kwilde Posted April 24, 2018 Share Posted April 24, 2018 There hasn't been much activity on this thread in the past few months, but I've been looking at the company for the last couple weeks, so thought I'd try to revive it. My initial take is as follows: - Electricity generation from onshore wind has crossed the threshold of being economically viable without the aid of Production Tax Credits; I have read conflicting reports on this, but my understanding is that on a levelised cost of electricity basis, it is cost competitive with other sources. I think this bodes well for long-term demand for new equipment including new installs and re-powering installs; I've seen estimates of medium-to-long-term CAGR of 3-5% which seems reasonable. - Parts & servicing has a more attractive growth profile than new equipment with CAGR estimates of 8-9% over the medium term (upcoming 7 year cycle). Servicing also offers much better margins for the companies with the servicing networks already in place who can easily scale the business. Servicing includes software upgrades that have very high ROIC's. - Offshore wind could offer very attractive growth opportunities, but I think it's highly uncertain, so I choose to view it as a free option. - The industry looks like it is very likely to continue to consolidate. Based on recent EBIT margins (Vestas ~9-13%, GE ~6-10%, Siemens Gamesa ~4-8%, Goldwind ~9-13%, Nordex ~1-5%, and Senvion ~ -4% to 0%), I think we're likely to see the true global players limited to three or four (Goldwind has been putting infrastructure in place to expand globally, but whether they'll be successful is anyone's guess). - The industry is clearly experiencing near-term pricing pressure as the auction system becomes more prevalent and competitive bidding intensifies; however, if wind is truly cost competitive vs. other forms of electricity generation, and the key players act rationally in the long-run, I don't foresee how Vestas' long-term EBIT margins for new equipment can drop much below 5%. - It appears to me that Vestas has a decent moat based on its leadership in technology and its scale advantage (fixed costs / MW, R&D spending, servicing infrastructure). - What I've read and heard about Vestas' management team is encouraging. Ambitions include maintaining market leadership, keeping the EBIT margin > 10%, achieving positive FCF each year throughout the cycle, double-digit ROIC, and keeping Net Debt / EBITDA , 1.0. Meanwhile, incentives are aligned to those ambitions and capital allocation makes a lot of sense (limiting M&A to bolt-on acquisitions, investing in organic growth through constant improvement of current technologies, and returning excess capital to shareholders via dividends and buybacks). - Although I think consolidated EBIT margins will return to around 10% in both the near-term and over the long-term, at today's price I estimate you're getting a FCF yield of ~7% (2.2% dividend yield + buyback potential of 430 mEUR). Furthermore, you should get revenue growth in the area of 4-6% per annum (blending 3-5% for new equipment and 8-9% for servicing). Finally, you can probably expect some positive multiple expansion over the medium-term (13x seems too low for a business of this quality). All told, I'm projecting a medium-term return of 12-14% per annum. If anyone has some views on the long-term risks / opportunities for the industry, I would love to hear them. I'm particularly interested in everyone's take on: - Whether they think wind energy can compete subsidy free with other forms of electricity generation over the long-term? - If and how you think the U.S. pulling out of the climate change accord will impact the industry and Vestas in particular? - Whether you think U.S. tariffs will impact Vestas? - How you see the phase-out of the Production Tax Credit affecting the industry? - Where you see margins ending up over the long-term? - Whether you're worried about a low-cost producer like Goldwind upsetting industry economics? Thanks. Link to comment Share on other sites More sharing options...
John Hjorth Posted April 24, 2018 Author Share Posted April 24, 2018 Thank you for a really, really great post here, kwilde!, - - - o 0 o - - - Unfortunately, I haven't been able to keep this topic going recently, but I certainly haven't forgotten about it. [Too much going on in IRL.] - - - o 0 o - - - Furthermore: Whoa! - Another Danish CoBF board member - Somehow, your posts so far has skipped my attention. Hereby a very belated welcome. [We aren't that many!] Link to comment Share on other sites More sharing options...
