Q3 2024 TPI Composites Inc Earnings Call
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Speaker Change: Good afternoon and welcome to TPI Composites 3rd Quarter 2024 Earnings Conference Call.
Speaker Change: At this time, I'd like to turn the conference over to Jason Wegmann, Investor Relations for TPI Composites. You may begin.
Jason Wegmann: Thank you, operator. I would like to welcome everyone to TPI Composites third quarter 2024 earnings call. We will be making four looking statements during this call that are subject to risks and uncertainties, which could cause actual results to differ materially.
Jason Wegmann: 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.
Speaker Change: With that, let me turn the call over to Bill Siwek, TPI Composites President and CEO.
Bill Siwek: Thanks Jason. Good afternoon everyone and thank you for joining our call. In addition to Jason, I am here with Ryan Miller, our CFO. Please turn to slide 5.
Bill Siwek: Our third quarter was a big improvement over the first half of the year as we were able to post positive adjusted EBITDA and operating cash flows driven by the actions we've taken to restructure our portfolio and transition 10 lines to next generation workhorse blades.
Bill Siwek: It's also nice to get back to growth mode, as our sales grew 23% sequentially over the second quarter of this year, and 3% over the third quarter of last year. We believe our strategic positioning with our key customers will enable sustained, long-term growth.
Bill Siwek: We continue to engage in productive discussions with our customers to understand their priorities and collaborate on mutual success.
Bill Siwek: As quality remains paramount, we have continued to maintain a measured and controlled approach to increasing production on new lines in Mexico to ensure a smooth transition. We remain confident in our ability to meet customer demand and anticipate finishing the year on a strong trajectory for 2025.
Bill Siwek: Discussions with customers on further expansion of our footprint continue. We've agreed with GE Vernova to reopen our Iowa plant in mid-2025 to support their two megawatt platform which has proven to be a popular option for repowering.
Bill Siwek: Discussions with other OEMs are progressing based on expected U.S. market expansion where we have recently secured additional U.S. manufacturing capacity as well as to serve the burgeoning onshore wind market in India as well as the Turkey A market given the recent announcements by the Turkey A government.
Bill Siwek: to increase its wind capacity threefold to 30 gigawatts by 2035.
Bill Siwek: Although the details on local content are still being finalized, it is anticipated that much of what will ultimately get installed in Turkey A will either require blades that are manufactured locally or will provide additional incentives for locally produced blades.
Speaker Change: We see this development as a potential positive for our long-term operations in Turkey A. From an operational perspective, sales for the quarter were $380.8 million, and while impacted by slower-than-originally-planned production ramps, we were in line with our expectations and full-year guidance.
Speaker Change: Adjusted EBITDA of $8 million in the quarter marks our expected return to positive EBITDA. However, it was lower than expected due to several factors.
Speaker Change: and ComplexBlade models extended our startup and transition timelines leading to about $15 million in lower sales along with higher startup and transition costs at two of our facilities which impacted our adjusted EBITDA by approximately $5 million.
Speaker Change: This approach, however, ensures we can deliver increased volumes in 2025 and beyond more efficiently and profitably.
Speaker Change: Second, inflation in Turkey led to a $4 million negative impact. Third, we recorded a $7 million change in estimate for legacy warranty matters to account for updated information, revised inspection and repair procedures implemented during the quarter, and of course, inflation.
Speaker Change: Finally, to support demand needs for the U.S. market in 2025 and beyond, we began investing additional resources to enable a 24-7 schedule on certain of our Mexico facilities.
Speaker Change: This will enable additional volume off the same number of lines with no or minimal capex, which will drive lower per blade costs and improve our long-term competitiveness.
Speaker Change: When looking at our ongoing operations without the specific charges I just outlined, I adjusted to the Edadot margin in the third quarter would have been north of 6% showing progress towards our long-term Edadot targets.
Speaker Change: Utilization in the third quarter jumped to 89% as 7 of the 10 lines in start-up or transition achieved full rate production with the remaining three lines expected to get there in the first half of the fourth quarter. Globally we delivered 601 blade sets representing 2.5 gigawatts of capacity during the quarter.
