TPI Composites, Inc.

Hello and welcome to the TPI Composites 2Q 2023 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to hand the conference over to your first speaker today, Mr. Jason Wegman, Investor Relations. Please go ahead.

Thank you, Operator. I would like to welcome everyone to TPI Composites' second quarter 2023 earnings call. We will be making forward-looking statements during this call that are subject to risks and uncertainties, which could cause actual results to differ materially. A detailed discussion of applicable risks is included in our latest reports and filings of the Securities Exchange Commission, which can be found on our website, tpicomposites.com. Today's presentation will include 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, Jason, and good afternoon, everyone. Thank you for joining our call. In addition to Jason, I'm here with Ryan Miller, our CFO. Jason is our new VP of investor relations and sustainability and is replacing Christian Eden, who has recently moved to Europe and is now part of our customer facing commercial team. I want to thank Christian for progressing our investor relations program over the last four plus years and for his passion and leadership in advancing TPI sustainability initiatives. Jason brings with him a wealth of experience and numerous financial leadership roles at a multinational aerospace and defense company. I want to welcome Jason to the team, and Ryan and I look forward to introducing him to all of you in the coming days and weeks. With that, let's get to it. Please turn to slide five. To put it simply, it's been a tough quarter. Q2 has been challenging from both an industry and TPI perspective, and I can boil it down to two key issues, quality and volume, both of which I will discuss in a minute. But first, some good news. I'm pleased to announce that TPI and GE have reached an agreement in principle to amend our existing supply agreement in Mexico to add four new lines to produce blades for GE's workhorse turbine in Juarez with an initial term through 2025. TPI and GE expect to finalize this agreement in the third quarter. Quality has been broadly discussed industry-wide over the past several quarters, and quality issues have had a pronounced impact on performance, and we have not been immune to these issues. While the accelerated pace of new product introductions within the industry over the last five years and the push to get larger wind turbines to the market faster has significantly reduced the cost of wind energy, it is also a contributing factor to the wind turbine and blade manufacturing quality issues that have surfaced. As we reported last week, our financial results for the quarter were impacted by a warranty provision for the inspection and repair of blades, primarily related to one blade type in one factory. We have responded to the evolving quality challenges with the following actions. We had a third party complete an in-depth assessment of our existing quality system and are implementing improvement initiatives. We have and continue to engage with our customers more deeply and earlier in the design phase to minimize quality risks in the product design and manufacturing process. The good news is that our customers have significantly slowed the pace of new product introduction and recognize the benefits of standardization and industrialization. We hired Neil Jones as our Chief Quality Officer effective August 1st, 2023. In this newly created position, Neil will oversee all quality processes, systems, and controls relating to TPI's wind business and will report directly to me. Neil brings over 25 years of experience in quality and engineering positions in the wind and automotive industry. Neal spent more than 13 years with Bestas in a variety of quality leadership roles with the last five years as Senior Vice President, Quality, Health, Safety, and Environment. Before joining Bestas, Neal spent over 20 years in the automotive industry, including engineering and quality leadership roles with TRW Automotive and a senior quality leadership role with Eaton Automotive. And finally, we are replacing certain members of our senior team to improve our operational leadership, given the performance and quality challenges the company has experienced during the past year. We are confident that the steps we've taken will significantly reduce our warranty claim exposure going forward. Now let's discuss volume. As we discussed on our first quarter earnings call, we are still working on a handful of volume changes with our customers that will likely net out to lower sales for the year. Given the extended time it is taking to get clear guidance on the Inflation Reduction Act and the complexity of its implementation, ongoing challenges in the EU, and the changing economics of certain markets, our customers continue to apply these on a market-by-market basis while considering existing inventory levels, all of which have resulted in volume changes from three of our four-blade customers in 2023. In addition, there is no doubt that permitting, transmission, transmission queues, the ability of the broader wind industry supply chain to ramp volume, inflation, and cost and the availability of capital are further factors impacting the timing of recovery, which we believe has likely pushed to 2025 as our customers continue to move transitions and new line startups to the right. Notwithstanding, we stand by our mid to long-term sales and adjusted EBITDA targets we had introduced in our 2022 year-end earnings call in February and are focused on positioning ourselves to deliver on those targets as volumes return and then accelerate to more robust levels the industry expects. Now let's cover our overall Q2 results. Sales for the second quarter were $381 million and were negatively impacted by delivery delays of blades from increased inspection and repair activities. We also had lower automotive sales due primarily to lower bus body deliveries and field service sales were down as we had our field service technicians working on warranty related efforts. Adjusted EBITDA was a loss of $38.9 million in the second quarter. As we discussed on our first quarter earnings call, we expect the second quarter to be the low watermark for profitability for the year, primarily due to annual wage increases kicking in, while incremental productivity benefits