Vestas Wind Systems A/S
CSE:VWS
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Vestas Wind Systems A/S
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Good morning, and a very warm welcome to this Third quarter investor call. First of all, it's another strong quarter from Vestas. Very positive ramp-up, and therefore, also a very high activity quarter for us. Personally, I will just say here, it's a pleasure to say thank to a lot of colleagues, but also having the pleasure of sharing that much of the business and operations and customer insights over the previous couple of months since 1st of August. So with that, let's begin the presentation for the third quarter. And next to me here, I have Marika, so we, of course, look forward to take you through the presentation year-to-date. So the disclaimer first and then our key highlights for the third quarter. So the third quarter here is, again, increased order intake and leads to an all-time high order backlog. We had a 4.7 gigawatt of order intake in Q3, and that also means if we look at the backlog, it's 38% higher year-on-year. And it comes to -- close to EUR 33 billion. We have a total revenue in the quarter of EUR 3.6 billion, positively here, stems from all our regions. So all regions are having a positive growth compared to same quarter last year, and it's an overall 30% increase compared to Q3 '18. We had an EBITDA of EUR 429 million and EBIT margin of 11.8%. We had a stellar performance in our Service business, revenue growth of 8% and EBIT of total EUR 125 million in the quarter. That also means, due to the visibility and where we are in the year, we are also, by this third quarter, launching a share buyback program of EUR 200 million, surely, to adjust the capital structure. And then on the outlook, we keep unchanged guidance for the year. We have slightly adjusted the Service. So it's a minimum growth target for the year, but that's all we had on the outlook. So let's jump into the markets. As you see here from it, it's 4.7 order intake in Q3. It's 4 point -- 1.5-gigawatt higher than it was in Q3 2018. And of course, when we look at it, it's mainly driven by U.S., Brazil and Saudi Arabia as main contributor in this quarter. And when we look at the ASP on the other side, we come out of the quarter of an ASP of 0.75, remains stable. We have a relatively lower proportion of EPC in the quarter. So therefore, we are quite pleased with the stable ASP for the quarter and with the normal sort of variances due to geography and type of orders. When we then look at the order backlog, as mentioned in the beginning, we are now at an order backlog of more than EUR 32 billion. It's up EUR 9.1 billion year-on-year, which is an increase of 38%. Also very pleased to see that we have the turbines at EUR 16.5 billion. It's up EUR 6 billion compared to a year ago in Q3 '18. And we have a Service backlog that is now EUR 16.3 billion, and it's up at a bit more than EUR 3 billion compared to third quarter '18. So again, a very, very positive backlog for us both to work with for the coming quarter and the coming years. When we then deep dive a bit more into the regions. It's -- clearly, we have had a very increasingly busy quarter in Americas. Not surprisingly, we were pleased to see the ramp-up are working. We have had deliveries of 3.7 gigawatt in the first 9 months this year. It's 39% higher than it was for the first 9 months in '18. If we look at the order intake, we are now 8.3 gigawatt of orders in the first 9 months. And as I said in the left side, we have seen very strong order intake from U.S. and Brazil. And generally, we see a very positive development in Brazil. More options are launched and carried out, and other countries are coming to it in Latin America. And when we then look at the revenue breakdown, we have 14% of the relative revenue in the first 9 months. But of course, with the increasing ramp-up of deliveries and turnover, we will also see that percentage being a bit under pressure, but very nice to see still that 14% is related to Service. When we then look at Europe, Middle East and Africa, I will just say from a market highlight point of view, a very positive development. We have an auction here in Poland, which is happening in Q4. We are probably a bit mixed on the climate proposal in Germany. We will tell you that we have hoped and expected a bit more to also see how we could loosen up what we probably see as a dock situation around some of the permitting in Germany. They're putting a target up for -- until 2030, but we are surely following that with big interest and also pushing for how we can participate in helping. If we look at Italy, they announced a 5-gigawatt technology auction-neutral in 2021. And generally across the piece and outside Europe, we see positives here also mentioning of South Africa where they will work towards 2030 with probably something in excess of 1.5 gigawatt a year, which, of course, is very pleasing to see. When we then look at the performance in Europe, it's actually a very good quarter. We now see deliveries first 9 months in Europe. The backloaded is -- start to work. We had 2.9 gigawatt in delivery, 34% higher than it was in the first 9 months of '18. We have had a very strong order intake in the region. We are in excess of 4 gigawatt for the first 9 months. It is also based in more than 20 countries, very pleasing to see. And just to mention a few here, we have Finland, Greece, Turkey and France as main contributors to it. But it's really nice to see that, that works across Europe. So credit to our European setup. And then in the revenue breakdown. First 9 months, we had a breakdown, which equals a service of 23% out of the EUR 3.2 billion of total revenue. When we then go to Asia Pacific, I think Asia Pacific is, again, here, a couple of comments to China. We know so that there is a very high attention to China before year-end 2020 where the feed-in tariffs are ending, but I also think that probably leads into a more market-based discussion around the LCOE for the future. And that, of course, is a thing we are following and also discussing intensely with both policy and customers in China. We have seen the India auctions being launched. We are still a bit uncertain around how that will unfold in India. There are initiatives, but there's also a very high step-up to reach the 140 gigawatt as target in 2030. So more needs to come there to fulfill that target. And then when we look at the broader course in Asia Pacific, a lot of individual positive messaging from individual countries. And among others, Australia is now set to meet its renewable energy target for 2020, and I'm sure