TPI Composites, Inc.

Greetings. Welcome to the TPI Composites third quarter 2021 earnings call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the call over to your host, Christian Eden, Investor Relations at TPI Composites. You may begin.

Thank you, Operator. I'd like to welcome everyone to TPI Composites' third quarter 2021 earnings call. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risk 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, 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 Cywick, TPI Composites President and CEO.

Thanks, Christian, and good afternoon, everyone. Thank you for joining our call. In addition to Christian, I am joined today by Brian Shoemaker, our CFO. I will briefly review our third quarter results, including the strategic financing transaction announced today. I will also cover our global operations, including our supply chain and the wind energy market more broadly. Brian will then review our financial results and financing activities in more detail, and then we'll open the call for Q&A. Please turn to slide five. Today, we announced that we signed a contract with Vestas to add three additional lines in Yangzhou, starting production in 2022, and we extended a two-line contract with Nordex in Turkey. These deals added approximately $150 million of potential future revenue under contract. I am also pleased to announce today that we have entered into a stock purchase agreement to issue and sell $400 million of Series A preferred stock to investment funds managed by Oak Tree Capital Management. Under the terms of the agreement, TPI will issue and sell $350 million of Series A to Oak Tree subject to customary closing conditions. TPA also may elect at its option to require Oak Tree to purchase an additional $50 million of Series A upon the same terms and conditions as the initial issuance of Series A during the two-year period following the closing of the initial issuance. Subject to the mutual agreement of TPI and Oak Tree, Oak Tree may invest an additional $200 million for follow-on capital. Oaktree is an experienced investor across the power and energy value chains, and today's announcement is a strong endorsement of our strategy and growth prospects. Oaktree's investment will strengthen our balance sheet significantly and positions TPI to navigate a rapidly evolving market and operating environment in the near term while providing the flexibility to take advantage of longer-term growth opportunities. We will discuss the terms of the Oaktree investment in more detail later in the call. Before I jump into our results and operations, it's important to note that we remain focused on operating our business safely while continuing to mitigate the impacts of COVID-19 and ensuring that we are prepared to deal with continued resurgences of the virus in any of our global locations. We have and will continue to adapt our operating procedures in order to enable our associates to work safely and continue to meet our customers' demand. To summarize, Q3 was clearly disappointing from a financial perspective, as market conditions continue to deteriorate, as most of our customers have already discussed publicly. So, although we delivered net sales of $479.6 million, a slight increase over Q3 of 2020, we ended the quarter with break-even adjusted EBITDA. The takeover of the Nordex facility in Matamoros has not gone as planned, and we have experienced significant delays in production while needing to upgrade the team. We are in the process of transforming the operations into a world-class facility like the facility we operate across the street, but it's taking more time and resources than originally anticipated. This was one of the primary factors for our poor financial results during Q3, and it will carry over into Q4 as well. However, we expect to have the operation stabilized by the end of the year and plan to have a much more successful 2022 in this location. In Juarez, Mexico, we are in the middle of a transition to an innovative blade, and with innovation sometimes comes challenges. In addition to delays moving from design to prototype and finally to production, we encountered multiple delays related to specialized equipment and component parts. As a result, our volume for the quarter was negatively impacted as our full year volumes. As with our new operations in Matamoros, we expect these challenges to be behind us by the end of the year and anticipate reaching full production volume in that factory during 2022. In China, our Yangzhou factory was shut down for three weeks due to a small COVID outbreak in Yangzhou City. We lost 10 sets in the quarter, but we expect to make those up in Q4. Supply chain and logistics challenges continue to plague the industry, and we were not immune from them in Q3. Certain customer-directed raw materials were in short supply, which caused production slowdowns in multiple plants. Lost volume related to these shortages was nearly 80 sets in Q3 and will be just over 150 sets for the full year. Furthermore, raw material and logistics costs remained at elevated levels and had an overall impact in the quarter of approximately $20 million and an estimated full-year impact of nearly $30 million. With the announced suspension of production in our Iowa plant at the end of 2021, volumes at that plant were reduced to minimize production risk as we wrap up our current customer commitment in that location. With these challenges and those facing the industry over the next year or so, Our focus has been on managing our liquidity and raising additional capital to strengthen our balance sheet and to prepare for the next wave of significant growth in the industry. Our announcement today of the strategic investment by Oaktree will provide us with the additional flexibility to manage our business through these near-term headwinds. Turning to slide six, I'll now give you a quick update of our global operations as well as a market update. During the third quarter, we did not have any lost volume at any of our facilities related to COVID-19 outbreaks or government mandates except for the short interruption in yangzhou however we did experience material unexpected production delays in turkey mexico and china because of shortages of customer directed and supplied raw materials we continue to evaluate our global footprint to ensure it is optimized for us our customers and the market as we discussed last quarter we are planning to consolidate our chinese operations into yangzhou to reduce costs, streamline activities, and meet the expected future demand of our customers. Our Yangzhou facility is world-class and can handle both onshore and offshore blades. This prime