Vestas Wind Systems A/S
CSE:VWS
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Vestas Wind Systems A/S
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So good morning, everyone, and welcome to this call for the first quarter of '18. Let me start then with the usual disclaimer slide and then move straight into the key highlights of the quarter. So an all-time-high order backlog, combined at EUR 21.6 billion, up 8% year-over-year. Revenue close to EUR 1.7 billion, which is 5% organic decline compared to the very high Q1 of last year where, of course, we had a lot of the 100% PTC components delivery and now back to a more normal seasonality. An EBIT margin of EUR 126 million, corresponding to 7.4%. Solid performance again from our Service business, organic revenue growth of 5% and a very healthy EBIT margin of 26.8%. So as usual, I will talk about the orders and the markets. Marika, here with me today, will talk about the financials, and then we come back with outlook and Q&A. This is also the time of year when we get an external view on market share when it comes to installation or grid connected for last year in gigawatt. And of course, we are satisfied that we keep our market leadership, both according to Bloomberg New Energy Finance and MAKE, with a bit over 16% on the global market share.Looking at order intake in the quarter then, it was 1.6, approximately, gigawatt, and average selling price of EUR 0.73 million per megawatt. The year-over-year decrease in megawatt was 420 or 20%. U.S., Italy and France were the main contributors to the order intake in the first quarter, accounting for approximately 65%. The ASP, as I said, in Q1 was EUR 0.73 million, so a stable development compared to previous quarter, but a market that remains highly competitive. And as usual, we should remember that geography, the scope, turbine type and uniqueness of the offer is factors in the ASP definition.We changed a little bit in the market regulatory environment, delivery order quarter and comment slides for this quarter, try to summarize it in one per region. So let me start then with Americas where we continue to see high demand in U.S. and Latin America. U.S., as before, very much driven by the current PTC structure and good high activity levels in the market. We also saw that the U.S. signed an order for 25% tariffs on steel imports, but the final outcome is still uncertain.On the Vestas side then, we are localizing our 4-megawatt platform in the U.S. We can see good demand on that platform. And as we talked about before, we see a shift from 2- to 4-megawatt platforms in the U.S. market.In Latin America, we had a restart of auctions in Brazil, actually started already last year, but also one in the quarter called A-4 and A-6 auction is expected in Q3. On the Vestas side then, we established manufacturing capacity in Argentina to support our leading market position and growth. Looking at delivery then, down 65% year-over-year and, again, primarily due to the high delivery of 100% PTC components that we had last year. But we also saw a bit lower activity level in Latin America. Orders, down 12%, continued high order intake in the U.S., but year-over-year not matching the strong orders we took in Argentina in Q1 of last year.From a market share position, we are the market leader in Americas. And of course, we are also very satisfied that we remained #1 in the U.S. market and increased our market share in Latin America during last year. Moving then into the EMEA region. Also here, we remain the leader in a region that is in transition. Starting on the regulatory side, as I said before, I think within EU, felt to say that the demand is driven by the 2020 and 2030 targets for renewable energy. A positive is, of course, that the EU Parliament has proposed 35% renewable energy target for 2030 compared to the earlier 27%. There's still no decision, but a positive indication of that lower prices for wind can drive higher volumes.Russia had an auction last year, and we expect another 900-megawatt auction for this year. And we also see positive signs then in Middle East, Africa. It's been a 400-megawatt auction completed in Saudi Arabia. And South Africa started to sign PPAs for the 1.4 gigawatt that has been at a standstill for quite some time, and also, there's expectations of new auction starting up.From a delivery point of view then, fairly stable, down 5%. Some changes between U.K., partly offset by Denmark, and continued high delivery in Germany.On order intake, down 18%. Here, we see the impact of lower orders from Germany where the recent auctions have not yet materialized as orders. But on the other hand, good order intake in Italy as a result from the auction in 2016 and our first-ever order in Kazakhstan. Again, last year, we are the market leader in the region with a well-established footprint and strong position in core markets, such as Germany, France and the Nordics. Moving over then to Asia Pacific, which, of course, geographically, we have -- it is a very diverse region and where we have presence in many of the markets. On the regulatory side in China, the wind target has been increased with 50 gigawatts to 2020. On the Vestas side, we have decided to start up production together with TPI of the V150 blade.India has had executed 2 auctions in Q1. And I would say also, we see good activity level in the broader region. Australia executed about 550-megawatt auctions in the first quarter.Delivery, up 328% from a very low base, from a number of different geographies, but primarily then India and Australia. Order intake, down 51%. So -- and that is primarily the drop in China year-over-year where we had a strong order intake last Q1.From a market share point of view in this region, we are on single digit. And the reason is, of course, that the region is highly dominated with China and volumes in China. And here, we have a very small market share but, of course, still the biggest nondomestic supplier.As I said, we had a record high -- we have a record-high order backlog of more than EUR 21 billion. And the combined backlog increased with EUR 700 million sequentially, despite a negative FX impact of EUR 250 million. The increase on the turbine side was EUR 0.5 billion and on the service side, EUR 0.2 billion.One slide about offshore [indiscernible] that, of course, we have with our partner, MHI. The first conditional orders was taken on the 9.5-megawatt turbine on the product side, and Taiwan added as a new market opportunity, so we start to see now that offshore market is not only concentrated in Northern Europe.The joint venture has a good track record with over 1,000 turbines installed and also healthy pipeline, both when it comes to under installation and firm orders of 1.6 gigawatt and conditional orders and preferred supplier of 2.5.In the quarter, the final commission was done of the Rampion project, which was a 3-megawatt project, also shown then in our Vestas P&L. And the joint venture are well-positioned for the Taiwanese market with local MOUs in place. And you can also see that on the near-term project execution now, it's very focused on the 8-megawatt turbine. So with that, I hand over to Marika.
