Oh, good morning, everyone, and welcome to this full year 2014 presentation. So let's start with the key highlights. So earnings improved significantly year-over-year, EBIT margin of 8.1%, up 4.6 percentage points compared to 13. Also, the combined order backlog increased to EUR 13.7 billion combined, well-balanced between turbines and services. The return on invested capital increased to 35%, more than 27 percentage points during 2014. Overall, one year on, I feel that we are well on track on the profitable growth strategy that I talked about just a year ago now. So good performance on all key financial and operational parameters.
Based on the improved earnings and the strong net cash position, the board of directors have recommended a dividend payout for the first time since 2002. Going then a bit more into the details and start with orders in the market. If you look at order intake, it was up 10% to 6.5 GW. This is the year-on-year development and also the quarter-on-quarter. So a short comment here from me, we see good development in Americas, very much driven by the US, offsetting lower activity, primarily in Canada and Mexico. In the quarter, we saw a decrease of 18%, again, US, because we had a very strong quarter a year ago. Europe and Africa, a very big region, up 16% year-on-year, and here it's really broad-based.
So a lot of countries, but a broad-based performance that is up, slightly offset then by some single countries and offshore. In Africa, overall, more or less flat. In Q4, we saw a good increase, driven by Lake Turkana in Kenya, which it was an order in the quarter, and also good development in Poland, slightly offset then by lower activity in primarily Romania. Asia Pacific, we saw a decline year-on-year and in the quarter. This is very much due to no activity in Australia that influence both, orders and delivery. Of course, Australia has traditionally been a very strong Vestas market in Asia Pacific. Very slow quarter, overall, low level in the quarter. Impact is from a single project.
The positive thing is that we see year-on-year improvements in orders in China from a small level. On the delivery side, delivery was up close to 30%, at 6.2 GW. Very strong delivery increases in Americas, again, driven both year-over-year and Q-on-Q by the US. So strong growth. But as I also said before, we see good development in, also in Latin America. Also, Europe and Africa, up 14%. Again, a good development in, in several of the European markets, and in the quarter mainly down due to less Romania and offshore. But overall, a good increase in delivery as well as orders in Europe and Africa. In Asia Pacific, we saw a decline in delivery of 20%.
Again, I talked about Australia, but we also see offsetting that new markets coming in, like Philippines, like South Korea, and that is really what has driven the uptake was in a fairly low quarter in Q4. Moving into Q4 orders then, up 122 megawatts to 2.2 gigawatt. US, Kenya, Poland, and Germany, main contributor to the orders in the quarter, accounting for almost 60%. The price per megawatt in the quarter, EUR 0.91, so, a small uptick. We have to remember that the price per megawatt depends on a number of different factors: the scope, the geography, type of turbine, and of course, the uniqueness of the offering. So all in all, I will say that prices remains fairly stable in the market, also in Q4.
US, we have talked about before on these quarterly calls, so to update you here, in 2014, we had an order intake of 2.2 GW. That, of course, I'm really pleased with, a good share, we believe, of the US market. Out of those, 1.6 were under framework agreement, MSAs, and 0.6 was outside. In the very late of last year, we got a PTC extension, and that of course then improves the visibility of potential delivery also for 2016 in the US market. I think I said last time we met that I expected our sales force in the US to be busy, and they were very busy also by the end of the year with this extension.
We have now up to approximately a potential combined MSAs of 3 GW in the US, and that's a combination of carryover from 2013 MSA to newly signed MSA by the end of last year. As before, there is also a possibility, of course, to take orders outside the frame contract, as we did in this quarter with close to 300 MW order in Kingfisher. As I said, backlog increased EUR 300 million from coming from the service business, a combined backlog of EUR 13.7 billion, well-balanced between turbines and services. A short update on the joint venture with Mitsubishi Heavy Industries as well, so the Mitsubishi-Vestas Offshore Wind company. Last year was the start of that company. They started operation in April.
I would say it has been very well received by the customer, and we see continued interest on the 3 MW platform, and also we have signed our first, or the joint venture, I should say, have signed their first commercial V164 contract with DONG. Now we're also busy setting up the supply chain, nacelle production here in Denmark and blade manufacturing in the UK. If you look at the external forecast for offshore and also turbine types, we feel that we are well-positioned for the joint venture to penetrate this offshore market. Further, we have got great reception of the V164 product, strong technical performance, and positive reception in the market. From an operational point of view, we are on track.
The milestones payment from Mitsubishi Heavy Industries into the joint venture is progressing as planned and as was the basis for the joint venture agreement. Marika Fredriksson, please, financials.
Yes, thank you, Anders Runevad, and we will start with the income statement for the full year of 2014. As you can see, our revenue has increased by 14%, so the activity level in the company has been fairly high during the course of 2014. You see gross profit improvements, so we continue our cost out on the products, so you see a gross profit in percentage increase from 14.7 to 17% for the full year 2014. You can also see that we continue to focus on our fixed capacity costs, so they are down by 10% despite the higher activity level, and that gives us a great improvement on the EBIT line. Consequently, we are delivering an 8.1% margin for the full year, EBIT margin, compared to 3.5 of last year.
We also made a net profit for the full year 2014, which again, is a great achievement by the company. So I think the P&L or the income statement clearly reflects that we're working on all parameters to continue to improve our operations. I f we go to Q4, you also here see a slightly higher activity level compared to last year. You see a 5% improvement. You don't see the same improvement on the gross profit, and that is primarily due to mix. But I would also like to remind everyone that last year of Q4, we said we had an exceptional Q4 from a lot of aspects. But mix is the primary reason here for the drop, but it also shows that we have a P&L that is under control.