location is the ideal place to consolidate our China operations and efficiently serve our customers. With respect to the facility in Juarez that will become available in 2022, we are actively seeking to backfill the four production lines with one or more customers, as we believe these operations will continue to be one of the best Low-cost options for blade supply into the US and Mexico in the future. Interest for this capacity is high, but timing is dependent on the US market recovery and the final provisions of the Build Back Better Plan, if passed. We are not anticipating any production in this facility during 2022. Due primarily to continued uncertainty regarding the regulatory environment and the expected impact on U.S. demand over the next couple of years, we do not currently have any planned volume for our Newton, Iowa facility in 2022. As a result, we are in the unfortunate position of needing to suspend manufacturing at the facility at the end of December 2021. We have extended the facility lease through 2022 to give us and our current customer or others Time to evaluate the final provisions of the proposed Build Back Better plan to determine if the facility can be economically viable in the future. With respect to our global service business, during the third quarter, we continue to focus on profitable global growth. Our team has been successful in securing new work from OEMs as well as asset owners. To accelerate our growth in Europe, our plan is to open a training center in Spain in the fourth quarter to complement our Americas training center. We expect to have 3X top line growth during 2021 and expect another doubling in 2022, all on an organic basis. On the transportation front, our pilot production program for a production passenger electric vehicle manufacturer has been extended as we have demonstrated the ability to scale our production in a cost effective manner on our high volume composite production line. This has also led to another pilot program with the same OEM that will kick off in Q4 of 2021. Additionally, we are continuing to collaborate with multiple OEMs on cabin body structures along with other critical EV components. As I mentioned earlier, our supply chain, like every other supply chain, is continuing to face challenges. As discussed on the last call, we have seen increased costs relating to resin, carbon fiber, and logistics. While we can pass on a majority, and in some cases 100% of the cost increases to our customers, the portion we are not able to pass on has had a material impact on our margins, and we expect that impact to continue through the balance of 2021 and through 2022. After increasing by almost 80% globally year over year, resin prices were flat in the third quarter, but we did see a slight tick up in October with a continued focus on margin expansion by our supply base. We do, however, expect pricing to continue to be relatively flat in the first half of 2022 before beginning to drop in the second half. Capacity constraints continued for carbon fiber with pricing up over 20% year over year. With demand exceeding supply in multiple industries, we expect pricing to increase in 2022, virtually all of which we can contractually pass on to our customers. Overall, we expect to be able to hold the average bill of material costs for customers for which we control the supply chain to a less than 2% increase over 2021 levels and expect to see commodity pricing begin to normalize in the second half of 2022 for many commodities. Logistics costs are also expected to remain high throughout most of 2022. So turning to the overall wind market in slide seven, since our last call, the Build Back Better plan was introduced and includes a 10-year PTC extension with prevailing wage and apprenticeship requirements. Importantly, the bill includes a 10-year direct pay provision although it requires certain domestic content requirements to be met to obtain 100% direct pay. The BBB also includes an advanced manufacturing production credit of $0.02 per watt from 2022 through 2026 on U.S.-manufactured wind blades, and then it is phased down through 2029. So as an example, the blades for a 4-megawatt turbine would receive an estimated $80,000 tax credit. As with the PTC, direct pay would be available. Other aspects of the bill that may help grow the wind market include storage and transmission tax credits and grants, loans and tax credits for hydrogen made from renewable energy. In addition, there are significant grants, rebates and tax credits to drive the acceleration of the decarbonization of the vehicle fleet for both electric passenger and commercial vehicles and charging infrastructure, which we believe could help accelerate the growth of our transportation business. Finally, the now-passed Infrastructure Investment and Jobs Act includes $550 billion in new federal investment in U.S. infrastructure to help tackle climate change by making investments in clean energy transmission and electric vehicle infrastructure, electrifying thousands of school and transit buses, and creating a new grid deployment authority to support upgrading the electric grid. This should be a further catalyst for renewables and EV growth in the U.S. Notwithstanding the positive long-term impact in the U.S. of the Build Back Better Plan and the Infrastructure Investment and Jobs Act, we expect decreased demand during the remainder of 2021 and expect volumes and therefore blade revenue and adjusted EBITDA on a billing basis to be flat or slightly down in 2022 due to less than optimal capacity utilization due to uncertainty in the U.S. market and elevated raw material and logistics costs globally. Thank you. Longer term, we believe the future for wind energy will strengthen significantly, given the necessity to decarbonize and electrify to meet the aggressive goals set by nations around the world to combat climate change. In its roadmap to zero emissions by 2050, the International Energy Agency expects that by 2030, 390 gigawatts of wind will be installed annually, or about four times more than the global record set in 2020. We believe that we are uniquely positioned with our global footprint in key strategic geographies to grow our market share with the industry-leading turbine OEMs through this expected period of rapid growth. The next decade is both critical and a terrific opportunity for TPI. Before I turn it over to Brian, I would like to reiterate that we remain focused on the health and safety of our associates while executing on our operating imperatives and ESG goals, which include safety, diversity, inclusion, and driving to become carbon neutral by 2030. With that, let me turn the call over to Brian.