Please turn to slide six.
Speaker Change: As we move into the fourth quarter, all our regions are expected to be EBITDA positive with anticipated utilization rates over 90%. The fourth quarter is also expected to be our strongest free cash flow generation quarter of the year.
Speaker Change: Our continued focus on lean principles and quality management has enhanced our production quality and improved our cost structure, but we still have significant opportunities, so we'll continue to focus on eliminating waste and streamlining processes to achieve higher efficiency and reduced operating costs.
Speaker Change: Moving forward, we will continue to invest in innovation and technology, ensuring we strengthen our competitive edge and position TPI as the premier blade provider in the onshore market.
Speaker Change: Our supply chain continues to operate effectively with overall raw materials estimated to decrease year-over-year in 2025.
It's a pleasure to be here
Speaker Change: With respect to the wind market, geopolitical events around the world have accelerated regional needs for energy independence and security.
Speaker Change: The global demand for clean energy continues to rise, driven by factors such as the growing need for data centers, semiconductor chip manufacturers, the adoption of electric vehicles, the electrification of buildings, and the desire to provide for this through net-zero sources.
Speaker Change: Over the course of the past years, we have seen numerous government policy initiatives aimed at expanding the use of renewable energy, including the passing of the IRA in the U.S.
Speaker Change: 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. We expect these trends in governmental policy will enable long-term revenue growth in the global onshore wind industry.
Speaker Change: Notwithstanding the recent U.S. election results, we are encouraged by the near-term demand we are seeing from our customers and therefore anticipate continued revenue growth for TPI in the U.S. in 2025.
Speaker Change: We expect this growth will be supported by blade lines operating at near full capacity throughout 2025, along with the planned reopening of our Iowa blade plant by mid-2025.
Speaker Change: While the past nine months have presented challenges, we believe we are strategically positioned with the right customers and play types to thrive in the U.S. market for years to come.
Speaker Change: Although it is too early to assess the impact of the outcome of the U.S. election.
Speaker Change: U.S. wind and solar sectors will remain resilient due to a strong state-level support, including significant renewable manufacturing investment in red states.
Speaker Change: increasing private sector demand for power that will dictate an all-of-the-above approach to capacity deployment and a relatively strong Republican support in Congress.
Speaker Change: Turning to Europe, long-term onshore market growth remains in sight. However, these markets are dealing with many of the same issues as in the U.S., namely inflation, permitting, transmission, supply chain disruptions, and labor availability.
Speaker Change: Historically, we have serviced the European market from our plants in Turkey A.
Speaker Change: However, the hyperinflationary environment that we have experienced in recent years in Turkey is not expected to subside anytime soon and although we can pass some of the incremental costs to our customers These incremental costs make us less competitive into the EU as well as less profitable
Speaker Change: Furthermore, we have competed successfully with Chinese blade manufacturers for years.
their recent aggressive push supported by the Chinese government.
Speaker Change: to expand their capacity for Europe has added to the challenging competitive environment for supply into the EU.
Speaker Change: Unlike the U.S., which has implemented tariffs and generous tax laws to encourage nearshoring in domestic manufacturing.
Speaker Change: The EU has not yet taken as aggressive an approach to help level the playing field for component suppliers like TPI.
Speaker Change: Nordax, our largest customer in Turkey, has eight production lines scheduled to expire by the end of 2025. Additionally, they have two lines in India that expire at the end of 2024. Nordax has informed us that they will not renew the two lines in India. However, we have already replaced those lines with two lines for Vestas.
Speaker Change: While we are committed to our long-term relationship with Nordics in Turkey and elsewhere, it is uncertain whether or not they will extend their contracts beyond 2025 at this time.
Speaker Change: However, I would suggest that should the recently announced plans of the Turkish government play out as we expect, demand for that capacity should be robust, and this would position Turkey A as one of the largest wind markets in the region. Given the market share enjoyed by both Nordex and Enercon, both companies stand to benefit from this development.
Speaker Change: Given the challenges experienced in the third quarter, along with the extended transitions and start-ups, we are reducing our adjusted EBITDA outlook for the year to a loss of approximately 2 percent.
