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TPI Composites, Inc (NASDAQ: TPIC) Third Quarter 2021 Earnings Conference Call, November 8, 2021, 5:00 PM Eastern Time
Hi. Welcome to the TPI Composites 2021 third quarter earnings conference call. 【Instructions】
I will now forward the call to your host, Christian Edin from the Investor Relations Department of TPI Composites. You can start.
Christian Edin - Investor Relations
Thank you, operator. I would like to welcome everyone to TPI Composites' third quarter 2021 earnings conference call. During this conference call, we will make forward-looking statements based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results may differ materially from our forward-looking statements, if any of our key assumptions are due to other factors discussed in today’s earnings press release as well as in this conference call or in our latest reports and documents filed with the Securities and Exchange Commission. The commission is incorrect for comments, and each commission can be found on our website tpicomposites.com. We do not undertake any obligation 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 the definition and reconciliation of historical non-GAAP measures and comparable GAAP financial measures.
With this, let me forward the call to Bill Siwek, President and CEO of TPI Composites.
William E. Siwek - President, Chief Executive Officer, Director
Thank you Christian and good afternoon everyone. Thank you for joining our conference call. In addition to Christian, today our Chief Financial Officer Bryan Schumaker also joined me. I will briefly review our third quarter results, including the strategic financing transaction announced today. I will also introduce our global business, including our supply chain and the broader wind energy market. Bryan will then review our financial performance and financing activities in more detail, and then we will open a Q&A session.
Please go to slide 5. Today we announced that we have signed a contract with Vestas to add three production lines in Yangzhou in 2022 and extend the contract for two production lines with Nordex of Turkey. According to the contract, these transactions add approximately $150 million in potential future revenue. I am also pleased to announce today that we have signed a stock purchase agreement to issue and sell US$400 million in Series A preferred shares to investment funds managed by Oaktree Capital Management. According to the terms of the agreement, TPI will issue and sell a US$350 million Series A to Oaktree Capital in accordance with customary closing conditions. TPI can also choose to require Oaktree Capital to purchase an additional US$50 million in Series A within two years after the end of the initial issuance, in accordance with the same terms and conditions as the initial issuance of Series A.
According to the mutual agreement between TPI and Oaktree, Oaktree may invest an additional US$200 million for follow-up capital. Oaktree is an experienced investor across the power and energy value chain, and today’s announcement is a strong support for our strategy and growth prospects. Oaktree’s investment will significantly strengthen our balance sheet and enable TPI to navigate a rapidly evolving market and operating environment in the short term, while providing flexibility to take advantage of long-term growth opportunities. We will discuss the terms of Oaktree Investments in more detail in the conference call later.
Before I begin to discuss our results and operations, it is important to note that we are still focused on operating our business safely while continuing to mitigate the impact of COVID-19 and ensuring that we are prepared to deal with the continued resurgence of the virus under any circumstances. Of global offices. We have and will continue to adjust our operating procedures to enable our employees to work safely and continue to meet customer needs.
All in all, as market conditions continue to deteriorate, from a financial point of view, the third quarter is clearly disappointing because most of our customers have already discussed it publicly. Therefore, although we achieved net sales of $479.6 million, a slight increase from the third quarter of 2020, we ended the quarter with breakeven adjusted EBITDA. The takeover of the Nordex factory in Matamoros did not go as planned, our production was severely delayed, and the team needed to be upgraded. We are transforming operations into world-class facilities, just like the facilities we operate across the street [Phonetic], but this requires more time and resources than originally anticipated. This is one of the main factors contributing to our poor financial performance in the third quarter, and it will continue into the fourth quarter. However, we expect operations to stabilize by the end of this year and plan to achieve greater success in the region in 2022.
In Juarez, Mexico, we are in the process of transitioning to innovative blades, and innovation sometimes brings challenges. In addition to the delays from design to prototype and finally to production, we also encountered multiple delays related to special equipment and parts. As a result, our sales in this quarter were negatively affected as well as our full-year sales. As with our new business in Matamoros, we expect these challenges to be resolved by the end of the year, and we expect the plant to reach full capacity in 2022.
In China, our Yangzhou factory was closed for three weeks due to the outbreak of the new crown pneumonia in Yangzhou. We lost 10 sets this quarter, but we expect to make up in the fourth quarter. Supply chain and logistics challenges continue to plague the industry, and we were not spared in the third quarter. Certain customer-oriented raw material supply shortages have slowed production in multiple factories. The loss related to these shortages was close to 80 units in the third quarter and will exceed 150 units in the whole year.
In addition, the cost of raw materials and logistics is still at a relatively high level, and the overall impact on this quarter is about 20 million US dollars, and the annual impact is estimated to be close to 30 million US dollars. As our Iowa plant announced that it would stop production at the end of 2021, the plant’s output has been reduced to minimize production risks because we have fulfilled our current customer commitments at this location.
Faced with these challenges and the challenges the industry will face in the next year or so, our focus has always been to manage our liquidity and raise additional funds to strengthen our balance sheet and prepare for the next significant growth of the industry Prepare. We announced today that Oaktree Capital’s strategic investment will provide us with additional flexibility to manage our business through these recent headwinds.
