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

Good morning, and welcome to Vestas presentation of first quarter of 2023. I just wanted to start with thanking, first of all, our customers, partners suppliers and also our 28,500 colleagues around the world for working tirelessly throughout Q1. Of course, a good start of '23, which we will talk more about. So let's, therefore, go into the highlights and the details of our Q1. And we had a revenue of EUR 2.8 billion. That is a growth of 14% year-on-year, driven by higher average pricing on deliveries, higher volume and also a 29% growth in the service business. Our EBIT margin ended positively at 1%. Profitability improvement driven by the sale of the converter business, lower warranty provisions, but also the very strong service business performance in Q1. The order intake of 3.3 gigawatt come from wind turbines orders, and that's up 12% year-on-year with an ASP of EUR 0.89 million impacted by mix, which we will take you through in one of the coming slides. The solid capital structure now with more than EUR 1 billion of new financing in Q1, testament to the strong credit both recognition of Vestas, but also in the market. There was a EUR 500 million sustainability-linked bond issue, plus EUR 750 million RCF that was signed with a strong group of banks. Vestas, we are leading the industry forward with discipline. So despite driving the industry maturity, Vestas maintains a leading position in the global market, and we will give you a breakdown of that in one of the later slides. So with that, let's go to the business environment. This slide is well known to you. On the left side, this is the one we have been working through over the last 3 years, and we still keep repeating that. Top priority is to keep the health and safety of our colleagues around the world, but also maintaining the business continuity of all our operations. This is still our operating priorities also in the year of 2023, where we expect to still have a rather remaining sort of a challenging environment throughout 2023. We have seen the Russian exit of Vestas in Q1, and we also seen that are still being combined with certain geopolitical uncertainties around the world, but we are working through it. The inflation is definitely becoming more pervasive. So if we look at it, it's impacting our production. It's impacting some of our execution cost and it's also impacting some of our activities in the discussion with unions across some of our European markets. When we look at the market design and also the permitting, it's still a barrier to new installations. That is, to us, surprisingly, giving the strong need for more energy solutions, especially in Europe. But we will talk more to it, but this is probably one of the disappointing factors that still remains. If we see then also that we still have some difficult conditions for completing projects. We are doing that across all components -- continents, but we also see that there are still shortages of certain components, and we also see that still brings some stop and go on some of our factories as well. Rest assured that we will spend this year in having our full focus on getting back in black and therefore, having Vestas in profitability by end of the year, which is still a key focus for all of our colleagues around the world. Let me then just give you a short snapshot of the market share of 2022. Goes without saying that we appreciate we are on top of that when we look at the onshore/offshore installation, excluding China. I think the other takeaway here is that we, in a year from 2022, see that the global installation actually dropped from 47 gigawatt to 41 gigawatt, which for us is disappointing in a year where probably the world needed more energy than ever. So I think here, this is what we will be working with, but also rest assured, we will drive both Vestas and also lead with the example to the industry of having that strong discipline commercially so we will not compromise the commercial discipline in terms of -- for volume. That's for sure. When we then look at the power solution in Q1, the commercial discipline intact. This is a necessity for, first of all, the industry-wide profitability and improvement but it also is the foundation for getting Vestas firmly back in profitable territory. We had a strong order intake. It's up 12% year-on-year driven predominantly from Americas and South Africa. We saw in the quarter a 1.3 gigawatt Casa dos Ventos orders in Brazil, it's the largest onshore order ever for Vestas. And I will also say it's a recognition of the customer, the partnership and also the personal relationship to the customers in Brazil. We've also seen that there is a slow permitting process and also regulatory uncertainty that remains a challenge in both the onshore and the offshore. In offshore, now probably more related to the PPA offtake levels that still form a challenge for the players, developers, OEMs and governments have to start moving. When we look at our ASP, it declined from EUR 115 million per megawatt hour in Q4 to EUR 0.89 million