Good afternoon and welcome to TPI Composites' Third Quarter 2019 Earnings Conference Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Christian Edin, Investor Relations for TPI Composites. Thank you. You may begin..

Thank you, Operator. I'd like to welcome everyone to TPI Composites' Third 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 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.tpicomposites.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 to the close of GAAP financial measures. With that, let me turn the call over to Steve Lockard, PBF Composites' CEO..

Thanks, Christian, and good afternoon, everyone. Thank you for joining our call. In addition to Christian, I'm joined today by Bill Siwek, 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 of the wind -- of the growing wind market and our strategy for profitable growth. Bryan will then review our financial results in detail, and then we'll open up the call for Q&A. Please turn to Slide 5.

We delivered solid results in the third quarter, with adjusted EBITDA of $27.6 million, a 57.2% increase over Q3 of 2018 and net sales of nearly $384 million, a 50.5% increase over Q3 of 2018.

With 52 wind blade lines currently under contract and world-class locations around the world, a growing average megawatt per year per line of about 300 megawatts and ramping of over 20 lines globally, we're 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 long-term target of $2 billion of annual wind revenue.

With an estimated 73 gigawatts global combined onshore and offshore wind market, we expect to have more than 20% global market share. Our pipeline remains strong, with the potential to add onshore lines as well as offshore lines once the offshore volumes reach levels to provide critical mass for efficient outsourcing.

We have worked through the challenges of the startup in Yangzhou, China and are now on a course to deliver as expected for the balance of this year and into 2020. Our Matamoros startup remains a challenge primarily as it relates to the local labor market.

We've made significant progress there as well, and we'll continue to explore avenues to maximize our productivity and finish the job of building this facility into a world-class manufacturing hub. In India, we're optimistic that this will be one of our best start-ups to date.

Our senior leadership team has significant wind, manufacturing and startup experience, and virtually all of the first 100 TPI associates have blade-manufacturing experience, which puts us at a distinct advantage compared to our more recent startups.

We're continuing to invest in our relationship with Proterra, while also focusing additional senior talent and accelerating expenditures related to our diversification efforts in the transportation space given the progress we've made with multiple customers over the last quarter.

As we've said before, these development programs will take time to convert to production wins, but we are very pleased with our traction against our mission to grow this into a meaningful part of our overall business. Our mature operations are continuing to perform at or above our expectations, even those going through transitions this year.

We've also recently hired Lance Merrem as Senior Vice President, Global Service. Lance will be responsible for expanding and implementing TPI's global wind service strategy, working with TPI's existing regional teams, collaborating with turbine OEMs as well as evaluating potential strategic acquisitions in the space.

Lance's more than 20 years of experience in the wind turbine business will be key to building a successful TPI Global service business. Finally, we continue to remain focused on building long-term sustainable value, and we're not going to compromise our medium and long-term mission just to optimize EBITDA in the short term.

Now I'll turn the call to Bill to provide a more detailed business and market update.

Bill?.

Thanks, Steve. Please turn to Slide 6. The global wind market, both on and offshore, is expanding as the LCOE of wind continues to trend down and decarbonization goals and initiatives grow.

Our customers are continuing to accelerate R&D investments in next-generation turbine platforms and blade enhancements to further reduce LCOE even as the unsubsidized cost of new wind installations is currently passing through the marginal cost of coal and new natural gas.

This technology arms race is requiring us to continue to invest alongside our customers in our blade-manufacturing capacity and capabilities and transition to longer and, in some cases, modular blades to keep pace and grow our position in the market.

Most in the industry believe that over the next few years, there will be continued consolidation at the OEM level, which, over time, we expect will lead to more overall stability in the market, more rational pricing and expanded profitability.

However, we expect price and margin pressure to continue for the hardware suppliers for a period of time as the industry continues to consolidate, trade policies become clear and new turbine products continue to be launched to further reduce LCOE in order to effectively compete in the next few years with solar and marginal natural gas.

We expect the impact on TP will be a continued state of product transitions for some time. TPI will stay on course to complete 18 gigawatts of global capacity and world-class manufacturing locations to profitably serve the growing regions of the wind market.

We will speed up our product transitions, work with our customers to make blade transitions easier, and we plan t6o charge more for these transitions, which should allow us to better protect our margins until transitions slow.

After the current India start-up, we expect the next phase of start-ups to have less of an impact on our results since we expect most of them to be in existing facilities with trained workforces, which will minimize the upfront costs and ramp-up timelines.

We will apply our global scale to expand and localize raw material supplies to create a competitive advantage for TPI, and we plan to pace the growth of new production lines to increase confidence that each new line will contribute profitably to the future consolidated state of the wind industry.

Although we believe that it may take longer to achieve, we still expect to achieve our stated goal of 60 lines under contract at an average of 300 megawatts per line, which at 80% utilization would equate to roughly 15 gigawatts per year, in which we currently project would allow us to achieve $2 billion in annual wind revenue, double-digit adjusted EBITDA and more than 20% market share based on current assumptions.

During the industry consolidation, we expect our customers to experience continued pricing and margin pressure, and this may, in turn, impact our profitability.

However, our confidence in the underlying long-term economics of our business in the wind industry remains strong, and we are continuing to invest in technology, technical capabilities and a world-class global manufacturing footprint.

These actions will enable us to maintain our competitive advantage in the short and long-term and offset the pressures of global raw material constraints, increasing labor costs and further competition from Chinese blade manufacturers.

With respect to 2020, many of our customers have requested that as much volume as possible be delivered by the end of Q3 to serve 2020 U.S. installations in order to meet the end-of-the-year deadline for the 100% PTC.

Uncertainty around the product mix of our customers' 2021 volume plans is impacting our ability to further refine our own 2020 volume estimates. We are still working with our customers on the final number, location and timing of transitions for 2020 as well as overall delivery and volume expectations for next year.

