So, good morning, everyone, and welcome to the third quarter report and also the updated upgraded outlook for 2013. The agenda today is that I will start with the introduction, our CFO, Marika Fredriksson, will talk about the financials. I will come back and talk about the order intake and outlook, and then we have time for a Q&A. So let me start with a short introduction then. This is my first quarterly report. I have now been with Vestas for two months, and I've had the opportunity to meet people from the different parts of our operation, both here in Denmark and abroad.
I met several of our key customers, and start to get an understanding, of course, both of the company, the market, and very important, what the customer thinks about the company. At the same time, it's absolutely vital that we keep on focusing on the turnaround plan. And that brings me naturally to today's topic, which is about Q3 and the Q3 report. As I said, to deliver on the objective in the turnaround plan is very important for us, and to recap a bit, three key objectives: reduce cost, and we see further reduction in fixed capacity cost during the quarter. Lower the investment level, and here we also see good progress in the quarter.
We have achieved a low investment level overall, despite the fact that we continue full steam ahead with the development of the V164-8.0 MW platform, and we have also introduced a new variant, the V105-3.3 MW for high wind sites. Another important event in the quarter is, of course, the joint venture with Mitsubishi, which has a limited effect this year, but of course, will reduce the need for investment in the future into the offshore segment. Third key objective is to improve capacity utilization and capital efficiency. We have a quarter again, with good improvement in net working capital. We have, on efficiency, divested our machining and casting units, and that creates a more flexible manufacturing footprint and a better efficiency. I will come back to some of this.
Looking at the first target then, of reducing our fixed cost, we are well on track of achieving the two-year objective with cost saving about EUR 400 million. And of course, it's closely linked to number of employees. We are today, then, in November, when we take, when we take into account the divestment of the machining and casting unit, 16,200 people, and our overall objective for the end of the year of a maximum of 16,000 people remains. It, of course, means that we, within that frame, can, and will scale up and down in certain parts of the operation, but we maintain our overall objective. I mentioned lower CapEx, and last 12 months, net investment has been lowered by 53% compared to a year ago, and also in this quarter, then, we have maintained a low level.
That is then despite the fact, as I said, we are continuing full steam ahead with the V164-8.0 MW development, and as well as we have during the year released several new products based on our 2- and 3-megawatt platforms. So the strategy is twofold in order to reach a lower CapEx. On the manufacturing side, we use the global footprint that we have and have established, make that more efficient. We don't see a need for further investment in manufacturing. On the R&D side, we are utilizing the platforms we have and do variants on that, which require a lot lower capital investment compared to new platforms. That brings me to another important event during the quarter, and that is the creation of the joint venture for offshore together with Mitsubishi Heavy Industries.
To recap a bit, the key contributions from both companies, from Vestas, we put in our existing offshore business, the development of the V164-8.0 MW and the related technology, and also the V112 offshore order backlog. And on the turbine side, Vestas will continue to produce and sell to the joint venture, the V112. From Mitsubishi side, then, it's a payment of EUR 300 million divided into two parts, an injection of EUR 100 million, and then another injection of EUR 200 million based on certain milestones achievements within the natural development of the V164. And, of course, the know-how and experience that Mitsubishi have from both the technology side and a long-standing position in the power markets.
All in all, I'm confident that we create a strong company for the offshore market, and that we together can address a much bigger market than either company could have done by standing alone. Looking at the third objective around capital efficiency and capacity utilization, we see an improved net working capital during the quarter, driven very much by an improved cash conversion. We still have room in Q4 for further improvement. We have 2,444 MW under completion as it stands in the end of Q3. When it comes to capacity utilization, we have divested two machining factories and four casting units. That will lower our cost for cast components by around EUR 30 million over the next two years, and with a further potential into the future.
There is an earn-out element for Vestas of up to EUR 25 million, but also more important, it fits well with our strategy to create a more asset-light company and to have a more scalable manufacturing footprint. During 2012, Vestas did a review of our manufacturing footprint based on market needs and closeness to the market. We have since gone from 31 factories to 19, and at the same time maintained a global footprint to make sure that we are present in, in all parts of the geography, that we are scalable, and that we achieve a better utilization. So please, Marika, join me and do the financials.
