Welcome to the Vestas Conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to your hosts, Ditlev Engel and Henrik Nørremark. You may begin.
Thank you, and good evening to everyone. Thank you for joining us for this conference call. We have just sent out a preliminary financial highlight, which is obviously the reason for the call this evening. We have to say that it is today, the 3rd of January, 2012, and therefore what has been issued here this evening is based upon the first reported figures concerning Vestas' level of activity as per December 31st, 2011. None of these have been consolidated and reviewed, and therefore they are preliminary highlights for the financial year 2011. This message or announcement has obviously been sent out in order to be in compliance with the Danish Stock Exchange regulation, that if we see a development that deviates from the original guidance, then it has to be communicated, and therefore this has been disclosed here tonight.
I hope you've had a chance to read through the announcement. Before we go to the Q&A session, which both Henrik Nørremark, our CFO, myself, and Peter Kruse, our Head of IR, is at the phone this evening, then I will just take you through some of the highlights and then go to the Q&A. First, on the order intake for 2011, we do expect that we will be at 7.4 GW with a total value of EUR 7.3 billion, and the forecast was 7-8 GW. If we look at the preliminary statements that we have at the moment from our banks, then that indicates that Vestas will be able to realize a positive free cash flow in 2011.
And that is despite the fact that we had anticipated to ship around 5.5 GW, but it will be around 5.1 GW, which of course are important as an important driver for the release of cash flow when we ship the turbines. On the more negative side, then the revenue that we are seeing now based upon the incoming reports means that we probably have to defer revenue of around EUR 400 million to the first quarter 2012 due to delay in transfer of risk, which will impact the EBIT negative by about EUR 130 million in the fourth quarter.
Then at the same time, we have received information that costs are expected to be approximately EUR 125 million higher than originally expected, of which EUR 100 million is predominantly related to the development cost for the industrialization of the V112 3-MW turbine and the GridStreamer technology, and higher than expected product cost. And we will come back, and also you will see later in the presentation, there is a bridge trying to describe where these figures originate from as we see them on a preliminary basis at the moment. That all in all means that based upon what we are looking at now, it would mean that the revenue will be around EUR 6 billion and an EBIT of approximately zero.
I can also say, coming back to what happened at the end of October, then the problems that we have experienced at the generator factory in Germany have been brought under control and are being solved. Therefore, we do not expect that this plant will have a negative impact on the operations in 2012 as we experience here in the fourth quarter. Finally, we mentioned in connection with the third quarter result that we would present a new organization for Vestas at the 8th of February, 2012, in connection with the Q4 announcement. Now, the work with this is progressing very well and faster than what we had originally anticipated, and that we are therefore now in a position on the 12th of January to present this internally as well as externally. This will be a significant change to the organization as we see it today.
The external will be presented at a press meeting at 2:00 P.M. in Copenhagen on January 12th, and obviously there will also be a stock exchange announcement, etc., associated with that. Those were the highlights. Just again, as I said, these are very early days. It is on January 3rd. I hope people will have an understanding for that. With this, I think we'll turn back to the operator for Q&A. Please go ahead, operator.
Our first question comes from Rupesh Madlani. Please go ahead.
Good evening. Rupesh Madlani from Barclays Capital. Three questions for me, please. This is probably the second major operational disappointment that you've had in the second half of 2011. Could you outline some of the lessons that Vestas have learned to avoid a repeat of these, notwithstanding the organizational changes we expect to hear in a few days? Second, with the lower levels of confidence around the company, can you comment on the need to find a strategic or financial investor in the company? And third, with some of the one-off costs with respect to new turbines and supplier issues, are there any costs that we could expect to be recovered from third parties? Thank you.
On the operational delays, then I think it's clear that the introduction of new technology has been much more costly and has actually given us these challenges here in the fourth quarter, both with regard to the manufacturing plant in Germany, but also on the development cost for the industrialization of these new products, which is causing these issues. So I would say for the rest of the operations, there may not be a lot of comfort with these challenges we are faced with here, but I think it's important to remember that these are coming specifically for the introduction of new technology.
And it's also clear that we will have, in connection with, let's say, the organization that we are looking at, these are obviously things that we are looking very carefully at, how come that we have experienced these kind of challenges when taking new technology to the market. Concerning finding strategic investors, then I can say we have no plans regarding this. And with regard to cost recovery from third parties, again, it is still early days to comment on this, but of course we will look into this as well.
Just to follow up, do you feel comfortable on reaching the free cash flow guidance even with all the incremental costs? Are you feel comfortable on reaching your free cash flow guidance? Has that been driven by better than expected prepayment levels from customers? How are you reaching that target?
Henrik?
Well, yes. The answer is yes. We expect to do that. The cash flow is very much driven by the fact that execution of projects are taking place under the inventory, and thereby the progress payments you will see under prepayments in the financial statement. And therefore, when turbines have been shipped to site and we have reached the milestone release for payment, then that will affect the cash flow positively despite that you will not be able to see it from the P&L. So the net working capital has very much to do with it. I would say also that when we are looking to the order intake, we have been very persistent about trying to preserve our terms of payment, including the down payment. So from the order intake, we have also enjoyed the cash inflow.
