Conservative Vestas must focus on growth

“Vestas is transformed.”

So writes chairman Bert Nordberg at the start of the 2014 annual report by Danish manufacturer Vestas, which was published on Wednesday. Under the headline of ‘Vestas continues to grow profitably’, Nordberg explains how Vestas is much leaner and more focused than it was in 2011 when it started its turnaround strategy.

And he finishes in stirring speech mode: “Renewable energy is going to help us in the race against climate change, energy poverty and water scarcity. This is a race we must win.”

Yet the reaction to the results among analysts and the stock market has been cooler.

They welcomed the 10% growth in orders year-on-year to 6.5GW; the 14% growth in sales year-on-year to €6.9bn; and a more-than-doubling of operating profit to €559m in the same period. The firm's proposal to pay its first dividend in 12 years is a good sign too.

But both analysts and the stock market were disappointed that the company’s guidance for 2015 was so conservative.

Vestas has forecast sales in excess of €6.5bn in 2015, which is down on the €6.9bn in 2014; and a narrowing of the EBITDA margin from 8.1% to 7%. The numbers are minimum targets but don’t suggest that the firm is ready to step up its growth.

One analyst observed: “We know that the guidance of Vestas is conservative, but it’s even more conservative than I had expected. This is an issue we need to hear more about.”

Vestas has a reputation as being conservative, but the market had been clearly hoping for more. The 6% drop in its share price in the hours after publication showed as much but, in our view, we should not read too much into the short-term reaction to the 2015 plans.

The fact is that it has been a difficult three years for Vestas.

The company put in place a tough turnaround strategy at the end of 2011 that lasted two years. This involved the loss of one-third of its global workforce; the closure of 12 of its factories; and the reduction in annual capital investments by more than €500m a year.

Those numbers all show the huge change at the Danish business.

The firm announced the end of this turnaround phase in its 2013 annual report last February, in which it revealed its current strategy, ‘Profitable Growth for Vestas’. This shows that the company wants growth but is wary about returning to the inefficiencies of pre-2011.

It is a sensible strategy. Perhaps too sensible.

Vestas is now out of the phase where survival and savings are its priorities. It now has to build on the solid base it has established to deliver growth on four fronts: in its established markets of Europe and North America; in the emerging markets of Asia, Latin America and Africa; in its services business; and offshore in its tie-up with Mitsubishi Heavy Industries. It can succeed on all four of these.

But, if the business is to deliver on these, it needs more hunger and ambition from a leadership team used to being conservative. Only then will it deliver strong sales and profit growth.

Vestas is transformed, but the mentality of its management is not.