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
Good morning, and welcome to this release of Vestas' Q1 for 2022. As everyone, I'm sure, have now appreciated with a different timing caused by, of course, the number of both special item, one-offs and also the changed outlook. Suggest we go through, first of all, the performance the list of items that most significantly relates to the changed environment and also the worsening of the environment directly connected to what has been going on in Russia and Ukraine most recently.
But first, let us go to the key highlight for the quarter. So we had an order intake of 2.9 gigawatts with continued increasing in pricing. That's leading to a wind turbine order backlog strongly of EUR 18.9 billion, as you can follow in our release.
We had revenue in the quarter of EUR 2.5 billion. That means it's a year-on-year revenue growth of 27% despite those supply chain disruptions. We've also had, and that's leading to an evaluation of our business activities, so we went through a strategic revenue triggered, of course, by the geopolitical changes leading to both looking at manufacturing, but also the technology reprioritization in the offshore, which I think everyone will appreciate when we go through it. On the profitability, it was hampered by the supply chain disruptions and those one-offs. Underlying, we had a negative EBIT margin of 6.2% while reported margin was negative 13.2%. More details to come in both Hans and my presentation later. And then in Q1, we completed the 2 sustainability linked fund issues, 2 tranches of EUR 500 million with sustainability bond KPIs that was significantly oversubscribed in the beginning of March also what has since been a challenged bond market.
But if we go back and go into the business, I think the global business environment in some ways, it speaks a little bit for itself. In other ways, I wish we might not feel that we had the right when we in Q3 last year said we think the supply chain and the disruption will remain throughout 2022. And I think we feel today that, that is definitely right and even it has worsened throughout Q1.
That doesn't take away which our priorities are still the same: keep employee health and safety, keep safety right at all the sites and all the construction sites we're working. It's a top priority. And then as a second priority, as we have kept all along, is to maintain business continuity. And that is now and has been throughout this quarter severely challenged, in some locations more than others, but I'm sure we can talk more about that.
But when we then look at it, if there is a positive to take away from this quarter is that the energy crisis that underlines the wind power, both criticality but also importance to meet electricity demand, both in the short, medium and definitely, definitely in the long run, that is the energy supply that is so critical these days and being discussed at various, including highest political levels. But we also see, of course, still the climate link, which is how do lower the CO2 emission over time. We saw the cost inflation and the supply chain disruptions. Some of it, yes, combined with now further COVID-related lockdowns, particularly in Asia Pacific and particularly in China. That, of course, continues to impact time lines and increase cost with us trying to mitigate some of these ripple effects.
The Russian government's invasion of Ukraine has worsened the global business environment significantly. That's causing negative ripple effects to global trade and also a cost inflation that seems to be in many areas unheard of previously. Investors, we condemn the Russian military invasion of Ukraine. And we also withdraw from Russia in an orderly manner, which is, again, what we also said at our AGM in beginning of April. And some of that is pure reflection of executing on that decision taken in the beginning of April. But we will give you details, of course, of that from here.
Here is the overview of market shares, and I think this is just for information in the investor presentation. It's the annual release with Mackenzie. And I think I would just highlight here, global onshore offshore installations in 2021, it came to around 103 gigawatts. Out of that, Vestas kept in '21 15.7%. It also seems when you drop down and exclude China, then it was 47 gigawatts in 2021 coming from 43 gigawatt in 2020. And our market share has remained within the range of from 34.6% to 33.2%. But I think most notable in this one is the top 4 OEMs still represents 85% plus of the installations outside China. But again, here, it's normally one we have shared with you in this format, and I think it's also just for having it as part of the deck of today.
When we net get to Power Solutions, I think the overall here is really a quarter where we see increased pricing is the key factor for any value creation that bodes in the short, medium and long term. When we look at it, we have had an increased order intake-driven by Americas and Asia Pacific. It's still impacted by accelerating cost inflation and timing of individual markets. And there are significantly differences in individual markets, which we have also experienced in the last quarter. It has in its assets with a total of 2.9 gigawatt, which is actually, for us, very satisfying given a very volatile and challenging market conditions.
We've seen there, again, the increased focus on energy independence, accelerating ambitions for renewable transition. And I keep repeating again and again, it is of an enormous importance that everyone understand how and how we contribute and also how along with our customers we can also be part of fulfilling that ambition on political part to increase renewable around the world. But one thing is the discussion, another thing is permitting and the acceleration of commissioning of it. And I think here, it's fair saying this is where we talk beyond 2022. But it should be and it must be one of the primary focuses for Vestas but also with our customers and not least governments around the world.
The pricing continues to increase. We continue to do that to mitigate the cost inflation, both experienced and seen. We highlight again and again is the discipline needed across both onshore and offshore, and it does start at the time of order intake. This is something we are absolutely committed continue to do. And we are ask also here the industry to come to the same conclusion in both onshore and offshore. And we have seen lack of, both from a discipline point of view and also from an action point of view, to say and do the same.
