Q3 2021 TPI Composites Inc Earnings Call
Ladies and gentlemen, the teleconference will begin in five minutes. Thank you for your patience.
[music].
Greetings and welcome to the T. P. I composites third quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
Please note. This conference is being recorded I will now turn the call over to your host Christian Edin Investor Relations at TPI Composites, you may begin.
Thank you operator, I'd like to welcome everyone to TPI composites third quarter 2021 earnings call. When you will 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 today's earnings news release and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission each of which can be found on our website TPI composites dot com, we do not undertake any duty to us.
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 definitions all information and reconciliations of historical non-GAAP measures to the comparable comparable GAAP financial measures with that let me turn the call over to Bill <unk> keep.
Composites, President and CEO.
Thanks, Christian and good afternoon, everyone and thank you for joining our call. In addition to Christian I'm joined today by Bryan Schumaker, our CFO.
I'll briefly review, our third quarter results, including the strategic financing transaction announced today I will also cover our global operations, including our supply chain and the wind energy market more broadly Brian will then review our financial results and financial activity our financing activities in more detail and then we'll open the call for Q&A.
Please turn to slide five today we.
Ounce that we signed a contract with Vestas to add three additional lines and young Joe starting production in 2022, you know we extended a two line contract with Nordics in Turkey. These deals added approximately $150 million of potential future revenue under contract I am also pleased to announce today that we have entered into a stock purchase agreement too.
To issue and sell $400 million of series a preferred stock to investment funds managed by Oaktree capital management.
Under the terms of the agreement T. P. I will issue and sell $350 million of series aided oaktree subject to customary closing conditions. Tpa also may elect at its option to require oaktree to purchase an additional $50 million of series eight upon the same terms and conditions as the initial issuance of series day during.
The two year period, following the closing of the initial issuance.
Subject to the mutual agreement of Tpa and Oaktree Oaktree may invest an additional 200 million for follow on capital Oaktree as an experienced investor across the power and energy value chain and today's announcement is a strong endorsement of our strategy and growth prospects oak trees investment will strengthen our balance sheet significantly and positions TPI.
To navigate a rapidly evolving market and operating environment in the near term, while providing the flexibility to take advantage of longer term growth opportunities. We will discuss the terms of the oaktree investment in more detail later in the call.
Before I jump into our results and operations. It is important to note that we remain focused on operating our business safely while continuing to mitigate the impacts of COVID-19, and ensuring that we are prepared to deal with continued resurgence of the virus in any of our global locations, we have and will continue to adapt our operating procedures in order to.
To enable our associates to work safely and continue to meet our customers' demand to.
To summarize Q3 was clearly disappointing from a financial perspective as market conditions continue to deteriorate as most of our customers have already discussed publicly.
Although we delivered net sales of $479 6 million a slight increase over Q3 of 2020, we ended the quarter with breakeven adjusted EBITDA. The takeover of the Nordics facility in Matamoros has not gone as planned and we have experienced significant delays in production while needing to upgrade the team we are in the process of trans.
Forming the operations into a world class facility like the facility, we operate across the street, but it's taking more time and resources than originally anticipated. This was one of the primary factors for our poor financial results during Q3, and it will carry over into Q4 as well. However, we expect to have the operations stabilized by the end of the year.
Glad to have a much more successful 2022 in this location.
And whereas Mexico, we are in the middle of a transition to an innovative blade and with innovation. Sometimes comes challenges. In addition to delays moving from design to prototype and finally to production we encountered multiple delays related to specialized equipment and component parts as a result, our volume for the quarter was negatively impacted.
As our full year volumes has with our new operations in Matamoros, We expect these challenges to be behind us by the end of the year and anticipate reaching full production volume in that factory during 2022.
In China, our young Joe factory was shut down for three weeks due to a small COVID-19 outbreak in young Joe City, We lost 10 sets in the quarter, but we expect to make those up in Q4.
Supply chain and logistics challenges continue to plague the industry and we were not immune from them in Q3 certain customer directed raw materials were in short supply, which caused production slowdowns in multiple plants lost volume related to these shortages was nearly 80 sets in Q3, and we will be just over 150 <unk> for the full year.
Furthermore, raw material and logistics costs remained at elevated levels and had an overall impact in the quarter of approximately $20 million and an estimated full year impact of nearly $30 million with the announced suspension of production in our Iowa plant at the end of 2021 volumes at that plant will reduce to minimize production risk.
As we wrap up our current customer commitment in that location with these challenges and those facing the industry over the next year or so our focus has been on managing our liquidity and raising additional capital to strengthen our balance sheet and to prepare for the next wave of significant growth in the industry.
Our announcement today of the strategic investment by Oaktree will provide us with the additional flexibility to manage our business through these near term headwinds.
Turning to slide six I will now give you a quick update of our global operations as well as a market update.
During the third quarter, we did not have any lost volume at any of our facilities related to COVID-19 outbreaks or government mandates except for the short interruption in young Joe. However, we did experience material unexpected production delays in Turkey, Mexico, and China because of shortages of customer directed and supplied raw.
