Afternoon, and welcome to Vestas presentation of the full year result, 2011, as well as our guidance for, 2012. Special welcome to press, and analysts in the room here today. We don't have as many in here as we normally have, in London or New York, and, but I know a lot of people are watching this as well, so of course, we will have a Q&A session also afterwards from people over the phone. Of course, we'll get to that after the presentation itself. The agenda that I would like to cover today is small introduction, but also update on the organizational changes, the financials at Vestas, the market outlook, financial guidance for 2012, and then of course, as I said, the actual Q&A session.
If we try to look at the main events as we normally do, Vestas sum up in one slide, then there are some very important key takeaways of what have happened over the last year. Firstly, the alignment of our organizational design to market dynamics has obviously been a very big focus point for us and still is. Vestas did realize its forecasted order intake in very tough markets. We were launching the V112 and GridStreamer, which gave us, regrettably, a lot of difficulties in the fourth quarter, and I will come back and talk about this, how this has impacted us.
To the best of our estimate, Vestas have during 2011 gained market share, and we are going to see a very high activity level in Vestas in the year 2012. This slide is basically a very important picture of how we see the year developing this year. Those of you following Vestas will know that normally when it comes to the shipment, that means when the turbines are leaving our factories, we are very busy in the fourth quarter.
But as you can see here, as an illustration, then we do expect that to be different in 2012, where we do expect to see a very high activity level during the midterm of the year, and then things slowing down at the end of the year, which obviously has a lot to do also with the fact that the PTC possibly is not gonna be extended, which means a lot of orders for delivery have been more front-end loaded, and therefore, the activity level is going to be very high in the beginning of the year and the midterm, rather than in the past, where it has been more sort of the opposite. We just say that because when people are watching Vestas, this is important to remember.
What is also important to look at here is that we estimate shipments of around 7 GW or 7,000 MW. That is actually an increase in activity level of 44%, compared to the activity level in 2011, and this has to be handled in the year 2012. At the same time, we are sticking to our targets of reducing the total cost of EUR 150 million in the fourth quarter. We have already had to say goodbye to approximately 1,000 colleagues that have been made redundant. So we have on one hand to execute something which is 40% higher, while at the same time, we have to work with a more leaner Vestas during the year.
If we start with the organizational changes, then, last night, they sent out two messages. The first one was that the board of directors of Vestas Wind Systems had received a thorough briefing on the conditions and during the last months have led to the profit warnings. As a consequence of this, our CFO and Deputy CEO, Henrik Nørremark, has resigned. Also, at the same time, it was announced that the chairmanship, Mr. Bent Erik Carlsen and Torsten Erik Rasmussen, will not stand for re-election for the board of directors at the annual AGM on the twenty-ninth of March, two thousand and twelve. Let me just say that, despite these developments in the organization, there are absolutely no changes to the strategy that was laid out and approved by the board already earlier.
Therefore, what we are targeting, what we are working on in the executive management and throughout the company, is 100% aligned with what we previously had planned, and that those are the plans that we are following, irrespective of these changes. Coming to the overview of the employees and the headcount reduction since the full year 2010. You have here on the left-hand side, how things have evolved in terms of the employees and the expected employees by the end of this year. On the right-hand side, you have a geographical distribution, where you still can see that approximately 60% of the people working at Vestas are in Europe, 16% in Americas, and 23% in Asia Pacific.
In these numbers, we have not included the potential layoff in North America of 1,600, in case the PTC is not extended, a matter that we are going to review during the year, as we see how the political situation actually do develop in United States. Now, let me turn to the financials. Shipments, as I just mentioned earlier, are the primary cash generator for Vestas.
If you look here, you have the actual shipments as they have taken place over the last few years, from 2008, going up here to 2011. Here, please remember that we originally, for 2011, guided on a much higher shipment level than the one that we actually realized, because of the challenges with the implementation of new technology, which obviously severely hurt the company's earnings last year. Even though the activity level actually increased by 25% in 2011 compared to 2010, we had planned for a much higher activity level, but that did not materialize because of those challenges with the introduction.
As I mentioned, even though the activity level was 25% higher in 2011 compared to 2010, then we actually do expect that the activity level in 2012 is going to be 440% higher than 2011. The deliveries, that is, after the accounting changes, the ones that are the primary driver for our revenue and how they have evolved over the quarters. That means when we recognize the revenue and the earnings, and there you can see in the fourth quarter 2011, it was just around the 2 GW versus 2.5 in the fourth quarter 2010. And because of those challenges with the ramp up in the generator factory in Germany, we actually deferred a lot of deliveries and revenue recognition, that is going on into 2012.
And other matters that are somewhat outside Vestas control, and I'll come back to that in a minute, is obviously that if the weather conditions at the end of the year are not the best one, it is tough to install turbines. And we have just, for the sake of good order, actually measured that the average wind speed in December 2011 was 30%-45% higher than average over the last 10 years for most German regions. And that actually means that you cannot install turbines when the weather is of such a nature. And that, again, of course, impacting the revenues. If the projects are not completed, we cannot take the revenue recognitions.
If you look at our geographical spread of deliveries on the right-hand side between Europe, Americas, and Asia Pacific, you will see that the distribution of deliveries within the three regions, which should be fairly self-explanatory, how they went. But what is important to notice here is the development, in particular in China, where the deliveries was lower than last year due to two issues. One was grid constraints in China, and another thing was an unacceptable pricing level in the Chinese market, where we decided not to participate at prices and terms and conditions at such level, as they would not support Vestas forward. Therefore, we actually took the decision not to follow some of those terms and conditions in the Chinese market.
Overall, because of these challenges, Vestas came out with a disappointing result, no doubt about that, for 2011 compared to our original expectations, with revenues of EUR 5.8 billion and operating profit before special item was -38. And we had special items in connection with the closure of 22, bringing the total operating profit to minus 60. And after tax and financials, it went to a total minus of 166. This is the first deficit that Vestas has realized since 2005. And as I said, it is indeed disappointing. And if you look underneath in the gross margin, you will see here a big part of the explanation, apart from the low activity level, also very much related to the development of the gross margin.
Coming back to, let's say, a bridge of where we initially anticipated to be, namely revenues in 2011 of around EUR 7 billion, that turned out to be EUR 5.8 billion. First, the delayed ramp up of the generator facility moved revenues of around EUR 600 million. Then weather delays cost us EUR 210 million. Then there were, let's say, anticipated customer delays when we came with the announcement on the third of January of another EUR 140 million, and then some production delays of another EUR 50 million. Once the final account was done, and that's why it's in a gray color versus the blue color, then we had additional customer delays of EUR 164 million, which brought the revenue further down to the EUR 5.836 billion, where we ended up.
This is also important to be aware of when you look at the sensitivity, how we can take the revenue and earnings in as we complete the projects. If we turn to the EBIT side, we had originally anticipated EUR 490. Then we lost approximately EUR 200 from volume effect from revenue change. We had the cost up from delayed ramp up of generator facility, volume effect from revenue change of EUR 145, and then the cost overruns that I'll come back to in a minute, and the cost out not achieved, and writedowns, plus some special items. All of this led to the -EUR 60 realized in 2011.
