Good morning, and welcome to this presentation for Vestas Wind Systems' first half, 2012, and the second quarter result for this year. We have decided to label this presentation Intensifying Preparation for 2013, and I will come back a little later on and explain in detail why we have decided exactly for this headline. The agenda for today is to take you through this preparation for 2013. Then, my new colleague, Dag Andresen, our new CFO, will take you through the financials, and I'll come back and give you some perspectives on the order intake situation, as well as the outlook, before we go to the regular Q&A session, where both Dag and I will be participating.
If we start to drill into the year 2013, and what we have announced this morning, I think it's important to be aware of what is exactly that we are looking at here in the year 2012, and of course, also going into 2013. Back in November 2011, we used exactly these words, that we expect 2012 to be tough, and that 2013 could be even tougher. We put a plan in place, and that is the plan that we have been working on ever since, and which we are now intensifying, which I'll come back to in a minute, why we're doing just that.
We also mentioned back at the time, that the cost out on the products was very essential for us, and we are today giving some headlines of what is exactly that we have been looking for in terms of the product cost out, which is on schedule. You're seeing that EUR 30 million will be contributing positively to the EBIT this year, thanks to these product cost out efforts, and even more, it will benefit us in the year 2013. We are also today announcing that we intensify our plan for the layoff of the organization, unfortunately, which means that we are ahead of the schedule that we laid back in November 2011.
Meaning at that time, we said that we will, in the fourth quarter this year, have a run rate that will be EUR 150 million lower going into 2013 compared to going into 2012. This we are now, as I said, intensifying because we believe that 2013, as previously mentioned, is going to be even tougher, and therefore, this target is now raised from EUR 150 million euros to EUR 250 million going into next year. It's also important to say that the operational excellence, and that I mean how the turbines are performing, safety, performance, installation, overall business, service, et cetera, et cetera, is going very well.
Also, I would like to say that what gave us a lot of challenges in the second half, 2011, and in the beginning of this year, namely running in new technology, is no longer the challenge that it was. Which also means that we, of course, are being burdened from these very disappointing results from the second half, 2011, and in the first quarter, 2012. No doubt about that. But again, looking in here to the second half of 2012, this is no longer new technology for Vestas. This is actually now a known technology throughout the organization. I want to look at the years 2012 and 2013 as one.
Just as we did back in November 2011, where we mentioned that we were going to put Vestas into a new organization and have a lot of additional efforts in order to make Vestas a more scalable organization, a more flexible organization, but also one where we, in the future, not only focus on installation of new turbines, but that we have two revenue streams, one coming from the traditional sale of turbines and one coming from the sales of services. As you can see, when I speak about an even tougher 2013, then that is very much related to the challenges there are in the new installation market.
Because if you just compare this to the service, you will actually see that here in the second quarter, 2012, the service revenues have grown 34% compared to Q2 last year. And that is the balance that we have to strike going forward with a more leaner and more agile Vestas group, changing the organizational structure at the same time, which we are in the process of doing. In January, as I said, we have said that 2,335 people would have to leave us during 2012. We are ahead of this plan now, and we are therefore further intensifying it by an additional 1,400 to be cut through the remainder of this year, and I'll come back to that later on.
We are preparing and are putting some lights on what it is that we are looking into in 2013. We are preparing for 5 GW. 5 GW of new installation activity is significantly down from what we saw in 2012 already now, but also for the remainder of the year. And this balance is the ones that we have had to strike, being very busy in 2012, while at the same time preparing for a significant slowdown in 2013, which we now expect to be around 5 GW. And therefore, these balances are the ones that we've had to strike during this year and also preparing for next year.
Looking at the split of the reduction of employees, as I said, we expect to be around 19,000 by the end of the year, and you have here on the slide the split between salary and hourly paid. The reduction is going to take place across Vestas, and we expect approximately 55% of the layoffs to take place in Europe, 25% in Asia, and 20% in Americas. And this is again something where we have been looking at how do we strike the balance between a very busy 2012, and of course, preparing for an even tougher 2013.
If we look throughout the organization, I would also like to say that having the kind of increase in activity that we have seen in the first half 2012, has, in my mind, been extremely impressive by the organization, knowing that these were the challenges were ahead of us. And I would like to use the opportunity to thank everybody within Vestas watching this, that it has been really, really impressive the way people have handled it, and are handling it right now, because we still have a lot to do here in the second half 2012. The additional redundancies, which actually correlates to 58%, are expected to take place here for the second half of the year, with the majority taking place next month in September.
Which again, means, as I said, the total workforce will go down by 3,700 by the end of this year. Talking a little bit about the new organization that was put in place earlier in this year, and which is a very important part of driving this process for a more leaner and scalable Vestas. We have, since we met in Q1, had the pleasure of announcing two new members of the executive management team, Jean-Marc Lechêne, responsible as COO for manufacturing, and Dag Andresen, taking over as the CFO, coming in, which of course, is a very important strengthening of many of the activities that we are in the process of undertaking.
On this slide, you can see some examples of what it is that is going on inside the organization at the moment, within each of the areas, in order to prepare Vestas for these tougher challenges on the turbines market in 2013. While at the same time ensuring that we get a better balance between installation of new turbines and our service business. If I should try to describe in a single slide, what are some of the real main messages and events that we are seeing as per today? Intensifying the organizational adjustment that I just mentioned. But what must not be forgotten is actually that Vestas has the highest combined order backlog for turbines and services ever, of more than EUR 14 billion. This gives us a good visibility going forward, but doesn't take away the fact that we are preparing for even tougher times.
We are maintaining our outlook for EBIT, free cash flow, and revenue for the full year 2012. As I said earlier, we still have a very high activity level, as you will see later on, not just within the manufacturing area, but definitely also within installation and handing over projects to our customers that we need to undertake. As mentioned, on July 31, we have agreed to defer the covenants test with our banks, and we should also not forget that even though we come out with a first half year deficit, then it is on a background with two very different quarters. Q1 2012 was very problematic, with very low earnings, very much driving all the challenges with the new technology.
Whereas we, in the second quarter, have a significant progress of EUR 244 million in earnings in Q2, compared to Q1. And therefore, the composition and the swings in the quarters that we are seeing here in the first half is quite significant, and that needs to be remembered as well when we look at the first half year results. With this, it gives me great pleasure to ask Dag, I normally do this, Dag will do it this time, to take over the financials and going forward, and take us through the main figures. Dag?
Thank you. It's a pleasure to present the second quarter on behalf of Vestas, and I propose we go directly into the slides. If you look at the activity level at the different factories, we can see that shipments are the primary cash generator, and this is very important to take into account. We have an improvement of 52% if you're comparing quarter to quarter, and that's actually due to very high activity level in Americas before the PTC expiration. And of course, full year shipments are expected to increase by more than 25% to around 6.3 GW. Deliveries are the primary revenue driver, and you see 16% comparing quarter to quarter. And deliveries, again, in Americas, driven by the PTC, is actually one of the key explanation here.
