Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Ditlev Engel – President and CEO

Analysts

Daniel Patterson – SEB Enskilda

Patrik Setterberg – Nordea Markets

Fasial Ahmad – Handelsbanken Capital Markets

Claus Almer – Carnegie Bank

Peter Rothausen – Danske Markets

Caster Truman (ph) – SEB Asset Management

Andreas Willi – JPMorgan

Patrick Hummel – UBS

Martin Prozesky – Sanford Bernstein

Rupesh Madlani – Barclays Capital

John Segrich – Gabelli

Christian Nagstrup – Jyske Bank

Mark Freshney – Credit Suisse

Burt Chao – Simmons and Company

Robert Clover – HSBC

Kasper Larsen – Macquarie

Allen Wells – Morgan Stanley

Mark Fielding – Citi

Tom Plinston – Matrix

Arnaud Brossard – Exane BNP Paribas

Tom Gibney – Credit Suisse

Vestas Wind Systems ADR (OTCPK:VWDRY) Q3 2010 Interim Earnings Conference Call October 26, 2010 9:00 AM ET

Ditlev Engel

Good afternoon and welcome to Vestas Wind System Presentation on the third quarter result for 2010, which we have decided to have here in Copenhagen in Denmark. We were supposed to be in New York. But due to the messages that we have sent today concerning the reduction in Europe, we wanted to make sure it happened in Denmark today. This is also the reason why we have called this reduction of European capacity required as the theme of the presentation today.

Let me start by saying that the situation that we experienced is unfortunately at a level where we have to reduce our expectation to the European demand compared to what we thought a while back and obviously I will come back to this a lot more during this afternoon.

At the same time we definitely also see on a global level that the competition is increasing. But I would also like to stress that Vestas is more than ready to let’s say handle this situation and that is another theme that I will definitely get back to on how we intend to handle the market situation that we are experiencing as well as the competition.

If we look at Vestas’ position at the moment, then we have today maintained our guidance for 2010 obviously before the one-off cost that we need to do in connection with the reduction of capacity. We are also announcing that for the order intake in 2011, we expect this to be at around 7,000 to 8,000 megawatts, which is a little lower than what we anticipated for the year 2010. Also, in 2011, we are expecting a positive free cash flow and it is very much our view that if you look at the value proposition that Vestas has to the market, it is really paying off but we of course at the same time are seeing that the market circumstances are challenging, and all this, I will get much more back to.

So with a very unfortunate message that we had to publish this morning concerning the reduction of production capacity in Northern Europe and the overall cost level is simply due to the fact that we are also have to be very certain that Vestas’ competitiveness is being increased in the years to come, making sure that we can provide the lowest cost of energy to our customers. This obviously does not just come from let’s say the development of technology but definitely also from the fact that we have to make sure that the turbines are manufactured at the most cost competitive level that one can imagine. Otherwise, it, of course, would be very difficult for Vestas in the years to come to win, let’s say, in this industry, which we for sure intend to do.

Therefore, the agenda for today will basically deal with four main themes; obviously, the guidance for 2010, the third quarter 2010 result, how we intend to take orders by ensuring the lowest cost of energy to our clients and also what is that we see for the year of 2011.

Let me start by saying that with the announcement made this morning, we intend to unfortunately close down five manufacturing units, four here in Denmark and one in Sweden. And in total, we expect to reduce the workforce by approximately 3,000 colleagues. We will immediately start the consultations with the relevant employees in order to take these negotiations further and we expect to complete the majority of this around 20 to 21 of November. But it is also very important that this is also to be seen and what we need to do in order to enhance Vestas cost competitiveness in order by reducing the overall cost base.

If we then look specifically at the 2010 guidance, it was, as I said, unchanged before the one-off cost. But they are in fact three areas compared to guidance that is going to be impacted and these are the ones that you see on the slide highlighted in red. First, the one-off cost is expected to be around EUR140 million to EUR160 million and I would like to stress that this will have limited cast effect as these are predominantly writedowns. This obviously will impact the EBIT margin for the full year and therefore, as we say, the guidance is unchanged before the one-off costs.

When we look at the investment level, then we were expecting an investment level initially around EUR650 million for the full year and we are now saying we do expect this to be max at EUR550 million, i.e. EUR100 million lower than initially anticipated whereas the investments in intangible assets are unchanged giving an overall investment level for this year of EUR900 million compared to the previously EUR1 billion.

If we then look specifically where Vestas stands after Q3 and also after the first nine months, I would first like to turn to the left hand side of the slide and saying that we can see that after the first nine months, Vestas revenue is down by approximately 16% and if you look at the EBIT level, Vestas is having a loss after the first nine months of EUR59 million compared to a profit at the same time last year of nearly EUR400 million.

However, if we look specifically at the Q3 result for 2010, I think here there are some important issues to be aware of. If you look at the gross margin in the third quarter 2010, it reached 21.1% versus 20.8% in the third quarter 2009, i.e. we actually saw in the third quarter that the gross profit or gross margin actually went up. But due to the lower revenue, the overall EBIT margin got to 10.7% versus 13.5% at the same time last year and of course, also we are running at a higher cost level the year in 2010 than we did in 2009.

This also means that the first two quarters of 2010 have been very challenging. Vestas reported deficits of EUR96 million in the first quarter and EUR148 million in the second quarter, but here in the third quarter we saw a plus EUR185 million. Unfortunately looking into the fourth quarter and here, this is the midpoint figure of approximately EUR389 million, we do expect that the full year will be around a profit of EUR330 million on EBIT before the one-off cost, I have to stress, but it means that in an extremely challenging year, as the year we are seeing in 2010, Vestas is still, let’s say, producing a positive result.

If you turn to the balance sheet, they are here, a few items I think is important to be aware of. We actually have reduced the net debt in the third quarter compared to the second quarter 2010 by close to EUR170 million. And if you look at the financing structure of Vestas, it is still carried by Eurobond we issued the European Investment bank and Nordic investment bank, i.e. it is some long-term facilities that we are using for the financing. And if you look at the equity ratio, then Vestas is still having an extremely robust balance sheet despite the very challenging 2010 that we are undertaking at the moment.

If you look into the net working capital and the development of this, then we definitely still even though it has gone down, have too high inventories. And we are also seeing that both receivables and trade payables have increased a lot, which is not so surprising if one looks at the steep increase in activity level that we actually have also here during Q3 2010, actually an increase of 50% and 34% respectively; overall, increasing the net working capital to nearly EUR1.5 billion. I would also like to say that the expectation to the net working capital of 15% to 20% is also maintained in what we have announced earlier today.

If you look into the cash flow and the development of the cash flow, then we have seen a steep improvement in the third quarter compared to the previous quarters. If you look at the line of free cash flow, then one can see that after the first nine months of 2010, it was minus EUR878 million, which was slightly better than in 2009 or more than a billion, and this is of course, due to the fact of the heavy investments level that we have been undertaking in order to globalize and develop Vestas. But if you look specifically at the free cash flow in the third quarter 2010, it actually went into a positive of EUR180 million and if you look at where this is coming from further up here on the slide, we see this on the cash flow from operating activities and improvement in working capital, overall improving the cash flow from operating activities from minus five at the same time last year to a plus of 362.

During the second quarter result 2010, I got a number of questions through the line called non-cash transactions. Therefore I would like today just to highlight what is it exactly that has happened between the second quarter 2010 and the third quarter 2010. If you look at the bottom of the slide, you will actually see the cash flow from operating activities before change in working capital has improved by EUR585 million from a minus of EUR255 million to a plus of EUR330 million. This basically results – comes from two main areas. The first is of course due to the fact of the profit that we are carrying in the third quarter compared to the loss in the second quarter but also the adjustment for non-cash transactions, which is mainly caused by the tax reversal and exchange rate adjustments moving from negative in Q2 to a positive in Q3. But overall, as I said, a very strong improvement in the overall development of the cash flow.

If you look just at the non-financial reporting, then Vestas is continuing to show good progress when it comes to industrial injuries, again improving from 7.1 in the third quarter 2009 to 5.5 in the third quarter 2010 and we are also seeing a nice increase in the amount of renewable energy and electricity compared to the past. Overall, we are experiencing at Vestas that keeps becoming safer and greener within our own activities.

