We'll start to talk about the completion of the turnaround program. Those of you who attend these sessions regularly recognize this slide. Three key objectives: reduce cost, reduce investment, and improve capacity utilization. That has been the cornerstones of the turnaround program. Looking at achievements, I'm starting with fixed cost. We had an objective with a two-year plan of a saving about EUR 400 million, and we have achieved EUR 484 million. In the quarter, so in Q4, fixed cost was reduced with EUR 121 million compared to fourth quarter of 2011.
The majority of the cost savings comes from, reductions in number of employees, which leads me to the next slide, where you can see that, employee reduction was 32%, and close to 60% of that was salaried employee, which, of course, is important for, both the flexibility and the fixed cost. Moving over to CapEx, and as I said, CapEx requirement has been reduced with more than EUR 500 million, compared to a previous run rate on 2011 and before. And we also then guide for a CapEx during 2014 of approximately EUR 250 million.
CapEx have been reduced despite the fact that we have launched a number of new products into the market during last year, five new products, and of course, on top of that, we continue the development with our new turbine, the V164 8 MW for the offshore market. And that leads me into another important milestone during last year, and that is the agreement with Mitsubishi Heavy Industries to form a joint venture for the prototype to address the offshore market. We are on track, both on when it comes to establishment of the joint venture, which we expect to happen in April of this year, and when it comes to the development plans, where we announced last week that we have produced the first kilowatt from the 8 MW turbine.
So high expectations for the joint venture to be able to take a leading position in the offshore market. For Vestas, this also means, going forward, a lower and more flexible, CapEx setup. Some words about the capital efficiency and capacity utilization. We ended the year with, negative close to EUR 600 million in net working capital, very much driven by improvement in operation, installation time, inventories, better time planning, and better control. And we still see some headroom or some improvements in megawatts under completion, even though, of course, we had a big quarter when it comes to delivery in Q4 of last year.
On the manufacturing side, we have gone from 31 to 19 factories, while we have maintained a good global footprint, and we feel confident that within the existing factories that we have, we have the capacity for ramping up. That then leads to a good improvement in return on invested capital. Two main drivers, the improved earnings, and of course, also the better capital, capital efficiency. So if I summarize then, the turnaround program, which is really the foundation now for a more agile and leaner Vestas, going forward. So fixed cost savings of close to EUR 500 million, CapEx requirement lowered with more than EUR 500 million, and net working capital by the end of last year on EUR -600 million.
So, good improvement in the operation, during last year, and we see that in the result, in the Q4, with double-digit EBIT margin in the quarter, and overall, then a free cash flow for the full year of about EUR 1 billion. At the same time, we have decided then to also strengthen the balance sheet of the company, with a capital increase, and we also have a new banking agreement, and that is to increase the competitiveness of the company going forward and generate better business. And I will come back then to talk more about the strategy, but first, welcome, Marika, to go through the numbers in a bit more detail.
Thank you, Anders. And, so what I will share is how is the turnaround plan that Anders have taken you through reflects on the financial. As we said already in Q3, we expected a busy Q4, and, even though, the revenue is down compared to last year, it was compared to the other quarters during 2013, a busy quarter. But you can see on the gross profit that we have improved quite considerably, and I would say a lot of what was accomplished in Q4 was also due to really a flawless execution of that particular busy quarter. That is also not only reflected in the gross profit, but also reflected in the EBIT that we delivered in Q4.
We managed to deliver double-digit EBIT margin more than 10%, so a great improvement compared to last year. How does that correlate to the full year? Of course, the same pattern as Q4 had a big impact on the year. But the main driver here, I would say, is really the volume reduction and still improving the EBIT from EUR 4 to EUR 211. So this is really fixed capacity cost focus has delivered, and that resulted in 3.5% margin for the full year. Also note here that that includes a bonus of EUR 67 million-EUR 97 million. I will come back to that on the bridges.
So what you can see here, for Q4, the volume has a negative impact in the quarter as such. You also see that we had a better margin compared to last year. So you see that the project margin more than offset the bonus provision, so we ended up at EUR 240 and a margin of 10% in Q4. In the full year, of course, project volume overall, as we have had a headwind throughout the year of 2013 when it comes to volume, but also improvement here on the project margins. And we said already in Q1 that that was not representative because we had a couple of really low margin projects in that particular quarter.
And we, of course, saw that both Q2 and Q3 in terms of margin improved. But what is important here that the project margin, together with the achievement on the fixed capacity cost, really offset both the volume headwind as well as the bonus provision. So the EBIT for the full year is EUR 211, compared to EUR 4 in 2012, so again, a 3.5% margin for the full year. Service continued to grow with a stable margin, and as you can see, around one third of the number of employees are connected to the service business. We should bear in mind here that these are really revenue generating headcount.
If we look at the balance sheet, current assets are down, and that is mainly due to the reduction in inventory for 2013. I think the highlight of this part is really on the balance sheet, is really the net debt is negative for the full year. So we have repaid our debt in 12 months. You also see the positive development. We have a negative working capital of EUR 596. I will come back to that in more detail, and I've spoken about it before. Solvency ratio improved from 23 to 27 for the full year.
So when we look at the change in working capital over the 12 months, we said in the midst of the year that we have a working capital program that we are driving for 2013, and that will also continue in 2014. And we had approximately 80 different work streams focusing on reducing the receivables, and in particular, the overages that were, and that has also been delivered successfully. We also had a lot of focus on the inventory, and the megawatt under completion has always been sort of the bottleneck in Vestas. But we have managed to improve all of the parameters. We have made sure that the changes we made to the processes are embedded in the way we work, so in the processes, so we try to avoid any one-time effect improvements.
