Even as a Leaner, Meaner Company, Vestas Faces Tough Times

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Researched by Industrial Info Resources (Sugar Land, Texas)--Vestas Wind Systems (OTC:VWDRY) (Randers, Denmark), which is a Danish manufacturer, installer, seller and servicer of wind turbines, has undergone a number of extreme changes over the past few years. In November 2011, the executives announced that the company was going to be reorganized. As a result of a challenging and unpredictable wind industry, Vestas had to let go of 5,000 employees in 2012. In 2011, the company had 22,721 employees, and in 2012, this number was reduced to 17,778. Clearly, 2012 was an extremely tough year for the company. Executives explained in a conference call on February 6, 2012, that the company had the target of reducing costs by more than $535 million (400 million euros) in the 2012/2013 time period. In 2013 so far, Vestas has been able to reduce costs by more than $334 million (250 million euros).

"This scalability, flexibility and the importance of being lean have been a very important part of the operating business model in the year 2012, and remains to be so during 2013," Ditley Engel, president and chief executive officer, said. Perhaps the company is half way on its way to completing this mission. But this mission of reducing costs and improving finances has clearly come at a cost.

In addition to cutting jobs, Vestas has also closed a manufacturing facility in China. Engel explained that the company's manufacturing organization was consolidated. Vestas also made changes to its U.S. and Spanish factories. "We have reduced the manufacturing workforce in the United Sates, seized production of the control factory in Spain, and reduced production capacity at the blade factory in Spain in Daimiel," Engel said. In Denmark, Vestas merged control factories in Lem and Hammel in order to optimize its business and move production to Tianjin in China.

The last recent transformational change the company made was when it began supplying third-parties for some of the company's facilities within both tower and castings. This is another way, according to Engel, to improve the capacity utilization at Vestas plants. Moving forward, Vestas plans on making more changes. "This journey is no way over, but we have taken a lot of important steps during 2012 in order to get where we want by the end of this year," Engel said.

It appears that Vestas attempt to reorganize its business has had a positive impact on the company's number of shipments. Engel explained that Vestas increased shipments 22% in 2012, while decreasing its number of employees by 22%.The executives of the company said that activity levels increased because of higher activity shipments in the European community, specifically in Italy, the United Kingdom, Sweden and Poland. There was also more shipments sent to Canada and Australia.

In the fourth quarter of 2011, sales increased 25% to $3.4 billion (2.5 billion euros). At this time, Vestas generated $556 million (416 million euros) in free cash flow, which allowed the company to cut net debt by $517 million (387 million euros). In 2012, the company did not obtain positive free cash flow that it had hoped for. The company's free cash flow was in the negatives at minus $480 million (359 million euros) last year.

Wind is a competitive business, and who knows which way wind prices will go. Wind is sometimes around $6 compared to gas. Currently, price levels are at $3. Wind prices dropped when natural gas prices dropped. Because of this volatility in wind prices, some believe that the industry needs all the help it can receive. Executives at Vestas think that the U.S. production tax credit (PTC) is essential for their business. They also believe that the PTC was extended because the U.S. now has 75,000 people employed in the wind industry. Now, according to the executives at Vestas, the wind industry is a "real industry" in the U.S.

Outlook for 2013

For 2013, executives at Vestas are under the impression that shipments will be around 5 gigawatts. They expect revenue to be at least $7.4 billion (5.5 billion euros), and of this amount, service is projected to be 1 billion euros. Earnings before interest and taxes (EBIT) margin before special items is projected to be at least $1.3 billion (1 billion euros). Free cash flow, on the other hand, is projected to be zero.

Moving forward, Vestas will continue to develop the 8-megawatt (MW) V164 offshore wind turbine. The first prototypes will be installed in the second quarter of 2014 in Denmark. The company will continue to upgrade the 2-MW and 3-MW platforms.

A number of the power companies in the Industrial Info database use wind turbines that were manufactured by Vestas. Industrial Info is also tracking a number of projects that Vestas is involved in. For example, Vestas has continued mechanical completion for a grassroot 150-MW windfarm in Chile. This project has a total investment value of $200 million. This project kicked off in 2011, and completion is expected in the third quarter of 2013. In Ireland, Industrial Info is tracking a project that Vestas is working on with Bord Gais (Cork, Irealand). For this project, the companies are conducting construction for a 24-MW windfarm extension. This project is worth $47 million, and it is projected to be completed in the third quarter of 2013. Industrial Info is also tracking projects in South Africa and the United Kingdom, which Vestas is involved in.

Overall, 2013 is not going to be an easy year for Vestas. Engel explained that he has a glass half-full mentality when he thinks of what lies ahead for Vestas. "Let me wrap up by saying that we have spent 2012, certainly every minute of the year in preparing for a very tough 2013. The three core focus areas have been on reducing cost, lowering the investment level and improving capacity utilization." Engel said.

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Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, and eight offices outside of North America, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.