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Edited Transcript of TPIC earnings conference call or presentation 28-Feb-19 10:00pm GMT

Q4 2018 TPI Composites Inc Earnings Call

SCOTTSDALE Mar 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Tpi Composites Inc earnings conference call or presentation Thursday, February 28, 2019 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christian Edin

TPI Composites, Inc. - Senior Director of IR

* 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

* Ethan Cory Ellison

Morgan Stanley, Research Division - Equity Analyst

* Jeffrey David Osborne

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

* Joseph Amil Osha

JMP Securities LLC, Research Division - MD & Senior Research Analyst

* Mark Wesley Strouse

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

* 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 Fourth Quarter and Full Year 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'd like to turn the conference over to Christian Edin, Senior Vice -- Senior Director of Investor Relations for TPI Composites. Thank you. You may begin.

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Christian Edin, TPI Composites, Inc. - Senior Director of IR [2]

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Thank you, operator. I'd like to welcome everyone to TPI Composites' fourth quarter and full year 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 our annual form 10-K that we will file with the Securities and Exchange Commission and in our SEC reports on filing, each of which can be found on our website, www.tpicomposites.com. We do not undertake any duty to update any forward-looking statements.

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

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 fourth quarter 2018 earnings call. I'm joined today by Bill Siwek, our CFO; and Christian Edin, our Senior Director of Investor Relations. Christian is new to our IR team but not new to the company. He's been an invaluable member of our business development team for over 10 years and has contributed greatly to TPI's growth.

I'll begin today with some highlights from the year, followed by a brief update of the wind market and our strategy. I'll then turn the call over to Bill to review our financial results before we open up the call for Q&A.

Please turn to Slide 5. In Q4, we continued the investment we discussed last quarter in new startups as well as transitioning several existing lines to new larger blades. We believe this investment will provide a foundation for our continued growth in 2019 and beyond. Notwithstanding the significant amount of effort and complexity involved in the startup and transition process, we finished the year in line with the guidance we provided in November.

Our net sales for Q4 were $290.1 million or 14% increase over Q4 2017, and adjusted EBITDA was $9.8 million compared to $28.4 million in Q4 of 2017. Net sales for the year increased by 7.8% to $1.03 billion compared to $955.2 million in 2017. And adjusted EBITDA was $68.2 million or a margin of 6.6% compared to $100.1 million or a margin of 10.5% in 2017. The impact of both startups and transitions resulted in our adjusted EBITDA declining quarter-over-quarter and year-over-year specifically due to the lost contribution margin dollars from lower blade volume during the transitions, coupled with the high cost of startups. However, our adjusted EBITDA margin before the impact of startup and transition costs was 13.9% on an annual basis, benefiting from continued reductions in manufacturing cycle times, improvements in productivity, material cost-out efforts and the strength of the U.S. dollar.

Our customers continue to invest and grow with TPI in adding new outsourced blade capacity, and additionally, they're tooling up new larger blade models more quickly than initially planned to aggressively drive down LCOE in response to economically driven global auction and tender processes.

Last month, we announced a multiyear supply agreement with Vestas Wind Systems to provide blades from our 4 manufacturing lines with an option to add more lines for India and export markets. The blades will be produced at a new Indian facility in Tamil Nadu, which TPI plans to open for production in the first half of 2020. This new state-of-the-art manufacturing hub will enable us to reliably and cost-effectively serve the India and global wind markets for multiple customers.

We also plan to localize a substantial portion of our required raw materials in-country for supply to our India blade plant as well as for export to other TPI global plants to add raw material supply capacity and to continue to drive down our raw material costs. Our move to India highlights the continued execution of our growth strategy.

Since the beginning of 2018, we've added 16 new lines under contract around the world and reduced 4 lines for a net addition of 12 lines to bring our total dedicated lines under long-term contracts, as of today, to 54, which was near the high end of our 2018 guidance range. These transactions as well as a few amendments to existing supply agreements represent additions to potential contract revenue of up to $3.4 billion over the terms of these agreements, and we now have a total potential contract value of up to $6.8 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. We updated our pipeline at the end of Q3 to include lines we intend to close by the end of 2020. At the time, this updated prioritized pipeline included a total of 23 lines. Since that time, we have converted 4 lines with Vestas, leaving 19 to close on by the end of 2020. We are confident in our ability to convert this pipeline and continue to be in active negotiations with existing and potential new customers.

2018 was an investment year for TPI, with 16 lines in startup and 15 lines in transition during the year. Given our historical returns on invested capital from startups and our rigorous investment policy, startup cost translates to growth and future potential profitability, and we believe the same is true with transitions. We have and will continue to evaluate every transition request from our customers to ensure that it is in the best interest of TPI, our stakeholders and, of course, our customers. While we've had some execution challenges and delays relating to both startups and transitions in 2018, we're improving the speed and reducing the cost of both startups and transitions.

