Q2 2019 Earnings Call
Good afternoon, and welcome to the <unk> Company second quarter 2019 earnings Conference call.
Today's call is being recorded and we have allocated one hour separate headroom aucs and QNX.
At this time I'd like to turn the conference over to Mr. Christian aid and Investor Relations <unk> upsets. Thank you you may begin.
Thank you operator, I'd like to welcome everyone to TPS composite second quarter 2019 earnings call, we 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 or 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 www dot TPG composites dot com, we do not undertake any duty to update any forward looking statements.
Today's presentation also includes references to non-GAAP financial measures.
You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historical non-GAAP measures. The closest GAAP financial measures with that let me turn the call over to Steve lock, our T.B. I composites CEO .
Thanks, Christian and good afternoon, everyone. Thank you for joining our call. In addition to Christian I'm joined today by built <unk>, our president and Bryan Schumaker, our CFO on this call Bill and I will provide an update on progress against our goals summary of the quarter a brief update on the growing when market and our strategy for profitable growth. Brian will then review our financial results in detail before we open up the call for Q and a.
Please turn to slide five.
We delivered solid results in the second quarter with adjusted EBITDA of $19.5 million on net sales of nearly $331 million a 43.4% increase over Q2 of 2018 during the second quarter would work through the impact of the strike and Matt Morris and continued to ramp up six lines in that facility. We're slightly ahead of our revised production plan and expect to be fully through the start up during the fourth quarter.
We've completed our negotiations and signed an agreement to sell the remaining Sunday and blades that are inventory directly to send billions customer to enable them to complete a project in Australia. The result was better than what we had included in our revised guidance last quarter, the impact of which will be seen in the third quarter as part of those negotiations, we mutually agreed with sandy and to terminate our two line supply agreement.
Early in July we announced that we acquired certain intellectual property and hired a team of engineering resources from the euros group based in Berlin, Germany.
Euros had been owned by Symbian. Since 2016. This team of approximately 20 technical experts focus is on blade design tooling materials and process technology development. This transaction will strengthen our technical capabilities in support of our global operations and growth and the experience and skills of this engineering team will enable us to offer complete blade solutions were valuable.
Last week, we reached agreement with Nord acts to transition multiple existing lines in Turkey to longer blades and at the same time extended the contract by two years through 2022.
These changes will result in an increase to our potential revenue under contract of approximately $180 million opened the new term of the deal.
As it relates to the consolidation and restructuring we announced last quarter, we expect to complete the transition of our blade facility in tight some poor China to a tooling facility before the end of the third quarter and we expect to complete that consolidation for less than originally expected. We also entered into an agreement to sell a small non strategic operation in fall River, Massachusetts, which we expect to close in the third quarter. We are however, maintaining our technical development Center and limited production capacity in war in Rhode Island.
Weve pivoted, our planned investment of $11.5 million in an automated high volume pilot production line for transportation applications to Harvard Island facility to leverage our existing technical team and the proximity to additional technical talent in the greater Boston area and expect that to be operational by Q3 of 2020.
We're continuing to invest in our relationship with pro Terra, while focusing additional senior talent and accelerating some expenditures related to our diversification efforts in the transportation space to capitalize on our work with pro Terra as well as both existing and new development programs with other customers as Weve said before these development programs will take time to convert to production wins, but we are pleased with our progress.
With 52, when blade lines currently under contract and more expected to follow as the tariffs and trade picture clears up a growing average megawatts per year per line of about 300 megawatts and ramping up 18, new lines globally.
We are progressing well toward our goal of establishing 18 gigawatts of global wind blade capacity over the next few years.
Even with ongoing blade model transitions at that time running at about 80% utilization, we expect to produce about 15 gigawatts of blades per year and achieve our target to double our wind related revenue to $2 billion per year.
With an estimated 70 gigawatt global combined onshore and offshore wind market, we expect to have 20% to 25% global market share.
Our pipeline remains strong with potential to add both onshore and offshore lines. However, we and our customers have delayed some of those commitments due to uncertainty related to global trade policies and in order to focus on delivering on the 52 lines already under contract.
We expect to participate in the offshore wind blade market as the volumes reached levels to provide critical mass for efficient outsourcing.
The global wind market, both on and offshore is expanding as the Levelized cost of energy of wind continues to trend down and de carbonization goals and initiatives grow.
Our customers have recently accelerated R&D investments in next generation turban platforms to further reduce LCR, we even as the unsubsidized cost of new wind installations passes through the marginal price of coal.
Estimates by Wood Mackenzie suggests that the top 10 Oems will invest as much as $2.5 billion in R&D through 2023.
Wood Mackenzie also estimates that 90, plus new onshore and offshore turbine models will be launched in the next five years by the top 10 Oems.
