Good afternoon, and welcome to TPI Composites' Third Quarter 2020 Earnings Conference Call. Today's call is being recorded, and we have allocated one 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 2020 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 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 comparable GAAP financial measures. With that, let me turn the call over to Bill Siwek, TPI Composites' President and CEO..

Thanks, Christian, and good afternoon, everyone. Thank you for joining our call. In addition to Christian, I'm joined today by Bryan Schumaker, our CFO.

I'll briefly review our third quarter results and activities, discuss the current operational status of our manufacturing facilities, including our supply chain, give a quick update on our global service and transportation business and then touch on the wind energy market.

Bryan will then review our financial results in detail, and then we will open up the call for Q&A. Please turn to Slide 5.

We had a very strong third quarter in which we delivered net sales of just over $474 million, a 23.5% increase over Q3 of 2019 and adjusted EBITDA of $49.1 million or 10.4% of net sales, notwithstanding the estimated impact of COVID-19 on adjusted EBITDA during the quarter of approximately $8 million.

During the quarter, we announced that we extended two supply agreements with GE, one in Newton, Iowa through 2021, with an option to extend through 2022; and one in Juarez, Mexico through 2022. We also announced that we will be adding an additional production line in Mexico to provide blades for GE's wind turbine technologies in North America.

We also announced that we signed a multiyear agreement with Nordex for two manufacturing lines in our Chennai, India facility with a planned start of production in the first quarter of 2021. Additionally, we extended our best disagreement in Turkey during the quarter.

Finally, we announced that Linda Hudson and Bavan Holloway were appointed to our Board of Directors. Linda is the former President and CEO of BAE Systems. Prior to BAE, she held various executive positions with General Dynamics, Lockheed Martin, Martin Marietta and Ford Aerospace.

Linda also sits on the Board of Directors of Bank of America and Trane Technologies and brings a wealth of global operating experience to our Board. Bavan is the former Vice President of Audit at the Boeing Company.

Prior to Boeing, she worked for KPMG as a partner and another role primarily serving investment services, broker dealer and financial clients. Bavan brings broad global finance and additional audit and risk management experience to our Board. We're all very excited that Linda and Bavan agreed to join the TPI Board. Please turn to Slide 6.

We remain committed to operating our business safely while working to mitigate the impact of COVID-19 and ensuring that we are prepared to deal with the resurgence of the virus we are seeing in many countries around the world.

We have and will continue to adapt our operating procedures to enable our associates to work safely and continue to meet the strong demand we see around the globe.

We also continue to drive the operational imperatives we outlined at the beginning of the year to reduce costs and improve our operations globally and are making very good progress on these imperatives, notwithstanding the challenges created by COVID-19. Turning to Slide 7.

I'll now give you a quick update of our global operations as well as a market update before turning it over to Bryan for a financial update. During the third quarter, we operated at or above capacity in all of our facilities for most of the quarter.

As you may recall, our plants in Mexico were still ramping to full capacity at the end of the second quarter and, since the end of, July have been operating near or above our normal capacity. In China, we still expect to deliver more volume than our original 2020 plan as production continues uninterrupted.

In India, we are moving full speed ahead with the ramp of the facility, and we are preparing to start-up two lines for Nordex in early 2021. In Turkey, production is at a full pace with, the exception of the transition of lines for Vestas to their state-of-the-art V162 blade as part of the extension of that contract.

As most of you are probably aware, there was also a 7.0 magnitude earthquake off the coast of Izmir last Friday. All of our associates in Turkey are safe, and neither of our plants in Izmir suffered any structural damage.

Production was temporarily shut down while we had structural inspections completed, and we then resumed operations on Saturday afternoon. There has also been a resurgence of COVID-19 cases in the Izmir area, so we are watching that closely to ensure it does not disrupt our operations.

As I mentioned earlier, in Mexico, we are operating all plants at or above normal capacity while continuing to closely monitor our plants in Juarez, given the resurgence of COVID in that community. We've also expanded the production of electric vehicle components in Mexico to increase our capacity and drive down cost.

In the U.S., production has continued uninterrupted. On the service side of the business, we have made very nice progress over the last couple of quarters, securing new deals with OEMs as well as with asset owners, and are working hard to build out our global service team to execute our growth strategy.