Turn to slide 6; I will now briefly introduce you to our global business and market dynamics. In the third quarter, apart from the brief outage in Yangzhou, none of our facilities experienced any production losses due to the COVID-19 outbreak or government orders. However, due to customer-oriented and supply shortages of raw materials, we did experience unexpected production delays for materials in Turkey, Mexico, and China. We will continue to evaluate our global footprint to ensure that it is optimized for us, our customers and the market. As we discussed last quarter, we plan to integrate our China business into Yangzhou to reduce costs, simplify activities and meet the anticipated future needs of our customers. Our Yangzhou factory is world-class and can handle both onshore and offshore blades. This prime location is an ideal place to consolidate our business in China and effectively serve our customers.
Regarding the Juarez plant, which will be put into use in 2022, we are actively seeking to backfill these four production lines with one or more customers because we believe these operations will continue to be one of the best low-cost options for blades. It will be supplied to the United States and Mexico in the future. Interest in this capability is high, but the timing depends on the recovery of the US market and the final rule of the "Rebuild Better Plan" (if passed). We don't expect any production at this factory in 2022.
Mainly due to the ongoing uncertainty in the regulatory environment and the expected impact on US demand in the next few years, we currently do not have any plans for the production of the Newton, Iowa plant in 2022. Therefore, we are in an unfortunate position to suspend production at this facility at the end of December 2021. We have extended the lease term of the facility to 2022 so that we and our current customers or others have time to evaluate the final terms of the proposed "Better Rebuild Plan" to determine whether the facility is economically viable in the future.
Regarding our global services business, in the third quarter, we continued to focus on profitable global growth. Our team successfully got new jobs from original equipment manufacturers and asset owners. In order to accelerate our growth in Europe, we plan to open a training center in Spain in the fourth quarter to supplement our Americas training center. We expect revenue to grow three times in 2021 and expect to double again in 2022, all of which are organic.
In terms of transportation, our pilot production plan for a manufacturer of passenger electric vehicles has been expanded because we have proven our ability to scale up production in a cost-effective manner on our high-volume composite production line. This also led to another pilot program in cooperation with the same OEM, which will be launched in the fourth quarter of 2021. In addition, we will continue to cooperate with a number of OEMs on the cabin body structure and other key electric vehicle components.
As I mentioned before, our supply chain, like all other supply chains, continues to face challenges. As discussed in the last conference call, we have seen increased costs related to resin, carbon, fiber, and logistics. Although we can pass on most or even 100% of the cost increase to our customers, the part that we cannot pass on has a significant impact on our profit margins, and we expect this impact to continue until 2021 to 2022. After global growth of nearly 80% year-on-year, resin prices were flat in the third quarter, but we did see a slight increase in October, and our supply base continues to focus on margin expansion. However, we do expect prices to continue in the first half of 2022 It remained relatively stable, and then began to decline in the second half of the year.
The production capacity of carbon fiber continues to be limited, with prices rising more than 20% year-on-year. As demand in multiple industries exceeds supply, we expect prices to actually rise in 2022, and we can pass on all these prices to our customers through contracts. Overall, we expect to be able to maintain the average material cost of our customers who control the supply chain at a level of less than 2% from the 2021 level, and expect commodity prices to begin to normalize for many commodities in 2022 in the second half of the year. For most of 2022, logistics costs are also expected to remain high.
So, turning to the overall wind energy market in Slide 7, since our last conference call, we have introduced a "Rebuild Better" program, which includes a 10-year PTC extension, as well as general salary and apprenticeship requirements. Importantly, the bill includes a 10-year direct payment clause, although it needs to meet certain domestic content requirements to receive 100% direct payment. The BBB also includes an advanced manufacturing production credit of US$0.02 per watt for wind blades manufactured in the United States from 2022 to 2026, and then gradually reduced by 2029. For example, the blades of a 4 MW turbine will receive an estimated $80,000 tax credit. Like PTC, it can be paid directly.
Other aspects of the bill may help develop the wind energy market, including tax credits for storage and transmission, as well as tax credits for grants, loans, and hydrogen production from renewable energy. In addition, there are a large number of grants, rebates and tax credits to accelerate the decarbonization of electric passenger vehicles and commercial vehicle fleets, and to charge infrastructure, which we believe will help accelerate the growth of our transportation business.
Finally, the infrastructure investment and employment bill now passed includes $550 billion in new federal investment and U.S. infrastructure to help combat climate change, and through investments in clean energy transmission and electric vehicle infrastructure, the electrification of thousands of schools and buses , And create a new grid deployment authority to support grid upgrades. This should be a further catalyst for the growth of renewable energy and electric vehicles in the U.S.
Although the “Rebuild for Better Plan” and the “Infrastructure Investment and Employment Act” have had a positive long-term impact on the United States, we expect demand for the remainder of 2021 to decrease, and expect the number and blade revenue and adjusted EBITDA on the bill On the basis, due to the uncertainty of the US market and the increase in global raw material and logistics costs, the capacity utilization rate is lower than the optimal level, and will be flat or slightly decreased in 2022.
In the long run, we believe that the future of wind energy will be significantly enhanced, because it is necessary to achieve the positive goals set by countries around the world through decarbonization and electrification to combat climate change. In its roadmap to achieve zero emissions by 2050, the International Energy Agency predicts that by 2030, 390 GW of wind power will be installed each year, roughly four times the global record set in 2020. We believe that we are in a unique position on a global scale. In this anticipated period of rapid growth, our footprint in key strategic regions will increase our market share with industry-leading turbine OEMs. The next decade is both critical and an excellent opportunity for TPI.
Before I transfer it to Bryan, I want to reiterate that we will continue to focus on the health and safety of our employees, while implementing our operational requirements and ESG goals, including safety, diversity and inclusion, and promoting carbon neutrality by 2030.