Materials, we continue to evaluate our global footprint to ensure it is optimized for us our customers and the market.
As we discussed last quarter, we are planning to consolidate our Chinese operations into young Joe to reduce cost streamline activities and meet the expected future demand of our customers are young Joe facility is world class and can handle both onshore and offshore blades. This prime location is the ideal place to consolidate our China operations and efficiently.
Serve our customers with respect to the facility in war as that will become available in 2022, we are actively seeking to backfill the four production lines with one or more customers. As we believe these operations will continue to be one of the best low cost options for blade supply into the U S and Mexico in the future interest for this capacity is.
Hi, but timing is dependent on the U S market recovery and the final provisions at the build back better planning if past we are not anticipating any production in this facility during 2022.
Due primarily to continued uncertainty regarding the regulatory environment and the expected impact on U S demand over the next couple of years, we do not currently have any planned volume for our Newton, Iowa facility in 2022 as a result, we are in the unfortunate position of needing to suspend manufacturing at the facility at the end of December 2021.
We have extended the facility at least through 2022 to give us and our current customer or others time to evaluate the final provisions of the proposed to build that better plan to determine if the facility can be economically viable in the future.
With respect to our global service business during the third quarter, we continue to focus on profitable global growth. Our team has been successful and secure securing new work from Oems as well as asset owners to accelerate our growth in Europe. Our plan is to open a training center in Spain in the fourth quarter to complement our Americas training Center, we expect to have three.
<unk> topline growth during 2021 and expect another doubling in 2022.
Unemployed ganic basis.
On the transportation front, our pilot production program for a production passenger electric vehicle manufacturer has been extended as we have demonstrated the ability to scale our production in a cost effective manner on a high volume composite production life. This has also led to another pilot program with the same OEM that will kick off in Q4 of 2021.
Additionally, we are continuing to collaborate with multiple Oems on cabin body structures, along with other critical EV components.
As I mentioned earlier, our supply chain like every other supply chain is continuing to face challenges as discussed on the last call. We have seen increased costs relating to RASM carbon fiber and logistics, while we can pass on the majority and in some cases, 100% of the cost increases to our customers.
Portion, we are not able to pass on has had a material impact on our margins and we expect that impact to continue through the balance of 2021 and through 2022.
After increasing by almost 80% globally year over year RASM prices were flat in the third quarter, but we did see a slight tick up in October with a continued focus on margin expansion by our supply base. We do however expect pricing to continue to be relatively flat in the first half of 2022 before beginning to drop in the second half.
Capacity constraints continued for carbon fiber with pricing up over 20% year over year with demand exceeding supply in multiple industries, we'd expect pricing to increase in 2020 to virtually all of which we can contractually pass onto our customers overall, we expect to be able to hold the average bill of material costs for customers for <unk>.
Which we control the supply chain to a less than 2% increase over 2021 levels and expect to see commodity pricing begin to normalize in the second half of 2022 for many commodities logistics costs are also expected to remain high throughout most of 2022.
So turning to the overall wind market in slide seven.
Since our last call to build back better plan was introduced and includes a 10 year PTC extension with prevailing wage and apprenticeship requirements importantly, the bill includes a 10 year direct pay provision, although it requires certain domestic content requirements to be met to obtain 100% direct pay the BBB also includes an advanced manufacturing.
Production credits of <unk> <unk> per watt from 2022 through 2026 and U S manufactured wind blades and then it is phased down through 2029. So as an example, the blades for a four megawatt turbine would receive an estimated $80000 tax credit as with the PTC direct pay would be available other aspects.
The Bill that May help grow the wind market include storage and transmission tax credits and grants loans and tax credits for hydrogen made from renewable energy. In addition, there are significant grants rebates and tax credits to drive the acceleration of the de carbonization of the vehicle fleet for both electric passenger and commercial vehicles and charging infrastructure, which we believe could.
Help accelerate the growth of our transportation business finally than our past infrastructure investment and jobs Act includes 550 billion in new federal investment in U S infrastructure to help tackle climate change by making investments in clean energy transmission and electric vehicle infrastructure electrifying thousands of school and transit buses.
And creating a new grid deployment authority to support upgrading the electric grid. This should be a further catalyst for renewables in an EV growth in the U S.
Notwithstanding the positive long term impact in the U S of the build back better plan and the infrastructure investment and jobs Act, we expect decreased demand during the remainder of 2021 and expect volumes and therefore blade revenue and adjusted EBITDA on a billings basis to be flat or slightly down in 2022 due to less than optimal.
Capacity utilization due to uncertainty in the U S market and elevated raw material and logistics costs globally.
Longer term, we believe the future for wind energy will strengthen significantly given the necessity to decarbonize and electrify to meet the aggressive goals set by nations around the world to combat climate change and its roadmap to zero emissions by 2050, the International Energy Agency expects that by 2030 390 Gigawatts of wind will.
