Steady Third Quarter For Vestas Presages Tense Q4 & Brighter 2019

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Danish wind turbine manufacturer Vestas published its third quarter earnings on Wednesday, reporting a steady quarter with solid, but not spectacular results across the board, including on-par revenues and solid order intake, setting up for what some analysts expect to be a pressure-filled fourth quarter.

Vestas revealed revenue of €2,811 million for the third quarter, an increase of only 2% on the same quarter a year earlier, but well in excess of that seen so far this year. EBIT before special items dropped by €79 million to €276 million, while EBIT margin was 9.8% compared to 12.9% in the third quarter of 2017.

The company boasted a firm order intake of 3,261 megawatts (MW) for the third quarter, increasing the company’s wind turbine order backlog value up to €10.5 billion as of the end of the third quarter. Vestas also boasts service agreements with revenue worth €13.2 billion, helping to create a combined backlog of wind turbine order and service agreements of €23.7 billion, an increase of €3.5 billion year-over-year.

“With continued strong global demand for wind energy, Vestas delivered industry-leading results and profitability in the third quarter of 2018, including another all-time high order backlog and all regions contributing to a 25% increase in order intake year-on-year,” said Group President & CEO Anders Runevad.

“Although the industry remains highly competitive, average selling price in the third quarter saw continued underlying stabilisation, which highlights Vestas’ ability to create value for customers.

“Our service business performed well with 14% organic growth in the quarter, while our offshore joint venture contributed to our net profit with EUR 23m, underlining the strength of our three-legged business model. To ensure Vestas sustains its leading position and ability to achieve long-term growth in the renewable energy industry, we remain focused on managing our fixed costs, effectively mitigating external factors such as tariffs, and delivering the profitability needed to innovate and deliver our industry-leading renewable energy solutions.” – Runevad

Looking forward, Vestas has maintained its 2018 guidance on revenue to be in the range of €10 to €10.5 billion on an EBIT margin of between 9.5% to 10.5%.

However, it’s worth noting that the rocky year-to-date and an unchanged guidance range could create problems for the company in the fourth quarter, according to James Evans, an analyst with Bloomberg Intelligence.

“Vestas retained its full-year sales guidance range, which adds pressure in 4Q to match the record operational performance attained in 4Q16 to just meet the low-point of company targets,” explained Evans. “Any slight project delays such as from adverse weather conditions may risk attainment of company sales guidance. Enduring strength in order intake and a stabilization of average order prices add visibility into 2019, yet a cost focus is required on likely rising US raw-material and component expenses in 2019 on trade policy actions.

“Vestas matched top-line consensus expectations in 3Q, with flat turbine sales supported by strong sales growth and margins from the service division. A 25% increase in order intake vs. the prior year drove a record turbine order backlog and adds confidence in improved 2019 activity.”

However, with that being said, investors were pleased enough with the company’s third quarter performance to push its share price up by a high of 7% and a stabilized increase of 5% as of the time of writing. This is due likely to the company’s promise that wind turbine prices have stabilized and that, looking through to 2019, Vestas now expects higher sales and activity levels next year.

“This confirms that the price pressure in the industry is on the decline, there is a stabilisation, and Vestas is on its way towards record high activity levels in 2019,” said Sydbank analyst Jacob Pedersen, who maintained his Buy rating on the stock.

“Vestas’ sales prospects continue to strengthen into 2019, despite lower average turbine selling prices, as strong order interest drives the backlog to record highs,” agreed Bloomberg Intelligence’s James Evans. “Execution of the order pile is enhancing sales visibility, with the company building inventory and flexing capacity levels to prepare for a busy delivery schedule over the next year. A prioritized service-unit contribution is lending sales support. Vestas’ attempt to engage with clients earlier in the development process will also help stimulate new sales.

“Fixed-cost controls ensure a peer-leading margin, with a high share of stable servicing business minimizing turbine-demand volatility and supporting overall profitability. Nevertheless, the equipment-pricing trend and potential disruption from trade tariffs are set to retain margin-compression dynamics.”

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Joshua S Hill

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