Of course, with the downward adjustment that had to take place on the third of January, it's important to understand, which at that time was reported to be 125, actually ended up by being 149. And where did these overrun actually come from? If you look at the gray box, you will see that, development cost of industrialization, which we, on the third of January, anticipated would cost us EUR 70 million, ended up by costing us EUR 86 million. If you look at the increased product cost, which we thought were about 30, turned out to be 41. And finally, provision and writedowns, which we, at that time, estimated could be around 25, ended up to be around, 22. Overall, giving a significant overrun in terms of the industrialization and product cost.
which obviously have been very expensive for Vestas in 2011, and is also an item I'm going to get back on when you look at the expectations for 2012. The challenge, in terms of this has been that the platform of the turbines simply have had too high costs, primarily on the V112 and the related GridStreamer technology. And, we have ongoing initiatives on costing out on these platforms to make sure that we do increase our, earnings, from these platforms, something I will come back to a little later on when we talk about the guidance for 2012.
But even though we had significant challenges in the fourth quarter from the generator factory in Germany, then this is not expected to have adverse impact on our 2012 shipments, even though we do expect a much higher activity level. And we also would like to make sure everybody understands that the product quality is not to be compromised in connection with this manufacturing ramp up, that we are in the process of executing. Not to go into all the details, but just to say that the development of the gross margin and the fixed costs, you can see the gross margin and the gross profit on the left-hand side, how this has evolved over the quarters. And in particular, if you compare 2010 to 2011, there are, of course, some big deviations here.
If you look at the development, the fixed cost also in terms as a percentage, then some of it increased due to additional, R&D, and of course, also related to the challenges that we had in the, in the fourth quarter. Turning to the balance sheet, just, a few items to, to highlight. The, the V112, and again, and GridStreamer, was brought into serial production during the year, and therefore, we are seeing a big delta on completed development projects and development projects in progress. If you look at the bottom of this slide, you will see actually some of the more positive development actually in the year 2011, namely that Vestas reduced its net debt from EUR 579 million down to EUR 545 million.
Actually, that the net working capital went from +EUR 672 down to -EUR 71, which you will see here on a little later on. Another very important and positive story has been the development of Vestas warranty provisions and our Lost Production Factor, which is an expression of how the turbines are actually performing, seen with the eyes of the customers, something I will also touch upon a little later. There you have seen that the Lost Production Factor actually have reached the quite aggressive target of getting down to 2 by the end of 2011. Again, illustrating that the performance of the Vestas turbine fleet is doing very well.
Therefore, also, you saw that the warranty provisions have been constantly decreasing over the last number of years and ended up with a full-year provision of 2.5% for the full year. Just turning back to the working capital, then, you will see that the net working capital actually went into a minus by the end of the year, EUR -71 million, which is a significant improvement compared to previous years in freeing up cash from the operations. And on the right-hand side, you can see the bridge, where were the majorities of the positive impact coming from, that we had a year where we had EUR 672 million, which ended up at a minus of 71.
The main contributors to this are payables, prepayments, and inventories that developed positively during the year 2011. And here, again, it's important to recognize on the payables that normally, compared to previous years, the activity level in the start of the year is going to be much higher in 2012 compared to previous years. So the cash flow overall had, thanks to this, also a very positive development, contrary to the earnings. And actually, the free cash flow improved by more than EUR 800 million in 2011 compared to 2010. And that is something which Vestas has been striving a lot to, because previous year, Vestas have been much more challenged on our capability to improve the cash flow.
As you can see on the following slide, where we have just tried to make an illustration of how has the cash flow actually from operation and investments developed back since 2007, and the journey that we have been on. If you look at 2009, 2010, Vestas obviously had very challenging times because we were globalizing the company, while we ran into a lot of challenges with financial crisis, et cetera. But we have steadily, during 2010 and 2011, pushed Vestas back up in positive territory in our net cash flow generation capabilities, something that we haven't seen over the last few years. But we are again, for 2012, guiding on a free cash flow for the full year 2012.
The return on the invested capital, unfortunately, but obviously, developed negatively because of the result in 2011. Went from 10.7% on return on invested capital in 2010, down to -1.3% in 2011, which is, of course, not satisfactory. We actually ended up in having lower investments than we initially had anticipated, and you will see here, on the right-hand side of the slide, how things were split between intangible and tangible of the total of the investments in the year 2011, and also in the previous quarters.... On net debt and our facilities, we came out with a net debt to EBITDA of 1.79. Obviously, increased a lot compared to the previous years because of the challenges in 2011.
But here, I would like to say that if you look at the right-hand side, then, Vestas facilities and the facilities we do have, Vestas have a revolving credit facility of EUR 1.3 billion that has maturity in 2016. Our Euro-denominated bond of EUR 600 million in 2015, and a European Investment Bank of EUR 250 million with expiration in 2016, and the Nordic Investment Bank of EUR 55 million in 2015. With the improvement of the cash flow in 2011, actually meant that we had no drawing on our revolving credit facilities of EUR 1.3 billion by the end of December in 2011. Turning to the order intake, which has been a more positive story than the earnings last year.
You will see that the market was very challenged in the wind turbine market in 2011. But despite that, Vestas actually did realize its second highest order intake ever, of 7.4 gigawatts, where we had forecasted 7-8 to the market, and we ended at 7.4. The year 2010 was obviously a very high year, and of course, it also had to do with, if you look at 2009, where the market basically collapsed compared to 2008, not least due to the financial crisis that took place in the autumn 2008. If you look at the geographical distribution, you will still see that Europe is where Vestas have most of its order intake.
The Vestas in Americas region was basically unchanged and comparable, have gained a larger share of the total order intake compared to 2010. Whereas, as previously mentioned, the situation in Asia, also very much because of China, meant that went down from 1.9 to 1.1 in 2011. But overall, we got to our target of between 7-8 gigawatts. Just detailing a little bit on the order intake and also for the split of the turbine type, also to understand why the challenges with the new technology is an area that Vestas is working very hard to improve. If you look in 2010, you will see that the V112 and the V100 each constitute around 600 MW of the total intake of the year.
If you look in 2011, you will see that both platforms have been extremely well received by the market, and therefore, with 1.5 and 1.7, and therefore, Vestas' ability is to really make sure that the costing of these products are developing as they should, is of essence in order for Vestas going forward. If one look at the average, which is, I would have to say, a number which is maybe not that correct, but anyway, then the average selling price for the order intake was very stable of around EUR 1 million per gigawatt, oh, sorry, megawatt.
And, therefore, one, of course, has to recall that the new platforms that you see on the left-hand side do carry a higher cost than the more mature products, and that is, of course, putting pressure on the earnings for 2012, that these new technologies are more expensive than originally anticipated. It does not, however, change the fact that the order backlog is at the highest level ever of just below EUR 10 billion of orders for Vestas, and the order backlog actually increased by 25% from 2010 to 2011, and 60% of the orders are sitting in Europe, 25% in Americas, and 15% in Asia Pacific. And actually, the value of the order backlog equals just around 1 to 1 when you compare the megawatts to the euros.