And if you look at Q4, you see the flush out of inventory. So should bear in mind here, this is not only a Q4 exercise. You have seen the development quarter-over-quarter in terms of the activities that has been made during 2013. Warranty provision, you can see warranty provision made and consumed continue on a very good path, and also the Lost Production Factor is continue flattening and is now below to 1.7, to be precise. Cash flow for Q4, of course, is reflected in the change in working capital that I talked about, and free cash flow consequently over EUR 800 million.
So really, really strong performance on, on the cash side in Q4. Full year, we have announced that we generated more than EUR 1 billion, and of course, changing working capital, a very, big component in that, cash flow, free cash flow for Vestas. Net debt, you see here, the, the repayments of the debt. We are a debt-free company. We're actually having a net cash position of EUR 86 million. So I think a really, really great achievement, from the company. Net debt to EBITDA, is now, I guess, in negative territory, so also quite a steep development here in the latter part of the year. The order intake, we said that, Q4 is going to be very busy, and you see compared to twelve, of course, the order intake has improved.
And Q4, busy because of the U.S., and I don't think any surprise that was also announced, that that was part of the expectations for, for 2013. When it comes to pricing, please note that because of a large order intake on from the U.S., that is supply only, so lower prices, but also bear in mind, lower costs. So it doesn't necessarily have to reflect on the, on negatively on the margins. And also, when it comes to pricing, you have, you have geography, as I'm alluding to, but also turbine types that will have an effect. Overall, we see a fairly flat pricing on a global basis, and as I said, fairly flat. Looking at the backlog, you can see here the service backlog improving, slightly down compared to last year on the wind turbine.
Combined, we have a very strong backlog of 13.5. Still, a strong position for Vestas. With that, I leave it over to you, Anders.
Thank you, Marika. So let me then talk about the strategy and profitable growth for Vestas. I will start with a couple of slides on the market environment, talk about the key differentiators that we have, and then go in a bit more in detail on the strategy. So if I start with overall electricity market, two key takeaways on this slide. First of all, there is growth, fairly modest growth in the total market, around 3% globally. But a fairly different picture when it comes to new installation and new electricity when it comes to OECD markets, that are fairly flattish, and we see a growth in the non-OECD markets. So this is the overall market.
The other part of the market is, of course, then in Europe and the U.S., and then, where you don't have a great need for new energy consumptions, but actually then it's a replacement market where existing power plants are being retired. External estimates says that there is about 200 GW of capacity that will be shut down for the next 10 years due to economic end of life and also environmental reasons. As you can see then, wind is expected to take a fair share of that market. This market then is, of course, also then reliant on policies, the replacement, the incentive for replacing existing power generation that will determine the size and the timing of the replacement cycles. So how competitive is then wind?
If these are the sort of two main markets, of course, the more competitive we are against the alternatives, the larger addressable market we have. And that's why it's so important to work on improving the cost of energy for wind. That gives us both access to a much bigger market. On the global scale, wind is still only 2-3%, but it also gives a more stable market because we get less dependent on policy decisions. Today, then, wind in many markets, this estimate around 30 listed countries, is already on par with gas. So we have seen a lot of positive development, and looking at the last five years, we can see back then in time, you can see that wind has actually improved the cost of energy with 15%, while most of the other alternatives actually have increased in price.
So historically, there is a good development. Going forward, this is a key objective for us to continue to drive down. Then jumping into the forecast for the wind market overall, and these are two different external sources. One, a bit more optimistic, around 10%, CAGR, and the other one, a bit more cautious on 4. We think that these are good intervals that we have used in our planning process and our strategy process on our view on how we think that the market will develop. The differences comes a bit from, of course, where the starting point is, and that we probably get more clarity now as this year start to progress, and we see what the market was last year.
Then I would say that the other big uncertainties are, of course, political policies, when they start and end, and the other part is around the offshore timing and size of the offshore market. But for us, investors, we think these are two good intervals for our planning purpose. So what are then the key differentiators for us that we need to leverage on also going forward? First of all, the installed base. We have an installed base that is 50% bigger than our closest competitor, and this is a great asset to have, not the least when we talk about service business going forward. The lost production factor is really what our customer cares about.
That's in the end of the day, the return they get on their investment from Vestas, and that we continue to improve that and that with world-class products, but also installation just in time, best-in-class monitoring device, and get the most output of an installed base. It's the business case for our clients. Next part is the technology leadership around the product portfolio. We have a strong product offering, both for different geography markets, but also for different wind sites. And last but not least, is our global reach, of course, in sales, but also in installation and in manufacturing, and also evident from the fact that last year, we had order intake of 6 gigawatts, and it was spread from 37 countries from across 6 continents. So Vestas has a global reach, and it is a competitive advantage.
Working in more to the strategy, and if I start with our overall long-term vision is to be the undisputed global leader in wind. We need to do that by bringing wind on par with oil and gas, being the market leader in volume, generate best-in-class margins over the cycles, and have the strongest brand in the industry. So that's our long-term vision, what we need to strive for in the company. We have identified 4 strategic objectives for the midterm, so 3-5 years, where, of course, we have a lot of detailed actions and KPIs to drive internally. Grow profitable in mature and emerging markets, capture the full potential of the service business, and then 2 objectives that enables this, and that is to reduce the levelized cost of energy.
