Vestas Wind Systems A/S
CSE:VWS
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
98.64
215
|
| Price Target |
|
We'll email you a reminder when the closing price reaches DKK.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
Vestas Wind Systems A/S
You don't have any saved screeners yet
So good morning, everyone, and welcome to the first quarter of '19 result presentation. As usual then, it's me and Marika here and also part of the IR team. So let's start with the usual disclaimer slide and then go straight into key highlights.As you probably have seen, I have decided to step down as the CEO effective 1st of August '19. I strongly believe that this is the right time for Vestas. During the last 6 years, we have completed the turnaround program, executed on the profitable growth strategy and Vestas today is declared market leader in wind with a strong financial position. I'm also delighted that the Board has appointed Henrik as the successor. He knows the company and the strategy well from his time in the Board. And I'm sure he is the right person to execute on -- both on the strategy and take the next step for the company. Also I would like to be clear that it's, of course, personally been a difficult decision and that's also that I'm actually not leaving Vestas after 1st of August. I will stay on as the Chairman of our joint venture with MHI for offshore and also as an adviser to the Vestas Chairman and the CEO until mid-2020.But I'm still the CEO and I will still be CEO for another quarter. So with that, let's dive into the results of Q1. And of course, we are really pleased to have -- to show a record-high order intake, leading then to an all-time high order backlog. Order in the quarter was 3 gigawatts, leading to a combined backlog of over EUR 28 billion, up 31% year-over-year. Total revenue, EUR 1.7 billion, 2% increase compared to the same quarter last year. An EBIT margin of EUR 43 million. And here, we see the impact of a competitive market, tariffs, and as we have said before, a very back-end-loaded activity level during this year.Continued to see strong performance in our Service business, both from a top line point of view with revenue growth of 16% year-over-year and an EBIT margin of 26.4%. And we also continued to see positive development in our joint venture for the offshore business with an underlying improvement of EUR 14 million year-over-year.So I will then talk about the market and the other side, Marika, as usual on the financial. And I come back to the outlook and Q&A. This is the time of the year where we also get reports on market share during last year when it comes to external analysts. And then looking at installation, and of course, it's a very positive picture for us in Vestas, where we see that we clearly gained market share last year from around the 16% to 22% on the onshore market. And as you can see, the forecast is also that the market during last year from an installation point of view actually showed a small decline.Also when it comes to offshore, of course, really encouraging to see that our joint venture from an installation point of view took a clear #2 position when it comes to installation market share in 2018.Then going into the orders. As I said, record-high order intake of 3 gigawatts and also a satisfactory average selling price of EUR 0.81 million per megawatt.So the order increased 84% year-over-year. U.S., Brazil, France, Australia were the main contributors to the order intake in the quarter. As I said, ASP at EUR 0.81 million. The price per megawatt increased in Q1, primarily driven by turbine type and geography, and underlying prices remained fairly stable.Leading then to an all-time high order backlog of more than EUR 28 billion, increase year-over-year of EUR 6.7 billion, 31%. And you can see that the wind turbines side increased with EUR 4 billion and the service side with EUR 2.7 million. Looking a little bit more into the different regions then. And as we can see, of course, again, really pleased with the quarter where we actually saw a growth in order intake in all our 3 regions. But starting then with Americas and where we see continuous growing demand both in the U.S. and Latin America. U.S., of course, driven by the current PTC cycle. And we, as before, of course, working on the tariff and still mitigation actions. Latin America, also good activity level. New auctions has been announced for -- in Brazil for the '19 to '21 time frame. And in our side, we are ramping up in our nacelle factory in Brazil. But I would say overall broad-based support for auctions and new auctions in the region.Looking at deliveries then. Up an impressive 262%, of course, from a low quarter last year, mainly driven by U.S. delivery but also good contribution from markets such as Argentina, Mexico and Chile. Orders, up 105%. And here, it's the strong order intake in Q1 from Brazil that drives the year-over-year increase but also the U.S. increased from an already high level. The market share for last year and these are then driven by new energy finance. Number shows that we are a clear market leader in this region with close to 40% market share, remaining #1 in the U.S. market and also taking share in Latin America.Then moving over to EMEA region, so Europe, Middle East and Africa. Again, a good market share increase and also a year-over-year increase in orders. In Europe, I would say it is very much driven by the 2020 and 2030 renewable energy targets. A bit more detail in the quarter was that we saw last year a successful restart of auctions in Poland of 1 gigawatt. And on the