Our growth strategy remains intact, and we continue to see traction as we diversify our sources of revenue across customers, geographies and non-wind markets. We remain committed to our long-term goal of doubling our 2018 wind revenue to more than $2 billion in 2021. We plan to continue to execute our stated strategy and take advantage of the growth in 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 approximately $6.8 billion through 2023. At the end of 2017, our potential revenue under our supply agreements was approximately $4.4 billion. We have increased that amount by approximately $2.4 billion, net of the impact of approximately $1 billion of billings, since that time. In other words, contract value added since last year at this time through new deals, amendments and blade transitions prior to considering what we've realized in total billings over the last year is over $3.4 billion. The minimum guaranteed volume under our supply agreements has grown to approximately $4 billion, up from $3 billion at December 31, 2017.

Turning to the global wind market. We are pleased to see the continued growth of wind energy as a cost-effective and reliable source of clean electricity as we and the industry continue to drive down LCOE while consumers and corporate customers demand it. We see the future of global electricity growth as cost-effective and reliable wind, solar, storage and transmission.

Global annual wind power capacity additions are expected to average nearly 68 gigawatts between 2018 and 2027, according to Wood Mackenzie. This forecast also estimates that the top 20 global markets will grow at a CAGR of 8.4% between 2018 and 2027, while the top 20 emerging markets will grow at a CAGR of 25% between 2018 and 2027. Our strategy is to continue to leverage our global manufacturing footprint 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. We believe we remain well positioned to execute this strategy and serve global demand from our facilities in the U.S., China, India, Mexico and Turkey. And we expect this global growth to continue to drive the outsourcing trend we've seen over the last 10 years.

The U.S. market outlook over the next several years is strengthening, with expected annual installations averaging 10.2 gigawatts through 2021 and then averaging just over 8 gigawatts from 2022 through 2025, according to UBS. We, like many participants in the wind and utility industries, believe that the economics of wind, along with the demand from both retail and industrial customers, the electrification of the vehicle fleet and decarbonization initiatives by utilities, will continue to drive wind penetration long after the current PTC sunsets in 2023.

In 2019, we are extremely focused on execution. With strong global wind market growth year-over-year and TPI's planned top line growth of 50% to 60% come many challenges. We are adding raw material supply capacity and are localizing raw materials to remove constraints and to serve our various manufacturing hubs in a manner that helps us to continue to drive down cost. We are doubling our global tooling capacity with additions in Mexico and China in order to keep pace with our new line startups and transitions. We are adding top talent on a global scale.

Let me now touch on the status of labor unrest in Matamoros, Mexico. In January, unions and factories in Matamoros, Mexico went on strike, seeking higher wages and bonuses after the Mexican government increased minimum wages in the northern border region. This was initially contained to a few companies but has since spread to virtually all businesses in Matamoros. Many of TPI's Matamoros associates initiated a strike in mid-February that was initially declared illegal by the Mexican labor board, but subsequently, an injunction was issued by a federal court that suspended the labor board's ruling but also permitted TPI's plant to reopen. We have been assured by senior officials in the AMLO administration that they are working to get our plant reopened, consistent with the court order, and that the Mexican government sees Matamoros as a gateway to significant commerce between the U.S. and Mexico and recognizes the importance of resolving this matter quickly. For these reasons, we are confident that this matter will get resolved in the next several days.

However, this disruption has resulted in the stoppage of production and has resulted in the turnover of a meaningful portion of our direct labor workforce. This will result in the delay in the startup of a few of the lines in this facility and will have an impact on overall production volume for the year, primarily in the first and second quarters. To mitigate this disruption and leveraging our global footprint, we have been able to increase volumes at some of our other plants to make up some but not all of the anticipated volume shortfall for the year. The overall financial impact will not be known until we finalize an agreement with the union over the coming days. While we have not experienced any labor unrest in any of our Juarez, Mexico facilities, there is a risk that similar wage demands could be made by employees at most, if not all, businesses along the U.S. and Mexican border.

As discussed in our last call, the U.S. and China are continuing to negotiate a new trade deal. The current tariff on wind products is 10% and could increase to 25% if a deal is not reached. In recent days, the U.S. negotiation team has expressed that good progress has been made and optimism that a deal will get done. Regardless of the outcome of the U.S.-China trade talks, we believe our global footprint will help us mitigate the impact of tariffs on Chinese products. While today, less than 15% of the blades we produce globally are imported by our customers into the U.S. from China, we recognize that the added cost of the tariff may result in our customers shifting which TPI or other factory they source their U.S. blades from.

The benefit of our global manufacturing footprint is that it can allow our customers to shift volumes to best meet their cost and delivery requirements. We still have strong demand on our China facilities in 2019, even though many of the blades will be shipped to other locations. This is further demonstration why having world-class manufacturing hubs to serve large geographies cost-effectively is important for our customers and provides us with an advantage over most other blade manufacturers.