per megawatt hour -- megawatts in Q1 2023. That is impacted solely by mix effects from scope, country and FX. So the underlying ASP and profitability is absolutely not diluted. This relates to that we -- in Q4 last year, we had EPC, we have hardly no EPC in this quarter, and it will also see that you've seen the first repowering coming through in the U.S. where there are actually no towers included, which, of course, are some of the main explanations in exactly that scope country mix. We will talk more about it, I'm sure, in the Q&A. When we look at the strong momentum we are having in offshore, we've now passed 10 gigawatt of total preferred supplier agreements, and we are very pleased to see that coming across also in a couple of regions and we are looking forward to that, but it also forms basis of firm discussions with governments and customers in those markets. You will see the normal charts on the right where you can follow the development and then, as I said, respect the trend of where we will go also with ASP. Then to the service business, stellar quarter in Q1, a strong start of the year. We, of course, appreciate all our colleagues, the continued high activity with customers forming basis on top of the normal platform and the normal portfolio of service business, but there is higher transaction on one-off also in Q1. The service order backlog increased to EUR 31 billion in the quarter. Inflation indexation continues to protect the profitability of the backlog and, of course, also very importantly to keep in the higher inflated environment we have in all our markets. We also saw Covento, it's the Vestas digital platform for aftermarket parts and services, building momentum. They are opening more markets and they're getting more of our -- both our customers, but also global suppliers on that platform, and we welcome more of that. When we look to the right, we can see the service order backlog, as said, EUR 31 billion. We have 147 gigawatt under service, and we have an average year's contract duration in excess of 11 years. Below, you will see the breakdown per the regions. And again, here, really appreciate the strong development across all regions in growth. When we then look at the Vestas development for Q1, it's a high activity level in many of our major energy markets, but it's also a quarter where we are putting a lot of effort into is still working with the quality of the total project pipeline we have. So in Q1 2023, Vestas' pipeline of development projects amounted to 32 gigawatt with Australia, U.S. and Brazil being the countries with the largest project pipeline we have. During the quarter, Vestas secured 1.1 gigawatt of new pipeline projects. Net-net, there's no change actually to the end of last year in Q4, which also is a reflection of that when we look at development, we are very disciplined. And also if there are projects that doesn't make sense, then they also will drop out. So if you have the 2 large numbers here, new secured pipeline and the overall net project pipeline, you can do your own gross and net within there. And that's just a natural reflection of still remaining very disciplined around this business. Finland generated 50-megawatt of order intake in the quarter. Appreciate that. And that's, of course, start of the year, some more to come. We look forward to share that in the coming quarters with you. When we then look at the sustainability in Q1 2023, another quarter where we just move and work diligently forward. We are still the most sustainable energy company in the world, and we are #2 sustainable company in the world, and we will keep working with that, and we will keep bringing initiatives from our operations. The lifetime CO2 avoided by produced and shipped capacity decreased by 21% from Q1 '22. That's due to the lower produced and shipped turbines, a natural reflection of what you can see in the chart and the full message from us. When you look at the carbon emission from our own operations, they decreased by 4% due to lower activity, but also in the -- against that, of course, we have had a much higher activity in the service business. So there are some underlying movements in that number. When we then look at the safety, we are now introducing a new methodology of talking about total recordable injuries. We feel it's very, very important when we talk about total recordable injuries that we also include anyone that is on our sites and therefore, in and under our leadership going forward. So we now here release 2.1, which includes now contractors on site, and we will, on the coming quarters follow that development with also a little bit of how do we build that statistics, we will come back, but you will be able to follow that over the coming quarters as we go. This is also why there is sort of a little bit of a broken line between Q1 '22 and Q1 '23, they are not comparable in that sense. Very pleased, but we still have more than 40 injuries in Q1, and that's 40 too many. So of course, we will keep working hard on that discipline. With that, I would like to pass over to Hans for the financials.