Once our customers' plans are solidified, we can firm up our Q4 2020 volumes as well as our full year 2020 plan.

In light of the foregoing factors and the corresponding impact that these factors will have on our 2020 outlook, we will be postponing the Investor Day originally scheduled for November 15 and will reschedule as soon as our plan has firmed up. We apologize for any inconvenience caused by this postponement.

We also will not be providing formal 2020 guidance until such time. However, we do expect formal 2020 adjusted EBITDA guidance to be lower than our previously announced 2020 target. Turning to Q3 performance. First, I'll touch on start-ups and transitions.

In the third quarter of 2019, we continued our investment in both start-ups and transitions, with 10 lines in start-up and 8 lines in transition during the quarter. Start-up and transition costs for the quarter totaled approximately $22 million, slightly above our guidance for the quarter.

I am pleased to report that we have made significant progress over the last quarter at our new facility in Yangzhou, China and are on a path to be at full speed by the end of the year and moving into 2020. Our new facility near Chennai, India is under construction and is on schedule and budget.

We have hired our senior leadership team from India and they are actively working on the start-up. We have also accelerated the hiring and training of new TPI associates to minimize the start-up risks we've experienced this year, which will have an impact on Q4 earnings but we believe will positively impact the overall start-up results in 2020.

We are very pleased with the experience and quality of our new hires in India, the majority of which have prior blade manufacturing experience, and we are on track to begin production in this facility in the first quarter of 2020.

Finally, as it relates to start-ups, although we have worked through most of our challenges in Matamoros, the labor market in that region of Mexico remains quite challenging, so we are continuing to experience more labor instability than normal.

We are actively dealing with this and developing a long-term solution but this will continue to challenge our efficiency in the near term and will continue to impact our results for the balance of 2019 and into 2020. As for transitions, they're going well, and we're generally on track with each of them.

We are continuing to improve on our speed of transitions and, as importantly, continue to drive manufacturing cycle times down by, on average, over 30% over the past several years, notwithstanding that we are building longer blades.

We believe that these expected lower cycle times will continue to enable us to deal more effectively with the increased number of transitions we anticipate over the next few years. 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.

We are continuing to work actively with our customers and suppliers to minimize the impact to production for the balance of the year.

As a longer-term solution, we are also working with some of our key suppliers to localize certain critical inputs in Mexico, Turkey and India 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 guaranteed supply of critical materials. Moving on to Slide 7.

We now have a total potential contract value of up to approximately $5.8 billion through 2023, and the minimum guaranteed volume under our supply agreements is approximately $3.2 billion.

The potential and minimum contract value does not include 2 lines in China that will be operating under a short-term agreement in 2020, nor does it include the impact from most of the anticipated new larger-blade models that we will produce after the 2020 transitions as these are still in discussions with our customers.

While we have purposely slowed down our expansion pace in order to focus on the 52 lines we have under contract today, we also estimate that we only need to have 60 lines installed to achieve our targeted global capacity of 18 gigawatts.

So although the quality of our pipeline is still strong and we are confident in our ability to convert it over the next couple of years, we plan to be selective in adding lines to ensure profitable growth. Turning to the global wind market on Slide 8.

We continue to be pleased with the continued growth of wind energy as a cost-effective and reliable source of clean electricity as we and the industry continue to drive down LCOE, 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. We are very pleased that wind energy growth is now driven by economics and what customers want to buy.

Global annual wind power capacity additions are now expected to average more than 73 gigawatts between 2019 and 2028 according to Wood Mackenzie's third quarter forecast update. The strength of the U.S. wind market continues to increase. Over the last year, Wood Mackenzie has increased its 2019 to 2023 onshore forecast by more than 13 gigawatts.

For example, over the last quarter, Wood Mackenzie updated its 2021 onshore forecast by approximately 1.7 gigawatts to approximately 12.3 gigawatts in that year alone. In the third quarter, the U.S.

surpassed 100 gigawatts of installed wind capacity, with another 46 gigawatts under construction or in advanced planning, a new record according to the American Wind Energy Association. The global wind markets continue to be strong and growing, including offshore. Wood Mackenzie estimates the U.S.

offshore market to have more than 16 gigawatts installed by the end of 2028 and the Asia -- and in Asia-Pacific, more than 63 gigawatts by the end of 2028. Many expect offshore market forecast to be increased over time as the industry continues to come -- become even more cost competitive, with significant additions beginning in 2023.

For the balance of 2019, we remain extremely focused on execution. We are localizing raw materials to serve our various manufacturing hubs in a manner that helps us to guarantee capacity and to continue to drive down cost. We remain confident and committed to our overall business model and strategy.

The fundamentals of our business remain strong, wind 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 many fast-growing emerging markets and a very strong U.S. market.

Along with our customers, we continue to invest heavily into existing line transitions and new line start-ups. Our mature operations continued to perform at or above our expectations, which gives us confidence in our ability to navigate these challenging times and generate the profit levels we expect over the long term.

With that, let me turn the call over to Bryan..

Thanks, Bill. Please refer to Slides 10 through 12. For the third quarter of 2019, net sales for the quarter increased by $128.9 million or 55 -- 50.5% to $383.8 million compared to $255 million in the same period in 2018.

Net sales of wind blades increased by 49.9% to $352.2 million for the quarter as compared to $234.9 million in the same period in 2018.

The increase was primarily driven by a 44% increase in the number of wind blades produced during the quarter compared to the same period in 2018, largely as a result of increased production at our Turkey, Mexico and China operations.

The increase was also due to higher average sales price due to the mix of wind blade models produced during the quarter compared to the same period in 2018. Total billings for the quarter increased by $144.9 million or 60.2% to 2 -- $385.6 million compared to $240.7 million in the 2018 period.