In another matter, one of our customers in China, Senvion, announced on February 24 that it was undertaking a transformation program aimed at correcting its execution challenges as well as obtaining financing with outside lenders so as to secure its position in the future. These challenges have caused Senvion to delay its 2018 earnings release. While we continue to produce blades for Senvion from 2 lines at our Taicang, China plant, we could see reductions in the volume of wind blades Senvion ultimately orders from us in 2019. In addition, the financial challenges Senvion is facing could put at risk the collectibility of our outstanding accounts receivable and may also hinder our ability to fully recoup the cost of raw materials and work-in-process inventory we've incurred for Senvion projects.

With that, let me now 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 9 and 10. Net sales for the quarter increased by $36.6 million or 14.4% to $290.1 million compared to $253.5 million in the same period in 2017. Net sales of wind blades were $257.8 million for the quarter as compared to $231 million in the same period in 2017. The increase was primarily driven by a 3% increase in the number of wind blades produced and higher average sales prices due to the mix of wind blade models produced year-over-year. These increases were partially offset by foreign currency fluctuations.

Total billings increased by $62.1 million or 25.6% to $304.8 million for the 3 months ended December 31, 2018 compared to $242.7 million in the same period in 2017. The impact of the fluctuating U.S. dollar against the euro in our Turkey operations and the Chinese RMB in our China operations on consolidated net sales and total billings for the 3 months ended December 31, 2018 was a net decrease of 1.4% and 1.3%, respectively, as compared to the same period in 2017.

Gross profit for the quarter totaled $12.6 million, a decrease of $17.8 million over the same period of 2017, and our gross profit margin decreased to 4.3%. The lower gross margin was primarily driven by the increase in startup and transition costs of $9.7 million compared to the same period a year ago. And we also experienced unfavorable changes to net sales in the fourth quarter of 2018 as we were required to record an unfavorable cumulative catch-up adjustment under ASC 606 based upon changes in estimates of future revenue, cost of sales and operating income in large part due to the treatment of certain blade transitions. These impacts were partially offset by favorable foreign currency movements. Before startup and transition costs, gross margin was 11.7% compared to 16.5% in Q4 of 2017. This decline was primarily due to the impact of an increased amount of blade and bus volume in the ramp-up stage that typically generate lower contribution margins until those lines are at full capacity.

Our corporate overhead costs included within general and administrative expenses for the quarter were $11.6 million or 4% of net sales as compared to $12 million in the same period in 2017 or 4.7% of net sales. Before share-based compensation, G&A as a percentage of net sales was 3.7% and 3.9% in Q4 of 2018 and 2017, respectively. The remaining G&A costs in Q4 2018 primarily related to the discount on the sale of certain receivables on a nonrecourse basis to financial institutions pursuant to supply chain financing arrangements with certain of our customers.

The loss for the quarter was $8.8 million as compared to net income of $2.2 million in the same period of 2017. This decrease was primarily due to the operating results discussed above. The diluted loss per share was $0.26 for the quarter compared to earnings per share of $0.06 for the same period in 2017.

Our adjusted EBITDA decreased to $9.8 million compared to $28.4 million during the same period in 2017. Our adjusted EBITDA margin for the quarter was 3.4%, down from 11.2% in the fourth quarter of 2017. The decline was driven primarily by the increased startup and transition activity. Before startup and transition costs in both periods, our adjusted EBITDA margins were 10.7% and 15.8% in Q4 of 2018 and 2017, respectively.

For full year 2018, net sales for the year increased by 7.8% to $1.03 billion compared to $955.2 million in 2017. The increase was primarily driven by higher average sales prices due to the mix of wind blade models produced in 2018 compared to 2017. This increase was partially offset by a 12% decrease in the number of wind blades produced year-over-year due to the number of transitions and startups during 2018 period as well as the loss of volume from 2 contracts that expired at the end of 2017.

Total billings for the year increased by 6.9% to $1.01 billion compared to $941.6 million in the same period in 2017. Gross profit for the year totaled $72.8 million, down from $110.5 million in the same period of 2017, and our gross profit margin decreased to 7.1% from 11.6%. The decrease in gross margin was primarily driven by the increase in startup and transition costs of $34.1 million, partially offset by the impact of savings in raw material costs and the impact of currency fluctuations. Before startup and transition costs, gross margin was 14.3% in 2018 compared to 15.8% in 2017.

Our corporate overhead costs included within general and administrative expenses for 2018 were $43.5 million or 4.2% of net sales as compared to $40.4 million in the same period in 2017, also 4.2% of net sales. Before share-based compensation, G&A as a percentage of net sales was 3.6% in both 2018 and 2017. The remaining G&A costs in 2018 primarily related to the discount on the sale of certain receivables on a nonrecourse basis to financial institutions pursuant to supply chain financing arrangements for certain of our customers.