We installed annually or about four times more than the global records set in 2020, we believe that we are uniquely positioned with our global footprint in key strategic geographies to grow our market share with the industry, leading turbine Oems through this expected period of rapid growth. The next decade is both critical and a terrific opportunity for <unk>.
Yeah.
Before I turn it over to Brian I would like to reiterate that we remain focused on the health and safety of our associates, while executing on our operating imperatives and ESG goals, which include safety diversity inclusion and driving to become carbon neutral by 2030 with that let me turn the call over to Brian. Thanks.
Thanks, Bill Please turn to slide 11, all comparisons made today will be on a year over year basis compared to the same period in 2020.
For the third quarter ended September 32021, net sales increased by $5 5 million or one 2% to $479 6 million net sales of wind blades were relatively flat at $457 million.
Net sales were positively impacted by an increase in the average selling price due to the mix of wind blade models produced offset by a 20% decrease in the number of wind blades produced primarily due to the reduction in manufacturing lines under contract in China.
Q3 was also impacted by the transition to an innovative blade and whereas Mexico the impact on our production due to a shortage of raw materials supplied by our customers and a temporary shutdown of our young Joe manufacturing facility.
Due to COVID-19 outbreak and young Joe City Q3, 2021, ASP was approximately 172000, an increase of 19% year over year.
Startup and transition costs for the quarter increased $6 million to $14 5 million as we continued to transition lines to longer and innovative blades in Mexico and ramp up production at the facility we took over from Nordics in Matamoros.
Our general and administrative expenses for the quarter decreased by $1 1 million to $8 2 million in G&A as a percentage of net sales decreased 30 basis points to one 7% of net sales.
Foreign currency income was $4 million in Q3, 2021 as compared to a foreign currency loss of $17 1 million in Q3 2020.
This change was primarily due to net euro liability exposure.
Against the Turkish lira, the liability exposure continues to be naturally hedged on a cash flow basis due to our euro denominated revenue contracts approximately 23% of our revenue in Q3 2021 was denominated in euros.
Our income tax provision for the quarter was $8 2 million as compared to a tax benefit of $32 3 million for the prior year.
<unk>.
We are forecasting our cash tax liability to be $22 million to $25 million for 2021.
Net loss for the quarter was $30 7 million as compared to net income of $42 4 million in the same period in 2020. The decrease in net income was primarily due to the reasons previously described.
Net loss per share was 83 cents for the quarter compared to diluted net income per share of $1 13 for the same period in 2020.
Our adjusted EBITDA for Q3 was breakeven with a utilization rate of 76% for lines installed at quarter end. This compares to an adjusted EBITDA of $49 1 million or 10, 4% of net sales and utilization of 93% in the same period in 2020.
Q3 was significantly lower than we forecasted it was impacted by approximately $10 million due to the challenges and the Nordics facility. We took over in Matamoros, $6 3 million related to the transition to the innovative blade in Juarez, Mexico and $2 million associated with the three week production shutdown of our facility in young Joe China.
In addition, there was approximately 16 million net impact related to ASC 606. The net impact was the result of three main components.
First a change in estimate for raw material costs in 2020 for example in Q2, we expected certain raw material costs like resin to start declining in Q4 of 2021 now we are forecasting resin cost to stay constant throughout 2022, and our ASC 606 models.
Second we are contractually entitled to liquidated damage from your customers due to supply shortages of customer controlled raw material. However, under percentage of completion accounting for these contracts required under 606, there was limited recognition of the liquidated damages in the quarter. Finally, we were negatively impacted under ASC.
606 for new lines contracted in existing lines extended that bill referenced earlier as a profitability assumptions built into our prior forecast were impacted by adding the new lines can extending those funds.
Moving to slide 12.
We ended the quarter with $119 million of cash and cash equivalents and net debt of $143 8 million.
Quarter end, our liquidity has been significantly impacted by the slowdown slow production ramp and our Matamoros facility. The transition challenges we were facing in our whereas facility shortages of customer directed and supplied raw materials and forecasted reductions of demand due to sorry reduction due to reduced customer.
<unk> demand in Q4, 2021 and 2022.
Our leverage ratio was 298 times in Q3 or more than our maximum allowed ratio of 275.
We have obtained a 30 day waiver from the Bank group, which we believe will allow us time to close the oaktree funding to commitment from Oaktree will strengthen our balance sheet significantly during a rapidly evolving market. The proceeds will be raised from our series a preferred stock financing will be used to repay in full the amounts outstanding under our credit agreement.
Turning to slide 13.
For 2021, our full year guidance is revenue of between $1 72 billion and $1 74 billion.
Adjusted EBITDA of between $30 million $40 million.
Our adjusted EBITDA guidance for the year relative to the guidance we provided during the second quarter results relate to three main items, we have highlighted on slide 14.
First is bill walked through we have experienced greater than expected delays and costs related to our Matamoros facility visa.
These account for approximately $15 million adjusted EBITDA impact in 2021, the second key item relates to our Juarez facility and greater than expected cost and delays. This accounts for approximately $16 million of our adjusted EBITDA impact in 2021.
