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Edited Transcript of TPIC earnings conference call or presentation 17-Mar-17 12:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 TPI Composites Inc Earnings Call

Mar 17, 2017 (Thomson StreetEvents) -- Edited Transcript of Tpi Composites Inc earnings conference call or presentation Friday, March 17, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anthony Rossmus

TPI Composites, Inc. - IR

* Steve Lockard

TPI Composites, Inc. - President, CEO & Director

* Bill Siwek

TPI Composites, Inc. - CFO

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Conference Call Participants

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* Stephen Byrd

Morgan Stanley - Analyst

* Mark Strouse

JPMorgan - Analyst

* Jeff Osborne

Cowen and Company - Analyst

* Pavel Molchanov

Raymond James - Analyst

* John Quealy

Canaccord Genuity - Analyst

* Philip Shen

ROTH Capital Partners - Analyst

* David Vos

Barclays Capital - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to TPI Composites fourth-quarter and full-year 2016 earnings conference call. Today's call is being recorded and we have allocated an hour for prepared remarks and Q&A. At this time I would like to turn the conference over to [Anthony Rossmus], Investor Relations for TPI Composites. Thank you. Please go ahead, sir.

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Anthony Rossmus, TPI Composites, Inc. - IR [2]

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Thank you, operator. I'd like to welcome everyone to TPI Composites' fourth-quarter and full-year 2016 earnings call. In addition to our press release you can also find our Q4 earnings slide presentation on our IR website.

Before we begin let me remind everyone that during this call TPI Composites' management may make certain statements that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include remarks about future expectations, projections, beliefs, estimates, plans and prospects.

Such statements are subject to a variety of risks, uncertainties and other factors that could cause actual results to differ materially from those indicated or implied by such statements. Such risks and other factors are set forth in the Company's earnings release posted on the website, provided in our final prospectus and Form 10-K and other periodic reports as filed with the Securities and Exchange Commission. The Company does not undertake any duty to update such forward-looking statements.

Additionally, during today's call the Company will discuss non-GAAP measures which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.

The reconciliations of total billings to net sales, EBITDA and adjusted EBITDA to net income loss, net debt to total debt and free cash flow to net cash provided by operating activities calculated in accordance with GAAP can be found in our earnings release which is posted on our website at www.tpicomposites.com and is also included in our Form 10-K as filed. With that let me turn the call over to Steve Lockard, TPI Composites' President and CEO.

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

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Good morning, everyone, and thank you for joining TPI Composites fourth-quarter 2016 earnings call. I am joined today by Bill Siwek, our CFO. I will start with some highlights from the full-year followed by an update on the wind market and TPI's progress against our strategy of strong and diversified global growth. I will then turn the call over to Bill to review our quarterly and annual financial performance in more detail. I will then conclude with our 2017 guidance before we open up the call for Q&A.

Please turn to slide 5. We are pleased with our results as we delivered strong operational and financial performance closing out the year with solid fourth-quarter and full-year 2016 results. For the full-year net sales were up 28.9% to $754.9 million while total billings were up 27.4% to $764.4 million, above our guided range of $750 million to $760 million. Net income increased to $13.8 million compared to $7.7 million in 2015. Adjusted EBITDA for the year increased to $66.2 million demonstrating growth of 68% while our EBITDA margin expanded 210 basis points to 8.8%.

Today we reaffirm our target of 25% average annual top-line growth for the next few years. We plan to continue to diversify our sources of revenue across customers and geographies and expect to benefit from the wind blade outsourcing trend. As of today we have $3.9 billion under contract across 43 molds. In Q4 30 molds were in full production while three molds were in start up. We have increased our pipeline from 25 molds last quarter to 31 molds today. This 31 mold pipeline consists of those we have prioritized to close over the next 24 months.

Last quarter we discussed the fact that GE had announced their intention to purchase LM Wind Power, our largest competitor. GE recently stated that this transaction should close in the second quarter of 2017. Our contracts with GE in Iowa and Mexico remain in effect through 2020. However, the contracts with GE in Turkey and China are due to expire at the end of 2017.

We are still in discussions with GE regarding a potential extension of the GE China supply agreement and we have agreed with GE not to extend the Turkey supply agreement. We expect to backfill the three Turkey mold slots with two larger blade models for a different customer and enter into a supply agreement with this customer in the first or second quarter of 2017 with the ability to begin production in early 2018.