Thank you, Henrik. As we usually do, we start with the income statement, where we can clearly see that the profitability is improving from the low levels we had in Q1 2022. Revenue increased by 14% year-on-year, driven by higher average pricing on the deliveries by higher volumes and by increasing service activities. Gross margin increased by 5.7 percentage points year-on-year to 6.6%, driven by the higher revenues in both segments and also the improved margins that we saw in the Power Solutions segment. I'd like you to remind you also of the KK transaction, which impacts the quarter with sale of technology to the tune of roughly EUR 150 million. This is the line you can see here to the right that sits somewhere above the EBIT line. And all in all, that takes us then to an EBIT margin before special items that increased by 15 percentage points year-on-year, EUR 40 million, 1.4%, driven by all the aforementioned reasons of gross margin, better fixed cost absorption in the quarter, but also the fact that we do not have the same types of offshore adjustments as we had in the first quarter of 2022. Turning then to the segment overviews. We start out with the Power Solutions segment, where, as I said before, we can see that the profitability is improving. Revenue increased by 9% year-on-year to just over EUR 2 billion, driven by higher activities in the EMEA region and in the Americas. The EBIT margin before special items stood at negative 2.7%, but this is actually an increase 18 percentage points year-on-year, driven, as I mentioned before, by the sale of the converter business, by the lack of offshore adjustments in this quarter that we had last year, not least the high activity levels that we also saw. All in all, I would say that the underlying profitability is improving. But I would also like to say that we are still also seeing profitability hampered by the execution of the low-margin projects that we have in the backlog. So still some work to do there for sure. In the Service segment, we see strong growth and a stable EBIT margin. Revenue increased 29% year-on-year from EUR 623 million to EUR 806 million, driven by higher activity levels overall, inflation indexation in the contracts and also by higher transactional sales. This is then offset a bit by negative currency effects. The service business generated EUR 183 million of EBIT, which corresponds to a margin of 22.7%. So also there, we see an improvement compared to last year. Turning to the SG&A. I think it's fair to say that we see a level that is quite similar to what we had last year. SG&A relative to revenue stood at 8.2% on a trailing 12-month basis, which I said this is pretty much the same. So I don't necessarily want to spend too much time on this page. Net working capital increased in the quarter. However, this does reflect the normal seasonality we would be seeing. This is driven by an increase in the level of inventory, also by higher levels of supplier payments in the quarter, which are then only partly offset by the down in milestone payments that has come in. As mentioned, I would say that the net working capital development reflects the seasonality we see in our business where we build inventory in the first half in preparation for, say, this year, second half of the year. This is what we have seen for many years, and this is certainly also what we're expecting to see in 2023. That then leads to the cash flow, where the operating cash flow before changes to working capital actually increased by EUR 560 million, driven by higher profitability in the quarter. It actually takes us to EUR 248 million of positive cash flow. So of course, that is something positive to see. Working capital changes and take us down to the levels you can see here to the right and furthermore, adding also the CapEx we are seeing, we get to levels of roughly EUR 1.1 billion. And all in all, that is in some ways also a reflection of the seasonality we see in the business. And as mentioned, also on par with what we had last year. Investments came in at EUR 107 million. I would like to highlight here that the sale of the Converters and Controls business has had an impact by roughly EUR 60 million. Additionally, we did see also lower investments -- or sorry, investments in transportation equipment and transportation tools. And all in all, I would say that the number you have here, you can't multiply that by 4 and then get to an estimate for the full year. It is artificially low. And as such, you're not seeing changes either for the same reason to what we expect for the full year on this metric. Warranty provisions remain at elevated levels, but certainly work very hard on this, and we are doing our best to make sure that we say diligently do what we can to see improvement in this area, specifically for the LPF, it continues to sit at high levels. This is a consequence of the continued extraordinary repair and upgrade levels that we're seeing in the business. Warranty provisions, as mentioned earlier, is something we are working very much to spring into better shape. We're seeing for Q1 a level of 4% of revenue, which is actually an improvement compared to last year of -- that we came from 7.8%. So almost half of what we had last year. So as mentioned, quite an improvement on that metric. That then takes us to the capital structure overview where we have a net debt-to-EBITDA level of 5.8%. It is mainly affected by the low the EBITDA levels we are seeing on a trailing 12-month basis, as we've been discussing before. The profitability that we are seeing clearly has an impact on this metric as there's a nominator and denominator, and when the numbers are very, very low, of course, you can see quite some swings in this. I think important to say is that in March, we issued a EUR 500 million sustainability-linked bond, which matures in 2026. And furthermore, we also signed a EUR 750 million revolving credit facility, which matures in 2024. Finally then, we had Moody's gave us a rating of Baa2 with a stable outlook. And speaking of outlook, I would like to hand it back to you, Henrik, to talk a bit about the outlook.

