Vestas Wind Systems A/S
CSE:VWS
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Vestas Wind Systems A/S
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Good morning, and welcome to this investor presentation of Vestas' third quarter 2021. A warm welcome to everyone, and especially also a warm welcome to Marika here next to me, which we'll talk more about. But first of all, to the key highlights for the quarter. As announced this morning, Marika will be stepping down 1st of March 2022. We have an internal successor, Hans Martin Smith, who is our current CFO of Vestas North & Central Europe, who will succeed Marika in March the coming year. So there is at least a number of months to hand over. And I hope you will all congratulate Marika and also Hans Martin on this call. Secondly, we were awarded the largest preferred supply agreement to date. We were -- the PSA was awarded in the Empire Wind project in the U.S. from Equinor and bp. And that comes on top of an onshore order intake of 3.7 gigawatts in the quarter. Revenue ended at EUR 5.5 billion in the quarter. It's the highest-ever quarterly revenue. And we have to say, it was secured despite the continued supply chain challenges. And we'll come back to that, but a very high activity quarter for us. The EBIT margin ended at 5.9%. The EBIT here, impacted by further cost inflation and higher level of warranty provisions in the quarter. On the CSR and ESG, the circularity road map was launched, as we promised before. We are raising the bar in also how we can make the turbine full circular when we look towards 2030 and 2040. And especially on the rotor and the blades, we are trying to accelerate the recyclability as we speak. And then last but not least, we'll talk more about the outlook. But the guidance on EBIT margin was updated and revised to reflect these accelerated cost inflation and also the supply chain challenges, which, of course, we will talk much more about in this call. So first of all, if we go to the global business environment. A challenging global business environment and supply chain instability is expected to last throughout 2022. I think, on the positive, we have seen wind power is increasingly critical, first of all, to address the short-term electricity demand. We have seen the electricity demand short term go up in many of the countries we operate in. It is, therefore, also important we both support the countries, the customers and not least also the whole community around the electricity pricing. But in some cases, electricity pricing and energy prices haven't changed just a few percentages, but we are now talking into the several hundred percentages, and in some cases, also in Europe, up to more than 10x of what it was compared just a few quarters ago. When we look at the supply chain disruptions and instability, it is absolutely here to impact both our timelines and also the increased cost. Timelines now means that most of the deliveries, when we talk about deliveries to either factories or the site where we need the assets and parts, we often see that maybe 2 out of 3 deliveries are either delayed or changed during this disruption. Therefore, cost inflation continues to accelerate within transportation and raw materials. We are mitigating but unaffected we can't be. When we look at the mobility, both for our construction colleagues and also our service technicians around the world, they are not only remain challenging. But as we speak, COVID-19 in a number of countries are reemerging. So I will just say here a big thank you to our customers, the partner suppliers but also not least here, our 29,000 colleagues that despite this environment have contributed to one of the busiest quarter in the history of Vestas when we both consider the offshore and onshore. When I go into the Power Solutions, no doubt, Power Solutions now operates as one business. We have spent most of this year in now getting to one business and one team Vestas, which includes both the offshore and the onshore. Our systems went live just a few days ago over the weekend. So now we also operate in one system for the activity. And that means we are basically coming out of the first year of the ownership of the offshore business, where we would have completed the physical integration of the business. Now it's all down to also creating that spirit and one team Vestas in there. When we then go to the highlight of the Power Solutions, we can say that power prices continue to be record high. But of course still, there is a smaller increase seen and compared to the PPA levels that are currently seen. That is absolute challenging to the industry. It's also challenging especially to our customers. Because some of our customers would, around the world, have agreed PPA levels that are away from where the current levels are or even the electricity prices are. And of course, that creates an imbalance because the cost of the renewable solution