that inspires Australia to do more when we look ahead to 2030. When we look at the numbers for the region, we have seen a slight decrease in deliveries. We are 1.2 gigawatt for the first 9 months. That's 16% down. It is harder when you have a size of a region of this. So you will be up against tough comparison with single orders, but mainly driven by law in Thailand, China and Mongolia. Australia remains stable, which is positive. On the order intake side, we are 14% up compared to the same 9 months in '18. And there, Australia, China and New Zealand underlying positive. And overall for the region, we see 15% of service in the region. That is up 4% year-on-year. And I would just say, out of a total revenue of EUR 1 billion, we actually see a lot of positive movements in Service in that region. And I will also say from a Chinese point of view, when you get into a great parity market and in an open market, we actually hear a lot more attention to how to look after your assets in both 10, 20 and 30 years. So that's a good way of jumping to our Service business. A stellar performance in Q3, we have now gone from 86 gigawatt to 91 gigawatt of onshore turbines with active service contracts in the quarter. A very good performance in this quarter, we cover 67 countries with active operations. And I would just say here, an 18 years of average duration coming on, on the new contracts, very encouraging. For us, it's very encouraging for the Service business and backed by long customer relations. When we look over here, we actually had 4 contracts that had more than 25 years signed in Q3. We saw power upgrades of more than 25 contracts, which, of course, makes efficiency gains for the customers. And then we had more than 500 megawatt of multi-brand contracts across U.S. and Europe. Below there, we see a normal split in the regions. And again, there, positive over the progress for the Service business across. That leads me to the offshore wind, MHI Vestas Offshore. And I would just say here, similar to last quarter and similar to this year, fully focused on executing on where we are executing on the pipeline. We are putting up our turbines, and it works well. But key highlights for the quarter is we've become a preferred supplier to Seagreen. It's up to 114 wind turbines. And again, it supports the U.K. track record, but also it will be the largest project in Scotland. We were selected as a preferred wind turbine supplier of 29 megawatt of -- in Groix & Belle-Ile Floating Offshore Wind Farm in France. And as you would appreciate, it's not necessarily the 29 megawatt of order that is the takeaway here. It's the innovation that goes into also here make an effort to see the floating platform start working offshore. So that's an important innovation and technology for us. When we then look at it, there was an inauguration of the Horns Reef with Vattenfall in Q3, and that brings the total to 143 offshore wind turbines operating in Denmark. And below here, we're just mentioning the projects that are ongoing and in progress in Q3, and we look forward to update you on progress when we come to the future quarters. So with that, let me hand over to Marika.
Thank you, Henrik. So if we have a look at the income statement, I would say that this clearly reflects a lot of the positives already mentioned by Henrik. So you see revenue is up 30%, and this is also a reflection of the extremely back-end loaded profile that we have for 2019. And the increase is driven by both Power solution and Service.Gross margin, as a consequence, up by 1.4 percentage point, and that is also positively impacted by sale of the Romanian project. The external factor remains negative, I would say, and that's primarily tariffs, but also transportation and raw material. So we still have a challenge on the increased costs. EBIT margin increased by 2 percentage points, mainly driven by higher gross profit and increased leverage on the SG&A costs, which I will come back to. Altogether, I would say that the very positive is that the high activity level is something that we can clearly deliver here in the quarter. The SG&A cost continues to be under control. In absolute numbers, it is up compared to Q3 2008, but in percentage points, it's only a 0.2 point increase. The increased cost is, again, related to the higher activity level and, again, planned for as expected. Service business, which Henrik already highlighted, very strong service performance. We see, compared to last year both in terms of revenue, it is up, but also from a profitability point of view. So a very strong performance in the Service business. The offshore wind, we had a very good Q3 2018. So it is a tough comparison. And both revenue and profit is, as a consequence, down. The underlying trends and already on a high level, said again by Henrik, we have a positive view on the offshore space. And the net profit in this case is impacted by delay in a project. Change in net working capital. The net working capital in the quarter is negatively impacted by an increased level of receivables and also a higher inventory. Having said that, we're following the -- on an inventory side, we're following the principle that we have, and we only have some order intake in the inventory. Down- and milestone payments partly offset the increased level of receivables and inventory. Cash flow statement. The cash flow from operating activities is positive, and we see a free cash flow before financial investments of EUR 205 million compared to a negative in the same order of magnitude in '18. So altogether, a positive cash flow here in the quarter. The net interest-bearing position is still at a high level of EUR 1.2 billion. Total investments is down compared to Q3 of last year, but still at a fairly high level and also mentioned before. And we're following the same methodology, so no changes. We are capitalizing R&D, and we are also investing in capacity and, in this case, primarily molds. So no changes to what we have highlighted before. Warranty provision and lost production factor. We see that the lost production factor continues at a low level, below 2%. We see -- we have slightly increased compared to last quarter on the warranty provision consumed. And you can also see that we have increased the percentage of revenue in -- to 2.6%, and that is really to cater for the steep ramp-up that we have right now and also the acceleration of new product introductions. Capital structure. Net debt-to-EBITDA continues well below threshold, so we are negative 1.3%. Solvency ratio is 23.3% here in Q3, and that is primarily impacted by the increase in total assets. By that, I'll leave it to you, Henrik.
