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Executives

Ditlev Engel – President and CEO

Dag Andresen – CFO

Analysts

Patrik Setterberg – Nordea Markets

Andreas Willi – JPMorgan

Patrick Hummel – UBS

Rupesh Madlani – Barclays Capital

Daniel Patterson – SEB Enskilda

Arnaud Brossard – Exane BNP Paribas

Claus Almer – Carnegie

Håkon Levy – DNB Markets

Martin Prozesky – Sanford C. Bernstein

Allen Wells – Morgan Stanley

Sean Mcloughlin – HSBC

Archie Fraser – Redburn Partners

Kasper Larsen – Danske Markets Equities

Klaus Kehl – Nykredit Markets

Fasial Ahmad – Handelsbanken

Vestas Wind Systems ADR (OTCPK:VWDRY) Q2 2012 Earnings Conference Call August 22, 2012 4:00 AM ET

Ditlev Engel

Good morning and welcome to this presentation for Vestas Wind Systems’ First Half 2012 and the Second Quarter Results for this year. We have decided to label this presentation, Intensifying Preparation for 2013. And I will come back a little later on and explain in detail, why we have decided exactly for this headline. The agenda for today is to take you through this preparation for 2013. Then my new colleague, Dag Andresen, our new CFO, will take you through the financials, and I’ll come back and give you some perspectives on the order intake situation as well as the outlook before we go to the regular Q&A session, where both Dag and I will be participating.

If we start to drill in to the year 2013 and what we have announced this morning, I think it’s important to be aware of what is exactly that we are looking at here in the year 2012 and of course also going into 2013. Back in November 2011, we used exactly these words, that we expect 2012 to be tough and that 2013 could be even tougher. We put a plan in place and that is the plan that we have been working on ever since and which we are now intensifying which I’ll come back to in a minute why we are doing just that.

We also mentioned back at that time that the cost-out on the products was very essential for us and we are today giving some headlines of what is exactly that we have been looking for in terms of the product cost-out which is on schedule. And you’re seeing that EUR30 million will be contributing positively for the EBIT this year, thanks to these product cost-out efforts and even more, it will benefit us in the year 2013.

We are also today announcing that we intensify our plan for the layoff of the organization unfortunately, which means that we are ahead of the schedule that we laid back in November ‘11 and meaning at that time we said that we will in the fourth quarter of this year have a run rate that would be EUR150 million lower going into 2013 compared to going into 2012.

This we are now as I said intensifying because we believe that 2013 as previously mentioned is going to be even tougher and therefore this target is now raised from EUR150 million to EUR250 million going into next year. It’s also important to say that the operational excellence and that just means how the turbines are performing, safety, performance, installation, overall business service, et cetera is going very well.

Also I would like to say that what gave us a lot of challenges in the second half of 2011 and in the beginning of this year, mainly running in new technology is no longer the challenge that it was, which also means that we of course are being burdened from these very disappointing results from the second half of ‘11 and in the first quarter of 2012, no doubt about that. But again looking in here to the second half of 2012, this is no longer new technology for Vestas, this is actually now a known technology throughout the organization.

I want to look at the years ‘12 and ‘13 as one. Just as we did back in November 2011, where we mentioned that we were going to put Vestas into a new organization and had a lot of additional efforts in order to make Vestas a more scalable organization, a more flexible organization but also one where we in the future not only focus on installation of new turbines but then we have two revenue streams, one coming from the traditional sale of turbines and one coming from the sales of services.

As you can see when I speak about an even tougher 2013 then that is very much related to the challenges there are in the new installation market, because if you just compare this to the service, you will actually see that here in the second quarter of 2012, the service revenues have grown 34% compared to Q2 last year, and that is the balance that we have to strike going forward with a more leaner and more agile Vestas Group, changing the organizational structure at the same time which we are in the process of doing.

In January as I said – we have said that 2,335 people would have to leave us during 2012. We are ahead of this plan now and we are therefore further intensifying it by an additional 1,400 to be cut through the remainder of this year and I’ll come back to that later on. We are preparing and putting some lights on, what it is that we are looking into in 2013. We are preparing for 5 gigawatts. 5 gigawatts of new installation activity is significantly down from what we saw in 2012 already now, but also for the remainder of the year.

And this balance is the once that we have had to strike being very busy in 2012 while at the same time comparing for a significant slowdown in 2013 which we now expect to be around 5 gigawatts and therefore these balances are the ones that we’ve had to strike during this year and also preparing for next year. Looking at the split of the reduction of employees. As I said, we expect to be around 19,000 by the end of the year and you have here on the slide, the split between salaried and hourly-paid.

The reduction is going to take place across Vestas and we expect approximately 55% of the layoffs to take place in Europe, 25% in Asia and 20% in Americas and this is again something where we have been looking at, how do we strike the balance between a very busy 2012 and of course preparing for even tougher 2013. If we look throughout the organization, I would also like to say that having the kind of increase in activity that we have seen in the first half 2012 has in my mind been extremely impressive by the organization knowing that these were the challenges were ahead of us and I would like to use opportunity to thank everybody within Vestas watching this that it has been really, really impressive the way people have handled it and are handling it right now because we still have a lot to do here in the second half of 2012.

The additional redundancies which actually correlates to 58% are expected to take place here from the second half of the year with a majority taking place next month in September which again means as I said the total workforce will go down by 3,700 by the end of this year. Talking a little bit about the new organization that was put in place earlier in this year and which is an very important part of driving this process for more leaner and scalable Vestas.

We have – since we met in Q1, had the pleasure of announcing two new members of the executive management team, Jean-Marc Lechêne, responsible as COO for Manufacturing and Dag Andresen, taking over as the CFO, coming in which of course is a very important strengthening of many of the activities that we are in the process of undertaking. On this slide, you can see some examples of what it is that is going on inside the organization at the moment within each of the areas in order to prepare Vestas for these tougher challenges on the turbines market in 2013 while at the same time ensuring that we get a better balance between installation of new turbines and our service business.

If I should try to describe in a single slide what are some of the real main messages and events that we are seeing as per today. Intensifying the organizational adjustment that I just mentioned, but whilst it must not be forgotten is actually that Vestas has the highest combined order backlog for turbines and services ever of more than EUR14 billion. This gives us a good visibility going forward but doesn’t take away the fact that we are preparing for even tougher times.

We are maintaining our outlook for EBIT, free cash flow and revenue for the full-year 2012. And as I said earlier, we still have a very high activity level as you will see later on not just within the manufacturing area but definitely also within installation and handling over projects to our customers that we need to undertake. As mentioned on the 31st of July, we have agreed to defer the covenants test with our banks and we should also not forget that even though we come out with a first half year deficit, then it is on the background with two very different quarters. Q1, 2012 was very problematic with very low earnings, very much driving for the challenges with the new technology whereas we in the second quarter have a significant progress of EUR244 million in earnings in Q2 compared to Q1 and therefore the composition and the swings in the quarters that we are seeing here in the first half is quite significant and that needs to be remembered as well when we look at the first half year results.

With this, it gives me great pleasure to ask Dag, I normally do this, Dag will do it this time, to take over the financials going forward and take you through the main figures. Dag?

