Good morning and welcome to Vestas Wind Systems third quarter result for 2012. Welcome to people in the room, but also welcome to press, analysts, investors, that have tuned in, and, colleagues, my colleagues investors, for this presentation this morning. We have labeled this presentation, apart from the third quarter, obviously, "The Preparation for a Profitable 2013 Continues," and that is going to be some of the main features and drivers that we are going to talk about apart from the actual results that we have presented this morning.
As earlier, or at the Q2, I will do the introduction, then my colleague, Dag Andresen, our CFO, will take you through the financials, and then I will talk more about the order intake, and the outlook, and then both of us will be here for the Q&A session that we will take, as we normally do, both in the room but also over the phone. Let me start by saying what is it that we want to achieve with the organization that we put in place in November 2011. It was, number one, a Vestas that is focused on two revenue streams based upon wind turbines and services. It is also an organization that should be scalable and flexible. We needed to focus more on our ability to deliver on product cost out.
We knew that 2012 would be tough, and also that we had to prepare for an even tougher 2013 market, not least on the installation of new turbines. And thereby, a scalable organization and a new management team to execute this was of the utmost important, but we had to do it in a way that we could maintain both our focus on quality and technological leadership. All these things are the ones that we have been working with ever since November 2011, and we had to do it in a way that we kept on intensifying our focus on our customers, who are obviously the key driver for everything that we are doing in our operations on a daily basis.
This has been part of the overall plan that we laid out, as I said, in November, and at that time we also said in the beginning of 2012 that we had, unfortunately, to close down 2,335 positions during 2012. As we were trending, more ahead of the plan, we further increased the expectations with an additional 1,400, that was announced in connection with Q2, in August earlier this year. All this is in the process, as you will see in a minute, of being implemented and executed, and we also said back in August that we had to adjust the Vestas organization for an activity level of around 5,000 MW, in 2013, and that is still the plans that we carry today, while at the same time, and we'll come back to that, have announced that additional 2,000 headcounts will not be in the company by the end of 2013.
So overall, we are seen from that point of view working our way through this adjustment of the organization to the new operational model, but of course also preparing Vestas for these uncertain times, in particular with installation of new turbines. Just for the clarification, you have here on this slide the numbers that we are going through and the number of people that have been leaving us. And as per November 2012, we have realized the reductions of approximately 3,700 colleagues. We will have an additional 1,000 that are in the process of leaving us, temporary employees, people who are working in the termination period, and therefore it's a little difficult to say categorically how many will we exactly be when we do the headcount by the end of December, and that's why we say we will be approximately 18,000 by the end of this year or early 2013.
The additional 2,000 headcounts that we talk about is not necessarily just layoffs at Vestas. They will come from three areas. Number one, we are looking, as previously mentioned, into divestments, and that means that maybe some Vestas facilities will be having a new owner, but that means they will no longer be at Vestas but with maybe under new ownership. Number two, we will keep on focusing off our hiring freeze, as we have done also during this year. And finally, we will carry on with further optimization within the organization, within each of the executive management areas, which of course will mean some additional layoffs but not to the tune that is being mentioned here. All this will mean that we will be, as I said, by the end of next year, 16,000 people versus approximately 18,000 by the end of this year.
That also puts us in a position to further escalate our expectations to savings compared to the end of 2011 and where we see to end at the end of 2013. And that means that we are now targeting savings of approximately EUR 400 million. That is, of course, quite a significant challenge and something that has been executed during a very busy 2012, but also means that when we are talking about building a Vestas for a more profitable 2013, then these are, of course, one of the important building blocks in terms of the cost savings. This also directly relates into the productivity. If we just compare where we were in the end of 2011, we shipped or produced approximately 5,100 MW. This year we expect the figure to stand around 6,300 MW. That is an increase of 24%.
If we look at the number of employees that we were by the end of 2011, we were 22,700, and now we expect to be around 18,000. That means a reduction of 21%. As you will see later on, we have actually increased within one area in particular, and that is within service. Overall, I think a positive development when you look at this, within the productivity area. I know that there have been made various comparisons between the number of employees that we were some years ago compared to the activity level that we see, for instance, in 2013, as both of them in 2007 stood at 5,000 MW, and we expect the same activity level in 2013.
Now, when you look into the service business within Vestas and deduct that, you will actually see that the number of employees within the manufacturing area will have gone down by more than 10%. That is important when you look into the productivity because in 2007 a lot of this was made in fewer plants, in particular in Europe. We now have a much more diverse manufacturing footprint, and that means that it is also, let's say, with more units, and that normally also will mean that the number of FTEs will go up. So further productivity improvements are going to take place but have already taken place, and therefore one has to, when one looks into these numbers, to remember that the service part is becoming quite a substantial part of the number of employees that we have within these areas.
Some of the initiatives I will not go through all of them here. They can be found later on in the presentation, but a lot of initiatives have been undertaken or are in the process of being undertaken in order to make sure that Vestas get properly adjusted to this overall activity level that we are now seeing in the market, and is also one of the reasons why, as you will see later on, why we have made some additional provisions on special items. So the organization that we put in place is now there.
Executive management positions have been filled, but of course there will still be, within some of the areas, further optimization within each of the areas in the executive management, but overall, the organization is in place for being both a more scalable and a lean and effective organization compared to what we have in the past, and an organization that is adjusted to these tough market environments. If we look particularly into the Q3 report, I would say that if you look into the earnings, revenue, and cash flow, then they are in line with our expectations and also what we mentioned, in connection with Q2 in August. There are, as I said, special items due to write-downs, and Dag will come back and talk about this, but our fixed cost and our CapEx continue the downward trend, as we previously said it would.