One of the main features for this has been the order intake for Vestas and we announced that already back in 2009 that we did expect to see an order intake of 8,000 to 9,000 megawatts. And if we compare how this has developed here by the end of the third quarter, then we have an order intake of 6567 megawatts. At the same time on the full year 2009, we did have an order intake of 3000 megawatts. And very much the very low order intake in 2009 is one of the main reasons for many of the challenges that we have been faced with in 2010. But not when it comes to the order intake. There Vestas have made we believe very strong progress and we are also today confirming that we do expect to get to 8,000 to 9,000 megawatts for the full year expectations when it comes to the order intake.

If we just try to look behind the development, then as you can see here, how it has evolved in the three main regions compared to our overall expectations, if we start with Asia Pacific, we can see that they are very close to reaching the target, which is approximately 20% of the overall order intake whereas both Americas and Europe still have a gap to close in order to get to the full year expectations of 2010. But this we do expect to take place here in the fourth quarter so that we will reach the guidance of 8,000 to 9,000 megawatts. As I mentioned in the second quarter, these orders have been attained in a very difficult market situation and I think this is important to remember when we look at the value proposition that Vestas have in the market at the moment.

This, of course, also has a positive impact on the backlog and if you look at what we have experienced in the sector, starting in the second quarter 2008 where Vestas had its strongest backlog of around 6500 megawatts, and ever since down to the fourth quarter 2009, we have seen the backlog keep declining and getting smaller until it started to pick up again here in the first quarter 2010 and is now here by the end of the third quarter standing at more than 5800 megawatts.

If I should try to put a few words on 2010, it is without a shadow of doubt an extremely tough year and also being confirmed by the very unfortunate reduction of capacity that we had to announce earlier today. But when we look into 2011, we do expect a very fierce competition that we need to relate to. But as I said in the beginning, we feel quite confident that Vestas is very well equipped to deal with this fierce competition; and why is that?

Well, the reason why the order intake has progressed as well as it have is for sure due to the fact that Vestas is capable of delivering the lowest cost of energy and we do this through the products of Vestas, the global presence of Vestas, but definitely also because of the people working at Vestas. And this business case certainty and this value proposition to our clients is for sure helping us in a very demanding and competitive market.

If we start to look at the products and the performance of the products, then I would like to say that at the moment we have approximately 28,500 megawatts now under surveillance. This means that we watch 24/7 how the turbines are performing. And even though a slide, which looks like this going down, then actually down means good, and this is because we talk about the lost production factor. And what does this mean? Well, this means that when the wind blows, how often do we catch it? Meaning that every time there is an opportunity to generate revenue and cash flow for a customer is Vestas’ turbines ready to catch this opportunity and yes, we are. This means that in order to get the most out of every single day when the turbines are standing out there, we are getting to a very satisfactory level. And the curve that you are seeing here is the global Vestas one-year rolling average. And for competitive reasons, we have decided not to put our numbers on the scale but I can tell you that if you are a customer at Vestas, you know exactly 24/7 how the fleet is performing, which is of course very important also when you are looking at doing business in the future.

If you look at the product offerings that Vestas have and the broad platform that we are offering to the market whether it’s for high wind, medium wind, low wind, on or offshore, we feel that Vestas stand with a very strong product offering both on the kilowatt, two megawatt and three megawatt platform and it has been previously mentioned turning also towards a six megawatt offshore platform. We can see this in the market that the demand and the interest of doing business with Vestas is very strong and another reason why we do believe that we are well equipped to deal with the competitive situation we are faced with.

But, of course, this also comes at a cost to develop this kind of product lines. And if we just look back to the year 2006 until by the end of September this year, we were seeing that the number of employees at Vestas in R&D has grown from more than 500 to more than 2000 by the end of September and this of course, I said, comes also at a cost or maybe I should say an investment that we like to do.

The fact that we have increased regionalized or should I say globalized was further confirmed that we here in October opened new R&D facilities in Beijing in China meaning that Vestas global R&D is now in China in Beijing, it is in Singapore, it is in Chennai in India; Houston, Texas; Isle of Wight, UK, and then obviously the main center, Aarhus, Denmark. But the focus on the R&D is I am sure keep on increasing and through these efforts ensuring the lowest cost of energy from technology combined obviously with the lowest possible venturing cost.

So the fact that we have a global presence, we can see today when negotiating with number of the major clients is of the utmost importance. One could say that the geographical footprint that we have is a very important part of ensuring our overall attractiveness. And therefore when we say in the region, for the region as you can see here, whether it’s sales and service, production, research and development, Vestas is present in all the major markets around the world and Vestas is doing business in all the major markets around the world, which again we know for sure is an important part of selecting Vestas for your, let’s say, global need and this is something which is important to remember when looking at the industry. It also means that Vestas better can balance the geographical swings that we will always see in the market and making sure that we are not too dependent on any region but make sure that we have a better global balance.

So the fact to be in the region, for the region is important for many reasons. It is secure that we have regional sourcing. It is secure that we have a regional service set up, that we have sales supporting production and production supporting sales but also in many meetings like the one we are having this afternoon, a lot of questions have been raised, how will the exchange rate affect Vestas in 2010 or whatever. And by ensuring a more natural hedge, we believe is the best way to ensure that Vestas will not be exposed to major swings in the currencies. And this is important because this will ensure that we are not trying to pretend that we know better how currencies will develop but at least we have tried to make sure that we also when we talk about the balancing have taken best precautions we possibly can for whatever is going to happen in the years to come.

As I previously mentioned, with the regional R&D that we are running, it also means that we are now interacting with global research institution all over the planet; actually more than 60 institutions are now working together with Vestas in finding new and more exciting solutions for how to bring down the cost of energy.

So the regional presence that we do have today definitely drives our competitiveness and it also ensures that wherever there is a demand, driven of course by our customers, we make sure that we are there whether it’s in China, Australia, United States, Europe or whatever, we ensure that we are there and we do believe that this is a value, which is highly appreciated by our customers.

As I said, looking at Europe and the reason why we have acted as we have unfortunately by reducing the capacity and having to say goodbye to more than 3000 people, why are we doing this? Well, if you look at through Europe for 2011, we are experiencing a low economic growth. We are seeing thereby a lower demand for energy. And even though there are a lot of political willingness to do more for this agenda, it is also clear that there are lot of budget restrictions at the moment taking place, which we of course have to relate to. And this also means that there is uncertainty concerning the project approval processes in some of the European markets. And when we add all this together, we have unfortunately come to the conclusion that we do have to expect a lower demand in Europe in 2011, which is also expressed in our order intake. And looking at the capacity that were carrying at Vestas, we unfortunately have again to balance Vestas towards these expectations.

We, of course, as management have to do what serves Vestas best and we do believe that by aligning capacity and cost to the 2011 demand as we’re doing today is unfortunately what serves best as best under these circumstances.

One of the other areas within the competition we have seen and actually expected is that we would see Asia becoming more and more involved in this very exciting business of the wind industry. And therefore going back all the way to 2005 where we decided to globalize investors, as some of you may recall, we went to China first. And by establishing our global presence in China we wanted to establish, can we grow in the Chinese market and I might add at that time China was approximately 600 megawatt. This year it’ll probably be like 16,000 to 18,000 megawatt in this range.

We went out there because we wanted to engage in the market but we also wanted to understand what is the cost level that we’re going to expect out of Asia in the years to come. Would it be better to produce everything in Asia and ship it across the world to for instance United States or to Europe, we need to understand this. And therefore we have been working under this assumption Asia cost plus freight. And let me give you a few examples of what it is that we have seen and the reasons for the decisions that we have made.

If you look today, as an example, producing in Asia and add to transportation we know that in Denmark today whether you produce it in Asia and ship it to Denmark or whether you produce it in Denmark, it’s about the same cost level and we do expect that we will see more coming out of Asia down this region which will imply further pressure on the Asia plus cost challenge.

If we on the other hand for instance look at Vestas manufacturing facilities for instance in Southern Europe, we can see today that it is cheaper for Vestas to produce in Southern Europe and for instance, ship the turbines to Sweden than it is to produce them in Denmark and send them just across to Sweden. This also means that the Asia cost plus freight challenge can be handled for instance based upon Vestas units in Southern Europe but it cannot probably in the future handle it in the northern part of Europe. This is one of the reasons why we also have taken the decision as we have taken today.

