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Better profitability and full order book -- No surprises from Vestas

Vestas will achieve its projected turnover of EUR 4.5 billion this year and by all accounts also its 7-9% profit margin. The question is when and how Vestas, with ongoing component-supply bottlenecks, will start raising its market share from the 28% achieved in both 2005 and 2006 to the 35% it is targeting already next year. For the time being, delays of up to 15 months for key components continues well into 2008. That costs money, admits Vestas' management.

Adding to its difficulties in securing components, Vestas predicts that global growth of the wind turbine market -- 75% of which is supplied by the five top suppliers -- will attract new competitors. But the target for 35% market share does have lowest priority. "Profitability is the core of our strategy plan, The Will to Win," says management in its annual report for 2006, released on March 20.

That Vestas has already sold nearly all its production in 2007 and can with confidence state what both turnover and profit will be was the main news of the 2006 report. Revenues last year reached EUR 3.85 billion, providing an EBIT margin of 5.23%, or profits of EUR 201 million. In 2005, the company reported a deficit of EUR 116 million and a negative EBIT of 3.2%.

Vestas reports orders received for EUR 4 billion at the close of the year, to be delivered to a market that the company refers to as "overheated." The higher turbine prices introduced in 2005, together with improved control of prices and delivery terms, is Vestas' guarantee that last year's orders will be profitable. It shipped 4313 MW of capacity in 2006, a 33% increase on the year before but not enough to raise its market share.

The company secured itself economically by doubling the share of supply-only deliveries from 10% of revenue in 2005 to 20% in 2006. In this way the company avoids potential "significant unknown" economic risk associated with installation, foundations, and other infrastructure, it says.

That is not to say that Vestas' problems are behind it. While new factories, which together can turn out more than 1000 turbines a year, are planned or under construction in China, the US and Europe, the continuing shortage of key components of sufficient quality means that, "Vestas currently has significant unutilised production capacity."

Growth bottleneck

Component shortages will continue this year, says CEO Ditlev Engel. "More professional collaboration with many suppliers is necessary in order to improve execution ability of both parties," says management, which is focussing on "strategic framework agreements" to facilitate long term planning for increasing production capacity. "Vestas generally believes that it will take a few years before the wind power industry will be able to meet global demand. Shortage of specialised labour represents a major bottleneck to growth."

In future, Vestas is choosing to let its service department form a larger part of its business. The steady decline in customer satisfaction over the past five years has been halted, with a single percentage point increase in Vestas' "loyalty index" in 2006, from 43% to 44%. The index is based on a survey which asks customers to evaluate Vestas as a partner and supplier and compare the company "with other market players." The survey result was "unsatisfactory," says management, which expects an increase in customer satisfaction this year. The company also reports a 22% drop in the frequency of accidents among Vestas' 12,300 employees and the same drop in the number of sick leave days. Vestas employed 1700 new staff in 2006 and expects to take on about the same number this year.

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