back of that, we expected an auction in '19 for around 2.5 gigawatts. Also, France and Italy plan to auction around 5 gigawatt each through 2020. In Middle East and Africa, we see that on the back of the successful auction in Saudi Arabia, new auctions are being planned. And in the broader Africa, we also now start to see firm targets on renewable from a number of different countries. On the delivery side, we decreased 54%. This was very much due to the decline in the German market. And I would say generally, in the region, we see also here then a very back-end-loaded profile. Order intake, as I said, plus 10% where we saw that order in France more than realized -- offset the decline on a year-over-year basis in Sweden and Italy. In the quarter, we also secured project for the first complete merchant-driven projects, one in the U.K. and one in Denmark. Looking at the market share. Definitely gained market share last year to 40%. And I will say that this is due to our very strong diverse footprint in the region that, of course, we have a high presence in core market. But generally speaking, we have a very solid presence in all these markets.Last but not least in Asia Pacific. Of course a, very diverse region. Starting with China, market is moving from a feed-in tariff to an auction system. On our side, we are ramping up production both with ourselves, of course, but also then with suppliers as TPI and a new supplier in Aeolon. In India, the new rounds of auctions has been announced. But from a delivery point of view will cause a delay where previous auctions has not been awarded.On the broader Asia Pacific region, and I think I talked about this already last quarter, that Japan is moving from -- also from feed-in tariffs to auctions and we start to see a very interesting pipeline being built in their plan. Australia, also a good market that shows in the numbers. And they have ruled out now a large investment in coal-fired power stations. Looking at delivery then, up 23%, primarily driven by Australia, Thailand and Vietnam. China and India, fairly stable order intake. Of course, a very impressive percentage point of view, but from a lower level, 286%. Strong order intake in Australia. But as I said, broad based. And we see orders also New Zealand, China, Taiwan, Vietnam in the region.We look at the market share. Then of course, we -- the Chinese market has a very big influence on the market share in the region. So here, we are #4 and actually both 1 to #3 are all Chinese manufacturers.Service business. As I said, continue to have a strong performance. The fleet under service has increased to 88 gigawatts. Some of the highlights in the quarter was a 20-year service extension for 1 gigawatt in the U.S. And also in the U.S., to sign -- that we signed a 30-year service contract with CIP. Overall, of course, we have been working diligently to increase the duration in the backlog and it's now increased to 8 years from 7 years.As I said also, good progress in our joint venture for the offshore market. Key highlights in the quarter was a preferred supplier announcement for the Baltic Eagle project with a 9.4 megawatt turbine. And also worth mentioning, they secured a firm order for the world's largest floating wind farm of 50 megawatt. And a number of projects in progress or under delivery. So with that, I leave the word to Marika.
Thank you, Anders. So we -- sorry, we start with the income statement. And here, you can see that we have a slight increase in revenue compared to Q1 of last year. That is primarily driven by FX. So translation impact here in the quarter. All in all, I would say that we have a slow, slow start here in 2019 and that is as anticipated. And also this is something we have tried to communicate, that you will see a very busy second half and a slower first half than what we are used to see.The Power solutions segment is obviously the one that has been impacted the most. And Service continued to deliver a very stable, all in all, gross profit margin and revenue.If you look at the gross profit, that's obviously where we have lost compared to last year. And that is the low-margin projects that we took in, in 2017 and are executed here in Q1 of '19.There's also, on a comparable basis, a large portion of U.S. project that we have executed. And therefore, we also have an impact from the U.S. tariffs relating to the U.S. business.EBIT margin, as a consequence, is down by 4.9 percentage points compared to last year, and that is primarily driven, as you can see here, gross profit but also SG&A. I will -- this SG&A that you see here is obviously absolute numbers, but I will talk about the 12-month rolling on the next slide. So if we look at the SG&A and the 12-month rolling, you can see that we keep SG&A under tight control. We're also showing the performance over the last number of quarters. We are 7% here. But remember that we are building up to actually cater -- building up SG&A to cater for the busy second half and that is also a reflection here in Q1 2019. So it's primarily activity level that we are planning for. Depreciation and amortization, as we have also highlighted, increased in the quarter, and that is primarily due to the introduction of new products. So that is also a path that you will see here in 2019, that we are at a higher run rate. And the SG&A amounted to 7%, again, a very stable performance all in all compared to Q1 2018, a slight decrease.Service business continues to operate and run very well. You see a top line increase of 16%. So also a reflection of the all-in-all high order intake and high