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Edited Transcript of TPIC earnings conference call or presentation 7-Aug-18 9:00pm GMT

Q2 2018 TPI Composites Inc Earnings Call

SCOTTSDALE Aug 21, 2018 (Thomson StreetEvents) -- Edited Transcript of Tpi Composites Inc earnings conference call or presentation Tuesday, August 7, 2018 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Rozmus

* Steven C. Lockard

TPI Composites, Inc. - President, CEO & Director

* William E. Siwek

TPI Composites, Inc. - CFO

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Conference Call Participants

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* Chip Moore

Canaccord Genuity Limited, Research Division - Senior Associate

* Eric Andrew Stine

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* Hilary Cauley

* Jeffrey David Osborne

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Paul Coster

JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies

* Pavel S. Molchanov

Raymond James & Associates, Inc., Research Division - Energy Analyst

* Philip Shen

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon, and welcome to TPI Composites Second Quarter 2018 Earnings Conference Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A.

At this time, I would like to turn the conference over to Anthony Rozmus, Investor Relations for TPI Composites. Thank you. You may begin.

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Anthony Rozmus, [2]

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Thank you, operator. I'd like to welcome everyone to TPI Composites' second quarter 2018 earnings call. We will be making forward-looking statements during this call based on current expectations and assumptions, which are subject to risks and uncertainties.

Actual results could differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in today's earnings news release and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission, each of which can be found on our website, www.tpicomposites.com. We do not undertake any duty to update any forward-looking statements.

Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides accompanying today's presentation for definitional information and reconciliations of historic non-GAAP measures to the closest GAAP financial measure.

With that, let me turn the call over to Steve Lockard, TPI Composites' President and CEO.

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [3]

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Good afternoon, everyone, and thank you for joining our second quarter 2018 earnings call. I'm joined today by Bill Siwek, our CFO.

I'll begin with some highlights from the quarter, followed by a brief update of the wind market. I'll then turn the call over to Bill to review our financial results. We'll then review our full year 2018 outlook and our improved position for strong and diversified global growth for TPI in 2019 and beyond before we open up the call for Q&A.

Please turn to Slide 5. In Q2, we continued to invest heavily in new start-ups as well as transitioning lines to new larger blades, providing a foundation for strong growth in 2019 and beyond. In general, we're tracking well against our plans and executed well in the quarter.

Our net sales for Q2 were $230.6 million and adjusted EBITDA was $13.5 million. Due to heavy investments in start-up and transitions which reduced our blade volumes, our sales declined 3.7%, and adjusted EBITDA declined quarter-over-quarter. However, gross margins and adjusted EBITDA margins before the impact of start-up and transition cost remained strong as a result of continued reductions in manufacturing cycle times, improvements in productivity and material cost-out efforts.

Our customers are continuing to invest with TPI and adding new outsourced blade capacity ahead of the new line guidance we provided for 2018. In addition, they are tooling up new larger blade models more quickly than initially planned in order to aggressively drive down LCOE in response to economically driven global auction and tender processes.

Given the accelerated pace of the conversion of our prioritized pipeline, the addition of Enercon as a new customer with an aggressive start of production date and accelerated transitions requested by our customers, we are now expecting a total of 17 lines in start-up and 17 lines in transition during the course of 2018. This is up from our prior guidance of 12 lines in start-up and 14 lines in transition. This positions us well to hit our growth target in 2019 and our long-term goal of doubling TPI's annual revenue over the next several years.

Since our last earnings call, we signed a multiyear supply agreement with Enercon for 2 manufacturing lines in one of our Turkey facilities. Adding Enercon means TPI customers now represent 6 of the top 6 turbine manufacturers on an ex China basis. Vestas exercised options for 4 additional lines in our manufacturing hub in Matamoros, Mexico, bringing the total number of lines in that facility to 6.

GE has agreed to extend our supply agreement in one of our Mexico plants by 2 years to 2022 and will increase the number of lines in that facility to 5 from the current 3. Additionally, the existing 3 lines in that facility will be transitioned to a larger blade model. In addition, GE also agreed to transition to a larger blade model in our Iowa plant in early 2019 and to eliminate its option to terminate our supply agreement in Iowa prior to its December 2020 expiration.

In short, the expansion and extension with GE in Mexico and the transition in Iowa will result in 2 additional lines in Mexico while eliminating 1 line in Iowa. Annual Iowa volume will remain the same due to cycle time and productivity improvements. This brings our total number of lines with GE to 14.

The transition to larger blade models will result in higher revenue per year per line and add significant potential contract value over the remaining terms of the contracts. We are very pleased to be growing our business again with GE.

To accommodate the additional GE lines, we negotiated the removal of 3 lines for Siemens/Gamesa. These were the only lines in our portfolio subject to geographic exclusivity versus a minimum volume obligation. This was a unique situation, and we continue to work closely with Siemens Gamesa to close on other opportunities and we'll continue to collaborate with them on their next generation of turbine blades. Nordex/Acciona has agreed to extend our supply agreement with them in China for an additional 1 year beyond its current expiration the end of 2018.

