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Consolidation before leap overseas -- Gamesa braces for next growth spurt with quieter year

Spain's Gamesa was expecting to finish 2004 having sold 1600 MW, the second largest annual volume among the world's wind turbine makers, says the company, up from fourth place in 2003. A cracking good year was also had by its project development division, Gamesa Energía, on the back of extraordinary earnings after completing its "stock reduction" phase of the past two years.

Spain's Gamesa, both a manufacturer of turbines and a wind project developer, was expecting to finish 2004 having sold 1600 MW, the second largest annual volume among the world's wind turbine makers, says the company, up from fourth place in 2003. A cracking good year was also had by its project development division, Gamesa Energía, on the back of extraordinary earnings after completing its "stock reduction" phase of the past two years. During this period it sold 1325 MW of completed wind plant, 634 MW of these in 2004, while building 845 MW, 445 MW in 2004.

This year, however, will be one of consolidation, it says. Having sold-off its stock of finished projects, the extraordinary income of the past two years is over. For Gamesa, a year of consolidation means a less meteoric growth rate for the group of 11% on "recurrent" growth (without extraordinary items), compared with 13% in 2004 and 28% in 2003.

In 2005 it expects to sell 1830 MW of turbines and build 612 MW of projects, several of these for a range of major utilities. The indication is that two-thirds of turbine sales will be to customers outside the company and one-third to its development division. Although the projection for turbines sales represents a 20% growth in revenues, to EUR 1.4 billion, and a 10% increase in profits, both are still down on the turbine division's revenue growth for 2004 of 37% and estimated hike in profits of 15%.

For the stock market this was disappointing, especially with CEO Iñaki Gandasegui admitting at November's shareholder meeting that profits for 2004 of a projected EUR 222 million were 3.6% down on its January 2004 forecast. Though the 2004 profit for the group is still up by 10% on 2003, for 2005 it is projected to shrink for the first time, to EUR 214 million, a drop of 4%. The group's poorly performing aeronautics division, about 17% of Gamesa's business, is the major culprit for shrinking profit forecast, but wind business consolidation plays its part.

Shareholders are used to Gamesa outperforming everybody, including its own projections. The company has produced a compound annual growth rate of 49% from 2000 to 2004. News of a year of consolidation was apparently not what the market wanted to hear. Gamesa's share price dropped 8.23% over a month in which only two other traders on Spain's Ibex prime-shares list lost value.

The big leap

The consolidation, says Gamesa, is in preparation "for the jump into international markets" and its second growth phase of 15% a year during 2006-2008. It sees its domestic market steadily shrinking. In 2004, Spain accounted for 76% of its turbine sales, compared with 99% in 2002. This year, Gamesa expects Spain's share to drop to 63%, with Germany, Italy and Portugal increasing to 18% from 14% last year, and the rest of the world -- mainly Asia and perhaps a 62 MW sale in the US -- taking 19% of its projected 1830 MW of turbine sales this year.

Gamesa says it has 15,000 MW of wind projects in its development pipeline, all of them on land. The offshore market is currently not in focus. The strategy is to concentrate on the highest growth markets, both for project development and sales, and to secure long term framework agreements for turbine sales with top international players. For a vertically integrated, publicly traded company, Gamesa sees this level of visibility as an essential ingredient to its business model.

Also seen as essential is building up its overseas business, which it is tackling with three regional structures; North America, Germany (including immediate neighbours) and Rest of World. Other overseas markets, such as France, the UK and southern European countries, will be run from Spain. Gamesa will complete its US manufacturing facility this year and is considering building one in China in 2006. It clearly believes that to maintain its reputation as the world's most profitable wind company, it has to move out of Spain.

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