Thank you, Anders. If we have a look at the shipments and deliveries for the quarter, you can see as we expected and as we communicated earlier, there is a pickup on the shipment side in the quarter. The deliveries are lower compared to last year, and that, of course, leads us into the P&L and the reduction hereby in the revenue by 27%. This has been compensated with what we have highlighted earlier, the reduction in the fixed capacity cost and thereby giving a positive EBIT in the quarter, despite the reduction of 27% on the revenue.
If you look at the more detailed description of what has happened in the quarter compared to Q3 of last year, you see that we have compensated the 27% drop by better margins, but also lower fixed capacity cost. I should say here, though, that Q3 of last year was on the margin side, not a very impressive quarter, but the fact remains that we have continued to reduce the break even for Vestas by lowering the fixed capacity cost. Coming back to the cost again, we communicated also in the last quarter that the positive development continues, but we're also expecting this to plateau as we're coming to an end on the turnaround plan in Q4.
The special items are mainly related to non-cash items, and here is mainly the write-downs on the casting and machining factories. That has also been communicated earlier. So that is the main portion of the special items in the quarter. Service is down compared to last year, but year to date, we are satisfied with the performance of the service business. The two most important things to highlight here is that the earnings and the revenue can vary depending on the contracts we enter into quarter-over-quarter, and you also see the pattern here, that there are fluctuations, but we still consider this a very stable business in Vestas.
Should also note here that, when Anders come back to the outlook, we have upgraded the guidance on the service business. The balance sheet, the most important two improvements are the improvement in net working capital year-over-year by close to EUR 600 million, EUR 598 million to be precise, and also the reduction of the net debt by EUR 560 million or EUR 559 million in the quarter. You see also there's two big items on the assets held for sale and also the liabilities held for sale, and this is mainly related to the joint venture with Mitsubishi.... And here you can see more in detail.
Would just like to highlight here that the net impact on the balance sheet is EUR 166, and this, of course, once all the work around the agreement with Mitsubishi is finalized at the end of March next year, this will no longer be on our balance sheet. The change in net working capital is year-over-year a big improvement in Vestas, and I would also like to say here that we have managed to reduce the net working capital in quite a busy quarter, and this is normally when we build up to a larger extent. We have also improved quarter-over-quarter, although not as significant as year-over-year, but still a good improvement for Vestas.
If you look at the warranty provision, it's not actually much to say, and neither on the LPF. I would say it's continuing at a satisfactory level, below 2%, so overall, a good performance of the company. Cash flow, you see the change year-over-year, EUR 198 million, and that leads me into the reduction of the net debt by EUR 560 million year-over-year. And this, of course, is a consequence on the focus on the net working capital, and thereby cash flow. We have also reduced the net debt to one, to EBITDA by down to 1.4%. The ROIC is still, and as we have highlighted and communicated, at an unsatisfactory level.
Worth noticing, though, is that from Q2 to Q3 this year, we have improved the ROIC, and that's a consequence of the improved earnings for the company. Should say here, we have a lot of focus on improving, and the two improvement areas is really earnings and better use of our capital, so focus on the net working capital, CapEx, and basically what we have been doing under the turnaround plan. So thank you, and thereby, I leave it to you, Anders.
Thank you, Marika. So, looking at the order intake, Vestas have leveraged our global footprint and our strong offering to secure orders in Q3. Orders are almost four times as high as in Q3 last year, but of course, that was an exceptionally weak quarter, so that comparison is a little bit less relevant, I must say. On the other hand, we are satisfied with levels of 1,547 megawatt, and also important is that we secured significant orders in the U.S. of 540 megawatts, and that is 35% of the orders in Q3. Looking at price per megawatt, that decreased 3% compared to year-over-year, so compared to Q3 2012.