John Hjorth Posted April 24, 2018 Author Share Posted April 24, 2018 Time to detonate a bomb in this topic. [i should have done it just after the VWS AGM, but have been too busy with other things in life.], Tim Bergin [fellow board member TBW here on CoBF] together with I and the Lady of the House attended together the VWS AGM at April 3 2018 in Aarhus, Denmark. I'll cut it to the bone here, and elaborate further about the AGM later in this topic. - - - o 0 o - - - The third speaker among shareholders attending the AGM with questions was Mr. Erik Bomans, partner at deminor, Brussels [Please see attached copy af business card]. Tim and I had been fairly relaxed untill that time, just sitting listening [Tim from time to time with headset provided by the company, providing simultanious translation to English, when somebody spoke Swedish or Danish.] Tim and I "woke up" fairly instant at the same moment, from staying leaned back relaxed, to sitting leaned forward, listening extremely focused on what was said. Mr. Bomans was absolutely straight forward and candid - and perhaps, - to some extent - pretty brutal: He accused from the podium the company of "hiding [material] losses" from it's last down period, when it was near broke and default. Carrying those losses forward, "depreciating them", over time. He was very specific. He mentioned a sub called "Wind Power Invest A/S", not even mentioned as a VWS sub in the financials, where "the whole thing was "burried"". It should be about whole installations of wind power projects not sold - now obsolete, because of technical evolution in efficiency. Tim and I were totally stunned by this information. What happened then next? The VWS CEO Anders Runevad took the word to reply with something really close to this: "Some companies within the group provide losses, some provide profits - the group financials including the financials for the VWS subs are all audited." [<- <me>:"What?!"] Tim and I were almost passing out! - Basically, it was almost ringing for my ears, - however, I think I heard Tim saying something like: "This is the most arrogant answer I have ever heard a CEO giving to a company shareholder!" - - - o 0 o - - - Attached are the 2015 & 2016 financials for this "VWS black sheep". - - - o 0 o - - - What do you think about this? - I certainly need to study it further ... - - - o 0 o - - - Tim, if you read this this, please chim in!offentliggorelse_Wind_Power_Invest_AS_2015.pdfoffentliggorelse_Wind_Power_Invest_AS_2016.pdf Link to comment Share on other sites More sharing options...
Spekulatius Posted April 24, 2018 Share Posted April 24, 2018 Looks like Vestas has a sub for certain projects (of which the balance sheet is shown) that generated fairly heavy losses. The CEO is correct though, if this sub is consolidated (if in fact Vestas is thr majority holder, which seems to be he case there) then this is not a big deal and there is no fraud as far as I can tell. I don’t even think this answer is that arrogant. He should have alluded to what this sub exactly is doing and why it is supposed to turn around (as indicated in thr annual report). Link to comment Share on other sites More sharing options...
John Hjorth Posted April 24, 2018 Author Share Posted April 24, 2018 Looks like Vestas has a sub for certain projects (of which the balance sheet it shown) that generated fairly heavy losses. The CEO is correct though, if this sub is consolidated (if in fact Vestas is thr majority holder, which seems to be he case there) then this is not a big deal and there is no fraud as far as I can tell. I don’t even think this answer is that arrogant. He should have alluded to what this sub exactly is doing and why it is supposed to turn around (as indicated in thr annual report). I strongly disagree with you, Spekulatius, If those project parts [as I understood it, whole windturbines not installed] were worthless years ago, they should have been written down to scrap value, when they were considered obsolete. More analysis needed here, though. To me, what does this mean?: Years past with earnings burdened with "gradually write downs" of obsolete assets, that should have been written down in one shot years ago, implying actually more favorable earnings in recent years, Question about when this "traffic" actually comes to an end. Question about overall candidness of current management [sorry to say, I'm extremely sceptical with Swedish industrialists, based on experience.