TPI Composites Inc (TPIC) 2018 Q1 法說會逐字稿

Good afternoon and welcome to the TPI Composites' First Quarter 2018 Earnings Conference Call. Today's call is being recorded, and we have allocated one hour for prepared remarks and Q&A. At this time I'd like to turn the conference over to Anthony Rozmus, Investor Relations for TPI Composites. Thank you. You may begin.

Thank you, operator. I'd like to welcome everyone to TPI Composites' first quarter 2018 earnings call. In addition to our press release, you can also find our Q1 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 described in our 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 certain 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 GAAP to non-GAAP information can all 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.

Good afternoon everyone, and thank you for joining our first quarter 2018 earnings call. I'm joined today by Bill Siwek, our CFO. I'll start with some highlights from the quarter, followed by a brief update of the wind market and TPI's progress on our strategy of strong and diversified global growth. I'll then turn the call over to Bill to review our financial results in more detail. I'll then conclude with a review of our full year 2018 outlook before we open up the call for Q&A. Please turn to slide 5.

We delivered another solid quarter of operational and financial performance. Our net sales grew 21.7% to $254 million. Adjusted EBITDA for the quarter increased 55.6% to $27.4 million, and our adjusted EBITDA margin increased 240 basis points to 10.8% from 8.4% in the first quarter of 2017. Reductions in manufacturing cycle times, improvements in productivity, and shared gain from material cost out efforts continue to drive our adjusted EBITDA results.

We signed a multiyear supply agreement with Vestas for 4 manufacturing lines with an option for additional lines in a new manufacturing hub in Yangzhou, China. We added a third manufacturing line to our existing supply agreement with Vestas in Turkey. Since the beginning of 2018, we've signed supply agreements for a total of 5 lines, representing potential contract revenue of up to $1.2 billion over the term of the agreements, and we're tracking well against our planned range for the year of closing on 10 to 14 lines.

We've entered into an agreement with Navistar, Inc. to design and develop a Class 8 truck comprised of a composite tractor and frame rails while targeting 30% weight savings compared to current trucks. This brings our development program count in strategic markets to a total of 5.

Shortly after quarter-end, we refinanced our senior debt facility with a new $150 million revolving facility, giving us an additional $50 million of capacity and reducing our stated interest rate by 375 basis points. Additionally, we executed an interest rate swap to fix our rate at 4.19% on $75 million, the total amount outstanding when we closed the transaction.

The JEC Group announced that TPI composites and Proterra have won a Future of Composites in Transportation 2018 Innovation Award in the public transportation category with the following title, Design and Fabrication of an Integrated Monocoque Composite 40 Foot Plug-In Electric Transit Bus. This underscores the deep collaborative relationships and cooperative innovation with our customers.

Sandia National Laboratories, teaming with TPI and Oak Ridge National Laboratory, a leader in the field of large-scale 3D printing, has won the Federal Laboratory Consortium for Technology Transfers, FLC, National 2018 Technology Focus Award for demonstrating a 3D printed mold for a wind blade directly from a digital design. While the demonstration focused on a relatively small 13 meter blade, if applied at larger scales in industry, designers could take more risks with experimental designs and accelerate prototyping and innovation in wind technologies.

We continue to develop our robust wind pipeline of global opportunities with current and new customers, both onshore and offshore blades. As blades continue to get longer, utilize more advanced materials, and we continue to drive increased output per line, the revenue from new lines will grow meaningfully. Furthermore, as our customers transition to larger wind blades under existing contracts, the revenue per line will increase, providing additional revenue growth opportunities from existing facilities.

At the end of last quarter, our prioritized pipeline was 24 lines. As of today, our prioritized pipeline of lines we expect to close by the end of 2019 sits at 19 due to the 5 lines that we've closed since year-end. We remain very confident in our ability to convert this pipeline by the end of 2019. And in fact, we're in active negotiations for a number of lines with the expectation of closing them in the next 1 to 2 months.

As we've talked about previously, 2018 will be an investment year for TPI as we have estimated that 14 lines will be in transition and 12 lines will be in startup. Notwithstanding this, we estimate that we will have top line growth of approximately 10% this year.

We expect these new lines, as well as the transitions and additional startups, will position us nicely for strong growth in 2019, and we are still confident in our revenue target of $1.3 billion to $1.5 billion or approximately 35% growth in 2019. Therefore, our 3 year revenue CAGR target still stands at 20% to 25% through 2019.

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

We believe that the combination of our current lines under contract combined with our prioritized pipeline provide a clear path to more than $2 billion in wind-related annual revenue over the next few years, plus opportunities in other strategic markets.

