TPI Composites Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 22, 2024

There are 11 speakers on the call.

Operator

Good afternoon,

Speaker 1

and welcome to the TPI Composites 4th Quarter and Full Year 2023 Earnings Conference Call. All participants will be in 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 turn the conference over to Jason Wegman, Investor Relations for TPI Composites.

Speaker 1

Thank you. You may begin.

Speaker 2

Thank you, operator. I would like to welcome everyone to TPI Composites' 4th 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.

Speaker 2

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 comparable GAAP financial measures. With that, let me turn the call over to Bill Siwek, TPI Composites' President and CEO.

Speaker 3

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 Q4 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 and A.

Speaker 3

Please turn to Slide 5. Expected our 4th 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 4th quarter were successful as we ended the year with $161,000,000 of cash, which was flat with where we ended the Q3. 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 the last few quarters, we believe we had opportunities to harvest cash out of our balance sheet and that's exactly what we did.

Speaker 3

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 4 weeks while we resolved the issue with both the supplier and our customer. This reduced our 4th quarter sales by approximately $23,000,000 and adjusted EBITDA by $8,000,000 but we do expect to recover the misplay 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 through a cashless exchange for $393,000,000 of senior secured term loan and the issuance of 3,900,000 shares of common stock. This refinancing improved our liquidity by about $190,000,000 over the term of the loan and we permanently reduced our obligations to Oaktree by about $90,000,000 We can now take up to 100 percent of interest payments through December 31, 2025 and up to 50 percent of interest payments from January 1, 2026 through the maturity on March 31, 2027.

Speaker 3

This agreement provides us with significantly greater financial flexibility and along with 132.5 $1,000,000 convertible green bond we issued earlier in 2023 provides us with

Speaker 4

the liquidity we expect to need to fill our existing capacity, manage

Speaker 3

through the current market conditions and ultimately grow to serve our customers' capacity needs. From a customer 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.

Speaker 3

We will start up four lines of the new blade this year and production will ramp up in the second quarter to be on full serial production over the second half of the year. With the addition of this blade, we now support GE's 3 primary turbine models for the U. S. Market. To expand its reach in the European wind energy market, we established 2 new production lines in Turkey A for Nordex, increasing our total capacity for them in Turkey to 8 lines or approximately 3.2 gigawatts.

Speaker 3

This expansion secures production for up to 3 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.

Speaker 4

Please turn to Slide 6.

Speaker 3

Before I jump into our operating results, I would like to formally welcome Chuck Stroud, 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 and Controls within Collins Aerospace, a multibillion dollar business. With a track record of leading large complex organizations, Chuck brings deep operational expertise and leverage 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.

Speaker 3

Neil brings over 25 years of experience in quality and engineering positions as the wind and automotive industry. Neil spent more than 13 years with Vestas in a variety of quality leadership roles with the last 5 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.

Speaker 3

Our blade facilities in India and Turkey continued to excel operationally, driving our global utilization rate to 87% while delivering $0.602 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 Q2. 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.

Speaker 3

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 this year. Our supply chain costs have improved significantly compared 2 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 had returned to pre pandemic norms, we have seen a spike in rates due to the ongoing Red Sea situation.

Speaker 3

While the situation remains fluid, we've mitigated delivery impacts through alternative suppliers 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 the 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.

Speaker 3

This momentum was further bolstered at COP 28 where parties made history by agreeing to a transition away from fossil fuels and the global stock date. 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 2,030 renewable energy target to 42.5%. In addition, the wind power package was launched aiming to double wind capacity by 2,030 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 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 the full fledged market recovery.

Speaker 3

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 4 for Nordex and Matamoros that will transition back to them in mid-twenty 24 as well as 6 new lines starting up and 4 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 in start up and transition achieve cereal 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 20 24 EBITDA margin and to our target EBITDA margin in the high single digits.

Speaker 3

With that, I'll turn the call over to Ryan to review our financial results.

Speaker 5

Thanks, Bill. Please turn to Slide 8. In the Q4 of 2023, net sales were $297,000,000 compared to 400 $2,300,000 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 $96,900,000 in the Q4 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 4 weeks due to out of spec material we received from a supplier and we ran down 5 lines of preparations for transitions that will occur in early 2024.