I mentioned earlier about the development of the customer loyalty and the overall performance of the fleet. Back in 2007, Vestas started to track the development of how Vestas customers view how we are performing. In 2007, we got a Customer Loyalty Score on 46, which we clearly categorized as being totally unacceptable, that Vestas had to do much better in order to make sure that we have the most loyal and satisfied customers in this industry. Since 2007, up to the end of 2011, Vestas have had quite a significant increase in customer loyalty, now getting close to 70, and that is a significant increase across the value chain, across the SBUs, indicating as what we had wanted to achieve, namely a much more customer-focused Vestas, and we will continue to stay on this path.
Later on, you will also see in the organization that that's one of the reasons why our structural setup, in terms of serving our customers, has not been changed that much in terms of the front office and with the engagement of our clients, as we are seeing and monitoring that they are telling us that this works very well for them, and by the way, also for us. We have used the customer loyalty as an expression of the of this, and going forward, we are going to change that into a customer relationship strength indicator, as this actually gives us more knowledge about how the customers are seeing Vestas on reputation, the loyalty also, but preferred partner and net promoter score.
And therefore, when you look at the old target, which was 75, of customer loyalty, that is still the target we have. But when you translate this into this CRSI indicator, that translates to 81, and that is therefore the target for all Vestas employees, including myself, for where we should be by the end of 2012, in the way that the customers judge our performance. The Net Promoter Score, which measures the customer's tendency to recommend Vestas, has gone significantly up.
And I think also when you want to benchmark Vestas' industrial strength, we are now having comparable numbers across a lot of industries to try to get an understanding of how is Vestas really performing compared to a lot of other industries and companies, and not just within the wind turbine sector, but that these are, what I would say, benchmarkable figures on how we look at the customer relationships. That is what I would like to say about the year 2011. Now, let's look at 2012. But before we do that, there are a lot of discussions going around concerning the Levelized Cost of Energy. And according to Bloomberg New Energy Finance, you will see up here that they have categorized what does it really cost?
There are a lot of opinions about how expensive or how cheap are various sources of energy, and therefore, we just like to bring to the table, what does other people say about this? And if you look at the bottom of the slide, you will see that according to Bloomberg, then overall, wind onshore is today being beaten by coal-fired, landfill gas, and natural gas. But all other types of energy are more expensive than wind, and that is, again, another reason for us why we do believe that wind has such an important future role to play going forward. If you then look at the offshore sector, then we have to go much further up on the slide, and you will see that wind offshore obviously have a different cost of energy compared to onshore.
The only way really to bring down the cost of offshore wind is to make a paradigm shift in terms of technology, and therefore, we have launched the V164 7-MW turbine, because we need to bring down the cost of energy also for offshore, but it is clear today that onshore is becoming more and more competitive. One of the challenges that we have had in 2011, and also previously, is, of course, that if you look at some of gas, for instance, has become much, much cheaper at the same time, even though we have actually decreased the cost for offshore and for onshore wind. Turning to that point of view, you will see we have four graphs here. Let me start by the one at the bottom on the left-hand side. You will see here the development on the Henry Hub natural gas price, spot price.
Going back just to 2009 and 2010, we saw a level around 6-7, and by the end of this year, we could go even further down on the future of natural gas. And the reason why that is important to be aware of is that that is driving the so-called PPAs, i.e., the Power Purchase Agreements in the United States, which then again, of course, are putting pressure on whether projects are, let's say, attractive to build or not, when the other costs, like for instance, gas, has gone down so much. And that is, of course, putting further pressure on the pricing there.
But on the other hand, one have to remember, it is not because that wind is not keeping becoming more competitive, but here, especially on the gas side, there have been a very big change in the gas prices. If you look at the right-hand side for the input cost, two of the most important cost drivers for Vestas are steel and copper. And even though we all talk about financial crisis and other challenges, then they have not gone down that much, and actually also been pretty volatile over the periods. And of course, we'll have to wait and see how this evolves in 2012. But I think there is this notion that when it comes to the financial crisis and others, it must mean that the input costs have gone down a lot, and there we have to say that has not been the case.
If I should try to say in two points, what are the real challenges for Vestas in 2012, it is, of course, to execute an increase in business activity level of 40%, while at the same time preparing for what could be a much more challenging 2013. Here is what EER have estimated, that the market in 2012 will go from 37-46 gigawatts, and then drop down to 39 the year after. And you will also see that the growth rates, which were previously in the magnitude of 18, are forecasted to go down around 4%. Some of the accelerators could be that demand for electricity will rise, depending on the world economy development, and of course, also that some resources are getting more expensive, and as I mentioned previously, the fact that wind is becoming more competitive.
However, on the other side, the financial crisis increased NIMBYism and politicians being hesitant to support renewables is, of course, some of the inhibitors that also needs to be reckoned with. If you look at this challenge we have, as I said, on one hand, we have to make sure that Vestas is executing a big 2012 and preparing itself for a potential challenging 2013, which hopefully then, if it is correct, we'll see the market picking up again following 2013. But we also have to say that the other main challenge is, of course, how do we ensure that the profitability of our new platforms reach the targets? And I will talk about that in a second, but these are the two main challenges for the year 2012.
EER is forecasting that the American market will go down a lot in 2013. And I think if you just take a rule of thumb, looking at these numbers, then the US market, as I just mentioned here, could maybe go from around 11 GW, which is about the same as EUR 11 billion, down to EUR 2.4 billion the year after that. That is quite a drop that a company needs to be prepared to handle. But those are the realities that we have to deal with in case the PTC extension does not take place. If you look into Europe, Middle East, and Africa, we are seeing a, according to EER, a more stable outlook, not the biggest growth, but at least some growth going forward in the coming periods.
Those countries that we have seen in the past doing well, we still expect to do well, whereas other major markets that for financial crisis or other reasons have not been moving that much, we do not expect that is going to change that much in 2012. Turning to Asia Pacific, a lot of talk about the growth in the emerging markets and in Asia. But if you look at the anticipated growth rates in Asia, is not at the level that we have seen in the past, where in particular, China has grown dramatically over the last number of years, but doesn't seem to have the same kind of growth, at least according to EER, as we have seen in previous years.
This again means that looking at what can take place within the sector is again very dependent on the development on the legislation. Here we are, of course, happy to see that a country like Australia has introduced a fixed price on carbon, and that is some of the things which, of course, are important for us to see a future growth in the wind sector. There is a lot of talk about offshore and the development of offshore, but even onshore has by far the highest growth rate of 35%, at least forecasted by EER. Then, if you add the year 2011, 2012, 2013, and 2014 together, you will get a market which is of the same size of the US market this year.
And therefore, one has to remember that even though the growth rates in offshore are expected to be high, then, the market is still significantly smaller than the onshore wind, and we still have high aspiration for offshore. But one have to remember that the total market in offshore is significantly smaller than the onshore market. Turning to another part of Vestas, development, one of the matters that we talked about by changing our organization, is to say that in the future, Vestas will have two types of revenues, one coming from the turbines and the other one coming from service. And, we, in 2011, actually had a revenue and service of EUR 705 million, and we expect this to grow to EUR 850 million in 2012.