Certainly from the net working capital, you will see a lot of the cash flow coming from there.
Just to be clear, that you shipped the product, you reached those milestones, you received the cash flow for that, you achieved these cash flow guidance, but you didn't get quite far enough to recognize the transferring risk to move everything off the balance sheet to the P&L. Is that clear?
That's absolutely correct. And for those now, I remember that I've also had the pleasure of you, Rupesh, in the past when we changed the accounting principles that in essence cash flow is more current with the company's current activities than the P&L, that is far further from behind. So your understanding is absolutely correct. And if I may just add to the lessons learned on introducing new technology, we have, when developing new technology, had plenty of lessons learned, which we have applied to our test centers for the technology itself, for the longevity of the technology. However, when it comes to the industrialization, we have also stepped up tremendously the requirements to both suppliers, documentation, adopted PPAP processes from the car industry as the first ones in the manufacturing. And yes, it has definitely been a tougher journey than we had anticipated.
However, we have done that to preserve that we don't have inferior products afterwards, which has been the industry's problem and certainly also Vestas' problem in the past. But having said that, that of course does not relieve us from that we should of course be able to forecast what does it cost to industrialize new products.
Okay. Very good. Thank you.
The next question comes from Patrick Hummel from UBS.
Yes. Good evening, gentlemen. Two questions. Questions from my side, please. First of all, the cost overrun, those EUR 125 million, is it due to the fact that you simply were not able to capitalize those expenses that you had expected to capitalize these and now found out maybe in conversations with the auditors that it's not possible? And as a consequence, should we simply assume higher R&D expenses in the P&L going forward, or is it simply a cost overrun that you just discovered? And if the latter is the case, would there be any management changes as a consequence? Because that's quite an unusually big amount in terms of cost overruns during a quarter. And the second question relates to the statement you make about 2012 and the delay of the shipment of those 430 MW, that those revenues will come at high costs.
Is that basically guiding towards another quite bad 2012 year, or is it just that the organization was so stretched in the fourth quarter that you had a very high cost span?
If we take the R&D cost overrun, if it was that we couldn't capitalize them, if that was something we just found out, the answer is no. We have never capitalized development costs pertaining to industrialization of products into serial manufacturing. We have forecasted that we would have costs associated here with, but we have not forecasted and expected that it would cost the excess amount that we are talking about here. And when we are talking about the cost into 2012, these pertain to the turbines that were manufactured in 2011 that we are bringing into 2012 and thereby taking over the P&L in 2012 and nothing else. And when it comes to the management consequences, Ditlev?
Yeah. I think we will come back to that on January 12th.
Okay. Thanks. Regarding the revenues coming at high costs in the first quarter or in 2012, those 430 MW?
The revenue. Yeah. These are the turbines, the V112 and GridStreamers that have been produced at a higher cost in 2011 that will be turned into turnover and thereby the associated cost will also move into cost of goods sold in 2012. And therefore, that will, with that higher cost, affect these 430 MW in 2012. But that's it.
Okay. But do they come at a negative gross margin, or?
No, no, no, no. If they came at a negative gross margin, we should have provided for that. Not at all. Not at all.
Okay. Good. Okay. Thanks.
The next question comes from Brian Gamble from Simmons & Company.
Good evening, guys. Just a couple of quick ones. Ditlev, the figures that you're talking about obviously are big numbers as far as adjustments for Q4, but when you think about how you typically model your fiscal year, are there already some, I guess, adjustments that you make internally to your own forecasts that account for things like bad weather, like disruptions for various reasons? I mean, that's not something new. These are essentially adjustments, in my view, that are above and beyond your typical expectations. Maybe you could just provide a little clarity there.
Yeah. I think if you look at page two, there is this reason for the revenue adjustment on weather delays and customer-related delays, and then there are production delays. And you have the numbers there. I would say we knew that the year 2011 would be more back-end-loaded. I think we mentioned that early in 2011. When you topple that with the fact of the challenges that we encountered from the generator plant in Germany, of course, put even more pressure on this.
And then we always know, and especially after the change of accounting principles where we are only allowed to take the revenue and the income when they are handed over to the customers, then the sensitivity of hitting this becomes even more challenging compared to the past where it was more a question of getting these to site and without ensuring that they may, for instance, have to have transfer risk. So I would say we knew that the risk was there. It's not a, let's say, an excuse, but we knew that that risk was there. So seen from my point of view and as they are moving from the fourth quarter into the first quarter, it's not that everything equal problematic. Of course, the additional cost that we have incurred of the EUR 125 is, of course, as I see it, much more problematic.