Dag Andresen

Thank you. It’s a pleasure to present the second quarter on behalf of Vestas. And I purposely go directly into the slides. If you look at the activity level at the different factories, you can see that shipments are the primary cash generator and this is very important to take into account. We have an improvement of 52% comparing quarter-to-quarter and that’s actually due to very high activity level in Americas before the PTC expiration, and of course full-year shipments are expected to increase by more than 25% to around 6.3 gigawatts.

Deliveries are the primary revenue driver and you see 16% comparing quarter-to-quarter and deliveries again in Americas driven by the PTC is actually one of the key explanation here. Deliveries are expected to be higher in Q3 than in Q2 and we expect them very high in Q4. Income statement, draw your attention directly to the gross margin that is 15.4%, that’s actually a slight drop, 2.3% and EBITDA margin before special items is more or less in part with comparing quarter and EBIT margin before special items is a reduction of 3% down to 2.5% and that’s actually due to higher amortization and depreciation.

Gross margin and fixed costs, if you look at the Q2 gross margin, we have an increase of 15% comparing quarter-by-quarter Q2, 2011 that was a very, very good quarter for Vestas. We have a reduction in 3%, but that increase should draw the attention to the difference between quarter one of 2012 as Ditlev has explained to quarter two of 2012 and the 15% increase. We see also fixed costs continued to trend down and that’s despite increase of depreciation and amortization. We foresee fixed cost to be further lowered during the autumn [ph] and fixed costs above and below gross margin to be lowered by more than EUR250 with full effect at end of 2012.

Well this is also very important to take into consideration is that we have fluctuation in the P&L. Typically a project can have contribution margins between 10% and 14% and this is very, very much depending on the uniqueness of different projects. It could be different wind, it can be location, it can be sites and so forth and so forth. And we presented here a log of different indicator or variables that is influencing the distribution of margins and we also presenting here more than 200 projects a year and you see the shape of the curve. This is very important to understand the business model in a company.

If you compare quarter two versus quarter one, we see we have two EUR248 million in gross profit and we have high margin on projects delivered this quarter, higher volume in Q2 and we have extraordinary very high warranty provision in Q1 2012 and lower fixed costs, but higher depreciation. And here we can see typically volume and project margin is the biggest explanation factor. Service revenue, its trend line is going in the right direction as expected and is increased with 34%. Still service revenue and earnings may fluctuate over the quarters but it do not fluctuate as much as for turbines.

Half year operating profit before allocation of Group costs is EUR89 million and margin 20.7%. Half year operating profit after allocation of Group costs is EUR44 million and margin 10.2%. Balance sheet, go directly down, if you look at net debt, you can see we have slight increase from EUR1.071 million to EUR1.147 million and this means actually that they have an increase in 7% on the net debt area. That’s more or less in the same situation as we have quarter-by-quarter.

If you look at the net working capital, we have a large reduction by 62%. The change in working capital has now decreased over the 12 months. Here you typically can see the net working capital change over the last 12 months and you see inventories and prepayments is more or less in part on the ratio very, very close to one and that’s a very good situation. If you look at the net working capital change over the last three months, you see that inventories in prepayments is not in part regarding ratio and this means that the inventories is actually projects and service under installation.

Megawatt under completion increased during Q2 due to very high shipment activity as we have mentioned before and we have planned sale of 90 megawatt project in Chile that will lower megawatt under completion, and megawatt under completion to decrease in Q4. We had better performance of the turbine fleet as our CEO has indicated, and we see warranty provision and the trend line is going down. We have very limited consumption of the additional warranty provision of EUR40 million for the V90 and root cause has been discussed and confirmed by ZF supports the Vestas’ opinion here.

Lost production factor is below 2% and that’s according to our guidance and this is a very good number for the Company. Cash flow statements, you see that free cash flow of the last 12 months is minus EUR60 million in the end of the period and free cash flow to improve in quarter four. Typically you can see the cash flow generation in Vestas is seasonable. The first half is very typically negative and the half to – last two quarters is typically positive. The net debt is expected to be reduced by year-end.

You also see that the net debt will be reduced, it means also the ratios in the multiple regarding net debt on EBITDA is also expected to come close to 3. Return on invested capital is very disappointing for Vestas. We are doing an overall global evaluation of overall manufacturing footprint in the Company and this will of course keep effect. We see also decline in CapEx but also higher depreciation and amortization and we see the total Europe at 51% in quarter two.

And then I would like to leave the floor back to our CEO Ditlev Engel.

Ditlev Engel

Thank you, Dag. I will speak now a bit about the order intake and the order intake situation. And if we start to look at what happened in the second quarter of 2012 compared to the second quarter of 2011, we obviously saw quite a big drop of 58% down to 945 megawatts. And why is the order intake so low in the second quarter? There are number of reasons for that. First and foremost, there is no doubt that the global wind market is very challenged now when it comes to new installations. Obviously also because of the uncertainly in United States, means that orders are not being placed.

And if you look for instance to one of the other largest markets in China, there is still a lot of grid challenges in that part of the world which again are holding customers back from placing new orders, but there are also other issues for this and that is of course it’s very important for Vestas that the projects we undertake are projects that makes sense also for Vestas going forward in terms of earnings.

And therefore actually receded we see the development of the average selling prices on the order intake, then that is actually up by a few percentage point this quarter compared to the same time last year. Of course this can depend, depending on where in the world that we are but overall we are seeing a pricing level that is rather stable at the moment and I expect so going forward which again I think is important to say that when we look at the value and the earnings potential of the backlog is very important obviously for Vestas going forward and to secure that also in the order intake.

We actually have when it comes to turbines, we have an order intake of close to EUR9.6 billion. 63% of this backlog is based in Europe, more than 20% in Americas and 15% in Asia Pacific. And the average price of the backlog is just above EUR1 million per megawatt. Point being obviously here that the backlog and shall I say the quality of the backlog is something that we are comfortable with which of course we now have to go and execute going forward.

The same goes for the service backlog. And if you look in Q1, the service backlog was EUR4.2 billion which is now up to EUR4.8 billion and again meaning that the balance between the value of services and turbines are getting closer and closer. Just in the quarter here we announced our biggest service contract ever of 1,900 megawatts with our good customers’ EDP in Portugal but again underlying that the service is becoming a bigger part of Vestas.

Just to illustrate this, EUR9.6 billion on turbines and EUR4.8 billion on services by the end of the first half of this year and again as I said, it is actually despite the challenges in the world, our largest order backlog ever.

If we look forward and try to look a little ahead how we see the remainder of the year 2012. We have made some adjustments to our expectations in terms of the activity level. We now expect to produce and ship around 6.3 gigawatts versus 7 gigawatts originally. And the main reason for this is I just mentioned is that the lower order intake that we have been seeing in the second quarter has meant that we have reduced the expectations to shipment down to 6.3 gigawatts.