Speaker Change: However, the fourth quarter is still expected to be EBITDA positive and the strongest free cash flow generation quarter of the year, leading us into what we expect to be a much stronger year financially in 2025.
Speaker Change: Our current thinking on 2025 in context of the adjusted EGLE target we have discussed the last few quarters has evolved based on updated information and customer decisions made in the last few months.
Speaker Change: While we are still working through our annual plan for 2025, some of these customer decisions are creating some headwinds that are going to be difficult to offset in the near term. The two biggest challenges are related to inflation, particularly in Turkey A, and demand in both Turkey A and India from Nordex.
Speaker Change: While it's still too early to provide you with a lot of specificity and therefore formal guidance for 2025, we currently expect volumes for lines under contract in 2008 to be down approximately 40% in 2025 compared to previous expectations.
Speaker Change: These factors have created a volume shortfall for us compared to what we had previously anticipated in 2025. We are working to replace that volume as well as exploring other strategic alternatives to maximize the value of our Turkey A operations.
Speaker Change: With that, I'll turn the call over to Ryan to review our financial results.
Ryan Miller: Thanks, Bill. Please turn to slide 8. In the third quarter of 2024, net sales were $380.8 million compared to $370.2 million for the same period in 2023, an increase of 2.8 percent.
Ryan Miller: Net sales of wind blades, tooling, and other wind-related sales increased by $6.9 million, or 1.9%, to $369.1 million for the three months ended September 30, 2024, as compared to $362.2 million in the same period in 2023.
Ryan Miller: The increase was primarily due to higher average sales prices of wind blades due to changes in the mix of wind blade models produced.
Ryan Miller: In particular, the startup of production at one of our previously idled facilities in Juarez, Mexico, favorable foreign currency fluctuations, and an increase in Windblade inventory included in contract assets driven by the startups and transitions.
Ryan Miller: The increase in wind blade inventory directly correlates to higher sales under the cost-to-cost revenue recognition method for our wind blade contracts.
Ryan Miller: These increases were partially offset by a 10% decrease in the number of wind blades produced due primarily to the number and pace of start-ups and transitions and expected volume declines based on market activity levels.
Ryan Miller: Field service inspection and repair service sales increased by $3.7 million or 45.8% to $11.7 million for the three months ended September 30, 2024, as compared to $8 million in the same period in 2023.
Ryan Miller: The increase is due primarily by the return of technicians deployed to revenue-generating projects versus time spent on non-revenue-generating inspection and repair activities.
Ryan Miller: Adjusted EBITDA was $8 million for the three months ended September 30, 2024, as compared to adjusted EBITDA of $0.2 million during the same period in 2023. Adjusted EBITDA margin was 2.1%, as compared to an adjusted EBITDA margin of 0.1% during the same period in 2023.
Ryan Miller: The increase was primarily driven by the absence of losses from our Nordics Matamoros facility, which was shut down at the end of the second quarter of 2024.
Benefits from foreign currency fluctuation.
Lower charges for changes in estimate for pre-existing warranty campaigns.
Ryan Miller: A reduction in general and administrative costs due to lower employee compensation costs.
Ryan Miller: and an increase in revenue. These improvements were partially offset by increased labor costs in Turkey and Mexico and higher start-up and transition costs.
Moving to slide 9.
Ryan Miller: We ended the quarter with $126 million of unrestricted cash and cash equivalents and $606 million of net debt.
Ryan Miller: Pre-cash flow was a negative $5.6 million in the third quarter of 2024 compared to negative pre-cash flow of $20.8 million in the same period in 2023. The net use of cash in the third quarter of 2024 was primarily due to interest and tax payments and capital expenditures, partially offset by positive adjusted EBITDA and other working capital changes.
Ryan Miller: Notably, operating cash flow was a positive $1 million in the quarter.
Ryan Miller: We believe our current cash position provides us the flexibility to meet near-term demands of the business and continue to invest in growth for lines under rooftop today. In the fourth quarter, we expect positive free cash flow on lower startup and transition costs, working capital improvements, and positive EBITDA.
