TPI Composites Fundamental Analysis
Caveat Emptor.
Company:
TPI Composites is the only independent manufacturer of composite wind blades for the wind energy market with a global manufacturing footprint. The company has wind blade manufacturing facilities in Mexico, Turkey, India, United States and China.
Products:
The company manufactures and delivers composite wind blades for wind turbine original equipment manufacturers (OEM’s). Production of wind blades requires adherence to the unique specifications of each of TPI Composites customers, who design their wind turbines and wind blades to optimize performance, reliability and total delivered cost. The key raw materials for the production of wind blades include advanced fiberglass fabrics, select carbon reinforcements, foam, balsa wood, resin, adhesives for assembly of molded components, gel coat or paint for preparation of cosmetic surfaces and attachment hardware including steel components.
Market:
The wind blade market is highly concentrated, competitive and subject to evolving customer needs and expectations. A wind blade manufacturer plays a specific role for wind turbine OEM’s. TPI Composites plays a horizontal supply chain role in the greater wind turbine OEM industry. Historically, wind blade manufacturing has been vertically integrated into the wind turbine OEM business model.
To some degree all of the wind turbine OEM’s manufacture wind blades in house. There has been a greater demand for wind turbines and thus wind blades than current supply is able to provide. These companies then contract third party wind blade manufacturers like TPI Composites to meet production demand.
Customers:
The customers of TPI Composites are wind turbine OEM’s. From 2017–2019, 96%, 95% and 96% of the company’s revenues were derived from the wind blade and precision molding and assembly systems manufacturing business. Revenues from the wind blade manufacturing unit come entirely from 5 customers: Vestas, GE wind, Nordex, Siemens Gamesa Renewable Energy S.A. (Siemens Gamesa) and ENERCON GmbH (ENERCON). Together, these customers represent the majority of wind turbine OEM’s on a megawatt (MW) basis. They represented approximately 55% of the global onshore wind energy market- approximately 87% of that market excluding China, and 99% of the U.S. onshore wind turbine market over three years ending December 31, 2018.
Two customers, Vestas and GE Wind, accounted for 46.1% and 25.7%, respectively, of TPI Composites total net sales for the year ending December 31, 2019. In addition, two customers, Nordex and Siemens Gamesa accounted for 16.1% and 5.1%, respectively, of TPI Composites revenues for the year ending December 31, 2019. Accordingly, the company is substantially dependent on continued business from all of their current wind blade customers — Vestas and GE Wind in particular.
The company has also begun operations to manufacture and supply electric vehicle bodies with a handful of electric vehicle companies. In November 2017, TPI Composites signed a five- year supply agreement with Proterra Inc. (Proterra) to supply Proterra Catalyst® composite bus bodies. In February 2018, they entered into an agreement with Navistar, Inc. (Navistar) to design and develop an all composite Class 8 tractor cab. In 2019, TPI Composites also agreed to develop prototype composite body delivery vehicles for Workhorse Group. In November 2018, TPI Composites announced a capital investment of approximately $11.5 million in 2019 to develop a highly automated pilot manufacturing line for the electric vehicle market within the Warren, Rhode Island facility.
Opportunities:
The company enters into long-term supply agreements pursuant to which they dedicate capacity at their facilities to customers in exchange for their commitment to purchase minimum annual volumes of wind blade sets (which consist of three wind blades). The company’s growth prospects are stringent on expanding the relationships with their current wind blade customers and adding new OEM’s who have traditionally built wind their wind blades in house.
Currently all of their customers produce their own wind blades in house to some degree. TPI Composites opportunity lies in transitioning these customers completely to a horizontal rather than vertical supply chain.
As of February 27, 2020, TPI Composites long-term wind and transportation supply agreements provide for minimum aggregate volume commitments from their customers of approximately $2.8 billion. Customers may purchase additional volume up to, in the aggregate, a total contract value of approximately $5.2 billion through the end of 2023. In order for TPI Composites to reach the higher end of the possible revenue, there will have to be extreme growth in demand for wind turbines that outweighs the manufacturing capabilities of their customers in house wind blade manufacturing facilities.
Threats/Risks:
Customer preference to Vertical Supply chain:
In 2017, General Electric Company (GE) completed its acquisition of LM Wind Power (LM), the largest competitor of TPI Composites. It is expected that GE Wind will utilize LM for a substantial percentage of its wind blade production in the future and that they will reduce the volumes of wind blades it purchases from TPI Composites.
GE Wind historically outsourced all of their wind blade production requirements prior to its acquisition of LM. TPI Composites business and growth strategies depend in large part on the continuation of the trend toward outsourcing manufacturing. If the trend of persuading wind turbine OEMs to shift from in-house production to the outsourcing of their wind blade manufacturing, TPI Composites revenue will be severely hurt. This is a major red flag as GE Wind is the second largest customer representing 25.7% of the TPI Composites total revenue.