We plan to invest alongside our customers. During this time in our blade manufacturing capacity and capabilities and transitions to longer and in some cases modular blades to keep pace and grow our position in the market.
This investment over the next several years will likely create some volatility in our quarterly and annual results, but it does not change our confidence in the underlying long term economics of our business or the wind industry and we believe it will enable us to remain in position for profitable growth significant free cash flow and compelling return on invested capital as the industry matures.
Let me now turn the call over to Bill.
Thanks, Steve Let me now get into more detail on the events impacting Q2 results as well as some update updated thoughts on future transitions.
In the second quarter of 2019, we continued our investment in both startups and transitions with 13 lines and startup and seven lines and transition during the quarter startup and transition costs for the quarter totaled approximately $23 million slightly lower than our guidance for the quarter. However, we expect the full year cost to be slightly higher than our prior year full guidance.
The start up of our new facility in the onshore China has been more challenging than expected our new government provided facility was completed behind schedule and the recovery plans. We had in place were not adequate to fully catch up as a result, we are behind our expected ramp and expect to fall short of forecasted volumes for the year, which will result in more investment and the startup than planned.
The startup for Entercom, Turkey is on plan, our new facility near Chennai, India is under construction and is on schedule and budget. We have hired most of our senior leadership team for India and they are actively working on the startup and getting fully integrated into TPS.
We are very pleased with the experience and quality of our new hires in India and are on track to begin production and this facility in the first quarter of 2020.
Finally, as it relates to startups, we have worked through our challenges in MME or us by stabilizing our workforce in operations and are now on track to meet or exceed our revised plan for 2018.
As for transitions. They are also going well and we are generally on track with each of them.
Consistent with Steve's earlier comments around the accelerated investment in R&D by our customers the number of new product introductions, and our need to keep pace with their platform changes our expectations for transitions in 2020, and a few years beyond that have changed we now expect as many as 16 transitions next year based on our most recent discussions with our customers many of which we expect will lead to contract extensions and increases in overall contract value, but nonetheless will impact our operating margins and overall adjusted EBITDA levels.
We will continue to work with our customers to minimize the impact of these transitions through cost sharing and collaborative teamwork, reducing the time it takes for us to change out moulds as well as moving modular bleeds into production, but we won't be able to fully offset the lost contribution margin from last sets or the full amount of under absorbed overhead.
Given the expected changes in transitions in 2020, and the resulting impact on contribution margin and transition costs. We are revising our 2020 net sales and adjusted EBITDA target levels to reflect our new outlook around the ultimate number and type of transitions.
Our net sales target as adjusted to $1.6 billion to $1.8 billion from $1.7 billion to $1.9 billion previously and our adjusted EBITDA target is revised to $140 million to $160 million from $170 million to $190 million.
Last quarter, we discussed some raw material and component supply constraints facing the industry driven by significant year over year demand growth in the wind industry globally.
We continue to work actively with our customers and suppliers to minimize the impact to production for the balance of the year as a longer term solution. We are also working with some of our key suppliers to localize certain critical inputs and Mexico, and Turkey to not only expand global capacity to match up with our planned 18 gigawatts of capacity build out but to reduce overall costs and lock in a guaranteed supply of critical materials.
Finally, with the U.S. in China, continuing their trade negotiations there remains uncertainty as to what the ultimate outcome will be and when that may materialize and although the recent us and Mexico trade tensions heavies. There remains some uncertainty with what may happen long term if the U.S.M.C.A. is not signed into law. This uncertainty as well as some noise around tariffs within India is causing some of our customers to slow down certain expansion and our sourcing decisions, while some of the trade talks play out.
With that as a backdrop, let's turn to slide six.
Since the beginning of 2018, we have added a net 12, new wind blade lines under contract around the world to bring our total dedicated lines under long term contracts as of today to 52, excluding the two lines for San beyond that were recently terminated.
These transactions as well as amendments to existing supply agreements, including the extension of the Nordics agreement discussed earlier represented additions to potential contract revenue of up to $3.7 billion over the terms of these agreements. We now have a total potential contract value of up to approximately $6.2 billion through 2023.
At the beginning of 2018, our potential revenue under our supply agreements was approximately 4.6 billion.
We have increased that amount by approximately 1.6 billion net of the impact of approximately $1.6 billion of billings since that time and the removal of amounts related to cenveos in other words contract value added since the beginning of 2018 through new deals amendments and blade transitions prior to considering what we have realized in total billings over the last 18 months is over $3.2 billion. The minimum guaranteed volume under our supply agreements has grown to approximately $3.5 billion up from $3 billion at the beginning of 2018.
The pace of our pipeline conversion has slowed since the end of last year.
