TPI Composites - Earnings Call - Q3 2020
November 5, 2020
Transcript
Speaker 0
Good afternoon, and welcome to TPI Composites Third Quarter twenty twenty Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q and A. At this time, I'd like to turn the conference over to Christian Eden, Investor Relations for TPI Composites. Thank you. You may begin.
Speaker 1
Thank you, operator. I'd like to welcome everyone to TPI Composites' third quarter twenty twenty 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 because of other factors discussed in today's earnings news release and the comments made during this conference call or in our latest reports and filings with the Securities and Exchange Commission, each of which can be
Speaker 2
found on our
Speaker 1
website, www.ppicomposites.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 comparable GAAP financial measures. With that, let me turn the call over to Bill Siwicz, TPI Composites' President and CEO.
Speaker 3
Thanks, Christian, and good afternoon, everyone. Thank you for joining our call. In addition to Christian, I'm joined today by Brian Shoemaker, our CFO. I'll briefly review our third quarter results and activities, discuss the current operational status of our manufacturing facilities, including our supply chain, give a quick update on our global service and transportation business and then touch on the wind energy market. Brian will then review our financial results in detail and then we will open up the call for Q and A.
Please turn to Slide five. We had a very strong third quarter in which we delivered net sales of just over $474,000,000 a 23.5% increase over 2019 and adjusted EBITDA of $49,100,000 or 10.4% of net sales, notwithstanding the estimated impact of COVID-nineteen on adjusted EBITDA during the quarter of approximately $8,000,000 During the quarter, we announced that we extended two supply agreements with GE, one in Newton, Iowa through 2021 with an option to extend through 2022 and one in Juarez, Mexico through 2022. We also announced that we will be adding an additional production line in Mexico to provide blades for GE's wind turbine technologies in North America. We also announced that we signed a multiyear agreement with Nordex for two manufacturing lines in our Chennai, India facility with a planned start of production in the first quarter of twenty twenty one. Additionally, we extended our Vestas agreement in Turkey during the quarter.
Finally, we announced that Linda Hudson and Bhavan Holloway were appointed to our Board of Directors. Linda is the former President and CEO of BAE Systems. Prior to BAE, she held various executive positions with General Dynamics, Lockheed Martin, Martin Marietta, and Ford Aerospace. Linda also sits on the board of directors of Bank of America and Trane Technologies and brings a wealth of global operating experience to our to our board. Bhavan is the former vice president of audit at the Boeing Company.
Prior to Boeing, she worked for KPMG as a partner and in other roles primarily serving investment services, broker dealer and financial clients. VaVon brings broad global finance and additional audit and risk management experience to our board. We're all very excited that Linda and Bhavan agreed to join the TPI board. Please turn to slide six. We remain committed to operating our business safely while working to mitigate the impacts of COVID nineteen and ensuring that we are prepared to deal with the resurgence of the virus we are seeing in many countries around the world.
We have and will continue to adapt our operating procedures to enable our associates to work safely and continue to meet the strong demand we see around the globe. We also continue to drive the operational imperatives we outlined at the beginning of the year to reduce costs and improve our operations globally and are making very good progress on these imperatives, notwithstanding the challenges created by COVID-nineteen. Turning to Slide seven, I'll now give you a quick update of our global operations as well as a market update before turning it over to Brian for a financial update. During the third quarter, we operated at or above capacity in all of our facilities for most of the quarter. As you may recall, our plants in Mexico were still ramping to full capacity at the end of the second quarter and since the July have been operating near or above our normal capacity.
In China, we still expect to deliver more volume than our original 2020 plan as production continues uninterrupted. In India, we are moving full speed ahead with the ramp of the facility and we are preparing to start up two lines for Nordex in early twenty twenty one. In Turkey, production is at full pace with exception of the transition of lines for Vestas to their state of the art V-one 162 blade as part of the extension of that contract. As most of you are probably aware, there was also a seven point zero magnitude earthquake off the coast of Izmir last Friday. All of our associates in Turkey are safe and neither of our plants in Izmir suffered any structural damage.
Production was temporarily shut down while we had structural inspections completed, and we then resumed operations on Saturday afternoon. There has also been a resurgence of COVID-nineteen cases in the Izmir area, so we are watching that closely to ensure it does not disrupt our operations. As I mentioned earlier, in Mexico, we are operating all plants at or above normal capacity while continuing to closely monitor our plants in Juarez given the resurgence of COVID in that community. We've also expanded the production of electric vehicle components in Mexico to increase our capacity and drive down costs. In The U.