Delivery is expected to be higher in Q3 than in Q2, and we expect a very high Q4. Income statement, draw your attention directly to the gross margin, that is 15.4%. That's actually slightly dropped 2.3%. EBITDA margin, before special items, is more or less in par with comparing quarter. EBIT margin before special items is a reduction of 2 or 3%, down to 2.5%, and that's actually due to higher amortization and depreciation. Gross margin and fixed costs. If you look at the Q2 gross margin, we have an increase of 15%. Comparing quarter by quarter, Q2, 2011, that was a very, very good quarter for Vestas.
We have a reduction in 3%, but I think we should draw the attention to the difference between quarter 1, 2012, as Ditlev has explained, to quarter 2, 2012, and a 15% increase. You see also, fixed costs continue to trend down, and that's despite the increase of depreciation amortization. We foresee fixed costs to be further lowered during the autumn, and fixed costs above and below gross margin to be lowered by more than EUR 250 million, with full effect end of 2012. What is also very important to take into consideration, is that we have fluctuation in the P&L. Typically, a project can have contribution margin between 10% and 40%, and this is very, very much depending on the uniqueness of different project.
It could be different wind, it can be location, it can be sites, and so forth, and so forth. And we presented here a row of different indicator or variables that is influencing the distribution of margins, and we're also presenting here more than 200 projects a year, and you see the shape of the curve. This is very important to understand the business model in the company. If you compare quarter two versus quarter one, we see we have 248 in gross profit, and we have higher margin on projects delivered this quarter. High volume in Q2, and we have extraordinary, very high warranty provision in Q1 2012, and lower fixed costs, but higher depreciation. And here we can see typically volume and project margin is the biggest explanation factor.
Service revenue is, trend line is going in the right direction, as expected, and is increased with 34%. Still, service revenue and earnings may fluctuate over the quarters, but it do not fluctuate as much as for turbines. Half year operating profit before allocation of group costs is EUR 89 million, and margin 20.7%. Half year operating profit after allocation of group cost is EUR 44 million, and margin 10.2%. Balance sheet, go directly down. If you look at net debt, you can see we have a slight increase from EUR 101.71 million to EUR 111.47 million, and this means actually that we have an increase in 7%, on the net debt area. That's more or less in the same situation as we had quarter by quarter.
You look at the net working capital, we have a large reduction by 62%. The change in working capital has now decreased over the last 12 months. Here, you typically can see the net working capital change over the last 12 months, and you see inventories and prepayments is more or less in par on the ratio, very, very close to one, and that's a very good situation. If you look at the net working capital change over the last 3 months, you see that inventories and prepayments is not in part regarding ratio, and this means that inventories is actually projects and service under installation. Megawatt under completion increased during Q2 due to very high shipment activity, as we have mentioned before, and we have planned sale of a 90-megawatt project in Chile that will lower megawatt under completion, and megawatt under completion to decrease in Q4.
We have better performance of the turbine fleet, as our CEO has indicated, and we see warranty provision, and the trend line is going down. We have very limited consumption of the additional warranty provision of EUR 40 million for the V90, and root cause has been discussed and confirmed by ZF, supports the Vestas opinion here. Lost production factor is below 2, and that's according to our guidance, and this is a very good number for the company. Cash flow statements, you see the free cash flow the last 12 months is -EUR 60 million in the end of the period, and free cash flow to improve in quarter four. Typically, we can see the cash flow generation in Vestas is seasonally. The first half is very typically negative, and the half two, the last two quarters, is typically positive.
Net debt is expected to be reduced by year end. We also see that the net debt will be reduced, it means also the ratio, and the multiple regarding net debt on EBITDA is also expected to come close to 3. Return on Invested Capital is very disappointing for Vestas. We are doing an overall global evolution of all manufacturing footprint in the company, and this will, of course, give effect. We see also decline in CapEx, but also higher depreciation and amortization, and we see the total, we are at 51% in end quarter two. Then I would like to leave the word back to our CEO, Ditlev Engel.
Thank you, Dag. I will speak now a bit about the order intake and the order intake situation. If we start to look at what happened in the second quarter 2012, compared to the second quarter 2011, we obviously saw quite a big drop of 58%, down to 945 MW. Why is the order intake so low in the second quarter? There are a number of reasons for that. First and foremost, there is no doubt that the global wind market is very challenged now when it comes to new installations. Obviously, also because of the uncertainty in United States, means that orders are not being placed.
If you look, for instance, to one of the other largest markets in China, there's still a lot of grid challenges in that part of the world, which again, are holding customers back from placing new orders. But there are also other issues for this, and that is, of course, it's very important for Vestas that the projects we undertake are projects that make sense also for Vestas going forward in terms of earnings. Therefore, if you actually see the development of the average selling prices on the order intake, then that is actually up by a few percentage points this quarter compared to the same time last year.
Of course, this can depend, depending on where in the world that we are, but overall, we are seeing a pricing level that is rather stable at the moment, and expect so going forward, which again, I think is important to say that when we look at the value and the earnings potential of the backlog is very important, obviously, for Vestas going forward, and to secure that also in the order intake. We actually have, when it comes to turbines, we have an order intake of close to EUR 9.6 billion. 63% of this backlog is based in Europe, more than 20% in Americas, and 15% in Asia Pacific. And the average price of the backlog is just above EUR 1 million per megawatt.
Point being, obviously here, that the backlog and the, shall I say, the quality of the backlog, is something that we are comfortable with, which of course, we now have to go and execute going forward. The same goes for the service backlog, and if you look at in the Q1, the service backlog was EUR 4.2 billion, which is now up to EUR 4.8 billion. And again, meaning that the balance between the value of services and turbines are getting closer and closer. Just in the quarter here, we announced our biggest service contract ever of 1,900 megawatts with our good customers, EDP, in Portugal. But again, underlying that the service is becoming a bigger part of Vestas. Just to illustrate this, EUR 9.6 billion on turbines and EUR 4.8 billion on services by the end of the first half of this year.
And again, as I said, it is actually, despite the challenges in the world, our largest order backlog ever. If we look forward and try to look a little ahead, how we see the remainder of the year 2012, we have made some adjustments to our expectations in terms of the activity level. We now expect to produce and ship around 6.3 gigawatts versus 7 originally. And the main reason for this, as I just mentioned, is that the lower order intake that we have been seeing here in the second quarter, has meant that we have reduced the expectations to shipment down to 6.3.