With respect to the GE China supply agreement, we expect to reach agreement in the second quarter to either extend the supply agreement or if necessary backfill the four mold slots from our demand pipeline in China.

Finally, outside of our wind business TPI continues to demonstrate additional commercial capabilities for our advanced composites and we are gaining traction in our effort to build the transportation business. We recently signed a supply agreement to manufacture composite bus bodies for Proterra, a leading supplier of zero emission electric buses. We also recently signed two new confidential automotive development programs for advanced vehicle applications. These applications will be produced and delivered out of our New England facilities.

If you turn to the next slide, as of today we have 43 molds under long-term supply agreements providing long-term revenue visibility of $3.9 billion through 2023. While the minimum guaranteed volume under contract is $2.6 billion, our contract structure encourages customers to purchase the maximum volume as their price increases if their volume drops below the maximum.

We had 44 molds under contract at the end of 2016. During the first quarter Vestas asked if we could provide additional flexibility to them and install two of the four molds originally planned for Turkey in one of our China facilities. In order to fit the larger molds in China we needed to remove one of their existing molds. However, given the improvements we've made over the last year in cycle time, although we will be removing one mold, we will actually be able to produce more volume from the nine molds than originally anticipated from the 10 molds.

This move is a win-win and demonstrates our deep partnership model and our commitment to driving more volume through our plants, improving our overall margins, driving down average selling price for our customers and in turn driving down levelized cost of energy.

As shown in slide 7, wind levelized cost of energy, or LCOE, has declined 66% in the last seven years to where wind energy is now competitive and mainstream. TPI's aggressive cost out and shared gain programs with our customers are supporting this LCOE reduction while also providing opportunities for margin expansion.

We remain focused on executing on our strategy of global growth, customer diversification, expanded profitability with long-term supply agreements generating significant revenue visibility and driving capital efficiency for the industry leading OEMs in the wind energy market.

Turning to slide 8, I would like to provide an update on the wind industry, which continues to exhibit areas of strong growth. As we stated last quarter, the US election results do not change our strong outlook for the US market. To date we haven't seen any significant impact on the wind market post President Trump's election. And we were pleased to hear Treasury Secretary Mnuchin agree with Senator Grassley's view that the multi-year PTC phase down is locked in for its duration.

Policy stability on a global basis and LCOE reductions continue to drive renewables growth and wind remains an industry that enjoys bipartisan support here in the US. According to [Mate Consulting], global grid connected demand is estimated to be over 60 gigawatts per year from 2017 through 2026, 37 gigawatts annually on an ex-China basis or 627 gigawatts of new capacity installed. This represents a CAGR of 3.4% over that period.

In 2016 there was 8.2 gigawatts of wind installed in the US of which 90% of that market share was made up of TPI customers. According to the American Wind Energy Association, at the end of Q4 2016 there was over 18 gigawatts of wind either under construction or in advanced stages of development in the US.

Given the beneficial regulatory backdrop, we expect to see strong demand for wind in the future as does Mate, which has estimated onshore annual grid connected demand through 2021 of over 9.5 gigawatts in the US market. This outlook is stronger and more stable than at any time in the history of the US wind market.

Wind continues to play a large and growing role in many state energy plans. The commercial and industrial segment is also driving significant demand in the US. This segment accounted for nearly 20% or 1.6 gigawatts in the US in 2016 and is expected to drive nearly 5 gigawatts of new wind contracts through 2020 and over 20% of demand over the next 10 years.

Repowering is also expected to increase over the next several years and provide substantial additional wind demand in key mature markets. For example, Mate estimates assets owners in Europe to replace 7.7 gigawatts of old projects with 11 gigawatts of new capacity from 2016 to 2025. And in the US it is expected that there will also be a meaningful amount of repowering activity as the average age of the US wind fleet continues to grow and as a result of the IRS clarification of the 80/20 rule under the PTC.

We believe current market conditions and our customers' positioning for future sales, including some smaller blades for repowering, and cost out targets, will result in more product transitions in 2017 than initially anticipated, but lays a strong foundation for future growth in 2018 and beyond.