It doesn’t change our expectations to the revenue which is still between EUR6.5 billion and EUR8 billion and the service revenue is also unchanged at EUR850 million. And an EBIT margin between 0% to 4% for the full-year. We have however increased our expectations in earnings to services which previously was 14% which we now have increased to 17%. We have also lowered our CapEx expectations from EUR550 million down to EUR450 million and as you can see it comes from intangibles that has been lowest from EUR350 million to EUR250 million which is mainly due to a more focused R&D approach by our turbines division which means that we expect to use EUR100 million less within these areas.

Because we are front-loading more of the layoffs, we have also increased the expectations for special items now to EUR75 million to EUR125 million which is due to the increase of redundancies as I earlier said which has gone up with 58%. Free cash flow for the full-year still maintained and warranty provisions around 3% as Dag was just alluding to that there has been quite a positive development within this area, and I think it’s also important to say that the new technology is performing just as it should which again of course is important to maintain these expectations for the overall warranty provisions.

The investments, obviously significantly down compared to previously years where Vestas have invested a lot in globalizing the company and of course putting a lot of this new technology into the market that gave us the challenges in the second half of ‘11 but actually means that we’re seeing a significant reduction of more than 40% on the overall investment level and as I said that also means that we can lower our CapEx guidance by an additional EUR100 million on these more focused approaches within R&D.

This might look like a rather busy slide from people from the outside, but let me try to take you through it exactly what we would like to make sure that we get communicated here. The blue one are the shipments that means what Vestas produce and ship through the quarters and as you can see here, we are extremely busy at this moment here in the middle of or the end of Q2 over the summer. And you will also see as we are getting through the end of Q4 that the activity level in the Vestas manufacturing facilities are expected to go a lot down coming back to the 5 gigawatts in 2013.

That on the one hand also means that we expect to have the turbines out in the field in good time to make sure that they can be installed and hand it over to the customers. The deliveries is what is driving the revenues and the earnings and that means that depending on what we deliver to the customers in a given quarter means that the quarters can fluctuate quite heavily depending on which projects are handed over in the quarter and as you saw earlier from Dag’s presentation there can be huge deviation from quarter-to-quarter.

What you also can see from this is that we expect that the year will be more back-end loaded meaning that until the projects are finally handed over to the clients, we are not allowed to take the revenues and the earnings and therefore again we do expect that the fourth quarter to be very big in terms of revenues whereas on shipments we do expect activity level to go down in the fourth quarter and that is basically what we’d like to illustrate with the way that the two graphs are running because often we will see that there is maybe necessarily a clear bundling between what we actually see in the activity level in manufacturing plants and what is crystallized out on the P&L, there is normally quite a delay between the two.

The preparation as I said in the beginning for 2013 continues. And today we have announced that we are preparing for around 5 gigawatt in an uncertain environment, while still making a profit in 2013. I think it could be, maybe described as going down the highway with a lot of speed while preparing to slam the brakes very fast and obviously everybody knows that this is not the most comfortable situation to be in, but those are the realities that we have been working with both in ‘12 and also going into 2013.

This means that 3,700 colleagues will have to leave us by the end of the year, and as I said, that is more than what was previously announced. What we are also in the process of doing is evaluating our global manufacturing footprint and identification of outsourcing opportunities that is being done with Jean-Marc’s areas as our new COO. These are some of the decisions that we will take here in the second half of how we’re going to handle this including the situation in United States.

And let me just say that we see positively what has been passed by the Finance Committee in the senate about the proposal for an extension of the PTC but obviously until this is signed into law, we will have to wait and see how it goes and these are of course some of the things we’ll take into account when deciding on how to look at the manufacturing footprint going forward, but it doesn’t change the fact that we are preparing and gearing Vestas for 5 gigawatts next year.

The fixed cost reduction has been increased from EUR150 million to more than EUR250 million by year-end exactly to take care of this 5 gigawatts scenario. And the cost-out of the new products are being also further intensified and today we are selling, for the first time how much value we expect to get out of this and this year, we expect EUR30 million to hit the P&L in 2012 and more in 2013.

And here I am back again to, there is a delayed factor from when it actually takes place in the manufacturing plant by taking the cost out of the product, until it actually is delivered to the customers you will not be able to see it in the P&L and this year EUR30 million will go into the P&L in 2012 and obviously more will go in 2013 as we hand over these new technologies to our customers. The organizational scalability and flexibility to be further increased within each of the areas of the member of executive management to make sure that Vestas better can adapt to these very changing external environments.

Finally, before we go to the Q&A, I would like to draw the attention that on the 3rd of October here in Aarhus, Denmark we will have our Capital Markets Day and I would kindly ask those who are interested to participate to sign up before the 14th of September where we would like to take you through more about how our service business is being developed and how we see that going forward, talk more in detail about the product cost-out program that I just gave reference to, and of course also it’d be a good opportunity to meet members of the new management team in order for them to give you their perspective of how you see the development within each of the areas and make sure that there is a good opportunity for interaction as well.

Finally, we will present our third quarter results on the 7th of November also taking place here in Aarhus, Denmark or probably for most of you over the web.

With this, I would like to turn to the Q&A session. And if there are any questions here in the room, we’re happy to take those, otherwise we will turn to the phone, unless there are questions here in the room. It seems not to be the case, so operator let’s turn to the phone.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Patrik Setterberg from Nordea is on line with a question.

Patrik Setterberg – Nordea Markets

Yes, hello gentlemen. I have a couple of questions, just starting off with your free cash flow. I just want some clarification. You’ve highlighted in your report that in the fourth quarter, free cash flow could amount nearly to EUR1 billion, does this implies taking into account that you have a negative free cash flow in the first half of almost or above EUR600 million that we should see a positive free cash flow to full-year of around EUR300 million to EUR400 million or that we should expect to see a negative free cash flow in the third quarter as well? That is my first question.

Ditlev Engel

Yes. And the second question?

Patrik Setterberg – Nordea Markets

My second question is regarding your ambitions to make some outsourcing. I just wanted to have some elaboration on what kind of outsourcing opportunities you see within your business model? And then my last question is regarding that you’d intensified your restructuring plan just to make sure that you will be profitable with an expect manufacturing level around 5 gigawatt in 2013. I’m just wondering if you aim to be profitable on net profit or is it on the EBIT line?

Ditlev Engel

Okay, let me take some of them and then maybe Dag, can take your first question on the cash. On the overall activity level on the profitability with the 5 gigawatts, that is basically saying that we expect to be profitable, and I think it’s very hard just to quantify to what level in 2013. Basically what we are saying is if we look at the value and the orders that we have and the cost-out activities, we do expect 2013 to be profitable as well and I think that’s important to relate to.

I don’t want to go into detail of exactly how much on net profits and how much on the EBIT line and so on, but only to say that we do expect 2013 to be a profitable. When it comes to the ambitions within outsourcing and the opportunities there, we of course as we also mentioned today, looking at our total manufacturing footprint to see what could make sense. Now as an example, we earlier this year decided to sell our tower manufacturing facility in Varde in Denmark to one of our suppliers which is one way that such a deal could be struck with a supplier or of course there could also be other areas within Vestas that would make sense whether it’s a supplier or with another third party that we could look into if that seems to be a good idea for both parties.