The impact of the currency movement on consolidated net sales and total billings for the quarter was a net decrease of 1.6% and 1.5%, respectively, as compared to 2018. Gross profit for the quarter totaled $25.9 million, an increase of $9 million over the same period of 2018, and our gross profit margin was up slightly to 6.8%.

General and administrative expenses for the quarter totaled $10.6 million or 2.8% of net sales. This compares to $9.8 million or 3.8% of net sales for the same period in 2018. The decrease was primarily driven by lower incentive compensation.

Realized loss on sale of assets for the quarter was $3.4 million comprised of $2.5 million of realized loss on the sale of receivables under our supply chain financing arrangements with our customers and $0.9 million of realized losses on the disposal of assets. There were no corresponding charges for the same period in 2018.

Income taxes reflected a provision of $18.8 million for the quarter as compared to a benefit of $10.3 million for the same period in 2018. The change was primarily due to the jurisdictional earnings mix in the quarter as compared to the same period in 2018 and from the reversal of the U.S. valuation allowance in the 2018 quarter.

Net loss for the quarter was $4.6 million as compared to net income of $9.5 million in the same period in 2018. The diluted loss per share was $0.13 for the quarter compared to earnings per share of $0.26 for the 2018 quarter. Adjusted EBITDA increased to $27.6 million for the quarter compared to $17.6 million during the same period in 2018.

Our adjusted EBITDA margin for the quarter was 7.2%, up from 6.9% in the third quarter of 2018. Before start-up and transition costs in both periods, our adjusted EBITDA margins were 13% and 15.3% in the third quarter of 2019 and 2018, respectively. Moving on to Slide 12.

We ended the quarter with $92.1 million of cash and cash equivalents, total debt of $142.7 million and net debt of $51.3 million compared to net debt of $91 million at June 30, 2019.

For the quarter, we had cash provided from operating activities of 60 -- $64.3 million, while spending $21.4 million on CapEx, resulting in free cash flow for the quarter of $42.9 million. For the first 9 months of 2019, we generated approximately $2.5 million of free cash flow.

For the year, we expect negative cash -- free cash flow of $20 million to $30 million due to Q4 forecasted CapEx payments. Our balance sheet remains strong with over $92 million of cash, and we have an aggregate of $74 million of availability under our various credit facilities. Please turn to Slides 14 and 15.

We are maintaining our previously announced guidance for 2019. Net sales of between $1.4 billion and $1.5 billion and adjusted EBITDA of between $80 million and $85 million for the full year. We expect to be at the low end of the ranges for each.

The only changes to full year guidance for the last -- from the last quarter are the expected 2019 billings of between $1.38 billion and $1.4 billion, down slightly from between $1.4 billion and $1.5 billion, set invoiced to be between 3,180 to 3,205 and G&A to be between 3.5% and 4% of net sales, down from the range of 4% to 4.25%.

With that, I will turn it back over to Steve to wrap up, and then we will take your questions.

Steve?.

Thanks, Bryan. Our overall long-term mission remains unchanged, establishing 18 gigawatts of global wind blade capacity with 60 lines to drive $2 billion of wind revenue, along with $500 million of transportation revenue and achieve double-digit adjusted EBITDA levels.

With an estimated 73 gigawatts global combined onshore and offshore wind market, we expect to have more than 20% global market share.

We plan to continue to drive for more speed during transitions, leverage our global scale for operating and buying efficiencies to continue to drive down costs, all while maintaining a strong and conservative balance sheet. I want to thank all of our dedicated TPI associates for their commitment to our mission.

We remain very confident in our multiyear game plan and will stay that course. Thank you again for your time today. And with that, operator, please open the line for questions..

[Operator Instructions]. Our first question comes from the line of Paul Coster of JP Morgan..

Steve, in the prepared remarks, you said -- can you hear me?.

Yes, we can, Paul. Please go ahead..

Okay. Sorry. In your prepared remarks, you talked about not compromising your long-term prospects, and that may mean that you don't optimize EBITDA in the short term.

What is the short term? And what do you mean by all of that? Can you just, sort of, talk us through the kinds of trade-offs that you're having to make?.

Yes, Paul. So the biggest impact on the short, call it, through next year timeframe is largely related to product mix and volumes. We've talked a lot, as you know, the last couple of quarters, Paul, about the number of transitions, more transitions than we'd like or than we expected.

And a lot of this is driven, as you know, by the pace of consolidation across the industry, the price pressure and margin pressure that our customers are working through as levelized cost of energy comes down. So I think our hope is that this would stabilize a bit over the next couple of years.

I think it's a little bit tough for us to predict perfectly, it's -- we're not in complete control of it. But the other pivot that we spoke about last quarter, and we've reemphasized today, is our model. Our financial model needs to withstand transitions as we go forward and still meet the overall profit goal.

So what we're doing is laying out the overall infrastructure of 18 gigawatts, the plan to operate at 80% of that so that we can withstand transitions in the future and still be at double-digit EBITDA level. So it's 70% EBITDA now growing at a very rapid pace, as you know.

Today, we're building out that infrastructure, right? We're making 7% today but that's not double digit. So we're investing. We're investing today, we'd expect to invest still for another year or 2. But we do expect things to stabilize a bit more and for us to be able to operate efficiently, profitably at the levels that we've committed.

Once we can get things to settle in just a little bit more, and we've talked also, Paul, about charging a bit more for transitions. We get to charge for those operating more quickly on those. And we've also said here, we're going to pace the growth a bit. We don't need 70 lines to get to $2 billion, right? We need 6 -- 60.

So 52 to 68, we can pace that a little bit more slowly, and hopefully, get that to settle in a timeframe that's reasonable here. I think I feel that we can do on the timeframe question..

Okay. And then I think I'd like to hear -- get some color on this uncertainty that you experienced.