We have a good fixed capacity cost level in Q4, and consequently, we managed to deliver 10.2% margin for Q4, which is at the same level as last year, 2013. So again, a good story. Service business is one of the key parameters in our midterm strategy, and what we have said and continue to say is that we're growing the service business with stable margin, and that is clearly what we have done also in 2014, so this picture is a reflection of that stability. You can see that we have carved out the offshore business to give you a flavor of the size of the offshore business, previously, and for 2014, we obviously had the offshore business included for the Q1 .
The renewable rate that we have been talking about earlier is 72% in the quarter. We would like to reiterate that the service renewable rate will continue to vary in the quarter, depending on what type of contracts are up for renewable. Balance sheet again a good story and a good focus in the company. We have, as everyone is aware of, but by what Anders told you earlier, a focus on the working capital. We did, as everyone also, I think, remember, as at the same time, February of 2014, increased our share capital, so we did new equity.
If you look at the net debt, you see a positive swing of EUR 1.3 billion, which I think is quite remarkable in only a year timeframe. You see an improvement of the net working capital of EUR 361 million. The whole EUR 361 million is not a reflection in our cash flow, as EUR 100 million is currency, and it's consequently a non-cash item. Solvency has increased from 27% full year 2014 to 34% this year, and you remember our capital structure target is to be above 30%. Changing working capital, again, a good story, not only for Q4, but also for the full year. In Q4, you see that the main contributor to the positive development is the inventory and also prepayments.
So this is a process that we as a company is very proud of because it runs through the whole company, improves the efficiency gains we have made and will continue to focus on. So it's a process reflection of a good process in the company, so good achievement. If we look at the warranty provision, that is another thing that has been a focus in the company, and that is quality, and we have seen great improvements from the quality work. You see that the warranty consume is going down, and the provisions is a reflection of how much money of the revenue in a single quarter. That consequently have led to a loss production factor that is very stable below 2%.
So, again, a very good and solid performance of Vestas. The cash flow for the full year is slightly different compared to last year, because last year, a lot of the improvement came from net working capital releases. This year, earnings have improved quite significantly compared to last year and is also reflected here. And here you can also see the change in net working capital, because here you have the cash items, so it's EUR 260, so the EUR 101 are not reflected in the cash flow. So that gives us a very high level of EUR 841 million in cash flow compared to EUR 1 billion last year. So again, a good achievement.
If we look at Q4, which is normally, and also this year, last year, has been a very active quarter, earnings are slightly up compared to last year. We also see a continued change in the net working capital, positive for Vestas, and also, as I said in Q3, we were basically collecting money as late as New Year's Eve. So, it is a lot of activity and a lot of loyal people actually being available for the last minute of the year. Net debt, good story, only one year, and we have improved by EUR 1.3 billion.
Of course, we did new capital in February last year, but we have also a very efficient net working capital focus, and we have improved earnings consequently, and that is a reflection in the net debt. Total investments are slightly up compared to last year, but having said that, we continue the CapEx-light solutions for the company. So the investments you see are primarily in molds for the new blade technology, and the molds are actually movable, so we can move them from one region to another. So it is a very flexible solution that we have today in our industrial setup. Capital structure, we have, as everyone, I think, can understand, met the targets. We said that the net debt to EBITDA no more than 1x. We're clearly below that.
On the solvency ratio, we said we will reach a minimum of 30%, and we are at 34%. So great improvements during the course of 2014. Return on Invested Capital, which is one of the mid-term targets that we have as a company, we have increased from 7.7 year end 2013 to 35.3 year end 2014. So really, really good improvement. We said that in 2014, the improvements will primarily come from better earnings, and that is also what we have provided. Of course, some also comes from the net working capital improvements that you see in the company. But we are efficient on our invested capital, so I think a very good improvement overall in the company. By that, I leave the word to you.
Thank you, Marika. So, as I said, a year ago, I talked about and presented our, our strategy around profitable growth, and therefore, I think it's a good timing to do an update, both on, where we are, what we have done, but also, of course, looking forward. So if I look at the overall, market environment, I will say it basically remains unchanged. We see a good solid growth in energy demand. This looks up until 2040, so, long term, good growth. Very much two different types of markets, OECD, flattish to a slight growth. We see China growing now and then over this period, flattening out. And of course, the rest of the world stands for then the majority of, of new, energy need.
That means that we basically have two different kind of markets, you can say, a replacement market and an addition market. And what we also see is that renewable is expected to take about 50% of this total market, both when it comes to replacement and additions, and wind, and onshore wind is this most competitive renewable alternative. So a good potential for a long-term growth, two different type of markets with slightly different dynamics. Also worth mentioning is, of course, that despite the limited demand growth then for new addition, OECD countries are still then expected to account for 1/3 of the total capacity addition. And of course, if you look closer to time, of course, the replacement market is even bigger than 1/3. This will, of course, play out over the years up to 2040. So market remains.
If you look at long-term climate and energy policy, I think we see positive development, the US-China climate accord around lowering CO2 emissions, the EU climate agreement with binding renewable target of 27%, 2030, currently at 14%, and also the reduction in greenhouse gas emission. COP21 in Paris is coming up. We see positive development, and of course, we are also well aware that we are a long way to go before we have firm agreements in place. Also, positive signals from India about the new government on renewable and energy build-out. T hey, in India, there is also an agreement on fighting global climate change with the US. W e see progress in green trade negotiations.
So all in all, positive signals, but a lot of work remains, and a lot of work remains, of course, to make these firm policies. Looking at the competitiveness of wind and onshore wind, we see good development. Again, looking back, last 30 years, wind energy has lowered the cost with 70%, so significant efficiency gain. In the last five years, 12%, while coal and gas has increased the cost of energy production with about 50% in the same five-year period. These are average numbers, and of course, will vary greatly between different countries, b ut if you look at the global number, then you can see that on a global average, on the low side for all comparison, onshore wind on levelized cost of energy is now competitive with gas.