So we are evaluating this because as we said we know that the industry is having tough challenges especially on new installation and therefore we think it’s a good idea to approach this and see what could possibly be done for the benefit of both parties. And as I said there are number of options that we will now evaluate, but exactly what it will be, I don’t think it would be prudent to elaborate on.

On the questions of the EUR1 billion in the fourth quarter, I don’t know if you want to answer it, Dag?

Dag Andresen

Absolutely, Ditlev. I think as we said we guide on a positive free cash flow, and that’s actually how the budget will end out. And in Q3, we expect free cash flow to be negative due to significant improvement of net working capital. We expect actually Q4, last quarter to again right close to EUR1 billion in free cash flow. So that’s the situation and of course we will come back to this issue in quarter three presentation.

Patrik Setterberg – Nordea Markets

Okay, thank you very much.

Ditlev Engel

Thank you.

Operator

Andreas Willi from JPMorgan is on line with a question.

Andreas Willi – JPMorgan

Yes, good morning. Thank you for taking my question. The first one on the outlook for ‘13 where you provided the 5 gigawatt number, and said you expect the market overall to also decline, would you expect the global wind markets outside the U.S. to decline, is that also part of the guidance or is the decline in 2013 you are preparing for just related to your assumptions on the U.S. which is obviously going to be down? The second question on the covenants, the tests that got deferred in the summer, are you in a position to say for how long that has been deferred, how much time do you have to achieve the necessary covenant levels again? Thank you.

Ditlev Engel

Okay. On the outlook, we have said, as you rightly said 5 gigawatts for 2013 and it is also based upon that we do expect that the global wind market will be much more challenged in 2013 including of course United States, and therefore we are preparing the total cost structure in the organization for activity level around 5 gigawatt. We haven’t taken yet a specific decision on how we look upon United States, but we have said that the overall cost structure will deal with 5 gigawatts while we at the same time are evaluating the overall manufacturing footprint here in the second half.

So very shortly, yes the installation of new turbines, we expect to be very challenged in 2013 whereas the service business not to be forgotten, we still expect to see a quite a positive progress on the service business going forward. You want to comment on the banks?

Dag Andresen

Absolutely. If you look at last quarter of 2011 and first quarter of 2012 that was pretty disappointing quarters. It did actually end out with a higher net debt on EBITDA. And as we said in the press release, the 31st of July, the situation is that – is allowed to draw under that facility that is EUR1.3 billion and we’re going to continue to draw under that facility this year and we expect the net debt to go dramatically down in the end of the year. So there is nothing news that is not reported in the press release to say so.

Andreas Willi – JPMorgan

But basically should your financials not improve for whatever reason, is there a certain date by which you would have to sit down with the banks again to ask for another deferral?

Ditlev Engel

Well, Andreas I don’t think we have as, Dag said, not more to add that what we put on the 31st of July that we expect to test our normal terms in the future and we have no other view on that as per today.

Andreas Willi – JPMorgan

Thank you.

Ditlev Engel

You’re welcome.

Operator

Patrick Hummel from UBS is on line with a question.

Patrick Hummel – UBS

Yes, good morning everybody. Two questions basically, first one is regarding your cost base. I am a bit confused. Is basically the new headcount target based on a no PTC extension scenario in the U.S. or if there is no extension by year-end, would it potentially mean further cuts to your cost base? That’s the first question. And the second question, the 5 gigawatt target for next year and your expectation to be profitable on the back of that top line number, what does it assume for the order intake yet to come because I guess you don’t have the 5 gigawatt already in your pockets, are you assuming the same margin quality for orders yet to come as you see it in the existing backlog or do you expect an improvement, a deterioration there? Any color would be helpful, thank you.

Ditlev Engel

Okay. Let me start by saying that on the cost base that we are now mentioning with the 19,000 employees is before the decision is taken on what we’re going to do on a manufacturing footprint in United States. I hope that will make that part of it clear. When we talk about the order intake and the – we have not given a guidance for the expectations to the order intake this year, but it’s clear, as I also said in the presentation that it is important for us that the projects that Vestas take onboard are project that has a decent earnings profile and therefore if you look at the overall pricing and the development of the pricing, it’s up a few percentage points, obviously it would fluctuate between the quarters, but that is where we have our focus going forward.

On top of this, we also have to look into when you talk about the profitability for 2013 to pay attention to what we said about the product cost-out. The product cost-out is something that we have more than 200 people working on and initiated obviously for the reasons of the challenges we came into is now giving EUR30 million EBIT positive effect in 2012. And obviously it will give us more in 2013 as these projects are being handed over to the clients. So when we talk about what are important drivers with the 5 gigawatt scenario, it is obviously the cost-out of the organization and the preparation for that, but also the cost-out of the product platforms.

Patrick Hummel – UBS

Okay. Thank you.

Operator

Rupesh Madlani from Barclays on line with a question.

Rupesh Madlani – Barclays Capital

Good morning. Three questions for me please. First, do you see potential to lower your fixed costs back to 2006 levels on the back of the comments you made around increased use of outsourcing? Second, shipments are the primary driver for cash flow. What do you see is a single biggest risk to achieving your full-year cash flow guidance? And finally, do you see potential to lower your research and development costs further either this year or going into next year? Thank you.

Ditlev Engel

Okay. Let me address the fixed cost and R&D and then Dag can talk to the cash. If we look at the overall organizational structure, I think you have to remember that if you compare for instance our service activities in 2006 versus our service activities now, then you cannot only compare with the gigawatt activity level in the manufacturing facilities that I think is important to remember that there are a lot of additional activities around that.

Secondly, if you look at the R&D and the spending here on R&D, we have also previously mentioned that it’s clear that the V164 offshore turbine is obviously still a very big project for Vestas to undertake and a lot of our resources go towards the development of this. And but if you look of new platforms going forward, like the V164 of course it’s clear that we do not anticipate to make a new version of the big offshore turbine going forward, but right now obviously we have high R&D expenditure very much related to those activities undertaken now. So these are some of the things that are driving the overall expenditures plus of course when it comes that there are a number of people who are quite busy of taking the cost-out because of the challenges we had which of course on the short-term is also costing us money, but of course giving us much more benefit going forward.

Rupesh Madlani – Barclays Capital

So would you say therefore that if for example U.K. where you didn’t see significant orders for the V164, also deliveries in the U.K. going out a number of years still that your R&D costs for the V164 could fall significantly beyond what you’ve already announced today?

Ditlev Engel

It’s clear that once the V164 is developed, that obviously will mean unless people come out with new bright ideas means that everything equal you will see that the cost level on R&D everything equal will go down because it is a big project we’re undertaking here, but we’ll have to wait and see that and I can just add that we still expect to have the prototype for 2014.

Rupesh Madlani – Barclays Capital

And may I just ask on the use of except the point around service business, different from ‘06 but there is an increased use of outsourcing, could that potentially extend to the production and manufacturing of blades, or was that something you still consider to be essential to the business?

Ditlev Engel

Well I think if you look at the journey we have been on, I think we have to remember that we have actually over the years we have closed a number of plants here in Northern Europe and therefore if you look at our manufacturing footprint today, and making sure that Vestas is competitive for instance in North America or in Asia, thanks to the ramp up in China and the U.S. and so forth and so on. I think one has to remember that it’s not only a question of the plants, but also the operational cost of the plants going forward.