Is it that the customer is saying, well, look, we don't know if we want it on this date or that date or we want this size or that size or, I mean, can you just, sort of, talk us through a case study of the uncertainty and how it's impacted you?.

Yes. It's a good question, Paul. We're not going to speak about any one customer by name, but I think we're seeing this generally across our customer mix.

And as an example, something Bill spoke about in his portion of the prepared remarks, with installations by the end of 2020 at the 100% PTC, it's blades that we would deliver by the end of Q3, for example, generally, that would go into the remainder of the 2020 installation. So our Q4 volume in '20 would be installed in 2021.

So a question around Q4 for us, still right now, is the volume. And to your point, the product length, the product type, so it's both of what you said. It's the volume and the mix, if you will.

Which products do we accelerate a transition for Q4? Do we hold off on a transition for Q4? Those are, as you might imagine, those are all decisions that our customers are making related -- right now, related to 2021 volume. And that is the primary reason, as we said, why we're postponing the Investor Day today. We need to lock down our 2020 guidance.

That's on us. We've got to do it. But we need Q4 volume to settle before we can do that. So we don't expect that to take months and months here, but we do expect it to take a little bit of time and are just not in a position to lock down that plan by next Friday. And so we'll postpone that a little bit until we can lock it down. But it's volume and mix..

Okay. This is helpful. And just one last question then, which -- it sounds like your visibility into the first three quarters of next year is no different than the last time we talked. So the volatility is all around the fourth quarter. Bill, I think, said that EBITDA will be down relative to prior expectations.

Are you just simply derisking that for us, the fourth quarter? Or is there more than a fourth quarter risk here?.

Paul, this is Bill. Thanks for the questions. It's primarily around Q4, derisk in Q4. Again, depending on when the final volume and mix is determined, we'll determine when some of those transitions may start. Some may be accelerated, some may be pushed.

So there's just that much uncertainty as it relates to the back half of the year, primarily Q4, which is creating the uncertainty..

Paul, I think just in general, and again, Bill commented on this, I think I did as well, that the over -- the good news about wind is the costs have come down. It's largely about economics. It's about what customers want to buy. And then that's really good news. The challenge that comes with that is really just a hard push on economics.

And when our customers are battling for market share based on price, then the price and margin pressure flows through the whole system. And there is that pressure, and there are choices. Choices with respect to product type, and as we've just discussed, accelerating or decelerating new product introductions.

That's the uncertainty of the environment, if you will. So the fundamentals over time aren't really changing but this short to medium-term is challenged that way..

Our next question comes from the line of Eric Stine of Craig-Hallum..

Maybe just to stick with 2020.

I mean, so as I'm trying to get my arms around this, on one hand, if things aren't a whole lot different from last time you spoke and then, it's really about the fourth quarter, I'm just curious, given that obviously, a lot of your business goes overseas, like, thought process on maybe just a wider range rather than nothing at all? Because, I guess, nothing at all implies -- or obviously, people are going to assume the worst as they often do.

So maybe just the thought process there, but just trying to get some sort of a sense of the magnitude of what fourth quarter could mean..

Yes, Eric. So look, I think -- I wouldn't say that nothing has changed in terms of the outlook for calendar 2020 except Q4. What Bill just said is the biggest part of our uncertainty around next year is related to Q4. So just -- so we're trying to be clear there. But we also just commented on the overall margin and price pressure.

Bill also commented on some of the raw materials that we buy. When things are constrained, prices get affected as well. So look, we're at a point of -- the budget cycle is on us and a lot of companies like us this time of year. We have to lock down some key assumptions.

We are going to provide guidance for next year, but we've just got to have our plan locked down in order to provide a responsible number and we're just not in a position to be able to do that today. So I don't think we can provide any more specifics than what we've said today, but we are quite mindful.

We are quite mindful that we need to move on as, kind of, as quickly as we can get our plan locked down with our customers, flow that through our budget process and come back with guidance..

Yes. Okay. Understood.

Just thinking about you deciding -- or I mean, and you've thought about this for some time, just to be more selective on some of the transitions that you do, and I would guess that you're not alone, I mean, has this caused any -- whether it's pushed back or just your OEM partners to, kind of, rethink the outsourcing strategy? And it's, kind of, swinging back the other way if you are going to be more selective on these?.

Yes, Eric, I would say, our comment about being more selective is probably more related to new lines, new production lines, than it is to whether we do or don't do a transition. You may recall the way our agreements work, our -- we guaranteed capacity, our customer guarantees volume. But they can request a transition when that's what they need.

We want to be building the product that they're going to sell, so they can request a transition. We could to quote the impact of that transition though. So what we have tried to say there is we could charge more for transitions.

That's not so much elective on transitions is one being paid a little better for them and focus internally on our side to be faster at them. But frankly speaking, right now, this was only around transitions. Our margin dollars and margin percent would be higher.

We're also making very large investments to just build global capacity and get to the 20% share. So we've got both things going on right now. It's a combination of transitions and big investments in growth and the EBITDA burden comes along with and the CapEx spend, as Bryan described, it comes along with that degree of investment.

Where we're being a bit more selective is getting from 52 to 60 lines, I would say. And there, the question for us is, we want to make sure that every life we add is in a world-class location. That it withstands the test of time, right? We're making these investments for the next 10 years, not 3 years or so, that we're picking good customers.

We have to earn their business, of course, but we also get to choose also, kind of, how we pace that investment and where the lines go. So in a world of consolidation pressure, you can imagine, we're being thoughtful about that.

So that may push our $2 billion target a little bit to the right, but it doesn't change the mission, and that's really what we're trying to say is, we're a little less concerned about which year we achieve that and more concerned about managing our balance sheet, making really smart investments as we get from here to there in an environment, our customers' environment, that's challenging in the short term.

