Vestas Wind Systems A/S (VWS) Earnings Call Transcript & Summary

Welcome to the Vestas conference call. [Operator Instructions] Just to remind you, this conference call is being recorded. [Operator Instructions] I'll now hand the floor to our host, Henrik Andersen, CEO; and Hans Martin Smith, CFO. Please begin your meeting.

Thank you, and good morning, and welcome to this extraordinary conference call around our 2022 numbers and also the outlook for 2023. As you've seen this morning, we announced preliminary results and unaudited numbers for 2022. And of course, in that sense, we came out early morning and take you through sort of the headings of that. So turnover came just at EUR 14.5 billion, lower part of the range of EUR 14.5 billion to EUR 15.5 billion. Service business came in strong, close to EUR 3.2 billion, which meant that it was growing 27% versus our outlook of approximately minimum 20%. And again, there, a positive development in Service also throughout Q4. On the EBIT side, negative deviation from around 5% to minus 8%, and it's predominantly driven in a few larger items in Q4. So if we take that, there is an additional warranty provision of EUR 210 million sitting in and around a couple of cases, one in onshore, one in offshore, which is known restricted or limited number of turbines, but also related to turbines of older date, but some components in there, which we will address later on. And secondly, we have also had to increase warranty simply due to that there is an increased repair and upgrade cost on some general in there. When we then look at it, we also had to do an impairment in offshore of EUR 95 million, which relates to the older platform of our V174, part of it because we see a dilutive profitability of the current business on that turbine, and secondly because we see limited new business opportunities. So that was sort of that, and then we -- on the EBIT margin for the Service -- and then I would say as a third point, we had a few of the projects that has gone from '22 in '23, which is also why we came out in the lower part of the turnover number, which, of course, is a sort of not disclosed number, but as you can see, that has effect also on the EBIT side. So minus 8% versus around 5%, which you also would calculate in that sense. EBIT margin on the Service business came in at 21.4% versus an outlook of approximately 22%. And as always, when you have that number of growth, you will have some deviation -- variations to the EBIT number. But besides that, really pleased with the progress in service also towards year-end. Then on the investment side, we ended up in EUR 758 million. Part of that is, of course, some has probably slipped further into '23, which you will also respect when you see our guidance for the investment level in '23. But besides that's done what needed to be done in '22 and did not overspend on it either. Another positive in that sense, on a similar is our pricing. We've spoken about it not only throughout 2022, but basically since second half of '20. And we continue to see the same discipline across the commercial world of Vestas towards our customers, where we asked for the correct pricing of these solutions. So in this quarter, we took order intake of 4.2 gigawatt with an average selling price of EUR 1.15 million. Again, it's up from the previous quarter with approximately 8%. Bear in mind, there'll always, between the quarters, be some scope changes or variations. But overall, we are very pleased and very satisfied with the continued address of pricing versus the value the turbine solution provides. And for the full year of 2022, it also, therefore, averaged an ASP of EUR 1.07 million per megawatt hour, and on onshore only, it's EUR 1.04 million. And that is the highest we have seen in that sense for actually a decade. So very pleased with the progress, pleased with also the progress in order intake in Q4. And of course you can also see from the variations between the quarters that Q4 ended strong, but also some of those projects, of course, have been in the, what I will call, in the discussion process for substantially longer. And of course, that will continue into 2023. The other positive, ending the year in Q4 with a positive cash flow of EUR 1.3 billion. That means that for the overall year, we end with a negative cash flow of EUR 953 million compared to a positive in 2021 of EUR 183 million. And I will say here that then resulted in that we were just around 0 in net debt at year-end, meaning that we actually