will be phased in over the second half of the year to offset those increases. However, at that time, we didn't expect the quality challenges I discussed a few minutes ago, which by far had the biggest impact on our adjusted EBITDA for the quarter. In addition to the warranty charge of $32.7 million we recorded, our adjusted EBITDA was also impacted by lower volume than expected, inflation, and higher costs of inspection and repair activities. Now, I'll give you a quick update on the rest of our global operations, including service and automotive. Please turn to slide six. Notwithstanding the challenges we faced in Mexico during the quarter, our blade facilities in India and Turkey performed exceptionally well. Globally, we produced 661 sets and achieved a utilization rate of 85%. In global service, sales were down year over year due to a reduction in technicians deployed to revenue-generating projects. For the full year, we expect revenue to be down by about 30% year over year. Things continue to progress nicely in our automotive business. However, we now anticipate automotive's 2023 full-year revenue to be down from 2022, primarily due to lower bus body sales. We are also experiencing lower than expected sales in other automotive products due to our customer supply chain constraints and customer delays and transitions of new product launches. In the second half of this year, we are planning to launch three new automotive production programs. These programs include large structural panels for a commercial truck, a full battery enclosure also for a commercial truck, and high voltage battery pack thermal barriers for a light duty truck. Our customer diversification initiative is paying dividends as these three launches are each with a different customer, with two of them being new to TPI. In addition, the products being launched show our investment and innovation and new manufacturing technologies are aligned with the needs of the automotive market. To support additional near-term growth, we have and are making additional capital investments in the light resin transfer molding, protrusion, and assembly processes. We expect our Rhode Island and Juarez automotive plants to be vertically integrated for these technologies by year end, which will enable the scaling of our capacity and significant growth next year. We continue to explore strategic alternatives for the automotive business to enable us to scale faster and are encouraged by the initial discussions and expect to have more information to share by the end of Q3. As it relates to our supply chain, the situation is significantly better than during the past two years. We continue to expect the overall cost of raw materials to trend down compared to 2022, while logistics costs have returned to pre-pandemic levels, both of which provide us some tailwinds for the back half of the year. Over the last couple of quarters, we've suggested that 2023 would be a transition year while the industry digests and or waits for formal implementation guidance related to key components of the IRA in the US and clarity around more robust policies in the EU. More and more, however, it's starting to look like the expected increase in volume related to the IRA and initiatives in the EU may not materialize broadly until closer to 2025. Last month, the EU finally signed off on its renewable energy directive after months of negotiations. The emergency measures on permitting agreed last year will now become permanent. That means enforcing the principle that the expansion of wind is in the overriding public interest, applying a binding two-year deadline to all permits, and a population-based approach to biodiversity protection and requiring all EU countries to digitalize their permitting procedures. These new rules are an important step forward and will help unlock the 80 gigawatts of wind farms currently in the permitting pipeline across Europe. EU countries have until the middle of 2024 to implement them. Some are already doing so, for instance, Germany. And there it has led to an increase in permitting rates for wind and to winning appeals against permits that were previously lost. Here in the U.S., although guidance on many of the key provisions under the IRA have been issued, interpreting and getting clarification of the guidance will take some time. As you might expect, with legislation as broad as the IRA, clarity around implementation will take some time. Just last week, the Federal Energy Regulatory Commissioner, FERC, issued a long-awaited final rule on interconnecting generation and storage resources to the grid. Based on initial FERC statements, the final rule will implement, among other reforms, a first-ready, first-served cluster study, providing much-needed relief for nearly two terawatts of renewables and storage that are currently waiting to interconnect. While we recognize the challenges the wind industry continues to face in the near term, with a continued focus on energy security and independence globally, we remain confident that demand for wind energy will strengthen once the current regulatory complexity is deciphered and global economies begin to stabilize. With our current facility capacity of nearly 15 gigawatts, we expect our wind revenue to eclipse $2 billion, yielding a high single digit adjusted EBITDA and a free cash flow percentage in the mid single digits over the next couple of years. Today, we are operating 37 lines, including four lines for Nordex in Mexico. With transitions to larger blades, the startup of new lines, and the completion of the Nordex contract in Mexico in mid 2024, We plan to exit 2024 with 39 lines. These 39 lines will enable us to produce approximately 3,200 sets per year or 15 gigawatts. In IEA's updated net zero by 2050 scenario, wind needs to reach over 400 gigawatts of installations per year with approximately 80% onshore and 20% offshore. Therefore, the market would have to be almost five times larger than it was in 2022. 15 gigawatts of capacity will not be sufficient to meet the long-term needs of our customers, so strategically growing our global capacity and footprint over the next few years is a discussion we are engaged in today with all of our customers, as we are in a unique position to capitalize on the growth in the wind industry. With that, let me turn the call over to Ryan to review our financial results.

