Vestas Wind Systems' CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Vestas Wind (VWDRY)

Vestas Wind Systems ADR (OTCPK:VWDRY) Q4 2013 Earnings Conference Call February 4, 2014 3:30 AM ET

Executives

Anders Runevad – Group President and CEO

Marika Fredriksson – CFO

Analysts

Claus Almer – Carnegie

Lars Heindorff – ABG

Fasial Ahmad – Handelsbanken

Robert Clover – Recharge Insights

Lane Greene – The Economist

Clemens Bomsdorf – Wall Street Journal

Kristian Johansen – Danske Bank

Pinaki Das – Bank of America Merrill Lynch

Sean McLoughlin – HSBC

Daniel Patterson – SEB Enskilda

Patrik Setterberg – Nordea

Jacob Pedersen – Sydbank

David Vos – Barclays

Daniel Patterson – SEB

Mark Freshney – Credit Suisse

Sean McLoughlin – HSBC

Mark Schindele – Nordea

Alok Katre – Société Générale

Klaus Kehl – Nykredit Markets

Anders Runevad

So, good morning everyone and welcome. We have a busy schedule today. So, I will dive straightly into it. The Full Year of 2013, of course Q4 as well, outlook for 2014 the full year 2013, outlook 2014 and the strategic update.

So, I will start and I will start to talk about the completion of the turnaround program. Those of you who attend these sessions regularly recognize this slide, three key objectives, reduce cost, reduce the investment and improve capacity utilization. That has been the cornerstones of the turnaround program.

Looking at achievements and starting with fixed cost, we had an objective relative to plan or the saving above €400 million and we have achieved €484 million.

In the quarter, so in Q4, fixed cost was reduced with €121 million compared to fourth quarter of €11 million. The majority of the cost savings comes from reductions in the number of employees which leads me to the next slide where you can see that employee reduction for 32% and close to 60% of that was salaried employee, which of course is important for both the flexibility and the fixed cost.

Moving over to CapEx, and as I said, CapEx requirement has been reduced with more than €500 million compared to previous run rate on 11 and before and we also then guide for a CapEx during 2014 of approximately €250 million.

So CapEx have been reduced despite the fact that we have launched a number of new products into the market during last year. Five new products and of course on top of that, we continue the development with our new turbine, the V164, 8 megawatt for the offshore markets.

And that leads me to another important milestone during last year and that is the agreement with Mitsubishi Heavy Industry to form a joint venture to address the offshore markets.

We are on track both on when it comes to establishment of the joint venture which we expect to happen in April of this year and when it comes to the development plans where we announce last week that we have produced the first kilowatt from the 8 megawatt turbine.

So, high expectations for the joint venture to be able to take a leading position in the offshore markets.

For Vestas, this also means, going forward, a lower and more flexible CapEx set up. Some words about the capital efficiency and capacity utilization. We ended the year with negative close to €600 million in net working capital, very much driven by improvements in operation, installation time, inventories, better time planning and better control.

And we still see some head room or some improvements in megawatts under completion, even though of course we had a big quarter when it comes to delivery in Q4 of last year.

On the manufacturing side, we have gone from 31 to 19 factories while we have maintained a good global footprint and we feel confident that within the existing factories that we have, we have the capacity for ramping up.

That then leads to a good improvement in return on invested capital. Two main drivers, the improved earnings and of course also the better capital efficiency.

So if I summarize then, the turnaround program which is really the foundation now for a more agile and leaner Vestas going forward. So fixed cost savings of close to €500 million. CapEx requirement lower with more than €500 million and net working capital by the end of last year is negative €600 million.

So, good improvement in the operation during last year and we see that in the result in the Q4 with double-digit EBIT margin in the quarter and overall then free cash flow for the full year of about €1 billion.

At the same time, we have decided then to also – from the balance sheet of the company with a capital increase and we also have new banking agreements and that is to increase the competitiveness of the company going forward and generate better business.

And I would come back then to talk more about the strategy, but first, welcome Marika to go through the numbers in a bit more detail.

Marika Fredriksson

Thank you, Anders, and so, what I will share is, how is the turnaround plan that Anders have taking you through reflects on the financial.

As we said already in Q3, we expected a busy Q4 and even though the revenue is down compared to last year, it was compared to the other quarters during 2013 a busy quarter. But you can see on the gross profit that we have improved quite considerably and I would say a lot of what was accomplished in Q4 was also due to really a flawless execution of that particular busy quarter.

That is also not only reflected in the gross profit, but also reflected in the EBIT that we delivered in Q3. And we manage to deliver double-digit EBIT margin more than 10%. So a great improvement compared to last year.

And how that correlate to the full year, of course, the same pattern as Q4 had a big impact on the year, but the main driver here I would say is really the volume reduction and still improving the EBIT from €4 million to €211 million.

So this is really fixed capacity cost focus has delivered and that resulted in 3.5 margin for the full year and also note here that that includes a bonus of €97 million. I will come back to that on the bridges.

So what you can see here, for Q4, the volume has a negative impact in the quarter, as such, you also see that we had a better margin compared to last year. And so you see that the product margin more than offset the bonus provision. So we ended up at €240 million and a margin of 10% in Q4.

In the full year, of course project volume overall, as we have had a headwind throughout the year of 2013 when it comes to volume, but also improvement here on the project margins and we said already in Q1 that that was not representative because we had a couple of really low margin projects in that particular quarter and we of course, saw that was Q2 and Q3 in terms of margin improved.

But what is important here that the project margin together with the achievement on the fixed capacity cost really offset both the volume headwind as well as the bonus provision. So, the EBIT for the full year is €211 million compared to €4 million in 2012. So, again, a 3.5% margin for the full year.

Service continued to grow with stable margin and that you can see around one-third of the number of employees are in connected to the service business. We should bear in mind here that these are really revenue generating headcount.

If we look at the balance sheet, current assets are down and that is mainly due to the reduction in inventory for 2013 and I think the highlight of this part is really on the balance sheet. It’s really the net debt is negative for the full year. So we have repaid our debt in twelve months.