While we have purposely slowed down our expansion pace in order to focus on the 52 lines, we have under contract today plus the fact that we estimate that we only need to have 60 lines under contract to achieve our targeted global capacity of 18 Gigawatts that general capacity addition, slowdown has been a result of a number of factors, including trade uncertainty the increased pace of transitions of existing lines to larger blades and therefore increase megawatts per said to me megawatt demand from fewer sets and increased blade production.
Throughput in other words improved cycle times, which enables more output from the same number or fewer lines. Therefore additional lines are not required.
Therefore, we expect that the conversion of new lines for the balance of the year will be lower than expected and therefore dedicated lines under contract will be between 52 and 55 at year end.
We have begun to introduce the concept of discussing future growth in terms of megawatt capacity versus production lines. The primary reason for this is with ever increasing play lengths in our ability to manufacture larger blades at the same rate or faster.
The megawatts per set and therefore per line is increasing significantly. Therefore, we will not need the same number of lines. As we did just a few short years ago to produce the same or a greater amount of total megawatts.
For example at 300 megawatts per line per year 60 lines running at approximately 80% utilization will be all that is needed to produce 15 gigawatts per year.
We will continue to discuss lines for the balance of the year, but we'll be recalibrating, our pipeline and future dialogue to megawatts of capacity and capacity utilization during our investor day in November .
Turning to the global wind market, we continue to be pleased with the continued growth of the wind energy has a cost effective and reliable source of clean electricity as we in the industry continue to drive down LCM OE, while consumers and corporate customers demand renewable energy, we see the future of global electricity growth as a strong combination of cost effective and reliable wind solar storage and transmission.
Global annual wind power capacity additions are expected to average 73 gigawatts between 2019 and 2028, according to wood Mackenzie compared to just over 50 Gigawatts in 2018.
This forecast also estimates that the top 20 global markets will grow at a CAGR of 7% between 2019 and 2028, while the top 20 emerging markets will grow at a CAGR of 23% between 2019 and 2028. Our strategy is to continue to leverage our global manufacturing footprint to take advantage of growth in both emerging and mature markets and leverage our low cost hubs to not be too dependent on any one market. We believe we remain well positioned to execute this strategy and serve global demand from our facilities in the US China, India, Mexico, and Turkey, and we expect this global growth to continue to drive the outsourcing trend we've seen over the last 10 years.
The us market outlook over the next several years continues to strengthen and wood Mackenzie is Q2 global wind power market outlook update their 2019 to 2021 forecast increased by 12% from their Q1 forecast to 30 337, Gigawatts excuse me.
Or an average of 12 gigawatts per year and for the 10 year period, ending 2028 their forecast increased 16%.
Gigawatts installed per year from 2022 through 2028 is now six gigawatts up from four Gigawatts at this time last year.
US offshore forecast continue to increase as well with a three gigawatt or 23% increase compared to Q1 forecast and a total estimate of 15.9 gigawatts to be installed through 2028.
We like many participants in the wind and utility industries believed that the economics of wind along with demand from both retail and industrial customers. The electrification of the vehicle fleet and de carbonization initiatives by utilities will continue to drive when penetration long after the current PTC see sunsets in 2019.
According to Bloomberg, New energy Finance renewables are now the cheapest form of electricity generation across more than two thirds of the world as compared to 1% just five years ago costs are expected to continue to fall by 50% on a us dollar per megawatt hour basis by 2050 and by the early 2000 Thirtys batteries co located with wind will be cost competitive with new gas for Dispatchable generation.
More than five trillion dollars is expected to be invested in win through 2050 globally.
And 2019, we remain extremely focused on execution.
With strong global wind market growth year over year, and TPS plan topline growth of over 40% come many challenges.
We're localizing raw materials to serve our various manufacturing hubs in a manner that helps us to generate capacity and to continue to drive down costs. We are doubling our global tooling capacity with additions in Mexico, and China in order to keep pace with our new line startups and transitions, we are adding top talent on a global scale.
We performed and recovered well in Q2 from the challenges we encountered in Q1.
We remain confident and committed to our overall business model and strategy. The fundamentals of our business remains strong when markets around the globe continue to grow at an attractive pace. The trend of wind blade outsourcing is continuing and our customers and potential customers are demanding increasing quantities of blades to serve a very strong us market as well as the many fast growing emerging markets along with our customers. We continue to invest heavily in new line startups and existing line transitions are mature operations continued to perform at or above our expectations, which gives us confidence in our ability to navigate these challenging times and generate profit levels, we expect.
With that let me turn the call over to Brian .
Thanks Bill.
Please refer to slide eight and nine for the second quarter of 2019.
Net sales for the quarter increased by a $100.2 million or 43.4% to $330.8 million compared to $230.6 million in the same period in 2018.
Net sales of wind blades increased by 46.2% to $301.8 million for the quarter as compared to $206.4 million in the same period in 2018.