Turning to slide 6, as of today our long-term supply agreements provide potential revenue of up to $5.4 billion through 2023, including the 46 wind blade manufacturing lines and our transportation production lines. Our potential revenue under our supply agreements has increased by over $800 million over last quarter with the addition of the new Vestas lines, notwithstanding our Q1 billings of $223.7 million.

At this time last year, our potential revenue under our supply agreements was approximately $4.2 billion. We have increased that amount by approximately $1.2 billion net of the impact of approximately $950 million of billings since that time. The minimum guaranteed volume under our supply agreements has grown to approximately $3.6 billion, up from $2.7 billion at this time last year.

Please turn to slide 8. Our view of the onshore global market growth remains essentially unchanged. Annual installed onshore wind growth is expected to increase to 63.3 gigawatts in 2027 according to MAKE. This projected growth will be driven primarily by developing markets which, according to data provided by MAKE, will grow at a CAGR of 13.3% during that period, while more mature markets, those with at least 6 gigawatts in installed capacity at the end of 2016, will continue to grow but at a more modest CAGR of 1.6%.

We believe we remain well positioned to serve these emerging markets from our facilities in China, Juarez and Matamoros, Mexico, and Turkey. And we expect the growth of these markets will continue to drive the outsourcing trend we've seen over the last 10 years.

We also see a strong outlook for wind energy in large mature markets such as China, the U.S., and India, areas where there continues to be very low wind penetration rates. The opportunity for wind in both emerging and large developed economies allows multiple avenues for growth for TPI and the broader industry.

With respect to the U.S. market, we are pleased with the outcome of tax reform late last year, where threats to alter the PTC phase-down were rejected by key Republican allies. As you can see on slide 9, the next few years are expected to be strong, with expected annual installations averaging 10.7 gigawatts. We believe we remain very well positioned in the U.S. with our current customers accounting for 99% of the U.S. market share in 2017, and they also account for 98% of the projects under construction or in advanced development where developers have reported an OEM.

Although we recognize that there is still some uncertainty in the marketplace concerning the U.S. wind market beyond 2020, optimism is building due to several factors. 80% PTC orders placed in 2017 will increase installed gigawatts in 2021. MAKE reported that there was 10 gigawatts of wind safe harbored in 2017, 77% more than in its previous forecast.

In the same manner, 60% PTC orders placed this year should provide for more volume in 2022. The pure economics of wind energy are very compelling. Corporate and retail customers want to buy wind. Utilities are using it to grow their businesses and to meet aggressive CO2 emission reduction goals. And many large institutional investors are requiring change in environmental and in social responsibility from the energy industry. The fundamental drivers of our industry are getting really good based on economics and customer choices.

Before I turn the call over to Bill, I'll touch on a few topics that have been getting some airtime over the last couple of months, primarily trade, OEM margin pressure, and the liquid epoxy resin market. We are continuing to monitor trade talks closely, particularly with respect to the recent tariff proposed on steel, Chinese products, as well as the continued negotiations around NAFTA modernization.

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

The Office of the U.S. Trade Representative has determined that the act's policies and practices of the government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce, and will hold a public hearing regarding a proposed determination on appropriate action in response to these acts, policies, and practices.

The trade representative has also proposed an additional duty of 25% on a list of products from China. The list of products set forth in the annex to the notice did not include any of the raw materials or equipment that we use in our operations that we currently or may in the future import from China, nor did it include wind blades. We will continue to monitor this closely.

With respect to the tariffs placed on steel in late 2017, the only steel in our blades are the bolts that secure the blade to the hub of the turbine, so it's a very small portion of the overall cost of the blade and will not have any impact on our cost. As for the balance of the U.S. wind industry, MAKE has estimated that, under a worst-case scenario, wind LCOEs could be impacted by between 2% and 3%.

Many of our customers have been publicly discussing some of the margin pressures that they're experiencing as a result of the transition to more auction-based tenders in many regions of the world, the competition from solar in certain regions, and continued low natural gas prices. As we've outlined in our public documents and discussed with many of you, we have always taken an open book approach with our customers in order to collaboratively drive down the cost of the bills of material and reduce our manufacturing cost.

Our supply agreements provide a shared gain mechanism, whereby as we work to drive costs out of the blades and manufacturing process, we share a portion of that with our customers. This has the effect of reducing the sales price of the blade while enabling us to maintain or expand margins. We will continue to collaborate with our customers in this manner and will continue to use our contract structure to help drive down the LCOE of wind energy while building value for TPI.