Net income for the year was $5.3 million as compared to $38.7 million in 2017. The decrease was primarily due to the reasons set forth above. Diluted earnings per share for the year was $0.15 compared to $1.11 in 2017. Adjusted EBITDA decreased to $68.2 million or a margin of 6.6% from $100.1 million or a margin of 10.5% in 2017. Before startup and transition costs, our adjusted EBITDA margin was 13.9% compared to 14.7% in 2017. The decrease was driven primarily by the $34.1 million increase in startup and transition costs and the resultant lost contribution margin from blade volumes lost during the transitions.

Moving on to Slide 11. We ended the year with $85.3 million of cash and cash equivalents, total debt of $137.6 million and net debt of $53.2 million compared to net cash of $24.6 million at December 31, 2017. The decrease in our cash position during the quarter was driven by the increased level of startup and transition costs; a buildup of accounts receivable, the majority of which were collected shortly after year-end; and capital expenditures needed to fund our continued growth. For the quarter, we had a net use of cash from operating activities of $20.5 million while spending $2.1 million on CapEx, resulting in negative free cash flow for the quarter of $22.5 million. For the year, we had negative free cash flow of $55.9 million. Our balance sheet remains strong, and we continue to demonstrate the ability to fund our growth primarily with cash generated from our operations and the significant availability we have under our current credit facilities.

Please turn to Slides 13 and 14. While today we have included the 2019 guidance we provided during our Q3 earnings call, we do want to offer some caution about 2 matters which may put pressure on the guidance ranges. First is the labor unrest at our manufacturing facility in Matamoros, Mexico. While we are actively working to resolve the situation, any prolonged downtime from the situation will adversely affect our adjusted EBITDA and net sales for 2019. In addition, the ultimate outcome of the labor negotiations may require us to increase our labor rates in Matamoros beyond what we have forecasted, which could further reduce our adjusted EBITDA for 2019. Secondly, the financial difficulties our customer, Senvion, announced that they're experiencing could ultimately impact our 2019 net sales and adjusted EBITDA.

At this point, it is still too early to tell if these 2 situations, offset by other upside opportunities we have, will have a material impact or not on our 2019 adjusted EBITDA and net sales guidance. With that being said, we expect net sales and total billings of between $1.5 billion and $1.6 billion in 2019; adjusted EBITDA of between $120 million and $130 million; fully diluted earnings per share of between $1.34 to $1.45; sets invoiced of between 3,300 and 3,500; average sales price per blade of between $135,000 and $140,000; estimated megawatts of sets delivered of between 9,800 and 10,400; dedicated manufacturing lines at year-end to be between 62 and 65; manufacturing lines installed at year-end to be between 50 and 52; manufacturing lines in startup during the year to be approximately 14; manufacturing lines in transition during the year are expected to be approximately 10; line utilization based on lines under contract as of December 31, 2018 of 50 of approximately 85%; startup costs between $30 million and $33 million; transition costs of between $22 million and $25 million; capital expenditures to be between $95 million and $100 million, approximately 85% growth-related; our effective tax rate to be between 20% and 25%; depreciation and amortization of between $40 million and $45 million; interest expense of between $8 million and $9 million; and share-based compensation expense between $9 million and $9.5 million.

With that, I will turn it back over to Steve to wrap up, and then we will take your questions. Steve?

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

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Thanks, Bill. We're pleased with TPI's fourth quarter and full year results as well as the successful delivery of many of our aggressive startup and transition programs. I want to thank all of our dedicated TPI associates, who are doing the heavy lifting every day and tackling growth-related challenges. 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 wind market, the trend toward blade outsourcing and the opportunities for market share gains provided by the current competitive dynamic.

We have clear line of sight to doubling our 2018 wind revenue to more than $2 billion in 2021. In addition, we are pleased with the traction we are seeing in our transportation development programs. We are laser-focused on execution during 2019 and are looking forward to exciting and rewarding growth in 2019 and beyond.

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 comes from the line of Paul Coster with JPMorgan.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [2]

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This is Mark Strouse on for Paul. So I just wanted to start with the Matamoros event. So I understand it's a pretty fluid situation. But based on what you know now and what the labor union is seeking, I guess is there any way that you can kind of provide a range of potential impacts to EBITDA? Maybe not specifics, but I guess one way of asking it, would it still be possible to achieve the low end of your EBITDA guidance range, assuming they got everything that they're seeking?

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William E. Siwek, TPI Composites, Inc. - CFO [3]

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Mark, this is Bill. Thanks for calling in. Yes, clearly, I mean, it is a fluid situation. We're making progress every day, and we anticipate getting this resolved fairly quickly. It is certainly achievable, and that's why we have not changed the guidance at this point to reach our range of EBITDA given where we're at in the discussions with the union as well as taking into consideration some of the lost volume we already anticipate in Q1 and into Q2 as a result of the temporary shutdown.

