Q2 2023 TPI Composites Inc Earnings Call
[music].
Okay.
Okay.
Hello, and welcome to the G P.
Cute 2022 earnings.
All participants will be in a listen only mode.
After today's presentation.
You ask questions. Please note. This event is being recorded.
I'd like to hand, the conference over to your first speaker today, Mr. Jason Workman Investor Relations. Please go ahead.
Thank you operator, I would like to welcome everyone to TPI composites second quarter 2023 earnings call.
We will be making forward looking statements. During this call that are subject to risks and uncertainties, which could cause actual results to differ materially.
A detailed discussion of applicable risks is included in our latest reports and filings with Securities Exchange Commission, which can be found on our website TPI composites dot com.
The presentation will include references to non-GAAP financial measures.
You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures.
The comparable GAAP financial measures.
With that let me turn the call over to Bill sideways, TPI composites, President and CEO .
Thanks, Jason and good afternoon, everyone. Thank you for joining our call. In addition to Jason I'm here with Ryan Miller, our CFO .
Jason is our new VP of Investor Relations and sustainability and is replacing Christian Edens, who has recently moved to Europe and is now part of our customer facing commercial team I want to thank Christian for progressing our Investor Relations program over the last four plus years and for his passion and leadership in advancing TPI sustainability initiatives.
Jason brings with him a wealth of experience in numerous financial leadership roles at a multinational aerospace and defense company I want to welcome Jason to the team and Ryan and I look forward to introducing him to all of you in the coming days and weeks with that lets get to it please turn to slide five.
To put it simply it's been a tough quarter Q2 has been challenging from both an industry and GPI perspective, and I can boil it down to two key issues quality and volume both of which I will discuss in a minute, but first some good news I am pleased to announce that <unk> have reached an agreement in principle to amend our existing supply agreement in Mexico.
Add four new lines should produce blades for GE as workhorse turbine and Juarez with an initial term through 2025.
<unk> expect to finalize this agreement in the third quarter.
<unk> has been broadly discussed industry wide over the past several quarters and quality issues have had a pronounced impact on performance and we have not been immune to these issues, while the accelerated pace of new product introductions within the industry of the last five years and the push to get larger wind turbines to the market faster has significantly reduced the cost of wind energy.
It is also a contributing factor to the wind turbine blade manufacturing quality issues that have surfaced as we reported last week, our financial results for the quarter were impacted by a warranty provision for the inspection and repair of blades, primarily related to one blade type and one factory.
We have responded to the evolving quality challenges with the following actions we had a third party complete an in depth assessment of our existing quality system and are implementing improvement initiatives, we have and continue to engage with our customers more deeply than earlier in the design phase to minimize quality of risks in the product design and manufacturing process there.
Good news is that our customers have significantly slowed the pace of new product introduction and recognize the benefits of standardization and industrialization.
We hired Neil Jones, as our Chief quality Officer effective August one 2023, and this newly created position Neil will oversee all quality processes systems and controls relating to Tpi's wind business and will report directly to me Neil brings over 25 years of experience in quality and engineering positions.
In the wind and automotive industry, Neil spent more than 13 years with Baptist and a variety of quality leadership roles with the last five years as senior Vice President quality health safety and environment before joining fastest Neil spent over 20 years in the automotive industry, including engineering and quality leadership roles with TRW automotive and <unk>.
And your quality leadership role with Eaton automotive and finally, we are replacing certain members of our senior team to improve our operational leadership, given the performance and quality challenges. The company has experienced during the past year.
We are confident that the steps we've taken will significantly reduce our warranty claim exposure going forward now.
Now, let's discuss volume as we discussed on our first quarter earnings call. We are still working on a handful of volume changes with our customers that will likely net out to lower sales for the year.
Given the extended time it has taken to get clear guidance on the inflation reduction act and the complexity of its implementation ongoing challenges in the EU and the changing economics of certain markets our customers continue to.
Fees on a market by market basis, while considering the existing inventory levels all of which have resulted in volume changes from three of our four blade customers in 2023.
In addition, there is no doubt that permitting transmission transmission queues, the ability of the broader wind industry supply chain to ramp volume inflation and cost and the availability of capital or further factors impacting the timing of recovery, which we believe is likely pushed to 2025 as our customers can.
To move transitions and new line startups to the right.
Notwithstanding we stand by our mid to long term sales and adjusted EBITDA targets. We introduced in our 2022 year end earnings call in February and are focused on positioning ourselves to deliver on those targets as volumes return and then accelerate to more robust levels the industry expects.
Now, let's cover our overall Q2 results.
Sales for the second quarter were $381 million and were negatively impacted by delivery delays of blades from increased inspection and repair activities.
