TPI Composites, Inc. (NASDAQ:TPIC) Q4 2023 Earnings Call Transcript
TPI Composites, Inc. (NASDAQ:TPIC) Q4 2023 Earnings Call Transcript February 22, 2024
TPI Composites, Inc. beats earnings expectations. Reported EPS is $0.31, expectations were $-0.91. TPIC isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the TPI Composites Fourth Quarter and Full Year 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jason Wegmann, Investor Relations for TPI Composites. Thank you. You may begin.
Jason Wegmann: Thank you, operator. I would like to welcome everyone to TPI Composites fourth 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.
Bill Siwek: Thanks, Jason. 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 fourth quarter and full year, 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. As we indicated on our third quarter earnings call, we expected our fourth quarter sales and adjusted EBITDA to be down as we started line transitions across our plants and lowered inventory levels to optimize cash. Our strategy to preserve cash in the fourth quarter was successful as we ended the year with $161 million of cash, which was flat with where we ended the third quarter.
I'm very happy with how our team executed our cash flow initiatives to prioritize liquidity through the quarter given some of the headwinds we were facing. As Ryan has been discussing in the last few quarters, we believe we have opportunities to harvest cash out of our balance sheet, and that's exactly what we did. During the quarter, our sales were negatively impacted at one of our plants due to out-of-spec material received from a supplier that resulted in a significant production slowdown over a 10-week period, including a shutdown for four weeks, while we resolved the issue with both the supplier and our customer. This reduced our fourth quarter sales by approximately $23 million and adjusted EBITDA by $8 million, but we do expect to recover the missed blade volume, revenue and adjusted EBITDA along with liquidated damages from the supplier in 2024.
I was pleased with how our team reacted to this issue, shut down production and engaged with our customer quickly to ensure we didn't have a quality issue. As we announced in mid-December, we refinanced our Series A preferred shares by converting the $350 million of Series A, along with $86 million of accrued pay-in-kind of dividends through a cashless exchange for $393 million of senior secured term loan and the issuance of 3.9 million shares of common stock. This refinancing improved our liquidity by about $190 million over the term of the loan, and we permanently reduced our obligations to Oaktree by about $90 million. We can now pick up to 100% of interest payments through December 31, 2025, and up to 50% of interest payments from January 1, 2026, through the maturity on March 31, 2027.
This agreement provides us with significantly greater financial flexibility and along with the $132.5 million convertible green bond we issued earlier in 2023 provides us with the liquidity we expect to need to fill our existing capacity, manage through the current market conditions and ultimately grow to serve our customers' capacity needs. From a customer perspective, we finalized several contract extensions and expansions to provide significantly enhanced visibility into our sales volumes in 2025 and beyond. We signed a new supply agreement with GE in Mexico to provide their workhorse turbine, which will facilitate GE's ability to competitively serve the U.S. market while building on a long and productive relationship. We will start up four lines of the new blade this year, and production will ramp up in the second quarter to be at full serial production over the second half of the year.
With the addition of this blade, we now support GE's three primary turbine models for the U.S. market. To expand its reach in the European wind energy market, we established two new production lines in Türkiye for Nordex, increasing our total capacity for them in Turkey to eight lines or approximately 3.2 gigawatts. This expansion secures production for up to three years through 2026. We also extended our supply agreements with Vestas through 2024 in Mexico and India and continue to work with Vestas to align our footprint with their long-term needs. Please turn to Slide 6. Before I jump into our operating results, I would like to formally welcome Chuck Stroo, our COO of Wind. Chuck comes to us having spent 24 years in the aerospace industry, most recently as Vice President of Operations for Power & Controls within Collins Aerospace, a multibillion-dollar business.
With a track record of leading large complex organizations, Chuck brings deep operational expertise, and leveraging his passion for lean principles to drive operational excellence and consistently deliver results. We are thrilled to have Chuck join the TPI team and look forward to his contributions to our ultimate success. Also joining us this past year as our Chief Quality Officer was Neil Jones. Neil brings over 25 years of experience in quality and engineering positions in the wind and automotive industry. Neil spent more than 13 years with Vestas in a variety of quality leadership roles with the last five as Senior Vice President, Quality, Health, Safety and Environmental. Before joining Vestas, Neil spent over 20 years in the automotive industry, including engineering and quality leadership roles with TRW and a senior quality leadership role with Eaton Automotive.