And I think this is where we stand tall on that one. And in the quarter, we have seen an ASP ending at 0.89 positively for the onshore and 1.01 in total. That also means we have wind turbine backlog orders at EUR 18.9 billion. And when we compare Q1 with Q1 from '21, then, of course, it also means that the value of the order intake is just around EUR 3 billion in Q1 compared EUR 1.6 billion a quarter last year.
We then go to the Service business. I think the Service business had another stellar performance in a world that is definitely considered on the surroundings we are working in, well positioned for further growth. We saw in the quarter a strong operational performance, increased activity level also associated with the high transactional sales, which we discussed in Q4, as part of ending and concluding 2021. I think here, all owners of turbines with the electricity price experience they have in local markets. Of course, we want to make sure and customers want to make sure that turbines are generating electricity in the current environment.
We also had a 589-megawatt offshore wind order service agreement to the offshore in Thailand, which comes with a 15-year full-scope service contract. To the right here, you will see that the Service backlog now stands at EUR 30 billion, of which EUR 26 billion comes from onshore. We look after 132 gigawatts, of which 125 comes from onshore. And we have an average contract duration in excess of 10 years. It is here timely to thank everyone involved in the Service business for another really positive and strong performance in the quarter and being able to mitigate some of these challenges that has been thrown at you throughout the last quarter. Below, you will see the growth in all of the regions, which, of course, we are positively pleased with because it shows the progress we are doing across all regions at the same time.
When it comes to sustainability, yes, we were awarded the most sustainable company in the world in January of this year, and that's what we referred to in the subheading here. Other key highlights, we did the issuance of the sustainability linked bond, 2 tranches of EUR 500 million, one of them used to repay an existing maturity of a bond and that was well executed in Q1 with investors from Hans and the team in treasury and finance.
Over their lifetime CO2 avoided in the quarter by produced and shipped capacity decreased by 6% in Q1 2021, but that is due to that we had a slightly lower produced and shipped turbines, which, of course, will deviate quarter-on-quarter. Nothing that gives us raise to any other things than just here saying that the produced and shipped turbines in Q1 '22 comes to 118 million tonnes of avoided CO2 of the lifetime of those turbines, which, of course, is a number we track both on quarters, but also especially on the full year when we get to that.
The carbon emission from our own operations decreased by 4%. That is mainly due to the transition of the Daimiel factory heating system, where we have gone from gas to biomass positively. And of course, then also with a positive from that we had an overall activity levels, so positively down with 4% in the quarter.
Most notable here, I will also conclude on the safety. We remain at 3.1% in TRIR, which is considering what we have had to do in a, I will call it, an extremely challenging Q1 when it comes to getting people in and out of sites, but not least also handling the situation around Ukraine. I'm really pleased to see that we have been able to keep the safety records at the same level and, therefore, taking good care and safely of each other, working around the world. With that, I would also just like to extend here, big thank you to customers, suppliers, partners and not least employees that are able to hold our activities running and operating across the world. This is tough, and it is hard operational environment, and therefore, your effort and commitment and support are really appreciated.
And now I would like to pass over to Hans to go through the financials.
Thank you, Henrik. As you pointed to, as part of our Q1 review, we have carried out a business review to assess our activities in light of the geopolitical challenges that we have witnessed in the last quarter. These are part of a strategic prioritization to improve our profitability. And as said, it is our imperative here that we want to say adjusted to the new world that we are facing.
The first point listed here is that we have reviewed and looked at the business case for our legacy offshore activities. And before going into the details there, let me reiterate that we continue to see a fantastic and very strong prospects for the offshore segment, the Blue Marlin turbine the V236 has been greatly received. But that also means that we are obviously also seeing that the demand for the legacy platform is being impacted by that. We have done a total of adjustments of EUR 176 million, which is split roughly equally between impairments and provisions. And as said, these all linked to the legacy 164, 174 platform.
Next on the list is related to the Russia-Ukraine situation, that we've special items of EUR 400 million, which is split between write-downs of inventories, impairments of tangibles and VAT and provisions. This represents a list that we will be actively working with in the coming months. There are, say, discussions and negotiations ongoing. And of course, this is something that I said we will be spending more time on also going forward. And I should mention also that, of course, forfeited revenue and profits are not included in these figures.
Due to the low demand locally as well as challenged landed cost in, say, outside the region, so to say, we have also reassessed our footprint in China and India. And hence, we are looking at write-downs there of EUR 183 million for that particular part of our footprint. This is coming from impairment of tangible and intangible assets, but there's also an element of impairment of inventory and other costs linked to this.
Finally, we are then doing a reversal of part of the write-down we did for the Lauchhammer and Viveiro facility. And this just highlights the diligent work that we are carrying out when we step into working with these types of elements in the P&L.
