Head of Equity Strategy
Summary: The wind turbine industry has been through a couple of difficult years with declining operating margin and elevated input costs from higher steel prices. This morning the news got even worse with Siemens Energy announcing worse than expected quality issues related to its onshore wind turbines. The problems will cost Siemens Energy an excess of EUR 1bn and investors have sent its shares down by 32%. The bad news is following an improving outlook for revenue just one month ago as orders in its gas and power business are surging.
The renewable energy theme basket was already the worst-performing theme basket this year down 8.8% as investors have focused elsewhere in pursuit of returns with AI-related stocks stealing the show. This morning it got worse for renewable energy stocks and especially those related to manufacturing of wind turbines.
Siemens energy is withdrawing its profit guidance due to worse than expected quality issues related to its Siemens Gamesa wind turbine business. The company is currently evaluating the associated costs related to these issues and the board of directors are assessing that costs will likely be in excess of €1bn. In addition, the board of directors is reviewing the assumptions behind their business plans for Siemens Gamesa as productivity improvements have failed to materialise as expected and ramp-up of offshore wind turbines has proved more difficult than expected. Shares are down 32% to around €16 per share which is below the IPO price in August 2020. The issues in Siemens Gamesa and the falling share price in Siemens Energy will likely mean that Siemens further divestment of shares in Siemens Energy will take longer than planned.
Siemens Energy is maintaining its revenue guidance for the fiscal year which was recently lifted due to significant order intake in its gas and power business driven by strong demand for electrification.
The wind turbine industry is going through a tough period. In the years before the pandemic the industry experienced solid growth and reasonable operating margins leading to strong return on invested capital (ROIC) figures. However, the pandemic led to a 275% increase in steel prices which have significantly impact the operating margin and while steel prices are down 52% from their highs they are still around 30% above the long-term average since 2008. Besides higher input costs many of the wind turbine manufacturers have had difficulties ensuring quality and high productivity despite higher volume and revenue sending a worrying signal. Most industrial companies experienced improved unit economics and higher efficiency as the business scales, but in the case of wind turbine manufacturing that has not been the case in recent years. Vestas, the world’s largest wind turbine manufacturer, is a good example of this.
Vestas generated revenue of €14.5bn in 2022 up 138% over 10 years or 9.1% annualised. During this period of rising revenue the company initially improved the EBITA margin from 5.3% in 2013 to a peak of 15.7% in 2016, but since then the EBITA margin has declined every single year to a catastrophic -7.5% in 2022. In 2016, Vestas delivered a ROIC of 36.1%, but by 2020 it had fallen to 13.8% which is still above the cost of capital, but a significant deterioration. For a market leader in a growth industry the ROIC should be above 20%. Siemens Gamesa has had the same issues and their EBITA margin was also -6.8% in 2022, so the entire industry is having major problems.
The long-term outlook is still solid and wind energy is still an energy source that governments are allocating resources to deliver on the green transformation. However, it is clear that production issues and industry manufacturers operating at a loss are a bad recipe for the industry to fulfil its potential. Profitability should recover over the years as the top five ex-China manufacturers are enjoying a market share of around 90% in the ex-China markets, so pricing power should not be a problem. If the wind turbine manufacturers can improve their productivity and quality then margins should recover over time. For more information on the wind turbine industry read Wood Mackenzie’s short summary.
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