Q3 2023 TPI Composites Inc Earnings Call
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Yes.
Hello, and welcome to the TPI Composites third quarter 2023 earnings conference call. All participants will be in a listen only mode. After today's presentation. There will be an opportunity to ask questions. Please note. This event is being recorded I would now like to hand, the conference over to your first speaker today, Mr. Jason Wegman of Investor Relations. Please.
Go ahead Sir.
Thank you operator, I would like to welcome everyone to TPI composites third quarter 2023 earnings call.
We will be making forward looking statements. During this call that are subject to risks and uncertainties.
Cause actual results to differ materially.
A detailed discussion of applicable risks is included in our latest reports and filings with the Securities and Exchange Commission, which can be found on our website TPI composites dot com.
Today's presentation will include references to non-GAAP financial measures you should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures to the comparable GAAP financial measures.
With that let me turn the call over to Bill Silex, TPI composites, President and CEO.
Thanks, Jason and good afternoon, everyone and thank you for joining our call. In addition to Jason I'm here with Ryan Miller, our CFO.
I'll discuss our results and highlights from the third quarter, our global operations and the wind energy market more broadly Brian will then review our financial results and then we'll open the call for Q&A. Please.
Please turn to slide five.
Despite the challenging global wind market and economic climate, our operational execution in the third quarter was in line with our expectations, but our overall results were negatively impacted by an incremental warranty charge and charges related to the unexpected pro taro bankruptcy the.
The third quarter was highlighted by strong cash performance as we ended the quarter with $161 million of unrestricted cash due to our continued focus on balance sheet efficiency and cost controls.
We are confident that our liquidity position will enable us to deal with the near term challenges the industry is facing and provide us with a runway required to execute on our long term financial targets.
We also made progress during the quarter with our customers on several fronts to gain visibility into volume and capacity needs in 2024 and beyond that are part of our pathway to those long term targets. Therefore, we expect to announce final sign contracts by the end of the year for a number of expansions startups and trying to transition.
Please turn to slide six.
To summarize our operations for the quarter and the blade business. Although we continue to work through some challenges in Mexico, a blade facilities in India, and Turkey continued to perform exceptionally well globally. We produced 666 cents or two nine gigawatts with a utilization rate of 85%.
We anticipated a global service business is down year over year due to a reduction in technicians deployed to revenue generating projects. Neither the warranty campaign. We are working on for the full year, we expect revenue to be down about 40% year over year.
Things continue to progress nicely in our automotive business. However, we now anticipate automotive's 2023 full year revenue to.
It would be down from 2022, primarily due to lower CRO Terra bus body sales because of their bankruptcy. It's important to note that the reduction of sales broke terra does not have a meaningful impact on tpa as go forward EBITDA and cash flow given that the bus volumes forecasted by approach era, We're never achieved and the program was operating at about breakeven.
In addition, the automotive business is also experiencing lower than expected sales and the other automotive products due to our customer supply chain constraints and delays in new product launches.
With that said we.
We are planning to launch three new automotive production programs in the fourth quarter. These programs include large structural panels and a full battery and closure for two class eight commercial truck customers and.
High voltage battery pack and thermal barriers for our light duty truck.
Diversification initiative is paying dividends as these three launches are each with a different customer with two of them being new to TPI. In addition to products being one sure investment in innovation and new manufacturing technologies is aligned with the needs of the automotive market.
We are continuing to explore strategic alternatives for the automotive business and are encouraged by the progress we have made and expect to have more information to share by the end of the year.
That's where our supply chain the situation continues to be significantly better than during the last two years.
Overall cost of raw materials has continued to trend down compared to 2022, while logistics costs have returned to pre pandemic levels. We expect to see additional cost savings in 2024, given the excess capacity for many of our input and a slowdown in demand in China.
We will need to keep an eye on the events in the middle East and the potential impact that may have on petroleum prices, which could impact the cost of certain feedstocks as well as transportation costs.
Over the course of the past few years, we have seen numerous government policy initiatives aimed at expanding the use of renewable energy, including the passage of the inflation reduction act in the U S and several policy initiatives in the EU that are expected to simplify regulations speed up permitting and promote cross border projects to accelerate.
Climate neutrality in Europe.
We expect that the new government policy will accelerate long term growth in the wind industry. Despite these favorable long term policy trends, we don't expect an increase in demand is till 2025, while the wind industry await clarity on the implementation guidance related to key components of the <unk>.
They are a and clarity around more robust policies in Europe. In addition, permitting transmission transmission queues the ability of the broader wind industry supply chain to ramp volume rising interest rates and inflation and the cost and availability of capital or further factories liberating the timing of the wind market recovery.