I'm excited with the transformative strength of our new and improved executive team as each member brings exceptional talent, diverse perspectives and a proven record of success, making them well equipped to guide our company to the next exciting chapter. Now moving on to the business. Our blade facilities in India and Türkiye continue to excel operationally, driving our global utilization rate to 87% while delivering 602 sets or 2.6 gigawatts during the quarter. As expected, revenue from our global service business declined year-over-year due to fewer technicians deployed on revenue-generating projects due to the warranty campaign we announced in the second quarter. That will turn around in 2024. While the automotive business has made significant progress with the order pipeline and operational execution initiatives, 2023 revenue was down year-over-year due primarily to Proterra's bankruptcy.
As you know, we have made meaningful investments to expand the automotive business during the last several years. While we believe there is increasing demand for composite products for electric vehicles, and we have made significant progress with the automotive business, we intend to prioritize capital for growth in the wind business in the near-term, which is why we have been exploring strategic alternatives to ensure our automotive business is sufficiently funded to execute on its growth strategies. Our intent is to complete this process no later than June 30 of this year. Our supply chain costs have improved significantly compared to the past two years. Raw material costs continue to decline from 2023 levels, and we anticipate that excess capacity of key inputs and reduced Chinese demand should create further cost savings in 2024.
While logistics costs have returned to pre-pandemic norms, we have seen a spike in rates due to the ongoing Red Sea situation. While the situation remains fluid, we've mitigated delivery impacts through alternative suppliers and multimodal logistics solutions, and we'll continue to closely monitor events for potential effects on our cost and availability of critical raw materials. Now, with respect to the wind market, globally we have seen a surge in government support for renewables in recent years, exemplified by the U.S. Inflation Reduction Act and the EU’s policy push for streamlined regulations, faster permitting and cross border cooperation. These initiatives fuel our optimism for long-term wind industry growth. This momentum was further bolstered at COP28, where parties made history by agreeing to a transition away from fossil fuels and the global stocktake.
The Renewable Energy Directive, a key part of the European green energy deal was amended in early 2023 and adopted by all EU countries in November, raising its 2030 renewable energy target to 42.5%. In addition, the Wind Power Package was launched aiming to double wind capacity by 2030 and to strengthen Europe’s competitiveness in wind energy manufacturing. While favorable long-term policies like the IRA and Net-Zero Industry Act provide optimism, we still don’t anticipate increased wind industry installations to fully materialize until 2025, as the wind industry awaits some critical details on implementing key components of the Inflation Reduction Act and the execution of the more robust European policies. Additionally, permitting hurdles, transmission bottlenecks, elevated interest rates, inflation and the cost and availability of capital all contribute to delaying a full-fledged market recovery.
We expect 2024 to be a year of transition with sales declining slightly from 2023 but with a significant EBITDA improvement. Currently, we are operating 37 lines, including the four for Nordex and Matamoros that will transition back to them in mid-2024, as well as six new lines starting up and four lines transitioning all in 2024. This will impact utilization and output in the first half of the year with the second half projected to improve markedly as the lines and startup and transition achieve serial production levels. So, notwithstanding slightly lower utilization in 2024 compared to 2023, we expect a significant improvement in EBITDA and EBITDA margin as many of the operational and quality challenges we experienced in 2023 are now behind us.
We expect our 2024 EBITDA margin to be in the range of 1% to 3% for the full year, but on a trajectory to get back to EBITDA levels north of $100 million in 2025 and to our target EBITDA margin in the high single digits. 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 fourth quarter of 2023 net sales were $297 million compared to $402.3 million for the same period in 2023, a decrease of 26.2%. Net sales of wind blades, tooling and other wind related sales, which hereafter I’ll just refer to as wind sales decreased by $96.9 million in the fourth quarter of 2023 or 25.6% compared to the same period in 2022. Sales were negatively impacted at one of our plants by a production slowdown over a 10 week period, including a shutdown for four weeks due to out of spec material we received from a supplier, and we ramped down five lines of preparations for transitions that will occur in early 2024. Sales were also impacted by a reduction in wind blade inventory included in contract assets driven by working capital initiatives.
The inventory reduction impacted net sales of wind for the quarter ended December 31, 2023 as lower blade inventory costs directly correlate to lower revenue under the cost-to-cost revenue recognition method for our blade contracts. These decreases were partially offset by higher average selling prices. Field services sales decreased by $1.1 million in the fourth quarter compared to the same period in 2022. While we were able to deploy many of our field services technicians back to revenue generating services in the quarter, our field services sales continued to be negatively impacted by the warranty campaign we disclosed in the second quarter of 2023. Automotive sales decreased $7.3 million in the fourth quarter compared to the same period in 2022.