It doesn't change our expectations to the revenue, which is still between EUR 6.5 billion and EUR 8 billion, and the service revenue is also unchanged at EUR 850 million, and an EBIT margin between 0% to 4% for the full year. We have, however, increased our expectations in earnings to services, which previously was 14%, which we now have increased to 17%. We have also lowered our CapEx expectations from EUR 550 million down to EUR 450 million. And as you can see, it comes from intangibles that has been lowered from 350 to 250, which is mainly due to a more focused R&D approach by our turbines division, which means that we expect to use EUR 100 million less within these areas.
Because we are front-loading more of the layoffs, we have also increased the expectations to special items now to EUR 75-EUR 125, which is due to the increase of redundancies, as I earlier said, which has gone up with 58%. Free cash flow for the full year still maintained, and the warranty provisions around 3%, as Dag was just alluding to, that there has been quite a positive development within this area. I think it's also important to say that the new technology is performing just as it should, which again, of course, is important to maintain these expectations for the overall warranty provisions.
The investments, obviously, significantly down compared to previous years, where Vestas have invested a lot in globalizing the company, and of course, putting a lot of this new technology into the market that gave us the challenges in the second half of 2011. But it actually means that we're seeing a significant reduction of more than 40% on the overall investment level. And as I said, that also means that we can lower our CapEx guidance by an additional EUR 100 million on these more focused approaches within R&D. This might look like a rather busy slide from people from the outside, but let me try to take you through it, exactly what we would like to make sure that we get communicated here. The blue one are the shipments. That means what Vestas produce and ship through the quarters.
As you can see here, we are extremely busy at this moment here in the middle of, or the end of Q2, over the summer. You will also see, as we are getting to the end of Q4, that the activity level in the Vestas manufacturing facilities are expected to go a lot down, coming back to the 5 GW in 2013. That, on the one hand, also means that we expect to have the turbines out in the field, in good time to make sure that they can be installed and handed over to the customers. The deliveries is what is driving the revenues and the earnings, and that means that depending on what we deliver to the customers in a given quarter, means that the quarters can fluctuate quite heavily, depending on which projects are handing over in the quarter.
As you saw earlier from Dag's presentation, there can be huge deviation from quarter to quarter. What you also can see from this is that we expect that the year will be more back-end loaded, meaning that until the projects are finally handed over to the clients, we are not allowed to take the revenues and the earnings. And therefore, again, we do expect that the fourth quarter to be very big in terms of revenues, whereas on shipments, we do expect the activity level to go down a lot in the fourth quarter. And that is basically what we'd like to illustrate with the way that the two graphs are running, because often we will see that there is maybe not necessarily a clear bundling between what we actually see in the activity level in manufacturing plants and what is crystallized out on the P&L.
There is normally quite a delay between the two. The preparation, as I said in the beginning, for 2013 continues... Today we have announced that we are preparing for around 5 GW in an uncertain environment, while still making a profit in 2013. I think it could be maybe described as going down the highway with a lot of speed while preparing to slam the brakes very fast. Obviously everybody knows that this is not the most comfortable situation to be in, but those are the realities that we have been working with, both in 2012 and also going into 2013. This means that 3,700 colleagues will have to leave us by the end of the year, and as I said, that is more than what was previously announced.
What we're also in the process of doing is evaluating our global manufacturing footprint and identification of outsourcing opportunities that is being done within Jean-Marc's areas as our new COO. These are some of the decisions that we will take here in the second half of how we're going to handle this, including the situation in the United States. And let me just say that we see positively what has been passed by the Finance Committee and the Senate about the proposal for an extension of the PTC. But obviously, until this is signed into law, we will have to wait and see how it goes. And these, of course, some of the things we'll take into account when deciding on how to look at the manufacturing footprint going forward. But it doesn't change the fact that we are preparing and gearing Vestas for 5 GW next year.
The fixed cost reduction has been increased from 150 to more than 250 by year-end, exactly to take care of this 5 GW scenario. The cost out of the new products are being also further intensified. Today we are selling, for the first time, how much value we expect to get out of this. This year, we expect EUR 30 million to hit the P&L in 2012, and more in 2013. Here I'm back again to there is a delayed factor from when it actually takes place in the manufacturing plant by taking the cost out of the product. Until it actually is delivered to the customers, you will not be able to see it in the P&L.
This year, EUR 30 million will go into the P&L, in 2012, and obviously more will go in in 2013 as we hand over these new technologies to our customers. The organizational scalability and flexibility to be further increased within each of the areas of the member of executive management, to make sure that Vestas better can adapt to these very changing external environments. Finally, before we go to the Q&A, I would like to draw the attention that on the third of October, here in Aarhus, Denmark, we will have our Capital Markets Day. I would kindly ask, those who are interested, to participate, to sign up before the fourteenth of September, where we would like to take you through more about, how our service business, is being developed and how we see that going forward.
Talk more in detail about the product cost out program that I just gave reference to. And of course, also be a good opportunity to meet members of the new management team, in order for them to give you their perspective of how you see the development within each of the areas, and make sure that there is a good opportunity for interaction as well. Finally, we will present our third quarter result on the 7th of November, also taking place here in Aarhus, Denmark, or probably for most of you, over the web. With this, I would like to turn to the Q&A session, and if there are any questions here in the room, we're happy to take those. Otherwise, we will turn to the phone unless there are questions here in the room.
Seems not to be the case, so, operator, let's turn to the phone.
Thank you. If you have a question, please press star, then one on your touchtone phone. Patrik Setterberg from Nordea is online with a question.
Yes, hello, gentlemen. I have a couple of questions. Just starting off with your free cash flow, I just want some clarification. You highlight in your report that in the fourth quarter free cash flow could amount nearly to EUR 1 billion. Does this implies taking into account that you have a negative free cash flow in the first half of almost or above EUR 600 million, that we should see a positive free cash flow full year of around EUR 300 million-EUR 400 million? Or that we should expect to see a negative free cash flow in the third quarter as well? That is my first question.
Yeah, and the second question?
My second question is regarding your ambitions to make some outsourcing. I just wanted to have some elaboration on what kind of outsourcing opportunities you see within your business model. And then my last question is regarding that you intensified your restructuring plan in order to make sure that you will be profitable with an expected manufacturing level around 5 GW in 2013. I'm just wondering if you aim to be profitable on a net profit, or is it on the EBIT line?
Okay. Let me take some of them, and then maybe Dag can take your first question on the cash. On the overall activity level, on the profitability with the 5 GW, that is basically saying that we expect to be profitable. And I think it's very hard just to quantify to what level in 2013. Basically, what we're saying is, if we look at the value and the orders that we have and the cost out activities, we do expect 2013 to be profitable as well. And I think that's important to relate to.
I don't wanna go into detail exactly how much on net profits and how much on the EBIT line and so on, but only to say that we do expect 2013 to be profitable. When it comes to the ambitions within outsourcing and the opportunities there, we, of course, as we also mentioned today, looking at our total manufacturing footprint to see what could make sense. Now, as an example, we earlier this year decided to sell our tower manufacturing facility in Varde, in Denmark, to one of our suppliers, which is one way that such a deal could be struck with a supplier.
