TPI Composites, Inc.

of those of the resin we buy is under, you know, is purchased under contracts controlled by our customers. So that 100% of that gets passed on. Other than that, Joe, you know, we have a shared paying gain. And generally, it's a 70-30 split. So 70 gets passed on to our customer, we have to absorb 30. We are having discussions, as I mentioned earlier, with all of our customers, not only about extending contracts, but also what these commercial agreements might look like in the future. And some of those may, you know, may have some different terms where we might trade utilization percentages for, and price, quite frankly, for reducing or offloading some of the risk. Those discussions are all in process. Clearly our customers would like to not see that. So it's a balance, you know, that we have to work on with our customer on price, on utilization, share a wallet, and then how we deal with the risk of commodity costs.

Right. And that's kind of what I was getting at. You know, you've talked in the past about, you know, resin, carbon fiber, and that's fine. But you've been in the situation where a lot of the utilization and, you know, logistics and other factors, you know, that risk seems to rest disproportionately with you. So I'm just wondering if there's any opportunity for you to, as you indicate, there might be more sort of fundamentally remake the economic relationship with your customers, because that might be one way to address the volatility we've seen in gross margins, perhaps?

Yes, and that's exactly right, and that's exactly what we're working on with our customers today.

Okay.

How do we better balance the risk? Correct. Go ahead.

Right. Exactly. Second question, just following a bit on what Julian was asking about Turkey. And I'm sorry if I missed, if you answered this already. How does the tanking lira affect your business? Is it good? Is it bad? Does it not matter?

You know, it's generally, if you think about most of, you know, all of our revenues in euro, most of our bond cost is in euro. But, you know, direct labor and some of the local stuff is obviously all in Turkish lira. So it actually benefits us from a financial standpoint. It does make it more challenging for, you know, for some of our suppliers that are in Turkey with the lira deval. We, you know, we're working through that with our customers. In general, though, it does help us from a financial standpoint. And we did have some benefit from that this quarter as well.

Yeah, for sure. And then my final question, when you go through the Inflation Reduction Act, one of the things that becomes apparent is that everything, the manufacturing tax credits, the PTC, the property credit, everything is tied to prevailing wage and apprenticeship requirements. How might that affect affect your business if that's signed into law?

Well, again, I can't speak for our customers or our customers' customers, quite frankly, but from a TPI standpoint, we're not manufacturing in the U.S. today. However, when we were, we were paying prevailing wage. We had a union initiative in Iowa that was defeated in and it's because we were paying fair pay to our associates with better benefits than the union was offering. So I wouldn't see that as an inhibitor to us reentering the U.S. manufacturing market if that makes sense for us and our customers.

But it would be fair to assume that you're either going to be union or paying union-level wages if you end up restarting in the U.S.

we would be paying at least prevailing wage, correct?

Okay. All right. Thank you, Bill.

Yep. Thanks, Joe.

Our next question comes from the line of Mark Strauss with JP Morgan. Please proceed with your question.

Hi there. It's Drew on for Mark. Thank you for taking our questions. First one just on Europe and really just kind of broader. What are you seeing there from your customers? What are you hearing? Are they And really as it pertains to repower EU, are they waiting for some more formal legislation or how are they thinking about orders and new contracts and from a timing standpoint? So just really any color would be helpful.

Yeah, I think they're all clearly looking from a long-term perspective. Obviously, they see the repower EU as a positive and as a way to accelerate demand Again, it will take some time, just like any legislation here will. It's a little complicated in the EU with the way that works. It's got to go through three different layers. And I think the final one doesn't really happen until early 2023. So I think there's a little bit of wait and see as to how it ultimately will be rolled out, how it will actually work. But there's general optimism from a longer-term perspective. We're, you know... Mike Nygren, Turkey is you know we talked a little bit about Turkey and how attractive, that is to serve the European market so there's clearly. Mike Nygren, In anticipation of that market, you know accelerating there's a lot of interest in Turkey from from our customers and for us to expand. Mike Nygren, So I you know I see you know the medium to long term being very favorable. But it's, you know, short-term, we haven't seen, you know, an immediate spike in demand because repower EU came out, right? It's going to take some time to sort through and implement. But when it is sorted through and implemented, we do see that as a positive.

Got it. And just one follow-up, if I may. ASPs looked like they were up again in the second quarter or, you know, comparable to the first quarter. And it sounded like in the first quarter there was some transition issues or transition timing things there that drove the ASPs higher. So just kind of curious as a little bit more of a longer-term outlook here on ASPs, do we think of them as in the range that they were in 2Q? And especially as you talk about the new contract negotiations, are they going to be higher than some of the historic legacy contracts?

