Vestas Wind Systems A/S
CSE:VWS
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Vestas Wind Systems A/S
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Good morning, everyone, and welcome to this presentation of Vestas' Q2 and First Half of 2022. And with that, let's go to the key highlights for the quarter first.
So our key highlights for Q2 was we sustained the price increases, which also continued to pave the way forward for our profitability target. This is all about maintaining the required discipline to protect value creation and also get Vestas back in positive EBIT again. Order intake of 2.2 gigawatts, the wind turbine order backlog remains high at EUR 18.9 billion. We got a revenue in the quarter of EUR 3.3 billion. That's a revenue decrease by 7% year-on-year, caused mainly by a delay on one specific offshore project. Profitability negative in accordance with the outlook revised on 1st of May after Q1. EBIT margin of 5.5% negative driven by the supply chain disruptions and also the cost inflation.
Finally, I think over the last few days, we can say positive policy development in the U.S. and Europe. And I think counter against that is that the evidence both on the energy crises here, however, still with a lack of the permitting progress and that's both progress and process we would really encourage to speed up.
So with that, let's go and see to more of the details from Q2. So if we first go to our global business environment, it's known. The chart to the left is known. Tide is still highly relevant. This is how we run and operate Vestas throughout this and also continue to operate Vestas throughout this challenging macroeconomic business environment. We expect these supply chain disruption, they are expected to remain in the last throughout 2022, and therefore, this quarter has not been either worse or better.
If we look at the energy crisis on the -- here then underlines the wind power's criticality to meet both the electricity demand also ensure energy supply and more solutions and also lower the CO2 emissions positive. On the cost inflation the supply chain disruptions and COVID related lockdowns they continue to impact both timelines and increase our cost of delivery that's the negative. And then on the last bullet we will say the geopolitical uncertainty that continues to impact the global business environment and especially for private enterprises, these are, of course, giving us concern both currently and also for the future. It's negative, and it is an unknown.
Let me also take this opportunity on behalf of the Board and EX-M to thank our partners, customers and not least our 29,000 colleagues for a huge commitment throughout this quarter, again, showing the right level of resilience under some tough circumstances in many of the global markets. So thank you again.
If we then go to Power Solutions, main message here is increased pricing remain the key to both current and future value creation. If you look at the highlight, we decreased order intake driven mainly by EMEA and Asia Pacific, it impacted by delayed orders from customers, where customers have to balancing cost inflation and also the offtake uncertainty. We can see we are finding a way together, and we can also see that the offtake in the PPA markets are improving. The increased focus on energy independence have to accelerate the ambitions for renewable transition across the world, and we are seeing that. Now it's about getting it into real projects.
Pricing continues to increase to mitigate cost inflation secure future profitability. And just want here to say this is the highest onshore ASP in the last decade. Wind turbine order backlog remains high at EUR 18.9 billion and you will see the breakdown to your right and you will also see here the continuing development in the ASP which gives us over the last 4 quarters alone, plus 20% year-on-year development in pricing.
And then to the Service. And in the Service here, we've had again a very important quarter. We have worked diligently with our customers under an energy and electricity market that requires most of our turbines working at its best. So Service Business is well positioned for future growth. We have seen that there is an increased activity level, and there is higher transactional sales that continued from Q1. And we probably will say probably also see some of that continuing with the electricity demand we are seeing also for the coming quarters.
Vestas, we pioneered the first -- world's first hydrogen-powered offshore service vessel. We look forward to have that and hopefully also many other good examples in place within the Service Business when we look ahead. The average duration on our new contracts continue to increase. And you will see to the right, we have an order backlog in service of EUR 31.3 billion, of which EUR 27.3 billion is in onshore. We look at after 138 gigawatts of active service contracts and turbines, and we have an average backlog contract duration in excess of 10 years. Below, you will see the positive development across the regions, which, of course, we again highlight, and it's also the strength of the coverage we have in our Service Business, and Hans, we'll come back to some of the one-offs in the quarter.
When we then look at the sustainability. We are still, and I just wanted to remind you, we are still the most sustainable company in the world and will remain that for the rest '22. But in the quarter, also important to see that the CO2 emission avoided for our solutions that has been manufactured and shipped went from 167 million tonnes last year to 105 million tonnes this year. That's a drop of 37%. But illustrate a bit the, of course, quarterly deviations there will be in activity, we will catch up on that when we look at some of the quarters ahead.
On the carbon emission, which means it's our own Scope 1 and 2, we went from 28,000 tonnes of CO2 down to 24,000 tonnes of CO2, which mainly comes from energy changes and how we work with that in our factories. So well done. It's a reduction of 12% year-on-year.
Let me also here remind you of that the total fleet of turbines in Vestas displaces 221 million tonnes of CO2 a year. So actually, it's the timing and the length of those solution that really matters both for Vestas, but also for our customers and the world. When we then look at the safety, we worked through a quarter where we have also onboarded in a number of countries, new colleagues. So in 1 way, pleased to see that we have been able to keep our safety record at 3.1, but we are never happy or never pleased with having a number at 3.1. So therefore, we constantly work with safety to see that we keep each other safe arriving and working and also leaving back home to the families.
With that, I will hand over for more details on the financials to Hans, and then I will come back on the guidance in the end.