Of course, there could also be other areas within Vestas that would make sense, whether it's a supplier or with another third party, that we could look into, if that seems to be a good idea for both parties. So we are evaluating this, because as we said, we know that the industry is having tough challenges, especially on new installation. And therefore, we think it's a good idea to approach this and see what could possibly be done for the benefit of both parties. And as I said, there are a number of options that we will now evaluate. But exactly what it will be, I don't think will be appropriate to elaborate on.
On the questions of the one billion in the fourth quarter, I don't know if you want to answer that?
Absolutely. Absolutely, I think, as we said, we guide on a positive Free Cash Flow, and that's actually how the budget will, end out. And in Q3, we expect Free Cash Flow to be negative, but due to significant improvement of Net Working Capital, we expect actually Q4, last quarter, to generate close to EUR 1 billion in Free Cash Flow. So that's the situation. And of course, we will come back to this issue in, quarter three presentation.
Okay, thank you very much.
Thank you.
Andreas Willi from J.P. Morgan is online with a question.
Yeah, good, good morning. Thank you for taking my questions. The first one on the outlook for 2013, where you provided the 5,000 GW number and said you expect the market overall to also decline. Would you expect the global wind market outside the U.S. to decline? Is that also part of the guidance, or is the decline in 2013 you're preparing for just related to your assumptions on the U.S., which is obviously going to be down? The second question on the covenants that the tests that got deferred in the summer. Are you in a position to say for how long that has been deferred? How much time do you have to achieve the necessary covenant levels again? Thank you.
Okay. On the outlook, we have said, as you rightly say, at 5 gigawatts for 2013. It is also based upon that we do expect that the global wind market will be much more challenged in 2013, including, of course, United States. Therefore, we are preparing the total cost structure in the organization for activity level around 5 gigawatts. We haven't taken yet a specific decision on how we look upon the United States, but we have said that the overall cost structure will deal with 5 gigawatts, while we, at the same time, are evaluating the overall manufacturing footprint here in the second half.
So very shortly, yes, the installation of new turbines, we expect to be very challenged in 2013, whereas the service business, not to be forgotten, we still expect to see quite a positive progress on the service business going forward. You want to comment on the banks?
Absolutely. If you look at the last quarter, 2011, and first quarter 2012, that was pretty disappointing quarters. It did actually end out with a higher net debt on EBITDA. And as we said in the press release, July 31, the situation is that we is allowed to draw under the facility that is EUR 1.3 billion. And we're going to continue to draw under the facility this year, and we expect also the net debt to go dramatically down in the end of the year. So, there is nothing new that is not reported in the press release, to say so.
But if basically, should your financials not improve for that, for whatever reason, is there a certain date by which you would have to sit down with the banks again to ask for another deferral?
Well, Andreas, I think that I don't think we have, as Dag said, a lot more to add, that what we put out on July 31. That we expect to test on normal terms in the future, and we have no other view on that as per today.
Thank you.
You're welcome.
Patrick Hummel from UBS is online with a question.
Yes, good morning, everybody. Two questions, basically. First one is regarding your cost base. I'm a bit confused. Is basically the new headcount target based on a no PTC extension scenario in the U.S.? Or if there is no extension by year end, would it potentially mean further cuts to your cost base? That's the first question. And the five gigawatts target for next year and your expectation to be profitable on the back of that top-line number, what does it assume for the order intake yet to come? Because I guess you don't have the five gigawatts already in your pockets.
Are you assuming the same margin quality, for orders yet to come as you see it in the existing backlog, or, or do you expect an improvement or deterioration there? Any color will be helpful. Thank you.
...Okay, let me start by saying that on the cost base that we are now mentioning, with the 19,000 employees, is before the decision is taken on what we're going to do on the manufacturing footprint in the United States. I hope that will make that part of it clear. When we talk about the order intake and the, we have not given a guidance for the expectations to the order intake this year. But it's clear, as I also said in the presentation, that it's very important for us that the projects that Vestas take on board are project that has a decent earnings profile. And therefore, if you look at the overall pricing and the development of the pricing, it's up a few percentage points.
Obviously, it will fluctuate between the quarters, but that is where we have, where we have our focus, going forward. On top of this, we also have to look into, when you talk about the profitability for 2013, to pay attention to what we said about the product cost out. And the product cost out is something that we, have more than 200 people working on and initiated, obviously, for the reasons of the challenges we came into, is now giving EUR 30 million EBIT positive effect in 2012. And obviously, it will give us more in 2013, as these projects are being handed over to the clients.
So when we talk about what are important drivers with the 5 GW scenario, it is obviously the cost out of the organization and preparation for that, but also the cost out of the product platforms.
Okay, thank you.
Rupesh Madlani from Barclays is online with a question.
Good morning. Three questions for me, please. First, do you see potential to lower your fixed costs back to 2006 levels on the back of the comments you made around increased use of outsourcing? Second, as shipments are the primary driver for cash flow, what do you see as the single biggest risk to achieving your full year cash flow guidance? And finally, do you see potential to lower your research and development costs further, either this year or going into next year? Thank you.
Okay, let me address the fixed cost and R&D, and then Dag can talk to the cash. If we look at the overall organizational structure, I think you have to remember that if you compare, for instance, our service activities in 2006 versus our service activities now, then you cannot only compare it with the gigawatt activity level in the manufacturing facilities. That, I think, is important to remember, that there are a lot of additional activities around that. Secondly, if you look at the R&D and the expenditure on R&D, we have also previously mentioned that it's clear that the V164 offshore turbine is obviously still a very big project for Vestas to undertake, and a lot of our resources go towards the development of this.
But if you look of new platforms going forward, like the V164, of course, it's clear that we do not anticipate to make a new version of a big offshore turbine going forward. But right now, obviously, we have high R&D expenditure, very much related to, to those activities undertaken now. So, these are some of the things that are driving the overall expenditure. Plus, of course, when it comes that there are a number of people who are quite busy of taking the cost out because of the challenges we had, which, of course, on the short term, is also costing us money, but of course, giving us much more benefit going forward.
So would you say, therefore, that if, for example, the UK were you didn't see significant orders for the V164 or for deliveries in the UK going out a number of years still, that your R&D costs for the V164 could fall significantly beyond what you've already announced today?
It's clear that, once the V164 is developed, that obviously will mean, unless people come up with new bright ideas, means that everything equal, you will see that the cost level on R&D, everything equal, will go down because it is a, it's a big project we are undertaking here. But we'll have to wait and see that, and I can just add that we still expect to have the prototype for 2014.
May I just ask on the use of... I accept the point around service, the service business, different from 2006, but through the increased use of outsourcing, could that potentially extend to the production and manufacturing of blades? Or is that something that you still consider to be essential to the business?