Lastly, approximately $16 million of our 2021, adjusted EBITDA guidance change relates to a noncash accounting impact related to ASC 606.
We don't expect any changes to our dedicated manufacturing lines and wind blade set capacity versus what we disclosed during the second quarter earnings call.
Utilization of approximately 76% ASP.
ASP of approximately 165000, we saw strong ASP in Q3 of approximately 107.
Third 72000, but the annual ASP is being impacted by the decrease in the number of blades produced in Q3 and the mix forecasted to be produced in Q4.
Non blade sales of between $120 million and $125 million, an increase of the low end of $5 million compared to our previous guidance.
Capex of between $40 and $45 million, a decrease to our previous guidance.
Startup costs of between 17% and $20 million. This increase is due to the production ramp of the facility for Nordics in Matamoros.
As well as the transition in Juarez and finally, we're now for casting to incur a total of approximately 45 million of restructuring charges associated with global footprint alignment in 2021, and 2022 with approximately $30 million forecast to be incurred in 2021, approximately 15% of the restructuring charges will be.
Noncash.
Now I'll turn it back to Bill to go a little more detail on our capital raising activities. Thanks, Brian turning to slide 16.
Ongoing and near term headwinds facing the industry, we have been focused on enhancing balance sheet strength and best positioning the company to manage through a difficult operating environment has set us up for the long term as I noted earlier, we have entered into an agreement to initially sell $350 million of series a preferred stock to oak tree and we may also elect at our option to <unk>.
Oaktree to purchased an additional $50 million of series a upon the same terms and conditions as the initial issuance of the series a during the two year period. Following the effective date of the agreement.
The outstanding series, a will have an 11% dividend, which may be payable in kind for the first two years Oaktree will also be receiving approximately $4 7 million warrants with a five year term issued at a per share exercise price of a penny per share. In addition to the $400 million upfront commitment Oaktree may invest in additional capital of 200.
Million dollars based on terms to be mutually agreed to.
Turning to slide 17 through 19 place.
The Oaktree investment will significantly improve our balance sheet position, reducing net leverage from 298 times to a net cash position on a pro forma basis as of September 32021, with pro forma total liquidity liquidity of $251 million, including $201 million of unrestricted cash this liquidity.
Additional flexibility to manage our business through near term industry headwinds available liquidity and access to the potential incremental $200 million of capital from Oaktree can also provide us with flexibility to pursue growth opportunities, including by leveraging <unk> global relationships resources and expertise we view this investment by <unk>.
<unk> is a strong endorsement of TPI strategy and long term prospects.
With that operator, please open the call up for questions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is as our question queue. You May press star two if he would like to remove your question from the queue for.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
Your first question comes from Philip Shen with Roth Capital Partners. Please go ahead.
Hi, everyone. Thanks for taking my questions. The first one is on the Oaktree deal.
In terms of.
The shares can you talk through how many were issued and at what price.
Yes so.
It'll be three initially fail it'll be $350 million of series a preferred.
And $4 7 million warrants to purchase common shares at a penny of peace.
Okay.
Got it.
Yes.
Thanks for that Bill are shifting over to the outlook for 2022.
I know you haven't provided.
Pardon me official guidance, but I was wondering if you could talk through.
How do you expect.
Revenue or volumes to trend and then.
How margins might trend as well as we get through the year.
Yes, I think Phil we've said that.
Blade revenue would be relatively flat year over year.
And EBITDA on a billings basis.
It would be relatively flat on a billings basis, if you will.
Volumes are down a bit from a SaaS perspective, we expect them to be down a bit in 2022.
And that's a number of things right the Iowa facility.
Our one of our facilities in Juarez, which will finish production for our customer there in the middle of the month and then just overall softening of U S demand.
Out of our other plants.
Thanks, Bill and then from a quarterly basis.
Do you expect.
<unk> to be for.
Trough.
Metrics to maybe be in Q1, and then things to improve.
As we get through Q4, 'twenty, two or do you expect either some signs of some.
To some degree of seasonality or some other factors that might.
Perhaps making not.
Sequentially growing like that or improving yeah.
We're not we're not prepared to speak specific quarter to quarter quite yet, but I mean, if you look at the last couple of years.
Q4 has historically been a little bit low.
Part of that has been there.
PTC push.
You get you get things delivered by September 30, so they can get installed by Q4, but then there is they take a breather in Q4 as far as production and so I would expect to see similar cadence at least in Q4.
Okay, great. Thanks, Bill I'll pass it on.
Thanks Bill next.
Next question, James West with Evercore ISI.
Hey, good afternoon guys.
Hey, James Im curious.
Curious also on the capital raise here, particularly the incremental 200 million that's available.
And I think bill you highlighted kind of for opportunities or opportunistically deployment or there are certain.
Opportunities that are unfolding that you may be able to act on.
Near term or is this more of a lift.
Whats lined it up so if something does come through.
Yeah.
Thanks for the question James I would say there certainly are opportunities that are out there.