S, production has continued uninterrupted. On the service side of the business, we have made very nice progress over the last couple of quarters securing new deals with OEMs as well as with asset owners and are working hard to build out our global service team to execute our growth strategy. On the clean transportation side of the business, we continued with the production of Proterra buses, workhorse delivery vehicles and production parts for an EV automotive platform while continuing to work on a number of confidential development agreements. Our focus remains on refining and executing our strategy to build this into a meaningful business over time. With respect to our supply chain, as we mentioned during our last call, the raw material market is now essentially back to pre COVID-nineteen levels and we don't expect any further supply issues at this time, including balsa core, barring any disruptions from another significant wave of COVID-nineteen.
As we've discussed in the past, we will continue to evaluate our supply chain and diversify it geographically to reduce risk, provide for security of key materials and ultimately drive down cost. As it relates to the wind market, we expect the long term trend for wind energy to continue to strengthen based on the current cost of wind energy, continued efforts to drive down cost and strengthening of political will around the world to affect climate change. The U. S, while the production tax credit is set to expire at the end of twenty twenty, utilities are planning for expanded renewables due to the unsubsidized cost competitiveness of wind, commercial and industrial demand and more state renewable portfolio targets. For example, New York with targets of 70% by 2030 and one hundred percent by 2040 and California at 60% by 2030 and one hundred percent by 02/1945.
In Europe, the support for the European Green Deal is strengthening. And just last month, the European Parliament voted to cut emissions beyond the original targets in the European Green Deal to 60% by 2030 compared to 1990 levels. The European Council is expected to make a final decision in December. In September, China announced a commitment to reach carbon neutrality by 02/1960. And at the Beijing Wind Show in October, the wind industry pledged provide more than 50 gigawatts of wind per year in China through twenty twenty five and sixty gigawatts per year thereafter.
In India, prime minister Modi has committed to increase its renewable energy capacity to 450 gigawatts by 2030 and has committed to 40% non fossil fuel energy by 2030 as part of the Paris Agreement. These are a few examples of the accelerating energy transition we are seeing on a global basis. According to Bloomberg, NEF's 2020 new energy outlook climate scenario, to meet a well below two degree emission scenario, which is the key aim of the Paris Agreement, over 11 terawatts of onshore and one terawatt of offshore wind would need to be installed by 02/1950. This represents about three times more than the economic transition scenario or their base case. Under the climate scenario, one would represent 45% of global electricity in 02/1950.
Back to the economics of wind, according to Lazard's levelized cost of energy analysis version 14 o, the unsubsidized levelized cost of energy of the most competitive new wind projects is equal to or lower than the marginal cost of operating existing combined cycle natural gas, nuclear and coal plants. Furthermore, utility scale wind LCOE remains at or below that of utility scale solar on an unsubsidized basis and in the best locations significantly cheaper on a subsidized basis. Utility scale wind LCOE has been reduced by 71% since 2009 according to Lazard and we and the industry are working hard to continue to drive LCOE down and keep wind as the most cost effective source of new energy generation. We believe the future for wind energy will continue to strengthen given some of the recent initiatives and goals to promote the acceleration of an energy transition that I just noted. However, our current long term goals that we have discussed publicly, including 18 gigawatts of capacity, 20% market share, and 2,000,000,000 of wind revenue are based on older and more conservative industry forecasts that do not factor in these new initiatives and goals.
Stay tuned as we will review and update our long term goals in light of these new initiatives, including the optimization of our global footprint. Turning to Slide eight, we now have a total potential contract value of up to approximately $5,100,000,000 through 2024 and the minimum guaranteed volume under our supply agreements is $2,900,000,000 This is a net decrease from $5,400,000,000 and no net change from $2,900,000,000 from last quarter as a result of extending existing contracts offset by third quarter sales. The potential and minimum contract values do not include the two lines in China that we are operating under a short term contract this year nor does it include the impact from some of the anticipated new larger blade models that we expect to produce after the anticipated 2021 transitions or additional contract extensions. While the health and safety of our associates remains our primary objective, we remain focused on our operating imperatives, including the integration of our key ESG activities to drive profitable growth and long term shareholder value. With that, let me turn the call over to Brian.
Speaker 4
Thanks, Bill. Please turn to Slide 10. All comparisons made today will be on a year over year basis compared to the same period in 2019. For the third quarter ending 09/30/2020, net sales increased by $90,300,000 or 23.5% to $474,100,000 Net sales of Windblades increased by 27.8% to $450,100,000 The increase was primarily driven by a 20% increase in the number of wind blades produced year over year, largely as a result of increased production at our China, Mexico, Iowa and India facilities. We estimate that our net sales were adversely impacted by approximately 8,000,000 based upon wind blade sets, which we had forecasted to produce in the period under non cancelable purchase orders associated with our long term contracts, but were unable to do so as a result of COVID-nineteen.