Overall, we have had a growth in the service business of EUR 240 million in 2006, going up to EUR 850 million in 2012. When we announce orders to the market today, then 96% of all the orders do come with a service contract. And this is, of course, important also when we are looking at levelizing some of the markets that are coming and going, that the bigger part of the business that is going to come from service will create more stability. And there, Vestas' ability, so to say, to come with more sophisticated offerings within this area is, of course, a very important way of how to grow our service business in the coming years.
and again, another reason why we have made the changes as we have previously announced to the entire organization. Finally, the guidance for the full year 2012. We expect revenues between EUR 6.5 billion-EUR 8 billion, of which the service, as I just mentioned, is expected to be around EUR 850 million, an EBIT margin from 0%-4%. The EBIT margin, as it says on the right-hand side, is low due to too high production costs, predominantly on the V112 and GridStreamer, which we will reduce over the year.
And here I have to say, one has to remember that because of the way that the revenue recognition takes place, it means that a lot of cost out, as it takes place during the year, will not hit the P&L in 2012 until the project is delivered to the clients. Whereas obviously, it should have a more positive impact on the cash flow as we are reducing the actual cost for the cost out situation. But this is some of the things that are meaning that the EBIT margin for 2012 is of the area of 0%-4%, because of these two high production costs. We have also in the EBIT, depreciations and amortization, an increase of EUR 100 million compared to the year before.
Back in November, we guided investments of EUR 650 million. Those we have lowered with another EUR 100 million due to a more focused on the organization, bringing our total investments to EUR 550 million. We are still guiding for a positive free cash flow and a warranty provision below 3, and it was previously, for 2011, it was 2.5. But by introducing the new technology, we have set below 3. As we know, when you are introducing new technologies, there can be some additional costs that we need to incur in connection with this. Under special items, we have included EUR 50 million in connection with the layout of special items that we need to absorb here in the year, in 2012.
Finally, before we turn to the Q&A, we will report the Q1 figures on the second of May. And just for the sake of good order, it is the plan for Vestas also going forward, when we have the financial results, that it will not only be me making the presentation, but will also be joined by Vestas CFO, once this person have joined the company. And with this, I would like to turn to Q&As, either first here, if there are questions here in the audience-auditorium, or otherwise from the phone. If there are no questions in the auditorium, then I suggest, operator, that we turn to the phone.
Thank you. If you have a question, please press star, then one on your touchtone phone. Fazal Ahmad from Handelsbanken is online with a question.
Yes, Fazal Ahmad from Handelsbanken, with a couple of questions. Firstly, relating to Henrik Nørremark's departure. You were saying that you've conducted a thorough investigation, and could you maybe elaborate on what it exactly revealed? And the sudden departure of Mr. Nørremark, is there some kind of fraud involved in this? That's my first question. Maybe if we can take them one at a time.
I have no further questions to what was mentioned in the stock exchange announcement yesterday by the board of directors. But this has all to do with the financials and nothing else.
Okay. All right. Second question, just on your revenue guidance and your guidance for shipments. You're guiding for 7 gigawatts in the shipment for the full year. However, at the same time, you're guiding for a revenue range of EUR 6.5 billion-EUR 8 billion. What does this discrepancy really cover over? Maybe if you can help us with that?
The let's say there are matters also outside our control that we need to take into account. Like, for instance, there are in a number of countries today, some challenges on the grid. And, if we are not in a position to, or the customer is not in a position to take over the turbines or get them connected to the grid, then we could maybe not be allowed to take the revenues and the earnings. And these are matters outside our control. And therefore, we have to say that there are challenges here that we have to be aware of, and which can give, let's say, big changes between when we can take the actual revenue.
Is it something which you've already experienced here at the beginning of the year, or is it something you're including for the end of 2012?
Well, we have seen in 2011 that the grid situation is challenged, and it could also very well be challenged in 2012. Therefore, we want to make sure that everybody's aware that there's some of the risk that one has to look at.
Okay. Then just a final question here. You are obviously flagging that you're having too high production costs with V112 and GridStreamer. Is that basically too high production costs incurred at the end of 2011, or are you still experiencing production problems here in 2012? And maybe if you can just give us a bit of flavor of what kind of production problems you're still experiencing.
Well, I think we have to differentiate between production problems that we had in the fourth quarter, 2011, at the generator factory. And as I mentioned in the presentation, that's not what we expect to, or we are not going to see, we believe in 2012. However, the total cost of the platforms, i.e., the bill of materials, were higher than initially anticipated. And therefore, the cost out, as I mentioned, is very important to bring the cost back down on these new technologies, and thereby lowering the overall cost per platform, which we expect to happen during the year, and there's been a plan made for that during the year 2012, as we go through the year.
Okay. But are you producing these volumes on positive gross margins, or is it loss-making on a gross margin level?
Well, we are seeing a good development on the earnings on these turbines. They have simply, let's say, the design cost is simply too high, and we need to bring them further down during the year. And again, as I mentioned, we have to remember that before we can take the revenues, as we are bringing the cost down, there can be a delayed action before it hits the P&L, but it will hit the cash flow earlier.
Okay, thank you.
You're welcome.
Andreas Willi from J.P. Morgan is online with a question.
Yeah, good afternoon, gentlemen. Two questions, please. The first one on cash flow. You had a good result in Q4. If we use your P&L guidance and your overall guidance for- to achieve positive free cash flow for 2012, then you need to-- It seems like you need to reduce working capital quite a bit again in 2012. Your working capital at the end of 2011 is at -1% of sales. It normally is about 7%-12% of sales. So what are the drivers that an already very unusually low working capital level can go down further in 2012? And particularly, payables were quite high at the end of 2011.
Should we expect some payback here in the first few quarters of the year? And the second question I have is, you showed an interesting chart there on the prices to generate electricity, showing that offshore is extremely expensive. And then you say larger turbines will bring that down. If you look at the onshore turbines, then the price per megawatt hasn't really moved that much over the last seven, eight years. What is different in offshore that should drive this massive price reduction to make offshore viable, beyond the massive subsidies it's currently getting?
Okay. From the cash flow point of view, Vestas moved in, and one of the reasons why we have seen such a positive development in management of the working capital has very much been our make to order principle that we implemented. And I think if there are some good news in terms of the PTC situation, it's clear that it's very important to get everything over the line in 2012 of all these projects that we need to execute in Americas in the year 2012.
Secondly, concerning the development of the prices, I would have to say that if you look at the V112 as an example, even though it has a high cost price at the moment, one should not underestimate how it actually improves the overall business case for the clients as it is turning at very low wind speeds over the year, and thereby producing significantly more and makes it more attractive for the total investment of the turbines. Concerning the V164 and the offshore situation, well, today we have the V112 also in an offshore version, and have sold that.