Supply Agreements:
The supply agreements contain provisions that allow for TPI Composites customers to purchase less volume in later years of the contracts. The company says that customers utilization of their manufacturing line “percentage begins at 100% of the manufacturing capacity for the first few years of the supply agreement, and then the percentage declines over time in subsequent years according to the terms of the agreement, but generally remains above 50%.” This means that most of the time the customers are not utilizing TPI Composites manufacturing space adherent to their contracts. Thus, when the company says that “as of February 27, 2020, TPI Composites long-term wind and transportation supply agreements provide for minimum aggregate volume commitments from their customers of approximately $2.8 billion and that customers may purchase additional volume up to, in the aggregate, a total contract value of approximately $5.2 billion through the end of 2023” that the future revenue is going to be much closer to the minimum aggregate volume of $2.8B
“Customers are allowed to terminate or reduce the number of dedicated manufacturing lines due to the following reasons. Failure of TPI Composites to deliver the contracted wind blade volumes or the failure to meet certain mutually agreed upon cost reduction targets.”
This is not favorable contract terms for TPI Composites. For example, in 2019 TPI Composites experienced construction and startup delays with respect to a new manufacturing facility in Yangzhou, China and a work stoppage in Matamoros, Mexico during 2019. These delays resulted in the company paying liquidated damages of $20.5 million to one of their customers payable in installment payments in 2019 and 2020. Additionally, cost reductions may not be feasible for the company to achieve. The delays in Mexico were triggered by a labor union strike which was eventually resolved with an agreement to pay their manufacturing laborers more money.
Rising competition in Asia:
There has also been increasing pressure from Asian manufacturers improving the quality and reliability of their technologies, and considering moving out of their local markets and into international cross border transactions. For example, TPI Composites believes a key former employee may have shared some of TPI Composites intellectual property with a competitor in China and that this former employee or the competitor may use this intellectual property to compete with TPI Composites.
This is a major threat to one of the companies largest growth prospects. China implemented its 13th 5-Year Plan with a goal of 15% energy from non-fossil fuel sources and targeting 210 GWs of grid-connected wind capacity by 2020. When it comes to competition with China, I don’t believe TPI Composites can compete with a local manufacturer. Especially with current tariffs forcing deadweight loss on the companies pricing (although I believe we will see a repeal of the tariffs under President Biden).
Di-worsification:
The company experienced startup challenges and incurred significant losses in connection with the supply of bus bodies to Proterra from the Newton, Iowa manufacturing facility. Proterra (who just went public via a SPAC $ACTC), Navistar and Workhorse ($WKHS) are all developing different electric vehicles. From EV busses, tractors and delivery trucks respectively, there is simply no way TPI Composites can produce composite bodies for all of these EV companies in one manufacturing facility located in Warren RI. This is further compounded by the fact that the Newton Iowa facility, the only other facility dedicated to transportation manufacturing is closing down. Even if any of these EV companies land a large contract, TPI Composites does not have the capabilities to turn around and develop the composite bodies in a timely manner.
Pricing pressure on their customers:
Many governments are shifting from feed-in tariffs to auction-based tenders as a means of promoting the development and growth of renewable energy sources such as wind energy. As a result of this shift, wind turbine OEM customers are experiencing intense pricing pressure with respect to the sale of their turbines. As a result of this pricing pressure, TPI Composites will be required to further reduce the costs of manufacturing wind blades to remain competitive. This is just not possible if the company is to maintain a positive EBITDA (see below).
Financials:
EBITDA Margin:
2019 2018 2017
1.1% 2.4% 7.3%
- The company’s EBITDA margin has been continually decreasing to the point where they are not making significant money on an operational basis. The company has to bid against its customers who have their own in house manufacturing facilities. For example if these customers are increasing their own in house manufacturing capabilities TPI Composites becomes a less valuable part of the supply chain.
Total debt:
2019 2018 2017
$141,389,000 $137,623,000 $121,385,000
- The company’s debt levels are rising as their EBITDA Margins are falling. This is worrisome as payments on interest is a post EBITDA expense.
Cash:
As of August 2020 the company is sitting on $96,657,000 of cash.
Debt:
As of December 31, 2019, TPI Composites had a $150.0 million revolving credit facility (the Credit Facility) with JPMorgan Chase Bank, N.A. Wells Fargo Bank, N.A., Capital One, N.A. and Bank of America N.A., consisting of a $125.0 million revolving credit facility and a $25.0 million letter of credit sub-facility.
In February 2020, they entered into an Incremental Facility Agreement with the current lenders to the Credit Agreement and an additional lender, pursuant to which the aggregate principal amount of the revolving credit facility under the Credit Agreement was increased from $150.0 million to $205.0 million
Dividends:
The continued operation and expansion of the business will require substantial funding and thus TPI Composites currently intends to retain any future earnings and do not expect to pay any dividends in the foreseeable future.
Opinion:
Caveat emptor. The company’s second largest revenue source has bought TPI Composites largest competitor. The profitability of the wind blade business has continually decreased to extreme low levels. Although the Wind Turbine OEM’s such as Vesta’s may appreciate a 14% EBITDA Margin, TPI Composites has a 1% EBITDA Margin. Any loss of business is extremely detrimental to a company that is in a business where capital expenditures are very high. I recommend selling this stock if you hold it, I would recommend shorting the company but given the bull market a short is risky as a rising tide lifts all boats.