activity level in the -- both in the segment but also in wind in general. And the performance of the EBIT is also continuing on a very good path. So we delivered 26.4% here in the quarter. Remember that you can see a certain lumpiness in between quarters. But we are trailing at a very good and solid level. MHI Vestas continues to also be reflected here the activity level. So you see an increase in revenue of 83%. Remember that it's now a 3-megawatt platform in these numbers. This is 8-megawatt platform performance. And this is -- the increase is primarily driven by the deliveries from Horns Reef III and the Norther project. And the improved result profitability is also a reflection and a result of the higher activity level for the 164 turbine. The change in net working capital here, we're comparing net working capital end '18 and Q1 2019. And this is a reflection of the higher activity level and what we have communicated earlier that we are building up inventory simply to cater for the busy second half this year. So again, as planned for and no surprises. Obviously, impacting the cash flow, which I'm showing here. And here, you can see that the major deviation is the change in net working capital, and consequently, the buildup for the second -- very busy second half this year. Net interest-bearing position continues at the high level and we are close to EUR 2 billion in Q1 '19. Total investments are also trailing as anticipated. And we have an increase of EUR 57 million and that is simply to cater for the strong demand in the market and also new product launches. So reflecting the positive development and the positive demand in the market as such. Warranty provision and lost production factor shows that the control over the quality and good quality performance continues. And the warranty provision consumed remains at a stable level. We have increased the warranty provision to 2.1% of revenue here in Q1 '19 and that is to cater for new product introduction and/or new products in the market. We have done this before. So it's nothing new. That's a pattern that we have chosen to continue, being prudent about performance.The lost production factor continues at a satisfactory level, so we are also here being below 2%.Capital structure. Net debt-to-EBITDA is well below threshold. So -- and also solvency ratio, very close to the target. The major impact here is the new accounting rules, the IFRS 16, impacting total assets. But we are 24.9% and the target is 25%. Anders?
Thank you, Marika. Then we go to outlook and Q&A.And as we said, I mean, Q1 as expected. And of course, therefore, we also maintain our outlook for the full year as previously. So that means revenue between EUR 10.75 billion and EUR 12.25 billion. Service is expected to grow approximately 10%. EBIT margin before special items, between 8% and 10%. And here, Service margin, expected to be approximately 24%. And total investments then approximately EUR 700 million.So with that, we open for questions, please.
[Operator Instructions] Our first question is from Kristian Johansen from Danske Bank.
My first question is on the order ASP. Beget your CMD in November indicated you would raise prices in the U.S. and now we see the order ASP trending up 7% versus Q4. So can you just elaborate on how much of this increase is due to higher U.S. prices?
Yes. I think that -- I mean, as we said all along, when we see costs coming up in the form of tariffs, of course, we have an ambition to strive to find a fair balance between that burden between us as an OEM, and of course, the customer, and also the supplier. Of course, that's a continuous work. And more than that, I will not comment on our commercial discussions with customers in specific regions. And we're, of course, very satisfied with ASP in the quarter. But as I said, I mean, we have seen a certain lumpiness before in the ASP. So we think -- see that the underlying prices, they are stable. And I think that's how you should also view the ASP. Specifically in the quarter, we had a little bit of -- when I talk about turbine type, a little bit reverse effect of what I have talked about before when it comes to power modes. If -- for those of you who remember, of course if we sell a lot of power mode, that has a negative effect on the ASP, everything else equal. And this quarter, we actually sold a bit more nonpower mode. So you -- and you can see, of course, those variants between the quarter. But underlying, we see stable pricing.
All right. Then my second question is on the margin in Power solutions. So you highlight 3 things. You highlight the 2017 prices, the tariffs and raw material. I mean we have decent visibility on prices. But in terms of tariffs and raw materials, I mean, has these come in fully as you expected? Or are there any deviations?
I would say that the margin -- the impact from the low project margin is a big portion of the deviation compared to Q1 of last year when it comes to margin. Then we -- as I said, we had a very big portion. I think we were 40%-something U.S. deliveries here in -- or ToR in Q1. And from that, we see a EUR 25 million impact from tariffs. And raw material is also, as we said last year, it's an overall increase. So a portion of what you see here is also raw material in the rest of the world. And it's very hard for us to define exactly because obviously the tariff is -- part of it is raw material as well. So these are the 3 big chunks. But I would say that the low-margin project is a big portion of the chunk. And then tariffs and the raw material is less significant here in the quarter.
