TPI Composites (TPIC +16.98%) released its first-quarter numbers on May 8. Back in March, the manufacturer of composite wind blades had warned investors about potential obstacles in the first half of 2019 that could trigger an earnings downgrade. But the market didn't foresee such a sharp cut in the company's full-year guidance, which explains why the stock tumbled by double digits when TPI announced preliminary Q1 numbers and outlook earlier this month.
On an encouraging note, TPI is still confident about its long-term financial goals. Before I tell you what they are, let's see what went wrong with TPI this quarter and why 2019 will be a challenging year.
TPI Composites Q1 results: The raw numbers
As is evident in the table below, TPI suffered a big loss in Q1. That, however, doesn't mean the company is staring at low demand or battling operational inefficiencies. On the contrary, it continues to enjoy a strong order flow, as I explain later.
| Metric | Q1 2019 | Q1 2018 | Year-Over-Year Growth (Decine) |
|---|---|---|---|
| Total billings | $279.5 million | $223.7 million | 24.9% |
| Net sales | $299.8 million | $253.9 million | 18% |
| Net income (loss) | ($12.1 million) | $8.7 million | NA |
| Diluted earnings (loss) per share | ($0.35) | $0.24 | NA |
| Adjusted EBITDA | $2.9 million | $27.4 million | (89.4%) |
Data source: TPI Composites.
What happened with TPI Composites this quarter
The growth in TPI's total billings -- the amount it invoiced during the period that will later convert to revenue once product is delivered -- confirms a positive sales trend. It invoiced 662 wind blade sets in Q1, compared with 569 sets in the year-ago period. Higher production, combined with higher average realized prices, boosted the company's top line. It's worth noting that TPI has been reporting a favorable product mix -- with a greater proportion of higher-priced blade models -- for several quarters now.
Image source: Getty Images.
TPI's robust sales growth, however, failed to reflect on its bottom line as its cost of goods sold shot up 12% during the quarter for several reasons:
- A strike at a new factory in Matamoros, Mexico, that hurt production significantly.
- Higher depreciation booked on equipment used to manufacture blades for Senvion after the company recently filed for insolvency. Senvion accounts for roughly 4% of TPI's total blade production capacity.
- Restructuring charges of $12 million as TPI shut down two blade manufacturing lines in China.
All in all, it was an exceptionally challenging quarter.
And more challenges ahead
Given the nature of the problems TPI faced in Q1, it's important for investors to understand that the impact of some of those, especially Matamoros, will likely last through the year.
Matamoros is among TPI's largest wind-blade factories and one of only two to be unionized. Production at the factory started only late last year after TPI leased it following a multiyear supply agreement with Danish-based wind turbine marker Vestas in 2017.
While we do not have the exact figure, TPI pegged the number of workers on strike in the thousands in its recent annual report. The company is understandably having a hard time replacing and training so many workers and therefore expects production from Matamoros to be weak in the second and third quarters as well. During its first-quarter earnings conference call, management revealed that it expects to deliver only 60% of the planned blade sets from Matamoros this year.
TPI will also have to bear liquidated damages under the customer contract for the loss of production. Overall, it expects the troubles at Matamoros to cost $25 million, the impact of which is already included in its revised full-year guidance.
Meanwhile, the company also increased wages at its other Mexican factory, in Juarez, by 15% (or $2.7 million) at the end of the first quarter in view of proposed labor reforms and activism at the U.S.-Mexico border.
And there's another threat to TPI's growth: raw material shortage. TPI believes some of the opportunities it expected to see in the fourth quarter of 2018 may not be realized due to raw material constraints given the significant year-over-year demand from the wind-power industry. Although it's difficult to quantify the impact of this on TPI's growth for now, the silver lining is that with this statement, it confirmed that demand for wind energy is growing by the day.
What management had to say
CEO Steven Lockard admitted the first quarter didn't meet management expectations, but he continues to remain bullish for the long term:
The fundamentals of our business remain strong as we continue to partner with our customers to support their global production needs. We have invested heavily in new line start-ups and existing line transitions, laying the groundwork for doubling the company's revenue over a three-year period and beyond. From our perspective, the first quarter was a small setback in our longer-term vision, which continues to be supported by an increasingly improving global wind market outlook.
The last bit explains Lockard's confidence that TPI can still double its revenue to over $2 billion by 2021 and corner 20% to 25% of the global wind market.
Looking forward
Because of the events of the first quarter, TPI has downgraded its 2019 guidance as follows:
| Metric | Revised Guidance | Previous Guidance |
|---|---|---|
| Net sales and total billings | $1.45 billion-$1.5 billion | $1.5 billion-$1.6 billion |
| Adjusted EBITDA | $80 million-$85 million | $120 million-$130 million |
| Diluted earnings (loss) per share | ($0.03)-($0.09) | $1.34-$1.45 |
Data source: TPI Composites.
Uncertainty around Senvion also means that TPI's potential contract value has dropped to $6.3 billion through 2023 from the record $6.8 billion projected in Q4 -- a decline of $500 million.
But the company reiterated its 2020 revenue and adjusted EBITDA targets of $1.8 billion and 10%, respectively, as it expects Matamoros to operate at full capacity next year onward.