Let me also just highlight, it is not on this slide, that if you look to North America it is cheaper today to produce a turbine in North America and ship it around in North America than it is to produce it in Asia and ship it to North America. And therefore we do not believe that our new facilities in Colorado is going to experience the same challenge as what we are experiencing in the northern part of Europe.

So as I said, even by producing it in Spain and shipping it up to Sweden, it is cheaper than producing it in Denmark and shipping it to Sweden. This also means that looking at the European market going forward can easily handle the Asia plus freight issue but it is very difficult to do it out of Northern Europe.

So if I should try to characterize this, one way of saying it is actually we are doing this to ourselves so that others won’t do it to us and doing it in good time so we are aware of what we shall expect in the future, one of the other important reasons for the decision we have taken. And therefore, the capacity unfortunately needs to be reduced in the northern part of Europe and predominantly here in Denmark.

And if you look specifically some of the issues that we have also highlighted this morning at the earlier press meeting today, they are five units that we are closing down, four of them here in Denmark as can be seen on the slide and one based in Sweden; overall meaning that unfortunately we are closing down these five units with the consequence that 1240 people will have to leave Vestas and as I said earlier negotiations are now being initiated.

But if we then look into other areas within Vestas, this is where we plan reductions in some of the existing units within the respective manufacturing units. This also includes the group functions and also some in technology here in Denmark and we expect to have some further development globally in order to optimize administrative functions through some shared service centers. All in all this will give 1660 people of planned layoffs. Let me also say that the balance between salaried and hourly paid will be approximately 50/50 in the reduction that we are seeing now.

Due to this we have, as I said, for Q4 we have to expect writing downs, closures etc. for a total cost in the range of EUR140 million to EUR160 million but as previously mentioned, the majority is going to be on the write downs.

It is clear based upon what we know today for 2011 that it was of course from a financial point of view a wrong decision not to reduce the capacity earlier in 2010. No doubt about this; however, knowing that the fourth quarter 2009 was the most busy quarter ever for Vestas and the fact as we’re seeing here in the third quarter that the business is coming back, we at the management definitely believe that it was the right decision to turn all stones and all opportunities before we had to do what we have announced today. So I would have to say seeing from the management point of view, we have no regrets with the fact that we have waited. We believe really this what we owe to all the people who have done a magnificent job and it has nothing to do with their performance that we have to act the way that we have acted today.

So what we want to achieve by this in 2011 is a Vestas where the regional balance is being obtained between the three major regions, Europe, North America and Asia and we are moving Vestas from an export company to a globalized company that is in the region, for the region and thus ensuring that we need to act on all levels on a more local level and this is important for us by developing a global Vestas.

Now let me turn to another issue that we have addressed in the announcement today, which is related to our accounting principles better known as IFRIC 15. If you look what has been mentioned in the message today, it says that after IFRIC 15 came into force on the 1st of January 2010, Vestas bought and auditors have evaluated that the group should consider changing account policy for supply and installation contracts so that the treatment of these will be in accordance with the existing drive from IFRS standard regarding recognition of revenue; and what exactly does this mean? It means that Vestas has three types of contracts that we are undertaking; one is supply only, the other one is supply and install, and the third one is turnkey. And if this is implemented, it will mean that for supply and install projects, we will change from percentage of completion to transfer of risk; and why is this so important?

Well, let me try to illustrate it through an example. The first thing that I would like to highlight is that the cash flow is unaffected whether we have one or the other way of undertaking this and that is important to remember. Today, when we’re doing a supply and installation project when we start to produce to ship, to install the turbines we recognize earnings and revenue as we go along; and this, of course, means as we can see here on this slide starting in year one in Q2 and over the coming quarters there will be activity level that is hitting the P&L as we go along. This is the way that we have been doing it.

If we then turn into the definition according to IFRIC 15, which means that we have to treat supply and installation projects like the way we treat supply only. This means that when we are delivering the final project to the customer, we are allowed to book the revenue and the earnings when that takes place. This means that over longer projects we are decoupling the recognition of revenue and earnings until the customer has taken over the goods or the project and that means everything will come in one quarter.

I cannot say well one believe that one is the right or the other one is better. But on one hand we are saying on today’s principle if there is a risk that the customer will not take over the project, Vestas have recognized earnings and revenue before the customer actually accepted the project. If you use the IFRIC 15, that will ensure it will not happen because we will only do it when the customer have received the project, and that will make the years and the quarters could make them even more lumpier.

On the other hand, it will also mean based upon longer projects that we will decouple the actual activity level what we’re going to see in the P&L. I’m not saying what’s right or wrong, I’m just saying these are the things that we need to relate to. This, of course, will mean that if this happens that it will affect the P&L account and the balance sheet. It will also mean that going five years back everything has to be restated and to be issued and of course, if the board decides to do this, we will ensure that everybody is being properly informed.

The cash flow is, as I said, unaffected whether it is one or the other principle and whether we use one or the other, Vestas will not get any richer or any poorer depending on which principle. But this decision we expect to be taken by the board before the end of this year and if it happens we will of course ensure a conference call where both myself and my colleague Henrik Norremark will be present, to go through all the consequences of a possible change and this, of course, also will mean that if it does happen we will make sure that the 2010 result will have to be according to the new policy. And again if it is being decided, then we will update the expectations in connection with this for the year 2010. This is important to be aware of if the board takes this decision.

Therefore today, it would make no sense if this decision is being taken to issue a guidance that needed to be changed because it will affect also 2011. Instead we have tried to give a flavor of what we do expect for 2011 and that is as I said, an order intake of 7000 to 8000 megawatt. We do expect to produce and ship 6000 megawatts and we do expect investments and tangible investments of EUR400 million and intangible of EUR250 million.

We also do expect that cash flow from operation is expected to more than cover investments that we are looking at today. And thanks to the strong performance of the fleet, as I previously mentioned. We also do respect that the warranty provisions will be less than the 3% we are expecting for 2010. Therefore, on the 9th of February 2011, we will give guidance on EBIT, revenue and free cash flow. And of course, if the change does happen, it doesn’t make sense also to talk about the net working capital because then that will also be impacted by the change and make it more fluctuating and therefore we will turn from net working capital to free cash flow guidance for 2011 and this we expect to happen on the 9th of February when the Q4 result is being presented.

To all of you at Vestas, let me just say, as I said in Q2, Q2 the very challenging 2010 and confirmed unfortunately with the announcement this morning, then the global bonus scheme for sure will not kick in this year. And if some of you had expected targets for the bonus scheme for 2011, let me just say this will come also in connection with the Q4 expectations or Q4 announcement on the 9th of February where we’re also setting the expectations for the overall performance in 2011.

Let me finalize this as I said in the beginning to talk about the competition and how we intend to deal with it. If I look at Vestas global presence, if I look at the demand for Vestas products and if I look at the R&D investments and the organization that Vestas has today, I feel extremely confident that Vestas is very well positioned to deal with these challenges. It is of course more – it’s difficult to make the market larger because of the challenges in the world but if I look at the ground that we have gained in 2010, I’m sure we will do well also in the years ahead; thanks to these three main areas.

Finally before we turn to the Q&A, we are in Copenhagen today because of the announcement this morning but we do expect to resume our London/New York normal sequences meaning that on the 9th of February we will report Q4 in London. And of course we were expected to be in New York today but for obvious reasons this we had to cancel but we do expect to be back in New York in the first quarter 2011 announcement.

And with this let’s turn to the Q&A here in the room and of course, later on to people on the phone and again please two questions and who you are.

Question-and-Answer Session

Daniel Patterson – SEB Enskilda

Thank you very much. Daniel Patterson, SEB Enskilda. I have a question to your 2011 guidance. I understand for the accounting purposes and market uncertainty you don’t want to give revenue and EBIT. But I’m trying to get my head around the 6000 megawatt guidance because when I look at the orders you’ve received this year and what you’re expecting for next year, I can’t really square it. Is it because that some projects are being sort of postponed into ‘12 or sort of what’s going on here? Are you just being a little bit conservative? How do we square it?

Ditlev Engel

Well, how do we square it. We and I’m just looking here to make sure I give you the exact right number. If you look at by the end of the first nine months 2010, Vestas has produced and shipped 2431 megawatts and we are now saying 6000 megawatts for 2011, which is, of course, the full year is not gone. But this is what we believe we will produce and ship and of course, here it’s also important to remember that Vestas has changed to the made to order principle going forward and therefore this is what we do expect to produce and ship.

