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Analysts question bright forecast -- New Vestas believes it can change loss into profit this year

Can the world's largest wind company continue to sit on a third of the world market for turbines -- and earn money from doing so? That is the key question for the merged Vestas/NEG Micon concern after publication last month of what was the last set of separate annual accounts for the two former competitors, along with a shared prognosis for 2004.

The stock market's initial reaction to the poorest Vestas annual result in five years was a 5% increase in share price, though by the end of the day it was just 1% higher and a week later the price had fallen 8.3% from its March 17 level.

The new Vestas, a going concern from March 4, met its target for world market share in 2003 with a slight increase in turnover of EUR 2.36 billion compared with EUR 2.24 billion in 2002. First and foremost, however, the merged company expects turnover to increase already this year to EUR 2.7-2.8 billion, with a profit margin of 5%, unless exchange rates or market turbulence change the outlook. In 2003 the combined result of the two companies was a loss of EUR 13 million before tax.

Seen in isolation, the former Vestas turned a profit before tax of EUR 54 million in 2003 on a turnover of EUR 1.65 billion, representing an increase in turnover of 19% on 2002's EUR 1.39 billion. Profit in 2002 was EUR 45 million. Vestas lost market share in the US, just over half of which went to GE Wind, but increased its hold in other main markets, including that of Germany, and held on to 22.6% of the global market.

For its part, NEG Micon recorded a turnover of EUR 720 million in 2003, a decrease of 17% compared with 2002 revenues of EUR 839 million. Its share of the world market fell to just over 10% from around 14% in 2002. NEG Micon's end year result was a loss of EUR 66 million compared with a profit in 2002 of EUR 28 million. The company reports that orders flowed in as expected in 2003, but too late in the year to influence annual results.

Prospects

For 2004 the merged concerned says it has orders home for five months of production and expects a profit margin of 7% on the expected increase in turnover, though this will be reduced by extraordinary costs associated with integrating the two companies.

Company leaders are well aware that investors, analysts and the public in general will be keeping a close watch on their ability in the first year of the merger to transform a loss of EUR 13 million to a profit of EUR 135-140 million. Vestas is already warning that the first half-year's accounts will be negatively impacted by the stockpiling needed to cope with the seasonal swings of the wind business, when typically two-thirds of turnover is achieved in the second half of the year.

Vestas reports that the US market, even if wind's production tax credit (PTC) is reinstated, will have little impact on its turnover in 2004. The market uncertainty caused by the on-off PTC -- which adds $0.018 to the value of each kilowatt hour of wind production -- is exacerbated by the weak dollar. The new Vestas is discussing a US wind turbine production factory to avoid exchange rate penalties.

Disadvantages of the merger have, to a limited degree, been revealed in the necessary revision of sales forecasts for specific markets, where both companies had expected to receive orders for the same projects. A few potential customers have also turned to a third supplier following the merger.

Merger benefits are to be achieved already this year, among other things, through the dismissal of 400-500 workers, primarily in northern Europe, including Denmark, where Vestas cut its workforce by 500 last year.

Firing staff

Danish jobs could be hit hard again, it seems. Announcement of the round of dismissals is despite transferring assembly of the Vestas V80 2 MW turbine from the company's works at Husum in Germany to Denmark at the end of last month, a decision reported in the local Husum press. And the 60 employees, out of 600 in Husum, on the assembly line for the V80, will not be fired, Andreas Eichler of Vestas Deutschland reportedly told the Husumer Nachrichtens. Instead they will be transferred to jobs in service and maintenance and are apparently not among the 400-500 to be fired. Eichler also told the newspaper that the Vestas works in Husum, set up in 1986, is to be expanded into a logistics centre and that blade production for the Vestas V90 3 MW turbines will now be located in Denmark.

In contrast to the staff reductions in northern Europe, Vestas will increase its global workforce by 900. The new Vestas employs more than 9000 people today.

While relieved that Vestas did not downgrade its expectations for 2004, stock markets analysts still feel the company is far from being out of the woods in managing a successful merger. Among immediate reaction to publication of the annual results, Merrill Lynch in London rated Vestas shares as "high risk," said Vestas is unlikely to meet its 2004 targets, and retained its recommendation to investors to sell their shares, saying management's targets for this year are "far too high." According to Merrill Lynch, a fall in revenues is more likely than the 10% increase forecast by Vestas.

From New York, Bear Stearns was a little less negative, saying it sees "Vestas as a winner in the longer term, highly attractive wind power market" and that it does "believe that management's growth and margin outlook can be achieved." But it downgraded its rating of Vestas' shares to "peer perform" from "outperform," pointing out that both NEG Micon and Vestas failed to meet their projections for 2003, that Vestas reported lower than expected earnings for the year, that the share price already reflects "shorter term catalysts" such as an extension of the US PTC," and that the intended capital increase will dilute Vestas earnings by share.

The generally dim view of analysts could give Vestas problems when the company turns to the stock market in May or June to raise the targeted EUR 268 million to give it the capital strength required to be a global player competing against the likes of General Electric and Mitsubishi.

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