With the dislocation in the industry over the next year or two there could be more interesting opportunities. So it's really not earmarked for any particular transaction its more.
From an opportunistic standpoint.
So hopefully that answers your question.
That makes sense and then as.
As we think about a little bit longer term 23 to 25 should see a nice ramp up in the wind industry. How are you guys thinking about capacity.
For that period and beyond would you.
Add more capacity in 22, even though the.
The market itself will be flattish would you need contracts add capacity I guess can you help us think about how you guys are viewing that opportunity set.
Yes no.
For it.
I see.
Unless there is a very specific situation.
Adding capacity in a market where theres currently overcapacity it doesn't sound like a very good move from our perspective.
But to your point as we get into 'twenty four and beyond.
Yes.
The projections that <unk>.
And others are even half right.
There's going to be a significant increase in installation and build and so clearly we're going to we're going to use this period, where we think it's relatively flat, especially in the U S.
To put ourselves in the right position geographically to make sure that we can capture more than our share of the market. If you will with our with our current and potential customers. So again I wouldn't expect anything in the very near term.
Just given the market and the amount of capacity in the market today quite frankly, I'd love to get our plants back into the Ninety's right from from the high <unk>.
So to me, it's fill our existing capacity because we are in great locations geographically.
We cover the world very very cost effectively so our goal is fill our existing capacity and then we will think about future capacity.
Okay got it thanks.
Yes. Thank you.
Next question AD hoc <unk> with bank of America.
Hi, good evening. Thank you so much for taking the question just wanted to quickly follow up on that.
<unk> made about EBITDA as you see when.
When you say you you'll see that.
So I don't have a billing basis, just wanted to understand at Beckman. The 55 million. They thought would be that would be ASC 606 impact.
Yeah that is without it right now because of the volatility that we're seeing right now with raw material costs and other things. It's just not worth forecasting at this point. So that's why we just gave the indication of on a billings basis, we think that makes more sense. That's how we look at it. That's all oaktree is going to look at it going forward. So just it just makes more sense to.
Do it that way rather than trying to manage the volatility we're seeing the ASC 606, yes, it's that's a better reflection of cash generation AD hoc from from our perspective in being able to predict what our customers might do with volume or not and where raw material pricing is going to makes it very difficult to accurately forecast 606, the way it works.
Especially with the nature of our contracts.
Got it. Thank you and then just to stick to the new lines that you added this does and go with Nordics whats the duration of that 155 million wondering if they begin contracted it's true it's likely to be.
Okay.
Yeah. So further for the lines.
It's beyond 'twenty, two and with Nordics, it's through 'twenty two.
Got it and then one last one for me and I'll pass it on.
Was curious about just any any progress on the offshore Frank I know one of your customers announced Oct.
Winning offshore work in the U S and deciding to work with their supply chain partners in the U S. So I noticed in 'twenty four 'twenty five timeframe, but anything for what it means for you in that timeframe.
Yes.
Working at hard AD hoc I mean, it is it's complicated on the east coast.
I know you're well aware.
With that every every state once a blade plant and in the solid plant in the tower plant in <unk>.
Picking the right place and of course, having a customer to do that with is important so.
We have we're spending a significant amount of time and energy on it but that's about as much as I can tell you at this point.
Got it thank you so much.
Yeah. Thanks.
Next question, Eric Stine with Craig Hallum.
Hi, everyone.
Hey, how are you.
Doing well.
So.
On the Iowa plant.
And for obvious reasons, given the uncertainty.
You know your expectations are pretty low for 2020, but in the I'm, sorry, 2022, but and then on.
Likely event that an OEM decided whether its another one decided that they wanted to bring on production. There I mean, maybe a rough idea of how long that would take to bring up.
Your line and whether its different.
It's the one that is ending at the end of the year versus a new one.
Yeah, clearly if it's if there's a pause if you will and it's the same blade.
The challenges our associates, obviously, what we want to provide them with.
An opportunity.
To find other work if if there is uncertainty with whether it goes forward but.
And that's what we're going to do.
But as far as the ramp up if it's the existing line, it's really about being able to hire or the existing lives is really being about being able to hire associates to ramp it.
So if you think about having to hire a workforce.
Again, if there is a pause in our existing workforce finds other work then it's probably a six month process to do that.
Got it Okay, and then maybe test.
I mean.
I know you've got the co development agreement.
For advanced blades, just any thoughts on maybe where the overall relationship.
That agreement stands.
In light of in light of what's going on in Iowa.
Yes. So as you know we also manufacture blades for them in two facilities in Mexico.
And we are we are producing innovative blade in one of those plants.
So.
The relationship is still is very strong.
Continue to collaborate with them.
On that aspect and continue to build blades for them and plan to build blades for them for a very long time. So I would say the relationship is remains very strong as it has been for a long time.
And we aim to keep it that way.
Okay. Thank you.
Thank you.
Next question, Laura Sanchez with Morgan Stanley.
Hi, Thank you for your time.
I wanted to I wanted to.