Thank you, Henrik. Let's go straight into the P&L. As you can see here, profitability has changed, but it's as expected, in line with the revised outlook that we put out there in Q1. Revenue decreased 7% year-on-year, EUR 3,305 million, driven by lower offshore installations from a project that was delayed as referred to also by you Henrik.
Gross margins decreased by 7.7 percentage points from 10.6% to 2.9% year-on-year, mainly driven by the external cost inflation that we've seen and the supply chain disruptions that has also been observed. EBIT margins before special items decreased by 8.2 percentage points year-on-year, and this was mainly driven by the factors that I just mentioned. And then there's also a gearing effect from the lower revenue, and we ended that at minus 5.5%. And finally then, we have some special items driven by some ups and some downs, positive reversals that are partly offset by some further impairments in Asia.
Turning to the Power Solutions segment. Profitability is, of course, challenged as we have been talking about before. Revenue decreased by 11% year-on-year, driven by the delay that we had in offshore. I think as you can also see here on the chart to the right, it's important to look at the difference here between Q1 -- sorry, Q2 last year and Q2 this year, EUR 719 million from offshore last and only EUR 78 million in this quarter. EBIT margin before special items, negative 8.6%, which was an 8.6% decline as we were sitting at 0 a year ago, driven by the same factors that we referenced before, external cost inflation as well as supply chain disruptions and then a bit of gearing effect to add to that as well.
In the Service Business, activity levels were high, but profitability was challenged as you can also see here. Revenue increased 13% compared to last year, driven by higher activity levels overall. We have more transactional sales. And then, of course, in the current inflationary environment, we're also seeing how that has an impact on how the contracts are managed.
On the EBIT side, before special items, we said at EUR 124 million, which corresponds to 17.7%. The relatively low margin was driven by lower profitability, one-off type things on certain projects in the U.S. and in Africa. And I said that is what brings us into the relatively low margin in the quarter. We do expect, of course, to see the second half of the year to pick up so that we will say, a recovery towards the targets that we're having.
On the SG&A, they amount to 7.6%, pretty much under control. There is an increase compared to last year but this is predominantly related to the offshore impairment that we had as well as higher cost on transportation equipment. Net working capital increased in the quarter. This was driven by an increase in the level of inventory we had, which was the only partly offset by down and milestone payments coming in at lower levels.
This, in turn, also impacts the cash flow, where you can see there is a EUR 100 million effect from the net working capital. And then there's a negative effect also coming from the lower earnings. That, of course, also are reflected in the guidance we have for the full year, which all in all, leads us to a negative cash flow of EUR 188 million from operating activities.
On the previous slide on the cash flow, of course, we also had investments. As you can see here, a bit more specified. Investment levels are pretty much the same as they were last year, coming in at EUR 174 million, stable. So I guess not much to say there in terms of development. Provisions and LPF remains at elevated levels. The LPF continues to be at high levels, and this is a natural consequence of the extraordinary repairs and upgrades that we're currently carrying out. Warranty provisions in the quarter corresponds to 3.7% of revenue. And the elevated levels are driven by cost inflation, logistics challenges and similar things for the repair and upgrades that we are doing on the cases that we are having.
On the capital structure, the net debt to EBITDA increased due to the challenged profitability that we are having. The net debt to EBITDA now sits at 0.5 in Q2 this year. Our commitment to cash, our commitment to working with the capital allocation policy remains so and I think it's important to say that this transitory phase of the industry there will be swings in the quarters and the net debt to EBITDA will fluctuate a bit and probably be a bit different to what we have usually seen in some quarters. But I would also like to stress at the same time that we are comfortable with our capital structure and the liquidity position that we have.
With that, I think we'll turn it back to you, Henrik, for the outlook.
Thank you so much, Hans. And for the outlook, 2022, unchanged from Q1, that means revenue remains for the year between EUR 14.5 billion to EUR 16 billion. We expect service to -- expect it to grow with minimum 10%. Our EBIT margin before special items sits between minus 5 to 0. Service margin overall for the year is expected to be approximately 23%. And then the total investment, approximately EUR 1 billion around.
And of course, if we look at that, it is important to say that we keep the ranges for now. It is important to know that the basic assumptions behind those guidance are more uncertain than normal. We still see a quite volatile and also uncertain fundamentals and conditions around the world, which, of course, is reflected in the outlook for the full year. The outlook 2022 is also based on the current foreign exchange rates, which we have.
So with that, I just want to say thank you for doing that. And with that, I will hand over to the operator for our Q&A session.
[Operator Instructions] Our first question comes from the line of Claus Almer from Nordea.
Yes, I have a few questions. I will take them one by one. The first goes to the U.S. market and the like new PC, should we expect U.S. orders to be announced in Q4 already? Or is more a 2023 thing? That would be the first question.
Thanks, Claus. I think positively on the U.S., I think before we get to that, we are probably 10 days away of having a full sign and verified IRA as it is called in the short form. I think U.S. predictable here. Some will come release. I think Q4 could be a timing, but I also think we will run into 2023. I think for us, the whole ease of this also the now full transparency of what's going to happen in the next 10 years. There will be some interpretations probably opening up for some early discussions with customers but we are engaging with that, of course, as we speak, Claus, you would appreciate.