Thank you, Marika. And that then leaves us with the outlook. And as we said here, unchanged outlook. We have, though, changed the service to -- from approx to say we grow the Service business minimum 10% for the year. But otherwise, we will keep the other unchanged as the outlook for 2019. So still between EUR 11 billion to EUR 12.25 billion in revenue, EBIT margin between 8% and 9% and total investment approx EUR 800 million. So with that, I will leave it back to the operator for any Q&A.
[Operator Instructions] The first question is from Claus Almer from Nordea.
Yes, a few questions from me. The first question goes to the very strong order intake. When I look at your order intake for the last 12 months and at the Service revenue, I'm getting to a level of revenue 25% above consensus for next year. Is that the right way to look at your order intake momentum? And how that is going to be converted to revenue? That would be the first question.
Well, I should take that, Claus. When we release our full year, we will also come back and comment on what is the outlook. We have had a super strong year, but we don't say in what periods or what year they are coming to. So you can't make a sort of a close assumption on that. We are generally very positive over it. And what you will probably see also here, we're also looking into 2020 from an activity and a top line point positive to that. But let us comment on it when we get to first week in February.
Sure. It was worth trying, at least. My...
It was a good try, Claus, actually.
Well, the second question goes to this extra cost from rerouting you mentioned after Q2. What is the impact in Q3 from rerouting? And maybe also, what impact did you have from tariffs?
Okay. So what we see, Claus, is basically what we said in Q2. There's -- it's going to be an overall impact of 1.5 percentage points this year. Then the exact split in the quarters, I mean we haven't communicated that, but it's definitely -- compared to the assumptions when we enter into 2019 with the reduction we saw at that point is not materializing. So it's going to be a negative of 1.5 percentage point this year.
Okay. And this divestment of the wind farm, the cash flow will first come in Q4, right?
Correct.
Will that also be paid out to the shareholders, as you have done in the past when you do these one-off divestments?
I think we have just said we are paying out when we are starting the share buyback of EUR 200 million. So that's all included.
The next question is from Kristian Johansen from Danske Bank.
So first question is regarding project margins, which you highlighted in the quarter is negatively impacted by trade tariffs, transport and raw materials. I'm just curious, just assuming we look at the world as it is today, will these 3 effects continue to have a negative impact year-on-year on project margins for -- in 2020?
Altogether, Kristian. I mean the positive is the volume. The other positive is the stable price level that we see right now. The -- it's going to -- as we see it, unless there's any dramatic changes, it's going to be a negative or a headwind for us in terms of the overall cost base. But also remember that the overall activity level that we have and also the localization that we're doing and all the new product launches that we have is putting a lot of pressure on the operations at this point. So that is also definitely impacting us.
Okay. That's good. Then my second question, I continue to hear a lot of concern from investors regarding how you will be impacted by the phase-down of the PTC in 2021. So Henrik, your predecessor has previously indicated that he was optimistic that other markets could mitigate a potential decline in the U.S., considering you already and then very soon will have to sign a lot of orders for deliveries in 2021. I'm just curious to get an updated view on how you look at the delivery mix in 2021.
