Okay. Good morning and welcome to Vestas Wind Systems' quarterly announcement for First Quarter 2013. Welcome to everybody in the room here today, press and analysts, and everybody who has decided to tune in over the web. The presentation we have decided to call very easily Outlook 2013 Maintained, and I hope that we'll be able during the presentation today to give you an illustration of what has happened during the first quarter and the evidence of the activities taken and why we therefore believe that the Outlook for 2013 can be reached. The agenda that we will cover is the regular one, and before we get to the Q&A, I will introduce our new CFO, Marika Fredriksson, who is with me here today, and she will just give a small presentation of herself.
Obviously, I will do all the presentations and Q&A today as she just started last week, and then when we get to the second quarter, she will be up here with me on stage presenting the results. If we start to look into Vestas' aspirations and organization and operating business model, then we had three very important focus areas that we've been working on since 2012. Number one have been to reduce the overall cost through operational excellence. Secondly, to reduce investments and simplify our product roadmap. Thirdly, how we can improve our capacity utilization across the organization, but also the capital efficiency. However, it was also very important that these activities should not hamper Vestas' aspirations within running the business, meaning that we had to advance our technology.
We also had to ensure a more efficient setup of the way that we run Vestas overall, and we had to make sure that our focus on sales and service of the wind power plants was not hampered. All this had to tie into the new organization that was launched last year and the operational model that need to make sure that Vestas could be as flexible as possible and scalable as possible due to the big changes that we continuously see in the market. So that has been the focus point and the three main areas that we have been working on, and again, during the presentation today, we'll try to take you through where we think we have progressed within these. The main focus within those areas.
If we start on the cost side, then by the end of 2012, Vestas was 17,700 employees, and here by the end of the first quarter, we are now down to 17,196. And if you look at where the reduction has come from, then 95% of the reduction had come within the salaried area and the last 5% within the hourly paid. It is important to be aware of, coming back to the scalability, that of course we will also see fluctuations within this area as we are also scaling our production up and down in order to deliver what we have to do during the year 2013. However, all of it ties into that we have this aspiration of taking out the fixed cost of more than EUR 400 million over this two-year period.
If we look into the reduction of CapEx, then we have over a 12-month rolling period reduced the CapEx with 66% compared to one year ago. We obviously have no plans this year for new factories, and we are also lowering R&D investments, and that means that the net investments have been lowered by more than EUR 230 million over the last 12 months. Again, an important contribution to the aspiration that I mentioned in the beginning of how to be better in also utilizing our capital going forward, and as you will see, we have actually done so without hampering our aspirations within the competitiveness of Vestas.
On this slide, and I'm not going to take you through all the numbers, but it's just to say that Vestas' approach has been to see how can we get a better leverage on our 2 megawatt and 3 megawatt platforms, the new one based on the V112, and do so in a CapEx-light way, but also at the same time increase the offerings to the clients. The AEP that is mentioned here on this slide stands for annual energy production, and you will see that, for instance, the V126 is going to deliver nearly 20% more annual energy production compared to, for instance, the V112 3 megawatt.
This is, of course, important not only for the attractiveness for the customers going forward, but also important for Vestas to increase our earnings going forward as this is going to ensure that the competitiveness of Vestas within the turbine areas keeps being enhanced even though we are working with a lower CapEx program by capitalizing on the existing platforms that we already have developed. Another important message in the accounts today has been the acceleration of the V164-8.0 MW. We had originally planned that this was going to be installed on a prototype level in the second quarter 2014, and we are now advancing this to Q1 next year, and it's going to be installed here in Denmark.
The reason why we are capable of doing that is because the prototype test that is ongoing here is progressing very well, and also due to the fact that many of the people at Vestas working on this are having very nice progress. This means that the drivetrain, gearbox, and generators, hub, blade, bearings , etc., are moving according to plan. Again, an important message to Vestas clients that not only is the prototype going to be advanced, but also the actual parts testing is running well. Just to give a magnitude of what we talk about here, what you see on this slide is the gearbox, and what you maybe notice in the back is actually a pretty big truck just to give a feeling for what kind of magnitude we are looking at on this turbine.
If you look into the development of the net working capital, then Vestas has in the past normally seen that first quarter has been a challenging quarter when it comes to the net working capital, and actually this is the first quarter in five years where we see a positive development on the net working capital.
The megawatt under completion is down by a little more than 200 megawatts, but in terms of the operational model that Vestas is working on across the value chain, whether we talk transportation, construction, and manufacturing, and the turnaround time, it's an area that we have particular focus, not just in the way that we are doing it in terms of our daily operations, but of course also we are seeing now that the new design of the turbines and the way that they can be installed makes it easier and faster in the commissioning time, which again is decreasing the need for capital turned up when we are doing these kind of things.
We call it the order-to-cash implementation that we are working on, and it's an important part of many of the features that we have at Vestas across the value chain in order to improve the net working capital, and I'll come back later on and talk about the specific development of the cash flow. During 2012, we got many questions concerning the improved capacity utilization of our plants, and obviously we closed some plants last year. We also sort of divested one, and we will continue to look at how we can increase the capacity utilization of our facilities, whether it is doing something for third parties at Vestas facilities or some divestments.