So I won't set a particular quarter on it. But I think here, we are just welcoming now. Clearance of what is going on in the U.S. for the next 10 years, and we very much welcome that it includes onshore, offshore, solar, and also reach out to power to oxyhydrogen which actually has a prominent role in that act. So we look forward to start working with it, and then we will see if it hits in Q4. You will not be surprised for me saying that, of course, we will do whatever we can to make it hit Q4. But otherwise, it's a Q3 or it's a 2023 discussion for us.
Okay. So just to be 100% sure, in any meaningful volumes, we should not have too high hopes for this year. Is that best guess at this point?
No, because people will still have to get both the interpretation and also how we can work with it in some of the lineup of assets and others that will have to take some time, Claus. So therefore, I think people want now to be sure that the projects and orders that are being going into the pipeline actually hit that 100% PTC.
Okay. The second question goes to the ASP. And no doubt that the ASP in Q2 was rather strong. But I was actually wondering how we should think about the EUR 0.96 million Q2 versus the EUR 0.89 million in Q1. So this is 8% higher, and this is probably more than justified by the inflation. So in other words, does this mean the orders you signed in Q1 will be attached with a low contribution margin?
You can't put that necessarily to single out orders. But you have to say that did actually happen something during Q1 and Q2, if I have to remind you because in April was most likely the most volatile part of March, April was the most volatile period for both components and raw materials. So therefore, there is a reflection of price development from Q1 to Q2.
Claus, steel changed enormously in end of March, Q1. So therefore, there is a price development between the quarters. So you can read into that. We work with pricing. We are extremely disciplined with pricing, as you can now see quarter-on-quarter. And I think ASP of EUR 0.96 million demonstrate that we are doing what we are saying. We would like to have taken more orders for sure, but we are happy with the orders we have taken. And we are, again, particularly happy with the pricing we are getting on it. That's the thing to say about the pricing right now.
So Q1 and Q2 ASP underlying, so adjusted for inflation is more or less the same. It means the same contribution margin. Is that what you're saying Henrik?
No, because you cannot say that in ASP in Q1 cannot be hit by some of the fluctuations you had in Q1 as well. So you cannot -- I know what you're trying to do. You're trying to do that profitability in Q1 and Q2 is the same, but that's not necessarily right because you had some raw materials and component changes and also some other changes in Q1 that will affect the underlying profitability. That's just how we are trying to think ahead. We are trying to price, but we cannot price ahead for things we don't know.
And the next question comes from the line of Kristian Johansen from SEB.
Two questions from me as well. So firstly, on the onshore order volumes, if I look at the past three quarters, it's down 28% year-on-year. So to me, at least, it seems quite likely that you will see sort of material onshore delivery decline next year. So just curious to get your thoughts on what you are doing and what you potentially can do to avoid under-absorption of fixed cost next year and potential negative margin impact?
I think there's quite a number of questions in that, by the way, Claus, we didn't cut you off. So I don't think you left that quickly. But Kristian, on that part, as I said here, I think you can also compare with the full of H1, we have taken approximately 2 gigawatts less, but we are EUR 1 billion less. So that's the comparison you should do right now. It's also a strong signal from us. We said some of that in Q1. For us, pricing and profitability has drivers that overrides volume. And if we need to adjust, you have seen some of our adjustments we have done in both the capacity and therefore, the manufacturing setup. And if that's the part of it, then we will also continue part of that.
But on the other hand, if you've asked me 7 days ago, I would have said something may be slightly different because 7 days ago, we were sitting with something that looked like we didn't have a PTC route in the U.S. Now it seems like we have. So that also changes a few of those way of looking at it, but there is no compromise on pricing.
Okay. That's clear. Then Henrik, in the last couple of calls, you have sort of addressed the industry discipline and encouraged the industry to be as price discipline as you are. You haven't mentioned that this time. So just curious on whether you've actually seen a change in the industry in terms of discipline?
I think I'll avoid try to do too much outside saying it will correct itself because you get into so deep red numbers, problems if you don't remain disciplined on the pricing. We are a testament to that. We have remained disciplined throughout. We still sit in a quarter where we have 5.5% negative EBIT. And I actually think always to say we got that because we didn't price and we didn't price ahead but that we are working through. There is a big gap between what people have done and said in the last 4 to 6 quarters. And I don't think we have to keep repeating that. We remain disciplined, and we encourage everyone else to be that otherwise, the industry set themselves out for troubles.
And the next question comes from the line of Gael de-Bray from Deutsche Bank.
I have two questions, please. The first one is on the Service Business. So is this really a one-off this quarter? And given the 2022 target of 23% is unchanged, I mean, would you confirm that service margins will likely be in excess of 25%, 26% in the second half? So that's question number one.
Question number two is on the drop-through for the Power Solutions segment. I mean the -- in Q2, the operating loss was more or less the same as in Q1 if I adjust for Q1's write-downs in offshore. So it looks a little bit disappointing given the EUR 700 million increase in revenue sequentially. Could you talk a bit more about the specific headwinds this quarter compared to Q1, which explain the lack of operating leverage? And could you also give some color on the drop-through that we could expect in the second half for Power Solutions?