Follow up on the EBIT that question I think it was after a second Q earnings you had quantified what wasn't material benefit to EBITDA margin from the Siemens Gamesa lines going away, Mexico from the GE lines at that time potentially going away in the U S.
And now that we know.
Contracts with GE are rolling off.
Can you tell us a little bit about the dynamics.
That benefit on an improvement in 2022.
Yes, I think thanks for the question Laura Nice to talk to you.
So it is it is true.
That's accretive.
To our overall earnings.
With the shutdown of the plant in Mexico, as well as Iowa.
We'll tell you, though our Iowa plant is a fantastic plant it's just.
We're in it we're in a high cost area, which makes it difficult to be competitive.
We will see under this advanced manufacturing production credit whether that gives it gives us some life there.
We would like to have that have been clearly but.
Laura it's really it's commodity costs that we didn't we didn't expect to linger. This long it's the logistics challenges that we expect to carry through 2022 and quite frankly, it's demand.
And volume so you might have heard me earlier on in answer talking about the volume because of the softness in the U S market.
It's really when were at lower utilization levels that we expect in 2022.
That can eat up that that game fairly quickly now we're working on making our business more variable to be able to better <unk>.
Manage through some of the the demand swings that we've been seeing more frequently I will tell you since I have been around I've never seen as many.
Demand swings quarter to quarter as we've seen over the last year.
Last year and a half so I think our business has become a little bit tougher to forecast because of our customers' needs and their end demand and just the uncertainty in the market.
And so that's probably that is the main reason for not seeing as much benefit in what we think our 2022 EBITDA will be as a result of those closures.
Understood. Thank you for the color and on the Matamoros into Juarez facilities that are seeing challenges. This quarter I guess, what gives you confidence and that those issues will go away by the end of the year.
Yes, so so in Matamoros we've.
We've replaced the entire management team there that we inherited.
We have.
We're going to move between 150, and 200 associates from Juarez to Matamoros. When we finished production in the plant that is closing down that should be literally on a week.
We have a very experienced and talented global team that is residing in Matamoros right now to get it turned around we've.
We've seen significant progress over the last several weeks from a cycle time stand put in a throughput standpoint.
And so with the additional troops coming if you will for more S. As.
As well as the team we have in place there now as well as support from.
Just our overall infrastructure and Matamoros, we're very confident that we get this thing turned around by the end of the quarter and going into into next year, we're ready to rock and roll that full production I mean, our customers expecting it.
We're going to run flat out there all year.
So we're confident and we're devoting the resources as it relates to the war as challenge again. This is a this is a.
An innovative new blade that.
That went from design to prototype to production.
You tend to have challenges when you have a new innovative played like this.
We continue to work side by side with with our customer there.
We figured out where the where the challenges are from a production standpoint, we've got a solution for that and that solution should be implemented.
Towards the middle half for end of Q4, which gives us a lot of confidence that rolling into 2022.
We'll be able to hit that.
Volumes at our customers asking us for.
Got it got it and last one on my end you've talked about flat with revenues in 2022, and I think you gave a reference on the service side of the business that could double in 2022 any commentary on the transportation.
Precision or are the other revenue non wind related.
Yeah, so yeah on.
On the transportation side, we're still.
I think we've made a lot of progress over the last couple of quarters.
Which area Levine coming on board as our president of transportation Refocusing that group.
Really kind of reevaluating and focusing our strategy and who are what our target markets are and we've already seen some success from that.
From the additional.
Pilot production with the existing EV passenger.
Manufacturer that we are producing for to some really neat interesting opportunities.
Related to battery components.
Battery box components, if you will as well as structural other structural cabs or components, whether they be cabs or.
Or other aspects. So we're looking at some where we've got a joint development agreement on some very unique.
Composite technology that we think is going to be.
Significantly more cost effective to do what we do and provide a higher quality and easier to assemble vehicle. So.
We remain bullish on what the opportunity is there, albeit it is taking longer than we had originally anticipated. The traction we've gained over the last several quarters has been really significant so again the revenue numbers aren't going to be huge yet we do expect next year to continue to be another investment year by that.
Much lower levels than we've seen over the last couple of years and then rolling into 'twenty, three we expect to be profitable.
Thank you.
Thank you.
Next question, Steven Jeff Garrow with Stifel.
Hi, Thanks, good afternoon.
Hi, David.
Hi, So can you can you give us a sense for what Youre seeing I know you mentioned EBITDA, but when you look at 2022, how would you think about the different parts of our free cash flow generation.
Our cash flow in general how should we be how should we be thinking about sort of the puts and takes in and.
And given the given the transaction you announced Tonight I was just curious how youre thinking about 2022 cash flow.
Yes. So if you look at the announcements that we've had around the restructuring and the charges. We're taking the majority of that is all cash outflow of about 85% of it. So we see that hitting us kind of late Q4 and into Q1, So thats, where we see the significant need of cash right. Now is kind of that timeframe is over the next six months as far as.