However, what should not be forgotten, when we last year said goodbye to more than 5,000 people, of course also leaves us with opportunities to look into the administration optimization and therefore optimizing the office space that we have across Vestas. We actually announced, for instance, the closure of our former headquarters in Randers and our facilities in Copenhagen. For instance, in Shanghai and Leatherhead as a further optimization of the overall cost structure, which is an important feature of getting to the target of EUR 400 million cost savings over this two-year period. Now let's turn into the actual financials and start to look at the overall activity level on shipments and deliveries. As expected, we saw a significant reduction in the activity level.
Actually, what we produced and shipped was down 34% compared to the same time last year, and what we handed over to the client was down 26%. This is basically, as we anticipated, the activity level we would see. And you're also noticing that what we, for instance, are delivering here in the first quarter is in UK, Sweden, Australia, Chile, and Brazil, but for instance, there is nothing being delivered in the United States here in 2013, and that is of course something we have known all along that it would be the big challenge here in 2013 is how to mitigate the huge reduction that has taken place in the United States for this year. And I'll come back later on and talk about where we see the order development.
The income statement, the revenues were basically unchanged at EUR 1.1 billion in Q1 2013, exactly at the same level as we saw in 2012. However, the gross profit was improved by EUR 46 million to EUR 58 million. This improvement, on the one hand, looks like it is a positive development, which of course it is. However, seen from our point of view, the margin that we are carrying here in the first quarter is not satisfactory on the turbines. And actually, a big part of the progress we are seeing here in the first quarter comes also from the fact that our warranty provisions are significantly down due to the strong performance of the Vestas fleet of turbines.
Therefore, when we look at our full-year expectations, it's important to be aware of that this earnings level is not representative of the earnings level that we're seeing in the backlog that we are carrying. There will always be a mixture of projects and turbines that you are delivering in a given quarter, and what we are handing over in this quarter does not have a satisfactory earnings level even though it looks somewhat better compared to Q1 2012. However, what is more of a sustainable nature is the development of the fixed cost that is down from EUR 216 million to EUR 166 million, and these two together actually means that the EBIT has been improved with EUR 96 million from -EUR 204 million to -EUR 108 million.
So again, an EBIT margin improvement, but from our point of view, we still need to see a much further improvement on the turbine side, and we know that what we have in the backlog, this should be possible. The overall development of the gross margin is moving in the right direction, and of course here we are seeing more and more positive evidence of the improvement on the earnings of the new platforms, but again, it will take time before this filters 100% through in the earnings side, and there will always, as I said, be fluctuations how this develops quarter by quarter, but I think the trend is clearly moving in the right direction.
I mentioned the number of employees down from end of last year through this quarter, but if you compare it by the end of 2011, it is a reduction of 24% down to the 17,196. It is still our aspirations that we will get down to 16,000 compared to the level where we are now, and that is obviously going to be a continuation of the optimization of the existing organization, but also due to divestment that should bring us down at this level by the end of 2013 in order to get to the target of EUR 400 million reduction of the overall cost structure.
Again, coming back to the development of the fixed cost, I think this slide is fairly self-explanatory of the reduction that we are seeing quarter by quarter, and that is in line with the plans that we have mapped out for getting to the full-year target, and we are trending according to the plan that we laid out. Actually compared again to the end of 2011, we are down with EUR 55 million down to a level of EUR 101 million compared to more than EUR 150 million back at that time. I mentioned briefly how we saw the development of the EBIT, and let me therefore just reiterate what has been moving in the wrong and the right direction compared to Q1 2012.
As you can see here on this slide, the EUR 80 million contribution from the fixed capacity cost is the biggest driver of the overall improvement of the EBIT, and this comes both what is related to the manufacturing but also in the middle of the P&L in terms of the overall fixed cost. If you look into the positive contribution from the warranties, then that stands at close to EUR 40 million compared to the same time last year. However, again, the project margins were not at the level that we would like them to be, but again, as I said, they are not representatives for the margins on the projects that we do carry in the backlog and expect to execute here in the coming quarters. The service side continues to develop quite positively.
The service revenues increased by 7% compared to Q1 2012, but maybe more importantly, the margin before allocation of group costs was 24%, which was 15% in Q1 2012. If you compare it after the allocation of group costs, then the margin was 15% versus 3% in the first quarter 2012. Again, the activity level that is taking place out in the field can mean that we are seeing some deviation on the numbers, but it is an important parameter for us that with the 5,000 employees that we today carry in our service business, that we also here keep on working on how to optimize the overall performance of not only the turbine but also the time that we are running in the field.
There, again, the installation time, as I mentioned earlier, is an important factor of how fast we can turn around the people when they are attending the various tasks at the turbines. Turning to the balance sheet, there is, of course, compared to Q1 2012 with Q1 2013, there are a lot of deviations because of the write-downs that were made by the end of last year, so I will not dwell into that, but more looking at how has the development been on the net debt and the net working capital. I should maybe use the phrase that the net debt only increased by EUR 72 million during the first quarter 2013, whereas the net working capital, as I mentioned previously, improved by EUR 36 million here in Q1.
