Company announcement from Vestas Wind Systems A/S (Denmark)
All-time high order intake. Results in line with expectations. Full-year guidance revised downwards.
The second-quarter wind energy order intake was 3,031 MW, which was the highest level ever recorded and on a level with the order intake for the whole of 2009.
Vestas generated second-quarter revenue of EUR 1,007m, a drop of 17 per cent relative to the second quarter of 2009, realising an EBIT of EUR (148)m, against EUR 78m in the second quarter of 2009. The EBIT margin thus declined from 6.4 per cent to (14.7) per cent as a result of the expected very low capacity utilisation in the wake of the credit crisis. Net working capital stood at 25 per cent of expected annual revenue, against 12 per cent the year before. The second-quarter wind energy order intake was 3,031 MW, which was the highest level ever recorded and on a level with the order intake for the whole of 2009.
Consequently, at half-year, Vestas had obtained about half of the forecasted firm and unconditional orders of 8,000-9,000 for 2010. The value of the backlog of firm and unconditional orders amounted to EUR 5.2bn at 30 June.
Safety at Vestas’ workplaces was further improved further, and renewable energy accounted for 49 per cent of Vestas’ total energy consumption in the quarter. In 2010, Vestas expects to achieve an EBIT margin of 5-6 per cent and revenue of EUR 6bn, against the previous forecast of 10-11 per cent and EUR 7bn, respectively. The downgrade is made because expected, but still not concluded orders for delivery to the USA, Spain and Germany will now take place at such a late date in 2010 that they will not be recognised as income this year.
As a result of the revenue adjustment, net working capital is now expected to be 15-20 per cent of annual revenue, against the previous forecast of about 15 per cent.
Q2 2010 at a glance (against Q2 2009)
– 54% Vestas shipped a total of 283 wind turbines
– a decrease of 54 per cent
– 50% Vestas shipped wind power systems with an aggregate capacity of 588 MW
– a decrease of 50 per cent
– 17% Vestas generated revenue of EUR 1,007m
– a decrease of 17 per cent
– EUR 226m EBIT amounted to EUR (148)m
– a decrease of EUR 226m
– EUR 162m Profit after tax amounted to EUR (119)m
– a decrease of EUR 162m
+ 6% The number of employees rose to 22,392
– an increase of 6 per cent
– 39% Incidence of industrial injuries per one million working hours was reduced to 4.6
– a reduction of 39 per cent
+ 10% points The share of renewable energy increased to 49 per cent
– an increase of 10 percentage points
In the second quarter of 2010, revenue declined by 17 per cent to EUR 1,007m in line with expectations. The EBIT margin therefore fell to (14.7) per cent. Half-year revenue declined by 24 per cent relative to the first half of 2009, whilst the EBIT margin fell to (13.8) per cent. The decline in revenue and earnings reflects the very low level of activity in the wake of the credit crisis and Vestas’ decision not to adjust its capacity further because of short-term market developments. The ongoing expansion of capacity and workforce in the USA is part of the explanation of developments in costs during the period. Vestas’ capacity at year-end 2010 will be 10,000 MW. Having shipped 975 MW in the first half of 2010, as expected Vestas was far from utilising its capacity. In the second half, capacity utilisation will be much higher, positively affecting the EBIT margin.
Outlook for 2010
Of the expected intake of firm and unconditional orders of 8,000-9,000 MW with unchanged satisfactory profitability, Europe is still expected to contribute about 50 per cent, the Americas about 30 per cent and Asia/Pacific approx 20 per cent.
Adjusted for input prices, Vestas generally expects that prices will remain unchanged in 2010 relative to 2009, when the price per MW on average was about EUR 1m measured on order intake. In 2010, Vestas expects to achieve an EBIT margin of 5-6 per cent and revenue of EUR 6bn, against the previous forecast of 10-11 per cent and EUR 7bn, respectively. The downgrade is made because expected, but still not concluded orders for delivery to the USA, Spain and Germany will now take place at such a late date in 2010 that they will not be recognised as income this year. Compared with 2009, the EBIT margin will also be impacted by Vestas’ excess capacity and by greatly fluctuating capacity utilisation in the course of the year.
As a result of the lower revenue forecast, net working capital is now expected to amount to 15-20 per cent of annual revenue at the end of the year, against the previous forecast of about 15 per cent. Financial items are now expected to amount to EUR (35)m compared to earlier EUR (25)m, and revenue in the service business is expected to remain unchanged at EUR 600m with an EBIT margin of 15 per cent.
Investments in property, plant and equipment and intangible assets are still expected to be EUR 650m and EUR 350m, respectively. The effective tax rate is expected to be 28 per cent, and warranty provisions are expected to represent 3 per cent in 2010.