Finally, we delivered our first Proterra bus body from our new bus plant in Newton, Iowa in July as planned, and we will continue to ramp up that facility during the balance of 2018.

Since the beginning of 2018, we've signed new supply agreements for a total of 11 new lines, agreed to an amended supply agreement for 2 additional lines and extended an existing agreement for 2 lines, while eliminating 4 lines. The net of these transactions represents potential contract revenue of up to $2.5 billion over the terms of these agreements.

Furthermore, we have now closed on 13 new lines so far in 2018, putting us near the top of our guidance range for new lines in 2018 of 10 to 14. We now have 50 dedicated lines beyond 2018 and set a new record high total potential contract value of $6.4 billion extending through 2023. We continue to develop our robust wind pipeline of global opportunities with current and new customers in both onshore and offshore blades.

As blades continue to get longer, utilize more advanced materials and we continue to drive increased output per line, the revenue from new lines will grow meaningfully. For instance, the average revenue per year per line of the 13 new lines we've added since the beginning of the year is approximately $43 million. This is up from the average of $35 million per year per line we've been discussing since last November. Furthermore, as our customers transition to larger wind blades under existing contracts, the potential revenue per line will increase, providing additional revenue growth opportunities from existing lines and facilities.

At the beginning of the year, our prioritized pipeline was 24 lines. As of today, our prioritized pipeline, as we expect to -- that we expect to close by the end of 2019 sits at 13 due to the 11 lines we closed since year-end. We did not have the 2 new GE lines in our prioritized pipeline so these were additive. We remain very confident in our ability to convert this pipeline by the end of 2019, and we continue to be in active negotiations for several lines with the expectation of closing additional lines prior to the end of 2018.

As we've talked about previously, 2018 is an investment year for TPI, and we've updated our estimate of both lines in start-up and transition during the year to '17. Notwithstanding the significant investment and volume impact, we remain confident in our top line growth target of approximately 10% this year and we are reaffirming our prior guidance for 2018 net sales and total billings. However, the acceleration of certain start-ups, and in turn start-up costs, into 2018 along with the reduction in volume of nearly 100 sets resulting primarily from the unexpected additional blade transitions during 2018 caused us to revise our 2018 EBITDA guidance to a range of $65 million to $70 million from a range of $75 million to $80 million.

It's important to emphasize that notwithstanding some commodity pricing pressures early in the year, some material shortage issues with the new start-up that has caused a production delay and the sheer volume and complexity of the transitions and start-ups, our underlying operational execution has been exceptional and our transitions and start-ups have gone according to plan and on or better than our internal budgets with the exception of 1 production delay described above. This gives us the confidence to accelerate some of our planned expansion and growth in 2018 and 2019 to further position us for market share gains and supports our long-term goal of doubling our revenue from wind over the next several years.

To illustrate this point, it will only take 50 lines averaging $40 million per year to achieve the $2 billion in annual wind-only revenue for TPI. We remain confident in our previously stated revenue target for 2019 of $1.3 billion to $1.5 billion or approximately 35% growth and our 3-year revenue CAGR of 20% to 25%.

Our strategy remains intact. We continue to see traction as we diversify our sources of revenue across customers, geographies and non-wind markets. We will continue to execute on this strategy and take advantage of the growth and the global wind market, stability in the U.S. wind market and the ongoing wind blade outsourcing trend.

Turning to Slides 6 and 7. As of today, our long-term supply agreements provide potential revenue of up to $6.4 billion through 2023, including the 50 wind blade manufacturing lines plus our transportation production lines. Our potential revenue under our supply agreements has increased by $1 billion over last quarter, notwithstanding our Q2 billings of $237.4 million.

At this time last year, our potential revenue under our supply agreements was approximately $4.4 billion. We've increased that amount by approximately $2 billion net of the impact of approximately $960 million of billings since that time. In other words, contract value added since last year at this time through new deals, amendments and blade transitions is nearly $3 billion. The minimum guaranteed volume under our supply agreements has grown to approximately $4.5 billion, up from $2.8 billion at this time last year.

Please turn to Slide 9. The global energy transition, now well underway, casts a long shadow over the future of oil, gas and coal markets, and there are 2 primary technology drivers of this transition. First, renewables have emerged as alternatives to possible fuel-based supply within the power sector. Solar, wind and grid storage are still at early stages of a rapid growth path. Second, the use of electric-based technologies, like battery-powered vehicles and transportation is growing.

Policy at the national, state and city level and demand from businesses and consumers provide a strong impetus for the age of oil and gas to transition into the age of power and renewables. Global annual wind power capacity additions are now expected to average over 67 gigawatts between 2018 and 2027 or a 10-year CAGR of 8.3% according to MAKE Consulting, which upgraded its own forecast made just last quarter by 78% between 2020 and 2024. This forecast also estimates that the top 20 emerging markets will grow at a CAGR of 26.7% between 2018 and 2027.