As I mentioned in previous years, we actually have seen that the net working capital was moving in the wrong direction in Q1. This overall change in the net working capital and the improvement that we saw of EUR 36 million, you have here on the right-hand side of the slide how this is being composed. We had a positive contribution coming from prepayments, inventories, and receivables, whereas payables and other liabilities were moving in the other direction, but overall it did contribute to a positive development of EUR 36 million. As I said in the opening, the development of the turbines and the warranty provisions is a very positive development.
We are providing EUR 23 million here in Q1, but the actual consumption is down to EUR 17 million, and if you look across the blue bars here over the last many quarters, you will see that this is by far the lowest consumption of warranties, whereas the number of turbines under services are obviously much, much larger quarter by quarter. And this, of course, also contributed to the fact that the lost production factor continues to move in the right direction, lastly creating more energy for Vestas customers.
If you compare over a 12-month period, it actually means that the warranty consumption is less than 1.5% of revenue over the last 12 months, and therefore the constant focus on quality is, again, turning out to be extremely important for us, but of course also in order to maintain the earnings on the service business that we are seeing this development of the turbines. Turning now to the cash flow, the cash flow was improved by EUR 235 million compared to Q1 2012, and as you can see on the slide here behind me, it came from various factors. The improvement of the working capital was an important contributing factor, but also the overall investment level being reduced from EUR 91 million to EUR 37 million has contributed positively to the development of the free cash flow.
Again, the Vestas organization diligently working on how to further improve within this area is an important factor in order to get to the overall expectations for the full year. It has long been our aspiration that we should have a Vestas that was running at a net debt to EBITDA level below 2, and if you compare here in Q1 2013, we are at 1.8. Obviously, when we look at the very challenging year in 2012, we were actually in the middle of last year, we were above 5, and again, I think this is a good illustration of the progress that Vestas has made is starting to pay off, that we are now ending at a level of 1.8.
The return on invested capital, and I should say here that when we look on the left-hand side of the slide, it are still very small numbers, so maybe the slides or the curves look a little more impressive than they really are if you compare to the percentages on the left-hand side. However, I think the important message here is that since the second quarter 2012, the ROIC has been moving in the right direction, but it, of course, still not at an acceptable level, but at least the trend is moving where it should move. Turning now to the order situation and the overall order intake, it's clear that Q1 2012 with an order intake of 644 MW was a very low Q1 and down 50% compared to Q1 2012.
Fortunately, we saw in the month of April a rebound of 570 MW just in the month of April alone of announced orders. Of course, again, we are seeing here that there is no impact yet from the development in the United States as the new rules for the PTC were announced in the middle of April. On the pricing side, we are seeing a fairly steady environment. The average price per MW stands at EUR 1.04 million per MW, and that is up 2% compared to the same time last year, but again, it will depend on the types and the geographies that we talk about for this variance. But I think the key message here is that the bottoming out of the overall price erosion we have seen seems to be now stabilizing, and again, of course, for Vestas, an important message to look at.
Despite the low order intake in Q1, then the backlog is actually unchanged. The combined backlogs still stand at EUR 12.4 billion with a slight change to the turbines being down EUR 100 million, whereas the service is up EUR 100 million to EUR 5.4 billion, but overall we still have EUR 12.4 billion of orders that Vestas has to execute going forward, and we believe that that is important that we keep on building our backlog going forward, and it's, of course, an important priority for us looking into the rest of the year. Turning to the outlook, just to dwell a little bit upon the market share, we have not had the opportunity to comment on that since these numbers were released after our Q4 result.
There were, of course, four major industrial analysts coming up with how they saw the overall market development, one having Vestas as the largest, some having Vestas in the second spot. For us, the key takeaway actually is that Vestas, GE, and Siemens have gained global market share on the back of Asian players, irrespective which of the four industrial analysts that you look at. And we think this is important to be aware of also for the market going forward, in particular with the global requirements that they are in order to be able to work globally, install turbines globally, in particular many of the emerging markets, and we feel therefore that Vestas is well positioned, irrespective of where the business is going to go in 2013 and beyond, in order to capture our share of the market wherever it is on the planet.
This leads me to talk a little bit about the regulatory side, which, of course, is very important for us, and again, a bit of a mixed bag, not to go through all of them. We have got the PTC now rules guidance released in the middle of April. In the EU, there have been some discussion over the EEG from Germany that hopefully now has or has now subsided, which is important, but of course, the very low price on carbon in the EU is a challenge. We have had Romania with some uncertainties, so there are still various markets in the EU where things are moving in various directions.
Same thing actually takes place in Asia, where there are discussions in Australia about the future of the carbon tax, whereas we have seen both in India and Japan some positive development on the regulatory side for the expansion of our activities in that part of the world. As I said in the opening, we are maintaining the outlook. We expect to ship 4-5 GW for this year, revenues of minimum EUR 5.5 billion, of which the service is expected to be around EUR 1 billion, EBIT margin before special items at minimum +1%, and the EBIT margin before allocation of group costs of around 17% on the service side, and a positive free cash flow for the full year.
Again, there are no plans to invest in new manufacturing facilities, and therefore we also still expect to see that the investments in property, plant and equipment are expected to run around EUR 150 million, and as previously mentioned, we are working towards getting an organization of a level of no more than 16,000 people by year-end. Just to remind everybody, I know people who are following Vestas know this, but we will, of course, as ever, see fluctuations between the quarters on the activity level and the way that we recognize revenues and earnings in Vestas. Just to sum it up before I hand over to Marika, is to say, as I said in the opening, there are 3 main focus areas for us. It is to reduce cost, the low investment level, and the improved capacity utilization and capital efficiency.