Thanks, Bill. Please turn to slide 11. All comparisons made today will be on a year-over-year basis compared to the same period in 2020. For the third quarter ended September 30th, 2021, net sales increased by 5.5 million, or 1.2%, to 479.6 million. Net sales of wind blades were relatively flat at 450.7 million. Net sales were positively impacted by an increase in the average selling price due to the mix of wind blade models produced, offset by a 20% decrease in the number of wind blades produced primarily due to the reduction in manufacturing lines under contract in China. Q3 was also impacted by the transition to an innovative blade in Juarez, Mexico. The impact on our production due to a shortage of raw material supplied by our customers and a temporary shutdown of our Yangzhou manufacturing facility Due to COVID-19 outbreak in Young Joe City, Q3 2021 ASP was approximately $172,000, an increase of 19% year over year. Startup and transition costs for the quarter increased $6 million to $14.5 million as we continue to transition lines to longer and innovative blades in Mexico and ramp up production at the facility we took over from Nordex in Matamoros. Our general and administrative expenses for the quarter decreased by $1.1 million to $8.2 million, and G&A as a percentage of net sales decreased 30 basis points to 1.7% of net sales. Foreign currency income was $4 million in Q3 2021, as compared to a foreign currency loss of $17.1 million in Q3 2020. This change was primarily due to net euro liability exposure against the Turkish lira The liability exposure continues to be naturally hedged on a cash flow basis due to our Euro denominated revenue contracts. Approximately 23% of our revenue in Q3 2021 was denominated in Euros. Our income tax provision for the quarter was 8.2 million as compared to a tax benefit of 32.3 million for the prior period. We are forecasting our cash tax liability to be 22 to 25 million for 2021. Net loss for the quarter was $30.7 million as compared to net income of $42.4 million in the same period in 2020. The decrease in net income was primarily due to the reasons previously described. Net loss per share was $0.83 for the quarter compared to diluted net income per share of $1.13 for the same period in 2020. Our adjusted EBITDA for Q3 was break-even with a utilization rate of 76% for lines installed at quarter end. This compares to an adjusted EBITDA of $49.1 million, or 10.4% of net sales and utilization of 93% in the same period in 2020. Q3 was significantly lower than we forecasted. It was impacted by approximately $10 million due to the challenges in the Nordex facility we took over in Matamoros, $6.3 million related to the transition to the innovative blade in Juarez, Mexico, and $2 million associated with the three-week production shutdown of our facility in Yangzhou, China. In addition, there was approximately 16 million net impact related to ASC 606. The net impact was the result of three main components. First, a change in estimate for raw material costs in 2020. For example, in Q2, we expected certain raw material costs like resin to start declining in Q4 of 2021. Now we are forecasting resin costs to stay constant throughout 2022 in our ASC 606 models. Second, we are contractually entitled to liquidated damage from our customers due to supply shortages of customer-controlled raw material. However, under percentage of completion accounting for these contracts required under 606, there was limited recognition of the liquidated damages in the quarter. Finally, we were negatively impacted under ASC 606 for new lines contracted and existing lines extended the bill referenced earlier as a profitability assumptions built into our prior forecast were impacted by adding the new lines and extending the lines. Moving to slide 12. We ended the quarter with $119 million of cash and cash equivalents and net debt of $143.8 million. Since quarter end, our liquidity has been significantly impacted by the slow production ramp in our Matamoros facility, the transition challenges we were facing in our Juarez facility, shortages of customer-directed and supplied raw materials, and forecasted reductions of demand due to, sorry, reduction due to reduced customer demand in Q4 2021 and 2022. Our leverage ratio was 2.98 times in Q3, or more than our maximum allowed ratio of 2.75. We have obtained a 30-day waiver from the bank group, which we believe will allow us time to close the Oak Tree funding. The commitment from Oaktree will strengthen our balance sheet significantly during our rapidly evolving market. The proceeds will be raised from a Series A preferred stock financing will be used to repay in full the amounts outstanding under our credit agreement. Turning to slide 13. For 2021, our full year guidance is revenue of between $1.72 billion and $1.74 billion. Adjusted EBITDA of between $30 million and $40 million. Our adjusted EBITDA guidance for the year relative to the guidance we provided during the second quarter results relates to three main items we have highlighted on slide 14. First, as Bill walked through, we have experienced greater than expected delays and costs related to our Matamoros facility. These account for approximately 15 million adjusted EBITDA impact in 2021. The second key item relates to our Juarez facility and greater than expected costs and delays This accounts for approximately $16 million of our adjusted EBITDA impact in 2021. Lastly, approximately $16 million of our 2021 adjusted EBITDA guidance change relates to a non-cash accounting impact related to ASC 606. We don't expect any changes to our dedicated manufacturing lines and wind blade set capacity versus what we disclosed during the second quarter earnings call. Utilization of approximately 76%. ASP of approximately 165,000. We saw strong ASP in Q3 of approximately 172,000, but the annual ASP is being impacted by the decrease in the number of blades produced in Q3 and the mix forecasted to be produced in Q4. Non-blade sales of between 120 million and 125 million, an increase of the low end of 5 million compared to our previous guidance. CapEx of between 40 and 45 million, a decrease to our previous guidance. Startup costs of between 17 and 20 million. This increase is due to the production ramp of the facility for Nordex in Matamoros, as well as the transition in Juarez. And finally, we are now forecasting to incur a total of approximately 45 million of restructuring charges associated with global footprint alignment in 2021 and 2022. with approximately 30 million forecast to be incurred in 2021. Approximately 15% of the restructuring charges will be non-cash. I will now turn it back to Bill to go a little more in detail on our capital raising activities. Thanks, Brian.

