Hello and welcome to the TPI Composites Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Jason Wegmann 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, which could 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, tpicomposites.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 Siwek, TPI Composites’ President and CEO..

Thanks, Jason, and good afternoon, everyone, and thank you for joining our call. In addition to Jason, I am here with Ryan Miller, our CFO. Today, I’ll discuss our results and highlights from the third quarter, our global operations and the wind energy market more broadly.

Ryan will then review our financial results and then we’ll open the call for Q&A. Please turn to Slide 5.

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 Proterra bankruptcy.

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 the runway required to execute and attain 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 signed contracts by the end of the year for a number of extensions, start-ups and transitions.

Please turn to Slide 6. To summarize our operations for the quarter in the blade business, although we continue to work through some challenges in Mexico, our blade facilities in India and Türkiye continue to perform exceptionally well. Globally, we have produced 666 sets or 2.9 gigawatts with a utilization rate of 85%.

As anticipated, our global service business is down year-over-year due to a reduction in technicians deployed to revenue-generating projects due to 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 2023 full year revenue to be down from 2022, primarily due to lower Proterra bus body sales because of their bankruptcy.

It’s important to note that the reduction of sales to Proterra does not have a meaningful impact on TPI’s go-forward EBITDA and cash flow given that the bus volumes forecasted by Proterra were never achieved and the program was operating at about breakeven.

In addition, the automotive business is also experiencing lower-than-expected sales in other automotive products due to our customer supply chain constraints and delays in new product launches. With that said, we are planning to launch 3 new automotive production programs in the fourth quarter.

These programs include large structural panels and a full battery enclosure for 2 Class 8 commercial truck customers and a high-voltage battery pack thermal barriers for a light-duty truck. Our customer diversification initiative is paying dividends as these three launches are each with a different customer with 2 of them being new to TPI.

In addition, the products being launched through our investment in innovation and new manufacturing technologies as 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. As for our supply chain, the situation continues to be significantly better than during the last 2 years.

The 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 inputs and a slowdown in demand in China.

However, 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 until 2025, while the wind industry awaits clarity on the implementation guidance related to key components of the IRA 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 are further factors limiting the timing of the wind market recovery.

Specific to TPI, we currently expect to have 6 lines in start-up and 4 lines in transition during 2024 as our customers prepare for stronger expected demand beginning in 2025, which will impact utilization and output during 2024.

Furthermore, we expect demand from one of our customers to be down in the near term as they consider their existing inventory levels and contemplate changes in geographic demand, which are expected to result in lower volumes from the underutilization of certain lines and a reduction in overall lines from that customer.

So while we do not expect 2024 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 4 lines in Mexico for Nordex that we will transition back to them in the middle of 2024.

With the transition of lines to larger blades, the start-up of new lines and completion of the Nordex contract in Mexico and a reset of lines with Vestas, the current plan is to exit 2024 with 36 dedicated production lines.

During 2025, we will be working through additional start-ups and transitions and expect to have all of our capacity under contract resulting in 39 lines of production as we exit 2025. With all 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 a 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 Ryan to review our financial results..

first, our customers are working through rationalization of their own inventory levels and as a result, we are experiencing some weakened near-term demand; second, as we matured our discussions on transitions with two of our customers, we will begin to wind down production in some lines in the fourth quarter to be in 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 loss is driven by the warranty campaign, the Nordex Matamoros facility losses, the Proterra bankruptcy charge, increased cost of inspections and repairs, and the impact of diverting our field service technician to non-revenue warranty work.

As we look to the fourth quarter, I’m expecting a modest loss as our Nordex 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 reduce our work-in-process inventory, which will create negative cost absorption impacts in our factories.

This reduction in work-in-process inventory is driven by the previously mentioned line transitions, and 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, Ryan. 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 in the coming years. I want to thank all of our TPI associates once again for their commitment, dedication and loyalty to TPI.

I’ll now turn the call back to the operator to open it up for questions..