Speaker 5

Sales were also impacted by 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 correlates to lower revenue under the cost cost revenue recognition method for our blade contracts. These decreases were partially offset by higher average selling prices. Field services sales decreased by $1,100,000 in the 4th 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 Q2 of 2023.

Speaker 5

Automotive sales decreased $7,300,000 in the 4th quarter compared to the same period in 2022. This decrease was primarily due to a reduction in bus body delivery due to Protares bankruptcy. Net income attributable to common stockholders from continuing operations was $11,600,000 the Q4 of 2023 compared to a net loss of $41,900,000 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 $82,600,000 gain on extinguishment. Adjusted EBITDA for the Q4 of 2023 was a loss of $28,100,000 compared to adjusted EBITDA of $21,200,000 during the same period in 2022.

Speaker 5

The decrease in adjusted EBITDA for the 3 months ended 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 start up and transition costs. In addition, note the Q4 of 2023 includes $20,000,000 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 $161,000,000 of unrestricted cash and cash equivalents and $485,000,000 of debt, which includes the senior secured term loan with Oaktree, the 132,500,000 dollars Green convertible notes we issued in March of last year, the credit facilities we utilized in Turkey and India to manage working capital on a small number of equipment finance leases.

Speaker 5

We had negative free cash flow of $15,400,000 in the Q4 of 2023 compared to positive free cash flow of $15,500,000 in the same period in 2022. The net use of cash in the Q4 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 $72,000,000 in the 4th quarter or almost 40%. We continue to place a significant focus on preserving cash, ensuring we 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 on Slide 10.

Speaker 5

We anticipate sales from continuing operations in the range of $1,300,000,000 to $1,400,000,000 representing a slight decline compared to 2023. This decline is primarily driven by lower blade sales due production line transitions and temporary demand softness, partially offset by rising ASPs. Additionally, automotive revenue will likely decline due to 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.

Speaker 5

The absence of a large warranty charge, completion of the Nordics Matamoros contract, the absence of the Proterra Bankers 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 start ups and transitions, higher start up and transition costs and continued inflation challenges, particularly in Turkey 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 2 halves.

Speaker 5

In the first half, we will be ramping up 10 lines that are either in startup or transition. We expect the first half 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 start ups early in the year, we are expecting to generate modest losses and consume cash. In the first half of the year, we're 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.

Speaker 5

We currently expect that sometime in the second quarter we will likely hit our low watermark for cash on hand and then as the ten lines ramp to cereal production, we expect to be generating positive cash flow in the second half of the year. In 2024, we anticipate capital expenditures of $25,000,000 to $30,000,000 These investments are driven by our continued focus on achieving our long term growth targets and restarting our idle lines. 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

Speaker 3

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 to 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.

Speaker 3

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.

Speaker 1

We will now begin the question and answer The first question today is from Mark Strouse with JPMorgan. Please go ahead.

Speaker 4

Yes, good evening. Thank you very much for taking our questions. So wanted to go back to the comment about the some of your customer well, I guess, kind of the ramp in order activity kind of waiting for some of the guidelines of the IRA to come out. Just want to make sure I'm thinking about this right. Is that more a comment of kind of the pipeline opportunities and new lines that might come with that?

Speaker 4

And I think the follow on question is just kind of the visibility into stone or is there anything that that ramp is waiting on as far as the IRA or otherwise?

Speaker 3

Yes. Hey, Mark. Thanks for the question. I mean, as far as the second half, that's pretty much baked in right now, right? I mean, we've got there's nothing dependent on the IRA for that.

Speaker 3

I think from a longer term perspective, we see inflection point in 2025. You've seen a number of our customers announce some pretty good orders towards the end of last year, beginning of this year. Many of those are for 2025 and 26 and beyond. So again, I think there is some clarification on IRA. There's I think we're starting to see a lot of interest and activity around repowering as well.

Speaker 3

And I just think there's still some clarification domestic content and a few other things that will kind of open up the spigot, if you will, on whether it's repowering or further orders into 2025 and 2026.