And therefore we have paid particular attention to how do we make sure that our manufacturing footprint is cost competitive, not only from let’s say a run rate point of view but also from a transportation point of view because our transportation costs are quite significant as these machines obviously are very big, so it’s not only a question of that but also the related transportation cost. So if I look at our manufacturing footprint today, I think we have a good balance in terms of Europe, Asia and North America. Whether we will outsource some of these or not, and which of them, time will tell but I think it’s important that unlike back in ‘06 and ‘07 where we were much more concentrated in Northern part of Europe, we today have a much better global footprint which makes sure that we are competitive within the regions which we were not at that time when we took these decisions.

So whether or not we will outsource, time will tell, but I think at least now unlike at that time we have a good geographic spread [ph].

Dag Andresen

I think what is also very important is that the difference between new revenue driver and also the cash generated because on most projects we recognized the revenue when the turbines are finally delivered to the customers and installed according to the accounting principles and regarding the primary cash generator is of course the shipments. And this means that even if we are shipping and delivering, it doesn’t mean that we are recognizing on the revenue side, but on the cash side of course you are building up the cash accordingly of the shipments that we are delivering.

I do not actually foresee any key risk in the shipments, so maybe Ditlev, if you have any viewpoints that maybe you can take it.

Ditlev Engel

Well if you look at, we have at the moment 2.5 gigawatts under installation and obviously that is a very high number but as I said a little earlier if you look at how deliveries and shipments are playing out, then the shipments and the production is expected to be quite low by the end of the year and that obviously reduces the risk in terms of getting these projects over the line to the customers, and that is of course where we have to focus, but again I have to say there are certain areas that are not within our control, as an example, even we have shipped all the turbines to site, if the customer is not ready with a grid connection which is beyond our control, we cannot take the revenues and the earnings on the projects even though we have delivered them as we should. And therefore these are some of the risks that we have to be laid through and the reason why we have such a broad span on the guidance because we know that things can happen weather-wise, grid-wise, which means that even we have sort of say done our part, we are still not allowed to take them in as revenue and earnings and that is something that needs to be looked at.

Rupesh Madlani – Barclays Capital

Very good but with respect to shipments as driving cash flow and shipments being something that you can’t control, you feel pretty comfortable in your ability to ship and generate cash flow to meet your year-end guidance, would that be your cash flow neutral guidance, would that be fair?

Ditlev Engel

Yes, I think that if you look at the 6.3 gigawatt that we are now shipping, it’s clear that obviously since we are not shipping the 7 gigawatt as previously announced but even with 6.3 gigawatt, we still believe we can get to a free cash flow for the full year.

Rupesh Madlani – Barclays Capital

Very good, thank you.

Ditlev Engel

You’re welcome.

Operator

Daniel Patterson from SEB is on line with a question.

Daniel Patterson – SEB Enskilda

Thank you. I have a few questions. I just wanted to start off, sorry to label the point but the 5 gigawatts you’re talking about next year, I just wanted to be here absolutely certain you are talking about activity at your factories, so shipments and not orders, is that correct?

Ditlev Engel

Correct.

Daniel Patterson – SEB Enskilda

Okay. Then secondly, there is more on the whole sort of outsourcing situation, looking in from the outside and looking back at Vestas over few years, this is a pretty big change. It looks like a pretty big change coming from being very vertically integrated to maybe more outsourcing. Could you maybe take a step back Ditlev, and give us a little flavor of, is this correct assumption, it is a pretty big change and how do you sort of view the whole strategy?

Ditlev Engel

Yes. If you look at our warranty provisions as they evolved, you will see that they have come significantly down, and they have come down because of the focus that has been on quality throughout the entire value chain. Best illustrate is through the lost production factor which is now trending below 2%. And if we go back some years and looked at where did the problems come from, versus what we could control and what we could not control. One of the reasons why we have been so heavy on in-sourcing where first and foremost to make sure that there were no problems in terms of the performance of the turbines and we need to be in control of that and of course together with our suppliers.

What we saw for instance here in the first quarter of 2012 where we had some gearboxes delivered to the V93 with faulty bearings, how costly that is not only for Vestas but also for our customers and not least for our reputation. So any approach that we’re going to have on this, it means that it has to be done in a way that there is absolutely no compromise on quality. And we have today been much better as an organization to work much closer together with our suppliers and that is thanks to a lot of efforts, lot of KPIs put in place, a lot of quality measurement put in place in the plants.

So we can feel much more comfortable with, but even it is not within our own jurisdiction sort of say, then we can still keep a very high quality by buying it from somebody else. And that also means that our ability as an organization to work much closer together with the suppliers, with the right quality focus, with the right KPIs is something we think makes a lot of sense. A few years ago, where we had to say, we had to become much better, we felt more comfortable with that we could do these things ourselves to actually demonstrate what is most important for our customers namely the development of the lost production factor which very easily could turn around and say if you look at the satisfaction of Vestas customers the way it has grown from 47, up now in the 70 area over a few years is very much related to the performance of the turbines.

And lastly but not least, it is impossible to run a profitable service business if you do not have full control over the quality. We are giving in the service business and the proposal to the clients, a very huge commitments of that people will get the electricity that they should have when the wind is blowing. If you have any challenges on the quality that obviously means that your service commitments will become much more costlier. So a long answer but just to make it very short, the outsourcing – potential outsourcing has to be seen in the light that there is no absolutely no compromise on quality because otherwise we are going to jeopardize what is most important for our customers and its going to jeopardize our service business. So that’s a fundamental requisite before we go into this.

Daniel Patterson – SEB Enskilda

I think that’s very clear. And just to be certain here as well potential outsourcing and I guess, potential divestiture of more factories that is not included in the 3,700 layoffs, is that correct?

Ditlev Engel

Correct.

Daniel Patterson – SEB Enskilda

Okay, thank you.

Ditlev Engel

You’re welcome.

Operator

Arnaud Brossard from Exane is on line with a question.

Arnaud Brossard – Exane BNP Paribas

Good morning everyone. First I have a question on 2013. It’s a clarification in fact. You said you are expecting to be profitable in 2013, is it at the EBIT level? Second on 2013 again, can you just give us an estimate of the sales figure that would correspond to your 5 gigawatt shipment scenario? Third, you are evaluating your manufacturing footprint in outsourcing opportunities, can you tell us how long you expect this process to take, and finally what’s your view on potential wider partnerships. What role would you expect Vestas to play in potential consolidation of the industry?

Ditlev Engel

Okay. I think previously got the question on which level of the line we talk about the profitability and I am not going to go further into that, but just say with 5 gigawatts we expect to be profitable also in 2013. When we talk about the backlog and being at a level of 5 gigawatts, please remember that at this moment, we have 9.6 of turbines basically corresponding to 9.6 gigawatts in the backlog also going in to 2013, by the end of Q2 so that obviously give us some visibility, but we haven’t shed a light on what we expect the total order intake to be for the full-year and do not expect to do so.