Still have some way to go to coal. The picture is very similar than looking at different regions in Asia-Pacific, in EMEA, and in Americas. Competitiveness of wind is increasing, and that is, of course, a key driver for us, for the future growth. That leads me into the strategy that remains and also the objective that remains, and just to repeat them a bit, as I said, reduce levelized cost of energy, the key enabler for Vestas to grow our business, and a focus area across the whole company. Improve operational excellence as another enabler, for us to capture growth in a profitable way in both mature and emerging market. We have now an installed base of more than 66 GW, so, the full focus on objective on expanding our service business also remains.
Same thing with the vision, our desire and ambition to be the undisputed global wind leader. Short then, how we've done for the first year of implementation, and as I said, very satisfied with a solid track record and that we are on track on delivering on our strategy. On the market side, revenue grew, 14%. We see an increased activity levels in both delivery and orders, and we feel that we are well on track on growing faster than the market on the revenue side. Services, growth in revenue of 7% and good margin, development. The service organization is established with more detailed plan and a different focus to driving the organization. W e feel, again, that we are well on track on our ambition of growing more than 30%, in the midterm.
We always levelized cost of energy, which is, of course, very much the competitiveness of our product. We feel that we have a very competitive product portfolio. We are present in all wind classes. We are present in more markets than anyone else. We took new orders in 31 markets last year. So will be key also going forward to make sure that the competitiveness of our portfolio remains. On operational excellence, it's about improved learning capability. A s Marika presented, I would say that we have really delivered on that during last year with the great improvement in EBIT margins and the ROIC of 35%. Looking ahead then, as I said, on the market side, ambition is to grow faster than the market, present in 31 countries. We see continued strength in the US and Europe.
Of course, a very good development year-on-year in the US market, but as I said, broad-based improvement also in Europe. And we see some of the highlights, Turkey, Poland, France, Finland. M aybe not the usual northern European market that you would expect, but we see good, solid improvement there. And I will say that I feel this is a very important foundation for further growth. Also, strong position in the rest of the world, Latin America, many new markets coming online. Also see new markets such as Kenya, South Africa, where we now started delivery, South Korea, and the Philippines, new markets and good activity level. We have a special attention to China, India, Brazil. In our strategy, we start to see that that is paying off with recent orders announced in both China and Brazil.
Going forward, continue to focus and strengthen our account management across our markets, make sure that we improve our competitiveness with cost out and localization in appointed key growth market, and we will continue to be a pioneer in wind when it comes to exploring new markets. On the service side, the organization is established, more detailed plans has been drawn up. Growth, revenue growth in the year was 7%. We increased the backlog, and it now stands at EUR 7 billion. We have launched multi-branding propositions to the market that has been well received. We are also diversify the portfolio, both with more customer specific centric solutions and also with energy enhanced energy production solutions such as PowerPlus.
Focus will continue to be on revenue growth, to leverage our scale and our operational performance, to broaden the portfolio, and of course, we will still keep track of the renewal rate. On levelized cost of energy, which I said is, of course, a key KPI for the whole company. We have seen improvements on our 2 and 3MW platform, launched new product offering that aims to lower the cost of energy. Successfully commissioned the V164 8MW turbine that, of course, Vestas develops for the joint venture. It's now the record holder in most energy production within 24 hours, and of course, will considerably lower the cost of energy in the offshore market. C ontinue our continued focus on cost reduction on existing platform.
Going forward, the key driver will continue to be more efficient wind turbine, lower the Levelized Cost of Energy, and therefore, the addressable market for us. We will continue to do cost reduction, leverage our scale, leverage localization, and standardization within components. On operational excellence, as I said, very, very solid improvement, also working on the fixed, cost side with site simplification during last year and setting up shared service centers. On the cost out and variable cost, we will continue that, and have a new program in place. We will leverage the potential fully on shared service center and outsourcing, continue with a strong focus on working capital, and we will move site simplification also to new market in time when leases expires.
All in all, our key differentiator remains intact, and this is really how we will deliver and the reason why we will deliver on the strategy. So the global reach, orders in 31 countries and a unique position, not just when it comes to sales and manufacturing, but that's actually also when it comes to installation capability and service capability globally. That's the key. Technology and service leadership, a broad-based portfolio, 2 MW and 3 MW, and also at least 1/2 in offshore.
Best-in-class quality, loss production factor now consistently below 2%, which I believe is world-class. O f course, the siting and forecast capability we have in Vestas. Very important, scale more than 66 GW installed, the largest service organization. All in all, Vestas has the most people dedicated to wind, and the largest volume to utilize the scale. Marika?
Thank you. We said in Q3 that we would revisit the capital structure and the targets from those, and we have done so. And what you can see here is that our net debt to EBITDA target remains, so we have 1x net debt to EBITDA. I mean, this chart is a reflection of the cyclicality in the industry, s o even if it may seem prudent to keep that target, considering the position we're in right now, we find a net debt to EBITDA 1x still meaningful for Vestas and the industry. The solvency ratio reflects basically the same picture historically. It's bouncing up and down quite significantly, as you can see here. W e have set a target of 30% earlier.
That target of solvency is now increased to 35. We have benchmarked our own industry as best as we can, but also other capital goods industry, and there clearly, the 35 is more a reflection of the cyclicality in this type of an industry, so 35 is the new target for solvency going forward. Anders?
Thank you. So talking about target and target fulfillment, we have then fulfilled our target for 2014 on the capital structure side, so the conditions for the priorities on excess cash are met. As I said, we have a strong net cash position. We see good improvements in earnings, and the board of directors has recommended a dividend payout of DKK 3.9 per share, and that is then in the upper end of the dividend policy that is 25%-30% of the net result of the year. So to summarize and outlook, so the profitable growth strategy is on track, a solid performance during 2014. We continue to keep our four main objectives, our vision and mission.