Thanks, Bill. Please turn to slide eight. All comparisons discussed today will be on a year-over-year basis for continuing operations compared to the same period in 2022. Please note our prior year financial information has been restated to exclude the discontinued operations from our Asia reporting segment as we shut down operations in China at the end of 2022. In the second quarter of 2023, net sales were $381.3 million compared to $392.5 million for the same period in 2022, a decrease of 2.9%. Net sales of wind blades tooling and other wind-related sales, which I'll refer to as just wind sales, decreased by 4.9 million in the second quarter of 2023, or 1.3% compared to the same period in 2022. The decrease in net sales of wind during the second quarter was primarily due to a 2% decrease in the number of wind blades produced due to lower customer demand and delivery delays and increased inspection and repair activities. A decrease in other wind-related sales for mold decommissioning services and lower average sale prices due to the impact of raw material and logistic cost reductions on our blade prices. These decreases were partially offset by favorable foreign currency fluctuations and an increase in tooling sales. Additionally, our utilization in the second quarter of 2023 was 85% compared to utilization of 88% in the second quarter of last year. Field service sales decreased by $2.9 million in the second quarter compared to the same period in 2022. The decrease was due to a reduction in technicians deployed on revenue-generating projects due to an increase in time spent on non-revenue-generating inspection and repair. Automotive sales decreased by $3.4 million in the second quarter compared to the same period in 2022. The decrease was primarily due to a reduction in the number of composite bus bodies produced and a decrease in sales of other automotive products due to our customer supply chain constraints and customer delays in transitions of new product launches, partially offset by an increase in fees associated with minimum volume commitments. Net loss attributed to common stockholders from continuing operations was 80.8 million in the second quarter of 2023, compared to a net loss of 25.3 million in the same period in 2022. Adjusted EBITDA for the second quarter of 2023 was a loss of 38.9 million, compared to adjusted EBITDA of 5.6 million during the same period in 2022. The decrease in adjusted EBITDA during the second quarter ended June 30, 2023, was primarily due to increased warranty costs, higher production costs for additional quality control measures implemented at certain manufacturing facilities, and increased labor costs in Turkey and Mexico, partially offset by foreign currency fluctuations, cost-saving initiatives, and lower startup and transition costs. Moving to slide nine, we ended the quarter with $170 million of unrestricted cash and cash equivalents and $195 million of debt. We had positive free cash flow of $6.2 million in the second quarter of 2023 compared to $19.4 million in the same period in 2022. In light of a challenging quarter, we placed a significant focus on preserving cash, ensuring we efficiently deployed our working capital and make sure we can comfortably execute key initiatives as we move forward. We do expect a modest level of cash burn in the second half of the year as we satisfy our warranty commitments and continue to implement quality improvement initiatives. Note that most of this cash burn is expected to occur in the third quarter. I know many of you want to understand how we are thinking about our cash position beyond 2023. And as we enter a period of time in 2024, when we expect to be starting up idle lines and transitioning to longer blades, the bottom line is we continue to be confident in our liquidity position. To shed a little color on the moving pieces, in 2024, we expect positive EBITDA and working capital initiatives to be our primary sources of cash. We are expecting EBITDA to significantly improve in 2024 compared to 2023 as we get the cost of quality issues behind us and we effectively shed the losses from our Nordex Matamoros plan. We also expect to get some advances from our customers to support the ramp of Idle Lines. Offsetting these sources of cash will be CapEx, primarily related to the transitions and startup of Idle Lines, interest in taxes, as well as cash payments to Oak Tree for the preferred dividends. Our first dividend payment to Oak Tree will be in January 2024. In total, we expect to make about $40 million in payments for preferred dividends to Oak Tree in 2024. End of the day, we believe our balance sheet, our projected liquidity position, and our operating results will enable us to navigate the short-term challenges and invest in our business to achieve our mid- to long-term growth targets of $2 billion-plus in wind sales and high single-digit adjusted EBITDA margins. Moving on to slide 10. As a result of the quality and volume changes Bill discussed, we are updating our financial guidance for the year. Sales are now expected to be down by about $100 million at the midpoint of the ranges from our initial guidance. Approximately half of the reduction relates to lower customer demand for blades and delays for inspection and repair activity. About a quarter of the reduction relates to lower field service sales as technicians have been diverted to non-revenue generating work. The remainder of the reduction relates primarily to lower ASPs from supply chain reductions and lower automotive sales than expected. We do continue to expect to achieve low single-digit adjusted EBITDA margins over the second half of the year. which is consistent with our initial adjusted EBITDA guidance for the full year. However, with the loss from the second quarter, we now expect our adjusted EBITDA for the full year to be a slight loss of less than 1% sales. With the reduction in sales volumes, we now expect utilization to be in the low to mid-80s versus our initial guidance in the mid to upper 80s. With that, I'll turn the call back over to Bill.

