"The end of 2013 also marks the end of Vestas' turnaround plan and the beginning of a new strategic direction. The execution of the turnaround plan has created a leaner, more flexible business model with improved earnings margins and a stronger capability to generate cash flow. By divesting or outsourcing non-core activities, Vestas has also sharpened its focus on utilising the company's core competencies to full effect."
-- Vestas 2013 Annual Report
Vestas (OTC:VWDRY) is transitioning out of its legacy as a top-heavy manufacturer to become lean, focused, and flexible. The company closed 12 of its 31 factories, reducing its headcount by 5,000 employees in the process, and is outsourcing non-core manufacturing in order to reduce fixed expenses. However, the company still lost $110 million in 2013, so as much as things have improved, it's not out of the woods just yet. Facing off against competitors like Siemens (OTC:SIEG.Y) and General Electric (NYSE:GE), with much deeper pockets and diversified businesses, will Vestas keep moving forward and return to profitability in 2014? Let's take a closer look.
Visible progress over 2013
While Vestas did finish the year with a net loss of $110 million, it made significant progress over the year. After the first two quarters, the company had a net loss of $288 million, a larger loss than the first half of 2012, a year that saw the company lose more than $1.2 billion.
This was largely the result of management making some hard choices, like reducing its labor force by nearly one-third through the factory closings, and some not so hard, like selling its tooling business to a German manufacturer. The end result -- more than $655 million in annualized fixed-cost savings -- led to Vestas generating $135 million more gross profit than in 2012, even with revenue falling $1.6 billion in a down year for wind. Most impressively, Vestas generated $1.36 billion in free cash flow, compared to negative $485 million in 2012.
These efforts to streamline the business look like they will be part of a successful 2014 and beyond, especially with the company's partnership with Mitsubishi Heavy Industries for offshore wind, and the V164-8.0MW turbine, which will give the joint venture a strong competitive advantage. Additionally, the company is making efforts to streamline its product line, using common parts as much as possible to further reduce cost in ways that won't impact reliability or customer service. And even with the global market growth for wind turbines beginning to slow, the future offers plenty of room to expand:
The global market is forecast to grow between 4% and 10% over the next six years, but Vestas' goal is to expand its market share. If the company is able to maintain its new, less top-heavy model and still be competitive, then it should be able to maintain its top position in wind turbines.
Both Siemens and General Electric have one potential strategic advantage over Vestas, in that their respective energy segments do much more than just wind. GE's Power & Water segment generated more than $10 billion in sales and almost $1.9 billion in profits in the fourth quarter of 2013 alone; significantly more than Vestas' annual sales. Similarly, Siemens' energy business generated $7.8 billion in sales in its fourth quarter. Of that total, more than $3 billion was in wind turbines, including three large orders in the U.S. that total more than $1 billion combined, to be delivered in 2014. While it's hard to state with any accuracy how much effect it has, GE and Siemens' wider base of capability in the energy arena could be seen as a benefit by some customers.
For investors, both GE and Siemens have their risks. U.S. investors should be aware that Siemens is de-listing itself from the NYSE on the basis that less than 5% of its trading activity happens on the exchange. While shareholders are able to keep their positions, future trades will be "over the counter," likely meaning much lower liquidity, higher trading fees, and potentially a discount versus value on the exchange in Germany.
GE, on the other hand, could be an interesting investment. The recent announcement that GE will IPO part of its consumer finance division could unlock some value, as shares have traded at a discount for the past several years, as a result of the damage caused by GE Capital's massive losses after the financial crisis. By separating much of the consumer finance group from the core industrial business, there's a good chance that GE shares will trade at a slightly higher multiple going forward due to the reduced risk.
Final thoughts: Not just blowing hot air
All the signs indicate that Vestas is indeed back in the game. While Siemens and GE are both tough competitors, Vestas has a solid reputation with its products, and the new management has so far made the right moves to get the company headed back in the right financial direction. Will these moves lead to sustainable profits? Only time will tell, but I'd say management may have a solid tailwind for the next few years.