So not challenging from the fact that there's demand for the product but just challenging on the economics side. And Bill had one other thing he wanted to add to, like, your last question..

Yes. I guess on the EBITDA, what changed from last time. There are a number and timing of transitions has continued to move, Eric. So -- and it's moving quite rapidly and continuing to move as we speak, so that's part of it. So it's not just Q4, it is additional transactions -- or transitions potentially and when they occur.

The other thing is, and we talked about making really good traction this last quarter on our diversified markets efforts in the transportation space. And so we are likely to accelerate additional investment in that part of the business next year as well, and we're still nailing that down.

So that's another piece of it that's provide -- or creating a little bit of yet-resolved of uncertainty as it relates to locking down our 2020 number..

Our next question comes from the line of Chip Moore of Canaccord..

Just following up there. Guys, wondering maybe you can talk a bit about receptivity to some of the work you're doing with customers to deal with these rapid transitions.

How are some of those negotiations going?.

Yes, Chip, I don't think we're going to get into more specifics about individual customers. I think, in general, the discussions are going fine. We're all in this together in terms of navigating what the transitions ought to be. Our customers are making tough choices about their product plans, and we're matching up with them on it.

But I don't think we can get into any more specifics on that by customer..

Sure. No, that's fair. And you just talked about accelerating some spend it, sounds like next year, on transport. Would that be for existing opportunities you're currently ramping for? Or we should be thinking about new potential partnerships? Or any more color you can provide there..

Yes. What we said in our prepared remarks, we'll just repeat a little bit here is, that we're continuing to invest in the relationship with Proterra in driving down costs of the composite technology for use in transit buses, it's an important initiative for us. But we also mentioned that we're accelerating investments with other customers.

And so there are more customers than just that. We've not announced anything publicly in terms of production wins and we will when those are real. But we also understand, and we try to help you all understand, that the transition piece of this is going to take some time.

We're choosing to make smart investments there to accelerate the outcomes where we think it's the right choice to build value over time to optimize Q1 or even 2020 EBITDA. So that's Bill's point that we're accelerating investments in that space. We're doing it for good reasons to build value.

But some of that is yet to be locked down, as Bill just said, for 2020 as well. And his point was, that's part of the uncertainty around the entirety of full 2020 plan, not just a Q4 kind of an impact..

Got it. And maybe just one last one, understand the dynamics next year, some uncertainty on Q4.

Do you have a sense of when that visibility might shore up from your customer set?.

We're working to lock it all down as quickly as we can with our customers. It's not 100% within our control to do so. Our hope would have been to perhaps through the Analyst Day just out a few number of weeks perhaps. But as you know, we'll be bumping into holidays before long here late December, so it may well slip into the earlier part of next year.

But we're working to lock it all down in weeks, if you will, not many months, as we said. But it's -- we're not 100% in control of locking down each piece, and we'll get to it -- we'll get it done as soon as we can..

Our next question comes from the line of Jeff Osborne with Cowen and Company..

Just a couple on my end. I think when you last provided 2020's commentary, essentially, the lines in transition roughly doubled, I think my math is was from 8 to 9 to about 16, it sounds like it's getting worse.

Is there any sense of what that magnitude is? Is it half the lines that are in transition? Any way to handicap that? I would imagine that, that's a number you know but just not the timing of when those transitions would take effect seems to be the issue..

Yes, Jeff. You're right. We were at 16 last time we talked. That number has bounced around a little bit. It's gone up as many as 20 but the timing matters here, right? Because some of those transitions now may -- they could push to 2021 depending on the timing of some of those.

And again, just depending on final decisions on product mix for our customers some of them could pull in. So it is a bit of a moving target. There are a few more in there now than we anticipated when we last talked. But again, those could push to 2021 in the next week or 2 as designs get nailed down and timing gets mailed out with our customers.

So apologize for a little bit of a wishy washy answer there but it is that fluid at this point in time..

And Jeff, it's Steve. Just one -- we understand this is a little tough perhaps to fully understand or follow, but one way to think about this too, and this has been publicly stated by some of our customers, that as our industry prepares in the U.S.

market anyway for a post-PTC world, there's a lot of work being done on what those products are and the timing of when they get implemented -- introduced. And so to Bill's point, you could imagine a desire to accelerate that. Get really ready for '21 post 100% as soon as practical.

On the other hand, some of those product plans get tweaked along the way. So it's not that there's not good robust discussion or a clear understanding of what's going to change, the trick, as Bill just said, is really when. And so it's a total number, but the tricky part here is also timing and it's lost volume. I mean, let's just be clear about it.

When we make a transition, we lose volume and it's not all recoverable. Therefore, the impact in the short-term on EBITDA swings us around a bit through that transition. So again, we'll knock it down as best we can, as soon as we can, but that's the reasoning why it's impacting us the way Bill just described..

That's helpful, Steve. And just for everybody on the line, is there a way you could flesh that out a bit? So my understanding is that each line was roughly $40 million, $45 million in revenue a year. You talked about a 10% double-digit EBITDA target.

And I think in the past, you've talked about every transition costing about $3 million, but you were hoping to do that faster and cheaper.

So I was wondering, a, can you confirm that those numbers are reasonably accurate? And then with the R&D teams that you have put in place in Denmark and the folks in Berlin that you've acquired from Senvion, is there any demonstrable evidence over the past 3 months that you've actually driven down either transition cycle time or made this less expensive to do?.

Yes, Jeff. We are making progress. As I stated earlier, we have brought down -- we performed very well on our transitions this year. And then some of the -- in many of our mature plants, where we went through transitions, we had very, very good -- we had very good financial results there, notwithstanding the transition.

So we have definitely demonstrated the ability to do them cost effectively and to accelerate the number of them. A little bit of it depends on the complexity of it and the location and whether you're flipping an entire plant or you're doing a line or 2 so all those things factor into it.