> Link to comment Share on other sites More sharing options... TBW Posted April 24, 2018 Share Posted April 24, 2018 kwilde, could summary. I see similar fwd returns. I think to address your concerns, LCOE is steadily dropping so tax changes shouldn't matter longer term. What could matter is how this plays out, I expect the revenue to trend upwards given tailwinds, but it could be volatile given shorter term mkt impacts from different regulations. I think margin increase slightly as the company becomes more like a servicing company and near term competitive pressures lessen. I agree it is attractive here, and I have a small position. As for what John was talking about, I haven't had a chance to look deeper so can't really give an opinion yet. Not sure I felt management was arrogant, just that they didn't really answer the question which was direct and making serious accusations. I think John may be right that equipment was obsolete, if it is true. The current management team likely inherited this issue, don't think they created, if there is an issue I am not yet sure either way on this point. This is something that I think needs to be looked into further. Conclusion can go many ways, could actually imply company will be more profitable going forward if the speaker was correct. Or it could just be a fake issue. Link to comment Share on other sites More sharing options... John Hjorth Posted April 24, 2018 Author Share Posted April 24, 2018 Thanks Tim for putting some balance to the topic at hand here. The point here is, that we will [perhaps] never for real know. This - what did I call it before? - "Black sheep" - basically consists of a row of non-consolidated subs [in the meaning of: Not disclosed at the consolidated sub level]... so how does that mess in that sub actually look like, if consolidation for that particular sub group was public? [Which it isen't.] Among other things, I see a Blue sailboat spurting around the world included there. Link to comment Share on other sites More sharing options... Spekulatius Posted April 25, 2018 Share Posted April 25, 2018 Thanks Tim for putting some balance to the topic at hand here. The point here is, that we will [perhaps] never for real know. This - what did I call it before? - "Black sheep" - basically consists of a row of non-consolidated subs [in the meaning of: Not disclosed at the consolidated sub level]... so how does that mess in that sub actually look like, if consolidation for that particular sub group was public? [Which it isen't.] Among other things, I see a Blue sailboat spurting around the world included there. OK, I understand now - the allegation is that the losses in these subs were unrecognized on Vestas balance sheet at that time, which basically is accounting fraud. Deminor is apparently a company specialized on “recovery” and probably trying to make a living on shareholders lawsuits, which is more difficult in Europe than in the US. Apparently, they posted a transcript of this speech on their website: https://drs.deminor.com/en/erik-bomans-deminor-addresses-agm-vestas-3-april-2018/ Link to comment Share on other sites More sharing options... petec Posted April 25, 2018 Share Posted April 25, 2018 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 Link to comment Share on other sites More sharing options... John Hjorth Posted April 25, 2018 Author Share Posted April 25, 2018 Yes, it certainly raises quite some questions, Spekulatius,: Why do two persons [they were two, actually] from this company travel from Brussels to Aarhus to stand up and come with these allegations? Who do they represent? Why does this VWS sub dig a hole every year? [total loss over the years north of DKK 1 B] What is going on in the subs of the sub? [perhaps we can find out - requires time for some work] Why was the answer from VWS CEO Anders Runevad evasive [to say the least]? Link to comment Share on other sites More sharing options... kab60 Posted April 25, 2018 Share Posted April 25, 2018 Wind Invest has been covered in the Danish press and there's even a book about it - I have it on my shelf (but haven't read it). Deminor are targetting Vestas - somewhat rightfully I think - but that relates to stuff going back to former management. As an investor I couldn't care less. The investment thesis by kwilde is pretty solid, I just have one thing to add which is somewhat difficult to quantify; Vestas had 40 pct. of the US market last year, and the Company is very strong in North America as well as Europa. However, when one looks 4-5 five years ahead, forecasts expects US volumes to be cut in more than half, and Europa is already pretty mature. A lot of the growth is expected in Latin America as well as Asia Pacific, where Vestas aren't quiet as strong, and Siemens Gamesa has a better position. Now, forecasts are always way off, and at this valuation I could live with the uncertainty, just thought it was relevant to point out. Link to comment Share on other sites More sharing options... kwilde Posted April 25, 2018 Share Posted April 25, 2018 Hi Guys, Thank you for the responses, they are much appreciated. John…I had no knowledge of the account used for hiding losses. With this being the first I’ve heard of it, and not being an accountant, I’m still trying to wrap my head around it. So, am I correct in assuming these are losses inherited / carried over from the previous management team? If so, what would have been the correct way of disclosing the losses and reporting them to the shareholders? Do you see it as a case of correct accounting, but poor disclosure / transparency? TBW…I have a similar take on the situation; ie. short-term volatility, but over the long-term, new equipment sales should grow. I also agree that growth in servicing revenues should buoy the company’s margins as they leverage their servicing infrastructure. Spekulatius…thanks