The news that General Electric's (NYSE: GE) fierce rival in renewable energy, Siemens Gamesa(OTC: GCTAF), is replacing its chief executive officer may not really appear to be significant. However, in the context of an industry suffering collapsing margins and soaring costs, anything likely to stabilize the industry must be a plus. Here's why the change could be good news for GE.
A highly competitive market
The three big players in wind power in the West are GE Renewable Energy, Siemens Gamesa, and Vestas(OTC: VWDRY). Unfortunately, all three had a disappointing 2021, and they seem to be engaged in a "race to negative profit margins."
In a nutshell, all three renewable energy businesses have been caught in a storm of soaring raw material and supply chain costs (notably transportation) while trying to execute on competitively won projects with already small margins.
All three finished the year with margin performance nowhere near initial expectations. Of the three, only Vestas maintained a positive profit margin, and management expects adjusted earnings before interest and taxation (EBIT) of 0% to 4% in 2022 on revenue of 15 billion euros to 16.5 billion euros.
Only Siemens Gamesa hit its revenue guidance range, albeit at the bottom of the range. However, that's probably because its fiscal year ends on Sept. 30. The pain continued over the winter for Siemens Gamesa, and its management has already lowered the full-year 2022 guidance it gave in November. Back then, management had forecast full-year 2022 revenue to decline 9% to 2%, but the new guidance calls for a decline of 7% to 2%. Meanwhile, the adjusted EBIT margin is expected to decline 4% to a gain of 1%, compared to a previous range of 1% to 4%.
This table shows a comparison of what all three businesses reported in their fiscal 2021 as well as their initial outlooks for the year.
Initial Full-Year 2021 Guidance
Full-Year 2021 Actual
Revenue of 16 billion euros to 17 billion euros
Adjusted EBIT margin of 6% to 8%
Revenue of 15.6 billion euros
Adjusted EBIT margin of 3%
Revenue of 10.2 billion euros to 11.2 billion euros
Adjusted EBIT margin of 3% to 5%
Revenue of 10.2 billion euros
Adjusted EBIT margin of (0.9%)
General Electric Renewable Energy
Mid-single-digit growth on revenue of $15.7 billion in 2020
Profit margin to improve on (5%) in 2020
Free cash flow-positive
Revenue flat at $15.7 billion
Segment profit margin declined slightly to (5.1%)
Outflow of cash of $1.4 billion
As such, Siemens Gamesa CEO Andreas Nauen resigned. The board appointed a new CEO, Jochen Eickholt, to replace him starting in March to try and fix issues with cost overruns and project delays. The interesting question is whether Eickholt's appointment will lead to a stabilization in the industry, particularly with regards to pricing.
The soaring costs have left all three companies nursing margin erosion, so what's needed now is price increases, not the highly competitive price bidding that characterized the industry in recent years. On a positive note, Siemens Gamesa's recently released earnings showed a notable increase in the average selling price of onshore wind orders from 0.63 million euros per megawatt (MW) in the fourth quarter of 2021 to 0.76 million euros per MW in the first quarter of 2022.
What about General Electric?
The issue of an adjustment in competitive pricing policy came up in GE's fourth quarter. GE missed its overall revenue guidance by a whopping $1.5 billion, and it's hard not to think that GE Renewable Energy wasn't responsible for a big chunk of that.
Assuming "mid-single-digit growth" (see table) means 5%, GE Renewable Energy missed its full-year 2021 revenue guidance by around $750 million. Moreover, the cash outflow of $1.4 billion was hugely disappointing for a business that was supposed to start generating free cash flow in 2021.
In response, GE CEO Larry Culp said the business would be "more selective" and said: "It's OK not to compete everywhere, and we're looking closer at the margins we underwrite on deals with some early evidence of increased margins on our 2021 orders. Our teams are also implementing price increases to help offset inflation and are laser-focused on supply chain improvements and lower costs."
Given this commentary, it appears highly likely that GE Renewable Energy forewent orders and revenue in the fourth quarter to maintain margin.
Moreover, in another positive sign, Culp appointed Scott Strazik to head up all of GE's energy businesses. For reference, Strazik is the highly successful CEO of GE Gas Power, responsible for a significant turnaround in its business fortunes.
So where is General Electric in 2022?
While there's no guarantee that Eickholt will aim to implement price rises at Siemens Gamesa aggressively, he will undoubtedly be under pressure to do so. GE Renewable Energy has already implemented price increases and is being more selective. If Siemens Gamesa and Vestas follow suit, it will be good for the industry.
Indeed, as noted, the average selling price of Siemens Gamesa's onshore wind orders increased notably in the first quarter -- a good sign. That could help improve margin performance at GE Renewable Energy in 2022 as Strazik sets about restructuring the business.
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