Turning to slide 16, given ongoing and near-term headwinds facing the industry, we have been focused on enhancing balance sheet strength and best positioning the company to manage through a difficult operating environment and set us up for the long term. As I noted earlier, we have entered into an agreement to initially sell $350 million of Series A preferred stock to Oak Tree, and we may also elect at our option to require Oak Tree to purchase an additional $50 million of Series A upon the same terms and conditions as the initial issuance of the Series A during the two-year period following the effective date of the agreement. The outstanding Series A will have an 11% dividend, which may be payable in kind for the first two years. Oaktree will also be receiving approximately 4.7 million warrants with a five-year term issued at a per share exercise price of a penny per share. In addition to the 400 million upfront commitment, Oaktree may invest an additional capital of $200 million based on terms to be mutually agreed to. Turning to slide 17 through 19, please. The Oaktree investment will significantly improve our balance sheet position, reducing net leverage from 2.98 times to a net cash position on a pro forma basis as of September 30, 2021, with pro forma total liquidity of $251 million, including $201 million of unrestricted cash. This liquidity provides additional flexibility to manage our business through near-term industry headwinds. Available liquidity and access to the potential incremental $200 million of capital from Oak Tree can also provide us with flexibility to pursue growth opportunities including by leveraging Oaktree's global relationships, resources, and expertise. We view this investment by Oaktree as a strong endorsement of TPI's strategy and long-term prospects. With that, operator, please open the call for questions.

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Your first question comes from Philip Shen with Roth Capital Partners. Please go ahead.

Hi, everyone. Thanks for taking my questions. The first one is on the Oak Tree deal. In terms of... the shares, can you talk through how many were issued and at what price?

Yeah, so it'll be three, initially, Phil, it'll be $350 million of Series A preferred and 4.7 million warrants to purchase common shares at a penny apiece.

Okay. Got it.

Yep.

Thanks for that, Bill. Shifting over to the outlook for 2022, I know you haven't provided official guidance, but I was wondering if you could talk through how you expect revenue or volumes to trend and then how margins might trend as well as we get through the year.

Yeah, I think, Phil, we said that You know, blade revenue would be relatively flat year over year. And EBITDA on a billings basis would be relatively flat on a billings basis, if you will. Volumes are down a bit from a set perspective. We expect them to be down a bit in 2022. And that's a number of things, right? The Iowa facility, one of our facilities in Juarez, which will finish production for our customer there, in the middle of the month, and then just overall softening of U.S. demand out of our other plans.

Thanks, Bill. And then from a quarterly basis, do you expect the cadence to be for trough metrics to maybe be in Q1 and then things to improve sequentially as we get through Q4 of 22, or do you expect either some sense of some degree of seasonality or some other factors that might perhaps make and not sequentially growing like that or improving? Thanks.

Yeah, we're not prepared to speak specific quarter to quarter quite yet. But, I mean, if you look at the last couple of years, Q4 has historically been a little bit low. Part of that has been a PTC push. You know, you get things delivered by September 30 so they can get installed by Q4, but then they take a breather in Q4 as far as production. So I would expect to see similar cadence, at least in Q4.

Okay, great. Thanks, Bill. I'll pass it on.

Thanks, Bill.

Next question, James West with Evercore ISI.

Hey, good afternoon, guys. Hey, James. I'm curious also on the capital raise here, particularly the incremental $200 million that's available. And I think, Bill, you highlighted kind of for opportunities or opportunistically deployment. Are there certain opportunities that are unfolding that you may be able to act on near term, or is this more of a let's line it up so if something does come through?

Yeah, thanks for the question, James. I would say there certainly are opportunities that are out there. With the dislocation in the industry over the next year or two, there could be more interesting opportunities. So it's really not earmarked for any particular transaction. It's more from an opportunistic standpoint. So hopefully that answers your question.