Daniel Patterson – SEB Enskilda

All right. The second question is concerning the gross margin. You mentioned in your presentation, I think, the strongest third quarter gross margin ever as far as I believe; why was it so strong?

Ditlev Engel

Why was it so weak in Q2? I think I’ve said on numerous occasions that there will be huge fluctuations between the quarters. And if I look at the projects that we are executing here in the third quarter and the product mix that is very much driving it, obviously if you look accumulated for the nine months, we are still much lower. But it’s a consequence of the way that the projects are being added up and executing during this quarter, but it doesn’t change with the fact that we had previously mentioned that we looked for 2010 at the pricing level adjusted for input cost and so on is what we are seeing and therefore we are seeing this huge fluctuations between the quarters. And as I mentioned today, if we change the accounting principle, then I’m sure on a quarterly basis it’s going to be even more entertaining.

Daniel Patterson – SEB Enskilda

But to follow up I mean irrespective of the accounting change, if we just look on an underlying business way of thinking about it, you did 21%. I mean is 20% a sort of a reasonable level to think about going forward.

Ditlev Engel

I don’t want to speculate about going forward because then we talk about 2011, but I’m just referring to what we have seen in 2010.

Patrik Setterberg – Nordea Markets

Yes, hello, Patrik Setterberg from Nordea Markets. Two questions. The first one regarding these cost saving initiatives. I was wondering if you could give us an idea of what the analyzed cost savings will be when you have carried out these cost initiatives. My second question is will there be any additional one-offs in 2011.

Ditlev Engel

Well, the last one was nearly a guidance issue on ‘11, so I can’t tell you exactly. The only thing I can tell you is that the changes that we are making now at Vestas is obviously to make sure as I said that we have a Vestas, which is balanced for 2011. So that is why we’re doing it now. But, of course, I can’t give you the guarantee on how 2011 is going to evolve overall. If you look at the total cost savings, I think it’s hard to say exactly but approximately we are talking about a cost level on average about EUR60,000 per year per person, tonnage of 3000 [ph].

Fasial Ahmad – Handelsbanken Capital Markets

Yes, Fasial Ahmad from Handelsbanken Capital Markets. A few questions and I would like to take them one at a time, if that’s okay. First of all, it does seem that your comments regarding pricing and contribution margins are starting to get a bit more cautious. Is that a correct interpretation?

Ditlev Engel

I’ve only talked about 2010 and what I’ve said previously about 2010 is also what I’m saying today that adjusted for input cost then we did expect to see an overall equal level.

Fasial Ahmad – Handelsbanken Capital Markets

So you aren’t commenting on 2011 price?

Ditlev Engel

I’m not commenting on 2011.

Fasial Ahmad – Handelsbanken Capital Markets

And you haven’t seen any deterioration in pricing from Q2 to Q3 and in Q4?

Ditlev Engel

For projects executed in 2010?

Fasial Ahmad – Handelsbanken Capital Markets

No, the orders you have received so far.

Ditlev Engel

Yes, so I think that’ s the same question as answering on 2011.

Fasial Ahmad – Handelsbanken Capital Markets

Okay. So you’re basically not commenting on the amount of backlog you have?

Ditlev Engel

We have said that in February we will tell you what we expect for 2011 and I think I don’t want to speculate today about the pricing level, but only say this is we will give you when come to 2011 and then I think we can discuss it then.

Fasial Ahmad – Handelsbanken Capital Markets

Okay. The next question basically relates to your order intake guidance of 7000 to 8000 megawatts for 2011.

Ditlev Engel

Yes.

Fasial Ahmad – Handelsbanken Capital Markets

Could you give us some flavor on the regional distribution of this order intake guidance?

Ditlev Engel

We have decided for competitive reasons not to disclose the regional split. It was the first time this year because we had such a low order intake in 2009 that we decided to give the regional distributions. What we believe it serves Vestas best is to tell you this 7000 to 8000 but not to give the geographical split, as I said due to competitive reasons. And when we get to the fourth quarter, you will there get a flavor of how do we see the overall expecting earnings level. I know that you would like to have seen more today but due to the things that I mentioned here previously then we will have to get back to this in Q4.

Fasial Ahmad – Handelsbanken Capital Markets

On the order intake guidance, are you assuming market share gains in the 7000 to 8000 gigawatt guidance?

Ditlev Engel

It’s very hard for me to say exactly and here China is having less of a visibility. But if you ask me of the order intake at least that we have obtained so far this year, I can say based up the view that Vestas have of the knowledge globally, then Vestas have definitely seen from let’s say from a market share order intake perspective increased our total share quite a lot.

Claus Almer – Carnegie Bank

Claus Almer from Carnegie Bank. Well, the wording in the Q3 report is somewhat more negative than we’ve seen in this last couple of quarters. This, of course, understandable since your redundancy program announced today. However, is this only based on the developments seen since the Q2 report? The second question will be you are giving some guidance for 2011. Should we see this being done in the same way as in the past so this is without a buffer or are you starting to be more cautious in late October and there’s a lot of uncertainty out there?

Ditlev Engel

Let me say that it’s very hard to start to discuss how cautious, optimistic, pessimistic whatever. We tried to share with you best as we possibly can and, of course, based upon a downward adjustment in Q2 [ph] might sounds odd but we actually do try to give you our best view on how things would develop. And the figures that we have published today concerning 2011 based upon those numbers we do believe we can disclose like the order intake and we know for instance that if you look at 2010, we have gotten like for instance the EDPR deal, which is a very big deal, which of course is helping us getting to the 9 to 10. So looking at the seven to eight, these deals are not around every day. So we have basically assessed what we believe is possible to get of orders in 2011 and that is bringing us to this level of 7000 to 8000. But I don’t want to comment on whether we are more optimistic, pessimistic or whatever. We try to be as realistic as we possibly can is what we’re looking at the moment.

Claus Almer – Carnegie Bank

On the provisions, you’re guiding for a lower provision level in ‘11 compared to ‘10.

Ditlev Engel

Yes.

Claus Almer – Carnegie Bank

Then again in Q3 you have repeated using more provision than you are putting on the balance sheet.

Ditlev Engel

Yes.

Claus Almer – Carnegie Bank

And if you compete – if you continue with this thing you could say, there will not be much end of Q4. Can you say will it be very low use of provision in Q4 and thereby you’ll have a decent level going into 2011?

Ditlev Engel

We expect still for the provisions for 2010, we expect accumulated to reach 3% for the full year. Lastly, we were 3.5, we expected to go down in the fourth quarter, but of course we will also be on our higher revenue.

Claus Almer – Carnegie Bank

But then you have almost none on your balance sheet left 31st of December 2010?

Ditlev Engel

We expect 3% for the full year of this year, based upon the revenue for this year.

Claus Almer – Carnegie Bank

Okay.

Peter Rothausen – Danske Markets

Peter Rothausen from Danske Markets. I’ll take my questions one by one. Regarding, the revenue recognition change I calculated that this could have an impact of around EUR300 million on a negative EBIT impact in Q4 2009. Could you please walk us through, how it potentially could impact your 2010, I assume since you have highlighted this today, it’s something that you must consider and you said also that 41% of shipments this year to supply and install. So the question is how does this – can you walk us through how the revenue recognition change will impact the EBIT and to what extent?

Ditlev Engel

Well first the IFRIC 15 (ph) came into place in the 1st of January this year. And it is now our belief that it will become a standard. And if it becomes a standard, this is what I also mentioned then we will have to follow the standard. And therefore we’re preparing Vestas for this as I mentioned, the Board will now considered if we’re going to do it, but if we’re going to do it we will. The question that you’re raising I will guarantee you that we will take this through how all this will affect probably more numbers that you would like to receive because it of course if you do that over the five years it is quite an extensive and this is of course something that we will make sure we take this but today I don’t want to discuss will it be this much and this and so much and so forth, I think it’s much better and when you have all the figures, if it happens then let’s cross how we see this impact that this could have on Vestas total results year-by-year.

Peter Rothausen – Danske Markets

But as I hear now you say that this is something that is very realistically going to happen and if that’s correct, as I see it and maybe you can correct me if I’m wrong, then the adjustment means, that there will be quite a severe margin impact or EBIT impact for 2010 if you make that changes. Is that correct?