We have, due to the uncertainty of the high amount that we have to execute here in the fourth quarter and also due to the uncertainty on the order intake, increased the free cash flow guidance from previously positive to minus EUR 500, and as can also be seen today in the announcement, we consider this to be more of a timing issue that we have to relate to. The Q4 order intake is expected to be the largest in the year, following a very weak order intake on turbines in the third quarter, and I will come back and speak more in detail about this a little later on in the presentations.
Finally, another main event is the additional savings of more than EUR 150 million that we do expect to execute in 2013 through, as I said, further consolidation and, of course, also the headcount reduction that I just spoke to. With this, I'll be happy to turn the microphone and the stage over to Dag who will take you more into the details of the Q3 results as such. Dag?
Thank you, Ditlev. If we go directly into the activity level at the different factories, as this picture shows, we have a 6% increase if we're comparing last quarter in 2011 to this quarter. This is mainly driven by the shipments up. Shipments in the U.S. is now dampening, and that's due to the PTC expiration getting closer. And we see also, as Ditlev mentioned, we have shipments expected to increase by more or less 25%, up to 6.3 GW. Deliveries is a key primary revenue driver for the company. We have 15% up comparing last year quarter to this quarter. But we would like to highlight, regarding Q4, there will be certain uncertainty regarding grid connection weather and other disruption that will set more or less the principal level for what will be achieved in Q3. Income statement: This is the second quarter.
We have a positive operating profit, EUR 13 million, and also special items that I will come further back to, EUR 153 million, and that's due to the situation that we are actually changing the operating business model of the company and tightening up the operation in principle on a global level. We have an operating profit margin at 7%, comparing from Q3 2011. That was -6.9%. Special items: First of all, I would just like to say that if we start at the right part, EUR 35 million is due to the approximately 1,000 employees and also the already ongoing redundancy. This has a cash effect on the P&L.
The write-down of other assets is due to the closure of R&D facilities in the U.S. and Denmark, and we have also centralization of group treasury, taking that back to the headquarters here in Aarhus and closing down in Zurich, and we are scaling down our activities in India. Regarding development projects, we have 62, and that's due to change of technology regarding blades and also tower cranes. Looking into deliveries and revenue in Q3, we see that deliveries transfer of risk is increasing 15%, to EUR 1.464, and the revenue component, as we said, is increasing to as far as 49%, very close to EUR 2 billion for the quarter. Gross margin: if you look quarter-on-quarter, this product margin may result in a substantial fluctuation in the earnings.
This is due to the uniqueness of the different products that I'm going to show a little later on, but also that the industry that we are working in has this kind of volatility in principle, very much based on what kind of timing regarding placement of order and also regarding revenue recognition. If we compare with the very challenging situation we had in Q3 and Q4 2011 and also the Q1 in 2012, at 1%, we see that today we are at a level of gross profit at EUR 203 and 10% gross margin. This is a picture we showed before. I think this is very important to understand.
If you look at more than 200 products from Vestas' side, you can see the different uniqueness and the 10 components that are key drivers for the variation and volatility, both regarding margins, both regarding operating profit, and also regarding primarily the revenue for the company. Fixed cost: The fixed cost is continuing going down. That's based on the different initiatives and products that the company has pursued but also is closing, and some of them go further on into 2013. We see that this will be further lowered by the September layoffs and also cost reduction for more than EUR 250 million with full effect as from year-end 2012. This is very important, since the trend line is actually what we should focus on and not the absolute number for the quarter.
Going into depreciation and amortization, we see that we now have an increase in depreciation, and that's actually due to the issue about completion of some of the R&D projects and also that we have full serial production of 112 and the GridStreamer. Reduction of employees: the total reduction of employees is going to be approximately ending out at 18,000 people in the end of this year. This is more than we announced in quarter two, 2012. And we would like also to emphasize that these initiatives and this process will contribute that we're going to reduce costs by more than EUR 400 million with full effect from the end of 2013. Operating profit development: As you see, the operating profit from quarter three 2011 to quarter three presented today, we see that we have a very good increase in volume.
But due to certain products, both in the U.S. and in Germany, we had lower margin on several of these products that we were also aware of. But again, EUR 52 million from service and volume and margin is giving this a positive contribution in addition to the fixed capacity cost of EUR 24 million. Then, as we said before, the depreciation and amortization has now started to hit the P&L, and for the period, it was EUR 30 million, ending out as today with a EUR 13 million profit, operating profit. Going to comparing quarter, last quarter to this quarter, we see starting at EUR 40 million operating profit and still very high volume.
But again, the margin, actually, very also based on the year products, it means that taking this down by 124, we see also that we have service volume and margin going a little down due to some more costly contracts just for the period, and then ending out in an operating profit of EUR 13 million. That is the second quarter in a row. Service revenue is continuing according to the plans. There is also further potential in the service industry in principle. We see that more and more of the contracts and also for existing turbine fleets, but also new turbine fleets, delivered and set in operation, we are also increasing the number of service contracts in principle.
We increased the service revenue by 46% if we compared last quarter last year to this quarter, and we had for the nine months operating profit before allocation of group cost EUR 137 million. As Ditlev said, we have more or less now 5,000 people in this operating segment, and we also foresee and have very strong hope that it is going to continue, and we have further plan how to develop the service industry.
Balance sheet: Due to the write-down of R&D products, as mentioned before, and the centers, different R&D centers, we are actually having a reduction in tangible asset and property, plant and equipment, and net debt and net working capital is increasing, due to the high activity level of the company that we are into now.
The change in Net Working Capital: If you're comparing Q3 2011, we see that both inventories and prepayments were more or less balancing each other, but still we have payables and other liabilities that are ending up in the EUR 481 million net working capital. If you're comparing over the last three months, we see that both inventories and prepayments are more or less equally balancing out each other. That is actually a very good signal. But, of course, then we have the payables. That is actually setting the net working capital for the period at EUR 481 million.