You also see the positive development. We have a negative working capital of 596, I will come back to that in more detail and I’ve spoken about it before. Solvency ratio improved from 23 to 27 for the full year.

So, when we look at the change in working capital over the 12 months, we said in the midst of the year that we have a working capital program that we are driving for 2013 and that will also continue in 2014 and we had approximately 80 different work teams focusing on reducing the receivables and in particular the over dues and that has also been delivered successfully.

We also had a lot of focus on the inventory and the megawatt under completion has always been sort of the bottleneck in Vestas. But we have managed to improve all of the parameters.

We have made sure that the changes we made at the processes are embedded in the way we were also in the processes. So we try to avoid any one-time effect improvement. And if you look at Q4, you see the flush out of inventory.

So, we should bear in mind here, this is not only a Q4 exercise, you have seen the development quarter-over-quarter in terms of the activities that has been made during 2013.

Warranty provision, you can see warranty provision made and consumed continue on a very good path and also the loss production factor is continue to flattening and it’s now below 2, 1.7 to be precise.

Cash flow for Q4, of course is reflected in the change in working capital that I talked about and free cash flow consequently over 800 million. So, really, really strong performance on the cash side in Q4.

Full year, we have announced that we generated more than 1 billion and of course change in working capital, a very big component in that cash flow, free cash flow for Vestas.

Net debt, you see here, the repayment of the debt. We are a debt free company. We are actually having a net cash position of 86. So I think a really, really great achievement from the company.

Net debt-to-EBITDA is now in negative territory. So quite a steep development here in the latter part of the year. The order intake, we said that, Q4 is going to be very busy and you see compared to 12 of course the order intake has improved and Q4 basically because of the U.S. and I don’t think any surprise that was also announced that that was part of the expectations for 2013.

When it comes to pricing, please note that because of a large order intake from the U.S. that is supply only. So lower prices, but also bear in mind lower cost. So it doesn’t necessarily have to reflect negatively on the margin. And also when it comes to pricing, you have the geography as I am alluding to but also turbine types that will have an effect.

Overall, we see fairly flat pricing on a global basis and as I said fairly flat.

Looking at the backlog, you can see here the service backlog improving slightly down compared to last year on the wind turbine, but combined; we have a very strong backlog of 13.5. So still a strong position for Vestas.

By that I leave the word to you on this.

Anders Runevad

Thank you, Marika. So, let me then talk you about the strategy profitable growth for Vestas. We saw three capital slides on the market environment, talk about the key differentiators that we have and then go in a bit more in detail on the strategy. So, if I start with overall market, two key takeaways on this slide.

First of all, there is growth, fairly modest growth. We ended – market around 3% globally, but a fairly different picture when it comes to new installation and new electricity when it comes to OSD markets, it’s fairly flattish and we see a growth in the non-OSD markets.

So this is overall market. The other part of the market is of course then in Europe and U.S. and then well you don’t have a great need for new energy consumptions but actually then it’s replacement market where existing power plants are being retired and external estimates says that there is about 200 gigawatts of capacity that will be shut down for the next 10 years due to economical end of life and also environmental reasons.

And as you can see then, wind is expected to take a fair share of that market. This market then is of course also then reliant on policies. The replacement incentive for replacing existing power generation that will determine the size and the timing of the replacement cycles.

So, power compared to - if they saw the sort of two main markets of course, the more competitive we are against alternatives, the larger addressable markets we have and that’s why it’s so important to one improving the cost of energy for wind. That gives us both access to a much bigger market on the global scale we ended still only 2%, 3%.

But it also gives more stable market, because we get less dependent on policy decision. Today then, wind in many markets is estimated around fairly listed countries are already on par with gas.

So we have seen lots of positive development and looking at the last five years we can say back then in time you can say that wind has actually improved. The cost of energy with 15% while most of the other alternatives actually have increased in price. So historically, there is good development. Going forward, this is a key achievement for us to continue to drive down.

Then, jumping into the forecast for the wind market is overall down and they saw two different external sources. One a bit more optimistic around 10% CAGR and the other one a bit more cautious going forward. We think that these are good intervals that we have used in our planning process and our strategy process one of our view on how we think that the market will develop.

The differences comes a bit from of course where the starting point is and that will probably get more clarity now as to this year this progress and we see what the market was last year and then I would say the other big uncertainties are of course political policies when they start and end and the other part is around offshore timing and size of the offshore market.

But for us in Vestas reaching these are two good intervals for our planning purposes. So what are the key differentiators for us that went into leverage on also going forward? First of all the installed base. We have an installed base that is 50% bigger than our closest competitor and this is a great asset to have not least when we talk about service going forward.

The last production factor is really what our customer cares out that’s in the end of the day the return they get on their investment from Vestas and as we continue to improve that that will grow the class products but also installations just in time best-in-class monitoring device and get the most out through its installed base. It’s the business case for our clients.

Next thought is the technology leadership around the product portfolio. We have a strong product offering both for different geography market but also for different wind sites.

And last, but not least, is our global reach, of course in sales, but also in installation and in manufacturing and also evidenced from the fact that last year we had order intake of 6 gigawatt and it was spread from 37 countries from across six continents. So Vestas has a global reach and it is a competitive advantage.

Then walking in more to the strategy and if I start with our overall long-term vision is to be the undisputed global leader in wind and I mean to do that by bringing wind on par with oil and gas, being the market leader in volume generate best-in-class margins over the cycle and have the strongest brand in the industry.

So that’s our long-term vision what we need to strive for in the company. We have identified four strategic objectives for the mid-term sort of three to five years where of course we have lots of data, actions and KPIs to drive internally.

Grow profitable in mature and emerging markets, capture the full potential of the service business and then to objectives that enables this and that is through reduced levelized cost of energy as I said that increased our overall addressable market and actually provide some more stable market environment and improve operational excellence.

That’s our own capabilities that enable us together for this profitable growth and of course then the execution of the strategy. So a few more words on each of these objectives.