Recent discussions about potential changes to US trade and tax policy have made it difficult to separate the noise in Washington from potential changes of substance. Very few details have been provided as to how such a program might really work. There has been no specific legislative language proposed and nothing official has been released. So trying to speculate on the ultimate impact, if any, of tax or trade reform is not prudent at this time.

We will continue to monitor developments on both fronts very closely with our legislators and consultants in Washington and will be prepared to comment when any official proposals are put forward. Let me now turn the call over to Bill to discuss our financials in more detail.

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Bill Siwek, TPI Composites, Inc. - CFO [4]

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Thanks, Steve. I am going to cover the quarter and the full-year results in a bit more detail, but please refer to slide 10 to 12 as I walk you through it.

For the fourth quarter of 2016 net sales increased by 3.7% to $185.6 million. The increase was primarily the result of a small increase in the number of wind blades delivered during the quarter and an increase in the average selling price of approximately 7% offset by the impact of the strengthening of the US dollar against the euro, better Turkey operations and the Chinese RMB at our China operations as well as a reduction in non-wind blade revenue during the quarter.

Total billings for the quarter increased by 3.9% to $197.6 million. The impact of the currency movements on consolidated net sales and total billings were reductions of 1.6% and 1.4% respectively for the quarter. Consistent with our stated strategy to diversify our customer base, the percentage of revenue from GE, our largest customer, decreased to approximately 47% in the fourth quarter of 2016 from approximately 55% in the fourth quarter of 2015.

Gross profit for the quarter totaled $19 million, a decrease of $2.2 million over the same period of 2016 and our gross profit margin decreased by 160 basis points to 10.3%. The decrease in gross margin was driven primarily by the increase in startup costs partially offset by improved operating efficiencies globally, the impact of savings in raw material cost and the favorable impact of fluctuations of the US dollar relative to the local currencies where we operate.

Startup costs in Q4 were $6.7 million as compared to approximately $300,000 in the fourth quarter of 2015 and relate to the startup activities underway in our two new Juarez, Mexico plants as well as in our new facility in Turkey. When excluding the effects of the startup costs on our gross profit, the gross profit margins in the fourth quarter of 2016 and 2015 would have been approximately 14% and 12% respectively, reflecting margin expansion from our fully operational facilities.

General and administrative expenses for the quarter increased to 5.2% of net sales or $9.7 million as compared to 2.6% and $4.6 million in 2015. The increase was primarily driven by share based compensation of $1.5 million recorded in the 2016 period, none of which was recorded in 2015. Costs related to the work we are doing in anticipation of adopting the new revenue recognition standard in 2018, as well as additional costs incurred to enhance our corporate support functions and build our global team to support our growth in public Company governance.

Net loss attributable to common shareholders was $2.3 million or $0.07 per share on a fully diluted basis. The primary driver of the loss for the quarter related to the startup costs discussed earlier and $4.5 million of deferred financing costs written off in connection with the refinancing of our senior debt facility.

Adjusted EBITDA was $14.3 million or a margin of 7.7% compared to $19.5 million or a margin of 10.9% in Q4 of 2015. The decrease in both the absolute amount and as a percentage of net sales was primarily driven by startup costs. When excluding the effects of startup costs our adjusted EBITDA margin would have been 11.3% in 2016 as compared to 11.1% in 2015.

We invoiced 541 wind blade sets and the estimated megawatts generated by those sets once installed is estimated to be 1,234. During the quarter we had 33 lines installed and operating with three of those lines in the early stages of startup.

For the full year 2016 we delivered record results as we continued to grow in line with our strategy. Net sales for the year increased by $169 million or 28.9% to $754.9 million compared to $585.9 million in 2015. The increase was primarily driven by a 38% increase in the number of wind blade sets delivered during 2016 as compared to 2015, offset somewhat by the impact of foreign exchange fluctuations in China and Turkey and the results of savings in raw material cost, a portion of which we share with our customers, along with a decline in sales from precision molding and assembly systems.

Total billings for the year increased by $164.3 million, or 27.4%, to $764.4 million compared to $600 million in 2015. The impact of the currency movements on consolidated net sales and total billings were reductions of 1.1% and 1.0% respectively [for the] year. For the full year the percentage of revenue from GE, our largest customer, decreased to 50.3% from 53.3% in 2015 and we expect to reduce the percentage of our revenue from GE to approximately 40% in 2017 as we continue to grow faster with our other customers.