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Mark Wesley Strouse, JP Morgan Chase & Co, Research Division - Alternative Energy and Applied & Emerging Technologies Analyst [4]

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Okay. And then switching to the non-blade business. Just hoping you could give a bit more color regarding the ramp of the electric bus business, the new pilot line for the automotive-type products. And, I mean, you're reiterating your long-term targets. I kind of take that to mean that you're kind of tracking towards your expectations. But are there any metrics that you can provide, maybe not now but sometime in the near future, kind of like you do with the blade business, where you have the prioritized pipeline? Is there a similar metric that you can start to introduce for that non-blade business relatively soon?

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

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Mark, it's Steve -- I'm sorry, Bill. Mark, it's Steve. I think on the -- just a couple of questions in there. On the pilot line, we're tracking toward what we've said we would do there specific to Proterra as we've said in the past. We're not going to get into details about any specific customer. And since they're the only kind of significant production program and transportation, we're not going to comment more specifically except to say we continue to ramp with that customer in the way that we said we would, generally. And in terms of metrics, it's a good question. But again, keep in mind, we're really working on this goal of $500-million-or-so of adjacent market, diversified markets business over the next few years. And as we've said before, it's going to take some time for that to turn from development programs into production programs. We have told you about development programs that we've signed up in the past. We're pleased this last year to add Navistar to that list. So we'll continue to keep you posted on significant development programs as we sign those and then as things become production business. But I think -- again, keep in mind, we're really working on this, call it, for years 4 through 10 in terms of significant impact to the company's growth. And you probably want to be thinking about it that way.

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Operator [6]

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Our next question comes from the line of Philip Shen with Roth Capital Partners.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [7]

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I had a follow-up on Matamoros. Can you help us understand or know how long Matamoros has actually been down? It sounds like you can bring it back up online in the next few days. And you -- strike started I think in your facility early in February. But if you can quantify that, that will be great. And then you had mentioned some workers have turned over. What percentage of the workers have turned over? And I think it looks like they're looking for a 20% increase in labor rates. Do you expect that that's where you're going to end up? Or do you think there's some place in the middle that you can get to?

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William E. Siwek, TPI Composites, Inc. - CFO [8]

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Yes, Phil. As we stated in the prepared remarks, the strike began on February 15. And so we have -- our production has been down since that point in time. As I stated earlier, we are making progress every day towards a final resolution. If you're familiar with what's happened in Matamoros in general, it's been most businesses have been impacted there, including some nonunionized where the employees have gone out on strike even though they're not unionized. So it's been throughout Matamoros, it's not unique to us. I think 20% is a pretty good estimate and a likely range of where we will wind up. That's pretty much what has happened citywide at this point. So I think that's a fair assumption that we'll probably be in that range. And you asked about 4 questions, I am not sure if I got them all.

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

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Sorry, the other one was about the number of workers that have turned, so how many workers do you think you have to replace?

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William E. Siwek, TPI Composites, Inc. - CFO [10]

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Yes. It's -- whenever you're ramping up a new facility, Phil, especially in a new location, your turnover tends to be higher than it is once you get to a more stable crew, if you will. And so the turnover has been higher than it would be in a mature plant. Obviously, with the strike, there are some individuals that have created some similar difficulty than others that won't -- will likely not be returning. So I would say, it's higher than it would be in a stabilized position, probably a little bit more than in a typical ramp as a result of the labor unrest. But nothing out of the unusual for a start-up in a new geography.

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

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Okay. And sorry to keep on harping on this. But if you kind of feel like it's getting to that -- you are going to end up at that 20% number, which I understand is across the entire state, they're all chanting that 20-32 phrase. Do you think -- can you quantify for us, coming back to Mark's question earlier, what that might mean, given the number of lines that you have there? I suppose we could do some of that math, but if you can help us that will be great.

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William E. Siwek, TPI Composites, Inc. - CFO [12]

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Yes. No, we're not going to give you specifics on this, Phil, at this point in time. We're -- as we said, we are still confident in our -- on the EBITDA range we gave. There are some puts and takes around the globe. And to the extent we resolve this in short order as we anticipate we will, we're still confident in the range that we provided.

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Philip Shen, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [13]

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Got it. One last question here. You said to offset Mexico and Senvion challenges there are some upside opportunities. I was wondering if you could give us some more color on what those upside opportunities might be, perhaps booking some of those 19 lines earlier than expected or something else that we might not be thinking about?

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William E. Siwek, TPI Composites, Inc. - CFO [14]

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Yes. No, good question. It's really, as we talked about it, it's one of the many benefits of our global manufacturing footprint. We can bring blades from other locations to satisfy our customers' needs for a shortfall in another. And so, as we continue to ramp our productivity, we've got the ability to either speed up, work more overtime, work more weekends to produce more sets off of the lines we have. And so some of it is certainly that. And others, that's just a matter of demand being a little bit stronger in some locations for some customers than was originally anticipated. So it's a combination of those things.

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Operator [15]

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

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [16]

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Maybe just following up on that previous question about the additional upside opportunities. Maybe just tie that into what you're seeing in terms of -- maybe versus what it was a quarter ago or a couple of quarters ago? The timing of those transitions, whether they'd sped up, whether that is a piece of the confidence or potential upside that you start to see more of a contribution there? And then just kind of where is your confidence today that you do, in fact, see a normalization of those transitions as you get to the end of 2019?