Our next question is from Claus Almer from Nordea.
Yes. Also a few questions from my side. The first question goes to the low-margin projects that hits Q1. Will that also be the situation in Q2? And also the share of low-margin projects in Q1, how was that as a percentage or in comparison with Q4 last year? That'll be the first question.
Okay. So a big portion of the low-margin project, and at least we tried to communicate that, have been executed in Q1. But you will see also some in Q2. My estimation is that a big part of all the low-margin projects will have been executed here in the first half of 2019. And I don't know how specific I can be, Claus. But if you look at the low-margin projects, it's a big part of the dip that you see here in Q1 when it comes to margin. But on top of it, you have 40% of the project coming from the U.S. were executed. And then there you have the tariffs on top of partly low-margin projects. So you have a double whammy here in the quarter as such.
And all of that with the U.S. will still be the situation in Q2, right?
I will say that the U.S. will be -- the more U.S. we have this year in comparison to last year, the more you will see a tariff impact. That's a fact. But it doesn't necessarily have to be low-margin project.
Okay. And then my second question goes to 25% tariffs. If the trade war escalates in -- on Friday, what would be impacting you this year and next year?
And a fair question, and this is something we have obviously been working on but it changes by the day and I think you're fully aware of that. So basically, what we're doing is that we have a look at where are we now. And as this is an extremely busy year, it's well planned for. So deviation from the plan is, all in all, it will cost us something. But we are also trying to be as proactive as possible. So we have written basically what can we do without impact? What can we do with some impact if something happened? But everything is impact. But I will say we are extremely cautious. We are prudent, as you know, so we are planning for different scenarios. And thanks to our global industrial platform and also global suppliers, we have a big opportunity to deal with the situation. But it's also costing us something.
So we shouldn't be overly concerned if things turn over, yes, at next Friday?
I would say -- I mean, overly concerned is a strong word. But I mean, obviously, as this is such a high-level activity this year, we have the high activity in the second half. And any changes for a very well planned year has a cost impact, so obviously that's what we're trying to mitigate as much as possible. It's not easy. But we have a big opportunity to deal with it in a very good way.
Our next question is from Akash Gupta from JPMorgan.
Yes. Anders and Marika, I have 2 questions, please. My first question is on project execution. Maybe if you can comment about if there were any liquidity damages that were booked in Q1 given the ongoing issue that we see at one of your blade suppliers in Mexico. And maybe if you can talk about how do you see project execution for rest of the year.And my second question is on full year guidance. I see you are reiterating the guidance. But if I look at the midpoint of the guidance, you need to deliver 10% margin for rest of the year against 2.5% delivered in first quarter. So how do you see midpoint of the margin guidance range given you'll also have some mix impact in the second quarter?
If I start and I hope I captured everything that you asked. In Q1, to be very specific, there's no LDs in the quarter or there's no extraordinary events in the quarter. It's just as anticipated and, I would say, as planned for.The strike in the Mexican factory is not impacting here in Q1. But as I said earlier, any deviations will obviously have an impact on an already very busy and planned year. So that is what we are continuously working with. But here in Q1, there's no impact from the strike.And then your second question is we will see a slow start of the year. We will see, I would say, a slow start in the first half. And we're not guiding for the quarters but we feel comfortable with the guidance that we have provided. But the reason for the big range is really execution, I would say normal headwinds that you can anticipate in the second half as we have a very busy Q4 and weather condition might not be in our favor. And that's why we keep the wide range. But it is a guidance that we feel comfortable delivering on.
I mean I can add to the mix in your question that -- I mean we use third-party outsourcing for around 25% to 30% of our blade production. Majority of that, TPI, but we also qualify new supplier, as I talked about on -- in my presentation.So of course, everything else equal, as Marika said, of course, it's a negative when we see a disturbance in the quarter. But you should also bear in mind then that we produce this blade both in-house, as I said, and with partners. And we actually have 6 production places where we produce this blade. So yes, so that is the situation.
Our next question is from Dan Togo from Carnegie.
Two questions from my side as well here. Firstly, on Service margin, above 26% in the first quarter and well above your guidance. Anything impacting here that we should be aware of? And is this level, so to say, sustainable? That's the first question.