Thank you so much, Hans, for the walk through there. And now to our unchanged outlook for the full year 2023. So revenue sits between EUR 14 billion and EUR 15.5 billion. Service is expected to grow minimum 5% of that. When we look at the EBIT margin before special items sits between minus 2% to 3% and, of course, also, you've now seen the full effect of the divestment of -- or to KK, which we also said in February. Service margin is expected to be approximately 22%. And then as Hans rightly said, don't do the 4 quarters because the total investment is expected to be approximately EUR 1 billion, and some of those, both ramp up in manufacturing and technology, of course, will affect this. As always, with this comes the outlook here is based on the current foreign exchange rate. And it also still comes, as mentioned in the operating environment still in an environment where there are uncertainties and there are still challenges out there. So there is a higher uncertainty than normal. So with that, thank you for listening in, but also now opening the Q&A to all of you.

[Operator Instructions] And the first question comes from Kristian Tornøe from SEB.

Yes. So my first question is about the cost predictability sort of reflecting on our discussion last year I recall. A lot of talk about sort of unexpected costs and the challenges from supply chain disruptions. So Henrik in the beginning, you did talk about sort of continued challenges out there, but maybe you can just elaborate a bit on the cost predictability. So how much unexpected costs do you continue to see?

Thanks, Kristian. I think here, we can see it's easing. So that also means that the mitigations we have to do are becoming less or fewer. So for that matter, I think it's easing, but we are just saying here. We still have components, critical components that doesn't ease up from just a China reopening in Q4. And then we have a world that just operates normal. That's not the case. And we have all along said it probably takes some quarters, and that's why we are here, sort of saying we are executing on projects that are in the backlog that still will be affected by that, but it should be easing up over the year to hopefully become less and less and no one would be more pleased with that than we, if that happens.

That's quite clear. Then my second question is on the service business and the transactional sale. So given the fact that you don't change your guidance on growth for service, I guess you are not assuming transactional sales to continue at the current level? Is that correct?

I think we are super pleased with the performance of the service business. We also see they operate in an environment right now where there is a criticality of getting the assets to operate because the energy and the electricity output is so valuable. So there is a drive for transactional sales, and there is a drive for parts and others. But I will also say here, Kristian, you're moving from first half of the year into a second half of the year in '23, where your comparable quarters also hit Q3 and Q4 last year where you had respectively, high 30% and into the 40% growth in Q4 and -- Q3 and Q4. So from a math exercise point of view, you are certainly hitting very difficult quarters to hit with that. So we would rather say here let's look at a business that grows more than 30% over 24 months. We are really pleased with it. And therefore, we are very happy to see the business doing what it does right now. And there is transactional sales. And of course, there are indexations included in that growth number. But I can also promise you if we can do more, we will do more.

And next question comes from Akash Gupta from JPMorgan.

I have 2 as well. The first 1 is on competition and particularly the topic of Asian competitors in the last few quarters. Can you talk about how do you see the landscape today versus, let's say, 12 months ago? And is there something that needs to be done to address some of the concerns, particularly on the cost side, given the cost difference between you and your Asian competitors? And the second 1 is, I was wondering if you can update with this offshore wind situation. I think your customers, launch customers, EnBW has already given final investment decision to the project. And I'm wondering if you can talk about when shall we expect the firm order from EnBW for this 900-megawatt German offshore wind project.