Yep. That makes sense. And then As we think about a little bit longer term, you know, 23 to 25 should see a nice ramp up in the wind industry. How are you guys thinking about capacity for that period and beyond? Would you, you know, add more capacity in 22, even though, you know, the market itself will be flattest? Would you need contracts to add capacity? I mean, I guess can you help us think about how you guys are viewing that opportunity set? Sure.

Yeah, no. I see, unless there's a very specific situation, adding capacity in a market where there's currently overcapacity doesn't sound like a very good move from our perspective. But to your point, as we get into 2024 and beyond, if the projections of IEA and others or even half right, there's going to be a significant increase in installation and build. And so, you know, clearly we're going to use this period where we think it's relatively flat, especially in the U.S., to put ourselves in the right position geographically to make sure that we can capture more than our share of the market, if you will, with our current and potential customers. So, again, I wouldn't expect anything in the very near term. just given the market and the amount of capacity in the market today. Quite frankly, I'd love to get our plants back into the 90s, right, from the high 70s. So to me, it's fill our existing capacity because we are in great locations geographically. We cover the world very, very cost-effectively. So our goal is fill our existing capacity, and then we'll think about future capacity.

Okay, thanks. Got to go. Thanks.

Yep, thank you.

Next question, Ad Hoc Bellarcar with Bank of America.

Hi, good evening. Thank you so much for taking the question. Just wanted to quickly follow up on the point Phil made about EBITDA, as you see for FY22. When you say you see it mostly being flat on a billing basis, just wanted to understand if that meant the 55 million with or without the ASC606 impact.

Yeah, that is without it right now because the volatility that we're seeing right now with raw material costs and other things, it's just not worth forecasting at this point. So that's why we just gave the indication of on a billings basis. We think that makes more sense. That's how we look at it. That's how Oak Tree is going to look at it going forward. So it just makes more sense to do it that way rather than trying to manage the volatility we're seeing in the ASC 606.

Yeah, that's a better reflection of cash generation ad hoc from our perspective and Being able to predict what our customers might do with volume or not and where raw material pricing is going makes it very difficult to accurately forecast 606 the way it works, especially with the nature of our contracts.

Got it. Thank you. And then with respect to, you know, the new lines that you added with Vistas and two with Nordics, what's the duration of that $150 million contract? Is it through FY22 or beyond?

Yeah. So for the lines with Vestas, it's beyond 22. And with Nordex, it's through 22. Got it.

And then one last one for me, and I'll pass it on. I was curious about just any progress on the offshore front. I know one of your customers announced winning offshore work in the U.S. and deciding to work with their supply chain partners in the U.S. So I know it's in 24, 25 timeframe, but anything for what it means for you in that timeframe?

Yeah, we're working at hard ad hoc. I mean, it's complicated on the East Coast, as I know you're well aware. Every state wants a blade plant and a nacelle plant and a tower plant and picking the right place. And of course, having a customer to do that with is important. So We're spending a significant amount of time and energy on it, but that's about as much as I can tell you at this point.

Good. Thank you so much.

Yeah, thanks, Ed.

Next question, Eric Stein with Craig Hallam.

Hi, everyone. Hey, Eric. How are you? Hey, doing well. Thanks. So just on the Iowa plant, and for obvious reasons given the uncertainty, your expectations are pretty low for 2022, but in the unlikely event that an OEM decided, whether it's GE or another one, decided that they wanted to bring on production there, maybe a rough idea of how long that would take to bring up a line and whether it's different if it's the one that is ending at the end of the year versus a new one.

Yeah, clearly if there's a pause, if you will, and it's the same blade, the challenge is our associates. Obviously, we want to provide them with an opportunity to find other work if there's uncertainty with whether it goes forward, and that's what we're going to do. But as far as the ramp up, if it's the existing line, it's really about being able to hire or the existing lines, it's really being about being able to hire associates to ramp it. So if you think about having to hire a workforce, if, again, if there's a pause and our existing workforce finds other work, then it's probably a six-month process to do that.

Got it. Okay. And then maybe just, I mean, with TE, I know you've got the co-development agreement for advanced blades. Just any thoughts on, you know, maybe where the overall relationship stands, that agreement stands, you know, in light of what's going on in Iowa?

Yeah. So, as you know, we also manufacture blades for them in two facilities in Mexico. and we are producing an innovative blade in one of those plants. So, you know, the relationship is still very strong. We continue to collaborate with them on that aspect and continue to build blades for them and plan to build blades for them for a very long time. So I would say the relationship remains very strong as it has been for a long time, and we aim to keep it that way. Okay, thank you.

Thank you.

Next question, Laura Sanchez with Morgan Stanley.

Hi, thank you for your time. I want to follow up on the EBITDA question. I think it was after second Q earnings, you had quantified what was a material benefit to EBITDA margins from the Siemens-Gamesa lines going away in Mexico and from the GE lines at that time potentially going away in the U.S. And now that we know that those contracts with GE are rolling off, can you tell us a little bit about the dynamics eating that benefit on improvement in 2022?

