New factories and expansion on the way -- Vestas starts up production in the United States and Spain

A doubling of Vestas' profit for the third quarter of the year to EUR 40 million from EUR 20 million last year and an upgrading of expected profit in 2008 from 10% to 10-12% was enough to raise share prices by over 25% in the 24 hours following presentation of the company's results for the first nine months of the year on November 22. A number of share market analysts and speculators had expected a downgrading of profit predictions from Ditlev Engel, but were instead presented with a string of good news by a CEO in top form. The market reacted accordingly.

Vestas' target this year is a margin for earnings before interest and tax (EBIT) of 5% from a projected turnover of EUR 3.7 billion, both of which fall within the framework of earlier guidance for an EBIT of 4-7% and revenues of EUR 3.6-3.8 billion. Next year revenues are expected to increase 20% and EBIT to hit 7-9% before jumping to 10-12% the year after.

Perhaps of most note is that Vestas' aim for a 35% share of the global wind turbine market remains unchanged. The company's strategy of turning down unprofitable orders in the past two years has cost both revenues and market share. In 2005, Vestas market share fell to 28%. With a focus on nearly doubling profit in 2008, how Vestas will also increase market share remains to be seen; it requires faith in an overheated market supporting increased sales for higher prices.

Engel issues a series of warnings on the risks for why his goals for the company may not be achieved, including delivery times of 12-15 months on key components which carry the risk, despite several long term supplier agreements, of "disturbing operations at Vestas." Among other risk factors, Engel also stresses "further warranty provisions, pending patent disputes, the development of raw material prices, transport costs, and the development of the US dollar. "Revenue and profit forecasts, especially for 2007, are subject to not inconsiderable uncertainty in spite of the fact that Vestas has secured critical components to cover the projected revenue," states the third quarter report.

On the positive side, management says that higher turbine prices and better contract terms are having a positive effect on earnings, while optimisation of operations and the supply chain is an as yet "unexploited margin potential." Together the initiatives "have created a basis for a more profitable business development than originally assumed," and Vestas has "revised the strategic goals for 2008."

Easing bottlenecks

Improved working relations with component suppliers have started to "pay off," says Engel. But he describes the tight components market as "very unsatisfactory." To help ease the bottlenecks and allow expansion, Vestas is establishing blade production in the United States and in Spain in 2007 and consolidating its testing and production of electronics in a new factory in Denmark not far from its headquarters, which will open in 2008. The long awaited US production line, together with production in China, will help to secure Vestas against currency swings in the dollar, Engel notes. In total, EUR 120 million is being invested in new factories.

Vestas has increased its payroll with 1300 new jobs in 2006 and by the end of 2007 it expects global employment to have reached 14,000.

The company maintains its expectations for revenues this year of EUR 3.7 billion. With the first EUR 2.457 billion already home, that leaves EUR 1.2 billion to achieve in the last quarter. Vestas assures the sum is already secured through "firm and unconditional orders."

Warranty provisions

The company again notes a number of quality and performance problems in existing wind turbines. Some are of a technical nature while others are connected with "commercial agreements on performance levels in environments for which the sold turbines have not been developed," wording which presumably covers overly optimistic production guarantees given by Vestas. Resolution of the issue, also referred to under a section in the third quarter report on "warranty provisions," is expected to be achieved by the end of next year. Vestas currently sets aside 3-5% of revenue on turbine sales for warranty provisions and expects to use EUR 130-140 million on fulfilling warranty agreements in 2006.

While shareholders in Vestas could watch the value of the company and their shares rise to the highest level seen since they began a dramatic drop in 2003, the company's third quarter results were an expensive lesson for speculators, particularly hedge funds, which had calculated with a price drop. They found themselves buying up in a rising market to return the shares they had loaned in expectation of buying them back at lower rates after presentation of Vestas' accounts.

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