Finally, many of you have been asking about the impact of the recent spike in spot prices for some of the feedstocks used in liquid epoxy resins, or LER, and how this may impact TPI's results. The spike in spot prices was primarily driven by a reduction in supply after the Chinese Ministry of Environmental Protection implemented new pollution measures late last year, and many plants manufacturing the key components of LER were shut down until environmental improvements could be put in place.

This supply shortage has enabled many non-Chinese suppliers the opportunity raise prices in the short term. We identified this issue early and have implemented a comprehensive mitigation strategy that we're executing in order to minimize the impact of this short-term price increase.

I'll now turn the call over to Bill to go through our financial results and to walk you through our LER strategy and explain why this will not impact our ability to still hit the financial guidance we set forth back in November 2017, which we reaffirmed in March of 2018 and will reaffirm today. Bill?

Thanks, Steve. In addition to our epoxy strategy and before I hit the financials in detail, I'll also touch on our ASC 606 restatement and implementation at a high level to put the more detailed discussion into context.

First let's discuss epoxy pricing. We disclosed in our December 31, 2017 10-K that the impact of a 10% increase or decrease in epoxy resin pricing would have had an impact of approximately $13 million on our 2017 income from operations. That was a very conservative number, as it was based on the total amount of resin we purchase during the year and didn't take into account the share pain/gain structure of our contracts.

Also, it's important to note that approximately 35% of the epoxy resin we use is purchased under contracts controlled by our customers, and therefore 100% of all price changes are borne by those customers. And for the customers where we control the epoxy resin contracts, we have the ability to generally pass on up to 70% of the net increase in our BOMs, which would include epoxy resins. You will see in our Form 10-Q filed earlier today we have updated our commodity risk disclosure to take into consideration only the impact of the resin cost under our control.

With that as a backdrop, our global supply chain strategy is to have multiple suppliers for all key raw materials to ensure not only an adequate and uninterrupted supply, but to also maintain a competitive pricing environment. Furthermore, for key inputs like epoxy resin, having suppliers that are backwards integrated, in other words, they manufacture their own feedstocks, is also critical. We have multiple suppliers of epoxy resin and also suppliers that manufacture their own feedstocks, so this is an advantage for us.

Additionally, for the same reason we all like the visibility we have with our long-term supply agreements with our customers, our suppliers also like the visibility we provide them as a result. This enables us to develop long term, mutually beneficial relationships and helps to deter them from trying to take advantage of short-term pricing swings in order to protect a long-term growth opportunity with us.

Bottom line, our mitigation strategy, which includes in some circumstances changing suppliers and in other situations changing other key components such as hardeners and pastes, is enabling us to mitigate most if not all of the epoxy pricing exposure that was identified early in 2018.

Finally, we are continuously working on driving the cost out of the bills of materials, our manufacturing process, and overhead. So an increase in one commodity, although important and significant, doesn't have to result in an increase in our overall cost or negatively impact our margins. Therefore, we have not revised nor do we anticipate revising our guidance for 2018.

Now for a quick recap on the impact of the adoption of the ASC 606. As we've discussed the last few quarters, the adoption of ASC 606 has had the effect of accelerating revenue, as we now are required to recognize revenue on a percentage of completion basis and also recognize revenue on raw materials when purchased if they are customer specific.

During the first quarter of 2018, we accelerated the production of certain blade models for some of our customers in order to meet their aggressive delivery schedules and to complete certain volumes in order to facilitate some of the blade transitions we expect to have during 2018. As a result, the number of blades in production at quarter-end was unusually high in two of our geographies.

As I will discuss in more detail, this has resulted in significantly higher revenue compared to billings in the first quarter and has also favorably impacted net income, earnings per diluted share and adjusted EBITDA. Notwithstanding, we are affirming our full year guidance for revenue, billings, earnings per share and adjusted EBITDA, and we plan to provide more specific quarterly guidance for these items later in the quarter once we have finalized the full update of our models under ASC 606. All comparisons in the MD&A section of our Form 10-Q and in the discussion to follow will compare Q1 2018 under ASC 606 to Q1 2017 as restated for ASC 606.

Please refer to slides 12 and 13. For the first quarter of 2018, net sales for the quarter increased 21.7% to $254 million compared to the same period in 2017. Net sales of wind blades increased by 19.7% to $234.2 million for the first quarter of 2018 as compared to the first quarter of 2017.