Specific to T. P. We currently expect to have a fixed lines in startup and four lines in transition during 2024 as our customers prepare for stronger than expected demand in beginning in 2025, which will impact utilization, but during 2024. Furthermore, we expect demand from one of our customers to be down in the near term as they can.
<unk> existing inventory levels and contemplate changes in geographic demand, which are expected to result in lower volumes from the under utilization of certain lines and a reduction in overall lines from that customer.
So while we do not expect 2020 for it to be a year of growth for TPI, we do expect to make significant improvements to our EBITDA and EBITDA margin.
Today, we are operating 37 lines, including the four lines in Mexico for Nordics that we will transition back to them in the middle of 2024 with.
With the transition of lines to larger blades, the startup of new lines and completion of the Nordics contracted Mexico and a reset of lines with Vestas. The current plan is to exit 2024 with 36 dedicated production line.
During 2025, we'll be working through additional startups and transitions.
To have all of our capacity under contract is out there.
<unk> 39 lines of production as we exit 2025.
All of that as a backdrop, we continue to stand by our mid to long term sales adjusted EBITDA and free cash flow targets with our current manufacturing capacity of nearly 15 gigawatts.
We expect our wind revenue to approach $2 billion, yielding a high single digit adjusted EBITDA margin and free cash flow percentage in the mid single digits over the next couple of years now with that I'll turn the call over to Brian to review our financials.
Please turn to slide eight all comparisons discussed today will be on a year over year basis for continuing operations compared to the same period in 2022.
He's known our prior year financial information has been restated to exclude the discontinued operations from our Asia reporting segment as we shut down our manufacturing operations in China at the end of 2022.
In the third quarter of 2023, net sales were $372 9 million compared to $384 4 million for the same period in 2022, a decrease of 3%.
Net sales of wind blades to lean and other wind related sales, which hereafter referred to as just when sales increased by $6 4 million in third quarter of 2023, or one 8% compared to the same period. In 2022 did you hire wind blades produced favorable foreign currency fluctuations and an increase in tooling sales in preparation for manufacturing line startups and transitions.
The increase in wind blade volumes, primarily driven by lower production in the prior comparative period due to a temporary production stoppage in the third quarter of 2002 in one of our Mexico plant as the customer implemented a play to redesign and every flavor disruption in Turkey in the third quarter 2022.
Work with the union to resolve inflationary pressures on wages is.
These higher sales were partially offset by lower average sales prices due to the impact of raw material cost reductions on our blade pricing.
Field services sales decreased by $10 1 million in the third quarter compared to the same period in 2022.
The decrease was due to a reduction in technicians deployed on revenue generating projects due to an increase in time spent on non revenue inspection and repair activities.
Automotive sales decreased by $7 9 million in the third quarter compared to the same period in 2022.
This reduction is mainly due to a decrease in the number of composite bus bodies produce due to <unk> bankruptcy. During the third quarter of 2023. In addition sales of other automotive products were down due to our customer supply chain constraints and delays in transitions of new product launches.
Net loss in sugar annuity common stockholders from continuing operations was $72 8 million in the third quarter of 2023 compared to a net loss of $21 8 million in the same period in 2022.
Adjusted EBITDA for the third quarter of 2023 was a loss of $27 4 million compared to adjusted EBITDA of $5 1 million. During the same period in 2022 the decrease in adjusted EBITDA. During the third quarter was primarily due to $22 6 million of credit losses and charges related to the bankruptcy of Portera and a $13 5 million incremental.
Warranty charge as we revised estimates related to the warranty campaign announced in the second quarter.
These two items adjusted EBITDA would have been $8 7 million or two 3% of sales.
Moving to slide nine.
We ended the quarter with $161 million of unrestricted cash and cash equivalents.
196 million of debt, which includes the $132 5 million convertible notes, we issued in March and credit facilities legalized in Turkey, and India to manage working capital our debt levels are stable and ended last quarter.
Had negative free cash flow of $20 8 million in third quarter of 2023 compared to negative free cash flow of $29 4 million in the same period in 2022.
Net use of cash in third quarter of 2023 was primarily due to our EBITDA loss and warranty costs incurred partially offset by working capital improvements we.
We continue to place a significant focus on preserving cash and ensuring we efficiently deploy our working capital.
Sure we can comfortably execute key initiatives as we move forward would you expect a modest level of cash burn during the balance of the year as we satisfy our warranty commitments.
Quality improvement initiatives and invest for growth.
