New profit warning triggers Vestas credibility crisis

DENMARK: Vestas issued its second profit warning in three months yesterday as it revealed development costs of €125 million largely associated with the development of its V112-3.0MW turbine.

Vestas V90 3MW turbines

The turbine manufacturer's share price plummeted this morning by 18.4% to DKR 56.80 (€7.53) following Tuesday evening's announcement that it hoped to only break even for 2011, down from the €250 million profit predicted by the firm in October 2011. Previously Vestas had predicted a 7% profit margin for 2011 equalling €490 million.

Weakening sales forecasts for 2011 are behind the revised profit estimates. Vestas expects 2011 revenue to be €6 billion, down from previous predictions of €6.4 billion and €7 billion.

Vestas said it had reduced its profit estimate for 2011 from €255 million to zero for two key reasons:

· €130 million of profits will now not be recognised until 2012 as they are tied to projects under construction that have been hit by delays;

· €125 million in higher-than-expected development costs across several technologies.

Of the previously unforeseen development costs, Vestas said that €100m "predominantly related to" its V112-3.0MW turbine and its V80-2.0MW GridStreamer turbine.

"The development costs of industrialisation for these new technologies are now expected to be €70m higher than originally anticipated due to wrongly produced items, additional R&D costs and production stoppage at the suppliers as well as at Vestas," said the company's financial statement.

"To this should be added €30m covering additional installation costs at the sales units, raw materials and scrap of items in the fourth quarter of 2011." The remaining €25 million related to product and project write-downs.

The markets reacted angrily to yesterday's profit warning, coming as it did just days after the firm had confirmed seven key orders that would put it on track to meet its 2011 order target.

Equity research firm Bryan, Garnier & Co issued an analysts' note saying that Vestas' management had lost all credibility. "As of H1 2011, we were encouraged by the management's positive (in our view) attempts to improve its communication and treat the market's confidence problems," said the note.

"Those efforts are more than annihilated by these two warnings in a row. Also adding to the balance, (i) a very bad track record in terms of execution (unsuccessful ramp-up of a facility in Germany and an inability to deliver projects on time) and (ii) cost management (very late discovery of cost overruns of €125m). This is too many disappointments for a company already lacking investor credibility."

Jakob Pedersen of Sydbank said to a Danish television news programme: "It's an extremely negative announcement and confidence is again blown completely away."

Vestas chairman Bent Erik Carlen told Danish newspaper Jutland Post: "It's embarrassing for us all because it's definitely not something we like, but we must take note and learn from it."