Turning then to the income statement and looking at the effects what it is that some of these things has meant. Let me start by saying actually that when you look at this table here, which is slightly different to what you normally see, when we look at the underlying figures, which excludes the offshore adjustment, I think we come out with very strong activity levels, but obviously, with a challenge still on the profitability as you also alluded to earlier, Henrik. But let me start out by saying that we actually do see an increase in activity level by 27% year-on-year, driven, in particular, by service and by onshore installations. We are then seeing adjusted for the offshore FX, gross margin decrease by 4.3 percentage points, driven mainly by external cost inflation and very disrupted supply chain elements going into the P&L.
When we then look at the EBIT margin before special items, this decreased by 2.3%. And again, we're here comparing, say, the underlying P&L. So that is without the offshore adjustment. This is driven by the lower gross profit, but there's actually a positive coming from the better fixed cost absorption due to the higher top line.
In the Power Solutions segment, profitability is challenged, but actually the activity levels are up 30% year-on-year, driven by the onshore activities we have seen in the quarter. EBIT is impacted EUR 164 million by the offshore adjustments in the quarter. But underlying, I think it's important to say that the 20% negative margin you have there, actually, when you adjust for this, sits at negative 11.6 which is a decline of 4 percentage points. It's driven by the same elements as I mentioned on the previous slide. And again, I think it's just important to say that underlying, there is, of course, the development that we are working on addressing. But it looks a little less bad than what you can see on the chart to the right-hand side.
In the Service business, you pointed to already, Henrik, that we are seeing a very strong performance. Service revenues were up 19% compared to Q1 last year. This is driven by high activity levels overall, transactional sales, but also inflation adjustments in the contracts, which is natural in today's environment. We need to remind you also that the offshore adjustments do have an impact of EUR 12 million on the EBIT levels. And so if we adjust for this and look at the underlying margin in the Service business, we actually sit with 22.3% performance, which is higher than what we saw last year in Q1.
SG&A naturally also impacted by some of the specials in the quarter. Relative to activity levels, we are sitting at 7.5%, which is an increase of 1.7 percentage points compared to last year. This is mainly related to the offshore impairment, but there is also an effect coming in from higher cost of transportation equipment. There is an impact here of EUR 64 million, specifically from the offshore adjustment that is also mentioned here on the slide. So clearly, again, as I said before, this effect should not be underestimated when looking at the SG&A for this quarter.
Net working capital, we are seeing an increased net working capital in the quarter. It follows, by and large, what we probably would expect for Q1 in that we are seeing that we built inventory, and this is clearly also what you can see here on this page that there has been an increase in the level of inventories. This is then partly offset by down in milestone payments, but we have also seen in the earlier years that Q1 would follow a similar pattern to what we're seeing in Q1 this year.
This links naturally into the cash flow statement then, where due to the working capital movements, we are seeing a negative cash flow in the quarter. It's also driven by lower profitability, of course. But all in all, this leads to a negative cash flow from operating activities of EUR 928 million. You mentioned already the bond issuance, Henrik, EUR 1 billion. And when we then adjust for the repayment of the previous facility, we have a net effect from financing activities of roughly EUR 500 million positive.
Investments totaled out at EUR 193 million in the quarter. This is an increase from Q1 2021, and it is mainly driven by investments in construction equipment and transport tools and when we look at that where the increase is coming from.
Provisions and LPF is naturally a topic that requires a great deal of attention from everyone and not at least also from management. There is, say, a high degree of focus on warranty provisions and on the LPF. If we turn to the LPF first, it continues at a high level, but this is a quite natural consequence of the extraordinary repair and upgrades that we are carrying out. The warranty provision sits at 7.8% in the quarter of revenue. This high level is driven by the offshore adjustments that we have made, but it's also driven a bit by general cost inflation and logistic challenges for the repair and upgrades we're doing for the existing cases. And that is, all in all, what takes us to the EUR 195 million you're seeing there on the lower right-hand side on this slide.
Finally then, capital structure. Our net debt-to-EBITDA remains well below the threshold of 1.0 that we have defined. We are currently at 0.0 in Q1 2022. Our commitment to cash focus and our capital policy remains. There's absolutely no change to that part of what we do.
With that, I give it back to you, Henrik, to take us through the outlook and the Q&A.
Thank you, Hans. And I think the outlook, of course, goes without saying it's a guidance that is giving under particularly lower visibility as we have also seen in the previous quarter. And we, unfortunately, believe and also see that will continue for the coming quarters under the circumstances. It comes with larger volatility, and it comes also with changes that are many and also suddenly arising to us. So therefore, the guidance here is in that environment. When we then look at it, the revenue also have to reflect that we have a stop and we have a withdraw from Russia and Ukraine. So therefore, we are adjusting revenue from previous 15 to 16.5 down to 14.5 to 16 That is in this environment still kept with a range of EUR 1.5 billion, considering the quarters we are looking into.