Yes. There was nothing -- there were no special items in the Service in the quarter. So -- and of course, we are pleased with the margin. I mean we have not changed our guidance. So we still feel that approximately 24% is a good guidance for the Service business. You have seen this lumpiness a little bit between the quarters in the Service margin before. And of course -- so I mean, a good quarter, a normal operation and we've maintained our guidance on approximately 24%.
And then a question on prices because I understand you are pushing through higher prices, particularly in the U.S., to compensate for tariffs and steel. Are these new prices, so to say, protecting your long-term EBIT margin target of around 10%?
I mean we have definitely not changed our long-term EBIT margin target. And of course, we haven't either comment on exactly when we believe that we will reach it. But of course, that is the target. And of course, that is what we drive the business on. So then of course, the market is the market, but we have definitely not changed our mind when it comes to our long-term target and how we drive the business to achieve that target as quickly as possible.
Maybe I want to ask it in another way. How far does it take you in compensating the 1.5% gross profit, negative gross profit, that you saw coming from higher steel prices and tariffs?
But that -- I mean as I said, of course, we are working on a number of different fronts to improve margin and compensate tariffs. I mean pricing is one issue. The other issue -- the other action is, of course, our cost-out program that we continue to run. And the third thing is, of course, the introduction of new turbines and more competitive turbines. So of course we are working on all the different fronts that we can do.
Okay. Good. And then just one final question on ASP because I struggle a bit to see it going up with you selling more, [ up to 150 ], with the higher scope. Is there any particular strong impact from EPC that also was quite a high proportion of order intake in this quarter? Any particular impact from EPC in ASP?
No. There wasn't. The ASP was about on the same level as the quarter before. But maybe I wasn't super clear on the turbine type. So what I meant was that it was not so to more 150. But if you take an example, we have a, let's say, 3-megawatt turbine that has a power mode to 3.5. If we then see a lot of the power modes, everything else equal, of course, the ASP goes down. But of course, they're not a margin, if I put it like, that because that's a fairly less cost of an upgrade from 3 to 3.5 power mode. If we then have the reverse situation compared to the quarter before, that we actually sell a little bit less power mode, then of course the ASP mathematically goes up. So that was what I referred to as some changes that we can see in the quarter.
Our next question is from Casper Blom from ABG Sundal Collier.
First of all, sad to see you leave, Anders, but I appreciate the structured way that it is happening. And then a few questions from my side. First of all, probably for Marika. On the SG&A side where you post a total of EUR 192 million here in the quarter, is that a fair run rate to assume in the coming quarters also? Or is there something a little bit more costly here in Q1? That's my first question.
No. I would say that the SG&A, as I tried to say here, in the quarter, there's an uptick compared to last year. But that is really for planning for the busy, busy second half as we have so much execution to do.So I wouldn't say that you should expect a big uptick. But I mean the overall high activity level will obviously have certain impact on the SG&A in terms of absolute numbers, but again not in percentage as revenue is expected to follow that same path.So that's why I said that the SG&A continues at a very controlled level. I think you all appreciate and understand that we're not having an intention to increase more than what we have to in absolute numbers.
Good. And then my second question. I think back in 2007 when the industry started to face some lower prices, you talked the industry going through a transition phase. Would you sort of say that the industry has gone through that phase now? Are we kind of back to a -- or are we at a new normal, so to say, where everyone has sort of aligned to what happened back then and you can sort of now look ahead? And I'm obviously asking in the context of your 10% EBIT margin target, which I think you said was something that was within reach post the transitional phase.
No. I mean I would say that of course we, generally speaking, we're already in the transitional phase. So I think when we talked about that in '18 as you said, and of course, we see -- definitely see '19 as a transitional year. And I mean we talked about already then what we see are key indicators where we start to see a bit more normal or alter the transition. And of course, pricing is one key indicator. And of course, we are encouraged to say that we now have seen stable price development and also stable ASP for a number of quarters. The other is, of course, volume. And we talked then about that, cheaper prices for wind should lead to increased volumes in the market. And of course, we definitely see that. And we actually also see auction prices or PPA prices for wind stabilizing compared to the situation we had in '17 where, of course, our customers' price for wind drastically came down.So that's all trending in the right direction. If we then look internally what do we have to do, so to speak, or what we control ourself, it is very much about new technology, new turbines that simply produce more through a higher cost but less high cost than the production gain, so to speak. So that we continue to take steps on leverage cost on the turbine side. And of course, we have and we will launch a number of new turbines. And the second parameter is, of course, the cost-out program that we're working on and that we feel have good traction. The -- and what has then changed according to this picture is, of course, that we also now then see the headwind from tariffs that has influenced the raw material and also on the transportation side that we didn't have at that time.So we are in a transitional year. Still, we see good development on the factors that we can control. I will not speculate on exact timing. But -- and of course, the big unknown for the future is around prices going forward, which of course is the market.