The increase was primarily driven by a 23% increase in the number of wind blades produced during the quarter compared to the same period in 2018, largely as a result of increased production at our Turkey and Mexico operations.
This increase was also due to higher average sale price due to the mix of wind blade models.
Produced during the quarter compared to the same period in 2018 net sales from the manufacturer of precision molding and assembly systems during the quarter were $12.9 million as compared to $12.3 million in the same period in 2018.
Additionally.
There was a 4.1 million increase in transportation and other sales during the quarter as compared to the same period in 2018.
Total billings for the quarter increased by $67.1 million or 28.3% to $304.5 million compared to $237.4 million in the period.
In the 2018 period.
The unfavorable impact of the currency movement on consolidated net sales and total billings for the quarter was a net decrease of 2.7% and 2.9% respectively.
As compared to 2018.
Gross profit for the quarter totaled $22.6 million, an increase of $7.5 million over the same period of 2018, and our gross profit margin increased 30 basis points to 6.8%.
The higher gross profit margin was primarily driven by the impact of savings and raw material costs and for foreign currency fluctuations, partially offset by the extended startup of our Newton, Iowa transportation facility, an increase and under utilization labor and met a Morse, Mexico, and a 5.6 million increase in startup and transition costs.
General and administrative expenses for the quarter totaled $9.2 million or 2.8% of net sales. This compares to $11.0 million for the same period in 2018. The decrease was primarily driven by lower incentive compensation.
Realized loss on sale of assets for the quarter was $5.0 million compared.
Comprised of $3.1 million of realized losses on the disposal of assets and $1.9 million of realized losses on the sale of receivables under our supply chain financing arrangements with our customers.
There were no corresponding charges for the same period in 2018.
Income taxes reflected a provision of <unk> point $5 million for the quarter as compared to a provision of $2 million for the same period in 2018. The decrease was primarily due to the earnings mix by jurisdiction in the quarter as compared to this.
In the same period in 2018.
The diluted earnings per share was five cents for the quarter compared to a net loss per share of 12 cents for the 2018 core.
Adjusted EBITDA increased to $19.5 million for the quarter compared to $13.5 million. During the same period in 2018, our adjusted EBITDA margin for the quarter was 5.9% up from 5.8% in the second quarter of 2018.
Before startup and transition costs in both periods, our adjusted EBITDA margins were 12.8% and 13.4% in the second quarter of 2019 and 2018, respectively.
Moving on to slide 10.
We ended the quarter with $58.7 million of cash and cash equivalents.
Total debt of $148.9 million and net debt of $91 million compared to net debt of $81.9 million at March 31 2019.
The decrease in our cash position during the quarter was primarily driven by the increased level of startup and transition costs related to capex.
For the quarter, we had cash provided from operating activities of $10.5 million, while spending 19 million on capex, resulting in negative free cash flow for the quarter of $8.5 million for the year, we expect to be able to take full advantage of supply chain financing agreements with most of our customers while aggressively managing the rest of our working capital, we expect to be at or near breakeven free cash flow for the 2019.
As our capex levels moderate in future years, and we are consistently operating 60 lines at a utilization level of about 80%, we expect to see significant free cash flow generation.
Our balance sheet remains strong with nearly $60 million of cash.
We had an aggregate of 77 million of availability under our various credit facilities.
Please turn to slides 12 through 14.
Before I touch on our updated guidance I'd first like to refer you to slide 12, which is a bridge for Q2 2019 and forecasted full year 2019, adjusted EBITDA to highlight some of the key differences from our previous guidance.
In Q2, we saw better than expected results from continuing operations, which included a favorable impact from NSC six of six compared to billings and lower than expected restructuring cost incurred incurred during the quarter.
We expect to incur less than $1 million of restructuring charges for the remainder of the year.
The benefits to adjusted EBITDA were partially offset by an increase in startup execution costs at our blade manufacturing and transportation facilities in the quarter.
For the full year, we expect startup execution costs to offset the benefit we had in Q2.
With that as backdrop.
Our updated 2019 guidance is as follows.
We expect net sales and total billings of between $1.45 billion and $1.5 billion in 2019.
Adjusted EBITDA of between $80 million and $85 million for the full year and between $27 million and $30 million in Q3.
Loss per share of between 18 and 23 cents.
Sets invoice of between 30180 and 3220.
Average sales.
Price per blade of between 135000 $140000.
Estimated megawatts of sets delivered of between 9300 9400.
Dedicated manufacturing lines at year end to be between 52, and 55 manufacturing lines installed at year end to be 48.
Manufacturing lines in startup during the year to be approximately 14.
Manufacturing lines in transition during the year are expected to be approximately 10.
Line utilization based on 50 lines in Q1 in Q2 and 48 in Q3 and Q4 of approximately 80%.
