TPIC Composites: Beat And Reaffirm, Future Looks Increasingly Bright

Summary

• TPI Composites reported solid 1Q21 results and reaffirmed 2021 guidance.
• The company was not materially impacted by Covid or global supply chain issues.
• The transportation segment continues to gain traction as the quarters roll by.
• The medium and long-term wind.

Photo by PacificWD/iStock via Getty Images

This is a Z4 Energy Research post conference call note on TPI Composites (NASDAQ:TPIC). The report and conference call were last night and notes are incorporated below.

A quick look at the key quarterly numbers:

A few 1Q21 numbers to highlight:

• Revenues rose year over year on an 11% increase in blades produced and 8% higher average selling prices (ASP).
• EBITDA margin improved on a YoY basis as noted above due in large part to lower G&A.
• Wind backlog: Contracts holding at $4.2 B in potential revenue through 2024 with minimum commitments of $2.5 B.

Covid Comment: Last quarter they said they were "closely monitoring the COVID-19 pandemic but have successfully dealt with resurgences across all regions in which we operate". This quarter they said, "Our vigilance addressing the ongoing COVID-19 spikes around the world has allowed a safe operating environment for our associates which, in turn, has paid off from an operational and financial perspective as evidenced by our first quarter results." More Covid related comments are detailed in the Wind section below.

Supply Chain Comment: "Our team also did an exceptional job this quarter of navigating through some supply chain challenges primarily related to the resin market and ongoing logistics challenges. Our supply chain strategy remains intact as we diversify geographically to reduce risk and provide security of key materials." To date they have seen no material impacts but have seen some cost increases including resin that will impact 2Q21 profitability. As the quote indicates, they are managing through finding alternative sources for raw materials where needed but also see supply constraints easing and see pricing improving again in 3Q21. Notably, they are seeing better pricing for balsa vs last year.

Guidance: All items have been reaffirmed. This was one of the fears from analysts and investors going into the call. While risks to the year from Covid still exist we note that management has historically been quick to cut when visibility or confidence was suboptimal.

• Revenues were maintained at $1.75 to $1.85 B. ASP range and blade sets produced were also reaffirmed.
• EBITDA was also left unaltered from prior guidance of $110 to $135 mm. One potential nit on the quarter is management's move to alter the shape of the year with a bit of cost increase and a customer requested delay in orders from 2Q to 2H yielding a bit lower expectation for 2Q21 with higher expectations back filling into the second half.
• Capex was maintained at $55 to $65mm.

Highlights:

Wind Segment: Utilization was 77% vs 70% a year ago and they see wind segment prospects as having strengthened in the U.S. and globally since the last call. A check up by region follows.

• China is operating normally and they are working to back fill production from the previously noted five line closure at the end of 2020 and said to stay tuned.
• In India there has been no interruption in the lines working for VWDRY and the two lines for Nordex have been fully ramped. They have seen no material impact from the ongoing Covid outbreak there and are doing everything they can to prevent a factory outbreak.
• In Turkey they have seen no disruption from Covid, operations are normal now but they are monitoring a Covid outbreak there.
• In Mexico operations are proceeding as normal albeit with a number of transitions in progress.
• In the U.S. there has been no interruption due to Covid and they've conducted a number of mass vaccinations for associates and their families.

Other Wind Items of Note:

• Offshore Wind - Management indicated they have been in discussions for some time now and would expect to make contract announcements in early 2022 for blades to be produced and shipped in 2024.
• Field service now has one training center running with another planned for Europe later this year having grown segment headcount by 30% year to date. It will be interesting to see how rapidly they can grow this revenue wedge as it should be stronger than corporate margins once it gains its footing.
• Segmented Blades - they confirmed on the call that they are making them today. While this makes a lot of sense given ever expanding blade lengths we were not aware of this. This opens up more opportunities for larger blades for larger turbines on and offshore but also helps address some location specific challenges we see OEMs mention more and more frequently.

Transportation Segment:

• Favorite Quote Watch: “On the transportation front, we now have deep collaboration with six OEMs for cab and body structures (this includes Proterra and Navistar) and with nine OEMs related to electric vehicle component parts." Previously they said they want to have 5 to 10 partners in the space with annual revenues from each of $50 to $100 mm. It appears they are well on their way and we expect to see multiple conversions from collaborations to production deals over the next several quarters.
• Cab and structures include bus bodies, Class 8 truck cabs and delivery vehicle shells. EV components range from under body protection, battery enclosures, and structural components.
• They are pleased with the performance of the automated pilot production line in Rhode Island demonstrating unique abilities for the car and truck OEMs. Demonstrates strength and light weight but also the cost is coming down which should increase interest as it comes into parity with tradition parts production.

Balance Sheet:

• Net debt of $98.9 mm; net debt to annualized EBITDA of 0.9x.

Nutshell:

• Solid quarter as first quarters go with better than expected EBITDA margins.
• More importantly:
  • the fundamental backdrop is increasingly strong,
  • they are executing well globally despite Covid and other supply chain issues affecting many names,
  • and they see a Wind market that is fundamental under-suppled in the medium term.
• And yet, the stock is off 23% since the 4Q20 call in February and they have reaffirmed guidance for the year due to group think in the renewables space since January. There may be some shape of year concerns post call but we do not expect a large shift in sellside estimates. We think the idea of reduced estimates along the move in the group has been the primary driver in recent lethargy in the shares.
• We continue to see the fundamental backdrop here as very strong for both segments and we continue to hold the name as the largest position in the ZLT.

Analyst’s Disclosure: I am/we are long TPIC, ACTC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.