But I may add that when we are looking at the risk adjustments for weather, for cost of delays, that is something that we do follow and that we do calculate with. We use statistics statistically of how many days we should account for at different parts of the world, at different parts of the year. For the last part of the year, we are very much talking about Europe and then Northern Europe, to a large extent, Germany. And some of you may have known that it has been extremely windy during most of December, which has made that we have had some very serious blown-out days and thereby standby charges with the activity that we had planned for December. But it is not that it is not something that we look at, but it doesn't mean that we just take worst case every time.
But it is something that we do calculate that, but it has been excessive.
Great. And just a quick follow-up. Ditlev, what has changed in the wind market since we heard from you guys last? I mean, any new revelations that you care to share or any trends that you're seeing that may be developing that would either benefit or hurt 2012?
Well, I think that the wind market is one thing. Another thing is, of course, the economy in general. I don't think we should spend time on that. I think at least we can say that based upon what we have seen so far, that obviously in 2011 in particular, for instance, the Chinese market has not at all developed at the speed that was anticipated when the year started. As far as I know, then the order intake that we have realized in 2011 is the second highest ever. In my own personal view, it is that the competitiveness of Vestas in a very demanding industry at the moment is still very strong. That is not to take away the focus from these issues that we are addressing here today as well on the preliminary basis.
But if I look at where Vestas is standing in a challenging market, I still believe Vestas is very well positioned. And the order intake is, in my mind, reflecting that. I will be interested to see how order intake has developed throughout the industry, but I do think that with the 7.4 GW that Vestas has received the first year in 2011.
Thank you, Ditlev.
Pleasure.
The next question comes from Andreas Willi from JP Morgan.
Good afternoon. A couple of questions, please. The first one on the change in the organization structure. Have you mentioned before what that could cost? Is this about a change in the structure? Is this going to be actually a restructuring program with a restructuring charge attached to it? In terms of 2012 guidance, given what happened again in 2011 and just how unpredictable the industry is and how unpredictable Vestas is, does it make sense for you to still provide guidance to the market? Are you having this debate internally, or do you want to continue providing financial guidance to the market? And on the EUR 125 million higher costs, that's a pretty large number if we just basically look at that for one quarter.
If one analyzes it and assumes a certain salary per head, it looks like incrementally 6,000 more people working for Vestas in terms of the scale. Even for a company like Vestas, it seems a very large number. So anything more, you can say how this can have developed over the last few months because obviously there was no indication of that, neither with the Q3 results nor with the quarterly update in December.
Okay. Let me take the organizational and the guidance, and then Henrik can comment on the numbers. From the organizational cost, we'll come back to that on the 12th of January. But as it says in this statement, the significant change of the whole organization will be presented on January 12th. I think I will leave it by that phrase today. Concerning the guidance principle we mentioned at the Q3, that we were now reviewing the future guidance principles for Vestas. It's clear that the sensitivity on earnings and revenue with those principles that we're using today is making it very difficult.
There, I think as we also mentioned at the time when we changed in connection with that, that the cash flow and following the cash flow would probably be a better barometer to follow the development in the company instead of those fluctuations that we will see. We will, and we are working and debating it, coming back to your question internally, what will be the best way to try to give people the, let's say, the knowledge of how Vestas is progressing without putting ourselves in such a tight spot where we are subject to just a few issues can make a huge impact from a revenue and earnings point of view. Then there was a question on the cost, Henrik, on the 110.
Yeah. And certainly, do absolutely recognize that the EUR 125 million is a lot of money, an excessive amount of money. And if we break it down to what is to the development cost of industrialization, the EUR 70 million, then it is not that we have had the entire R&D department suddenly on that job, but there have been resources at the R&D department, quite a number of them, to expeditiously address the issues. And the issues when it comes to documentation to the sub-suppliers that we do require and that we have instigated gates that shall assure procurement processes and quality standards that we can trace as per the entire industry. This has done that a number of suppliers have come back to us and said, "Well, you have not communicated this well enough.
If this is what you want, then it is at a different cost, at a different also in terms of qualification of our factory. You will have to pay for that. You will have to pay for that. We will have to be on standby to do some of this. There have been on drawings that for serial manufacturing when we have them received the item, the hole has not been in the right place of the component to assemble to the other one because there was a mistake on the drawing to assure that we got that fixed. Of course, we then have cost in terms of that component that then will have to be scrapped.
So when we are recalculating the whole thing into people, then I can rest assure you that it is not all people, but it has to do with the inefficiency both in our own factories and our own supply chain arriving out of the industrialization of these products as well as from the subsupply chain. However, it has been important to us not to abandon the process that shall assure that the turbines that we are installing in the field are as per the specification and that we have all the tracing numbers and are able to monitor it, and we do not have to go out afterwards to fix these machines.
Right or wrong, compared to what not only Vestas, but I think the whole industry has suffered from in the past, we have been very determined on that if things were not documented as they should be and if there were things that were not lined up for future efficient serial manufacturing, it had to be changed now.
Thank you very much.
Most welcome.
The next question comes from Matthew Yates from Bank of America.