But then, of course, we should remember that the price per megawatt depends on a number of different factors, the wind turbine type, the geography, the scope of the contract, and of course, the uniqueness of the offering. And in the quarter, we have, we had a large proportion of supply-only contract, primarily from the U.S. market. That brings me then to the backlog, and, for wind turbines, the backlog increased with EUR 0.2 billion, up to EUR 7.3 billion during the quarter, and as I said, we had firm order intake of 550 MW in the U.S., so a significant order intake. We have also additionally a potential up to 1.2 GW in the U.S. through the master supply agreement that we have announced during the quarter. Looking at service, the backlog in service has also increased with EUR 0.2 billion to EUR 6.1 billion.
As you can see, we've had a steady growth in service, and, the last 12 months, the backlog has increased with EUR 1.2 billion. The average, length for the service contract is about seven years, and we continue to have a high renewal rate. So all in all, the backlog stands at EUR 13.4 billion, which is an increase in the quarter with EUR 400 million. We have also updated our outlook for the full year, and, probably most, Marika mentioned the service, probably most interest is, of course, on the EBIT margin, where we have upgraded from minimum one to minimum two, and the free cash flow, that you heard about, where we upgraded from minimum 200 to between 500 and 700.
So looking a bit forward, then, I've been with the company now for two months, and as I said, I've met a lot of customers and people from the organization. Vestas has some very, very important key assets. We are the market leader with a global presence, and I feel that we can get even more leverage of our global reach, our scale, and our installed base. We deliver world-class wind turbines, services, and aftermarket, services. And of course, we need to continue our relentless effort to get cost of energy down in our products and offering. At the same time, we are the leader in the service business, and here I think that we can do even more in the future by bringing new and innovative solutions to the market.
However, let me be very clear that our first priority is to execute on the turnaround plan and improve the earnings and the cash flow of the company. That remains our focus for 2013. We are now in a very busy Q4 with a very high activity level, and we are all within Vestas focused on delivering in Q4. Therefore, I will come back to you with our views of next year and the future, and I will do that in February of next year, following the strategic planning process that we have within the company. Marika, please join me, and operator, if you could please open for questions.
Thank you. If you have a question, please press star, then one on your touchtone phone. Please keep it to a maximum of two questions per person. Once again, if you have a question, please press star, then one on your touchtone phone. Claus Almer from Carnegie is on the line with a question.
Yeah, hi, and congratulations on a very strong Q3 report. I have two questions. The first one goes about your orders that you delivered in Q3, and therefore was recognized as revenue. Would you characterize these projects as being normal for those projects you have in your order backlog? That would be my first question.
I would say that what we said in Q1 is that the margins on those projects were not representative for the full year. And consequently, Q3 is more representative for what we see for 2013.
But also for the full order backlog?
They are more representative, yes.
Okay. Then my second question, that's about your free cash flow guidance for 2013. Is there any impact from the creation of the JV in that?
No.
Or is that all too expected in 2014?
No, there's no impact on the upgrade, on the guidance from the joint venture.
So that's purely operational driven?
Correct.
Thank you so much.
Patrik Setterberg from Nordea is on the line with a question.
Yes, hello. My first question is regarding the service business. During the first nine months, you have realized a 5% revenue growth in the service business. I just wondering, is this the run rate we should expect going forward, or will the growth back, or will the growth come back to double-digit numbers, which we have been used to in the past?
What we have said is, we're obviously upgrading the earnings for this year. Anything beyond this year, we will get back to, in, February of next year.
But let me phrase it on a different way. Are you satisfied with the 5% earnings or revenue growth for the first nine months?
We're very satisfied with the service business overall year to date, yes.
Okay. My second question is regarding your order intake in the United States. In the Q2 report, you, you said that you expect a significant pickup in order intake from United States. However, this comment is not in your Q3 report. I just wondering, have you realized all your American orders, or is there more orders in the pipeline going forward?
Oh, as I said, we regard 540 MW in Q3 as a significant order. And as I also said, we additionally have talked about that we have a frame agreement of 1.2 GW. And of course, that is also significant. When it comes to further orders, we will release that in our normal way, as we release firm orders.
But what is your general outlook for orders in the United States, just overall market-wise?