So if I were to sort of try and sum up what you said, then you said that 2019 is still a transitional year in terms of the P&L. But the, how can you say, more forward-looking parts of what you report, i.e, your order intake and your prices, they have sort of normalized?
Yes. I mean, of course, we are really pleased with order intake. I mean, we have 84% growth year-over-year. So you have to be very pleased with the order intake and the market share position we have. And of course, I'm also pleased with ASP development that we've seen. So yes.
And our next question is from Alok Katre from SocGen.
Alok Katre from SocGen. A couple from my side. Firstly, Anders, just surprising to see the announcement yesterday and the comments about succession planning, et cetera. Just wondered the thought process around the change in the management that we are still seeing and particularly in the context of when Bert says in the statement about Vestas transitioning to a sustainable energy leader from a wind energy leader. Just wondering what the thought process around that is. I know you've talked about solar hybrids, energy storage, et cetera, so any color over there would be greatly appreciated. And then I'll come back to my second question.
Yes. No. I mean as I said, and of course, it hasn't been an easy decision for me to step down as CEO. I mean I think it's a fantastic industry, it's a fantastic company. But it's, of course, also so that I think that this is the right time. And I think this is the right time for the company. I have been here 6 years and we have gone through different phases. I think the company is in great shape. We are the market leader, we have a strong financial position. And so it's more a matter of not if, but when, so to speak. And then I think that this is a good timing. And of course, from a personal point of view as well. I mean I've had this position for 6 years now. I'm turning 60 next year. So I think it's also from a personal point of view I'm looking forward to be able to control my own time a little bit. So I think it fits well together. And of course, as I said, I'm really pleased that the Board have appointed Henrik, who knows the company well, who has been part of the strategic process in the company. And of course, also I'm actually not leaving Vestas. You will see me around for quite some time as well. And that's also an important statement from my side. I'm not leaving Vestas to go somewhere else and I'm actually staying in the company then until mid-2020.So yes, that's the long story. If I then talk -- if I look then to your question on the strategic direction of the company and the next step. And I think we talked about that before as well. We had a clear ambition to beat fossil fuel and be on par with fossil fuel. We've done that. We had a clear ambition on being the market leader in wind, and we have executed on that. And we say that the market going forward, we -- that to penetrate more and more wind and renewable, we actually have to look at a bigger solution in the energy market and that goes from everything as easy as how is the market set up? I mean, how does the market reward renewable electricity when we get to a system that is more distributed and more intermittent?So that's one area. It goes, of course, to the product and the product offering that we can do. And we talked about hybrid as something that we see a large potential going forward. We also do simple things like, for example, increase the capacity factor of our existing turbine, all in all, to be more friendly to the grid. So sustainable energy solution encompass us, encompass all of that. Also, you can say core development that we take a bigger share of the value chain and offer something more to our customer than we did before.So those are -- we've taken the first steps in those areas. But of course, as always, there is a lot more to do.
Okay. And my second question, Marika, really just going to come back a little bit on the working capital side. I think -- is there an inventory by sales cap that you have in mind when you're talking about building inventory? Yes, I understand it's a good way to manage capacity. But is there some sort of a limit that you have in terms of inventory by sales, for instance. And in the offsetting side, historically, whenever you've had really, really strong orders, you've kind of seen fairly large down payments as well.I'm just wondering if you have production going up and you have orders being very, very strong, why haven't we seen larger offset to the inventory sort of increased, in fact, payables and contract assets liability haven't really moved Q-on-Q, which is a bit surprising. So any color on that side would be great
Now All in all, when it comes to our payment terms, we are following the same methodology that we have used before. Also on the payables side, there's no major changes. This is obviously one thing that we continue to work with. If you see a discrepancy in between the order intake and the 2. Also remember, payables is also a consequence of the activity level. So there will be a timing difference. But all in all, the methodology remains. And what we have said as well is obviously we will use the balance sheet simply because we have the opportunity. And especially as this year is so back-end loaded, there's a good opportunity for us to actually use it. And to actually cope with the capacity, we have investments in most. We're also having a slightly bigger portion with external parties. And you see TPI is a good example of that. And that is how we will continue to overall monitor.And then on top of it, we also have investment in local content requirements. That means that in certain countries, we do produce as well. So that is something we have to accommodate for, and that's why we choose when we can to use the balance sheet simply because it's strong enough. It's very hard for us because you will see a lumpiness. And obviously the buildup is in the first half now because we're expecting a very high activity level in the second half. But then again you see the strong order intake that we have right now. So we obviously also have to start the planning for 2020 and what to execute.So I -- and we're not guiding on top of it for the working capital. But I will say, it's well under control and we -- it's also based on the firm order intake principle that we have used in the past and that we are continuously using. So we're not speculating in any inventory whatsoever. That's out of our interest.