Thank you, Anders. So if we have a look at the income statement, and I would like to highlight here that we have a tough comparison against our own numbers in Q1 2017, which was a record quarter from all parameters. We are delivering according to our own expectations. But we also said that on the back of Q4 that you will see a normal distribution of the quarters here in 2018, and that's also what we are delivering.Revenues decreased by 10%, and that is driven by both FX and also lower deliverables in deliveries in Power solution. Gross profit, as a consequence of lower activity, is down, and that is volumes, but also lower average project margins in the V2G or Power solutions segment.You can also see that SG&A cost is lower compared to last year, which I will come back to in more detail on another slide. EBIT is down, driven by the explanations given on the revenue and gross profit. The result from the joint venture, the positive EUR 18 million is primarily the result from delivery of the Rampion project that Anders was alluding to earlier. So if we have a look at the SG&A, we are 7.4% compared to -- or in line with last quarter. Obviously, the percentage is a consequence of a lower activity level, but bear in mind that what's shown here is the 12-months rolling. This continues to be a focus area and one that we are controlling, obviously, a part of the -- one of the controlling element we have in the group. So good performance on the SG&A and well in line and above expectations compared to the lower revenue that we had in the quarter.So if we have a look at the Service, the performance continues to be strong. You see a slight revenue decrease in actual numbers compared to '17. Main factor there is a negative FX impact of EUR 22 million, and that is resulting in 5% organic growth. As you can see, we are delivering a very strong EBIT margin, 26.8% to be exact. And that, obviously, is a consequence of good performance, good cost control and also good performance of the turbines. The Service order backlog also grew compared to Q1 of '17. So good growth, good margins and, excluding FX, also a growth in the organic side for the Service business.The balance sheet remains strong and, obviously, provides flexibility for us as a group. And this is, as you know, something that we have been working towards and gives us a strong position but also flexibility in the market. We deliver net cash position of EUR 2.6 million. That is impacted by the acquisition of Utopus, also the net working capital element that I will come back to and the share buyback program. The net working capital increased. And again, I will elaborate more on that note when you see the performance over the last 12 months and the last 3 months. Solvency ratio is above the minimum 25% that we have put up as a target.So the change in net working capital. As you can see, we are building inventories, and that is well in line over the last 12 months with the prepayments. And you can also see that we have a contract asset/liability of EUR 171 million. I would like to highlight here that we have said now for the last few quarters that we will use the balance sheet and the possibility to build inventory on -- based on firm order intake, and nothing but firm order intake, to avoid some of the investments because of capacity needs primarily for the molds. So that story remains -- or rather, that fact remains.You can see the net working capital change over the last 3 months is following the same pattern. The quarter is impacted by increased revenue and reduced payables. And that is, to a certain extent, offset by higher prepayments. So no surprises on this note.The warranty provision and the lost production factor. The high quality of the turbines continues. And you can see on the lost production factor that we are continuing to be below 2%. You also see a slight decline here in the quarter. Also, bear in mind, despite that we have a higher consumption than provision, that the consumption is based on previous provisions, so it's not related to the quarter, as such.Cash flow is negative and it decreased, if you look at compared to Q1 '17. And the decrease is primarily driven by lower profit, as you can see, a negative change in net working capital, as I was alluding to earlier, and negative noncash adjustments. And cash flow from investing activities, no surprises here, it's the Utopus, EUR 65 million. And you also see cash flow from financing activities that is primarily driven by the share buyback program that we launched in -- at full year 2017 result.Total investments are more or less in line with the Q1 of 2017. The methodology has not changed. We continue to invest in capitalized R&D and the molds primarily. And you also see the impact from the quarter of increase of EUR 65 million compared to last year is Utopus.Capital structure is well below the threshold. When you look at net debt-to-EBITDA, despite a slight uptick, we are well in the negative territory. And the share buyback causes the solvency ratio to decline to 27.6%, but still above the minimum 25% target that we have put forward.Anders?
Thank you, Marika. So then look -- going over to the outlook for this year, and we maintain outlook. That means then revenue between EUR 10 billion and EUR 11 billion; an EBIT margin of 9% to 11%; total investment, approximately EUR 500 million; and a free cash flow of minimum EUR 400 million. And we have not either changed our view on the service with growth and stable margins.So with that, we will move over to your questions.
