Q3 2019 Earnings Call
Good afternoon, and welcome to <unk> Composites third quarter 2019 earnings conference call.
Today's call is being recorded and we have allocated one hour for prepared remarks and queuing up at.
At this time I'd like to turn the conference over to Christian Eaton Investor Relations for TV I composites. Thank you you may begin.
Thank you operator, I'd like to welcome everyone to P.I. composites third quarter 2019 earnings call.
We'll be making forward looking statements. During this call based on current expectations and assumptions, which are subject to risks and uncertainties.
Actual results could differ materially from our forward looking statements if any of our key assumptions are incorrect.
Because of other factors discussed in todays earnings news release.
And the comments made during this conference call Board, our latest reports and filings with the Securities and Exchange Commission.
Each of which can be found on our website www dot TPS composites dot com.
We do not undertake any duty to update any forward looking statements.
Today's presentation also includes references to non-GAAP financial measures.
You should refer to the information contained in the slides accompanying today's presentation for Definitionally information and reconciliations of historical non-GAAP measures to the closest GAAP financial measures.
With that let me turn the call over to Steve Lockhart P.B. I can call the CEO .
Thanks, Christian and good afternoon, everyone. Thank you for joining our call. In addition to Christian I'm joined today by built <unk>, our president and Brian Shoemaker, our CFO on this call Bill and I will provide an update on progress against our goals summary of the quarter a brief update out the window, the growing when market and our.
Strategy for profitable growth, Brian will then review our financial results in detail and then we'll open up the call procurement <unk>. Please turn to slide five.
We delivered solid results in the third quarter with adjusted EBITDA up $27.6 million, a 57.2% increase over Q3 of 2018 and net sales of nearly $384 million, a 50.5% increase over Q3 of 2018.
With 52, when blade lines currently under contract and World class locations around the world a growing average megawatts per year per line of about 300 megawatts and ramping up over 20 lines globally, we are progressing well toward our goal of establishing 18 gigawatts of global when blade capacity over the next few years.
Years.
Even with ongoing blade model transitions at that time running at about 80% utilization, we expect to produce about 15 gigawatts of blades per year and achieve our long term target of $2 billion of annual when revenue with an estimated 73 gigawatts global combined onshore and offshore wind market.
We expect to have more than 20% global market share our pipeline remains strong with the potential to add onshore lines as well as offshore lines. Once the offshore volumes reached levels to provide critical mass perficient outsourcing.
We have worked through the challenges of the startup in young Joe China and are now and of course to deliver as expected for the balance of this year and into 2020.
Our matter more a startup remains a challenge primarily as it relates to the local labor market. We've made significant progress there as well and we'll continue to explore avenues to maximize or productivity and finish the job building this facility into a world class manufacturing hub.
In India, we're optimistic that this will be one of our best startups to date, our senior leadership team has significant wind manufacturing and startup experience and virtually all of the first 100, TP <unk> associates have blade manufacturing experience, which puts us at a distinct advantage compared to our more.
Recent startups.
We're continuing to invest in our relationship with pro Terra while also focusing additional senior talent and accelerating expenditures related to our diversification efforts and the transportation space given the progress we've made with multiple customers over the last quarter as we've said before these development programs.
We'll take time to convert to production wins, but we're very pleased with our traction against our mission to grow this into a meaningful part of our overall business.
Our mature operations are continuing to perform at or above our expectations, even those going through transitions this year.
We've also recently hired Lance Merrell as senior Vice President Global service Lance will be responsible for expanding and implementing TPS <unk> global when service strategy working with TP eyes existing regional teams collaborating with turban Oems as well as evaluating potential strategic acquisitions in.
Space.
Lance is more than 20 years of experience in the wind turbine business will be key to building a successful TPR global service business.
Finally, we continue to remain focused on building long term sustainable value and we're not going to compromise our medium and long term mission just to optimize EBITDA in the short term.
Now I'll turn the call to bill to provide a more detailed business and market update bill. Thank Steve. Please turn to slide six the global when market bolt on and off shore is expanding as the LTL, we up when continues to trend down and de carbonization Golden initiatives grow our customers are continuing to accelerate R&D.
The investments in next generation turban platforms and blade enhancements to further reduce sales. So we even as the unsubsidized cost of new wind installations is currently passing through the marginal cost of coal and new natural gas. This technology arms race is requiring us to continue to invest alongside our customers.
And our blade manufacturing capacity and capabilities and transition to longer and in some cases modular blades to keep pace and grow our position in the market.
Most in the industry believed that over the next few years, there will be continued consolidation at the OEM level, which overtime, we expect will lead to more overall stability in the market more rational pricing and expanded profitability. However, we expect price and margin pressure to continue for the hardware suppliers for a period of time as the industry.
He continues to consolidate trade policies become clear and new turban products continued to be launched to further reduce LCL. We in order to effectively compete in the next few years was solar and marginal natural gas.
We expect the impact on T. P will be a continued state of product transitions for some time.
<unk> I will stay on course to complete 18, gigawatts of global capacity and World class manufacturing locations to profitably serve the growing regions of the wind market, we will speed up our product transitions work with our customers to make blade transitions easier and we plan to charge more for these transitions, which should allow us to better.
In fact, our margins until transition slow.
After the current NDS started up we expect the next phase of startups to have less of an impact on our results. Since we expect most of them to be an existing facilities were trained workforce is which will minimize the upfront costs and a ramp up timelines, we will apply our global scale to expand and localized raw material supplies to create.
Competitive advantage for <unk>, and we plan to pace the growth of new production lines to increase confidence that each new lines will contribute profitably to the future consolidated state of the wind industry.
Although we believe that it may take longer to achieve we still expect to achieve our stated goal of 60 lines under contract at an average of 300 megawatts per line, which at 80% utilization would equate to roughly 15 gigawatts per year, which we currently project would allow us to achieve 2 billion an annual when revenue.
Well digit adjusted EBITDA and more than 20% market share based on current assumptions.