I sometimes here, I still will have -- sometimes we get into August, and it seems like we forgot the sequence of how it unfolded in Q2. Let me just remind you, in Q2, the world almost come to a complete stop for several weeks, considering the Ukraine and Russian case. So if you go back and look at what people have been able to mitigate, when I extended a big thank you to all our stakeholders and not least our many thousands of colleagues around amended because it has been exceptionally difficult in the Q2 to get just the physical part of things to site or to factories due to some of those challenges.
So I will -- as much as you try to do your quarter-on-quarter in a backlog, we work through the backlog, but it is fair saying Q2 did pose us quite a number of challenges. And what we managed to do in the end of Q1 and into Q2 in Ukraine and Russia, I still thank wholeheartedly our colleagues for managing those difficult circumstances. So I would encourage you, Gael to a little bit and say there will be fluctuations. So therefore, you cannot say that there is a EUR 700 million, is that a missing leverage? We're getting to quarters where the backlog will be better in ASP, and that will also be seen in profitability.
I guess I barely have to comment now on the second question. Thanks for that, Henrik, I appreciate it. But it's exactly as you say, Q2 was a very special quarter. We're sitting now here in August, but let's remember what happened in the late part of February and what kind of ramifications that had on a lot of the things that we were in the process of doing them in Q2. And clearly, that is something that has an effect in a quarter like Q2, I think that pretty much addresses your second question.
On the first one on service, yes, these effects are one-off in nature. We are seeing some cost coming up in the geographies mentioned. And yes, I guess you have made that calculation already yourself, that mathematically, that also means that we're expecting to see that we are going to be at levels much higher than what we've seen in the first half of the year that's what we're going to be expecting them for the second half of the year in Q3 and Q4. I think that's mathematical logic in some ways.
And positively for the business.
Yes.
Can I just try again on the drop-through. I mean, I appreciate that Q2 was obviously pretty unusual in a number of aspects and things. But hopefully things are gradually going back to normal, hopefully into the second half. And if that's indeed the case, what sort of operating leverage can we hope for?
I think we are working through the backlog, as Henrik was saying. And clearly, again, it's mathematical logic also in some ways. First of all, we have, let's say, a back-end loaded year, as we always have. And we are also expecting to see that we will mathematically have to do better margins in the second half of the year. So we are certainly not hoping that Q3 or Q4 is going to be a special as Q2 was. But again, I mean, that's how it's going to work, and that's what's reflected in our guidance.
And as we have said, disruptions are still expected. They still happen, and therefore, they are expected to continue throughout 2022. And I don't think we are through that yet. And then as I said, Gael, you can't put an equation between a specific ASP in a specific quarter and then take the next quarter will increase with what the ASP did 4 or 6 quarters ago. There is a mix of projects coming in a quarter and being executed from the various part of the backlog. So I think you can take the average ASP for the back and then continue and compare it up against the recent quarter of ASP. That's a much better way of looking at it.
And the next question comes from the line of Ajay Patel from Goldman Sachs.
I have two questions. The first one is more trying to understand the pace of recovery here. Clearly, huge amounts of uncertainty. It's very difficult for us looking in on how the components are moving, but maybe a sort of simplistic question. If you look at your order backlog as of today, what proportion of the order backlog doesn't have margins that are consistent to your 8% to 10% margin, so that we can maybe gauge how much legacy maybe projects that you've secured that are a little bit lower margin are still going to work through the backlog?
And then secondly, just on this year's guidance, is there any sort of rough idea a range maybe that how much of that guidance has been impacted by transport and logistics are the negatives? Has it been the up 200 bps, 400 type of impact to help us to gauge? And then how do you expect that to develop over the next 12 months, given the level of supply that's maybe expecting on container ships and potential for a recession? Could that be a headwind or sizably revert? Just to try to understand how things can evolve over time for us.
Thank you, Ajay. I think on your first question on breaking out the backlog for you in average and also profitability by projects. We have that, and we, of course, won't share that in public. But as you will be able to say when we are priced, we can only price of what we know. And for what we have also seen some of the -- as we have also discussed in a major part of the last 3 to 4 quarters, it has not been only a price discussion of where you entered. It has also been -- have you actually been able to physically get delivery of either the raw materials or the components or even get the transport into your factories and out again. And that is where we say it's priced when we enter it. We are very disciplined, but we could not price for the challenges we ended and we are still executing part of.
So quarter here, we price for what you are rightly saying our long-term target. But we have also repeatedly done that. That's probably why we are in a situation where we can see we have come out with minus 5.5% EBIT. But I would just encourage you also to see the ASP development compared to 4 quarters ago. It's up more than 20%. And in that, there is your answer to the question.
When we then look at the guidance also for the coming quarters and what we are expecting, we won't say anything about '23 until we get to February. It's obviously that we are working with both planning '23, and we are long into that but we're also executing. And when we look at it, I think most of the transport providers and logistic providers have said so far that they at least foresee.
As we have said here, remaining challenges will continue throughout 2022. And then we will see if there is an easing in '23. And if the easing come, no one would welcome it more than us. And of course, that we will share with our customers on any both existing projects and also continuing order intake for '23 and '24. So it's not -- time is not now to sort of give you a quarterly guidance because there are simply still too many uncertainties for being able to do that. But as you would appreciate, there is an ongoing improvement just from executing the backlog.
