Following a disappointing 2021, investors in wind power were hoping for a better 2022. Unfortunately, that hasn't materialized. Once again, the leading players in the West, namely General Electric's (GE 0.80%) renewable energy business, Vestas (VWDRY +0.09%), and Siemens Gamesa (OTC: GCTAY), will miss their initial earnings estimates this year. So what's going wrong, and is the wind power industry uninvestable?
NYSE: GE
Key Data Points
Three problematic issues in wind power
The challenges in 2022 can be put into three buckets. First, shortages and supply chain issues have bedeviled the global economy over the last year, and those have in turn contributed to higher prices for raw materials.
All three of these companies -- and indeed, much of the broader industrial sector -- believed that the supply chain issues (logistics and transportation, etc.) would ease in the second half of 2022. Unfortunately, they have persisted. These are particularly problematic issues for wind turbine manufacturers since assembling and transporting those massive structures are logistical feats in and of themselves.
Second, political uncertainty persists regarding whether or not production tax credits (PTC) in the U.S. will be extended. That's a particularly important issue for GE Renewable Energy, as it impacts its core onshore wind market. "The ongoing paralysis in Washington with the PTC expiration is hitting our most profitable market, impacting demand," GE CFO Carolina Dybeck Happe noted during the company's most recent earnings call.
Third, pricing in the industry has been ultra-competitive in recent years, and margins have slumped across the sector. The result has been a perfect storm of rising costs pressuring already slim profit margins while demand wanes.
OTC: VWDRY
Key Data Points
Vestas, Siemens Gamesa, and GE Renewable Energy in 2022
In light of these pressures, all three companies have lowered their expectations for their current fiscal years.
|
Company |
Current 2022 Guidance |
Original 2022 Guidance |
|---|---|---|
|
Siemens Gamesa |
Revenue to decline at near the low end of revised guidance, for a contraction in the range of 2% to 9%, with an adjusted earnings before interest and taxes (EBIT) margin of negative 5.5%. |
Sales to contract by 2% to 7%, with an adjusted EBIT margin in the range of negative 1% to negative 4%. |
|
Vestas |
Revenue of 14.5 billion euros to 16 billion euros, and an adjusted EBIT margin of 0% to negative 5%. |
Revenue of 15 billion euros to 16.5 billion euros, and an adjusted EBIT margin of 0% to 4%. |
|
GE Renewable Energy |
Results will be below the investor day outlook, and "we no longer expect a step-up profit in the second half."* |
Low-single-digit percentage revenue growth, and an operating loss of $500 million to $700 million. |
Data source: Company presentations. *Dybeck Happe on the earnings call.
Change is coming
The key takeaway here is that all three of these companies expect to lose money in 2022. Siemens Gamesa's disappointing performance encouraged Siemens Energy to make a cash tender offer for the remaining 32.9% of the company that it didn't own. The idea is that it will be able to turn around Siemens Gamesa by fully integrating the business into Siemens Energy, thus reducing costs.
OTC: GCTAY
Key Data Points
GE is also taking concerted actions to improve its performance. Management is looking to downsize the company to fit its end market, be more focused on selected geographical markets, and be more discipline in pricing new contracts. Vestas has also been increasing the price of its order intake in 2022.
If these companies have a positive example to follow in their turnaround efforts, it comes from how GE managed to turn around GE Power (mainly gas turbines) from a loss-making business in 2018 to a solidly profitable one today. It didn't happen overnight, but taking a more disciplined approach to pricing, applying lean management principles, and gradually working through its less-profitable contracts worked at GE Power.
The same methods could benefit GE Renewable Energy, especially as the market for wind power solutions is not likely to halve as the heavy-duty gas turbine market did from 2017.
What to expect from wind power in 2023
A bullish outlook sees the new pricing approach in the industry as a positive for margins. Combined with an easing of the world's supply chain issues, that could lead to a better year in 2023.
However, resolving those supply chain issues and getting a handle on cost pressures will take time. These companies' margins will surely improve due to the actions they have taken in 2022, but there are no quick fixes to the problems they face.