Thanks, Ryan. Please turn to slide 12. We remain very bullish on the energy transition and believe we will continue to play a vital role in the pace and ultimate success of the transition. We remain focused on managing our business through the short-term challenges in the industry and are excited about how we are positioned to capitalize on the significant growth the industry expects in the coming years. I want to thank all of our TPI associates once again for their commitment, dedication, and loyalty to TPI.

I'll now turn it back to the operator to open the call for questions.

Thank you. Ladies and gentlemen, should you have a question, please press the star followed by the one on your touchtone phone. If you'd like to retry a question, please press the star followed by the two. One moment, please, for your first question. Your first question comes from Julian Dumoulin-Smith from Bank of America. Please go ahead.

Sorry, guys. Can you hear me? I was on mute. Yep. Gotcha, Julian.

Good to talk to you.

Hey, likewise. Thanks for taking the time. I really appreciate it. Hey guys, just a couple different things here. So look, I know the backdrop has been challenging here of late, but can we talk about the quality related matters in a little bit more detail? So you disclosed here a issue with a customer at a given site under warranty, but you also discussed a third party independent evaluators come through, review your operations, et cetera. Can you discuss what the third-party review found, and have you needed to pursue quality changes at other sites and or for other customers thus far, if we can kind of get into some of the other permutations here, if you don't mind?

Sure. Yeah, we – We brought in, actually, we brought in the third-party quality reviewer. That was our choice. Our customers didn't know we were doing it, quite frankly, at the time. I commissioned that a couple of months ago, and it was more just to make sure that, again, we were seeing more issues within the industry, and we had a little bit of an increase in what we would call non-conformances in some of the blades we were producing. So wanted to get a very objective third party view of our quality management systems, what we were doing well, what we needed to improve on. So I would tell you it's not, I mean, in virtually all of our plants we're in actually really good shape. We just had a couple of a couple of facilities that were not where we would like them to be today. So that's kind of the genesis of the findings. There's improvements we can always make, and then we're making those. But overall, there was nothing that was of major concern. It was just improvement on what we had already done. So that's, I think, that's about the third-party reviewer. But, you know, again, we have, just so you guys know, I mean, blades are incredibly man, right? I mean, it's anywhere from 1,500 to 3,000 or 3,500 direct labor hours per blade. Hundreds of layers of glass laid up by hand. Infusion that is somewhat automated, but still relatively manual, as well as laying core down, et cetera, et cetera. So there's a lot of manual processes that go into it. Every one of our customers' blades is different, and each of our customers' blade models are different. So it's not like it's a highly automated process, which then leads to more room for non-conformances when you're building a blade that can be 80 meters long, 30,000 plus pounds, right? And so the whole industry has work to do, especially as we move from relatively moderate-sized blades to very large blades very quickly. The challenge is getting up to serial production. Once you get to serial production, the quality is obviously much better. But when you're switching blade models as quick as you are, you never really get there. So the good news is, is with NPI slowing down, I think our, and the improvements we're making from our quality standpoint, I think the instance of quality issues going forward will moderate back to levels that we used to see, which were very low.

Got it. And just to clarify this, you said there was a couple sites with issues. Just can you elaborate a little bit on what's been done to remediate and, you know, it seems like you didn't elect to pursue a warranty claim on that second site. If you can elaborate.

So, Julian, we evaluate our potential warranty claims continuously. There are some other small warranty claims out there. I mean, we've got a fairly sizable reserve now, so we feel very comfortable that what we've got is covered. So, I mean, the other, what have we done to protect them? We have firewalls that we put in place. And again, remember, we have our customers are in our plants with us. And so not only are we inspecting them, but generally our customers are inspecting them as well before they get shipped. We've increased the level of inspection. We've increased the numbers of inspection during the production process, not just at the end of the process. And in some cases, we've invited third parties into our plants to validate the inspection work that we've done.

And lastly, you said that you have work to do. Oh, yeah, go for it.