What has happened on that front here in Q1, we have managed to reduce the number of employees 95% in the salaried areas, and we are therefore trending positively towards the EUR 400 million over this two-year period with EUR 80 million going down compared to Q1 last year. The investments are down by 59%, but despite that, we are advancing the V164, and we have introduced a number of new variants on the 2 MW and 3 MW platform. On the improved capacity and capital efficiency, we have seen both closures of offices and an improvement for the first time in five years on the net working capital. All these lead us to believe that we can maintain our objectives for 2013 on the number of employees, investments, and also further improvement of the capital and capacity.
As I said in the opening, I'm joined by our new CFO, Marika Fredriksson, and I will do the rest of the Q&A, but Marika, we'd just like to come up here and briefly introduce herself, and then I will be back on. Marika?
Thank you, Ditlev. Well, my name is Marika Fredriksson, and I joined Vestas just a few days ago. My background is CFO in global industrial companies such as Volvo Construction Equipment, Autoliv, and Gambro. I work with both turnarounds and growth, and as Ditlev Engel said in his introduction, I will not take an active part in the presentation of the Q1, neither the Q&A, but I will be on a roadshow for the coming week and a half, so hopefully I'll meet some people then. And I will, of course, take an active and full role in the presentation and the Q&A in the Q2. Thank you.
Okay. Thank you, Marika. Let's now turn to the Q&A, and let's start here in the room before we turn to the phone, and I think we have the mic over there.
Yeah. Jacob Pedersen from Sydbank with a couple of questions. First of all, you commented that the project margin on the first quarter was below your expectations and was in the order book. Could you comment a bit on the project margin on your current order intake compared to start level? That's my first question.
Well, as I said, the margin that we carry in the backlog is not representative of what we've seen here in the first quarter. We also have to remember that we have some projects also affected by the cost that were run from previously, so we knew that these projects on a lower earnings level had to be handed over during this year, and they are coming in here in Q1. I think I mentioned that if you look at the margins going forward, then the pricing level has panned out, as you can also see on the order intake, and with the further improvement on the cost out, that, of course, is going to build to that the margins that we're seeing in the first quarter is not going to be represented also on the new order side.
Okay. Next question. Could you talk a bit more about your expectations for what's going to happen with the order intake from the U.S.? We have seen GE commenting that they've already won around 1,000 MW in the first quarter from the U.S., so what is your expectations going forward to the U.S. market? You previously had a market share of 10%-15%. Should we expect that too going forward?
I think it's clear that with the PTC rules in place, which means that you have to be 5% complete of a project in order to get the grant also after 2013, will mean that the normal PTC rush to get everything done in 2013 is not that great as long as you get started. So that, of course, means that the overall activity level on installation will obviously be significantly down this year compared to last year. When it comes to placing orders, we haven't given a number, and I'm not going to give you that either, but it's clear that we have actually seen no movement in the U.S. market over the last 12 months because people have been waiting for this.
Based upon the projects that we know from people's pipeline, we are definitely hopeful we will see here in the coming quarters that the order intake in the U.S. is going to pick up again.
Great. Last question from my side. Do you have a plan if the low order intake that we've seen in the recent quarters, if that persists in the coming quarters, do you have a plan for what's going to happen in 2014?
Well, first, we still have EUR 12.5 billion of business we have to execute, and we have no changes to our shipment expectations for this year, so that is the plan we're working along. But of course, when we look beyond and into the future, we are, of course, paying close attention to how does the order intake develop compared with the activity level we need to see. So we have no other plans that we should be around these 16,000 people by year-end, and let me just say April alone was 570 MW on the turbine side on the announced orders.
Daniel Patterson from SEB Equities. I want to come back to the gross margin again, not to sort of burst the bubble on an otherwise strong quarter, but obviously, 5% is not particularly strong. You say that's not satisfactory. You also showed us a slide where the rolling 12 months was almost 12%, so you're saying that's on a good trend, so I must assume that's not satisfactory either. So what is a satisfactory gross margin?
A higher one? But we haven't given a number for this, but what we're just saying is that the margins we're seeing in the backlog are different than the ones we're reporting in this quarter, and therefore, I think if you do the math in order to get to the guidance, I think you can start to simulate based upon Q1 what it needs to be in the next three quarters in order to get to the guidance that we maintain.
Okay. To follow up perhaps specifically in Q1, just to be crystal clear, is this some specific project that has had cost overruns or specific components that are more broad for Vestas?
This is projects that we knew were not carrying a satisfactory margin, a combination of that with the projects themselves, due also to some of the changes that we have had on technology, became more costly than they should be originally when we took them on because we had this overall cost overrun, but now we're handing them over, and then we take the impact on that. So there's not a surprise to it, but it was a function of that, and it is some specific projects that are affected by that. Therefore, when we look into our backlog now and knowing where we are on the cost of the turbines, etc., we can see that it is not representative of the projects we need to execute in the coming quarters.