I will then follow in the footstep of Anders and be optimistic on that one. I think, overall, externally, we don't see anything right now from a trend and a recognition of the renewable energy and especially wind from an LCOE perspective that we have been recognized. We have been competitive in all continents. So I think right now, what we see positively in Americas, we see, first of all, a U.S. market that also has a life after '21. And generally, we see some of the forecast there being upgraded. Secondly, as you'll also appreciate, what you can see from our landscape of order intake, South America is picking up more and more, especially with Brazil, but there's also individual countries outside in South America. When we go to Europe, I don't think any of us would have particularly forecasted that Finland would be at the level they are now in 2019 if we go 1.5 years back, but that suddenly also comes and supports. So I think there are many countries that suddenly pick up to actually cover for some of that, that comes down. Then what we see generally across in Asia and Pacific, I think, out there, we see countries that certainly picks up and start on either 3-, 5- or 10-year programs. And as you will appreciate, we don't have a particularly strong order intake record, for instance, in a market like China. But as I said recently, in China, there is a changing environment and a changing view what will happen in China after '20. So we are -- generally, on that one, we are positive. And that is also why we are saying we are scaling for a higher capacity, and therefore, also a higher activity investors for the future.
So just to be clear, you do expect you can deliver growth in deliveries in 2021 as well?
And that was a long guidance, but what we say here, we are optimistic both for '20 and '21, yes.
The next question is from Dan Togo from Carnegie.
Yes. The first question for me is on the unannounced orders, 2 gigawatts here in the quarter. Surprisingly strong, I would say. What is your visibility into this? And is this sort of a new level we should expect? Or is there any sort of, say, unusual events that affects this in Q3? And also, these orders today come at a favorable margin or on par so to say with risks. That's the first question.
Yes. So I would say, Dan, that you would see fluctuations between the quarter as we have seen before. And for us, the level is high. It's well spread across many countries. So altogether, positive. And when it comes to margin and average sales price, we have the same requirements across the board. So it doesn't -- it's no discrepancy or variances, whether it's announced or unannounced.
Nothing unusual in this quarter, as I understand.
No.
And then on Asian orders -- order intake, it seems a bit weak in Q3, and we are seeing order -- others announcing rather big orders from information -- has competition in -- particularly peers, and you've been walking away in some tenders. Or how should we look at this at the moment?
We are -- I mean when you look at a region there and you look at also the size of the region, we are very humble and respectful for that. We only need 1 or 2 orders to change a picture like that. And if somebody puts a lot of effort into winning an order, we -- generally, we -- as you know, we are focused on -- that it has to create value for shareholders and you. And therefore, if we walk away from something, it's generally because either the price or the project margin was not sustainable for us to say yes to. But in all honesty, in Asia Pac, as I said earlier, we are very positive over the progress. We have also a growing unannounced order, which we are negotiating and looking into. And therefore, we are just working diligently towards both end of the year for next year to look at new orders. So nothing particular to say there.
Can you comment, particularly on India, right now, because some are announcing orders here? And yes, on that mark, what's going on there?
India is a market which we have followed closely. We're also fully aware of that. There are certain restrictions and constraint in the auction system with the ceiling in India. And generally, if we can't make our project profitability to work on some of these or the technology there is not the one that is acquired for and asked for in the auctions, then we don't win. We have taken some. We are fine. But we also see that the steep ramp-up in India is still ahead of us if they want to reach the target of 140 gig in 2030.
The next question is from Martin Wilkie from Citi.
This is Martin from Citi. Just a couple of questions. You've -- firstly, you've highlighted execution risk, given the size of your backlog. I think the third quarter was probably a stronger quarter of deliveries than many expected. Were projects pulled forward for delivery? Or was this the phasing that you'd always anticipated? And does that, in any way, alleviate some of the delivery risk in Q4, which always looked like it was going to be quite a busy quarter? So that was the first question, and I'll follow-up with a second.
Yes. So the Q3, I think, from our point of view, the positive is on -- in terms of the activity level, we are delivering and we are coping with the high activity level anticipated in Q3. And obviously, if you look at the overall guidance that we have now for 2019, that implies that it's going to be another very busy quarter in Q4. And altogether, when you have -- if you have evenly spread quarters, obviously better. But on top of it, you have a very high activity level anticipated for this year. So that is a constraint right now. And on top of it, we have the tariffs and the changes that, that -- or the changes that incur because of the tariffs. And that is what you saw in Q2, and that we had to accommodate at that point in time. But apart from that, I mean it is the normal steep ramp-up that we see and that we are mitigating at our best, and it's going to be continuously busy.
And then just my follow-up, just coming back to this question on tariffs and transportation costs. I mean you've talked about your cost base being higher next year, and obviously, there was an annualization effect of tariffs. If you could just clarify, are you expecting incremental tariffs here as well? Or is it really just the annualization effect that you're referring to? And also, on the transportation side, I know you've not called them out separately, but is that sort of a 12-month overall drag? Or does that incremental cost still hit you in the first half of next year? Or are the projects that experienced those transportation incremental cost, is that just a sort of 1- or 2-quarter type of incremental cost?