But if you look at the total cost associated with installing offshore, if you can get 7 MW instead of 3 MW per installed turbines, you will, by having the scaling effect, bring down the total cost of energy quite a lot. But that also means that you have to have a paradigm shift, and that's why we are looking at moving from 3 up to 7. Because if you get 7 MW per hour instead of 3, that is quite a difference if everything is per one installation.
But on the cash flow and the very high level of the payables as of the end of December, when do you need to pay your suppliers? Is there gonna be a cash outflow, a large cash outflow in the next couple of months?
Well, it's clear that if you look at the, as I mentioned, the activity level, since we are growing, and I think this, graph, that you saw, where we're seeing, especially in the middle of the year, we're going to be very busy. We'll, of course, going to see during the year 2012, fluctuations, because we are having a very high activity level throughout the manufacturing units right now. But then on the other hand, as we are approaching, the end of 2012, we are going to see that the requirements for materials in the plants are gonna go down, in the, in the end of the year.
Thank you.
You're welcome.
Rupesh Madlani from Barclays Capital is online with a question.
Good afternoon, Rupesh Madlani from Barclays Capital. Three questions for me, please. First, given that there is a departure with respect to the CFO, could you comment on the timing of a replacement CFO, and who currently will be responsible for that, for that function? Second, it looks like from your guidance that the vast majority of your profitability in the year is going to come from service at the midpoint of your guidance range. Could you comment on how that's reconciled in terms of, is there a difference in product mix? Are you expecting higher warranty costs? Why are your profitability—why is your profitability in the equipment side much, much lower than in the last couple of years?
And then third, with the activity levels that you referred to, what would you say your peak monthly cash requirement will be, and how much of your credit lines do you expect to use to meet that peak requirement, particularly given that a lot of the activity will be further forward in the year than in prior years? Thank you.
Okay. Well, so far, the CFO search was obviously launched already earlier as we announced the new organization. So that is ongoing, and once we have a person in place, that will be announced. Concerning who is doing the task right now, well, obviously, the people responsible in the respective areas are carrying those. And in between, I will have a chat with those direct reports that normally reports to the CFO. On the service side and the development of the service, what was your question there on the warranties in context of the service?
If you take the midpoint of your range, it looks like over 80%-85% of your profitability will come from service as opposed to equipment. You actually get something like a 0.4% EBIT from the equipment.
Okay. Well, it's clear that the turbines, of course, are not at the level where they should be. No question about that. But again, it has to do with that the cost of the platforms, of the new platforms, are simply too high. And again, coming back to the revenue recognition, it will take a while, even if we are costing out now, before we actually allowed to take it later on, because of the accounting change. One also has to remember that service as such—even though it looks nice on the profitability side, is, of course, still very dependent on the rest of the WTG business and the associated costs with this, which has to be for the—which one has to remember at the same time.
If you then had a question on the cash. We have only forecasted a cash of a free, free cash flow for the full year. But as I mentioned, by the end of 2011, we didn't have any drawings on our revolving facilities.
And you feel comfortable that your credit lines will be sufficient to meet the, you've got a very big order backlog that you expect to order for the year, so you feel comfortable that you have those credit lines to be able to service that? And just to follow up on the CFO, do you feel, what percentage probability would you assign to having an announce, say, for the next quarter?
I'm not gonna have a, let's say, a guessing game here. But just on when there's a new CFO in place. But just to say that when it comes to the cash, we have no plans to change our position on the balance sheet.
Very good. Thanks.
Brian Gamble from Simmons & Co. is online with a question.
Yes, good morning or good afternoon, rather. The couple things I wanted to talk about, Ditlev. One, when you mention pulling costs out of the higher-cost products, understandably, that won't be a 2012 event. But what sort of cost-outs, declines, you know, either on a percentage basis or on a dollar-per-megawatt basis, do you see being able to be recognized in 2013? And then you talked about, obviously, kind of a shying away from the Chinese and Asian market in general because of, essentially, pricing that was unacceptable in your view.
Can you juxtapose that against some of the, I guess, more recent commentary with regard to the Chinese market and their desire to make sure that they're actually implementing turbines that are viable moving forward, rather than just implementing any turbine that can physically be manufactured?
Let me say that, if we start with the China situation and also on the old customer loyalty and so on, our business unit in China is judged by, like, basically all the others, but also in particular in China, to be judged to doing a magnificent job, seen from the customer's point of view, and also in terms of the performance and the reliability. Our choice has been a conscious choice of saying, well, with that pricing in the market, we would not like to participate. And, and I think that's just sometimes if markets are at a level which are not, let's say, interesting, it's better to, to go into a, to a, let's say, waiting mode, and that's what we have done, have done in China.
But for that business that we carry in China, we can see that our customers are very satisfied with our Chinese operation, which is very encouraging. And that, as I said, goes across the entire company when it comes to the customer's evaluation of the performance, which is very good. Concerning the product cost out and the impact on 2013, I don't want to comment on this today, as this is not today we give the guidance for 2013, but for 2012. But of course, it's clear that this is some of the very important tasks that we do have through our investors to get these things back in line and make sure that we get those cost prices back at the level where they should be.
And that is what we intend to do. But I don't want to speculate on exactly how much it is. But we will hopefully be able to demonstrate that as we are going through the coming quarters.
Thank you.
Patrik Setterberg from Nordea Markets is online with a question.
Yes, hi, Ditlev. Thank you for taking my question. I will start out with a more general question. I think you have touched this a little bit, but looking around, Vestas is currently not the only turbine producers who are seeing a pressure on its profitability. And my question is then, what scenarios, in your view, should take place in order for the turbine industry to become more profitable again?
Well, concerning the profitability, I mean, we have said that we would like to see investors going up at the high end of single-digit range. And that is the target that we do have. I think that was also back what we mentioned back in November. Concerning this, for the long-term aspirations with a normalized U.S. market, I don't have that much more to add today concerning our profitability aspirations.
Just a follow-up. Do you see a need for consolidation in this turbine industry?
Well, I have said before, and I would like to repeat it, that investors have no plans to participate in that. I think that what we have mentioned, for instance, on the V164, namely that Vestas would be open-minded to saying, "Well, the cost involved in this is of such a high magnitude that we will go ahead with our prototypes, but we would be open-minded in sharing this with somebody else," is, for me, maybe another way of the industry seeing some cooperation that could take place with other players, as it is a very cost-intensive industry. So that would, for me, be one way to look at what could maybe be some of the changes to the industry.
... Okay, thank you. My last question is relating to your 2012 EBIT margin and free cash flow guidance. The range you have been giving, is that reflecting a scenario where you have included a reduction of your potential reduction of fixed costs in United States?
No, the situation in U.S. is a separate matter and something we will deal with during the year.
Okay, thank you.
Mark Freshney from Credit Suisse is online with a question.
Afternoon, it's Mark Freshney from Credit Suisse. I just have three questions. Firstly, on the services business, I noticed that the EBIT margin is coming down from 16% last year to 14% this year. Is there any indication that that's becoming a more competitive business, and that those margins could be under pressure as other companies compete it away? Just secondly, on the EUR 22 million of special items, can you speak please clear about what that relates to? Is that some of the initial cost of the redundancies? And just finally, with regards to the additional costs that you're taking on the development of the V112, is that more of a volume issue in that your volumes are much lower, so the overhead costs have to be absorbed over fewer machines?