I will however say, if you look from historical facts you will normally see that about 40% of the order intake comes in the first half and approximately 60% in the second half. So it is not abnormal if you look at it from that perspective that more orders come into the second half than they do in the first half, just to remember that. Concerning the 5 gigawatt scenario overall, as I said this is what we are gearing the organization for and it’s something with the complexity that the organization have means that this is where we are putting our expense level in. And in order to make sure that we can handle even 5 gigawatt if it should end up at this level in 2013.

Concerning partnerships, then we have already at the beginning of the year mentioned that we may consider to share the V164 but other than that I don’t have additional comments concerning partnerships or potential partnerships.

Arnaud Brossard – Exane BNP Paribas

Okay, thank you.

Ditlev Engel

You’re welcome.

Operator

Claus Almer from Carnegie is on line with a question.

Claus Almer – Carnegie

Yes, hi. I have a few question, if I may, the first, you stated that Vestas should be profitable in a scenario where shipments to the 5 gigawatts as we talked about today. Is that including the effect from the service division? Second question, average selling prices of turbine sales year-over-year in Q2, however is that enough as in newer turbines are more expensive to manufacture than the older models which you also stated in the report? And finally, should we still expect more cuts in the U.S. to be announced in Q3, as only 350 out of 1,400 layoff is related to your U.S. operation? That’s it.

Ditlev Engel

Okay. Let’s start with the U.S., we have not taken a decision on the manufacturing footprint including the U.S., but as I stated today, we will do that here in the second half. So basically that is something that we need to sit and evaluate and could whatever decision we take, it’d be top of what has already been announced today. Concerning the cost-out and the efforts within the cost-out, as we said EUR30 million goes out or improves the EBIT in 2012 for the project that we’ll expected to be handed over to the clients this year, but obviously going into 2013, this will have a much bigger impact because this is an activity that has been undergoing here during 2012 and therefore there is a delayed effect from 2012 activities benefiting the P&L more in 2013.

Concerning the price development as we know, we can fluctuate between the quarters but I think it’s clear that with the efforts that we are undertaking now talking about the profitability in 2013, due to the scalability of the organization and also due to the cost-out of the product platforms, it’s of course very important drivers to ensure a profitable situation in 2013. We are just saying, we have not given any flavor over the service and the earnings of services in 2013, we are just saying to you today that we expect that with around an activity level of 5 gigawatts, Vestas’ expecting to be profitable in 2013 even though the year 2013 as it looks today is probably going to be the toughest year the wind industry have seen for a number of years.

Claus Almer – Carnegie

Maybe just to follow-up, just to be 100% sure, the profitability is on Group level then, no information about the split between service and manufacturing, right?

Ditlev Engel

Correct.

Claus Almer – Carnegie

And the second question, even with the cost-out, I would assume that the new turbines per megawatt will be more expensive to manufacture that for instance the V90 and therefore the ASP should go up everything equal per megawatt?

Ditlev Engel

Now we have to remember that the order intake is of course quite small in this quarter, but everything equal, yes, the new technology should have a better earnings than the older technology. On the other hand, you also have to remember from a comparison basis that right now the cost that you are seeing in the P&L is with a very high cost level of the turbines, those that are handing over today.

Claus Almer – Carnegie

Sure. So only you’re talking about the order intake in Europe per megawatt not about the costs, but thanks.

Ditlev Engel

Thank you.

Operator

Håkon Levy from DNB Markets is on line with a question.

Håkon Levy – DNB Markets

Good morning and thank you for taking my questions. Firstly back to the alternatives for a more flexible manufacturing base with more sort of process outsourced. Can you say anything else about how much of the capacity you expect to keep in-house and what the timeline for, say, divestments of factories are and who are the potential bars of these assets should be. And secondly on net financial items, the slight changed by EUR43 million from positive EUR20 million in first quarter to negative EUR23 million in the second quarter, seems to be quite volatile, I am wondering if you could help us understand this swing and how would you think about this line in the P&L going forward? Thank you.

Ditlev Engel

Again on the outsourcing, I don’t have that much to add to what I’ve already said. We are going to work with this. We have announced that we are merging some of the manufacturing activities under our new COO and also there we are going to look at what are the options and possibilities we have going forward. But as I said, and what would make sense both from a financial point of view but also from a quality point of view and then we’ll have to take it from there, but again let’s see where we go but I don’t want to go into the details. Then what’s your question on the financials?

Dag Andresen

Yes, I would like to come back to this question a bit more in detail via our Head of Investor Relation if that’s okay, so we can explain in detail how this (inaudible).

Håkon Levy – DNB Markets

Okay. Then a short follow-up question, can you just remind us approximately how much manufacturing capacity you have as of today?

Ditlev Engel

It’s again how many shifts are you working et cetera, but overall one would say that we are probably in a position everything equal to do in the magnitude of 9 sort of gigawatt everything with approximately.

Håkon Levy – DNB Markets

Okay, thank you.

Ditlev Engel

You’re welcome.

Operator

Martin Prozesky from Bernstein is on line with a question.

Martin Prozesky – Sanford C. Bernstein

Good morning guys, one question please and a few points around it. The first is, how can you give investors confidence on the EUR1 billion free cash flow in Q4, I mean the previous best free cash flow quarter we’ve seen was back in Q4 of ‘06 when it was EUR500 million and that mostly driven by a prepayments increase of EUR400 million. And one of the other good quarters was last Q4 but that was mostly due to EUR300 million increase in payables, so how can you give investors confidence that we will see the increase in free cash flow that’s double the previous record? And linked to that, what is the remaining credit on the credit line of EUR1.3 billion from the cash use so far this year. It looks like you’ve used about EUR700 million of that, is that correct?

Ditlev Engel

If we look at the inventories and the development of the net working capital where the inventories are standing at EUR458 million and if you look at the overall activity level, please be aware of how much money that is right now tied up in turbines under construction as we have shipped quite a lot. So there is a huge amount sitting in the inventories that we expect to be released here in the second half.

If you talk about what kind of confidence that can be given, then I would say if you look at the net cash profile between first and half year of Vestas, then it is not unusual that first half is negative and second half is positive. Last year in the first half, it was negative with EUR494 million and this year it is negative with EUR633 million even though the activity level is significantly up going forward.

It is of course clear that we are also in this quarter suffering from compared to same quarter last year that the order intake is significantly down and that obviously means that the down payments in this quarter is not very big, simply because very few orders were placed. And therefore you are absolutely right in saying that new orders coming in here in the second half which we normally tend to see that there are more orders in the second half than the first half is of course also an important point to make sure that we get the amount of cash flow that we are forecasting for the full-year.

Then there was a question on the…

Dag Andresen

RCF.

Ditlev Engel

On the RCF line.

Dag Andresen

In the first half of 2012, we had cash burn of approximately EUR633 million. So then you can do the math by yourself and you need also to remember that our net debt now is more or less the same level as it was a year ago. And also that the cash generation of more than EUR600 million in the second half of 2012 will of course also then as I said reduce the net debt. So the RCF calculation is more or less in line with what you said.