As I said, that increase our overall addressable market and actually provides a more stable market environment and improve operational excellence. That's our earning capabilities. That enable us to go for this profitable growth. And of course, then the execution of the strategy. So a few more words on each of these objective. Grow profitable, that, and our ambition there is to grow faster than the market. We need to strengthen the position, we have a solid position we have in mature market, and at the same time, grow share in the emerging market. A number of different initiatives to do this. One, to highlight is that, a large part of our business comes from a strategic accounts, often European or U.S. based.
They are now looking for opportunities outside the mature market, and of course, a natural for us to follow them in their expansion. We will build this on a partnership based on value, the business case certainty, and a stable and financially strong company. Overall, our leverage is our global reach and as working as a trusted partner. Next part is the service business, and to grow that by more than 30%. We, of course, have a strong relationship between new orders, making sure that that is always connected to the service contract and also continue to work on the renewal rate. But I also see a great potential in a more segmented service portfolio, and that's also feedback that I get from having talked to quite some customers now since I joined Vestas.
We should be able to get more efficiency from our scale in services by doing things consistently in the same manner across the globe. And I have therefore also decided to create a new service organization reporting directly to me to get increased focus and transparency on the service business. And here, we need to leverage on the biggest installed base. As I said, an important third objective and enabler for the above is the continued reduction of cost of energy, and we aim to do that better than the competition and faster than the market. It's a lot about new product functionality with larger rotors, bigger generators.
It's about cost out program on our 2- and 3 MW turbines, and it's making sure that we industrialize the whole process from product development to manufacturing and delivering, and use scale wherever we can. Main competitive advantage for Vestas, sorry, is that we have the largest R&D organization focusing on industrialization and cost out. Last but not least, operational excellence, and that is really to improve our earnings capability, also an important enabler in the strategy for profitable growth. Here, we look at external spend to lower our variable cost. Again, a model of product design that reduces lead time and cost. So we have cost KPIs in place here, as well as continued focus on our fixed capacity cost. And we're looking at, for example, shared service centers, increased outsourcing, and further site consolidation.
So not lose track of the good work that we've done so far on the fixed cost side. At the same time, of course, working capital, cash flow continue to be very important for the company, and here, the focus now is on reducing lead time in the total chain. The key competitive advantage and differentiation for Vestas is the economy of scale that we have, and also we have no other business than wind. We are 100% focused on optimizing this business. Last but not least, strategy is also about execution and a few words with that. As I said, I decided to create a service unit reporting to me, also decided to increase the speed of implementation of the decision by adding some members to the group management team.
Overall, when it comes to governance, we need to create more measurable units and actually drive accountability and control of those units in order to increase the speed, the transparency, and of course, accountability over the organization. We also decided to, instead of a bi-yearly, have a yearly strategy cycle. This is a fast-moving market, and we need to stay very close to the market and control what we can control within the company. Overall importance for me is that we work with speed, that we simplify, and that we drive accountability in the organization. So to summarize, the ambitions, grow faster than the market, grow the service business by more than 30%, reduce the Levelized Cost of Energy faster than market average, and improve earning capability.
That's the key ambitions in the midterm strategic plan that should bring us closer to our overall vision of being the undisputed leader in the wind industry. Please, Marika, welcome back.
Yeah, so, what Anders have taken you through, what does it lead to in terms of the outlook and the guidance for 2014? We have chosen to guide for a revenue of minimum EUR 6 billion, EBIT margin of minimum 5%, total investments of approximately EUR 250 million, and free cash flow of a minimum of EUR 300 million. So, a minimum guidance, we expect to continue to grow the service business with stable margins. The midterm financial targets are ROIC, and what we mean by that, we say that we will deliver double-digit ROIC over the cycle, but a double-digit ROIC every year.
Just to transfer that to what where we are right now, we actually in 2013 delivered 7.7 with a 3.5% EBIT margin that I showed you earlier. Free cash flow, positive free cash flow every year, and the capital structure, net debt to EBITDA to be lower than one. Solvency ratio must be over 30% every year, and the priorities of excess cash is to pay back debt if net debt to EBITDA is above the target, and allocation to shareholders if solvency ratio is above target. So we have decided to do a capital increase of up to 9.99% that we see benefiting our customers, our suppliers, and we also, as Anders said, have a new bank agreement.
To tie that a little bit to what Anders have talked about in the strategy part, we have now delivered a turnaround plan. We have a strategy going forward that's very much built on the turnaround plan that we have delivered, so it's nothing revolutionary. It's make sure that we capture and continue develop what we have done up to this point. So the capital increase, together with the bank facility, is actually two enablers for us to accelerate the strategic objectives going forward. So that is one of the main purposes of this capital increase. So the raised bank agreement, what does it mean? We have a revolving credit facility up to EUR 850 million. It expires in 2019, so a five-year tenure on the facility.
We have a full facility available for project guarantees, and that relates very much to what Anders talked about in the strategic objectives on, growing in both mature and emerging markets, then project, guarantees are extremely important. We have an outstanding, corporate bond, of EUR 599 million that is falling due in end of March 2015. Anders, welcome back. I think I stay here now.
Yeah. So to summarize then, what we talked about today, successful turnaround, really see that in the results in Q4. So fixed cost saving of almost EUR 500 million, CapEx requirement low, by more than EUR 500 million, net working capital, negative EUR 600 million at the end of last year, a free cash flow of more than EUR 1 billion for 2013, and improved in operation. Talked about the capital increase and why we need it to do that, to strengthen our, our balance sheet going forward and looking beyond now, really to change gear, get into profitable growth.
