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Forecasting a fourfold profit hike -- Vestas faces busy half year

Vestas' management is being forced to face up to the fact that most wind turbine sales are traditionally concluded in the second half of the year and efforts to force a more efficient distribution of revenues are not succeeding. In its mid-year report, Vestas admits that 69% of its 2008 revenues will fall in the six months between July and December, along with more than three quarters of its forecast annual profit.

Despite the lost battle for a more even business cycle, Vestas reports that more efficient operation and higher wind turbine prices have led to an improved profitability. The company maintains its expectations of a profit margin of 10-12% for the whole year, up from 9% for 2007, based on revenues of EUR 5.7 billion. That requires more than a fourfold increase in the EUR 126 million profit for the first half year. Profit for the same period in 2007 was EUR 110 million on revenues of EUR 1.83 billion, which were slightly higher than the EUR 1.79 billion recorded in the first six months of 2008.

Long lead times of up to 15 months on components is a major factor in preventing Vestas from achieving its aims for more even production throughout the year. The company says strong demand has triggered price increases for a number of key components, though it expects to pass these on to customers. Faced with rising fossil-fuel prices, customers are placing a higher value on wind power, says Vestas. The company expects the component shortfall to continue for several years despite the rapid ramp up in sub-suppliers, particularly in China.

In drawing attention to the risks investors may face, Vestas warns that demand on its warranty provisions could "deviate substantially" from the 3-5% of revenues already set aside. Other risk factors it cites are rising transport costs, disruptions in production and wind turbine installation, patent disputes and price movements in the dollar/euro exchange rate. Last but not least, "large price increases of up to 50% on raw materials, including steel, may cause supply difficulties" despite long term supply contracts already having been secured.

On the other hand, the typical guarantee period on a Vestas turbine has been shortened from five to two years, reducing risk for the company. A focus on research and development to improve product quality is also aimed at improving the company's risk profile.

Announcement of a series of new investments reflects Vestas' expectations of the future. It is building a nacelle assembly plant for the first time in the United States and adding a further blade facility and another tower factory, all to be built in Colorado (page 50). Before the end of the year, the company's workforce will reach 18,000, with 4000 staff located in the US. In China, Vestas is expanding its generator and machining factories in Tianjin, and in Britain it will add a new technology centre to its blade production facility on the Isle of Wight, the fifth such centre globally alongside those in Denmark, Singapore, India and Houston, Texas. By the end of this year, more than 1000 Vestas workers will be employed in product development.

In Spain, Vestas is opening a factory to produce generators, in addition to those in Lübeck in Germany and Tianjin. The company produces its own generators for its 850 kW, 2 MW and 3 MW machines. President of Vestas Nacelles, Søren Husted, declines to say what proportion of Vestas' production of wind turbines are equipped with its own generators. Back in Denmark, the company is opening a new factory for control systems not far from the its headquarters.

Sales of wind turbines in Europe in the first six months increased to 1158 MW, up from 734 MW in the first half of 2007, to 345 MW in the United States, up from 318 MW and to 431 MW in the Asia-Pacific region, up from 388 MW. Vestas is now aiming for a global market share of 25%. If that and a series of global targets are met, a bonus of EUR 72 million is triggered for distribution to Vestas' workers in spring next year. In the four days following the mid-year report's release, Vestas' share price rose 10%.

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