We see it from very good improvement in ROIC, as we talked about, in earnings, and also on the activity level, both in delivery and in orders, a nd we end the year with a cash position of EUR 1.4 billion. Looking ahead and looking at this year, we expect it to be a year with a solid financial performance, revenue minimum EUR 6.5 billion, EBIT margin before special items minimum 7%, total investment approximately EUR 300 million, and a free cash flow of minimum EUR 400 million, and service business is expected to continue to grow with stable margins. Mid-year ambition when it comes to ROIC, free cash flow are the same as previously. As Marika said, we have increased our solvency ratio target to 35%. The priority for excess cash and the dividend policy also remained.
We also keep our midterm strategic ambitions. We want to be the market leader in revenue, bring wind on par with coal and gas, deliver best-in-class margins over the cycle, and have the strongest brand in the wind power industry, which, of course, is a reflection of, of our products, our services, and the daily interaction between all the people in Vestas and the external stakeholders. So thank you very much for your attention, and with that, we can move over to Q&A, and we start with this room. Yes?
There are some questions about your expectations for 2015, and occasionally it seems like the stock market is really not happy with that. I know you know don't comment on the stock market, but I'll ask you to comment on your very conservative estimates for 2015, and comment on if it's right that you, in many ways, says that 2015 is not going to be much better than 2014, especially if you hit the low end of the estimates for 2015. Thank you.
Yeah, if I start there, and of course, the outlook for 2015 and the guidance, it is our best estimate at this point in time. We're very early in the year. It is a minimum guidance, and of course, as I also said, our ambition remains when it comes to the strategic ambitions we have on growth. But, yeah, that's how it is.
Yeah, I don't know, I have much else to say. I would also like to highlight that even if the guidances can be perceived as prudent in others' eyes, it is a best estimate at the beginning of 2015. I would also like to say that even though the guidance is, it is a minimum guidance, but it's also higher than what we provided beginning of 2014. So it's clearly an omission in the guidance.
What kind of markets do you see challenging, and is that the reason why you come out very conservative? You mentioned Australia and other markets, which are not performing very well.
No, but in general, as I said, we see a fairly stable market. I mean, we all know that we are dependent on political decisions in this industry. T hose decisions are hard to predict, and they can create either a bit of an artificial boom, if you have to be ready before a certain date, or they can take down the market when you look at it in the short term.
But overall, I will say that we look, we come from a situation, of course, from 2013 to 2014, where we saw a great uptick in the market from a percentage point of view, because 2013 was a fairly depressed market. We don't see the same kind of growth overall, of course, in the market from 2014 to 2015. But having said that, we see a stable market, which I think and I hope also was reflected when I look and describe our orders and into the different regions.
Hi, this is Poulsen from Børsen. You have a conservative guidance. Are you afraid to disappoint the market?
As I said, we have a guidance that is our current best estimate.
Are you afraid to disappoint the market?
I think we do a guidance that is based on our best estimate at this point in time. So that's our, that's our guidance. I mean, that's what, what I can, and Marika can influence is, of course, Vestas and, and how we run Vestas. To try to influence the market is not really my business or my expertise.
So, Vestas has learned from the past?
I have not changed my view since I arrived in Vestas, that we talk about what we can achieve from Vestas. We give our best estimate from a Vestas point of view, and then the market decides what they estimate. That's my view, and I will continue to focus on the operational performance of Vestas and the forecast that I can deliver from Vestas. That's my job, and that's my worry, you can say.
Last question, you've clearly changed Vestas since you arrived one and a half year ago. Is Vestas where you want it to be right now?
I'm very satisfied with the results during last year. It's a good performance and a tremendous effort from all 20,000 employees. Okay, so then I think. Sorry.
Hello, my name is Kato from Nikkei. I have a couple of questions, and first one is, regarding, current oil price. So how do you evaluate, how do you see the impact of our current lower oil price in, yeah, in terms of the new installation? And second point is, offshore wind market. And yes, it's true that the result was nice, but, still now, the Siemens is a big giant in this area. So how do you compete with, Siemens in offshore market? And, could you elaborate some comment on Japan market?
You know, Japanese government is trying to expand offshore wind as well. Third point is, yeah, you experienced a lot in, Ericsson. So yeah, and, so could you give me some comment on what kind of experience in Ericsson could be, was useful for, for you in, investors?
Yep.
That's all.
Okay, thank you. So if I start with oil price question, the short answer is, there is a very small correlation when it comes to electricity generation and oil. So of the total global electricity generation, about 4% is generated with oil. So the direct correlation is small. Then, of course, you can have indirect correlations between our industry and the prices of oil. And that's of course a very long answer, but that-
It goes to the macroeconomy, and I think there is a global debate for the moment if a low oil price is good or bad for the macroeconomy. I think it depends very much in which country you sit, and how much of that reduction in oil price actually filter through to the population, so to speak, and therefore lift the income. So there is a positive argument to say that we will see an increased economic activity, therefore, the need for energy will increase, and that's a positive. We also see that oil price, of course, influence other commodities, and there we can see a positive effect on our transportation costs.
Possibly we see, of course, the influencing also commodity prices like steel and copper and so on, that they are all commodities that we are used to. You can also see a potential consequential negative effect, when, of course, you look at in some market, the correlation between gas prices and oil prices, and therefore, if you have a lower gas price and a lower coal price, then you have a negative effect. So secondary, of course, there is a lot of speculation, but short answer, 4%. The other short answer is that our customer invest in a 20-year return on investment case for electricity production in wind. Y ou can't look at short-term spot prices in sort of a 20-year business case. So it's a fairly different business case to look at, compared to our customer.