But I would tell you, our performance this year from a transition standpoint has been very good. The biggest number this year, as it relates to start-up and transitions, has been start-ups. That's been the biggest impact. So the answer is, yes.

And when we get to Investor Day, hopefully here in the next month or 2, we're going to lay that out in much more detail for you all so you can see not only the impact on a per-line basis, but, kind of, what the incremental revenue and margin is long term once you go through a transition..

That's helpful.

And I may have missed this in my last question, but can you just briefly touch on the situation in Matamoros, how the stats ramped up and if there's any lingering raw material issues that you flagged in prior quarters?.

Yes. So I think we mentioned that, that the -- that continues to be a bit of a challenging labor market. It's just that region of Mexico tends to be a little bit different than some of the other regions we operate in. We are ramped up. We're still ramping our last 2 lines there. We're in that start-up mode this last quarter and this quarter.

But we have made significant progress on the workforce, and we're still solidifying that core group of employees. But yes, we've made significant progress there, but it continues to be a bit of a challenge from a labor market standpoint.

And on the raw material side, as an industry, we are a bit constrained on core materials, which originally was caused by a shortage of PET so a lot of our customers switched to Bolsa. There have been some challenges with Bolsa just because the increased demand that wasn't initially planned for.

Political unrest in Ecuador created some delays, you probably read about that. And quite frankly, the Chinese wind market, which has exploded here in the last year in anticipation of a drop in their feed-in tariff, they have been overwhelming Bolso supply. So that's been the challenge. We're navigating through that. We've got multiple suppliers.

We're working with our customers and suppliers. So it's not that we're out of the woods but we're going to manage that for the balance of the year and it should ease up quite significantly next year as more PET capacity comes online here in the fourth quarter..

And Jeff, just to add one last point on your question on transitions and, kind of, the modeling assumptions. And we certainly understand the desire to have good modeling numbers as a way for you to try to navigate this but that also assumes that there's basically 100% volume demand off of the capacity. And there are a few other constraints in the U.S.

market this next year that, again, you can read about. One of them is just having enough trucks to move all the product or having enough cranes to erect all the turbines. So there's a range of constraints that pressure this stuff.

So if the volume demand just isn't there for whatever combination of reasons, it's not only can we affect the transition quickly, but what is the impact of volume during a transition stretch? Or, in this case, during an aggressive installation stretch? So again, that's not an excuse around it. That's just the environment that we're operating in.

And so those things end up affecting, and are having an effect on, 2020..

And Jeff, there's been a lot of discussion about volume. The good news is that volume is very strong. Generally, our fourth quarter volume is to supply the next year's volume. And when you look at -- if you think about just the U.S. market, U.S. market in 2021 is anticipated to be a heck of a lot stronger than it was a year ago.

And so a lot of that -- a lot of what we're doing is just solidifying the volumes for 2021 in store. So the volume is not -- it's a big -- that's not the big issue, it's the timing of when we're going to go through these transitions and solidifying the mix so that we can adequately build that into our budget from a pricing and cost standpoint..

For '21?.

Right..

Q4 of '20 for us?.

Yes, thanks, Jeff..

Our next question comes from the line of Joseph Osha of JMP Securities..

We in Q4 of next year side, which I think has been discussed enough. It would seem to me that there has been, perhaps more broadly, a decline in the predictability of this business.

Would you agree or disagree with that? I'm trying to get a sense as to what the world is going to look like a year from now when the PTC air pocket has passed but we're still dealing with these transition issues and the OEMs behaving the way they behave..

Yes, Joe. It's Steve. I think there has been a decline in predictability in the short term for all the reasons that we've described, all the things that push or pull on volume and ability to deliver. As Bill just described though, there are pieces of good news around it like the volume demand for 2021 strengthening. So that's a good sign.

So again, we come back to -- we need to pivot a bit as a company to where we can operate within that 20% utilization haircut, if you will, from 18 down to 15 and still deliver consistently and deliver and double in the double-digit EBITDA territory. So it will take us a little time to get to that.

We're building infrastructure and capacity and we're going through these transitions at the same time. We do see a path to stabilizing that as a working model for the business over the next couple of years but it's a little less predictable in the short term. But I think that's apparent and it's true..

Okay.

Second question, listening to you talk about not wanting to over optimize EBITDA in the short term, I'm reminded a little bit of the arm wrestling that went on for years between the DRAM companies and the PC companies, and the ones that survived and ended up with quite a bit of leverage were the ones that just wait until everybody else went bankrupt.

And so I'm wondering as you think about your balance sheet, your staying power and so forth, whether part of this game is to try and outlast some of the merchant -- other merchant suppliers out there and maybe even some of the internal capacity at the Tier 2 manufacturers until they just go away? Is that part of the thought process here?.

Yes. I wouldn't put it maybe as extreme as that in terms of our direct competitors going away, Joe, but there's no doubt, and we've said this in our prepared remarks, that our plan is to continue to operate from a conservative balance sheet period and to have staying power.

And we're focused on the medium to longer term, not optimizing the short term, and we're pacing our growth a bit. So you -- all those words are consistent with the theme of what you said though. The right to protect the future of our business, have global scale, world-class locations, 20% global market share, capacity for even more.

And all that's about -- we have scale, and we're building more. We're going to use our scale. We are using our scale to drive down raw material costs, we're going to do more of that.

So all of that is around in a business and technology that's maturing where it becomes about economics and speed, then we're pivoting to be all about execution, economics and speed, right? And balance sheet strength as we go through it. So I think, thematically, what you said, there's a lot of truth to that.

I wouldn't necessarily state it quite as extremely as you did..

Okay. I tend to do that. And then last question, sort of, in that vein.