The increase was driven by an overall increase in the average sales prices of blades during the quarter, notwithstanding a 10.5% decrease in the number of wind blades delivered during the first quarter compared to the same period in 2017 as a result of transitions and the loss of volume related to our contracts with GE in China and Turkey.

Total billings for the first quarter increased by $12.3 million, or 5.8%, to $223.7 million compared to the same period in 2017. The favorable impact of currency movements on net consolidated sales was 3.4% for the quarter compared to a negative impact of 1.4% in the first quarter of 2017.

Gross profit for the quarter totaled $28.3 million, an increase of $8.3 million over the same period of 2017. And our gross profit margin increased by 160 basis points to 11.1%. The increase in gross margin was driven primarily by continued operating efficiencies, the impact of net savings in raw material costs, offset by the negative impact of currency movements and an increase in startup and transition costs of $8.6 million compared to the same period a year ago.

General and administrative expenses for the quarter were $11.2 million or 4.4% of net sales as compared to $8.3 million in 2017, or 4.0% of net sales. The dollar increase quarter-over-quarter was largely driven by costs related to the implementation of ASC 606, costs related to Sarbanes-Oxley, and increased personnel costs from filling key global positions to support our growth and diversification strategy.

Net income for the quarter was $8.6 million as compared to $5.2 million in the same period of 2017. This increase was primarily due to the improved operating results discussed above. Diluted earnings per share was $0.24 for the quarter compared to $0.15 for the same period in 2017.

Adjusted EBITDA increased to $27.4 million compared to $17.6 million in the same period of 2017. Our adjusted EBITDA margin for the quarter was 10.8%, a 240 basis point improvement from our margin of 8.4% in the first quarter of 2017.

Moving on to slide 14, we ended the quarter with $138.8 million of cash and cash equivalents and total debt of $125.7 million, or total net cash of $11.1 million compared to net cash of $24.6 million at December 31, 2017. For the quarter, we had net cash used in operating activities of $3 million while spending $11.7 million on CapEx, resulting in negative free cash flow for the quarter of $14.7 million.

Net cash used in operating activities was primarily driven by the increase in contract assets, in other words inventory, under ASC 606, as we have accelerated production in certain sites to accommodate customer delivery schedules and transitions later in the year.

In April, we completed the restructuring of our existing senior credit facility with $150 million revolving line of credit with a syndicate of banks led by J.P. Morgan Chase, Wells Fargo, and Capital One. Shortly thereafter, we entered into an interest rate swap to fix our rate on $75 million of the outstanding borrowings for a 5 year period at 4.19%.

This represents a rate reduction of 375 basis points from our prior facility and provides us with interest rate certainty in what we expect to be an environment of increasing rates over the next several years. We expect the net impact of these transactions to reduce our cash interest expense for 2018 by $1.7 million and will result in overall cash savings of $4.5 million in 2018, since we will avoid $2.8 million of principal payments that were due in 2018 under our prior facility.

Furthermore, the additional capacity under the new revolver gives us added flexibility as it relates to some of our outstanding foreign debt as well as additional optionality related to funding our continued growth.

We continue to be pleased with the strength of our balance sheet, our ability to generate the cash we need to expand our global footprint, and the additional flexibility and certainty our new credit facility and swap provide.

With that, I'll turn it back to Steve.

Thanks, Bill. Please turn to slide 16. Now I'd like to update our key guidance metrics. We expect total billings for 2018 of between $1 billion and $1.05 billion, while revenue under ASC 606 is expected to be within the same range. We expect our adjusted EBITDA for the full year to be between $75 million and $80 million.

We expect to deliver between 2,500 and 2,525 wind blade sets in 2018. Blade average selling price for the year will be in the range of $125,000 to $130,000. Total dedicated lines at year-end will be between 51 and 55. Capital expenditures will be between $85 million and $90 million. Startup and transition costs will be between $58 million and $61 million. Net interest expense will be between $11.5 million and $12.5 million.

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

We're very pleased with TPI's first quarter results. To summarize, we delivered outstanding results both on the top line and on an adjusted EBITDA basis. We signed multiyear supply agreements for 5 lines plus options with Vestas, adding nearly $1.2 billion to our total potential revenue under our supply agreements. We expanded the potential diversification of our revenue base with the Navistar joint development agreement. We remain very confident in our ability to continue converting our prioritized pipeline by the end of 2019, and expect to be announcing some of those conversions before the end of the quarter.

I want to thank the TPI associates for their dedicated effort, our customers for placing their trust in us, and our shareholders for your continued support. Thank you again for your time today.

And with that, operator, please open the line for questions.