Megawatt under completion: First of all, I would like to highlight that in the U.S. we have only 438 MW left, and that means that, before the PTC is expiring, it means actually the risk for deliveries in the U.S. is going down. We have an increase in for a period by 6% comparing quarter-over-quarter, and we see also that MW under completion will decrease in quarter four and also influencing the net working capital and inventories for the company. We have a much better performance of the wind turbine fleet, going forward, for the whole period. We see that for the first nine months, we have a warranty consumption of EUR 33 million, lower than actually what we have set aside as a warranty. But we also see that we have very limited consumption regarding the V90 gearboxes that we have informed about before.
The company has Lost Production Factor target to be below 2% for the year. We also see that V112 is actually improving and performing better than expected. Cash flow: You see changing working capital from EUR 472 last year same quarter to -EUR 151, and that's actually negatively impacted by the change in payments and prepayments and payables. We see also cash flow from investing activities is as much as 69% lower, and we see that we will have a lower run rate going forward for the company as such. Also net CapEx lowered by the sale of the tower factory that we have informed about in Varde in Denmark earlier. Net debt to EBITDA: We see net debt expected to be reduced by the year-end.
We see also that earnings expected to be higher than in Q4 2011, and we expect both the denominator, and also EBITDA to improve for the last quarter four. So, the net debt to EBITDA leverage is going to continue in the same trend line as this one. Invested capital: We see that both CapEx during the first nine months was EUR 151 million lower than depreciation and amortization, and we also now have initiated a process to identify outsourcing opportunities in the combination with looking over the global footprint for manufacturing for the company. This is giving, as you can see, a return on invested capital. I would like to highlight, as I said before, also in Q2, that the company has a strong focus, both on operating profit and also on invested capital.
We see that, the end of the curve in Q2 2012, Q2, and we have the trend line going up, according to better, lower investment and higher return. That means also we foresee that we will come to a break-even level in the end of the year. I would like to give the word over to our CEO, Ditlev Engel, for looking into the order intake for Q3.
Thank you, Dag Andresen. Turning to the order intake and the development in the third quarter, let's start by looking at the order intake for wind turbines. That was down by 70%, which is obviously quite a significant drop compared to the same period last year.
Obviously, we knew that the wind market was slowing down, and in particular, you cannot see on this slide, but, for instance, when in the United States, there has obviously been very low activity due to the uncertainty in the market that has been there during the third quarter. So, definitely, the global wind market is slowing down, but that is also what we had predicted when we looked at our activity planning for 2013. We do, however, still expect that the fourth quarter will be our biggest quarter in the year, and that means that we will see a rebound in the fourth quarter of new orders, like we also have seen in the past, that normally the fourth quarter is the busiest quarter when it comes to placing new orders.
I would also like to say that everybody knows that the installation is very challenged at the moment, and therefore Vestas has maintained a very strict policy on making sure that we have well-balanced projects, both with regard to profitability, payment terms, and risk. I think that's important to be aware of, that this is something that we rigorously are looking into and something that, if you look at Vestas overall, I think over the last many years, we have been very strict on ensuring that we are not running into major challenges when executing some of these very big projects.
Even on a very low basis, but nevertheless, the average prices went up with 10% from EUR 0.91 million- EUR 1 million per megawatt, and that, of course, also has to do with the mix, but at least we are now around EUR 1 million per megawatt in the third quarter. That means, due to the low order intake, also what we have executed in the third quarter, that our backlog has gone down. And, as you can see here in the middle, in Americas, obviously, as was mentioned earlier by Dag, as we've been handing over and executing more there, we are also seeing that the backlog in Americas is going down.
However, we still have, when it comes to the turbine side of the business, a backlog of EUR 8.3 billion, and the value of the backlog is exactly EUR 1 million per megawatt, also, that we need to execute going forward. If we look into the service business, which is not part of the backlog that you just saw, then we now have service contracts by the end of the third quarter of EUR 4.9 billion, and we are seeing that the average length of the contracts that we are executing are now in the range of six to seven years. Dag also mentioned earlier that we are now close to being 5,000 people in our service business.
Not only do we have a sizable backlog of close to EUR 5 billion, but if we look into how the service is going hand in hand with our installation business, then there are two parameters to be aware of. The first one is that if you look at the orders that we have announced, then in 94% of the cases, they do come with a service agreement here after the first nine months. And if we look into the renewal rate, that means that when we have service agreements currently with our customers that are expiring, how many of them are being renewed with the clients, which is, of course, also important when building the service backlog, then we are now at 89%.
I take that as a clear sign that the activities that Vestas is undertaking within service and the performance of the turbines that you saw previously is going well, and that we need to make sure that we can keep on building on this momentum as we are further developing our service business in the years to come. If you can recall, I showed a similar slide in Q2 between the balance of the backlog between wind turbines and service, and if you compare the two here, you will actually see that the chunk of service in the backlog has gone up compared to the total, where we last year or last quarter stood in the magnitude of around EUR 40 billion.
Turning now into the outlook that we foresee for the rest of the year, we still expect shipments around 6.3 GW, as we also did in August, revenues around EUR 6.5 billion-EUR 8 billion. We have, due to the high level and the increase that you saw, 46% in service, increased our revenue expectations to service from EUR 850 million to close to EUR 900 million, EBIT margin unchanged between 0%-4%, and also unchanged EBIT margin on service of around 17%. We have lowered our investments from EUR 450 million- EUR 350 million, and you will see in a minute how that is composed, with EUR 200 million in intangible and EUR 150 million tangible. Special items, as you saw from Dag's presentation, have been increased due to the additional write-downs that have taken place here in the third quarter.