Service is now expected to grow minimum 10%. That is up from the 5% we ended sort of when we looked from the ending of last year. That is due to the market condition, and that is also due to the market condition of what we have seen in Q1 a very high level of transactional sales and positively for that, of course, is something we believe the Service business will be able to continue it over this year.
The EBIT margin has been changed to reflect both some of these changes, some of the volatility we look into, but definitely also the one-offs we have described here from the offshore. And therefore, the previous outlook was 0% to 4% which is now with the current outlook is minus 5% to 0% where the Service margin is expected to be approximately 23%, considering again there the one-off effect of offshore and also the change in accounting standard, which has now been included in what we are seeing here for the full year, which we didn't have the full overview of when we finished 2021.
Total investments remain at approximately EUR 1 billion. And of course, we will give further update to that. But that is very much triggered at the continued investment into both the technology, but also the manufacturing plants of the offshore activities we have.
Last year, I will just mention here that 2022 outlook, of course, is based on the current foreign exchange rates, which has been updated as part of the Q1. As said, for us, definitely not anything as usual with this quarter, with the exceptions of the underlying performance of the business. I think we have had a long list of things that has been -- where we have been forced to debate it, not only in details. A number of those items, especially around Russia and Ukraine, are not concluded on, which is also why in part of this conference call. We will probably in a number of those areas simply respond that it's sitting in an ongoing discussion, and we'll give you further updates in the quarters to come.
So with that, once again, to thank everyone on the call. And again, apologize for the timing of it, but that's how life is when we do and have to do these things. So with that, I will pass over to the Q&A and we pass to the operator for taking that.
[Operator Instructions] The first question comes from Claus Almer, Nordea.
I have a few questions, and we'll take them one by one. The first question goes to the offshore and these one-offs you're saying. I'm a little bit unclear what is actually causing these one-off costs, so maybe put a bit more color to this. Is this a quality issue? Or what is it? And secondly, do you think that you have taken necessary provisions to cover possible [ additional ] cost to solve these issues? That will be the first.
Thank you, Claus. I think on the offshore, it's actually -- it's, yes, despite sort of the number, and it's a positive reflection of, we are now that advanced in progressing with the Blue Marlin, the V236-15 megawatt. When we go around in the world now wherever we are in Americas, wherever we are in Mainland Europe or we are in Asia Pacific, we have very little projects that will be coming on where there will be a permitting limitations that sits around the V164, the V174. So it's a reflection of that the technology is maturing to the end of its life cycle quickly because there will be very little allocated to that.
That, of course, also means we basically take that as a technology separation now. We've learned all the things. We are ramping up on the Blue Marlin, and that's the positive of it that the Blue Marlin will simply overtake everything else remaining at it. There are no specific other things in the technology. And that's just us being cautious of when we look at us now ramping that the 2 existing platforms down in the sense of both the tangibles, intangibles, but also how we then treat the warranties around it in the offshore.
Well, as I read the report, there is also some extra costs associated to already installed turbines, which was probably not linked to your new platform coming up or...
No, that's in some of the existing. And we can just see now that part of repairing offshore in some of those platforms with a capacity that is definitely limited also causes more either time or cost allocated to it. So that's just us being cautious on when we look at some of these repairs. But there are no other new things as such, as warranty-related cases to that, Claus.
And therefore, there will be no new prices in the coming quarters as to these repairs?
There shouldn't be.
Okay. Then the second question goes to a growing concern in the equity market, I think, at least I've been hearing this a lot. Will this just need to raise new capital? Is a scenario within a decent likelihood that you have to raise capital? Is there anything with these new bonds that we should be concerned about?
I think it's -- we have no such plans. Let's make that clear. I also stress that my last slide, Claus, that we remain committed to our policy of staying within the boundaries that we have defined. So I think that's a short and simple answer to that.
The next question comes from Kristian Johansen, SEB.
Two questions from me as well. First one, Henrik, you once again sort of a call out to the industry and urge for improved discipline on pricing, should we read this as that you have seen no improvement in pricing discipline in the sector in the quarter?
We're just highlighting we don't break attitude and discipline down into neither weeks, months or quarters, Kristian. So I think here, it's an ongoing. We can see that there are things going on that probably will hurt people at from order intake and onwards, and that's just the only thing we are highlighting here. We're also highlighting here, it has to be a discipline that is kept in both onshore and offshore. And then I think we have said what we need to say to both the industry, but also around our own participation in those discussions. Okay.
Fair enough. Then my second question goes to sort of your visibility, which obviously, I know is low. But if we look into 2023, can you, at this point, already see some of the current challenges will sort of drag into next year? Or is it sort of still hope that 2023 could be much more normalized?