I think as a supplement to that, to just say also to your point about movements and then what might happen. There's still a long way before we hit the end of the year. And we obviously work with chronograms and projects that are to be delivered. And if you see harbor disruptions, these kinds of things, it trickles into an already back-end loaded 2022. And that's where we see still for the year a lot of uncertainty in terms of how the execution is going to go for the remaining 2 quarters.
So at this stage, you can't give us an idea to this year, how much the numbers this year in margin terms have been weighed down by transport and logistic issues as an -- yes, is it a 4% type hit to margin 5%? Or is it a bit difficult to disentangle it?
I think at some point in time, when we get to the end of the year, we ourselves will have a better view on that right now, and we're obviously working on mitigating the risks. And obviously, we have been doing forecasting, and we have the guidance we have to reflect this, but there's still a set, a lot of uncertainty. And it is, as you say, also quite intertwined the different effects we have seen from some of these complications.
And the next question comes from the line of Casper Blom from Danske Bank.
I'll take my two questions one by one also. I was hoping you could give a little bit more flavor to the discussions you have with customers and what is basically holding customers back from placing more orders because it is a little bit ironic that the world needs energy and your order intake is down. Is it a higher interest cost that are holding them back? Is it the fact that you are raising prices on turbines? Is it because you still have customers stuck with old PPA levels that now need to buy equipment at new prices? If you could sort of talk a little bit about that dynamic and what is the problem sort of here and now compared to what it was a quarter or 2 ago?
Thanks, Casper. Talking to a lot of customers, my short answer would be, yes, all of them because it's individual per customer. And I share your frustration. I think we have a lot of discussions on the energy crisis, and we see it as a consumer on the utility bill. More capacity is needed to bring the electricity and utility bills down, therefore, speed up that permitting process.
When we then look at the individual customers, we have seen probably a better one in the last quarter where PPAs are adjusting faster upwards. And I think there has been a little bit on the PPA and offtake markets generally, that it has been -- maybe this will work itself out and go over faster. I don't think anyone are saying that nearly today, that means PPAs are more rapidly increasing towards some of the -- not the spikes we have seen, but more probably longer -- midterm, longer-term electricity pricing. That will facilitate more positive customer discussions in the future quarters, simply because there has been enormous volatility also in this quarter when it comes to offtake.
Pricing of turbines is one of them. But I'm sure you would appreciate there is right now a consideration for most customers do you go PPA? Or do you go merchant? And what percentage do you split it through? And there, we see those, and they are very individual depending on what country you're in, what country you've gotten the permitting.
But in generally, all projects are taking longer time to negotiate and agree with customers, and that's probably where you can see a reflection in volume. So I share your point, we would have loved to take more orders in the quarter not been possible. And I don't know sure everyone will say we could have taken more if we had lower prices, but that one we won't do.
If I just may follow up, Henrik, is it similar the fact that the world is so uncertain and everything has moved so fast and so extreme that is holding. In fact more than it's the fact to actually make a project economically? I mean can they still make the math work, but it's just uncertain on what to decide?
I will say if you sold PPAs on what was PPAs 6 or 8 quarters ago, then you're struggling because you can see that on the ASP development. There, you will struggle to have the economics in it. But if you're looking at something where -- as I said, some governments are right now saying in the latest tender, they reached historical low cost levels for electricity for some of the offshore tenders or something. I actually think that's a little wrong way of looking at right now.
I think when you compare the tender levels compared to the off current spot market and utility levels, it is heartening to see that there's often 10x difference between that. So I think right now, it must be an encouragement for governments to say, how do we actually shorten this to 6 or 12 months instead. So customers -- the ones that are caught with old PPAs there, I think it's a combination of how we can work with new projects combined with old to make it happen. Otherwise, if you get a new project today permitted, we will also get it built and the customer likes to have it built as fast as possible.
Okay. That's good. Then my second question on the debt side. I mean it's -- yes, one of the first times for a long time that you actually have a little bit of debt. How does that place you commercially? I mean I've always seen it as an advantage that you've had a very strong balance sheet in terms of taking all large projects with long delivery times. Is this sort of a discussion that is starting to pop up again with customers? Are they in any way worried about your balance sheet? And at what point would you consider having to strengthen the balance sheet further from a commercial point of view?
Let me take that one, Casper. So it's not a discussion we're having with the customers. And I think it's important to say that whilst we are debt positive or negative, whichever way you want to phrase it here, it's EUR 400 million. So it's not a huge number for a business our size. I think you're seeing some mathematical effects also on the net debt to EBITDA, for instance, that you saw before when you are struggling a bit with profitability as we are right now.
But we are absolutely comfortable with our balance sheet. We have, as I said before, also the liquidity reserve that we need. There's going to be some fluctuations in quarters like these ones. But as said, we are very comfortable with that situation, and it's not a discussion that we're having with the customers.
And the next question comes from the line of Martin Wilkie from Citi.
It's Martin from Citi. A couple of questions just on your footprint and portfolio. You obviously announced a disposal this morning just to give a little bit of background and that would be helpful and whether there's other assets or footprint that you're thinking of rearranging or selling.
