No cancelled orders but slower growth -- Vestas maintains forecasts

The global financial crisis is being felt by Vestas in the form of a credit crunch. The company has stopped hiring staff and is stockpiling products to achieve a margin of safety on deliveries. But no orders have been cancelled and, in its quarterly report for the three months to the end of September, the firm maintains its revenue and profit forecasts for both 2008 and 2009.

Revenues in the third quarter came in as expected at EUR 1759 million, compared with EUR 1150 million in the same period last year. Profit increased from EUR 102 million to EUR 160 million, or 9.1% of revenues. Expectations for the year continue to be for sales of EUR 5.7 billion and a profit margin of 10-12%, with its service business accounting for 15% of revenues. In 2008, revenues are forecast to rise to EUR 7.2 billion and the profit margin to 11-13%. Firm and unconditional turbine orders amounted to EUR 6.3 billion on September 30.

Vestas stresses that higher prices for its wind turbines and improved operational efficiency are the reasons for its better profit margin. A greater level of customer prepayments and a "strong increase in inventories," which at the end of the quarter amounted to EUR 1880 million, also contributed to the bottom line. The large inventories help to stabilise production capacity and secure revenues of EUR 2.1 billion in the final quarter of the year, reports the company, 20 years after it declared bankruptcy with a large component stockpile on its hands. "As long as a large number of suppliers fail to comply with the terms of their contracts with respect to volumes, deadlines and quality, Vestas will continue to build buffer stocks," states the company.


Demand for its products has weakened and Vestas is adjusting its growth rate to a "lower-than-planned rate of utilisation of the organisation in 2009." It reports an over capacity in the concern of about 15%. There are no plans to reduce employment, however, although "a number of new employments have for the time being been postponed." As soon as credit flows ease, Vestas will be seeking to fill vacancies again, it says. Forecast employment of 20,500 at the end of the year is 2500 higher than previously planned for.

Wind turbine service, which Vestas previously said it did not make a profit on, is on the way to becoming a better business than wind turbine sales. Vestas' service prices and quality of its work have been a hot topic between the company and its older customers. Their dissatisfaction was reflected in Vestas' annual customer survey at the start of the year, which revealed a customer loyalty of 46. That index must be increased to 65 in 2009, says Vestas' management. It is offering a bonus of EUR 94 million to be shared by all employees if that goal is reached. By increasing the reliability of turbines through quality improvements, Vestas hopes to reduce its warranty provisions to 3-4% of turnover from the current level of 4-5%.

The company expects a wider choice of component suppliers in future, particularly from China, which will push prices down. "The prices for a number of key components has peaked," says the company. Vestas does not, however, expect to reduce the price of its products, believing that the rising price of fossil fuel generation will keep wind power competitive.

Long term growth prospects are good and Vestas still expects its market share to rise to 25% after dropping from 28% to 23% last year. Supply-only orders, which bear less risk for Vestas than selling turbines coupled with a full installation and commissioning package, now make up nearly 40% of sales and that share will increase in 2009.

Vestas' share price, which in the two months prior to the quarterly report on November 6 fell from DKK 650 to less than DKK 225 before rallying to DKK 300, dropped once more to DKK 270 in the three days following the report's release, ending the month at that level.