[Operator Instructions] And the first question comes from the line of Claus Almer from Nordea.
A few questions from my side. The first question goes to the service margin. Marika, you also mentioned this nearly 27% margin in Q1. Is that a new level or it's more an extraordinary for the first quarter? That would be the first question.
Yes. And as, yes, as you are alluding to, Claus, it is a very high margin in Q1. We have not set a new level for the Service business. What we're continuing to say is that we will deliver high stable margins for the Service business also going forward. So we are not setting a new standard. You will see certain lumpiness, but it's obviously, with efficiency gain and growing the business, we see that the stable performance is crucial for the Service business.
It's just the second quarter in a row where you are making a really amazing margin and distribution.
Yes. And I understand, obviously, where you are coming from, Claus. But we see stable high margins. And then if it's going to remain at this level, obviously, it remains to be seen. But we have delivered very high stable margins for the Service business.
Okay. Then the second question goes to your revenue per megawatt, in -- yes, in the revenue, obviously. So the delivery per megawatt, which is around EUR 1.1 million, I thought it was going to decline closer to your backlog ratio. At the same time, based on the rounded numbers, your backlog ratio was actually going up despite the order intake megawatt ratio. Maybe you can shed some light on these trends?
The EUR 1.1 million on deliveries that you are alluding to, obviously, have -- is impacted by the scope of the projects, but also the mix of the projects. So if you have an EPC project, that will have to be deducted from that number as such. And the other question, Claus, was, sorry?
Yes. So I mean, we have to [ mask ] that your backlog ratio was 0.77 end of '17. Your order intake ratio was 0.73 in this quarter. And then when you're delivering significantly above the ratio, once you think that the backlog ratio end of Q1 would go down, but it's actually going up Q-over-Q. So just wondering what was going on in these numbers.
A little bit what I was trying to say, Claus. It's -- the backlog will be impacted by also the new accounting standards that we have. So it will shift both backward and forward. So if you have deliveries, that will obviously also impact the revenue. To which extent? It's hard for me to speculate. But you will see the same impact. Some of the projects from '17 has been pushed into '18. But you will also push out some of the projects from '18 into '19, depending on delivery time. So it will have -- that will have an impact both on the backlog, the revenue and also on the deliveries, the EUR 1.1 million that you were alluding to earlier.
And does it have any margin impact?
I mean, as I said, I don't expect that to have a significant impact on the revenue for this year and, consequently, not a significant impact on the profitability in this year. But it depends on -- I don't have the exact number because it obviously depends on how flawless we can be on the delivery, if it's exactly according to expectation. But my expectation is that we will push out some from '18 to '19. And you have also consequently done the same from '17 into '18.
We got the next question from the line of Akash Gupta from JPMorgan.
My first question is on pricing in order intake, given that ASPs are flat sequentially but, at the same time, raw materials are going up and maybe there will be some impact because previously, it might be hedged but may not be hedged for new orders. So basically, if you can comment on the pricing and here, particularly, you can talk about how the impact of higher steel price will reflect in your financials. That's my first question.
Okay. Also, if I look at the ASP, of course, it was, as I said, 0.3 in the quarter, so stable compared to last quarter. Compared to last quarter also, I wouldn't say any big change in scope. We had a little bit more supply only in the quarter. And on the other hand then, no China order intake in the quarter, so fairly, fairly comparable. We had a headwind of FX in -- of 0.02 in Q1. So yes, I mean, sequentially, the ASP, stable, with those variations that I talked about. On the steel, I think to comment and also, as you said, first of all, of course, we are dependent on steel in our products, for sure. So of course, if and when steel prices goes up, it has to be absorbed by the same. Having said that, I think there are still -- it's also fair to say that there are still quite a lot of uncertainty around both import tariffs and different local steel prices. And you are also correct, when it comes to the backlog and the firm order, we are hedging with different means, so to speak, either indexation or customer discussion or supplier discussion. So we don't expect any major impact on steel price increases for '18. But potentially then, of course, except for auto orders in '18 and then potentially more, let's say, what happens for '19.
And my second question is on share buyback. Given the stock is still down year-to-date, I thought of -- you may be going to renew share buybacks. So if there are any reasons why you would add that you would like to highlight behind not renewing a share buyback, that will be great.
Yes. I mean, our methodology remains, and we were particular on why we did the share buyback here at the beginning of the year. And we will follow our normal pattern and come back with what we are intending to do on the share buyback in -- on the back of Q2 this year.
And the next question comes from the line of Casper Blom from ABG Sundal Collier.
Two questions from my side also. When you gave your guidance for 2018, you also talked about a longer-term guidance. And in that connection, you described 2018 as a transition year. Have you come in further, too, whether you would also describe 2019 as a transition year? That's my first question.