Growth, first of all, that’s our ambition there is to grow faster than the market. We need to strengthen position that we have and solid position we have in mature markets and at the same time grow our share in emerging markets.

A number of different initiatives to do this, one to highlight is that, a large part of our business comes from strategic accounts, often European or U.S. based they are now looking for opportunities outside the mature markets. And of course it’s natural for us to follow them in their expansion.

We will build this on a partnership based on value the business case certainty and a stable and financially strong company.

Overall, our leverage is our global reach and working as a trusted partner. Next part is the service business and to grow that by more than 200%. We of course have a strong relationship between new orders making sure that is always connected to the service contract and also continue to work on the renewal rate.

But I was to say a great potential in a more segmented service portfolio and that’s also a feedback that I get from having talk to some customers now since I joined Vestas.

We should be able to get more efficiency from our scale instead of which is by doing things consistently in the same manner across the globe and I have therefore also decided to create a new service organization reporting directly to me to get increased focus and transparency on the service business.

And here, we need to leverage on the biggest installed base.

As I said, an important third objective and enabler for the above is the continued reduction of cost of energy and we aim to do that better than the competition and faster than the market.

It’s a lot about the new product functionality with larger rotors, bigger generators. It’s about the cost of the program one, two and three megawatt turbines and it’s making sure that we industrialized the whole process from product development to manufacturing and delivering and use scale wherever we can.

Main competitive advantage for Vestas is that we have the largest R&D organization focusing on the industrialization and cost-out.

Last but not least, operational excellence and that is really to improve our capability also an important enabler in the strategy for profitable growth. Here we look at external spend to lower our variable cost.

Again a modular product design that reduces lead time and costs, so we have cost KPIs in place here as well as continued focus on our fixed capacity cost and we are looking at for example, shared service centers, increased outsourcing and further site consolidations.

So not to lose track of the good work that we have done so far on the fixed cost side. At the same time, of course, working capital, cash flow continues to be very important for the company and here the focus now is on reducing lead time in the total shape.

The key competitive advantage and differentiation for Vestas is the economy of scale that we have and also we have no other business than wind. We are a 100% focused when optimizing this business.

Last but not least, strategies also about execution and a few words with that, as I said, I decided to create a service unit reporting to me also decided to increase the speed of the implementation of decision by adding some members to the group management team.

Overall, when it comes to governance, we need to create more measurable units and actually drive accountability and control of those units in order to increase the speed, the transparency and of course accountability of our organization.

We also decided to instead of buy yearly have yearly strategy cycle, this is a fast-moving market and we need to stay very close to the market and control what we can control within the company.

Overall importance for me is that we work with speed that we simplify and that we drive accountability in the organization.

So to summarize, the ambitions, grow faster than the markets, grow the service business by more than 30%, reduce the levelized cost of energy, faster than market average and improve earning capability. That’s the key ambitions in the mid-term strategic plan that should bring us closer to our overall vision of being the undisputed leader in the wind industry.

Please, Marika, will come back.

Marika Fredriksson

Yes, so, what Anders have taken you through, with that lead to in terms of the outlook and the guidance for 2014. We have chosen to guide for revenue of minimum 6, EBIT margin of minimum 5, total investments of approximately 250 and free cash flow of a minimum of 300.

So a minimum guidance. We expect to continue to grow the service business with stable margins. The mid-term financial targets are wrote and what we mean by that, we say that we will deliver double-digit ROIC over the cycle, but a double-digit ROIC every year and just to transfer that where we are right now. We, actually in 2013 delivered 7.7 with the 2.5% EBIT margin that I showed you earlier.

Free cash flow, positive free cash flow every year and the capital structure, net debt-to-EBITDA to be lower than 1, solvency ratio must be over 30% every year and priorities of excess cash is to payback debt if net debt-to-EBITDA is above the target and allocation to shareholders, ex solvency ratio is above target.

So, we have decided to capital increase of up to 9.99%. That we see a benefit to our customers our suppliers and we also as Anders said, have a new bank agreement. To tie that a little bit to what Anders have talked about in the strategy part, we have now delivered a turnaround plan.

We have a strategy going forward that's very much built on the turnaround plan that we have delivered. So it’s nothing revolutionary is to make sure that we capture and continue to develop what we have done up to this point. So the capital increase together with the bank facility is actually two enablers for us to accelerate the strategic objectives going forward.

So that is one of the main purposes of this capital increase. So, the right bank agreement what does it mean, we have a revolving credit facility up to €850 million. It expires in 2019, so a five year tenure on the facility.

And we have full facility available for project guarantees and that relates very much to what Anders talked about in the strategic objectives on growing in both mature and emerging markets then project guarantees are extremely important.

We have an outstanding corporate bond of €599 million that is falling due in end of March 2015.

Anders, welcome back. I think I’ll stay here now.

Anders Runevad

So, to summarize then, what we talked about today, successful turnaround, really say that in the results in Q4, so fixed cost savings of almost €500 million, CapEx requirement low by more than €500 million, net working capital, negative €600 million at the end of last year. Free cash flow of more than €1 billion for 2013 and improved in operation.

Talked about the capital increase and why we need it to do that was to strengthen our balance sheet going forward and looking now really to change gear, get into profitable growth, talked about the service business, the potential there.

The growth in the different types of markets, relentless focus on making us more competitive against alternative sources on the cost of energy and of course improve our earnings capability are all key for the realizing and executing on the strategy going forward.

So, with that, we should open for Q&A and also then say that we will have a Capital Markets Day on 12th of June.

I understand that our limited time where we can go through the sort of more detail of the strategies today. So therefore we will also do that to give an opportunity to go a step further of understanding the strategy.

Thank you very much.

Question-and-Answer Session

Claus Almer – Carnegie

Hi, this is Claus Almer from Carnegie. I have three questions. The first one goes for cost savings. How much do you expect to see in 2014 as a full year effect? That will be my first question.

