Author Topic: VWS.CPH - Vestas Wind Systems A/S  (Read 6146 times)

Spekulatius

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #40 on: April 25, 2018, 07:52:12 PM »
I don't foresee how Vestas' long-term EBIT margins for new equipment can drop much below 5%.

May I ask what gives you this confidence? Plenty of razor/razorblade models run losses on the initial sale.

As for whether wind power is economic, I'd offer two thoughts:
1) The old assumption that intermittent sources of power have to be limited within the mix is just starting to break down. See the work Enel is doing to modulate demand and to use electric cars as "batteries on wheels". I expect intermittents to continue growing in the mix without issue.
2) On the negative side, solar costs are falling faster. If I see a threat to wind, it's not that it can't compete with coal and gas but that it can't, in the long run, compete with solar.

Pete

The razor/blade business model does not work for wind turbines, because most of the cost of ownership is determined by purchase price, since wind turbines don’t need much maintenance.

Also compared to elevators and aircraft engines, there less issues with safety and a wind turbine is a standalone investment, rather than a component of it like and elevator (part of a building) or an aircraft engine being part of an airplane.

I looked at this market a few years ago when Gamesa was still Independent and didn't like too much of what I saw. The margins are below other power business, competition is fierce and there are Chinese competitors which will hold the prices down, if now one else does. Just look at how they trashed the solar market. The big power equipment companies like GE or Siemens are in it, because it rounds out their product offerings, since wind power is here to stay, I think. They would rather sell gas turbines.
« Last Edit: April 26, 2018, 01:49:24 PM by Spekulatius »
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kwilde

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #41 on: April 26, 2018, 12:45:13 PM »
I just read some market research suggesting that while there has been pricing pressure in recent quarters, the effect of a product mix shift from 2 MW units to 4 MW may be causing a market mis-judgment with Vestas.  The research showed that selling a 4 MW unit as opposed to a 2 MW unit could result in a 30% reduction in Average Sale Price (on mEUR/MW basis) without impacting profitability (ie. turbines offering 60% higher output only cost 35% more to build).  This analysis jives with what Vestas’ CEO, Anders Runevad, has stated a number of times during recent earnings calls.  The market research estimates the underlying price decline excluding efficiency improvements and currencies effects is ~2% for FY2017.

I’ve also been thinking a bit about the possible risk of low-cost Chinese competition.  I’m wondering if this is as serious a threat as it sounds?  From what I’ve read, although larger turbines are prominent in Europe and becoming more popular in the U.S., in the Chinese market, very few larger turbines are being sold.  Based on their 2016 annual report, Goldwind doesn’t sell any turbines over 3 MW; to give some perspective, it took 5-years of technological advances for Vestas to upgrade their 3MW platform to 3.45MW.  Doesn’t this mean the Chinese are quite far behind from a technology perspective?  Maybe more importantly, how important is the location of your head office in this industry.  While I can see how having manufacturing facilities in China is important when selling something like shoes or clothing, wouldn’t much of the wind turbine manufacturing & assembly need to be done closer to the region it is being installed in?

I’m also wondering how everyone else is treating the company’s net cash position?  On the surface, the Enterprise Value looks good because the net cash position results in an EV that is ~2.7 bEUR less than the market cap; however, the company holds 2.9 bEUR of customer prepayment liabilities on its balance sheet.  I added back the customer prepayments to the EV when estimating the purchase price…does anyone disagree with my take?

What kind EV/EBIT multiples do other people think are reasonable for the service business?  What kind of EV/EBIT multiple would you put on the Power Solutions / new equipment business?

Finally, management guided to 400 mEUR of FCF for 2018, anyone have any idea how they got to that number?  Unless I’m missing something, based on their revenue and EBIT guidance, it sure looks like they’re sandbagging with that number.

John Hjorth

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #42 on: April 26, 2018, 01:30:00 PM »
I don't foresee how Vestas' long-term EBIT margins for new equipment can drop much below 5%.

May I ask what gives you this confidence? Plenty of razor/razorblade models run losses on the initial sale.