had EUR 46 million positive cash at year-end. I'll also here take the opportunity -- I know a lot of our internal stakeholders and employees and, to some extent, customers are listening in. I also want to extend a big thank you to everyone here pushing for the completion of what has been, of course, a very challenged year to execute on. And not least, many, many of our employees did a quite impressive job in finishing the year in installing. So therefore, I think it's very important when we look into 2023, that we are off with everyone knowing both where we are coming from and also where we are heading right now. That gives me an opportunity to also go towards the outlook for 2023. And I will say here, in some ways, we have helped ourselves. We are still very disciplined. We see that we have a pricing that continues to support the progress we are making. On the other hand, we also have to appreciate we are still living in a world that has uncertainties, it's probably a weak wording, but I think from either uncertainties or direct challenges, both when it comes to the supply chain, also when it comes to the addressable part, that, that is only now weeks ago since we saw China reopening again. So I think we are just coming into 2023, not knowing, I'm sure, with all of the challenges that can hit us there. At the same time, we are, in one way, disappointed over, team, still the relatively weak permitting acceleration happening in EU. And on the other hand, we are welcoming a step-up in many, many countries around the world to address it, not least in Latin America and not least in the U.S. And I will say here the IRA probably, in that sense, is very strong. And especially for the Europeans, it is not an attempt to create tensions between EU and U.S., it is just an extension of what it is in the U.S. So '23 for us will be a ramp-up year in the U.S., and we still see opportunities in that sense, but we are also ramping up in factories and with partners in the U.S. to what is coming after 2023. So we have put an outlook together that reflects that for '23. What you will also see in '23, it means that the activity measured in number of gigawatts is lower. But as we say, that's not the worst thing that can happen if the gigawatt produces a higher value and a higher turnover in EUR 1 billion. So the revenue for 2023 is expected to be in the range of EUR 14 billion to EUR 15.5 billion. When we look at the EBIT, the EBIT before special items is in the range of minus 2% to plus 3%. And we expect the total investment to sit somewhere around EUR 1.1 billion to EUR 1 billion in 2023. And as I said here, just to say that as it is -- it is still a world outside that do pose some uncertainties, both from an execution point of view, from an access point of view, and not least from an ease of doing business point of view. And therefore, it comes with a degree of higher uncertainty than it normally would be, and that's also why we operate with an EBIT range of 5% in the guidance. When we then look at it, also be aware that in the outlook for 2023, there is an impact of the sale of the converter factories that was announced on the 10th of August. That's sit as an approximately income of EUR 150 million on EBIT before special item and is included in the outlook. And then secondly, I think, on a positive side is that with the progress we are making in the development business, we now see that development is a firm fourth leg of our strategy besides the onshore, offshore, and service business. And therefore, we will, from 1st of January, include the income also from projects and others where we have minority stakes on the same consolidation in EBIT before special items. So you'll be able to follow that. That will have lower double-digit million euro positives in 2023. But as I said, it's the strength from our side to also see the progress we are making in the development business. So I think with that sort of finished the 2023 (sic) [ 2022 ], and I will say here again, giving the nature of when we are announcing this and giving the nature of timing we have had, there will also be a number of questions where we will answer politely, but also with a firmness in that we didn't have to push that towards the 8th of February, because we will have -- and we will come out with the full, of course, annual report on the 8th of February. So with that, I'll pass back to the operator, and we can then have, I will call it, a limited Q&A today, but happy to take questions here from the audience.