Yes. I think that, of course, we will come back to 2019 and guidance for that in due time. So I mean, currently, of course, we're focusing on '18. But having said that, I mean, we are clear with our long-term financial ambition. We also put both when -- what kind of market condition we will see for that to happen and also a time frame when we think that, that is a likely scenario, and we said that 3 to 5 years, which is our strategy horizon. So yes, that's where we are today, and I would say that not much has changed there.
Okay, fair enough, Anders. Then secondly, we've seen some of your competitors that were struggling a little bit to get orders last year having bit of a bounce back in their order intake, both Siemens Gamesa and Nordics, just to mention 2 names. Are you seeing any changing in sort of the competitive dynamics? And I understand if you don't want to comment on competition specifically, but do you see any change to what you could call your technological leadership in the industry?
I mean, we feel very confident with our technology leadership. And because, of course, you're right, I mean, the competition, as we have said many times, is really on the levelized cost of energy from the customer. And that is a combination with -- of products, technology leadership, also future products and future product commitments. It's the fit to tower heights, the fit to the customer sites and then -- and of course, then also last, price. So it is all those factors. And it continued to be, as I said, a very competitive market to get to the levelized cost of energy. And I feel very comfortable with our technology leadership position, which I think also reflected in that we are generating best-in-class margins.
But if I could just then sort of try and ask it in a different way and see if that works. Fair enough that you remain comfortable in being #1, but are you sort of starting to feel someone sort of catching up on you a little bit? Or how would you else explain the sort of comeback that we've seen from some competitors?
No. But I think that if you look at our order intake in '17, as we also said, I was very satisfied with our order intake. I agree with you, we've seen a bit higher order intake here now in Q1 from some of our competitors. But to draw a big conclusion on a single quarter, I think, is a bit too hasty, honestly. I think that, as I said, we felt very good -- we feel very good with our order intake compared to the competition for the full year last year, and we see a healthy volume in the market going forward. And then, of course, we accept that between quarters, orders can be a bit lumpy.
So you are not worried by what some might have read as a slightly disappointing order intake from your side in Q1?
If I look at our forecast, if I look at the market overall, I see healthy levels in the market, good activity level. I feel that we have a good position. And then -- and I feel that we have a good market share, as I talked about. So then, of course, we need to execute on that, and we need to get orders firm and do that announcement. But yes, I mean, I will not guide on orders, so to speak, but that's how I see it.
The next question comes from the line of Marcus Bellander from Carnegie.
First question, regarding warranty provisions. Why were provisions made so much lower this quarter than in previous quarters?
Well, that is obviously based on how we perceive the performance of the turbines and if we have any specific cases. And this is quite a rigorous process that we go through on a regular basis together with the V2G segment. And we have reduced because of the good performance of the turbines, as you can see also on the very stable delivery on the lost production factor.
And does that mean we should expect lower provisions going forward as well if turbine performance doesn't change from quarter-to-quarter?
Yes, I mean, that's obviously, as I said, that will be dependent on how the turbines are performing and if we have any specific cases. But as we see, what we see now, it is well within the coverage of how we are performing.
All right. And second question, regarding the strong service margin, following up on Claus Almer's question. Just to understand, is turbine performance the most important parameter for the service margin?
Yes, but it is -- so turbine's performance, definitely, it is also dependent on how much efficiency we get out of the service organization, as such. But primarily, it is a consequence from the high quality of the turbines. And therefore, you will also see certain fluctuations as we take the revenue when we do a physical servicing. And if we don't have any major costs related to that, obviously, that will have a positive impact.
And is there any seasonal variation to that? I'm thinking -- I mean, I imagine turbines produce more power in Q4 and Q1, at least in Europe. Does that boost your [ strength going forward ]?
No, it's not. But I think if -- I mean, a bit more generic. If you look at the lumpiness that we've seen also before, we have had also a pattern where if the revenue had been a bit lower or the revenue growth has been a bit lower, the margin has been higher. The simple fact, as Marika said, that if we, for example, have anticipated a major component change at a certain point in time, and then that doesn't happen because the quality is better, then we don't take the revenue that we take when we do an activity and we don't have the cost either. So that is more the pattern, and it has nothing to do with seasonality.
And the next question comes from the line of Dan Togo from Handelsbanken Capital Markets.
A couple of questions as well. I'd like to hold onto the service margin here because you are guiding for a flat service margin compared to '17; [now you're around] 20%; now you're at 27%. So could you maybe share some or give some thoughts around what could potentially or will potentially take the margin below the 20% in order to sort of reach 20% for the full year? So what's in store basically for the rest of the year because, I mean, otherwise you should increase your guidance. That is the first question. The next question would be around ASP. Could you give some comments around the pricing environment at the moment? Because yesterday, sequentially, ASP is almost flat, but it's still on a declining scale. Is that, so to say, continuing and in what pace? How should we look at ASP going forward?
Yes. So I will probably not give you any different answer than what you heard previously on the service margin. It continues to be stable and, again, at a high level. That's also what we have softly indicated on the service margin. There is lumpiness in the service business, and it's absolutely performing very well from a profitability point of view. But we will stick to stable margins for the Service business. We have no intention of changing that.