Speaker 4

Okay. Thanks, Bill. And then the comment about the getting north of $100,000,000 in annualized EBITDA in 'twenty or beginning in 2025. Just kind of making sure I'm thinking about that right, are you saying kind of full year 2025 number you're expecting that to be over $100,000,000 or is that at some point in 2025, the annualized run rate will be north of $100,000,000

Speaker 3

No, that would be for the year 2025 over $100,000,000 dollars

Speaker 4

That's the one.

Speaker 3

If you think about the okay, thanks. Thanks, Mark.

Speaker 5

No, no, no, sorry, Bill. I didn't

Speaker 4

mean to interrupt. Go ahead.

Speaker 3

No, you're good. Thank you.

Speaker 1

The next question is from Eric Stine with Craig Hallum. Please go ahead.

Speaker 4

Hi, Bill. Hi, Ryan.

Speaker 3

Eric, how are you?

Speaker 4

I'm doing well. Hugh? So maybe we could just talk a little bit about the more color on the materials issue you had that caused the slowdown and then also the shutdown. I mean, is this something that is common in your business, but this just happened to be very large, so it had an outsized impact and you need to call it out or just maybe some thoughts and is it something that we can think about that it is behind you?

Speaker 3

Yes, it's behind us. It's not common, and it was a material impact to us, which is why we called it out. So this was a customer directed supplier with a quality issue. We identified it quickly early on, quite frankly, and stopped production as a result because we didn't want to have any quality escape. So it's not something that is normal in the industry, but it happens from time to time.

Speaker 3

And we it is behind us and it did create a significant slowdown for us in at least in one plant in the Q4, which is why we called it out separately.

Speaker 4

Got it. And it's something that I mean, just to confirm, so you do expect, I mean, this is not lost volume. These are volumes that you will see in 'twenty four, you expect to see in 2024? And is there any way to think about kind of the magnitude of the makeup that you might get from that supplier or is it I mean I would assume it's a meaningful amount?

Speaker 3

Yes. I mean we've obviously we've returned the material. But it was I think we it's a $20,000,000 sales impact and an $8,000,000 EBITDA impact in the Q4. So you would expect that to flow through into 2024.

Speaker 4

Okay. And then maybe second one for me, just on the warranty issues, good news that some of your technicians are starting to transition back to more revenue producing activities. I mean, on one hand, you're sounding much more optimistic about it, but yet it still sounds like it's something that you expect to have an impact going forward. So is this just a case of these things winding down? And I mean, do you feel like you've got a handle on the entirety of the issue?

Speaker 4

Is this something that you think you're getting very close to it being done?

Speaker 3

Yes, we definitely feel we have a handle on the issues quite frankly we have for quite some time. But these warranty campaigns take a little bit of time to work through. So we'll be continuing to work through the balance of those campaigns even though the cost is already sitting in the P and L, but we will still have some technicians as we finish up those campaigns. So the vast majority of our technicians are already on 3rd party work or on billable work already. So yes, 2024 should be a much better year from the field service standpoint.

Speaker 4

Okay, that's great. Thanks.

Speaker 3

Yes. Thank you.

Speaker 1

The next question is from Justin Clare with ROTH MKM. Please go ahead.

Operator

Yes. Hi, thanks for taking our questions here. So I guess first off, I was wondering if you could just update us on how many lines you expect to have operating at the end of 2024? I know you had some commentary earlier about it. So it sounds like maybe 39, but I wanted to be sure.

Operator

And then how many of those lines that you expect at the end of the year are under contract versus how many are under negotiation still?

Speaker 5

Justin, I'll start off. We ended this year with 37 lines. And we're turning 4 lines back over to Nordex for Matamoros. We're adding 4 lines in for GE down in Juarez. So those kind of offset.

Speaker 5

And then there's 6 other lines that we're starting up through startups and transitions this year. And then there'll be 7 lines that go away because in one factory just due to space that we're going from 3 lines down to 2. So we'll end the year with 36 lines installed.

Speaker 6

Got

Operator

it. Okay. Is there any discussions with your customers to potentially add more lines by the end of 2024 than where you are right now? Or if not in that timeframe, given the strong order flow and the potential ramp in 2025, what's the possibility that you could look at expanding at in that timeframe?