Start up and transition costs for the quarter decreased by 13,600,000.0 to $8,600,000 Our general and administrative expenses for the quarter decreased by $1,300,000 to $9,300,000 G and A as a percentage of net sales decreased 80 basis points to 2% of net sales. This decrease was primarily related to a decrease in travel and training costs during the quarter. Before share based compensation, G and A as a percentage of net sales was 1.52.3% in 2020 and 2019, respectively. During the quarter, we were impacted by a realized loss on foreign currency remeasurement of $17,100,000 primarily due to net euro liability exposure against the Turkish lira. On a cash flow basis, this exposure is naturally hedged due to our euro denominated revenue contracts.
Approximately 15 of our revenue in Q3 was denominated in euros. Our income tax benefit for the quarter was $32,300,000 as compared to an income tax provision of $18,800,000 for the same period in 2019. The Q3 benefit was in line with our expectations. The Q3 benefit offset some of the impact we saw in Q2 as a result of applying a forecasted annual effective tax rate to a quarter that was significantly impacted by losses in several jurisdictions due to COVID-nineteen. We are forecasting our cash taxes to be approximately $20,000,000 for the year.
Net income for the quarter was $42,400,000 as compared to net loss of $4,600,000 in the same period in 2019. This increase was primarily due to the reasons described above. In addition, we estimate the net income was adversely impacted by approximately 6,000,000 associated with the production volume lost under non cancelable purchase orders due to the reduced production along with other costs primarily related to the health and safety of our associates and nonproductive labor associated with COVID-nineteen. Net income per diluted share was $1.13 for the quarter compared to a net loss of $0.13 per share for the same period in 2019. We estimate that adjusted EBITDA was negatively impacted by approximately $8,000,000 associated with the production volume lost along with other costs related to COVID-nineteen that impacted our production facilities.
However, even with the impact of COVID-nineteen on our facilities, we were able to achieve a 93% utilization rate. The strong utilization in Q3 led us to an adjusted EBITDA of $49,100,000 and adjusted EBITDA margin of 10.4%. This compares to an adjusted EBITDA of $27,500,000 and an adjusted EBITDA margin of 7.2% in the same period in 2019. Moving to Slide 11. We ended the quarter with 149,400,000 of cash and cash equivalents, total principal amount of debt outstanding of 238,700,000.0 and net debt of $89,300,000 compared to net debt of $142,500,000 as of the end of Q2 twenty twenty.
For the quarter, we provided $60,900,000 of cash from operating activities and free cash flow of $49,500,000 With our strong performance during the quarter and continued focus on our cash conversion cycle, we were able to drive our total net leverage ratio down from 3.1 times in Q2 to 2.2 times in Q3 as calculated under our senior revolving facility. This created significant cushion on our debt covenants. Turning to slide 12. Guidance for q four twenty twenty. We are guiding to revenue of between 200 435,000,000 to 455,000,000, utilization of approximately 90%, and adjusted EBITDA of between 36,000,000 and 46,000,000.
These numbers could be impacted by COVID-nineteen due to the rapid evolving nature, magnitude, duration of the COVID nineteen pandemic, the variety of measures implemented by governments around the world to address its effect, and the impact on our manufacturing operations. Although our plants are currently operating at or above planned capacity, many of our manufacturing facilities are operating in regions with continued high levels of reported COVID nineteen positive cases. As such, we may be required to reinstate temporary production suspensions or volume reductions at our manufacturing facilities to the extent there is a resurgence of COVID nineteen cases in the region where we operate or there may is an outbreak of positive COVID nineteen cases in any of our manufacturing facilities. To ensure the health and safety of our associates, we will continue to incur approximately 5,000,000 of COVID nineteen related costs on a quarterly basis until there is better treatments, options, or an effective vaccine for COVID nineteen. We plan to provide formal 2021 guidance during our q four twenty twenty call in February 21.
Speaker 3
With that, I will turn it back over to Bill to wrap up, and then we'll take your questions. Bill? Thanks, Brian. Turning to slide 14. The health and safety of our associates and their families, as well as the communities in which they live remain our number one priority.
We continue to take the necessary as well as proactive steps on the COVID-nineteen front to ensure the safety of our associates and safe working conditions in our facilities. We continue to work our wind pipeline and we are pleased that we were able to add more capacity for Nordex and GE, extend two existing agreements with GE as well as extending our contract with Vestas in Turkey. The impact of these additions and extensions was to increase our potential contract value by approximately $950,000,000 We are also very encouraged by the progress we continue to make in the service space and look forward to this being an increasingly important part of our overall strategy in wind. We are continuing to build on our momentum in the transportation space and we'll continue to refine our long term strategy to capitalize on the increased interest investment and activity in the electric vehicle space. We continue to remain focused on managing our liquidity to provide financial security and to emerge stronger as we drive through the current environment.