Hi. Good afternoon. Hopefully, a couple of easy ones for you. Can you just give us some extra information on regionally where the deferred deliveries were concentrated, if at all? And then likewise, on the large amount of undisclosed orders where you saw particular strength in the quarter. Thanks a lot.
Well, it's mainly Europe. We are reporting on three continents. Where we have been lacking compared to the order guidance or the order intake has been mainly Europe. This is where it has been coming from. Europe consists, I wouldn't say traditionally, but very often, apart from offshore, of projects that are on a smaller scale and thereby on announced orders.
It was also in Europe where we had the majority of the delays.
That's correct.
All right. That's fine. Thank you.
The next question comes from Mark Freshney from Credit Suisse.
Good evening, guys. I just have two questions. Firstly, I think on page four, you make the statement, "The new organization will include input received by the company from a number of institutional investors." Could you just clarify exactly what that means, i.e., does it mean a new equity issue might be required? And just secondly, on the additional costs, I think the EUR 125 million, can you just confirm that those additional costs are mostly cash in nature rather than impairments? Thank you.
Okay. The input received from a number of institutional investors has nothing to do with equity. We mentioned in the Q3 that the future Vestas, we have been looking very much to we said we look very much on a more inclusive Vestas going forward. And therefore, we have also had a number of input that we also taken into account in connection with the future development of the company. And that's how this is to be understood, but nothing to do with equity. And then on the 125, Henrik?
Yeah. Whether it's good or bad, I'll leave to you, but I can certainly confirm that all of it is cash. There is no impairment.
Just to fund these extra costs, can you confirm that you won't be needing new equity in the coming months?
We can also confirm that.
Okay. Thank you. Very fair.
Now, I need to make sure that it's understood right. I can confirm that we do not need new equity in the coming months, period.
Thank you.
The next question comes from Daniel Patterson from SEB.
Yes, sir. Good evening, gentlemen. I have a couple of questions. In the fourth quarter, you're saying that you're shipping 1.5 GW and at the same time, you're also sticking to your positive free cash flow guidance. For me, that really implies that there's probably been a positive working capital benefit to cash flow in the fourth quarter. And here, I'm not really talking about the sort of the accounting cash flow or working capital change. I'm talking about true underlying inventories and things. Is that true? There was a benefit there?
That is correct, even though we don't have a full financial statement as we have not consolidated, and we don't have thereby a full complete picture. But I can tell you from all the records and other mechanisms that we have that, yes, there has been a positive net working capital development.
Okay. Then secondly, on the order intake in the last quarter, obviously, that's been very strong, and you met your guidance for the year. Did I hear you correctly in saying that most of the orders here in the fourth quarter were from Europe? Was that right?
Yeah.
That is correct. Okay. The reason I was asking was whether there'd been any sort of late-year sort of flurry in the U.S. as the cash grant has sort of fallen away by the end of last year. Can you comment on the development on that?
On the U.S. situation?
Yeah. The U.S. situation with the cash grant now sort of being behind us and only the PTC ahead of us. What's been the order development among clients?
Well, traditionally, the orders that we get in North America are the ones that we also announce as they are normally and with a certain size. So I think you, from the announced orders, already have a good picture of what we have seen in the U.S. As is mentioned in the stock exchange announcement as well concerning the future organization, our concern on the United States is not related to 2012 but 2013. Obviously, Congress, before going on Christmas break, did not include the PTC in the tax discussions there. They are now discussing to come back and look again in February. Time will tell. Obviously, the big concern, I think, from Vestas' point of view is how 2013 is going to be impacted both with the ITC but also the PTC situation.
And just to clarify, when you're saying you're not too concerned about 2012. Are you talking about new fresh orders in the US or installations?
Well, it's clear that first and foremost, we are looking at a positive activity level in terms of installation, production, commissioning. How the order intake is going to develop in the United States in 2012 is, of course, going to be very dependent on how people see the 2013 situation for sure.
Yeah. Absolutely. Okay. One final question. This is probably for Henrik. On the EUR 125 million costs, you're stating that, if I understand it correctly at least, that EUR 25 million of the EUR 125 million are provisions and write-downs made for discontinued products and two specific projects. And my question is here then, are these sort of provisions and write-downs, are they sort of warranty or guarantee provisions, or is it more like execution and installation of specific projects?
Well, for the write-down, it pertains to discontinued products, predominantly the V82 that we have phased out and that we are constantly monitoring of how we can realize the last ones we have into cash. And then for the two specific products, these are two specific customer-owned projects that we have that the customer believed that he has a special claim for special matters that we have found it prudent that we are making a provision for. This doesn't mean that we necessarily find it that it is us who shall compensate the customer for his perceived loss.
Okay. That was very clear. And if I may just make one final remark on your planning for guidance, I think it's probably a very good idea, like the other gentleman said, that maybe stop guiding on P&L items and guide more on cash flow items. I think that would make more sense. Thank you very much.
Thank you.
The next question comes from Martin Prozesky from Bernstein.