Speaker 3

Yes, we there's certainly we do have some available capacity that we could fill relatively quickly in 2024. And as you rightly point out, there has been a lot of order activity recently, end of last year and carried into this year. We do see volumes picking up fairly significantly in 2025. So you might imagine we're having discussions with all of our customers about capacity, additional capacity and additional lines.

Operator

Got it. Okay. And then just one other one, just curious on the trend in OpEx in 2024 versus what we saw in 2023? And then as we move further into 2025, any meaningful change that we should be thinking about?

Speaker 5

Yes. I'm assuming you say OpEx or our capital expenditure guidance, we've guided to $25,000,000 to $30,000,000 About half that is related to startups and transition.

Speaker 2

Operating expense.

Speaker 5

Okay. Are you referring to operating expense or CapEx, Justin? Operating expense.

Speaker 3

Yes. I mean, we have taken significant amount of operating costs out of our structure over the last several years and we will continue to do that. Our new COO has a very deep history and experience on with lean, and that is a mindset that we're employing throughout our organization. So we expect to continue to take down structural costs and we'll continue to focus on that as we move forward. So I would the trend of reducing our operating costs as a percentage will continue.

Operator

Okay, great. Thank you.

Speaker 3

Yes. Thanks, Justin.

Speaker 1

The next question is from Dimple Gossai with Bank of America. Please go ahead.

Speaker 7

Hi, good evening. Thank you so much for taking our question today. I have two questions, please. One is, given that you've realized higher pricing in this latest set of results, can you give us an idea of what how we can think about the cadence of margins through 2024 given various different dynamics at play? That's the first question.

Speaker 7

And also on the pricing side and the backlog, do you see any evidence of customers that are basically looking to renegotiating pricing for some of these projects in the backlog?

Speaker 3

I'll take the second one first and then I'll let Ryan take you through the margins. But no, I mean, obviously, we have we repriced essentially every quarter based on market pricing of raw materials and what have you. But as far as renegotiating price based on specific projects, that's not something we're seeing. I mean, it's we have contractual arrangements with our customers that have formulaic pricing. So we're not seeing anybody come back on specific projects for repricing.

Speaker 3

And on the margins, Ryan?

Speaker 5

Yes. I think on the pricing side, so with this year, our mix of blades was a little bit more towards the longer blades. We actually had that mix more than outweighed that we had material cost coming down. As you know, a lot of our material costs flow to our customers, so that partially offset that. As we look to 2024 on the pricing side, we do expect our ASPs to go up.

Speaker 5

That will be largely due to just the length of blades and some of the ramp up of those. From a margin perspective, the big hitters as you look from 2023 to 2024 is we had almost $50,000,000 of warranty charges that go away. We also had about $45,000,000 of losses from our Nordic SmetMorris plant that effectively go down to close to 0. And then we had a $22,500,000 charge for Fotero bankruptcy that goes away. And so as those go away, we have a number of different margin improvement plans that we have in place.

Speaker 5

One of those being that field services will be obviously a lot more party revenue generating activities and less time on warranty work. And then we have about $30,000,000 of total cost reductions baked into the plan that are offsetting a lot of the inflation headwinds that we have currently out there today. As you when you go into our 10 ks, we talk a lot about some of the inflation headwinds we have in Turkey and Mexico. And so our teams have worked to go out and take a lot of cost out of our system to make sure that we can offset those things.

Speaker 3

So first, as we talked about though, it's a tale of 2 halves, right? So first half, we're talking about mid single digit loss, back half of the year, second half of the year, mid single digit profit. So that's kind of the cadence.

Speaker 7

Perfect. Thank you so much.

Speaker 3

Yes.

Speaker 1

The next question is from Andrew Percoco with Morgan Stanley. Please go ahead.

Speaker 8

Great. Thanks so much for taking the question. Most of mine have been answered, but I just want to follow-up quickly on the margin cadence.