As we look beyond 2023, I want to provide some commentary on why we remain confident in our liquidity. The biggest change you should expect is a return to positive EBITDA in 'twenty 'twenty four as we get a number of significant items in the rearview mirror for example.
We expect significantly reduced warranty costs, which this year include $47 8 million of charges primarily related to a single campaign. We Additionally expect to avoid approximately $40 million of anticipated losses in 2023 from the Nordics Matamoros facility since we'll hand it back over to Nordics at the end of the contract period on June 32024.
Sure.
We also don't expect to experience another customer bankruptcy charge that impacted our 2023 EBITDA by almost $23 million and finally, we expect to move our field services technicians back to more Jevan revenue generating service work and less non revenue warranty work.
Other areas, we expect our cash flows will be positively impacted our advances from customers to help facilitate startups and transitions, we will be executing in 2024.
And as I have previously mentioned, we are continuing to work down our working process inventory and optimize our working capital efficiency.
Offsetting these sources of cash will be capex, primarily related transition and startup of idle lines interest and taxes and it has it now cash payments to oaktree for the preferred dividends.
We believe our balance sheet, our projected liquidity position and our operating results will enable us to navigate the short term challenges and invest in our business to achieve mid to long term growth targets of 2 billion, plus and wind sales and high single digit adjusted EBITDA margins.
Moving onto slide 10, given all that transpired in the third quarter, we are updating our financial guidance for the year. We now expect sales to be approximately $1 5 billion. This is about $50 million lower than the midpoint of our previously provided sales guidance, which is being driven by two factors.
First our customers are working through rationalization of their own inventory levels.
And as a result, we are experiencing some weaker near term demand.
As we matured our discussions on transitions with two of our customers. We will begin to wind down production. Some lines in the fourth quarter to begin the decommissioning process of the lines and to ready ourselves for transitions in 2024.
We've also revised our full year guidance.
For adjusted EBITDA to a loss of about 5%.
Our losses, driven by the warranty campaign, the Nordics Matamoros facility losses.
The <unk> bankruptcy charge increased cost of inspections and repairs and the impact of diverting our field service technician non revenue warranty work.
As we look to the fourth quarter I'm expecting a modest loss as our Nordics Matamoros plant will be back in full scale production. The other factor that will negatively impact adjusted EBITDA in the fourth quarter is that we plan to have lower sales than previously expected and significantly reduced our work in process inventory, which will create which will create negative cost absorption impacts in our factories.
This reduction in work in process inventories driven by the previously mentioned line transitions.
We are also planning to drive our work in process inventory levels down to lean out our balance sheet. These reductions will temporarily negatively impact adjusted EBITDA, but they will allow us to harvest cash from the balance sheet as we head into another transition year in 2024.
With that I'll turn the call back over to Bill.
Thanks, Brian Please turn to slide 12, we remain bullish on the long term energy transition and believe we will continue to play a vital role in the pace and ultimate success of the transition we remain focused on managing our business through the short term challenges in the industry and are excited about how well we are positioned to capitalize on the significant growth the industry expects on that.
Coming years I want to thank all of our TPI associates once again for their commitment dedication and loyalty to TPI well now I'll turn the call back to the operator to open it up for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
We're using a speakerphone please pick up your handset before pressing the keys.
Anytime Youre question has been addressed and you would like to withdraw your question. Please press Star then two and at this time, we'll pause momentarily to assemble our roster.
And the first question will come from Eric Stine with Craig Hallum. Please go ahead.
Hi, everyone. Thanks for taking the question.
Hum.
So last call I know that when you were talking about your line expectations. I think you were expecting 39 exiting 'twenty four now it sounds like that's 39 exiting 'twenty five so can you just walk us through kind of the puts and takes is that simply just timing of startups being pushed out now.
Now taking longer or maybe just walk through that for us.
Yeah.
Hey, Greg.
You know I'd say from a big picture perspective over the course of the last few months, we've matured a lot of the discussions with our customers on lines and.
And where theyre going and.
And just part of that has been what we started to talk about last quarter, we are seeing a slide to the right.
When we talked last quarter, you know there are a lot of startups and transitions and we thought we'd be at 39% and 25. When we exited we don't think Thats changed right now we still expect to be at 39, the timing of some of those transitions and startups is moving around.
As we think through where we're at right now we expect to.
Nobody said there'll be some puts and takes but as we as we look at 24, we expect to exit with around 36 lines today, and then we'll grow that throughout our with additional startups and twenty-five also there'll be some transitions whereby we'll bring in longer blades and that and Theres, a few factories, where those longer bytes consumed more space and so we actually go down.