[Operator instructions.] Our first question is from Stephen Byrd from Morgan Stanley.

Just wanted to touch base on a couple of things as I think about the longer term. 2019 is obviously going to be a very big year of growth. And I'm thinking about sort of the pace of transitions with your customers, the rate of change. Obviously we've seen I guess I think of it almost as an arms race in terms of the increase in wind blade length and characteristics, and that's all to the better for you. But also at the same time, I'm thinking about sort of the pace of transition to ever-larger and sort of upgraded blade technology. I know you're not giving guidance on 2020, but just at a high level when you think about transition and the pace of transition post 2019, is there any sort of thoughts you can give us in terms of that sort of rate of change of transitioning production lines?

Yes, Stephen, I think it's a good question. There has been a lot of rapid change in product transitions at this period of time and kind of chasing each other, leapfrogging to some degree, on rotor size. And you'll remember the big driver for LCOE reduction is taller towers and longer blades. So just by going bigger in the blades, LCOE comes down.

Some of the tenders that have been bid into and the competitive pricing have been on the basis of the next generation larger rotor size. And that's what -- guys are looking out the cost curve a couple of years, bidding on more aggressive pricing on that basis.

We would expect as things normalize a bit, as the PTC glide path is achieved in the U.S., and then as other markets are really selling wind turbines on a fundamentally economic basis, where that becomes a bit more the norm. Then the question is are we cheaper as an industry and technology than marginal cost of coal, for example, or burning gas in existing gas plants. And it's one thing to be cheaper than the new installed hardware on nat gas, for example. It's another if we're cheaper than the fuel.

And so our sense is, once the industry achieves those numbers, then I think the turbine companies will be focusing a bit more on their return on their invested capital and probably slow things down a bit. That's our sense of it as a general direction, I would say. It's not something we're in control of, of course, but just to give you a sense of the macro dynamics.

On offshore wind, I've been just thinking about the nature of that business. And for example in North America, there's a lot of activity in the Northeast United States. And sort of I guess as I think about a lot of local infrastructure that's likely to be built I believe in New England, are there differences in terms of the offshore wind business in terms of whether it be manufacturing location or other characteristics of production that just are notable that we should be thinking about? I guess I'm always thinking about the very large factories that you all have globally that are highly efficient relative to perhaps -- I guess I guess I've been thinking perhaps somewhat smaller local sort of offshore capabilities, not only because if the infrastructure is local also the volumes seem to be a bit smaller in certain locations. But are there certain differences in the offshore market, as you think about tackling that, that we should be keeping in mind?

Yes, the main difference with the offshore blades, as you know, is really the physical size, Stephen, right? The blades today are in the call it 85 to 90 meter range per blade for offshore and growing. And so it's even more important with a single piece blade at that size that the blade never touch a truck or only be trucked or moved by rail a very short distance and then really moved by water, by barge or by ship.

I think your point's right that it doesn't really make sense to us, for example, to think about opening small plants in high labor cost regions with immediate water access to serve a New England offshore market, for example. But instead, what probably does make more sense is to leverage the big efficient factories that you talked about with one offshore line, for example, along with a bunch of onshore blade lines so that we leverage the material cost, we leverage the workforce. They are very efficient, big scale operations, but we can still efficiently move that big blade by water to where the offshore sites are going to be.

That also helps us then to not only efficiently price into the smaller project, but they're a bit lumpier in nature as well. So, rather than building a plant that's dedicated to a market that may be up for year and then down for a year, it really spreads our bets much more in a much smoother manner. So we think that's a better way to go.

You can imagine our Matamoros site serving that type of opportunity. You can imagine the Yangzhou, China facility, which has immediate water access to the Yangtze River, being able to do that very efficiently as well. And I think you may remember we have said in our now 19 mold pipeline there are a couple of offshore blades in that as well. That's the way we would plan to attack it.

That makes perfect sense. Lastly, if I could very quickly, just on the vehicular market. You continue to make really nice progress and get recognized for your technical achievements there. At a high level, though, in terms of just thinking about when this is going to become a very meaningful part of the business, I just wanted to do a quick temp check. Is there anything fundamentally different, or is this sort of more lockstep in progress but not sort of step change differences in terms of how you're tackling that?

Yes, for us it's the same strategy that we've discussed before. And as we think about it, the addition of 19 lines in wind, if we end up with call it 65 production lines in wind, even if you haircut that back to just, say, 60 for sake of discussion times $35 million per year per line, that's $2 billion of revenue for our company in wind alone. And we're not guiding on a particular date for that.