I think the good news for us is that wind, once you've done the investment, is a free resource in oil currency. So that's the oil price. The second question around offshore, I think, and I will stay on a high level here. We have now a joint venture together with Mitsubishi, and they are really the spokespersons for the offshore. If I look at the market, and as I saw, I showed the external analyst, I think we are in a good position at a good point in time. We see the market now coming, being more firm when it comes to the regulatory support being put in place in UK, Germany, and so on.
We see definitely that the sizes of the market has come down from initial very high numbers, but it's still a very attractive and big market. We are very focused in the initial phase on the North Sea. We think that is where big turbine, the market for big turbines will start. That is our primarily focus from the joint venture. We feel that we have a very good product that we will bring to market in 2016 with an 8MW platform, and we are confident that we can challenge the existing players in that market.
On my previous experience, of course, there is a lot of similarity, business to business, infrastructure, when it comes to restructuring work, when it comes to importance of growing service business. Hopefully, I learned something when I was at Ericsson as well and can bring that to use in this role.
What are the major challenges in 2015 for delivering the results you have promised today?
I would say that, I mean, it's normal business risks and opportunities, market development, production ramp up, better than expected demand, worse than expected, so nothing unusual, normal risk, business risk, ups and downs.
The reason for asking is also the profitability guidance you have made, that is the minimum of 7%, while delivering 8%. Is there anything in 2015 that would indicate that the profitability will go down, even though that you have all these cost effectiveness programs running?
Well, I think that if you look at the guidance, it is a guidance, a best estimate, as I said earlier, for February 2015. It is an increase compared to 2013 guidance. And, of course, we have at this point as well, a minimum guidance. So, I mean, the focus on continuous improvements is there, and also the minimum guidance importance is very important for all our employees to see that we're trying to do better, also in 2015.
Do you see any risk that the Danish Central Bank would give up the Danish krone's peg to the euro? I f it did, would it have any impact for Vestas?
Well, I think obviously, we have been a lot to that to that question in considering what happened in Switzerland. We have looked into it, and as we have employees, we have assets in Denmark, yes, it would affect us. But also as the head of the central bank said, we shouldn't speculate in that, and I think that would be overall very severe for the Danish economy. So we are following, we are tracking, we have good visibility on our exposure, but we're not speculating in that.
Which impact would it have?
As I said, we have a cost base in Danish krone. We have assets, we have employees, so it would have an impact.
Okay. Then if we go to the phone questions.
Yeah. We'll now take questions via the teleconference. So if you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. We kindly ask you that you limit your questions to two questions at the time. Once again, if you have a question, please press star, then one. Our first question comes from Kristian Johansen from Danske Bank. Please go ahead.
Yes, thank you. Could you please comment on the impact from the currency movement on your earnings for 2015, and especially how you're impacted by the movement in the US dollar?
Yes. Well, overall, Vestas is fairly naturally hedged. Of course, we, we have an exposure in US dollar, but what we do is, we have the— our hedging policy means that we are hedging the contracts where we are exposed to local currency. Overall, there is, I would say on a comparable basis, fairly little exposure. The impact you would see on our P&L is primarily translation, and, the translation impact on EBIT for 2014 is very, very marginal.
Do you expect it to be that for 2015 as well?
I mean, that is obviously something we, we monitor. But as I said, as we have the industrial platform we have, we are fairly naturally hedged, and we also have the possibility to source locally if need be.
Okay, then my second question is regarding the contribution from the joint venture. You had a negative contribution of EUR 31 million in 2014. Should we expect another negative contribution in 2015, or do you expect that to become positive?
Well, the joint venture contribution in terms of our P&L for 2014, you have a positive when the joint venture was signed, you have a positive impact on the special items. That is why we have a big positive impact on special items. Overall, you have a slight positive result from the P&L from the joint venture on the P&L for 2014, and half of that amount is in Vestas, not EBIT, but below EBIT line.
Yes, I understand, but I was referring to income from investments in the joint venture, not the special items.
Okay.
Yeah, I get that.
But the revenue from the joint venture will come on the other revenue line. It's not in the Vestas revenue, but it's on other revenues, and it's fairly small for 14, as you can see.
Okay, but, but again, do you expect a positive contribution?
Well, that is, I mean, we're not guiding or looking into the future for the joint venture, so that remains to be seen what the result from the joint venture will be for 2015.
Okay, thank you.
This question comes from David Vos from Barclays. Please go ahead.
Good morning, and thanks for taking my questions. I have two really. First, on the balance sheet, it occurs to me that the balance sheet is still relatively overcapitalized, and you've indeed now put out even stricter targets, for 2015 and beyond. Could you comment on how you intend to use the cash that you've accumulated, and indeed, whether your solvency targets exclude you from levering up to your 1x net debt to EBITDA target? That's the first question. Thank you.
Okay, in terms of the cash that we have at hand at this point, it's obviously creating more opportunities for us in terms of evaluating our position. Anders just presented that we will propose from our board of directors a dividend, which is obviously a good sign to all our loyal shareholders that we have. The solvency ratio of 35%, we still think is feasible, but you also see that we have not changed our net debt to EBITDA targets, so we remain on the one time. That is, of course, looking at the cyclicality in the industry, I think that makes a lot of sense to keep that target, not to sort of corner ourselves too much.
No, no, indeed, I fully appreciate that. I was just wondering whether you could potentially lever up to 1x net debt to EBITDA.
Yeah, I think it's too premature to speculate on that.
Sorry, come again?
Well, what I said is, I think it's a bit premature to speculate, considering our net cash position today, when and how we will gear up the company or increase the leverage of the company.
Okay. The second question on the guidance. I understand the 2015 guidance to be a minimum guidance. I think the market takes that as well. But what about the targets? What about your ambitions longer term, 2016, 2017? What do we, you know, what do you aim at internally?