Speaker 4

Can you maybe

Speaker 8

just give us a sense for what's baked in for the Red Sea dynamic? I think it was mentioned that it's having an impact on freight costs. So can you give us some sense for what you're baking into your margin guidance for elevated freight costs? And maybe just remind us, what your contract structure looks like in terms of passing those costs through to

Speaker 3

customers? Yes. So I can't give you a precise percentage that we've baked in. Again, we're not impacted that significantly quite frankly. It's relatively few raw material SKUs, if you will.

Speaker 3

And we have looked and we do have alternative suppliers to avoid that route to some extent. So it's actually pretty minimal impact. And however, to the extent it does impact, our pricing is on total delivered costs. So to the extent we have price increases as a result of logistics that would get baked into the blade price as well.

Speaker 8

Okay. That's helpful. And then maybe just to come back to working capital for a second. Can you just give us a sense for what that looks like in the first half of the year as you transition some of these lines? And maybe just give us a sense for on the liquidity front, it sounds like you're focusing on managing cash, but what are some of the levers that might warrant some additional capital to be brought into the balance sheet to manage through this transition?

Speaker 5

We're not planning on bringing incremental capital onto the balance sheet at this point in time. I think there still is a little room to work in our existing plants that have that we have mature blades on we're producing. I think there's still some room out there that we can bring some of that working capital down particularly around our inventory balances and contract assets, which is what we executed on the Q4. You will see a modest increase in working capital because we have a lot of lines that are ramping up here in the first half of the year. So that consumption of cash that I talked about in the prepared remarks was really focused in on some of those areas that we have production that will be ramping up.

Speaker 5

So that will consume some of that working capital. But we're going to continue to go after everything we can on the balance sheet as far as getting as efficient and disciplined as we can.

Speaker 8

Great. Thanks so much.

Speaker 1

The next question is from Kashy Harrison from Piper Sandler. Please go ahead.

Speaker 9

Thank you for good afternoon, everyone, and thanks for taking the questions. Maybe a follow-up to Mark. So how much of your revenue guidance is derisked by your current supply agreement? And then while we're on the discussion of revenues, what is the level of revenue required in 2025 to get to $100,000,000 of EBITDA?

Speaker 3

Yes. So the all of our revenues derisked in 2024. I mean, it's all under contract. So that's pretty straightforward. Revenue, I mean, we're not going to give you guidance for 2025 at this point in time clearly, but think of it as

Speaker 5

Yes, I would think, Kashy, mid single digits is where we plan to be at the second half of the year. I think as we enter 2025, we'll be on that pace and as volumes start accelerating, that's where we start to get on that walk to get up to our high single digits that we expect to be on a pace to be there as we exit 2025 and go into 2016. So still working through the timing on some of starts and transitions, but I would think about us being at least a mid single digit EBITDA type business as we get into 2025.

Speaker 9

Got it. I appreciate the color there. And then just my follow-up question. You guys have highlighted the IRA clarity as a driver of project delays. Can you remind us what exactly customers are waiting on?

Speaker 9

When do you expect to get that clarity? And then I guess maybe just another question is, why is it that solar development has moved forward regardless of IRA clarification and while wind has taken longer has that taken longer to move forward post IRA?

Speaker 3

Yes. So on IRA, there's still even though guidance has come out on domestic content, there's still a lot of clarification that's needed, obviously, on the green hydrogen piece, which could drive a significant amount of wind in the long term, there's still a lot of clarification around that. The initial guidance was not that favorable. Those are just a couple of examples. On the solar side, it's a good question.

Speaker 3

I think part of it is development of solar might be perceived as being a bit easier. I think inflation has impacted solar a little bit differently than it has wind. I think wind does take longer to permit in some locations. So it's a whole bunch, it's a whole combination of different factors. Kashy, I can't just point to 1, but it's a number of different factors.

Speaker 9

Got it. Thank you.

Speaker 3

Yes.

Speaker 1

The next question is from William Grippin with UBS. Please go ahead.

Speaker 4

Hi, good evening. Thanks for

Speaker 10

the time. My first question was just around the strategic alternatives for the automotive business. And if you can speak to just any potential outcomes or maybe range of outcomes here as you move towards possibly completing it, it sounds like by June here?