Well, I think the, I think if you look at the, at the journey we have been on, I think we have to remember that we have actually, over the years, we have, closed a number of plants here in Northern Europe. And therefore, if you look at our manufacturing footprint today, and making sure that Vestas is competitive, for instance, in North America or in Asia, thanks to the ramp-up in China and the U.S. and so forth and so on. I think one has to remember that it's not only a question of the plants, but also the operational cost of the plants going forward.
And therefore, we have paid particular attention to how to make sure that our manufacturing footprint is cost competitive, not only from an, let's say, a run rate point of view, but also from a transportation point of view, because our transportation costs are quite significant, as these machines obviously are very big. So it's not only a question of that, but also the related transportation costs. So if I look at our manufacturing footprint today, I think we have a good balance, in terms of Europe, Asia, and North America.... Whether we will outsource some of these or not, and which of them, time will tell.
I think it's important that unlike back in 2006 and 2007, where we were much more concentrated in northern part of Europe, we today have a much better global footprint, which makes sure that we are competitive within the regions, which we were not at the time, when we took these decisions. So whether or not we will outsource, time will tell, but I think at least now, unlike at that time, we have a good geographical spread.
I think what is also very important is the difference between the revenue driver and also the cash generator, because on most projects, we recognize the revenue when the turbines are finally delivered to the customers and installed according to the accounting principles. And regarding the primary cash generator is, of course, the shipments. And this means that even if we are shipping, delivering, it doesn't mean that we are recognizing on the revenue side. But on the cash side, of course, we are building up the cash accordingly after each sequence that we are delivering. I do not actually foresee any key risk in the shipments, so maybe, Ditlev, if you have any viewpoints there, maybe you can take it.
Well, if you look at, we have, at the moment, 2.5 GW under installation, and obviously, that is, a very high number. But as I said, a little earlier, if you look at how deliveries and shipments are playing out, then the shipments, and the production is expected to be quite low by the end of the year. And that obviously reduces the risk, in terms of, getting these projects over the line, to the customers. And, and that is, of course, where we have to focus. But again, I have to say, there are certain areas that are not within our control.
As an example, even we have shipped all the turbines to site, if the customer is not ready with the grid connection, which is beyond our control, we cannot take the revenues and the earnings on the projects, even though we have delivered them as we should. Therefore, these are some of the risks that we have to relate to, and the reason why we have such a broad span on the guidance, because we know that things can happen, weather-wise, grid-wise, which means that even we have sort of, say, done our part, we are still not allowed to take them in as revenue and earnings, and that is something that needs to be looked at.
Very good. With respect to shipments as driving cash flow and shipments being something that you can control, you feel pretty comfortable in your ability to ship and generate cash flow to meet your year-end guidance? Would that be, or your cash flow neutral guidance, would that be fair?
Yeah, I think that if you look at the 6.3 that we are now shipping, it's clear that obviously, since we are not shipping the 7 as previously announced, but even with 6.3, we still believe we can get to a free cash flow for the full year.
Very good. Thank you.
You're welcome.
Daniel Patterson from SEB is online with a question.
Thank you. I have a few questions. I just wanted to start off, and sorry to labor the point, but the 5 gigawatts you're talking about next year, I just wanted to be absolutely certain you're talking about activity at your factory, so shipments and not orders. Is that correct?
Correct.
Okay. Then, secondly, there's more on the whole sort of outsourcing situation. Looking in from the outside and looking back at Vestas over a few years, this is a pretty big change. It looks like a pretty big change coming from being very vertically integrated to maybe more outsourcing. Could you maybe take a step back, Ditlev, and give us a little flavor of is this correct, the assumption that it's a pretty big change, and how do you sort of view the whole strategy?
Yep. If you look at our warranty provisions as they evolved, you will see that they have come significantly down, and they have come down because of the focus that has been on quality throughout the entire value chain. Best illustrated through the lost production factor, which is now trending below two. And if we go back some years and looked at where did the problems come from versus what we could control and what we could not control, one of the reasons why we have been so heavy on insourcing were, first and foremost, to make sure that there were no problems in terms of the performance of the turbines, and we need to be in control of that, and of course, together with our suppliers.
What we saw, for instance, here in the first quarter, 2012, where we had some gearboxes delivered to the V90-3.0 MW with faulty bearings, how costly that is, not only for Vestas, but also for our customers, and not least for our reputation. So any approach that we're going to have on this, it means that it has to be done in a way that there is absolutely no compromise on quality. We have today been much better as an organization to work much closer together with our suppliers, and that is thanks to a lot of efforts, a lot of KPIs put in place, a lot of quality measurements put in place in the plants.
So we can feel much more comfortable with, that even it is not within our own jurisdiction, so to say, that we can still keep a very high quality by buying it from somebody else. And that also means that our ability as an organization to work much closer together with the suppliers, with the right quality focus, with the right KPIs, is something we think makes a lot of sense. A few years ago, where we had to say, we had to become much better, we felt more comfortable with, that we could do these things ourselves to actually demonstrate what is most important for our customers, namely, the development of the lost production factor.
Which you very easily could turn around and say, if you look at the satisfaction of Vestas customers, the way it has grown from 47 of now in the 70 area over a few years, is very much related to the performance of the turbines. And lastly, but not least, it is impossible to run a profitable service business if you do not have full control over the quality. We are giving in the service business, and the proposals to the clients, a very huge commitments of the people will get the electricity that they should have when the wind is blowing. If you have any challenges on the quality, that obviously means that your service commitments will become much more costly.
So a long answer, but just to make it very short, the outsourcing, potential outsourcing, has to be seen in the light that there's absolutely no compromise on quality, because otherwise we are going to jeopardize what is most important for our customers, and it's going to jeopardize our service business. So that's a fundamental requisite before we go into this.
I think that's very clear. Just to be certain here as well, potential outsourcing, and I guess potential divestiture of more factories, that is not included in the 3,700 layoffs. That's correct?
Correct.
Okay, thank you.
You're welcome.
Arnaud Brossard from Exane is online with a question.
Good morning, everyone. First, I have a question on 2013. It's a clarification, in fact. You said you are expecting to be profitable in 2013. Is it at the EBIT level? Second, on 2013 again, can you just give us an estimate of the sales figure that would correspond to your 5 GW shipment scenario? Third, you are evaluating your manufacturing footprint and outsourcing opportunities. Can you tell us how long you expect this process to take? And finally, what's your view on potential wider partnerships, what role would you expect Vestas to play in potential consolidation of the industry?
Okay. I think previously got the question on which level of the line we talk about the profitability, and I'm not going to go further into that, but just say with 5 gigawatts, we expect to be profitable, also in 2013. When we talk about the backlog, and being at a level of 5 gigawatts, please remember that at this moment, we have 9.6 of turbines, basically corresponding to 9.6 gigawatts in the backlog. Also going in to 2013 here by the end of Q2. So that obviously give us some visibility. But we haven't shed a light on what we expect the total order intake to be for the full year, and do not expect to do so.