I think Anders presented the midterm targets. We have reiterated the double-digit ROIC through the cycle, even in trough years, and that means we would, in theory, be even in trough year in the lower single digit EBIT. We are also guiding for a positive free cash flow, which means that we will continue the focus. I think that the ambitions that Anders presented to have best-in-class margins are very ambitious targets for us also going forward. I don't know if you wanna elaborate a little bit more.
No, but I can, as I said, I think from when I presented the strategy and the mid-term ambition in the strategic plan, it's to be the undisputed leader, to grow the market in revenue, to grow the company in revenue faster than the market, and to generate best-in-class margins over the cycle.
Yes, yeah, I fully appreciate those targets are out there, and we know that. But to a certain degree, you've met all those targets now. With a ROIC of 35%, that is, you know, comfortably in the double-digit range. What else can we expect from Vestas from here? What do you achieve to go to 50%, or are we in effect saying that, you know, we would be comfortable going to 11, which is also double digit?
No, but I mean, we are, of course, very happy about the performance that we've done over the first year in the strategic cycle. It is midterm. We know it. It's that in the mid-long term this is a market that is cyclical. We're well aware of that. We are really pleased with our performance. I mean, I would argue that to grow faster than the market, generate best-in-class, are very ambitious targets also for the long term. And we will not, we will always strive to improve, of course, like any company, and I think that is very much reflected in our targets. But we are not coming out with numbers for 2016 and 2017.
All right. Thank you for taking my questions.
Thank you.
Thank you.
Our next question comes from Claus Almer from Carnegie. Please go ahead.
Yeah, hi. Thanks, the first question goes to the capital structure. Should we expect a share buyback program possible later in 2015, given that your 25%-30% payout target, and the fact that you are already in the higher end of your new solvency ratio? That would be the first one.
Yes, Claus. I mean, obviously share buyback is something that we can consider. It's nothing that we have in the plan right now. We are, for the first time since 2002, paying out or proposing to pay out a dividend for this year. So, it is something that we will continue to evaluate in terms of buying back shares, but there's no current plans for that right now.
What would trigger such decision?
I think that is something we again are evaluating and will be discussed and agreed internally with what we will do, and consequently, also by the board.
Okay, and then my second question, that goes again to your 2015 guidance. Have you based this year's guidance on the same method as you did in 2014? Marika, you have several times now, you know, referred to how 2014 guidance started the year.
Yeah. I mean, we, I think Anders and I would like to see ourself as very consistent, so of course, we have a methodology in how we view each beginning of the year. Again, the guidance is a prudent guidance, but it is a best estimate, and it is a minimum guidance, so the strive to improve is certainly there in the company.
Okay, so which, which market could potentially drop in 2015?
Yeah, I mean, as I, as I said, we don't see a specific potential market risk in a single market, so to speak. But we also know from experience that we are dependent on political decisions. We've seen that happening before. As I said as well, we, if we see a stable market development into 2015, it will not be. We don't expect the same kind of year-on-year growth in the overall market as we saw between 2013 and 2014. But we expect a stable market into 2015.
Okay, thank you.
Thank you.
Our next question comes from Patrik Setterberg from Nordea. Please go ahead.
Yes, hello, two questions. The first one is regarding your average selling price, which has been around EUR 0.9 in 2014. Would you still argue that it's only due to the contract type, or is there structural element in terms of you being able to reduce the production cost, that you, so to say, are able to offer the customer cheaper turbines?
As I said, and as I said throughout last year, we see a stable price picture overall, a relatively stable price picture overall. T hat is the same picture in Q4, as I talked about in Q3 and Q2. A t the same time, then, of course, we're seeing, I must say, fairly stable, as you also point out, the price per megawatt, and we see a small uptick now in the fourth quarter. But that is dependent on the scope, the turbine supply only compared to full turnkey. T hose are the factors that influence the price per megawatt. And that is what we see throughout the last year. O n a price level, it's fairly stable.
Of course, it's a competitive business. O f course, like all competitive business, we have to fight to get our orders. O f course, there is also a drive for lowering the cost of energy or levelized cost of energy. T hat there are a number of ways that that is achieved. But of course, the big part there is actually more efficient turbines, bigger rotors, larger power curves. That's the big driver for lowering the cost of energy.
Okay. My second question is just relating to your bonus program. It's been a successful year for you in 2014, and there's going to be nice bonus payments for all the employees. Will you have a similar program in place for your employees in 2015?
Yeah, we will have a similar setup of bonus program in 2015 as we had in 2013, and as in 2013 and I think in 2012 as well, and going back. So the setup of the program has not changed and will not change for 2015. It's a well-deserved bonus for all employees in Vestas on a really good execution of 2014. So we will keep the structure as such. We will, yeah, we will keep the structure.
Will it be like in 2014, that the targets for this bonus program will be above the minimum target you have been given to the market in terms of the overall group guidance?
Yes, that will be the case. We will have a span, and if you look at the bonus payout for last year, they are actually less money than the year before, despite the fact that we were considerably more employees, which, of course, means that we didn't reach as high on the target scale during 2014 as we did in 2013.
Okay. Thank you very much.
A lso, that we include, of course, bonus in our guidance and, as we did last year, so no changes there.
Okay, thank you.
Our next question comes from José Arroyas, from Exane BNP Paribas. Please go ahead.
Good morning, gentlemen. Two questions, please. On working capital performance and in particular on the inventory side, could you give us some color as to what actions Vestas took in 2014 to improve inventory levels that it didn't take in 2013? That's question number one. And on the offshore JV, does the target of ROE of at least 10% that you use for Vestas as a whole also apply to the JV? I f so, when could that be reached? Thank you very much.