Yeah, thanks for the question, Laura. Nice to talk to you. So it is true. You know, it's accretive to our overall earnings. with the shutdown of the plant in Mexico as well as Iowa. I will tell you, though, our Iowa plant is a fantastic plant. It's just, you know, we're in a high-cost area, which makes it difficult to be competitive. We'll see under this advanced manufacturing production credit whether that gives us some life there. We would like to have that happen clearly, but I think, Laura, it's really commodity costs that we didn't expect to linger this long. It's the logistics challenges that we expect to carry through 2022. And quite frankly, it's demand and volume. So you might have heard me earlier on an answer talking about the volume because of the softness in the U.S. market. And it's really when we're at lower utilization levels, that we expect in 2022, that can eat up that gain fairly quickly. Now we're working on making our business more variable to be able to better manage through some of the demand swings that we've been seeing more frequently. I will tell you, since I've been around, I've never seen as many demand swings quarter to quarter as we've seen over the last year, last year and a half. I think our business has become a little bit tougher to forecast because of our customers' needs and their end demand and just the uncertainty in the market. And so that's probably, that is the main reason for not seeing as much benefit in what we think our 2022 EBITDA will be as a result of those closures.

Understood. Thank you, Bill, for the color. And on the Matamoros and the Juarez facilities that are seeing challenges this quarter, I guess what gives you confidence in that those issues will go away by the end of the year?

Yeah, so in Matamoros, we've replaced the entire management team there that we inherited. We're going to move between 150 and 200 associates from Juarez to Matamoros when we finish production in the plant that's closing down. That should be literally in a week. We have a very experienced and talented global team that is residing in Matamoros right now to get it turned around. We've seen significant progress over the last several weeks from a cycle time standpoint and a throughput standpoint. And so with the additional troops coming, if you will, from Juarez, as well as the team we have in place there now, as well as support from the just our overall infrastructure in Matamoros. We're very confident that we get this thing turned around by the end of the quarter and going into next year, we're ready to rock and roll that full production. I mean, our customer's expecting it. We're going to run flat out there all year. And so we're confident and we're devoting the resources. As it relates to the Juarez challenge, again, this is an innovative new blade that went from design to prototype to production. You tend to have challenges when you have a new innovative blade like this. We continue to work side by side with our customer there. We've figured out where the challenges are from a production standpoint. We've got a solution for that, and that solution should be implemented towards the middle half or end of Q4, which gives us a lot of confidence that rolling into 2022. we will be able to hit the volumes that our customer is asking us for.

Got it, got it. And last one on my end, you've talked about flat wind revenues in 2022, and I think you gave a reference on the service side of the business that could double in 2022. Any commentary on the transportation and the precision or the other revenues, non-wind related?

Yeah, so, yeah, on the transportation side, you know, we're still, I think we've made a lot of progress over the last, you know, couple of quarters with Jerry Levine coming on board as our president of transportation, refocusing the group, you know, really kind of reevaluating and focusing our strategy and who are, what our target markets are. And we've already seen some success from that. It's from the additional pilot production with the existing EV passenger manufacturer that we are producing for to some really neat and interesting opportunities related to battery components, battery box components, if you will, as well as other structural components, whether they be cabs, or other aspects. So we're looking at some where we've got a joint development agreement on some very unique composite technology that we think is going to be significantly more cost effective to do what we do and provide a higher quality and easier to assemble vehicle. So, you know, we remain bullish on what the opportunity is there, albeit it is taking longer than we had originally anticipated. the traction we've gained over the last several quarters has been really significant. So again, the revenue numbers aren't going to be huge yet. We do expect next year to continue to be another investment year, but at much lower levels than we've seen over the last couple of years. And then rolling into 23, we expect to be profitable.

Thank you.

Thank you.

Next question, Steven Gengaro with Stiefel.

Thanks. Good afternoon.

Hi, Stephen.

Hi. So can you give us a sense from what you're seeing? I know you mentioned EBITDA, but when you look at 2022, how do you think about the different parts of free cash flow generation or cash flow in general? How should we be thinking about sort of the puts and takes and you know, given the transaction you announced tonight, I'm just curious how you're thinking about 2022 cash flow.

Yeah, so if you look at the announcements that we've had around the restructuring and the charges we're taking, the majority of that is all cash outflow, about 85% of it. So we see that hitting us kind of late Q4 and into Q1. So that's where we see the significant need of cash right now is kind of that timeframe is over the next six months. As far as kind of the overall picture of next year. I mean, working capital on that, we don't see big drags on that throughout the remainder of the year. We're really focusing on limiting CapEx as we're not growing. So we're trying to focus on a lot of that, but it's this next six months and the liquidity drain that we saw kind of from these other plants. And then overall, how long does this shortfall come throughout 2022 and make sure we're positioning ourselves for the future.