With this, let me forward the call to Brian. Thank you Bill. Please go to slide 11. All comparisons made today will be compared to the same period in 2020 year-on-year. For the third quarter ending September 30, 2021, net sales increased by US$5.5 million, or 1.2%, to US$479.6 million. Net sales of wind blades were relatively flat at US$450.7 million. Due to the mix of wind blade models produced, the increase in average selling prices had a positive impact on net sales, but it was offset by a 20% reduction in the number of wind blades produced, which was mainly due to the reduction of contracted production lines in China. The third quarter was also affected by the transition to innovative blades in Juarez, Mexico. The impact on our production due to the shortage of raw materials supplied by our customers and the temporary closure of our Yangzhou manufacturing plant due to the outbreak of COVID-19 in Yangzhou. The average selling price in the third quarter of 2021 is approximately US$172,000, a year-on-year increase of 19%. Start-up and transition costs increased by US$6 million to US$14.5 million this quarter as we continue to transition our production line to Mexico’s longer innovative blades and increase the output of the factory we took over from Nordex in Matamoros. Our general and administrative expenses for the quarter decreased by US$1.1 million to US$8.2 million, and the percentage of G&A in net sales fell by 30 basis points to 1.7% of net sales. Foreign currency income in the third quarter of 2021 was US$4 million, while foreign exchange losses in the third quarter of 2020 were US$17.1 million. This change is mainly due to the net euro debt exposure to the Turkish Lira. Because of our revenue contracts denominated in euros, liability risks continue to naturally be hedged on the basis of cash flow. In the third quarter of 2021, approximately 23% of our revenue is denominated in euros. Our income tax provision for the quarter was US$8.2 million, compared to US$32.3 million in tax incentives for the same period last year. We forecast cash tax liabilities in 2021 to be between 22 million and 25 million US dollars. The net loss for the quarter was US$30.7 million, while the net income for the same period in 2020 was US$42.4 million. The decrease in net income is mainly due to the reasons described above. The net loss per share for the quarter was US$0.83, while the diluted net income per share for the same period in 2020 was US$1.13. Our adjusted EBITDA in the third quarter reached break-even, and the line utilization rate installed at the end of the quarter was 76%. In comparison, adjusted EBITDA for the same period in 2020 was US$49.1 million, accounting for 10.4% of net sales and a utilization rate of 93%. The third quarter was significantly lower than our forecast. Due to the challenges we faced at the Nordex plant that we took over in Matamoros, it was impacted by approximately US$10 million, US$6.3 million was related to the transition to innovative blades in Juarez, Mexico, and US$2 million was related to the three-week shutdown of our factory Relevant in Yangzhou, China. In addition, the net impact associated with ASC 606 is approximately US$16 million. The net impact is the result of the three main components; first, the estimate of raw material costs in 2020 has changed. For example, in the second quarter, we expect certain raw material costs (such as resin) to begin to decline in the fourth quarter of 2021. Now, we predict in ASC 606 that resin costs will remain unchanged throughout 2022. Secondly, we have the right to compensate customers for losses caused by supply or shortage of raw materials controlled by customers in accordance with the contract. However, based on the percentage of completion of these contracts required by 606, the confirmation of liquidated damages was limited this quarter. Finally, according to ASC 606, the contract for the new line and the extension of the existing line have a negative impact on us. Bill mentioned this before because the profitability assumption in our previous forecast is affected by the addition of new lines and the extension of old lines. Influence. Move to slide 12; we have $119 million in cash and cash equivalents and $143.8 million in net debt at the end of the quarter. Since the end of the quarter, our liquidity has been severely affected by the slow production of the Matamoros plant, the transformation challenges faced by the Juarez plant, the shortage of raw materials for customer guidance and supply, and the expected reduction in demand-due to reductions in 2021 and Customer demand in the fourth quarter of 2022. Our leverage ratio in the third quarter was 2.98 times, or higher than our maximum allowable ratio of 2.75. We have received a 30-day waiver from the banking group, and we believe this will give us time to close the Oaktree Capital financing. Oaktree's commitment will significantly strengthen our balance sheet in our fast-growing market. The proceeds will be raised from Series A preferred stock financing and will be used to fully repay the outstanding amount under our credit agreement. Go to slide 13; for 2021, our full-year guidance revenue is between $1.72 billion and $1.74 billion. Adjusted EBITDA is between US$30 million and US$40 million. Compared to the guidance we provided during the second quarter results, our adjusted EBITDA guidance for this year is related to the three main items we highlighted in Slide 14. Matamoros facilities. The impact of these factors on adjusted EBITDA in 2021 is approximately US$15 million. The second key item is related to our Juarez facility and higher-than-expected costs and delays. This accounts for approximately US$16 million of our adjusted EBITDA impact in 2021. Finally, the approximately $16 million in our 2021 adjusted EBITDA guidance change is related to the non-cash accounting impact related to ASC 606. We do not expect any changes to our dedicated manufacturing lines and wind blade group capacity compared to what we disclosed on the second quarter earnings call. The utilization rate is about 76%, and the average selling price is about US$165,000. We saw a strong average selling price of approximately US$172,000 in the third quarter, but the annual average selling price was affected by the decrease in the number of blades produced in the third quarter and the number of blades expected to be produced in the fourth quarter. Non-blade sales are between US$120 million and US$125 million, an increase of US$5 