Kristian, I probably heard somebody will ask me about 2023 today. We are battling through 1 quarter at a time. If we go back and see what we have done in order intake, how we diligently and disciplined in accessing that. I think we can sort of say we look into a quarter-by-quarter where we basically just needs to have a world that comes a little bit better back together, then we will also see things improve.
But it is just right now not today, and it hasn't been any day in the previous quarter where we can see any improvement. It has worked the wrong way, so to say. So I think here, there were more ships in queue, there were more things in potentially being threatened by lockdown as when we are coming out with this report, Kristian. So I think it's a reflection of that when you see -- starting seeing that easing, then we believe it will be improving. And right now I don't dare guessing how long it will take.
I think previously, we said it will take 1 or 2 quarters to clear out when we normalized. I think today is you can sort of look for a normalization. You can also describe it, but it's just not present. But we are not, as such, negative of neither the future outlook beyond '22, and we are not negative on the order intake beyond '22. We just have to face the challenges we are with -- in '22, which they are, of course, a consequence of the decision we have made.
The next question comes from Akash Gupta, JPMorgan.
My first question is also on offshore provisions. And I mean last year, when you closed the deal, you took some additional warranty provisions around EUR 130 million to EUR 135 million. And now you are taking provisions again. And last year as well, you didn't say there was anything unusual, and you said it was because of under provisions in the past. And maybe if I come back on the topic, like how confident are you that we won't see any future warranty provisions in offshore? And on the same point, I mean, outlook for V164 and V174 was pretty weak given competitors have better turbines. I mean I want to understand what has changed in the last 3 months that you are taking the write-down now and not before?
Yes. So your first point there, I think what we are seeing is that, obviously, the environment is challenged overall. That means that a lot of things have gotten more expensive also in the last few months in terms of, for instance, booking of ships and other things that takes place in the offshore space. I think this is our best assessment at this point in time. And obviously, we believe for the same reason that this should cover what we have seen, Akash. And hence, as said, we are seeing things have gotten more expensive here over the course of the last 3 months, and we have done this assessment. And it is then also part of the review we have done in terms of the demand picture we are facing right now, which leads us to come to this conclusion.
To your second point then on the demand side, I think in some ways, you mentioned it as a positive, Henrik, and it is definitely true, and I can only confirm that we are seeing an uptick in terms of demand generally. The 236 machine has been very positively received. And that is what has then led us to sit and say 1 year after the acquisition, this is now what it looks like for this part of the business and which has led us to then come to the conclusion that we need to impair certain parts of the asset. And mind you, it's certainly not the entire lot that is being hit by this, it is a subset of the value.
And Akash, maybe I can add to that, it's 6 quarters ago since we announced the deal in offshore. So as I said, as much as we would appreciate it to do some of these things at an earlier stage, we've also spent the first quarter basically getting the permit to acquire the business and integrate the business. And therefore, it's part of that road map coming throughout the last quarters, which, of course, we completed in Q4 last year with the full integration of the system part. I'm also pretty sure if you go back 6 quarters ago, your outlook for offshore and the forecast for offshore, for instance, towards 2030 would have looked dramatically different just 6 quarters ago to what it does look today.
And my second question is on manufacturing footprint optimization in China and India. I think you said that this is driven by higher landed cost. Then I think it makes sense. The question I have is that do you need to invest elsewhere in the organization like in your European or American footprint to offset lower production in China and India?
Yes. I think there's a couple of observations here. There's a twofold messaging in today's footprint. There's, first of all, the landed cost and therefore, don't manufacture necessarily certain parts of what is most cumbersome or most expensive to transport. Secondly, it is also some of those manufacturing footprint, Akash, builds in a handshake and a commitment from countries where there was a local demand cycle coming. And we're also here just highlighting a little bit the warning to governments and saying, if you want it, don't just ask for it as turning into a 100% export play. So it does require local demand side.
When again comes to capacity, we work closely with partners on all continents. That goes for Europe, and it also goes for Americas to build out that. You have seen some of those announcements, and you've seen some of those partners. So we are fully ready to build both internal investors but also with partners when it comes to that. So we don't see that necessarily changing what we're doing currently.
The next question comes from Dan Togo, Carnegie.
A couple from my side as well. And the first question may be a bit following up on what you were just saying here, Henrik. Is there a risk in the longer term that the way you sort of say, step down or ramp down, at least, in China and India, that you lose some scale advantages that could impact your 10% plus EBIT margin target in 2025? And along those [ lines ] as well, stepping away from producing your own blades, is that leaving -- could that potentially risk leaving some money on the table in the longer run, and impacting that margin target as well? So maybe some wording on how you see this supporting the 10% margin target, or is there also a risk involved here. That's the first question.