Our strategy is to continue to diversify our international markets to take advantage of growth in both emerging and mature markets and leverage our low-cost hubs to not be too dependent on any one market. A new analysis from Bloomberg New Energy Finance predicts a global electricity supply mostly fueled by carbon-free sources by 2050, with a chilling outlook for fossil fuel generators and little hope for nuclear resurgence with today's technology.

The new energy outlook report concludes a dramatic shift to 50 by '50, 50% wind and solar by 2050, is being driven by cheap renewables generation and falling battery costs. Solar and wind costs are expected to drop 71% and 58%, respectively, by 2050. And the additional global investment in renewables of $11.5 trillion, the bulk of which is for wind and solar, is expected to result in wind and solar representing 79% of all new generation capacity through 2050.

We believe we remain well positioned to serve the global demand from our facilities in the U.S., China, Mexico and Turkey. And we expect this global growth to continue to drive the outsourcing trend we've seen over the last 10 years.

As you can see on Slide 10, the U.S. market is expected to be very strong over the next several years with expected annual installations averaging nearly 10 gigawatts through 2021 according to MAKE, while UBS estimates are an average of 11.1 gigawatts through 2021, and then averaging just over 8 gigawatts from 2022 through 2025.

The U.S. wind market made healthy gains in the second quarter of 2018, surpassing 90 gigawatts of total installed capacity with new research from AWEA suggesting new wind energy project installations will continue to surge between now and 2020.

The U.S. project pipeline also saw a healthy growth in the second quarter. At the end of June, there were 19 gigawatts of wind capacity under construction and 18.8 gigawatts in advanced development. That combined 37.8 gigawatts is a 46% year-over-year increase and a 13% rise from the first quarter of 2018.

We believe we remain very well positioned in the U.S. with our current customers accounting for 99% of the U.S. market share in 2017 and also accounting for 99% of the projects under construction or in advanced development where developers have reported an OEM.

The U.S. offshore wind industry continued to see a significant amount of activity during the second quarter of 2018 as well, including the selection of 1.4 gigawatts of offshore wind energy through state solicitations. New Jersey passed a law calling for 3.5 gigawatts of offshore wind by 2030, and MAKE updated its U.S. offshore estimates by 16% recently to 7.4 gigawatts by 2027.

Although we recognize that there still remains some uncertainty in the marketplace concerning U.S. wind market beyond 2020, optimism continues to build due to several factors. 80% PTC orders placed in 2017 will increase installed gigawatts in 2021. And likewise, 60% and 40% PTC orders placed in 2018 and 2019, respectively, will drive installed gigawatts in 2022 and 2023. The pure economics of wind energy remain very compelling.

Corporate and retail customers want to buy wind. In the first half of 2018, nonutility purchasers contracted 36% of the capacity installed, and in the second quarter alone, they signed 56% of capacity contracted. First-time buyers, including Grupo Bimbo and Merck & Co., with repeat customers, AT&T and Walmart, each contracting an additional 300 megawatts of wind capacity. Furthermore, Denver's mayor has pledged the city will source of 100% of its electricity from renewable resources by 2030. In doing so, Denver has become the 73rd city in The United States to commit to a 100% renewable energy target.

Utilities are using wind to grow their businesses and meet aggressive CO2 emission reduction goals. During the second quarter, utilities announced plans to add another 1.5 gigawatts of wind capacity on direct -- under direct ownership, and approximately 49% of advanced development capacity is proceeding under direct utility ownership.

For example, MidAmerican Energy has achieved an exciting milestone as a renewable energy leader, stated Adam Wright, MidAmerican Energy's President and CEO. He was quoted as saying, "We have now crossed the 50-yard line, and we're moving closer to the goal, which is the vision we announced in 2016 to ultimately provide 100% renewable energy for our customers."

Coal and nuclear retirements are accelerating. MAKE estimates 55 gigawatts of coal capacity will be retired by 2027, and the U.S. Energy Information Administration has indicated that 9 nuclear plants with a combined 11 gigawatts capacity have announced plans to retire by 2025 with an additional 9 gigawatts of capacity expected to be retired by 2050.

Finally, many large institutional investors are stepping up their efforts to require change in environmental and social responsibility from the energy industry. For the reasons outlined above, and more importantly, the underlying economics, the fundamental drivers of the wind industry remain very strong.

Before I turn the call over to Bill, I'll touch briefly on the recent tariffs proposed by the U.S. government on goods imported from China as well as NAFTA negotiations post the Mexican presidential election. Wind blades are one of the many products included in the list of proposed products to be covered by the 10% tariff and a number of turbine OEMs imported blades from the U.S. [through] China when the U.S. market demand is strong, including blades manufactured by TPI. Although we believe these tariffs may have been proposed to help negotiate bilateral or multilateral agreements, if they ultimately do go into effect for wind blades, we believe they will have a relatively small overall impact, 2% to 2.5%, on the overall cost of a wind turbine.