We also had lower automotive sales due primarily to lower bus body deliveries and field service sales were down as we had our field service technicians working on warranty related efforts.
<unk> EBITDA was a loss of $38 9 million in the second quarter.
As we discussed on our first quarter earnings call, we expect that the second quarter to be the low watermark for profitability for the year, primarily due to annual wage increase is kicking in.
Incremental productivity benefits will be phased in over the second half of the year to offset those increases.
However at that time, we didn't expect the quality challenges I discussed a few minutes ago, which by far had the biggest impact on our adjusted EBITDA for the quarter. In addition to the warranty charge of $32 $7 million. We recorded our adjusted EBITDA was also impacted by lower volume than expected inflation and higher cost of inspection and repair activities.
Now I will give you a quick update on the rest of our global operations, including service and automotive please turn to slide six.
Notwithstanding the challenges we faced in Mexico during the quarter, our blade facilities in India, and Turkey performed et cetera, generally well globally. We produced 661 sets and achieved a utilization rate of 85% in.
And global service sales were down year over year due to a reduction in technicians deployed to revenue generating projects for the full year, we expect revenue to be down by about 30% year over year.
Things continue to progress nicely in our automotive business. However, we now anticipate automotive's 2023 and full year revenue.
To be down from 2022, primarily due to lower bus body sales.
We are also experiencing lower than expected sales and other automotive products due to our customer supply chain constraints and customer delays and transitions of new product launches.
In the second half of this year, we are planning to launch three new automotive production programs. These programs include large structural panels for a commercial truck a full battery and closure also for our commercial truck and high voltage battery pack thermal barriers for our light duty truck our customer diversification initiative is paying dividends as the REIT as these three.
Launches are each with a different customer with two of them being new to TPI.
In addition to products being launched show our investment in innovation and new manufacturing technologies are aligned with the needs of the automotive market to support additional near term growth, we have and are making additional capital investments in the light resin transfer molding <unk> and assembly processes, we expect our Rhode Island.
Whereas automotive plants to be vertically integrated for these technologies by year end, which will enable the scaling of our capacity and significant growth next year.
We continue to explore strategic alternatives for the automotive business to enable us to scale faster and are encouraged by the initial discussions and expect to have more information to share by the end of Q3.
As it relates to our supply chain the situation is significantly better than during the past two years. We continue to expect the overall cost of raw materials to trend down compared to 2022, while logistics costs have returned to pre pandemic levels, both of which provide us some tailwind for the back half of the year over the last couple of quarters, We've said.
Adjusted that 2023 would be a transition year, while the industry digests <unk> waits for formal implementation guidance related to key components of the IRI in the U S and clarity around more robust policies in the EU.
More and more however, it's starting to look like the expected increase in volume related to the IRS and initiatives in the EU may not materialized broadly until closer to 2025.
Last month, the EU finally signed off on its renewable energy directive after months of negotiations the emergency measures on permitting agreed last year will now become permanent.
That means enforcing the principle that the expansion of wind is in the overriding public interest applying a binding two year deadline to all permits and a population based approach to biodiversity protection and requiring all EU countries to digitalize their permitting procedures.
These new rules are an important step forward and will help unlock the 80 gigawatts of wind farms currently in the permitting pipeline across Europe .
Countries have until the middle of 2020 forward to implement them. Some are already doing so for instance, Germany.
And there it has led to an increase in permitting rates starwood to winning appeals against permits that were previously lost.
Here in the U S. Although guidance on many of the key provisions under the IRS had been issued interpreting and getting clarification of the guidance will take some time as you might expect with legislation as broad as the IRA clarity around the implementation will take some time.
Just last week, the federal Energy regulatory commission or <unk> issued a long awaited final rule on interconnecting generation and storage resources to the grid based on initial for statements. The final rule will implement among other reforms are first ready first served cluster study providing much needed relief for nearly two tera.
Lots of renewables and storage that are currently waiting to interconnect.
While we recognize the challenges the wind industry continues to face in the near term with a continued focus on energy security and independence globally, we remain confident that demand for wind energy will strengthen once the current regulatory complexity has deciphered in global economies begin to stabilize.
With our current facility capacity of nearly 15, Gigawatts, we expect our wind revenue to Eclipse 2 billion deal.
Yielding a high single digit adjusted EBITDA and our free cash flow percentage in the mid single digits over the next couple of years today, we are operating 37 lines, including four lines for Nordics in Mexico.
With transitions to larger blades, the startup of new lines and the completion of the <unk> contract in Mexico in mid 2024, we plan to exit 2024 with 39 lines. These 39 lines will enable us to produce approximately 3200 sets per year are 15 gigawatts.