Our overall mission remains unchanged as of today, establishing 18 gigawatts of global wind blade capacity to drive $2,000,000,000 of annual wind revenue, reach $500,000,000 of annual transportation revenue over time and achieve double digit adjusted EBITDA levels. We will continue to optimize our global footprint while using the leverage our global scale provides for operating and supply chain efficiencies to continue to drive down costs all while maintaining a strong balance sheet. As I mentioned earlier, these goals are based on older and more conservative industry forecasts that do not factor in the acceleration of the energy transition. We will continue to evaluate the global demand and update our long term targets accordingly to better reflect the opportunity we expect to see and win long term under this accelerated energy transition movement. I want to thank all of our dedicated TPI associates for their commitment to our mission to decarbonize and electrify.
We are confident we will emerge stronger from the current environment, and we remain energized with our multiyear game plan. Thank you again for your time today. And with that, operator, please open the line for questions.
Speaker 5
Thank you. If you like to register for a question,
Speaker 6
please press the one followed by the 4
Speaker 5
on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3. 1 moment, please, for our first question. And our first question comes from the line of Laura Sanchez with Morgan Stanley.
Please proceed.
Speaker 7
How are doing, Brian? Can you hear me okay?
Speaker 3
Hear you just fine. Thanks, Laura. How are doing?
Speaker 7
Perfect. Hi. Congrats on a strong quarter. So I know that chances of a blue sweep are are small at the moment. But in the event that Biden wins the presidency and and his clean energy plan moves forward, could you discuss the implications of a made in America requirement?
I know it's very early to tell how that would look like, but wondering if you could comment on moving pieces in regards to how quick TPI would be able to accommodate that.
Speaker 3
Yeah. Thanks for the question, Laura. I think it's a little bit difficult to answer at this point in time because there's not a lot of detail behind the plan. So, you know, he's got the made in American and offshoring tax as well. So we've looked at what's out there and it's a little bit early yet to describe what the impact might be.
But again, we have manufacturing capacity here in The U. S. And depending on what that means, it could mean additional capacity over time depending on demand and and what those all what those provisions might ultimate ultimately be if they come into if they come into, fruition. But it's a little early to tell right now what the impact may or may not be.
Speaker 7
Yeah. And is it fair to say that in next, given the higher volumes, you would expect the implementation of his clean energy agenda to be positive for TPI?
Speaker 3
Yeah. I think, you know, his aspirations are are are are pretty significant and, you know, the decarbonization goals and transmission infrastructure investment, etcetera, would clearly be would be very favorable for renewables over the long term without a doubt.
Speaker 7
Yeah. Understood. And if I may, one last question. Looking at your margins, you you target 12% EBITDA margins or or double digit EBITDA margins. Can you reach that level while in construction of a new facility?
Or is it 12% dependent on the further on the current geographical expansion or footprint?
Speaker 4
Yes. No, I mean, we'll continue to drive it down. If you look at the performance of some of our plants as I mean, we see that margin at or above that in several of our plants and we're going to continue to drive that across the board. So it doesn't necessarily mean all of them have to be and you can't have any startup as we continue to drive down costs and look at other things, speeding up transitions and just cutting costs out of startups. That's where we see us achieving that 12% margin that we put out there as a long term target.
Speaker 3
And if you'll recall, we put that target out, we talked about an 80% utilization. So that does anticipate transitions and startups while still generating that double digit EBITDA. And as Brian has said, we have gone through transitions in our more mature plants and demonstrated EBITDA levels at the plant level well above that. That's why we're confident in that number.
Speaker 7
Understood. Thank you so much and congrats again.
Speaker 3
Thank you. Thanks for your questions.
Speaker 5
Our next question comes from the line of Eric Stine with Craig Hallum. Please proceed.
Speaker 6
Hi, Bill. Hi, Brian. It's Aaron Spahala on for Eric Stine. Thanks for taking the questions.
Speaker 3
Hey, Aaron. Hi.
Speaker 6
Maybe first on the lost production last quarter. Can you just kind of quantify what was made up in the third quarter and what remains to be made up? See you kind of called out an $8,000,000 impact as well in the third quarter. So can you just kind of square those up for us, please?
Speaker 8
Yes. As we're looking at it,
Speaker 4
I mean, we're looking at the total revenue that's gonna be made up, not necessarily the lost production. As we spoke about some of the transitions we're getting pushed out to and not just because of COVID for other reasons, and that's how we're looking at on a total revenue number making up the lost production or the total revenue amount we forecasted in our guidance. As far as quantifying the made up, we had some impact this quarter. A lot of that had to do delays and shutdowns in Q2 associated with India and just the slowing of the ramp and the delay of that. And now that's getting back on track throughout q three and into q four.