Your line because of that but I'd say, it's still lots of moving parts and I would say we're still in the we're still in the probably the sixth or seventh inning of a lot of these customer negotiations and discussions and where we're at today as you know we will be exiting 'twenty fives and when we will be on pace to be at that 2 billion plus in sales and high single digit EBITDA margins.
You got it you mean exiting 'twenty five you think you'd be in a position to do that.
Yeah, It will be on a run rate as we exit 'twenty five as our current expectations.
Got it Okay, and then maybe just sticking with the customer.
Conversations I mean, the quality issues and I know that there is.
It's not something you've necessarily dealt within the past.
And felt like it's relatively contained but I also know this quarter.
There was more there just.
Confidence that this is not part of a larger issue and Im curious what the conversations look like with your customers I mean, I know that in some cases. These are based on their designs.
And so how much how much of this is is on T. P. I C and how much is on the customers.
Yeah, Hey, Eric It's bill good to talk to you.
When we put when we are when we announced the warranty provision last quarter, we were still pretty early in the.
And the execution of that and.
So that's why we added to it this quarter. So there's nothing nothing different it's just we have better information today than we did when we talked last time and I would say yeah. We believe you know our conversations with our customers. If it's a warranty charge. It's on us Eric lets be clear with that now there are times when our blades.
Those are the blade issues and it's a design issue and then that's not a warranty issue for us, but if theres a warranty charge that we talked about then that is on us.
Can be complicated by design, but it's on us.
Conversations with our customers are we we've taken many steps to improve our quality systems to enhance our quality systems I should say I would say the the the industry is very sensitive to quality today.
Everything that we've seen in the press from a number of the Oems.
So the conversations with our customers are very constructive we're in this together, we're working together to make sure that we have processes that can meet their design specs.
We are working with them very early in the design process to make sure that what they're designing is manufacturer bull in an efficient and effective way so very constructive discussions and we believe we have our arms around the issue that we announced last quarter and.
And to the extent we.
To the extent there are material issues, we disclose them as we did if we don't disclose anything gets because they're not material in there or just normal course.
Got it okay. Thanks.
Thank you.
The next question will come from Morgan Reed with Bank of America. Please go ahead.
Thanks for taking the question.
And now that we were just kind of talking about some of that.
New opportunities in any industry and that you're having a lot of productive conversations with Oems as you all worked through product quality issues and it's sort of a collective industry. Just curious if you're seeing any sort of an emerging market share opportunities or emerging.
Emerging sort of near term opportunities as one of your competitors tend to deal with its own product quality issues and it potentially pulling back on some of their commitments for the near term just curious if there's an opportunity for you all.
Demand there.
Well again so.
That would be our customers that would be looking at expanded market share as a result of that particular Oems challenges with the onshore space with that said.
Clearly if there is market share gains by our customers that certainly provides an opportunity for us to gain share as well. So long answer to your question, but I wanted to make sure we're clear but.
Yeah, absolutely to the extent our customers are gaining share and that certainly is an opportunity for us to gain share as well.
Got it that makes sense and is there any sort of timing expectation around that or is that still kind of falling inside your application and communication I'm sorry, it's like an improving environment for TPI in 2025 plus.
Yeah, I think yeah, I think it's still a little bit in flux I mean, we're we're not counting specifically on that.
To be Frank I mean, we are working with our existing customers and are evaluating what their what their needs are and as we've said, we see 2024 as a continued of the transition with <unk>.
Inflexion, probably in 2025 is what we're looking at so.
We're not focused specifically on the challenges of the single OEM, we're more focused on what we can control and the Oems we're working for today and how we can help them be successful.
That makes a lot of sense and one more from me I was just curious.
Where you are in servicing your own warranty issues. I know you just mentioned that you are taking up that charge just about a year later in that process. So just curious if you can provide an update on maybe what was different from your expectations and maybe what's left here.
As you've taken up that expectation for warranty charges.
Yeah, I think you know.
The further along you get in the process the more.
Experience you have at.
Dealing with the challenges I think we've done what we have left is theres, a fair amount of up tower, which tends to be a little more challenging than if the blade as downtown.
But I would tell you we've worked very closely with our customer and our customers' customer.
<unk>.
Developing a very efficient program to get this warranty work behind us over the next couple of quarters quite frankly, so well we will have some work going into 'twenty four but we've already begun shifting our technicians on the billable work for the back half or for the end of this year. So we'll see.
More of that as we get into the early part of next year, we will have much more billable work and well will wind down that warranty work in the first half of next year.
Got it very helpful. I'll take the rest offline. Thank you.