Well, yes, I understand your question, Martin. The overall is that getting into a year like this where we can -- we have a full visibility, more or less, we plan rigorously. And that's also why we saw a reduction from the 1.5 percentage points cost pressure down to 1%, and that's what we planned for. Everything was signed and sealed. We have started up production in Vietnam and in Korea. Then in the midst of the year, that was part of the tariffs. And then the whole rerouting started, and then you have the double cost. The other challenge when it comes to transportation, which is on -- from a broader perspective, is also that our type of products require special vehicles, both on land and also on sea. So that -- and there, you have a shortage. So you have to time those boats with what we need at any given point in time. And when I look into -- or we look into next year, the tariffs continues, whether this -- we are not planning for new tariffs, we are planning for what we know. But if there will be additional changes also in 2020, that will have a negative impact for us. But with what we know, we continue with the cost base that we see right now, and that's the 1.5 percentage point cost base increase that we had for this year.
But in terms of those transportation costs, I appreciate you've obviously got these expense of additional ships and so forth, but that is also a cost that you'll be incurring into 2020 as well. It's not -- look, it's a small number of projects that will be done by the end of the year that are incurring these incremental costs.
No. It's across the board, and simply because it is a shortage as well for the type of vehicles that we need.
The next question is from Akash Gupta from JPMorgan.
Yes. My first question is a follow-up from Henrik comment earlier on Bloomberg. So Henrik, you said, according to Bloomberg, that you can maintain service margins. So maybe if you can elaborate which base you are referring to because we have 28% in -- over 28% in Q3 and 27.7% in year-to-date, and that your guidance is at least 24%. So when you say maintaining margins, if you can also report the base. That's my first question.
Yes. The good thing here is I can say, and I know exactly what it was, I was asked to comment on if we can maintain the high margins we have in the Service business. And on that, I answered yes because the investment and the one we are running the Service business, I'm very encouraged by the way we run that. We have 10,000 people that works in and around our Service business. We build a value proposition that sits well with our customers. And generally, quarter-on-quarter, we see customers more and more asking for also longer and longer commitments in that relationship with customers based on our turbines. So we just said there, we foresee still that there are more things we can do in the Service business, and that will maintain and also give us opportunities to still keep building both the Service business and the margins and profitability in the Service business.
And maybe a follow-up on your comment that customers are asking for longer commitments. I mean you have a pretty strong balance sheet. So I would say the risk of you disappearing is almost next to nothing. And therefore, when customers are asking for longer commitments, contracts, what do they get in return from you?
What I will just say here, that depends all about what people are paying for because we got different service agreements overall. So I would just sort of say, when we look at that, some of it comes down to also in certain markets that they have a full service package. And to some extent, no one knows the turbines -- investors turbines better than we do also from a sensor and digital point of view. So we are very happy with that. But we don't generally give something we are not comfortable and ultimately creates big liabilities back. That's not how we work.
And my second question is on -- is about -- more about risk from -- it's like a risk from the equipment that you have sold in recent years. So I mean Vestas' commentary in the last few years has been that industry as well as you are selling equipment on -- and services together on a levelized cost basis, and now we are seeing that some of these projects, which have been very aggressively a couple of years ago, are coming online. So a question I have is that what sort of guarantee do you generally provide in these contracts where you were bidding on LCOE basis? And let's say, if the customers are not getting the desired project IRRs, then do you have any liability in future, maybe, let's say, if they don't get the desired load factor or something and they may ask for some sort of compensation from you? So that's question number two.
I was just about to say, I was just almost jumping in and cutting you off in the middle of your question. We don't go in and take every financial risk you can imagine on and around a wind park or a turbine in that sense. What we know is we know the output. We know how the turbine will create and how it will work under certain conditions. And then when you have the upside as an investor in a wind park, you also have some of the downsides. But if it comes to uptime of our turbines and also how they perform, that's what we generally stand on our behalf. The rest, when it comes to that, we won't take the risk on the weather either. So therefore, let people do that. And the IRR, that's the final owner of the wind parks, which we don't do.
And maybe a quick one for Marika. Marika, thanks for elaborating this one-off that you have from project sales this year. Can you also provide if you had any one-off in 2018 or 2017 just for comparison purposes?
No. But I mean we're -- anything that we see as -- we rarely take one-offs, as you know. We have positives and negatives, and that goes fully into the results. So anything that happens in the company, we have full visibility. We don't take anything as special items or similar.
The next question is from Supriya Subramanian from UBS.