Speaker 3

By range of outcomes, you mean structure or I mean, I think we've talked about it before. It could be we could be talking about joint venture, partnership, any combination of those things that would provide capital to that business to execute on a lot of the development programs we have and the growth we expect.

Speaker 10

Got it. Perfect.

Speaker 3

Was that

Speaker 10

And then Does

Speaker 3

that answer your question?

Speaker 10

Yes. You got it. You got it. Yes. And just thinking a little longer term, 3 plus years out here as the wind market hopefully continues to recover and stabilize.

Speaker 10

How are you thinking about potentially adding lines beyond the 37 at that point. Are you comfortable with kind of the footprint you have in place or would you expand more if you think the demand is there and sustainable?

Speaker 3

Yes, clearly, if the demand if we see the demand there and it is sustainable and we have commitments from our customers that in certain regions, we certainly will look at opportunities. We're looking at them today. These if it's a greenfield, it takes a long time to get there. So looking at markets and geographies where demand we think demand will be for quite some time, we're evaluating that today. So the answer is yes, we will certainly consider that.

Speaker 3

Are we comfortable with our footprint today? Absolutely. I think we have a great footprint and we do have capacity to fill. So I think just by filling our capacity today, we get north of $2,000,000,000 of revenue, filling our capacity and running that at a fairly modest utilization rate, 90s mid-90s and gets us to those EBITDA numbers that we've talked about. So I think we're in a good position today.

Speaker 3

But if Bill. Yes,

Speaker 5

Appreciate it. Thanks, Bill.

Speaker 3

Yes, you bet. Thanks, Will.

Speaker 1

The next question is from Jeffrey Osborne with TD Cowen. Please go ahead.

Speaker 6

Hey, Bill, three quick ones. On the EV side, I think you had previously talked about year end having some clarity on that. I think the 10 ks makes reference to June. Is the sort of anti EV marketplace delaying that or is there just a slower process than anticipated?

Speaker 3

I would say it's more of a little bit slower process than anticipated. But still, we're moving forward, a lot of interest and we do believe we'll have something done here shortly.

Speaker 6

Got it. Good to hear. And then on the supplier issue, it looks like the decremental margins were around 35%, just 8 divided by 23. What are the why is that? Is that just you had to pay people to stand around from a labor perspective, I assume in Mexico for 4 weeks to do nothing?

Speaker 6

Or you just walk us through that? And then when you are going after damages, is it for the full value of the product loss or the full loss income or EBITDA to the company?

Speaker 3

Yes. So the I mean, you're basically losing contribution margin, right? So, it is we do have people that are I wouldn't say they were doing nothing, but they are not nearly as productive as they would be if they're building blades. So yes, you're basically stopped and you can't just send them home. You've got to keep that workforce intact.

Speaker 3

So it's that, it's additional cost to deal with the speed up then of the production once you do restart. Damages, I don't want to talk about that publicly, but our contracts provide for that and so we'll follow our contract.

Speaker 6

Got it. And the last question I had is, is there any update on what the plan is for Knewton? And is that I assume that's not in 2024 guidance and perhaps if it's like repowering for GE, is that something that could be started fairly quickly versus a newer blade model that maybe you haven't produced in the past?

Speaker 3

Yes. So you're right, it's not in 2024 guidance. And to your point, to the extent we were to be asked to start with the existing blade that the plant is tooled for, we could start up fairly quickly. It would just be a matter of assembling the workforce. So that would be relatively quickly.

Speaker 3

But yes, it is not in the 2024 guidance at this point.

Speaker 6

The rationale there is that because they need clarity on IRA or is there some other market driver on why you don't have clarity on that facility?

Speaker 3

Yes. That's it's more clarity for GE and what they want to use the plant for at this point.

Speaker 6

Got it. Thank you. Go ahead.

Speaker 3

Thanks, Jeff.

Speaker 1

This concludes our question and answer session. Would like to turn the conference back over to Bill Siwek for any closing remarks.

Speaker 3

Thank you again for your time today and continued interest and support in TPI. We'll talk next quarter. Thank you.

Speaker 1

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

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Earnings Conference Call
TPI Composites Q4 2023
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