Ryan Miller: A summary of our financial guidance for 2024 can be found on slide 10. We are narrowing our full year 2024 revenue guidance to about $1.35 billion.
Ryan Miller: which is in the middle of the previously guided range of 1.3 to 1.4 billion.
Ryan Miller: For Adjusted EBITDA, we are lowering our guidance to a loss of approximately 2% compared to the previous guidance of a positive Adjusted EBITDA margin of approximately 1%. This adjustment reflects the impact of our actual results in the third quarter, as well as the quality-focused moderation of our startups and transitions.
Ryan Miller: This adjustment also reflects investments we are making to divert some of our plants to 24-7 schedules so we can produce more blades next year on our existing lines in Mexico to support strong demand in the U.S.
Ryan Miller: And finally, similar to the fourth quarter of last year, we are planning to reduce our work in process inventory, which will create negative cost absorption impacts in our factories.
Ryan Miller: This reduction is partially driven by four lines that will be transitioning over year-end, and we are also planning to drive our work and process inventory levels down to free up cash on our balance sheet.
Ryan Miller: For the full year, our utilization guidance remains unchanged at 75 to 80 percent, and we anticipate capital expenditures of around $30 million, which is at the top end of our previously guided range of $25 to $30 million.
Speaker Change: These investments, including significant investments in innovation and technology, are driven by our continued focus on achieving our long-term growth targets, which also include investments in new lines in Iowa and India in the fourth quarter. With that, I'll turn the call back over to Bill.
Thanks, Ryan. Please turn to slide 12.
Bill Siwek: While we remain optimistic about achieving our long-term targets, the timing has shifted to the right a bit based on overall market conditions, increased competition outside the U.S., and a more deliberate approach to transitions and start-ups.
Bill Siwek: to ensure initial blade quality for new designs and to ensure stability of the process to enable long-term successful serial production.
Bill Siwek: We are encouraged by the progress we've made over the past year, including shedding the losses from both the Nordex Matamoros plant
Bill Siwek: and the automotive business, starting up or transitioning 10 new lines with workhorse blades and making significant improvements in streamlining operations and improving quality, all while doing it as safely as we ever have. We expect to close out 2024 with our best quarter financially in the year while generating positive free cash flow and setting us up for a strong 2025.
Bill Siwek: Before we open the call for Q&A, I want to once again extend my gratitude to all our TPI associates for their continued commitment and dedication to TPI and our mission to safely decarbonize and electrify the world.
Bill Siwek: and I want to welcome Jennifer Lowry, our newest member of the Board of Directors, effective as of November 13, 2024.
Bill Siwek: Jen brings over 25 years of experience in the energy sector, including senior positions with Exelon, Constellation Energy, and AES, among others, and currently serves on the boards of Clearway Energy and MYR Group.
Speaker Change: Janet is a great addition to our board and I look forward to working with her in the future. I'll now turn the call back to the operator to open the call for questions.
Speaker Change: Thank you. Ladies and gentlemen, the floor is now open for your questions. If you would like to queue for a question, simply press star 1 on your telephone keypad.
Speaker Change: If at any point your question has been answered, you may remove yourself from the queue by pressing star 2. Once again that is star 1 to signal for a question and star 2 to remove yourself.
We'll move next to Mark Strauss with J.P. Morgan.
Great. Thank you very much for taking our questions.
Speaker Change: Bill, I take your point that it's too early to kind of have a whole lot of visibility post-election, but one of the things that has been thrown out there is potential for increased tariffs coming into the U.S.
Speaker Change: Can you just remind us, on your contracts that you have with your facilities in Mexico, how do those contracts work? If there are new tariffs that come on in the middle of a contract, who bears that risk?
Speaker Change: And then kind of a quick follow-up on that point is, I mean, are there any kind of contingency efforts that you're looking at as far as potentially, excuse me, potentially moving that production into the U.S.?
Speaker Change: Yeah, hey Mark, thanks for the question. I mean we, if you recall, way back in the day there was a threat of tariffs before and we did a bunch of work there. It depends a little bit on the contract and on the terms.
Speaker Change: Generally, it would be included in the cost of the product, the tariff.