Good evening, gentlemen. A few questions from my side, please. The first on just coming back to that U.S. guidance, the statement in the report about the uncertainty. What I read in there is that it seems like if the production tax credit does not get renewed, that there will have to be big changes in the U.S. Is that how you're thinking about it, or are you just waiting to see how that develops in the next year? The second is on hello?
No, go ahead. Sorry.
So the second one was on your credit facility. Can you tell us how much of it's undrawn at this stage and how much credit facilities do you have? And then another statement in the a sentence in the statement around production stoppages at suppliers, that was also a part of the reason for the cost overrun. Can you just give us a bit more color on that, please?
Yep. Okay. Let me start with the US. What we said also at the Q3 announcement is that the US or the production tax credit in the US is always something that is of concern to Vestas, and the United States is an important business for us. What we are therefore saying on the 9th of November and also saying now is that when we present the organization on the 12th of January, that needs to be seen in a two-step process, basically. Firstly, we need to make sure that the rest of the Vestas organization, that means the non-US, is able to cope with if we get a very negative situation in the United States in 2013. And we will then, when we get to around the fourth quarter, probably 2012, have to decide specifically what we're going to do with the US operations.
We are not going to sit and wait for the development of the United States by adjusting the rest of the Vestas organization for a potential challenge in 2013. We are starting that preparation already now. We will take US as a second step when we see how things evolve during 2012.
And then the question on the credit facility, the working capital requirements, since we expect the cash flow to not change our guidance on cash flow, this means since we opened the year with a net interest-bearing debt position where we had positive cash balance on our working capital facilities, that we will have that again. And about the size, I will refer to what we have previously announced when we went out in midyear and renewed our working capital facilities, and they are all still in place. And then there was a.
Maybe you should just mention the size. It's EUR 1.3 billion. Sorry?
Yeah. Evolving.
Evolving at 1.3 on a five-year period.
Yeah. Plus.
But that's the credit facility.
And then you had a question that I didn't quite get. I'm sorry. About the subsupplier?
Yeah. They were saying there were some production stoppages at suppliers as well as at Vestas. Can you just clarify what happened?
Sure. When it comes to the industrialization, industrial manufacturing, as I said, we have been extremely rigid on making sure that it is documented as per the process that we have instigated to assure not only future quality but also cost efficiency of the production. This means that we have also made these requirements to our subsuppliers. You may be familiar with the PPAP from the car industry, which we, as the first ones, have adopted to that. When we have been qualifying and helping our subsuppliers getting to that documentation level, then it has, in some cases, meant that their production had to stop if there were drawings that were not quite as they were supposed to be or if there needed to be changes to the manufacturing documentation.
We have been very rigid in then stopping the line and thereby meaning that we have caused also stoppage at our subsuppliers, which, of course, they have claimed Vestas for.
Then just one final question, please. On the free cash flow, were there any changes in Q4 to CapEx spending compared to plan? Did you pull back on any CapEx given what you saw on the delays, or was CapEx executed as expected?
Now, unfortunately, we don't have the full financial statement yet. I cannot give you a very precise answer. But give or take, CapEx were running as planned.
Thank you. Thanks very much.
The next question comes from Ben Backwell from Recharge.
Yeah. Good afternoon, everyone. I just wanted to ask on the new order intake. I was kind of surprised about how much of this was unannounced orders because I think on the last day of the last day of the year, you were still reporting something like 6,245 or something like that, which is a very kind of unusually large amount of unannounced orders. Could you just say a little bit about that, why that's happened? I know you've said it's partly because a lot of the orders came from Europe, where you tend to get smaller orders. But even so, it seems like a very big kind of discrepancy.
Well, not to be in any way cocky, but a discrepancy we like. There is no doubt about that, Europe is still, for good and for bad, Vestas' most manifested position within this industry. And when it comes to the customer base and also particularly the produce in Europe, many of these are not of such a size that they do qualify for announcement. However, when they come so late, this does mean that they have not been pre-negotiated and they have not been conditional orders, but they have been awaiting down payment or another condition before that they would turn into our classification of a firm unconditional order. And a number of these conditions have been removed here late in 2011.
Typically, the unannounced orders have been about 400 MW-500 MW. Is that right? It's more than double that this time, right?
I think when you look to Europe overall with the interest for renewal, then Scandinavia and Sweden have shown some very positive developments. When we are looking to the Central European countries in Eastern Europe, I think we are enjoying a very strong position. We are repowering in Germany in the German approach to wind. With our position in Germany, I think we have that you need to factor some of all these things in.
Ben, just a further point on this. As is mentioned in the announcement on page 2, then some of our customers have chosen to postpone signing of contracts for some major orders or a number of major orders from 2011 to 2012. We still got to the 7.4 GW.
Yeah. Okay. Thanks.
You're welcome.
The next question comes from Faisal Ahmad from Handelsbanken.