Talked about the service business, the potential there, the growth in the different types of markets, the relentless focus on making us more competitive against alternative sources on the cost of energy, and of course, improve our earnings capability are all key for the realizing and executing on the strategy going forward. So with that, we should open for Q&A, and also then say that we will have a Capital Markets Day on 12th of June. I understand that our limited time where we can go through the sort of more detail of the strategies today. So therefore, we will also do that to give you an opportunity to go a step further of understanding the strategy. Thank you very much.
Thank you. We will now begin the question and answer session.
This is Claus Almer from Carnegie. I have three questions. The first one goes for cost savings. How much do you expect to see in 2014 as a full year effect? That would be my first question.
Yes, and as we have said here, we have up to this point made 484 in savings, in fixed capacity cost savings. And we will, of course, as you're alluding to, get the full year effect on those savings for 2014. I think it's very important to bear in mind that we will, of course, continue to expand on the good momentum we have now, so we will continue to make improvements in 2014 as well. We also have a program running when it comes to cost out on products, so that will also have an impact on, in particular, the gross margins going forward.
Could you put any rough estimate to the year-over-year improvement?
Well, we are not disclosing the yearly improvement on the... I think that what is important to know is that what we have achieved will be maintained, and the strive is to do more.
Okay. Then the share caps increase, I guess with a positive net cash position, some are struggling to really understand why it was necessary to raise even more cash. Could you please put a little bit more color to why you're doing this?
Yeah.
If I start, and then you fill in. I mean, as I said to some of you, I think, is that I've met a lot of customers now during my first 5 months, and it's very clear that there are a number of different buying criteria, and one of them is the financial stability for the long term. These are 20-25 years investment, and that is an important decision criteria for customers. So increased competitiveness and therefore the enabler for better business is one key.
Yeah. And actually expand on what Anders said, if you look at the three out of the four pillars in the strategic objectives, you have growing in emerging and mature markets. And as Anders said, I mean, we would like, we want to compete head-to-head with our competitors that have a stronger financial position. We also want to grow the service business and one enabler there, we are of course dependent on the turbine sales, but we are also committing to a very long-term service contract, and our customers want to know that we are there for the long run.
Also, if you look at the operational excellence targets, we have the ability with a stronger balance sheet to get better terms, payment terms from customers as well as suppliers. So that, of course, is an enabler to further improve the net working capital. As I said before, I think the main sort of reasoning for doing it now is that we, by that, have a chance to accelerate those pillars in the strategic objectives together with the bank agreements.
But you're still cash flow positive-
Yes.
But that's not a question. My third and last question goes for the long-term targets, which I guess isn't that aggressive. Can you also put some more color to why you came out with, you know, you're almost at ROIC at close to 10%,
Should we expect your EBIT, EBIT to go between EUR 200 million and EUR 600 million over a cycle, or how do you look at that?
What we are saying is that we will deliver a double-digit ROIC every year in the cycle, which means even in a trough. So you can say that 2013 has been a challenge from a volume perspective, but we have still delivered a ROIC of 7.7 and an underlying EBIT of 3.5. So that is to give you the flavor that we will be double digits, over, or double-digit ROIC even in a trough. And obviously that correlates to black numbers in the trough of the cycle, on the EBIT margin.
Lars Heindorf from ABG. Also a couple of questions. First of all, I'd like to get a better sense for the cost outs. You mentioned some numbers about sort of the year-on-year improvement in the costs. I think it was EUR 480 million. How much of that is gonna be derived from group cost, or how much is gonna come from the turbine production?
Well, most of what the focus now and the programs that are running, the programs that have been running up to the closure of the turnaround program have been closed. We are not running any programs on the pure OpEx right now. That doesn't mean that we are not continuing to further create efficiency in terms of what we have delivered up to this point. So most of the improvement and the programs running at this point is cost out on programs. So that will have an impact on, as I said earlier, the gross margin.
Okay, what—and just to stay with that, what, what kind of utilization are you running at? Earlier, you said that you had yearly production capacity around 9 gigawatts. Following the restructuring and some of the sale of the factories, what are you down to now?
Well, from a capacity point of view, when we talk about facility and machining, we are probably at 7-8 GW. But we then would have to or we need to increase the number of employees, blue-collar employees. So that's the flexibility we have created in the company.
Okay, then the last question is regarding the still around the project margins. In connection with the Q3 report, you were asked about sort of the margin in the backlog, and I think you said that the Q3 margin was probably sort of roughly representative for the backlog. Now we have Q4, the margins are looking even better. Can you give us an indication about sort of the margin potential in the backlog?
Well, we are not guiding on the margins, on the project or on the order backlog. What I said is, for 2013, Q1 was not representative because we had a small quarter with a couple of bad projects. Q2 and Q3, more representative, and we did a very good Q4. So to give you some indication, it's a blend. You will have a blended picture, and you will have some differences quarter-over-quarter going forward as well.
Thank you.
Wow.
Yes, Casper Blom from Handelsbanken Capital Markets. A few questions from my side. If you look historically, your invested capital has been very volatile between the years. I mean, if you look ahead in the strategic period, the next three to five years, I mean, can you try and indicate what kind of invested capital there will be in the business, if you could indicate some kind of absolute level?
Well, I will not indicate any absolute level, but of course, the efficiency on the invested capital will be part of us delivering a double-digit ROIC, even in a trough, even though earnings is the main contributor, and that you can also see what Anders presented on the slide. You see the spike upwards in Q3 and Q4 because of positive earnings.
I'll try and ask my question in another manner here. How do you want us to think about working capital? Will you be able to operate with negative working capital for the cycle?