And related to that, the second question would be how you're thinking about the footprint in the face of some of these requirements for the new PTC in the U.S.? I appreciate it some ways away, but as we move into the second half of the decade, there are search in the domestic content requirements to maximize the PTC, it might be too early for to be able to predict that. But does your footprint already support some of those domestic content requirements or as an industry, does the wind industry needs to put more footprint into the U.S. market as opposed to importing from other regions?
Thanks, Martin. I think there's two different parts here. But you saw this morning, we announced a divestment and a partner's increased partnership with KK Industries, especially on the controller and converter part. We believe very much you also know the ownership of KK Industries are Maersk Holding. And in that sense, it's an extended discussion on strategic partnership. We believe there will be a need and also a requirement for the industry to be able to scale and live with the volumes we foresee in the next not only years but decades and decades, it's important that the supply chain also, to some extent, consolidating.
In this area, we have found a partner, who also has a long-term ownership structure that sits well for us to work closer with. And that, of course, is an area where we will then align as we have done this morning. The financial implication will come back with when we close the transaction. And Hans can talk more about potentially those. But it's a natural consequence. It's something we will pursue more when there is the right structure in place. And that can be, as you saw here, a divestment, but it could also be where we are expanding in other areas where we will do it ourselves.
When it comes to footprint, Martin, I'm sure you will appreciate my comment in the U.S. We have now had most of 24 months where we have adjusted footprint or shifts, unemployment and employees and colleagues down in the U.S. for obvious stop reasons and uncertainty over the structure. When we have an agreed at IRA signed, then we will be in planning process. There is both the planning that is currently ongoing anyway for the offshore. And then on the onshore, we are not in too bad a position. You know we have the factory. So this is how we will use part of the factories and if we need to adjust some of that upwards. But this time, I will say, I would rather start having some of their plans also when we see the customer engagement leading into proper tangible things we can plan for to get out of the factories in the U.S.
It has been a tough time being in this vacuum in the U.S. I won't shy away from that seeing some of our colleagues going from factories and also positions over there. So I look forward to see that ramping up again, and then we will come back probably in next quarter or in February to talk more about what it has actually been happening to our order intake and also the planning in the U.S., Martin.
And the next question comes from the line of Supriya Subramanian from UBS.
I have two, again, I'll go one at a time. The first one was sort of based on your guidance and expectations for the second half of this year. One is just on the offshore equipment since we had low revenues this quarter, do you expect to make up for the lost revenues in the second half, given that you haven't changed your top line guidance? And second, also, sort of within the guidance, if I take the midpoint now of the margin guidance, it is actually implies a small positive adjusted EBIT for the second half. So just wanted to get your thoughts on what are the assumptions going into the second half? And what would be the drivers headwind sales in the margin into the second half?
Yes. So first of all, on the offshore project, we'll have to see how that goes. I mean it looks challenging, but we have many moving parts as the guidance would also indicate clearly there's quite some range on the -- in particular, on the EBIT side. And that is reflective of the fact that there's still a lot of things that could go in either direction when you have as back-end loaded a year as we have again this year. And for that reason also, I think we'll obviously do what we can to work with the different elements we have for completing the year. But as I said, it's very volatile and a lot of things that can shift around.
On the profitability side that you seem to be pointing to on the midpoint there. I mean that's one way of looking at it as we try to do. We try to reflect in our guidance all the uncertainties and moving parts that we see may come up. And then I said we'll have to see, I guess, basically how the year plays out.
Okay. Maybe if I put it this way, what would -- what are the expectations or assumptions underlying the lower end than the upper end of the guidance range in terms of the environment externally or internally in the second half?
I guess you say it yourself and there are many assumptions in either directions. And if we end up in the good ends, then a lot of things has to come our way. And if we -- and in the other end, then I guess a lot of the headwinds that you could imagine would have to materialize. I think it's a challenging year. We are very back-end loaded, as I said before, and that also means that there's a lot of uncertainty as to what is going to be happening in the next 4, 5 months. It is a very tricky operating environment right now. I mean let's not forget that. The world has not suddenly come to a better place.
And I think sometimes or often we talk about what happens until we get to site, and we get to the commissioning stages. Just also here, Supriya, just don't forget that right now, it is more tense in that operating part from commissioning to actually on the grid because the price of electricity in the grid is so many times higher than you've ever seen before. So therefore, of course, the timings and everything else is highly depending on how well we get executed in the second half of the year.
Okay. Fair enough. And my second question was related to pricing and you're looking at it maybe slightly longer term, if -- I mean, we've seen some recent trends of from a raw material price active, at least things easing off to some extent. What is your thoughts on ability to hold on to these higher prices maybe for a little longer, even if cost ease given that there was a lag in raising the prices itself?
I have to separate that we don't have an extraordinary different pricing discipline that we have had. We have seen the underlying costs develop, and we are very disciplined. If the cost development underlying is there, then we adjust the prices at that second, we see that. And that's where life has been difficult for continuing 6 quarters. So if cost remain at this level with what we have seen, then you should expect to see pricing continuing at this level.
And actually, the current pricing compared to an offtake of electricity price is not necessarily a difficult thing for customers to work through. So for us, pricing here becomes very much subject to how we continue to see the underlying trends and also where it is in the world and how we get the transport and logistics to play with that. So you should read into EUR 0.96 million. We're happy with it. It plays to the long-term EBIT targets we have. And therefore, that's what we remain consistent providing.
