TPI Composites, Inc. (NASDAQ:TPIC) Q2 2022 Earnings Conference Call August 3, 2022 5:00 PM ET
Company Participants
Ryan Miller – Chief Financial Officer
William Siwek – President & Chief Executive Officer
Conference Call Participants
Operator
Good afternoon, and welcome to TPI Composites Second Quarter 2022 Earnings Conference Call. Today’s call is being recorded. We have allocated 1 hour for prepared remarks and Q&A.
At this time, I’d like to turn the conference over to Anthony Rozmus [ph], Investor Relations for TPI Composites. Thank you. You may begin.
Unidentified Company Representative
Thank you, operator. I would like to welcome everyone to TPI Composites Second Quarter 2022 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 risk 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 Chief Executive Officer.
William Siwek
Thanks, Anthony. And good afternoon, everyone. Thank you for joining our call. I am here with Ryan Miller, our new CFO. Ryan brings with him a wealth of experience, spending considerable time in FP&A operations, Investor Relations and most recently as the CFO of a large division of a multinational aerospace and defense company. I want to welcome Ryan to the TPI team, and I look forward to introducing Ryan to all of you in the coming days and weeks.
Now onto our second quarter results, where I will discuss our global operations, including our service and transportation businesses then cover our supply chain and the wind energy market more broadly. Ryan will then review our financial results, and then we will open the call for Q&A.
Please turn to Slide 5. We delivered sales of $452.4 million during the quarter, which was down slightly from the prior year. Sequentially, sales increased 18% over the first quarter as we completed a number of transitions and start-ups. Adjusted EBITDA was $10.3 million, including unanticipated nonrecurring shutdown costs in Iowa and Mexico. And we generated free cash flow of $19.4 million as a result of tight cost controls, solid execution, including multiple transitions and start-ups.
As you can see on Slide 6, we have approximately $2.7 billion of potential wind blade revenue through 2024. You should expect to see our potential wind blade revenue under contract growing again as we close the negotiations to extend production on up to 14 production lines currently under contract through the end of 2022 as well as approximately 20 lines that are under contract through 2023.
Turning to Slide 7. I’ll now give you a quick update of our global operations supply chain as well as the wind market. During the second quarter, we did not experience any significant production issues from COVID, including in China, where COVID cases have moderated since the beginning of June. Domestic logistics in China have been impacted. But thanks to the efforts of our supply chain team, we met our Q2 production targets and continued to deliver blades on time from Yangzhou as well as export raw materials on a timely basis that we still source in China.
During the quarter, we continued to make excellent progress on the speed of our startups and transitions. We completed 5 transitions and start-ups across China, Mexico and India, all ahead or on schedule. Our plants in China, India and Turkey all performed well ahead of plan in Q2. And with the exception of our Nordex facility in Matamoros, our Mexico operations are performing at or above plan as well. Our focus on safety, quality, execution, cost savings and the optimization of our manufacturing footprint during these challenging times will enable us to continue to maintain a strong balance sheet and put us in a position for growth once global demand returns.
In our service business, we have further expanded our footprint in Europe with the addition of a branch in France while continuing to increase operations in the U.S. We’re on track for 40% to 50% top line growth this year. We expect transportation revenue to grow by approximately 40% in 2022 based on awarded supply agreements and development programs, notwithstanding the supply chain issues plaguing the automotive industry.
The transportation business unit continues to deliver strong improvements in operational efficiencies and customer engagement despite certain programs experienced reduced volumes in Q2 due to the aforementioned customer supply chain constraints. The development programs continue to validate the potential weight reduction, investment efficiency, reduce time to market and performance benefits of composite solutions. We anticipate these programs will result in incremental OEM supply agreement starting in 2023. Through collaborative development with our commercial vehicle and EV passenger segment customers, we are delivering innovative solutions to enable the electrification of their fleets.
Moving on to our supply chain. The situation continues to be challenging. We continue to see higher energy prices as well as higher prices on petroleum-based feedstocks. During the past year, there were both significant price increases and supply constraints with respect to epoxy resin and carbon fiber as well as increases in inbound logistics costs. We expect carbon fiber and related product supply to remain constrained as demand for carbon continues to outpace capacity additions.
Production of carbon products is also very energy-intensive, and rising energy costs are adversely impacting the cost of carbon materials after already seeing price increases of up to 50% for certain carbon feedstocks during 2021. Epoxy resin prices continue to see pressure with constrained and high-priced petroleum-based feedstocks and high energy costs driving some producers in Europe to curtail production. High resin prices in Europe and North America continue to be supported by bullish demand from industries like automotive, infrastructure and construction. As of today, we have secured adequate raw materials for all plant production in 2022, including the raw materials that is controlled by our customers.
Although we expect that the price of carbon fiber and resin will remain at elevated levels in 2022, approximately 60% of the resin and resin systems and approximately 90% of carbon fiber we use is purchased under contracts either controlled or borne by our customers and therefore these customers receive or bear 100% of any decrease or increase in price.
We are continuing to diversify and derisk our supply chain by qualifying sources in the regions in which we manufacture products to reduce the impact of high logistics costs, provide security of supply and build long-term strategic partnerships with key suppliers to ensure the best pricing and availability in the short, medium and long term. Other than our production in China, which primarily relies on Chinese suppliers, we have reduced our exposure to China for TPI-controlled spend under 6%, down from over 20% in 2019.