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

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Yes. I would say from a startup and transition standpoint, Eric, we are on target. Clearly, the labor unrest in Matamoros will cause the startup in Matamoros to be a little bit longer than we originally anticipated. We've been able to shift a little bit of some resources to speed up startups elsewhere to try to mitigate some of the impact of Matamoros clearly. But our transitions are on schedule. You might -- once you get a chance to look at the guidance in detail, we did shift our utilization guidance a little bit in Q1 and Q2 to reflect what we know will be volume shortfall in Q1 and Q2 related to Matamoros. But other than that, we are feeling pretty good about the timing of and the number of transitions and startups for 2019, that will be on the pace that we originally anticipated, if not faster.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [18]

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Okay. Got it. May be just to clarify something from the release. You -- I know you've got the 2 lines at Taicang with Senvion, and we know the -- you're dealing with some of the issues and uncertainty there, but you did mention a new customer at that plant in the release. And I'm just wondering -- I mean, any clarity there, is that a customer that has yet to be disclosed, how should we think about that?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [19]

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Yes. I don't -- we wouldn't have mentioned a new customer in Taicang this year. It's still Senvion. It -- maybe you're confused with new -- we announced the -- we're talking about a new customer, Enercon in Turkey.

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Eric Andrew Stine, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [20]

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All right. Okay. All right. That was just a line in the release. We can talk about that later. Maybe last one from me. Just the onshore/offshore mix, I mean, obviously, today, it's very small, very skewed onshore, but maybe 5 years out, what do you think it looks like in terms of the offshore mix? And what can that mean in terms of potentially size of blade and revenue per line in that trend?

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William E. Siwek, TPI Composites, Inc. - CFO [21]

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Yes. So as we've talked about before, we do have some offshore lines in our prioritized pipeline. So we are actively working on that side of the business, if you will. I can't give you any definitive timeframes or customers as we normally don't. But yes, that is something that we're obviously actively working on. We've got 2 to 3 facilities today that can accommodate offshore, some with longer blades than others, just depending on location. But clearly, the blades will be longer, they will be heavier. And we think over the next several years that, that becomes a more meaningful mix of our business.

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Operator [22]

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Our next question comes from the line of Chip Moore with Canaccord.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [23]

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You talked about Senvion, maybe being some risk there on AR or rods or even inventory. But can you maybe size that potential risk for us?

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William E. Siwek, TPI Composites, Inc. - CFO [24]

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So they were a little past due at year-end. They brought us current after year-end with respect to that. But I can't give you the -- we're not going to quantify that total amount at this point because obviously, they're still working through their plan to improve their operations and shore up their financial situation. We are obviously monitoring it very closely. You might imagine, we've had many discussions with their CEO, CFO and CPO as well as their major shareholder on what their plans are. So we are monitoring the risk. We're certainly taking preventative measures to make sure that we don't get more exposed. The other thing to remember though is, the blades we're manufacturing for them today are for a specific project that has been sold and is being installed today. So they need those blades to complete that project. So it's important that they have them. So we feel a bit more comfortable from that perspective. But we're going to continue to monitor it and be in communication with them. And we'll see how it plays out.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [25]

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Got it. Understood. And Bill, can you say whether there's any of their business in the prioritized pipeline?

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William E. Siwek, TPI Composites, Inc. - CFO [26]

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Yes. Again, we don't comment specifically on who's in and who's out. But obviously, we're going to monitor that situation and be very careful with who and where we expand as we would in any situation.

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Chip Moore, Canaccord Genuity Limited, Research Division - Senior Associate [27]

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Got it. And just one last one on the India plant. I think you talked about localizing raw material sourcing. Any way to size that potential cost-saving opportunity? I think you mentioned you might be able to move that around the world, maybe you can speak to that a bit?

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

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Thanks, Chip, I'm not sure that we've quantified exactly what that number is. I mean some of the early work that we've done has been quite positive. Again, India is a pretty amazing place with the supply chain they have, the amount of industry, especially in Tamil Nadu, which is where we're located. So we're very optimistic, and it's a pretty mature wind market there as well. There's been a number of other blade suppliers that have been there for a while. There's a number of turbine OEMs that are located there. So it's a pretty mature supply chain. So we've been I shouldn't say pleasantly surprised, we obviously did our due diligence before we went. But what we thought is coming to fruition, that there will be a very robust supply chain that will give us alternatives to other locations today and in all likelihood will enable us to hopefully continue to drive costs down globally as a result of either supplying directly from India or just the competition that it provides for our other vendors.