On the clean transportation side of the business, we continued with the production of Proterra buses, Workhorse delivery vehicles and production parts for an EV automotive platform while continuing to work on a number of confidential development agreements.

Our focus remains on refining and executing our strategy to build this into a meaningful business over time.

With respect to our supply chain, as we mentioned during our last call, the raw material market is now essentially back to pre COVID-19 levels, and we don't expect any further supply issues at this time, including balsa's core, barring any disruptions from another significant wave of COVID-19.

As we've discussed in the past, we will continue to evaluate our supply chain and diversify it geographically to reduce risk, provide for security of key materials and ultimately drive down cost.

As it relates to the wind market, we expect the long-term trend for wind energy to continue to strengthen based on the current cost of wind energy, continued efforts to drive down cost and strengthening of political will around the world to affect climate change.

In the U.S., while the production tax credit is set to expire at the end of 2020, utilities are planning for expanded renewables due to the unsubsidized cost competitiveness of wind, commercial and industrial demand and more state renewable portfolio targets, for example, in New York, with targets of 70% by 2030 and 100% by 2040, in California at 60% by 2030 and 100% by 2045.

In Europe, the support for the European Green Deal is strengthening. And just last month, the European Parliament voted to cut emissions beyond the original target in the European Green Deal to 60% by 2030 and PAUSE compared to 1990 levels. The European Council is expected to make a final decision in December.

In September, China announced a commitment to reach carbon neutrality by 2060, and, at the Beijing wind show in October, the wind industry pledged to provide more than 50 gigawatts of wind per year in China through 2025 and 60 gigawatts per year thereafter.

In India, Prime Minister Modi has committed to increase its renewable energy capacity to 450 gigawatts by 2030 and has committed to 40% non-fossil fuel energy by 2030 as part of the Paris Agreement. These are a few examples of the accelerating energy transition we are seeing on a global basis.

According to Bloomberg NEF's 2020 New Energy Outlook climate scenario, to meet a well below two-degree emission scenario, which is the key aim of the Paris Agreement, over 11 terawatts of onshore and one terawatt of offshore wind would need to be installed by 2050.

This represents about three times more than the economic transition scenario or their base case. Under the climate scenario, one would represent 45% of global electricity in 2050.

Back to the economics of wind, according to Lazard's Levelized Cost of Energy Analysis version 14.0, the unsubsidized levelized cost of energy of the most competitive new wind projects is equal to or lower than the marginal cost of operating existing combined cycle natural gas, nuclear and coal plants.

Furthermore, utility-scale wind LCOE remains at or below that of utility-scale solar on an unsubsidized basis and, in the best locations, significantly cheaper on a subsidized basis.

Utility scale wind LCOE has been reduced by 71% since 2009 according to Lazard, and we and the industry are working hard to continue to drive LCOE down and keep wind as the most cost-effective source of new energy generation.

We believe the future for wind energy will continue to strengthen, given some of the recent initiatives and goals to promote the acceleration of an energy transition that I just noted.

However, our current long-term goals that we have discussed publicly, including 18 gigawatts of capacity, 20% market share and $2 billion of wind revenue are based on older and more conservative industry forecasts that do not factor in these new initiatives and goals.

Stay tuned as we will review and update our long-term goals in light of these new initiatives, including the optimization of our global footprint. Turning to Slide 8. We now have a total potential contract value of up to approximately $5.1 billion through 2024, and the minimum guaranteed volume under our supply agreements is $2.9 billion.

This is a net decrease from $5.4 billion and no net change from $2.9 billion from last quarter as a result of extending existing contracts, offset by third quarter sales.

The potential and minimum contract values do not include the two lines in China that we are operating under a short-term contract this year, nor does it include the impact from some of the anticipated, new, larger-blade models that we expect to produce after the anticipated 2021 transitions or additional contract extensions.

While the health and safety of our associates remains our primary objective, we remain focused on our operating imperatives, including the integration of our key ESG activities to drive profitable growth and long-term shareholder value. With that, let me turn the call over to Bryan..