I had a couple of questions. One is around, given that the execution ask is quite high for 4Q and likely to be even higher for 2020, what do you see as risks of -- I'm sure the supply chain will be quite stretched. So do you see risks of slippages from fourth quarter into 2020 and correspondingly 2020 and to potentially 2021? And related to that, to some extent, is, is 2020 as well going to be as heavy back-end loaded as 2019? Or do you see a more even phasing of revenues across the quarter?
Okay. So if I start with your question on slippage in between the quarters, and that will all -- the more we have at the end of the year, the more slippage risk you have towards the coming year. But it's not again any lost revenue, it's just -- you could potentially see something spill over from Q4 into Q1 of next year. But that is as -- and again, as what to be anticipated, looking at the guidance, we will have a busy fourth quarter this year and a very, very busy fourth quarter. And if you look at next year, with the visibility that we have in terms of that very high order backlog, obviously, it's going to be a busy year. We don't see that it's going to be equally skewed amongst the quarters, and we are in -- bear in mind that we are in the midst of the budgeting process as we speak. But it's going to be a more normal distribution amongst the quarter, and that's obviously easier to deal with than what we have this year. But it's not going to be a walk in the park next year from an operation point of view either.
Okay. Okay. Got it. And again, sort of into 2020, I know you can't guide right now, but if I may put it this way, if all else being the same that is there are no further tariff escalations, et cetera, net of all the headwinds and tailwinds, do you see margins expanding potentially in 2020?
It's hard to give a commitment on margins. We have -- and we will come back again for the guidance of next year in February. But I mean what we have said there remains. We have a strong order backlog, both in the Service business as well as the turbine business. We have a stable price picture as we speak, and that is sort of a positive. Then from an operation point of view, it's going to be a hectic year looking at the visibility that we have right now, and that's all we will comment at this point in time.
Okay. And if I may, just one more quick question. On the offshore business, do you see a risk of pricing pressure here, given that there was this recent news flows of Ørsted as well expecting lower-than-expected IRRs for certain projects? I know that's related to only a certain set of projects of Ørsted, but does that then put risk on to the turbine makers in terms of pricing there?
I don't want to comment on that specifically. I think we know the value. We know the value of the turbine. We have had the offshore turbine, our V164 out there for the longest, so we also know the value of that. We don't generally work around to give a price pressure on it. We know also that the projects generally will be competitive. So therefore, we participate in that market with joy, and we also look forward to see that the offshore market is gaining more and more momentum at several continents outside where it originally started in Europe.
The next question is from Casper Blom from ABG Sundal Collier.
Two questions from me as well. First, on the working capital. You have been using your working capital to build inventory towards this very high number of deliveries that you're doing now. Should we start to expect some sort of release of working capital here in Q4? Or will you maintain a high level of inventory into 2020 that is looking to be even this year? That's my first question.
Okay. So if you look at -- and as you're stating, Casper, we have used the ability to actually build inventory to cope with the high activity level that we see right now. We're following -- which you don't have, we're following our anticipation in terms of how we reduce inventory here in the quarter, but we are also building up for a very busy Q4. And if everything works as it should and also looking at the high activity level that we are anticipating in 2020, we will build up. I will -- you will see us utilizing at this point in time, the possibility to have inventory also going forward, considering the high activity level that we have. And we're not giving, as you know, any exact numbers. But you will not see this -- you will see a reduction, but at the same time, an increase to build up for 2020 unless we have some slippage because that will obviously change the picture in between Q4 and Q1. That was a very unclear answer. I hear that myself. Did you get it, Casper?
As I understand it -- as I understand, you're saying that we shouldn't sort of expect sort of a huge relief of working capital when we get the annual results.
The short summary, yes.
That was nice dancing around that, right, Marika.
Yes. Then a little bit connected to that, your balance sheet. You have the last couple of years when presenting the annual results. You've had net cash of -- hovering around EUR 3 billion. Is that sort of still a level to look for where you're comfortable? Or would you actually be more comfortable at a higher level, given that the company is somewhat bigger in terms of delivery now than it was just a few years ago?
I would say -- I would put it like this, Casper, the cash that we have, have served us well and will also continue to serve us well. And if you look at the activity level, you look at the level of investments that we're doing. We haven't changed our philosophy. We will still have a very prudent view on the balance sheet and the cash that we have. So that will continue. We're not easing up on that requirement internally.
No. But actually, what I was pointing to was not an easing up, but more a tightening, where you would say we've actually have more cash, given how much bigger we are now in terms of activity and also in light of basically how weak some competitors are to really stand out competitively on that parameter.
But we still do with the cash we have. And I mean as I said, we -- it depends on where we are in the cycle, how much we have to invest. And what we have on the balance sheet right now in terms of our organic growth profile has served us well. So we haven't changed anything, neither more prudent or less prudent. We are satisfied with the balance sheet that we have at this point in time.