Gross profit for the year totaled $77 million, an increase of $35.3 million over the same period of 2015, and our gross profit margin increased by 310 basis points to 10.2%. The increase in gross margin was driven primarily by improved operating efficiencies globally, the impact of savings and raw material cost and the favorable impact of fluctuations of the US dollar relative to the local currencies where we operate partially offset by a $2.3 million increase in startup costs during the year.

General and administrative expenses for the year totaled $33.9 million as compared to $14.1 million in 2015. As a percentage of net sales, general and administrative expenses were 4.5%, up from 2.4% in 2015. The increase was primarily driven by a share-based compensation costs of $8.4 million recorded in 2016, costs related to the work we are doing in anticipation of adopting the new revenue recognition standard in 2018, certain one-time costs related to our IPO, as well as the cost of enhancing our corporate support functions during this period of growth.

Net income for the year was $13.8 million as compared to $7.7 million in 2015. The increase was primarily due to the reasons set forth above, partially offset by higher year-over-year startup costs and the impact of the write up of deferred financing costs of $4.5 million related to the refinancing of our senior credit facility in December.

Net income attributable to common shareholders increased to $8.4 million during the year from a loss of $1.7 million in 2015. This increase was primarily due to the improved operating results discussed previously.

Diluted earnings per share for the year ended December 31, 2016 was $0.48 compared to a loss of $0.41 for the year ended December 31, 2015.

Adjusted EBITDA for the year was $66.2 million, or a margin of 8.8%, an increase of 210 basis points and an increase of 68% from the prior year.

For 2016 we delivered free cash flow of $23.3 million and ended the year with unrestricted cash of $119.1 million and net debt of just $6.4 million. We invoiced 2,154 wind blade sets, a year-over-year increase of 34%, and the estimated megawatts generated by those sets once installed is estimated to be 4,920, a year-over-year increase of 37%.

We currently have 43 manufacturing lines dedicated under long-term supply agreements with 33 of those currently installed. We plan to install the remaining 10 lines by the end of 2017.

Moving on to slide 12, as I indicated before, we ended the quarter with $119.1 million of unrestricted cash. For the (technical difficulty) we generated cash from operating activities of $25.9 million while spending approximately $11.6 million on CapEx resulting in free cash flow for the quarter of $14.3 million.

Our CapEx for the quarter was lower than we had planned primarily due to the timing of some of the work at our third plant in Mexico as well as our second plant in Turkey. Consistent with our past practices we will continue to finance a relatively modest portion of CapEx for our new facilities and the balance will be funded with cash flow from operations.

Net debt as of December 31, 2016 decreased to approximately $6.4 million from $90.7 million as of December 31, 2015. The reduction was primarily a result of the completion of our IPO in July 2016 and the repayment of certain debt with cash flows from operations offset by an increase in financing related to our new facilities in Mexico and Turkey.

We also completed the refinancing of our senior debt facility on December 30, 2016. Our new agreement consists of a four-year term loan facility for an aggregate principal amount of $75 million and a four-year $25 million revolving credit facility inclusive of a $15 million letter of credit sub facility.

We are pleased to have completed this refinancing by the end of 2016 setting us up with a more flexible and cost-effective capital structure entering 2017. The new loan facility features a borrowing rate 225 basis points below the previous facility. The flexibility of a revolver component with letter of credit capacity that as of today has enabled us to free up approximately $8 million of the $10 million of cash that was restricted as of December 31. We were also able to reduce the number of covenants and secure a more favorable covenant structure.

Moving to slide 13, to summarize -- as you can see on slide 13, the results demonstrated in the fourth quarter and the full year are a continuation of the strong results we have delivered over the past three years as well as in recent quarters with net sales, total billings, adjusted EBITDA, adjusted EBITDA margin and sets delivered all exhibiting strong growth. Net sales and total billings have grown at a compound rate of 52% and 51% respectively since 2013, while our adjusted EBITDA margin has increased by 490 basis points during the same period.

We are pleased with the strength of our balance sheet and our ability to continue to generate the cash we need to expand our global footprint and we believe we are in a solid position to continue to capitalize on the growth opportunities before us. I will now turn the call back over to Steve to discuss our outlook for 2017.