Okay, if we start with the first question, we initiated the working capital project in June of 2013, and at that point, we had more than 80 different activities to improve the working capital. The main focus and the big, the big part of the improvements were in work in progress and finished goods. B ecause that is the big part of our net working capital, we have obviously focused also on the payables, but to a lesser extent because they're simply smaller, although we have seen improvements in that case as well, and also on receivables. I t is a lot of activities in terms of the whole manufacturing setup for work in progress, so it's a linear manufacturing that we have today.
We're sourcing differently, we're sourcing much more timely, so we avoid to have supplies in inventory. The finished goods is obviously the bigger challenge because there we are dependent on the customers, and the customers having the grid connections, we're dependent on weather. So it's a lot of factors beyond our control. But we are continuing to identify processes that can also improve that part. So, and then, of course, we had a big activity level now for also for 2014 in the last quarter, and that means that we managed to get a lot of inventory out. And the second question, when it comes to target for the JV, I think Anders would say that it, the JV had to speak to their EBIT targets.
Yeah. It's a separate company, so they will have to speak for that. Okay?
Okay, our next question come from Shai Hill, from Macquarie. Please go ahead.
Yes, good morning. Thank you. I have two questions, and in some sense, they've been asked before, but I'm afraid I need to ask them again. Firstly, is in terms of revenues, you've used the phrase best estimate, so a minimum EUR 6.5 billion is, at this stage, your best estimate. It's fair to assume that the US revenues will be up firmly in 2015. So is there some concern in your guidance that Europe revenues will decline 2015 on 2014? That's my first question. The second question is on your EBIT guidance, minimum 7%. Are there any price or cost issues emerging recently that have made you think that the EBIT margin could be lower in 2015 than in 2014, please?
Okay, if I start with- thank you for your question. If I start with the first, I mean, in Europe, as I presented, we see order intake year-on-year in Europe up 16%. As I said, we see broad base, we come from a number of different countries. So, I think we see, as I also said, we see a stable development in Europe. So, I don't see any specific countries that we have specific worry about today. Overall, a stable market. We are also present in 31 markets with new orders last year, so that gives us a benefit if we see ups and downs in markets. So, from a market point of view, that's not the reason at all.
As Marika said, and as I said as well, it is our best estimate, very early on in the year. There are no sort of one-time issues that if you ask for that, that we are worried about. We have seen how the business developed during last year, which, of course, gives us confidence. We see a fairly stable market, but we are also well aware of that we are early in the year, that we have to see both how the market develop and the execution as the year goes by.
Okay, I think it's fair questions that you're asking. J ust to give you a flavor, it's not only the market conditions that could have an impact on the revenue and the EBIT. I mean, we have provided a minimum guidance, and that can include supply constraints, it can include transportation issues, you can have strikes, and it's a lot of things that would go into a result, a full year result. So the best estimate that we have right now is the 6.5 and the minimum, or the minimum 6.5, and the minimum 7% EBIT is our best estimate at this point in time.
Thank you.
Our next question comes from Sean McLoughlin, from HSBC. Please go ahead.
Thank you, and good morning. I think just building on the last few questions, I mean, how confident are you, or how confident can we be that you're going to see revenue growth in 2015? Is my first question. My second question then on the fixed cost base, how much higher do you see that on a year-on-year basis now? S econdly, thirdly, rather, on the services, impressive EBIT margin 18%, is this a sustainable margin now going forward?
You want me to start?
Yeah, I can start, and then you can get. We will maintain our guidance of minimum EUR 6.5 billion. It's a minimum guidance. It's early in the year. It's our best estimate at this point in time. We see no specific risks that we have seen before or not seen before, or that we highlight. Let me just answer that question as clear as possible, and then I think you can comment a bit on the fixed cost development, Marika.
Yeah.
But a general statement from me there is, of course, that we've seen great improvement in fixed cost development during the years. We, of course, have actually lowered the fixed cost and increased delivery close to 30% last year, which I think is a great achievement. Of course, we will not expect to see the same kind of continued lowering cost and increase in delivery. So of course, from a fixed cost point of view, we have a lot of activities to make sure that we stay in control. But the focus now on reducing fixed cost, we will see less of going forward.
I think, Sean, that, if you look at the fixed capacity cost, I think we are at a, a good level. We have projects in place. We have the shared service center, that is an enabler. We also have the site simplification. What we will focus on is, to, to fine-tune, and continue to improve, the processes we have within the company. But it's also a, reallocation of cost, dependent on where the activities are. I mean, the flexibility overall in the organization is very important, so we can move the costs where the activities, are, and that is, one of the focus areas, right now.
When it comes to services and a good margin, as you say, we still consider the service business to grow with stable margins, and we consider, although at a high level, 18% as a fairly stable margin for the service business.
Great, thank you.
Our next question comes from Pinaki Das from Bank of America. Please go ahead.
Hi, good morning, guys. Thank you. I think a couple of questions. The first one is on cost cutting. You've mentioned something about the cost-out program. You've already done a lot of fixed cost savings. Is there room for more variable cost savings in the future, and do you think that can uplift margins going into 2015 or 2016? That's my first question. O bviously, my second question is around the guidance. I understand you don't move for the guidance, but clearly, you know, the stock is down 8%, and the market is not taking it well. So is there anything that you can give us which gives the market more confidence that 2015 should be a decent year?
My last question is around PTCs. You know, there's been news around the PTC potentially being made permanent. What are your views, and where do you stand on the eventual outcome on US PTCs? Thank you.
Okay, if I start with the last question then, and we work ourselves backwards. So on the PTC, as I said, of course, we got an extension by the very late last year, which gives another year basically in the US, which of course is positive. Of course, we follow the discussions carefully about the potential of a longer-term PTC rule, which of course would be very beneficial for us, and not just Vestas, but of course the wind industry overall in the US.