from Vestas on the turbine side increases in price and therefore either dilute the business case or potentially challenging the project in its entirety. On the positive side, I will also say it probably, on the medium to long term, have never been better and more committed from the markets and countries we operate in. As an example, we saw Germany, fully subscribed auction in Germany in the last auction here with 1 -- more than 1 gigawatt. And of course, that non-allocated 2021 volume from non-permitted that will come on top of the 2022 auctions, which means that Germany, as an example, will basically have gone in the last 12 months from almost 0 to now doing auctions in excess of 5 gigawatt for 2022. When we look at the offshore, yes, we had a 2.1-gigawatt preferred supply agreement of our new 15-megawatt platform in the U.S. And that adds on top of the 3.7-gigawatt onshore but a firm order intake in onshore. On the onshore ASP, it increased in the quarter to partially mitigate the cost inflation. And we will talk more about that. Positively, on the charts to the right, as you can see, slightly lower order intake. But year-to-date, we are happy with the order intake, but we are also cautious. But as you can see in all regions, a very business-as-we-go, especially in Asia Pacific and, to some extent, Americas, been pleased with seeing also now the reemerging of the order intake in this quarter. When we then go to the Service business. Service business again here operate now as one team in the service integration between offshore and onshore. And that comes towards the end. Service business has had a very busy quarter in terms of also both seeing the activity and also what we have done in both onshore and offshore. Above that, we also introduced the Covento, which is our digital platform, where partners can connect and customers can connect to also see, leverage scale in the renewable aftermarket. In Australia, we had a 396-megawatt service contract that was for 30 years on the new EnVentus platform. So again, a testament of how the market has worked. And this is definitely part of the projects where it was built, even though that the conditions were changing under the way. We continue to have a full scope multi-brand focus and, of course, we continue to also do that as part of our presence and density, as you can see to the right. So currently, backlog in the Service business is EUR 28 billion, of which EUR 24 billion comes from onshore. We look after 124 gigawatts, of which 118 comes from the onshore. And we then have a contract average which is above 10 years on average. Below, you will see the regional presence and therefore well growth in all regions. And we are very pleased to see the progress and also the performance of the Service business. In total, we have now a combined order backlog that is in excess of EUR 47 billion. And under normal circumstances, we will be really, really pleased with that. But as you can also hear and see in this quarter, that order backlog gives some challenging in the current environment to execute. But again, thank you to so many colleagues being involved. When we look at the sustainability, we will just say here, we continue the journey we are on. And therefore, we also, as we said earlier quarters, we will launch a full circularity strategy, which we have done here. We put out a road map, where we will look at how we accelerate some of those targets for 2030 already now for the rotor. And we are very convinced that the road to 2040 will be both exciting, but it will also be rewarding for Vestas' customers, Vestas itself and also our partners in the supply chain. We launched an updated and strengthened Employee and Supplier Codes of Conduct, which we have received many positive comments on. And I think that helps us operate in the many countries, more than 80, around the world. In the quarter, we have seen an increase in the carbon emission, which is mainly driven by the offshore activities, which we, compared to last year in Q3, didn't have. And therefore, of course, the added installations, of course, therefore, add to the CO2 emission in the quarter. Positively here, the displaced CO2 emissions annualized quarter-on-quarter is now up 13%. It's more than 200 million tonnes. And at least living in Denmark, it's somewhere like 5x the full displacement of the CO2 emission of Denmark on an annual basis. And it more than equals to 130 million cars. So it is actually a number that matters in these days, where it's discussed so heavily. Carbon emission, I talked about, but probably most prominent here and what I'm really, really proud of on behalf of the Executive Management Board is also that we, in a quarter where we had that many activities, our safety records did not only stay remain stable, but we actually managed to improve that under the high activity levels. So thank you for looking after each other. With that, I will hand over to Marika.