Ditlev Engel

As I said I don’t want to speculate whether it will go from this year to that year or how much it will impact. As I said before whatever we do it doesn’t overall make Vestas any rich or poor depending on where it comes in but obviously if that happens, it will impact both the P&L and the balance sheet, but I think it would be much more relevant. First if the Board decides and if they decide then let’s discuss the impact at that time.

Peter Rothausen – Danske Markets

Okay, fair enough. On the cash flow you have good progress in the third quarter, having a positive cash flow. When I look into it, it seems as if the payables they’ve gone up or improved by EUR400 million compared to the second quarter meaning, that the payables there has gone up quite a lot. Can you explain the dynamics between this, why is this happening right now?

Ditlev Engel

It is simply a function of that the activity level has increased a lot here in the third quarter. So both the receivables have increased and so has the payables due to the higher activity level. There is nothing else in that than that.

Peter Rothausen – Danske Markets

Because just when I compared last year where you had much higher revenue you actually now have better payables than you had last year on a lower revenue days meaning that you must require a longer payment period from your sub-suppliers?

Ditlev Engel

There obviously have been some areas where these things have been changed but overall it is more due to the fact that we are now seeing a much bigger activity at the moment in this specific quarter.

Peter Rothausen – Danske Markets

Then the final question about your CapEx guidance, going into 2011. You expect a decline in R&D CapEx, to EUR250 million from EUR350 million this year, if I recall correctly.

Ditlev Engel

No, the EUR350 million is unchanged. It is the tangible that goes from EUR650 million to EUR550 million.

Peter Rothausen – Danske Markets

Yes but from the R&D CapEx specifically, you said EUR350 million this year but, for ‘011 you say EUR250 million. The drop in R&D CapEx?

Ditlev Engel

Sorry.

Peter Rothausen – Danske Markets

This reduction – does this mean that you are going to expend smaller R&D cost for 2011 than you have done in 2010, i.e., there’ll be a negative margin impact going into ‘11?

Ditlev Engel

I can’t tell you exactly what this will be on the margin impact again in Q4, we can talk more about this but this is when we’re looking at the projects that we expect to undertake then this is the level that we are getting in.

Peter Rothausen – Danske Markets

Thank you.

Caster Truman (ph) – SEB Asset Management

Caster Truman from SEB Asset Management. Now you’re reducing your workforce with 3,000 people but should we see this also, as a new sign that you’re going to increase cost containment in all areas within the organization?

Ditlev Engel

It’s clear that as I think I also mention that Q2 that in 2010, we have been in a building process and ensuring that Vestas got its business globalized. And I can only say in the competition going forward that will of course look very strict at the overall cost level depending on the markets now that we have ensured the globalization of Vestas overall activities. So for sure in this competitive environment we will look very much into this on all areas, but we also feel that we have and this is also being looking to the CapEx program that a lot of the ramping up that we have undertaken latest this year in United States, we have now basically completing and again meeting that we can better align the capacity on a region-by-region basis and actually also on a cost-by-cost basis.

Okay, then let’s turn to the phone.

Operator

Thank you. (Operator Instructions). Andreas Willi from JPMorgan is online with the question.

Andreas Willi – JPMorgan

Good afternoon. I have two questions please. The first one is to come back on the previous question on the R&D and how it’s going to be accounted for next year. From looking at your headcount reduction program but that’s not really focusing on R&D. So I assume the overall number of people working in R&D next year will not be lower than this year. If you capitalize EUR100 million less, it kind of means we have EUR100 million more in the P&L. Is that the right understanding? And then the second question, if you maybe could break down your backlog, watch for deliveries, committed deliveries in 2011 and what’s for out years? Thank you.

Ditlev Engel

Well if you look at the slide that we have where the reductions will be. It will also impact the R&D. So they will be impacted also by the reduction as was mentioned here in Denmark. Concerning the overall level of the 250, I don’t want to speculate on how this will impact overall on the P&L but saying this is a reflection of where we look at what we do expect in intangible investments based upon the products we expect to execute, also the projects we expect to execute in 2011.

Concerning the backlog for 2011, we haven’t broken down the coverage year-over-year that we’re looking as we have never done before and we are not disclosing this today either.

Andreas Willi – JPMorgan

Thank you.

Operator

Patrick Hummel from UBS is online with the question.

Patrick Hummel – UBS

Yes, good afternoon. Two questions, please. Number one, on the restructuring amount of EUR140 million to EUR160 million, can you give us a split by cash and non-cash, and related to that why did you not rule out that all restructuring charges are taken in ‘10? You referred to the ‘11 guidance, which you haven’t given yet. Fair enough, but I would assume now that you know what you are doing to do, the headcount reductions, etcetera, you can also put all charges into one quarter. So can you just confirm that? And the second question relates to your run rate capacity? Now you’re guiding for six gigawatts of shipments next year, but I assumed that the cuts you’ve done in Europe don’t reduce your production capacity, actually, to the 6 Gigawatt level. So can you just give us a refresher at which level you currently see or after the restructuring you see your run-rate production capacity, please?

Ditlev Engel

We haven’t, let me say we haven’t stated exactly what the utilization rate is expected to be the based upon the 6000 to produce and shipped next year. But that is the level that what we are looking at concerning the provisions then if I had said something about 2011 then that is definitely not correct, we do expect that the provisions taken will be here in the fourth quarter 2010 and would actually not impact 2011 and we haven’t stated the number that but the majorities of this are related to write downs and i.e., there will be a limited cash flow effect of the EUR140 million to EUR160 million.

Patrick Hummel – UBS

Okay. And just coming back to – if I may to your run rate capacity, where I’m coming from basically, I mean, you had this famous 10 Gigawatt targets. Now with the staff reduction in Denmark, I would assume that you still have a cost base also in your production facilities it’s capable of dealing with more. So either — I mean it shows that there could be some additional potential for further adjustments in the staff for example, if you don’t increase the run rate in the US or it shows you if you get to a higher revenue – sorry your higher shipment level, you’re able to handle with it and you have a positive operating leverage on it. So and with what we know at the moment, it’s a bit tricky to figure out for ‘011, if there is further potential downsizing coming from excess capacity or if you feel like your cost structure is adequate for the 6 Gigawatt of shipments. That’s my point.

Ditlev Engel

It’s true that coming back to your question that obviously the reductions that we are doing at the moment is not for instance 4000 megawatts of reduction that we are doing. So you’re of course right, that the run rate we could increase to it above the 6000 but I don’t want to speculate to what level. And we haven’t coming back to your other questions, we haven’t got any plans for reductions going forward, but I think as one asked me here in the room earlier of course we will have to relate to the reality as we see them going into 2011 but as we look up on it today we don’t have any expectations to make further adjustments than the ones that we announced this morning.

Patrick Hummel – UBS

Okay, thank you very much.

Ditlev Engel

You’re welcome.

Operator

Martin Prozesky from Bernstein is online with question.

Martin Prozesky – Sanford Bernstein

Good afternoon. I’ve got two questions, please. And the first is on service revenues, it seems that service revenues are quite flat compared to overall revenues. Can you just give some color on that why that’s the case, and second in the cash flow numbers you’ve mentioned the non-cash adjustments due to tax and Forex (ph). Can you give us some color why the swings have been so extreme recently, what has been driving that? Is there something that has changed in the way you – because of mix or something in terms of the way you hedge, because the changes seem pretty extreme?

Ditlev Engel

Yes, I mean the – a lot of its related to the currency that and the impact of the currencies and the adjustments that we have to make because of the changes of the currencies which is impacting us apart from the tax but that is the majority of the reason for the adjustment. And secondly, when it comes to the service revenues we haven’t changed our guidance expectations to the overall service revenues. So the fact that it is fluctuating I wouldn’t pay too much attention to that.

Martin Prozesky – Sanford Bernstein

Yes the non-cash, should we expect any non-cash and cash flow adjustment if there is an accounting change?

Ditlev Engel

In the accounting change?

Martin Prozesky – Sanford Bernstein

Yes, for the Q4 accounting change, should there be any non-cash cash flow adjustments?

Ditlev Engel

If I just have to understand – if I hear your question whether they would if we change accounting principles.

Martin Prozesky – Sanford Bernstein

So on the guided accounting change for the supply and installation.