Thanks, Bill. Please turn to Slide 10. All comparisons made today will be on a year-over-year basis compared to the same period in 2019. For the third quarter ending September 30, 2020, net sales increased by $90.3 million or 23.5% to $474.1 million. Net sales of wind blades increased by 27.8% to $450.1 million.

The increase was primarily driven by a 20% increase in the number of wind blades produced year-over-year, largely as a result of increased production at our China, Mexico, Iowa and India facilities.

We estimate that our net sales were adversely impacted by approximately $8 million based upon when blade sets, which we had forecasted to produce in the period under noncancelable purchase orders associated with our long-term contracts, but we're unable to do so as a result of COVID-19.

Start-up and transition costs for the quarter decreased by $13.6 million to $8.6 million. Our general and administrative expenses for the quarter decreased by $1.3 million to $9.3 million. G&A as a percentage of net sales decreased 80 basis points to 2% of net sales.

This decrease was primarily related to a decrease in travel and training costs during the quarter. Before share-based compensation, G&A as a percentage of net sales was 1.5% and 2.3% in Q3 of 2020 and 2019, respectively.

During the quarter, we were impacted by a realized loss on foreign currency remeasurement of $17.1 million, primarily due to net euro liability exposure against the Turkish lira. On a cash flow basis, this exposure is naturally hedged due to our euro-denominated revenue contracts. Approximately 15% of our revenue in Q3 was denominated in euros.

Our income tax benefit for the quarter was $32.3 million as compared to an income tax provision of $18.8 million for the same period in 2019. The Q3 benefit was in line with our expectations.

The Q3 benefit offset some of the impact we saw in Q2 as a result of applying a forecasted annual effective tax rate to a quarter that was significantly impacted by losses in several jurisdictions due to COVID-19. We are forecasting our cash taxes to be approximately $20 million for the year.

Net income for the quarter was $42.4 million as compared to net loss of $4.6 million in the same period in 2019. This increase was primarily due to the reasons described above.

In addition, we estimate that net income was adversely impacted by approximately $6 million associated with the production volume lost under noncancelable purchase orders due to the reduced production, along with other costs primarily related to the health and safety of our associates and nonproductive labor associated with COVID-19.

Net income per diluted share was $1.13 for the quarter compared to a net loss of $0.13 per share for the same period in 2019. We estimate that adjusted EBITDA was negatively impacted by approximately $8 million associated with the production volume lost, along with other costs related to COVID-19 that impacted our production facilities.

However, even with the impact of COVID-19 on our facilities, we were able to achieve a 93% utilization rate. The strong utilization in Q3 led us to an adjusted EBITDA of $49.1 million and adjusted EBITDA margin of 10.4%. This compares to an adjusted EBITDA of $27.5 million and an adjusted EBITDA margin of 7.2% in the same period in 2019.

Moving to Slide 11. We ended the quarter with $149.4 million of cash and cash equivalents, total principal amount of debt outstanding of $238.7 million and net debt of $89.3 million compared to net debt of $142.5 million as of the end of Q2 2020.

For the quarter, we provided $60.9 million of cash from operating activities and free cash flow of $49.5 million.

With our strong performance during the quarter and continued focus on our cash conversion cycle, we were able to drive our total net leverage ratio down from 3.1 times in Q2 to 2.2 times in Q3, as calculated under our senior revolving facility. This created significant cushion on our debt covenants. Turning to Slide 12. Guidance for Q4 2020.

We are guiding to revenue of between $435 million to $455 million, utilization of approximately 90% and adjusted EBITDA of between $36 million and $46 million.

These numbers could be impacted by COVID-19 due to the rapid evolving nature, magnitude and duration of the COVID-19 pandemic, the variety of measures implemented by governments around the world to address its effect and the impact on our manufacturing operations.

Although our plants are currently operating at or above planned capacity, many of our manufacturing facilities are operating in regions with continued high levels of reported COVID-19 positive cases.

As such, we may be required to reinstate temporary production suspensions or volume reductions at our manufacturing facilities to the extent there is a resurgence of COVID-19 cases in the region where we operate or there is an outbreak of positive COVID-19 cases in any of our manufacturing facilities.