During the industry consolidation, we expect our customers to experience continued pricing and margin pressure and this may in turn impact our profitability. However, our confidence in the underlying long term economic so our business and the wind industry remained strong and we are continuing to invest in technology technical capabilities and a word.
Old class global manufacturing footprint. These actions will enable us to maintain our competitive advantage in the short and long term and offset the pressures of global raw material constraints, increasing labor costs and further competition from Chinese blade manufacturers.
With respect to 2020, many of our customers have requested that as much volume as possible be delivered by the end of Q3 to serve 2020 U.S. installations in order to meet the end of the year deadline for the 100% PTC.
Uncertainty around the product mix of our customers 2021 volume plans is impacting our ability to further refine our own 2020 volume estimates, we're still working with our customers on the final number location and timing of transitions for 2020, as well as overall delivery and volume expectations for next year once.
Our customers plans are solidified we confirm up our Q4 2020 volumes as well as our full year 2020 plan.
In light of the foregoing factors and the corresponding impact that these factors will happen. Our 2020 outlook, we will be postponing the investor day originally scheduled for November 15th and we'll reschedule as soon as our plan is firmed up we apologize for any inconvenience caused by this postponement. We also will not be providing formal.
2020 guidance until such time, however, we do expect formal 2020, adjusted EBITDA guidance to be lower than our previously announced 2020 target.
Turning to Q3 performance first I'll touch on startups and transitions in the third quarter of 2019, we continued our investment in both startups and transitions with 10 lines in startup and eight lines and transition during the quarter startup and transition cost for the quarter totaled approximately $22 million slightly above our guidance for the quarter.
I am pleased to report that we've made significant progress over the last quarter at our new facility in the on Joe China and are on a path to be at full speed by the end of the year and moving into 2020.
Our new facility near Chennai, India is under construction is on schedule and budget, we have hired our senior leadership team for India and they are actively working on the startup. We have also accelerated the hiring and training of new TPS associates to minimize the startup risks we that we've experienced this year, which will have an impact on Q4 earnings.
But we believe will positively impact the overall startup results in 2020.
We're very pleased with the experience and quality of our new hires in India. The majority of which have prior blade manufacturing experience and we are on track to begin production in this facility and the first quarter of 2020.
Finally, as it relates to start ups, although we have worked through most of our challenges and Matt Morris the labor market in that region of Mexico remains quite challenging. So we're continuing to experience more labor instability than normal we are actively dealing with this and developing a long term solution, but this will continue to challenge our efficiency in the near term and.
We will continue to impact our results for the balance of 2019 and into 2020.
As for transitions that are going well and were generally on track with each of them. We're continuing to improve on our speed of transitions and as importantly continued to drive manufacturing cycle times down by on average over 30% over the past several years notwithstanding that we are building longer blades, we believe that these expected.
Lower cycle times, we'll continue to enable us to deal more effectively with the increased number of transitions, we anticipate over the next few years.
Last quarter, we discuss some raw material and component supply constraints facing the industry driven by significant year over year demand growth in the wind industry, we're continuing to work actively with our customers and suppliers to minimize the impact to production for the balance of the year as a longer term solution. We are also working with some of our.
Buyers to localize certain critical inputs in Mexico, Turkey, and India to not only expand global Pat capacity to match up with our planned 18 gigawatts of capacity buildup, but to reduce overall costs and lock in guaranteed supply of critical materials.
Moving on to slide seven.
We now have a total potential contract value of up to approximately $5.8 billion through 2023, and the minimum guaranteed volume under our supply agreements as approximately $3.2 billion the potential and minimum contract value does not include two lines in China that will be operating under a short term agreement and 22.
Many nor does it include the impact from most of the anticipated new larger blade models that we will produce after the 2020 transitions as these are still in discussions with our customers. While we have purposely slowed down our expansion pace in order to focus on the 52 lines. We have under contract today, we also estimate that we.
Only need to have 60 lines install to achieve our targeted global capacity of 18 Gigawatts.
So although the quality of our pipeline is still strong and we're confident in our ability to converted over the next couple of years, we plan to be selective and adding lines to ensure profitable growth.
Turning to the global wind market on slide eight we continued to be pleased with the continued growth of wind into wind energy as a cost effective and reliable source of clean electricity as we in the industry continued to drive down LCL, we well consumers and corporate customers demand renewable energy.
We see the future of global that electricity growth as a strong combination of cost effective and reliable wind solar storage and transmission. We're very pleased that wind energy growth has now driven by economics, and what customers want to buy.
Global annual wind power capacity additions are now expected to average more than 73 Gigawatts between 2019 and 2028. According to wood Mackenzie third quarter forecast update the strength of the U.S. when market continues to increase over the last year Wood Mackenzie has increased its 2019 to 2023 onshore fourq.
Cash by more than 13 Gigawatts for example over the last quarter Wood Mackenzie updated its 2021 onshore forecast by approximately 1.7 gigawatts to approximately 12.3 gigawatts in that year alone and the third quarter. The U.S. surpassed 100 gigawatts of installed wind capacity with another 40 sixk.
Gigawatts under construction or an advance planning a new record according to the American Wind Energy Association.
The global when markets continued to be strong and growing including offshore wood Mackenzie estimates the U.S. offshore markets to have more than 16 gigawatts installed by the end of 2028, and the Asia Pacific in Asia Pacific more than 63, Gigawatts by the end of 2028, many expect offshore market forecast to be increased over time.
As the industry continues to kind of become even more cost competitive with significant additions beginning in 2023.
For the balance of 2019, we remain extremely focused on execution, we're localizing raw materials to serve our various manufacturing hubs in a manner that helps us to guarantee capacity and to continue to drive down costs, we remain confident and committed to our overall business model and strategy the fundamentals of our business remains strong.
When markets around the globe continues to grow at an attractive pace the trend of when blade outsourcing is continuing and our customers and potential customers are demanding increasing quantities of blades to serve many fast growing emerging markets and a very strong us market along with our customers. We continue to invest heavily into exists.
