Wind Power: A New Service Industry

As companies compete on the pricing of wind turbines, the providing of service is becoming increasingly important in generating profits.

Apr 23, 2014 at 9:40AM


Source: Vestas Wind Systems

Unlike the solar industry, which has numerous manufacturers of solar panels, the wind industry has only a few manufacturers of wind turbines. Of this select group, Vestas Wind Systems (NASDAQOTH:VWDRY), a global leader in the wind industry, has just finished a two-year restructuring process, which management believes has "transformed Vestas into a more lean, flexible and scalable company much better prepared for the future challenges of an increasingly dynamic and competitive wind power industry."

Aside from carrying out large-scale reductions in its workforce -- the company has reduced its staff by 32% since 2011 -- Vestas has identified four areas in which it plans to focus its efforts moving forward:

  1. Grow profitability in mature and emerging markets
  2. Capture full potential of the service business
  3. Reduce levelized cost of energy
  4. Improve operational excellence

As the company embarks on its new strategy, investors would be wise to keep an eye on all four of these areas, but, for now, let's take at look at just one of these items: the service segment. In its annual report, management called attention to the segment as "already a significant source of revenue and profitability ... the service area will become an increasingly important element of our business."

The wind turbine segment
Vestas operates in two segments. One of the these is the wind turbine segment. Growing nearly 60%, order intake growth was not a problem for Vestas in 2013. The company attributes the 5,964 MW of orders, 2,226 more than the 3,738 MW in 2012, to increased orders in the United States and new markets. Although this would seem to be a boon for the company, the average selling price for the turbines decreased 4% over the levels in 2012; subsequently, revenue from this segment dropped from €6.298 billion in 2012 to €5.092 billion in 2013. The future for the wind turbine segment doesn't seem to be faring much better. Although the backlog stands at €6.8 billion, this actually represents a decrease of €300 million.

A service industry
The other revenue stream for the company is its service segment. This segment has seen impressive growth over the past five years, and management has high hopes for its growth in the future. Since earning €504 million in 2009, the service segment revenue has grown nearly 90% to €954 million in 2013.

The future looks promising for the service segment as well. Despite the drop in backlog for the wind turbine segment, the backlog for the service segment stands at €6.7 billion -- an increase of €1.4 billion. Management contends that the service segment will drive the company's growth moving forward. It bases this on the fact that new wind turbine orders are combined with a service agreement which typically runs for five or ten years. This is illustrated by two deals in which the company has recently entered. First, the company secured a 194 MW order with EDF Renewable Energy for a project in the Texas panhandle; the order comes with a five-year service contract. Also, the company announced its first deal in Italy: a 48 MW deal with Asja Ambiente Italia, which includes a 10-year service contract.

Unlike the wind turbine segment, the service segment saw revenue growth in the past year, increasing from €886 million in 2012 to €954 million in 2013. Management contends that "with the trend going toward more sophisticated service offerings, revenue per service MW has increased during the last five years." Elaborating on its future strategy for the segment, management stated that it is also looking "to keep our service agreement renewal rate high and develop service offerings to recapture lost service business."

Another industry player
GE is one of the other major producers of wind turbines and a provider of wind power related services. In the first quarter of 2014, GE's power and water segment, in which its wind division operates, grew revenue 14%. The company partially credits this with the 646 turbines it shipped -- an improvement over the 345 turbines it shipped in the first quarter of 2013. On the other hand, the service revenue was down 5%. The comparison is fairly tenuous since Vestas is a pure-wind play while GE is a conglomerate that has its hand in a number of different energy endeavors. Nonetheless, the comparison is interesting.

A Fool's final take...
Between the downturn in the wind turbine segment revenue and the increase in the service segment revenue, Vestas recognized a 16% drop in revenue from €7,216 million in 2012 to €6,084 million in 2013. Despite the decrease in top-line growth, though, Vestas managed to substantially grow EBIT from €4 million in 2012 to €211 million in 2013.

It is clear that the company is counting on the service segment to produce profits for the company as it reduces its average selling price on its turbines; therefore, investors interested in Vestas would be wise to keep an eye on the quarterly and annual figures from the service segment.

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Scott Levine has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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