Yeah, and I guess just to pile on a little bit, I think we talked about, you know, volume likely to be down next year from a set standpoint and lower than desired capacity utilization. So when you have that in a business that is relatively, you know, there's a fair amount of fixed costs related to that, you'll see some, you're not going to see that significant free cash flow that we would like to see. So I think Until we get back our capacity utilization up to the levels that we would like to see and volumes become more stable quarter to quarter, that's when you'll start to see us generating that free cash flow that we all would like to see.

Great. Thanks. And just as a follow-up, I think, to another question, what are you seeing on the labor side? Are you And how difficult has that been to manage and kind of how are you thinking about the labor side going forward?

Yeah, we, you know, it's a great question and it really varies a bit by geography. I would tell you, though, for technical talent, there's a war. I mean, there's a war for talent out there. And, you know, engineering talent, technical talent, you know, we have a very good technical team. we have some of the best minds in the business and the best folks to build blades in the business. And so they're in high demand. So, you know, it's tough. It's tough to replace if we lose. So the key is to not lose them, right? So we focus a lot on our people programs, a lot on engagement, and how do we make sure we keep our associates engaged, understand what their needs are, Um, and so that's, that's the name of the game for us. I mean, we've dropped turnover year over year, the last few years by significant amounts, which quite frankly saves us a significant amount of money, but it's all about engagement and how we're dealing with them and giving them the right career path. So I will tell you, um, for, for technical talent, it's, you know, it's very competitive generally at the, at the more direct labor position. I don't think we see – Iowa is a bit of a challenge from a workforce standpoint just because the workforce is a bit smaller. But in most of our locations, we don't really have a problem from that standpoint at this time. Great. Thank you, gentlemen. You bet. Thank you. Appreciate the questions.

Next question, Pierce Hammond with Piper Sandler.

Yeah, thank you for taking my questions. I'm just curious, with the setup that you now have with Oak Tree and the potential for $600 million worth of investment as you stare out into next year, and thanks for the helpful info on next year, do you think this takes care of you kind of in all scenarios from a liquidity standpoint for next year?

Yeah, I would tell you we think that the investment by Oak Tree gives us sufficient capital to weather the near-term challenges or the headwinds that I said probably three or four times in my prepared remarks. But absolutely, we think we have some cushion as well, but certainly enough for the near-term challenges. And that cushion is to the extent the downturn extends longer than most think it will. So we've spent a lot of time on what our working capital needs are, what our outlook looks like for 22, anticipating a relatively flat 23 just from a planning standpoint. And that's how we kind of sized the deal and made sure that we have adequate liquidity to carry us through kind of this challenging period, specifically in the U.S. market over the next couple of years and positions us very well for opportunistic growth once the market turns.

Excellent. Thank you for the helpful answer. And then my follow-up, if you can provide any color as to how the deal came about with Oak Tree specifically versus other alternatives. Obviously, Oak Tree is a very well-respected marquee-type investor, but just curious if you could provide some color about how it all came about.

Yeah, we spent a fair amount of time with our financial advisor. We used Lazard, a little plug for them. But, yeah, we spent a bunch of time with Lazard evaluating what our options were. And I will tell you, the folks at Oak Tree get us. They get our industry. They get renewables. They're excited about the energy transition. They've done a lot of investing in, you know, kind of an adjacent space, you know, with Array and Shoals and the like. So they really understand that. kind of what our challenges are, what the industry challenges are, but also what the industry opportunity is. And so I don't think we could have picked a better partner. We're really excited about the people we're working with and the skills they bring. And so that's it. I mean, it's experience in the industry, understanding our story, understanding our strategy, and then the people, right? I mean, people's important here. We're going to have to work closely with them for a long time, and they brought a great team to the table.

Thank you very much.

You bet.

Next question, Pavel Malkinov with Raymond James.

Thanks for taking the question. Given your global operating footprint and even more global sales mix, you've often talked about being able to kind of reroute blades to different geographies, just depending on where the demand comes from. So given the softness you referred to in the United States, can you give some examples of places where demand is perhaps better than expected, kind of an upside surprise?

Yeah, I would tell you Turkey next year is, you know, we expect it to be flat out and being asked for more. So I think that's good. India remains pretty strong for us. With the new, obviously, new lines in China with Estes is important. So we expect to have a good year there. So, yeah, I mean, and then, you know, and are plants that are really U.S.-centric, which would be the ones along the border in Juarez. Now, Matamoros, we're pretty close to a port, so they can export from Matamoros if they choose to. But most of what we build today comes into the U.S. market. So those are the plants where, with the exception of the Nordex plant, the volumes are a little bit – we expect the volumes to be down a little bit next year just because of the U.S. market.

Okay. And the strength in Turkey and India, is that domestic in Turkey and India, or are these export opportunities, for example, going to UK, Germany, et cetera?