He has updated net zero by 2050 scenario when needs to retail or 400 gigawatts of installations per year with approximately 80% onshore and 20% off shore. Therefore, the market would have to be almost five times larger than it was in 2022.
<unk> 15, gigawatts of capacity will not be sufficient to meet the long term needs of our customers. So strategically growing in our global capacity and footprint over the next few years is a discussion we are engaged in today with all of our customers as we are in a unique position to capitalize on the growth in the wind industry.
With that let me turn the call over to Ryan to review our financial results.
Thanks, Bill Please turn to slide eight all comparisons discussed today will be on a year over year basis for continuing operations compared to the same period in 2022. Please.
Please note our prior year financial information has been restated to exclude the discontinued operations from our Asia reporting segment as we shut down operations in China at the end of 2022.
The second quarter of 2023, net sales of $381 3 million compared to $392 5 million for the same period in 2022, a decrease of two 9% net sales of wind blades to another wind related sales of chapter I'll refer to as just wind sales decreased by $4 9 million in the second quarter of 2023, or one 3% compared to the same period in <unk>.
'twenty two.
The decrease in net sales of wind during the second quarter was primarily due to a 2% decrease in a number of wind blades produced due to lower customer demand and delivery delays increased inspection and repair activities.
A decrease in other wind related sales for multi commission services and lower average sales prices due to the impact of raw material and logistic cost reductions on our blade prices.
Decreases were partially offset by favorable foreign currency fluctuations and an increase in tooling sales. Additionally, our utilization in the second quarter of 2023 was 85% compared to utilization of 88% in the second quarter of last year.
Field service sales decreased by $2 9 million in the second quarter compared to the same period in 2022.
Decrease was due to a reduction technicians deployed on revenue generating projects due to an increase in time spent on non revenue generating inspection and repair.
Automotive sales decreased by $3 4 million in the second quarter compared to the same period of 2022.
<unk> was primarily due to a reduction in the number of composite bus bodies produced and a decrease in sales of other automotive products due to our customer supply chain constraints and customer delays and transitions to new product launches, partially offset by an increase in fees associated with minimum volume commitments.
Net loss attributable to common stockholders from continuing operations was $80 8 million in the second quarter of 2023 compared to a net loss of $25 3 million in the same period in 2022.
Adjusted EBITDA for the second quarter of 2023 was a loss of $38 9 million compared to adjusted EBITDA of $5 6 million for the same period in 2022.
The decrease in adjusted EBITDA during the second quarter ended June 32023 was primarily due to increased warranty costs higher production costs for additional quality control measures implemented at certain manufacturing facilities and increased labor costs in Turkey, and Mexico, partially offset by foreign currency fluctuations cost savings initiatives and lower startup and transition costs.
Moving to slide nine we ended the quarter with $170 million of unrestricted cash and cash equivalents and $195 million that we.
We had positive free cash flow of $6 2 million in the second quarter of 2023% compared to $19 4 million in the same period in 2022 and.
In light of a challenging quarter, we placed a significant focus on preserving cash is surely efficiently deployed our working capital to make sure. We can comfortably execute key initiatives as we move forward. We do expect a modest level of cash burn in the second half of the year as we satisfy our warranty commitments and continued to implement quality improvement initiatives note that most of this cash burn.
As expected to occur in the third quarter.
I know many of you wanted to understand how we're thinking about our cash position beyond 2023, and as we enter a period of time in 2024, when we expect to be starting up idle lines and tricia transitioning to longer blades.
The bottom line as we continue to be confident in our liquidity position shed a little color on the moving pieces in 2024, we expect positive EBITDA and working capital initiatives to be our primary sources of cash we are expecting EBITDA to significantly improve in 2024 compared to 2023, as we get the cost of quality issues behind us and we effect.
We set the losses.
From our Nordics Matamoros plant.
We also expect to get some advances from our customers to support the ramp of idle lines.
Offsetting these sources of cash will be capex, primarily related to the transition and startup of idle lines.
And taxes as well as cash payments to Oaktree preferred dividends.
Our first dividend payment to Oaktree will be in January 2024 in total we expect to make about $40 million in payments for preferred dividends to oaktree in 2024.
The end of the day, we believe our balance sheet, our projected liquidity position and our operating results will enable us to navigate the short term challenges and invest in our business to achieve our mid to long term growth targets of $2 billion plus in Wednesday, and high single digit adjusted EBITDA margins.
Moving on to slide 10.
As a result of the quality and volume changes as Bill discussed we are updating our financial guidance for the year sales are now expected to be down by about $100 million at the midpoint of the ranges from our initial guidance.
Approximately half of the reduction relates to lower customer demand for blades and delays for inspection and repair activity about a quarter of the debt reduction relates to lower field service sales as technicians have been diverted to non revenue generating work.