Although still early in the game, recent indications are that NAFTA negotiations have resumed and are moving with some urgency. Public comments by various sources suggest that fears that the López Obrador administration will reverse key economic policies are likely overstated and that the new administration understands that abandoning trade agreements and reinserting the federal government into the energy sector would severely impede economic activity. These views have been supported by statements from López Obrador's designated cabinet appointees in recent weeks. With respect to NAFTA, Mexico's key negotiator stated recently that, "We are basically supporting what Mexico has been putting forward and we will be more than happy to explore proactively ways to energize the negotiation."

At this point, we haven't seen any proposed changes that would impact our operations in Mexico or our ability to continue to cost effectively serve our customers in multiple markets out of our Mexico locations.

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

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William E. Siwek, TPI Composites, Inc. - CFO [4]

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Thanks, Steve. Please refer to Slides 12 and 13.

Net sales for the quarter were $230.6 million or a decrease of 3.7% compared to the same period in 2017. Net sales of wind blades were $206.4 million for the quarter as compared to $225.8 million in the same period of 2017. The decrease was primarily driven by a 17.3% decrease in the number of wind blades produced during the second quarter of 2018 compared to the second quarter of 2017 as a result of lost volume during transitions and a delayed customer start-up as well as a reduction of volume in Turkey and China. This was partially offset by higher average sales prices due to the mix of wind blade models produced during the model compared to the same period in 2017, an increase in non-blade revenue and the favorable impact of foreign currency fluctuations. Total billings for the second quarter increased by $6.3 million or 2.7% to $237.4 million compared to the same period in 2017.

The favorable impact of currency movement on consolidated net sales was 2.4% for the quarter. Gross profit for the quarter totaled $15.1 million, a decrease of $14.9 million over the same period of 2017, and our gross profit margin decreased to 6.5%. The lower gross margin was primarily driven by the lower volume due to transitions, an increase in the start-up and transition costs of $6.8 million compared to the same period a year ago and unfavorable foreign currency movements. These were partially offset by the impact of net savings in raw material cost and improved operating efficiencies.

General and administrative expenses for the quarter were $11 million or 4.8% of net sales as compared to $10.8 million in 2017 or 4.5% of net sales. The net loss for the quarter was $4.1 million as compared to net income of $9.6 million in the same period of 2017. This decrease was primarily due to the operating results discussed above, an increase in the loss on foreign currency remeasurement and the write-off of debt cost and a prepayment penalty related to the refinancing of our prior credit facility.

The diluted loss per share was $0.12 for the quarter compared to earnings per share of $0.28 for the same period in 2017. Adjusted EBITDA decreased to $13.5 million compared to $26.2 million during the same period in 2017. Our adjusted EBITDA margin for the quarter was 5.8%, down from 11.0% in the second quarter 2017. The decline was driven primarily by the start-up and transition activity and the result in lost volumes.

Moving on to Slide 14. We ended the quarter with $114 million of cash and cash equivalents, total debt of $129.9 million and net debt of $17.4 million compared to net cash of $24.6 million at December 31, 2017. The decrease in our cash position is primarily due to the increased start-up and transition activities described above, including the related CapEx.

For the quarter, we had net cash provided by operating activities of $5.6 million while spending $30.6 million on CapEx, resulting in negative free cash flow for the quarter of $25 million. We're pleased with the strength of our balance sheet, our ability to generate the cash we need to expand our global footprint and the additional flexibility our new credit facility provides.

With that, I'll turn the call back over to Steve.

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [5]

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Thanks, Bill. Please turn to Slide 16. Now I'd like to update our key guidance metrics.

We expect total billings for 2018 of between $1 billion and $1.05 billion, while revenue under ASC 606 is expected to be within the same range. We expect our adjusted EBITDA for the full year to be between $65 million and $70 million.

We expect to deliver between 2,450 and 2,480 wind blade sets in 2018. Blade average selling price for the year will be in the range of $125,000 to $130,000. Total dedicated lines at year-end will be between 51 and 55.

Capital expenditures will be between $85 million and $90 million. start-up and transition costs will be between $66 million and $68 million. Net interest expense will be between $14 million and $14.5 million.

We remain very confident in our global competitive position and the application of our dedicated supplier model to take advantage of the strength in the growing regions of the wind market, the trend toward blade outsourcing and the opportunities for market share gains provided by the current competitive dynamic.

We are pleased with TPI's second quarter and year-to-date results.

To summarize, we continue to invest heavily in new start-ups as well as transitioning lines to new larger blades as we position the company for strong growth in 2019 and beyond. We are tracking well against our plans and delivered strong results, both on the top line and on an adjusted EBITDA basis.

We signed a multiyear supply agreement with Enercon for 2 manufacturing lines in our Turkey location. Vestas exercised an option for 4 additional lines in our manufacturing hub in Matamoros, Mexico, bringing the total number of lines in that facility to 6. And GE has agreed to extend our supply agreement with one of our Mexico plants by 2 years to 2022 and will increase the number of lines in that facility to 5 from the current 3.

Furthermore, the existing 3 lines in that facility will be transitioned to a larger blade model. In addition, GE has also agreed to transition to a larger blade model in our Iowa plant in early 2019 and to eliminate its option to terminate our supply agreement in Iowa prior to its December 2020 expiration.