Yes. Faisal Ahmad from Handelsbanken Capital Markets. A couple of questions. First one to the postponed contracts or the major contracts which you just mentioned. Could you just give a bit more flavor on that? Why has there been postponements and which regions are these orders related to? And maybe also a bit about the magnitude of these orders. And the second question really relates to the problems which you've had with your subsuppliers and respecifications and all that, what you've mentioned during the conference call. I mean, how confident are you that those costs are contained now with the EUR 70 million or EUR 125 million euro cost which you're taking Q4? And to what extent can this continue to be an issue going into 2012? And I'll stop with these two questions.
Okay. Let me take the postponement of contracts. We normally never comment on unless we have to through the stock exchange on contracts that we are negotiating. But it's clear, I think, that despite the financial crisis, then the wind as a sector is still being viewed, fortunately, by some major players as a very important part of development of their overall energy activities. And I think it's also clear that without going into details, but at least there are for sure some probably financial institutions and banks that have preferred not to do this at the end of 2011 but maybe wait for the next year. But I think and then I just would like to say, I think, that still there is still good activity out there despite the challenging world that we are in at the moment. And then the suppliers?
Yeah. When it comes to the subsuppliers and if it has been contained during Q4, now we are just diving into this. We have been delivering a number of both the V112 and GridStreamer. We are confident that the process is established that assure the control that the machine's going out, that they are okay as they are supposed to be. We will, of course, need to look much more into here. So when we come into February 8th to make sure, is this then it? Indicating from what we are delivering, then at least it looks like that we are on the right side of it. We will need to look more into the details of this, sir.
Okay. And just a follow-up question. How can you be surprised so late in the quarter by these problems? I mean, these problems must have been evident for you, I mean, during the second half of the year if you've had problems with your subsuppliers. And to what extent do you need to make some part of recalls on back of this? Could you also comment on that?
Sure. If we start with the last part first about recall, we do not expect that we need to make any recalls whatsoever. As I said, it has been absolutely imperative to us that we are not shortcutting the process to assure that the products that we do deliver, that they are fully compliant. The standing order has been to the organization that then rather postpone. When it comes to the excessive cost that has come in and why we only discover that now, then there is no doubt about that the pressure on putting these products into serial manufacturing where basically all of it has been for Q4 has been enormous on the organization and certainly also on the suppliers. And now we need to look more into, again, the particulars of it.
But a number of it are charges that are now coming out from the subsuppliers coming back and saying, "Well, your documentation was not okay. You asked us to make changes to require to update the documentation. We have had materials. We have had this. We have had that that you need to account for and compensate for." And all these details, we will need to dive into here to get a full understanding of that and come back on.
Okay. Thanks. Thanks.
The next question comes from Claus Almer from Carnegie.
Hello. A few questions about the extra cost associated to this V112 loan. Could you please put some more color on the nature of these issues? Is it design issues? Is it need to further improve? Is it technical matters or another thing?
Sure. I can tell you that from a performance point of view for the products, that is not the case. It is not a design about functionality. It's not a design about lifetime expectation to the products. However, it is about the industrialization for serial manufacturing, the fact that we have pieces that are actually designed for serial manufacturing and not for project assembly, so to say, where they are made special for this and that. It is very much a matter about the documentation. So we have the traceability on the components, should there be anything at a later stage so we know and have control over the serial manufacturing, not only at Vestas but as much at the sub-suppliers. When it comes to the industrialization itself, then we must recognize here that that planning that has gone into that, that has not been adequate.
But the product itself, we have had so much focus on assuring the technical capabilities and the performance capability of the products that we are very confident on. And we have seen those that we have started up, that we have delivered; these products are performing. However, when it comes to the industrialization for serial manufacturing of them, that has been inadequate, absolutely.
But how has that been possible? Given all your focus on Six Sigma and so on, I mean, it seems quite strange that one of the key issues you have raised in seven years now, you lack the focus on this.
Yeah. I'll say when we look at if you go back to not only Vestas, but I will also claim the launching of products in the wind industry in the past, the problem has been that we have not been diligent enough as to the industrialization processes as, for instance, the car industry. We have taken a step with this, and that is where we need to go. And we are going to stick to that, that we have not been good enough. And that, of course, we need to look into. But exactly the Six Sigma requirements, the requirements too that we do not deviate and we do not compromise on quality, that is exactly what is causing that the costs show up here and then prevent it from showing up at a later stage. But that it is not good enough to fully recognize.
Of course, it is something that we will need to dive into to get a far better detailed understanding of, so when we are presenting the annual report on February 8th, that we can address this.
Okay. Then maybe a follow-up on this.
Yep. Sorry?
That if you did not have these issues in the German factory, then you would have had 500 MW or so of the V112 and other turbines of the GridStreamer installed. Would that have caused any issues given these extra costs? Or is it just the documentation? So there would be no issue having 0.5 GW installed?
I just need to make sure I follow your thought process. If we had not had.