Speaker Change: but again it's a little bit, it gets a little specific by customer depending.
Speaker Change: So I can't give you a precise answer on that right now.
Speaker Change: But we will obviously, we'll monitor that, we'll look at that, but I don't anticipate that being a big issue for us. And we are continuing to look at additional, you might have picked up, we did secure some additional capacity in the U.S.
Speaker Change: And so we will continue to look at U.S. capacity as well, but we don't anticipate we'll have any issues with what we've got in Mexico at this point.
Okay. Thanks, Bill. And then, Ryan, just a quick follow-up.
Speaker Change: So, I take your point about the volume in Turkey A down more than you were previously expecting in 2025. The target that you've thrown out there for more than $100 million in EBITDA next year, is that off the table now, or are you able to provide any more color on what that could potentially look like?
Speaker Change: You know, I guess what I can do is a couple things. One, I think, volume-wise.
Speaker Change: We're still expecting growth next year on the top line. The strength that we have in the U.S. market and some of the investments we're making to go to 24-7 ships in Mexico is a signal from us. We've got really strong demand in the U.S. I expect that volume to outpace that reduction that we quantified for Turkey.
Speaker Change: I think it's a little too early for us right now. We're currently reacting and planning and figuring out where we can optimize things. And so I kind of put you on hold until we get to when we announce fourth quarter earnings. We'll give you an update there on the earnings side of things.
Okay, thank you.
Speaker Change: Our next question will come from Pavel Molchanov with Raymond James. Please go ahead.
Speaker Change: Thanks for taking the question. Let me zoom in on Turkey as well. The fact that you're seeing, as you said, 40%
Speaker Change: lower demand versus prior expectations. Is that relating to lower wind new builds in Turkey domestically, or is it something happening in the broader European conversation?
Speaker Change: Yeah, hey Pavel, thanks for the question. I think it's it's it's more the latter.
Speaker Change: There's some of it is a shift to Chinese suppliers and part of it is lower volume or lower demand next year whether it be in Turkey or in the broader the wider European market.
It's a combination of both.
Thank you very much.
Speaker Change: Why do you think Europe is struggling? I mean, I ask because it was less than two years ago, Europe was running out of gas quite literally, and we saw record new bills.
Speaker Change: Yeah, it's a lot of things. It's not that there's not demand. I mean, they've got, but they have similar challenges in Europe as we do in the U.S. as it relates to permitting, transmission, you know, the grid.
It's different country by country.
Speaker Change: so there are a lot of different factors there so it's really there's a desire for it there's the demand for it we've got the capacity to deliver it but it's really challenges around more the regulatory side than anything that's creating the problems or the or the delays I should say
Speaker Change: Okay, last question. What is the latest on the kind of service operations and maintenance business unit that you guys have been working on?
Yeah, so you...
You might have heard, we...
Speaker Change: grew up fairly substantially the top line this last quarter, and that's partially just a shift of resources from some of the warranty and spare inspection work we were doing into more revenue generating work. We're going to continue to grow that business. We see pretty healthy growth next year both in the U.S. and in Europe. So that does remain a focus for us, Pavel, to continue to grow that business alongside our manufacturing business.
And is that line item EBITDA positive?
Yeah.
Speaker Change: It was it was pretty close to break even the last couple of quarters because of the the amount of work that we were doing on inspection and repair but moving forward it's certainly EBITDA positive.
Okay, thanks very much.
Yep, thanks Pavel.
Speaker Change: Our next question will come from Justin Clare with Roth Capital Partners. Please go ahead.
Yeah, hi, good afternoon.
Peace out!
Speaker Change: Hey, so I wanted to just dig into Iowa a little bit more here. I was wondering if you could just share, you know, specifically how many lines are being added in that facility.
Speaker Change: And then if you could talk about, you know, CapEx requirements or the potential startup costs that could be incurred in ramping that up.
Speaker Change: And then just in terms of the timing, how should we think about the revenue impact there? Could you be kind of ramping volumes in Q3 and then at full capacity in Q4? Or how should we think about that?