[Operator Instructions] Our first question comes from the line of Kristian Johansen at SEB.

Two questions from me. So first goes to the cost pressure from the supply chain disruption and logistic congestion, which has been an obvious challenge for you in 2022. So just some reflections of what you have seen to date, how much normalization or easing, if you will, have you seen? And secondly, what's sort of embedded into your guidance? So that's the first question. Then my second question goes to warranty provisions. So in your guidance for '23, what have you assumed in terms of the warranty provision to sales ratio? And secondly, in your 2025 targets, you are assuming 2% to 3% level. When do you expect to be at that level?

Thanks, Kristian. I think on the cost pressure, I think we see generally a mixed bag. We see, in some parts of the business, an easing of certain parts, and we see, in other parts of the business, more or less the same constraint. There is -- generally, in a lot of the electronics and other parts, there is still a backlog and a vacuum of some of those critical components. So I think we have just to assume that the year can and will still be a relatively -- I wouldn't call it bumpy, but just an year where we have to do mitigation still, and that's a reflection in there. Then you will have that there are certain raw materials that has pointed downwards for a period of time. And then there are other parts where you have a higher inflationary pressure underlying, whether that's from wages or it's from energy pricing and others. So there is -- and please, Kristian, don't ask me to split that in, because it is a mixed bag in the current. What we really hope to see during the year here is that we don't have to mitigate or be held a little bit in the queue of that. And I think that will be helpful when we get into 2023. On the warranty side, it goes without saying, we can't live with a warranty provision that is of this level in the longer term. So therefore, part of improving, also towards not only '23, but beyond, is also to get the warranty provision stems from the simple fact it's our quality and it's our partners' and suppliers' quality into the turbine, and that has to be under better management when we look going forward. I won't put percentages on it, but your sort of highlight from what we also stated, there is no doubt of our goal that it has to trend towards 3%, and it's definitely not where it has been in 2022 either.

And our next question comes from the line of Akash Gupta at JPMorgan.

My question is on prospects of European IRA. I think we touched base upon U.S. IRA and provided some color there. But here in Europe, we are seeing some increased stock of European IRA and we note some concerns in political circles that the supply chain could move otherwise to the U.S. So maybe looking at your business in both onshore and offshore, do you see a risk of supply chain moving to the U.S. from Europe if we don't get an IRA influence? Any color on that would be useful.

Yes. No, I said, I think, Akash, I will really strongly encourage everyone on the call to shift rhetoric discussion around this. I don't think the European tone of voice around that this is a U.S. capture renewable industries and other stuff. For us, that has been in the U.S. for 30 years, have factories already. We are not going to change gear in that. Actually, the fact of it is that instead of having a 4 day 1 shift a day, we expect to be using our factories in the U.S. to a much higher degree when we look towards the coming quarters and not least the coming years. For once, U.S. have thought in a 10-year framework instead of having a stop-and-go PDC for 2 or 3 years at a time. So I think, if I look at that, we still see a European market that is expanding. We see a European country by country taking active decisions to try to speed up, if not permitting, then at least how you do options, and we've seen progress of doing that also in countries like Germany and others. So we believe the volume is also in EU. What we would like people to do in the EU, if EU can't sort of agree on an IRA like reform in EU, then let's, for every sake, avoid the individual country mayhem of trying to subsidize individuals or attract individuals or compensate with state aid. That's not the right way of solving an industry that, first and foremost, has to be disciplined in itself, and secondly, give us the permitting, then it's actually very attractive and very valuable to put our solutions up in EU. So I'm actually slightly more optimistic in EU. But of course, if we make it a slowdown in permitting and then have to try to compensate to keep manufacturing, that's the wrong way. That's not a way to address the energy prices.

And our next question comes from the line of [ Dan Togel at Sir Carnegie ].

Maybe a question here on these onerous projects that are being pushed into '23. Can you give some color on how much revenue we are talking about here? And also, if these projects were not delayed and still had impact in '22, what would the impact on the margin have been? So that would be the first question.

Thanks, Dan. I think we -- as I said, I don't think we can call them, it's delayed projects, it's not onerous projects. When you have projects right now, they fall into each side of the year-end. And if you got complications in commissioning, it's not an unknown that we see slippage from Q4 into Q1 or even in the first half of the year. So there is nothing in that, that is unusual for us. We had a high activity year, and we've also had and seen, in certain parts of the world, both commissioning and weather doing that. So that's not a -- so I'd rather say, if you sit and think, okay, there was some hundred millions that slipped into '23 at ease with this. And the good thing for both Hans and me is that we don't have to do 2 sets of accounts, one with how it would have looked and how it -- so therefore, this is how it looks for '22, and then some of it slips into '23. And there isn't a good way of keeping financials into those projects. They come from the backlog there with customers, and we will commit and finish them in '23.

I want to understand, Henrik, that they do not materially change the numbers for '22?

No. As I said, the way they change '22 is, of course, that if you slip from something that is a midpoint of a guidance that was given in the beginning of November, then, of course, then you can say then there is an indication there is gross margin on it, and there is also, therefore, a loss of EBIT in both the Q4 and for '22.