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Operator [29]

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

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [30]

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I'm actually going to ask you a question off the bat here that's not about Mexico or Senvion, although I will come back to that. It seems to me like this transportation business is mostly developing around great big sort of commercial structural types of products, if I look at Navistar, and I look at the bus business. Steve, I know you've talked about more automotive components, deck lids, doors, stuff like that. How are we going to see this business develop? Is it going to be, you think, for the foreseeable future, frame rails and bus bodies and stuff like that? Or would we see some actual maybe car parts come out of this over the next couple of years?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [31]

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Yes. Thanks, Joe. We're working to build a big business in this space. And our belief is, we'll end up with a range of size of products. They'll all be high-strength, lightweight, durable replacements of steel or aluminum in large part, Joe. But as we said when the announced the pilot line last quarter, that the main reason to put that pilot line in with some unique technology relative to what we've done before is to build physically smaller parts, not full bus bodies, for example, but with cycle times measured in minutes. So you can imagine if we have some large bus molds on one side of that building and some smaller much higher speed, higher volume, shorter-cycle time products made in the bay next door, that it'd be a mix of some bigger parts and some smaller parts.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [32]

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Okay. Okay. That's helpful. And then on to Mexico. Can you just remind us what -- how many lines you have on the ground in Juarez and in Matamoros?

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William E. Siwek, TPI Composites, Inc. - CFO [33]

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Yes. So in Matamoros, we have 6 lines, not all installed yet. And then in Juarez, we have 13 lines in Juarez.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [34]

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Okay. And no issues in Juarez at this moment, I assume?

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William E. Siwek, TPI Composites, Inc. - CFO [35]

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No. Not today. I mean, obviously, with what AMLO and the administration is doing, there is some discussion in Juarez. But we are proactively dealing with that. But we're not unionized today in Juarez. So it's little bit of a different situation. We've been there for a long time, have very good relations with our employees. So -- but again, there's a lot of activity along the border, all the way across the border. So we're monitoring that again and looking at proactive opportunities there to make sure that we keep our workforce happy and productive.

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Joseph Amil Osha, JMP Securities LLC, Research Division - MD & Senior Research Analyst [36]

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Okay. And then last question. At least, in my experience, one of the things you do when you worry about your customers is you make them pay upfront. Any possibility over the year that you go to basically cash upfront or some kind of risk mitigation arrangement with Senvion?

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William E. Siwek, TPI Composites, Inc. - CFO [37]

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Yes. I mean, we'll explore all options depending on where they come out of their process that they're going through now. But certainly, there are options that we have that we'll discuss as we move forward with them.

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Operator [38]

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Our next question comes from the line of Pavel Molchanov with Raymond James.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [39]

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You may have mentioned this earlier, but how many of your production lines are assigned to Senvion or if you can quantify the top line exposure in a different way that would be helpful as well?

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

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Yes, Pavel. We just have 2 lines with Senvion, both of those being in Taicang, China.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [41]

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Okay. And I assume those are of average capacity in the context of the portfolio?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [42]

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That's correct.

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Pavel S. Molchanov, Raymond James & Associates, Inc., Research Division - Energy Analyst [43]

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Okay. And then more broadly, this is a question that's been asked to probably every company exposed to the power sector in the last few days. With the bankruptcy of PG&E, does that have any conceivable read through from the standpoint of any of your, I suppose U.S. customers specifically?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [44]

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Yes, Pavel, it's Steve, I'll take that one. We don't think so directly to TPI. As you know, we sell to a variety of the big turbine players, they sell to different developers for various projects. So you could imagine individual developers or individual projects perhaps being affected with some of the plans that might have been on the drawing board with a customer like that. But it doesn't drive through to us, and as Bill described, and we described, the overall market is strengthening globally in 2019. The U.S. market is expecting to be over 10 gigawatts a year for a few years and then at least 8 gigawatts or so after that. So it's relatively minor in that bigger scheme of market demand. And as we do our job right here, we want each of our plants to be dependent on large markets not individual projects and not individual customers of our customers, if you will.

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Operator [45]

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Our next question comes from the line of Ethan Ellison with Morgan Stanley.

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Ethan Cory Ellison, Morgan Stanley, Research Division - Equity Analyst [46]

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So 2 higher level questions. The OEMs have faced margin pressure over the last 2 years, with several seeing margins fall from double to single digits on product. Just at a high level, could you maybe speak to TPI's pricing power and margin defensibility? And maybe some discussion of how the margin negotiation goes when you're recontracting lines?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [47]

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Ethan, so I think in general, the margin pressure is clearly there on our customers' businesses with the tenders -- large tenders and major contracts and then the leapfrogging of larger machines, longer blades and taller towers, helping to drive LCOE. You'll remember, in our agreements, we have a nominal gross margin defined and we have shared gain on raw materials. And as we've said before, we're still utilizing a lot of the shared gain to help bring our prices down without affecting our margins on mature lines. So our impact on our margins, as Bill described and I have, has been the investments in startup and transitions, not margin deterioration due to -- just pure price-related negotiations. But we've started a long time ago to drive cost out of our products and pass on the majority of that gain because wind used to be too expensive. Now that it's not too expensive and economics are driving a lot of the growth, there's pricing pressure. But as we've said before, we'd rather be as a manufacturing company in a business where the markets are strong and the demand pull is strong, which you can see with our contract value clearly is, and then having a mechanism built into our agreements where we defend margin, we're able to defend margin. And we're building value. We're now delivering value for our customers over time, it's tough to defend. But we clearly are, we're growing with that and defending our margins, primarily through shared gain and cycle time reduction as we go.