Well, I mean, you see how we're guiding in 2014. We are saying minimum EUR 6 billion revenue, minimum EBIT of EUR 500 million, contributing to a minimum cash flow of EUR 300 million. So of course, that alludes to that we are maintaining what we have delivered up to this point. So we are focusing on maintaining the activities that we have had in place and now embedded in the operation. And we, of course, strive to do even further improvements, and that will be in particular on the megawatts and the completion.
The second question, it relates to your operational excellence. It's going to continue here. I mean, what kind of costs should we expect in connection with that? I mean, do you have some kind of guidance for special items the next three to five years?
Well, as I said earlier, we are not expecting to launch any big programs, and as Anders said in his strategic part, it's more continue to work on what is already embedded. So we will look at more efficiency, and that will, to a large degree, the processes that we now have implemented, and that you can also see one of the processes is Q4, that we actually did a very flawless execution of Q4.
Okay, and then just one final question here. If you look at your EBIT margin before the corporate bonus, then you were already at 5% level. I mean, how do you want to think, make us think about the corporate bonus targets for next year? I mean, 10% ROIC doesn't seem very ambitious, especially if you look at the 5% pre-bonus EBIT margin.
Well, as I said, the positive on the ROIC is, of course, that we are saying we will deliver a double-digit ROIC even in a trough. And of course, the strive is to be above 10% for the company. And as you are alluding to, we are already with a 3.5 margin that we have delivered in 2013. We are at 7.7%, ROIC.
Thank you.
Thank you. It's Robert Clover from Recharge Insights. I've got two sets of questions. First, on some of the emerging market growth opportunities that you alluded to. Could you perhaps remind us where your focus will be, and also give us some insights on whether you feel it's possible to grow profitably in some of these new emerging markets with auctions and local content requirements, and also some of the new market segments that you expect to be looking at? Thank you.
Yeah. So, I mean, as I said, I think during last year, we took new orders in 37 markets. So of course, it's a lot of different markets, and we've seen a very good growth in, for example, South Africa. We see a lot of interest coming up in Middle East. We see a lot of interest in Latin America. So also, Asia, outside China, actually, we see interest in new to wind. But of course, the big three markets are on emerging markets is, of course, China, India, and Brazil.
And of course, you're right, as I also said, as enabler for us to grow profitably in those markets, is that we execute on our earnings capability, and of course, also on our cost out program for the turbines that are relevant in those markets, and also that we continue to execute on our strategy on reducing the cost of energy. So those are enabler that helps us to take share on those markets.
Thank you, and, sorry to come back to the capital increase, but also, if I look at your numbers and your projections for free cash flow, it does look as if you could end up this year with quite an attractive cash position. Could you just, for the record, rule in or rule out any M&A ideas that you may have? Do you need to inject any cash into the offshore joint venture? And perhaps you can make a couple of comments on what you mean exactly by allocation of cash to shareholders, do you envisage buybacks or dividends? Perhaps some comments there, please. Thank you.
If I start, I mean, the strategy that we describe here is based on organic growth, so to be clear on that. So that's how we have planned the strategies. We have not included any M&A on that, and that is not the reason for the capital increase. There are no changes in our plans for the joint venture with Mitsubishi and offshore, it's as we have communicated before, and there are no update or changes to that.
The allocation to shareholders, as you saw on one of the slides that I presented, if we are net debt to EBITDA below one, yes, and also, if we have a solvency ratio above 30, we are intending to allocate to shareholders. But that, of course, will be also a decision from the board side. But we have a policy in place which says 25%-30% of the net result to be allocated to shareholders.
Many thanks for your answers. Thank you.
Hi, Lane Greene from The Economist. Does the recent shift in EU climate policy towards climate, so CO2 targets rather than renewables targets, implicate anything important for your long-term strategy?
There is actually both a CO2 target and a renewable target of 27%. The next step of that is, of course, that then needs to be broken down to fixed targets per market in the EU. So that's the next process. So before that, it's very hard, of course, to predict, but we are working hard on also supporting the next step on getting further clarity on how that renewable target of 27% is broken down for 2030. But it provides a long-term clear guidance of where the EU is going.
How important is it for you that you see binding targets? You talked earlier about trying to get away from dependence on public policy. Do you imagine that even if those targets are not what you were hoping for, that you will be able to compete and grow profitably without that sort of guaranteed-market.
I mean- dependency on policy, of course, creates volatility in the market, both on the upside and on the downside, so to speak. When the policy is about to end, you see maybe a bit artificial high market, and if you have no policy, you see a low market. So of course, from a cyclical point of view and a volatility point of view, we would like to see long-term targets that we can plan for and that investors that invest in wind can plan for. So long-term targets are important. When it comes to the dependency on them, as I said, there is a big replacement market especially around coal, some nuclear as well, that needs to be replaced.
That is partly driven by environmental concern, and it's partly driven by end of economic life. And of course, the speed of that change-out will be dependent on what kind of policies are in place, and therefore it is important for us, for the overall market. But most important is the long-term visibility on the targets and the policies in place, because that actually gives us the possibility to plan better.
Claus Bomsdorf, Wall Street Journal. Do I understand correctly that EUR 2.1 million of the bonuses of EUR 97 million will be paid to the executive management? And second question, when was the last time that Vestas did pay out dividends to its shareholders?
So I start then, the bonus program we have in Vestas is for all employees, including blue-collar employees. So the bonus provision that we've done is actually for all people working in Vestas and not for executive management only. There is a description on the executive management pay structure and bonus structure in the annual report. But the reserve that we've done for bonus is for all Vestas employee. And on the dividend, as for-
Yeah, sorry, just to follow up. That's what I meant. I mean, EUR 97 million to all employees, and of this EUR 97 million, EUR 2.1 million is going to the executive management, because the annual report mentions EUR 2.1 million. That I understand correctly now?