Yeah, you always have work to do, right? It's called continuous improvement. And again, when you're dealing in an extremely manual process, there's always improvements you can make. But we've had a very, very good long-term track record from a quality standpoint. The large issue that we specifically provided for this quarter is Think about how we talked about it. It's inspection and repair. So a lot of this is proactive. There were some non-conformances found out in the field before blades were put up tower. We looked at those with our customer and we developed a plan to make sure that we inspected every blade. And if there was the need to repair, we would repair. And if not, we would move on. So it's not like we have blades failing in the field, blades flying off towers. This was more proactive to make sure that we never get into that situation. And, again, for many of these blades, there will be relatively minor repairs that are done. Some blades will likely not have any, and others will have some repairs to do before they go up tower.

Right. And you still reconfirmed here your high single-digit EBITDA margin target, although you didn't specify a timeline necessarily. But it seems like the warranty costs, the higher optics, et cetera, still hasn't taken you off that goal?

Well, that higher single digit, we said in a couple years, right? We've got to get through. We've talked about 23 being a transition year, 24 a bit of a transition year as Some of the transitions that we planned from a line standpoint, as well as startups, have moved to the right a bit by our customers. And so we see 23 and 24 really as not only industry transition years, but TPI, some TPI transitions as it relates to lines. And so we see ourselves exiting 24, entering 25 more on that run rate.

Thanks for your time. Appreciate the details.

Yep. Thanks, Julian.

Your next question comes from Mark Strauss from JP Morgan. Please go ahead.

Good afternoon. Thanks for taking our questions. Hey, Mark. I'm thinking back to the second half of last year, maybe around the same time that you announced the GE contract in Iowa. You were talking about you being in discussions with other OEMs as far as potential U.S. manufacturing. Has this quality issue impacted those conversations at all?

No. We're still, you know, we're evaluating sites today and still in discussions with multiple customers for sites within the U.S. Okay. Good to hear.

And then with the announcement today with GE, how should we think about when Assuming that you get the full contract in 3Q, what the timing of that might look like as far as when that might start. And since it's in Juarez, is there any disruptions to your existing lines while that process is ongoing?

Yeah, so if you remember, Mark, we had a vague or we had an empty facility in Juarez. So this is the empty facility, so GE will be moving into that new facility, and we expect production to start early next year.

Got it. Okay. Thank you very much.

Yep. Your next question comes from Justin Clare from Roth MKM. Please go ahead.

Yeah, hi guys. So I wanted to start with the demand picture a bit here. You indicated demand might be pushing to the right a bit and into 2025. Just given that backdrop, maybe you could walk through what your expectations are for your open lines. It sounds like you're going to be exiting 2024 with 39 lines. So it seems like you're adding the four with GE. There's two others that you'll contract and then maybe the five lines in or the potential five lines in Iowa, those might not get contracted, you know, in the near term. So just maybe if you walk through what you're expecting here.

Yeah. Yeah. So as, you know, the line count was a little bit different last quarter, and that's because as we've gotten deeper into discussions with customers and we looked at blade sizes, The number of lines have actually come down a little bit. But if you are listening to the prepared remarks, we wind up with the same number of gigawatts or the same capacity at 15 gigawatts because the larger lines will generate, you know, obviously we can produce the same amount of gigawatts or megawatts that we would have otherwise. So we add to four lines, you know, we add four lines in Mexico. We subtract four lines in Mexico as well, the Nordex lines, right? And then you think about Iowa, which is probably, you know, four to five lines at this point.

And then India, adding a couple of lines there as well. Okay. Do you want me to give you the exact? Yeah, we're at 37.

You had four in Iowa, potentially. Again, all, you know, GE, we're working with GE to still determine the right time for that to open based on clarification around some of the IRA and what their demand needs are. So that's, you know, still to be determined. But think of it as four lines. Mexico, too, we just talked about, which is four lines. Two more in India, two lines in India. We take out the four lines for Nordex and Matamoros. When we transition to a larger blade in another plant in Mexico, we'll go from six lines there today to four lines. And then same in Turkey. In both Turkey plants transitioning to larger blades, we actually lose a line in each. So if you do that math, you get to 39. But it's the same number of gigawatts, if you will.

Right. Okay. Okay. That makes sense. Thanks for, thanks for walking through that. And then just on the, the cost of inspection and the increased focus on quality here, I was wondering, does that serve as a headwind to your gross margins as you move into Q3 and Q4? How impactful might that be? Maybe you just speak to that, that element.

Hey, Justin, I'd say this is Ryan. You know, I think a lot of that's behind us. So, you know, we went through a bit of a learning curve and some catch up on some blades that were, and we talked in the first quarter about how we had, we slowed down deliveries. And so we were catching up on some of those inspection and repairs. We've now got a lot of that behind us so far this year, and you'll see this disclosed in the 10Q. We probably incurred around $10 million of higher inspection repair than what we had planned at the start of the year. There's probably still a couple million dollars left over the balance of the year, so a total of, call it, $12 million or so. But we think a lot of that increased cost is behind us. I think we've gotten through a lot of the catch-up and learning curve as we've gone through those. And it actually has helped us identify areas where we need to go back and build more quality up front and make it more proactive instead of reactive on the back end and catching it later.