Onto the wind market. As we explained on our last earnings call, the war in Ukraine has brought to the forefront the need for energy security and independence not only in Europe but across the globe. We applaud the European Commission’s swift action by announcing the Repower EU plan in May, which is aimed to transform Europe’s energy system by handing the EUs dependence on Russian fossil fuels and further addressing the climate crisis. In July, the EU announced that they are investing over EUR 1.8 billion and 17 large-scale innovative clean tech projects with an option for 20 additional projects that could be announced later this year. While we won’t start to see the benefit immediately, we are encouraged by the long-term prospects of the European wind market.
In the U.S., we are certainly encouraged by the recently proposed Inflation Reduction Act of 2022. The stability of the act would provide in the U.S. market and the impact this could have to accelerate demand should it ultimately get signed into law. In the meantime, we continue to listen and work with our customers to optimize our footprint to better serve their needs today and be best positioned to serve their needs once demand recovers.
While we recognize the challenges the wind industry faces, we still believe demand for wind energy will strengthen over the long term given the focus on energy security and independence globally and the necessity to decarbonize and electrified to meet the aggressive goal set to combat climate change. TPI remains in a unique position with our global footprint in key strategic geographies, along with collaborative relationships with our suppliers and our customers to grow as the demand for wind begins to accelerate again. Execution, cost control and liquidity are at the forefront of our priorities while continuing to move forward on multiple strategic initiatives to enable TPI to capitalize on the expected long-term growth in the wind market, including expanding our global service offerings and leveraging our expertise in blade design while also expanding our capabilities around logistics and recycling.
With that, let me turn the call over to Ryan to review our financial results.
Ryan Miller
Thanks, Bill. Please turn to Slide 9. All comparisons made today will be on a year-over-year basis compared to the same period in 2021.
For the second quarter ended June 30, 2022, net sales were $452.4 million compared to $458.8 million in the same period in the prior year. Net sales of wind blades were $414 million, down slightly compared to $418.7 million in the prior year. The decrease in wind blade sales was primarily driven by a 7% decrease in the number of wind blades produced due to a reduction in manufacturing lines, transitions of existing lines and currency fluctuations, which were partially offset by a higher average sales price due to the mix of wind blade models produced. Note that estimated megawatts generated from our blade production increased about 3% over the prior year due to over 3,400 megawatts, notwithstanding the reduction in lines in blade volume.
Net loss before preferred stock dividends and accretion improved from a loss of $39.8 million in the second quarter of 2021 to a loss of $5.5 million in the second quarter of 2022. Including $14.6 million of preferred stock dividends and accretion, net loss attributed to common stockholders for the quarter was $20.1 million compared to a net loss of $39.8 million in the same period in 2021. This improvement was due primarily to a $22.1 million decrease in income tax expense and $16.4 million in favorable foreign currency changes, partially offset by the increase in preferred stock dividends and accretion as well as approximately $8 million in nonrestructuring-related operating costs that were associated with certain manufacturing facilities in Newton, Iowa; Dafeng, China; and Juarez, Mexico, where production has stopped.
Our adjusted EBITDA in Q2 was $10.3 million or 2.3% of sales compared to $17.4 million or 3.8% of sales in the same period in 2021. The decrease was primarily due to the nonrestructuring-related operating costs associated with the 3 manufacturing facilities where production has stopped.
Now moving on to Slide 10. We ended the quarter with $155 million of unrestricted cash and cash equivalents and $62.3 million of debt. While our free cash flow for the 6 months ended June 30, 2022, was a net use of cash of $67.1 million, we had a good second quarter and generated $19.4 million of free cash flow. During the quarter, we continued our focus on tight cost controls, managing working capital and constraining capital expenditures. The current environment continues to be challenging across the wind market as we balance certain customers trying to stretch payment turns while at the same time ensuring we have a healthy supply chain. As we move forward, we are acutely focused on our cash position. and ensuring we are able to not only efficiently sustain operations but also capitalize on the recovery of the wind market when the time comes.
Back to you, Bill.
William Siwek
Thanks, Ryan. Turning to Slide 11. As we look forward to the rest of the year, we expect Q3 sales and adjusted EBITDA on a billings basis to be higher than Q2 as we anticipate higher volume will drive improved utilization. We have updated our formal guidance for CapEx for 2022 to $15 million to $20 million, down from $25 million to $30 million. Other than that, our guidance has not changed. We are still not providing GAAP revenue or adjusted EBITDA guidance given current market volatility, potential impacts under ASC 606 related to future contract modifications or extensions and corresponding changes to our long-term volume, which cannot be forecast with certainty at this time.
Please turn to Slide 13. To close, we remain focused on managing our business through near-term challenges in the industry and our efforts to position TPI as the preferred global solution provider to our customers and their customers to enable profitable execution and growth in the future. I want to thank all of our TPI associates once again for their commitment, dedication and loyalty to TPI and our mission to decarbonize and electrify.
I’ll now turn it back to the operator to open the call for questions.
Question-and-Answer Session
End of Q&A
And this concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.
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