for the link to the Deminor article, that helped explain the allegations. Petec…thanks for the question. My statement was assuming that “the key players act rationally in the long-run, I don't foresee how Vestas' long-term EBIT margins for new equipment can drop much below 5%.” My line of thinking was that Vestas currently has an EBIT margin advantage over its next biggest global competitors (ie. GE & Siemens) of around 4%, and that a rational management team is unlikely to sell their products that represent >85% of their sales at a loss in order to grow their service business that represents <15% of its sales. Furthermore, the following excerpt is from Siemens’ 2017 Annual Report: “Within the framework of One Siemens, we aim to achieve margins through the entire business cycle that are comparable to those of our relevant competitors. Therefore, we have defined profit margin ranges for our industrial businesses, which are based on the profit margins of the respective relevant competitors. Profit margin is defined as profit of the respective business divided by its revenue.” They then go on to outline that their target margin range for Siemens Gamesa Renewable Energy is 5 – 8 %. Finally, my thinking was deeply rooted in having studied the elevator industry, an industry that I think has a similar operating model. For example, KONE (OHEL:KNEBV) has new equipment EBIT margins of ~10%, maintenance EBIT margins of ~25%, and modernization EBIT margins of 7.5%. Otis, Schindler, and Thyssen Krupp all have lower EBIT margins than KONE, but to my knowledge, none of them sell their equipment at negative EBIT margins. Anyway, so while I can’t be 100% confident that competitors won’t sell their equipment at negative EBIT margins in order to grow the service business, I didn’t think it was the probable outcome. Which industries running a ‘razor/razorblade’ model that run losses on the initial sale do you think are most applicable? I’d like to have a look at them to see what kind of negative margins they are selling at. Kab60…do you have the source showing US forecasts projecting volumes cut in half within 4-5 years? Thanks, Kevin Link to comment Share on other sites More sharing options... kab60 Posted April 25, 2018 Share Posted April 25, 2018 Kone is what Vestas are aspiring to be. I agree it's unlikely Ebit margins are gonna plummet absent a major demand plunge. There's basically 3 tier 1 players (Vestas, Siemens Gamesa and GE), and GE is mostly domestic. Siemens Gamesa has a long term margin target of 10 pct., which is around Vestas' level, so I think they'll behave. What I hear from industry sources is that Siemens Gamesa has been discounting heavily especially last year because the order book was very low, so they basically bid for projects they won't make money on, but which will help them cover their fixed costs. That should probably change when integration is further along; they have quiet a bit of issues. Here's a free demand side analysis; https://fti-intelligencestore.com/index.php?route=download/main&download_id=160 There's a graph on the expected size of the US market (but I don't believe the numbers are listed, so take "cut in half" with a grain of salt). And take any forecast with a grain (a ton) of salt. Another point - I believe there's still room to reduce prices quiet a bit (thus less need for subsidies). The new 4 MW platforms aren't much more expensive than the current 2 MW platforms - it's mainly bigger blades and towers, so LCOE drops a lot. Link to comment Share on other sites More sharing options... John Hjorth Posted April 25, 2018 Author Share Posted April 25, 2018 Kevin, I have started to work on it a bit - it will be on/off over some days - it's actually a bit cumbersome. Time will tell what I bump into of dead ends etc. I'm also thinking about it with regard to dimensions and materiality, based on what kab60 has posted. I just don't like what I have experienced at the AGM and what I've seen - attached to one of my posts in this topic - about it. Link to comment Share on other sites More sharing options... kab60 Posted April 25, 2018 Share Posted April 25, 2018 Kevin, I have started to work on it a bit - it will be on/off over some days - it's actually a bit cumbersome. Time will tell what I bump into of dead ends etc. I'm also thinking about it with regard to dimensions and materiality, based on what kab60 has posted. I just don't like what I have experienced at the AGM and what I've seen - attached to one of my posts in this topic - about it. I wouldn't worry about it. It's obvious that current management is tired of Deminor and talking about issues inherited from former management which almost bankrupted the Company. That said, I agree their communication could be better. Link to comment Share on other sites More sharing options... Spekulatius Posted April 26, 2018 Share Posted April 26, 2018 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. Link to comment Share on other sites More sharing options... kwilde Posted April 26, 2018 Share Posted April 26, 2018 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. Link to comment Share on other sites More sharing options... John Hjorth Posted April 26, 2018 Author Share Posted April 26, 2018 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.] Link to comment Share on other sites More sharing options... John Hjorth Posted April 26, 2018 Author Share Posted April 26, 2018 ... 