Stenglein transitions and new line startups are mature operations continued to perform at or above our expectations, which gives us confidence in our ability to navigate these challenging times and generate the profit levels, we expect over the long term.
With that let me turn the call over to Brian .
Thanks, Bill please refer to slides 10 through 12.
The third quarter of 2019 net sales for the quarter increased by 128.9 million or 55, 50.5% to 383.8 million compared to $255 million in the same period in 2018.
Net sales of wind blades increased by 49.9%.
To 352.2 million for the quarter as compared to 234.9 billion in the same period in 2018.
Increase was primarily driven by 44% increase in the number of wind blades produced during the quarter compared to the same period in 2018, largely as a result of increased production at our Turkey, Mexico in China operations. The increase was also due to higher average sales price due to the mix of when blade models.
Produced during the quarter compared to the same period in 2018 total billings for the quarter increased by 144.9 million or 60.2% to to 385.6 million compared to 240.7 million in the 2018 period.
The impact of the currency movement on consolidated net sales and total billings for the quarter was a net decrease of 1.6% and 1.5% respectively as compared to 2018.
Gross profit for the quarter totaled 25.9 million, an increase of 9 million over the same period of 2018, and our gross profit margin was up slightly to 6.8%.
General and administrative expenses for the quarter totaled $10.6 million were 2.8% of net sales.
This compares to $9.8 million or 3.8% of net sales for the same period in 2018.
The decrease was primarily driven by lower incentive compensation.
Realized loss on sale of assets for the quarter was 3.4 million comprised of 2.5 million of realized loss on the sale of receivables under our supply chain financing arrangements with our customers and point 9 million of realized losses on the disposal of assets. There were no corresponding charges for the same period.
In 2018.
Income taxes reflected a provision of 18.8 million for the quarter as compared to a benefit of 10.3 million for the same period in 2018.
The change was primarily due to the jurisdictional earnings mix in the quarter as compared to the same period in 2018 and from the reversal of the U.S. valuation allowance in the 2018 quarter.
Net loss for the quarter was $4.6 million as compared to net income of 9.5 million in the same period in 2018.
The diluted loss per share was 13 cents for the quarter compared to earnings per share of 26 cents for the 2018 quarter.
Adjusted EBITDA increased to 27.6 million for the quarter compared to 17.6 million. During the same period in 2018, our adjusted EBITDA margin for the quarter was 7.2% up from 6.9% in the third quarter of 2018.
For startup and transition costs in both periods, our adjusted EBITDA margins were 13% and 15.3% in the third quarter of 2019 in 2018, respectively.
Moving on to slide 12.
We ended the quarter with $92.1 million of cash and cash equivalents.
Total debt of 142.7 million and net debt of 51.3 million compared to net debt of 91 million at June Thirtyth 2019.
For the quarter, we had cash provided from operating activities of 60 point 64.3 million, while spending 21.4 million on capex, resulting in free cash flow for the quarter, a 42.9 million.
For the first nine months of 2019, we generated approximately 2.5 million a free cash flow for the year, we expect negative cash free cash flow of 20 to 30 million due to Q4 forecasted capex payments our balance sheet remains strong with over 92 million of cash and we have an aggregate of 74.
Million of availability under our various credit facilities.
Please turn to slide 14 and 15.
We are maintaining our previously announced guidance for 2019 net sales of between 1.4 billion and 1.5 billion.
And adjusted EBITDA of between 80 million and $85 million for the full year.
We expect to be at the low end of the ranges for each.
The only changes to full year guidance for the less from the last quarter or the expected 2019 billings of between 1.38 billion and 1.4 billion down slightly from between 1.4 billion and 1.5 billion.
Thats invoice to be between 3180 to 3205 Mg in a to be between 3.5% and 4% of net sales down from the range of 4% to 4.25%.
With that I will turn it back over to Steve to wrap up and then we will take your questions Steve.
Thanks, Brian our overall long term mission remains unchanged, establishing 18 gigawatts of global when blade capacity was 60 lines to drive $2 billion of when revenue along with $500 million of transportation revenue and achieved double digit adjusted EBITDA levels.
With an estimated 73 gigawatts global combined onshore and offshore wind market, we expect to have more than 20% global market share. We plan to continue to drive for more speed during transitions leverage our global scale for operating and buying efficiencies to continue to drive down costs, all while maintaining a strong and.
Server to balance sheet.
On a thank all of our dedicated TPS associates for their commitment to our mission. We remain very confident at our multiyear game plan and we'll stay that course. Thank you again for your time today and with that operator. Please open the line for questions.
Thank you at this time, we will we will be conducting our question and answer session. You would like to ask a question. Please press star one on your telephone keypad.
Confirmation total indicate your line is in the question Q you made press star too if you would like to remove your question from the Q.
Participants using speaker equipment, or maybe necessary to pick up your handset before pressing the star Keith one moment, please what we call for questions.
Our first question comes from the line of Paul Coaster of JP Morgan. Please proceed with your question.
Thanks for taking my question, Steve in the prepared remarks, you said hi, Kevin.
Yes, we have all thanks, okay.
Sorry.
Good afternoon.
In your prepared remarks, you talked about smoke compromising your loans plus prospects.
And that May mean that you're talking optimize EBITDAR in the short so what is the shorts.
And what do you mean by what looks like change this will talk us through the kinds of tradeoffs that you're having somebody like.
Yes, Paul Thanks, and good evening, so the biggest impact on.
The short call it no turned next year.
Timeframe is largely related to product mix and volumes when you talked a lot as you know last couple quarters, Paul about a number of transitions for transition that we'd like or that we expected and a lot of this is driven as you know bye.
The pace of consolidation across the industry the price pressure at margin pressure that our customers are working through us levelized cost of energy comes down.
I think our hope is that this would stabilize a bit over the next couple of years I think it's a little bit top for us to predict perfectly. It's we're not in complete control of it but the other pivot that we spoke about last quarter and we'd reemphasize today is our model our financial model the age to withstand.
Transitions as we go forward.