Marika Fredriksson

Yes, and as we have said here, we have up to this point made €484 million in savings, in fixed capacity cost savings and we will of course as you are alluding to get the full year effect on those savings for 2014. I think it’s very important to bear in mind that we will of course continue to expand on the good momentum we have now.

So we will continue to make improvements in 2014 as well. We also have a program running, when it comes to cost-out on products, so that will also have an impact on in particular the gross margins going forward.

Claus Almer – Carnegie

But, could you put any rough estimate to the year-over-year improvements?

Marika Fredriksson

Well, we are not disclosing the yearly improvements on there. I think that, what is important to know is that what we have achieved will be maintained and the strive is to do more.

Claus Almer – Carnegie

Okay. Then your share capital increase, I guess, with the positive net cash position, so much struggling to really understand why it was necessary to raise even more cash. Could you please put a little bit more color to why you are doing this?

Marika Fredriksson

Yes.

Anders Runevad

If I start and then you fill in, I mean, as I said, to sum I think we said, we lost our customers during my first five months and it’s very clear that there are a number of different buying criterias and one of them is financial stability for the long-term. These are 20, 25 years investment and that is an important decision criteria for customers. So increased competitiveness and therefore the enabler for better business is one key.

Marika Fredriksson

Yes and to actually expand on what Anders said, if you look at the three – one of the three out of the four pillars in the strategic objectives you have growing in emerging and mature markets. And as Anders said, I mean, we would like – we want to compete head-to-head with our competitors that have a stronger financial position.

We also – when we want to grow the service business, and one enabler there we are of course dependent on the turbine sales, but we are also committing to a very long-term service contract and our customers want to be - know that we are there for the long run.

Also if you look at the operational excellence target, we have the ability with the stronger balance sheet to get better terms – payment terms from customers as well as suppliers. So that of course is an enabler to further improve the net working capital. And as I said before, I think the main reasoning for doing it now is that we by that have a chance to accelerate those pillars in the strategic objectives together with the bank agreement.

Claus Almer – Carnegie

But you are still cash flow positive, but that’s not a question. My third and last question goes for the long-term targets which I guess isn’t that aggressive, can you also put some more colors why you came out with – you are almost at close to 10%. Should we expect your EBITDA growth between €200 million and €600 million over the cycle or how do you look at that?

Marika Fredriksson

What we are saying is that, we will deliver double-digit ROIC every year in the cycle, which means even in a trough. So you can say that, 2013 has been a challenge from the volume perspective.

But we have still delivered a ROIC of 7.7 and an underlying EBIT of 3.5. So that is to give you the flavor that we will be double-digit ROIC even in a trough and obviously that correlates to black numbers in the trough of the cycle on the EBIT margin.

Lars Heindorff – ABG

Good morning Lars Heindorff from ABG. I also have a couple of questions. First of all, like to get a bit of sense for the cost-outs. You mentioned some numbers about sort of the year-on-year improvement in the costs, I think it was €480 million. How much of that is going to be derived from Group cost or how much is going to be coming from the turbine production?

Marika Fredriksson

Well, most of what the focus now in the programs that are running, the programs that have been running up to the closure of the turnaround program have been closed. We are not running any programs on the pure OpEx right now.

That doesn’t mean that we are not continuing to further create efficiency in terms of what we have delivered up to this point. So most of the improvement and the programs running at this point is cost-out on programs. So that will have an impact on – as I said earlier, the gross margin.

Lars Heindorff – ABG

Okay, what – just to stay with that, what’s the kind of utilization are you running at? Earlier you said that you had yearly production capacity around 9 gigawatts following the restructuring and some of the sale of the factories, what are you down to now?

Marika Fredriksson

Well, from a capacity point of view, when we talk about facility machining, we are probably at the 7 gigawatts to 8 gigawatts, but then we would have to – we need to increase the number of employees, blue collar employees. So that’s the flexibility we have created in the company.

Lars Heindorff – ABG

Okay and then the last question is regarding the project margins. In connection with the Q3 report, you ask about sort of the margin in the backlog and I think you said that the Q3 margin was roughly representative for the backlog. Now we have Q4, the margins are looking even better. Can you give us an indication about sort of the margin potential in the backlog?

Marika Fredriksson

Well, we are not guiding on the margins on the project, on the order backlog, what I said is, for 2013, Q1 was not representative because we had a small quarter with a couple of bad projects. Q2 and Q3 more representative and we did a very good Q4. So, to give you some indication, it’s a blend, you will have a blended picture and you will have some differences quarter-over-quarter going forward as well.

Lars Heindorff – ABG

Thank you.

Fasial Ahmad – Handelsbanken Capital Markets

It’s Fasial Ahmad from Handelsbanken Capital Markets. Few question from my side. If you look historically, your invested capital has been very volatile between the years, I mean, if you look ahead in the strategic period the next three to five years, I mean, can you try and indicate what kind of invested capital there will be in the business, if you could indicate some kind of absolute level?

Marika Fredriksson

Well, I will not indicate any absolute level, but of course the efficiency on the invested capital will be part of us delivering double-digit ROIC even in a trough. Even though earnings is the main contributor and that you can also see what Anders presented on the slide, you see the spike upwards in Q3 and Q4 because of positive earnings.

Fasial Ahmad – Handelsbanken Capital Markets

Okay, I’ll try and ask my question in another manner here. How do you want us to think about working capital? Will you be able to operate with negative working capital through the cycle?

Marika Fredriksson

Well, what we – I mean, you would see how we are guiding in 2014. We are saying minimum 6 revenue, minimum EBIT of 5 contributing to a minimum cash flow of 300. So of course that alludes to that we are maintaining what we have delivered up to this point.

So, we are focusing on maintaining the activities that we have had in place and now embedded in the operation and we of course strive to do even further improvements and that will be in particular on the megawatt on a completion.

Fasial Ahmad – Handelsbanken Capital Markets

Okay, and the second question, it relates to your operational excellence, it’s going to continue here. I mean, what kind of costs should we expect in connection with that? I mean, do you have some kind of guidance for special items the next three to five years?