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

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Thanks, Bill. Now I'd like to introduce our guidance for full-year 2017. For 2017 we expect total billings of between $930 million and $950 million. Sets delivered of between 2,800 and 2,900 with an average selling price of between $315,000 and $330,000 per set or $105,000 to $110,000 per blade. Estimated megawatts of sets delivered to be between 6,350 and 6,600. Dedicated manufacturing lines under long-term agreements at yearend to be 52 to 56.

As we install larger blade molds and reduce manufacturing cycle time the average revenue per line is increasing. We will not need to increase molds by 25% per year in order to meet our average annual revenue growth target of 25% for the next few years. Manufacturing lines installed at yearend of 40. We expect to have 15 lines in startup and five lines in transition during the year resulting total startup and transition costs of between $30 million and $40 million.

Finally, we expect our capital expenditures to be between $75 million and $85 million of which approximately 85% is growth related. We remain very confident in our global competitive position and the application of our dedicated supplier model to take full 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 dynamics.

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). Steven Byrd, Morgan Stanley.

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Stephen Byrd, Morgan Stanley - Analyst [2]

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I just wanted to get your thoughts on broadly the trend towards outsourcing since we have seen on one end the GE transaction with LM, but we've also seen other wind OEMs talk about their desire for outsourcing. What are you sensing in terms of trends towards outsourcing? Does the GE transaction change that in terms of perhaps other customers either wanting to do either more outsourcing or wanting to rethink potentially having their capabilities in-house to a greater extent, what are you seeing lately?

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

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Yes, thanks, Stephen. So I think each of the other wind turbines companies are giving consideration to the GE LM acquisition announcement. What we have seen is a growth in our pipeline, as indicated, from 25 all to 31. So in terms of our discussions, we see additional demand or strengthening demand for TPI and our global footprint and our business model. But I think folks are paying attention and kind of giving consideration to what impact that might have on their planning.

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Stephen Byrd, Morgan Stanley - Analyst [4]

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Understood. And then just as a follow up, you made some comments on border adjustability. And I very much respect the need to be pretty careful about how you talk about that given that we really don't have any sense for how that might look, if at all. But to the extent that you did want to shift towards more manufacturing in the US, presumably in Iowa, perhaps reduce manufacturing in Mexico. Could you talk at a high level in terms of your ability to pivot in that regard? What sort of steps would you take? How straightforward is it to make that pivot happen?

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

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Yes, again, I think, Stephen, it is premature for us to comment on any pivot. I think if -- in its simplest form, if a border adjustment tax were to be implemented the price of imported products, the price of blades as a US industry will go up. The price of towers would go up.

These are deeply entrenched supply chains not just for TPI blades but for basically almost all of the components in a wind turbine and, as you know, almost all of the components in automobiles and almost all the product that is sold through our large retail stores. So I think from our perspective over time if we were required to pivot then we will do so. But I think it is really early -- too early to speculate on whether that would be required or not.

We've been focused on driving down levelized cost of energy. We think that is a good thing to help the industry become larger and more stable and you can see in general across the industry that is what is happening. So our hope would be that policies would not be put in place that would reverse that good work and increase the cost of wind. But I think largely the cost of most everything we would buy, others would buy or we would compete against would also go up in that simplest scenario. So I think it is premature to speculate beyond that.

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Stephen Byrd, Morgan Stanley - Analyst [6]

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Very much respect that. All right, thank you very much.

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Operator [7]

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Paul Coster, JPMorgan.

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Mark Strouse, JPMorgan - Analyst [8]

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Good morning, guys, this is Mark Strouse on for Paul. Can you just talk about your competitive dynamics? Have there been any changes over the last few months particularly with your regional competitors? I'm thinking maybe like Chinese competitors looking to expand more globally or really any other regions that -- anything we should be aware of? Thanks.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [9]

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Yes, thanks, Mark. We have not seen any specific moves by the significant players at this point in China or elsewhere. So today I would say the status is the same basically which is that there are two large global independent footprint providers being LM and TPI. And there are a number of regional players that at this point are basically staying within their regions in terms of the significant players in the industry.

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Mark Strouse, JPMorgan - Analyst [10]

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Got it, okay. That is it for us. Thank you very much.