The remainder of the reduction relates primarily to lower asps.
From supply chain reductions and lower automotive sales unexpected.
We do continue to expect to achieve low single digit adjusted EBITDA margins over the second half of the year, which is consistent with our initial adjusted EBITDA guidance for the full year. However, with the loss from the second quarter. We now expect our adjusted EBITDA for the full year to be a slight loss of less than 1% of sales.
With the reduction in sales volumes, we now expect utilization to be in the low to mid <unk> versus our initial guidance in the mid to upper eighties.
With that I'll turn the call back over to Bill.
Thanks, Ryan Please turn to slide 12.
We remain very bullish on the energy transition and believe we will continue to play a vital role in the pace and ultimate success of the transition.
We remain focused on managing our business through the short term challenges in the industry and are excited about how we are positioned to capitalize on the significant growth the industry expects in the coming years.
I want to thank all of our TPI associates once again for their commitment dedication and loyalty to TPI I'll now turn it back to the operator to open the call for questions.
Thank you ladies and gentlemen.
Have a question. Please press the star followed by the one on your Touchtone phone you should like to withdraw your question. Please press the star followed by the two one moment. Please for your first question yes.
First question comes from Julien Dumoulin Smith from Bank of America. Please go ahead.
Sorry, guys can you hear me I was on mute.
Yes got you Julien good to talk to you.
Thanks.
Hey, Thanks for taking the time really appreciate it hey, guys.
Just a couple of different things here. So look I know the backdrop has been challenging here of late but can we talk about the quality related matters and a little bit more detail right. So you disclosed here.
A issue with a customer at a given site under warranty, but you also discussed the third party.
Independent evaluators come through reviewed your operations et cetera can you discuss what the third party review found.
And have you needed to pursue quality changes at other sites <unk> other customers. Thus far if we can kind of get into some of the other permutations here if you don't mind.
Sure Yes.
We brought in actually we brought in third party quality review, our that was our choice our customers didn't know we were doing it quite frankly at the time.
Commission that a couple of months ago.
It was more just to make sure that as again, we were seeing.
More issues within the industry.
And we had a little bit of a of an.
The increase and what we would call a nonconformance as in some of some of the blades. We were producing so wanted to get a very objective third party view.
Our quality management systems, what we were doing well, what we needed to improve on so I would tell you it's not I mean.
In virtually all of our plants were in actually really good shape.
Had a couple of a couple of facilities that were.
Not where we would like them to be today.
So that's kind of the Genesis the findings.
<unk>, we can always make and we're making those.
But overall there was there was nothing that was of major concern. It was just improvement on what we had already done.
So that's I think that's about the third party reviewer.
But.
Again, we have there.
No I mean blades are are incredibly man right I mean, it's.
Anywhere from 500 to 3000 3500 direct labor hours per blade hundreds of layers of glass laid up by hand.
Fusion that is somewhat automated but still relatively.
The annual as well as laying core down et cetera et cetera. So there is a lot of manual processes that go into it every one of our customers' blades is different and each of our customers blade models are different so it's not like it's a highly automated.
Process, which.
Then leads to.
More room for nonconforming, because when Youre building, a blade that can be 80 meters long.
30000, plus pounds right.
And so we.
The whole industry has work to do especially as as we move from relatively moderate sized blades to very large blades it very quickly.
The challenge is getting up to serial production once you get to serial production quality is obviously much better but when youre switching blade models as quick as you are you never really get there. So the good news is with NPI is slowing down.
I think our and the improvements we're making from a quality standpoint, I think the instance of quality issues going forward will moderate back to levels that we used to see which were very which were very low.
Got it and just to clarify this you said there was a couple of sites with issues.
Just can you elaborate a little bit on what's been done to remediate.
It seems like you didn't.
Elect to pursue a warranty claim on that second sight, if you can elaborate.
So julien.
We evaluate our potential warranty claims continuously there are some other small.
Warranty claims out there I mean, we've got a fairly sizable reserve now so we feel very comfortable that what we've got is covered.
So.
I mean, the other what have we done to protect them, we have firewalls that we put in place.
And again remember we have our customers are in our plants with us.
So not only are we expecting them, but generally our customers are inspecting them as well before they get shipped we've increased the level of inspection we've increased the numbers of inspection during the production process not just at the end of the process.
And in some cases, we have invited third parties into our plants.
Two to validate the inspection work that we've done.
And sorry, Lastly, you said that you have work to do.
Yes.
Yes, you always have work to do right is call it continuous improvement and again when you when it's your when youre dealing in an extremely manual process. There's always there's always improvements you can make but.
We've had a very very good long term track record from a quality standpoint.
This large the large issue that we specifically provided for this quarter.