I will, however, say if you look from historical facts, you will normally see that about 40% of the order intake comes in the first half and approximately 60% in the second half. So it is not abnormal, if you look at it from that perspective, that more orders come in in the second half than they do in the first half, just to remember that. Concerning the 5 GW scenario overall, as I said, this is what we are gearing the organization for, and it's something with the complexity that the organization have, means that this is where we are putting our expense level in, and in order to make sure that we can handle even a 5 GW, if it should end up at this level in 2013.
Concerning partnerships, then we have already the beginning of the year, mentioned that we may consider to share the V164. But other than that, I don't have additional comments concerning partnerships or potential partnerships.
Okay. Thank you.
You're welcome.
Claus Almer from Carnegie is online with the question.
Yeah, hi. I have a few questions, if I may. The first, you state that Vestas should be profitable in a scenario where shipments drop to the 5 GW, as we have talked about today. Is that including the effect from the service division? Second question, average selling price is up 2% year-over-year in Q2. However, is that enough, as the newer turbines are more expensive to manufacture than the older models, which you also state in the report? And finally, should we still expect more cuts in the US to be announced in Q3, as only 350 out of today's 400-1,400 layoff is related to your US operation? That's it.
Okay. Let's start with the, with the U.S. We have not taken the decision on the manufacturing footprint, including the U.S., but as I stated today, we will do that here in, in the second half. So, basically, that is something that we need to sit and evaluate and could, whatever decision we take, be on top of what has already been announced today. Concerning the cost out, and the efforts within the cost out. As we said, EUR 30 million goes out or improves the EBIT in 2012 for the project that will be expected to be handed over to the clients this year.
But obviously, going into 2013, this will have a much bigger impact, because this is an activity that has been undergoing here during 2012, and therefore there is a delayed effect from 2012 activities benefiting the P&L more in 2013. Concerning the price development, as we know, it can fluctuate between the quarters, but I think it's clear that with the efforts that we are undertaking now, talking about the profitability in 2013, due to the scalability of the organization and also due to the cost out of the product platforms, is of course, very important drivers to ensure a profitable situation in 2013.
We are just saying we have not given any flavor over the service and the earnings of services in 2013. We are just saying to you today that we expect that with around an activity level of 5 GW, Vestas is expecting to be profitable in 2013, even though the year 2013, as it looks today, is probably gonna be the toughest year the wind industry have seen for a number of years.
Okay, maybe just to follow up, just to be 100% sure, the profitability is on group level, then? No information about the split between service and manufacturing, right?
Correct.
The second question, even with the cost out, I would assume that the new turbines per megawatt will be more expensive to manufacture than, for instance, the V90 , and therefore, the ASP should go up, everything equal per megawatt.
Yeah. Now, we have to remember that the order intake is, of course, quite small in this quarter. But everything equal, yes, the new technology should have a better earnings than the older technology. On the other hand, you also have to remember from a comparison basis, that right now, the cost that you are seeing in the P&L is with a very high cost level of the turbines, those that are handing over today.
Sure. I was only talking about the order intake in euro per megawatt, not about the cost. But thanks.
Thank you.
Håkon Levy from DNB Markets is online with a question.
Good morning, and thank you for taking my questions. Firstly, back to the alternatives of our more flexible manufacturing base with more of the process outsourced. Can you say anything about how much of the capacity you expect to keep in-house, and what the timeline for say divestments of factories are, and who the potential buyers of these assets could be? And secondly, on net financial items, this line changed by EUR 43 million from positive EUR 20 million in first quarter to a negative EUR 23 million in the second quarter. It seems to be quite volatile. I'm wondering if you could help us understand this swing, and how would you think about this line in the P&L going forward? Thank you.
Again, on the outsourcing, I don't have that much to add to what I've already said. We are going to work with this. We have announced that we are merging some of the manufacturing activities under our new COO. And also there, we're going to look at what are the options and possibilities we have going forward. But as I said, what would make sense, both from a financial point of view, but also from a quality point of view, and then we'll have to take it from there. But again, let's see where we go, but I don't wanna go into the details. There was a question on the financials?
Yeah, I, I would like to come back to this question in little more in detail by our head of investor relations, if that's okay, so we can explain in, in detail how this-
Okay. Then, a short follow-up question. Can you just remind us approximately how much manufacturing capacity you have as of today?
It's again, how many shifts are you working, et cetera, et cetera. But overall, one would say that we are probably in a position, everything equal, to do in the magnitude of 9, sort of, gigawatt. Everything with approximately.
Okay. Thank you.
You're welcome.
Martin Prozesky from Bernstein is online with a question.
Good morning, gentlemen. One question, please, and you've got a few points around it. The first is, how can you give investors confidence on the EUR 1 billion free cash flow in Q4? I mean, the previous best, free cash flow quarter we've seen was back in Q4 of 2006, when it was EUR 500 million, and that was mostly driven by a prepayment increase of EUR 400 million. And one of the other good quarters was last Q4, but that was mostly due to EUR 300 million increase in payables. So how can you give investors confidence that we'll see the increase, in free cash flow that's double the previous record? And linked to that, what is the remaining credit on the credit line of EUR 1.3 billion from the cash use so far this year?
It looks like you've used about EUR 700 million of that. Is that correct?
If we look at the inventories and the development of the net working capital, where the inventories are standing at EUR 458 million, and if you look at the overall activity level, please be aware of how much money that is right now tied up in turbines under construction, as we have shipped quite a lot. So there is a huge amount sitting in inventories that we expect to be released in the second half. If you talk about what kind of confidence that can be given?...
Then I would say, if you look at the net cash profile, between first half year Vestas, then it is not unusual that the first half is negative and second half is positive. Last year, in the first half, it was negative with EUR 494 million, and this year it is negative with EUR 633 million, even though the activity level is significantly up, going forward. It is, of course, clear that we are also, in this quarter, suffering from, compared to same quarter last year, that the order intake is significantly down. And that obviously mean that the down payments in this quarter is not very big, simply because very few orders were placed.
And therefore, you are absolutely right in saying that new orders coming in here in the second half, which we normally tend to see, that there are more orders in the second half than the first half, is, of course, also, an important point to make sure that we get the amount of cash flow that we are forecasting, for, for the full year. Then there was a question on the,
RCF.
On the RCF, sorry, yeah.
As in, in the first half of 2012, we had a cash burn of approximately EUR 633 million. So then you can do the math by yourself. And, you need also to remember that our net debt now is more or less the same level as it were also a year ago. And also that, the cash generation of more than EUR 600 million in the second half of 2012 will, of course, also then, as I said, reduce the net debt. So the RCF, calculation is, is more or less in line with what you say.
