TPI Composites Has the Wind at Its Back

On Aug. 7, TPI Composites (TPIC 1.67%) announced that its total contract value has hit a record of $6.4 billion. In other words, the manufacturer of wind-turbine blades can potentially generate $6.4 billion in revenue through 2023, thanks to a steady stream of long-term supply agreements, provided none is terminated prematurely. For perspective, TPI generated $930.3 million in net sales in fiscal 2017.

That's just one of the numbers from TPI's second-quarter earnings report released last week. The stock, however, has come under considerable pressure since, perhaps because of fears around crisis-hit Turkey, where the company has some manufacturing facilities and supply agreements. Nonetheless, investors will want to know how TPI fared in Q2, and how extended relationships with key customers like General Electric (GE -0.69%) have encouraged management to project three-year annual compound revenue growth of 20% to 25% through 2019.

TPI Composites Q2 results: The raw numbers

The table below provides a snapshot of the key numbers from TPI's second quarter. The drops in the company's sales and profits look alarming, but there's more to the story than meets the eye.

Data source: TPI Composites.

Wind-energy components manufacturing is a complex business. Two industry terms that are important for understanding TPI's context right now are "dedicated manufacturing lines" and "total billings."

Dedicated manufacturing lines are wind-blade manufacturing lines dedicated to particular customers under supply agreements. A rise in this metric, therefore, indicates greater demand for TPI's blades and affects its total billings.

The total amount TPI invoiced during the period is the total billings, the payments for which will be received later (under long-term supply agreements) and recognized as revenue. The trend in total billings, therefore, gives an idea about the company's future sales.

Image source: Getty Images.

What happened with TPI this quarter?

A 17.3% drop in the number of wind blades produced drove TPI's sales lower during the second quarter. Production declined primarily because of the start-up of new manufacturing facilities, and transition of some to new wind-blade models, which typically delays production during the initial stages. In fact, at the very beginning of the year, TPI had warned investors of decelerating sales in fiscal 2018, as it anticipated significant transitions this year to meet customers' evolving needs.

Lower sales, combined with start-up and transition costs and expenses related to refinancing of debt, dented TPI's profits in Q2. That aside, some important developments from TPI's quarter worth noting are:

• A better mix of wind-blade models boosted average selling prices.
• GE Wind, a branch of General Electric's subsidiary GE Renewable Energy, extended its supply agreement with one of TPI's plants in Mexico by two years to 2022, and is transitioning to a larger-blade model at TPI's Iowa plant. GE Wind is TPI's largest customer and accounted for 44.4% of its revenue last year.
• TPI signed a multiyear agreement with Germany-based ENERCON for two manufacturing lines in Turkey.
• Germany-based Nordex-Acciona extended its supply agreement with TPI in China through 2019.
• Vestas agreed to four additional lines at TPI's new manufacturing hub in Mexico, taking the total number of lines in that facility to six.

Thanks to the strong flow of long-term supply agreements during the quarter, TPI's potential revenue rose to $6.4 billion from around $4.6 billion earlier this year.

What management had to say

TPI now expects 17 lines each in start-up and transition this year, thanks mainly to new customer ENERCON and accelerated transition requests from other customers. CEO Steven Lockard believes this will drive the company's revenues significantly higher in coming years:

This additional investment positions us well for 2019 and our long-term goal of doubling the sales of TPI over the next several years and we are confident we will achieve a 20-25% three-year revenue CAGR through 2019. We remain focused on our strategy to expand globally, diversify our customer base, grow our wind business, improve our operational effectiveness, drive profitability and continue to drive down LCOE while continuing to develop and explore additional opportunities in other strategic markets.

LCOE is "levelized cost of energy." Renewable energy companies are constantly striving to cut down their LCOE.

Looking forward

TPI reiterated its full-year outlook of total billings and sales of $1 billion to $1.05 billion each, and earnings of $0.10 to $0.14 per share. While that means the company's earnings could almost halve from 2017, investors know by now that line start-ups and transitions, and not demand, are to blame. That's actually a positive sign, as a greater number of lines and higher total billings confirm that TPI's business is growing. It's painful in the short term, but positions the company for strong growth in the long haul.