This decrease was primarily due to a reduction in bus body deliveries due to Proterra’s bankruptcy. Net income attributable to common stockholders from continuing operations was $11.6 million in the fourth quarter of 2023 compared to a net loss of $41.9 million in the same period in 2022. The year-over-year improvement was primarily driven by the refinancing of our Series A preferred stock into a senior secured term loan whereby we recorded an $82.6 million gain on extinguishment. Adjusted EBITDA for the fourth quarter of 2023 was a loss of $28.1 million compared to adjusted EBITDA of $21.2 million during the same period in 2022. The decrease in adjusted EBITDA for the three months end of December 31, 2023 as compared to the same period in 2022 was primarily driven by lower sales as I just described, increased costs related to quality initiatives and higher startup and transition costs.
In addition, note the fourth quarter of 2023 includes $20 million of losses from our Nordex Matamoros plant. This should be the last quarter we see anywhere near that level of loss for this plant as we have better pricing in 2024 and plan to transition that factory back to Nordex in the middle of the year. Moving on to Slide 9. We ended the quarter with $161 million of unrestricted cash and cash equivalents and $485 million of debt, which includes the senior secured term loan with Oaktree, the $132.5 million green convertible notes we issued in March of last year, the credit facilities we utilized in Türkiye and India to manage working capital, and a small number of equipment finance leases. We had negative free cash flow of $15.4 million in the fourth quarter of 2023 compared to positive free cash flow of $15.5 million in the same period in 2022.
The net use of cash in the fourth quarter of 2023 was primarily due to our EBITDA loss and capital expenditures partially offset by working capital improvements, which were primarily aimed at lower inventory levels in our contract asset balance. Note that we were able to reduce our contract asset balance by $72 million in the fourth quarter or almost 40%. We continue to place a significant focus on preserving cash, ensuring efficiently deploy our working capital to make sure we can comfortably execute key initiatives as we move forward and restart our idle capacity. Now, a summary of our financial guidance for 2024 can be found in Slide 10. We anticipate sales from continuing operations in the range of $1.3 billion to $1.4 billion, representing a slight decline compared to 2023.
This decline is primarily driven by lower blade sales due to production line transitions and temporary demand softness, partially offset by rising ASPs. Additionally, automotive revenue will likely decline due to the Proterra bankruptcy, while field service sales are expected to improve with increased technicians deployed on revenue generating projects. We previously highlighted our expectation for a significant improvement in 2024 adjusted EBITDA and EBITDA margin. This is driven by several factors, the absence of a large warranty charge, completion of the Nordex Matamoros contract, the absence of the Proterra bankruptcy charge and our field service organization returning to revenue generating work. However, these positive factors will be partially offset by utilization decline from 82% to a range of 75% to 80% due to planned startups and transitions, higher startup and transition costs and continued inflation challenges, particularly in Türkiye and Mexico.
These factors contribute to an expected EBITDA margin range of 1% to 3%. I wanted to give you some directional perspective on our plans for 2024. We believe 2024 will be a tale of two halves. In the first half, we will be ramping up 10 lines that are either in startup or transition. We expect the first half’s volumes to be a fair amount lower than second half and the first quarter will be lower than the second quarter. As we work through these transitions and startups early in the year, we are expecting to generate modest losses and consume cash. In the first half of the year, I’m expecting our adjusted EBITDA margin to be a mid-single digit loss and as these volumes ramp, our adjusted EBITDA margin improves to mid-single digits in the second half.
We currently expect that sometime in the second quarter we will likely hit our low watermark for cash on hand and then as the 10 lines ramp to serial production, we expect to be generating positive cash flow in the second half of the year. In 2024, we anticipate capital expenditures of $25 million to $30 million. These investments are driven by our continued focus on achieving our long-term growth targets and restarting our idle line. We continue to be confident in our liquidity position, which has improved significantly since we refinanced the Oaktree preferred shares into a term loan. Our balance sheet, along with the improvement in our liquidity and operating results will enable us to navigate another transition year and will also allow us to invest to achieve our mid to long-term growth, profitability and cash flow targets.
With that, I’ll turn the call back over to Bill.
Bill Siwek: 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 market challenges and remain excited about how well positioned we are with our significantly improved liquidity and strong balance sheet to capitalize on the significant growth the industry expects in the coming years and in turn attain our growth and financial goals. I want to thank all of our TPI associates once again for their commitment, dedication and loyalty to TPI. I’ll now turn it back to the operator to open the call for questions.
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