Okay. Very clear. Just a final question on working capital. Obviously, very strong development here in the quarter, quite impressive. When we look at the megawatts on a completion year, you're on roughly 1,700 now. Is the scope for you to reduce that even further and therefore structurally lower your working capital even further, or is this basically what we've seen now in Q1 to date?
Well, in order to get to our overall cash flow guidance, we need to do even better on the net working capital, and as I said, we actually only lowered it by 200 MW on the project under completion, and it was coming also from other areas. So from our point of view, we should be even better in the turnaround time of project under installation, and that is, as I said before, that is a clear priority that we will be even faster in the turnaround. And the design of the new turbines has been built very much that they should be plug-and-play.
I can tell you that the other day I was out crawling in our new V112 turbines, and it's clear that when I listen to the service technician, they are telling me that compared to where we were 12 months ago installing it because it was a new technology, and the time that they spend today installing the new technology. Of course, it has become much more of a plug-and-play, and that is, of course, important in terms of also improving the turnaround time, and that is some of the design features that was actually also going to be part of it. Okay. Let's turn to the Q&A on the phone.
Thank you. If you have a question, please press star and one. Lars Heindorf from ABG is on line with a question.
Yes. Morning, gentlemen. A question regarding the order composition here in the first quarter. We can see now that for a couple of quarters that the unannounced value has been larger than the announced orders, so I'm just curious if you can give us sort of an indication about are there any specific areas where you're seeing this huge number of small orders coming from?
I think that it's maybe more in reverse. It is more the fact that the large orders, for instance, from the US, are not happening because the large orders are normally coming from offshore US, Australia, Mexico, are some of the main areas where we announce large orders, and therefore, it's probably more a function of that they have not taken place, whereas a number of smaller orders have been placed in various parts of the globe. So I wouldn't say it's something specific, but more due to the things that we did not announce for obvious reasons.
Okay. And then still a little bit another question regarding the project margin. Is these bad projects and cost overrun in the first quarter, is that related to a certain turbine?
It's related to the overall cost overrun we had on technology, and then, as I said, the fact that we knew that they, for various reasons, would not be the best projects from an earnings perspective, so it was in line with the expectations. So it is not a turbine that is showing some problems. It is basically that we knew that some of this new technology would be more costly when we were handing it over, and that is what we're seeing now.
Okay. Then lastly, just maybe a clarifying question. Did you say at some point that you didn't expect any deliveries in the U.S. for Vestas this year?
No. I said that we would probably not see that many deliveries this year to the clients because that the PTC now gives the fact that you need to be 5% complete, and thus there's not the same pressure to have everything done this year when normally, compared to previously, where you have to be completed by year-end.
Okay. Thank you very much.
You're welcome.
Patrik Setterberg from Nordea is on the line with a question.
Yes. Hello, gentlemen. Coming back to the theme of today, the project margins here in Q1, I want to know how big a part of the revenue was these projects contributing on?
I don't have the exact number, but it related to a few projects.
It's less than 5% of the total revenue in the first quarter?
I would probably more than that.
Okay. And regarding these projects, were they loss-making on the gross margin? And if they were, so could you quantify the absolute amount, how much they were loss-making on the gross margin?
I don't wanted to say that, but only to say that they were not in the loss-making territory, but again, I have to say it is not a surprise. When we looked into 2013, we knew that when these projects were going to be handed over, they were not going to be the most interesting projects from an earnings perspective.
Okay. Then two final questions, just some housekeeping. You're moving forward the prototype of the V164. Is that going to impact your CapEx in 2013? And secondly, regarding the special items for 2013, could you give us a full-year estimation of how big these will be?
I cannot give you an estimation on the special items, but I can tell you that the advancement of the V164 does not change our expectations to the CapEx of EUR 150 million.
Okay. Thank you.
Claus Almer from Carnegie is on the line with a question.
Yeah. Hi. I have several questions. The first one goes to the free cash flow where, I guess, the divestment of the 19 MW in Chile has benefited Q1. Could you quantify the impact in Q1? That's my first question.
We have to remember that obviously, when we handed over the project, it had impact on cash in Q1, but there have also been milestone payments on this project prior to Q1, so it was not all the cash that came from this project in Q1.
But I mean, is it EUR 10 million? Is it EUR 15 million? You know about just a ballpark number?
I cannot recall the number that we got here in the last installment when we handed over the project, but as you know, we have milestone payments, and I can't recall the exact number that we got here.
Then about the CapEx in the quarter, which was also pretty low, how should we think about the EUR 150 million guidance for the full year? Would that be evenly split in the next three quarters?
Well, as you know, we don't guide on that, but of course, it's clear that also with the V164, we will source more and work further on this advancement, but we'll see how it's going to pan out. So we are not giving it on a quarterly basis, but we still stand to that even that we are advancing the V164 on the 150.
Okay. My second question goes to the service division where the Q1 report states that you have a renew rate of 71%. I believe that the normal rate is closer to 90%, so was there anything special happening in the quarter, and how much were renewed in the quarter?
It varies on how much is being renewed and also depending on which contracts are running out. I would say we still see quite a satisfactory progress on the renewal rate , and therefore, we don't, let's say, see this as anything disturbing in any way, that it was at 71 here in Q1.
So it's not like competition is picking up, and some of the more pure players are winning some of your contracts?
I mean, there are also some customers on older turbines that are just not wanting to renew them.