Martin Prozesky – Sanford C. Bernstein

And then just one follow-up on the inventory, I appreciate the fact that inventories are up nearly EUR400 million, but the way I understand the working capital items now is that you do get progress payments against those inventories or if you’re prepayments did increase as well Q-on-Q, so does that mean if you’re going to see a big inventory release that you’ve not received any progress payments on the work done because that is the unusual compared to the past?

Ditlev Engel

Yes, but you have to remember that we have shipped a little more than 3,000 megawatts. We still expect to ship another 3,000 in the second half which of course is also going to drive cash. That’s important. You’re right, that we get milestone payments when we ship but of course we also get payments during installation. We don’t get everything when we ship, but we get a nice chunk when we ship, but of course you also have to remember that there is still a number of turbines that have to leave the plants which again also is going to have a positive impact on the cash flow.

Martin Prozesky – Sanford C. Bernstein

And then just one last question. If you get towards the end of Q3 and you do need cash, are you prepared to go to the equity market to raise capital?

Ditlev Engel

I have no comments to that.

Martin Prozesky – Sanford C. Bernstein

Thank you.

Operator

Allen Wells from Morgan Stanley is on line with a question.

Allen Wells – Morgan Stanley

Good morning guys. Most of my question has been answered, just a couple still to go. Firstly on working capital, obviously coming into the year working capital was pretty low, I expected at least to my numbers to go back to the sort of the level for you to be free cash flow positive end of this year as well. Is that sort of level in your view sustainable for Vestas particularly under the new guidance of 2013 being around 5 gigawatts and also obviously with visibility on your order book potentially coming down a little bit as orders have slowed up that’s my first question. And secondly, on the service business obviously you’ve increased your margins on this business to 17%. Is this sort of 17% a sustainable level now moving forward or would you expect a sort of full 10% to 15% or even lower just trying back to that sort of level in 2013 and 2014? And then finally just on offshore, obviously you’re still active in the market with the V112. I wondered if you can just provide a little bit of an update on just in general what you’re seeing in that market. Has there been any slowdown in interest or activity that in Germany as it relates to the grid issues or any other issues that might be affecting that market as well? Thank you.

Ditlev Engel

Okay. First thing I would say Allen is on the working capital. It’s important to remember that Vestas is working on make to order and that means that if you look at the sourcing that we did for instance by the end of 2011 when we were preparing for a much busier first half 2012, meaning that we were because of the make to order principle working along those lines. As we are now preparing for a 5 gigawatt scenario next year, it’s of course also mean on the make to order principle that lot of the sourcing that we are not going to do sort of say because we are expecting for low activity level in 2013 as we leave 2012 and that actually means from a net working capital point of view is that we will see lower inflow of components by the end of this year unlike the end of last year where we were actually preparing for a much busier 2012. That’s one point I think is important on the working capital development.

It’s of course clear that in order to get through this positive scenario, all of the turbines that are right now on installation needs to be handed over to the clients, we should not therefore hopefully run into problems weather, grid-wise or whatever but that we are able to hand them over. And another point just to like to make sure, when we talk about handing over this to the clients, we have to remember that what gave us a lot of problems in the second half of 2011 mainly the manufacturing and running in of new technology is not something we’ve foreseen for the second half of this year simply because it’s now a known technology and that reduce obviously the execution risk compared to what we saw in the second of ‘11.

Turning to the service earnings, the progress that we are seeing on service earnings in the second half on the second quarter of 2012 of this level, we are – this is basically coming from a lower cost base, thanks to the way we are now organizing Vestas with the scalability, which again means that unless of course a lot of things happening on the pricing or the performance of the turbines, then obviously since this has been driven more from a cost-out exercise than anything else, we do expect to see that service in the future should have a decent earnings level whereas as we saw a much lower earnings level but again it can fluctuate depending on the activity level but overall we are seeing that the service organization is also becoming more efficient.

Talking about offshore, I fully agree with you. The offshore market, there are challenges on the grid and orders. I actually think that the order we announced in Belgium as far as I can be able to see was the only offshore order announced in the second quarter of 2012, and I think that basically it speaks for itself that the activity level in offshore has not been so high and I think you pointed some of the right issues concerning grid and other issues that needs to be dealt with.

Operator

Sean Mcloughlin from HSBC is on line with a question.

Sean Mcloughlin – HSBC

Good morning. I have two questions remaining. Firstly, just on the offshore, if you can confirm you’re still committed to funding the prototype even without a partner? Secondly just a comment on Brazil, what steps are you taking to regain compliance status with BNDES and how quickly do you think you can regain compliance status?

Ditlev Engel

Yes. Well offshore, very brief, yes, we expect to go ahead with the prototype for 2014. Concerning Brazil, then it’s true that some of us in industry had to regain the approval by BNDES and a lot of activities have been taken by Vestas to make sure that we get this in place. I cannot give you a specific date, but we do expect to make sure that Vestas regain this approval from BNDES going forward, but I can’t give you the date on that, but a lot of people are working hard to make sure that that happens.

Sean Mcloughlin – HSBC

Great. So you don’t see any current risks to your order pipeline in Brazil currently?

Ditlev Engel

No.

Sean Mcloughlin – HSBC

Thanks.

Operator

Archie Fraser from Redburn is on line with a question.

Archie Fraser – Redburn Partners

Good morning gentlemen, just a couple of questions left. Firstly, going back to the banking covenants, I wonder if you could let us know are these tested quarterly or semi-annually, do you have the next test September or December and is there any further color you can give us on for example the way the net debt to EBITDA is calculated, is that rolling quarters, I don’t know if you can let us know of what the levels are? Secondly, your comments on the U.S. situation I think what you were saying is that the current headcount expectation at the year-end of 19,000 is before potential for the U.S. cuts I imagine that’s 1,600 that you’ve been talking about earlier this year if PTC isn’t renewed. So I understand there is potential movement on the headcount taking out because of the PTC. Should we also consider that there is potential movement on the 5 gigawatt shipments, I guess the next year depending on the movement in the PTC, could that actually go down? That’s it.

Ditlev Engel

Okay. Let me start with the U.S. and then Dag, can talk to the covenants. It’s true. The 19,000 we talk about here is before we had taken a decision on the U.S. situation. As is also been reported we have already made some adjustments to the facilities, but we have not overall decided on the total manufacturing footprint which we are going to do here in the second half. Then you had another question on the U.S., what was that?

Archie Fraser – Redburn Partners

Well if you could be cutting further jobs in the U.S., could you cut your 5 gigawatt shipment guidance to next year because of what happens in the U.S.?

Ditlev Engel

Well again let me say that preparing for 5 gigawatts is obviously with a very positive – I’m sorry, with a very let’s say a cautious view in 2013. Whether things can change or not, it’s hard to say, but I would say I think already we’re 5 gigawatts, we have taken a fairly conservative view on the year 2013.

Dag Andresen

Yes, regarding the covenants and as a principal we do not actually comment on the covenants structure to say it so. So that’s how the principals are here at Vestas. And number two, we are testing on the rolling EBITDA 12-months, that’s what we use. And as you see also on the presentation you can see that the multiple is expected to go down now in end of this year.

Archie Fraser – Redburn Partners

So you can’t say whether it’s tested quarterly or semi-annually?