Startup costs of between $47 million and $49 million transition costs between 19, and 21 million capital expenditures to be between $95 million and $100 million approximately 85% is growth related.
Interest expense of between $8 million and $8.5 million.
Share based compensation expense of between $7 million and $8 million.
With that I will turn it back over to Steve to wrap up and then we will take your questions Steve.
Thanks, Brian I'd like to thank all of our dedicated team associates, who are doing the heavy lifting everyday and tackling our growth related challenges, we remain very confident in our global competitive position and the application of our dedicated supplier model to take advantage of the strength of the growing wind market the trend toward blade outsourcing and the opportunities for market share gains provided by the current competitive dynamic.
We have clear line of sight toward achieving our target of doubling our 2018 when revenue to more than $2 billion in 2021.
We are focused on execution during the remainder of 2019 and are looking for looking forward to exciting and profitable growth in 2020 and beyond.
As a reminder, CPI is hosting an investor day in New York City on November 15th at the Maxwell New York City, if you're interested in attending please send us an email to investors at TPG composites dotcom.
Thank you again for your time today and with that operator, please open the line for questions.
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One moment, please while we poll for questions.
Okay.
Your first question comes from Joseph Osha from JMP Securities.
Please go ahead.
Hi, This is actually Hilary on for Joe Thanks for taking our questions I just wanted to first touch on your efforts to localized for raw materials, and particularly as it relates to the competitive dynamic in Mexico any color you could provide there would be great.
Sure Hillary thanks for thanks for the question.
Yeah, we're working hard with the number of our critical suppliers to to localize production in Mexico.
We're down the path with a number of them.
And it's you know it's critical because it not only will increase capacity globally, but it will guarantee us a capacity for our needs in Mexico as well as North America. So we're continuing down that path aggressively.
Okay, Great and then.
Few quarters ago, we had kind of talked about transitioning towards more of the family of blades and I was wondering if you could give a little context are we already getting there is that a little further out as we as the market transitions to those longer blades.
[laughter], Yeah, Hillary and Steve we're not going to get out ahead of our individual customers in terms of commenting on their product plans and timing that way some customers have already made announcements.
In terms of what they're doing in that manner, but as we've stated now we need to.
Accelerate product transitions, we need to be smarter as an industry in terms of planning.
The product the new products that are being introduced.
As you heard in our prepared remarks, the transitions are coming more and faster than I think any of us anticipated a while back and thats continuing so the steady state going forward needs to be.
Faster transitions more modularity to the product platforms, which also then means some amount of modular blades that are designed and built to make.
Extensions and transitions faster.
And also our model shifting a little bit as a business to charge more for those transitions. So that we can.
Maintain our profit going forward in an environment, where the product transitions appear as if they'll they'll continue.
Great. Thank you.
Thanks, Thank you.
Your next question comes from Eric Stine with Craig Hallum. Please go ahead.
Hi, everyone.
Eric Eric I would just love to get your thoughts on.
Why do you think things have changed in terms of pace the transitions and I know you gave the the data about the level of investment from Oems.
But when you talk about LCL, we crossing.
Crossing a cost level that's necessary.
A number of other things that would would kind of speak to the opposite the and I know for some time you've expected those the slowdown so I mean any thoughts there that that you have as to why that has changed and why it's changing is going to sustain four it sounds like you expect through 2022.
Yes, Erika to look it's a fair question I think.
Passing through the marginal price of coal is a pretty amazing accomplishment I think for the industry a decade ago I'm not sure what any of US would have expected we'd be able to do that so on one hand, the environment that we're operating in is getting better in many ways coal is being retired as you know coal is going away. It's a question of time kind of thing certainly in the U.S. uneven and other places in the world. However.
So our competition for wind is shifting from coal theres still cheap relatively low cost natural gas were cheaper today than new Nat gas installations with the hardware and the fuel are included in the price, we're not yet equal to the marginal price of gas. So you can imagine that would be another worthy goal and solar is continuing to get cheaper too and so.
The good news about all this is the races, narrowing down a bit too to being really wind and solar and some natural gas, but I think rather than just resting on that what we're seeing and our customers are communicating is rather than slowing that down.
That they expect a lot of new models to continue to come to the market. So it is a bit of a shift for us we're responding to that shift.
We'll be Recalibrating as Bill described our overall lines and the lines the number of lines, we need to hit the goals, but we've got to be able to operate in I think I'd say it this way we need to be able to operate in an environment, where the transitions continue.
And still achieve the profit goals and the overall model that we've that we've contemplated within the scope of our business. So we're preparing for this to take longer is a way to say it.
We're not in complete control of it it's our customers product plans, we need to match with that we're choosing to build scale build global inch infrastructure maintain a really strong gain in our market share position and then focus on getting faster on transitions. So that we can meet both goals right continue to drive down LCR, we and meet the overall margin profiles that we've contemplated to build value over time.