I think with having a global supply chain right now, everyone can see there is a risk associated with that. There's also an upside, so I think here we've a good balance of doing that because if we've not had that, we wouldn't be able to remain running the activity and the deliveries we've done. So I think it is in one hand also appreciating what we have done quarter-on-quarter. This quarter is actually up more than 20% compared to the quarter last year. So it also illustrates that the global supply chain are working. I think this is much more also in saying, if you have localized technology that is also asking and looking for a local demand and it's not there, then it's a natural reflection and conclusion from our side that we're not going to remain with the capacity.
If it comes back, we will consider it. If it's not there, then it's a natural reflection of that. We're not leaving and you will definitely appreciate what I'm -- we are not leaving a untouched stone in a global supply chain with any value behind as such. So this is more on saying, in the current environment, we see that's the most natural to do because it doesn't makes sense to have that transportation on top of it.
Understood. And then a question related to offshore. Here, you have also previously provided some guidance towards 2025. The more challenging, so to say, margin environment for 10-megawatt platform, does that in any way affect the way you have guided for the market towards '25? I'm referring here to the EUR 1 billion to EUR 2 billion revenue in '23 and '24 and the breakeven-ish margin you have alluded to here.
No, that doesn't change those facts. And I think it's just for us now to say that I don't think we will, together with customers, participating in many of other conversations they're just delivering on that. And that's just a positive reflection on the new technology road map that comes in. So no other changes to that.
The next question comes from William Mackie, Kepler Cheuvreux.
My first question would be with respect to the great success you've had on booking orders in the quarter. Could you reflect on the expected level of gross margin given the dynamic cost environment that you've received in those orders relative to the historic norms that we've seen in the period '16 through '20? That would be the first question. The second question relates to pricing and the competitive environment. I note on your Slide 6 that when we look at the market share outside China, there's a growth in other, and it seems there is an opportunity for Chinese producers to make headway in Western markets. How would you describe the competitive environment at the moment and its effect on price development going through '22?
Thank you. I think on the price development and especially on a question towards your gross margin and margin on projects individually that, I think, is the wrong, so to say, conference call and have conversations. That's very much an internal discussion. We got the same exactly the same way of handling sign-off on order intake, which means we sign them off. We also align with it. It's a very important part of our moving towards the 10% EBIT, which also means that we don't allow things come into our backlog. That is not fulfilling at the time of order intake the profitability targets we have. So that goes for the world. And by the way, it's the same alignment, and it's the same way of signing off the orders across the world with the same threshold, by the way.
When it comes to a specific discussion around China and Chinese OEMs, I think it's fair saying we see various input on that in various markets. We price consistently of the cost of the turbine from both raw materials components and other and from time to time, we see that others have available pricing that are basically not for us to consider. So I will keep it with that response, William.
Then a short follow-up, just related to the guidance, very wide range. Could you perhaps talk to what scenarios push you to the bottom or the upper end of the range?
So I guess, I mean, there's a lot of different elements that goes into providing a guidance range like the one we have provided here. What I would say is, as you say, it is wide, and it's also wider than what we saw earlier. But I think it's also fair to say that when you look at what the world looks like today, it is a very different place to where we were only a couple of months ago. And that is what we have tried to reflect that in the guidance range. We have tried also to say give a picture of the world as we see it now. And clearly, you can sit and speculate a lot about different kinds of scenarios. I think we'll come back to that also as we go through the following quarters. But I think generally speaking to the wideness of the guidance range, it is a reflection of the fact that, say, uncertainty is very high as it looks right now in the world.
And I think also here, guys, appreciate right now market conditions. You've got historical high electricity prices. We don't have a customer globally that is not looking for delivery on time or even early generation in discussions with ourselves. We have seen that in countries where we've had, for instance, feed-in tariffs, expiries early on and others. But now with today's electricity price, it's simply just full attention to that. You will also appreciate, William, when you then consider that and compare to other industries right now that there are an effect of some of those lockdowns. There are an effect on some of the supply chain constraints.
So I'm pretty sure if you've had a car under order, you could be one of the ones that have had to wait for it for a long time. And that's just not right now in anyone's interest in where the whole world is looking to get more availability of energy supply. And that energy supply is across every country in the world currently. So I think it's just be mindful of. It's a tense, and it's a tough operating environment.
Next question comes from Deepa Venkateswaran, Bernstein.
I had two questions, too, on the guidance. So on the revenue, just a clarification, the change is that really from forgoing the Russia and Ukraine orders? Or is there is any uncertainty on volume delivery or something? And on the guidance, assuming mid point of the guidance prior and now, there's a swing of almost EUR 700 million. And all the disclosures you've made in Q1, we can probably get to EUR 265 million or something. So there's a delta of EUR 430 million. So I just wanted to understand within the 430 million, again, is there anything specific for loss of profit from Ukraine? Any other elements? Presumably anything you would have had certainty you would have already had to book provisions already. But it's a pretty wide range, so if you can at least event qualitatively give us some idea what are the other buckets of uncertainty that, that you might see as the year unfolds? Is it logistics? Is it raw materials? Something else?