million in the low-end compared to our previous guidance. Capital expenditures are between US$40 million and US$45 million, which is lower than our previous guidance. Start-up costs ranged from US$17 million to US$20 million. This increase was due to increased production at the Nordex Matamoros plant and the transition from Juarez. Finally, we now predict that the total restructuring costs associated with global footprint alignment in 2021 and 2022 will total approximately US$45 million, and that it will generate approximately US$30 million in 2021. Approximately 15% of restructuring expenses will be non-cash. Now I will turn it back to Bill to introduce our financing activities in detail. Thank you Brian. Turning to slide 16, in view of the ongoing and recent headwinds facing the industry, we have been focusing on strengthening the balance sheet strength, as well as the company's management in a difficult operating environment and establishing a long-term optimal position for us. As I mentioned earlier, we have reached an agreement to initially sell US$350 million in Series A preferred stock to Oaktree Capital. We can also choose to require Oaktree to purchase an additional US$50 million in Series A preferred stock under the same terms and conditions. The A series will be issued for the first time within two years after the agreement takes effect. The outstanding A series will have a dividend of 11%, which can be paid in kind in the first two years. Oaktree will also receive approximately 4.7 million warrants with a term of 5 years and an exercise price of $0.01 per share. In addition to the initial commitment of 400 million U.S. dollars, Oaktree Capital may invest another 200 million U.S. dollars based on mutually agreed terms. Please turn to slides 17 to 19; Oaktree’s investment will significantly improve our balance sheet position. As of September 30, 2021, the pro forma-based net leverage ratio has dropped from 2.98 times to the net cash position. Liquidity is 251 million U.S. dollars, including unrestricted cash of 201 million U.S. dollars. This liquidity provides additional flexibility to manage our business through recent industry headwinds. The available liquidity and potential incremental capital of US$200 million from Oaktree Capital also allows us the flexibility to seek growth opportunities, including the use of Oaktree Capital’s global relationship resources and expertise. We believe that this investment by Oaktree Capital is a strong support for TPI's strategy and long-term prospects. With this, operator, please open the question phone.
Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Your first question comes from Philip Shen and ROTH Capital Partners. please continue.
Philip Shen - ROTH Capital Partners - Analyst
Hi everyone, thanks for answering my question. The first is the oak tree trade. In terms of shares, can you talk about how many are issued and at what price?
William E. Siwek - President, Chief Executive Officer, Director
Yes. So it will be three-initially Phil will be US$350 million in Series A preferred stock and US$4.7 million in warrants to purchase common stock at a price of US$0.01 per share.
Philip Shen - ROTH Capital Partners - Analyst
William E. Siwek - President, Chief Executive Officer, Director
Philip Shen - ROTH Capital Partners - Analyst
Thank you Will. Turning to the outlook for 2022, I know that you have not yet provided official guidance, but I want to know if you can talk about your expected trends in revenue or sales, and how profit margins will follow us through the year?
William E. Siwek - President, Chief Executive Officer, Director
Yes. I think Phil, we said that blade revenue will be relatively flat compared to the same period last year. If you want, EBITDA calculated by bill will be relatively flat. From a collective perspective, sales will decrease slightly. We expect them to decline in 2022. This is a lot of things, right? The Iowa factory and one of our Juarez factories, we will complete production for our customers in the middle of this month, and then our other planned US demand will generally be weak.
Philip Shen - ROTH Capital Partners - Analyst
Thank you Bill. Then, starting from each quarter, do you hope that the rhythm of the bottom indicator may be in the first quarter. Then the situation will improve sequentially as we pass the fourth quarter of 22, or do you expect in a sense-some degree of seasonality or some other factors that may prevent continuous growth or improvement like this? thanks.
William E. Siwek - President, Chief Executive Officer, Director
Yes-we are not ready for specific discussions on a quarterly basis. But what I mean is, if you look at the past few years, Q4 has historically been a bit low, partly because of PTC push, you delivered things before September 30, so they can be installed before Q4, but then-they are in the first Take a breath in the fourth quarter, in terms of production. So I hope to see a similar rhythm, at least in the fourth quarter.
Philip Shen - ROTH Capital Partners - Analyst
Okay, great. Thank you Bill. I will pass it on.
William E. Siwek - President, Chief Executive Officer, Director
Next question. James West and Evercore ISI.
James West - Evercore ISI - Analyst
William E. Siwek - President, Chief Executive Officer, Director
James West - Evercore ISI - Analyst
I am also very curious about the financing here, especially the available 200 million US dollars increments. I think Bill, you emphasized some kind of opportunity or opportunistic deployment. Are there certain opportunities that are emerging that you may be able to take action in the near future, or is this more like-let's line up, so something is indeed happening?
William E. Siwek - President, Chief Executive Officer, Director
Yes, hi, thanks for the question, James. I will say that there is definitely an opportunity. With the industry's dislocation in the next year or two, there may be more interesting opportunities. So it is really not designated for any particular transaction. This is more from an opportunistic perspective. So hope this answers your question.
James West - Evercore ISI - Analyst
That makes sense. Then, when we consider the longer term, '23 to '25 should see a good growth in the wind energy industry. What do you think of the capacity during that period and beyond? Will you add more capacity in 22 years? Even if the market itself is flat, do you need a contract to increase capacity? I mean, I think, can you help us think about this opportunity?