And told me the overall profit goals. So what we're doing as laying out the overall infrastructure of 18 Gigawatts. The plan to operate at 80% of that so that we can withstand transitions in the future and still be at double digit EBITDA level. So at 7% EBITDA now growing at a very rapid pace.
As you know today, we're building out that infrastructure.
We're making 7% today, but thats not double digit so we're investing where investing today, we'd expect to invest.
Well for another year or two.
But we do expect.
Thanks to stabilize a bit more at for us to be able to operate efficiently and profitably at the levels that we've committed.
Once we can get thanks to settle in just a little bit more and we.
We've talked also call about charging a bit more for transitions, we get we get to charge for those.
Operating more quickly on those.
And we've also said here, we're going to pace the growth a bit.
Don't make 70 lines to get the 2 billion right, we need six fixed.
So 50 to 60 to date.
We can paint that a little bit more slowly.
And hopefully get that to settle landed in a timeframe as reasonable here I think thats. So assuming we can do on the timeframe question.
Okay, and then I think I would like to give some color on this.
See you experience. This is the the customers, saying well look we don't know every once in this state oil that we want this size or that sizeable I mean can you just sort of talk us through a case study.
So you inherit it's impacted you.
Yes, it's a good question, Paul we're not going to speak about any one customer by name, but I think we're seeing this generally across our customer mix and as an example, something bill spoke about in his his portion of his prepared remarks.
With installations by the end of 2020.
At the 100% PTC, it's blade that we would deliver by the end of Q3. For example, generally that would go into the remainder of the 2020 installations. So our Q4 volume at 28.
Would be installed in 2021, so a question around Q4 for US still right now is the volume and to your point the product like the product type so with all of what you said, it's the volume and the mix, if you will which products.
We accelerated transition for Q4 do we hold off on the transition for Q4. Those are as you might imagine those are all decisions that our customers are making related right now related to 2021 volume.
That is the primary reason as we said why were postponing the Investor day today, we need to lock down our 2020 guidance. That's on US we got to do it but we need Q4 volume to settle before we can do that so we don't expect that to take lots and lots here, but we do expect it to take a little bit of time.
That are just not in a position at locked down that plan.
My next Friday, and so we'll post called out little bit until we can lock it down but its volume and mix.
Okay. This is helpful. Just one last question then.
It sounds like your visibility into the first three quarters of next year is no different than the last time, we too so the the volatility it's all around the fourth quarter Bill I think said.
It's all will be down relative to prior expectations.
Are you just simply de risking that.
For us the fourth quarter or is it more than a fourth quarter risk.
Paul.
Thanks for the questions and it's primarily around Q4 and de risking Q4.
Again, depending on when the final volume and mix is determined will determine when some of those transitions may start some may be accelerated some maybe some.
So there's that much on sir.
Related to the back half of your primarily Q4, which is creating the uncertainty.
Okay. Thanks, So I think just in general and again Bill commented on this I think I did as well that.
The good news about when is the cost to come down it's largely about economics, it's about what customers want to buy and that that's really good news.
Challenge that comes with that.
Is really just a hard push on economics and wed what our customers are battling for market share based on price.
Ben the price and margin pressure flows through the whole system add there there is that pressure and there are choices choices with respect to product type and as we look we've just discussed accelerating or decelerating new product introductions. That's the uncertainty of the environment. If you will see the.
Fundamentals over time, Mark really changing but this short to medium term is challenged that way.
Thank you.
Thanks, Paul Paul.
Our next question comes from the line of Eric Stine of Craig Hallum. Please proceed with your question.
Hi, everyone.
Maybe just to stick with 2020 I mean so.
And so I'm trying to get my arms around this on one hand.
If things are in a whole lot different from last time you spoke.
Then it's really about the fourth quarter I'm just curious.
Given that obviously a lot of your business goes overseas.
He like thought process on maybe just a wider range rather than the nothing at all because I guess nothing at all implies.
Or you know obviously people are going to assume the worst as they often do.
So maybe just thought process, there, but just trying to get some sort of a sense of the magnitude.
And what fourth quarter could mean.
Yes, we are thanks, so look I think.
I wouldn't say, but nothing has changed in terms of the outlook for calendar 2020, except Q4 with Bill just said as the biggest part abroad are uncertainty.
Our next year is related to care for so just so we're trying to make clear there, but we also just commented on the overall margin in price pressure Bill also commented on some of the raw materials that we buy when things are constrained prices get affected as well so what we're at a point out.
So the budget cycle is on us and a lot of companies like US. This time of year, we have to locked out key assumptions.
We are going to provide guidance for next year, but we've just got to have our plan locked out in order to provide a responsible number and we're just not at a position to be able to do that today. So I don't think we can provide any any more specifics than what we've said today, but we are mindful. We are quite mindful that we need to move on this kind of as quickly.
As we can get our planned locked out with our customers flow that through our budget process and come back with guidance, yes, okay understood.
Just thinking about you deciding or I mean, you've thought about this for some time just to be more selective on some of the transitions that you do.
I would guess that you're not alone I mean as this is this caused any.
Whether it's pushed back or just your OEM partners to kind of rethink the outsourcing strategy.
And it kind of swinging back the other way.
If you are going to be more selective on these.
Yes, I would say our comment about being more selective is probably more related to new lines, new production lines that it is too whether we do or don't do what transition you may recall the way our agreements work our cost we guarantee capacity, our got customer guarantees volume, but they can request a transition.
Well thats, what they need we want to building the product that theyre going to sell so they can request to transition we get to we get to quote the impact to that transition, though so what we had tried to say there as we can charge more for transitions.
Not so much being selective on transitions as moderate.
We paid a little better for them and focus entirely on our side to be faster at them.
Frankly speaking right now this was only around transitions.
Our margin dollars in margin percent would be hiring you know, we're also making very large investments such as bill global capacity and get to the 20% share. So we've got both things going on right now, it's a combination of transitions and big investments in growth and EBITDA burn that comes along with and the Capex.
Again.
As Brian described the comes along with that degree of investment, where we're being a bit more selective is getting from 52 to 60 lives I would say at there. The question for US is we want to make sure that every live we added a world class location.