These deals, along with the other deals we've signed since this time last year, represent nearly $3 billion of additional contract value that we've added in the last 12 months, leaving us with up to $6.4 billion of contract value through 2023 as of today, positioning us well for strong growth in the future. And we continue to gain traction with our diversified markets initiatives and are working on several opportunities that will continue to advance these initiatives.

We remain very confident in our ability to continue converting our prioritized pipeline by the end of 2019 and expect to be announcing some of those conversions before the end of this year.

I want to thank the TPI associates for their dedicated effort, our customers for placing their trust in us and our shareholders for your continued support. Thank you again for your time today. And with that, operator, please open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Paul Coster with JPMorgan.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [2]

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Perhaps you can give us a little bit of color around what exactly is happening with the Siemens/Gamesa business in Iowa. It sounds like it's getting bumped, but I may be misunderstanding what you said.

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [3]

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Yes. Thanks, Paul. So in Mexico, plant 1, there were 3 Siemens/Gamesa lines of a smaller blade that had been, you may recall, Paul, under a geographic exclusivity provision as opposed to our normal course minimum volume obligation. That particular blade was -- the market's moving to bigger blades, so that capacity was not needed for that product, for SGRE. And frankly, we have an opportunity to grow our business with GE. It was a better opportunity for us, and so we've seized that opportunity. So SGRE just didn't move quickly enough in a sense to secure that capacity back. And we've seized on what we think is a good opportunity for TPI. So you may have heard not only are we adding 2 lines to Mexico plant, 1 for GE, but we also extended the term by 2 years for all 5 of those lines in addition to the Iowa transition and elimination of the early termination rights. So think of all that as a package a bit, if you will, with GE. And so we're really pleased to be growing our business again with GE, and we seized on an opportunity.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [4]

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So what does it mean about the relationship with Siemens/Gamesa moving forward?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [5]

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Yes. The relationship there is still good. As we said in our prepared remarks, we'll continue to work with them to expand in global opportunities and continue to collaborate on new blade models. Plant 2 in Mexico is dedicated to SGRE with 4 lines. We have lines in Turkey for them. And we'll continue to work to earn their business as we go forward. So no change from that perspective.

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Paul Coster, JP Morgan Chase & Co, Research Division - Senior Analyst, Alternative Energy, and Applied and Emerging Technologies [6]

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Okay. Got it. And then my last question, Steve, is that this year, obviously, it's been a transition year and next year is something of a payback year. But the rate at which these blades are being upgraded is actually encouraging really. Is there a risk, therefore, the 2019 EBITDA numbers kind of get reined in because suddenly we see another wave of transitions?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [7]

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Yes. So our targets for 2019, the $1.3 billion to $1.5 billion of revenue, $145 million of EBITDA, that -- those targets remain our targets, unchanged at this point. We'll provide more detailed guidance later in the year for 2019. But I think it is true, Paul, that there's a more intensive set of transitions going on in 2018 than we've seen before. I think all of our customers are retooling for larger, more cost-effective blades. Everyone's chasing a number of the tender processes that are more economic-driven today, auctions and different forms of tendering processes. So there's a very intense level of activity of transitioning to larger blades. There will be some transitions in 2019. In fact, some of the comments we made around GE Iowa would be a 2019 transition, so there will be some transitions. We expect, as a percent of our total lines, that the transition count will drop. We also expect over time that transitions will slow a bit. If you think about the economics of our customers' business, in order for them to have returns on their invested capital, they're all retooling pretty heavily right now, but they're not going to be in a position to retool as often their businesses as they go forward, given the economic nature of the business. So the good news is, wind energy is about economics now, right? That's really good news. But it also means there's some tougher competition at our customers. They need to invest for that LCOE level, but they need to provide returns as well. So we see it slowing a bit as time goes on. And I'd just had one other kind of overarching point there, Paul. We've set a goal to double our revenue, again, from the current levels over the next few years. One way to get there would be 50 lines at $40 million per year per line is $2 billion in wind-only revenue. Or if we're successful the way we just outlined of 50 lines plus 13 in our pipeline, that's 63, there's room in that, times $35 million to $40 million, there's room for some number of transitions every year and still achieving the doubling of revenue for the company. And so that's really what we're doing is build out the capacity such that whatever the minor haircuts might be, be it product transitions or anything else, we'll be able to absorb those transitions, absorb that underutilization a bit, if you will, and still achieve a goal of doubling the revenue and doubling the value, if you will, of our company over the next few years.