Yeah, I think as we talked about in the first quarter, they were a little bit, they were artificially high in the first quarter because of some transitions. I think we're, you know, the way we calculate it, we're like 182, 183, something like that, 1,000 a blade. We expect to wind up for the year in that 180 to 185. As we extend contracts or renew contracts, Depending on the blade type, I would expect to continue to see a bit of an increase in ASP. If we're building a bigger blade, the ASP is obviously going to be higher. And clearly, the inflationary environment has driven ASP higher as well. Just as we see commodity costs up, it's going to raise the price of the blade. So it's a combination of those things. But over time, I think you continue to see ASPs go up as blade size continues to increase.

Got it. Thank you.

Yep. Thank you, Drew.

And our next question comes from the line of Tom Kerwin with Seaport. Please proceed with your question.

Hi. Thanks for taking my questions. Heading into 2022, your known startups and transitions were very front-half loaded. In one queue, you realized the positive surprise relative to internal expectations on the five you executed. finishing all of them ahead of schedule and enabling the delivery of additional volumes for those customers over 2022. How did performance compare in Q2 and what's the transitions outlook for the second half?

Yeah, so we pretty much wrapped up all of our transitions by the end of Q2. And at this point, we have no transitions slated for the back half of the year. That's why you'll see our utilization should climb up into the low 90s in Q3. You know, the lines we transitioned in a couple of startups will be running at full capacity in Q3. So nothing planned for the back half of this year, and so certainly you should see utilization improve in Q3. Got it.

And then for field inspection and repair services, So can you give us a sense of how you did at the top line 2Q and just how demand there has been evolving relative to when blade set demand, you know, is it outpacing? Is the aftermarket holding up better? And what's the outlook heading into the second half?

Yeah, I would, again, I would say we're obviously growing the wind up. or the field service business quicker today than the blade business. The blade business, as we've seen, has been relatively flat just given the challenges with policy in the U.S. and the EU. But, yeah, we see significant opportunity for growth in field service. It's really about having, you know, it's really about techs, you know, being able to obtain and train and retain, if you will, the techs. That's how you grow the business. So we're, we are aggressively recruiting in that area. We've grown our, you know, our, our, our, our workforce significantly in the U S and we're continuing to grow it outside of the U S. So we see significant opportunity there. Um, especially, you know, with our global footprint, it gives us a bit of an advantage where we have a critical mass in these, in these geographies where there are a lot of installs, uh, and that need blade service and or repair. So, you know, having that global footprint is not only a benefit from a manufacturing standpoint, but also in deployment of the field service operation.

Got it. And when it comes to that workforce of techs, do you have any targets you could share for us, you know, for the second half in terms of where you take headcount? And then I know you've more recently been investing and expanding in Europe for field services. Maybe an update there?

Yeah, so we don't give out headcount numbers specifically, but we've got significant demand in the U.S. That's really where we started the business, so we've got a critical mass here, and we'll continue to grow that. But the European market is a huge opportunity for us. We've been strong in Turkey for a while, but we've just, over the last year or so, begun expanding outside of Turkey. So we're in Spain, we're in France, we're in the U.K., And the opportunity for just blade repair and service as well as repowering is pretty significant in the EU. So we see that as a pretty significant growth opportunity for us as well.

Got it. I appreciate the color.

You bet. Thank you, Tom.

And our next question comes from the line of Greg Wysotowski with Weber Research. Please proceed with your question.

Hey, guys. Thanks. Just one for me, two-parter. Can you recap your guidance for dedicated lines versus lines installed for the rest of the year and then mainly into 2023? And then how many lines are there that are similar to what you described in Iowa where you could ramp up without significant capex and an actual real estate expansion? Maybe asking in another way, what's the theoretical maximum dedicated lines that you guys could have by the end of 2023?

So we have 43 dedicated lines today. We have capacity, excluding Iowa for the time being, but if you look at our footprint between China, Mexico, Turkey, and India, we could go to 50 lines without expansion of a facility. Now, there'd be some CapEx to enable us to get to 50, but it's probably $25 million of CapEx to get those six to seven lines up and operating. And if you throw in Iowa, that could be another four to six lines. And again, very little CapEx there since the CapEx is sitting there already.

Perfect. Very helpful. Thank you, guys.

And we have reached the end of the question and answer session, and I'll now turn the call back over to Bill Sidewick for closing remarks.

Yeah, thanks, everybody, for participating on the call, and to the analysts, thanks for your questions, and look forward to speaking with you again next quarter. Thank you.

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.