William E. Siwek - President, Chief Executive Officer, Director
Yes, no,-I understand-unless there is a very specific situation to increase capacity in the current overcapacity market, from our point of view, this does not sound like a good move, but as far as you are concerned, as What we have got is that by 24 and beyond, if the predictions of the IEA and other agencies are half right, then the amount of installation and construction will increase significantly. Obviously, we will take advantage of this period that we think is relatively stable, especially in the United States, to put ourselves in the right geographic location to ensure that we can occupy more than our market share, if you will, with our existing and Potential customers.
Once again, considering today's market and market capacity, I will not expect anything in the short term. Frankly speaking, I really want to bring our plants back to the 90s, starting in the 70s. So for me, this is still our current capacity, because we are very good geographically. We cover the world in a very cost-effective manner. So our goal is to fill our existing capacity, and then we will consider future capacity.
James West - Evercore ISI - Analyst
OK, thanks. Understood, Bill. thanks.
William E. Siwek - President, Chief Executive Officer, Director
The next question is Adhok Bellurkar and Bank of America.
Adhok Bellurkar-Bank of America-Analyst
Hi, Good Evening. Thank you very much for answering this question. Just want to quickly follow up on your views on EBITDA, as you saw in FY22. When you say it, you will see that it is basically flat on a billing basis. Just want to know, does this mean $55 million with or without the impact of ASC 606?
William E. Siwek - President, Chief Executive Officer, Director
Yes, there is no it now, because we are now seeing fluctuations in raw material costs and other factors, which are not worth predicting now. So that's why we only give instructions on the basis of the bill. We think it makes more sense. This is how we look at it. This is how Oak Tree will see its future. So it makes more sense to do so, rather than trying to manage the volatility we saw in ASC 606.
Bryan Schumaker - Chief Financial Officer
Yes, from our point of view, this better reflects the cash generation, Adhok, and is able to predict how our customers may handle the quantity and the direction of raw material prices, which makes it very difficult to accurately predict 606 its job The way, especially related to the nature of our contract.
Adhok Bellurkar-Bank of America-Analyst
understood. Thank you. Regarding the two new production lines you added with Vestas and Nordex, what is the duration of the $150 million contract? Is it through FY '22 or later?
William E. Siwek - President, Chief Executive Officer, Director
Yes, so for Vestas' production line, it has been over 22 years, and Nordex is until 2022.
Adhok Bellurkar-Bank of America-Analyst
understood. Then give me the last one and I will pass it on. I am curious about any progress on offshore? I know that one of your customers announced that they won offshore jobs in the United States and decided to work with their supply chain partners in the United States. So, I know this is in the 24-25 year time frame, but in that time frame What does it mean to you?
William E. Siwek - President, Chief Executive Officer, Director
Yes. We are working hard in Adhok. I mean the situation on the East Coast is very complicated, I know you know it well, but every state wants a leaf plant, then a cell plant, then a tower plant, and then choose the right place, and of course there is a customer like this Doing is very important. So we have, we spent a lot of time and energy on this, but I can tell you so much now.
Adhok Bellurkar-Bank of America-Analyst
understood. thank you very much.
William E. Siwek - President, Chief Executive Officer, Director
Next question, Eric Stine and Craig-Hallum.
Eric Stine - Craig-Hallum - Analyst
William E. Siwek - President, Chief Executive Officer, Director
Hey, Eric? Are you OK?
Eric Stine - Craig-Hallum - Analyst
I did a good job. thanks. So as far as the Iowa plant is concerned, for obvious reasons and considering the uncertainty, your expectations for 2022 are quite low. But in the unlikely event that the OEM decides whether it’s General Electric or another manufacturer, and decides to produce there, I mean about how long it will take to propose a line, and if it’s at the end of the year Is the ending line different from the new line?
William E. Siwek - President, Chief Executive Officer, Director
Yes. Obviously, if it is-if you will, if there is a timeout, and it is the same blade, then the challenge is related. Obviously, we want to provide them with an opportunity to find other jobs if there is uncertainty and whether it will continue, but this is what we are going to do. But in terms of upgrading, if it is an existing production line, it is actually able to recruit for the existing production line. It's really about-being able to hire employees to promote it. Therefore, if you consider that you have to hire labor in the following circumstances-similarly, if there is a suspension and our existing labor finds other jobs, it may take six months to do this.
Eric Stine - Craig-Hallum - Analyst
understood. OK. Then maybe it's just-I mean with General Electric, I know you have reached a joint development agreement for advanced blades. Given what is happening in Iowa, are there any ideas that might be the position of the overall relationship, the position of the agreement?
William E. Siwek - President, Chief Executive Officer, Director
Yes. As you know, we also produce blades for them in two factories in Mexico, and we are producing innovative blades in one of the factories. So this relationship is still-very strong. We continue to work with them in this regard, and continue to manufacture blades for them, and plan to manufacture blades for them for a long time. So, I want to say that this relationship is still very strong, because it has been a long time, our goal is to maintain this state.
Eric Stine - Craig-Hallum - Analyst
William E. Siwek - President, Chief Executive Officer, Director
Next question, Laura Sanchez and Morgan Stanley.
Laura Sanchez-Morgan Stanley-Analyst
Hi. thank you for your time. I want to follow up on EBITDA issues. I think this is after the second quarter earnings. You have quantified what is the substantial benefit to EBITDA margins of Siemens Gamesa’s exit from Mexico’s production line and General Electric’s exit in the United States at that time? Now that we know that those contracts with General Electric are expiring, can you tell us some developments that will benefit from the improvements in 2022?