It would stand the test time right, we're making these investments for the next 10 years not three years or so.
That we're picking good customers, we have to earn their business of course, but we also get to choose also kind of how we pace that investment in where the line go so in a world of consolidation pressure you can imagine we're being thoughtful about that so that may push our our 2 billion dollar target a little bit to the right but.
It doesn't change the mission and Thats really what we're trying to say as we're little less concerned about which year, we achieved that and more concerned about managing our balance sheet make it really smart investments as we get from here to bear and it environments.
Customers environment, that's challenged in the short term so not challenging from the fact that theres demand for the product, but just challenging on the economics side Bill had one other thing I wanted to add that like your last question I jumped on the EBITDA what changed from last time there are.
The number and timing of transitions has has continued to move all right. So.
And as moving quite rapidly and continuing to move as we speak so that that's part of that so it's not just.
Q4 is additional transactions or transitions potentially and when they occur the other thing as.
We talked about making.
Really get traction this last quarter on our diversified markets efforts on the transportation space and so we are likely to accelerate additional investment in that part of the business next year as well, we're still nail on that out so.
So thats another piece of that that provide their trading a little bit of yet result, uncertainty as it relates to up and down our $20 million.
Got it okay. Thanks.
Our next question comes from the line of Chip Moore of Canaccord. Please proceed with your question.
Good evening thanks.
Just following up there.
Guys wondering.
You can talk a bit about.
Receptivity for some of the work you're doing with customers that to deal with this rapid transition how are some are those.
Occasions going.
Yes, I don't think we're going to get into more specifics about individual customers I think in general the discussions are going fine. We're all we're all in this together in terms of navigating what the transitions ought to be our customers are making tough choices about their product plans.
We're matching up with them on it but I don't think we can get in any more specifics on that by customer.
Sure that's fair.
Can you just talked about.
Accelerating some spend.
Sounds like next year on the transport it would that be for existing opportunities. You're currently ramping for we should be thinking about.
New potential partnerships or any more color you can provide there.
Yeah, what we said in our prepared remarks, we'll just a little bit here is that we're continuing to look to invest in the relationship with pro Tara.
Driving down cost of the composite technology for use in transit buses Thats, an important initiative for us, but we also mentioned that we're accelerating investments with other customers. So there are more customers and just that we'd not announced anything publicly in terms of production wins, we will when those are real.
But we also understand that we've tried to help you all understand that the transportation piece of this is going to take some time.
We're choosing to make smart investments there to accelerate the outcomes, where we think it's the right choice to build value over time, I've got to optimize Q1, or even 2020 EBITDA. So thats Bill's point that we're accelerating investments in that space, we're doing it for good reasons to build value.
But some of that is yet to be locked down as bill just set for 2020 as well and his point was that part of the uncertainty around.
Tightening the full 2020 plan not just at Q4.
And the impact.
Got it and maybe just one last one.
I understand the dynamics next year.
Yes, so some uncertainty on Q4.
Have a sense of when that visibility might shore up.
From the customers thanks, guys.
We're working to lock it all down as quickly as we can with our customers, it's not 100% within our control to do so.
Our hope would have been to perhaps move the analyst day, just out a few number of weeks, perhaps but as you know will be bumping into holidays.
For long here late December so it may well slip into the earlier part of next year, but we're working to lock it all down.
In weeks, if you will not not many months as we said.
But its job, we're not 100% control of locking down each piece and we'll get to it will get it done as soon as when cap.
Sure Okay, great. Thank you.
Thanks.
Our next question comes from the line of Jeff Osborne up now and company. Please proceed with your question.
Hi, Good afternoon, guys. Just a couple on my end I think when you last provided 2020 commentary essentially the lines and transition roughly doubled I think my math is from eight to nine two about 16 sounds like it's getting worse is there any sense of what that magnitude is is it half the lines that are into.
In addition, anyway to handicap that I would imagine that Thats a number you know, but just not the timing of when those transitions would take effect seems to be the issue yes, Jeff.
You're right. We were we were at 16 last time, we talk.
That number has passed.
Around a little bit it's gone up.
As many as 20, but the timing matters here right some of those transitions now my.
Pushed to 2020 watt, depending on the timing of some of those.
Hi, guys, just depending on final decisions on products for our customer sample and Paul and so and as it has been a moving target.
There are there are few more in there now than we anticipated when we last talk.
But again those kind of pushed in 2021 and the next week or two as has designs again.
Okay nail down in timing is now about their customers. So I apologize for a little bit of a wishy washy answer there, but and that.
At this point in time and Jeff in stages, one we understand that.
It's up perhaps to fully understand or follow one way to think about this too.
And this has been publicly stated by some of our customers that as our industry prepares in the U.S. market anyway proposed 18 say world. There's a lot of work being done on what those products are and the timing of when they get implemented introduced and sort of bills.
You can imagine a desire to accelerate that get really ready for 21 post hundred percent as soon as practical on the other had.
Some of those product plans.
Tweaked along the way so it's not that theres not good robust discussion or a clear understanding.
What's going to change.
Did trick as Bill just said is really wed.
So it's a number it's the total number but the tricky part here is also timing and it's lost volume I mean, let's just be clear about it when we make a transition we lose volume.
That is not all recoverable therefore, the impact in the short term on EBITDA.
Swings thoughts around a bit through that transition. So again, we'll market down as best we can't as soon as we can but that's the reasoning why it's impacting us the way Bill just described.
That's helpful. Steve and just for everybody on on the line is there way you could flesh that out a bit. It's my understanding is that each line was roughly 40 45 million in revenue a year you talked about a 10% double digit EBITDA target and I think in the past you've talked about every transition costing about 3 million box, but you were hoping to do that faster and cheaper.
So I was wondering hey can you confirm that those numbers are reasonably accurate and then with the R&D teams that you have put in place in Denmark in the folks in Berlin that Youve acquired.
From semi on is there any demonstrable evidence over the past three months that you've actually driven down either transition cycle time or.