Ditlev Engel

Yes.

Martin Prozesky – Sanford Bernstein

Or shall we expect any non-cash adjustments to cash flow?

Ditlev Engel

I can’t answer you today on what the impact will be from that specific areas depending on this, but that is more related to as I said on the currencies irrespectively of what we have been seeing in Q2 and Q3 but what that expect impact to be in Q4, I can’t tell you today.

Martin Prozesky – Sanford Bernstein

All right, thank you.

Ditlev Engel

You’re welcome.

Operator

Rupesh Madlani from Barclays Capital is online with the question.

Rupesh Madlani – Barclays Capital

Good afternoon, a couple of questions for me, please. First, you said in press interviews and in the third quarter report, that you continued to see significant uncertainty in terms of new orders and timing and so forth. And therefore my question is do you see any risk at all to your balance sheet and the need potentially, to raise additional equity capital, to compete effectively with your conglomerate peers, and second with respect to the proposed green investment bank here in the UK. Do you think this could create any upside for you, in terms of stimulating demand for your offshore products?

Ditlev Engel

If I look at the order intake that we expecting for this year as we have maintained today and we do expect to fulfill by the yearend. And also if you look at our expectations for next year also in terms of the cash flow, free cash flow then we have no expectations whatsoever for increasing of capital or raising capital in 2011. When it comes to this green investment bank, it will for sure be a welcomed initiative. I think also it’s important to say that we fortunately are also seeing that initiatives like this or the European investment banks and others are engaging in the financing of some of these bigger projects which is very good news but what we are let’s say doing today coming back to your initial comments about what we have said is basically that we do see uncertainty because of the overall budget situation of the number of countries in Europe and that is what we are relating to today in terms of the – let’s say the project approval process etcetera and one of the reasons why we are reducing the capacity.

So but I still believe that with 7 to 8 megawatts to 2011 that Vestas will have a strong order progress compared to what we believe will be available in the market in 2011.

Rupesh Madlani – Barclays Capital

Great, and just as a follow up to that given the focus on your R&D capitalization, could you say broadly, how much of your R&D that’s being capitalized relates to your 6 megawatt offshore turbine, just ballpark maybe a quarter half, three quarters none, if you can please?

Ditlev Engel

I could but I won’t.

Rupesh Madlani – Barclays Capital

Okay, thanks.

Operator

John Segrich from Gabelli is online with a question.

John Segrich – Gabelli

Hi. Just two questions I guess if I could. One, given that you don’t really want to talk about the capitalization of the R&D, it looks like you have 2,150 heads roughly right now. You talked about cutting some in R&D, can you just very clearly, tell us how many heads you plan to cut out of R&D, and if you plan to add heads elsewhere in the R&D organization. So maybe what the net effect could be looking into next year?

Ditlev Engel

I think you hope you will understand that in the process that we are at the moment we are starting negotiations with the relevant employee’s representatives. And I don’t think it will be correct today to start to discuss here on the final number and so on. This is something where we now have to respect the process that is running and where we start negotiations.

John Segrich – Gabelli

Okay.

Ditlev Engel

So unfortunately we have to respect that.

John Segrich – Gabelli

Maybe can you just let us know if you think the R&D headcount for the total company will be up or down next year?

Ditlev Engel

Well as we also announced here in October in Beijing that we will increase the R&D presence in China and those will of course also go into the total R&D headcount. So while we are talking about in the reduction here is related here in Europe whereas obviously we have R&D facilities elsewhere and are enlighting them like for instance like in China.

John Segrich – Gabelli

So the net effect of the two would be R&D up?

Ditlev Engel

I don’t want to speculate about a number. I’m just telling you that if I look at how important R&D is for Vestas, we will still have quite a significant – let’s say presence within this area.

John Segrich – Gabelli

Okay and then just the second one, you mentioned that you wouldn’t necessarily need to do anything to the balance sheet next year in terms of any sort of fund raising, can you maybe just confirm that you wouldn’t have to do that this year as well. And then also just to address your competitors are now offering vendor finance with GE, Siemens, most of the Chinese. Can you just explain how you plan to compete on that level or will you offer vendor financing, and if you do make that decision then would you have to address the balance sheet?

Ditlev Engel

First I can’t confirm, that we don’t have these plans for 2010 either just to make that clear. Secondly, when we talk about the vendor finance please observe that the purpose we have made so far with more than 66000 megawatts after the first nine months is without any vendor financing from Vestas, I think that’s important to remember. Secondly, it’s also important to say that some of the things where – let’s say where financing have been critical Vestas have for instance used what we have here in Denmark which is called the Export Credit Foundation which is putting off, which is AAA rating where we are using this if necessary sometimes on some projects, but we still have no plans whatsoever into engage into vendor financing. And I will also have to say that the problem we are seeing in the market at the moment is not that much related to the availability of the financing, but it is more related to the fact of finding the projects that people can and will execute for instance in 2011 i.e., for instance United States, getting the PPAs or whatever, but not as much as it was for instance in 2009 where financing was extremely critical.

John Segrich – Gabelli

Okay, thanks a lot.

Operator

Christian Nagstrup from Jyske Bank is online with question.

Christian Nagstrup – Jyske Bank

Yes, hello. It’s Christian Nagstrup from Jyske Bank. A question on the markets, you said that Europe looks to be performing weaker than originally expected. So does that mean that you expect the US market to perform well or at least according to your previous expectations?

Ditlev Engel

Yes it’s the – where we have revisit our view is as we mentioned this morning is on Europe and that is where we are revisiting it and that is of course another way of saying that the other markets including North America, we have not changed our expectations as we saw them internally at Vestas.

Christian Nagstrup – Jyske Bank

Okay, thank you. And then on your 2011maybe not guidance but how much do you expect networking capital affect your cash flow in 2011, I mean, you must have something in your assumptions?

Ditlev Engel

Internally yes, but as I said we have mentioned already that we do expect a free cash flow to exceed the overall investment level, but again let’s talk more in detail about 2011 when we have to delivered Q4 result 2010 and when we know whether or not the Board will let’s say change the overall accounting principle then it will make much more sense to discuss it and unfortunately this is as much as I can and will say at the moment regarding this.

Christian Nagstrup – Jyske Bank

Lastly if I may, you have a record high order intake but it seems to be a large decline in unannounced orders, could you please explain what’s driving this change?

Ditlev Engel

Unannounced orders?

Christian Nagstrup – Jyske Bank

Yes, a big decline from Q2 to Q3?

Ditlev Engel

I’ not so sure I understand what you’re saying the unannounced orders?

Christian Nagstrup – Jyske Bank

Yes the level of unannounced orders in Q3.

Ditlev Engel

I’m sorry.

Christian Nagstrup – Jyske Bank

Yes was about below 200 megawatts according, comparing to 450 megawatts.

Ditlev Engel

Well it’s very simple the – when we add up the numbers that’s how it turns about what we have announced I have not announced. So and that obviously is what we are disclosing when the quarter has passed but of course it’s also important to say that we still need in the fourth quarter to have a quite a decent order inflow in order to get to the 8,000 megawatts to 9,000 megawatts. And normally the fourth quarter is also characterized as being the most busiest quarter when it comes to placement of new orders.

Christian Nagstrup – Jyske Bank

Okay but what I am trying to figure out is that the level is much lower than in previous quarters, there must be some kind of explanation for this?

Ditlev Engel

IF you can see if you look at the what we need to cover of ground you will see North America and Europe as being the two major areas where we’re going to get the outstanding in order to get to the full year expectations and obviously they are characterized with North America normally being characterized with few and bigger projects, whereas in Europe, it’s normally characterized by a lot of more smaller projects which normally then would go into the on-announced orders.

Christian Nagstrup – Jyske Bank

Okay, that makes sense. Thank you.

Operator

Mark Freshney from Credit Suisse is in line with the question.

Mark Freshney – Credit Suisse

Afternoon, I just have three questions. Firstly, I know it’s in the cash flow that you repaid EUR225 million of long day or noncurrent liabilities in the financing section. If you’re holding so little cash, why would you – why did you take the decision to repay that money?

Secondly, just moving on to the statement that you put out this morning, you talk about squeezing absolutely earnings in the same paragraph that you also speak about the profitability of new projects fluctuating input prices. What do you mean by that? Is it squeezing your earnings?