To ensure that health and safety of our associates, we will continue to incur approximately $5 million of COVID-19 related costs on a quarterly basis until there is better treatments, options or an effective vaccine for COVID-19. We plan to provide formal 2021 guidance during our Q4 2020 call in February '21.

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

Bill?.

Thanks, Bryan. Turning to Slide 14. The health and safety of our associates and their families as well as the communities in which they live remain our number one priority. We continue to take the necessary as well as proactive steps on the COVID-19 front to ensure the safety of our associates and safe working conditions in our facilities.

We continue to work our wind pipeline, and we are pleased that we were able to add more capacity for Nordex and GE, extend two existing agreements with GE as well as extending our contract with Vestas in Turkey. The impact of these additions and extensions was to increase our potential contract value by approximately $950 million.

We are also very encouraged by the progress we continue to make in the service space and look forward to this being an increasingly important part of our overall strategy and wind.

We are continuing to build on our momentum in the transportation space, and we'll continue to refine our long-term strategy to capitalize on the increased interest, investment and activity in the electric vehicle space.

We continue to remain focused on managing our liquidity to provide financial security and to emerge stronger as we drive through the current environment.

Our overall mission remains unchanged as of today, establishing 18 gigawatts of global wind blade capacity to drive $2 billion of annual wind revenue, reached $500 million of annual transportation revenue over time and achieve double-digit adjusted EBITDA levels.

We will continue to optimize our global footprint while using the leverage our global scale provides for operating and supply chain efficiencies to continue to drive down costs, all while maintaining a strong balance sheet.

As I mentioned earlier, these goals are based on older and more conservative industry forecasts that do not factor in the acceleration of the energy transition.

We will continue to evaluate the global demand and update our long-term targets accordingly to better reflect the opportunity we expect to see in wind long term under this accelerated energy transition movement. I want to thank all of our dedicated TPI associates for their commitment to our mission to decarbonize and electrify.

We are confident we will emerge stronger from the current environment, and we remain energized with our multiyear game plan. Thank you again for your time today. And with that, operator, please open the line for questions..

[Operator Instructions] And our first question comes from the line of Laura Sanchez with Morgan Stanley..

Bill and Bryan, can you hear me okay?.

I hear you just fine. Thanks, Laura..

Perfect. Congrats on a strong quarter.

So I know that chances of a blue sweep are small at the moment, but in the even that Biden wins the presidency and his clean energy Plan moves forward, can you discuss the implications of a made-in-America requirement? I know it's very early to tell how that would look like, but wondering if you could comment on moving pieces in regards to how quick TPI would be able to accommodate that..

Yes. Thanks for the question, Laura. I think it's a little bit difficult to answer at this point in time because there's not a lot of detail behind the plan. So he's got the made in America and an offshoring tax as well. So we've looked at what's out there.

And it's a little bit early yet to describe what the impact might be, but, again, we have manufacturing capacity here in the U.S. And depending on what that means, it could mean additional capacity over time, depending on demand and what those provisions might ultimately be if they come into fruition.

But it's a little early to tell right now what the impact may or may not be..

Yes.

And is it fair to say that in next, given the higher volumes, you would expect the implementation of his clean energy agenda to be positive for TPI?.

Yes. I think his aspirations are pretty significant, and the decarbonization goals and transmission, infrastructure, investment, etc., would clearly be - would be very favorable for renewables over the long term, without a doubt..

Understood. And if I may, one last question. Looking at your margins, you target 12% EBITDA margins or double digit EBITDA margin.

Can you reach that level while in construction of a new facility? Or is the 12% dependent on the further - on the current geographical expansion or footprint?.

Yes. No. I mean, we'll continue to drive it down. If you look at the performance of some of our plants as - I mean, we see that margin at or above that in several of our plants, and we're going to continue to drive that across the board.

So it doesn't necessarily mean all of them have to be, and you can't have any start-up, as we continue to drive down costs and look at other things, speeding up transitions and just cutting cost out of start-ups. That's where we see us achieving that 12% margin that we've put out there as a long-term target..

Yes. And if you recall, when we put that target out, we talked about an 80% utilization. So that does anticipate transitions and start-ups while still generating that double digit EBITDA. And as Bryan has said, we have - we've gone through transitions in our more mature plants and demonstrated EBITDA levels at the plant level well above that.