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. Link to comment Share on other sites More sharing options... Spekulatius Posted April 26, 2018 Share Posted April 26, 2018 ... 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. Link to comment Share on other sites More sharing options... John Hjorth Posted April 27, 2018 Author Share Posted April 27, 2018 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. Link to comment Share on other sites More sharing options... kwilde Posted April 27, 2018 Share Posted April 27, 2018 Spekulatius, Regarding: 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. Link to comment Share on other sites More sharing options... Spekulatius Posted April 28, 2018 Share Posted April 28, 2018 Spekulatius, Regarding: 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. Link to comment Share on other sites More sharing options... kwilde Posted May 2, 2018 Share Posted May 2, 2018 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. Link to comment Share on other sites More sharing options... 2 months later... John Hjorth Posted July 20, 2018 Author Share Posted July 20, 2018 Attached are the 2017/18 financials for MHI Vestas Offshore Wind A/S.offentliggorelse_MHI_Vestas_Offshore_Wind_AS_2017-18.pdf Link to comment Share on other sites More sharing options... Prev 1 2 3 Next Page 2 of 3 Create an account or sign in to comment You need to be a member in order to leave a comment Create an account Sign up for a new account in our community. It's easy! Register a new account Sign in Already have an account? Sign in here. Sign In Now Share More sharing options... Followers 0
TBW Posted April 24, 2018 Share Posted April 24, 2018 kwilde, could summary. I see similar fwd returns. I think to address your concerns, LCOE is steadily dropping so tax changes shouldn't matter longer term. What could matter is how this plays out, I expect the revenue to trend upwards given tailwinds, but it could be volatile given shorter term mkt impacts from different regulations. I think margin increase slightly as the company becomes more like a servicing company and near term competitive pressures lessen. I agree it is attractive here, and I have a small position. As for what John was talking about, I haven't had a chance to look deeper so can't really give an opinion yet. Not sure I felt management was arrogant, just that they didn't really answer the question which was direct and making serious accusations. I think John may be right that equipment was obsolete, if it is true. The current management team likely inherited this issue, don't think they created, if there is an issue I am not yet sure either way on this point. This is something that I think needs to be looked into further. Conclusion can go many ways, could actually imply company will be more profitable going forward if the speaker was correct. Or it could just be a fake issue. Link to comment Share on other sites More sharing options...
John Hjorth Posted April 24, 2018 Author Share Posted April 24, 2018 Thanks Tim for putting some balance to the topic at hand here. The point here is, that we will [perhaps] never for real know. This - what did I call it before? - "Black sheep" - basically consists of a row of non-consolidated subs [in the meaning of: Not disclosed at the consolidated sub level]... so how does that mess in that sub actually look like, if consolidation for that particular sub group was public? [Which it isen't.] Among other things, I see a Blue sailboat spurting around the world included there. Link to comment Share on other sites More sharing options...
Spekulatius Posted April 25, 2018 Share Posted April 25, 2018 Thanks Tim for putting some balance to the topic at hand here. The point here is, that we will [perhaps] never for real know. This - what did I call it before? - "Black sheep" - basically consists of a row of non-consolidated subs [in the meaning of: Not disclosed at the consolidated sub level]... so how does that mess in that sub actually look like, if consolidation for that particular sub group was public? [Which it isen't.] Among other things, I see a Blue sailboat spurting around the world included there. OK, I understand now - the allegation is that the losses in these subs were unrecognized on Vestas balance sheet at that time, which basically is accounting fraud. Deminor is apparently a company specialized on “recovery” and probably trying to make a living on shareholders lawsuits, which is more difficult in Europe than in the US. Apparently, they posted a transcript of this speech on their website: https://drs.deminor.com/en/erik-bomans-deminor-addresses-agm-vestas-3-april-2018/ Link to comment Share on other sites More sharing options...
petec Posted April 25, 2018 Share Posted April 25, 2018 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 Link to comment Share on other sites More sharing options...