But as we said in our prepared remarks, we're seeing a pretty clear picture, if you will, to roughly $2 billion annually in wind only related revenues. So I think then the transportation or non-wind strategic markets work, Stephen, for us is thinking about call it years 4 through 10, more in that timeframe, that we want to make sure we continue to have good revenue growth opportunities for our company in that timeframe. And we're seeing this market area, the adjacency, applying our composites technology to kind of the one lane over market opportunity as a smart way to do that.

So these development programs are very important to us strategically. They're not necessarily going to add significant revenue in the immediate term. But we're building a business for a few years out.

Our next question is from Phil Shen from Roth Capital Partners.

Hey, guys, congrats on the nice results for Q1. We heard you reiterate guidance for '18, wanted to make sure that you're doing the same for 2019 as well. And let's say -- to Bill and Steve, thanks for the detail on the resin situation. Let's say the condition persists and the resin levels remain elevated. Is there a potential impact on your 2019 outlook, or do you expect to have enough tools and avenues to be able to continue to mitigate it beyond '18?

Yes, Phil, we didn't -- I think Steve did mention '19. We haven't moved off the target. We haven't provided formal guidance yet, but we haven't moved off the targets that we talked about at the end of the year or in November, so we're still there.

From the epoxy standpoint, we're already seeing prices start to stabilize and in some cases go down. If you look at LER in Europe, Asia and then China outside of -- or you look at all of Asia including China, LER prices came down in April from March. The U.S. is still a little bit elevated.

But we don't anticipate that to continue. And as we talked about before, epoxy resins are 20%, give or take depending on the blade type, of our overall raw material BOM. So that gives us 80% of other stuff to continue to drive cost out and to drive operational efficiency. So long answer to a short question, but the answer is at this point we don't see it impacting what we're talking about thus far for 2019.

And Phil, it's Steve. Just to be clear, we are reaffirming our confidence in our revenue target of a range of $1.3 billion to $1.5 billion in 2019. And I think your question and Bill's answer relates then to we would expect the EBITDA target on that revenue to remain the same as well.

Shifting to kind of more of a macro question, in terms of the activity with unsubsidized development, I think there was a recent announcement that developers are proceeding with a 300 megawatt unsubsidized wind project in Spain. This appears to be the first or one of the first on this scale to move forward. Although there is some doubt that after this has been awarded that it might be carried out, it certainly highlights the direction where the industry is going and we're moving toward unsubsidized demand. I know you spoke to it a little bit in your prepared remarks, but can you talk about how quickly you expect the industry to move to unsubsidized demand? I know we have -- and perhaps you could talk to the activity here in the U.S. as well as globally.

Yes, Phil, I think that we're starting to see examples of that already, the Mexico tenders, the Turkey YEKA of 1 gigawatt, the Spain example. And they're already kind of two years out or so as they think about bidding some of these tenders.

In the U.S., orders placed last year on the 80% of the PTC deal basically have through the end of 2021 to install those turbines. We mentioned the 10 gigawatts that was safe harbored. Not all of that 10 gigawatts may get built, but a very large percentage of it should. And if you think about it, we're kind of constrained between now and then in the U.S. market, the forecast being 8 to 10 to 12 gigawatts or so roughly over the next few years. You can imagine a good chunk of that 10 gigawatts perhaps being installed in 2021.

Then the question is what happens on 60% orders this year. And with utilities doing more of the work themselves, there's probably some more efficient uses of the tax -- the monetization of the tax equity and use of tax equity and monetization of the credit, really, that would allow 60% and perhaps even 40% to continue. So that is still "subsidized," so to speak for a bit, but yet the glide path is there.

And so the really good news, I think, we're starting to hear some of the industry leaders talk about pricing in the $0.02 to $0.025 or $0.03 unsubsidized in the early 2020s or perhaps by mid-2020, the 2020 timeframe. But that all -- we like that glide path. It really hangs together as you think about it. Our work is not done to continue to drive down the cost of wind. You can imagine our customers and TPI was still working to do so over that period of time.

So long answer there again, but you could consider it, certainly in the early to mid-2020s, that most all of the work being done is likely to be on an unsubsidized basis that way.

I'd like to kind of put a finer point on Steve's question earlier about the potential transition costs in 2020. 2018 is an investment year. 2019 we should get to more normalized startup and transition cost. Just to kind of, again, put a finer point on it, should 2020 look more like 2019, or what degree of risk is there that it could be an investment year again in 2020 if product transitions are 2 years? Or do you really have a high degree of confidence that it'll look much more like 2019?