About how we talk about it its inspection and repair so a lot of this is proactive.
There were some there were some non conformance is found.
Out in the field before blades were put up tower.
We looked at those with with our customer and we developed a plan to make sure that we inspected every blade and if there was the need to repair we would repair and if not we would move on so it's not like we have blades failing in the field Glade flying off towers. This was more proactive to make sure that we know.
Ever get into that situation and again for many of these blades there'll be relatively minor.
Repairs that are done some blades will likely not have any.
Others will have some repairs to do before they go up tower.
Right.
You still reconfirmed here.
Our high single digit EBIT margin target, although you didn't specify a timeline that necessarily but it seems like the warranty costs, the higher opex et cetera, still hasnt, taking you off that goal.
Well that higher single digit we sat in a couple of years right. We've got to get through we've talked about 23 began a transition year 'twenty for a bit of a transition year as.
Some of the transitions that we plan from a line standpoint, as well as startups have moved to the right a bit by our customers and so we see 'twenty three and 'twenty four really as not only industry transition years, but TPI. Some TPI transitions as it relates to lines and so we see ourselves exiting 'twenty four entering 25 more on that.
Right.
Thanks for the time I appreciate the detail.
Yeah. Thanks Julien.
Your next question comes from Mark Strouse from JP Morgan. Please go ahead.
Yes, good afternoon, thanks for taking our questions.
Hey, Mark I'm thinking back to the second half of last year, maybe around the same time that you announced.
The <unk> contract in Iowa.
You were talking about.
<unk> been in discussions with other Oems as far as potential U S. Manufacturing has this quality issue impacted those conversations at all.
No.
We're still we're evaluating.
Right today, and still and still in discussions with multiple customers for <unk>.
Sites within the U S.
Okay good to hear.
And then with the announcement today with <unk>, how should we think about when.
Assuming that you will get the full contract and three Q with the timing of that might look like as far as when that might start.
And since it in more as is there any disruption to your existing lines, while that process is ongoing.
Yes. So if you remember mark we had a vague or we had an empty facility in juarez.
So this this is the empty facility, so GE will be moving into that new facility and we expect production to start early next year.
Got it okay. Thank you very much.
Yes.
Your next question comes from Justin Clare from Roth MTM. Please go ahead.
Hi, guys.
I wanted to start with the demand picture a bit here, you indicated demand might be pushing to the right a bit.
And then to 2025.
Just given that backdrop, maybe you could walk through what your expectations are for your open lines. It sounds like youre going to be exiting 2024 with 39 lines. So it seems like you're adding the floor with GE. There is two others that youll contract and then maybe the five lines and where the potential five lines in Iowa.
Might not get contracted.
In the near term so just maybe if you could walk through what you're what you're expecting here.
Yes, so ads.
<unk>.
The line count was a little bit different last quarter, and that's because as we've gotten deeper into discussions with customers and we looked at blade sizes.
The number of lines have actually come down a little bit, but if you. If you are listening to.
The prepared remarks, we wind up with the same number of gigawatts of capacity or the same capacity at 15 gigawatt caused the larger line.
We will generate obviously, we can produce the same amount of gigawatts.
What's that we would've otherwise.
So we had to four lines, we have four lines in Mexico.
We subtract four lines in Mexico, as well the Nordics lines right and that we were.
Think about Iowa, which is probably.
Four to five lines at.
At this point.
And then India, adding a couple of lines there as well.
Okay, well I'll give you the exact yes, we're at 37.
Add four in Iowa potentially again.
Gee, we're working with GE to still determine the right time for that to open based on clarification around some of the IRA and what their demand needs are so thats still to be determined but think of it as four lines Mexico. Two we just talked about which is for lines two more in India two lines in India.
We take out the six or the four lines for Nordics in Matamoros.
When we transition to a larger blade in another plant in Mexico will go from six lines there today to four lines.
And then.
Same in Turkey, and bulk Turkey plants transitioning the larger blades, we actually lose a line at each.
So if you do that math you get to 39.
It's the same number to the Gigawatts if you will.
Right. Okay, Okay that makes sense. Thanks for thanks for walking through that.
And then just on the cost of inspection and increased focus on quality here.
I was wondering does that serve as a headwind to your gross margins as you move into Q3, and Q4, how impactful might that be.
Maybe just speak to that.
That element.
Hey, Justin I would say this is Ryan.
I think a lot of that is behind us. So we went through a bit of a learning curve and some catch up on some blades that were in and we talked in the first quarter about how we had slowed down deliveries and so we were catching up on some of those inspection and repairs.
Now, we got a lot of that behind us so far this year and Youll see this disclosed in the 10-Q, we probably incurred around $10 million of higher inspection repair than what we had planned at the start of the year. There is probably still a couple of million dollars left over the balance of the year. So total of call it $12 million or so, but we think a lot of that increased cost is behind us I think we've gotten through a lot of the catch.