Marika Fredriksson

Well, as I said earlier, we are not expecting to launch any big programs and as Anders said in his strategic part, it’s more continued to work on what is already embedded. So we will look at more efficiency and that will – to a larger degree the processes that we now have implemented and that you can also see one of the process is Q4, that we actually did a very flawless execution of Q4.

Fasial Ahmad – Handelsbanken Capital Markets

Okay, and then just one final question here. If you look at your EBIT margin before the corporate bonus, then you were already at 5% level. I mean, how do you want to make us think about the corporate bonus targets for next year and I mean, 10% ROIC doesn’t seem very ambitious, especially if you look at a 5% pre-bonus EBIT margin?

Marika Fredriksson

Well, as I said, the positive on the ROIC is of course that we are saying we will deliver a double-digit ROIC even in a trough and of course the strive is to be above 10% for the company and as you are alluding to, we are already with the 3.5% margin that we have delivered in 2013. We are at 7.7% ROIC.

Fasial Ahmad – Handelsbanken Capital Markets

Thank you.

Robert Clover – Recharge Insights

Thank you. It’s Robert Clover from Recharge Insights. I’ve got two sets of questions. First on some of the emerging market growth opportunities that you alluded to. Could you perhaps remind us where your focus will be?

And also give us some insights on whether you feel it’s possible to grow profitably in some of these new emerging markets with auctions and local content requirements and also some of the new market segments you expect to these looking at?

Anders Runevad

No, I mean, as I said, I think during last year we took new orders in 37 markets. So, of course it’s a lot of different markets and we’ve seen a very good growth in for example, South Africa, we see lots of interest coming up in Middle East. We see a lot of interest in Latin America.

So, also Asia, outside, China actually we see interest in year two. But of course the big three markets are – one and early market is of course China, India, and Brazil and of course you are right.

As I also said that’s an enabler for us to grow profitable in those markets is that we actually - our earnings capability and of course also on our cost-out program for the turbines that are relevant in those markets and also that we continue to execute on our all strategies – cost of energy. So those are enablers that they are first to take share on those markets.

Robert Clover – Recharge Insights

Thank you. And I’m sorry to come back to the capital increase, but also if I look at your numbers then your projections for free cash flow, it does look as if you could end up this year we’ve got an attractive cash position.

Could you just for the record rule in or rule out any M&A ideas that you may have, do you need to inject any cash into the offshore joint venture and perhaps you could make a couple of comments on what you mean exactly by allocation of cash to shareholders? Do you envisage to buy back some dividends, some comments there please? Thank you.

Anders Runevad

If I start and I mean, the strategy that we describe here is based on organic growth. So to be clear on that, so that’s how we have planned the strategies. We have not included any M&A on that and that is not the reason for the capital increase. There are no changes in our plans with the joint venture with Mitsubishi and offshore as we have communicated before and there are no update or changes to that.

Marika Fredriksson

And the allocation to shareholders, as you saw on one of the slides that I presented, if we are net debt-to-EBITDA, below 1, yes. And also if we have a solvency ratio above 30, we are intending to allocate to shareholders but that of course will be also a decision from the Board both sides. But we have a policy in place which says, 25% to 30% of the net result to be allocated to the shareholders.

Robert Clover – Recharge Insights

Many thanks for your answers. Thank you.

Lane Greene – The Economist

Hi, it’s Lane Greene from The Economist. Just the recent shift in EU climate policy towards climate, CO2 targets rather than renewables targets implicate anything for your long-term strategy?

Anders Runevad

There is actually both. The CO2 target and the renewable target of 27%. The next step of that is of course that that then is to be broken down to fixed targets per market in the EU.

So, that’s the next process. So, before that, it’s very hard of course to predict, but we are working hard on also supporting the next step on getting further clarity on whole of that renewable target of 27% is broken down for 2013. But it provides the long-term clear guidance of where the EU is going.

Lane Greene – The Economist

And how important is it for you that you see binding targets you talked earlier about trying to get away from dependence on public policy if you imagine that even if those targets are not what, you were hoping for, that you will be able to compete and grow profitably without that sort of guaranteed market?

Anders Runevad

I mean, dependency of policy of course creates volatility in the market both on the upside and on the down side. So the policy is both and you see maybe bit artificial high market and if you have no policy you will see a low market.

So of course from a cyclic point of view and a volatility point of view, we would like to see long-term targets that we can plan for and that investors that invest in wind can plan for. So, long-term targets are important.

When it comes to the dependency, as I said, there is a big replacement market especially around coal, some nuclear as well that need to be replaced, that is partly driven by environmental concern and it’s partly driven by end of economic life.

And of course, the speed of that change out will be dependent on what kind of policies are in place and therefore it is important for us for the overall market. But most important is the long-term visibility on the targets and the policies in place because that actually gives us the possibility to plan better.

Clemens Bomsdorf – Wall Street Journal

Clemens Bomsdorf, Wall Street Journal. Do I understand correctly that €2.1 million of the bonuses of €97 million will be paid to the executive management? And second question, where was the last time that Vestas did pay out dividend to its shareholders?

Anders Runevad

The bonus program we have in Vestas is for all employees including blue collar employees. So the bonus provision that we have done is actually for all people working in Vestas and not for executive management only.

There is a description on the executive management pay structure and bonus structure in the annual report. But the reserve that we done for bonus is for all Vestas employees. And on the dividend thus far?

Clemens Bomsdorf – Wall Street Journal

That’s well, I mean, €97 million to all employees and of this €97 million, €2.1 million is going to the executive management because, the annual report €2.1 million that understood correctly now.

Anders Runevad

Yes, perfect.

Clemens Bomsdorf – Wall Street Journal

Thank you and dividend, yes.

Marika Fredriksson

Yes, if I recall correctly and I’m looking at last year on the dividend, it’s 2003.

Anders Runevad

Okay. Okay.

Marika Fredriksson

Okay, okay.

Anders Runevad

Okay, so, operator, do we have any...