Yes, Phil, this is Bill. I would suggest it will probably look more like 2019, which would be more startups than transitions as we convert the balance of our prioritized pipeline. Some of that will be closed in '19, obviously, and then we'll have those startups likely in '20. So you'll see a similar level of startup. But I think the transition -- as Steve mentioned in his response to Stephen's earlier question, I think we should see a much more modest level of transition than certainly in '18.

Our next question is from Jeff Osborne from Cowen & Company.

I might have missed this. But Bill, I was wondering, did you disclose what the 606 impact specifically was for Q1 for revenue and EBITDA results?

Yes, it's a little -- it's in the footnote in the 10-Q so you can get some sense of it, but it's a little hard to get the exact impact. There were impacts related to obviously recognizing revenue on the work in process. There's a true-up concept whereas if estimates change for cost to complete or for total contract revenue, that has an impact as well. But we didn't specifically call out what the difference was.

I guess I was just in particular looking at the EBITDA. Was there any onetime-y true-ups that inflated Q1 as it relates to looking at the Q1 as a percentage of the total EBITDA for the year?

Yes, there was actually a negative impact for a true up as it relates to it. But net-net, it was a pick up because of the increase in the contract asset. And I'll use that term because that's what ASC 606 calls it, but basically for us old guys that's the build up of WHIP and the raw materials. And so we're recognizing revenue on the build up of it.

Okay, that's fine. I'll go through the Q and revert back. Just two other real quick ones. On the Vestas Izmir, if I'm going the math right, is that the old Gamesa option that was not exercised, or is there a new mystery line that you added capacity to in Izmir?

No, we had -- the plant we built had capacity for Vestas for additional lines there. And so they took that capacity, or at least one of the slots of additional capacity, but it doesn't impact the Gamesa plus one.

The Gamesa slot still is empty at the moment?

That's correct.

And then I don't know if you can answer this or not. But you highlighted a couple items as it related to the gross margin cycle time and shared pain/gain. I was just curious on the cycle time. I know China in the past had been at around a 24 hour cycle time. Are any of the other facilities at that level? And then the follow-up question on the margin side, which was impressive, is just the shared pain/gain. Just hypothetically, if you had $100.00 of savings, are you passing on $100.00 of that to your customer today to help them lower the localized cost of energy, or are you keeping any portion of that? Is there any way to kind of aggregate what that savings is or gain that you're capturing? Is it part of your cycle time improvement and reduction in bill of materials?

Yes. On the first one, cycle time, we're at 24 in all locations, not for all blades all the time. Obviously, for some of the blades, we're in transition on or startup, the cycle time starts higher. But for virtually all of the blade models where we are in serial production, we're at or near 24 hours, and in some cases lower than that.

As it relates to the shared pain/gain, as we've talked about in the past, generally it's a 70/30 split with our customers. In some cases it's 50/50. So if it's $100.00, they would get $70.00. We would get $30.00. We don't quantify specifically what the total shared pain/gain is on an aggregate basis or customer that we disclose. But we do have the option, if we choose to, to share more than we're contractually obligated to, and we've talked about that in the past.

Yes, and I guess that was sort of the theme of the Analyst Day, on the negative side. And so I was just trying to get a sense of is that better or worse than you were anticipating, sharing more, as it relates to your commentary in November.

Just to clarify the commentary in November, I think the commentary was we could choose to do so. We could choose to do more than we are contractually obligated. So I just want to make sure that's clear. We didn't say we would do all of it, but we could choose to.

But I think as we work through some of the challenges with our customers as we're looking at transitioning some of the blades, we may choose to -- and in some cases when we transition to a blade, we may not keep 100% of the gain we had on the prior blade, right? So if we shared it 70/30 and our margin went up on that blade, when we go through a transition and we reprice the new blade, we may give back some of that gain margin, if you will, from before initially. And then we'll get it back as we improve from a productivity standpoint.

So there's puts and takes. So it's not just in all cases we're giving up -- that we would give up more than we have to. So there's puts and takes, and that's why we said we don't anticipate an issue with our margin and the margin that we've guided to as a result of balancing the puts and takes as it relates to that.

Our next question is from Pavel Molchanov from Raymond James.

Can you give an update on the bus body fab in Newton, Iowa? Kind of what's the startup timetable and when you're expecting to reach steady state operations there after startup?

Yes, Pavel. As we disclosed I think in the fourth quarter as well as in the Q, we plan to start up in second quarter. So we're pretty much in the second quarter, so we're on track with that startup. So we'll be producing buses out of Iowa by the end of the second quarter, and expect to be at a full production rate probably by the end of the third or early fourth quarter there.