Speaker 6
Okay. Thanks. And then, on the field services business, can you kinda talk about how, you know, that's how you're building that there, what the pipeline's looking like, and and how big that can become over the next couple years and and any investment, that might be needed there?
Speaker 3
Yeah. So, you know, we've made a lot of really nice progress so far on, securing arrangements with, you know, some of the OEMs that we build blades for as well as some third parties. We're not gonna give specific dollars on it right now. We may give some a little bit more specificity when we give $20.21 guidance. But suffice it to say that, we look at this business as as fairly high growth opportunity, higher margin business than than our traditional blade business.
So, you know, we expect it to become a fairly significant part of the overall picture over time. We'll try to give you a little bit more specificity, when we talk in 2021. But at this point, just suffice it to say that we're really pleased with the progress we've made and, what we've got from a backlog standpoint and pipeline moving into 2021. Understood.
Speaker 6
Okay. Thanks for the color. I'll hop back in queue.
Speaker 3
Great. Thanks, Aaron.
Speaker 5
Our next question comes from the line of Craig Lewis with p BTIG. Please proceed.
Speaker 9
Yes. Thank thank you, and good afternoon, good evening. I I guess I wanted to you you you know, you kinda mentioned a little side that the decision to kind of go into Mexico, just looking through the queue real quick. It looks like you generated a little bit of revenue in Mexico. Could you
Speaker 3
just talk, I guess, at
Speaker 9
this point about the decision, realizing that it's still early days and and you guys pulling out transportation, you know, the the thoughts around the decisions to move into Mexico.
Speaker 3
Yeah. So this you know, we had we moved some of the man it's not all of It's just some of the the components that we're we're manufacturing in Mexico, so it still gets assembled in The US. But it it makes sense because what we do is is still pretty labor intensive. And to the extent we can reduce labor cost, that's a that's a plus for our customer and for our customer's customer, much like in the wind business.
So it's not you know, the whole operation hasn't moved there. We still have a pretty sizable operation in Rhode Island that is that is dealing quite frankly with most of our transportation business today, but there are components of it that we moved to Mexico for efficiency and cost reasons. Okay. So so okay.
Speaker 9
So it wasn't it wasn't really about just seeing an acceleration in growth. It was more just okay. Okay. And then and then just
Speaker 3
just a second. Hey. Hey, Greg. It's a combination. So it's cost and capacity.
Right? So it's it's both. Perfect. Yeah.
Speaker 9
Good. And then just and then just one other one for me. I mean, Clinton, you touched on it in your prepared remarks about, you know, China's new plan and India's new plan. You know you know, one of the things that we've started hearing and and maybe maybe it's some hope, may maybe it's it's fear around potential supply logistics supply shortages just if if China is is able to really push through this their their kind of ramp and wind. And I'm just kinda curious, you know, maybe it's only been, like, a month out, so it's kind of hard for you guys to to think about what needs to happen now.
But just, you know, bigger picture, do you think that's a a fair statement that that kind of the the industry as a whole, if a country like China and or India really decides to turn it on, could that create some real strain on the supply of, you know, anything from wind blades to to whatever else needs to go into windmills?
Speaker 3
Yeah. I I think if it happened overnight, certainly, it it'll it'll take a little time to ramp to those levels so that gives our suppliers the opportunity to ramp their capacities as well. And, you know, we've talked in the past about, you know, diversifying our supply chain, localizing, in many respects, and and really derisking it, to any one geography. So I think our our plan to do that, which we started a number of years ago and we will continue to do, will help to alleviate what could be some some capacity constraints maybe in China if they get to those levels. But again, there's some there will be time for for suppliers to ramp.
But again, if you look at not just China but the whole if you look at where wind could go over time when you look at some of these new models with the energy transition, our supply chain as well as we are going to have to ramp to be able to meet that demand. So could there be some bottlenecks in the short term when that happens? Certainly. But, you know, we'll all work to make sure we get through those and make sure that we have, you know, adequate suppliers around the globe to meet our demand.
Speaker 9
Okay. Perfect. Thank you very much.
Speaker 3
Yep, thanks, Greg.
Speaker 5
Our next question comes from the line of Jeff Osborne with Cowen and Company. Please proceed.
Speaker 10
Yeah, thanks for taking the questions. A couple on my end, you don't mind, Bill. One, I was wondering what level of visibility you have into next year as it relates to transitions that's been sort of the evil that popped up in the past. Obviously, this year, not as many, and you're seeing the fruits of that with the EBITDA and the cash flow. As you look out to next year, I know you're not giving guidance at this point, but do you have any visibility into planned transitions or not at this point?