Now, we feel that we have a good position in the U.S. We feel satisfied with our share in the U.S., and I will not speculate on additional order in Q4.
Okay. Thank you.
... Daniel Patterson from SEB is on the line with a question.
Yes, hello. Yes, I have two questions. First of all, on your free cash flow outlook, you mentioned that it's driven, you know, on a lots of different lines. But my question is really: has something happened in the last three months that, you know, drove the several hundred million EUR improvement? Or is it more like the risk on the overall year cash flow outlook has now decreased? So that's my first question.
Yes, I think you answered actually the question with your last question. We are, of course, coming closer to the year-end and have more visibility and over the overall performance, and thereby, what will happen now going forward in Q4. So, and the activities we have now to contribute to the improved cash flow is very clear to us. So it's CapEx, it's EBIT, and also the focus on the working capital.
Okay. Yeah, that's clear. Now, that leads me to my second question on Net working capital. Net working capital for this year, and at least the nine months to date, is reduced by about EUR 350 million. Now, this is again driven by various things, higher payables and different things. But my question is, is this mainly really driven by the lower revenue? Because nine months revenue is down 21%, and you should expect a Net working capital release. Or is it more driven by, let's say, sustainable, permanent improvement in the level of working capital?
Of course, revenue will always have an impact on the net working capital, but I think if you look at it, the activity level is increased now in Q3, and we still manage the working capital in a very good way.
But just to be, I mean, you're mentioning that basically, it's the answer is both sides, but this goes also to play into the future, that once growth comes back, I'm assuming it's going to be very difficult for you to, let's say, keep this level of working capital. Is that true?
We are satisfied with the performance so far. We'll continue the focus and the initiatives we have. So, nothing from that perspective has changed. So the focus will remain on keeping the net working capital at a good level. And if you look at it, we look at megawatts under completion, there's still room for improvement.
Okay. Thank you very much.
Thank you.
Sean McLoughlin from HSBC is on the line with a question.
Yes. Good morning. I had two questions. Firstly, just around the risk to Q4, clearly, you've highlighted it in the release that because of the way that you recognize revenues, there is obviously some execution risk that is partly out of your hands. Do you feel this is fully represented now in the range of free cash flow that you're guiding for the year? And secondly, on the service business, the margin before allocated group cost, I mean, what is the reason why you don't guide to a clean EBIT margin here, and what would that be?
Answer your first question, there is a very high activity level in Q4, and with the guidance that we're now providing, we, of course, feel more comfortable with the uncertainties in the Q4, and that we have captured those in the cash flow range that we have given. The second question, referring to the service business, we are, again, as I said, very satisfied with the performance so far, and we have upgraded the guidance for the full year in terms of our earnings on the service business.
But the reason why you don't split out, you don't guide to a clean margin, is this to do with some uncertainty in the allocation of the cost?
No. I think what we have chosen to guide for this year remains, and anything beyond 2013, we will get back to in February of next year.
Thank you.
Thank you.
Klaus Kehl from Nykredit Markets is on the line with a question.
Yes, hello, Klaus Kehl from Nykredit Markets with a question, and it also relates to your cash flow and your net working capital. I know it's, it's maybe a bit boring, but, anyway, your net working capital has obviously improved quite a lot, and that's very positive to see. But I was wondering if, if we don't talk about the absolute level of net working capital, but talk about it in a, a percentage of sales, would you then think it would be reasonable to expect a negative, net working capital to sales going forward? Or could you, yeah, could you manage to be either negative or around zero? Because that, if you compare it to other companies, that they normally have net working capital of, let's say, 5%-10% of sales.
Where we're coming from, we have not been satisfied with the net working capital performance. Therefore, we have initiated a lot of activities to improve and consequently improve the cash flow for Vestas. We see room for further improvements. What percentage that would lead us to going forward is again a question for next year. I think overall, you will always see fluctuations in the quarter for a business like ours when it comes to net working capital. The most important thing is that we have a good situation and have improved during the year, and also improved in a quarter where activity level has increased.
Okay, but then a follow-up question. When you see room for further improvements, is that in absolute terms, or is that in, net working capital to sales?