The overall picture of next year, I mean, working capital and that we don't see big drags on that throughout the remainder of the year, we're really focusing on limiting capex as we're not growing so we're trying to focus on a lot of that but it is this next six months and the liquidity drain that we saw kind of from these other plants and then overall how long does this.
Shortfall come throughout 2022, and make sure we're positioning ourselves for the future.
Yeah, and I guess just to pile on a little bit I think we talked about volume likely to be down next year from a set standpoint and lower than desired capacity utilization. So when you have that in a business that is.
Relatively theres, a fair amount of fixed costs related to that.
Youll see some youre not going to see that significant free cash flow that we would we would like to see so I think until we get back our capacity utilization up to the levels that we would like to see in volumes become more stable quarter to quarter. That's when you'll start to see us generating that free cash flow that we all would like to see.
Great. Thanks, and just as a follow up I think to an earlier question. What are you seeing on the labor side are you.
How has that been how difficult has that been to manage and kind of how you're thinking about the labor side going forward.
Yes.
It's a great question and it really varies a bit by geography.
I would tell you, though for technical talent there's a.
War I mean, there is a war for talent out there and engineering talent technical talent.
We have we have a very good technical team.
We have some of the best minds in the business and the best folks to build blades in the business.
And so they are in high demand so.
It's.
Its tough its tough to replace if we lose so the key is to not lose them right. So we focus a lot on our people programs a lot on engagement and how do we make sure we keep our associates engaged understand what their needs are.
And so that's the name of the game for US I mean, we've dropped turnover year over year in the last few years by a significant amounts, which quite frankly saves us a significant amount of money, but it's all about engagement and how we're dealing with them and giving them. The right career path. So I will tell you.
For technical talent.
It's very competitive generally at the at the more direct labor position.
I don't think we see Io is a bit of a challenge from a workforce standpoint, just because the workforce is a bit smaller but in most of our locations. We don't really have a problem from that standpoint at this at this time.
Great. Thank you gentlemen.
You bet. Thank you I appreciate the questions.
Next question Pearce Hammond with Piper Sandler.
Yes. Thank you for taking my questions just curious with the setup that you now have with Oaktree and the potential for $600 million worth of investment as you stare out to next year and thanks for the helpful. Info on next year do you think this takes care of you.
Kind of in all scenarios from a liquidity standpoint for next year.
Yes, I would tell you we think that the investment by Oaktree gives us significant carrier sufficient capital to weather the near term challenges or the hedges or the headwinds that I've said, probably three or four times in my prepared remarks, but absolutely. We think we think we have we have some cushion as well.
But certainly enough for the near term challenges and that cushion is to the extent the downturn extends longer than most thinking well.
So we've spent a lot of time on what our working capital needs are what our outlook looks like for 'twenty two.
Anticipating a relatively flat 23, just from a planning standpoint, and Thats, how we kind of sized the deal and.
And made sure that we have adequate liquidity to carry us through this challenging period, specifically in the U S market over the next couple of years and positions us very well for opportunistic growth once once the market turns.
Excellent excellent. Thank you for the helpful answer and then my follow up if you can provide any color as to how the deal came about with Oaktree, specifically versus other alternatives, obviously oak trees are very well respected marquee type it faster, but just curious if you could provide some color about how it all came about.
Yes.
We spent a fair amount of time with our financial adviser, we use lazard little plug for them.
But yes, we spent a bunch of time with Lazard evaluating what our options were and I will tell you.
The folks at Oaktree get us they get our industry they get renewables, they're excited about the energy transition.
They've done a lot of a lot of investing in kind of an adjacent space with array and shows and the like so they really understand.
Kind of what our challenges are what the industry challenges are but also what the industry opportunity is.
And so.
I don't think we could have picked a better partner.
We're really excited about the people, we're working with and the skills. They bring and so that's it I mean its experience in the industry understanding our story understanding our strategy.
And then the people right I mean people is important here and we're going to have to work closely with them for a long time and they brought a great team to the table.
Thank you very much.
You bet.
Next question Pablo market with Raymond James.
For taking my question.
Given your global operating footprint and even more global sales mix, you've often talked about.
Being able to kind of re route.
Blades to different geographies, just depending on where the demand comes from.
No.
Given the softness that you referred to in the United States.
Can you give some examples of places where demand is perhaps better than expected kind of an upside surprise.
Yes, I would I would tell you.
Turkey next year as we expect it to be flat out.
And being asked for more so I think thats good India.
Remains pretty strong for us.
With the new obviously new lines in China with Vestas is important.
So we expect to have a good year there.
So, yes, I mean and then.
Our plants that are really U S centric, which would be the <unk>.
One's along the border and whereas now Matamoros, we're pretty close to a port. So so they can export from Matamoros, if they chose to but most of what we build today comes into the U S market. So those are the plants, where with the exception of the Nordics plant the.
The volumes are a little bit we expect the volumes to be down a little bit next year, just because of the U S market.
Okay, and the strength in Turkey and India.
Is that domestic in Turkey, and India or these.
Export opportunities for example, going to U K, Germany et cetera.