Finally, we have increased the, I would say, the uncertainty of where the cash flow is going to end by New Year's Eve from previously positive to now positive to -500 EUR, and that has, of course, a lot to do with the exact timing of when exactly the cash inflow will happen and outflows over the new year, and, of course, also to the down payment that we expect to receive on new orders, how this is going to develop, and therefore we have increased the spend on the cash flow from previously +0 EUR to now +0 EUR to -500 EUR. Warranty provision still stands at 3%, and as you could see previously, there is a positive development both on warranties and the LPF.
The lowering of the CapEx, which is quite significant in 2012 compared to where we were in 2011, is down from EUR 760 million to now expected EUR 350 million. If you look at the tangible investment, then it's due to property, plant and equipment that we have lowered with an additional EUR 50 million, and then intangible investments are lowered also with EUR 50 million driven by a more focused R&D, which we also spoke about in Q2. Finally, just a few words. I have received a lot of calls this morning to get Vestas' comments on what the election last night will mean for the extension of the PTC, seen from Vestas' perspective. Let me just add a little flavor to how we see it.
First and very importantly, whether there is a Production Tax Credit or not for 2013, then Vestas has prepared and therefore is prepared to whatever way this is going to play out. We do believe, actually, that the PTC will be extended. We, of course, cannot say that with certainty, but we will have to see what now happens in the coming months and as people are preparing for the new composition in Washington, D.C. We also should say that we are looking into the development and how this is going to affect our overall activities, not just in the U.S., but also Canada and Mexico and in Central and South America.
But, as I said, we think that there is still a likelihood, a fair likelihood, that the PTC will be extended, and if it goes through as it is now being presented to the proposals on the table, it actually means that it could become close to a two-year extension because the way it's formulated now means that if you are 5% complete with a project in 2013, you will actually still get the tax credit after 2013. So, but that is what is on the table now. But, of course, until things have signed into law, we are still preparing for that it will be challenging in 2013 in the U.S.
Finally, as I said in the beginning concerning preparing for a profitable 2013, despite the very challenging installation market that we will see next year, we have adjusted operations for an activity level around 5 GW and done so while still expecting to make a profit next year. Secondly, with the approximately 18,000 employees that we expect to be at Vestas by the end of this year and with the additional optimization, as mentioned earlier, with 16,000 people by the end of next year, we will have achieved cost savings in the magnitude of EUR 400 million, which, again, is an important building block for securing a profitable 2013.
Finally, something that has not impacted our books so much in 2012, namely the cost out of our product platforms in order to further benefit the earnings of the company, then because of the way that we recognize earnings and revenue, then we do not expect this to have a big impact in the year 2012, only in the magnitude of EUR 30 million, and the predominant part is going to be here in the fourth quarter of 2012. But it goes without saying that much more have taken place within this area during this year, and that means that we have higher expectations to a positive impact for the product cost out when we look into the year 2013, but we will come back and talk more in detail about this when we give our expectations for 2013 in February when we are reporting the Q4 result.
So, those are some of the very important building blocks for securing a profitable 2013, despite the uncertainty, in particular, in the turbine market. And with this, we'd like to turn to the Q&A session, and I don't know if we have any questions here in the room. If that is not the case, then we will go straight to the phone and take the questions, operator.
Thank you. If you have a question, please press star and one on your touch-tone phone. Lars Heindorf from ABG is on the line with a question.
Yes, morning, gentlemen. A question regarding your production platform. You mentioned in connection with the second half, sort of first half numbers, that you have a production platform around about 9 GW.
With the new cost out plans that you have scheduled here and also the potential sale of factories and other stuff, what kind of platform are you aiming for?
Well, the size that you talk about here, of course, varies within which area that we talk about and, of course, also with the combination of the turbine types that we are producing. Let me give you an example. For instance, you can say we do not have 9 GW activity or possibility within towers, but we have it within some of the other areas. What we have done overall with the 5 GW adjustment that we are making now means basically that we are adjusting the company to that cost level next year.
And then I think you can always discuss if you can squeeze more through within one of the areas, but overall, the company will be in a position to produce around 5 GW next year, and that is what we are planning for and what we have planned for during this year.
Okay. Second question is regarding the PTC extension. I think Dag mentioned that he expects the net debt to EBITDA will improve going into the fourth quarter. Now, if the extension will come, and I sense that you expect that also, that there will follow a number of new order intake in the early parts and late part of 2012, what kind of impact will that have on your cash flow in the first half next year?
It's, of course, difficult to say exactly what impact it will have. As I said, our expectations is that the market in 2013 in the United States will be very challenged. If we get a fast extension of the PTC, it obviously will have a positive impact not only for the planning for 2013 and the execution, but definitely also, as you mentioned, for the down payments. But to what magnitude, I think that's hard to say today what it will be. The only thing I can say is that we are, as I said, planning for that 2013 is going to be difficult in the United States, but we hopefully to see an upside, but how big the upside could be, I think, is hard to say. But there is this caveat to it, as I mentioned before, that you have to be 5% complete in 2013.
So, if the PTC gets extended, there's going to be a lot of time pressure on to get going, and therefore one could be hopeful for that if it gets extended now, that that will actually have quite an accelerating effect, but we'll have to wait and see.
Okay. So, is there a follow-up on that? Because I've seen that you also changed your EBIT margin target from 5% in the medium term to now become a high single digit, but that is subject to a normalized U.S. market. I'm curious to hear what you see as a normalized market in terms of installations.
Well, let me say that even if the PTC should be extended now, I don't think we're going to see a normalized U.S. market next year because we are so late into this year. But a normalized market is not even if we should have it extended tomorrow, we would not see that in 2013, but then we'll have to see how that will play out for 2014. And we still expect to have a high-end single-digit market on a normalized market, but then we'll have to wait and see how the, let's say, the politics plays out here.