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Operator [8]

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Our next question is from Philip Shen with Roth Capital Partners.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [9]

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Congrats on GE. That's exciting. As it relates to GE Mexico, I just want to confirm, are the blade sizes actually increasing for all 5 lines? So you used to have 3 lines for GE, 3 lines for Siemens/Gamesa for a total of 6. And now you're going to 5 and all 5 will be larger in size? And then also for Iowa, they, I think, are not -- they got rid of the termination clause. But typically, we would expect to see an extension of that, the lines in Iowa. Can you give us an update on what's happening there? Is that under -- in process now? If they've agreed to upgrade the line and get rid of the termination clause, I can imagine you want some security in understanding how long you might be able to operate that line for. And then finally, as a follow-up to Paul's question on Siemens, if you -- were there any financial impacts as a result of removing those 3 lines? And what did they get in exchange for letting go of those lines? Because I recall, those lines may have been set to terminate by year-end '20? So it's looking like we're a couple of years early or ahead of time. So just some additional color in each of those lines would be great.

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [10]

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Yes. Thanks, Phil. So regarding Mexico one, the first question, yes, all 5 lines for GE would be transitioning to a larger blade model and extending the term as well. In terms of Iowa, yes, we have eliminated GE. Working with GE, we have agreed to eliminate their early termination right. Yes, we'll be retooling all those lines. So even though there was not an extension beyond 2020, you can see it rightly, I think, as they and we are making investments together to position the Iowa factory for future opportunities. As we've said, I think the market is really quite clear in the U.S. through 2020 and strengthening in '21 and beyond. But you can imagine GE's position of being willing to eliminate the early termination right. And then as time goes on, we'll talk about 2021 and beyond. And then in terms of SGRE, the conditions around the 3 lines in plant 1 were a little bit unique. You may recall, Phil, talking about that they were operating under a geographic exclusivity, not an annual minimum volume obligation. So the provisions on those 3 lines were a bit unique in terms of our obligation to maintain capacity and their obligation from an MVO perspective, there was no MVO. And therefore, we were able to negotiate through with some financial investment, but negotiate through an opportunity that we think is a better one to retool the whole plant for 5 lines as you said, of a larger blade for GE and just settle it that way.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [11]

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Okay, great. And then I want to clarify, I think you talked about a prioritized pipeline remaining of 13, and I think you're at -- you have 50 now so that by year-end '19, we could be at 63. But I think in the past, you've talked about 65 lines by the end of '19 and then 2 additionally for GE. So I'm guessing I got my wires crossed somewhere, but is it possible that we end up at the end of '19 with 67 lines? Or do I have that wrong? And then importantly, if you could -- I know you talked about the $43 million average revenue for the recent wins. But for the entire footprint of lines, let's say it ends being 67 or 65, whatever it is, what's the right blended average revenue for the entire capacity footprint when we get to year-end '19? Is it $40 million or is it $35 million? Or is it maybe even $43 million?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [12]

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You bet. So Phil, you did not get your signals crossed there. Your math was right. On the 50 lines plus 13 that we're describing today, so total of 63, keep in mind that as we retool for larger blades, sometimes we will reduce the number of lines. And so the 65 was kind of a net equivalent of the lines being run at the time, but we'll continue to see a little bit of a shrinkage of the number of lines. But exactly as you pointed out, times -- multiplied by a larger revenue per year per line. We've not provided additional guidance yet at this point in terms of an average. What we're trying to point out is that the last 3 -- last 13 lines, pardon me, do average $43 million. So you can see that average shifting, but that's 13 out of 50, if you will. Our last guidance, as you'll recall, was averaging $35 million. And I think over time, we'll provide a new modeling average. But at this point, $35 million is the modeling average we provided, last 13 lines at $43 million. And I think probably wait until our guidance to reset those numbers.

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Operator [13]

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Our next question is from Joseph Osha with JMP Securities.

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Hilary Cauley, [14]

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This is actually Hilary on for Joe. I just had 2 questions around the transportation side business actually for you. The first being, I saw you raised the non-blade billings a little bit. And I was just wondering, is that fully on the transportation side? Or does that also have some of the, I think you said, service revenues clumped in there as well?

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William E. Siwek, TPI Composites, Inc. - CFO [15]

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Yes. It's a bit of a combination, Hilary. This is Bill. It's -- but it's primarily related to tooling. As you can imagine, with an increase in the number of transitions as well as start-ups, generally, we're providing that tooling for our customer. They're paying for it, we're building it. And so a good chunk of that increase is related to the increased tooling activity as a result of the transitions and start-ups.

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Hilary Cauley, [16]

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Okay, great. And then just kind of more broadly speaking, a lot of exciting stuff going on, on the wind side of the business. But I was wondering if you could just talk about what's kind of progressing on the transportation side, back half of this year and into '19.

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [17]

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Yes. Hilary, it's Steve. So as we've announced in the past, we have a handful. I think it's at 5 now, development programs in the strategic market space, including electric vehicles in the automotive area, trucks with Navistar, products along that line. A couple have been mentioned by name, General Motors, Navistar and there are a few others that remain confidential at this point. So those are all progressing. They are a little bit longer-range development programs in general. So as opposed to expecting us to report purchase orders each quarter, that's just not quite where we are with those programs. The one production program of consequence is Proterra. As we mentioned in our prepared remarks, we did ship bus #1 -- bus body #1 out of our Newton plant. We're continuing production out of the Rhode Island operation for Proterra. So we're rooting for them in terms of their overall volume in the electric transit bus space. That's going well. Our operations are coming up and going well there also. So we are pleased with our progress, but this is building a non-wind business that's going to take some time in parallel with the growth of the wind business.