Speaker 3
Yes, certainly we do. We don't have perfect visibility yet. We're still working with our customers on what their ultimate product plans are really more towards the end of next year and then into 2022. So that's still being worked with our customers. But and we're in the process of some transitions right now that really began in the fourth quarter that will move into into the early first quarter.
So we have reasonable visibility. It's probably, anywhere from mid to mid single digits to maybe low double digits is kind of what we're thinking right now. But we'll firm that up when we give guidance with our fourth quarter call, but in that neighborhood.
Speaker 10
Got it. That's good to hear. And then two other quick ones. One, you highlighted at the top of the call the two new folks on the board with aerospace experience. Can you talk about what the pipeline is for TPI and aerospace?
There's been a lot of focus on EVs. Now with the board additions, I assume you're seeing something.
Speaker 3
No, not necessarily. I mean, we talked a couple of years ago about transportation, aero and wind. We haven't spent a lot of time in the aero side at this point. But really what Bhavan and Linda bring to us is, you know, Linda's got great global manufacturing experience in global ops and Bhavan has obviously been with Boeing has not only the aerospace, but great kind of the financial expertise from a global standpoint and risk management. So it wasn't specifically for the aero, operations and other experiences that they bring to to the board.
Speaker 10
Got it. And then the last question I had was just on the offshore side. Is there any activity or thoughts about that space given everything going on in the East Coast Of The US and and your potential role there?
Speaker 3
Yeah, that's still obviously something that we're very interested in and in discussions with multiple parties on that. Yeah, that's certainly in our longer term plans. As we've talked about before, revenue from those deals are probably not till 2324 time frame when you look at kind of what the planning cycle is for a lot of those offshore deals. Could come a little quicker than that in APAC. But yes, we're actively engaged in discussions around offshore and that's certainly in our long term plans.
Speaker 10
Got it. That's all I had. Thank you.
Speaker 3
Great. Thanks, Jeff. Good talking to you.
Speaker 5
Our next question comes from the line of Jo Osha with JMP. Please proceed with your question.
Speaker 11
Hello. This is actually Hillary on for Joan. Thanks for taking our questions tonight. I I had two for you, both kind of on the transportation side of the business. And first, I was hoping you could kinda speak to building up to that $500,000,000 revenue target you guys have set.
Just kinda what opportunities do you see out there and, you know, kinda the most interesting and timing for that revenue ramp. And then secondly, as you continue to ramp the volume for the EV production, I was just kind of wondering if you could speak to the margins you expect to realize on that piece of the business as you continue to work to driving down costs. And that's all I have for you. Thank you.
Speaker 3
Thanks Hillary. On the overall transportation, I mean there are a lot of segments that are very interesting and there's a lot of compelling value propositions for composites in those segments. Last mile delivery clearly is a very interesting segment for us and we think with a lot of the work we've already done and that we're continuing to do, we can drive some pretty unique value propositions there from both an economic standpoint and a total cost of ownership. So upfront economics as well as total cost of ownership, I should say. The class eight space is interesting.
You've seen a lot of activity there. We've been working on a development agreement with Navistar, and that's gone very well. So there are many other opportunities in that space that we're exploring. And then, of course, you know, you look at the EV automotive space with with the the, you know, the production work that we're doing right now. Again, the margins on that to be determined depending on volumes, but, I would expect the margins to be, you know, double digits on those, at least initially.
But again, it's a it's a little early and and and building up to kind of the ultimate, you know, level of revenue on that. There there's just a lot of opportunities that we are working on right now. So that's why we're still confident long term that that revenue is there. It's just a matter of of executing on a on a couple of the deals we're working on and then and then getting them into production.
Speaker 11
Great. Thank you.
Speaker 3
Thanks, Hillary. Thanks.
Speaker 5
Our next question comes from the line of Mike Webber with Webber Res. Please proceed with your question.
Speaker 2
Hey. Good afternoon, guys. How are you?
Speaker 3
Good, Mike. How are you? Good, Mike.
Speaker 2
Good. Good. Just want to follow-up on, I guess, a couple of topics already came up. I guess, first, transitions and maybe just within the context of having moved to more of a kind of a, I guess, a long term utilization guide. I'm just curious, can you maybe can you put a range or maybe a tighter range around how that you will like, that long term guide, is it around 80%?
How how should that trend or what kind of realistic range should we expect for that over the next couple of quarters kind of giving the given kind of the kind of the movement in some of those transitions? Just I I know you're not gonna and I know you can't
Speaker 3
get into too many details.
Speaker 2
I'm just looking for to sort of tighten up the modeling on it a little bit in terms of how to think about what's a realistic floor and ceiling for that over the next couple of quarters.