And learning curve that we see as we've gone through those that actually has helped us identify areas, where we need to go back and build more quality upfront and make it more proactive instead of reactive on the backend and catching up later.
Okay.
Thanks, very much I'll pass it on.
Yeah.
Your next question comes from Eric Stine from Craig Hallum. Please go ahead.
Hey, everyone. Thanks for taking the questions.
So I'm just trying to think through these quality issues and what this could mean longer term I mean, clearly it sounds like you feel that the one quality issue you're having in the smaller ones that you've kind of got those ring fence and historically I don't think you've had many of these warranty.
Warranty programs I mean do you.
Do you see this at all changing kind of the whole in source versus outsource dynamic or I mean.
Is this something that could could permanently slowdown that moved to larger blades.
Which I guess would mean fewer startups and transitions for TPI.
Yes, I don't think it changes the outsource.
Outsource in source discussion quite frankly.
And then new product introduction has already slowed down I mean do you just have to listen to what our customers are saying publicly about new product introduction and the need to standardize and industrialize.
And running running these in.
Modular organization of the turbine.
So we're seeing that already.
But I do not think it impacts the in source versus outsource.
If the market goes to where we think it needs.
Where the where many think its going.
There's going to have to be a ton more capacity in the market over time.
Thank the Oems are going to want to absorb.
To have the appetite to spend that capital on blade plants quite frankly or another manufacturing facility. So.
No I don't I don't think it impacts us I think to your point, we have not had significant warranty issues in the past we.
We see this as a.
As a unique event for us.
And we will learn from it and continue to improve what we do and work.
Very closely with our customers one of the important things that we've talked about in the past is collaborating more closely and deeper upfront with our customers. So that we can minimize the.
Potential for risk areas in the manufacturing process and and turbine design in and our customers recognize that they are engaging with us more deeply in earlier.
I think that will help in the long run with minimizing the types of.
Risky manufacturing operations that we see at points in time to that.
Got it and when you talked about the two lines in Turkey.
<unk> from three to two.
And then it seem in Mexico, I mean is that I have.
Are those plans that are already underway and are kind of.
Already starting and so theyre not necessarily subject to kind of the slowdown youre seeing on the activity.
Sure.
No. It has nothing to do with that let's be clear in Turkey. It was we have two plants. They are once going from four lines or three lines. One is annoying from seven lines <unk> lines and in Mexico. The one plant we have running a smaller blade today. When we go to a bigger blade that goes from six lines to four lines.
Producing the same number of Gigawatts for 39 lines as we were off up to 44 that we talked about before so it's not about <unk>.
Reduction in demand for what we're doing it's a larger blade. Therefore, you need fewer sets to hit the same number of Gigawatts now overtime.
Might we might we expand.
Expand a couple of those plants to add more lines suet, absolutely or will look for.
Additional additional capacity in the same geographies or new geographies.
Got it alright, that's helpful. Maybe just a quick.
Just on the automotive side, you mentioned strategic alternatives I mean.
It doesn't sound like that strategic alternative would include selling or monetizing that business. So maybe just some of the thoughts are the more likely forms that might take.
No different than we've talked about Eric.
We're looking at all options could be partnership joint venture.
Separate source of capital.
So there is a multitude of different things, we're looking at we were actually looking at.
Probably three different forms today.
So those discussions are progressing we hope to be able to give you more information later in the quarter.
Okay. Thanks.
Yes.
Your next question comes from Joseph Osha from Guggenheim Partners. Please go ahead.
Hi, there guys I just wanted to talk about next year, a little bit you've got this oaktree breath dividend coming in at $40 million.
You have not based on my sort of pass through your model.
Ever generated that much free cash at least in 2015 or so so it would seem to me that youre going to be.
Burning cash next year to meet you.
All of your obligations as data is that a fair observation.
Yes, Joe I think a lot of this.
For us I think we feel pretty comfortable with our liquidity position today could we be burning some if we do we believe it would be a very modest amount.
A lot of this is going to depend on the startups and the timing of those startups, it's going to be dependent upon the amount of customer advances that we can get to help fund those startups and transitions.
We're currently thinking about 'twenty, four and obviously, we're not yet ready to guide to 'twenty four yet, but we laid out what we think our sources and uses of cash are next year and I think the one thing that you may discount a little bit right now is our ability to generate cash out of our balance sheet and so youll see us focusing a lot on that over the balance of this year and next year. They don't help fund some of.
We do have some different areas of inefficiency and certainly when youre in a time period, we're in today, where we've had some delays in deliveries.