Okay. Thank you.
You're welcome.
Claus Almer from Carnegie is on the line with a question.
Yeah, hi. My first question goes to your 2013 aim. After the Q2 report, you also said you were aiming for a profit 2013. Now you're reducing the number of employees further, and you're also introducing new cost-saving initiatives. Should we add the effect on top of your aim after in August, or has the market deteriorated even further since then? That's my first question.
Well, I can start. I would say we still stand at 5 GW next year, as we also said in August, so that is basically unchanged in terms of the overall activity level. You can, of course, say that if you manage to take out these additional EUR 400 million for 2013, then obviously that is going to have a more positive impact on the expectations for 2013, but we will come back and talk more in detail about this at the fourth quarter.
Okay. And then about capital structure. At the Capital Markets Day, there was a slide where you hinted that that was under consideration. Given your change in cash flow guidance for Q4, how do you look at your capital structure going into 2013?
As we said in Q2, we were very aware that Q3 is going to be challenging and not maybe the best Q3, so this we have been pretty clear about all the time. It has not actually changed the plan for the capital structure for the company at this stage. We have said the following things: that we're going to close the agreements with the banks, and we're going to evaluate the need for further capital if that's going to be the issue as it is today. We go for 5 GW production. We are scaling down regarding FDs, taking out cost, further cost out from the products, and also with a significant lower investments level going forward means that we have a much more tighter and more robust financial company during 2013.
This will, of course, have an implication on the whole capital structure of the company in a positive way. But until further notice, we have no further plans regarding any equity issue or a capital increase at this stage.
Okay. Then my final question. About the offshore and your announcement about Mitsubishi negotiations, in the Q3 report, you just mentioned that you are in talks with several partners. Does that mean that you are I mean, you're open for everything, and you're not in any close negotiation with Mitsubishi?
I have nothing further to add to the Mitsubishi apart from what was announced in the second half of August this year. But I have one comment to make just on the cash flow.
I think it's important what is also mentioned in the report today, namely when we talk about the uncertainty on the cash flow, that we still expect that due to the uncertainty over the new year, that the exact timing of this in-and-out flow and the first weeks of 2013, just to be aware of, that in our point of view, we are looking more of a timing issue here, and that's important to be aware of.
Okay. Thank you.
You're welcome.
Daniel Patterson from SEB is on line with a question.
Good morning, gentlemen. I have a couple of questions. Firstly, on the free cash flow guidance. Of course, it's potentially a very large change if you come out at the lower end in the fourth quarter. You're mentioning EUR 275 million in the fourth quarter. How should we think about this?
I mean, if all of the projects, let's say risky projects, they sort of get them across before New Year's, then you expect to land at the upper end, and if none of them come across and the cash flow moves into the first quarter, then you'll end at the low end. Is that the risk, or is there something else that we're missing?
Again, I think Ditlev just said it. We have a timing issue that we are presenting today that we were not actually aware of in Q2 because we see that the time for delivering the products can actually stretch over for next year. You have to be very clear about the distribution of the payments to the company. Very often, when you place an order, you get approximately 10%-15% payment. Shipments, you get 40%-50% of the payments.
And, of course, with technical completion and final completion and delivery, we get the rest of the payments. And this means actually, as you see the high stock that we have in products under completion, this will, of course, now be reduced successively during the autumn and also during the first quarter. It means that lower net working capital, lower inventories, and better cash position. So, this is now a timing issue, and we say that there is a risk, but the risk is about weeks, two to four weeks, and some of this can come after the end of the year, some can be before, but still, there is an uncertainty there. In addition, as we said earlier on, there is a lower order intake in the last quarter, lower than we were actually anticipated, and this means actually that we need to take this quarter- by- quarter.
Okay. Second question is, what is the current status of your manufacturing footprint evaluation? If you don't have any news, can you maybe then tell us when do you expect to have any news, timing-wise?
Well, there is not a lot of news there. I mean, we have said all the time we were, and we said that in August also, we were adjusting to the 5 GW, and that is what we have been doing all the time, and that is what has been put in place. And now, concerning the potential divestments, then that is something that we, of course, are evaluating, and we have to make sure that it makes sense. And then we will come back when there is something to say.
But for the overall planning and for the execution of 2013, we have basically prepared the organization for being able to do around these five gigawatts next year. And again, as I said, a megawatt is not just a megawatt because it's also a little the composition of the type of turbines that we're looking into and the expectations of the composition of the portfolio.
Okay. And maybe one final question. I saw a remark that you, Dag, you were out commenting that investors might be interested in selling a 20% stake in the company. Could you comment on what's the thoughts and reasoning behind that?
I referred to I had a question this morning with one of my interviews, and they were referring to the Chairman, Mr. Bert Nordberg's announcement in a newspaper where the Chairman says that he's welcoming any large investor.
If it's going to be 20% or 5% or 8%, that remains to see. But when the Chairman has stated this in the media and we have not said anything else, this is still valid. I think it's very important to understand that we need investors and shareholders to understand that the turbine industry is quarter by quarter a volatile industry, but we need to look in the industry over a business cycle. I know, as you maybe also know very good, that wind is a very important part of the energy mix, and over a business cycle, five to seven years, we see that energy will also be an even more important part of the energy mix.
This means also it's more or less a question about new profitable areas on the global market where this, we know, continues to have a bigger part regarding total energy mix composition. So, this means that we need investors to understand not only the company, the turbine, but now also the service industry that is getting more and more important for the company because it reduces the operating profit volatility and gets more stable profitability going forward. But it's also needed for investors to understand that the industry that we are working in is a part of the whole energy mix solution. What is very clear is that the company will be very strong, that wind will be even more important going into the future, even if we have a pretty challenging year in 2012.