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Operator [11]

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Jeff Osborne, Cowen and Company.

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Jeff Osborne, Cowen and Company - Analyst [12]

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Just a couple from my end. Can you talk, Steve, about the ASP trends in 2017? It looks like the guidance has a mix shift. Is that repowering playing out or currency? I am just trying to understand the moving parts.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [13]

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Yes, good morning, Jeff. So our average selling price for blades is affected by a few different things generally and it is true in 2017 as well. As you know, Jeff, when we make larger blades, when we transition from a smaller model to a larger blade average selling price goes up.

When we are building the same blade year over year typically with the material cost outwork and share gain average selling price would come down. And then to the extent we are asked to build some smaller blades, to your point, for repowering applications, which we do have some of that in our plan for 2017 and beyond, then you are right, that would reduce on average the average selling price as well.

So, I think it is a mix of those primary drivers. We will continue to provide information, as we are now, regarding 2017 on average selling price on a blended basis to try to help see that picture.

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Bill Siwek, TPI Composites, Inc. - CFO [14]

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Just to add onto that real quick, it is also geographic mix, as you mentioned in your question. So, a little bit as mix shifts you could have some impact on ASP as well.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [15]

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Yes, that is great, that is right.

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Jeff Osborne, Cowen and Company - Analyst [16]

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And then how many repowering lines do you have up and running? I assume only in China? I know you were trying to shoehorn some of those in. Were you able to do that?

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

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Jeff, we are not going to be able to be more specific with respect to that. There are a number of repowering-related lines that we'll be building from this calendar year.

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Jeff Osborne, Cowen and Company - Analyst [18]

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But are those in the 44 contracted lines or are those in addition to that?

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

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Yes, they are within our current number of lines. As of today we are at 43.

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Jeff Osborne, Cowen and Company - Analyst [20]

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43, okay. And then --.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [21]

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Jeff, I am sorry, there are a number of lines that will be in transition this year that we have commented on as well.

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Jeff Osborne, Cowen and Company - Analyst [22]

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Got it.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [23]

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So you might imagine given the recent repowering activity the pipelines in transition could be -- would be affected by repowering.

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Jeff Osborne, Cowen and Company - Analyst [24]

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Makes sense.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [25]

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If that's helpful. Yes.

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Jeff Osborne, Cowen and Company - Analyst [26]

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No, that is. And then also can you just touch on the 25 lines in the pipeline going up to 31? And then with the China opportunities -- I am not looking for a specific quantitative breakdown of the 31, but just can you say qualitatively if China is a meaningful contributor to your pipeline in the event that you were not able to come to an agreement with GE with the lines in the second quarter?

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

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Yes, we are really pleased with the 31 line pipeline in terms of existing and new customers as well as geographic diversity. There is strong demand out of the Asian region which could support expanding in China or backfilling, if that is required.

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Jeff Osborne, Cowen and Company - Analyst [28]

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Great, thank you.

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Operator [29]

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Pavel Molchanov, Raymond James.

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Pavel Molchanov, Raymond James - Analyst [30]

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Well, no one has asked you yet about Proterra, so I thought I will do that. It is an intriguing announcement, but you did not specify anything in the release about what kind of volumes under this supply deal might be materializing. Can you give any sense of the scale of this opportunity?

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

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So we are not in a position to speak in more detail about the Proterra volume or timing of that supply agreement. It is a supply agreement for a period of time. What we can say, Pavel, we are gaining some nice traction in developing the transportation market in applications like this, but it is still a small percentage of our overall revenue. So we are glad to have good traction, we are very pleased to have won the contract.

In an example like an electric bus, a 40% weight savings in composites relative to steal equates to range in a really impactful way or fewer batteries which drives cost in the right way. So it is a good demonstration application, it is a reasonable volume for us out of our New England operations. But transportation in total -- we expect to grow that market over a few year period to where it will become a more significant percentage of our overall sales.

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Pavel Molchanov, Raymond James - Analyst [32]

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Okay. So maybe I will frame it this way. In your 2017 billings guidance of $930 million to $950 million is there any credit for sales to Proterra?

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

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Yes. But again, it is a relatively small percentage of our total revenue.

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Pavel Molchanov, Raymond James - Analyst [34]

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Okay, appreciate it.