And the next question comes from the line of Mark Freshney from Credit Suisse.
Firstly, just on the patent dispute between 2 of your competitors, and I know you guys have been involved in these kinds of disputes as well in the past. How do you see the judge ruling in North America and other areas globally impacting the Blue Marlin project or the Blue Marlin product, should I say? And does it work in favor of that product?
And just secondly, Henrik, very interested, I know we've been through many permutations already of margin questions, costs, et cetera. But based upon what you see today, how do you see global supply chain, which is vessel pricing availability and COVID outbreaks? How do you see that evolving over recent days and weeks?
Thanks, Mark. I think on the patent side, we don't give any comments to it. We run Vestas long away from issues like that. So we don't give -- we talk with customers. And if there are any opportunities that we have an opportunity to present our solutions or being asked for our solutions, then we will, of course, then buy our technology and our solutions, and we are continuing doing that in offshore and it won't be until we are from '25 and onwards. So that's the short answer to that one.
On the global supply chain, I think we haven't seen a worsening in Q2, it's fair saying, but we have seen many variables. Everyone asked us about, is there an easing around the corner? I don't know, at least the people we work with, and you know the names of Maersk and DSV and others difficult to foresee right now. And I think all comes down to will the world have more stop and go or more recession like terms when we get later in the year. But Mark, I simply from heartfelt pain over the last 6 quarters we stopped trying to predict any of it. We work with it, and then we work with it also in execution rather than second guessing.
I think it's right now, it's difficult to see inflation on, for instance, utility and electricity go down. There is an energy crisis, and that doesn't ease up over the next many quarters. So therefore, there is something here to be done in the short run that will still drive some supply chain logistic challenges for quarters to come. That's probably the best way of expressing it.
And the next question comes from the line of Deepa Venkateswaran from Bernstein.
I had two questions. One on the U.S. and the other one on offshore. So starting with the U.S., I just wanted to confirm whether you will be able to get these manufacturing subsidies, which are also substantial within the IRA and whether you think onshore wind in general would be able to qualify for the 10% bonus?
And the second question on offshore. So obviously, you've had the U.K. CFD auction around 7 gigawatts clearing and your -- one of your competitors seems to have got quite a lot of orders. Should we still be expecting something to come your way from the U.K.? And one small follow-up just on the delay on offshore. I believe this is because of a vessel failure that's not your fault. So is it fair to assume that this is more of a delay of revenue recognition rather than any impact for you from that delay?
Thanks, Deepa. On the U.S. part, we're welcoming this. We have so far worked with all our presence in the U.S. for decades. So therefore, we are well positioned for doing that. On the possibility of getting hold of extra percentages on the delegislation, we will clearly wait to give you any indications and any discussion will be with customers only. And I think the industry has to now balance how they work that around in the U.S. for themselves. We feel U.S. is a home market for us, and we will keep investing into the U.S. to also now have a framework for it for a 10-year decade ahead of us. So we are positive of that. But as I said now a couple of times, I won't give it more shots until we have a final signature from his presidency in the U.S.
On the offshore of the CFD round, we will always participate where it makes sense and also where timing makes sense and then also where pricing and localization plays in our favor. And that's a discussion. We have -- we take the same attitude as we would have done across all other things. And then I think CFD around 4, 5 coming in the U.K. is one of many markets. And I think the capacity for us to plan for that, we are more looking at how we get the right level of our value creation on it.
On the vessel side, you're absolutely right. That also means we have a very close collaboration with that customer individually, and we will see how we will solve that. And that is triggering both a revenue EBIT and also a cash flow conversation, but I'm sure you will appreciate me saying that, that is now down to a very private and bilateral discussion between the two of us. And we will manage that because everyone deserves to come well out of that challenging acceleration.
And the next question comes from the line of Ben Heelan from Bank of America.
I wanted to come back on some of the questions on orders earlier. The book-to-bill is well below 1x now over the last 12 months. And I know you highlighted Henrik, that the pricing has obviously improved. But I'm just struggling to see how you're going to grow revenues in Power Systems in 2023.
I just wanted to understand if there was anything I was missing because it doesn't sound like you're expecting H2 book-to-bills to materially inflect? And then on book-to-bills and orders going forward, I mean, you mentioned the U.S., it's probably more 2023 that you see the orders come through. How are you thinking about the orders in Europe? And also, why has Asia been weak?
I think the bullet in the slide says it did quite a lot. There are a number of places in Asia where you had quite high uncertainties on offtake and pricing on the offtake, which, of course, has slowed some of that down. So I don't think, Ben, you can just read from a Q2 and then parallel track that into a 2023 as a whole. We have had quarters where it fluctuates and we will have quarters also going forward where it fluctuates. And we will talk more about it when we get later in the year.
But for us, as we also hinted, we can do more in capacity, and we will keep some of the capacity, but we will rather use the capacity with the right pricing, then we will do something else. So we will adjust to that when we look into also the second half of the year and into '23. Too early to say in terms of your growth negative expectations, I can hear on your voice, we come back and we gave that guidance in February. And then we will see how we also finish this year in terms in orders. But rest assured, we know what we are working towards.