Okay. Great. Thanks very much. I'll pass it on.

Your next question comes from Eric Stein from Craig Hallam. Please go ahead.

Hey, everyone. Thanks for taking the questions. So I'm just trying to think through, you know, these quality issues and what this could mean longer term. I mean, clearly it sounds like you feel that the one quality issue you're having in the smaller ones that you've kind of got those ring fence. And historically, I don't think you've had many of these warranty, you know, warranty programs. I mean, do you see this at all changing, kind of the whole insource versus outsource dynamic? Or, I mean, is this something that could permanently slow down that move to larger blades, which I guess would mean fewer startups and transitions for TPI?

Yeah, you know, I don't think it changes the outsource-insource discussion, quite frankly. And the new product introduction has already slowed down. I mean, you just have to listen to what our customers are saying publicly about new product introduction and the need to standardize and industrialize and, you know, running these and, you know, modularization of the turbine. So we're seeing that already, but I do not think it impacts the insource versus outsource. You know, if the market goes to where we think it needs or where many think it's going, there's going to have to be a ton more capacity in the market over time. And I don't think the OEMs are going to want to absorb or are going to have the appetite to spend that capital on blade plants, quite frankly, or on other manufacturing facilities. So No, I don't think it impacts it. I think, to your point, we have not had significant warranty issues in the past. We see this as a unique event for us, and we will learn from it and continue to improve what we do and work very closely with our customers. One of the important things that we've talked about in the past is collaborating more closely and deeper upfront with our customers so that we can minimize the potential for risk areas in the manufacturing process and in turbine design. And our customers recognize that. They are engaging with us more deeply and earlier. And I think that will help in the long run with minimizing the types of risky manufacturing operations that we see at points in time today.

Got it. And when you talked about the two lines in Turkey, you know, going from three to two, and then same in Mexico, I mean, are those plans that are already underway and are kind of you know, are already starting and so they're not necessarily subject to kind of the slowdown you're seeing on the activity side?

No, it has nothing to do with that. Let's be clear. In Turkey, we have two plants there. One's going from four lines to three lines. One's going from seven lines to six lines. And in Mexico, the one plant we have running a smaller blade today, when we go to a bigger blade, it goes from six lines to four lines. producing the same number of gigawatts off of 39 lines as we were off of the 44 that we talked about before. So it's not about a reduction in demand for what we're doing. It's a larger blade. Therefore, you need fewer sets to hit the same number of gigawatts. Now, over time, might we expand a couple of those plants to add more lines to it? Absolutely. Or we'll look for additional capacity in the same geographies or new geographies.

Got it. All right. That's helpful. Maybe just a quick, just on the automotive side, you mentioned strategic alternatives. I mean, it doesn't sound like that strategic alternative would include, you know, selling or monetizing that business. So maybe just, you know, some of the thoughts or the more likely forms that might take place.

No different than we've talked about, Eric. It's, you know, we're looking at all options. It could be partnership, joint venture, you know, separate source of capital. So there's a multitude of different things we're looking at. We're actually looking at probably three different forms today. So, you know, those discussions are progressing. We hope to be able to give you more information later in the quarter. Okay, thanks. Yep.

Your next question comes from Joseph Osha from Guggenheim Partners. Please go ahead.

Hi there, guys. I just wanted to talk about next year a little bit. You know, you've got this Oak Tree draft dividend coming, and, you know, it's $40 million. You have not, based on, you know, my sort of path through your model, ever generated that much free cash, at least since 2015 or so. So it would seem to me that you're going to be burning cash next year to meet all of your obligations. Is that a fair observation?

Yeah, Joe, I think a lot of this – For us, I think we feel pretty comfortable with our liquidity position today. Could we be burning some? If we do, we believe it would be a very modest amount. A lot of this is going to depend on the startups and the timing of those startups. It's going to be dependent upon the amount of customer advances that we can get to help fund those startups and transitions. but you know as we're currently thinking about 24 and you know obviously we're not yet ready to guide to 24 yet but we laid out you know what we think our sources and kind of uses of cash are next year and i think the one thing that you may discount a little bit right now is our ability to go generate cash out of our balance sheet and so you'll see us focused in a lot on that over the balance of this year and next year to go help fund some of that we do have some different areas of inefficiency and certainly when you're In a time period we're in today where we've had some delays in deliveries and we're working through some inventory issues when you're going through that, we'll help, we'll monetize that as we get through the balance this year. But we will certainly plan and work to make sure that we can make it through this. And we initially guided back when we put out our kind of mid to long-term guidance that to light back up all of our idle lines, it's probably in the $25 to $35 million range, still believe it's in that range. And so I kind of contain the CapEx for that into that range, probably spending about a third of that this year, and then the rest of it will primarily come in 24.