Okay. Then my third and last question, and that also goes to these projects. It's always difficult to look at a quarter's profitability, but if you did Q1 and multiply that with 4 trying to get a feeling for the full year, then you will get EUR 4.5 billion more or less revenue, but also a loss on EBIT line of -EUR 440 million. Then you could argue these two projects should be added back, but still, there is some room for improvement before you hit a break-even on EBIT. How should we think about the profitability for the next couple of quarters?
You should think about 2 things, that there will always be fluctuations in the quarters, and that when we say that the margin of the backlog is different from what we see here in the first quarter, I think it's the best way we can say to you that you should not do what you just described, i.e., take Q1 and multiply it by 4.
Okay. And maybe just follow up. The issues you had with these two projects with cost overrun, I mean, you're comparing with Q1 last year where you also had all the cost overrun issues. What is different this quarter compared to 12 months ago? That's my final question.
The difference is that we knew that these projects would have this kind of earnings profile, and thusly, of course, again, sometimes it's difficult to know whether they'll be handed over in Q1 or Q2, but we knew that when we go in there. 12 months ago, because we had the cost overrun on the V112, we were not aware that we were going to see this major cost overrun, so I think that's a huge difference.
Okay. Thank you so much.
You're welcome.
Manuel Losa from Exane BNP Paribas is on the line with a question.
Hi, everyone. First question, on Europe and Africa, which are increasing as a share of your total backlog, could you please tell us which countries are the biggest in your Europe and Africa backlog, and tell us whether this is related to offshore orders?
As far as I recall, there's no offshore in there. For offshore, we have some projects still in there that are all for Europe, and then most of it, I think, are still in the more traditional countries that Vestas have executed going forward, which means particularly in the northern part of Europe and elsewhere in that part of Europe.
Okay. Thank you. Second question, now that we're in May and you have more visibility for the year, could you please give us an indication of a sort of guidance range rather than just a minimum, and that means give us an indication of how much above EUR 5.5 billion sales and 1% EBIT margin you think your results could go in 2013?
I have nothing more to add than the outlook that we have already given. I'm sorry.
Okay. I understand. I understand. Final question, on your service business, the service EBIT margin has had a very strong start to the year. Can you please tell us whether this was what you had factored in in your full-year guidance, or if this provides some upside potential to your estimate?
Well, if you look at our expectations for the full year, it is still 17% before the allocation of group costs, and again, the service business is also going to be a bit like what you have on the turbine side, depending on which projects you are executing in the quarters, and of course, there are also various earnings on which kind of service contracts we are executing in the quarter. So my recommendation is still to say, "Well, we have given the guidance of how we see this developing, and again, there will be fluctuations between the quarters.
Okay. I see. Sorry, I just want to add that last one, just an explanation on why you choose to give us a guidance for minimum outcomes rather than a range or an estimate of what you would expect as the actual outcome.
Because I think also, as you could see on the regulatory slide, that there are still a number of unknown factors in the market. We have actually, on the shipment, given you a range of 4-5, and obviously, depending on how this pans out, because some of the regulatory uncertainty will have a huge impact, and that's why we said we need to try to take that into account when we give our expectations going forward.
Okay. Very clear. Thank you.
Thank you.
David Vos from Barclays is on line with a question.
Good morning, everyone. I have two questions, please. First, just going back to the orders in the U.S., when you develop a farm there and you need to be done and you need to have 5% constructed by the end of the year, when do you kind of need to place your orders for those wind turbines? If you can give us a feel for that, please. That's the first question.
I cannot remember all the exact, to be honest, all the exact language that is in the language released by the U.S. authorities, but as far as I know, you have to, for instance, get started. That means you have to start to build the foundations, and you have to place an order, which I guess realistically means that you can wait fairly long and still demonstrate that you actually have a project and that you are started. So I would still say that you have a fairly good time, simply because you don't have to have the project complete by year-end.
Okay. Thank you. And then just on the working capital improvement, which was obviously very good in the quarter, I just wondered if you could give us a sense for how much of that was a true operational improvement stemming from all the efforts that you're putting through versus a kind of more mechanical effect of the strong volume decline that we've seen going through your deliveries?
I think you should also just remember that Q4, 2012, actually also had a pretty positive development on the cash flow, and therefore, I would say it's probably due to various factors, but there's no doubt that all the work that is taking place in order to improvement of the net working capital across the organization is definitely having a very important impact on this improvement.
Okay. You can't quantify how much that is proportionally?
Well, I think you can see where most of it's coming from. We also have to remember that there are other factors than this, but as I said, the fact that you have this regional footprint that Vestas does have and the turnaround time and improvement of the turbines, so there are many factors that are playing into the fact that you can improve this development on the net working capital.
Okay. Thank you very much.
You're welcome.
Mark Freshney from Credit Suisse is on line with a question.
Hello. It's Mark Freshney from Credit Suisse. Just two questions. Firstly, on refinancing the various bank facilities and the Eurobond, those mature in around about 20 months, so clearly, you have to start thinking about them in a year. I'm just wondering what your thoughts are regarding the credit financing in the business. And secondly, you've already pretty much achieved almost the EUR 400 million fixed cost cutting. Is there scope for any more? Are you generally happy with the cost structure within the business? Thank you.