Made this less expensive to do.
Yes, Jeff we are making progress as as I stated earlier, we have brought down.
We performed very well on our very well on our transitions this year.
And in some of the and many of our mature plants, where we went through transitions. We had very very good we have very good financial results are notwithstanding the transition. So we have definitely demonstrated the ability to do them cost effectively and to accelerate the number on a little bit of it depends on.
In the complexity of it and the location.
And whether you're flip in an entire platform here do on a liner too so all those things factor into it but I would tell you are performance. This year from a transition standpoint has been very good.
The biggest number this year as it relates to startup and transition has been startups. That's been the biggest impact. So the answer is yes, and when we get to Investor day.
Hopefully here in the next month or two.
We're going to lay that out and much more detail for you also you can see not only the impact on a per line basis, but kind of what the incremental revenue and margin as long term. Once you go through a transition.
That's helpful and Minimis. This my last question media can you just briefly touch on the situation memoirs, how the staffs ramped up and if there's any lingering raw material issues that you flagged in prior quarters.
So I think we mentioned that that be that continues to be a bit of a challenging labor market. It's just that region of Mexico tends to be a little bit different than some of the other regions we operate at.
We are we are ramped up we're still ramping our last two lines there were in that startup mode. This.
Last quarter this quarter.
But we have made significant progress on the workforce.
And where sales were still solidifying that core group of employees.
But yeah, we've made significant progress there, but it continues to be a bit of a challenge from a labor market standpoint on the raw material side.
As as an industry we are a.
A bit constrained encore materials, which originally was caused by a shortage of PTT. So a lot lot.
Of our customer switch to fall so there are up and some challenges with balsa.
Just because the increased demand that wasn't.
Actually plant for.
Political unrest in Ecuador created some delays you probably read about that and quite frankly, the Chinese when market, which has exploded here in the last year in anticipation of a drop in their feed in tariff they have been.
Overwhelming ball supply so that's been the challenge we're navigating through that we've got multiple suppliers were working with our customers and suppliers. So it's not that were out of the words, but we're going to manage that for the balance of the year and it should ease up quite significantly next year as more PGT.
Capacity comes online here in the fourth quarter.
Hey, Jeff you add one one last point on on.
Your question on transitions in kind of the modeling assumptions that we certainly understand the desire to have good modeling numbers. It was waiting period and try to navigate this but that also assumes that theres basically 100% volume demand.
The capacity and they're up there are few other constraints in the U.S. market. This next year that again, you can read about one of them is just having it up trucks to move all the product or having enough cranes to erect all the turbine. So there's a range of constraints that pressure. This stops so if the volume demand just isn't there for whatever combination.
The reasons, it's not only can we affect the transition quickly, but what is the impact of volume during a transition stretch or in this case story.
At aggressive installation stretch, so again thats not a excuse around if thats just the environment that we're operating entity. So those things end up affecting it at our having an effect on 2020 and Jeff.
There's been a lot of discussion about volume the good news is as volume is very strong.
Generally our fourth quarter volume as to supply the next year as volume and when you look at it think about just the US market. You asked market 2021 is anticipated to be a heck of a lot stronger than it was a year ago.
So a lot of that a lot of what we're doing is just solidifying the volumes for 2021 and stuff. So the volume it's not it's not a big.
That's not the big issue with the timing of when we're going to go through these transitions and solidifying the mix. So that we can adequately build that into our budget from a pricing that cost standpoint for 20 Watt right.
We've got it.
For Q4 20 for US yeah. Thanks, Jeff.
Our next question comes from the line with Joseph Osha of JMP Securities. Please proceed with your question.
Hello, and thank you, leaving Q4 of next year side, which I think it's been discussed enough.
It would seem to me that there has been perhaps more broadly oh declined in the predictability.
Of this business.
Would you agree or disagree with that I'm trying to get a sense as to what what the world's going to look like a.
A year from now when the PTC Air Pocket is passed but we're still dealing with these transition issues.
Yes, behaving the way they behave.
Yeah, Joe It's Steve I think there has been a decline of predictability of the short term for all the reasons that we've described all the things that push or pull on on volume to add ability to deliver.
As Bill just described though there are pieces of good news around this like the volume demand for 2021 strengthening.
That's a good science forget we come back to we need to pivot a bit as a company to where we can operate within that 20% utilization haircut. If you will from 18 down to 15 and still deliver consistently and deliver double double digit EBITDA territory. So it will take us a little time to go.
So that we're building infrastructure capacity and we're going through these transitions at the same time, we do see an path to stabilizing that as a working model for the business over the next couple of years, but it's a little less predictable in the short term, but I think that is thats apparent and that's true.
Okay.
Second question listening to you talk about not wanting to over optimize your EBITDA on the short term.
I remind a little bit of.
The arm wrestling that went on for years between the DRAM companies and then the PC companies in the ones that survived and ended up with quite a bit of walbridge were the ones that just wait until everybody else went bankrupt and so I'm wondering as you think about your balance sheet, you're staying power and so forth whether part of this game is drawing out why asked.
Some of the merchant other merchant suppliers out there or maybe even some of the internal.
Capacity at the at the tier two manufacturers until they just did just go away is that part of the thought process here.
Yes, I wouldn't put it may be as as.
Extreme is that in terms of our direct competitors going away, but Joe, but there's no doubt and we've said this in our prepared remarks that our plan is to continue to operate from a conservative balance sheet area and to have staying power and we're focused on the medium to longer term not not optimizing the short term.
And we're pacing our growth a bit. So you all those words are consistent with the theme of what you said go right to protect the future prognosis have global scale World class locations, 20% global market share capacity for even more at all Thats about.
We have scale and we're building more.
We're going to use our scale, we are using our scale to drive down raw material costs, we're going to do more of that so all of that is around in a business and technology that's maturing.
Where it becomes about economics and speed.
Then we're pivoting to be all about execution economics, and speed right and balance sheet strength as we go through it. So I think some adequate what you said theres a lot of truth to that.