Thank you. [Operator Instructions] And the first question will come from Eric Stine with Craig-Hallum. Please go ahead..

Hi, everyone. Thanks for taking the question. So last call, I know that when you’re talking about your line expectations, I think you were expecting 39 exiting ‘24. Now it sounds like that’s 39 exiting ‘25.

So can you just walk us through kind of the puts and takes? Is that simply just timing of start-ups being pushed out now taking longer? Or maybe just walk through that for us..

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 where they are going. And just part of that has been what we started to talk about last quarter. We are seeing a slide to the right.

We – when we talked last quarter, there were a lot of start-ups and transitions, and we thought we’d be at 39 in ‘25 when we exited. We don’t think that’s changed right now. We still expect to be at 39. The timing of some of those transitions and start-ups is moving around.

I’d say, as we think through where we’re at right now, we expect to – there’ll be some puts and takes, but as we look at ‘24, we expect to exit with around 36 lines today. And then we will grow that throughout with additional start-ups in ‘25.

Also, there’ll be some transitions whereby we will bring in longer blades, and there is a few factories where those longer blades consume more space. And so we actually go down a few lines because of that.

But I’d say still lots of moving parts, and I’d say we’re still in probably the sixth or seventh inning of a lot of these customer negotiations and discussions. And where we’re at today is we will be exiting ‘25 and we will be on pace to be at that $2 billion plus in sales and high single-digit EBITDA margins..

Got it.

You mean exiting ‘25, you think you’d be in a position to do that?.

Yes, it will be on a run rate as we exit ‘25 is 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 – it’s not something you’ve necessarily dealt with in 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.

I’m 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 of this is on TPIC and how much is on the customers?.

Yes. Eric, it’s Bill. Good to talk to you. When we put – when we announced the warranty provision last quarter, we were still pretty early in the execution of that. And so that’s why we added to it this quarter. So there is nothing different. It’s just we have better information today than we did when we talked last time.

And I would say, we believe our conversations with our customers, if it’s a warranty charge, it’s on us. Eric, let’s be clear with that. Now there are times when a blade fails or there is blade issues and it’s a design issue, and then that’s not a warranty issue for us. But if there is a warranty charge that we talked about, then that is on us.

It can be complicated by design, but it’s on us. But conversations with our customers are – we’ve taken many steps to improve our quality systems – to enhance our quality systems, I should say. I would say the industry is very sensitive to quality today given everything that we’ve seen in the press from a number of the OEMs.

And 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 are designing is manufacturable 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 to the extent we – to the extent there are material issues, we disclose them as we did. If we don’t disclose anything, it’s because they are not material and they are just normal course..

Got it. Okay, thanks..

Yes. Thank you..

Your next question will come from Morgan Reid with Bank of America. Please go ahead..

Hi. Thanks for taking the questions. I know that we were just kind of talking about some of the new opportunities in the industry and that you are having a lot of productive conversations with OEMs as you all work through product quality issues and sort of the collective industry.

Just curious if you are seeing any sort of emerging market share opportunities or emerging sort of near-term opportunities as one of your competitors kind of deals with its own product quality issues and potentially pulling back on some of their commitments for the near-term, just curious if there is an opportunity for you all to pick up some demand there..

Well, again, so that would be our customers that would be looking at expanded market share as a result of that particular OEM’s 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 are clear. But yes, absolutely, to the extent our customers are gaining share, 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 expectation and communication of sort of like an improving environment for TPI in 2025 plus on the demand side?.

Yes. I think it’s still a little bit in flux. I mean we are not counting specifically on that, to be frank. I mean we are working with our existing customers, evaluating what their needs are. And as we have said, we see 2024 as a continued of the transition with an inflection probably in 2025 is what we are looking at.

So, we are not focused specifically on the challenges of a single OEM. We are more focused on what we can control and the OEMs we are working for today and how we can help them be successful..

It 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 a bit as you are 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 have taken up that expectation for warranty charges..