What we have spoken about is in absolute terms, and in particular, on the megawatt, under completion.
Okay. Thank you very much.
Thank you.
Roland Vetter from CF Partners is on the line with a question.
Good morning, sir.
Morning.
Morning.
You have a comment in your annual report, in your quarterly report, saying that the study expects grid parity for onshore wind in Europe. What is Vestas's expectation? Can you bring costs down to that level? And what would be grid parity for you? What, like, levelized cost of energy would that be?
That's a very big question, so and I think hard to go into today. But, I mean, if I give a generic answer, I think that in we see already today in certain markets, certain conditions, that we actually are on grid parity. And, that is then dependent on many, many different factors, and probably requires a section by themselves. So but today, we see that we are on grid parity in several markets. But, of course, our drive to lower the cost of energy and our product and services continue to get that part of the market even bigger than today.
Do you have some estimate? What is your Levelized Cost of Energy for onshore wind in 2015 for good sites?
No, as I said, we will come back to how we view the market, and therefore our priorities and strategic objectives in February next year.
Okay, thank you.
Lars Heindorf from ABG Sundal Collier is on the line with a question.
Yes, morning. A question regarding pricing in the market. I don't know if you could give us a bit of a feeling for how pricing has been here during the third quarter, in particular, for some of the new turbines. Maybe if you can add a bit of a, sort of a split on the various geographies that you operate in.
I think overall, we see that pricing has been fairly stable in Q3, and we don't comment on pricing in the different markets.
All right, thank you.
Clemens Bomsdorf from The Wall Street Journal is on the line with a question. Clemens Bomsdorf, please go ahead and ask your question.
Yes, can you hear me?
Yep.
Yeah.
Yes, Clemens, you're through now.
Yes, you can hear me. Okay, perfect. There was some technical problem, seems to be. Okay, so, given the joint venture with Mitsubishi and increasing importance of the service business, how will the relative importance of these two look like in the longer run? And the second question, since you started as a CEO quite recently, what are you doing differently compared to the former CEO?
So, can you repeat your first question, the relationship with our service business and the offshore business, or?
Yes, exactly. How will the relative importance of these segments develop in the longer run?
Yeah, I think we, that is a question also we have to come back to in February. I mean, generally speaking, of course, we have just announced the joint venture on the offshore. We are confident that we get that company established in March. And then, of course, we will talk much more about also the prospect for the joint venture. When it comes to the service business, as I said, I think it's a very important part of the Vestas' onshore business. It's a business that is stable, and we are happy with the development, and it's a business that we intend to develop further.
Mm-hmm. One follow-up question on that one. Say, having said it's very important for the onshore business, what potential does it have for the offshore business, the service?
No, it's also, of course, services will also be an important part of the offshore business, for sure.
Mm-hmm. And then my second question: as the new CEO, what are you going to do differently?
I will come back to that in February in much more greater detail. For now, I'm extremely focused on delivering on the turnaround program and closing this year, as well as working on the outlook for the future.
Thank you very much.
...Once again, if you have a question, please press star, then one on your touchtone phone. Alok Katre from Société Générale is on the line with a question.
Hello?
Hello.
Hello, yeah, can you hear me clearly?
Yes.
Yeah, thank you. I have two questions. One, obviously, again, you know, coming back to the net working capital and, you know, in particular, inventory. Obviously, the megawatt under construction has gone up between June and September. I just wanted to get a sense of what we should expect for the year and, you know, in terms of the next few months going ahead. And, as a related thing, is the trimming of the shipment guidance related to, you know, this sort of objective to reduce megawatt under construction?
Okay, if I answer your first question regarding megawatt under completion, we will not give you any indication on, on where we will end up. I think worth noticing is, of course, that we have improved our net working capital position despite a ramp up now in Q3, as you can see on our shipments, as they are increasing from Q2 to Q3, so as expected, more or less in line with last year. And the last question on the trimming, can you please repeat that?
Yeah, just wanted to—is the trimming of the shipment guidance to 4.5 gigawatt linked to the objective of reducing megawatt under completion, or is it something completely different?