We're working through some inventory issues when you're when you're going through that will help or monetize that as it gets.
This year, but we will certainly plan and work to make sure that we can make it through this and we.
<unk> guided.
When we put out.
Mid to long term guidance that to light back up all of our idle lines, it's probably in the 25% to $35 million range still believe it's in that range and so I kind of contain the capex for that for that range, probably spend and about a third of that this year and then the rest of that will primarily come in 'twenty four.
Other thing to think about Joe. This is the easiest way to think about it I think as we.
Eliminate the losses that we're incurring debt.
Nordics Matamoros plant that covers the dividend.
Definitely.
So say that again.
Losses that you are currently incurring from Nord acts in Matamoros that remind me exactly when that goes away.
The contract itself ends June 30 of 2024.
But we've agreed to a bit of a different structure in 2024.
So we'll eliminate virtually the entire loss that you had that youll see this year from Matamoros.
So that basically pays for the dividend.
So that's $40 million right there.
Yes, yes.
Yes, Joe in the first half of this year, we will.
The disclosure in the Q, we lost about $20 million last year. It was about 40%. So it's been going on about a $10 million run rate pace.
Alright, not good not to take all right a quarter. Thank you alright that was my that was my question and just do you guys have at this point.
Any kind of covenants.
I assume not on the convert but is there any kind of covenant.
The Gulf refinancing in terms of cash flow, because you've got to maintain or any of that or.
So we've got we have to maintain $50 million of cash in the U S and we have to get approval for capex over $30 million annually.
And one other one is we have an $80 million limit on our other debt that we can maintain but we do have consensus obviously from oaktree for both.
Purchases of the wind turbine in for the convert.
Okay. Thank you very much.
Yes, Thanks, Joe.
Your next question comes from Sharon.
Grabby from BTG. Please go ahead.
Hey, Thanks for taking my questions.
First on on moving to <unk>.
Larger turbine production lines, how long does it take to shift production from one blade type to another.
Is it a function of.
Of widening down supply agreements and what can you remind us what kind of capex is associated with that.
Yes so.
In most cases, if we're doing a transition it's in an existing facility that is already got the basic capex in it.
There are occasions, when if we're going to a much larger blade, where you might have to do a crane upgrade which might be a couple million dollars. The biggest capex, though as the tooling itself or the mold in the mold is paid for by our customer.
So the capex on a transition sort of having to extend the building are.
Or change of Crane out as Janet is usually relatively relatively small.
At the time it takes to do it.
Part of that depends on the part of the World We're in.
Whether we're working five days six days seven days a week.
But it's generally to go from stopping of the old mold removal of that mould.
Install of the new mold and then ramping it back to serial production is probably around a quarter.
Okay. Thanks, and then.
And the field service business bit of a smaller point here, but how long do you expect warranty claims to pull technicians away from.
If I'm doing field service work.
Yes, I would say.
A lot of that is happening this year, we'll have a little bit spillover into next year.
But I think probably by the end of the first quarter or so next year, we should be through most of it is that.
Back to a more normalized back to a more normalized rate so.
It will impact us for the balance of this year and a little bit of next year that we should be back yet.
A more normalized level up.
Warranty versus revenue generating work.
That's helpful. Thank you.
Your next question comes from Pavel <unk> from Raymond James. Please go ahead.
Thanks for taking the question I wanted to zoom out for a moment about kind of this whole quality.
Control discussion in the wind space now ever since Siemens started talking about this right.
Right around a month ago.
Or do you have a sense that there is almost like a witch hunt to try to.
Find kind of Nit pick.
Things that perhaps would not have been regarded as serious issues.
Until that rather kind of high profile headline so an overreaction so to speak.
Okay.
Hey.
I have to agree with you I think clearly there are some and that's why when I was talking a little bit about it. After the first question I mean.
We're a category categorizing the issues right, whereas yes, it's something that really needs to be fixed because it could impact.
The longevity of the blade others are yes, we ought to watch that but likely is not going to impact performance of our longevity and then there are other things that well yeah, you could fix it because its the nonconformity, it's not going to make it perform any better it's not going to do anything different in fact that may create more of a problem. If you fix it as opposed to leaving it as is.
And so I think there is a heightened sensitivity, especially.
For those customers of our customers.
May not.
Completely I'm trying to say this in the right way, who may not completely understand how these blades are built and the fact that it is a very manual process and <unk>.
First pass yield on a blade is generally zero because there are always some nonconformity is because it is a manual process, where youre infusing resin.
It delayed as long as a football field.
So youre going to have some of that stuff. So I do think there's probably a heightened sensitivity around nonconformity isn't the blades that maybe we didn't see in the past.
Okay.
Let me turn to the electric vehicle.