Got it and I guess that would.
That's that's where the previous question just about move into family of blades.
All right maybe last one for me just turn on the transportation side I know that Proterra.
They've been making a little noise about supplying electric drive trains for heavy duty trucking just any thoughts on how that may expand your market opportunity with them and how that kind of matches up with your Navistar agreement.
Yes, I don't think it'd be right for us to comment about about.
Protesters business in the truck space, what they may choose to do or not in terms of selling those platforms. We do have we publicly announced we have development program with Navistar that work is progressing like most of these development programs, they're fairly lengthy R&D initiatives.
A year to multiple years, perhaps so we're progressing well, but we don't have anything new to announce in terms of production activity at this point.
Okay. Thanks.
Thank you.
Thank you. Your next question comes from Paul Coster with JP Morgan. Please go ahead.
Yes. Thank you.
I'm wondering if you could just contextualize the commentary on market share the reps.
An increase in share so was it come from what do you think is happening with outsourcing over that time line as well as increasing decreasing.
That's my first question.
Yes, Paul so thanks, so our market share last year on a gigawatt scale was about 14%.
We are growing our overall gigawatts of output last year's 6.6. This year targeting 9.3 to 9.4 and that as we've said, we're we're building additional capacity our expectation of about 18 gigawatts of global capacity selling about 15 and as the market continues to expand as well the overall global market growing from lets say 60, gigawatts a year or so.
Onshore is growing offshore is growing.
Some of the estimates are for that to be at the 70 to 73, gigawatts or so per year. So as the pie gets bigger we want to continue to grow our piece of that pie and grow with the overall market. So it's a combination of those those two things we do see the outsourcing the fundamental outsourcing trend generally continuing the way we've set so we don't really see a change in the percentage of outsource or the trend, let's say of outsourcing changing there are few unique examples that are exceptions to that but the broader trend is generally building new factories to attack the growth pieces of the market, which right now are developing economies developing countries as well as some of the offshore growth.
So its a combination right to continue to outsource.
Grow our share and grow the overall volume.
To maintain a strong market share position the net of all that we expect to be in the 20% to 25% range and continue to be one of the major players in the space as the market continues to mature.
You also mentioned that so you see offshore glades, drawing and so since should for business at some point in the future or whats the effect when I think of offshore of course, I think if you will see.
And geographically, we know very well positioned for that so I assume you saw there are other markets. What are you going to need new locations or is it possible to sort of the whole offshore market from any port located.
Joining facility.
Yes, it's a good question, Paul we do expect to be able to serve a good chunk of the market from potentially from young show, China potentially from our India.
Locations near Chennai.
But we are also considering additional locations and we've talked in the past about.
Next our newer Mexico operations being closer to the Gulf of Mexico Theres also as you know I think.
Growth in the us market.
What we said in our prepared remarks here as we'd like to see the offshore business get to a little more critical mass.
We don't we don't build a tenure factory for one project per se in the wind business, but we're pleased with the progress of the products of the projects that are coming along with offshore.
The overall volumes are increasing not only in the north sea, but in places like.
The northeastern us.
In Asia, and various other markets as well and so it is a smaller part of the market, but its growth rate is higher and therefore additions to capacity.
For larger blades immediate water access.
All that is in is in process right now we've said in the past and still true today, Paul that we have some offshore lines in our pipeline and we do expect to be in the offshore business here as the let's say as the volume reaches critical mass and Paul I would just add and Steve touched on it but north North Sea is where it's traditionally been in the around the UK, but if you look at where the big offshore growth markets are its Asia and northeastern us and if you think about historically, the biggest players and offshore and where their blade factories are at so it's really all in northern Europe to serve that market. So that also opens up the opportunity to outsource once you get to that critical mass if you will or the volumes to support an outsourcing decision.
Got it thank you very much.
Thanks, Paul as Paul.
Thank you. Your next question comes from Pavel channels with Raymond James.
Please go ahead.
Yes, thanks for taking the question I appreciate that you don't want to.
I get into your.
Well I could pass customer in detail, but in general terms the buff.
Body fab in Iowa can you just give us an update on our capacity ramp or utilization ramp.
How operations are going status south of the Labor force because it obviously, it's a new operating asset for you.
Yes, I think from from a labor force standpoint, we benefit by having the blade plant. There there are some comparable skills between between the bus and the blade so were able to.
Attract additional labor through our reputation there from the from the blade plant so from a labor force standpoint.
I think we're in pretty good shape.
Let's say, we're doing a couple of we're going through some transitions there as well model transitions.
And that has impacted the ramp a bit.
We'll be going through a couple of more transitions there yet this year. So I would say, we're making significant progress along those lines, but we're certainly not.