And when I look at your non-wind revenue in Q1, I think it was just under $20 million. If we just annualize that, we would get the high end of your $75 million to $80 million target for the year, and that's without the Newton fab. So does that imply that you're going to be shifting some sales that you're currently fulfilling elsewhere into the Newton fab? Because otherwise you easily get above $80 million.

Yes, that number included what's happening in Iowa. So it didn't exclude that, so that's in the non-blade number.

But you got to $20 million without any sales from that new fab, correct?

Yes. We have tooling in there and we also have service revenue in there as well.

Yes, Pavel, remember there's wind-related tooling in that number also. So that's not just a transportation number.

And we're producing buses in Rhode Island as well.

That's right.

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

It's Aaron Spychalla on for Eric. Thanks for taking the question. First on the transitions and startups, obviously since that's key for the 2019 ramp, can you just provide an update on how things are progressing with those? Have you seen any unplanned issues or delays or anything outside of the ordinary, or is it just kind of status quo? You did mention more blades in production at quarter-end to kind of facilitate some of those, I think, right?

Yes, there are a number of startup and transition programs all going on, and there are several that are a bit ahead. And from time to time, we may have 1 or 2 that are a little bit behind, but we're not going to be reporting out on detail of every line around the world of transition or startup. But suffice it to say we've confirmed our guidance and are generally on track.

And then second, just high level on the overall lines, looking at what you have in-house today and with the transitions and startups going as planned, it seems like most of your 2018 targets are in hand today. Maybe you just need a few more lines to close. Is that right or is there anything that we're missing?

Yes, I think that's right on the first part. And then on the lines, we've closed 5 lines on a nominal of 12. The range was 10 to 14. So we're tracking pretty well against the range of 10 to 14, but have some more work to do there between now and the end of the year.

And then last question maybe just on repowering, seeing much more of that in the market. It seems like a real nice opportunity for you guys. Is there a way to quantify what percentage of the business that might be today, and how you think it can become going forward?

The repowering percentage of the total market or the ability for that to add to the market of new machines, it's starting to grow but it's still not a very large percentage in total of the new installs on an annual basis. It's getting a fair amount of press in the U.S. because of the PTC benefit that some of the repowering projects could take. So that is going on in the U.S. market on that basis.

But the bigger macro over time would be can we -- will the industry increase the overall market on an annual basis based on starting to replace old machines that might have been in the ground for 20 years or so. That's starting to contribute, but it's not a major number. And for us, we're largely building new blades, state of the art machines, new blades.

So unless that repowering project is taking out the old machine entirely and putting in a brand new machine, that's -- we may not be participating in the business. And if it's that way, then it looks like just new orders to us for the most part, so a little tougher to call that out exactly. The good news is it's starting to contribute to the overall demand, but truthfully not a huge percentage yet.

Our next question is from Joseph Osha from JMP Securities.

Back to Pavel's question, I'm looking at the Q here. And as you point out, only about $4 million of that $20 million in non-blade sales were actually transportation, and the implication is that that's going to grow. But in your guidance, you say that the number that you refer to is all non-blade billings, which I would assume includes the molding and equipment sales and whatnot. So it kind of gets me back to the question Pavel asked. I would think if the transportation business is going to ramp, that $75 million to $80 million still looks low. Can you help me understand that?

Our guidance is $75 million to $80 million, Joe, and that's where we're at right now. So that includes our transportation, it includes tooling, and it includes some other small transportation work that we do as well.

And then I think this is just a timing question. If you go back and look at what you guys said in Q1, you were expecting 6 lines to be in startup and 7 in transition. And things came out a little differently. You had 10, I think, in startup and 4 in transition. Is that just timing, or is there something else going on there we should know about?

It's just timing. I think when we talked about it originally, some of these can move a week or two, which could flop a quarter. So again, that was just trying to give you more of a general idea of the cadence. It wasn't specific necessarily, because it does move a little bit. So it's just timing.

And one other very quick one. You've given us Q1 '17 now for comps for ASC 606. Maybe I missed it. Did Q2, Q3, and Q4 ever show up, or are those going to roll out as you report '18 and put the Qs out?

Yes, as the Qs come out, we'll show you restated not only for that quarter but for the year-to-date.

This concludes the question and answer session. I'd like to turn the floor back over to management for any closing comments.

Yes. Thanks again everyone for your interest in TPIC. And we look forward to continuing to update you on our progress. Thank you.

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