And then just one follow-up on the inventory. I appreciate the fact that inventories are up nearly EUR 400 million. But the way I understand the working capital items now is that you do get progress payments against those inventories, or because your prepayments did increase as well, Q on Q. So is that-
Yes.
Does that mean if you're going to see a big inventory release, that you've not received any progress payments on the work done?
Yeah, but listen-
Because that's unusual compared to the past.
Yeah, but you have to remember that, we have shipped a little more than 3,000 MW. We still expect to ship another 3,000 in the second half, which, of course, is also going to drive cash. That's important. You're right, that we get milestone payments when we ship, but of course, we also get payments during installation. We don't get everything when we ship, but we get a nice chunk when we ship. But of course, we also have to remember that there's still a number of turbines that have to leave the plants, which again, also is going to have a positive impact on the cash flow.
Then just one last question: If you get towards the end of Q3, and you, you do need cash, are you prepared to go to the equity market to raise capital?
I have no comments to that.
Thank you.
You're welcome.
Ben Wells from Morgan Stanley is online with a question.
Hey, good morning, guys. Most of my questions have been answered, just a couple still to go. Firstly, on working capital. Obviously, coming into the year, working capital was pretty low. Expected, or at least in my numbers, to go back to that sort of level for you to be free cash flow positive, end of this year as well. Is that sort of level, in your view, sustainable for Vestas, particularly under the new guidance of 2013 being around 5 GW, and also obviously with visibility on your order book potentially coming down a little bit as orders have slowed up? That's my first question. Secondly, on the service business, obviously, you've increased your margins on this business to 17%.
Is this sort of 17% a sustainable level now moving forward, or would you expect a sort of 14%-15% or even a little bit lower to trend back to that sort of level in 2013, 2014? And then, finally, just on offshore, obviously, you're still active in the market with a V112. Wondering if you can just provide a little bit of an update on just in general, what you're seeing in that market. Has there been any slowdown in interest or activity in Germany, as it relating to the grid issues or any other issues that might be affecting that market as well? Thank you.
Okay, first thing I would say, Ben, is, on the working capital, it's important to remember that Vestas is working on make to order. And that means that if you look at the sourcing that we did, for instance, by the end of 2011, when we were preparing for a much busier first half of 2012, meaning that we were, because of the make to order principle, working along those lines. As we are now preparing for a 5 GW scenario next year, it's of course, also mean on the make to order principle, that a lot of the sourcing that we are not going to do, so to say, because we are expecting for a lower activity level in 2013, as we leave 2012.
And that actually mean from a Net Working Capital point of view, is that we will see lower inflow of components by the end of this year, unlike the end of last year, where we were actually preparing for a much busier 2012. That's one point I think is important on the working capital development. It's, of course, clear that in order to get to this positive scenario, all of the turbines that are right now on installation needs to be handed over to the clients. We should not, therefore, hopefully run into problems, whether grid-wise or whatever, but that we are able to hand them over.
Another point that I'd just like to make sure, when we talk about handing over this to the clients, we have to remember that what gave us a lot of problems in the second half of 2011, namely the manufacturing and running in of new technology, is not something we foreseen for the second half of this year, simply because it's now a known technology, and that reduce, obviously, the execution risk compared to what we saw in the second half of 2011. Turning to the service earnings, the progress that we are seeing on service earnings in the second half on the second quarter 2012 of this level.
We are seeing this is basically coming from a lower cost base, thanks to the way we are now organizing Vestas, with the scalability, which again means that unless, of course, there are a lot of things happening on the pricing, or the performance of the turbines, then obviously, since this has been driven more from a cost out exercise than anything else, we do expect to see that service in the future should have a decent earnings level, whereas we saw a much lower earnings level. But again, it can fluctuate depending on the activity level. But overall, we are saying that the service organization is also becoming more efficient. Talking about offshore, I fully agree with you. The offshore market, there are challenges on the grid and others.
I actually think that the order we announced in Belgium, as far as I can be able to see, was the only offshore order announced in the second quarter, 2012. And I think that basically speaks for itself, that the activity level on offshore has not been so high, and I think you point to some of the right issues here concerning grid and other issues that needs to be dealt with.
Sean McLoughlin from HSBC is online with a question.
Good morning. I have two questions remaining. Firstly, just on the offshore, you can confirm you're still committed to funding the prototype even without a partner? Secondly, just a comment on Brazil. What steps are you taking to regain compliance status with BNDES, and how quickly do you think you can regain compliance status?
Yep. Well, offshore, very brief. Yes, we expect to go ahead with the prototype for 2014. Concerning Brazil, then it's true that some of us in the industry have to regain the approval by BNDES, and a lot of activities have been taken by Vestas to make sure that we get this in place. I cannot give you a specific date, but we do expect to make sure that Vestas regain this approval from BNDES going forward, but I can't give you the date on that. But a lot of people are working hard to make sure that that happens.
Great. So you don't see any current risk to your order pipeline in Brazil currently?
No.
Thanks.
Archie Fraser from Redburn is online with a question.
Good morning, gentlemen. Just a couple of questions left. Firstly, going back to the banking covenants, I wonder if you could let us know, are these tested quarterly or semiannually? Do you have the next test in September or December? And is there any further color you can give us on, for example, the way the net debt to EBITDA is calculated, is that rolling quarters? And I don't know if you can let us know, what the levels are. Secondly, your comments on the U.S. situation. I think what you were saying is that the current headcount, expectation at the year-end of 19,000 is before, potential further U.S. cuts. I imagine that's the 1,600, that you've been talking about earlier this year, if PTC is renewed.
I understand that there's potential movement on the headcount figure because of the PTC. Should we also consider that there is potential movement on the 5 GW shipment figure for next year, depending on movement in the PTC? Or could that actually go down? That's it.
Okay. Let me start with the US, and then Dag can talk to the covenants. It's true, the 19,000 we talk about here is before we have taken a decision on the US situation. As has also been reported, we have already made some adjustments to the facilities, but we have not overall decided on the total manufacturing footprint, which we are going to do here in the second half. Then you had another question on the US. What was that?
Well, if you could be cutting further jobs in the U.S., could you cut your 5 GW shipment guidance for next year because of what happens in the U.S.?
Well, again, let me say that preparing for 5 GW is obviously with a very positive, sorry, with a very, let's say, cautious view in 2013. Whether things can change or not, it's hard to say, but I would say, I think already with 5 GW, we have taken a fairly conservative view on the year 2013.
Yes, regarding the, the covenants, and as a principle, we do not actually comment on, on the covenant structure, to say it. So, that's, that's how the principles are in Vestas. And number 2, we are testing on the, on the rolling EBITDA 12 months. That's what we use. And as you see also on the presentation, you can see that, the multiple is expected to go down, now, in end of, this year.