To where we would be in a normal serial production stage because of the red the transitions we've gone through this year as as.
As our customer has changed models a couple of times during the year and prevail. It's Steve We're building bus bodies out of our Rhode Island operation as well.
And we say broadly we're investing in our relationship with Proterra and that's true. We are building technology, we're scaling volume capacity for them and we're also learning quite a bit frankly about what's it going to take to be a higher volume transportation composite provider. Some of these parts are large not not as big as the wind blade, but still large pieces that are made using a vacuum infusion kind of conventional technology for us and some of them are smaller more automated.
Technology choices as well so we're on a on a technology roadmap journey here in the transportation space and we're starting with pro Tara and we're going to be doing we're planning to be doing a lot more so I'd say generally on that on that path is going well, but we are investing a bit in our relationship with proterra and in the technology space more broadly.
Okay and in that context, you hired.
I think you said 20 people from.
The division of Sandy on.
That seems like a very large R&D team for yet.
Obviously given.
Kind of your existing capability so white.
Incremental.
Gil said, our know how well those 12 20 folks bring to the table that you did not already have it in house.
Yes, just for context, but overall, we've got about 300 engineers globally within the company. So adding 20 is good.
We are normally one of our constraints is technical talent and so anytime we can add five or 10 or 20 seasoned people, we would be very keen to do so and so we're pleased to have the the euros team as part of the CPI the unique skills that they bring that we don't practice generally today is basic blade design the product design itself to air foil the pure structural part this typically done by our customers beyond that a lot of the capability is very similar to what we have today tooling and materials and process. Those engineering skills. It's just adding athletes to that to that team, but the direct answer to your question. The uniqueness is around the ability to design wind blade product and or other structural products.
We have a strong structural design team already within the company that is doing the transportation structures, but this adds to our tool box for sure.
Okay very good appreciate it guys.
Thank you thanks.
Thank you.
Your next question comes from Jeff Osborne with Cowen and company.
Please go ahead.
Okay, Great guys I had one clarification and two questions I'll try to be brief but.
Steve for you how in a labor intensive business.
Can you get people to move faster on transitions, particularly is it modular that you have to go I'm just trying to understand you said the target is to make transitions have been smoother and faster I didn't know.
Is there like top two ideas on how that happens.
Yes, Jeff it's a good question, so and you're on the right track them. If you think about it what we need to do is take a line that's running at full speed, let's say, a 24 hour cycle time shut it down.
Put in whatever new tooling as needed and then get that skilled workforce back up to a full sprint again that is I mean that is the right way to think about it one thing. We can do is to transition molds faster right. So when we take molds out putting molds in having those molds ready to go a little bit more of a standardized platform. For example, we will say days or weeks, perhaps in that cycle that every week is going to be valuable to us. If you think about it that way.
Also then this is there is a part of this that's the modular product planning so you've heard us talk before about when we do a tip extension rather than than a formal change. So if we're planning the product evolution with our customers smarter.
And that they are and we are.
To the extent there tip changes the tip changes happen much faster than full mold changes. So it's really going to be attacking all of those things and frankly, we've been working on this I think the emphasis on it is increasing it needs to increase in order for us to to keep pace here and hit our numbers and so that's that's where the focus is is speed of tooling more modularity and smarter product planning on the transitions and then frankly charging more for the transitions as well, but when we lose sets we can't generally make up all the loss contribution margin on the last set. So you are on the right point there its about kind of speed of getting the full line. The line back to full speed as quickly as we can.
Got it and two other quick ones here. So I think when you went public and as far as I can remember you talked about sort of a target EBITDA margin of the company had sort of tenish percent and on a per facility basis 12 before corporate overhead if im right now with this sort of a permanent state of greater transitions at least over the next few years.
Is there a target sort of business model that we should think about over the next years, obviously, you've given 2020 guidance, but I didn't know as you talked about all these transition initiatives if those take a few years to implement.
If we should handicap those prior targets by 100 bits or 150 beds.
Jeff It's a it's a fair question I think for US right now.
Over the next year or so we've got to really focus on the speed part of this so we can transition run at 80% and not fall off kind of a model of EBITDA. If you will getting to our 2 billion dollar revenue level, we do expect in that in the $2 billion range to be in the double digit EBITDA level that may come a year later than we might have said a year ago.
For example, but look the environment, we're operating in is changing and it's changing in many ways for the better in some ways, it's more challenging.
The ways, it's getting better is the maturation of the wind industry. The volumes are there that the us market is strengthening even in a post PTC world. All that's true it's about economics.
Thats good and on the other hand, it's about economics right. So it means that we're all our customers and we are peddling faster to really be able to hit the margin numbers that we bargained for and so I think I would just say it that way that our overall target has not changed but I think how we get there is going to need to change a bit and thats. What you are hearing us are trying to articulate is how we're going to achieve that double digit and frankly right now I'd say it may come a year or so later.