That's why we're confident in that number..

Understood, and congrats again..

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

Bill and Bryan, Aaron Spychalla on for Eric Stine. Maybe first on the lost production last quarter. Can you just kind of quantify what was made up in the third quarter and what remains to be made up? I see you kind of called out an $8 million impact as well in the third quarter.

So can you just kind of square those up for us, please?.

Yes. As we're looking at it, I mean, we're looking at the total revenue that's going to be made up, not necessarily the loss production as we spoke about some of the transitions we're getting pushed out to, and not just because of COVID for other reasons.

And that's how we're looking at, on a total revenue number, making up the lost production or the total revenue amount we forecasted in our original guidance. As far as quantifying the made up,, I mean, we had some impact this quarter.

A lot of that had to do with delays and shutdowns in Q2 associated with India and just the slowing of the ramp and the delay of that. And now that's getting back on track throughout Q3 and into Q4..

Okay.

And then on the field services business, can you kind of talk about how that's - how you're building that there, what the pipeline is looking like and how big that can become over the next couple of years? And any investment that might be needed there?.

Yes. So we've made a lot of really nice progress so far on securing arrangements with some of the OEMs that we build blades for as well as some third parties. We're not going to give specific dollars on it right now. We may give some - a little bit more specificity when we give 2021 guidance.

But suffice it to say that we look at this business as fairly high-growth opportunity, higher-margin business than our traditional blade business. So we expect it to become a fairly significant part of the overall picture over time.

We'll try to give you a little bit more specificity when we talk in 2021, but, at this point, just suffice it to say that we're really pleased with the progress we've made and what we've got from a backlog standpoint and pipeline moving into 2021..

And our next question comes from the line of Greg Lewis with BTIG..

Yes. I guess, I wanted to - you kind of mentioned a little bit on the transportation side the decision to kind of go into Mexico. Just flipping through the Q real quick. It looks like you generated a little bit of revenue in Mexico.

Could you just talk, I guess, at this point about the decision, realizing that it's still early days and you guys building out transportation, the thoughts around the decisions to move into Mexico?.

Yes. So this - we had - we moved some of the - it's not all of the manufacturing. It's just some of the components that we're manufacturing in Mexico. So it still gets assembled in the U.S. But it makes sense because what we do is still pretty labor-intensive.

And to the extent we can reduce labor costs, that's a plus for our customer and for our customers' customer, much like in the wind business. So it's not - the whole operation hasn't moved there. We still have a pretty sizable operation in Rhode Island that is dealing, quite frankly, with most of our transportation business today.

But there are components of it that we moved to Mexico for efficiency and cost reasons..

Okay. So it wasn't really about just seeing an acceleration in growth. It was more just - okay, okay. And then....

It's a combo - Greg, it's a combination. So it's cost and capacity, right? So it's both..

Perfect. Yes, good. And then just one other one for me. I mean, you touched on it in your prepared remarks about China's new plan and India's new plan.

One of the things that we've started hearing, and maybe it's some hope, maybe it's fear, around potential supply with just supply shortages just if China is able to really push through this - their kind of ramp in wind.

And I'm just kind of curious, maybe it's only been like a month out, so it's kind of hard for you guys to think about what needs to happen now.

But just bigger picture, do you think that's a fair statement that kind of - the industry as a whole, if a country like China and/or India really decides to turn it on, could that create some real strain on the supply of anything from wind blades to whatever else needs to go into wind mills?.

Yes. I think if it happened overnight, certainly. It will take a little time to ramp to those levels. So that gives our suppliers the opportunity to ramp their capacities as well. We've talked in the past about diversifying our supply chain, localizing in many respects and really derisking it to any one geography.

So I think our plan to do that, which we started a number of years ago, and we will continue to do, will help to alleviate what could be some capacity constraints maybe in China if they get to those levels. But again, there's some - there will be time for suppliers to ramp.

But again, if you look at not just China, but the whole, if you look at where wind could go over time, when you look at some of these new models with the energy transition, our supply chain as well as we are going to have to ramp to be able to meet that demand.

So, could there be some bottlenecks in the short-term when that happens? Certainly, but we'll all work to make sure we get through those and make sure that we have adequate suppliers around the globe to meet our demand..