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Operator [35]

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John Quealy, Canaccord Genuity.

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John Quealy, Canaccord Genuity - Analyst [36]

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Just a couple questions. First, back to transitions for a moment, and I apologize if I missed this. Did you comment how much were full transitions versus tips?

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Bill Siwek, TPI Composites, Inc. - CFO [37]

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Hey, John, it is Bill. Good morning. No we did not. We just indicated that we would have five transitions. I can tell you they will be full mold versus tips though.

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John Quealy, Canaccord Genuity - Analyst [38]

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Okay. And then I thought in the past when you did do transitions there was the concept of extensions with those OEMs. Are those already accounted for in our sort of contract visibility or are they still to be determined in terms of timing on any relationship tenor?

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Bill Siwek, TPI Composites, Inc. - CFO [39]

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Yes, for the most part those are already accounted for and in the contract values. And I guess that is -- yes, they are accounted for in the contract volumes as well as in the lines -- in the lines of transition (multiple speakers).

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John Quealy, Canaccord Genuity - Analyst [40]

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Okay. And just a follow up for me. In terms of -- I think Bill was talking about Asia. Can you just talk a little bit about your efforts there? I want to say I thought back in the full-time from you folks were thinking of doing a little bit more, that was at least my impression. But if you could just update us on development efforts at the Company around Asia? Appreciate it. Thanks.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [41]

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Yes, so John, we continue to work on expanding our business and diversifying in all of the large markets including Asia and some of the kind of second level markets as well. As you may recall, there are higher growth rates in some of the regional markets, emerging markets, if you will, places like India, Mexico, Turkey and other pockets, Latin America and other pockets of Asia. We are definitely focused on expanding Asia, to your point, throughout the Asia region, but also other regions of the world as well and in a diversified manner.

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Operator [42]

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Philip Shen, ROTH Capital Partners.

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Philip Shen, ROTH Capital Partners - Analyst [43]

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Nordex and [Senvion] recently talked about increased margin pressure ahead. So 2017 and 2018 look like they could be transition years. So how could this possibly impact your margins ahead? Question one.

Question two; do you expect your new contracts to have similar economics as to the ones you are currently delivering on? And what are the key factors that could either improve those economics or hurt returns?

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

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So the price pressure throughout the industry has amped up a bit. I think you've heard from other -- from wind turbine OEMs on their public company calls they're reporting around the auction processes that are becoming more common driving some more aggressive pricing pressure for our customers and other industry players, as well as just some of the competitive technologies, the price of solar coming down, the price of natural gas in the US continuing to be low. So that is the environment for our customers.

We have had from the beginning in our dedicated supplier model this concept of shared gain where we work with our customers to drive raw material cost out and then share a large portion of that with them to help reduce blade price, levelize cost of energy in total. And that is working well, Phil, continuing to work well.

We're not waiting around to be asked to reduce pricing or be more competitive; we tend to drive it pretty aggressively from day one. And so I think the opportunity is still there for us to help drive down LCOE while at the same time continuing to mature into our -- the margins that we bargained for as a Company and expand those margins over time.

And then in terms of new contracts, we are executing new agreements basically to the same financial terms that we have done in the past. As Bill described earlier on the ASP question, margins will be a little different around the world being a little higher in low-cost countries for example then higher wage rate countries. But the terms and the economics of new agreements are on par to what we have been doing.

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Philip Shen, ROTH Capital Partners - Analyst [45]

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Great, good to hear. As it relates to GE, so far as you can talk about this a bit. I was wondering if you could compare and contrast the GE Turkey and China contract discussions and what variables pushed GE to not renew its Turkey contract with you while -- what are the key factors that may cause the China contract to be renewed or not renewed?

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [46]

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Yes, Phil, we can't get into detail about the discussions we would have with GE or what might drive their rationale. What we can say I think in general, and this you would know anyway, is our China location is a very cost effective factory to serve basically any port in the world. Once the blades are on the water we can move them -- or our customers can move them long distances without much additional cost.

So the China manufacturing hub is a very cost effective global hub and therefore the addressable market, and for any customer, their strength in various markets can pull in a strong way from China. Turkey is true -- that is true as well in Turkey but to a little bit lesser degree the way trades in Turkey being higher than China. The regional EMEA market is what we serve from Turkey.