Ditlev Engel

No. I’m sorry, Archie we don’t comment on that.

Archie Fraser – Redburn Partners

Okay, thanks.

Ditlev Engel

You’re welcome.

Operator

Kasper Larsen from Danske Markets is on line with a question.

Kasper Larsen – Danske Markets Equities

Yes, good day. Most of my question has also already been answered but just a few also on the credit. I was just wondering if you still have full access to the entire credit line or if it has been limited, this is based on the – what you say little bit on clear wording you’re using in the 31st July announcement where you say that led us to have a loud drawings which in the opinion of Vestas are sufficient for the continued operation. So I was just wondering if you still have full access to the entire line or whether that is only a trend [ph] of that? And the second question is if you could get a little bit more flavor on the interaction between shipments milestone payments from shipments and prepayments from new orders in terms or actually turning into cash generation, you’ve been talking about shipments being the main driver of cash flows but I am just trying to wonder here whether the project completion perhaps is contributing even more. So if you could get some flavor on would it be 60/40, 70/30 kind of split between shipments and advanced payments, please?

Ditlev Engel

Okay. Normally we still see down payments, of course they can vary but we still see down payments in the magnitude of 10% to 15% depending on area, region and so far and so on, then it’s correct, that you see a big milestone payment in terms of shipment. We haven’t given the exact split, but of course there are still quite a number of payments coming after the shipment, but the shipment in itself is the largest single payment that we get but there are of course payments subsequent to the shipment.

Concerning the RCF and the drawing, then we have no further comments than what we put out on the 31st of July, as I think you basically read it out yourself, so I don’t have further comments with that. Also what was mentioned in there is that we expect to test on normal terms in the future.

Kasper Larsen – Danske Markets Equities

Okay, thank you very much.

Operator

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

Klaus Kehl – Nykredit Markets

Yes hello, Klaus Kehl from Nykredit. Two questions if I may, first of all, you have given some comments about the outlook for 2013 in relation to your shipments et cetera. Could you also try to give us some flavor on your CapEx for 2013 and what I am referring to is that as you previously said, you have a manufacturing capacity of 9 gigawatts, so in other words you have plenty of capacity, does that mean that we should expect very low tangible investments? And secondly, should we expect the R&D costs to stay at the current level as you’re guiding forward here in 2012? So that’s my question related to your CapEx for ‘13. And secondly, could you give us an update on the costs related to the V112 that you have seen here in 2012?

Ditlev Engel

Let me start by saying the fact that we have – normally we guide in February, and the fact that we today have released a number of 5 gigawatts is basically just to get everybody an flavor of because there is so much talk about what is that we expect in 2013, how will this impact Vestas and so far and so on. So the reason why we have given you the 5 gigawatts does not necessarily imply we’re going to give you all the other numbers just to manage expectations here.

So the 5 gigawatts is there. Obviously I should correctly say with 5 gigawatts, it doesn’t really – it means that we have a plenty of capacity that I think is clear. Concerning the cost-out, then I would like to say that the EUR30 million that we have stated today is obviously again with a delayed impact, meaning that this is what we take over the P&L in 2012, but not necessarily what the real cost-out is that there has been taking place as the changes to the buildup material [ph] of the platforms. And therefore we are saying we do expect that in 2013 that this will contribute significantly to a further improvement on the earnings of the new technology as they are handed over in 2013.

Klaus Kehl – Nykredit Markets

Okay. Then just a follow-up question regarding to your R&D costs, given what you have announced today, would it be fair to expect them to remain at the same level in 2013? Should we expect them to go…

Ditlev Engel

You can of course ask the same question in many ways but let me just tell you that of course, the V164 will of course as we are expecting the prototype in ‘14 that will of course also be important development on that turbine in 2013, but exactly how we’re going to see the R&D spend in ‘13 I don’t want to comment further on today.

Klaus Kehl – Nykredit Markets

Okay, thank you very much.

Ditlev Engel

You’re welcome. I think we have the last question, operator?

Operator

Fasial Ahmad from Handelsbanken is on line with a question.

Fasial Ahmad – Handelsbanken

Yes, Fasial Ahmad with a couple of questions. Firstly on the cost take out program, could maybe just comment how much of the planned or how much of the goal have you actually implemented, if you could give us some kind of percentage in terms and how much are you expect to implement in 2013? And the second question it really relates to your revenue guidance, I mean you’re cutting your shipments guidance quite significantly and you’re still maintaining your revenue guidance. How should we square this? And thirdly on your free cash flow guidance, I mean again you’re cutting your shipment guidance quite significantly and you’re also talking about orders having disappointed yourself. Is there anything which has progressed better than your expectations since you’re maintaining your free cash flow guidance? That’s all.

Ditlev Engel

Okay. On the cost-out program, let me say that there is not a lot more to add than what I just said concerning there is EUR30 million so far, but we will come and get more in behind this at the Capital Markets Day on October 3rd. Concerning how to bridge the revenue and the shipments, basically if we look at the expectations for this year, you will see that we are cutting these 700 megawatts, but of course it was not necessarily given that those 700 megawatts were expected to turn into revenue this year that has been taken out of the manufacturing plants for the remainder of the year in order to bridge that.

But as I showed earlier on the slide, there can be huge variations between when they are shipped and when they are actually hitting the P&L. Concerning good news, bad news concerning cash flow, let me say obviously the fact that we are reducing the CapEx from EUR550 million to EUR450 million everything equal obviously has a positive impact. And then if you compare first half on the net working capital, I think it’s evident that we are in the second quarter suffering from the order intake was significantly down compared to the same time last year.

And obviously hopefully going forward, we will see that the order intake will perform better than what we have seen in particular here in the second quarter. But again the tie up of net working capital is of course where we have the majority of the cash sitting and therefore in order to get through the guidance it’s of at most importance that we manage to take all these projects over the line and thereby ensure that we lower the net working capital throwing the execution. And again as I said as shipments are going to be quite low by the end of the year, that at least should give a flavor for that the turbine should be out in the field and everything equal increases the likelihood that they are going to be handed over to the customers.

Fasial Ahmad – Handelsbanken

Okay. And just to follow-up, a question on the free cash flow guidance again and also on your comments regarding orders, I mean it’s quite clear from your (inaudible) banks are taking a fight to close the eye on your free cash flow development, I mean to what extent is that hampering your ability take in orders, if you could comment on that?

Ditlev Engel

You were breaking up a little bit, but I don’t see that if your question was related to the announcement we send out on the 31st of July whether that is anyway impacting our order intake. Our view is that if you look at the market here particular in the second quarter, that it has been the overall orders placed in the markets have been very limited and this is also what Vestas have seen here in the second quarter, but it is not our impression that any of these issues are related to Vestas. And just as a proof point to this I would say if we then look at the progress that we have made here in the second quarter in terms of earnings, then if that assumption should be right then maybe the order should be flowing in here in the third quarter.

Fasial Ahmad – Handelsbanken

Okay, thank you.

Ditlev Engel

Thank you very much everybody, and thank you for tuning in today. And hope to see you all when we present the third quarter on the 7th of November. Thank you very much.

Dag Andresen

Thank you.

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