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TPI Composites' Cautionary Note for 2019 Shouldn't Worry Long-Term Investors

By Neha Chamaria – Updated Apr 10, 2019 at 2:03PM

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The contract value of the wind blade manufacturer hit record highs in the fourth quarter, so why is the market worried?

TPI Composites' (TPIC 3.43%) just-reported fourth-quarter numbers shouldn't surprise investors who've followed the company closely. As expected, TPI's profits slid and the company suffered a net loss in the fourth quarter, compared with a profit in the comparable period last year.

Yet what the market didn't expect to hear were two developments that could see TPI falling short of its sales and adjusted 2019 projections for EBITDA (earnings before interest, tax, depreciation, and amortization). Is that a cause for worry? The composite wind blade manufacturer's sales and order growth in the fourth quarter suggest otherwise.

TPI Composites Q4 results: The raw numbers

When you look at the key numbers from TPI's fourth quarter, it's evident that higher costs and not declining sales are to blame for the company's losses. In fact, the higher costs shouldn't worry investors either, for reasons I'll explain later.

More importantly, the growth in total billings is encouraging, as it's a proxy for the potential revenue TPI can generate in the coming years. Total billings is simply the amount TPI invoiced for its products and services during the period under long-term supply contracts that it'll later recognize as revenue once the product is delivered to the customer.

Metric Q4 2018 Q4 2017 Year-Over-Year Change
Total billings $304.8 million $242.7 million 25.6%
Net sales $290.1 million $253.5 million 14.4%
Net income (loss) ($8.8 million) $2.2 million NA
Adjusted EBITDA $9.8 million $28.4 million (65.5%)

Data source: TPI Composites.

What happened with TPI Composites this quarter

After a substantial fall in the production of wind blades in the third quarter, TPI bounced back with 3% growth in production in Q4. To add to higher sales volumes, TPI's average realized prices are also on the rise thanks to a greater proportion of higher-priced wind blade sets in its sales mix.

The key number to note is TPI's contract value, which hit a record high of $6.8 billion as at the end of the fourth quarter, up from $6.3 billion at the end of Q3. Put simply, TPI can generate sales worth $6.8 billion through 2023 under its long-term supply agreements. For perspective, its sales in fiscal 2018 came in at roughly $1 billion.

Wind mills against the blue sky.

Image source: Getty Images.

Notably, TPI's contract value jumped a whopping 55% in 2018 as the company saw a steady flow of multi-year supply agreements from existing customers such as General Electric even as it added a new customer, ENERCON. Thanks to strong demand from end markets, TPI is aggressively expanding its capacity and announced a new manufacturing facility in China last year, followed by one in India recently.

You could largely "blame" TPI's growth for its rising costs: Costs the for start-up of new facilities and the transition of some existing ones to new blade models per customer specifications added nearly $20.5 million to TPI's total cost of goods sold in Q4, resulting in a net loss of $8.8 million for the quarter.

Check out the latest earnings call transcript for TPI Composites.

What management had to say

TPI's CEO Steven Lockard is excited about the company's future. Lockard stressed how capacity expansion and the transition to longer wind blades that have hit TPI's near-term profitability position the company for solid growth in coming years. "We believe the investments we made in 2018, and the additional investments that we expect to make in 2019, position us well for our goal of doubling our wind related sales by 2021", he said. 

You read that right: TPI aims to double its wind-blade sales by 2021. Now if you're wondering why Lockard mentioned "wind related," you should know that TPI also manufactures composite vehicle structures. Last year, for example, TPI tied up with trucking giant Navistar to develop a Class 8 truck out of composite materials that could potentially reduce a truck's weight by 30%.

Coming back to TPI's wind sales, Lockard cautioned that the company's path to doubling its revenue wouldn't be without challenges. Two such near-term headwinds include widespread labor unrest in Matamoros, Mexico, and operational concerns at Senvion, a key customer in China.

During TPI's Q4 earnings call conference (here's the full transcript of the call), management hinted that disruption in Mexico could hurt TPI's production and sales volumes in the first two quarters of 2019 and force the company to increase wages by as much as 20%. As for Senvion, TPI has cautioned not only about a potential drop in demand for wind blades from Senvion in 2019 but also the risk of not being able to recover existing dues if the German company lands itself in a deeper financial mess.

Looking forward

TPI management reiterated its sales and adjusted EBITDA outlook for 2019 despite the near-term challenges. However, TPI bumped up its earnings estimate significantly to a range of $1.34-$1.45 per share, from $1.24-$1.35 a share. I believe that's probably because of an anticipated reduction in the numbers of shares outstanding as the company repurchases vested stock from employees.

Overall, from a business standpoint, TPI is coming off a stupendous year and is confident of carrying the momentum forward into 2019.

Neha Chamaria has no position in any of the stocks mentioned. The Motley Fool recommends TPI Composites. The Motley Fool has a disclosure policy.

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