And I guess my third point is you always referred to in future invest amounts in production facilities albeit financially strong high-quality collaboration partners are expected to be used, what do you mean by that? Are you going to start doing loading assets and JVs? Would you be able to elaborate please? Thank you.

Ditlev Engel

Could you just repeat the last part?

Mark Freshney – Credit Suisse

Yes, you talk about carrying forward investing considerable amounts in production facilities, but with financially strong high-quality collaboration partners, does that mean you’ll be investing in joint ventures or with other turbine manufacturers going forward?

Ditlev Engel

We have no – we have no plans for joint ventures. We are seeing investors working more together on a global scale with a let’s say various bigger players, whether it is on the customer side, but also on when it is on the supplier side for future development. But we have no plans for joint ventures.

When it comes to the cash flow and the repayment, well that’s basically a function of what we believe is the best optimization. And, of course, also as mentioned in the statement today, we expect to see further improvement in the overall cash flow development in the fourth quarter 2010.

And then you had a question on the squeezed earnings.

Mark Freshney – Credit Suisse

Yes, what exactly do you mean by that?

Ditlev Engel

I have to – you have to remind me exactly where we’ve used this phrasing on squeezed earnings.

Mark Freshney – Credit Suisse

It was on the fourth page, “squeezing absolutely earnings”, fourth page, second paragraph, “National budget deficits are hampering, sales on Central European markets squeezing absolute earnings.” Is that your earnings or your client’s earnings?

Ditlev Engel

Well, that is basically squaring out the overall what people are willing to pay for the – let’s say for the electricity, and therefore, of course, increasing the pressure and further highlighting the need for the lowest cost of energy.

Mark Freshney – Credit Suisse

Okay, thank you very much.

Operator

Burt Chao from Simmons and Company is in line with the question.

Burt Chao – Simmons and Company

Yes, thank you for taking the questions. Within your reductions in Northern Europe, do you anticipate any repayment of anything to – from grants from government for those facilities similar to some other organization there has been no reductions or is that something that is still in negotiation phase?

Ditlev Engel

No, we don’t expect to repay any grants.

Burt Chao – Simmons and Company

Okay, thanks for answering that.

Operator

Robert Clover from HSBC is in line with the question.

Robert Clover – HSBC

Good afternoon. Yes, I’ve just got one question. I wondered if you could provide some – a little bit more detail on the implied pricing on your order backlog, which looks to have declined quite sharply from the yearend from about EUR1.29 million per megawatts to a little under EUR1 million just now? Could you just perhaps pick out how much of that is due to a change in the contract mix and how much is due to sort of underlying pricing, discounting or declines, please? Thank you.

Ditlev Engel

It’s – first, of course, if you look at the progress we have made in Asia-Pacific, well depending on which market we talk about, obviously that can have an impact on the overall value of the backlog, whether it is constituted. For instance, if it’s off-shore projects compared to for instance projects in China can affect whether the overall value is of the backlog.

But as I have previously mentioned, if we adjust for the input prices, talking about 2010 specifically, then there is no change to this in terms of the pricing. And if we look at the gross margin that we are carrying here in the third quarter 2010, we are I think also demonstrating that what we have previously mentioned about this – I think this is also one of the things that we are seeing here in the third quarter result.

Robert Clover – HSBC

Okay, thank you.

Operator

Kasper Larsen from Macquarie is in line with the question.

Kasper Larsen – Macquarie

Hello, just two questions. Firstly, coming back to the cost reductions, you’re talking about roughly EUR60,000 per employee. Would that include what you would save in running cost of the plants, et cetera, that you’re closing down, as well?

Ditlev Engel

The EUR60,000 is basically what it cost on an annual basis approximately.

Kasper Larsen – Macquarie

Inclusive.

Ditlev Engel

It’ll cost only per person on a yearly basis.

Kasper Larsen – Macquarie

All right. And secondly, you were talking about in the second quarter results that you had a lot of sub suppliers and they were growing and there was intensified competition throughout the value chain and now you’re talking about that the short-term slowdown in market growth and the credit crisis constitute an increase in challenge in the supply chain. In those three months, what exactly has happened there? Can you give a little bit more flavor on that?

Ditlev Engel

Well, what we are highlighting is obviously as the industry are facing a lot of challenges at the moment. We, of course, are even more aware of whether or not this could mean that some of our suppliers is going to face difficulties, and thusly impacting Vestas if this happens.

And we have actually, unfortunately in Denmark today, actually seen a supplier going into receivership this morning. So we are of course paying a lot of attention to whether or not of this development in supply chain, how this is going to evolve and that’s what we are giving reference to.

Kasper Larsen – Macquarie

Okay. So having compared to when we go back to like the 2002s and 2003s where there was a lot of pressure on the supply chain, which resulted in a lot of component constraints in 2005 and 2006, are you starting to see a little bit of the same movements now or is it not nearly as severe?

Ditlev Engel

I would say another reason for the globalizing of Vestas, and as I said in the presentation, the fact that we have established regional sourcing. Of course, also means that going back to what you’re referring to, we were much more depending for instance on European suppliers.

But the fact that we have developed suppliers in Asia, developed suppliers in North America and so on, of course also means that in case if some of our supply should face difficulties in whatever region, we have a much better chance for a backup and it’s a clear policy of Vestas that we need to have at least two vendors for each of the items that we’re carrying.

And thanks to the regionalization, we of course also thusly we’ve reduced the dependency. But that doesn’t mean it cannot give us some challenges if it should happen.

Kasper Larsen – Macquarie

Okay. Thank you very much.

Operator

Allen Wells from Morgan Stanley is in line with the question.

Allen Wells – Morgan Stanley

Hi, good afternoon. A couple of questions. And firstly, just on the new CapEx guidance for 2011, and particularly the tangible CapEx. Obviously, we’re seeing a bit of reduction there from 2009, 2010 levels, but it’s still at a relatively high level, bearing in mind you’re not going to be adding significant capacity, I guess. I wonder if you could just provide some guidance on exactly where that money’s being spent, what will be upgraded and if there will be any new capacity coming on line in any of the regions off the back of that?

And secondly, just a clarification on the comments that you made during the conference call on the cost from importing from Asia into different markets. Can you confirm that’s Vestas’ costs versus Vestas’ costs in Europe and Asia or if this is Vestas’ costs in Europe or the US versus the local turbine suppliers in Asia, as well?

And, third question, just on your guidance, I wonder if you – you suggested that the majority of the reason that you are not providing full P&L guidance for 2011 is because of the changes in accounting. Could you confirm that 100% of this is because of accounting changes and none of this is because of ongoing uncertainties on the marketplace? Thank you.

Ditlev Engel

Okay. Starting with the CapEx, of course, we are running in for instance the V112. And that means that when you are changing some of the manufacturing setup you need the CapEx to adjust for the new platforms and they are investments that need to be undertaken for an instance putting in the new technology into the operation, and that means the majority of the CapEx is related to for instance preparation for new platforms.

When it comes to the costs through Asia question, I have to say that I know Vestas figures better than those of our colleagues. So the figures that we are giving today is obviously Vestas cost as we know it. But if you look at for instance our cost structure in Asia, it is a pure cost that we are looking out based up on the actual cost in the region. So I think that is a very assumption that the cost level that we are having for instance ourselves in Asia, reflects pretty well what other would carry a line if it was a like-for-like comparison. So that is obviously our own figures that we are relating to more than anything else.

Concerning the guidance for 2011, it’s clear that the potential change of accounting principles would mean that it would be rather difficult we believe to say anything at this moment, and therefore we are postponing this to Q4, the Q4 announcement. So that’s the main reason for this.

Operator

Mark Fielding from Citi is in line with the question.

Mark Fielding – Citi

Yes, hi, Mark Fielding with Citi. Three questions actually if I might. And the first one in terms of the falling warranty provisions into next year. I mean, I can understand the improving performance of your turbines, but I suppose it’s still somewhat surprising, given the launch of your new turbine as well. Obviously, you’re very confident that will be a very successful product, but I would have thought normally it would be prudent to provision slightly higher on a newer product launch.

And then my sort of second questions are to a degree interlinked in terms of the employee reduction. You talked about EUR60,000 per employee savings. Just to clarify, does that include the sort of adjustments for things like short-time working that you have been running a bit already or is there sort of on top of that and is it the same employees that are being affected? So just to give us some idea there whether we’re double-counting cost savings.