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Operator [18]

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Our next question is from Jeff Osborne with Cowen and Company.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [19]

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Just 2 quick ones here. One, can you just remind us around transitions as a topic in general, is there anything contractually around how much lead time a customer gives you? Can they come to you and say, "Hey, we're going to shut this line down and have a transition next month"? Or is there sort of a heads-up 2 quarters out? I just want to better appreciate the relationship you have with your customers, which I know is solid. But just the increase in transitions and get the markets competitive, but just want to understand that kind of dialogue you have with them about that process.

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [20]

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Yes. We've got a couple of individual relationships with our customers, Jeff, that might work a little differently one to the next. But generally, the answer to that is, there's no set period of time that, that new model has to run for. But keep in mind that each time that there's a transition, our customer makes a new investment in tooling. So it's not only us investing, which we do invest in some lost volume so to speak. So there's an EBITDA that's not generated, contribution margin that's not generated when the volume dips for a bit, and then we come back up. But they're making those investments too, so they want the product to run as long as possible. Of course, we would like for it to run as long as possible and a little longer than some of the transitions that are going on right now. But that's also why we said these are transitions that are a little more intense than normal. We understand it in terms of chasing LCOE and preparing for the tender processes, but we also think over the next year or 2 that, that would settle down somewhat. We'll always have some amount of transitions, we expect, but not 17 plus 17, if you will, transitions and start-ups into a lower denominator. As we go forward, we'll have more lines booked in total and less transition [intensivity] than we have right now.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [21]

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Got it. That makes sense. And then I just wanted to understand in terms of the GE extension, and congratulations on that. But I know in the past, the game plan had been whenever there's a transition to aim to extend the contract duration to make up for the lost EBITDA, and in the case of GE, it looks like you've been able to do that. Was it just that, that being a factor of the contract extension? Or is there anything from a locational aspect of where your plants are versus their own internal capacity or perhaps something technologically around production technique that you're doing versus their acquisition of LM? I just want to better understand why they extended the contract. Is there anything that you can add in that regards?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [22]

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Yes. I don't think we can speak kind of too much on their behalf in terms of how they make those internal decisions. But just a couple of fairly obvious kind of points, I guess. LM does not have a plant in Mexico. We have 2 plants serving GE in that location. So that, to your point, Jeff, that is a geographic advantage, I think you could say, in a pretty straightforward manner. Our Iowa operation is more kind of right in the thick of the Midwest as is their current in-house operations with the LM footprint. But look, we compete for business, right? We're driving productivity, we're reducing cycle time, we're driving material cost out and we're passing on a portion of that gain to our customers. So we're competing for business, and we're competing effectively with GE recently even against their internal operation, you could say. So as a global manufacturing company, we have to continue to drive cost down and compete, and I think that's an example of how that's been working. Now there is a bit of a chemistry difference between what LM runs and what TPI runs. LM uses a polyester chemistry, resin chemistry, we use epoxy. So there are some differences in terms of the technical nature between the 2 products, and that could influence some of the decisions that our customers make. But again on balance, it's about competing and winning share.

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Operator [23]

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Our next question is from Pavel Molchanov with Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [24]

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So you mentioned that the bus body plant in Newton opened earlier this summer. I'm guessing Q2 got very little benefit of that. But if you can give a status update on that facility and how you expect it to ramp between now and maybe the end of the year.

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William E. Siwek, TPI Composites, Inc. - CFO [25]

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Sure. Yes, we open pretty much on time, on schedule, so there was no revenue impact in Q2. So the first bus was delivered in early July, as we had suggested earlier. And so we'll continue to ramp that volume through the balance of 2018.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [26]

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Okay. That's helpful. And then kind of a broader question about the EV bus market. You're well aware of what the L.A. Times published a few months ago regarding competitor to Proterra selling in Los Angeles and the performance issues with those buses. Has that, to your knowledge, had any detrimental effect on the willingness of fleets to consider EV buses? Or is all of this a sideshow?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [27]

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Yes. I don't think we can comment too specifically, Pavel, about buying decisions around Proterra versus BYD or other products, except to say that the drivers for electrification of the vehicle fleet, including transit buses, is really strong, as you know, the fundamental driver. But the technology has got to be right. I mean, as any of the guys sell into these fleets, they're conservative bus buyers, and these folks measure reliability over decades. The stuff's got to work, it's got to be proven to work. So I think there's some really good work being done that way. I don't think we've seen an overarching negative impact, maybe a simpler answer to your question at this point. But the fundamentals are pretty good, but the technology, everybody has got to make sure the reliability is good and that it works well.

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William E. Siwek, TPI Composites, Inc. - CFO [28]

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Pavel, this is Bill. We -- you'll see tomorrow we'll post an updated Investor deck to the website. And we have updated the slide on Proterra and kind of the number of customers and vehicles delivered, et cetera. And they are continuing to make progress, and so you can kind of see what the delta has been quarter-over-quarter. But they do continue to make progress, just FYI.