When you have longer-term conversations with some of your large customers, I mean, to what extent do you all talk about a margin entitlement, if you will, or once this next year is over with some more constructive understanding with some of the large OEMs about how margins need to be split in order for this disaggregated model to work? I mean, do you have those kinds of conversations?.

So we have very candid and open discussions about costs and margins and how to drive down costs together, which, as you know, that's been our business model since we got in the wind business was to partner deeply with our customer. But I don't think we can get into any more detail on a customer basis as to how those discussions play.

But I think it's fair to say that, and we have said that, we are doing the things we just described in order to defend our margins better in the overall scheme of things, and our customers want suppliers that are healthy as well. So there's a good, healthy balance in those discussions about how to navigate this together.

And sometimes, it's hard to navigate the short-term in order to benefit more in the medium to longer term..

Our next question comes from the line of Michael Legg of the Benchmark Company..

I wanted to talk a little bit more about the diversification efforts in -- related to Proterra, actually.

Could you talk a little bit about how much of your CapEx that you're spending is related to the transportation versus the wind? Also of the $31 million of revenues that was nonwind, if you could give us any breakout on that? And then the last part of that is, when you put out the release with Proterra, you said you did 3,350 vehicles over the 5-year contract, and I just wanted to get an update on where we stand on that..

Yes, Mike. On the CapEx question, we will -- we haven't broken that out in the past. I can tell you, the CapEx we've spent on our bus manufacturing operations so far is relatively small, it's less than $10 million basically.

When we do give formal -- have our Investor Day coming up, we'll probably provide more granularity around overall transportation investment, not necessarily specific to a program or a customer. But we'll provide that detail going forward. Question two was the --.

The nonblade revenue..

Non-blade revenue, yes. The non-blade revenue the transportation sales. Bryan, do you want to -- I mean, I think --.

Yes. So I mean, if you look at the transportation sales, normal revenue is about $100 million in total on the assets made up of the transportation sales and some of the other activity going on in the wind service business..

Yes. So the bulk of the transportation sales would be with our production contract. And on Proterra, I mean, I think you should probably have a discussion with them about what their volumes are. We are operating within the framework of the contract. And as far as what their ultimate unit sales are, I think that's better to come from them than from us..

Our next question comes from the line of Ethan Ellison of Morgan Stanley..

I guess, just following up on Chip's and Joe's questions and your point around the potential to charge more -- charge customers more for transitions. I guess, I'll try this a third time.

But speaking very generally, have you started these discussions at all? And maybe, how is it being received?.

Yes, Ethan, we've been in dialogue for some time on these. We're always in discussion. Any time that there's a potential of a transition, it's a very open and candid discussion. And as I said a few minutes ago -- and again, we just can't be more specific on a customer basis. But the discussions go well.

We talk together about what their needs are for volume and what the timing is. And we do get to quote -- we get to quote the change, but we can't quote typically numbers that would make up all the contribution margin dollars that get lost with volume that's lost during a transition.

So we don't mean to say -- we haven't said that we would make up all of that. What we've said is one tool we can use is to charge more for it rather than extending contracts, which had been a bit more the way we operated.

Another tool can be worked with our customer to make sure their product designs allow for faster transitions, which helps everybody as well. And so there's a few tools that we can use, speed transitions on our side, cooperate with our customer on their design and then charge a bit more for them. The discussions are going well.

It's just an environment where it's a bit tricky timingwise for them to lock things down. And it's not yet locked down. So we're just -- we just have a schedule from in terms of getting that locked down and not being able to have our meeting on the 15..

Got you. That's really helpful. And I, sort of, preempted my second question, which was just around the potential to have contract extensions with the blade transitions.

It sounds like you maybe can't comment on that now, but when we do have a sense for what the 2020 transitions will look like, will we also know which contracts are extending versus potentially paying you higher pensions for the lost production?.

Yes. We won't get into the details of each one of those lines in terms of exactly how that trade-offs made, but we provide consistently every quarter, our updated contract value slide that shows how long the various contracts run. And so the answer is, yes, generally, that information would be more clear as those agreements are locked down.

But keep in mind, I think we've shared this a bit before. In times past, we might have been more willing to invest in a transition if we were adding term to a contract and share more of that pain, so to speak.

I think part of what we're saying, we've been saying for a while, we'll say again, is that we're probably better off now to behave a bit more along the way than just add to the contract value that's already a pretty solid number. So we're just making those choices along the way as to how to optimize the business..

Our next question comes from the line of Pavel Molchanov of Raymond James..

So just taking a step back, we have line transitions, kind of, a broad industrywide phenomenon, margin pressure. And then somewhat separate to that, we have the PTC in the United States.

Why is the PTC and its demand pull in having us this, kind of, surprising impact when everybody across the supply chain knew about the timing of this a year ago, two years ago, three years ago?.

I think what's accelerated, Pavel, over the last year or so is just the pace of new product introduction, new product launches, by our customers. If you plotted how quickly they were launching new models 3 years ago versus 2 or 1 year ago, that speed has increased dramatically. I think the combination of all the things we've been saying, that's one.

And there is, as we described, a bit of an arms race going on that the pace of that race is accelerating. That's the environment that our customers are operating within. So it is happening, kind of, faster, I think, than any of us might have predicted a year ago or even perhaps 6 months ago. And then it's a combination of the other things we described.

So it's just not all about the 100% going to 80%. You're right that, that was known some time ago. But what may not have been as well known is exactly the strain on the number of cranes that are used to install everything or the exact strain on the number of trucks or the exact strain on the amount of Bolson going into China.

So each of the things Bill described a few minutes ago, and I did, I think it's a compounding effect of those, that's probably having more of an impact than we would have thought. And then again, we gave you a couple of other reasons. We're accelerating investments in transportation as well. So this is not only wind-related, certainly not only the U.S.

wind market related, but that is one pretty significant factor..