John Hjorth Posted April 25, 2018 Author Share Posted April 25, 2018 Yes, it certainly raises quite some questions, Spekulatius,: Why do two persons [they were two, actually] from this company travel from Brussels to Aarhus to stand up and come with these allegations? Who do they represent? Why does this VWS sub dig a hole every year? [total loss over the years north of DKK 1 B] What is going on in the subs of the sub? [perhaps we can find out - requires time for some work] Why was the answer from VWS CEO Anders Runevad evasive [to say the least]? Link to comment Share on other sites More sharing options...
kab60 Posted April 25, 2018 Share Posted April 25, 2018 Wind Invest has been covered in the Danish press and there's even a book about it - I have it on my shelf (but haven't read it). Deminor are targetting Vestas - somewhat rightfully I think - but that relates to stuff going back to former management. As an investor I couldn't care less. The investment thesis by kwilde is pretty solid, I just have one thing to add which is somewhat difficult to quantify; Vestas had 40 pct. of the US market last year, and the Company is very strong in North America as well as Europa. However, when one looks 4-5 five years ahead, forecasts expects US volumes to be cut in more than half, and Europa is already pretty mature. A lot of the growth is expected in Latin America as well as Asia Pacific, where Vestas aren't quiet as strong, and Siemens Gamesa has a better position. Now, forecasts are always way off, and at this valuation I could live with the uncertainty, just thought it was relevant to point out. Link to comment Share on other sites More sharing options...
kwilde Posted April 25, 2018 Share Posted April 25, 2018 Hi Guys, Thank you for the responses, they are much appreciated. John…I had no knowledge of the account used for hiding losses. With this being the first I’ve heard of it, and not being an accountant, I’m still trying to wrap my head around it. So, am I correct in assuming these are losses inherited / carried over from the previous management team? If so, what would have been the correct way of disclosing the losses and reporting them to the shareholders? Do you see it as a case of correct accounting, but poor disclosure / transparency? TBW…I have a similar take on the situation; ie. short-term volatility, but over the long-term, new equipment sales should grow. I also agree that growth in servicing revenues should buoy the company’s margins as they leverage their servicing infrastructure. Spekulatius…thanks for the link to the Deminor article, that helped explain the allegations. Petec…thanks for the question. My statement was assuming that “the key players act rationally in the long-run, I don't foresee how Vestas' long-term EBIT margins for new equipment can drop much below 5%.” My line of thinking was that Vestas currently has an EBIT margin advantage over its next biggest global competitors (ie. GE & Siemens) of around 4%, and that a rational management team is unlikely to sell their products that represent >85% of their sales at a loss in order to grow their service business that represents <15% of its sales. Furthermore, the following excerpt is from Siemens’ 2017 Annual Report: “Within the framework of One Siemens, we aim to achieve margins through the entire business cycle that are comparable to those of our relevant competitors. Therefore, we have defined profit margin ranges for our industrial businesses, which are based on the profit margins of the respective relevant competitors. Profit margin is defined as profit of the respective business divided by its revenue.” They then go on to outline that their target margin range for Siemens Gamesa Renewable Energy is 5 – 8 %. Finally, my thinking was deeply rooted in having studied the elevator industry, an industry that I think has a similar operating model. For example, KONE (OHEL:KNEBV) has new equipment EBIT margins of ~10%, maintenance EBIT margins of ~25%, and modernization EBIT margins of 7.5%. Otis, Schindler, and Thyssen Krupp all have lower EBIT margins than KONE, but to my knowledge, none of them sell their equipment at negative EBIT margins. Anyway, so while I can’t be 100% confident that competitors won’t sell their equipment at negative EBIT margins in order to grow the service business, I didn’t think it was the probable outcome. Which industries running a ‘razor/razorblade’ model that run losses on the initial sale do you think are most applicable? I’d like to have a look at them to see what kind of negative margins they are selling at. Kab60…do you have the source showing US forecasts projecting volumes cut in half within 4-5 years? Thanks, Kevin Link to comment Share on other sites More sharing options...