Speaker Change: Yes, so the current plan is two lines ramping in the back half of the year, as you suggest. So ramping in Q3, getting up to...
Speaker Change: kind of full production speed by the fourth quarter. Pretty minimal capex, Justin. I mean, we're going to be building the same blade that we were building before in that factory.
Speaker Change: So there's not a ton of CapEx, there's a little bit of upgrade that we need to do but pretty minor. And then startup costs will be pretty minor as well, a couple million dollars, but for the year will be about break-even.
Speaker Change: from an EBITDA standpoint for next year. So we'll, you know, we'll have some startup costs early that we'll then recapture as we begin delivering blades in the back half of the year.
Got it, okay.
Speaker Change: And then I thought you mentioned earlier that you did secure some additional capacity in the U.S. It sounds like that's beyond this facility. I was wondering if you could just elaborate on that a little bit. Is that a Greenfield facility or another blade facility that you may be taking over? And then any sense for timing and the amount of capacity that could be added would be helpful.
Yeah, it's a, it's a...
Speaker Change: It's a brownfield, so it's a former blade facility. The capacity, depending on the size of the blade, is upwards of four lines of capacity. And timing is still to be determined.
Speaker Change: We're working on a number of options there, but we do have the capacity, and it does provide us with some, it's in a very, it's a very good geographic location to serve some pretty important and large wind projects, so we're pretty excited about it long term.
Speaker Change: But there's more to come on that probably early next year.
Okay, got it. I appreciate it.
You bet.
Speaker Change: once again ladies and gentlemen that is star one if you would like to signal for a question we'll return to Eric Stein with Craig Hallam please go ahead
Hey Bill, thanks for taking the question.
You bet.
Speaker Change: Hey, I'm jumping around on calls, so I can pretty much guarantee I'm asking one that you've already addressed, but...
Speaker Change: You know, I know you tempered, all right, well, you tempered 24, EBITDA guidance a little bit, just curious, reading through the deck, I didn't see it stated, but, you know, how you feel about
Speaker Change: You'd previously said 100 million dollars plus in EBITDA and 25. I mean given the Confidence you are talking You know talking about in the US. Is it fair to say that that is something that you feel good about?
You know, Eric, this is Ryan. I'll start with...
Speaker Change: We, as far as where we think we're going next year, we're still digging into things right now. It's been a pretty dynamic environment with some of the volume in Turkey A. And I would also say the inflation impacts in Turkey A, they're probably a little outsized from what we would have expected a few months back for what we're thinking we're going into the year with.
Speaker Change: So we're doing some pretty detailed planning right now, and again, I just say stay tuned. We will provide guidance and our expectations as part of our Q4 call, but we do want to just make sure we're being as transparent as possible, that we do see some volume that's weakened now in Turkey, particularly with Nordex.
Speaker Change: With that said, though, Eric, I mean, with the volume decline and...
Speaker Change: Turkey A, we're actually going to see pretty significant growth in the U.S.
So, top-line-wise, we expect to be better.
Speaker Change: in 2025 than we are in 2024, so notwithstanding the challenges for the European market.
Speaker Change: top line we look pretty good but as Ryan mentioned there are some other headwinds that were that we're working through
Yeah
Speaker Change: Totally understand, but it is fair to say that, I mean, it seems pretty clear to me that even in a quarter I mean you are already positive about the U.S., but even a quarter later you are more positive Incrementally more positive on the U.S. Is that fair?
Speaker Change: yeah we feel we have again just just based on what our customers are asking for we feel you know we're gonna have a very strong 2025 so
Okay, thank you.
Be back. Thank you.
Speaker Change: And ladies and gentlemen as a final reminder if you would like to signal for a question, please press star 1 and I'll pause for just a moment
Speaker Change: It appears that we have no further questions at this time. I'd like to turn the floor over to Bill Siwek for any additional or closing comments.
Bill Siwek: Thank you operator and thank you again everybody for your time today and the continued interest in support of TPI. Look forward to the next quarter. Thank you.
Speaker Change: Thank you. Once again, ladies and gentlemen, that will conclude today's call. Thank you for your participation. You may disconnect at this time.