Okay. And I just want to give you guys an opportunity to maybe give us a worst-case scenario for 2020.

If everything is bleak, dire to the fullest extent, will your EBITDA be up in 2020? Can you say that much?.

Yes, Bill. I mean, we -- again, we've got a range. The range is better than 2019, right? All right? So it's better than 2019. It's not what we had originally given a target for, right? So that's the broad range..

Yes. But the answer to your question is, yes, we would expect it to be up year-over-year..

Yes..

Under any conceivable circumstances?.

Yes, we would expect it to be up year-over-year..

Our final question comes from the line of Philip Shen of Roth Capital Partners..

Just as a follow-up to your response to Pavel's first question, what is the root cause of what -- of driving the pace of product introductions? And what is the -- why are they introducing the products so fast when, if you can imagine a stable global oligopoly, mostly understanding, kind of, the pace of things.

What caused that pace to change?.

Yes. So Phil, I think if you think about the fact that wind energy today is now passing through the marginal price of coal and coal is being retired, and in fact, the coal retirements are accelerating, there's still a -- and the next phase, if you think about it is, can we compete with marginal gas were already as cheap on average as new net gas.

And there's competition, as you know very well, with solar. So first, it's a price-competitive landscape, right? And the good news is it's about price and that also means it's about price. So it's a price-competitive landscape.

And then I think the other is, even if there were, let's say, 4 major suppliers competing, if 1 introduces a new model that drives price down, price per kilowatt hour down, and the others don't, they lose share, right? So there's pressure between the key turbine competitors to introduce new models.

There's more forward pricing being done, there's more trying to lock down large auctions or tenders outside the U.S. and then lock down economic build in the U.S. So it's really that acceleration of the economic impact and competitive tension, even though there are a handful of players that really, kind of, dominate the space, to your point..

Okay. So when the auction start to go away, I think it was 1.5, 2 years ago, and that caused the downturn in the wind sector. And this is kind of a second -- a continuation of that price pressure, and it's changed the behavior of the big OEMs and it's just, kind of, going through.

So basically, when this ends, when do you expect this price competitive dynamic -- price competition to end? I can imagine it slows down when you hit -- when wind is able to compete with and beat existing nat gas on a marginal basis, and ultimately, with solar as well.

So do you have a sense as to when the industry could largely be at those levels? And I know it depends on a lot of factors, including wind resource, location, et cetera.

But generically, from a timing standpoint, when you talk to your customers, do you guys have a mark on the calendar that gives you a sense for when that dynamic can slow down?.

Yes. I think we'd have to let our customers speak to that specific question, Phil, and not something that we should get out ahead of them or speak to quite so specifically. But as we've said, our model needs to adapt a little bit here to where we're able to deliver on the profit goals that we've stated regardless of those transitions.

So part of what you're hearing us try to describe for you is, we're not in control of the timing of the answer to your question. That's up to our customers. That's up to competitive tension with, as you rightly point out, with solar.

What we can control is how fast we transition, where we spend our money on growth and how we address just our overall speed and economics. And so that's what we're focused on and making sure that we pivot to where our model can withstand ongoing transitions, call it, no matter how long it lasts.

So that's what we can control, and that's what we're focused on..

And I'll try this a fourth time. In terms of the transitions, you have mentioned multiple times that you can charge more, that's a part of your tool set.

To what degree -- and you don't have to speak to specific conversations or specific customers, but to your -- do they bulk when they hear that you may need to charge more? Is there a receptiveness to that? Or ultimately, it's actually -- it might be tough for you to actually charge them..

So I think what it does is that it spurs the conversation of the timing of it is there. Can we get more volume from them in another location that we're not going through a transition to help offset the volume loss that we may see during a transition.

I think what it does is it spurs the conversation because it doesn't -- it's not good for them for us to take a long time to transition either.

So it's really -- it really spurs the discussion to be more collaborative on how to better plan for them, how to shift volume, if possible, and how to work with -- more collaboratively with them in our plans as well to make sure that these transitions go faster. So it's a combination of those things.

So the first discussion is well, how do we reduce that cost? And if we can reduce it, that's great for both of us if we can start producing blades faster. But I think as far as the discussion.

And if it doesn't, then the price is the price, right? But I think that the main thing is that spurs that conversation on how jointly we better plan for them and figure out how we minimize the costs for both parts because then it's a win-win..

Yes.

Have you actually charged more for any -- have you actually been forced to use that tool yet on anybody or you're not at that point yet with any of the conversations?.

Yes, Phil, I think rather than asking, we've been forced to use it. We've actually been talking about it for a couple of quarters so you can imagine that we are absolutely using it..

Okay. Great. And finally, you talked about in some of your remarks, some increased competition out of China.

To what degree are you seeing that impact your relationships with your existing meaningful large global OEM customers?.

Yes, Phil. And we're about out of time here. We'll wrap up with this answer though. This is a continuation of what we've been talking about for a while. We have a couple of good worthy competitors out of China. They're building product for a couple of the significant customers.

It's about total delivered cost to the wind farm side, right? That's the key at the end of the day. So we build blades all over the world. We ship -- they get shipped all over the world, and we're competing very directly against a couple of key competitors in China.

Again, some in-house capacity globally with our customers and against a couple of other regional players. It's not really changed much in terms of that overall competitive dynamic, and we're still gaining some share mostly from outsourcing is the big-picture answer to that. But we've got to continue to compete.

We've to have the lowest cost materials in the world, and we have to have world-class factories. And that's what we do. So we -- they're worthy competitors, but it doesn't really -- not really changing our plans..

We have reached the end of the question-and-answer session. I will now turn the call back over to management for any closing remarks..

Yes. Thanks, Tom. Thanks for your interest in TPI Composites. We will come back to you shortly with updated plans for our Investor Day and hope to see you there. Thanks..

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day..