Yes. So we start with the first one on revenues. I think what we're looking at there is obviously when you sit and assess this and as we have done in the last few days, then you look at what is the composition of the different building blocks we have that leads to the guidance that we end up with. Clearly, there is an impact from the situation in Russia and Ukraine that is factored in. We have looked at what I'd say the different ways that we can build the P&L in terms of what the year looks like. And so yes, of course, that has been part of where we have arrived at in terms of where the revenue guidance is ending. And it is, say, that, I guess, the numbers are well known. So clearly, there's an effect that goes into the top line guidance from that.
When it comes to then the guidance range on EBIT, you mentioned some numbers there. So I'll talk a bit to some of the building blocks that goes into the difference between where we were and where we now sit. I guess a lot of this can be seen already in the accounts that was sent out. There is the offshore adjustment, which is EUR 176 million. There is the impact from Russia and Ukraine that I just mentioned where the top line effect of that I said is, I guess, fairly well known. There are then some of, say, the more difficult to quantify, but obviously, that's what we have tried to do nonetheless in the guidance, is an effect coming from, say, the lockdowns we're seeing in China. There's also what we would say are the ripple effects coming from Ukraine and Russia, which is impacting and severely, severely disrupting the entire supply chain that we are working with and which is also back to the revenue part in part given us challenges on what we have been working on, on the in-for-out projects that we have had also for the year as well.
And then finally, when we look at where the impacts are coming from. We also have included now the accounting change for the Software as a Service, the cloud solutions. And all in all, these, I say, some of the main things that have been cooked into the change we have done on the guidance. I think it's important to say you said it already, Henrik, so let me say it again. It's -- I mean the world is a different place today than what it was before. There's a lot of uncertainty. And there's a high degree of disruption seen right now linked to China, linked to, say, ripple effects from the China lockdown at this and linked also to the Russia-Ukraine situation, which continues to impact freight markets and all kinds of raw material markets as well. And that is what we have then tried to cater for that uncertainty in the guidance that we now have.
The next question comes from Lucas Ferhani, Jefferies.
So my first one is on pricing again. Can you, I mean, describe a bit the pricing discussion you're having with clients? Are you seeing still protracted negotiations? Do you think there's some impact on demand from the higher prices not only from you walking away, but also from clients potentially walking away? And do you see any impact also on pricing from the difficulties of one of your largest competitors in onshore?
I think on the pricing right now, I think as we spoke detailed around from coming out of Q4, I think there's still a number of projects left in a discussion for projects and go live because I think still it's fair saying the world has and the customers have a number of projects that are left with much lower PPA agreements, and therefore, any price disruption to the level of what we are seeing now, of course, on the turbine and the solution does make it very, very difficult for customers to get their investment decision to actually stick together. And I think for those who have done a PPA agreement before they got the sort of the locked in turbine and renewable solution, it's a difficult world.
When we get to new projects and permitting coming on being discussed, then I think we can all see on the current market condition that, that is a different discussion point. Of course, with the variations that are to the theme, we just have more and higher volatility on both some of the raw materials like the steel, like the transport cost, which relates to fuel, which also relates to availability. And of course, that affects the discussion with customers. As I said, when we look back on the Q1, really pleased with the order intake. Some of the things that came in Q1 has been discussed for a very long time, and others have also come into that queue.
But I think we can expect the Q-on-Q this year, again, to be varied depending on how much we can have as a sort of, say, a normal working period because otherwise, we will have to update our outstanding offers to customers. And of course, that makes many of the process to be repeated again and again.
Okay. And my follow-up one is on free cash flow. Historically, you said you should be positive each year. After this Q1, do you still expect full year 2022 to have positive free cash flow?
I think the free cash flow guidance is not really I -- mean, let's not talk about this guidance because it's ambitions we have, first of all, in terms of our longer-term aspirations. But secondly, I think in a year like this where we are looking at, say, the profitability that we're facing and the supply chain disruptions, there's some hard work that obviously goes into having to manage the cash flow. Of course, that is a challenge right now when you look at what, let's say, the developments are in the world that we're in.
And you have to here also appreciate, as you can see on our inventory, we are running higher inventory to protect the ongoing activities as well for delivery. We have a backlog to deliver on customers and that, of course, triggers that as much as we do, we have to do that to secure deliveries to our customers as well.
The next question comes from Martin Wilkie, Citi.
It's Martin from Citi. Just a couple of questions. The first one is coming back to pricing. So obviously, stronger pricing in onshore. You mentioned that the pricing has to be at a level that gives you the profitability that you want. We've seen a couple of your competitors talk about escalation clauses and inflationary pass-through now getting embedded enter pricing for the first time. Is that something that you've also seen? And just to clarify, what sort of cost can be reflected in that? Is it freight? Is it raw materials? What sort of cost could possibly get included in those past [ few ] clauses? That's the first question.