Well, first, before we talk about refinancing, I think we should just remember that we entered a new bank deal in the beginning of this year, and that is the one we are working with, and I have no more comments than that, so that's a pretty fresh deal. It's actually only a few months old. Concerning what to achieve, it's clear that one of the main objectives in this new organization has been to make Vestas a more scalable organization and thusly being able to absorb the big swings that we see in the market, like, for instance, the dramatic drop in the U.S., and that scalability is something that we will keep on having going forward.
We are still at 17,200 people in the organization, so obviously, we hope to see that by bringing it down to 16,000 by year-end, that we can do even better on the overall run rate on fixed cost going forward. That's clear. It's definitely challenging, but that's what we're working towards.
Okay. Thank you.
Sean McLoughlin from HSBC is on line with a question.
Yeah. Good morning. I have three questions. Firstly, on pricing, several competitors are talking about pricing pressure in turbines. You're making some quite bullish comments about pricing having troughed, and certainly, we're seeing good pricing in the order backlog. What's the difference here? Are you turning down some projects because of the pricing? I mean, what is your strategy regarding pricing? Secondly, if you knew 12 months ago that certain projects would have a lower earnings profile, could you specify how many more projects at lower margins you expect through the remainder of 2013? And thirdly, on the new turbines, if you could comment on how this is opening up new markets, new customers, effectively, any feedback you can give on the impact on customer discussions from the new models, and what your actual margin expectations are compared with current existing models. Thank you.
Okay. Maybe let me take both. Pricing and the new turbines together, it's clear that, for instance, back when you introduced the V126 that has an annual production, which is 20% better, is, of course, something that hopefully should help both the clients in getting more out of their investment, but of course, also, we would like to ensure that Vestas gets more out of it as we are coming seen from our point of view, a superior product offering. So the pricing varies from region to region, but it has been, as I said in the introduction, it has been extremely important for us that even though we were going through all these changes, that we were not hampering bringing more competitive turbines to the market.
I think that the customers are seeing that the turbines and the reliability of the turbine, not least, and thusly also the service cost and the O&M cost and the security around this are very important parameters. A combination of higher annual energy production, even lower lost production factor with a good service backlog means, of course, giving the business case service that the clients are looking for, and we know that this is so important for them in their decision-making. It's a combination of things, and as you said, if you look at our pricing slide, you're seeing that it's 2% up, but again, it's depending on where we're placing the orders on the planet. Overall, these are, of course, very important factors for them and for us. You asked me something about the earnings lower. What was that?
It was just going back to these projects in Q1 that had a lower earnings profile, and you suggested that you already knew about these projects 12 months ago.
Oh, sorry. Oh, sorry. Yes. Right.
Just how many more projects in 2013?
When we went into 2013, we obviously have a fairly good view of the projects that we are going to execute, and thereby, we also know what kind of margin that they carry, and therefore, those projects that were handed over here in the quarter, we knew, as I said earlier, were not having the most exciting earnings profile, and therefore, we also know, at least in what we call the pre-calc. That means what we expect to get out of them based upon all the parameters, that is what the earnings level should be. Then, of course, it's also up to our operational organization to make sure that the estimated cost for installation, everything else, goes according to plan, those that the pre-calc and the post-calc will end up at the same level, and that's, of course, important.
So what I'm telling you here is that the projects that we are in the process of executing and are going to execute tend to have a much more interesting earnings profile than the ones we are handing over. Some of those we are handing over here in the spring months.
Very good. Thank you.
We leave one at the top.
Klaus Kehl from Nykredit is on line with a question.
Yeah. Hello. Klaus Kehl from Nykredit with two questions. First of all, could you update us on the run rate of the cost-out program here in Q1? I believe that you said after Q4 that you have managed to take out EUR 30 million in Q4, and secondly, you have said that you expect to make investments of approximately EUR 150 million in fixed assets here in 2013, but what about the R&D cost? Could you update us on that? Thank you.
If we start with the cost-out, then we are still seeing this work progressing nicely, as also we mentioned in Q4. We have not quantified here, but the trend that we saw at the end of last year is still continuing, but obviously, as we also said, it will also depend on which projects we hand over in a given quarter, but of course, that is, again, a positive contribution to the fact when we say that the margin profile on the backlog is improved. It's, of course, also a function of the fact that these machines are expected to be produced at lower cost due to this cost-out exercise.
Concerning the R&D, then the EUR 150 million of the overall tangible expenditure, as we mentioned, we have not quantified how much is going into R&D, but it's clear that R&D has, of course, also been affected by the overall reduction that took place here in 2012, and the V164 project is, of course, carrying a lot of the cost here in 2013 for the R&D department, but we have not specified exactly how much that is. But the majority of the changes that we expect to see on the organization is not coming that much from the R&D side.
Okay. Then just a follow-up question. Would it then be reasonable to look at the R&D level for 2012 and then perhaps use that as a benchmark for 2013?
As I said, there are no major changes expected within the R&D area, and I'm sure that they are going to be extremely busy delivering, in particular, on the V164.
Okay. Thank you very much.
Caspar Elmgreen from Handelsbanken is on the line with a question.