I Wouldnt necessarily stated quite as extremely should it.
Okay more tend to do that and then last last question.
Yeah sort of in that vein you when you have longer term conversations with some of your large customers.
I mean to what extent do you all talk about a margin entitlement, if you will or once this next years over with.
Some some more constructive understanding where some of the large Oems about how.
You know how margins need to be split in order for this disaggregated model to work I mean, do you have those kinds of conversations.
So we have very candid open discussions about cost at margins and and how to drive down costs together, which as you know that's about our business model. Since we got it went business was to partner deeply with our customer.
But I don't think we can get into any more detail.
On a customer basis as to how those discussions play, but I think it's fair to say that and we have said that we are doing the things. We just described in order to defend our margins better.
And the overall scheme of things and our customers watt suppliers that are helping as well so theres a good good healthy balance in those discussions about how to navigate this together and sometimes it's hard to navigate the short term in order to benefit or in the medium to longer term.
That makes sense. Thank you very much I'll jump back in queue. Thanks, Joe Thanks, Joe.
Our next question comes from the line of Michael leg of the Benchmark Company. Please proceed with your question good. Thanks.
Wanted to talk little bit more about the diversification efforts and related to protest or actually could you talk a little bit about how much of your capex that you're spending is related to the transportation versus the wind also 31 million dollar revenues that was non wind.
You give us any breakout on that.
And then the last part of that is when you put out the release with Botero. You said you do 30 350 vehicles.
Over the five year contract and just wanted to get an update on where we stand on that thanks.
Yes, Mike.
Thanks for thanks for the questions on the Capex question.
We will we haven't broken that out in the past I can tell you the capex we've spent.
On our boss manufacturing.
[noise] operation so far as is relatively small it's less than $10 million basically.
When we when we do give formal have our investor day coming up will probably provide more granularity around overall transportation investment not necessarily specific to a program where a customer.
Right that detailed going forward.
Question two was the.
Non blade revenue topline revenue you have inoculate revenue.
The transportation sales.
Brian you want to I think.
Yes, so I mean, if you look at the transportation. So let me non blade revenue is about a 100 million a total well that's made up of the transportation sales and some of the other activity going on in the wind service business.
So the bulk of the transportation sales would be with our production contract and on pro Tara I mean, I think you should probably having discussions with them about what their volumes are.
We are we're operating within the framework of the contract.
And as far as what their ultimate unit sales are I think thats better come from them for them from us.
Okay. Thank you yeah. Thanks.
Our next question comes from the line of Ethan Ellison of Morgan Stanley . Please proceed with your question.
Hey, guys.
Hey.
I guess, just following up on chips, and Joe's questions and and your point around the potential to charge more.
Charge customers more for transitions.
I guess I'll try and this a third time, but speaking very generally have you started these discussions at all and maybe how is that being received.
Yes, you can we embed in dialogue.
For some time bodies, we're always in discussion anytime that theres a potential of transition as it's a very open in Canada discussion and as I said, a few minutes ago and again, we just can't be more specific customer basis, but the discussions go well, we talk together about what their needs are for volume and what the timing yet.
And we do get the quote we get to quote and change, but we can't quote typically numbers that would make up all the contribution margin dollars. They get lost with volume that's lost during a transition. So we don't mean to say we have said that we would make up all of that what we've said as.
One tool we can use is to charge more for it rather than extending contracts, which had been a bit more the way. We operated another tool can be work with our customer to make sure their product designs allow for faster transitions, which helps everybody.
As well so theres a few tools that we can use their speed transmissions on our side cooperate with our customer on their design and then charge and up more for them. The discussions are going well, it's just an environment, where it's a bit tricky timing wise for that the lock things down and it's not yet locked down.
So which is we just have a schedule crop in terms of getting that locked down and not not being able.
Able to head to have our meeting on the 15.
Gotcha, that's really helpful.
Sorta preempted My my second question, which was just around the potential to.
To have contract extensions with the blade transitions it sounds like you.
Maybe can't comment on that now, but when we do have a sense for what the 2020.
Transitions will look like will we also know which contracts are extending first potentially paying you.
Higher.
Since for the for the lost production.
We will get into the details of each one of those lines in terms of exactly how that trade offs may but we provide consistently every quarter our updated on contract value slide that shows up how long various contracts Ron and.
So the answer is yes, generally that information would be more clear.
As those agreements are locked down but keep in mind I think we've shared this a bit before in times past, we might have been more willing to invest in a transition if we were adding turned to a contract.
And share more of that pain, so to speak I think part of what we're saying we've been saying for while we'll say yeah is that we're probably better off now to be paid a bit more along the way than just add to the contract value. It's already a pretty solid numbers. So we're just making those choices of all the way as to how to optimize the business.
Perfect. Thanks for the color there.
Yeah.
Our next question comes from the line of.
Though multichannel of Raymond James. Please proceed with your question.
Thanks for taking my question.
So just taking a step back we have.
Line transitions kind of a broad industry wide phenomenon margin pressure and then someone separate to that we have the PTC in the United States.
Why is the PTC and this demand pull in.
Having as you know this kind of surprising.
Packed when.
Everybody across the supply chain knew about the timing of this.
A year ago, two years ago, three internally now.
I think whats accelerated develop over the last year or so it's just the pace of new product introduction in product launches by our customers to imply that how quickly they were launching new models three years ago versus two or one year ago that speed has increased.
Dramatically I think the combination of all the things we've been saying that's one.
And there is.
As we described a bit of an arms race going on that a the pace of that race is accelerating that's the environment that our customers are operating within so it is happening kind of faster I think that any of us might have predicted a year ago or even even perhaps six months ago and then to come.
The nation of the other than things we describe so it's just not all about the 100% going to 80% you're right that that was no sometime ago, but what may not have been as well known is exactly in the strain on the number of cranes that are used to install everything we're in the exact strain on the number of trucks.
Or the exact strain on the amount of balls and going into China. So each of the things Bill described in few minutes ago, and I did I think it's a compounding effect of those that's probably having more of an impact.