Yeah, I would say the vast majority of what we're producing in Turkey is is being exported. Now, we do have lines for very strong players in Turkey, which helps, so there is a fair amount of domestic demand, but I will tell you the vast majority does get exported out, and I would say the bulk of that is to Europe. I mean, Europe is our second largest market behind the U.S. Okay.

Thank you very much.

Thanks, Pavel. Good talking to you.

Next question, Mark Stross with JP Morgan.

Yeah, thanks very much for taking our questions. Bill, to the extent that your customers are sharing this with you, can you just kind of talk about the, I hate to use this phrase, but kind of shovel-ready projects that are out there, just kind of waiting for some visibility from Build Back Better? uh, could they immediately kind of start construction then? Or do we kind of, is that the beginning of what would be kind of a more normal project cycle?

Yeah, I, I'll tell you, Mark, I, I don't have really good visibility on specific product. Now I do want a few, and those are the ones that, you know, we're pushing hard this year to get, uh, to get, uh, delivered to, to a couple of different, to a couple of different customers. Um, out of Mexico, clearly. But we usually don't know exactly where the blades are going. So I don't, again, I have general data, but not very specific data with respect to the shovel-ready deal. So I apologize. I'm probably not the best person to answer that question.

Sure. Yeah, understood. And then just a follow-up kind of technical question. The $0.02 per watt domestic blade manufacturing credit, If that passes, can you just talk about how that gets layered into your existing contracts? Would that be complete upside to TPI? Would that be shared with your customers? Would it require some kind of rewriting of your existing contracts?

It's a great question. Technically, it goes to the manufacturer, which would be TPI. And I think that would factor into, again, trying to make the U.S. plants economically viable. So if we got the credit, our customer could have a lower price, which would make it competitive with a blade brought from another geography, if you will, right? Or if our customer got it for some reason, then they could afford to pay us more for the blade and still have the margin. So The way I understand it right now, and again, it's still pretty fluid, but it would come to us as the manufacturer. And then, you know, obviously, if we want to keep those plants open, we've got to figure out what the right split is to make the blade cost, if you will, competitive with imports such that, you know, a customer, whether it be GE or another customer, would want to produce in the U.S. Does that make sense? Did I answer your question?

Yeah, it does. That's very helpful. Thanks, Bill. You bet. Thanks, Mark.

Next question, Greg Wasikowski with Weber Research.

Hey, good afternoon, guys. Thanks for taking my questions. I just wanted to start with the follow-on amount, $200 million for the oak tree deal. You guys already touched on this. I just wanted to put a finer point on it. Is that mostly baked in for additional runway if needed? Or is it maybe like an and-or type of situation? thinking about capex opportunities for you guys, whether that be on the offshore side or maybe something in transportation? Just put a finer point on that.

Yeah, so as I mentioned earlier, we think what we've pulled down today is adequate to kind of get us through this rough patch in the U.S. market. And so the 200 is really not It really is, you know, we're pulling 350 of the 400, and that 50 is kind of the cushion where if the downturn is prolonged, we've got access to that at our option. The 200 is different, right? The 200 is, I mean, I think it shows a commitment from Oak Tree to the industry and specifically to TPI and what our strategic intent is. And so I think, you know, if there is a opportunity, then that's what the 200 is for. It's more for future opportunity, whether it be growth or otherwise. And again, let's be clear, it would be on different terms than the terms we have today, mutually agreed upon terms. So it would be really not as a safety net for what we've got because we're confident in the number we've got is what we need. It's really for growth opportunities.

Okay, that's helpful. Thanks for the clarification there. And then on that point, thinking about future growth opportunities, is there maybe an intention or a focus on one area or another, whether that's offshore is kind of the leading opportunity there, or do we think of transportation as maybe an equal sort of opportunity, whether that be in terms of additional capacity or potential JVs, M&A, et cetera?

Yeah, I think clearly, you know, there could be some opportunities in the transportation space. You know, I think offshore, to your point, not an M&A, but more of a new build. I think that's an obvious use of capital as well. And, you know, it's a significant use of capital. I also think, you know, we've done all of our service work or all of our service growth has been organic. So that is, you know, that's an area that we would like to grow. I think, you know, there's a lot of activity in that space. Today we service blades. The question is, could we expand our offering to include more uptower work in the cell itself? So I think there are a lot of interesting opportunities to vertically integrate a little bit more, as well as over time, you know, The horizontal is an interesting thing, too, if you think about the entire value chain within the renewable space.

Okay. Very helpful. I'll take the rest offline. Thanks, guys. Great.

Thank you. Thanks. I will now turn the floor over to Bill for closing remarks.

Thank you, everybody, for your questions. We remain focused on managing our business through the near-term challenges facing the industry, and today's financing agreement with Oaktree highlights our efforts to best position TPI to do so, with the focus on execution of our strategy to capitalize on long-term energy transition trends and opportunities. So finally, I want to thank all of our TPI associates once again for their commitment and dedication during these challenging times. Thank you again for your time today.

This concludes the teleconference. You may disconnect your lines at this time and thank you for your participation.