William E. Siwek - President, Chief Executive Officer, Director
Yes, I think. Thanks for the question, Laura. Nice to talk to you. So this is true, and with the closure of factories in Mexico and Iowa, this has increased our overall revenue. But I will tell you that our factory in Iowa is a great factory. It's just-we are in a high-cost area, which makes it difficult to be competitive. We will see whether this has brought us some vitality under this advanced manufacturing production credit. We hope this happens clearly. But I think Laura, it's true-we didn't expect the cost of goods to last so long. This is the logistics challenge we expect to face by 2022, frankly speaking, its demand and quantity. Therefore, you may have heard my answer earlier, talking about the trading volume due to the weak US market, and indeed when we are at a lower utilization level, we expect that in 2022, this may be consumed very quickly Lose these gains.
Now, we are working hard to make our business more variable in order to be able to better manage some of the fluctuations in demand that we often see. I will tell you that since I worked, I have never seen as many quarter-to-quarter demand fluctuations as we saw in the last half of last year. So I think our business has become a bit unpredictable because of the final demand of our customers and the uncertainty of the market. Therefore, this may be the main reason why we think EBITDA will not see so many benefits in 2022 because of these closures.
Laura Sanchez-Morgan Stanley-Analyst
Got it, thank you, Bill, color. At Matamoros at the Juarez plant that is facing challenges this quarter, I think what gives you confidence and that these problems will disappear by the end of this year?
William E. Siwek - President, Chief Executive Officer, Director
Yes. So in Matamoros, we have replaced the entire management team there and we inherited them. When we complete the production of the closed factory, we will transfer 150 to 200 employees from Juarez to Matamoros, which should be within a week. We have an experienced and talented global team who now live in Matamoros to turn things around. In the past few weeks, we have seen significant progress in circular timestamps and throughput timestamps. So, with the support of the additional troops from Juarez and the team we are there now and our overall infrastructure in Matamoros, we are very confident that we can turn things around at about the end of the quarter, entering next year, we It is ready to go into full production. I mean, do customers expect it? We will run smoothly there throughout the year, so we are confident and invest resources.
As it is related to the Juarez Challenge, this is another innovative new blade, from design to prototype to production. When you have a new innovative blade like this, you often encounter challenges. We will continue to work side by side with customers there. From a production point of view, we have found the challenge. We have a solution that should be implemented in the middle or the end of the fourth quarter. This gives us a lot of confidence. Starting to roll over to 2022, we will be able to reach the number required by our customers.
Laura Sanchez-Morgan Stanley-Analyst
Understand, understand. In the last one, you mentioned that [Phonetic] wind power revenue will be flat in 2022. I think you have given a reference in terms of business services, which may double in 2022. Any comments about traffic and traffic, location or other income, have nothing to do with wind?
William E. Siwek - President, Chief Executive Officer, Director
Yes. So yes, in terms of transportation, we still-I think we have made a lot of progress in the past few quarters, Jerry Lavine became our transportation president, re-adjusting the focus of the team, really re- Assessing and focusing on our strategy and what our target market is, we have seen some success. From additional trial production with the existing EV passenger car manufacturer we are producing, to some very neat and interesting opportunities related to battery components-battery box components, and other structural cabs or components, whether they are Taxi or other aspects.
So we are considering some-we have reached a joint development agreement on some very unique composite technologies, and we think that doing so will be more cost-effective and provide higher quality and easier assembly of vehicles. Therefore, we will continue to be optimistic about the opportunities there. Although it took longer than we originally expected, the traction we have gained in the past few quarters is indeed very important.
Therefore, the revenue figures will not be very large. We do expect that next year will continue to be another investment year, but the level is much lower than what we have seen in the past few years. Then into '23, we expect to be profitable.
Laura Sanchez-Morgan Stanley-Analyst
William E. Siwek - President, Chief Executive Officer, Director
Next question, Stephen Gengaro and Stifel.
Stephen Gengaro - Stifel - Analyst
William E. Siwek - President, Chief Executive Officer, Director
Stephen Gengaro - Stifel - Analyst
Hi. So can you give us a feeling from what you have seen, I know you have mentioned EBITDA, but when you look at 2022, how do you see the different parts of free cash flow, or cash flow in general? ? Or how should we consider put options and take into account the trade you announced tonight. I'm just curious what do you think of cash flow in 2022?
Bryan Schumaker - Chief Financial Officer
Yes. Therefore, if you look at our announcements surrounding the restructuring and the expenses we are incurring, you will find that most of them are cash outflows, accounting for 85% of them. So we saw a blow to us at the end of the fourth quarter and the first quarter. So this is where we see a huge demand for cash now, because this time frame is within the next six months.
As for the overall situation next year. I mean working capital. In the rest of this year, we haven't seen a big drag in this area. We are really focused on limiting capital expenditures because we are not growing. So we are working hard to focus on many of these aspects, but it was in the next six months that we saw liquidity loss in other factories, and then overall, how long this shortage will last in 2022 and ensure We are positioning ourselves for the future.
William E. Siwek - President, Chief Executive Officer, Director
Yes. And I think it’s just a slight increase, I think we talked about the possibility of a decline in next year’s production from an asset point of view and lower than expected capacity utilization. So when you own it in the opposite business-there are a fair amount of fixed costs associated with this. You will see some-you will not see the massive free cash flow we would like to see. So I think that before we recover, our capacity utilization has reached the level we want to see, and sales volume every quarter becomes more stable, then you will start to see us generate free cash flow, all of us Want to see.