So I think just in general you could imagine that China would be a larger addressable market. But beyond that I don't think we can get into any more details.

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Philip Shen, ROTH Capital Partners - Analyst [47]

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Okay, that is helpful. Thank you, Steve. And one last one here as a follow-up to Proterra. And we recently saw a presentation from Proterra, they are talking about 280 announced bus orders and about 100 and announced in backlog. So that represents a total of nearly 400. Can you talk to us about what the typical TPI content might be in the average Proterra bus? And I know it is hard to talk about timing, but was wondering if (technical difficulty) kind of put those numbers out there does that help in terms of timing?

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [48]

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Yes, Phil, you are right about the Proterra backlog strengthening and that is information they have had out in public and we are pleased to see that. The content, the product that we build is the composite bus body, it is the full body. There is no structural steel, there's no steel frame that a composite housing would sit on. So the way we get this 40% weight savings is through replacing all of the structure of the bus. We can't really speak to specific dollar content, but I hope that answers your content question as best we can I think.

And just one other point back to your question regarding contract extensions in Turkey and China. Keep in mind with our 31 mold pipeline it is a question of do our customers want to extend, but the second part of the question is is it in TPI's best interest to extend? Or we better off to replace that volume under longer-term contracts. So, those are choices in general that we make along certainly with our customers' desire but also our own filtering criteria on the opportunities we have in front of us.

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Philip Shen, ROTH Capital Partners - Analyst [49]

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Great, thanks, Steve.

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Operator [50]

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David Vos, Barclays.

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David Vos, Barclays Capital - Analyst [51]

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I have another one on Turkey if I may. We have heard from Nordex that they are seeing some perhaps weak spots in Turkey in terms of the month. Could that be what is driving GE's decision and are you indeed seeing something similar happening in Turkey? That would be question one.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [52]

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Yes, David, good to hear from you. So again, I don't think we can speak in more detail about GE's view of individual markets of Turkey. What is public information regarding Turkey, the need for electricity growth is still there, wind is a very good resource and a good complement to what they do with hydro. There are some government-related megadeals that are in play and tenders associated with the megadeals where timing in my view is shifting around a little bit. But the fundamental demand for Turkey as a market I think is still pretty strong over time.

Also remember for us, we export about two-thirds of the product we make out of the Turkey plants, both of our plants there. So, from our perspective if the Turkey market is up or down in a given year, when it is up our customers keep more blades in country, when it is down more blades get exported. And that is okay with us. In fact you will remember that is by design to have each factory be as low-cost world-class as practical and to serve larger markets so we are less dependent on the policy or pull in any one year and in any one market.

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David Vos, Barclays Capital - Analyst [53]

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That's very clear. On newer markets, kind of looking into maybe Argentina where we have seen a tender clearly, Russia this week announced that it has some ideas around a gigawatt or more of wind being auctioned. How do you think about expanding into those markets? And perhaps if you could remind me of your plans in India as well that would be very helpful. Thank you so much.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [54]

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Yes, thanks, David. So as we said earlier, we are interested in the India market. We've not made any announcements with respect to India. We do serve and our customers serve the Indian market from China, which they could continue to do. We are interested in the Latin America market. There are a number of individual countries, as you mentioned, Argentina where there is good demand. Those markets are not as large as some of the big macro markets of individual countries around the world but they are very interesting.

So again, for us it is serving those individual markets for manufacturing hubs, but Latin America is growing, exactly as you said. Northern Eastern Europe through Russia has opportunities for growth as well. Our Turkey plant is in -- if you consider it to be Southeastern Europe with access to the EMEA region, the Northern Eastern European region is also interesting in terms of opportunities.

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David Vos, Barclays Capital - Analyst [55]

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All right, thanks very much, gents, thanks for taking my questions.

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Operator [56]

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Thank you. At this time I will turn the floor back to Steve Lockard for closing remarks.

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Steve Lockard, TPI Composites, Inc. - President, CEO & Director [57]

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Thank you all for your interest in TPIC. We look forward to updating you on our progress toward our stated strategy of global growth, customer diversification and expanded profitability. Thanks very much.

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Bill Siwek, TPI Composites, Inc. - CFO [58]

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Thank you.

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Operator [59]

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