No, I mean, it, of course, our focus is to is on revenue and deliver on revenue, and another focus is to reduce the megawatt under completion. So this, I would say, even if they are have correlations, the two- they are two different focus areas.
Okay. Okay, and then, the second question that I have is in terms of the services guidance. You have a revenue guidance for approximately EUR 1 billion in services. If I look at what it implies for Q4, it implies, you know, fairly strong pickup in revenue growth and also in margins. So could you offer any color in terms of what should drive the sequential development, you know, in services, or versus the first nine months?
I think that what I alluded to in my presentation is that you will have fluctuations quarter-over-quarter in the service business, depending on what type of contract. With what we know now, we feel comfortable with the guidance that we have provided.
Okay. Thank you.
Thank you.
Faisal Ahmad from Handelsbanken is on the line with a question.
Yes, Faisal Ahmad from Handelsbanken Capital Markets with three questions. The first one relates to your CapEx guidance. Can you please try and explain what has triggered this downward revision of your CapEx guidance? Is it projects which have been delayed, or have you actually just cut some projects away? That was the first question. The second question basically relates to your earlier comments about project margins and how one should think about them going forward, both in terms of Q4 and backlog beyond that. In the Q2 report, you mentioned that you expected project margins to be higher in Q4 than Q3. Is that still the case, or maybe if you can try and comment on that?
And the final question, it really relates to your cost structure, and it's a very top-down question. I mean, are you happy with your current cost structure? You've done a lot, but are you happy with your variable cost? Are you happy with your fixed costs?
Okay.
That's all.
I got the operating margin and the cost structure. Can you please repeat your first question?
The first question was basically-
Yes
... basically related to your CapEx guidance. You're taking that down from EUR 150 million to EUR 100 million. What is the driver behind that?
Okay. So I think, what you can see is up to now, we have not consumed a lot of CapEx, and, again, we have more visibility on where we will end. So I would say that the consumption of the CapEx will be now in the latter part of the year. So it's not like we're postponing. We will make investments in on the products, or on the upgrades on the products, in particular, molds, in Q4. Your second question relating to margin, what Anders was alluding to earlier, we see more stable margins in Q4, and we expect, as we also have communicated, it to peak in Q4 of this year. And beyond that, we will come back again in February.
And your last question regarding cost structure, the turnaround program that we have now and what both Anders and I have highlighted in terms of fixed capacity costs, we have driven them down quite significantly under this program. And of course, cost, as for any other company, will be a continuous focus for Vestas.
So just a clarification question here again, Marika. It's really related to my second question and project margins. I mean, on the Q3 level, you commented explicitly that project margins were going to be higher in Q4 than Q3. Is that still going to be the case?
Yeah, and-
Because, because due to leverage, Q4 margins should be increasing sequentially, but will they also be increasing due to project margins?
And again, as we said, yes, we expect the margins to peak in Q4.
Okay, thank you.
Thank you.
Okay, so operator, could we have the last question, please?
Yes, thank you. The last question comes from Claus Almer from Carnegie.
Yeah, hi, just a follow-up question. EBIT margin guidance has now been raised to minimum 2%, but the low point is still below the 3.7% threshold for the corporate bonus. What will the answer be if an employee was asking about the possibility of finally receiving a, a bonus? That's the question.
Okay, so we have given a guidance of minimum two, and again, a minimum two. So we're of course striving for further improvements on that and to get into the bonus territory. We have not given up on that.
Can you say anything about... I mean, that's a big difference between doing 2% or nearly 4%. Is there any, you know, major events that could happen in Q4 that would take you to 4%, or is it more about the scale of revenue?
I think that what I'm saying is it's a high activity level in Q4, and we'll strive to bring as high EBIT as possible for Vestas.
Okay, I guess your employees will be pretty happy about that answer. Thank you so much.
Thank you.
Thank you. Okay, so, that concludes this session. As I said, I've met a lot of stakeholders to the company. I look forward to the next couple of days and talk and discuss and get your views from the investor side. So, thank you very much.