Yes, I would say the vast majority of what we're producing in Turkey.
Is being exported now we do have lines for very strong players in Turkey, which helps so there is a fair amount of domestic.
Domestic demand, but I will tell you the vast vast majority does get exported out and I would say the bulk of that is to Europe.
I mean, Europe is our second largest market behind the U S.
Okay.
Very much.
Thanks, <unk> good talking to you.
Next question, Mark Strouse with Jpmorgan.
Yes, thanks, very much for taking my questions.
Bill to the extent that your customers are sharing this with you can you just kind of talk about the.
Yeah, I hate to use this phrase, but kind of shovel ready projects that are out there just kind of waiting for some visibility from from build back better.
Could they immediately start construction, then or do we kind of is that the beginning of what would be kind of a more normal project cycle.
Yes, I'll tell you Marc I don't have really good visibility on specific product now I do on a few and those are the ones that we're pushing hard this year to get.
To get delivered to a couple of different to a couple of different customers.
Out of Mexico, clearly, but.
We usually don't know exactly where the blades are going.
So I don't again, I have general data, but not not very specific data with respect to the shovel ready deal. So I apologize I'm, probably not the best person to answer that question.
Sure Yes.
And then just a fee.
Follow up kind of a technical question the two cents per watt domestic blade manufacturing credit.
If that passes can you just talk about how that gets layered into your existing contracts would that be complete upside to TPI would that be shared with your customers would it require some kind of rewriting of your existing contracts.
It's great question.
Technically it goes to the manufacturer which would be TPI.
And I think that would factor into again trying to trying to make the U S plants economically viable.
So if we got the credit.
Our customer can have a lower price, which would make it competitive with a blade brought from another geography, if you will right.
If our customer guidance for some reason then they could afford to pay us more for the blade and still have the margin. So the way I understand it right now and again, it's still pretty fluid, but it would come to us as the manufacturer and then obviously, if we want to keep those plants open.
Got to figure out what the right split is to make that the blade cost if you will competitive with imports such that.
Customer, whether it be GE or another customer would want to produce in the U S.
Does that make sense so to answer your question.
That's very helpful. Thanks Bill.
You bet. Thanks Mark.
Next question, Greg Watson Koski with Weber research.
Hey, good afternoon, guys. Thanks for taking my questions.
I just wanted to start with.
The follow on amount 200 million for.
The Oaktree deal you guys already touched on this I just wanted to put a finer point on it.
Is that mostly baked in for additional runway, if if needed or it.
Or is it maybe like an <unk> type of situation.
Thinking about.
Capex opportunities for you guys, whether that'd be on the offshore side or maybe something in transportation.
Put a finer point.
Yes so.
As I mentioned earlier, we think what we've pulled down today.
<unk> is adequate to to kind of get us through this rough patch in the U S market.
And so the 200 is really not it really is we're pulling 350 of the 400 and that 50 is kind of a cushion where if or if that if the downturn is prolonged we've got access to that at our option.
The 200 is different right. The 200 is I mean, I think it shows a commitment from oaktree to the industry and specifically the TPI and what are what our strategic intent is and so I think if we if there is a.
Opportunity then that's what the 200 is for it's more for future opportunity.
Whether it would be growth or otherwise.
And again, it's let's be clear it would be on different terms than the terms. We have today mutually agreed upon terms. So it would be really not as a safety net for what we've got because we're confident in the number. We've got is what we need is really for growth opportunities.
Okay. That's helpful. Thanks for the clarification, there and then on that point is there.
Thinking about future growth opportunities there.
Maybe our intention or our focus on one area or another whether that's offshore is kind of the.
The leading opportunity there or.
Is it do we think of transportation is maybe an equal sort of opportunity whether that be in in terms of additional capacity or potential jv's M&A et cetera.
Yes, I think clearly there could be some opportunities in the transportation space.
I think offshore to your point not an M&A, but more of a newbuild I think that's a that's an obvious.
<unk>.
Use of capital as well and it's a significant use of capital I also think we've done all of our service.
Or all of our service growth has been organic.
So that is that's an area that we would like to grow I think there are there's a lot of activity in that space. Today. We service blades. The question is could we expand our offering to include more tower work and then the sale itself.
So I think there are a lot of interesting opportunities to to vertically integrate a little bit more.
As well as overtime.
The horizontal is an interesting thing too if you think about the entire value chain within the renewable space.
Okay very helpful.
Take the rest offline thanks guys.
Alright, thank you.
I will now turn the floor over to bill for closing remarks.
Yeah.
Thank you everybody for your questions.
Just we remain focused on managing our business through the near term challenges facing the industry in todays financing agreement with Oaktree highlights our efforts to best position TPI to do so with a focus on execution of our strategy to capitalize on long term energy transition trends and opportunities.
So finally I want to thank all of our TPI associates once again for their commitment and dedication during these challenging times. Thank you again for your time today.
This concludes the teleconference. You may disconnect your lines at this time and thank you for your participation.
Okay.
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