Marika Fredriksson

Questions.

Anders Runevad

Questions.

Operator

Yes, thank you. We will now begin the question-and-answer session by phone. (Operator Instructions) Kristian Johansen from Danske Bank is on the line with a question.

Kristian Johansen – Danske Bank

Yes, hello. I just have a question regarding your growth into new markets. How will that impact your project margin in short-term, meaning in 2014 and 2015?

Anders Runevad

No, I mean, for 2014, of course, we have the guidance that we have just given, of minimum 5% EBIT margin. Long-term or mid-term in the strategic plan, the important enabler for us of course to grow our market share in those markets are.

They will be active through improvement its capability with operational excellence focused on margins and cost-out programs and lowering the cost of energy. So those are important enablers in order to penetrate the energy markets.

Kristian Johansen – Danske Bank

But will it not have a dilutive effect on project margins short-term?

Marika Fredriksson

Well, as Anders says – is saying and he also says clearly in the strategy for Vestas is to grow profitable and we are also saying that we want to extend our global footprint.

Kristian Johansen – Danske Bank

Okay. Thank you. That was all for me.

Operator

Pinaki Das from Bank of America is on the line with a question.

Pinaki Das – Bank of America Merrill Lynch

Hi, good morning. It’s Pinaki Das from Bank of America Merrill Lynch. I guess a lot of people have asked questions. My question is more about the guidance and the growth outlook that you have given. We can see that you have guided for a minimum number in terms of revenues and margins.

Just looking at 2013, you've already done more than €6 million of revenues. We know that the U.S. market is coming back in 2014. As you've mentioned in your equity increase, you are targeting for more growth in emerging markets and in service. So I'm just trying to understand here what sort of revenue growth can happen versus 2013? And is your 2014 revenue guidance very conservative here?

And secondly, even on the cost side, you've guided for margins going from 3.5% to at least 5%. But at the same time you're also mentioning about more cost initiatives in the coming years. So again, what sort of upside can you get on the margin side for the next year or two? Thank you.

Marika Fredriksson

Okay, if we focus on the 2014, I think it’s very important to remember it’s a minimum guidance. So – and we perceive the guidance to be realistic and that doesn’t mean that we are not striving to do more than what the guidance says.

Pinaki Das – Bank of America Merrill Lynch

And is that both in terms of revenues and margins?

Marika Fredriksson

Yes, as they are all minimum parameters and that will of course be the same for the cash flow.

Pinaki Das – Bank of America Merrill Lynch

Okay, thank you.

Operator

Sean McLoughlin from HSBC is on the line with a question.

Sean McLoughlin – HSBC

Good morning. I had a question on the U.S. margins. If I look at your pricing in Q4, it looks that it had come down to about 0.9. You suggested the larger proportion of supply only. Can I confirm from you that the profitability for these projects is in line with projects in other areas or is the U.S. a lower-profitability region for you?

Secondly, just to re-ask the same question. Can you give us an update on the target that there was your official target at the Q3 stage of a mid-term EBIT margin of single-digit with a normalized U.S. market? Thank you.

Marika Fredriksson

Yes, if we take your first question, what I said is that, the order intake that we had in Q4 of last year was to a large degree at the U.S. market with a large proportion of supply only. And also as I said that doesn’t mean that will impact the margins negatively because, that is also a lower cost related to those projects. I am sorry, remind me about your second question.

Sean McLoughlin – HSBC

Could you give us an update on the – on your medium-term EBIT margin guidance, which was high single-digit EBIT margin with the normalized U.S. market?

Marika Fredriksson

Well, we have now chosen to guide on ROIC and what we have said is the minimum is 10% every year in the cycle, which means that we will be at least 10% even in a trough. And just to give you some flavor is that, last year which we – I think we can consider a weak market, a weak year for Vestas and there we actually delivered 7.7% ROIC with a 3.5% EBIT margin. So we actually were in black numbers even with that reduced volume.

Sean McLoughlin – HSBC

Thanks.

Operator

Daniel Patterson from SEB is on the line with a question.

Daniel Patterson – SEB Enskilda

Yes, Daniel Patterson from SEB here. I have three questions. First of all, a question for Anders Runevad, here regarding market share. You have talked a little bit about it. It's easy to say that you want to gain market share, but I'd like to know what are you going to do differently in the future versus the past to gain market share. I mean, are you willing to invest in sales?

Do you believe you have lowered cost so much that they are more competitive? What will you do differently to gain market share? That's my first question.

Anders Runevad

Yes, so, I mean what we said on the mid-tem will be grow faster than the market. So of course we are targeting then to improve our market share and we say that of course in mature markets we have a solid market position, but we say there is room for further small improvement definitely.

On a larger markets, in many of those markets, we actually have a fairly low market share and that market is also several different segments on the market. And our proposition or value on certainty in investment on 20 years guaranteed return.

We also think it’s a good segment that is of increasingly importance also in emerging markets. And the way to do it’s a number of different initiatives but one thing that I also said was that we say that, our strategic accounts are – you can say global customers.

They are looking now at establishing themselves in more emerging markets. Those are customers where we have existing business relations that we have a long-term history with and of course it’s natural for us to follow their expansions into emerging markets.

And other initiatives – and important enabler for us of course to look at this over time is the cost-out exercise that we do, especially in our 2 megawatt platform. But again, let me emphasize that this is about profitable growth. It’s not about market share. So it’s profitable growth, it’s a mid-term plan on three to five years.

Daniel Patterson – SEB Enskilda

Okay. Thank you. Then I have another question regarding cash flow and it's regarding your 2014 cash flow guidance. And perhaps some flavor on how this played into the very strong Q4 cash flow.

Obviously, you had a very strong net working capital, sort of released in the fourth quarter. We would expect some flow back in the first quarter. But how has this played in the strong Q4? How should we think about that versus the 2014 guidance?

Marika Fredriksson

Well, as I have said, there is a minimum guidance. So we are looking from 6 on revenues, minimum 5 on EBIT and that of course is reflected on the minimum guidance of the cash flow that is 300.