Vestas expects to recruit nearly 3,000 employees, net, in 2010 against 3,400 as previously expected. The adjustment is made because Vestas, due to the ongoing regionalisation and delayed order intake on some projects for delivery in the second half of 2010, needs to realign its capacity, which will lead to lay-offs of 300 colleagues in Denmark. At the same time, an equivalent number of colleagues employed on a contract basis will not have their contracts renewed, and some factories in Europe incl. of Denmark will introduce work-sharing scheme as and when required. The number of staff at yearend 2010 will be about 23,500. Vestas Technology R&D will increase its employee headcount to about 2,000 in 2010.
Assumptions and risks
As a result of the credit crisis, Vestas’ order intake dropped considerably from the autumn of 2008 to the end of 2009. The expected improvement in order intake has materialised for Vestas. More banks are venturing into project funding, which will henceforth create a more robust financial infrastructure for the industry and its customers. As the banks are now much more critical than they were before the credit crisis, processing times and documentation requirements have gone up. This is clearly to the benefit of the financially strong blue-chip providers. A setback in the credit market would adversely affect the wind turbine market. Similarly, low prices of fossil fuels could postpone demand, and lower energy consumption caused by economic trends could also have an adverse effect on demand for wind power plants.
Prices of a number of components have gone up during 2010. As a general rule, Vestas’ contracts take such price increases into account so that the final price of the projects will reflect developments in input prices. This means that Vestas’ margin is relatively robust towards fluctuating input prices. Large-scale investments throughout the supply chain have eliminated any immediate risk of bottlenecks and, by extension, Vestas’ need for buffer stocks, which will be reduced in the course of 2010.
Other than the aforementioned, the most important risk factors include additional warranty provisions due to quality issues, transport costs, disruptions in production and in relation to wind turbine installation as well as potential patent disputes. The number of providers and sub-suppliers is growing, leading to intensified competition throughout the value chain.
Vestas operates with three types of contracts: “supply-only”, “supply-and-installation” and “turnkey”. The underlying operating risk is lowest when dealing with supply-only orders, but they may increase quarter-on-quarter fluctuations in revenue and EBIT as these types of orders are not recognised as revenue until the turbines have been delivered according to the contractual terms and risk has been transferred.
In the second quarter of 2010, supply-only orders accounted for a substantial part of the order intake, but several banks now require that one supplier is responsible for the whole project, which means that recent years’ trend towards more supply-only orders generally seems to have turned. In 2009, supplyonly orders accounted for 25 per cent of revenue excluding service. Revenue from supply-andinstallation and turnkey orders, in which Vestas is responsible for installing and connecting the wind turbines to the power grid and for the entire project including all engineering works, respectively, is recognised as the work is performed, providing a more balanced income flow, but the underlying operating risk is higher than for supply-only orders. The trend towards greater complexity raises the access barriers. There are no differences between the contract types in terms of the payment profile.
Vestas is managed and developed with a long-term perspective. Accordingly, Vestas should not be judged on the basis of its quarterly results as they will reflect fluctuations in the level of activity and, by extension, capacity utilisation and to some extent changes in contract and turbine types. In 2005-2006, Vestas initiated a sharp improvement in prices and contractual conditions, including not least the introduction of advance payments and a reduced warranty period, the standard of which is now two years against previously up to five years. These steps significantly reduced the risk on Vestas’ balance sheet.
A key factor in Vestas’ further progress is the improved ability to identify, control and price risks at all project stages and during the operational period of a wind power plant. This means that Vestas is now able to perform more complex assignments than previously and at a lower risk.
This work is organised under a Contract Review function, which reports to the CFO. Together with the CEO, the Contract Review function reviews all projects in excess of EUR 15m. Smaller projects are handled in the individual sales business units.
Far more effective production and improved quality are the means to lift Vestas’ profitability. New products such as the V112-3.0 MW, the V100-1.8 MW and the 6.0 MW turbine for offshore wind farm use and services in connection with the entire wind power plant will also help to improve Vestas’ competitive strength. Coupled with the regionalisation and more balanced output, the new products and services will thus be the drivers behind an expected earnings improvement, as announced in Triple15 – no later than in 2015, Vestas’ EBIT margin and revenue must be 15 per cent and EUR 15bn, respectively. As part of the No. 1 in Modern Energy strategy, Vestas will continue to invest large amounts in production facilities. Going forward, Vestas expects its headcount to rise at a lower rate than its business volume because of enhanced efficiency, improved turbine performance and economies of scale. A key measure in this context is the ongoing alignment of Vestas’ organisation, which will facilitate communications and collaboration across the 14 business units. Vestas is therefore expected to be able to maintain a high return on invested capital.
Source: vestas, August 19, 2010