Makes sense and then last just quick clarification, I, probably missed misheard this or I'm, not comparing apples to apples, but your guidance for 2020 goes down if I'm reading it right at the midpoint down by about 30 million in EBITDA I think you mentioned that with the two lines and Turkey that Nordics is transitioning into two year contract extension you added $180 million. So I'm, just trying to reconcile that $180 million worth 10% EBITDA I'd call. It 18 million you are taking a 30 million hit if I'm doing the math right or am I looking at that right.
Yes, it's.
The 180 is correct, but we will be transitioning those lines in early next year.
And so.
We'll be pulling molds out bringing him and so again, it's about the speed of the transition.
But these are much larger blades, we've got some building construction to do around them.
So we won't get that full capacity if you will.
In a single year and that $180 million over a.
Over the extend the term of the contract Thats not in a single year.
Right so.
So there are other puts and takes there a big part of that drop Jeff quite frankly is the increase in the number of transitions, we expect next year.
So it's not just so that those are two of them, but there are enough theres right. Now there's 14 other ones that we have line of sight to right now that will impact.
2020 as well.
And what was then yes really Jeff it's really it's a broader number as bill just said, it's the broader number of transitions not just thats, causing the $30 million move at the midpoint God's not not the nordics fees right got it that's helpful. Yes.
Yep.
Thank you once again, if you would like to ask a follow up question. Please press star one on your telephone NYSE and aim to be announced your next question comes from Philip Shen with Roth Capital Partners. Please go ahead.
Hey, guys. Thanks for the questions just to follow up on that line of questioning from Jeff.
This is a more specific question, but if you look at the number of lines that you have today.
What percentage of the lines today.
Do you think you have the capability of tip exchanges.
Instead of doing a formal change just trying to figure out.
How far we are away from that more idealized world were in a transition it's a more it's a faster transition. So we had 10% are we closer to 90.
Well I think we are closer to 90 than we are to Ted certainly I can't tell you exactly because again thats thats part partly depends on what our customer ultimately decides to do.
At times.
We've jumped if you will from.
We thought we were going to widen and they go to another one which is gets to the blade family model concept faster.
So it really depends on what their product planning cycle is and what blades. They would like us to build in the factories, we build for them and I would say, it's certainly a closer to 90 than it is.
Yes, Phil It's a fair question in terms of thinking about the modeling side of this a little bit but.
To Bill's point I mean, if if you just follow the product announcements that our customers have made.
In the last 12 months.
The leap the size of the turbans the rotor diameter. The leap frogging up one to the next has accelerated quite a bit and it's not just adding two meters to the rotor diameter, but they're pretty significant changes so.
Without speaking about any one individually.
To Bill's point, if there is a relatively small increase in rotor diameter that could be a tip change if it's a massive platform change that it's harder so even if the molds are designed to do it.
Bill's point is our customer may choose to make a whole.
A larger platform change let's call it.
And Thats, something Thats really kind of in their product planning decision now you'll remember I think in our contract structure. Our customers are allowed to change the blade models. That's part of the deal that we both bargained for but we get to quote the impact of the change.
And so they are in lives the negotiation if you will so we're quoting more for the change, but we also need to compete and we need to keep driving LC OE down together, so thats were focusing on.
US getting faster on our own and then working with them on product plans.
If there's inertia right if it cost them money to change. It then they'll consider that if it's worth it then they'll they'll pay a price to change it and we just need to find the right balance there while we continue to chase LCL we for solar.
If you think about a big picture that way the good news is that the hunt thats the new Hunt if you will.
But that's the work we also need to match up with.
Thanks, Steve Bill.
Next question is kind of related in terms of product.
I guess families.
To what degree are segmented blades, becoming more on the forefront of discussion I know one of your.
Peers and customers.
Yes, Angie is actively using segmented plates now.
Do you anticipate that becoming a part of the 2020 product roadmap or some of the trends reasons for the transitions is actually the switch to a segmented platform for any of your customers.
Yeah, and again, we'll speak kind of generally about that Phil not specific to any one customer to get ahead of any of their announcements, but I think when we talk modular the modularity could come from a split blade design or it could come from a modular molded being smart about about the product planning.
There will be more modular molds and more modular blades. If you will more split blades in the future than they've been in the past for sure. The timing of that is really up to our customers.
Okay, great. Thanks, Steve. Thank you thanks, though.
Thank you there are no further questions at this time I would like to turn the floor back over to Mr. Mccarthy for closing comments.
Yes, thanks, operator, and thanks, everyone for your interest in TPS composites, we continue to look forward to updating you on our progress thanks very much.
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