Yeah. Exactly.
Yes, perfect.
Yes.
Thank you very much. And dividend, yes.
Yes, if I recall correctly, and I'm looking at last year on the dividend, is 2003.
Okay.
Uh-huh. Okay. Okay.
Okay, so, operator, do we have any-questions
Questions ?
Yeah. Thank you. We will now begin the question and answer session by phone. If you have a question, please press star, then one on your touchtone phone. Kristian Johansen from Danske Bank is on the line with a question.
Yes, sir. Yes, hello, I just have a question regarding your growth into new markets. How will that impact your project margin short term, meaning in 2014 and 2015?
No, I mean, for 2014, of course, we have the guidance that we have just given of a minimum 5% EBIT margin. Long term or mid-term in the strategic plan, the important enabler for us, of course, to grow our market share in those markets are the objective to improve earnings capability with operational excellence. We're focused on margins and cost out programs and lowering the cost of energy. So those are important enablers in order to penetrate the emerging markets.
But, will it not have a dilutive effect on project margin short term?
Well, as Anders is saying, and it also states very clearly in the strategy for Vestas is to grow profitable, and we are also saying that we want to extend our global footprint.
Okay, thank you. That was all for me.
Pinaki Pinky Das from Bank of America is on the line with a question.
Hi, good morning. Pinaki Das from Bank of America Merrill Lynch. I guess a lot of people have asked questions. My question is more about the guidance and the growth outlook that you've given. We can see that you've guided for a minimum number in terms of revenues and margins. And just looking at 2013, you've already done more than EUR 6 billion of revenues. We know that the U.S. market is coming back in 2014. As you've mentioned in your equity increase, you're targeting for more growth in emerging markets and in service. So I'm just trying to understand here, you know, what sort of revenue growth can happen versus 2013, and, you know, is your 2014 revenue guidance very conservative here?
Secondly, even on the cost side, you've guided for, you know, margins going from 3.5 to at least 5%. But, you know, at the same time, you're also mentioning about more cost initiatives in the coming years. So again, you know, what sort of upside can we get on the margin side for the next year and or two? Thank you.
Okay. If we focus on 2014, I think it's very important to remember it's a minimum guidance. So, and we perceive the guidance to be realistic, and that doesn't mean that we're not striving to do more than what the guidance is.
Is that both in terms of revenues and margins?
Yes, as they are all the minimum parameters, and that will, of course, be the same for the cash flow.
Okay. Thank you.
Sean McLoughlin from HSBC is on the line with a question.
Good morning. I had a question on the U.S. margin. If, if I look at your pricing in Q4, it looks like it's come down to about 0.9. You suggest this is the larger proportion of supply only. Can I confirm from you that the profitability for these projects is in line with projects in other areas, or is the U.S. a lower profitability region for you? Secondly, just to re-ask the same question, can you give us an update on the target that there was your official target at the Q3 stage of a midterm EBIT margin of single digits with a normalized U.S. market? Thank you.
Yes. If we take your first question, what I said is that the order intake that we had in Q4 of last year was to a large degree the U.S. market with a large proportion of supply only. And as I said, that doesn't mean that that will impact the margins negatively, because that is also a lower cost related to those projects. Sorry, remind me about your second question.
Could you give us an update on your medium-term EBIT margin guidance, which was a high single digit EBIT margin with a normalized US market?
Well, we have now chosen to guide on ROIC, and what we have said is the minimum is 10% every year in the cycle. Which means that we will be at least 10, even in a trough. And just to give you some flavor, last year, which I think we can consider a weak market, a weak year for Vestas. And there, we actually delivered 7.7% ROIC with a 3% 3.5% EBIT margin. So we actually were in black numbers even with that reduced volume.
Thanks.
Daniel Patterson from SEB is on the line with a question.
Yes, Daniel Patterson from SEB here. I have three questions. First of all, a question for Anders Runevad here regarding market share. You've talked a little bit about it. It's easy to say that you want to gain market share, but I'd like to know, what are you going to do differently in the future versus the past to gain market share? I mean, are you willing to invest in sales? Do you believe you have lowered costs so much that you're more competitive? What will you do differently to gain market share? That's my first question.
Yeah. So I mean, what we said on the midterm objective is to grow faster than the market. So of course, we are targeting them to improve our market share. And we see that, of course, in mature markets, we have a solid market position, but we see room for further small improvement, definitely. On emerging markets, in many of those markets, we actually have a fairly low market share, and that market is also several different segments on the market. And our proposition of value on certainty in investment on 20 years guarantee return, we also think is a good segment that is of increasingly importance also in emerging markets.
And the way to do it, a number of different initiatives, but one thing that I also said was that we see that our strategic accounts or you can say global customers, they are looking now at establishing themselves in more emerging markets. Those are customers where we have existing business relation, that we have a long-term history with, and of course, it's natural for us to follow their expansions into emerging markets. And other initiative, an important enabler for us, of course, to look at this over time is the cost out exercise that we do, especially in our 2-megawatt platform. But again, let me emphasize that this is about profitable growth. It's not about market share. Though it's profitable growth, it's the midterm plan on three to five years.
Okay. Thank you. Then I have another question regarding cash flow, and it's regarding your 2014 cash flow guidance, and perhaps some flavor on how this played into the very strong Q4 cash flow. Obviously, you had a very strong net working capital sort of release in the fourth quarter. We would expect some flow back in the first quarter, but how has this sort of played in, you know, the strong Q4? How should we think about that versus the 2014 guidance?