Akash, thank you so much. I will address, and I don't think we need to say Asian, we can probably say Chinese competitors in that sense. I think the world develops as the world develops and we see China in our market, we haven't taken Chinese orders for approximately 2 years. We delivered quite a lot of it by end of the last feed-in tariff environment in China, which is also why I'm saying here, that is not in our plans and any planning or any expectations or for that matter, reliance of turnover in China. Outside China, different game. We, of course, work with customers across the world and there are some of the markets where it seems for us, even though we also have footprint across the world that some competitors operate at artificial lower cost levels. And we can welcome that because that means that there must be an underlying company investment or an underlying country investment into taking those infrastructure orders and that we refrain from. We run a company on behalf of the shareholders. So we don't participate in subsidizing solution build out like that. On the offshore, yes, as you're rightly saying, at some point in time, individual customer discussions and PSAs will lead to firm order intake. And that is solely down to the final discussion between us and individual customers. So I will have to ask for your patience to say that we will announce it when it's a firm order and then you will see it in the mix of it. But you're right, offshore is more transparent in that sense for all of us.

And the next question comes from Ben Heelan from Bank of America.

I wanted to ask a question on margins. The performance in Q1 was pretty good. You talked about costs better through the year, and it makes the low end of your margin range look relatively unlikely now. I just wonder if you could give a bit of an update on where you expect to land?

We expect to land within our guidance. No, I'm saying that come on, we have had a good start of the year. When we walk through this year, guys, you have to allow us that we are executing on the probably the most variated priced backlog Vestas has ever had. So we will have a lumpy ride through the years of the 4 quarters. And we only need 2 or 3 of those projects to be from 1 quarter to another, then in 1 quarter maybe looks better or 1 quarter maybe look a little worse. For us, it's about executing this year because that means we will have a year away in the backlog where we will still have a red number around the turbine solutions in the year, and that's what we have to turn a corner within '23. We are doing that. We think we have had a good start of the year. But when I look to Hans, that sits next to me here, we are also a bit scared from what we came out of in '22. So we execute the year, and then we will give you the update when we get to the next quarter. There's no need of changing the guidance at the current point. There are still many variables in the execution of this year.

Okay. And then a follow-on in terms of pricing, you highlighted the underlying development has been broadly stable. Could you talk a little bit about the discussions that you've been having with customers are now that costs have largely normalized on kind of forward-look basis? Are you seeing pressure from customers around pricing? Or are they -- is that still a recognition that you guys need to make money medium term? How should we think about that?

Let's say it like this. I think there is a good sound discussion. I think there are customers that are saying, well, the -- I don't think any customer picks up the phone and saying, by the way, we think we'll pay a bit more for the solution. So when we do this, it is tense. There are also now projects that are installed or in discussion because either there is a delay or there is a PPA that doesn't match the project. So I think that's what is being triggered right now. As we all along said, we have had a good quarter, 3.3 gigawatt, some of those orders have been discussed for much longer than normally because there has been so many variables in the last 4 quarters for customers to then get financed and get it done. I think the positive here balance is that in most of the markets, the energy and the electricity is still at a pricing level where the turbine price is not out of sync with the underlying value of the output. And that's important. Because, of course, if that was not the case, then we will be in a very different situation. So we've also seen in this quarter, huge changes in financing and the financing market but we're also able here to find with customers the good solution to that. So we're actually quite pleased with the execution in the quarter and also in the mix of countries and others. So discipline on the commercial, nothing else.

And the next question comes from Supriya Subramanian from UBS.

Two questions from my end as well. I guess, coming back to the permitting issues, and of course, the environment remains challenging on that end. But do you see any change in attitude, you've seen some countries make some progress there like Germany and Spain as well? And do you see maybe the recommendations of the EU Net Zero Industrial Act having any impact on the behavior of the countries? I'll start with that and then ask my next question later.

I think we have to split a lot in between guidance and recommendation and then actual decided projects and also sign and approve the permitted projects. And a couple of the countries you are mentioning I still think it's embarrassing to see that we have a larger part of auction rounds being unsubscribed. And as long as that's the case, Supriya, that then I -- we can probably conclude that then you're not doing your job as a politician right now to make that happen. The 2 -- the fact of life is that '22 in EU, you had a goal of 30 gigawatts and you got 15 gigawatt basically done and executed. That's half good. No, it's not. It's really bad in a year where Europe is still in shortage of energy supply. So I am -- and that's what I said, we keep saying it as an industry, we keep saying it as a company, as an executive, you keep saying it, but it seems like we are running in a different cycle. We put infrastructure up for 30 years and somebody else is focusing on potentially the storyline for 12 or 36 months in a political environment, we need to come together and fix this. Otherwise, we won't get the assets to work.