From the company side, you see that we address all the issues, and we do some of them faster than we also have anticipated. This means that the company is now preparing to have a healthy, robust financial and prudent way of operating going forward, and based on this, it's up to the board and the Chairman to invite eventually shareholders to be part of the company. We hope also the things that we are doing are welcome because it sees that we have execution capacity to do the things that are needed to do when the global market is putting some challenging time for us. I think also it's very good to discipline and set discipline into the company. This is the first time we actually have been testing if we can face the situation as we do for the whole wind turbine industry for 2013.
Based on what we have said to you today and also further announcement, it's extremely crystal clear that we managed to handle this situation in a prudent way. Regarding back to your question, any investor that is interested in this company and understands the energy mix, of course, they will be welcome.
May I ask, is it sort of should we understand this as an open invitation? I understand why you would want a long-term investor, or are you working actively on this?
I think you should put this statement to the Chairman, but if you read exactly what he says, I cannot imagine that he just says one thing and sits still and not doing anything with it, to say it so.
Thank you very much.
Haakon Amundsen from Handelsbanken is on the line with a question.
Hi. Yes, Haakon Amundsen from Handelsbanken with a couple of questions. Firstly, my question relates to the backlog. You have roughly 8.3 GW in your backlog. Could you just try and give us an understanding of how much of this is for delivery in 2013, and to what extent or how large part of the backlog currently is on hold, and how much is alive, actually? That's the first question.
Just for the clarification, what do you mean with alive or on hold? What do you mean by that? [audio distortion] Did you hear my question? Okay. Then let me just say we never comment on the timing of the backlog.
Of course, it's important to remember that Vestas' backlog consists of projects that are firm and unconditional, and that means that what you cannot see in these figures, if that was the question of being alive or not, are the so-called conditional projects because they are not counted into the backlog. Only the firm and unconditional is part of the backlog that we talk about here. So, I don't know what the definition is of alive, but in our point of view, it is at least very much alive, also legally.
I'll just try and elaborate on the question here. I'm basically trying to get an understanding of to what extent have your customers actually pushed delivery times into the future compared to the original deals which you have signed and announced?
Well, normally, if you look at the normal contracts that we have, then obviously, we have had some contracts where we, for instance, have signed a part of a frame agreement which is firm, and then the rest is built on, for instance, percentages that the customer is going to do. There, we only take the part which is firm in there, and the rest, we will see how things play along. Overall, I would say it is not that often that you see major changes compared to the timing versus our expectations. But, of course, there can be issues on the political side, grid side, which requires that something has to be pushed by the client side. But normally, I would say we have a fairly good view on when do we expect this part of the backlog to be executed. But we don't give the timing on the backlog.
Your free cash flow guidance and timing of free cash flow. You mentioned that you're cutting your guidance. It's basically an issue of timing. Does your bank and creditors also view this as a timing issue?
I would like to inform you that, first of all, to make it clear, we have a very good relationship with the core banking group of the company. Number two, the core banking group is always informed on our rolling financial forecast stretching for six-12 months, so they know exactly about the situation for the company going forward. And, of course, they also understand and know the timing issue because, as I said, I have very good interaction and dialogue with the banks and had it all the time.
This is a precondition, at least, to have a banking relationship, that you keep the banks informed upfront in a prudent way about how you look at your financial forecast in principle. So, they are aware of the situation, and we continue our relationship as before. Thank you.
All right. That's all. Thank you. Thank you.
Patrik Setterberg from Nordea is on line with a question.
Yes, hello. A couple of questions. I want to better understand your EBIT bridge. I want to have or could you give me an elaboration of the wind turbine margin? Why is it developing weakly in this quarter?
You said you would like to understand the EBIT bridge, but can you repeat the last sentence you said? You will.
It's in relation to the negative effect. If we're looking compared to the second quarter this year, you have a negative effect of EUR 124 million.
Yeah. First of all, I would like to say that several of the products that are counted into the cash flow to the company did not actually have very good margins. It means that we had higher costs and higher costs for some of these turbine systems that we delivered. It means also that we had a much lower margin that was taking this down. That's the key factor, to say it so.
Is that the projects you're referring to in the United States and Germany?
Yes.
Excuse me. Can you hear me?
Yeah. I said yes.
And could you please elaborate? Is this a general problem with your projects in the United States and Germany, that you have too low prices in these regions?
I would like to say it so, that there's a little more complex situation. First of all, the European and U.S. market, we in principle have some higher prices on the wind systems that we are delivering. Number two, you also know that we had challenging times regarding introduction of new technology that is going to influence the whole year, that actually was eating up the margins for some of the turbine systems that we delivered. So, this is actually a part of the whole picture, to say it so. This is for the period. We do not foresee that this is going to continue. Since we, as Ditlev said, we continue with the cost takeout from the different platforms, EUR 30 million hopefully hitting us for the last quarter. And, of course, we have plans to standardize even more to reduce the cost for the different turbine platforms.
But this was a situation that was more or less dedicated to the quarter as such.
Okay. Yep. That was it from me.
Thank you.
Thank you.
Arnaud Brossard from Exane BNP Paribas is on line with a question.
Hello, everyone. Hello, gentlemen. On your free cash flow expectations, if we look at your EBIT guidance for 2013, it's somewhat comparable to that of 2012. Apart from the timing issues that you mentioned, can you please explain to what extent you would expect the 2013 free cash flow to materially differ from the one of 2012? And, in particular, can you please tell us when you expect the special items to affect free cash flow?
First of all, I would like to say regarding 2013, when we're presenting the year-end result, we're going to come this is the next slot time for eventually coming with a new guidance.