So what you're saying is basically, it's too optimistic to factor in 27% flat in margin to coming quarters for Service?
Yes.
Okay, should I try to -- yes. So I mean, again, as I said, of course, sequentially, ASP is flat. And you -- as we also talked about many times, of course, ASP can vary a bit, especially between when we have different scopes in ASP. And I mean, generally speaking, ASP, of course, will decline due to technology, just due to the fact that we see a shift in the portfolio to more 4 megawatt and less 2 megawatt. So of course, those trends will continue. Very hard to say the exact timing of those scopes in between the quarters, but that general trend will, of course, continue.
But you don't see a new 27 -- 2017 coming up where prices take, so to say, a big dip down. You're sort of seeing we are reversing to the old trend with a modest decline?
I mean, of course, we've now seen sequentially more modest decline for 2 quarters, and that is, of course, positive. Then again, I don't have real visibility of what the competition will do going forward.
And the next question comes from the line of Katie Self from Morgan Stanley.
I just had a couple. Firstly, I want to clarify, I think it was the first question that was asked around the pricing of deliveries versus the pricing of orders. Obviously, there's still quite a big discrepancy in those numbers from EUR 1.1 million to EUR 0.73 million. And what I really just want to understand is how long that gap can stay or at what point those 2 numbers are going to collide, which they'll have to at some point. Maybe I'll give you that question first, then I've got another one to follow-up.
I mean, if you look at the ASP on the deliveries, yes, I agree it is higher than the EUR 0.73 million for order intake. But that is -- the ASP, as you know, is driven by scope of contracts and the differences in timing, combined also with the regional mix. So the turnkey projects will have an impact on the difference between these 2 numbers as that is recognized over time. But you don't include that in the deliveries until you have fully completed the project. And therefore, you have to adjust for EPC to get to the sort of exact number on the deliveries. Do you understand what I mean? Sorry.
Yes. Yes, yes, that's a bit clearer. Yes. And I guess you're not going to give us the adjusted number.
No, I think you can probably calculate that based on what we have shown. And on...
All right. And -- sorry, go on.
No, no, go ahead. Second question.
My second question was just on the kind of price/cost dynamic because as you've already discussed with the raw material and the steel prices, a lot of people in our industry have also been talking about labor wage inflation. And then, obviously, in just the wind, in general, the prices are coming down. What I was wondering is just what kind of levers are you looking at that you can pull in order to set -- to offset that price/cost challenge?
Yes. I mean, first of all, I think extremely important to continue to bring out new technologies and new turbines, more efficient turbines, with more production. I think that is, of course, probably the biggest lever and the one that we have used in the industry for quite some time. And there, I see continued good opportunity. The second part is, of course, to continue with the cost-out program that we see. That comes with standardization of components and with volumes and with high -- with manufacturing gains. And then the third thing is, of course, to make sure that we have our fixed costs under tight control in the company.
Okay. Understood. If I could then maybe just one last one, just a quick one...
Just to remind everyone that please only 2 questions per person. Otherwise, all your colleagues will not have the time to ask their questions. So please, only 2 questions per person.
The next question comes from the line of Kristian Johansen from Danske Bank.
So my first question is around the timing of deliveries. Obviously, you were strong in order intake last year and deliveries going up -- oh, sorry, backlog going up. I was a little surprised to see your deliveries going down here in Q1. Can you just help us understand the sort of the timing of your backlog in the coming quarters?
I would say if you compare to Q1 of last year, also bear in mind that we had a lot of activity in the U.S. because of the PTC components, that is obviously something that's not materializing here in Q1 of this year. So that is the major explanation why you see a deviation from Q1 of '17.
But still, would it be fair to assume that your backlog points towards growing deliveries?
I mean, the backlog, as you say, is big and on both for the Service business and the V2G business. And we are sticking to our guidance, so obviously, expectation is that it will go up.
Is there something you want to flag in terms of deliveries for the next 3 quarters we should be aware of?
Absolutely not.
Fair enough. Then you mentioned this localization of the 4-megawatt platform in the U.S. Can you just elaborate a bit more on what that means, also in regards to CapEx?
Yes, no, that is, of course, a trend that we've seen for quite some time. And I think that's actually good for us because, of course, we have a very strong 4-megawatt platform as well. So it's not the whole of the U.S. So it's still then different parts of the U.S. where the 4 megawatt delivers a better-levelized cost of energy. We have already, from the construction of the base factor, is that we have in the U.S. catered for that we can put in 4-megawatt molds for the blades. So from a factory CapEx investment, we handle it within our existing setup. Then -- so the investment for those products is very much what Marika talked about, it is the molds to produce them on.
And in terms of the timing, are you fully up [indiscernible] produce 4 megawatt [ locked to this day ]?
We have started production of the longer blades in the U.S. already, yes.
And the next question comes from the line of Pinaki Das from Bank of America Merrill Lynch.