The other thing to think about, Joe, this is the easiest way to think about it, I think, is we eliminate the losses that we're incurring at our Nordex Matamoros plant that covers the dividend. Just FYI.

So, say that again. The losses that you are currently incurring from Nordex and Matamoros, remind me exactly when that goes away?

The contract itself ends June 30 of 2020 for But we've agreed to a bit of a different structure in 2024. So we'll eliminate virtually the entire loss that you'll see this year from Matt Amoris. So that basically pays for the dividend.

So that's $40 million right there.

Yeah. Yeah. Yeah, Joe, in the first half of this year, we see this disclosure in the queue. We've lost about $20 million. Last year, it was about $40 million. So it's been going on about a $10 million run rate pace.

I'm sorry, not to take – all right, a quarter. Thank you. All right, that was my question. And just – do you guys have, at this point, any kind of covenants? I assume not on the convert, but, you know, is there any kind of covenant – on this Oak Tree financing in terms of, you know, cash levels you've got to maintain or any of that?

So we've got, we have to maintain $50 million of cash in the U.S., and we have to get approval for CapEx over $30 million annually.

Yeah, and one other one is we have an $80 million limit on our other debt that we can maintain, but we do have consents, obviously, from Oak Tree for both the purchases of the wind turbine and for the convert.

Okay. Thank you very much. Yep. Thanks, Joe.

Your next question comes from Sheriff Emma Grabby from BTIG. Please go ahead.

Hey, thanks for taking my questions. First on moving to larger turbine production lines, how long does it take to shift production from one blade type to another? Is it a function of of winding down supply agreements, and can you remind us what kind of capex is associated with that?

Yeah, so in most cases, if we're doing a transition, it's in an existing facility that's already got the basic capex in it. There are occasions when, if we're going to a much larger blade where you might have to do a crane upgrade, which might be a couple million dollars, The biggest capex, though, is the tooling itself or the mold, and the mold is paid for by our customer. So the capex on a transition short of having to, you know, extend a building or change a crane out is usually relatively small. The time it takes to do it, part of that depends on the part of the world we're in, whether we're working five days, six days, seven days a week. But it's generally to go from stopping of the old mold, removal of that mold, install of the new mold, and then ramping it back to serial production is probably around a quarter.

Thanks. And then in the field service business, a bit of a smaller point here, but how long do you expect warranty claims to pull technicians away from doing field service work?

Yeah, I would say a lot of that's happening this year. We'll have a little bit spillover into next year. But I think, you know, probably by the end of the first quarter or so next year, we should be through most of it. Is that? Yeah, back to a more normalized. Yeah, back to a more normalized rate. So, you know, it'll impact us for the balance of this year and a little bit of next year. And then we should be back at kind of a more normalized level of warranty versus, you know, revenue generating work.

That's helpful. Thank you.

Your next question comes from Pavel Malkanov from Raymond James. Please go ahead.

Thanks for taking the question. I want to zoom out for a moment about kind of this whole quality control discussion in the wind space. You know, ever since Siemens started talking about this, you know, right around a month ago, Do you have a sense that there is almost like a witch hunt to try to, you know, find and kind of nitpick things that perhaps would not have been regarded as serious issues until that rather kind of high-profile headline? So an overreaction, so to speak?

Avel, I... I have to agree with you. I think you know clearly there are some and that's why when I when I was talking a little bit about it after the first question. I mean, you know we're categorizing the issues right where it's yeah, it's something that really needs to be fixed because it could impact. the longevity of the blade. Others are, yeah, we ought to watch that, but likely is not going to impact performance or longevity. And then there are other things that, well, yeah, you could fix it because it's a nonconformity. It's not going to make it perform any better. It's not going to do anything different. In fact, it may create more of a problem if you fix it as opposed to leaving it as is. And so I think there is a heightened sensitivity, especially for Those customers of our customers who may not. Completely, I'm trying to say this in the right way. Who may not completely understand how these blades are built and the fact that it is a very manual process and you know, first pass yield on a blade is generally zero because there are always some nonconformities because it is a manual process where you're infusing resin, you know, on a blade that's as long as a football field. So you're going to have some of that stuff. So I do think there's probably a heightened sensitivity around nonconformities in the blades that maybe we didn't see in the past.