Regarding the numbers as such, I would like to close this quarter and next quarter, and then we're going to make up the total viewpoints on 2013. So, as we said before, we expect that the quarter four, isolated, will be positive cash flow. Number two, we have increased the spend regarding cash flow, of course, for this year. And this means, actually, this is a pretty challenging time for the company. But to be very concrete now, I would like to wait until we present the year-end result, to say it so, and also when we come up with new guidance. We know that analysts, investors, and banks, and everybody is very occupied about cash flow. This is also one of the top three priorities.
And if you read a little more, and as we said before, there is a big potential in taking down the net working capital and also reducing the inventory or improving the inventory management substantially. That's a part of the projects that is ongoing now that will improve the situation because earlier on, we had very many storages, very many inventories tying up very much net working capital. But there is a potential now to go forward in a more balanced way, and that's a part that we will come back to and hopefully see the effects for in 2013.
But, as you know, the company has been under full turnaround. We are changing the business model for the company, looking into manufacturing footprint, looking into the inventories and net working c apital, reducing the number of employees. In the same time, we have the highest delivery top, more or less, as ever.
So, I think that we need the quarters coming forward to adjust and calibrate the company now to be even more efficient. So, very much about the net working capital and the cash flow is going to be improved due to the operating excellence of the company. And this is very much, again, referred to the manufacturing footprint and also to how fast we manage, actually, to reduce the investments and also reduce the number of employees in nonprofitable areas. Thank you.
Okay. Thank you. And one word about the special items. How much of these are expected to be cash, and what proportion would be in 2012?
Special items didn't we say EUR 35 million is going to hit P&L? So, that's what we said, actually, if you look into the presentation. The other items of these EUR 153 million is noncash issues.
Sorry. I'm not sure I heard correctly. You said EUR 150 is noncash?
I said of the total write-downs and the total special items of EUR 153, only EUR 35 will hit the P&L because that's due to the FTE reductions plans.
Of the EUR 1 18, EUR 153 total, of which EUR 35 has cash effect?
I was referring to the full year guidance, the EUR 225-250?
Okay. But this we will come back to because that's the whole composition. So, we come back to this issue in the year and how much of this will be hitting the P&L. But until further, it's only EUR 25 at EUR 35, excuse me.
Okay. Thank you. And finally, can you just tell us why you decided at this stage in the year to cut your CapEx expectations?
Because this, as I said before, we are the company is in a program that we are changing the whole company, both regarding operations, the financial capacity of the company, and also the investments in principles. What I said before and our CEO has said before, we said it also during the Capital Markets Day, that all projects that are not going to be profitable within the next eight months or is possible to get to the markets approximately within the same time span has been closed down. We are going back now to basics, and that's actually to delivering the world's best turbines at the best prices, competitive prices. And we do actually then close down a lot of other initiatives and projects that has actually drawn a significant amount of investments.
In addition, also, we see that the service business, that is a marginal, low-cost business if you exclude the FTEs, means actually that we can now concentrate on turbines, on service systems, and also on the different platforms and also the total wind systems. And this means that we can also take down the investments in principle of all the other areas that we had plans about before when the market and the global outlook looked differently. We have also been doing a concept clearance with a large industry customer and the customer segments. And when we get information from them, they very clearly say what they would like to have from Vestas, and then we are concentrating on what the core products and the core systems they would like to have. And based on this, the company has taken a decision on reducing investments.
Okay. Thank you very much.
Klaus Kehl from Nykredit Markets is on the line with a question.
Yes. Hello. Most of my questions have already been answered. But a follow-up question on the CapEx questions before. This EUR 350 million you expect here in 2012, should we see that as a sustainable level going forward? Is that what you mean?
I think, as we have talked about in the past as well, that if you look into the intangible side, we know that the development program, for instance, on our offshore turbine, the V164, is, of course, a big contributor to the spend there. But, again, this is, of course, depending on going forward what we plan to do within that area.
But, of course, one platform drives a lot of intangible investments, like you saw when we started to depreciate the V112 and the GridStreamer, which I believe came in in the magnitude of around, I think, totally EUR 350 or so. On the more tangible side, then, of course, it depends on the changes that we are making, not least within the manufacturing footprint. And, of course, when we announced the V126, we also mentioned that the blade technology that is going to be used there will be much lower CapEx intensive than the technology we have been using so far. But, again, it depends on the overall activity level as we see it. And, of course, we'll come back and give our perspective on how we see this in 2013. But these are some of the main drivers for the total CapEx.
Okay. And then a follow-up question. Would you be able to launch the new offshore platform with CapEx levels in this range and, perhaps most importantly, the intangible investments? Is that realistic?
The only thing I will say is that, as I said, the V112 costed us, as I said, or the development cost was in the magnitude of EUR 350 million. And you should probably expect that the V164 is not going to be cheaper.
Okay. Thank you very much.
Sean McLoughlin from HSBC is on the line with a question.
Yes. Good morning. Most of my questions have been answered as well. I wanted to just have confirmation. Is covenant retesting on the syndicate loan going to happen by the end of the year?
We will come back to the market when we have closed the final, with underlining the final discussion with the RCF banks.
When this is closed, the final negotiation about the RCF, the composition and the structure and the covenants of the RCF, then we will inform irrespective all of you, to say it so. So, this is more or less about the timing issue. It takes the time it takes for going through since there are many participants in the RCF and many banks need to be handled in one composition, to say it so. So, when this is over, we're going to inform you, and then we continue with the testing. As we have indicated during the presentation, all the different denominators regarding the financial capacity of the company go in the right direction, and that's what we're very happy about.
Thank you. A follow-up question. If you could specify what you mean by scaling down in India?