As for whether wind power is economic, I'd offer two thoughts:
1) The old assumption that intermittent sources of power have to be limited within the mix is just starting to break down. See the work Enel is doing to modulate demand and to use electric cars as "batteries on wheels". I expect intermittents to continue growing in the mix without issue.
2) On the negative side, solar costs are falling faster. If I see a threat to wind, it's not that it can't compete with coal and gas but that it can't, in the long run, compete with solar.

Pete

Those are to me good and sound considerations, Pete,

I have no links to documentation, but with regard to your #2, I think of it this way:

To keep stability in power supply over the year cycle, I think you need both solar and wind. I think of it as a chart where you combine solar efficiency/output with wind solar efficiency/output on each axis, based on earth coordinates. Likely, solar energy will have an efficiency advantage nearer equator, gradually fading out to the advantage of wind, the more the distance from equator rises for the potential [wind/solar] power plant earth coordinates. [No other cycles included in the discussion here - which is actually needed.]
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John Hjorth

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #43 on: April 26, 2018, 01:59:54 PM »
... I’m also wondering how everyone else is treating the company’s net cash position?  On the surface, the Enterprise Value looks good because the net cash position results in an EV that is ~2.7 bEUR less than the market cap; however, the company holds 2.9 bEUR of customer prepayment liabilities on its balance sheet.  I added back the customer prepayments to the EV when estimating the purchase price…does anyone disagree with my take?

Kevin,

Partly reply, for my part, here. The cash position is needed as some kind of guarantee - as a cusion - against headwinds [<- did I really write that?] on projects in progress, proving / supporting that VWS will deliver, or pay.

Management adjusts it via the buyback program towards shareholders, if deemed fit.
« Last Edit: April 26, 2018, 02:27:20 PM by John Hjorth »
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Spekulatius

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #44 on: April 26, 2018, 03:20:06 PM »
... I’m also wondering how everyone else is treating the company’s net cash position?  On the surface, the Enterprise Value looks good because the net cash position results in an EV that is ~2.7 bEUR less than the market cap; however, the company holds 2.9 bEUR of customer prepayment liabilities on its balance sheet.  I added back the customer prepayments to the EV when estimating the purchase price…does anyone disagree with my take?

Kevin,

Partly reply, for my part, here. The cash position is needed as some kind of guarantee - as a cusion - against headwinds [<- did I really write that?] on projects in progress, proving / supporting that VWS will deliver, or pay.

Management adjusts it via the buyback program towards shareholders, if deemed fit.

The cash is mostly  customers prepayments for booked projects. This is very common in constructions business. I would look at this as restricted cash, even though technically it isn’t. it leads to the company being flush when the backlog is high, but will shrink when the backlog is worked off. The idiot management from CBI in a similar management used the cash for stock buybacks and you can see where it got them.

I don’t think it makes sense to d a SOMP for the manufacturing and the service business, be thr one wouldn’t exis without the other IMO. The service business had 20% EBIT margins which is twice that of the manufacturing business roughly.

the overall numbers are actually a bit better than I thought and thr valuation seems reasonable. how cyclical will this business be, I have seen 50% revenue declines peak to trough in Capex business thwt seem similar to to Vestas. Servis would provide some stabilization , but it’s too small to carry the company and even preventive maintenance can be come an discretionary expense when the going gets tough.

The Chinese will probably do better in 3rd or 2nd world countries than in Europe or the US - just my guess.
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John Hjorth

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #45 on: April 27, 2018, 12:58:20 AM »
Headwinds could be commercial [related to demand/pricing, as mentioned by Spekulatius], or they could be technically related. It has happened before with this sucker [or perhaps I should say a predesessor - NEG Micon A/S, that got merged with Vestas].

It was about gearboxes, and back in 1999. Schouw & Co. A/S had as largest shareholder to cough up with a quarter billion DKK to ride it out and get it right. It's a poor hidden secret, that the culprit was a vendor company, also as NEG Micon A/S then, based in the city called Randers, about 30 kms north of Aarhus, called Randers Tandhjulsfabrik A/S.