The next question is from Sebastian Growe from Commerzbank.
Yes. The first one is around the headwinds we discussed before in the U.S. tariff mitigation. I personally believe we need to distinguish here between what is really mitigation as such and then the underlying volume growth, which seems to go stronger than what eventually everybody had been expecting before. So my question then is if you are seeing a greater tightness in the overall supply chain, be it on the component, be it on the ships that you mentioned before, Marika, anything that is really changing to the bad, so to speak, that you are losing some of the eventually nice volume gains that we should expect for fiscal '20? That's the first question. The second question is around the CapEx and mix. You still guide for the EUR 800 million for the full year 2019. Obviously, a significant step-up required in quarter 4. I would be interested in what the key areas of the spending are. You referred to molds before, if anything you have to do to the footprint as well. And if I may then also pick your brain on mix. And could you just give us some sort of insight into how much the EnVentus platform has been contributing to order intake year-to-date. And with that, also then the expected contribution in fiscal '20 compared to what it might land at in fiscal '19.
You managed to squeeze in a lot in 2 questions here. So if I take it -- if I start with the CapEx and what it is in reality, it is, as I said, it's no change from the philosophy we've had previously. You will see that the capitalized R&D will be in the same order of magnitude as 2018. That means EUR 250 million, EUR 260 million. And then the molds on to further expand the capacity remains. But we also have localization investments because that is a requirement in many of the countries that we sell into, and that also continues. On the order intake for EnVentus is fairly limited. It's 300 megawatt at this point in time that we have order intake. But also remember that EnVentus is -- the full launch for EnVentus is 2021. So it's still the platform that we are -- it's still the 3- and 4-megawatt platform that we continue into '20. And sorry, what was your first question again?
Around the headwinds and the distinction between what is the U.S. tariff mitigation and escaping that pressure and at the same time, I think better than early expected volume growth. So I think it's really 2 separate buckets.
Yes. So the overall headwinds is, as I said, 1.5 percentage point. And the sort of the risk on suppliers is always there when you have a high activity level and high demand. The good thing, though, is that, as we have visibility over 2020, I mean -- and a very strong -- the strong order backlog that we have, we start firming up. As soon as you have a firm order intake, then we start firming up all of the supplies, all of the transportation. So if everything is according to that plan, we have a good overview. It is the changes in the midst of that planning period that causes additional headwinds. But it's -- I don't see any ease-up in the cost base for next year. It's still going to be in the order of magnitude as we see this year. Then if you have changes to it, then that will be on top of.
But you're not seeing any sort of greater greediness on behalf of suppliers I said, is the right takeaway?
Yes. I mean if you look at the overall heavy industry, they have different challenges than we do because they don't have the demand in the market. And obviously, we're trying to balance that without being too specific on our negotiations.
The next question is from Frans Hoyer from Handelsbanken.
Also a question on the 1.5% tariff pressure on margins in 2019. What was it year-to-date, Q1, 2 and 3 together?
I mean we haven't been specific here in the quarter. It is 1.5 percentage point for the full 2019. And as I said, that's 1 -- it's 0.5 percentage point higher than what we anticipated when we went into this year, and that's based on the cost base that we have globally.
Okay. And then I -- when I look at the margin guidance for the year, I look at -- try and look at Q4 separately, what's implied for the final quarter. And it looks to me like you are assuming some pressure even, of course, adjusting for the one-off gain in Q3. And that pressure, perhaps -- okay, I understand the tariff issue is a factor in Q4, but we also have the increasing importance of service and we have the presumably higher volumes and better fixed cost absorption in the fourth quarter. So I'm just trying to -- is there something I'm missing here in that progression in the Q4 margin?
No. But I think your assumptions on Q4 is correct. But remember that one of the high activity level that would be anticipated is at record, record high. And that is the steep ramp-up, and that will cost us something. Again, it's not a walk in the park to have that kind of volume to be exercised in a single quarter. The other thing is, obviously, that the later you get into the year, the more headwinds you see from -- also from an installation point of view. It could be delays, and delays is also a very costly exercise. So it's going to be a lot of pressure on us to exercise what we have left for -- to be executed here in Q4.
So an element of safety margin is in there as well?
I mean we -- you have the guidance, and it's a range. And I would say there's no safety margin, it is a very factual what I'm describing to you. That is what we're facing at this point in time.
The next question is from Lars Heindorff from SEB.
Two questions from my side as well. Firstly, in the first half this year, we've been talking quite a lot about leftovers, if you can call it that, from very low project margins that you took in '17 and '18. Are there anything left here of that kind in the third quarter? Is it relatively clean now? That's the first question.