My first question is around orders. Obviously, you've had a somewhat slow quarter for orders. But Anders, you mentioned that you see good activity levels. And you also are in the press saying you expect a pickup in activity in the second half. I'm not sure whether that's for orders or for general earnings. I wanted to understand, like, what gives you the confidence that order levels should be normalizing, as you said, and the quarterly fluctuation should become better? Which markets give you the confidence that the overall order activity level should keep you happy, as you mentioned?
Yes, I think -- I don't know which press, but I think what's clear is, of course, that we are back to a bit more than normal seasonality, which means higher activity levels, generally speaking, in the second half. On the order side, as I said, I mean, we see good activity levels in the market. We see healthy activities levels in the market when -- so when I look at the customer discussions we have, the potential we are discussing, I see a good high activity level in the market. And our regional sales organization is, of course, working hard to capture that activity level. So that is what makes me feel sort of confident that there is a healthy activity level in the market. Then -- and then, of course, the timing of those orders, as you know, I mean, we have a very good and very thorough process to declare our orders firm. That serves us well. And then those milestones has to be achieved and has to be for us to take it firm. And that, I think, as I said, serve us well, but also, of course, means that we will have a bit of lumpiness in order intake, as we've seen before. On top of that, when it comes to our competitiveness, I'm also confident. And of course, again, coming back maybe a little bit to a longer period and look at last year, and our record-high order backlog gives me confidence on our ability to take orders also going forward.
Okay, cool. Great. And the second question is regarding your guidance. Obviously, you've kept your guidance unchanged for the full year. I think, at the full year results, you sort of mentioned that you would aim to be towards the higher end. The consensus seems to have gone to the middle of the range now. Considering what has happened in orders or in steel prices and FX and whatnot, how do you feel about the range in terms of, like, which side of the range would you be more comfortable with at this point, the midpoint or towards the higher end or lower end?
Yes. First of all, I think we haven't indicated any ends of the range. We have kept the range, so just to make that clear. And also, as we said, at that point in time, we have a good order backlog. We have, of course, a good visibility what we need to do for both the lower part of the range and the high part of the range. We still need some in-for-out orders for this year, but we have a very -- we had a very good coverage coming in. And of course, we have, from that standpoint, a little bit better coverage now. But we then have the normal seasonality, which means the anticipated high level towards the second half of the year. We have a normal risk that is associated with that and, therefore, revenue recognition. As you said, I mean, the steel prices, we don't -- could have a minor impact this year. But they are not -- for the in-for-out, which, as I also said, of course, indicated is not enormous for this year but potentially, of course. And then we have a general FX headwind, of course, that is where we have different scenarios. So that will play out for the full year, depending on the geography, which is a bit hard also, of course, naturally to predict. So we will continue to work with different scenarios, as we have done in the past, and therefore, we also continue to keep the range.
And I just have a quick sort of comment to make is that you haven't disclosed the megawatt equivalent on the completions like you used to in the past. Perhaps, is that deliberate? Or you're not going to disclose it in the future?
A fair comment, Pinaki. But also, we are disclosing -- it's a balance how much we disclose. And if you look at the overall disclosure that we have here in Q1, it's much more than previously. So -- but I mean, you can get that number, if you choose, from the IR team. So no problem with that.
And the next question comes from the line of Mark Freshney from Credit Suisse.
Just a question on the inventory build, and on the turbines under completion, I think the data is -- can be put together easily. And I estimate that turbines under completion have reached 5.9 gigawatts. And inventory has caused your free cash flow to be, I think, one of the worst quarters, I think, I can remember. But can you give some more clarity on exactly what is causing the turbines under completion to rise? You alluded to some issues with the molds. But why would that not -- why would that impact this year and not in previous years when you also had very high levels of utilization? It just seems that there's something going on within the business operationally that is not clear to us.
Okay. So -- and that's what I tried to confirm is that the methodology that we don't produce for anything about -- apart from the firm order intake remains. So it's based on firm order intake. That's how we build the inventory, and that's what we obviously always will do. And because of -- you will also have a certain part of the inventory being, what I tried to explain before, with the EPC projects. They will not -- the volume will not be flushed out until you have a full transfer of the project. So there, you will take revenue, you will take profitability, but you will not take the deduction in deliveries until you have fully completed the project. So that's one factor that will have an impact. And then what we have said and, I would say, for the last 2 quarters, is that if we can see a possibility to extend the lifetime of the molds and use them fully, so we don't have anything idling there, we will do that instead of investing in new molds. So it's -- that usage of the balance sheet has not changed. And then, obviously, that have a big impact on our cash flow here in Q1.
The next question comes from the line of Michael Rae from Redburn.
The first one is just on steel prices. How should I think about your rough sensitivity to the steel price? Just if I can say things like hot-rolled coil or plate steel prices rising 30% year-to-date, should I imagine that your steel input costs are rising by that amount? Or by the time you buy the actual machine steel products, is the proportional increase less than that for you, is the first question. And then the second question is just on Taiwan and the offshore opportunity. What's the time frame for any orders that you could win there baking into the backlog?