The only thing we have said is that, in terms of our optimization of our approach to the market, it means that we need to make sure that we have a satisfying earnings level. And that is what we mean by that we have reduced some of our activities there because of this.
Casper Blom from Danske Bank is on line with a question.
Yeah. Good morning. Just one question left, basically. Could you elaborate a bit on what your maintenance CapEx are, what kind of level that is, please?
Say that again, Casper. What are what?
Your maintenance CapEx, pretty much, what you need to sustain your current facilities, etc.
We have not given a number for that. At least you can say that compared to the past, as we have made some closures, then that is helping in that direction. But we haven't given an exact specification of what exact runway is on the maintenance CapEx.
Okay. Thank you.
Håkon Levy from DNB Markets is on line with a question.
Good morning, and thanks for taking my questions. You have revised down Free Cash Flow quite significantly, partly as a result of weaker order intake than expected. Can you elaborate on in which geographies that have not met your expectations in the third quarter?
I think I would be hesitant to talk about this by geography because it's clear, for instance, that due to the uncertainty in the U.S., nothing really has happened on that front. But, overall, I would say I don't see this as just a geography. I see this that there are the uncertainty right now in the installation of new turbines and not necessarily just driven by a geography.
But we are expecting a rebound in the order intake in the fourth quarter, as we say that we expect that to be the largest quarter. The question is, obviously, how large in terms of the uncertainty on the cash flow from that part of the business.
Okay. And, secondly, are you seeing any in terms of the timing of the cash flows towards the year-end, are you seeing any effects of the storm Sandy in the U.S. for completion of U.S. projects? And do you face any potential liabilities in case you're not able to achieve completion as agreed? Thank you.
Well, I think that, first, on this one, no, and just very clearly why. If you look at the TOR and the shipments, if you look into one of the slides, you will actually see that the U.S. part is going down.
And that, of course, also means that the potential risk of compensation not to complete the projects, I think, is very well managed by our U.S. organization. So, we don't expect to have negative surprises for the installation of turbines before New Year's in the U.S., which is very positive. Another thing which I think should be taken into account, that is, A, the revenues actually grew 49% in this quarter. We had a very busy third quarter, and we're, of course, also having a very busy fourth quarter. But, unlike last year, we are no longer installing new technology. We are installing what is now known technology to us, both the V112, and some of this has caused us a lot of problems with running in of new plants.
So, I would say, from an execution point of view, it's still a massive part, and that in itself is a risk. But if I look at the technology risk, if I look at the political risk in terms of the PTC, I actually think that we are in a much better position today than we were, for instance, within that area 12 months ago. So, yes, there's a lot to do, but I would say we know now the technology and how to get it done, and this is also what has been proving in the third quarter.
Okay. And just a follow-up. In terms of your guidance for the fourth quarter, that order intake will be the best quarter in 2012, is that dependent on an extension of the PTC, or is that independent of a PTC extension?
Well, that is irrespective of the U.S. because, as I said, we have plans for a low activity level in the U.S. in 2013. And that, of course, also entails the order expectations in the fourth quarter. So, the rebound in the fourth quarter is not expected because we will get a - we will take it if it happens, but we don't expect to see a big positive rebound from the U.S. But we'll see what happens.
Okay. Ditlev , thank you.
Thank you. I think we have time for the last call, operator.
Okay. We have Shai Hill from Macquarie on line with a question.
Yes. Good morning. Shai Hill from Macquarie. Just a couple of questions, please. I did wonder if I might just push you a little bit on timing because, certainly, when you announce big orders, you do give an indication of delivery timing.
And, certainly, I think a lot of people want to know whether the 8.3 gig on your order book now is largely covering the 5 GW you expect to ship next year or give us some indication of how much more you would need to sign in order to be very completely confident on your 5 GW shipment guidance for next year? So, that's the first question. Secondly, in the order inflow of Q3, obviously, very soft, can you give us any geographical detail there? Obviously, I assume China and U.S.A. largely disappeared. But was Western Europe very weak too? And, finally, I just want to ask about covenants. The CFO, obviously, suggested there's a renegotiation going on with the RCF providers. I just want to know, if you are EBIT negative for four special items this year, are you in breach of RCF covenants as they currently stand?
Okay. Okay. Let me start by pushing back on the timing of the backlog. I understand the question, but we never give the timing of the backlog. You're right that, when we announce some orders or when we announce orders, we try to give an indication of when we do expect them to be executed. But we don't give a total timing of the backlog as we have never done. Concerning the order intake, again, it's not only a question about taking in orders. It's also about making sure that you take in the orders that also will secure the profitability that you would like to see going forward. And there, we have been very clear now that we have to make sure that the risk and the reward is properly balanced. And that is a policy that we have actually always had at Vestas.
Even though the market is more pressed now, then we are not giving up on those principles. We have to make sure that we stand by our standards in terms of the orders that we take in, even though the market is under more pressure right now. Geographically, we have not. This, as I said also before, is not just a question of certain geographies. I think, overall, you can say that, at this moment, the total market for new turbines is under a lot of pressure here in the third quarter. But, again, we expect a rebound in the fourth quarter. And then the last point on the covenants, we will never comment on the covenants, but I don't know if Dag wants to say more than no comments.
I would just like to repeat myself, and I fully understand that you would like to have insight into our capital structure and the loan agreements. But the company policy is that we do not actually motivate or go into discussion with neither analysts nor investors regarding details in the loan agreements that we have with the different banks. But, first of all, I would like to state what we have said before. We expect to test on normal levels in the end of the year, and that's the statement from the company.
Okay. Thank you.
Thank you very much. With this, I would like to thank everybody for tuning in today. And we look forward to February when we're going to present not only our fourth quarter but also our expectations to 2013. Thank you very much. Thank you.