kab60 Posted April 25, 2018 Share Posted April 25, 2018 Kone is what Vestas are aspiring to be. I agree it's unlikely Ebit margins are gonna plummet absent a major demand plunge. There's basically 3 tier 1 players (Vestas, Siemens Gamesa and GE), and GE is mostly domestic. Siemens Gamesa has a long term margin target of 10 pct., which is around Vestas' level, so I think they'll behave. What I hear from industry sources is that Siemens Gamesa has been discounting heavily especially last year because the order book was very low, so they basically bid for projects they won't make money on, but which will help them cover their fixed costs. That should probably change when integration is further along; they have quiet a bit of issues. Here's a free demand side analysis; https://fti-intelligencestore.com/index.php?route=download/main&download_id=160 There's a graph on the expected size of the US market (but I don't believe the numbers are listed, so take "cut in half" with a grain of salt). And take any forecast with a grain (a ton) of salt. Another point - I believe there's still room to reduce prices quiet a bit (thus less need for subsidies). The new 4 MW platforms aren't much more expensive than the current 2 MW platforms - it's mainly bigger blades and towers, so LCOE drops a lot. Link to comment Share on other sites More sharing options...
John Hjorth Posted April 25, 2018 Author Share Posted April 25, 2018 Kevin, I have started to work on it a bit - it will be on/off over some days - it's actually a bit cumbersome. Time will tell what I bump into of dead ends etc. I'm also thinking about it with regard to dimensions and materiality, based on what kab60 has posted. I just don't like what I have experienced at the AGM and what I've seen - attached to one of my posts in this topic - about it. Link to comment Share on other sites More sharing options...
kab60 Posted April 25, 2018 Share Posted April 25, 2018 Kevin, I have started to work on it a bit - it will be on/off over some days - it's actually a bit cumbersome. Time will tell what I bump into of dead ends etc. I'm also thinking about it with regard to dimensions and materiality, based on what kab60 has posted. I just don't like what I have experienced at the AGM and what I've seen - attached to one of my posts in this topic - about it. I wouldn't worry about it. It's obvious that current management is tired of Deminor and talking about issues inherited from former management which almost bankrupted the Company. That said, I agree their communication could be better. Link to comment Share on other sites More sharing options...
Spekulatius Posted April 26, 2018 Share Posted April 26, 2018 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. Link to comment Share on other sites More sharing options...
kwilde Posted April 26, 2018 Share Posted April 26, 2018 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. Link to comment Share on other sites More sharing options...
John Hjorth Posted April 26, 2018 Author Share Posted April 26, 2018 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.] Link to comment Share on other sites More sharing options...
John Hjorth Posted April 26, 2018 Author Share Posted April 26, 2018 ... 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. Link to comment Share on other sites More sharing options...
Spekulatius Posted April 26, 2018 Share Posted April 26, 2018 ... 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. Link to comment Share on other sites More sharing options...
John Hjorth Posted April 27, 2018 Author Share Posted April 27, 2018 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. Link to comment Share on other sites More sharing options...
kwilde Posted April 27, 2018 Share Posted April 27, 2018 Spekulatius, Regarding: 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. Link to comment Share on other sites More sharing options...
Spekulatius Posted April 28, 2018 Share Posted April 28, 2018 Spekulatius, Regarding: 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. Link to comment Share on other sites More sharing options...
kwilde Posted May 2, 2018 Share Posted May 2, 2018 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. Link to comment Share on other sites More sharing options...
John Hjorth Posted July 20, 2018 Author Share Posted July 20, 2018 Attached are the 2017/18 financials for MHI Vestas Offshore Wind A/S.offentliggorelse_MHI_Vestas_Offshore_Wind_AS_2017-18.pdf Link to comment Share on other sites More sharing options...
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