Being number one remains a top priority -- Vestas boss produces his best half year result yet

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With production efficiencies and better product pricing creating bigger profits at Vestas, attention is now focused on just how the world's largest wind turbine supplier will increase its market share from 28% last year to 35% or more in 2008. Being number one in the world remains a major goal at Vestas, assures company head Ditlev Engel, who last month presented the concern's results for the first half of 2007. For the moment, stock market analysts and shareholders believe he can do it: Vestas' share price on the Copenhagen stock exchange rose 8% in the 24 hours after his presentation.

Revenues increased in the second quarter of 2007 by 19% to EUR 1067 million and profit by 221% to EUR 90 million compared with the same period last year. Measured in megawatts, sales increased from 1005 MW to 1090 MW. For the entire half year, the margin on earnings before interest and tax (EBIT) came in at 6%, a 3.9 percentage point improvement on the first six months of 2006. The company is forecasting an EBIT margin for the year of 7-9%, the higher end of the spread dependent on contracted components being delivered on schedule. Last year's margin was 5.2%.

Profitability, however, will be hit by "the immense pressure on the entire organisation" caused by the seasonal concentration of 59% of the company's 2007 business in the second half of the year, a pattern that Engel is determined to change.

Engel maintains his 10-12% EBIT margin objective for 2008 and the expectation that Vestas will account for "at least 35%" of all turbine sales next year. "Vestas' strong position in megawatt turbines, the fastest growing market segment," will contribute to the company reaching that goal. It expects 40% of deliveries to be large machines.

With construction and expansion of factories in Spain, the United States, China and Denmark Vestas is on the way to increasing its annual production capacity by more than 50%, or 1300 turbines a year, effective from the second half of 2008. A blade factory in Australia inherited from its merger with NEG Micon is to close. "The factory is not of a sufficient size to ensure satisfactory profitability and the market outlook for Australia makes it impossible to expand the facility," explains Engel.

Full employment of Vestas' entire production capacity "will require improvements at our subcontractors, which can still not keep up with Vestas' expansion activities," states Engel. Delivery periods for key components remain at up to 15 months. "Vestas expects that it will take several years before supply will match demand given the present price and delivery conditions," he continues. "Lifting quality and substantially expanding production output requires massive investments in facilities and training throughout the supply chain." Engel believes a profitable Vestas will encourage sub-suppliers to invest in capacity expansion. "We are proving that it is possible to make money in the industry. It's a very important message," he says.

Problems with sub-standard quality demand that 3-5% of turnover, currently EUR 54 million, is set aside to cover turbine warranties, a sum Engel describes as "unacceptably high." Currently some of the money is being used to pay for retrofit work on offshore wind farms in Britain and the Netherlands. Gearboxes are apparently the problem, but yet again Vestas refuses to go into detail about the problems and what lies behind them. "It would be unfair to name individual components," says Engel.

Neither will Engel comment further on the decision to remove Vestas' flagship 3 MW turbine from its product program for offshore projects. Aside from giving an indication of the extent of the technical problems Vestas is facing, the disappearance of the 3 MW offshore turbine raises a question about the company's ability to bid for new offshore projects. That situation may have a negative impact on Vestas' ability to achieve its goal of a 35% market share.

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