Okay. Let me turn to the electric vehicle. I guess it was seven years ago, feels like ancient history, that TPI started supplying these bus bodies to Proterra. And, you know, since then, we're watching, you know, every commercial fleet is electrifying buses, trucks, vans. And I'm curious why carbon fiber has not become kind of the universal or mainstream solution because it feels like it's actually shrinking. What do you think happened there?

Yeah, carbon fiber is too expensive, Pavel, that's why. But what we're doing is not carbon fiber. It's selective use of carbon fiber in key stress points that you need to use carbon. But most of what we're doing is, you know, more glass fiber as opposed to carbon fiber. And I think as if I mean, if you look at what we're, and I wish I could tell you who we were working with, but if you look at who we're working with and what we're working on, there is some real traction taking place with the composite side of the business from an automotive standpoint. As they recognize, it's not just light weighting, but it's the durability, it's the performance especially in a battery enclosure, especially in certain of the structural panels and large panels with some of the unique technology we have. I think you will see it pick up, especially in the commercial space. But again, it's glass fiber mostly, not carbon fiber.

Okay. Point well taken. Are you working with Workhorse still?

No, we haven't been working with them for

Over two years now, I think.

And GM?

We've done some, we have done some work with GM that we've announced publicly. I can't say what we're doing now.

Okay. Thank you very much. Yep. Thanks, Pavel.

Ladies and gentlemen, as a reminder, should you have a question, please post a star followed by the one. Your next question comes from Julian Dumoulin-Smith from Bank of America. Please go ahead.

Julian, you're double dipping on us.

Hey, I'm back. You better believe it. Hey, I just wanted to follow up, if I can, on really pushing on the impact, the ongoing impact here. I mean, I know you said by the end of one cue that you should be seeing some normalization on sales, or at least the field sales, but Can you elaborate a little bit of sort of the ongoing OpEx and the timeline there? I mean, it sounds like, again, you reaffirm a couple years out, you see an ability to get back to that high single-digit outlook. But I just want to make sure we understand the full extent of the revenue and the OpEx impact. And then separately, I'll throw the second question in there. On the U.S. expansion, I thought there was some talk about looking at the western U.S. for a further facility. Is Mexico now in lieu of that?

So I'll answer first on the OPEX and revenue. I would say on the OPEX side, Julian, as Ryan indicated, we've spent about $10 million in the first half of the year. We'll spend about $2 million in the back half. As we've caught up and as we've gotten more efficient at kind of the new procedures that we're following that we've developed, as well as some of the new testing techniques, and inspection techniques. I think we won't have an increase in OPEX costs. I really think over time, we're actually going to find that we can reduce the cost of inspection because of what we'll be doing up front and how we'll be doing it differently. So I think long-term, it will be helpful to us. And on the revenue side, again, it's from the field service standpoint, we should, we're still hiring. We're still trying to expand in all regions that we serve today. The limiting factor is hiring techs, quite frankly, but we're still moving down that path. And we think we get back to a more normalized split of revenue generating versus warranty work by the end of Q1 of 24. And then on the expansion, no, it's not really in lieu of, Julian. It's in addition to, is my belief.

Okay. So that's actually still in play here in the near or medium term?

And your discussions are ongoing?

Ongoing discussions with multiple parties.

Yeah. Okay.

All right.

But is that a this year thing at this point, given the push out?

I'm sorry, is that what? Oh, this year? No, I don't think it was ever a 23. I mean, as far as building a facility, no. As far as identifying, we're in that process right now. So, yeah, I mean, is it possible that something gets announced before the end of the year? Certainly, my guess is probably more of a late 23 or a 24. Got it.

Sorry, I didn't mean to press you too much on that. And to clarify earlier, Nordex, the payment there offsets the dividend payment? Have I heard that right?

Yeah, what we're losing in that factory today is essentially equivalent to what the dividend payment will be for Oak Tree next year.

Or said differently, the liquidity that Nordic is paying you is effectively equivalent. I'm sorry, say that again? The Nordic compensation is effectively equivalent at that point.

Yeah, that's correct, Julian. We get back in 24 at a pace that we're pretty close to break even. So the losses we experienced last year and this year, which are about $40 million a year, about $10 million kind of run rate a quarter, that effectively ends beginning January 1st of 2024. Well, thank you, guys.

Sorry for all the questions. Thanks. No problem.

Bill, there are no further questions at this time. Please proceed with your closing remarks.

Sorry, I took a sip of water.

Thanks again for your time today and continued interest in support of TPI. I look forward to speaking with you again shortly and next quarter. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for joining, and you may now disconnect your lines. Thank you.