What the best scenario for us is, of course, to have a more long-term rules on PTC. All business likes predictability, also obvious from your questions here today, and so do we. So of course, a long-term PTC mechanism would be very beneficial for us.
Okay, and then if we start with the cost cutting on the variable part, yes, it has been in place for 2014, will also be in place for 2015, so that continues to be a very important element of our P&L performance. The guidance, I mean, we can only, I can only reiterate what we said. It is a minimum guidance. It is an improved minimum guidance compared to 2014. We of course, have set a minimum guidance because we are aiming for continuous improvements within Vestas.
Thank you.
Our next question comes from Alok Katre from SocGen. Please go ahead.
Hi, this is Alok Katre here from SocGen. Couple of questions. Well, first and foremost, in terms of just following up on the margin, margin questions, but looking a little beyond 2015 or the medium term, where do you see the margin opportunity or, you know, what level of margin opportunity do you see? You're already at 8%. If, well, if consensus is right, then it should be above that number next year as well. So is a double-digit sort of margin possible in the medium term? W hat really needs to happen for you and the industry as a whole to get to double-digit margins? So that's the first one. The second question really is on working capital.
If I look at your overall guidance, then it seems to suggest only a small outflow in 2015, which means your working capital as a percentage of sales could perhaps be well only slightly lower. Is that because the payment terms on some of the orders in 2014 are better than what we saw previously? T hen a related question, obviously, is how confident are you of keeping these working capital levels at so negative? Because some of the peers are suggesting 0%-5% is a sort of a sensible medium-term level. Just wanted your take on that as well. Thank you.
Okay, if I start with the working capital assumptions, as I said, the working capital has been a very important element for us in our journey since 2013. It continues to be a focus areas because it clearly defines the processes throughout the company, which obviously is very important to make sure that we're doing the right things. In the guidance that we, and you know that we're not guiding on working capital. The focus remains, but of course, a lot of the quicker impact was taken already in 2013. We saw a continuous improvement in 2014, and the working capital element is obviously also very important on the overall activity level in the market.
Coming back to your prepayments, we don't see changes in the prepayment or down payment behavior overall on a global basis. I would say it's still fairly consistent. But of course, overall, our good cash position, our overall good performance of the company, enable us also to get the down payment easier than when we were truly in the trough years of the company. If I start with the midterm guidance on the ROIC, as I said, I think still think that double-digit ROIC, even in trough year, is an ambitious target. Of course, a double-digit ROIC even in trough years would be an EBIT of the lower single digit.
The guidance now provided is overall 2015 is again a minimum guidance, so to strive to continue to improve. But I think also what we're saying with the midterm guidance is also that we want to create a stability, so you'd see less of the really, really big swings both on the P&L and as well as the balance sheet going forward.
Okay, thank you.
Thank you.
Remind everyone to press to ask a question, please press star, then one. The next question comes from Klaus Kehl, from Nykredit Markets. Please go ahead.
Yeah, hello, klaus Keil from Nykredit Markets. My first question would be about your visibility for 2015, based on the backlog. You have talked a little bit about the market, and you expect it to be flat, but I guess most of the activity level you will see in 2015 will already be in the books. C ould you try to give us a flavor of the visibility you have for 2015?
I mean, first of all, I think when I talk about the market, I didn't say flat, I feel- I said a stable market in 2015. So, on a global market point of view. So overall market, we see a stable market in 2015. So it will not have the growth we saw year-on-year, 2013 to 2014, but a stable market. I'm also very happy with our backlog and our order intake and the position that we have executed for this year, so I'm confident in our backlog. Of course, the backlog contains projects for 2015, for 2016, and to some extent for 2017.
The backlog, average time of the service backlog, which is a little bit more than half, is around seven years on the service contract, so a considerable longer lead time in that backlog. So I'm confident in the backlog, confident in the quality of the backlog, I'm confident in our position on the market, and I will not go in exactly on the order coverage of the backlog for 2015.
Would it be fair to say that your visibility, based on the backlog, ought to be very strong for 2015 and better compared to 2014 when you started the year?
I think it's fair to say that we have a good visibility based on a strong backlog.
Okay. T hen a follow-up, second question would be, you have recently started to have some success in China and Brazil, on your new strategy, but could you just give us a feeling for the price levels or the profitability in these markets? Would the projects be just as profitable as Vestas is on group level or, yeah?
I mean, our strategy in those markets, as we talked about before, I mean, it's actually. They are similar in the sense, emerging and solid growth, but otherwise, actually fairly different. So we have to have a more specific strategy per market. So on China, we see, as I said, a positive development when it comes to order year-on-year, so we're starting to get some better traction, but also, as I said, from a very low level. That has been also what I've communicated before in the strategy. First step is to turn around the development of having a negative order year-on-year, so to speak, to start to grow again from the level where we are.
We have done a number of different internal initiatives when it comes to what we need to implement to improve the competitiveness of the product to level leverage on the manufacturing capability that we have, to be more flexible in our service offering, and we start to see good signs of improvement in that area. That, and that is also the enablers in place to maybe answer a bit more your question, is that for us, the overall strategy is about profitable growth, and that means that it's not a strategy to drive market share in those markets without without living up to the profitability requirements that we have.
T hat's why we rather take it in steps to make sure that we put the enablers in place to actually drive a positive margin also from those markets. Price levels will vary, but again, so will cost levels. Brazil, I'm also really encouraged. We have put a plan in place. We got an order now in the first quarter. We are confident that also there, it's about localization and we need to execute on those plans because that is, again, the enabler to address those markets over the medium term in a profitable way. And then price level will differ quite a lot, but so will actually cost levels in those different markets.
Thank you very much.
Thank you.
We have no further questions, so back to you, speakers.
Okay. So I would like to again thank you for coming, thank you for your interest, thank you for your questions. I see you next quarter. Thank you.
Thank you.