Speaker 4
Yeah. So if you look at q four, I mean, we're estimating utilization of around 90% on that quarter. And then going out early next year, I mean, we'll give you more information when we give guidance. But I think that 80% still holds is kind of what we're thinking when you look at kind of the total transitions and start up and what we're looking at there as we see it right now and what we've contracted. So I think that model that we gave still holds.
I mean, we will see, again, higher utilization here as we finish up the year. And then from there, more to come as we give guidance in early February.
Speaker 3
Yeah. And if you think, if you think about q one, you know, we'll be starting two new lines. We'll be in transition. And if you and when you start up a line, that kinda really impacts the utilization because we look at that, you know, in the in the or in the, yeah, in the denominator, if you will, as a full year of production. So you'll see that impact q one.
But Brian is right. It should be in that neighborhood.
Speaker 2
Yeah. That the spread definitely got our attention just trying to tighten it up on our end, so appreciate that. In terms of just to to loop back on transportation, I know you're just gonna talk to, you know, the path to 500,000,000. I'm just curious, has the time frame changed at all from from when you guys first started talking about to today in terms of, you know, maybe picking up pace and maybe getting there a bit quicker than you would have originally thought just given the the acceleration in energy transition?
Speaker 3
No. I I I don't think the pace I mean, there there are a lot of opportunities we're looking at, and there's a lot of activity in the market. I think to build to that to that revenue level takes time when you think about how long it takes. The the development programs for automotive platforms takes a while. So I don't think our time frame, you know, looking out three to five years has changed.
But there are a lot of opportunities there right now that that we're obviously looking at. It's just a matter, like I said, of of closing and and getting into production, but that does take time.
Speaker 2
In terms of the mix of potential customers to get to that level, if you're kind of I think you're around four or five now in terms of, guess, the the scale of of the potential customers out there. Is that is that changed? I guess, what that future mix would look like, is that changed at all?
Speaker 3
Not significantly. I mean, I think in the past, we've talked, you know, at five to 10 customers of 50, you know, to a $100,000,000 a year type, run rates, and I think that's still a reasonable, a reasonable benchmark.
Speaker 2
Gotcha. Okay. Just just one more, and and forgive me. I'm probably gonna be backing into a number you probably spelled out somewhere, and I just missed it. But if I just look at the the backlog you guys referenced on slide eight, it looks like there was and just compare it year over year, it looks like there's about ballpark 300,000,000 that ran off, which is actually inside well inside of the revenue you guys recognize recognize in the quarter.
Is there did you were you guys able to add a handful of long term contracts in that mix? And if so, can you kinda give a give a bit of detail around that?
Speaker 3
Sure. So we the the revenue related to the GE contract extension as well as an additional line as well as the two new Nordex lines that we talked about at the in our second quarter call. The revenue related to those was already we we had put that in the contract value when we were having the second quarter call. Alright? But so the only the incremental is related to, the extension that we did with Vestas in Turkey.
Speaker 2
Gotcha. Okay. I got it. Alright. Thank you, guys.
I appreciate the time.
Speaker 3
You bet. Thank you.
Speaker 5
Our next question comes from the line of Phil Sheen with Roth. Please proceed with your question.
Speaker 12
Hi, guys. This is Donovan Schafer on for Phil Sheen. Congratulations
Speaker 6
on the quarter.
Speaker 10
How are
Speaker 12
you guys doing?
Speaker 3
Doing great. Thanks. Thanks.
Speaker 12
Okay. Good. So, my first question is around the q four guide and the utilization. So, you know, it's gonna be down sequentially. And I'm wondering, is that mostly just driven by the lower utilization?
And then kind of within that, is the lower utilization something where you're kinda hedging for, you know, well, there could be some COVID disruptions. You know? And if everything goes smoothly, you could you could be up higher at, you know, '93 or '95, or is that really kind of capped by the transitions you mentioned?
Speaker 3
Yeah. I I think so for q four, you you have transitions to your point. So that's gonna that certainly will impact utilization. And then in Q4, you do have some shutdowns towards the end of the quarter as a result of the holidays. So if you think about Mexico, The US, some of our other sites, you generally have a little bit lower utilization in the back half of the first of the fourth quarter.
So that's what's driving it.
Speaker 12
Okay. Great. That's super helpful. And then on the transportation or just non blade sales side, I kinda just quickly did some math to figure out what that non blade revenue is. Think last quarter, was 25,000,000, and then this quarter, it looks like it's down to 16,000,000.
You know? And but you you you stated well on the service side. So is that mostly coming from transportation? Did did I do a kind of a mistake on the math there? Could you just talk about that nonblade revenue for the quarter?