Yes. Caspar Elmgreen here with a few questions. Firstly, on your cost reductions, if you look at Q1, then most of the employees which you laid off were salaried employees. How should we be thinking about the composition of layoffs for the remainder of the year? Can you comment on that, the split between salaried employees and fixed-cost employees?
Yeah. It's based upon the plans that we have, which is everything equal about 1,100 FTEs, and some of this is divestment. That obviously means that where they're looking more into the hourly paid than we are looking into the salary paid.
Okay. So, would it be fair to assume that the OpEx level which you assume achieved in Q1—I mean, that's the run rate now. Going forward, can we basically multiply the OpEx level in Q1 by 4, or is there more to come in that respect?
We still expect to see the overall cost level being reduced during the year, so hopefully, we should see even further improvement on the cost side going forward, but obviously, let's say, the very big jumps that we took in particular in the second half of 2012. It's not going to be replicated, but we still expect to see further improvement during 2013.
Can you just help us explain where these cost reductions will be coming from? Because as you mentioned previously, most of the layoffs going forward will be salaried employees or hourly-paid employees.
Well, if you look in Q1, I mean, 95% came within the salaried area and only 5% within the hourly paid. It's clear that when you have made such a large change to the organization as we have, then obviously, there are still things that we do believe we can further improve on in order to increase the efficiency in the organization, but again, I'm just saying it's not going to be to the same magnitude that we saw last year, and therefore, it's a constant work that has to happen during the remainder of the year and then couple with some divestment, which is obviously going to be more lumpy than the overall optimization.
Just one final question on this theme before I have a casual question. I mean, given that most of the layoffs you're expecting for the remainder of the year to be hourly-paid employees, should we expect that special items peak in Q1 for this year?
As I said, we're not giving any guidance on the special items, so I'm sorry. I can't help you with that. You better turn to your cash flow question then.
Okay. So just two questions remaining. I'll take the cash flow question as the last one. I mean, given the regulatory certification which you have received in the U.S. and the ongoing regulatory uncertainties which you have in some of your other European markets, I mean, what are your thoughts about your shipment guidance? I mean, should we expect you to land in the lower end or the higher end? Are you more confident in any of the in the range?
Again, we have given a range because we feel this is the most prudent thing to do, and one also has to remember that some of this is not always in our hands. Sometimes, some projects are getting delayed by the clients, and that means we have to postpone them, so I don't want to speculate about whether it's one or the other. 4-5 is the best assessment we have, and then we'll see how it pans out during the year.
Okay. And my final question on the cash flow. You make a fairly big adjustment for non-cash transactions in the quarter of EUR 143 million. Besides depreciations, what does this amount cover over?
Sorry. What is the 43? On.
143 in non-cash transactions?
I cannot recall that off my head, so I'll have to get back to you on that one.
Okay. Thank you.
You're welcome.
Shai from Macquarie is on line with a question.
Yes. Good morning. It's Shai from Macquarie here. Three quick questions, please, Ditlev. On warranty provisions, slide 22, are you signaling that warranty provisions is going to be falling going forward as a percentage of revenues? Second question was just on U.S. orders. One of the other analysts cited the GE comment yesterday that they've already signed 1 GW of U.S. orders this year. Did I understand your answer correctly, please, Ditlev, which was that whilst you are optimistic on the recovery in U.S. orders later on into 2013, as yet, year to date, you haven't signed any orders for 2014 delivery in the U.S.? And the third and final question was just on Dag Andresen and the surprise resignation of the CFO. I do understand that so far, there's been a very clear investor relations stance on this, which is that it's a personal matter.
I just wanted to know if you wanted to make any comment on that because obviously, it continues to be a source of questioning for many analysts, for many investors. I just wondered if you wanted to comment on that or say when you were aware of Dag's decision to leave.
Well, let's take the last one first. I have nothing further to add to what has already been said, so I concur 100% with our investor relations. Let me just say that we are very pleased to have Marika on board and that she already is up and running, and as I said, or she mentioned, she will be out meeting the investors here in the next two weeks, and there are no changes to the plan whatsoever that Vestas laid out already last year of how to execute in year 2012 and 2013.
Concerning the warranties and the U.S. orders, then we would, of course, hope that we will see an even lower level going forward, but of course, we also know that also based upon history, when you work with this kind of machine, things can happen, so we are just saying that we are seeing a very positive development. In particular, I think one has to be aware of that 12 months ago, when we introduced the V112, we were sitting with not only a cost overrun, we were, of course, also sitting with the fact that when you introduce new technology and as you remember, a number of analysts asked me at that time whether we were confident whether or not this would mean a huge impact on the warranties, which we actually did not see in 2012.
Then, we are, of course, it's good to see that having introduced the new technology now, 12 months later, that it does perform very well and does not have a negative impact on the warranty consumption, which again is a very important KPI for us, so where it's going to end at the end, we will have to wait and see, but at least, we are happy that the level is at the level that it is, and I think it's the lowest for I don't know whether I haven't checked whether it's forever, but at least a very, very long time. Then on the U.S. orders, you know that the Vestas policy is, and to make that clear, we only comment on firm and unconditional orders, and that is the policy we maintain also on the U.S., so until something is announced, we don't give any comments on it.
What others have commented on, I will let them do. The only thing I will say is that obviously, we do hope and expect to see more U.S. orders starting to pick up as we go through 2013 overall.