Yes. So -- and that's absolutely correct, Lars. We have exercised the sort of more, call it, at this point, historical but the low-margin project that came in. So we are, today, exercising on a more fresh base. But also remember that -- I mean it is a very, very steep ramp-up. That means that we are, again, investing in capacity. We have -- that is -- and also, we are also outsourcing more than what we have done previously. That's obviously the other factor. So the leverage will be different than what you have seen before because then you had excess capacity that you filled up. And today, we have the opposite. We don't really have excess. We are installing new capacity and at the same time, also outsourcing. So from that point of view, the leverage will be different from what you have seen previously.
Okay. And then the second question, I mean I won't ask you about your headwind into 2020, but rather, I mean turn it around and hear a little bit about what, I mean, can you do to mitigate this? And you've been talking also in connection with the Q2 report about fairly good talks with the customers about passing at least some of this cost almost to the customers. I mean where are you on that? And to what extent can you sort of offset that by passing some of that cost and headwind on to the customers and into the prices?
I would say that, that has been contemplated for quite some time. But also remember that the firm order intake that we have in the backlog now is what we will be exercising next year. So we have full visibility. So it's nothing that's going to be on top of that to any significant degree. Next year is, I would say, as this year, very high visibility. So it's been exercising at the best we can.
Okay. And then just as a follow-up on the outsourcing part that you mentioned, which is, I mean, incremental margins. I mean back in the good old days, I think we talked about incremental margins of 20% to 30%. Can you give us an indication of where you expect those to be now with higher degree of outsourcing?
That was my point earlier. The leverage that you have seen in the past is, if anything, it's going down.
Okay. So below 20% to 30%?
Absolutely.
Well, it was also a slightly wide range, so you have to appreciate there.
The next question is from Klaus Kehl from Nykredit.
Yes. Two questions from my side. You have highlighted a couple of times that you have this execution risk in Q4, and I truly understand that. But can you talk about what you actually have done in order to reduce it? Have you, for instance, produced all the turbines in Q3, and perhaps that's the reason why the inventories are so big? That would be my first question. And secondly, you mentioned these power upgrades in the Service business that drives efficiency gains for the clients. On average, how much can you raise efficiency for clients? Could you talk a little bit about that?
So if I -- do you want to start or...
No, please.
Okay. I forgot the question. Sorry, Klaus.
You want me to repeat?
No, power upgrade was the second one.
First one was how does it look like? What have we done to mitigate the Q4 activity level? And as said here, Klaus, as you will see in the inventory, absolutely, we have done what we can. But you will also appreciate some of that inventory is not always at the site of where we're putting up the final project. So here, it is still fourth quarter, and you won't get access to the site before the site is ready from preparation to it. And therefore, it is, as always, difficult to access site, and we are still subject to the usual. We have done everything we can, but we don't inventory or stock it at site. That's just not what life is. So therefore, there is still a transportation between x factory and to the various sites. But we are well prepared, but we are still subject to, and that is also why we have kept the range for the turnover guidance between 11 and 12.25, and I hope you appreciate that. You can see it in the inventory as well, so I think it goes well hand-in-hand. But it's something that the project teams are very much used to and working diligently through.
I would say that -- sorry for filling in. The biggest risk in Q4 is that we have a lot of Nordic projects that have to be exercised really here in the latter part of the year. So the weather conditions or the weather impact is going to be bigger as it looks.
And then coming to the power upgrades. It's -- we're measuring that in percentages. It is down to the customer of where the individual customers are, how much percentages we are able to affect that. And as I said, I would not like to give that away as a statement to such a wide forum because, as you would appreciate, that is actually part of the value proposition and the competitive advantage to customers. Could we then just -- due to the timing, could we say this is the last question, operator?
We will now take the last question from Mark Freshney from Crédit Suisse.
We've been discussing a lot of the potential negative impacts to try and bridge the 2019 to 2020 EBIT margin. But can you talk about the mix effect? Because my understanding is that it's only recently in the last few months that you've started shipping the V150 and the 4-megawatt products, which I understand provide a step shift down in the Levelized Cost of Energy. So can you talk about how the product mix will change going into next year, what kind of percentage volume it is and potentially, what impact that would -- positive impact that could have on group margins?
Well, Mark, we're not commenting on the margins for 2020. As we said, we have a good visibility. We have a strong order backlog. We have a good average sales price because we see the stability in the price, and that's reflected in the order backlog. The V150 is going to be definitely a strong product for us in 2020, and that's all we can comment on at this point in time.
Okay. I think that probably concludes this investor call. Thank you very much for your attention. Thank you very much for the very, to us at least, interesting questions, and we look forward to seeing many of you over the coming weeks. And with that, thank you.