Well, as I've said, there is a minimum guidance, so we are guiding minimum EUR 6 on revenue, minimum 5 on EBIT. And that, of course, is reflected on the minimum guidance of the cash flow, that is EUR 300. So we are maintaining what we have delivered on the working capital up to this point. And that, of course, doesn't mean that we are not striving to further improve the working capital. And as I said, the working capital project that we have in place or initiated in 2013 will continue also in 2014.
Okay, so really what you're saying is you're quite comfortable with the cash flow guidance. Is that fair?
We think we have a realistic guidance overall.
Okay, and then my final question, just a housekeeping here. Is it correct that the minimum guidance that is not enough to get the bonus in 2014?
Correct.
Thank you, very clear. Thank you.
Thank you.
Jacob Pedersen from Sydbank is on the line with a question.
Yeah, hi, just a question on seasonality. You've experienced quite some ups and downs in 2013. Should we expect the same kind of seasonality in 2014? And then, if we should, what are you doing to improve this situation and create a more stable flow through the year?
Well, the business we're in, you will see some seasonality going forward. So that is nothing that we can change. What I think we have done and also proven already in Q2 and Q3 is that we are mitigating the seasonality with all of the programs that has been delivered under the turnaround. So of course, the flexibility to handle lower quarters is significantly improved through the turnaround program, and the lower of the fixed capacity costs and the continued cost out on products. So that is the enabler to sort of, we have reduced the break-even point of the company, and that, of course, will have an impact on the seasonality as well, positive impact.
So we can continue to work on what we can control, our own controllable cost and flexibility. But of course, it will continue to be seasonality, because it's business to business, and that's how this market works. And of course, we're all highly dependent on the customers for our business.
Okay. Then a question on the cost side. You say that you have a lot of, still a lot of cost out initiatives in the strategic plan moving forward. But you also launched a lot of new initiatives improving precision on some of the markets where your presence is not that good today. This must also yield some cost increases when we look into the future. How should we model this?
I mean, generally speaking, of course, well, again, we have to be more flexible, and we have to be quicker to adopt. And that means, of course, making sure that we can scale up, both when it comes to the sales capability, but also when it comes to, of course, delivering in the manufacturing, where we see uptake in those markets. And at the same time, we also have to be able to scale down quicker in the markets where we don't see any growth. So it's all about our internal flexibility. And as we have said as well, of course, I mean, also during last year, we actually reduced our fixed capacity and our headcount quite substantially.
At the same time, we hired people in the U.S. because we see an increased market in the U.S., and we started that expansion on the factory side towards mid-end of last year. So internal flexibility with the market, when the market is moving, use our global manufacturing scale, controlling what we can control. That is what we have to do going forward.
Okay, thanks a lot.
David Vos from Barclays is on the line with a question.
Good morning, guys. A couple of questions from my side, please. First of all, on prepayments. I note that as a proportion of order intake, prepayments in 2013 were actually down quite a lot versus 2012, and I wondered if you could comment on that. Is that a, you know, a shift in payment terms in the industry, or was it something more particular there? That's question one. Yeah. If you look at, yeah, as you said, the prepayment is for both Q4 and for the full year. I would say rather flat. And of course, I think it's good that we have actually maintained the prepayment level despite a lower revenue throughout the year.
But surely if the way to look at it is proportionally to order intake, right? As these are typically taken at the, you know, when the order is signed, or am I, am I coming at it from the wrong angle there?
As I said, I don't see we don't have any change in the payment structure or payment schedules from the customers. Then of course, it's not exactly the same everywhere on the global basis. And we don't have a concern with the flat levels that we see right now.
Okay, thank you. Then my second question around capacity utilization. It was addressed already earlier in the context of machining, where you mentioned 7-8 GW, I think. But could you quickly comment on the cells, towers, and blades as well, so we have a full picture there?
No, if that covers, that covers everything. I just gave an example, unfortunately. That, that is the overall capacity within the group. And if we, if we, sort of want to get there, we cannot do it with the current number of employees, so then we would have to increase. And we're talking about blue-collar or variable salary here.
Sure. Understood. Thank you. And the final question is around service margins, and a bit around Q4, where I note that on a, you know, a rather high growth, the expansion in margin was not that dramatic as it has been for the rest of the year. Could you comment on that effect, please? And then also on kind of what you were expecting for 2014, when you say that you do expect good growth. You know, if you annualize the 30% over the midterm, you know, looking at high single digits, at the very least, I would say, but yet you're expecting stable margins. So what's the, you know, what are the moving parts there? If you could comment on that, it'd be great. Thank you.
Yeah. And you will always see also on the service margins and revenue, you will see some fluctuations quarter-over-quarter. But if you sort of take an average, there are flat margins, and we deliver 22% margin on the service business. So we consider the service business as being a very stable business, and we see a continued growth for that business also in 2014.
Continued growth, but, but stable margins. That's, that's the message?
Yes.
All right. Okay, that's it. Thank you very much.
Thank you.
Mark Freshney from Credit Suisse is online with a question.
Good morning. I have two questions. Firstly, in the past, when you've announced measures to lower the levelized cost of electricity for clients and announced cost out initiatives, the benefit has generally gone back to clients and hasn't shown through in economics for shareholders. Do you hope to keep some of the benefits of the new cost out measures? And just secondly, on the service business, I know that you're, I mean, that's 2/3 of the group EBIT, and it's been the major growth driver. What are the risks, competitive risks, that you see to that business going forwards? Are you seeing competitors try to eat away at those margins or undercut you at all? Thank you.