The fate and history of VWS and Schouw & Co. A/S are closely related. If Schouw & Co. A/S haden't stepped in then, both Schouw & Co. A/S and VWS would most likely have looked very different today than they actually do. [1]

There is a Jubilee Book from Schouw & Co A/S, where a chapter is about Schouw's wind turbine venture [p. 107 - 112].

I think the industry is technically more mature now, though, with a long proven track record. The big three are just pushing soo hard to the limits on the technical side, out in more or less unknown territory.

All the managers in this industry must have a doormat at the front door with the text : "Think Big!". The housekeeper or the spouse turns the doormat when the manager is at work, so the text appears right, when the manager returns home from work!

- - - o 0 o - - -

[1] Schouw & Co. A/S exited VWS in 2013 with a total after tax gain on VWS over the years of DKK 1.8 B, while SCHO YE2013 equity was approx. DKK 5.7 B.
« Last Edit: April 27, 2018, 05:14:11 AM by John Hjorth »
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kwilde

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #46 on: April 27, 2018, 10:10:10 AM »
Spekulatius,
Regarding:

Quote
I don’t think it makes sense to d a SOMP for the manufacturing and the service business, be thr one wouldn’t exis without the other IMO. The service business had 20% EBIT margins which is twice that of the manufacturing business roughly.

Does this mean you think that to be successful in servicing wind turbines, you would need to be an OEM?  Just curious, because if that were the case, that would limit a lot of competitive threats from 3rd party servicing providers.  When I was looking at the elevator industry, there were some 3rd party servicing companies in China that posed a competitive threat to the OEMs despite not manufacturing elevators themselves.

Spekulatius

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #47 on: April 27, 2018, 06:35:32 PM »
Spekulatius,
Regarding:

Quote
I don’t think it makes sense to d a SOMP for the manufacturing and the service business, be thr one wouldn’t exis without the other IMO. The service business had 20% EBIT margins which is twice that of the manufacturing business roughly.

Does this mean you think that to be successful in servicing wind turbines, you would need to be an OEM?  Just curious, because if that were the case, that would limit a lot of competitive threats from 3rd party servicing providers.  When I was looking at the elevator industry, there were some 3rd party servicing companies in China that posed a competitive threat to the OEMs despite not manufacturing elevators themselves.

I believe there is an advantage of servicing the equipment as thr OEM who build it, especially regarding warranties, Software upgrades etc. The OEM will be able to charge more everything else being equal and a third party would need to compete on cost.
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kwilde

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #48 on: May 02, 2018, 08:44:31 AM »
For those interested, below are some responses from Vestas' IR team:

1.   Typically, how long is the warranty period on a newly built turbine? Varies from project to project, but typically 2-5 years.  What is the average length of your servicing contracts for new turbines sold? Average duration of 8 years on new service contracts  What is your retention rate on servicing contracts? It was 75 percent last time we announced it, and it has at least not been decreasing since.

2.   What percentage of the manufacturing for sales in a specific region is done within that region (ie. are most of the components assembled in the destination country)? The vast majority of a project will be manufactured within the same region. We of course localize production in low-cost countries, but it is part of our strategy to have a global manufacturing footprint and to be present in all the major regions. Please see our annual report for a complete overview of our manufacturing footprint.

3.   How long would a typical wind turbine last before it would need to be replaced? Our turbines have a designed lifetime of 20 years, but in many cases the lifetime can be extended. Exactly when it makes economically sense to replace the turbine is at the end of the day up to the customer.

4.   For what percentage of new build agreements is the company paid up-front? When selling a project, a prepayment of 5-15% of the total value is required.

John Hjorth

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Re: VWS.CPH - Vestas Wind Systems A/S
« Reply #49 on: July 20, 2018, 04:15:20 AM »
Attached are the 2017/18 financials for MHI Vestas Offshore Wind A/S.
”In the race of excellence … there is no finish line.”
-HH Sheikh Mohammed Bin Rashid Al Maktoum, Vice President and Prime Minister of the United Arab Emirates and Ruler of Dubai