So there's no change in the prepayment terms that you're receiving from customers in general, particularly on the larger orders as well, right? Because...
No.
Just wondering why -- okay. Okay. Fair enough.
[Operator Instructions] Our next question is from Klause Kehl from Nykredit Markets.
Yes. A follow-up question on this sub supply issue and I guess we all know that I'm talking about TPI. Marita, you said a couple of times that you expect a very high activity level here in 2019 and that any deviations would be a negative. And you also stated that TPI had no impact in Q1. So would it be fair to say that what you're saying is that we should expect a negative in here in the beginning of Q2?And secondly, how fast can you ramp up your own blade production or get deliveries from another sub supplier if these TPI issues continue?
I mean the strike that we have discussed before when it comes to TPI, again, Q1 simply because the activity level is not super high. It doesn't have an impact. What I'm trying to say is that all in all, if I look at the numbers, anticipation could be that it has, from a cost perspective, a very small impact. And the good thing, as the strike occurred early in this year, we are obviously trying to mitigate the impact from that strike. And we have quite a number of months to actually deal with it.The final outcome of the mitigation remains to be seen because we're not there yet and that will probably not be shown until really the end of the year because activity level is so high in Q4.
Okay. But how fast can you ramp up your own blade production if necessary or get deliveries from another sub supplier if needed?
I think you should put it a little bit into perspective, as I said. I mean we use third-party on around 30% of our blades. We -- this is 1 factory of 6 where we produce 136. We qualify additional supply, as I also said, Aeolon in China.So in the scheme of high execution here, of course, we have a lot of mitigating action on things that happens all the time in the supply chain and in the delivery chain. So I mean it's no -- it's in one factory in 1 quarter. So that's Marika's comment, that of course we have mitigating actions and are working on those, in this case, as in many other cases where we see tightness in supply or replanning that has to be done.So I think you should view it in the light of that. But also, as we said, of course all -- everything else equal, of course, it's a negative effect that we lose some early production of 136. But our -- I mean normal business of Vestas is that there are quite a lot of these kind of moving parts so that comes back to what we always talk about, that we have a fairly broad range on our revenue guidance for the full year. And of course, this year even more so when it is very back-end loaded.
And our next question is from Sean McLoughlin from HSBC.
If I could just build a little bit more on cash side. You're looking at further cash outflow in Q2 from what you're saying. And I'm just wondering how comfortable you are with the current EUR 500 million-plus positive free cash flow in consensus in 2019. That's my first question.
I'm not sure that I will comment on the consensus. And we are building up definitely and that's obviously reflected in the cash flow. We also have a higher level of investment. And you have seen previously to accommodate for both high activity level this year, but also anticipated high activity level going forward. And also the local content requirement. Cash flow is top on the list. And obviously, we are working hard to compensate for the buildup in inventory. But the -- at the consensus, I will not comment on. We have the internal target at this point. And it's again high focus and high priority on the agenda.
Fair enough. And Anders, I suppose on a high level, what is the key recommendation that you have for your successor as he steps into his role? Or what is the key issue you think he should prioritize?
No. I think that that's, of course, questions for him. And as I said, I mean, he knows the business well. So I think that he should form his own opinion. So I will just congratulate him and say that it's a very interesting role.
Our next question is from Ji Cheong from Citi.
I have a couple of questions on the markets, please. So on first, on the China market, are you seeing any change in the dynamics in the market given the switch to the auction system? And if so, what kind of business are you expecting in China in the coming quarters?And my second question would be on the LatAm region. So your competitor announced some strong growth in the region yesterday. It seems like you're also doing well in the region. Can you give us some color on what you see in the market in the coming quarters and what kind of business you're expecting, please?