I think it seems like everyone has gotten a catalog of wide things that can be included in new discussions. Martin, we've been here for many, many years, and most of things works well under normal circumstances. When it gets to extreme circumstance as we have seen, some of it works less optimal. And therefore, it's a customer to customer. We do both before and after and under the discussion with customers, and that will remain. We have included what we normally think is protective, especially when we are in a position where we have hedged and that we share with customers. So the pricing we're doing right now reflects on that we keep doing what we say we do and stick disciplined to it.
We don't have projects where we've had to provide onerous provisions or other stuff, which is also a reflection of that we do what we have now said for many quarters. The only thing is we cannot price and we cannot do things we don't know of. And I think this is a quarter we came out of. A couple of days, we actually saw, for instance, steel, European steel delivered and changed more than 40% within just a week. Martin, that's very difficult for customers and for an OEM to deal with within that short notice.
And if I could just also ask on Service. The margin outlook in Service, is that solely to do with the offshore provision and the change in the SaaS accounting for the cloud software? Or is there also a weakening of the underlying margin expectation in Service?
This is largely linked to the technicality as you mentioned there. There's really nothing else going into that figure other than those 2 points.
The next question comes from Casper Blom, Danske Bank.
I just had my answer -- one of questions answered there. But I would just like to follow up then on the China and India shutdown of late production. I mean how quickly will that happen? And when should we sort of start seeing potential and ease to transportation expenses as this is being near shore?
Yes, I think it's a combination. But when we announced this as part of today, Casper, you can sort of assume that starts with immediate effect. So therefore, that is what we plan for, and that's what we will do and that's also why we will have the backup range for in that to a certain notice. Then you'll be looking at something that is on transport, but you will also appreciate there is a rather long lead time until the last blades are at shore. So that's throughout 2022.
Okay. So from '23, basically, we could say that now it's sort of the new setup, if you would call that?
Yes. It's at least a setup, which is an adjustment to some parts of the global supply chain as you are seeing here.
Okay. Are there any plans of you also establishing production elsewhere? Or will it be solely through third-party suppliers?
We have a tendency and we have a very strict that we announced that when we make decision on it. So similar when we close, we also announced when we open. You've seen we have done that in a couple of the parts of offshore, and we promise to keep doing the same in onshore when it's getting there.
Okay. And then final thing on that matter is just could you kind of confirm that you will continue building shelves in China and will still have that transport happening?
We have large hubs in both India and China for both components and various parts of the assets to the turbine. We will continue to see a part of that. So for sure, both India and China will remain important, but it is also an invitation for further discussions with local governments to look into local demand.
The last question will be from the line of Klaus Kehl, Nykredit.
Yes. Two questions from my side. First of all, if we look at the long-term outlook, then it's, yes, it's pretty solid. But my question is more related to the short-term outlook because on one hand, we have a lot of uncertainty right now. And at the same time, we have a need for a lot of renewables and also fast. So if you were an investor, how would you think about the short-term order intake outlook? That would be my first question.
Yes. I think it's fair saying I think the short term here, as you can see, I think we are somehow positively reassured that what we are doing is right. We've also seen that the capital being allocated from customers have never been higher, Klaus. So I think on the short term, we simply have to work diligently through it. We are quite pleased to have a more or less a status quo on our order backlog for turbines of EUR 19 billion. And that's a testament to work through some of the challenges here in the short term. I think it's fair saying 2022 for most colleagues, investors and ourselves included here will be one of the toughest one we have done in operating terms. We come out of COVID. We had to overcome that in '20 and '21, did that well. There is an extra dimension to it now and that we work through.
And I think, therefore, '22 will be a delivery year and an operating year, which we just have to come through. And then we are, as we said here, both with an order intake and also looking into it, we're ready to help that government that wants to prioritize renewable in a faster fashion on permitting because there are plenty of customers that are willing to finance it.
Okay. And then my second question is a follow-up question to one of the previous questions. And basically, I'm not looking for a lot of details here. But have you changed anything in your order discussions with your clients just in order to protect your earnings and your margins and basically in order for you to end up with less risk and perhaps adding a little bit of risk to, yes, to the clients, which would be, I guess fair?
Yes, of course, we have. And that's just a short answer. I won't hold individual customer discussions on our conference call. So yes, everything is there in play. And we also have something where when we are sort of stoked by what we are seeing right now we will also be going back and opening some of our discussions in transport and other surcharges in the current environment. That's just how the nature of it must be. I think both you and I will have exactly the same if we have a transportation or a flight ticket or whatever, we are hit with exactly the same surcharge and that will also come to our projects.
Okay. With that, we have ended the Q&A for today. I know we are going to meet and see many of you over the coming days. We look forward to that. And also here, again, thank you for the interest and the support you are providing to Vestas in the current circumstances. So thank you on behalf of Hans and myself for today's Q&A.