Stephen Gengaro - Stifel - Analyst
Many thanks. As a follow-up, I would like to ask another question, what do you see in terms of labor? You-what's going on-how difficult is it to manage, and how do you see the future of labor?
William E. Siwek - President, Chief Executive Officer, Director
Yes, we, you know-this is a good question, and it does vary from region to region. I will tell you, although there is a war for technical talents. I mean, there is a battle for talents, engineering talents, technical talents, we have a very good technical team. We have some of the best talents in the industry, as well as the best candidates to build blades in the industry. Therefore, they are in great demand. So we-it's hard, it's hard to be replaced if we lose. So the key is not to lose them, right. Therefore, we are very concerned about our personnel plan, very much about participation and how we ensure that our employees are involved and understand their needs. This is the name of our game. I mean, in the past few years, our turnover has dropped significantly year-on-year, which, frankly, has saved us a lot of money. But it's all about participation and how we deal with them and provide them with the right career path. So I will tell you that for technical talent, the competition is very fierce. Generally speaking, in more direct labor positions, I don’t think we have seen it—from a labor perspective, Iowa is a bit challenging, just because the labor force is a bit small. But most of our locations currently have no real problems from this perspective.
Stephen Gengaro - Stifel - Analyst
Bryan Schumaker - Chief Financial Officer
William E. Siwek - President, Chief Executive Officer, Director
you bet. Thank you. Appreciate the question.
Next question, Pearce Hammond and Piper Sandler.
Pierce Hammond-Piper Sandler-Analyst
Yes, thank you for answering my question. Just curious, with your current setup in Oaktree Capital, and the potential for investment worth $600 million as you enter next year. Thank you for providing useful information about next year. From the perspective of next year’s mobility, do you think this can take care of you in all situations?
William E. Siwek - President, Chief Executive Officer, Director
Yes, I will tell you that we believe that Oaktree's investment has given us important-enough funds to deal with recent challenges or headwinds. I may have said this three or four times in my prepared speech. But definitely we think we have more-we also have some buffers, but it is certain that it is sufficient to deal with recent challenges, and to some extent, this buffer is longer than most people think. So we spent a lot of time studying what our working capital needs are and what our outlook for 22 years looks like. From a planning point of view, it is expected that 23 years will be relatively stable. This is how we determine the size of the transaction and ensure that we have enough liquidity to help us through this challenging period, especially in the next few years. In the middle of the year in the US market, once the market turns, we will be ready for opportunistic growth.
Pierce Hammond-Piper Sandler-Analyst
excellent. thanks for your help. Then my follow-up, if you can provide any information on how the deal between Oaktree Capital and other alternatives was reached, it is obvious that Oaktree Capital is a very respected big-name investor. But just curious, so can you provide some color on how this all happened?
William E. Siwek - President, Chief Executive Officer, Director
Yes, we spent a lot of time with our financial advisors. We use Lazard and provide them with a small plug-in [Phonetic]. But yes, we spent a lot of time evaluating our options with Lazard, and I will tell you that the people at Oaktree understand us and they understand our industry. They get renewable energy. They are excited about the energy transition. They have invested heavily in similar adjacent spaces, such as Array and Schulz [Phonetic]. So they really understand what our challenges are, what the industry challenges are, and what the industry opportunities are. Therefore, I think we cannot choose a better partner. We are very excited about the people we work with and the skills they bring. So that's it. I mean experience in the industry, understanding our story, understanding our strategy, and then people, yes, I mean people are important here, we will have to work closely with them for a long time, they Brought a good team to the table.
Pierce Hammond-Piper Sandler-Analyst
William E. Siwek - President, Chief Executive Officer, Director
Next question, Pavel Molchanov and Raymond James.
Pavel Morchanov-Raymond James-Analyst
Thank you for your question. Given your global operating footprint and more global sales mix, you often talk about being able to reroute blades to different regions, depending on the source of demand. So, given the weakness in the United States you mentioned, can you give some examples of areas where demand may be better than expected, it is a bit surprising?
William E. Siwek - President, Chief Executive Officer, Director
Yes, I will tell you, Turkey, next year is-we expect it to be flat and be asked for more. So I think this is good. India is still very strong for us. There is a new one—obviously, Vestas’ new production line in China is very important. So we hope to spend a good year there. So yes, I mean-and then our truly American-centric factory, the factory along the Juarez border. Now Matamoros, we are very close to the port, so they can export from Matamoros if they want. But most of the products we build today have entered the US market. So these factories—except for the Nordex factory, which has a slight decline in output—we expect production to decline next year, just because of the US market.
Pavel Morchanov-Raymond James-Analyst
OK. Is the strength of Turkey and India domestic, or these export opportunities, such as going to the UK, Germany, etc.?
William E. Siwek - President, Chief Executive Officer, Director
Yes, what I want to say is that most of the products we produce in Turkey are for export. Now we do provide routes for very strong Turkish players, which is very helpful. Therefore, domestic demand is considerable. But I will tell you that most of them are indeed exported, and I will say that most of them are exported to Europe. Europe is our second largest market after the United States
Pavel Morchanov-Raymond James-Analyst
OK. thank you very much.
William E. Siwek - President, Chief Executive Officer, Director
Thanks Pavel. It's nice to talk to you.
Next question, Mark Strauss and JPMorgan Chase.