Yes. If I start with China then, I would say that so far no major changes. There is probably a little bit of a rush into the feed-in type of regime since that is expected to be phased out. But having said that, I will say that the auction rules from the government are still not being issued. So they are still fairly unclear. There's, of course, been a big tender in China recently that started out more on levelized cost of energy focus and longer-term IRR, but ended up a bit more on the normal short-term CapEx focus. So I wouldn't say that we've seen any big changes in the market as such. I think for us, the -- what I've said before is still our focus. We're focused on the segments of the market where we are relevant, where we have a relevant offer, and that is the long-term IRR market where we compete and also on the low- to mid-speed wind segment and not in the ultra-low wind segment. And when that part of the market is won, I think we have shown also in the past that we can have a good performance. And when that market is not won, we are not sort of chasing that other part of the market.I, of course, hope over time because actually the merchant prices for electricity in China are pretty okay from a price level point of view. So I don't see any reason that we all the time we go to a bit more merchant longer-term market in China.I think for Latin America, we are really pleased with development. I mean, as I said, if I look at the increase in Americas overall, so both U.S. and Latin America in the Q, the one that -- the market that drove the big increase year-over-year was order intake in Brazil. So I feel that we've taken a very strong position there in the last auction. And of course, we are looking forward to the newly announced auctions as well. And otherwise, in Latin America, we see good activity levels with auctions in the other markets as well. The uncertainty for the moment is probably in Mexico where, of course, we've seen a shift in government, and therefore, auctions there has been canceled.New government has expressed their commitment to renewable energy and start up the auction system again. But we haven't seen that happening yet.But overall, good growth both on the order side and on the delivery.
Our next question is from Michael Rae from Redburn.
Just a question on MHI Vestas, which seems to be doing very well, you're taking market share and you're ahead of plan in terms of profitability. So I'm just wondering, how do you think about achieving proper market recognition for that business? And I'm really asking if your agreement with MHI has any kind of future call option with -- after a certain period of time.
Yes. No. But of course for -- we are really happy with the development in the offshore business. And of course, we are happy both with the financial development and with our partner, MHI. So we will continue to focus on that. I will continue as the Chairman of the joint venture. But of course, I will not comment on specifics when it comes to the shareholder agreements between us and MHI.We are -- arrived at the last question, please.
Our next question is from Mark Freshney from Crédit Suisse.
Can I please ask you on the U.S. market? I mean your order activity and your delivery activity in the U.S. accelerated year-on-year. Clearly, at some point, potentially the middle of next year, the U.S. activity levels will drop pretty substantially. Can I ask, firstly, what your expectations on the U.S. market are? And secondly, what measures you can take to reduce the operational gearing impact on your U.S. operations? Basically, how much headwind to gross margin could that be in the latter part of next year?
Okay. Let me try to answer that. I will not comment on headwind on the gross margin for next year. We will come back to guidance on margin overall for next year, as usual, towards the end of this year.But I think that, first of all, of course, U.S. is a big part of our business which I'm really happy about, I must say. I think it's a good market to be in. As we said before, we also expect 2020 to be the peak year when it comes to delivery in this cycle. I do, however, feel that there will be substantial market in the U.S. also in the 2021 year, for example. And what I base that on is, of course, our qualification of 80% PTC component and also the simple fact that we will see spillover from 2020 that goes through 2021. I mean remember that, of course, U.S. is going to be a tight market in 2020 and not just tight when it comes to turbine supply, but also when it comes to cranes, to new construction, when it comes to rails, to transport and so on.So we definitely expect that maybe some project that was planned for 2020 will go into 2021. And also remember that also 80% PTC support is a very good proposition.So all in all, we expect the market to be somewhere around 7 to 10 gigawatt in '21.If you then look at the drop from '20, I will say that there are, of course, several other markets that are growing really well that more than well can compensate for that drop. I mean, to mention a few, we talked about Brazil; Russia, where we have a framed agreement of up to 2 gigawatts. Germany, and I think Germany is another good example where actually the core market in Europe, as expected, has gone down considerably, and we are still growing in the region.So those are some example of other markets that can cater for the drop down in the U.S. in '21. And remember also that in Q1, our order intake will actually still have been record-high even without the U.S. orders. We took orders in more than 40 countries last year.So that was the last question. And again, thank you for your interest. Thank you for calling in, and I'm sure that I will see at least some of you during the next 2 days. Thank you.
Thank you.