Yeah. So if I start with the level, the cost of energy reduction, of course, it's our ambition to, because our ambition is to improve our earnings capability, so of course, as well as increase our competitiveness and of course expand our overall addressable market. So, I mean, that, that is all in the strategic initiatives and the initiatives that we have. So again, it, it's profitable growth and increased competitiveness, but actually also, an overall, bigger market. The second question was, around risk on services. As Marika said also, we view services as, as a very stable business, where we have, a good correlation between installed base and service revenue with, with, with stable margins.
Of course, having said that, I mean, we live in a competitive business, and that goes for both the turbine market and the service business. So of course, in a competitive environment, you always have to make sure that you offer the best value to the customer.
Okay, thank you.
Patrik Setterberg from Nordea is on the line with a question.
Yes, hello. Question please, on your renegotiated credit facility and whether you will provide any security for this facility, and potentially also, subsidy guarantees. And if so, how much in terms of revenue, EBITDA and assets those guarantees would cover, so to say? And also if you can disclose anything about the type of covenants in the facility and also the related levels. Thank you.
Okay. We are not disclosing any details in the agreement apart from what I said earlier. We have a five-year tenor. We have a full flexible facility when it comes to project guarantees. What I can say, though, is that the condition the company have negotiated under to get the new credit facility, compared to the situation the company were in when we negotiated the present, is significantly different.
So, in terms of sort of increased flexibility, that would also, I assume, then sort of relates back to the sort of broad extensive security and sort of asset hedges you were you made under the sort of previous facility, so to say?
What I'm saying is we have negotiated a facility that we are very satisfied with.
Okay. Thank you.
You're welcome.
Alok Katre from Société Générale is on the line with a question.
Hello, hi. This is Alok Katre from Societe Generale. A couple of quick questions from my side. Really just drilling down into your revenue guidance. You say greater than EUR 6 billion. If I look at the order flow through the year, and if you look at the master supply contracts that you have, I'm just trying to reconcile this with the revenue guidance, really. Is it timing of deliveries or is it something else that's driving your, what I'd say is conservative guidance?
As I said before, I think we—our perception is that we have a very realistic guidance, and it is, and I say again, it is a minimum guidance of 6, so we are striving to do more than 6.
Okay, just, just to put it another way, do the master supply contracts that you have in the U.S. figure are already included in the guidance, or is it something that will come over and above if they were to be converted?
Ah, we will not comment on that.
Okay, fair enough. The second question that I have is a bit on the product cost out benefits. If you could just help us with the phasing of the cost out benefits. Is it something that you recruit through the year, or is it something that's gonna be backloaded into 2014 or perhaps 2015?
As I said, we have programs that are running right now, and that will, of course, come with volume, will have an impact on this year, but a gross margin impact. And as Anders said, in the strategic targets when it comes to operational excellence and also the levelized cost of energy, I mean, the focus is to a large degree to sort of do more, but the programs that we have right now will deliver in the coming years.
Okay, thank you. And the last one from my side, in terms of the services business, really a bit of two-part question. One is, what led to the roughly EUR 50 million lower revenues in Q4 versus what you had guided for? That's the first one. And the second one is, in terms of the guidance for flat margins, are you not seeing the benefit of the full service contracts, which are typically more than 90% of your, new order flow? Is that something that you're not seeing, or is it more something that should only impact really in the three to five-year timeframe?
Okay. When it comes to the EUR 1 billion that we softly guided on for 2013, yes, we deviated EUR 50 million. And as I said, we can have slight fluctuations, but I think if you compare to 101 or 954, if I recall 100% correctly, it is still a very stable, stable business, both in terms of revenue and in terms of profitability.
Okay, fair enough. And then the full service contract benefit?
I mean, of course, the service margin that we talk about is the combined margin of the service portfolio, and we feel that that margin is stable, very much driven by the type of service contract. And then, we don't give guidance on individual margins, on individual part of the service portfolio.
Okay, thank you.
Klaus Kehl from Nykredit Markets is online with a question.
Yes, hello, Klaus Kehl from Nykredit Markets. Two questions, please. The first one is, probably for Anders. You said that you have met a lot of clients lately, and some of them, they had a wish for a stronger balance sheet. But does that also mean that you have lost business due to the current balance sheet? That would be my first question.
That is, of course, very hard to predict, and there is no customer told me that we lost a deal due to that. But so that's very hard to predict, but it's also very clear that a strong requirement and an important decision criteria for the customer is a financially strong company, and that you go into a long-term agreement with.
Mm-hmm. Okay, and then, my second questions would be that, you said that, some of the large clients, they are increasingly looking at emerging markets. But does that also mean that you will need new factories in emerging markets, for instance, in, Brazil, South Africa, et cetera? And what would that mean for your CapEx level for, for the coming two to three years?
If you start with South Africa, then, I mean, we have taken a very large market share in South Africa with the current setup we have. I mean, we have since before manufacturing capabilities in both China and India. So, I mean, generally speaking, we don't see a need for increased investment in manufacturing and factories. Of course, having said that, further on to the strategy, it could be that we need to do some more blade production in some local markets. On the other hand, we have a new, much more investment-light solution that is easier to set up, and again, it's much flexible, more flexible to move between markets.
Overall, we have a good manufacturing footprint since before, and that is what we need to leverage, you know, going forward, also in those markets.
Okay, thank you very much.
That was the last question.
Okay. Then, I would like to thank you for your interest and for attending today. Thank you very much.
Thank you.