Yes, if I start with Taiwan. And of course, that's really a question for you to answer, that what kind of timing they have there. So I honestly don't know. Let them speak for their activities there.
Then if we talk about the steel prices, what Anders was saying earlier, for this year 2018, we are not expecting any impact from higher raw material prices, steel primarily, because of the steel content in the products. So obviously, for the coming years, that is another thing, but that's also something we will have to come back to when we guide for '19. But we have a certain methodology that I have been alluding to earlier. So we have indexation in the contracts. We also prebuy and we hedge steel, and that's why we are confident in saying that the steel in-price for 2018 is not significant.
Okay, okay. So I understand the timing effect on 2018, but are you also saying that these kind of commodity steel benchmarks are not a useful indicator for your costs?
No. But I mean, obviously, the -- I mean, we have a certain methodology that I don't want to be -- how we secure ourselves within different time frames. But I mean, the methodologies that you look at certain time frames, how much you want to be covered and then you have different means of doing that. So again, what impact that potentially could have for next year and the coming years, we will come back to.
And the next question comes from the line of Sean McLoughlin from HSBC.
Firstly, a clarification. What is your current coverage of the minimum end of your sales guidance for 2018 at the end of Q1?
Sure. And that, we have not disclosed. We said that we -- compared to -- what we have said earlier is that compared to '17, we have a higher coverage entering into 2018. And obviously, with further order intake here in Q1, it has -- the visibility has increased further. But how much exactly, we have not been disclosing.
Okay. And a second question, on the U.S., just a general comment on the U.S. market post the tax reform. We understood that everyone was digesting the implications of the tax reform, of the BEAT provision. I mean, how are your customers feeling about the 2018 to 2020 ramp on the 100% PTC level? And should we expect U.S. order intake to really pick up through to 2018?
Yes. I think that, as you say, I mean, after the turbulence and all the speculation on changes in the PTC that results to us the end of last year, I would say that the good news that it's not back to the same situation as before. Those discussions started. So I mean, we see a very healthy market in the U.S. up to '20, I would say, also 2021. We still say that it will, from a delivery point of view then, or installation point of view, will be a phased market. So 2020 will be probably the biggest year. It's, of course, hard to speculate exactly how this will pan out over the years. But I think it will be a ramp-up, so to speak, from now until 2020 on delivery. I've seen different external forecasts that the '17 to 2020 time period, volume should be around 40 gig, and I think that this is a fair assumption for us to base the market size planning on.
The next question comes from the line of Gurpreet Gujral from Macquarie.
Just a couple from me. Marika, I know you -- just going back to the 1.2 gigawatts of turbines delivered in the quarter. I know you said compared to last -- last year was a bit of an anomaly, given the PTC cycle and hence is not a fair comparison. But if you look back in 2016 and 2015, the turbines delivered was also in that sort of 1.2-gigawatt range. So it does suggest that in this particular year, the Q1 deliveries are relatively low, especially against guidance. Is this primarily to do with the EPC side of how you recognize deliveries? Or is there something else?
No. I mean, as I said, one comparison is, obviously, the PTC if I compare with 2017. And then I don't recall the numbers exactly for '16 and '15. But you would also have deliveries -- if it's EPC contracts in a given quarter, that will have an impact. But that's nothing I recall from those quarters specifically. But it -- as we're not recognizing those from a volume point of view, that will have an impact, yes, you're right.
Okay, yes. Okay. So to be clear, when it comes to revenues, you do recognize clearly EPC contracts, but from a volume perspective, on deliveries, you do not, until there is a full commissioning of a particular project?
Yes. You have -- yes, correct.
Okay. All right. Second question, on the order intake in the U.S. specifically, I think you talked about sort of 800-odd megawatts in the Americas. Could you give us a kind of a guide as to how much of the 4-megawatt platform featured in this order intake relative to last year? I just want to get a sense of what the mix change is here.
That -- I don't have that on top of my head, sorry. So I think we have to come back to you on that to be more sure about the numbers. The IR team is nodding here. So we can definitely come back to you on that. I don't have the exact numbers, but we see a clear shift. And it depends a little bit, you still have them. In the wind belt, the 2 megawatt is dominant. In the what we call the rust belt, we start to see more of the 3 megawatt. And then on the coastal side, it's more of the 3, 4 megawatts. So you still have different markets within the markets that -- where the 2-megawatt platform is more dominant and where the 3-megawatt platform start to be dominant. But I think it's better that we come back with a bit more exact numbers than I guess.
The next question comes from the line of Alok Katre from Societe Generale.
Alok Katre from SocGen. My 2 questions really, Marika, just in terms of the activities of levels and the differential between shipments and deliveries. I know you sort of mentioned that you're using the balance sheet to build inventory only against the firm order and so on and so forth. But how comfortable are you with the kind of inventory levels that you now have with the risk associated, let's say, with having these inventory levels in terms of we're seeing price declines or in the risk of deferrals or pushout of deliveries by the customers, let's say, in the U.S. with all those uncertainties and perhaps even a risk of obsolescence from the perspective of changing technology and price pressures? So that's question number one.
