Ringkøbing Nov 5, 2015 (Thomson StreetEvents) -- Edited Transcript of Vestas Wind Systems A/S earnings conference call or presentation Thursday, November 5, 2015 at 9:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Anders Runevad Vestas Wind Systems A/S - Group President & CEO * Marika Fredriksson Vestas Wind Systems A/S - EVP & CFO ================================================================================ Conference Call Participants ================================================================================ * Kristian Johansen Danske Markets - Analyst * Claus Almer Carnegie - Analyst * Patrik Setterberg Nordea - Analyst * David Vos Barclays - Analyst * Fasial Kalim Ahmad SEB - Analyst * Pinaki Das BofA Merrill Lynch - Analyst * Alok Katre Societe Generale - Analyst * Sean McLoughlin HSBC - Analyst * Shai Hill Macquarie - Analyst * Klaus Kehl Nykredit Markets - Analyst * Jose Arroyas Exane BNP Paribas - Analyst * Phuc Nguyen Citi - Analyst * Mark Freshney Credit Suisse - Analyst * Jonathan Larson Hortons - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [1] -------------------------------------------------------------------------------- So good morning, everyone, and welcome to this third quarter 2015 earnings call. As usual, then, it's me, Anders Runevad, and our CFO; so the same procedure as normal. So let's get straight into the key highlights for the quarter. A high activity level and good solid quarter with improvements in both the financial and operational performance. Earnings continue to improve. EBIT before special items at 10.9%, up almost 2% year on year. Backlog also continues at a high level, EUR16.4 billion. A well-managed P&L and, also, a well-managed balance sheet, means that the ROIC continued with upward trend and in the quarter was 71%. We now have better visibility for the remainder of the year and we have increased the guidance on revenue, EBIT margin and free cash flow. We have also decided to adjust the capital structure and, therefore, launched share buyback program on EUR150 million. As usual then, I will talk about the orders and the market. Marika will talk about the financials. I will come back on the summary and outlook, and then we have the Q&A. Starting with the regulatory environment, I would say overall remains positive and favorable for renewables. In Americas, of course, timing of PTC is an important milestone. I would say that we, and the rest of the industry, expect this to be considered by the Congress later this year; so in Q4 and probably towards the end of Q4. Looking at EMEA the trend continues moving from a feed-in tariff to auction systems. A little bit different timings in different countries, but the trend is definitely there. Germany are working on the time schedule and also, actually, on clarifying the roles so that it's a smooth handover in between the current system and the new system. In the UK, we are also seeing that the government has proposed there to extend the grace period for the renewable obligation. So that, of course, gives also some more certainty into the UK market. Southern Europe, where we've seen very low activities, and continue to see very low activity, we see some positive signals in Spain, for example, where a new power auction is planned towards the end of the year. In Asia Pacific I would say not much changes, since we talked last quarter. Still a good support for renewables from the two main markets, China and India. But also, actually, from many smaller market in Asia Pacific. Of course, the talks between China and the US, overall, of limiting the CO2 is positive for the overall regulatory environment. Looking at order intake then. It was 1.5 gigawatts in the quarter, a 29% increase year on year. We also saw an uptick in the price per megawatt, mainly due to mix in the quarter, to EUR0.96. So orders in quarter was 338 megawatts, higher than the same quarter last year. US, Germany, Finland, France and Thailand were, in absolute terms in that order, the main contributor for the increase. If we look at the average selling price, as I said, we saw an uptick in the quarter. I would say, overall, prices remain stable in a competitive market and the uptick sequentially is mainly due to mix. Of course, if you compare year on year you also have a certain currency effect. Talking about orders then and looking at the global picture. First of all, very satisfied that we see growth in order intake in all regions across Vestas' large footprint. Nine months, we're up 46% year on year; so a very good development on orders. Americas up 61% on nine months, and 20% in the quarter. Overall, a strong performance from the US, but also very good growth, actually, in Latin America markets, like Brazil, Mexico, Chile; and in the quarter also in Uruguay. In EMEA we also see a positive development of nine months, 27%, and quarter, 5%. Fairly well spread activity levels, I would say, but driven Nordics, Germany, offshore. Then I talk about (inaudible) what -- so the offshore platform, Poland and France, and similar then looking at the third quarter. Asia Pacific, also a good growth, of course, from a lower volume, so percentage-wise very high. But encouraging to see that we -- for the nine months, we see improvements, and they are primarily driven by China, Thailand and India. Also, in the Q3 from a lower level last year, increased activity level in Vestas. Looking at deliveries then, starting with nine months, also up 26%. Total 4.8 gigawatts; again, a strong performance in delivery from the US. But, also, I would say, growth in Asia Pacific and a stable Europe, Middle East and Africa. The delivery follow, of course, very much the order picture with the strong performance in the US, but also in Latin America, both nine months and in the quarter. In EMEA we've seen a decline in delivery in Germany this year compared to last year, as anticipated. But we also see that we have many other markets that actually makes up for that decline. So many markets actually has a very positive trend in EMEA. In the quarter that contribution basically came from Poland, Italy and Jordan. In Asia Pacific, again, smaller numbers, but a good improvement for nine month, and in the quarter a very low activity level. Of course, that could happen when you have less projects that you have a quarter with less project activity. As I said, a strong backlog, EUR16.4 billion and equal size between wind turbines and services. Sequentially then, a decline in the turbine backlog of EUR0.6 billion and an increase in the service of EUR0.1 billion. US market and an update on where we are on the Master Supply Agreement. Started out the year with a potential of up to 3 gigawatts in Master Supply Agreement. Orders year-to-date is 2.2 gigawatts. The split is, under Master Supply Agreement, 45%, and outside, 55%. That leaves a potential of up to approximately 2 gigawatts in Master Supply Agreement. We should, of course, also remember, as I talked about before, that projects are traded in the market between customers and, therefore, also could be traded between customers that we have a Master Supply Agreement with and customers that we don't; also evident if you look at year-to-date order intake. In the quarter we have also further strengthened our broad product portfolio; we talked about that before. Vestas -- a key differentiating factor for Vestas. The reason for our global rate is that we have a strong 2 megawatt and a strong 3 megawatt platform. In the quarter we have announced our new V136-3.45 megawatt 3 megawatt platform that we reduced annual production by approximately 10% compared to previous platform. Very well suited for low wind sites and also not just more efficient when it comes to energy production, but also the possibility to open up new markets. Again, be it on our well-proven 3 megawatt platform that we have installed close to 7 gigawatts across 27 countries. Also a short update on offshore, our joint venture with Mitsubishi Heavy Industry. We have -- offshore, I should say, have now received all milestone payments. That means EUR300 million all in all. If you recall, the milestone payment was the plan when we set up the joint venture. The triggers for the payment are a mix between technical milestones and commercial milestones. So this is, of course very satisfying that we see that the joint venture is on track and that those milestones have been fulfilled, and the resulting payment now has been received by the joint venture. Looking at the order situation, the joint venture has announced firm orders of 846 megawatts and also announced conditional orders of 780 megawatts. So I would say that, from an order point of view, the joint venture is off to a good start. If we look at the 3 megawatt platform offshore projects you see has some examples of projects that has been completed, and also new orders on the 3 megawatt platform has been taken. For example, the Rampion 400 megawatt project that was taken last quarter, and also the Nobelwind project. Also, the 3 megawatt part of the business continues in the joint venture. So with that I hand over to Marika to go through the financials. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [2] -------------------------------------------------------------------------------- Thank you, Anders. Obviously, the positive story is well reflected in the P&L. You see an increase of the revenue and, consequently, the activity level of the Company of 17%. That generates a gross profit of EUR389 million in the quarter, so a 22% increase compared to last year. That is primarily driven by the revenue increase that you see, but also various mix effects in the quarter. On the revenue side the total translation impact is around EUR150 million on a totality basis. The gross profit, I should also mention, is obviously reflecting the EUR19 million of write-offs in the obsolete inventory, but still a very hefty underlying margin overall for Vestas. If you look at the fixed capacity costs you see a slight increase compared to last year, but we are at very stable levels also when it comes to the fixed capacity costs. We have another slide that shows you more about the outcome of that. EBIT is EUR232 million, so 42% increase compared to last year. That generates an EBIT margin of 10.9% in the quarter compared to 9% last year. Net profit is more than doubled to EUR206 million, so 102% increase also here, quarter over quarter. So, overall, a very good performance and good earnings in the quarter. If we look at the -- next, fixed capacity costs, which has been a big focus and continued to be a big focus for us. That's also what we see now is really the leveraging of the cost cuts that were made previously. We are now down to a level of 8.1%, so we're certainly leveraging the volume increase that we see right now, and that is compared to 9.9% last year. So, a very satisfactory path on the fixed capacity costs. If we look at the service business, we're well on the way to reaching our mid-term target of an increase of 30% in the revenue. You see -- quarter over quarter, you see 19% increase. So the quarter generates EUR280 million. You have translation impact also on the service business, and that's in the order of magnitude EUR10 million, and to be very specific, EUR11 million. The service revenue, or rather the margin was impacted by the write-off, as I said earlier, so you have EUR19 million write-off of obsolete inventory. This is nothing we do on a regular basis, but it can occur randomly in the quarter. But it's nothing underlying that we're worried about; we still see a healthy development in the service business. The service backlog is also at a very high level, as Anders alluded to earlier. Also in that backlog, quarter over quarter, you have close to EUR200 million of translation impact. The balance sheet, which is the next slide, is still very healthy. I will now talk about the equity. As you know we, in Q2 -- Q1, rather, of last year did raise the equity. We see a very healthy development also on the working capital. When I say healthy, it's all planned for because of high activity level anticipated in Q4. Solvency ratio is approaching 34%, and you also see the development of the net debt. If we go to the change in net working capital and here you see the change over the last 12 months. I would say that we said -- what we said in the beginning of the year, is that we see that all the efforts that we made to improve the net working capital are still having a big impact, but we also see that it's becoming more and more difficult to further improve, as it is still -- as it is at such a satisfactory level, despite the high activity. Over the last three months, you see a negative impact as, again planned for. It's primarily on inventory and receivables where we see the increases. You also, on the net working capital in the quarter, have around EUR80 million of currency impact. If we go to the warranty provision and the lost production factor, as we said earlier, this is certainly a proof of the quality effort that we made in the Company. It continues to have a big impact. When we provide for warranty, it's based on the revenue in the specific quarter. We have not changed the underlying 1.8% of provisioning, but in the quarter you have 2.1% in Q3, and that's because of reclassification. So the underlying remains the same; we have made no changes to that. If you look at the lost production factor that continues at a very satisfactory level below 2%; so no change in that performance. Cash flow statement, and I would like to say here that it's totally stripped from currency impact. So this is, again, we're very happy to see the cash flow that is generated from earnings. We have very few, or no one-timers in the cash flow, so it's a pure cash flow and we managed to generate EUR158 million in the quarter. So, again, a very good performance, as you can see. The total investments have increased, as planned, 20% quarter over quarter, so we are in Q3 of this year spending EUR79 million. No changes in where we spend the money. We spend the money on the capitalized R&D, and also investing in the molds for the capacity need that we see right now. Capital structure. We have today, as you know, launched a buyback program. But capital structure and the long-term target we have is to be net debt to EBITDA below 1 time. Obviously, in this part of the cycle, we're at a very positive level. Solvency ratio, we have also a mid-term/long-term target of 35%. We're approaching 34% in the quarter. So, overall, the long-term capital structure targets are well underway. The share buyback program, as I alluded to earlier, we have launched a program as of today and we have the intention to buyback EUR150 million-worth of share program. The purpose of this program is, obviously, that we are adjusting the capital structure as, to no secret, we have a good net cash position on the balance sheet. We are not committing to any frequency in the share buyback program. But, having said that, we're also continuing to invest in our mid-term strategy. So that is certainly the priority from our side. The dividend policy has not been impacted or affected by us issuing the share buyback program in 2015. That leaves us with the return on invested capital. Here, we clearly see the impact of the improved earnings, as we've seen also in the previous quarters, but we are now at very high levels of above 71%. Again, very satisfactory level, considering the high activity level that we have in the Company's earnings, and balance sheets are well controlled. By that I'll leave it to you Anders. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [3] -------------------------------------------------------------------------------- Thank you, Marika. So let's go to the summary and outlook. So I would say, of course, we are very satisfied with the quarter: a good execution and a strong improvement in most parameters. If I link it with our four strategic objectives, starting with the markets. As I said, we are -- experienced growth in orders in all our regions. We've taken orders in 31 markets across five continents for the first nine months, and increase of 46%. In the quarter, 26% -- or, in the quarter, as I said before, also a good development. On deliveries we have a high activity level, we increased deliveries last year considerably. This year, for the first nine months, deliveries up 26%, and, in the quarter, actually up 15%. So, all in all, confident with the position we have in the market and, of course, that is extremely important. Looking at the service business, we are growing the revenue this quarter, 19% year over year. Last quarter 20%; so also a good development and well on track on our mid-term target. We also saw backlog increase in the quarter. On the competitiveness and, of course, the reduction of levelized cost of energy, we also see good development, in the quarter. We have released our V136 -- announced our V136 turbine. Again, I am very satisfied with the broad portfolio we have on both 2 megawatt and 3 megawatt turbines. We'll continue to invest in both our platforms moving forward. On operational excellence, which is about improved earnings capability, clearly have delivered in the quarter with an EBIT of 10.9% and a ROIC of 71%. All in all, we have continued to leverage our key -- three key advantages: the global reach [and] Vestas now present in 74 countries; the technology and service leadership; and last, but not least, the scale. We have now passed 71 gigawatts in the installed base. Of course, it's also the scale in purchasing and simply the number of people dedicated to the wind industry. Looking at the rest of the year and the upgraded outlook. So, as I said before, we now have a better visibility for the rest of the year. We expect Q4, as usual, to be a busy quarter. But we also expect to have the usual challenges with weather, primarily, that we normally look at in a fourth quarter. So on the revenue side, we expect to be between EUR8 billion and EUR8.5 billion. Service business is expected to continue to grow. EBIT margin, before special items, between 9% and 10%; and stable margins in the service business. Total investments we keep at approximately EUR350 million. On free cash flow, we expect to be between EUR800 million and EUR1 billion. The dividend policy remains as before. So with that, of course, first of all, thank you all for your interest and call in, and we go over to the Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Kristian Johansen, Danske Bank. -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [2] -------------------------------------------------------------------------------- My first question is regarding your assumptions for the updated free cash flow guidance. Do you include any effect from a possible PTC extension? Here I'm, of course, thinking about potential prepayment for new framework agreements. Secondly, do you include any effect from a potential sale of your headquarter in your free cash flow guidance? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [3] -------------------------------------------------------------------------------- I didn't hear. Can you please repeat your last question, Kristian? -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [4] -------------------------------------------------------------------------------- Yes. It was regarding if effect from the PTC extension is included in free cash flow guidance, and a potential effect from the sale of the headquarter in August. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [5] -------------------------------------------------------------------------------- I would say no on both parameters. When we anticipated the cash flow, it's with what we know now, the same with any sale of facilities or similar; so both are excluded from the guided cash flow. -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [6] -------------------------------------------------------------------------------- Okay that's very clear. Then my second question, if we do a bit of math on your free cash flow guidance and your share buyback and dividend payment this year, I get that you should end the year with a net cash position between roughly EUR1.9 billion and EUR2.2 billion. Is this the level we should expect you to be comfortable with going forward as well? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [7] -------------------------------------------------------------------------------- Well, I will give you a very generic answer to that one. We are very satisfied with the levels we are at, and we have now adjusted the capital structure. Having said that, we will also continue to invest in the mid-term strategy that we have. -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [8] -------------------------------------------------------------------------------- Okay, well, then may be a follow up on that one. You say that you plan to build a blade factory in India. What's the cost and timeline of that? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [9] -------------------------------------------------------------------------------- That will be next year, primarily. Cost will be roughly normal for a blade factory, somewhere in between -- something roughly around EUR50 million. So that's the plan. -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [10] -------------------------------------------------------------------------------- Okay. Thank you. That was all for me. -------------------------------------------------------------------------------- Operator [11] -------------------------------------------------------------------------------- Claus Almer, Carnegie. -------------------------------------------------------------------------------- Claus Almer, Carnegie - Analyst [12] -------------------------------------------------------------------------------- Also a few question from my side. The full-year guidance -- or the new impressive full year guidance, does that include any material production issues or other extra cost in Q4? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [13] -------------------------------------------------------------------------------- When we give an estimate of the overall result, obviously, we're not expecting it to be a free ride. But then again, are we exact in the issues we might have? You never know, but this is the best estimate that we have for this point, and it includes that not everything will be smooth. -------------------------------------------------------------------------------- Claus Almer, Carnegie - Analyst [14] -------------------------------------------------------------------------------- Right, because when you look at the incremental margin, especially in the higher end of your guidance range, the EBIT margin sounds a bit low, I would argue at least. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [15] -------------------------------------------------------------------------------- Yes, and as I said, Claus, it is a best estimate with what we know now. Then obviously, we're striving to do the best we can, but this is the best estimate. -------------------------------------------------------------------------------- Claus Almer, Carnegie - Analyst [16] -------------------------------------------------------------------------------- Okay. Then my second question goes to the US frame agreement, these 2 gigawatts outstanding. What should we think about those contracts? Could they be converted to firm orders in 2015 or are they more PTC-dependent? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [17] -------------------------------------------------------------------------------- I would say, in general, nothing has changed. They can be -- the potential is there definitely. US team is working hard, as normal, especially this time of the year. I would say timing probably, of course, this year, but it could also very well be next year where the customer chooses to convert their frame agreements to firm and unconditional order. Of course, it's very hard to know exactly when the customers will do that and to what extent they will do it. So nothing has really changed since a quarter ago. It is the frame agreement. It is a potential. Most likely timing is during this year and the beginning of next year, if you want to fit them into the current PTC cycle. If we get a PTC decision towards the end of the year, of course, things can change a bit. But that is of course -- we are very close -- in a close dialog with the customer in the US, and when things get firm, as normal, then we will come back and announce them. -------------------------------------------------------------------------------- Claus Almer, Carnegie - Analyst [18] -------------------------------------------------------------------------------- Sure, okay. Then just a final question, your fixed cost base, you have a slide showing EUR640 million on 12-month rolling basis. Is that the ongoing rate, or how should we think about that going forward? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [19] -------------------------------------------------------------------------------- Obviously, we have had a very little increase in the fixed capacity costs, despite the very high activity level. We have also had a negative impact from the US dollar, from a translation point of view, on the fixed capacity cost. We're not committing to any level, because obviously you have to adjust if the activity level is very high. But we are at a satisfactory level for the rolling 12 months. -------------------------------------------------------------------------------- Claus Almer, Carnegie - Analyst [20] -------------------------------------------------------------------------------- Okay. Thanks very much. -------------------------------------------------------------------------------- Operator [21] -------------------------------------------------------------------------------- Patrik Setterberg, Nordea. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea - Analyst [22] -------------------------------------------------------------------------------- A couple of questions from my side as well. The first one is related to your project division in the third quarter, obviously some good margins in this business. You usually say sometime that the project you have been executing on in quarters, they have been having an above-average margin or a normalized project margin or below. How has it been in this quarter? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [23] -------------------------------------------------------------------------------- Well, it has been a good quarter, and that is also what we stated. We've had a good mix in the quarter and, consequently, also higher volumes. So it's -- from a margin point of view, it's been a very satisfactory quarter. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea - Analyst [24] -------------------------------------------------------------------------------- So we should be careful of using the leverage we see in this quarter? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [25] -------------------------------------------------------------------------------- Well, there is obviously a certain leverage, but it's been a good quarter and one that we're satisfied with. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea - Analyst [26] -------------------------------------------------------------------------------- Okay. My second question is relating to the impairments and the write-offs you make in the service business. Could you give a little bit more flavor to what you're actually doing? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [27] -------------------------------------------------------------------------------- If I give you the longer story, we have two divisions in the Company that we're focusing on, and that is turbines and it is service. We have the management in place and we have the structure in place for that business. We now decided that we also have obsolete inventory. Saying obsolete inventory, even if we make a write-off of EUR19 million in the quarter, obviously with the numbers in service, it has a big impact on the margin in the specific quarter. We are very happy with the overall performance of the service. Also, the obsolete inventory, even if we take the write-off there's never that we don't have hope to sell it, but it is appropriate to make the write-off at this point. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea - Analyst [28] -------------------------------------------------------------------------------- Just to be clear, you have reassessed any value of your service contracts? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [29] -------------------------------------------------------------------------------- No, no. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea - Analyst [30] -------------------------------------------------------------------------------- Okay. Then just finally, is there any impact from these impairments and write-offs in your cost of goods sold? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [31] -------------------------------------------------------------------------------- Yes, it comes in -- it has an impact on the margin, obviously, on the cost of goods sold; it comes below. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea - Analyst [32] -------------------------------------------------------------------------------- It comes all below. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [33] -------------------------------------------------------------------------------- No, I'm correcting myself, Patrik; it's in the cost of goods sold. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea - Analyst [34] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [35] -------------------------------------------------------------------------------- For service. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea - Analyst [36] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- David Vos, Barclays. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [38] -------------------------------------------------------------------------------- I have a couple of question, please. First, regarding the PPAs that you're able to -- sorry, that your customers are able to (inaudible) at the moment, how do you see those developing? Clearly, a forward base level price in California $28, but also in Germany, existing price are below [EUR30]. Gas in the US is at $2.30. Is that impacting your customers' ability to generate new business at all? That's question one. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [39] -------------------------------------------------------------------------------- No, I would say that -- I'm not an expert on the customers' negotiation on PPAs, but if you look at our order growth and orders booked for the first nine months, I must say that I don't see any impact or lack of orders for us or -- and, therefore, of course, at our plan to projects in the market. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [40] -------------------------------------------------------------------------------- Okay and -- but do those projects depend on the PTC still being there? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [41] -------------------------------------------------------------------------------- Of course, in the US, the project of today is with the PTC components. Of course, if your question is what will happen with or without the PTC in the US, I think it is, of course, very hard to predict. I think the good news is definitely that wind is getting more and more competitive. I saw a study from I think it was [LaSalle's] about the US market on levelized cost of energy for the last five years that show that, as a market, the cost -- the levelized cost of energy for wind has gone down more than 50%. Of course, it's also something that we see, that wind is getting more and more competitive. At the same time, of course, when policies are changed, you always get a question mark in the market. So there are definitely projects being discussed longer term without PTC. I think, generally speaking, of course, on your overall question also against the competition from traditional fossil fuel, I would say that wind has a very positive cost development. I think that's the reason why we see overall a good market this year, despite many countries moving into more type of auction systems. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [42] -------------------------------------------------------------------------------- Okay, that's clear. Now my second question is on the service backlog; I picked up that you now see that having a length of about six years. I previously calculated that at eight years. Could you please elaborate on what the change has been there? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [43] -------------------------------------------------------------------------------- Yes, pretty straightforward. We have discovered an error in the formula and, consequently, that we have corrected. We are, unfortunately, seeing it as six years instead of eight years. But it is an error and it has been corrected. Having said that though, on the new order intake that we see, the tenor is eight years. So it is order backlog, but the order backlog value, as such, is unchanged. So it is just -- but it is an error in the formula. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [44] -------------------------------------------------------------------------------- Okay, so it is then -- is my understanding -- I did some rough, high-level math there on the prospective revenues that you might have in the backlog, then I come to roughly six years. Is that now the methodology that you're applying? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [45] -------------------------------------------------------------------------------- No, we can go into a long discussion on how we have calculated. We have calculated -- unfortunately, there was a small error in the formula, as I said, and the six years is now the correct tenor of the order backlog. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [46] -------------------------------------------------------------------------------- All right, I'd like to take that one offline then. Thank you. That's all my questions for now. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Fasial Kalim Ahmad, SEB. -------------------------------------------------------------------------------- Fasial Kalim Ahmad, SEB - Analyst [48] -------------------------------------------------------------------------------- Two questions from my side. Firstly, on order pricing. I know you said that in the quarter your order pricing is partly driven by mix, but could you provide us with more granularity on this? It's such a big deviation compared to the previous quarters. That's my first question, please. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [49] -------------------------------------------------------------------------------- I think that, as usual of course, the mix and scope has a big impact on the average price per megawatt. That will -- we will -- varies between the quarter depending on the scope mix that we have in the quarter, and that is the biggest reason for the variation. If you look at it quarter to quarter you can have different scopes in different quarters. You have turbines, even turbines without towers in some example compared to fuel scope. So that is, if you look at this from a sequential point of view. I feel as I said that overall pricing in the market is fairly stable. Of course, if you compare also then year on year, you have a currency effect if you look at the -- in our price per euro per megawatt compared to the -- I think EUR0.89 (sic - see slide 6, "EUR0.87") that we had in the same quarter a year ago. -------------------------------------------------------------------------------- Fasial Kalim Ahmad, SEB - Analyst [50] -------------------------------------------------------------------------------- Okay, so are you indicating that we should be reverting to the trend pricing which we have seen the last few quarters? Is this what you're indicating? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [51] -------------------------------------------------------------------------------- No, but I'm not indicating any of that. I think -- I'm explaining what we see. So in the market overall on pricing and that we will see variations between quarters very much depending on mix. So I think if you look at this on an average basis for longer term that is what we have said. -------------------------------------------------------------------------------- Fasial Kalim Ahmad, SEB - Analyst [52] -------------------------------------------------------------------------------- Okay and the second question is related to the project margins. I appreciate that you're saying that it's a very good quarter, but how does it compare to your backlog margins? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [53] -------------------------------------------------------------------------------- Overall and that is also a consequence of what has been explained by Anders, we see very stable price developments across the board. We also have a huge number of markets, so with the order backlog as we don't comment on any levels, but it's a very healthy order backlog and we're very happy with the quality that we see. -------------------------------------------------------------------------------- Fasial Kalim Ahmad, SEB - Analyst [54] -------------------------------------------------------------------------------- Okay. Then just one final question here. You have seen a lot of turmoil in the US in [ecos] market. Should we expect that to impact any of your master supply agreements? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [55] -------------------------------------------------------------------------------- Overall, that is also what we have indicated. We have a broad base of different customers, so we're not exposed in any direction when it comes to customers. We also have a very good payment terms that we very consistent with; that also makes us very little exposed to what's happening in the market. To be very specific, the [ecos] is not the vast majority of our customers in any shape or form. -------------------------------------------------------------------------------- Fasial Kalim Ahmad, SEB - Analyst [56] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [57] -------------------------------------------------------------------------------- Well, to add to that; I think what we've primarily seen from the [eco] is less appetite of buying already constructed projects. -------------------------------------------------------------------------------- Fasial Kalim Ahmad, SEB - Analyst [58] -------------------------------------------------------------------------------- Okay, perfect. -------------------------------------------------------------------------------- Operator [59] -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [60] -------------------------------------------------------------------------------- I've got a couple of them. The first one is just on your margin upgrade. You're looking at 9% to 10% for this year, but clearly your orders are up over 40% this year, so next year should be a growth year in terms of revenues. Just trying to understand if you do more revenues next year, shouldn't your margin next year be above the 9% to 10%? So that's my first question. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [61] -------------------------------------------------------------------------------- Well, Pinaki, we're not guiding for 16%. But with what we see on the order backlog and the order intake we're very happy about the situation. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [62] -------------------------------------------------------------------------------- Secondly, my other question is probably more on the cautious side. I've seen your backlog is actually down DKK6.6 billion for the quarter. That's obviously a mix of good revenues offsetting the orders. I just wanted to understand if I do some quick math, it looks like you probably need EUR2.3 billion of orders probably in Q4, just to maintain the backlog where it is. So this is a more general question, it's if your backlog has been slightly over DKK8 billion you probably need to -- and your feel there are around EUR7 billion in the turbine business, probably need EUR7 billion of orders next year to just keep it flat. I just wanted to understand are you seeing order trends which help you have some confidence on next year as well in terms of order that you will get EUR7 billion/EUR8 billion of orders, so that you can maintain the backlog, and the backlog doesn't go down in value terms? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [63] -------------------------------------------------------------------------------- Okay, I'm not sure that I follow your questions. But to comment on what we're showing here in terms of the reduction in the order backlog for the Q, you also have a EUR200 million currency impact if you look quarter over quarter. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [64] -------------------------------------------------------------------------------- Okay. So of the EUR600 million, EUR200 million is just currency? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [65] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [66] -------------------------------------------------------------------------------- Okay, cool. The last question is I've seen that in your European both deliveries and orders are relatively flattish now. I don't know if there's already some offshore included in the orders in EMEA. Just wanted to understand are you seeing any slowdown in Europe for wind orders as well as deliveries? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [67] -------------------------------------------------------------------------------- No, if you look at EMEA on the order side we are up 27% for the first nine months. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [68] -------------------------------------------------------------------------------- I'm talking about Q3. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [69] -------------------------------------------------------------------------------- We also increased our orders in EMEA 5% in the quarter. So, I would say that we see a good solid EMEA region, from an order point of view. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [70] -------------------------------------------------------------------------------- Do those quarterly orders actually include offshore as well for Q3? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [71] -------------------------------------------------------------------------------- They include the 3 megawatts; the offshore order that we had in Q2, but not in Q3. But there is actually an order after Q3 that was announced, the Nobelwind, so you would see that in Q4. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [72] -------------------------------------------------------------------------------- Okay, great. Many thanks for the good results. -------------------------------------------------------------------------------- Operator [73] -------------------------------------------------------------------------------- Alok Katre, Societe Generale. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [74] -------------------------------------------------------------------------------- Congratulations on a pretty good solid quarter. Maybe I just perhaps thrash the margin question again. If I look at the Q3 margins and I just do the math then there was probably somewhere like 160 basis point or 170 basis point positive margin with the project mix effect. Could you just elaborate on what the moving parts were on the mix side; geographies, products and something else? And then also whether there was any effect from the Tianjin port issue during the quarter? So that's question number one and then I have a couple of follow-ups. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [75] -------------------------------------------------------------------------------- Yes, so if we start the Tianjin explosion. Obviously, we have been impacted from a cost point of view by the explosion, but it has been overall very little. Some has been booked in in the Q3, or some will have had an impact in Q3, but we will also see some impact going forward. But the order of magnitude is fairly limited. Then if you look at the mix in the quarter, it is a good mix -- variety. It's not only a mix of countries, but it's also scope of projects. So overall offshore options obviously on the -- but that is more or less scope that you see has an impact in the quarter. So, underlying we're still seeing improvements in the margin and that's also what we're working with, with the accelerated earnings program. So you see a lot of things, a lot of activity to continue to improve the margin. Then whether it's an average margin or not, we think -- we're very happy with the margins that we see. We're happy with the activities that we have. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [76] -------------------------------------------------------------------------------- Right, okay. Thanks for that. Then just on the share buyback; there's a question around the net debt position being roughly around the EUR2 billion mark at the end of the year, doing the math. I would have then thought that perhaps the magnitude of the share buyback could have been much higher, probably somewhere like EUR500 million or EUR600 million or so. So just in that context, should we see the EUR150 million as a starting point? And then just thinking a bit more forward, how much surplus cash do you actually need on your balance sheet to support your growth, and also to maintain a good balance sheet point? So just to understand what the follow up, let's say, capital -- ongoing capital adjustments via share buybacks could be. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [77] -------------------------------------------------------------------------------- We have not indicated the level. What we said is that, obviously, last quarter we have excess cash overall. But we're still very happy with the balance sheet that we have. We are in a cyclical industry, so basically when we calculate the level, we include the cyclicality. You would, in a lower cycle, consume 50% more or need 50% more. So based on that we have excess cash and we decided that we will do an adjustment by buying back shares, but we're also investing in the strategy going forward. We have not committed to any levels here. The commitment that we have is that we will continue the dividend policy that is in place. Any further adjustments we will have to get back to you. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [78] -------------------------------------------------------------------------------- So just to clarify, when you say the consumption of cash at the low point in the cycle should be 50% more. Are we talking working capital side of things, or are we talking free cash flow side, just to be clear. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [79] -------------------------------------------------------------------------------- It's cash at hand that we're talking about. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [80] -------------------------------------------------------------------------------- Fair enough. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [81] -------------------------------------------------------------------------------- So to secure the Company, to continue the consistency that we have in place, we see that the need, or the level, should be 50% higher at that point. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [82] -------------------------------------------------------------------------------- Okay, fair enough. And then lastly, in terms of a bit on the offshore side. How do you see the pricing development, given what [LCU] levelized cost of energy that we've seen in some of the recent bids? I'm referring to some of the projects in Denmark, for instance, where, reportedly, the cost of energy that's being paid for is closer to EUR100 per megawatt, [or mark] versus probably somewhere like EUR150/EUR160 that's for projects that are ongoing. So just to get a sense, do you think pricing is coming back too fast in the offshore market? And is that creating a bit of a challenge for you guys? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [83] -------------------------------------------------------------------------------- If I comment first on the 3 megawatt platform which, of course, is where we have the visibility in the offshore now, primarily, since that is the Vestas platform that the joint venture is selling. We actually didn't have any delivery of that in offshore during Q3. Then your question on offshore in general. That question is actually for the joint venture that handles the offshore business, so the Vestas Mitsubishi Heavy Industries joint venture. We are, of course, participating there as an owner and I'm part of the Board. But when it comes to how they view the pricing in those details that question, we have to refer to them. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [84] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [85] -------------------------------------------------------------------------------- Sean McLoughlin, HSBC. -------------------------------------------------------------------------------- Sean McLoughlin, HSBC - Analyst [86] -------------------------------------------------------------------------------- Two questions. Firstly on the service margin, you've mentioned this EUR19 million write-off, but you haven't included that as a special item. You're guiding for flat year-on-year margins, is that excluding or including this write-off? If I add EUR19 million back to EUR29 million, I would come up with a 17% margin. Am I thinking about this in the right way? Second question, you sound very confident about the PTC extension, I think more confident than I've heard you sound in previous cycles. What makes you so confident? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [87] -------------------------------------------------------------------------------- So if we start with the margin on service. As we have said before, we see stable margins in the service business. Stable margins could be anything between 17% and 19%. We still consider the range very stable. When we talk about stable margin, we do include the write-off of the EUR19 million that we have in this quarter. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [88] -------------------------------------------------------------------------------- And then talking about the PTC extension. I think what I said was that we, and I think as the rest of the industry, believe that it will come up to the Senate by the end of this year in December. How that will go, I think, remains to be seen. I haven't speculated in that what will happen. If it will be a two-year extension, one-year extension, or a more phased out, multi-year plan or no extension at all. I think there are still a lot of different opinions on that. I would say, just purely based on history and, of course, also the fact that there was a good bipartisan support in the Finance Committee of the Senate, of course, there are reasons to be optimistic that we will see some form of PTC extension. But again, I think that the way we deal with it in Vestas is, as usual, working then with different scenarios, making sure that we capture this very good growth that we see in the US today. That I think goes without saying. US long term, with or without a short-term decision in PTC, this year will continue to be an extremely important market for wind energy. Actually, last year more than 20% of all new capacity added in the US was wind. So there is no doubt in my mind that the US, long term, will continue to be an extremely important market for wind industry and, therefore, as well for Vestas. -------------------------------------------------------------------------------- Sean McLoughlin, HSBC - Analyst [89] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [90] -------------------------------------------------------------------------------- Shai Hill, Macquarie. -------------------------------------------------------------------------------- Shai Hill, Macquarie - Analyst [91] -------------------------------------------------------------------------------- Marika, I wonder if you could -- I'm sorry we're coming back to the product margin question. I calculate it as 200 basis points up year on year, which is a great performance. I just wonder if you can give me a rough split between operational leverage effects and sales mix effects, in terms of splitting that 200 basis point improvement. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [92] -------------------------------------------------------------------------------- Well, I will give you the same answer as I said before. Yes, we have an impact from the revenue, or the increase in revenue definitely. We also have a good mix in the quarter. But we also see that we are doing the cost out to a very large extent, as planned. So you have different factors impacting the positive margin in the quarter. -------------------------------------------------------------------------------- Shai Hill, Macquarie - Analyst [93] -------------------------------------------------------------------------------- Okay. Maybe I could just follow up that, Marika, just in terms of US, because obviously you've got a lot of supply-only deliveries coming through now into the income statement in the States, which -- does that have a positive or a negative or a neutral effect on the gross margin, the increase --? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [94] -------------------------------------------------------------------------------- It's fairly neutral. Even if the scope is less, then you would also have here a lower cost, because of a smaller scope. So it's fairly neutral. -------------------------------------------------------------------------------- Shai Hill, Macquarie - Analyst [95] -------------------------------------------------------------------------------- Okay, thanks very much. -------------------------------------------------------------------------------- Operator [96] -------------------------------------------------------------------------------- Klaus Kehl, Nykredit Markets. -------------------------------------------------------------------------------- Klaus Kehl, Nykredit Markets - Analyst [97] -------------------------------------------------------------------------------- Just two questions. First of all, are there any offshore deliveries included in your Q3 numbers for Vestas, not for Vestas MHI? And secondly, the fact that we are moving towards this auction system in Germany, what will that mean going forward for the dynamics in the market? That would be my questions. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [98] -------------------------------------------------------------------------------- So if I take. There is no offshore delivery for Vestas 3 megawatts in Q3. I think when it comes to the German market, again, as I said and if I compare this year to last year in delivery where the market is slightly down, as expected. At the same time, if I look at the order situation, we see an increased intake for Vestas on orders in the German market. So I will say that we view it as a very stable market. When it comes to the change to the auction system for the feed-in tariffs I think remains to be seen, both actually timing and how it will be implemented. I think that is very positive discussion to date with a long-term grace period on phase out and phase in. Of course, if that becomes the rules, which we still don't know, I will say that's very positive. I think what the industry has been good at handling is, as long as there is a clear longer-term policy with clear rules on how one system is phased out and another system is phased in, then the industry are able to plan for that and handle those things. That is what we foresee for the German market. -------------------------------------------------------------------------------- Klaus Kehl, Nykredit Markets - Analyst [99] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [100] -------------------------------------------------------------------------------- Jose Arroyas, Exane BNP Paribas. -------------------------------------------------------------------------------- Jose Arroyas, Exane BNP Paribas - Analyst [101] -------------------------------------------------------------------------------- I have three questions please. The first one is on the Indian market. You seem to be taking the market more serious with your new investment. A couple of questions: how long will it take you to have the new plant up and running, and what volumes are you targeting, and if to do that you need to become a developer of wind farms? That's question number one. Question number two is on the shares to be cancelled following the buyback. I believe you will have about 6% of treasury shares when you finish your buyback. How many of these will not be allocated to employee stock options and can, therefore, be cancelled at the next AGM? Lastly it's on offshore orders; apologies if you have covered this question already. How many offshore orders have you taken in Q3 in the manufacturing business? Thank you very much. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [102] -------------------------------------------------------------------------------- Okay, let me start about India. You're right, India is part of our strategy, as many other markets in emerging markets. We think that there is a good opportunity in India. We have taken some smaller orders in India in the year. We think that -- obviously, think that there is a solid business case to actually produce also blade in India; we have a sales factory since before. The construction time, I would say, is normal for this kind of blade factory, so probably around one year. But, as I said, we can, of course, and have done so in the past, also import blades. For competitive reasons I will not go into volumes that we target or that we can do on the factory. We will, of course, do it in a flexible way, so that we can manufacture different types of blade that fit well to the different type of turbines we have, dependent on how the market develops in the future. When it comes to only wind farms in India that is not our primary of business model, so we will work with partners when it comes to the construction; and of course, with normal customers when it comes to the ownership of the wind farms. When it comes to land development, our prime strategy is to work with strategic alliances and partners. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [103] -------------------------------------------------------------------------------- And if we go to your second question, which is the buyback program. You are right in the around 6%. The vast majority of the shares, the treasury shares bought, is for the program and basically, close to all of it. So it is the vast majority, it is the capital structure adjustment. And then, thirdly, there is no offshore in the quarter on -- down to EBIT line. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [104] -------------------------------------------------------------------------------- For 3 megawatts for Vestas. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [105] -------------------------------------------------------------------------------- Yes, for Vestas. -------------------------------------------------------------------------------- Jose Arroyas, Exane BNP Paribas - Analyst [106] -------------------------------------------------------------------------------- Sorry to come back on the share buyback. I just, of the 6% treasury reserves that you will hold, what percentage will you be canceling, based on your expectations at this point? Thank you. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [107] -------------------------------------------------------------------------------- Well, we're canceling what we're buying, but we have -- up to this point, we have 1.4% of treasury shares related to -- that covers the programs that we have internally. -------------------------------------------------------------------------------- Jose Arroyas, Exane BNP Paribas - Analyst [108] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [109] -------------------------------------------------------------------------------- Phuc Nguyen, Citigroup. -------------------------------------------------------------------------------- Phuc Nguyen, Citi - Analyst [110] -------------------------------------------------------------------------------- I have two questions. The first one relates to your US business. How much fixed cost do you have in the US business, maybe as a precaution of your overall fixed costs? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [111] -------------------------------------------------------------------------------- Well, we don't indicate any specifically, but the US business is, overall, run very effectively. And because of the PTC profile of the country, obviously, we have a lot of flexibility to reduce the cost base as need be. -------------------------------------------------------------------------------- Phuc Nguyen, Citi - Analyst [112] -------------------------------------------------------------------------------- Maybe alternatively, is there a megawatt break-even that you can tell us? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [113] -------------------------------------------------------------------------------- We are not sharing the megawatt break-even level, but obviously we have good control. It's well run and, as I said, we have a big possibility to adjust the cost level in the US if the size of the business is becoming smaller. -------------------------------------------------------------------------------- Phuc Nguyen, Citi - Analyst [114] -------------------------------------------------------------------------------- Okay. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [115] -------------------------------------------------------------------------------- Of the 4,000-plus employees in the US the absolute majority -- the vast majority is blue collar workers. -------------------------------------------------------------------------------- Phuc Nguyen, Citi - Analyst [116] -------------------------------------------------------------------------------- Sure. And the second question is on strategy. What is your current base case for the PTC that you are positioned for in 2017, in terms of ramp up and your production set-up? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [117] -------------------------------------------------------------------------------- No, as I said before on the PTC, I expect that we and the rest of the industry will get clarity around the PTC towards the end of this year. We are confident with the setup we have in the US, both when it comes to the ramp up that we now are executing on. We, of course, expect also a good activity in the US going into 2016. We are very happy with our position, the market share and the gains we've done in the US. We also feel that we have the necessary flexibility to look at different PTC scenarios, when we have them more clearly towards the end of the year. -------------------------------------------------------------------------------- Phuc Nguyen, Citi - Analyst [118] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [119] -------------------------------------------------------------------------------- Mark Freshney, Credit Suisse. -------------------------------------------------------------------------------- Mark Freshney, Credit Suisse - Analyst [120] -------------------------------------------------------------------------------- If I could ask two questions, please. Firstly, conditions on the ground in Brazil. Can you talk about what your Salesforce and commercial departments are seeing there? Secondly, can you talk about potential payments made to staff? I recall two years ago it was also a very strong year with guidance upgrades. I think the total bonus payments to staff amount to EUR90 million, from memory. Is it likely that there will be similar costs within the EBIT margin for this year? And is that within your guidance? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP & CFO [121] -------------------------------------------------------------------------------- Well, that question, obviously, with the performance we have, we would be very happy if we can pay a bonus to our employees. So that's nothing strange with that. We have also said that we will provide, when we see that we're reaching our targets. The thing that we can comment on is if it's 2013 that you're referring to, you will not see a similar spike of bonus provision in Q4 as you did in Q4 of 2013. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [122] -------------------------------------------------------------------------------- I talk a bit about Brazil. Of course, the macro economy -- from a macro point of view, Brazil is a challenging market and also from a currency point of view. So, of course, from a macro view, there are definitely some (inaudible) in Brazil as a market. From a wind point of view, we say that it is a good market, [we see] extremely competitive. We see auctions going ahead. It's a bit lumpy on the ordering side, of course, because of this auction round. It's also a market where you have to stay -- you have to stay very, very close to because, of course, there are big swings in currency. There are big swings in PTAs in the market in the auctions, as we have seen in the past. We are comfortable with our position. Maybe a bit luckier that we didn't go in so hard from the beginning, not perhaps by choice but more sometimes you also have good timing. But on the orders we have taken, and on the investments we are doing, and we follow then, of course, order intake with investments that we are doing, we feel that we are in a good position as well for the future of the wind business in Brazil. Then, of course, as all other businesses, you also have to have a decent macro environment. -------------------------------------------------------------------------------- Mark Freshney, Credit Suisse - Analyst [123] -------------------------------------------------------------------------------- Okay, thank you. -------------------------------------------------------------------------------- Operator [124] -------------------------------------------------------------------------------- [Jonathan Larson, Horton]. -------------------------------------------------------------------------------- Jonathan Larson, Hortons - Analyst [125] -------------------------------------------------------------------------------- I have a couple of questions about your market in North America. The first question is if you can give us an update on the negotiation process concerning the Production Tax Credit. What's the latest you've heard? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [126] -------------------------------------------------------------------------------- No, we don't participate in the negotiation around the PTC. Of course, the way we make our voice heard primarily in the US on the PTC is through the North American Wind Association, where we are a member; and, of course, also the lobbying activities we have, both in Washington; and, of course, also in the [realm] of political landscape, where wind actually contributes to a lot of employment in the US. But it will be a decision -- a political decision in the US, so of course it's something we monitor closely. -------------------------------------------------------------------------------- Jonathan Larson, Hortons - Analyst [127] -------------------------------------------------------------------------------- Can you say anything about how you prepare yourselves a scenario where it doesn't get extended? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [128] -------------------------------------------------------------------------------- No, not more than what we talked about before, that, first of all, again, Vestas has taken orders in 31 markets across five continents for the first nine months. So a global reach is very important for us. Of course, that means that -- and I would say that we are probably the most global of the wind turbine manufacturers. That, of course, means that we are less dependent on single markets over time. The second action that we are working on and have done so for the last two years is to have a flexible setup. The flexibility in the setup goes for the cost, of course; it goes for the people. It also goes for the technology choices we have done. One example is blade, where we actually can move molds from different markets as demand increases and contracts. So a number of different activities also on the flexibility side. -------------------------------------------------------------------------------- Jonathan Larson, Hortons - Analyst [129] -------------------------------------------------------------------------------- Okay. And my last question is, you mentioned the political landscape in the US as well. How do you prepare yourself for the change in the political landscape in the coming 12 months with the Presidential Election coming up? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [130] -------------------------------------------------------------------------------- No, what we are focusing on is, of course, the potential impact on regulations on the wind business. I mean generically speaking it's, of course, that the greater the policy certainty, the better for the industry. So that is what we are looking at. I think, in most markets, including the US, you see bipartisan, both support for and against. And, I think, that goes for many markets. So for me it's not so much a party political discussion. -------------------------------------------------------------------------------- Jonathan Larson, Hortons - Analyst [131] -------------------------------------------------------------------------------- Okay, thank you so much. -------------------------------------------------------------------------------- Operator [132] -------------------------------------------------------------------------------- We have no further questions registered at this time, sir. We'll hand the conference back to you. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [133] -------------------------------------------------------------------------------- Okay. Then, again, thank you so much for your interest. Thank you for calling in. And, if not sooner, I hear from you for the fourth quarter. Thank you.
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