So, we are maintaining what we have delivered on the working capital up to this point and that of course doesn’t mean that we are not striving to further improve the working capital. And I also said, the working capital project that we have in place for or initiated in 2013 will continue also in 2014.

Daniel Patterson – SEB Enskilda

Okay. So, really what you're saying is you're quite comfortable with the cash flow guidance is that my..?

Marika Fredriksson

We think we have a realistic guidance overall.

Daniel Patterson – SEB Enskilda

Okay, and then my final question, just housekeeping, is it correct that the minimum guidance, that is not enough to get a bonus in 2014?

Marika Fredriksson

Correct.

Daniel Patterson – SEB Enskilda

Thank you, very clear. Thank you.

Marika Fredriksson

Thank you.

Operator

Jacob Pedersen from Sydbank is on the line with a question.

Jacob Pedersen – Sydbank

Yes, hi, just a question on seasonality. You've experienced quite some ups and downs in 2013. Should we expect the same kind of seasonality in 2014? And if we should, what are you doing to improve this situation and create a more stable flow through the year?

Marika Fredriksson

Well, the business we are in, you will see some seasonality going forward. So there is nothing that we can change. What I think we have done and also proven in – already in Q2 and Q3 is that we are mitigating the seasonality with all of the programs that has been delivered under the turnaround.

So of course the flexibility to handle lower quarters is significantly improved the turnaround program and the lower of the fixed capacity cost and the continued cost-out on products. So that is the enabler to sort of we have reduced breakeven point of the company and that of course will have an impact on the seasonality as well. Positive impact.

Anders Runevad

So we can continue to work on what we can control our own controllable cost and flexibility, but of course it will continue to be seasonality because, it’s business-to-business and that’s how this market works and of course we are highly dependent on the customers for our business.

Jacob Pedersen – Sydbank

Okay. Then a question on the cost side. You say that you have still a lot of cost-out initiatives in the strategic plan moving forward. But you also launched a lot of new initiatives, improving position on - in terms of the market where your presence is not that good today. This must also yield some cost increases when we look into the future. How should we model this?

Anders Runevad

I mean, generally speaking, of course, we have to be more flexible and we have to be quicker to adopt and that means of course making sure that we can scale up both when it comes to the sales capability,

But also when it comes to of course delivering in the manufacturing where we see uptake in those markets and at the same time, we also have to scale - be able to scale down quicker in the markets where we see don’t present any growth.

So, it’s all about our internal flexibility and as we have said, as we allocate cost during last year, we actually reduced our face capacity and our headcount quite substantially at the same time we hired people in the U.S., because we see an increased market in the U.S. and we started at expansion on the factory side towards the mid-end of last year.

So, internal flexibility with the market – when the market is moving, use our global manufacturing scale, controlling what we can control. That is what we have to do going forward.

Jacob Pedersen – Sydbank

Okay. Thanks a lot.

Operator

David Vos from Barclays is on the line with a question.

David Vos – Barclays

Good morning guys. A couple of questions from my side please. First of all, on prepayments, I note that as a proportion of order intake prepayments in 2013 were actually down quite a lot versus 2012, and I wondered if you could comment on that, is that a shift in payment terms in the industry or was it something more particular there? That's question one.

Marika Fredriksson

Yes, if you look at – yes, as we said the prepayment is for both Q4 and for the full year. I would say rather flat and of course I think it’s good that we have actually maintained the prepayment level despite a lower revenue throughout the year.

David Vos – Barclays

But surely if – the way to look at it is, proportionally to order intake right, as these are typically taken at the - when the order is signed or am I going at it from the wrong angle there?

Marika Fredriksson

Well, as I said, I don’t see, we don’t have any change in the payment structure or payment schedules from the customers, then of course it’s not exactly the same everywhere on the global basis and we don’t have a concern with the flat level that we see right now.

David Vos – Barclays

Okay, thank you. Then my second question around capacity utilization, it was addressed already earlier in the context of machining, where you mentioned 7 to 8 gigawatts I think, but could you quickly comment on the sales tariffs on blades as well? So we have a full picture there?

Marika Fredriksson

That covers everything. I just gave an example unfortunately. That is the overall capacity within the Group. And if we sort of want to get there, we cannot do it with the current number of employees, so then we would have to increase. And we are talking about blue collars or variable salaried.

David Vos – Barclays

Sure, understood, thank you. And the final question is around service margins and a bit around Q4 where I note that, on a rather high growth, the expansion in margin was not that dramatic as it has been for the rest of the year. Could you comment on that effect please?

And then also on kind of what you are expecting for 2014 when you say that you do expect good growth? If you annualize the 30% over the mid-term, looking at high single digits at the very least I would say, but yet you're expecting stable margins. So, what’s the - what are the moving parts there? If you could comment on that would be great. Thank you.

Marika Fredriksson

Yes, you will always see also on the service margins and revenue, you will see some fluctuations quarter-over-quarter, but if you sort of take an average, there are flat margins and we delivered 22% margin on the service business. So we consider the service business as being a very stable business and we see a continued growth for that business also in 2014.

David Vos – Barclays

Continued growth but stable margins, that's the message?

Marika Fredriksson

Yes.

David Vos – Barclays

All right. Okay, that’s it. Thank you very much.

Marika Fredriksson

Thank you.

Operator

Mark Freshney with Credit Suisse is on the line with a question.

Mark Freshney - Credit Suisse

Good morning. I have two questions. Firstly, in the past, when you've announced measures to lower the levelized cost of electricity for clients and announced cost-out initiatives, the benefit has generally gone back to clients and hasn't shown through in economics for shareholders. Is - do you hope to keep some of the benefits of the new cost-out measures?

And just secondly, on the service business I know that that's two-thirds of the Group EBIT and it's been the major growth driver. What are the risks - competitive risks that you see to that business going forward? Are you seeing competitors tried to eat away at those margins or undercut you at all? Thank you.