And then linked to that, more generally, following up the question before on the cost shift and the difference between China, plus transport, given those stats does it not become the trend that more and more this cost base shift needs to continue, given that still I think, for Vestas, Europe will be your largest single region in terms of employees, even after this cost reduction?

Ditlev Engel

Okay. On the warranty provisions, well, when we look at the performance of the fleets that we have and of course also related to the running in of the V112, then we do believe that we will have a lower warranty provision in 2011 than we are experiencing in 2010. And this is when we look at our expectations through the overall fleet performance.

And, of course here the majority, we will still only start installation of the V112 in I guess in the spring, we will see the first turbines being delivered. So, obviously, overall coming back to your question, the V112 platform is still at the running in-phase in 2011. But having said that, we do not expect to have any additional provisions for the V112.

Coming to the EUR60,000, then that figure is and people’s asked, well, how much basically is the yearly cost per year for an employee in the Northern part of Europe. And then, we are just this is average of – averages just to give a flavor of this, and then we do expect that the yearly cost is around EUR60,000 per year average, and that’s what we are staying when we look upon the savings and reductions we are doing.

If we then look at the cost plus freights Asia discussion, then as I mentioned if we look at our units in another parts of Europe, then they are running at a lower cost level, and thusly our competitor compared to Asia plus freight, whereas we in Northern Europe would have a challenge to handle this and going forward we believe, and that’s why we are saying we need to embrace and be ready at Vestas in case this is going to be the future we are going to see in Vestas in a cost position to handle this challenge should the market evolve in this manner. And this is something that we have been looking at for quite a while ensuring our overall cost structure is based up on this.

Mark Fielding – Citi

Can I just follow up, in terms of the short-time working specifically, sorry, is that something you still have in place in Northern Europe and is it something we should still expect to be in place next year as part of your general methods of trying to improve your capacity utilization or will that largely be taken out by this reduction in the actual staff numbers?

Ditlev Engel

Yes, we have had some here. We had to introduce in connection with the revision of guidance and also some of the plants that we are announcing today have been affected by this. But going into 2011, we expect a more let’s say a normalized operational level at the manufacturing units.

Mark Fielding – Citi

Thank you.

Operator

Tom Plinston from Matrix is in line with the question.

Tom Plinston – Matrix

Hi. A couple of questions for me. Firstly, on the US, and your new facilities that’ll be operational by the end of this year, can you just confirm that they’ll be capable of running a 100% at capacity by Q1, they’ll be fully staffed up and equipped?

And secondly, can you run through the fine definition of a firm and unconditional order and then state what if any penalties exist for deferring of this? I’m just thinking about your large order backlog and then the EUR1 billion-odd of orders that were pushed backed into the following year and wondering what the risk is for the rest of your order book.

And then just thirdly on the competitive landscape, is it price per turbine, pre-payments, warranties? Anything specific that you see the key battlegrounds for competition? Any comments would be great. Thank you.

Ditlev Engel

Okay. Standing in North America, we are now apart from one blade factory, we are a bit running at the other facilities and that means going into Q1. The four of the facilities are in operations and we still have one more blade plant to put into operations in Colorado. We also have a facility when it comes to some spare parts and repair facilities that we are looking at putting into operation, but that’s a minor one.

The definition of a firm and unconditional order for Vestas, that means when we announce it, that means that all condition precedents are in place, and Vestas have received the relevant down payment and that we have a commitment obligation to deliver and the clients has a commitment obligation to take the product or the contract that we have agreed and that is when we announce it as firm and unconditional. And this is something that we of course we’ve been standing firm on for a while and the definition of announcing orders.

Coming back to the battlefield for 2011, I think the battlefield is going to be very much on the lowest cost of energy and the value proposition that you have. And, therefore, I don’t expect the battle ground specifically to be on, A, one of the items that you relate to, but very much relate to whether or not that you have the right project and that you have thusly the right capabilities to ensure the best possible IRR for your client, depending on your technology and your capabilities to execute it. And this is where we do believe that Vestas stand in a very good position to take on this. And one of the reasons we are also expecting that we actually have in 2010 increased let’s say our market share from an order intake point of view quite considerably.

Tom Plinston – Matrix

Thanks. Could I just follow up on that firm and unconditional order point? If I read that rightly, that means you – it is possible for orders that you’ve announced to be delayed into next year and essentially any order is at risk going forward, depending on, obviously, the market environment?

Ditlev Engel

This is not what we are seeing. I am not ruling out that if you have a client which is delayed with something that the client in question that we will ask could you please delay it a little bit. But, overall, we agree with the client that we have to have the turbines ready by given date. And thereby, the clients also need to be ready by a given date to receive them. That’s normally how it works. And this is of course something you negotiate in the contract negotiations. So what you are referring today is not something we generally are seeing, but I am not ruling out that it can happen that a particular client would like to have something changed.

Tom Plinston – Matrix

Okay, thank you.

Operator

Arnaud Brossard from Exane BNP Paribas is in line with the question.

Arnaud Brossard – Exane BNP Paribas

Hello. I understand you’re changing – you may change accounting policies and that’s why your 2011 guidance is different from what you used to give. Given we’re still under current accounting policies, could you give us an indication of what your guidance would be under the current accounting policy on sales in euro and EBIT in euros?

Ditlev Engel

Yes and no. Yes, I could, but I won’t.

Arnaud Brossard – Exane BNP Paribas

Okay. Now, maybe what we need is a point of comparison. So since you’re talking about 2011 megawatts produced and shipped of 6,000 megawatts, could you confirm that we should expect for 2010 around 5,000 megawatts? And about your cash guidance for 2011, you’re saying pre-CapEx it should be above EUR650 million. Could you confirm that for 2010 you expect something well around EUR700 million, maybe?

Ditlev Engel

We haven’t given a cash flow expectations for this year. But we as I mentioned previously would like to move into a – instead of net working capital is what we have been using for this year into a more focusing on the free cash flow development. But we haven’t given an expectation to the free cash flow development in – for the entire year in numbers.

And we have shipped – we haven’t either given you – I understand what you are looking for – but we haven’t given exact number exactly to how much we expect to ship and produce for the full-year 2010. But, obviously, everybody can see it was 2,400 after the first nine months that obviously the last quarter is going to be a very, very busy quarter.

Arnaud Brossard – Exane BNP Paribas

Okay, thank you.

Operator

Tom Gibney from Credit Suisse is in line with the question.

Tom Gibney – Credit Suisse

Hi, good afternoon. Just to come back to this paying off of your long-term bank loans, partly using your cash reserves. I think I’m correct in saying this effectively reduces all of your non-EIB or NIB bank loans to zero. I’m just wondering if you could confirm that that the – that that repayment was as a result of your decision rather than a request from the banks that you pay off those loans early? And that’s my first question.

And second of all, on the exchange rate adjustments mentioned on slide 13, can you give just a little bit more detail on what they actually relate to, what items perhaps in the balance sheet that they relate to, and also what size they were in the third quarter? And also, is this the reason that the gross margin is so high in this quarter?

Ditlev Engel

First standing on the bank loan, all the decisions that are related to this is decisions made by Vestas. When it comes to the change on this noncash transactions as it is on the exchange rate adjustments and if I – if memory serves me right we’re talking for instance all here on value of inventories and other things that is related to this, I can’t remember exactly, we haven’t stated exactly.

I do – I actually do believe there is something in the stock exchange announcement which is giving you a breakdown of the exact amounts if you look into the stock exchange announcement, but I can’t just get remember off my head exactly where the numbers were. And if that is not enough then, please give us a call afterwards, and we’ll try to clarify it for you.

Tom Gibney – Credit Suisse

So did that have a positive impact on your gross margin?

Ditlev Engel

No, not as I can recall.

Tom Gibney – Credit Suisse

Thank you.

Ditlev Engel

With this, I think we have unfortunately come to a close. And, again, thank you all of you at Vestas for tuning in. It is a very challenging day today, and hopefully this gave everybody both in and outside Vestas a better view of where we are after the first nine months in 2010, and what we are looking into 2011. And again as I said, next time, we will be back in London. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY’S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY’S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY’S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Vestas Wind Systems CEO Discusses Q3 2010 Interim Results - Earnings Call Transcript
This Transcript
All Transcripts