Okay. And then Europe?
I think we see -- I mean, Europe is -- EU target setting framework dropping down to country level. We see various degree of positive improvements in country by country. And I will just still encourage the larger countries to not only have the declaration and the policy statements ut actually making it happen in actual parts of the departments for energy and departments for permitting. That's the way of saying, I think it works too slow, Ben.
But on the other hand, we have to work through it. I think Europe is picking up. But I think Europe as an area needs a hell of a lot more coping with the energy crisis in the quarters to come. So therefore, I think we could do more, but I think it's coming, and there is definitely a positive development happening as we speak.
And the next question comes from the line of Sean McLoughlin from HSBC.
Firstly, on the order intake. You've helpfully broken down FX and scope in previous quarters on that ASP figure. I was hoping that you might give us a little bit of color on the same for this quarter to maybe to better understand the underlying trend? And secondly, on the loss production factor and the progress on returning below 3% on the provisions, I mean, how has the disruption that you've highlighted extended the time line to come back to normalized warranty levels?
Thanks, Sean. On the -- I will do on the pricing. There is no material changes between scope and FX. So in reality on our ASP in the quarters we have had in the last ones, they are mostly comparable. So there is no material effect on scope or FX in this quarter either. On the lost production factor, I believe LPF, I'll leave it to Hans to comment on.
Yes. So on that one, clearly, you are seeing, say, elevated levels right now, as also highlighted on the slides due to some of the fairly big cases we have been working on. And for sure, the expectation is that, that's going to be improving. The time lines for that, I mean, they are known at our end. It's not something we're planning on disclosing publicly, but we are expecting, at some point, clearly, to see improvements from this as we are right now in the midst of some of the hardest work we are doing in terms of rectifying these items.
And the next question comes from the line of Akash Gupta from JPMorgan.
My first one is on the onshore order mix. So looking at your large announced orders, I know that there are very few orders for EnVentus and despite more than 3 years of product launch. I wanted to understand whether this EnVentus, what is going on, is there any competitiveness issue even you are now expanding the rotor? Or is there any serial production issues that we also see at some of your competitors? And could this be a reason why some of your order weakness could be explained that EnVentus is not as effective as it would have been?
And then the second question I have is on offshore. So last year, you said offshore revenue equipment would be more than EUR 3 billion by 2025. And based on your commercial success so far, including your discussions that you're having with U.K. auction winners, can you update us on how do you feel about this more than EUR 3 billion revenue target for 2025?
First of all, Akash, one shouldn't overread too much into a quarter's order intake and pair that with a technology of a platform. That comes down to geography and individual projects and EnVentus work, as we have seen so far very well and very competitive in the markets where it's designed and suited for. And that's a normal planning one. So that's on grounded what you're thinking of. The other one, Hans, I don't know if you.
A few comments there. Obviously, I mean, we are -- it's not usual that you want to sit and say that you expect hockey stick like effects. But clearly, in offshore, there is expected to be say, a clear uptick in installations in '25 and then not least '26. Exactly how that's going to be playing out, I guess we'll have to see. I'd say, fundamentally, we can see how there's strong demand in this segment.
I think we can also say that we think we enjoy a good position with the new turbine that we are putting out there. And then there can be a set a bit of slippage of fluctuation between '25 and '26, but we're still far, far away from being concluding on those discussions with our customers at this stage. But again, just to reiterate, we can certainly see that there's a lot of interest and a lot of good discussions ongoing commercially with the offshore sales team.
And we have time for one more question, so that is from Henry Tarr from Berenberg.
Two quick questions. One, just on the Service Business again and the impairments and the issues there. Could you just give us a little bit more color on what those issues actually are? And then secondly, on sort of shipping and logistics costs. I think, historically, you've given us some color around where shipping is and the problems you've had there. Have you seen an improvement in reliability? And -- or are we sort of still where we were back in kind of Q1 at this point?
So if we start with the service topic first. What's going on there is that, as I said, it's select geographies, and it is kind of one-off in nature of what we're looking at. We have been assessing and we always do that, by the way, but we have been looking at how does cost levels look like for these projects. And we have come to the conclusion, unfortunately that we are looking at elevated cost compared to what we had expected for these projects. And hence, we've had to simply go in and say those assumptions were wrong and have corrected that. I don't think it's necessarily other -- more than that. And again, it's one-off in nature, what has happened here. And I said it's a U.S. and it's in Africa. Then I actually forgot the second question.
It's the shipping part, Henry. I think here, you can follow it. You can see it. The main part of it, all the inbound is coming and it's coming through. We work with Maersk. We work with DSV on other parts of it. And we are pleased with the progress we are making. But it still means that there is still a number of timing issues and you have seen up until very recently, you still have had closure and other disruptions in harbor part.
So that is also why we are seeing -- we still see that continuing. There's simply too many ships that are held in queue to have a workable around it. I think those are the signs you should look for and we are looking for is when then start some of those queues or wait time start easing up, then life will be hopefully easier.
With that, thank you so much for your interest. Thank you for your intention and interest to us. We look forward to seeing many of you over the coming couple of days. With that, hereby close the Q2 presentation. So thank you so much.