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

Yes. A couple on my end, if you don't mind, Bill. One, I was wondering what level of visibility you have into next year as it relates to transitions. That's been sort of the evil that popped up in the past, obviously this year not as many, and you're seeing the fruits of that with the EBITDA and the cash flow.

But as you look out to next year, I know you're not giving guidance at this point, but do you have any visibility into planned transitions or not at this point?.

Yes. Certainly, we do. We don't have perfect visibility yet. We're still working with our customers on what their ultimate product plans are really more towards the end of next year and then into 2022. So that's still being worked with our customers.

But - and we're in the process of some transitions right now that really began in the fourth quarter that will move into the early first quarter. So we have reasonable visibility. It's probably anywhere from mid to - mid-single digits to maybe low double digits is kind of what we're thinking right now.

But we'll firm that up when we give guidance with our fourth quarter call, but in that neighborhood..

Got it. That's good to hear. PAUSE then two other quick ones. One, you highlighted at the top of the call, the two new folks on the Board with aerospace experience. Can you talk about what the pipeline is for TPI and aerospace? There's been a lot of focus on EVs. But now, with the Board additions, I assume you're seeing something..

No, not necessarily. I mean, we talked a couple of years ago about transportation, aero and wind. We haven't spent a lot of time in the aero side at this point.

But really what Bavan and Linda bring to us is Linda's got great global manufacturing experience in global ops, and Bavan has obviously been with Boeing, has not only the aerospace, but great kind of the financial expertise from a global standpoint and risk management.

So it wasn't specifically for the aero, but it was the overall operations and other experiences that they bring to the Board..

Got it. And then the last question I had was just on the offshore side. Is there any activity or thoughts about that space, given everything going on in the East Coast of the U.S.

and your potential role there?.

Yes. That's still obviously something that we're very interested in and in discussions with multiple parties on that. So yes, that's certainly in our longer-term plans.

As we talked about before, revenue from those deals are probably not until '23, '24 time frame when you look at kind of what the planning cycle is for a lot of those offshore deals, could come a little quicker than that in APAC, but, yes, we're actively engaged in discussions around offshore, and that's certainly in our long-term plans..

Our next question comes from the line of Joe Osha with JMP..

This is actually Hilary [ph] on for Joe. I had two for you, both kind of on the transportation side of the business. And first, I was hoping you could kind of speak to building up to that $500 million revenue target you guys have set.

Just kind of what opportunities do you see out there and kind of the most interesting and timing for that revenue ramp? And then secondly, as you continue to ramp the volume for the EV production, I was just kind of wondering if you could speak to the margins you expect to realize on that piece of the business as you continue to work to driving down costs.

And that's all I have for you..

Thanks, Hilary. On the overall transportation, I mean, there are a lot of segments that are very interesting. And there's a lot of compelling value propositions for composites in those segments. Last-mile delivery, clearly, is a very interesting segment for us.

And we think with a lot of the work we've already done and that we're continuing to do, we can drive some pretty unique value propositions there from both an economic standpoint and a total cost of ownership. So upfront economics as well as total cost of ownership, I should say. The Class eight space is interesting. You've seen a lot of activity there.

We've been working on a development agreement with Navistar, and that's gone very well. So there are many other opportunities in that space that we're exploring. And then, of course, you look at the EV automotive space with the production work that we're doing right now.

Again, the margins on that, to be determined depending on volumes, but I would expect the margins to be double digits on those, at least initially. But again, it's a little early and building up to kind of the ultimate level of revenue on that.

There's just a lot of opportunities that we are working on right now, so that's why we're still confident long term that, that revenue is there. It's just a matter of executing on a couple of the deals we're working on and then getting them into production..

Our next question comes from the line of Mike Webber with Webber Res [ph]..

Just want to follow-up on, I guess, a couple of topics that came up. I guess, first, around transitions, and maybe just within the context of having moved to more of a - kind of, I guess, a long-term utilization guide.

I'm just curious, can you maybe - can you put a range or maybe a tighter range around how that - that long-term guide is at around 80%.