Speaker 4
Yeah. For the quarter, of the non blade revenue, when you look at it, I mean, it's comprised of the field services, the transportation, and some other smaller amounts of other revenue in there, some of the mold type revenue. So the decrease quarter over quarter, if that's what you're referring to, the q two time frame, is that what you're looking at?
Speaker 12
Yeah. The from q two to this quarter. Yeah. The quarter over quarter decrease.
Speaker 4
Yeah. So there was a decrease in transportation, but it wasn't necessarily tied to the actual production. It was more of the 06/2006 and some of the items that go through there. So on a looking at the true work we've done, that hasn't really changed quarter over quarter.
Speaker 12
Okay. That's great. And then the on the you mentioned that part of the margin improvement this quarter was from a decrease in in the press release. It's a decrease in direct materials and savings in raw material costs. Is that just a reduction in general raw material costs, or are you actually kind of providing less of the the content in the blade?
Speaker 3
No. The the content of a blade doesn't change unless we're more efficient with what we use and have less waste. So it's a combination of less waste in the production process and and and just, again, leveraging our scale to drive, commodity prices down. So that you know, that's a big part of what that's a big part of what we're doing with our with our global scale is driving driving raw material costs as much as we can. So that's what it is.
So
Speaker 12
when you say, like, a decrease in direct materials, it's that you're getting more production out of the same amount of materials being purchased with less waste
Speaker 3
and so forth? It it it could be less waste, or it could just be driving the unit cost of the same amount of material. Right?
Speaker 6
Okay.
Speaker 3
Because we're getting a better we're getting a better price from our supplier.
Speaker 12
Okay. That's great. That's, that's it for me. I'll go back in the queue.
Speaker 3
Cool. Thanks, Donovan.
Speaker 5
Our next question comes from the line of Ken Herbert with Canaccord. Please proceed with your question.
Speaker 8
Hey, good afternoon, Bill and Brian.
Speaker 3
Good to talk to you, guys.
Speaker 8
Hey, I just wanted to ask about from second quarter to third quarter, can you comment specifically on any sort of changes you'd identify in sort of the market opportunity with some of your big customers? And I'm specifically getting at just incremental decisions for maybe more outsourced production at Vestas and a few other suppliers. And I'm wondering if there was anything you'd call out that you maybe hit an inflection in the quarter or recently? Or how you're maybe more broadly speaking, the nature of conversations with customers around the expansion of the market opportunity?
Speaker 3
No, I think discussions slowed down a little bit at the beginning of the at the end of the first quarter beginning just because of COVID. But those discussions have ramped up and I think the amount of discussions and the quality of discussions continues to improve. So we're looking at multiple opportunities, continuing to work our pipeline in multiple geographies. So I I have not seen, you know, if anything, and I think this is what you're hinting at, has there been an acceleration of it? I I wouldn't necessarily call it a a significant acceleration, but there is a lot of activity and a lot of interest on additional geographies, if you will, and additional lines for our existing customers.
Speaker 8
Okay. That's helpful. And if I could, just back to the offshore discussion. I know you highlighted this earlier, and it's obviously a down the road opportunity. But can you just maybe remind us a couple of the sort of the key parameters or benchmarks that market you're going to be looking for as to when it might become incrementally more interesting for you and your customers in terms of capacity and more commitments to it?
Speaker 3
Yes. It's really around volume, Ken. I mean, there's gotta be enough volume, for the marketplace, and it's gotta be you know, we we would rather have it be a fairly steady, production process, if you will. To to build a big facility and run for a year and shut down for a year and run for a year doesn't make sense for us nor would it make sense for our customers from a cost standpoint. So it's really about the size of the market.
So as more deals get closer on the East Coast, again, once you get to a critical mass of blades that need to be built where you can have a productive and efficient facility, that makes sense for us and it would also make sense for customers. But it's really about volume.
Speaker 8
And I'm guessing just on that, it's both here, obviously, the East Coast United States and in Northern Europe where this market seems to have the most potential?
Speaker 3
Not sure. I mean, think initially some of the early offshore wind farms will likely be supplied from Northern Europe. But I think over time, the size that everybody expects The U. S. Offshore market to be as well as the desire for jobs and economic activity on the East Coast, I think there's going to be a fair amount of incentive, both economic and otherwise, to actually have those facilities be in The U.
S. Near The U. S. So I think, again, and that's a volume issue. So with lower volume, it makes sense to bring them from an existing plant in Northern Europe.
Once the volumes get to where we believe that market goes, then it makes sense to localize that manufacturing capacity.
Speaker 8
Great. Thank you very much.
Speaker 3
Thanks,
Speaker 5
And there appears to be no further question at this time. I turn the call back over to you.
Speaker 3
Thank you very much, and thank you all for your interest in TPI, and look forward to our next discussion. Thank you.
Speaker 5
And that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.