Yep. Thanks Martin.
The next question will come from Preval Molchan off with Raymond James. Please go ahead.
Yeah. Thanks for taking the question so I.
I know, you're not giving kind of formal 2020 guidance at this stage.
I think you mentioned that youre not expecting.
Growth year, so just.
Zooming in on that.
From the $1 5 billion in 2023.
Total topline.
Flattish down what kind of magnitude.
I'd say flattish to slightly down.
And then.
Okay. Okay. That's.
That's clear and the.
Trajectory quarter to quarter kind of more more backend weighted because.
2023 has been quite the opposite you started higher and lower.
Yeah, I'd say, it's probably more back end because of the transitions and startups that will have in the first half of the year.
Okay.
Absolutely clear a follow up.
On the <unk>.
Preferred you said that at this stage.
<unk>.
Agreement from two years ago, you will be moving to a cash dividend. Starting next year are you in talks with.
Oaktree about amending that in other words.
Prolonging the payment in kind arrangement.
Yes, I would I would tell you we are right in the middle of very constructive discussions with Oaktree.
Providing us with more flexibility.
Next year.
Let's leave it at that.
Okay.
Thanks very much.
Thank you for that.
Again, if you have a question. Please press Star then one our next question will come from Jeff Osborne with TD Cowen. Please go ahead.
Mr. Osborne you may be muted.
Sorry about that.
You folks walk through on the call all the cash flow issues that won't repeat themselves next year and putting aside the oaktree.
The dividend is can you walk through what the uses of cash will be.
Next year, especially in the first half I imagine there is some potential capex, maybe you can give us an update on the Newton facility.
And then just how we should think about cash burn through the first half of the year in particular with things might be a bit more challenged.
Yes, I think the first half to your point is going to be a period of time when they are going to be a bit more challenged the good news what I will tell you is our customers have been a much more amiable to providing us funding to help with those startups and transitions than they have in the past though.
We're feeling pretty good about where we're at right now with our plan I do think that you're probably going to see our low watermark for cash performance happened in the first half as we're going through those transitions, but we are getting subsidized by our customers. So that will help out a fair amount.
We are already this year starting to spend some capex dollars that he saw a little bit of a tick up this quarter Youll see that continue next quarter.
The first one out of the gate is going to be the what we announced last quarter with the Juarez facility, where GE is going to be produced in their workhorse Blake will be starting up that facility.
And then we had a couple of other transitions that will be going on where we're going from shorter blades the longer blades.
So this is all good stuff I mean for US we need to go through these in order to get to where we want to go to the 2 billion plus of sales as we get to get to full rate, but the first half where it will be I think at the low watermark for cash for us just because of those and it's not just the transitions. It's the slowdown in sales in dollars coming in that you get when you're going through a decommissioning.
So the old lines and everything so we're starting out here in the fourth quarter for a handful of lines that will continue into the first quarter and then we'll move into those transitions.
It makes sense and then can you give us an update on what the anticipated capex would be for the full year and any comments that you can share would be helpful.
Yeah, what I would tell you where we're at we're not probably not quite ready to guide what capex is going to be after the full year, but I'll kind of tell you Directionally, where we think it's going to be.
We've historically kind of our Opex capex bare bones are without startups and transitions has generally been about 1% of sales.
And what I would tell you is from a startup and transition perspective, we're probably going to be at least that are maybe a little bit more than that as we get into next year, but we're still kind of fine tuning the timing on some things right now, especially as thinking about thinking about the timing of transitions to happen in 'twenty five that may impact 'twenty four capex.
We definitely won't be spending anything beyond where we are this year because we're buying.
Wind turbines Turkey.
But we will have a combination will startup and transition capex and just normal opex capex and Jeff as it relates to Newton debt still.
We're still working with with our customer on timing for that one.
So we do not have that locked down yet as far as exactly when we will start or the blade type in that in that facility.
And then very quickly, though in the e-commerce.
Comments, you made in the thermal barrier light duty truck is there any capex associated with that could you compare our content per vehicle and further.
Reduction might be.
The capex for that is relatively light some of it's already been spent it'll depend on how fast it ramps quite frankly, if it ramps faster there will be there'll be a little bit more capex next year for it but.
Relatively small amounts of capex to ramp those programs that we've got.
That was that started here in the fourth quarter.
Perfect. Thank you.
Thanks, Jeff.
This concludes our question and answer session I would like to turn the conference back over Mr. Highway.
Alright.
Mark. Please go ahead.
Thank you operator, and thank you all again for your time today and continued interest and support of TPI and look forward to the next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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