Yes. I think the further along you get in the process, the more experience you have at dealing with the challenges. I think we have done – what we have left is there is a fair amount of up tower, which tends to be a little more challenging than if the blade is down tower.

But I would tell you, we have worked very closely with our customer and our customer’s customer on developing a very efficient program to get this warranty work behind us over the next couple of quarters, quite frankly.

So, we will have some work going into ‘24, but we have already begun shifting our technicians onto billable work for the back – for the end of this year. So, we will see more of that as we get into the early part of next year. We will have much more billable work, and we will wind down that warranty work in the first half of next year..

Got it. Very helpful. I will take it offline. Thank you..

Yes. Thanks Morgan..

Your next question will come from Pavel Molchanov with Raymond James. Please go ahead..

Yes. Thanks for taking the question. So, I know you are not giving kind of formal 2024 guidance at this stage, but I think you mentioned that you are not expecting a growth year.

So, just zooming in on that from the $1.5 billion in 2023 total top line, flattish, down, what kind of magnitude?.

I would say flattish to slightly down..

Okay. That’s clear. And the trajectory quarter-to-quarter kind of more back-end weighted, because 2023 has been like the opposite, you started higher and ended lower..

I would say it’s probably more back end because of the transitions and start-ups that we will have in the first half of the year..

Okay. Absolutely clear. A follow-up question on the preferred, you said that, at this stage, per the agreement from 2 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?.

I would tell you, we are right in the middle of very constructive discussions with Oaktree about providing us with more flexibility next year. Let’s leave it at that..

Okay. Thanks very much..

Thank you, Pavel..

[Operator Instructions] 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 walked through on the call all the cash flow issues that won’t repeat themselves next year and putting aside the Oaktree dividend. 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 when things might be a bit more challenge?.

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 much more amiable to providing us funding to help with those start-ups and transitions than they have in the past.

So, we are feeling pretty good about where we are at right now with our plan. I do think that you are probably going to see our low watermark for the cash performance happen in the first half as we are 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, and you saw a little bit of a tick up this quarter. You will see that continue next quarter. Probably 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 producing their workhorse blade.

We will be starting up that facility. And then we have a couple of other transitions that will be going on where we are going from shorter blades to 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 in sales as we get to full rate.

But the first half 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 and dollars coming in that you get when you are going through a decommissioning process of the old lines and everything.

So, we are starting that here in the fourth quarter for a handful of lines. That will continue into the first quarter, and then we will move into those transitions..

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 on Newton would be helpful..

Yes. What I would tell you, we are not quite ready to guide what CapEx is going to be up for the full year, but I will kind of tell you directionally where we think it’s going to be. We have historically kind of our OpEx, CapEx, bare bones without start-ups and transitions, has generally been about 1% of sales.

And what I would tell you is from a start-up and transition perspective, we are probably going to be at least that or maybe a little bit more than that as we get into next year, but we are still kind of fine-tuning the timing on some things right now, especially just thinking about the timing of transitions that happen in ‘25 that may impact our ‘24 CapEx.

We definitely won’t be spending anything beyond where we are this year because we are buying the wind turbines in Türkiye, but we will have a combinational start-up and transition CapEx and just normal OpEx, CapEx..

And Jeff, as it relates to Newton, it’s still – we are still working 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 facility..

And then very quickly, Bill, on the EV comments you made in the thermal barrier light-duty truck.

Is there any CapEx associated with that? And anything you can share around content per vehicle and when the start of production might be?.

Yes. The CapEx for that is relatively light. Some of it’s already been spent. It will depend on how fast it ramps quite frankly. If it ramps faster, there will be a little bit more CapEx next year for it, but relatively small amounts of CapEx to ramp those programs that we have got 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 to Mr. Bill Siwek for any closing remarks. Please go ahead..

Thank you, operator and thank you all again for your time today and continued interest and support of TPI. I look forward to the next quarter. Thank you..

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..