How should that trend? Or what kind of realistic range should we expect for that over the next couple of quarters, kind of given kind of the movement from some of those transitions? Just I know you're not going to - I know you can't get into too many details.

I'm just looking for - to sort of tighten up the modeling on it a little bit in terms of how to think about what's a realistic floor in ceiling for that over the next couple of quarters..

Yes. So if you look at Q4, I mean, we're estimating utilization of around 90% on that quarter. And then going out early next year, I mean, we'll give you more information when we give guidance, but I think that 80% still holds of kind of what we're thinking.

When you look at kind of the total transitions and start-up and what we're looking at there as we see it right now and what we've contracted. So I think that model that we gave still holds. I mean, we will see, again, higher utilization here in Q4 as we finish up the year, and then from there more to come as we give guidance in early February..

Yes. And if you think about Q1, we'll be starting two new lines. We'll be in transition. And when you start-up a line, that kind of really impacts the utilization because we look at that in the denominator, if you will, as a full year of production. So you'll see that impact Q1. But Bryan was right. It should be in that neighborhood..

Yes, the spread definitely got our attention. Just trying to tighten it up on our end. So I appreciate that. In terms of - just to look back on transportation, I know you're just going to talk to the path to $500 million.

I'm just curious, has the time frame changed at all from when you guys first started talking about it today in terms of maybe picking up pace and maybe getting there a bit quicker than you would have originally thought just given the acceleration in energy transition..

No. I don't think the pace - I mean, there are a lot of opportunities we're looking at, and there's a lot of activity in the market, I think, to build to that. Revenue level takes time when you think about how long it takes. The development programs for automotive platforms takes a while.

So I don't think our time frame, looking out three to five years has changed, but there are a lot of opportunities out there right now that we're obviously looking at. It's just a matter, like I said, of closing and getting into production, but that does take time..

In terms of the mix of potential customers to get to that level, if you're kind of - I think you're around 4% or 5% now in terms of, I guess, the scale of the potential customers out there, has that changed? I guess, what that future mix would look like, has that changed at all?.

Not significantly. I mean, I think in the past, we've talked at five to 10 customers of $50 million to $100 million a year type run rate, and I think that's still a reasonable benchmark..

Got you. Okay, just one more.

And forgive me, I'm probably going to be backing into a number you've probably spelled out somewhere, and I just missed it, but if I just look at the backlogs you guys referenced on Slide 8, it looks like there was - and this compare year-over-year, it looks like it's about ballpark $300 million that ran off, which is actually well inside of the revenue you guys recognized in the quarter.

Is there - did you guys were able to add a handful of long-term contracts in that mix? And if so, can you kind of give a bit of detail around that?.

Sure. So we - the revenue related to the GE contract extension as well as an additional line as well as the two new Nordex lines that we talked about at the - in our second quarter call, the revenue related to those was already - we had put that in the contract value when we were having the second quarter call. All right.

But - so the only - the incremental is related to the extension that we did with Vestas in Turkey..

[Operator Instructions] Our next question comes from the line of Phil Shen with ROTH..

This is Donovan Schafer on for Philip Shen. Congratulations on a good quarter. Okay, good. So my first question is around the Q4 guide and the utilization. So it's going to be down sequentially. And I'm wondering, is that mostly just driven by the lower utilization.

And then kind of within that is the lower utilization something where you're kind of hedging for - while there could be some COVID disruption? And if everything goes smoothly, you could be up higher at 93% or 95%? Or is that really kind of tapped by the transitions you mentioned?.

Yes. I think - so for Q4, you have transitions, to your point. So that's going to - that certainly will impact utilization. And then in Q4, you do have some shutdowns towards the end of the quarter as a result of the holidays.

So if you think about Mexico, the U.S., some of our other sites, so you generally have a little bit lower utilization in the back half of the first - of the fourth quarter. So that's what's driving it..

Okay, great. That's super helpful. And then on the transportation or just non-blade sales side, I kind of just quickly did some math to figure out what that non-blade revenue is. And I think, last quarter, it was $25 million and then this quarter, it looks like it's down to $16 million. But you save it well on the service side.

So is that mostly coming from transportation? Did I do kind of a mistake on the math there? Could you just talk about that non blade revenue for the quarter?.