Then we would have thought and then again, we've given you a couple other reasons, we're accelerating investments and transportation as well. So this is not only wind related it's certainly not only the U.S. when market related but that is one pretty significant factor.
Okay, and I just want to give you guys an opportunity to maybe.
You could give us a worst case scenario.
For 2020.
Yes.
Everything is.
Bleak die error.
Two to two the fullest extent.
Well your EBITDA be up.
In 2020.
Can you say that much.
Hey.
We again, we've got a range the range is better than 2019.
Okay, all right. So it's better than 2019, it's it's not what we had originally given a target for okay right. So that that's the broad range, yes, but the answer to your questions. Yes, we would expect it to be up year over year, yes.
And on under any conceivable circumstances.
Yes, we would expect it to be up year over year.
All right very good thank you.
Our final question comes from the line of Shen with Roth Capital Partners. Please proceed with your question.
Hey, guys. Thanks for the questions just as a follow up to.
Your response to our valves first question what does the root cause of what of driving the pace of product introductions and what is the.
Why are they introducing the product so fast when if you can imagine stable.
Global Oligopoly, mostly understanding kind of the pace of things what caused that pace to change.
Yes, so Phil I think it if you think about the fact that a wind energy today is now passing through the marginal price of coal.
And calls being retired and in fact, the coal retirements are accelerating.
Theres still a and then the next phase if you think about it is can we compete with marginal gas were already is cheap on average as new Nat gas and there is competition as you know very well with solar.
So first and say price competitive landscape.
In the good news is it's about price and that also means it's about price. So so it's a price competitive landscape and then I think the other is even if there were let's say four major suppliers competing.
If one introduces a new model that drives price down price per kilowatt hour down and the others adult.
They lose share.
So theres pressure between the key turban competitors to introduce new models.
There is more forward pricing being done theres more trying to lock down large auctions or tenders outside the U.S. and then lockdown economic bill in the U.S.
So, it's really that acceleration of the economic impact and competitive tension.
Even though there are a handful of players that really kind of dominated space to your point.
Okay. So when the auction started to go away I think it was a year and half years ago.
No that caused the downturn in the when sector and this is kind of a second a continuation of that price pressure and it's changed the behavior of the big.
Oems and it's just kind of going through so basically.
When when this ends.
When do you expect this price competitive kind of dynamic price competition to too and I can imagine it slows down when you hit.
And when is able to compete with.
And be existing Nat gas on a marginal basis.
Ultimately with solar as well so do you do you have a sense as to when the industry could largely be at those levels and I know it depends on a lot of factors, including wind resource location et cetera, but generically from a timing standpoint, when you talk to your customers do you guys.
Have a mark on the calendar that gives you a sense for one that.
Dynamic can slow down.
Yeah I think.
I think we'd have to what our customers speak to that specific question, Phil I'm not something that that we should get out ahead of them or speak to quite so specifically, but as we've said our model means to adapt a little bit here to where.
We are able to deliver on on the profit goals that we've stated regardless of those transitions. So part of what you're hearing us try to try to describe for you is we're not in control of the timing.
The answer to your question that's up to our customers, it's up to competitive tension with as you rightly pointed out with solar what we can control is how fast we transition where we spend our money on growth.
At how we address just our overall speed and economics, and so thats what were focused on and making sure that we pivoted to where our model can withstand ongoing transitions call. It no matter how long it by US well, that's what we can't control it and that's what we're focused on.
Hi, Thanks, Steve and I will try this a fourth time in terms of.
The transitions you've mentioned multiple times that you can charge more and that's a part of your toolsets.
To what degree.
And you don't have to speak to specific conversations or specific customer but.
To your do they bulk when they hear that you may need to charge more is there.
Oh receptiveness to that or.
Ultimately, it's it's actually might be tough for free to actually charge them.
No I think what it does is that.
Its first the conversation.
The timing of it is there can we can we get more volume from them and another location.
We're not going through a transition to help offset the volume loss that way me, we may see during a transition thing what it does as far as the conversation because it it doesn't it's not good for them for us to take a long time to transition either so its really it really is further discussion to be more collaborative on how to better.
Our plan for them how to shift volume if possible and how to work with more collaboratively with them at our plants as well to make sure that these transitions go faster. So it's a combination of those things. So the first discussion as well how do we how do we reduce that cost and if we can reduce it that's great for both of us.
If we conservatism blades faster I think it's further discussion and if and if and if it doesn't then the prices the price.
But I think the main thing is that spares that conversation on how jointly we better plan for them and figure out how we minimize the cost for ballpark.
Then it's a win.
Have you actually charge more for any as that have you actually been forced to use that tool yet on any anybody.
Or you're not at that point, yet with any yeah. So I think rather than asking we've been forced to use that we've actually been talking about it for a couple of quarters. So you can imagine that we are absolutely using it.
Okay. Great. Finally, you talked about in some of your remarks.
Summing increased competition on China.
Our to what degree or you're seeing that impact you relationships with a your.
Existing meaningful large.
Global OEM customers.
Yes, I feel and we're about out of time here will wrap up with this this answer though this is a continuation of what we've been talking about for a while we have a couple of good good worthy competitors out of China or they are building product for a couple of the significant customers.
It's about total delivered cost of the wind farms site.
That's the key in the end of the day. So we built blades all over the world we shift they get shipped all over the world and we're competing very directly against a couple of key competitors in China again saw in house capacity globally with our customers and against a couple other regional players, it's not really changed much in turn.
So that overall competitive dynamic and we're still gaining some share mostly from outsourcing.
Is the big picture answer to that but we've got to continue to compete for we have to add the lowest cost materials in the world and we have to have world class factories, and that's what we do so we are worthy competitors, but it doesn't really not really changing our plants.
Thank you much thanks.
We have reached the end of the question and answer session I will now turn the call back over to management for any closing remarks.
Yes. Thanks, all thanks for your interest in TV I can positives, we will come back to you shortly with updated plans for our Investor day, and hope to see there. Thanks.
This concludes todays conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.