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Ethan Cory Ellison, Morgan Stanley, Research Division - Equity Analyst [48]

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Perfect. And then second, Vestas announced a new 5-megawatt platform in January with 75- to 80-meter modular blades. And I think you guys are building some of these at your international facilities. Could you just discuss maybe expected ASPs on the longer and more technical blades? Does this present a higher margin opportunity? And is this something you may have already contemplated in longer-term guidance?

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [49]

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Yes. We're not going to comment as normal on any one customer's plans or what we may or may not do for Vestas on the 5-megawatt platform. But you can imagine with the growth we have and the way we're transitioning products in, general, when we transition or grow, we're transitioning and growing into the new leading-edge kind of state-of-the-art product in general, so that would continue. Average selling price, we'll continue to provide that to you on a blended basis because we certainly can't get in the business of sharing details about ASP for any one customer. But as blades get bigger, ASPs clearly have gone up and would continue to. And then as more advanced materials are utilized to take out weight or you can imagine if joints are put into blades, that would generally tend to increase the ASP for a blade, both bigger blades and, call it, jointed blades. But their savings to the overall wind farm that might come from different things, like reduction of transportation cost. While the spilt blade might be more expensive, the trucking cost goes down, for example. And again, I am trying to give you, Ethan, answers in the general sense and not specific to any one customer.

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Operator [50]

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

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [51]

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Most of the questions have been asked. Just another way of asking Pavel's question. On the Senvion lines I think there was a recent customer in the fourth quarter of last year, if my memory's right or maybe it was '17, I forget. But is it safe to say that as you talk about your lines that the older ones were more $25 million a year so the newer ones are more in the $40 million. Is that about $40 million of revenue, I'm just trying to get a sense of what the impact would be if those were to cease production for a period of time?

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William E. Siwek, TPI Composites, Inc. - CFO [52]

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Yes. I think what we talked about last time was the lines that we had signed back in, I think, probably on our third quarter call, the average was just north of $40 million per line, maybe $42 million, $43 million per line. That would've been a blend. And our average sets per year per line is -- it's gone up. We're closer to 78, 79 sets today than we were before. But that's a pretty big blade that we're building for them. So it might be a little bit less than that, so that will give you some way to frame it.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [53]

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Got it. And then at the factory level, I assume kind of low-teens margin? For something in China I imagine that's one of your higher profitability regions, just as you get EBIDTA impact for the full year? Is that...

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William E. Siwek, TPI Composites, Inc. - CFO [54]

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Yes, we've talked in the past about our nominal margins in that 14% to 16% range. Again, not being specific to a customer. But we'll just leave it at that.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [55]

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Okay. And then I have 2 other ones though. Is there any contractual risks out of Matamoros for failure to deliver for a period of time if this goes extended for a few weeks, is there anything that your customers could ding you on?

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William E. Siwek, TPI Composites, Inc. - CFO [56]

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Yes. I mean with all of our contracts, we generally have liquidated damage clauses where if we're unable to deliver there can be payments. They're generally limited to a percentage of the blade price, if you will. So yes, the answer is yes. There are contractual obligations. We're obviously working very closely with Vestas on this situation to alleviate those. One of the reasons we talked about some of the upside and being able to deliver blades from other plants is to try to mitigate, number one, the challenges for Vestas and their customers but also the liquidated damages that we may be subject to as a result of any other delays.

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Jeffrey David Osborne, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [57]

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Got it. And the last one -- the last question I had was just on cost structure in general. Could you just remind us sort of your general complexion of cost of goods. If my memory is right, I think it was around 60% to 70% direct materials, 5% to 10% labor, overhead 15%, 20%, give or take, warranty low single digits. But I'm just trying to get a sense of if costs go up 20% for the labor portion, if we were to just play with some round numbers, what the impact would be?

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William E. Siwek, TPI Composites, Inc. - CFO [58]

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That -- those are pretty good ranges. The raw materials anywhere from 60% to 65%, generally depending on the region. Labor is anywhere from 4% to -- if you take the U.S. out of the equation, it's 4% to 10%, in that range. And then your -- the G&A component or the overhead is anywhere from 10% to 15%, as you suggest. So those are kind of the ranges. So it's -- I mean if you think about a 20% increase on 5% of the cost, it's a relatively low impact.

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Operator [59]

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

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Steven C. Lockard, TPI Composites, Inc. - President, CEO & Director [60]

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Well, thanks again, everyone. We appreciate your interest in TPI Composites and look forward to continuing to provide updates to you. Thanks very much.

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Operator [61]

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