Yeah. The German generator issue in Travemünde, then you would have installed around 0.5 GW turbines in Q4, I guess. And then you will have all these turbines out spinning with a lot of guarantees. And then late in the year, you would realize that you have not all the right documentation and so on. Would that have caused some significant issues for you?
Most likely. To be very blunt with you, who has followed Vestas over its 30-year life, that is exactly what has caused the problems in the past and why we have had excessive consumption on the warranty accounts. And also for our customers, products that have not been performing adequately enough. So when we are talking about lost production factor, this is where the customers would be hit. And we would be hit on the direct warranty accounts with the claims of repairing and retrofitting the products. So most likely, that would have been the consequence, yes.
Okay. And then my final two questions. Is there any read-over to the provisions to be made in 2012 from these extra costs and documentation issues? And the second and last question will be, these two troublesome projects, is that V112 projects or some old ones?
The last one first. These are some old ones. They have nothing to do with neither V 100 and V112. They are far further back. And the question before that was provisions. Could I ask you to repeat it?
Yeah. We have seen in the last couple of years that you've been able to lower your provision levels. However, given these issues you have, does that mean you will need to take up the provision level for 2012?
No. We don't expect that because we are actually now here taking the issues up front that shall exactly assure us that that shall not be necessary but to assure that we do not put inferior products out in the field and thereby will have to start increasing warranty conditions. This is exactly the reason why we have been so adamant about that we are not shortcutting the process in any form or fashion. So that is not the issue.
But can you be sure? But can you be sure that you have found all issues? I mean, given this late discovery.
I guess as sure as anyone can be with our processes that we are going through with our approach to quality and Six Sigma, we feel very confident that the products that we are sending out the door, that they are okay. Can I guarantee you that there is not something we have not thought about that we have not seen before? That possibility will always exist. But the approach to Six Sigma makes the probability of that happening far, far, far less than what it has been ever before.
Okay. Also congratulations with the stronger order intake in Q4. That was all.
Thank you.
Thank you. The next question comes from Peter Rothausen from Danske Capital.
Just one follow-up question on the production cost. The mention that you expect 2012 production cost to go down. Is that including the 430 MW where you have additional costs 4 Q?
Well, for the 430 that has already been manufactured, I presume these are the ones that you are referring to, Peter. Yeah. It must be. They are sitting with the manufacturing cost they already have. So when we take them to the P&L, they will have that cost. But for the rest of those that are going to be manufactured in 2012, we expect to be able to reduce the cost, absolutely.
It's more that if you aggregate all of the products you expect to produce or let's say the products you expect to produce during 2012 and the 430 MW, if you take it aggregated, still then expect that production cost will go down?
Yeah.
Okay. Okay. Thank you very much.
Thank you.
The next question comes from Sean McLoughlin from HSBC.
The other one's the cost per megawatt.
Good afternoon. I had a question about your additional installation costs as part of the additional costs of developing your turbines. Can you specify whether that refers to the V112 or to the GridStreamer?
Well, physically, a number of these turbines that were installed were GridStreamer and V112. So in that sense, yes. But it has nothing to do with the product itself but the fact that cranes, manpower, transportation, everything had been mobilized for executing and installing these turbines. However, when we are blown out because the wind is too high that we can actually operate the crane, that we can take the blades in the air, that we can take the nacelle in the air, then we have the standby cost. We have a manpower cost. They need to sit readily available if we can find a two-hour window where we get below eight meters per second where we can actually go out and operate. So the extra installation cost has to do with crane, manpower, and all that and not the product as such itself.
There are also installations that this pertains to that were not GridStreamer and V112. In essence, you have no matter what turbine it is, the same issue at any site. However, it has actually.
Oh, excuse me.
Sorry. Go ahead.
You're suggesting that this is actually a weather-related issue that you weren't able to install them?
That's absolutely correct.
Understood. And then I guess my next question is, how do you then protect yourself from these kind of installation issues once this turbine is actually fully commercial?
So you are thinking about on other products that since we are operating generally on windy sites of how we avoid that we have these standby charges? Was that the question?
Correct.
Yeah. Normally, in the contracts, we do have a certain number of days where we are excused and that we do get relief. And when we are calculating the cost for the products here, then we do incorporate that there will be days that we are blown out. However, to the excessive wind that we have had compared to the statistics here during most of December, if we have excessive days outside of these statistics, we may very well have the extra cost. Now, in this case here, we had premobilized due to the fact that we were late with the delivery of these machines. Generally, we are trying and that's, of course, part of the negotiation to have excuse for these costs with the customer and thereby get the customer or ask the customer for certain compensation. That is individual from contract to contract.
Now, this, of course, only applies where we have the installation and where it's not that we are just to supply the wind turbine. But generally, it is not an unknown phenomenon for us. It is excessive here because we had pushed a number of particularly 112s and GridStreamers to very late in the year due to starting with our manufacturing delay and the other delays that we have had that we premobilized and therefore took that cost.
Understood. You expect this is completely resolved? In other words, you don't expect any delays to fall over into Q1 2012?