Thank you.
For the service business, I would say no, there is, first, our future expectations to service earnings, we as again, what lays beyond 2012, we will talk about when we get to that time. But overall, we are not seeing other companies, for instance, getting involved in the business. I think there are some natural changes on how things can evolve on the earnings. And as previously mentioned, basically all new orders that Vestas signs off is associated with a service contract. Concerning the special item of EUR 22 million, is related to the closure of the Danish tower factory, and then there are some other items throughout the organizations that we have put in there.
Concerning the V164, you ask if there were some additional costs for this?
Well, sorry, the V112, you know, the extra costs you're taking relating to industrialization of those machines. Are some of those, I mean, are some of those problems because your revenues and your shipments are not quite as high as you envisaged three years ago when you set out to commercialize this machine?
No, the reason I would say the V112 additional cost is simply that the, let's say, the design cost for the machines have turned out to be higher. The actual costs have been turning out to be higher than the initial design cost. The challenge is now to make sure that we bring the cost of these machines back at the level where they should be, without in any way jeopardizing the quality and the performance of the machines. I can only say that the changes that we have made to the new organization, I think, is absolutely clear of how this is going to be done on a cross-border level.
I'm quite confident that the team who is now heading this work will be capable of doing so.
Okay, thank you.
Daniel Patterson from SEB Enskilda is online with a question.
Yes, good afternoon, Ditlev. I have a couple of questions. Firstly, on the outlook, in your slide presentation, you're showing there are forecasts for the market on EER from EER. Did you sort of subscribe to this outlook? Does Vestas sort of think this is a realistic outlook for the next few years for the market?
Well, these are the forecasts from EER.
Yes, but what I'm asking is, do you sort of envision that this is a realistic market outlook, and you would sort of plan for this outlook?
We are not, we are looking at a number of inputs, when we are looking at the outlook, and I can tell you, we are also making our own bottom-up analysis on this, but those analysis we keep to ourselves.
Okay, then on also this sort of the cost out and then the V112 costs in 2012, I understand that you don't want to put a number on it, and I guess that's fair enough. But can you say, is it material in 2012?
I think it's, again, coming back to, and it's not just to give pushback, but one have to remember that if you look at the order coverage we have for 2012 of around EUR 10 billion, meaning that our visibility of what we have to do in 2012 is of course pretty high. But the question is, of course, how fast do we get these to happen? And even though from a cash flow point of view, that of course will have a first positive impact there. But when we get to the actual revenue recognition of this project is can be another question, because we can only take them when we hand over the projects.
One has to be a little careful in the way that you describe substantial, how it is. The only thing I will say is I think we have made a very good plan for how we're going to bring down the cost of these machines going forward. But of course, from an earnings revenue point of view, that will be delayed until they're actually delivered to the customers.
... Okay. Then I just have one final question, and that's on your CapEx guidance for 2012. You're lowering it by EUR 100 million on the intangibles. Really, this is a very simple question. Is it basically because you plan to spend EUR 100 million less in cash on these investments, or it's because you plan to expense more and capitalize less on the balance sheet?
We're going to... Well, the plan is we're going to spend less the cash from a more, let's say, focused R&D approach.
Excellent. Thank you very much.
You're welcome.
Matthew Yates from Bank of America is online with a question.
Hi, good afternoon. Mr. Engel, in light of the various management changes that have been announced today, can you address all the shareholders and potential shareholders on this call as to why you feel you're the right person to take Vestas forward? Thank you.
Well, the plans that we have laid out for Vestas, back in last summer, and the whole strategy surrounding that, the new organization that has been announced, and all the activities we put in place to move Vestas to the next level, building very much on a lot of the very positive operational performance that we have seen over a number of years, were actually the very important foundation. The way that I look upon it is that we, in the fourth quarter, ran into some major challenges in terms of implementing and industrializing some new technology, that we now have also understood, the associated cost with.
Solving those problems are the ones that we have to deal with, while we, at the same time, have to further build on all the opportunities and the positioning of Vestas' strength throughout the market, as I just showed you on these slides. Again, as I said, the plan that we have laid out was fully backed by the board, and that is also what the board would like to see, that we go out and execute this plan. That is what we would like to do, and the board have asked me to do it. I'll be very pleased and honored to have this opportunity to make sure that we get Vestas back to this level where we should have been, if it hadn't been for those challenges we encountered on new technology in the fourth quarter.
Sean McLoughlin from HSBC is online with a question.
Yes, good afternoon. Do you require any new capacity in order to meet your 2012 guidance? And I'm thinking in particular for orders globally for your new turbines.
We have no plans for a new capacity. You mean manufacturing capacity, I guess?
Yes.
No, there are no plans for new manufacturing capacity.
Do you need to actually extend any existing capacity? Just to clarify on that.
In the plans that we have now, there are no major changes to the manufacturing setup.
Okay. And I just wondered if you can provide any kind of breakdown of where you see shipments in H1 versus H2 this year?
Well, we haven't put a number on, but I hope that the slide that we showed with the distribution is making it clear that where the bulk of the activity level is going to be compared to normal years, where you're seeing much more back-end loaded on the shipment level, at least from that side, from that point of view.
In which case, what steps are you taking to minimize the risk of external factors delaying shipments into 2012? Sorry, into 2013.
Well, I would say the fact that we will front-end, let's say, front-end load the shipments more in 2012 than we have seen in previous years, hopefully will give us a better visibility in terms of getting the turbines out of the door compared to the past. But of course, we will still be very busy installing, because we have to install these turbines during the year. So we have to differentiate between what we're shipping out of the plants and what we are installing out in the field. So but from a shipment point of view, that is, of course, something that would fall before we are getting to the installation level.
So, I'm sure we'll be very busy installation during the year 2012, where we will see manufacturing slow down earlier.
Thanks.
Claus Almer from Carnegie is online with a question.
Yeah, hi. In the past, the message has been about the postponed revenue, that that will contribute with a profit of around EUR 330 million. Is that still the case?
To be frank, I can't recall the numbers for that, so I have to get back to you on that.
That has been part of the profit warnings in the past, when you try to split up the effect from the lower EBIT.
Yeah, but I have, I'll have to get back to you on that one.
Okay. That was actually my question. Thanks.
Okay.
Archie Fraser from Redburn Partners is online with a question.
Good afternoon. Thanks for taking my questions. Just a couple left. Firstly, given that there's the range of revenues guided for 2012, but in terms of shipments, a single figure of 7 gigawatts, given also that cash inflows are driven largely by shipments rather than deliveries, should we imagine that the variability in your likely cash inflows in 2012 is very much less than the variability in your revenues? And can you give us a feel for how much that might be? That's my first question. Secondly, on the Chinese market, do you see any recovery in pricing in the Chinese market? Can you give us a feel for your outlook there in terms of pricing and volumes for Vestas?