I guess it was seven years ago feels like ancient history that TPI started supplying these bus bodies to prior Tara.
And since then.
Watching every every commercial suite is electrifying buses dropped bands.
And I'm curious why carbon fiber has not become.
The universal or mainstream solution.
Because it feels like it's actually shrinking.
Or do you think happened there.
Yes, carbon fiber is too expensive pivotal that's why but.
We are doing is not carbon fiber, it's selective use of carbon fiber and key stress points that debt.
You need to use carbon but most of what we're doing is.
More glass fiber as opposed to carbon fiber, but I think if.
I mean, if you look at what we're and I wish I could tell you, who we were working with but if you look at who we're working with and what we're working on there is some real traction taken place with the composite side of the business.
From an automotive standpoint, as they recognize it's not just light weighting, but it's it's the durability. It's the performance.
Especially in a in a battery and closure, especially in certain of the structural panels on large panels with some of the unique technology and yes. So I think I think you will see it pick up especially in the commercial space.
But again.
Glass fiber, mostly not carbon fiber.
Okay.
Point well taken.
Are you working with workhorse stope.
No we haven't been working with them for.
For over two years now I think.
Okay and GM.
We've done some we have done some work.
With GM that we've announced publicly I can't say, what we're doing now.
Okay. Thank you very much.
Yes, Thanks Pavel.
Ladies and gentlemen, as a reminder, should you have a question. Please go ahead Sir.
Followed by the one.
Your next question comes from Julien Dumoulin Smith from Bank of America. Please go ahead.
Julian you're double dipping on us.
Hey, I'm back you better believe it.
I wanted to follow up if I can on really pushing on an impact the ongoing impact here I mean, I think you said by the end of <unk> that you should be seeing some normalization on sale or.
Sure.
But can you elaborate a little bit of sort of the ongoing opex in the timeline there I mean, it sounds like again reaffirmed a couple of years out.
And the ability to get back to that high single digits.
<unk> outlook, but just want to make sure we understand the full extent.
<unk> revenue and Opex impact and then separately.
Question in there.
U S expansion I thought there was some talk about looking at the Western U S where further facility.
As Mexico now on Loopnet.
So I'll answer first on the Opex and revenue I would say on the Opex side Julien.
As Ryan indicated we've spent about $10 million in the first half of the year, we'll spend about $2 million in the back half.
As we've caught up.
And as we've gotten more efficient at kind of the new.
Procedures that were following that we've developed as well as some of the new testing techniques and inspection techniques. I think we won't have a increase in opex, because I really think over time, we're actually.
You're going to be we're actually going to find that we can reduce the cost of inspection because of what we'll be doing upfront and how we'll be doing it differently. So I think long term, it's actually it will be helpful to us.
And then on the revenue side again, it's from a field service standpoint, we should we're still hiring.
Trying to expand in all regions that we serve today.
The limitation the limit.
Limiting factor is hiring tax quite frankly, but we're still moving down that path and we think we get back to a more normalized split of revenue generating versus warranty work by the end of Q1 of 'twenty four.
And then on and then on the on the expansion no. It's not really in lieu of.
Julian It's in addition to as my belief.
Yeah, Okay. So that's actually still in play here for the near immediate Sir.
And Youre correct.
Ongoing.
Ongoing discussions with multiple parties.
Yes.
Alright, but is that a this year thing at this point given the pushout.
I'm sorry is that what.
This year is that going.
On page 23 with you.
I don't think it was ever.
I don't think it was ever at 23.
As far as building a facility now as far as identifying where in that process right now so.
Yes.
Is it possible that something gets announced before the end of the year certainly my guess, it's probably more of a late 'twenty three 'twenty four time frame.
Got it sorry, I didn't mean to pricing too much on that and clarify nor deck the payment there offset the.
The dividend payment.
If I heard that right.
Yes, what we're losing in that factory today is essentially equivalent to what the dividend payment will be for poultry.
<unk> next year.
Or said differently, the liquidity that Nordic and paying you is effectively equivalent.
I'm, sorry say that again.
The nordics the compensations.
Compensation is effectively equivalent at that point.
Yes, that's correct Julian we get back in 24 at a pace that we're pretty close to breakeven. So the losses, we experienced last year and this year, which are about $40 million a year about $10 million kind of run rate a quarter that effectively and beginning January one 2024.
Well. Thank you guys start grow the question Okay.
Yes, no problem.
There are no further questions at this time. Please proceed with your closing remarks.
Alright.
It took a sip of water. Thanks again for your time today and continued interest and support of TPI and look forward to speaking with you again.
Shortly in next quarter. Thank you.
Ladies and gentlemen, this concludes your conference call for today, we thank you for joining and you may now disconnect your lines. Thank you.
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