Anders Runevad

Yes, so if I start with the cost of energy reduction, of course it’s our ambition to – because our ambition is to improve our earnings capability. So, of course, elsewhere that has increased our competitiveness and of course expand our overall addressable markets.

So, that is all in the strategic initiatives and initiatives that we have. So again, it’s profitable growth and increased competitiveness, but actually also an overall bigger market.

The second question was around risk on services. As Marika said also, we view services as a very stable business where we have good correlation between installed base and service revenue with stable margins. Of course, having said that, I mean, we live in a competitive business.

And that goes for both the turbine market and the service business. So of course, in a competitive environment, you always have to make sure that you offer the best value to the customer.

Mark Freshney - Credit Suisse

Okay. Thank you.

Operator

Mark Schindele from Nordea is on the line with a question.

Mark Schindele - Nordea

Yes, hello. A question please on your renegotiated credit facility and whether you will provide any security for this facility and potentially also subsidy guarantees? And, if so, how much in terms of revenue, EBITDA and assets in those guarantees would cover, so to say? And also if you can disclose anything about the type of covenants in a facility and also the related levels? Thank you.

Marika Fredriksson

Okay. What - we are not disclosing any details in the agreement apart from what I said earlier, we have a five year tenor. We have full flexible facility when it comes to project guarantees.

What I can say though is that the condition the company have negotiated under to get the new credit facility compared to the situation were in – when we negotiated the present is significantly different.

Mark Schindele - Nordea

So in terms of increased flexibility that would also I assume then relate back to the rather extensive security and the sort of asset hedges you made under the previous facility, so to say?

Marika Fredriksson

What I’m saying is, we have negotiated a facility that we are very satisfied with.

Mark Schindele - Nordea

Okay. Thank you.

Operator

Alok Katre from Societe Generale is on the line with a question.

Alok Katre - Societe Generale

Hello. Hi. This is Alok Katre from Societe Generale. Couple of quick questions from my side. Really just drilling down into your revenue guidance. You say greater than €6 billion

If I look at the order flow through the year and if I look at the master supply contracts that you have, I'm just trying to reconcile this with the revenue guidance really.

Is it timing of deliveries, or is it something else that’s driving your - what I'll say is conservative guidance?

Marika Fredriksson

As I said before, I think, our perception is that we have a very realistic guidance and it is and I’d say again there, it is a minimum guidance of 6. So, we are thriving to do more than 6.

Alok Katre - Societe Generale

Okay, just to put it another way, do the master supply contracts that you have figure or already included in the guidance or is it something that will come over and above if they were to be converted?

Marika Fredriksson

We will not comment on that.

Alok Katre - Societe Generale

Okay, fair enough. The second question that I have is a bit on the product cost-out benefits. If you could just help us with the phasing of the cost-out benefits, is it something that should accrue through the year or is it something that's going to be back-loaded into 2014 or perhaps 2015?

Marika Fredriksson

That are running right now and that will of course come with volume will have an impact on this year, but the gross margin impact and as Anders said, in the strategic targets when it comes to operational excellence and also the levelized cost of energy, I mean, the focus is to a large degree to sort of do more. But the programs that we have right now will deliver in the coming years.

Alok Katre - Societe Generale

Okay, thank you. And that the last one from my side. In terms of this services business really, bit of two-part question, one is what led to the roughly €50 million lower revenues in Q4 versus what you had guided for? That's the first one.

And the second one is, in terms of the guidance for flat margins, are you not seeing the benefit of the full service contracts which are typically more than 90% of your new order flow? Is that’s something that you're not seeing or is it something that should only impact really in the three to five year timeframe?

Marika Fredriksson

Okay, when it comes to the €1 billion that we softly guided for 2013. Yes we deviated €50 million and as I said, we can have slight fluctuations, but I think, if you compare to €1 billion or €954 million if I recall 100% correctly, it is still a very stable business both in terms of revenues and in terms of profitability.

Alok Katre - Societe Generale

Okay. Fair enough. And then the full-service contract benefit?

Anders Runevad

I mean, of course the service margin that we talk about is the combined margin of the service portfolio and we feel that that margin is stable very much driven by the type of service contract. And then we don’t give guidance on the individual margins – individual part of the service portfolio.

Alok Katre - Societe Generale

Okay. Thank you.

Operator

Klaus Kehl from Nykredit Markets is on the line with a question.

Klaus Kehl - Nykredit Markets

Yes, hello. I am Klaus Kehl from Nykredit Markets. I have two questions please. The first one is probably for, Anders. You said that you have met a lot of clients lately and some of them, they had a wish for a stronger balance sheet. But does that also mean that you have lost business due to the current balance sheet? That would be my first question.

Anders Runevad

That is of course very hard to predict and there is no testament on that. We lost the deal due to that. But – so that’s very hard to predict. But it’s also very clear that a strong requirement and an important decision criteria for the customer is a financially strong company and that you go into a long-term agreement with.

Klaus Kehl - Nykredit Markets

Okay, and then my second questions would be that - you said that some of the large clients, they are increasingly looking at emerging markets. But does that also mean that you will need new factories in emerging markets for instance, in Brazil, South Africa et cetera and what would that mean for your CapEx level for the coming two to three years?

Anders Runevad

Now, if you start with South Africa then, I mean, we have taken a very large market share in South Africa with the current set up we have. I mean, we have – since before manufacturing capabilities in both China and India.

So, I mean, generally speaking, we don’t see a need for increased investment in manufacturing and factories. Of course, having said that, further on to the strategy, it could be that we need to do some more blade production in some local markets.

On the other hand there, we have a new much more investment light solution that is easier to set up and again, it’s much flexible, more flexible to move between markets. So, overall, we have a good manufacturing footprint since before and that is what we need to leverage now going forward also in those markets.

Klaus Kehl - Nykredit Markets

Okay. Thank you very much.

Marika Fredriksson

That was the last question.

Anders Runevad

Okay, then, I would like to thank you for your interest and for attending today. Thank you very much.

Marika Fredriksson

Thank you.

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