You, you can't say whether it's tested quarterly or semiannually?
No, I'm sorry, Archie, we're not, we're not commenting on that.
Okay. Thanks.
You're welcome.
Kasper Larsen from Danske Bank is online with a question.
Yes, good day. Most of my questions also already been asked, answered, but just a few also, on the credit. I was just wondering if you still have full access to the entire credit line, or if it has been limited, and this is based on the, what you say, a little bit unclear wording you're using in the thirty-first of July announcement, where you say that lenders have allowed drawings, which in the opinion of Vestas, are sufficient for the continued operation. So I was just wondering if you still had full access to the entire line or whether that is only a tranche of that.
The second question is, if you could get a little bit more flavor on the interaction between shipments, milestone payments from shipments and prepayments from new orders in terms of actually turning into cash generation. You've been talking about shipments being the main driver of cash flows, but I'm just trying to wonder here whether project completion perhaps is contributing even more. If you could get some flavor on, would it be, you know, 60/40, 70/30 kind of split between shipments and advanced payments, please?
Okay. Normally, we see, we still see down payments. Of course, they can vary, but we still see down payments in the magnitude of 10-15%, depending on area, region, and so forth and so on. Then it's correct that you see a big milestone payment in terms of shipment. We haven't given the exact split, but of course, there are still quite a number of payments coming after the shipment. But the shipment in itself is the largest single payment that we get. But there are, of course, payments subsequent to the shipment.
Concerning the RCF and the drawing, then we have no further comments than what we put out on the thirty-first of July. As I think you basically read it out yourself. So, so I don't have, I don't have further comments with that. Also, what was mentioned in there is that we expect to test on, on normal terms in the future.
Okay, thank you very much.
Klaus Kehl from Nykredit Markets is online with a question.
Yes, hello, Klaus Kehl from Nykredit. Two questions, if I may. First of all, you have given some comments about the outlook for 2013 in relation to your shipments, et cetera. But could you also try to give us some flavor on your CapEx for 2013? And what I'm referring to is that, as you previously said, you have a manufacturing capacity of 9 GW. So in other words, you have plenty of capacity. Does that mean that we should expect very low tangible investments? And secondly, should we expect the R&D cost to stay at the current level, as you're guiding for here in 2012? So that's my question related to your CapEx for 2013.
Secondly, could you give us an update on the costs related to the V112, yeah, that you have seen here in 2012?
Let me start by saying the fact that normally we guide in February, and the fact that we today have released a number of 5 GW is basically just to get everybody a flavor of, because there is so much talk about what is it that we expect in 2013, how will this impact Vestas, and so forth and so on. So the reason why we have given you the 5 GW does not necessarily imply we're gonna give you all the other numbers, just to manage expectations here. So the 5 GW is there. Obviously, as you correctly say, with 5 GW, it doesn't really. It means that we have plenty of capacity that I think is clear.
Concerning the cost out, then I would like to say that the 30 million that we have stated today is obviously, again, with a delayed impact, meaning that this is what we take over the P&L in 2012, but not necessarily what the real cost out is that there has been taking place as the changes to the bill of material of the platforms. And therefore, we are saying we do expect that in 2013, that this will contribute significantly to a further improvement on the earnings of the new technology as they are handed over in 2013.
Okay, then just a follow-up question regarding your R&D costs. Given what you have announced today, would it be fair to expect them to remain at the same level in 2013? Should we expect them to go up?
You can ask, you can, of course, ask the same question in many ways. But let me just say that, of course, the V164 will, of course, as we are expecting the prototype in 2014, there will of course also be important development on that turbine in 2013. But exactly how we're gonna see the R&D spend in 2013, I don't wanna comment further on today.
Okay. Thank you very much.
You're welcome. I think we have the last question, operator.
Okay. Faisal Ahmad from Handelsbanken Capital Markets is online with the question.
Yes, Faisal Ahmad with a couple of questions. Firstly, on the cost takeout program, could you maybe just comment how much of the plan or how much of the goal have you actually implemented? If you could give us some kind of percentage terms and how much more you expect to implement during 2013?
... The second question really relates to your revenue guidance. I mean, you're cutting your shipment guidance quite significantly, and you're still maintaining your revenue guidance. How should we square this? And thirdly, on your free cash flow guidance, I mean, again, you're cutting your shipment guidance quite significantly, and you're also talking about orders having disappointed yourself. Is there anything which has progressed better than your expectations since you're maintaining your free cash flow guidance? That's all.
Okay. On the cost of the program, let me say that there is not a lot more to add than what I just said concerning the EUR 30 million so far. But we will come and get more in behind this at the Capital Markets Day on October third. Concerning how to bridge the revenue and the shipments, basically, if we look at the expectations for this year, you will see that we are cutting these 700 MW. But, of course, it was not necessarily given that those 700 MW were expected to turn into revenue this year. That has been taken out of the manufacturing plans for the remainder of the year in order to bridge that.
But as I showed earlier on the slide, there can be huge variations between when they are shipped and when they're actually hitting the P&L. Concerning good news, bad news concerning cash flow, let me say, obviously, the fact that we are reducing the CapEx from EUR 550 to EUR 450, everything equal, obviously, has a positive impact. And then, if you compare first half on the net working capital, I think it's evident that we are in the second quarter suffering from that the order intake was significantly down compared to the same time last year.
Obviously, hopefully, going forward, we will see that the order intake will perform better than what we have seen, in particular, here in the second quarter. But again, the tie-up of capital of Net Working Capital is, of course, where we have the majority of the cash sitting, and therefore, in order to get through to the guidance, it's of utmost importance that we manage to take all these projects over the line, and thereby ensure that we lower the Net Working Capital during the execution.
And again, as I said, as shipments are going to be quite low by the end of the year, that at least should give a flavor for that, the turbines should be out in the field, and everything equal increases the likelihood that they're gonna be handed over to the, to the customers.
Okay. And just to follow up, a question on the Free Cash Flow guidance again, and also on your comments regarding orders. I mean, it's quite clear from your announcement that banks are keeping a quite close eye on your Free Cash Flow development. I mean, to what extent is that hampering your ability to take in orders? If you could comment on that.
You were breaking up a little bit, but I don't see that if your question was related to the announcement we sent out on the 31st of July, whether that is any way impacting our order intake. Our view is that if you look at the market here, particularly in the second quarter, that it has been the overall orders placed in the markets have been very limited, and this is also what Vestas have seen here in the second quarter. But it is not our impression that any of these issues are related to Vestas.
Just to, as a proof point to this, I would say, if we, if we then look at the progress that we have made here in the second quarter in terms of earnings, then, if that assumption should be right, then maybe the orders should be flowing in here in the third quarter.
Okay. Thank you.
Thank you very much, everybody, and thank you for tuning in today. Hope to see you all when we present the third quarter here on the-