Okay. Noted. And maybe a question on PPA. It Was given that energy prices have of course come down, already it came down quite a bit in the fourth quarter and now into 2023 as well. Do you see this as being a challenge in terms of setting -- getting new deals with customers, given that maybe there is uncertainty on the long-term PPA level? And yes, just wanted to get your thoughts around this, especially in the current interest rate environment. How does that impact the IRRs of clients? Are you seeing some hesitance from client end on that front?

I think on the energy pricing and markets, I think it's actually well working. I mean if we look at the private PPAs, volume is bigger than ever. We see private companies coming together with developers and OEMs like Vestas, putting projects up and making it profitable and financially viable for all 3 parties in that triangle. Super concerned when you have public PPAs at artificial levels. And there, there are governments around in the world that stubbornly keeps electricity prices from 2 or 3 years ago and think that the industry can build out those projects 3 years on while interest rate has increased from 0 to 6. And in the turbine or the infrastructure, building it out has probably gone up with 30% to 40% at those PPA levels, you won't get any build out. And that's probably where I'm concerned right now that we don't see governments being just as market participants. So be a market participants, get the electricity build-out and the infrastructure build-out on the -- those market terms. So I think a little question mark, a little concerned that the government PPAs are the other ones that are in trouble right now where the private PPAs working brilliantly in across all the markets. And you can see that in our order intake in Q1.

The next question comes from Claus Almer from Nordea.

I have also a few questions from my side, and I'll take them one by one. Volume provisions is coming down versus last year at least. Should we see this as a strong indication of quality issues being solved and i.e., should we expect going out of this year, maybe back to the 2%? That will be the first question.

Yes. Thanks for that, Claus. I think on the warranty side, as you rightly point to, there is a decline from the higher levels in Q4 and not least also what we had for the full year last year, where we had 6.3%. We're seeing 4% being a good number for Q1. We'll obviously have to see how the year plays out. It is fair to say, also coming back to what you said before, like also about the guidance range. There's still a lot left of the year. A lot has to unfold. And I think it would be foolish to sit here and say that we think all of the problems have been solved after a couple of months -- being a couple of months into the year. But for now, at least, we see that the 4% that we have provided in Q1 is a level that makes sense in Q1. That's how I would think about it for now.

So it's more -- so the tradition you've done in Q1 is more for what you see today, there's no extra bills to be paid from what you have installed a few years back or 1 year back?

Of course, the warranty provisions reflects activity levels that, say, on 1 hand, we expect to see [indiscernible] going forward. But of course, if there are issues on turbines that have been sold in the past, that gets factored into the levels that we are looking at. So it's really a combination of those things you're looking at when you're looking at the warranty provisions. So it's a reflection of what we see would be needed at the point in time when we made that provision, so to say.

Okay. Then my second question goes to cost inflation. I know we have been touched upon this topic in this call. But if you look at the world today, do you still need to raise turbine prices? Or are you happy about the underlying turbine prices? Or if you're actually starting a cost deflation? That will be my second question.

I could be a little tempted to ask you, Claus, do you expect your salary to go up or down? Because I think actually, inflation is becoming sticky. Guys, all around the world right now, inflation is becoming more and more sticky. So I think we have to get used to right now that -- which is also why encouragement from our side is to look at PPAs and other stuff with indexations because there is no place to run electricity and then the whole components going into inflation are becoming sticky. So I have to say right now, turbine prices are not coming down the components and the raw materials after probably a slightly lower level around year-end. We start seeing some of it coming back as increases. And of course, the underlying China is now fully open after Q4. So Claus, inflation is not coming down currently.

For sure. Okay. That's good to hear. Maybe not good to hear, but that situation I mean I was hoping...

That's the situation we both have to deal with. That's for sure.