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Operator [29]

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Our next question is from Chip Moore with Canaccord Genuity.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [30]

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Obviously, you guy would rather not have this many lines in transition. But with all experience you're gaining here, how do we think about getting more efficient in terms of process? We talked about it at the Analyst Day in the past. But I imagine at some point, this becomes a pretty significant competitive advantage for the outsourcing model in general.

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William E. Siwek, TPI Composites, Inc. - CFO [31]

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Yes. We've talked in the past, Chip, about our ability to provide the flexibility to our customers, and one way to do that is to be more efficient from a transition standpoint, so you're right. And as much as we'd not like to have as many transitions, we get better and better at them as we go. You mentioned the Investor Day, we provided some statistics about the improvement that we've had year-over-year from '16 to '17. We're continuing to see improvement as it relates to transitions, so we get better. There's a number of these that are going to be what we would call a tip transition, so it's not a full-mode transition. So it happens quicker, and it's less of an interruption, if you will, on the volume. So that's helpful. But yes, you're right, we are getting better at it. And we've got a group of folks dedicated to it, and we do think it adds a competitive advantage to our toolbox.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [32]

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Got it. Makes sense. And maybe just one on the pipeline. Maybe you can talk more broadly, new versus existing customers. And any changes on what you're tracking in the offshore market?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [33]

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Yes. Really, no change to that, Chip. The pipeline includes expanding with some existing customers as well as a couple of new customer opportunities. It includes mostly onshore lines, but also a couple of offshore lines.

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Operator [34]

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Our next question is from Eric Stine with Craig-Hallum.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [35]

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So I'll just sneak in 2 here at the end. But have heard from some wind OEMs that there is some concern that the tariffs in place, they won't be able to pass on price increases to customers, and that would seem to be a pretty good environment for you in the shared savings model and the outsourcing. I'm just curious, I mean any thoughts on whether that's driving some of the acceleration of your pipeline? Or, I mean, do you really attribute it pretty much all to just the tenders and other things going on in the market?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [36]

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Eric, it's Steve. I think it's mostly the tenders and the other drivers, as we've suggested so far. I think the tariff-related stuff with China, it's still difficult to predict, I think today, what's going to stick and for how long. And so even though it's -- there's probably more substance and more noise in some of the discussions that are going on in some of the 10% versus 25% threats and $16 billion versus $200 billion kind of thresholds in the multiple list. You can see the negotiating fodder kind of building here through that discussion. And so I think to the extent that some of that sticks for a while, then maybe fewer components for the wind industry come from China, not just blades, but many things and maybe the costs go up for a period of time. You could see that happening for a period of time. I think it'd be a shame in a sense that we've done a great job as an industry of driving cost down and being just economically driven in many ways. So it'd be a shame to reverse some of that trend. But if the tariffs stick, there will be cost increases. From a TPI perspective, our contractual rights generally are the pass-through cost to our customers. We don't really want to be doing that. We really want to be driving cost down. So we'd like to see more and more work to help be more competitive as you hear us talk about the business rather than more tariff-related work. But we don't plan our global supply chains based on 1 presidential cycle or 2 years. We don't plan on that basis. We plan on 10 to 15 years. But if some of that sticks, then supply chains adapt. That's what global supply chains do. And if we need to adapt, we will. Our hope is that things would resolve themselves in a way that's pretty constructive and we wouldn't need to adapt. But if you go back to our comment of 63 lines, only really needing to run 50, if you will, to double the revenue of our company, there are many ways we can get to that doubling of value. There are a number of things we could absorb a bit as we go through this if we have to. Again, I started with, we don't think it's a significant concern, but we ought to stay grounded and make sure that our plan is resilient regardless of how a few of these things play out.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [37]

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Got it. And maybe just one quick on the EV side. I know now it's our -- I mean that's very recent. But I mean, any, if you're able to, any milestones or things we should look at or look for in second half '18 or 2019? I mean, just how that might play out here going forward.

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [38]

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Yes. I don't think with respect to any one of those programs that we're not going to get out ahead of our customers in terms of anything that they may choose to announce or PR around their platforms. So it's really probably not appropriate for us to set those milestones. Again, think of these as fundamental development programs. It's very good work. We're focusing on things that we think will really build revenue of TPI's. So we're not -- they aren't sidebar R&D projects that don't have much merit. We're investing, our customers are investing, so we're proving out weight savings and reliability and demonstrating very large scale structures. So the work that's going on is very significant. But it's not our place to put their milestones out there for one. And also I'd, again, just caution folks to think this is going to take some time. Development work in these areas does not happen overnight, the reliability has got to be proven. So stick with us there, but we won't necessarily be making announcements every quarter.

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Operator [39]

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Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [40]

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Thanks, operator. Thanks, everyone again for your interest in TPIC. And we look forward to continuing to update you on our progress. Thanks very much.

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Operator [41]

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