No. A part of why we were trying to accommodate customers is the fact that many places, particularly in Europe here, the feed-in tariffs when you cross the end of the year actually drops. So there is a very high incentive to make sure that you are actually getting the turbines up in due time because if it should go by the winds, you should install during the summer. But that's unfortunately not how they look at it.
Thank you.
Most welcome.
The next question comes from Shai Hill from Macquarie.
Yes, hello, gentlemen. Just really one question, I suppose, which is obviously, the former guidance for 2011 on EBIT margin was approximately 4% for this year. Do you think you might get to a level of around 4% for next year, 2012?
We have not given any guidance for 2012 and we will do that on February 8th. We can only say that in connection with Q3, we mentioned that on a normalized U.S. market, we would expect our ambition is to get Vestas to a high-end single-digit EBIT number.
Okay. Thank you, Ditlev.
You're welcome.
Patrick Hummel from UBS is back online. What question?
Yes. Thanks. Two follow-up questions. One on cash flow going into 2012. I mean, as you say, you had a significant benefit in cash flows in 2011 thanks to the reduction of net working capital, but that effect can't be repeated every year, I guess. So is it fair to say that net working capital levels from now on should be stable or even could go up if there is, for example, a lower level of prepayment with the new orders? Can you maybe comment on that part a bit?
And the second question, take it as a question or a comment, what strikes me a bit is that you or your spokesman have been in the press in the past few days confirming or saying that they were confident that Vestas made the order intake target and just three days later you come up with a significant warning on cost overruns. I mean, have you just discovered those cost overruns in the last couple of days or is it just a bit of an odd disclosure that you made in that case?
Okay. Let me just comment on the cash flow question. Then I would say we have said that in connection with Q3 that we expect to have a positive free cash flow in 2012. And that's what we have said. And I think at this stage, I think we all have to remember this is not a full-year result. This is on the 3rd of January today. So we'll have to come back on that. And then on the other hand, I talk about the cost overrun.
Yeah. And with regards to the cost overrun, I can understand why the spokesperson or investor relations have been stating that because if we had known it earlier, no matter how unpleasant it is, we would, of course, come with it earlier. As Ditlev just said, the announcement here today is caused by the fact that we have learned from the preliminary reporting coming in and closing out the manufacturing orders and other reports that there seems to be an overrun here that we need to address. And that is why we are on the call here tonight. So had we known this earlier, we would, of course, have reported this earlier as it has been stated a number of times, which we fully concur with. The amount is not just something that we think is insignificant.
But we will have now to dive more into the particulars of that so we can get back on it on February 8th.
Okay. Thank you, Patrick. Operator, how many more questions do you have?
We have two more questions at the time.
Okay. We'll take those two and then we will close the call.
We have a question from Patrik Setterberg from Nordea . Please go ahead.
Yes. Hello. Just two quick questions. Given the problem you have been having with the V112, are you still going to be quite aggressive on your investments for the V164 in 2012?
Well, I think it depends how you look on the V112 challenge. I might see a little different light than you're expressing. But we have no plans to change or any change plans changed in regard to the V164.
You're sticking to your positive free cash flow guidance for 2012 and as well your CapEx guidance for 2012?
We have no changes to what we said back at the third quarter.
Okay. And then another quick question. How many V112 turbines have you actually delivered to your customers at this stage?
Well, now we are getting into technically if you are thinking about those that have been turned over to the customer and thereby is over the P&L or if those that are out at site during installation. If it is the first one.
Just, I mean, how many V112 is operating now then?
Operating? Okay. About 70.
Okay. Thank you.
Most welcome.
Our last question comes from Daniel Patterson from SEB.
Hello again, gentlemen. One follow-up question on pricing. Obviously, the order intake in the fourth quarter is very strong. The implied pricing is 1.03 the way I work it out. Seen in the light that you had almost 1.4 GW of orders in the quarter, at least announced, for the V100 and V112, including one big one for offshore, is that then the 1.03? Is that pricing? Is that satisfactory for you?
I think when it comes to the pricing, we are trying our best to find both the best product and the most, of course, competitive Vestas product to the appropriate site and where we are looking to also our total offerings to our customers to, of course, maximize the product for Vestas. And that's why you will see very large variations depending both on the scope of work that Vestas can take but certainly also depending on the particular site of the competitiveness of that product compared to customers' alternatives. So when we are talking about average pricing, then it becomes extremely very much average where you will see Vestas have some very high-margin products and you will see Vestas have some that are not so attractive. We are assessing that with each and every customer if we find the deal attractive for Vestas.
There are many parameters that we look at, both the terms and conditions to cash flow, to available capacity, etc., etc., etc. So to us, it is the individual deal that will determine if the price is attractive or if it is not attractive. But for the overall portfolio, I don't think it's that bad.
Okay. Very clear. Thank you.
Okay. Do you have no more questions, Operator?
We have no further questions. Thank you.
Okay. Thank you all for participating.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.
Market. Concerning finding strategic investors, then I can say we have no plans we.