Mark Strauss-JPMorgan Chase-Analyst
Yes, thank you very much for answering my question. Bill, in terms of your customers sharing this with you, can you talk about-I hate to use this phrase, the kind of project that is ready, just waiting for some visibility from Build Back Better, can they immediately Start construction, or are we-this is the beginning of a more normal project cycle?
William E. Siwek - President, Chief Executive Officer, Director
Yes, I will tell you, Mark. I don’t have a good reputation for specific things-now I have made some, which are what we are trying to promote this year, obviously, to be delivered to several different customers outside of Mexico. But it-we usually don't know the exact location of the blade, so I don't know-I have general data, but not very specific data about the deal that prepares the shovel. So I apologize, I may not be the best person to answer this question.
Mark Strauss-JPMorgan Chase-Analyst
certainly. Yes, I understand. Then it's just a follow-up technical question. If passed, a domestic blade manufacturing credit of US$0.02 per watt. Can you talk about how to layer it into your existing contract? Is this a complete advantage of TPI and will it be shared with your customers? Does it require some rewriting of your existing contract?
William E. Siwek - President, Chief Executive Officer, Director
This is a very good question. Technically speaking, it belongs to the manufacturer, which is TPI, and I think this will take into account-try again-trying to make the US factory economically viable. Therefore, if we get the credit, our customers can have a lower price, which will make it compete with the blades brought from other regions for our more blades, and there is still a margin. So the way I understand it again and again, it is still very smooth, but it will come to us as a manufacturer, and then it is obvious that if we want to keep these factories open, we have to figure out what is the right split Yes, do this-if you want, the blade cost is competitive with imported products, so does it make sense for customers, whether it is General Electric or other customers, to produce in the United States? Did I answer your question?
Mark Strauss-JPMorgan Chase-Analyst
Yes. This is very helpful. Thank you Bill.
William E. Siwek - President, Chief Executive Officer, Director
Next question, Greg Wasikowski of the Webb Research Center.
Greg Rostkowski-Weber Research-Analyst
good afternoon everyone. Thank you for answering my question. I just want to start with the subsequent amount of the Oaktree transaction, which is $200 million. You have already talked about this, I just want to make it clearer. If necessary, is this mainly to increase the runway, or may it be like one and/or one situation? Consider your capital expenditure opportunities, whether it is offshore or transportation, just to put forward a better point of view?
William E. Siwek - President, Chief Executive Officer, Director
Yes. So as I mentioned before, we think that the funds we withdrew today are enough to get us through this difficult time in the US market, so 200 million dollars is really not-it really is-we are from 400 million dollars Withdraw 350 million US dollars, and this 50 million US dollars is a buffer, if the economic downturn continues, we can choose to use it. 200 million dollars is different, right. US$200 million is-I mean I think it shows Oaktree’s commitment to the industry, especially to TPI and what our strategic intentions are, so I think if we-if there is a chance, then this is the US$200 million is Because, this is more for future opportunities, whether it is growth or other aspects, and-let us be clear, this will be different from our terms today, mutually agreed terms. So this is really not the safety net we have, because we are confident that the quantity we have is exactly what we need. This is really for growth opportunities.
Greg Rostkowski-Weber Research-Analyst
Okay, this is very helpful. Thanks for the clarification there. Then at this point-considering future growth opportunities, whether it is possible to deliberately or focus on one area and other areas, whether offshore is the main opportunity there, or-we believe that transportation is perhaps an equal opportunity, whether in Additional capacity or potential joint venture mergers and acquisitions?
William E. Siwek - President, Chief Executive Officer, Director
Yes, I think it is clear that there may be some opportunities in the transportation sector. I think your point of view offshore is not mergers and acquisitions, but more new construction. I think this is also an obvious use of capital, which is an important use of capital. I also think that we have completed all services-all of our service growth is organic. So this is the area we hope to develop. I think there is-there are a lot of activities in that area. Today, we serve blades. The question is whether we can expand our product to include more tower work and the unit itself. So I think there are many interesting opportunities for more vertical integration. Over time, the level is also an interesting thing, if you consider the entire value chain, in the renewable field.
Greg Rostkowski-Weber Research-Analyst
Okay, very helpful. I'm offline for the rest. thank you all.
William E. Siwek - President, Chief Executive Officer, Director
Bryan Schumaker - Chief Financial Officer
I will now ask Bill to make a closing speech.
William E. Siwek - President, Chief Executive Officer, Director
Thank you all for your questions. In today’s financing agreement with Oaktree, we remain focused on managing our business through recent challenges faced by the industry, emphasizing our efforts to make TPI do this, focusing on executing our strategy to take advantage of long-term energy transition trends and opportunities .
Finally, I would like to thank all our TPI employees again for their commitment and dedication during these challenging times. Thank you again for taking your time today.
Christian Edin - Investor Relations
William E. Siwek - President, Chief Executive Officer, Director
Bryan Schumaker - Chief Financial Officer
Philip Shen - ROTH Capital Partners - Analyst
James West - Evercore ISI - Analyst
Adhok Bellurkar-Bank of America-Analyst
Eric Stine - Craig-Hallum - Analyst
Laura Sanchez-Morgan Stanley-Analyst
Stephen Gengaro - Stifel - Analyst
Pierce Hammond-Piper Sandler-Analyst
Pavel Morchanov-Raymond James-Analyst
Mark Strauss-JPMorgan Chase-Analyst
Greg Rostkowski-Weber Research-Analyst
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