Well, it's true. I mean, as we also have mentioned earlier, that the shipments are a very important part of the cash generation, and an important trigger point for cash generation. So, one could say that if you take, for instance, United States as an example, where because of the potential challenge on the PTC, there's no doubt that that at least, I think also ensures that our customers are gonna be very much ensuring that they get the turbines from us as soon as they possibly can, in order to get their projects constructed.
So overall, I would say, if you should look at the two of them, then there is probably, let's say, a more firm footing on the shipments and, let's say, a bigger potential variations on the actual recognition of the revenue and the earnings because of the installation time and grid, and so on and so forth. So I think it's a fair point. Concerning China, I would say, and the pricing volume, we are not changing our position of how we have positioned ourselves in China in terms of selling new technology. And that is what we are going to stick by, and we are not changing our position of that.
And then we will have, of course, to hope and see that this technology and the performance for Vestas in China is going to be recognized in the market.
Do you, do you see any change yet to the challenging market in China over the last few months?
Well, I think that at least if I listen to some of our colleagues in the industry from China, I think most of them have reported that they find also that the Chinese market has been quite challenging in 2011.
Okay, thanks.
Alan Wells from Morgan Stanley is online with a question.
Hey, good afternoon. Did have a couple of questions from, from my side. The first one is just, back on the, the topic of working capital. As we discussed earlier, part of the, the positive free cash flow guidance, I think it seems to be that working capital needs to stay at the, the relatively low levels that we're seeing now. Can you maybe provide a little bit of guidance on how you guys are thinking about orders, for 2012? Maybe if you can't provide it numerically, just in terms of maybe directionally. It seems like prepayments was a big, driver of, working capital coming down this year. Should we maybe expect that to reverse a little bit in, in, in 2012? The second question was just a, a clarification on, on restructuring costs.
You've announced that there's EUR 50 million of costs due to the restructuring you announced this year. Could you confirm that that's the number, the full number for that restructuring plan, that nothing will drip into 2013 as well? I'm just conscious that is about a third of the level that you put through in 2010, when you had layoffs. And the final question is just on guidance. Your revenue range is obviously pretty wide. I understand that there is a lot of uncertainty still on that, but maybe you should have reasonable visibility on where your customers are guiding in terms of delivery schedules at the moment.
You know, if all of those are met, should we assume you'd be somewhere in the top end of the range, maybe? And then, maybe you can talk about a little, what maybe would be the biggest driver of the delta, within that revenue line. Thank you.
I'm not so sure how many questions that really was, but I hope I noted down most of them. On the working capital, then, it's clear that the make to order concept is very important here to manage the working capital. And that is something that you really also have seen the benefit from in 2011. And we don't see any reason to change that.
I would actually say that if I look at the coverage that we have going into the year, obviously also give us better opportunity to plan ahead, because of the very strong coverage that we do have for the full year, and thusly making it easier to, or easier, but at least maybe not as complicated, to manage the, the working capital. We have not guided, on the orders, and, I'm not going to, to speculate about, how the orders is going to, to, to develop. But again, I would have to say that, looking at Vestas' strength, seen from the customer's point of view, I'm absolutely certain that Vestas will get, our fair share of the orders out there, just as we did, in 2011.
Concerning the restructuring costs, then, those EUR 50 million is the number that we do anticipate, but of course, it is not related to the situation in the US. You ask compared to 2010, and of course, here we have to say that in 2010, some of these things, we were closing down much more plants in 2010, and it also happened at a different time of the year. Then, concerning, you asked something about the delta on the delivery schedule?
Yeah, just trying to understand, obviously, a pretty wide range in revenue guidance. You know, maybe you can talk about what would be the biggest driver that pushes you towards the top or the bottom, and is there a particular region that maybe you're exposed to here?
...Well, I would say, as I said before, if there's some good news about not extending the PTC is going to put a lot of pressure on ensuring that the projects do get over the line. So that is obviously some kind of certainty in terms of the of the revenue. But again, there are countries that all of a sudden change their position on the grid and the connections. And these are some of the things that are totally outside our hands, where we could have shipped the turbine, installed it, but if the grid is not there or not ready, then we can't take it over. And that is something where it's very hard for us to estimate what it is.
If you compare to the past, where we took the revenues as we were shipping the turbine, it is, of course, a different story and much more inside our control. Whereas with the principle that we have now, that is giving a much less, let's say, visibility or control from our point of view, as we are now subject to other matters. So we are looking very hard together with our customers and ensuring that planning permits and grid connection, everything else, is in place, project by project, so we hope we can avoid that. But we have to say that there is a risk there, but again, maybe the U.S. will put some pressure on making sure that that risk is at least being minimized.
Thank you.
You're welcome.
Janne Vincent Kjær from Jyske Bank is online with a question.
Yes, good afternoon. I have only a couple of questions left. So let's start with the first one. You said in connection with the downgrade in the beginning of January, that you expect the production cost per megawatt to be lower than in 2011. Is that still the case?
Yeah, it's clear that of course, as we are going to have a much higher utilization rate of our manufacturing facilities in 2012, going in with 7 gigawatts versus 5 gigawatts in 2011. We obviously are going to have a better utilization rate of our total cost structure.
Okay. And then just a follow-up on the service business, where you expect the EBIT margin to fall to 14%, despite what I would expect a higher price and margin on the AOM 4000 and AOM 5000. Can you maybe say what margin the service orders taken in 2011 is carrying?
We have not mentioned that in terms of what margin we are taking the service orders in at. I would still say, though, that if I look ahead and the appreciation of Vestas capabilities within the service business, then we still do believe that Vestas will have a positive development of our overall service business. But of course, also, as we are hopefully adding in new services into the offerings to our customers, which is going to further help us going forward on building this business as a separate business, as we have decided to.
Okay. Thank you.
You're welcome.
Arnaud Brossard from Exane BNP Paribas is online with a question.
Hello, since Mr. Nørremark is leaving, could you please tell us who will be the COO of the group?
Well, to be very frank, right now, today, I am CEO, COO, and CFO right now.
Okay, no one has been identified to become COO?
There's been nothing, no changes made to that. So, at the moment, it is reporting to me, and obviously, it's an important task for us in the coming periods to have these executive management positions filled. But, right now, in the short term, I will carry that as well.
All right. Thank you.
You're welcome.
Ben Backwell from Recharge is online with a question.
Yes, sir. Good afternoon, Ditlev. A couple of questions. I do want to ask about this whole affair of the resignation of Mr. Nørremark. In January, when you announced the reorganization of the company, you were quite emphatic that, you know, Mr. Nørremark was not responsible for the issues like cost overruns, which have affected your results so much. And he also had a big increase in responsibility at the same time. And then less than a month later, you know, he's now resigned, and it appears that he was responsible. I mean, what can you do to restore confidence in the management given that that's happened, and also that two board members have subsequently resigned? Or is this something that's only going to be resolved at the AGM in March?
That's my first question. My second question on the V164 is what you're saying basically is that you would be open to forming a joint venture with another company to develop the turbine?