Yes. But if I hear your question fully, then that would mean, if we will have all those uncertainties, that would mean that we would be speculating in our inventory and how we build inventory. This is based on firm order intake, which obviously we have full visibility of price, scope of projects and which products we are delivering. And as we are building based on those facts, we don't foresee those kinds of risks to occur.
Right. I mean, at what stage do you start to say, okay, maybe we don't build further inventories from this level going forward? Just wanted to get your sense of how you're thinking about deliveries versus inventories from -- in the context of your backlog. Clearly, we've seen about 3 or 4 quarters now where you, obviously, built more and more inventories. I think that megawatt under construction was talked about and so on and so forth. So just wanted to get a sense of, yes, where we stand in terms of...
I mean, when it comes to inventory, it's obviously finished goods that we are looking at based on the firm order intake that we see. The -- we have been building for that purpose for the last 2 quarters, which obviously have served us accordingly. You also have a certain portion of PTC components in that. And you will also see EPC projects volume in that, again, based on firm order intake. But obviously, if things don't materialize as we anticipate, then -- I mean, we are not speculating in the inventories. Obviously, if things are not panning out as expected, then we will not continue to use the balance sheet. But it's based on firm order intake and nothing else.
Right. So not building anything for in-for-out orders?
No, no.
Okay, okay. Okay, great. And my second question is just on the capital structure. And obviously, there's been some expectations given your strong sort of balance sheet as well in terms of buybacks and so on in the second half. Clearly, given where your solvency ratio is and how close it is to be, let's say, 25% floor that you have set, does this kind of act as a little bit of a limiting factor in terms of when we think about potential buybacks and utilization of, let's say, excess cash on the balance sheet? Or are you a bit more open to flexing this range as well?
Well, as I said earlier, this is something we will come back to on the back of Q2. Our methodology has not changed from that perspective. But also bear in mind, what we have also said is that we will do a share buyback when we see fit. But we will also use excess cash for opportunities in the market, which comes from, as we have said earlier, acquisitions of companies within the service sector but also technology. So that has not changed. So that is core to means of having this strong balance sheet, which have served us extremely well and continue to serve us well in the industry.
Okay. But I mean, the 25%, is that kind of cast in stone for you? I mean, you lowered it last year, so just wondering.
No. I want to be specific. We have targets for a specific purpose. And if we would have any change in those targets, we will get back to you on that.
The next question comes from the line of Klaus Kehl from Nykredit Markets.
First, a follow-up question on these pretty low deliveries in Q1. Could you just confirm that there aren't any really problems with your deliveries, it's just a matter of timing? And therefore, if it's just timing, then it would be fair to assume that in the coming quarters, you will complete the projects and deliveries will go up and so will your revenues. That would be my first question.
Yes.
Yes. And we can only confirm that, yes.
Okay, pretty simple. Excellent. Next questions. In this quarter, you have a quite high percentage of EPC revenues in your Power business. I think the percentage is up from 4% to 20%. What kind of margin impact does that have in the quarter?
Yes. So I agree, in this quarter, it is high, as you say. But you, again, you will see difference in the different quarters from that perspective. But also, if in this quarter, in particular, we had a supply and install project that is qualifying for as an EPC project because we cannot use these turbines for any other purpose, and then the accounting principle, therefore, will be the same as an EPC contract. So it's a bit awkward in this quarter, specifically. But if you want to get more details, you can speak to the IR team on that, and we also have that in the notes, if you go through that in our report.
And the final question comes from the line of [ José Arroyo ] from [ Basinma ].
I just had one question on your cost-cutting plans. And I wanted to refer to the ambitions that some of your competitors have announced, particularly Siemens Gamesa aiming for about 15% of last 12-month revenues worth of cost-cutting and that's by 2020. And I was wondering, given that Vestas has not announced a similar target to the market publicly, if this is a reasonable level that Vestas could also achieve by 2020, if this is a run-rate level we should expect for the company?
Yes. I, of course, for obvious reasons, I can't really comment on the competition. And I think when it comes to cost levels and cut levels, we come from, of course, 2 very different places, where, as you -- as everyone know, they are going through a merger and we are not. So I mean, we will continue with our efficiency programs, both when it comes to the cost of the program on the product side, on the supply side. And of course, we will continue with our technology road map, both when it comes to the current product line out, but actually, also when it comes to the next generation of turbine because longer term, the product will increase -- output is actually the best driver for margin generation. But you can definitely, not only that, you have to work on both the cost outside and on the technology road map and, of course, the eternal cost savings. But I think it's very hard to compare to the competition also from the point of view that we are -- we come from very different situations.So with that, I would thank you very much for your interest and your calling today. And I'm sure that we will meet all of you or at least most of you during the next week. So thank you for your interest, and have a nice weekend.