Yes. For the quarter, the non-blade revenue; when you look at it, I mean, it's comprised of the field services, the transportation and some other smaller amounts of other revenue in there, some of the mold-type revenue. So the decrease quarter-over-quarter, if that's what you're referring to, is the Q2 time frame.

Is that what you're looking at?.

Yes, the - from Q2 to this quarter. Yes, the quarter-over-quarter decrease..

Yes. So there was a decrease in transportation, but it wasn't necessarily tied to the actual production. It was more of the 606 and some of the items that go through there. So on - looking at the true work we've done, that hasn't really changed quarter-over-quarter..

Okay, that's great. And then, the - on the - you mentioned that part of the margin improvement this quarter was from a decrease in the press release. It's a decrease in direct material, in savings and raw material costs.

Is that just a reduction in general raw material costs? Or are you actually kind of providing less of the content in the blade?.

No. The content of a blade doesn't change, unless we're more efficient with what we use and have less waste. So it's a combination of less waste in the production process and just, again, leveraging our scale to drive commodity prices down. So that's a big part of what we're doing with our global scale is driving raw material costs as much as we can.

So that's what it is..

So when you say like a decrease in direct material, is that you're getting more production out of the same amount of materials being purchased with less waste and so forth?.

It could be less waste or it could just be driving the unit cost of the same amount of material, right? Because we're getting a better price from our supplier..

Our next question comes from the line of Ken Herbert with Canaccord..

Bill and Bryan, I wanted to ask about - yes.

I just wanted to ask about - from second quarter to third quarter, can you comment specifically on any sort of changes you'd identify in sort of the market opportunity with some of your big customers? And I'm specifically getting at just incremental decisions for maybe more outsourced production at Vestas and a few other suppliers.

And I'm wondering if there was anything you'd call out that you maybe hit an inflection in the quarter or recently or how you're maybe, more broadly speaking, the nature of conversations with customers around the expansion of the market opportunity..

No, I think discussions slowed down a little bit at the beginning of - at the end of the first quarter beginning just because of COVID. But those discussions have ramped up, and I think the amount of discussions and the quality of discussions continues to improve.

So we're looking at multiple opportunities, working - continuing to work our pipeline in multiple geographies. So I have not seen - if anything, and I think this is what you're hinting at, has there been an acceleration of it.

I wouldn't necessarily call it a significant acceleration, but there is a lot of activity and a lot of interest on additional geographies, if you will, and additional lines for our existing customers..

Okay, that's helpful. And if I could, just back to the offshore discussion.

I know you highlighted this earlier, and it's obviously down the road opportunity, but can you just maybe remind us a couple of the sort of the key parameters or benchmarks in that market you're going to be looking for as to when it might become incrementally more interesting for you and your customers in terms of capacity and more commitments to it?.

Yes, it's really around volume, Ken. I mean, there's got to be enough volume for the marketplace.

And it's got to be - we would rather have it be a fairly steady production process, if you will, to build a big facility and run for a year and shut down for a year and run for a year doesn't make sense for us, nor would it make sense for our customers from a cost standpoint. So it's really about the size of the market.

So as more deals get closer on the East Coast, again, once you get to a critical mass of blades that need to be built, where you can have a productive and efficient facility, that makes sense for us. And it would also make sense for customers, but it's really about volume..

And I'm guessing, just on that, it's both here, obviously, on the East Coast United States and in Northern Europe, where this market - where it seems to have the most potential?.

Not sure. I mean, I think, initially, some of the early offshore wind farms will likely be supplied from the - from Northern Europe. But I think, over time, given the size that everybody expects the U.S.

offshore market to be as well as the desire for jobs and economic activity on the East Coast, I think there's going to be a fair amount of incentive, both economic and otherwise, to actually have those facilities be in the U.S. or near the U.S. So I think, again - and that's a volume issue.

So with lower volume, it makes sense to bring them from an existing plant in Northern Europe once the volumes get to where we believe that market goes, and it makes sense to localize that manufacturing capacity..

[Operator Instructions] And there are personally no further questions at this time. I turn the call back over to you..

Thank you very much, and thank you all for your interest in TPI. And look forward to our next discussion. Thank you..

And that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines..