Vestas Wind Systems (OTCPK:VWDRY) released its 2023 annual report on February 7, which the company titled “Return to Profitability.”After losing money in 2022, the company started making profits again in 2023, although profit margins in 2023 Very weak, only 1.5%. But considering all the headwinds Vestas has had to deal with over the past few years, I believe this is good news.
In this article, I will introduce you to the most important points from Vestas’ 2023 annual report. We’ll take a closer look at growing revenue and the differences between the stable services segment and the more volatile Power Solutions business. We’ll also look at strong growth in order books, which suggests the wind energy business is expected to see more growth in the coming years.Additionally, the average selling price of wind turbines is discussed as this Vestas still seems to be having some trouble in this area.
Risks and Opportunities
First, a brief review of Vestas and Wind Energy’s most important risks and commitments. In my last article about Vestas, written in October 2023, I wrote about the ongoing struggles in the wind energy industry: Tender structures for wind projects leave manufacturers such as Vestas exposed to significant risks, supply chain issues and the reliance on government for project launch, often with subsidies. All of these factors have contributed to Vestas’ profit margins shrinking in the past.Even though Vestas just had a profitable year, these issues haven’t completely gone away (although Vestas did mention that supply chain issues have become much smaller), but the company seems to be able to operate successfully although these struggles.
Seeking Alpha writer Keith Williams has written a useful article on Vestas and the wider wind energy outlook, highlighting why wind energy is likely to be an area of strong growth over the next few years. If you are interested in these important market fundamentals that position the wind energy industry for a decade of growth, I highly recommend reading his article, as Keith writes it better than I can.
In this article, I will focus on Vestas’ financial reports and outlook for 2024.
Vestas financial results
For the screenshots and quotes below, I used the following sources, which you can also access using the hyperlinks:
- Vestas Annual Report 2023
- Company announcements related to this report
- Vestas presents 2023 financial report to investors
Group President and CEO Henrik Andersen said in Vestas Wind Energy’s 2023 Annual Report:
Vestas’ results improved throughout 2023 and we are pleased that Vestas returned to profitability and hit the high end of our guidance. Our full-year order book set a record of 18.4 GW, driven by a record fourth quarter and underscoring our strong momentum at the end of the year. We continued to advance our strategic focus and strengthened our commercial and operational discipline, which, together with growth in our services business, helped us achieve revenues of €15.4 billion. Our 2023 results benefited from an improving business environment, but continued geopolitical volatility as well as slow permitting and grid underdevelopment across markets are expected to create uncertainty in 2024. Our strategic path to achieving our long-term goals is clear, and our focus remains on maintaining discipline, continuing to build our momentum and executing as strongly as possible.
Apart from the very obvious (profitability recovery), I believe there are several interesting themes mentioned in this statement:
- Full-year order volume hits record high of 18.4 GW
- Service business growth
- Business environment improves but fluctuates due to slow approvals and grid issues
Let’s zoom in on the first two aspects one by one. First, the order volume. Let’s look at the numbers on land and at sea:
We can see, especially compared to the fourth quarter of 2022, a significant increase in order volumes. Full-year figures are also presented in the financial report, with order volume also growing strongly from €11.9B to €18.5B compared to fiscal 2022. The average selling price of orders seems to fluctuate around €1 million per MW, but it should be remembered that Vestas reported in its 2021 annual report that the average selling price for the year was structurally lower: per MW €830,000. megawatts. In 2020 it was €740,000. Still, given the high rates of inflation that have occurred in recent years, it may still be debatable whether the average selling price per megawatt is structurally different from two years ago. More on this later because I think it’s an important topic.
Now let’s look at Vestas’ revenue figures, split into offshore, onshore and services, to check how much Vestas’ services business has grown compared to other segments:
From these figures we can draw the following conclusions:
- Vestas’ services business grew by more than 10% in 2023, which is very impressive growth.
- Vestas’ services business is the only segment to be profitable in 2023 and the only reason for the company’s positive EBIT margin of 1.5%
- But the power solutions business is catching up, with losses much smaller than in 2022.
- Services business backlog value appears to be growing slowly, while Power Solutions backlog is showing strong momentum. This may also impact the services business after the Power Solutions segment’s turbines become operational.
Also relevant and very interesting is this sentence I found in the annual report:
We work hard to complete low-margin projects booked from 2020 to 2022
This makes the power solutions business very likely to see a greater recovery in 2024 and beyond.
Additionally, let’s check Vestas’ key financial data to complete a snapshot of the company’s 2023 financial health. I’ve highlighted what I think are the key numbers:
Vestas’ revenue increased compared with last year, albeit slowly. But it still needs more growth to match its best year yet (revenue-wise) in 2021. Profit has reached €78 million and we have concluded that this return to profitability is mainly due to smaller losses in the Power Solutions business coupled with continued growth and greater profits in the Services business. Furthermore, free cash flow looks much healthier again, at €245 million.
The companies’ debt appears to be growing rapidly, from €2.4B at the end of 2022 to €3.4B at the end of 2023, but note that net debt is only €32m, as Vestas owns almost as much debt as it does. In my opinion, Vestas’ balance sheet looks very good.
The downside for investors: the company won’t be paying any dividends in 2023, but I think that’s understandable as the company is still recovering from a “bad” year in 2022, and 2023 Profits are still very low. Since Vestas typically pays its dividends as a percentage of net profits (the company has paid out 25-30% in the past), the dividends are likely to be small.
Of course, Vestas also provided an outlook for the upcoming financial year. Below, I have posted a screenshot of the most streamlined version of Outlook. I highlighted the things I wanted to discuss.
Something interesting I found in this outlook:
- Vestas expects record revenue in 2024
- The company expects profit margins to increase to 4-6%
- Profitability will gradually improve, as reflected in margins, but will be hampered by a backlog of low- to medium-margin projects
The last thing is the most interesting because it has also been used to explain Vestas’ poor performance in 2022 and 2023. I’ve listed the average selling prices over the years in the little table below:
|Average selling price (millions/MW)
|Eurozone annual inflation rate
|Inflation-adjusted average selling prices recalculated to 2024
I also added the Eurozone inflation rate for the years listed and recalculated the average sales price in 2024 based on 2020-2023 levels to take inflation into account and compare whether the average sales price also increased after adjusting for inflation . As we can see, when we take into account strong inflation, especially in 2022, the average selling price has also increased. But I also concluded that the inflation-adjusted average sales price in 2023 is not materially different from the price in 2021 when we calculated it. Corrected for inflation (€1.03 vs. €0.95). This could indicate that Vestas (after a recovery in 2021) is once again struggling to increase ASPs, albeit at much better prices than in 2020. This is a topic of concern for Vestas and its investors.
Vestas returned to profitability, mainly due to lower losses in its power solutions business and higher profits in its services business. At Power Solutions, more low-margin projects have been completed, and the company expects this trend to continue in 2024, when it will handle more high-margin projects. Order volumes for 2023, especially in the fourth quarter, are very strong and appear to indicate that the industry is recovering.
I think one potentially concerning metric is that Vestas appears to be working systematically to increase its average selling price (ASP) per megawatt. Vestas mentioned that the lower average selling prices in the fourth quarter were “due to range mix with a higher proportion of pure supply orders in the quarter.” But on a full-year average, the average selling price is lower than in 2022. Additionally, after correcting for inflation, the average selling price was not much different from 2021, which the company classified as a “low-margin” year. Therefore, in order to remain profitable and better positioned to weather future distress (which is coming whether the wind industry likes it or not), Vestas must continue to focus on its average selling prices. Otherwise, the company risks long-term profit growth in its services business to make up for losses in its power solutions business.
But all in all, I believe all of Vestas’ financial information and the broader wind market collectively paint a positive picture. Vestas expects better improvements in revenue and margins, already foreshadowed by high orders received in the fourth quarter of 2023. This makes it very likely that Vestas, as a cyclical business, will restart growth again. Vestas’ relatively low average selling price for new orders remains a concern, but I (and the company itself) believe it can improve this. Some important factors that make ASP less of an issue include easing supply chain issues and increased demand, which could improve margins and add to the advantages of scale. Please note that the wind energy market is still not a mature market and the risks and uncertainties of the business are inherently higher than in other mature markets. Therefore, I don’t think Vestas is a strong buy at these price levels, but rather a moderate buy. Therefore, as more of Vestas’ headwinds appear to be turning into tailwinds, the prospects for growth and profit growth have me upgrading Vestas to Buy from Hold.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.