Concerning the changes, I actually have not a lot to add in terms of what was put out in the stock exchange announcement last night. Neither from Henrik Nørremark leaving us, nor to the position of the board members. So I don't have any additional comments to that. Concerning the V164, then, as we also mentioned earlier, I think back in January, that when we are seeing that our customers in some of these major offshore projects are going in and sharing the risk because they are major projects-...
What Vestas have said is that, well, we would be open also to consider whether it would, if it makes sense, to share this with somebody, and that can be done on a lot of different levels. And the reason why we mention is just because, we're just saying that could be an option as well. We are still heading for making, as previously announced, the prototypes. But, before you move from prototype to serial production, it might be worthwhile considering it to share with somebody else, if that seems to be a good idea, and that's basically all we are saying, and again, it can be done in a lot of various forms.
Okay, thank you.
You're welcome.
Klaus Kehl from Nykredit Markets is on the line with a question.
Yes, hello. Two questions. First of all, the cost problems related to the V112 turbine, that seems to be rather substantial here in 2012. But has the problem grown since you issued the profit warning back in January? That's my first question. And secondly, could you elaborate a bit on what you hear from your sources regarding a PTC extension in the US here in 2012?
Okay, let's start with the PTC extension. I have to say to you that it's an election year, and normally history has shown that these things can go right down to the wire. As part of this, as you may be aware of, then just before Christmas, the U.S. actually extended the overall tax situation just by three months. And as far as I understand, the whole tax situation has to be reopened and discussed by Congress again here later this month. Whether or not that is going to include a PTC or not, I don't know.
I will have to say, though, that our president and Vestas Americas have given this position to the Senate on some of these matters, and we have had 26 governors rallying together on a bipartisan basis, addressing both the administration and Congress, and requesting, because there are a lot of jobs and companies involved in the United States today in this sector. So I have at least personally never seen such a, let's say, a true engagement in trying to make sure that we get this extension. But whether or not these efforts will prevail, I'm not gonna comment on, but I would at least say there is a tremendous activity to try to make sure that it does happen.
Concerning the V112 and the problem associated with that, I would say the problem that we encountered in the fourth quarter has not grown in terms of the technical side. But of course, the numbers associated with it actually of course has grown, as you see, that they went up from EUR 125 to EUR 149. So that is what we have to make sure that we work from in order to bring down the bill of material.
I said there has been plan made in order to make sure how do we do that, and now it's all about getting those plans executed going forward in the various teams working on this at Vestas.
Okay, thank you.
You're welcome.
David Voss from Sanford C. Bernstein is on line with a question.
Oh, hi, Ditlev. Good afternoon. Just a couple of questions more from me, please, if I can. In the first one, in terms of your CapEx plans and also your R&D, could you shed some light on where and on what in particular you are planning to spend this in 2012?
Well, there's no doubt that the V164 is a big contributor to the spend in 2012.
Is that both on the R&D side and on the CapEx, the potential CapEx side?
It's on both.
Okay. Thank you very much. And I appreciate that we've already spoken a lot about the production issues for the V112 and the GridStreamer. But could you be, please, a bit more specific on what the exact technical issue there is? Or if you can't, could you just, you know, break down why the costs are too high? Is this out, you know, outsourced componentry that is coming in at, you know, at too high a cost? Are you seeing a raw material squeeze? We'd just like to get a better feel for that, if we can.
Okay, let me try to break it up in two. The technology of the GridStreamer-
Mm-hmm.
is a new type of generator technology that is being used not only on the V112, but also on the 2 MW platform-
Yeah
... due to a new grid demand. And that means that the factories in Germany are supporting other platforms than the V112, and that's why it has such a big impact in 2012. And that technology, or let's say that generator technology, is being produced at this plant. And that is, we don't expect to have problems for the delivery as such from those new type of generators, which goes in to also the V112. If you look at then at the V112 specifically, then I think the easy way to explain this is to say that the bill of material cost for the V112 has actually turned out to be higher than initially anticipated, and thereby the cost of making the product.
And that is what we need to bring down again, in order to make sure that we get a lower bill of material cost... the platform. So it's a combination of, in essence, two things.
Okay, thank you. I just wanted to go on that, if you don't mind. So I understand the bill of material is higher for the V112, but what is it exactly? Is this steel pricing or is this outsourced componentry? You know, could you shed some more light on that, please?
Well, I think without going into all the components details, but just to say that the design cost of the initial expected design cost of the machines have turned out to be higher than what was initially thought when this was done. And that is the main challenge that we have here, to bring the cost level down totally on the bill of material. I think that's all I can add, I can add to that.
Okay, thank you very much. No further questions.
John Segrich from Gabelli & Company is online with a question.
Yes. Hi, Ditlev, I just want to go back to a question that was asked earlier, where, you know, you said you didn't have the numbers in front of you. But on slide 15, you walk through this EBIT shortfall, and you actually kind of spent some time going through it. There's two pieces, the 199 volume effect from revenue change from the first profit warning, 145 from the second. So as the other gentleman put it, roughly EUR 350 million of EBIT that was deferred out of 2011 into 2012. If I take the high end of your guidance for 2012, you're talking about roughly, EUR 8 billion in revenue at a 4% margin, so EUR 320 million in EBIT.
If I strip out the EUR 120 from your services business, where you gave discrete guidance, you're down to about EUR 200. Why is it not correct that we should be stripping out this EUR 350 that was pushed out of 2011 into 2012, in terms of trying to understand actually how loss-making your underlying business is?
Well, to be frank, as I also said to the other gentleman, I hear your question, but I can't recall, to be frank, off my head, these 330. But I'll make sure we'll get back to you with an answer to your question.
But it's not a question of actually the numbers, the numbers are on the slide, but why is that not the right way to think about your business? That you're actually losing close to 48% on the EBIT level on your core business.
Well, if you look at it, the uncertainty we have on the core business is to make sure that how do we get these costs out as they go into the recognition of the revenue during the year. And I think we also mentioned back in early January that we had a number of megawatts that we had also in Q4 produced, I think 400-something megawatts that we had, let's say, produced too at a too high cost also in the fourth quarter, that was going to hamper the earnings in 2012. Because of, let's say, the higher than expected manufacturing costs that we're carrying over from 2011 into 2012.
Okay, thanks.
The last question, operator?
The last question comes from Savyasachi Chatterjee from Morgan Stanley.
Hi, just one quick question. The EUR 1.3 billion RCF that you talk about, can you confirm me that the entire EUR 1.3 billion is committed? And, is there any uncommitted, like, letter of credit facility embedded in that EUR 1.3 billion? So entire EUR 1.3 billion you have as cash, or is there any letter of credit facility inside that EUR 1.3 billion? Thanks, thanks.
Well, the EUR 1.3 billion is, as we announced back last summer, a five-year facility at Vestas' disposal. And as mentioned, by the end of 2011, there were no drawings on those revolving five-year facilities.
But the entire thing is cash, right? There's no letter of credit facility inside.
That means cash.
Okay, thanks.
One and a half hour have passed. Thank you to everybody for tuning in this afternoon and watching our full year 2011 results, and guidance for 2012. Thank you to everybody who have joined us here in Aarhus today, and we'll be back in early May with Q1. Thank you very much.