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Into profit in Europe but not in America -- Vestas' first quarter

In the first three months of 2006 Vestas turned loss into profit. One of the methods in use is higher turbine prices -- and prices have been raised again for deliveries in 2007 and 2008, without reducing interest in Vestas' products, assures CEO Ditlev Engel. These were just some of news items to come out of Vestas' report to the Copenhagen Stock Exchange for the first three months of the year, the first time it has presented a quarterly statement.

Despite Vestas' recently announced decision to exercise more caution in giving competitors too much information, the report contains details of which markets Vestas earns money on and which markets the company has sold and continues to sell turbines to at a loss. Last year, US revenues of EUR 56.8 million in the first quarter of 2005 resulted in a loss of EUR 11.2 million. This year, US revenues grew to EUR 90.6 million, but still resulted in a loss of EUR 6.8 million.

In comparison, wind turbines sold for EUR 288.2 million in Europe during the first three months of the year realised a profit of EUR 8.4 million, while profit on sales of EUR 236.5 million in Asia and the Far East was EUR 4.1 million. The pattern is in marked contrast to the first quarter of 2005, when turbines were sold at a loss in both Europe and the Far East.

The geographic picture of the company's quarterly financial statement provides part of the explanation for why Vestas is primarily focusing on parts of the world outside America. Of the EUR 3.5 billion of confirmed orders on its books, 53% are for deliveries in Europe, 38% for North America and 9% for the rest of the world, which first and foremost means India, China and Australia.

In a comparison of the first quarter of 2005 with that of 2006, Vestas' revenues grew by 44% from EUR 495 million to EUR 715 million; earnings before interest and tax (EBIT) were improved to EUR 6 million in 2006, from a loss of EUR 37 million last year.

One of the company's goals is to smooth out seasonal business fluctuations, which have traditionally meant a slow first half of the year and a highly active second half. Vestas appears to have already turned the tide, raising the first quarter's share of budgeted annual turnover from 15% to 19%. In percentage terms, profit before tax has improved from minus 7.4% last year to a plus of 0.8%. Vestas' management refers to the change as a significant improvement and maintains its projection for an annual turnover this year of EUR 3.6-3.8 billion and a profit before tax and extraordinary items of 4-7%.

But dangers still lurk, warns Vestas. "The most important risk factors are still related to component shortage, warranty provisions and the outcome of pending patent disputes. To this should be added risks related to the continued depreciation of the USD exchange rate and rising raw materials prices."

On a more positive note, Vestas reports that rising oil prices have stimulated interest in wind power, making it an increasingly attractive alternative to conventional oil and gas based energy technologies. The trend, says the company, strengthens Vestas' "Wind, Oil and Gas" vision of the future.

But the increased demand for turbines is continuing to give component supply problems, says Vestas management, without suggesting what the solution might be, particularly when its current contracts for gearbox delivery come to a close in a couple of years. Both Vestas' major gearbox suppliers, Hansen and Winergy, are now owned by competing wind turbine supply companies, Suzlon and Siemens. When that time comes, Vestas is still budgeting for a profit margin of 10% of turnover.

Another unknown is whether the cash set aside to cover warranty provisions will be enough, although experience to date suggests it will be, says Vestas' management. But the company also stresses that warranty provisions are based on estimates. "The actual consumption of warranties may vary considerably from these estimates -- positively or negatively -- as the estimated costs for remedying type faults as well as timely component deliveries from suppliers."

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