Thank you, Henrik. And let's have a look at the income statement. We see very strong activity levels but clearly a challenge with the profitability that I assume we will talk more about. You see revenue increased 16% year-over-year. So obviously, focus on execution and doing it the best we can is obviously high on the agenda. You see a 16% change year-over-year and quarter-over-quarter. Gross margin decreased by 2 percentage points, driven by both Power Solutions and Service as well as additional need for warranty provisions. EBIT margin before special items decreased by 2.7 percentage points year-over-year. And that is mainly driven again by the lower gross profit and also higher SG&A costs as a result of the offshore integration. Special items is amounting to EUR 119 million here in the quarter. And that is relating to the alignment of the manufacturing footprint as part of the integration of MHI Vestas Offshore Wind. Power Solutions. I think it's clear to everyone that profitability is continuously challenged. Revenue though increased by 15% year-over-year. And that is driven by offshore, offsetting a decrease in the onshore activity level. That is primarily impacted by the continued supply chain challenges. EBIT margin before special items decreased by 2.1 percentage points. And again, as for the whole company, driven by higher warranty provision as well as continued increase in the external cost inflation. And I would say that the increase is more than unprecedented at this point in time. Service business. We see a continued positive Service performance. And the revenue increased 23% compared to Q3 of last year. And that is driven by higher activity, both onshore and offshore. Absolute value of EBIT amounted to EUR 143 million. And that gave us a margin of 23.2% in the quarter. SG&A cost continues to be a high focus but also under control. You see depreciation and amortization, excluding the impairments, increased by EUR 79 million year-over-year. And that is primarily related to offshore and the integration of offshore. Relative to activity levels, SG&A costs amounted to 6.5%. And that is an increase of 1.1 percentage points compared to Q3 of last year. Net working capital. We see a stable development of net working capital quarter-over-quarter this year. And it's actually following the plan. And that is obviously a consequence of the high activity level on the revenue side. But you see that we have a significant decrease in the inventory. And that is more than offset by down and milestone payments as well as receivables. So very good performance here in the quarter. Cash flow is obviously impacted by the operating activities. And positive free cash flow before financial investments is EUR 300 million in the quarter. And that is a decrease compared to Q3 of last year. And the underlying factor is, obviously, the operating cash flow as well as higher investments. There is a decline in the net interest-bearing, mainly driven by investments in CIP. But it remains at a high level. And the focus on cash discipline is continuing. Total investments. You see higher investments year-over-year and again as anticipated. And that is primarily driven by investments in construction equipment as well as transport tools and investment in the V236 offshore turbine. So no change in methodology or focus. Provision and lost production factor, obviously, focus on warranty provision and the lost production factor. And here, you see the trend in the lost production factor, which we have spoken about. And you see an increasing further during Q3 here in '21. And that is a consequence of the extraordinary repair and upgrade level, so basically the same argument as last quarter. Additional provision of EUR 50 million here in the quarter. And that is related to cost inflation on components as well as transport, which we will talk more about. Warranty provision made is corresponding to 4% of revenue. And I think it's also important to see here that provision consumed increased also in this quarter. And obviously, that means that upgrade and repair are continuing to a high degree. The capital structure. Net debt to EBITDA is continuously well below threshold and negative 0.4 here in Q3 of '21. By that, I hand over to you.
Thank you, Marika. And that then let us come to the outlook, which is the revised guidance. When we look at revenue, same as last, EUR 15.5 billion to EUR 16.5 billion. Service is still expected around 15%. When we look at the EBIT margin for the full year, it will be around 4%, where previously it was between 5% to 7%. And the Service is still to be expected approximately 24% and investments will be below EUR 1 billion. When we then look at the warranty provision, it is expected to be at a level above 3% of revenue as a consequence of these increased costs stemming from the supply chain instability but also the accelerated cost inflation from especially raw materials, transport and turbine components. When we look at the special items, as Marika rightly mentioned here, we still say that it will amount to approximately EUR 100 million related to the integration of the MHI Vestas Offshore Wind and also where we see that the footprint has to be aligned. And therefore, I will just say here, important is to note that the basic assumptions behind this guidance are, of course, more uncertain than normal, also with the reemergence of COVID and the continued supply chain challenges. Before we then go to Q&A, I will just do a little bit of marketing here also in terms of our Capital Markets Day. We have that, and it's an invitation to everyone for the 15th of December in Copenhagen, in the old location of Børsen in Copenhagen, or stock exchange in English, but Børsen building in Danish. There will be restrictions, as you will have guessed, which means that you will have to come with a negative COVID test. But I think we are all getting used to those circumstances. And of course, it is also still subject to that at least Copenhagen, Denmark and the rest of the world operates on normal transport level, so you can actually access the Capital Markets Day. So after that, I will just leave it to the operator and go to Q&A. And again, Marika, not yet but another at least couple of quarters together. And we look forward to see many of you in person and surely say proper goodbye over the next couple of quarters. So it will be a long one. Thank you for that. Q&A, please.
[Operator Instructions] Our first question comes from the line of Kristian Johansen from SEB.
Yes. So looking at the cost pressure you're facing, it seems like you carry the entire burden of these unexpected costs due to supply chain disruption. So I mean, to what extent are you able to change contracts to mitigate this by having customers or suppliers pay a bigger part of this going forward?
Kristian, thank you. I think on the relationship to customers, clearly there is an ongoing dialogue with customers in the current environment. But if we then look at it, if we haven't done the mitigation and other stuff, it would have looked very different because the changes in raw materials, the changes in also components is so severe in many ways that it's not about a single or few percentages, it is double-digit percentages in many parts of the world. Some customers, when we look at the current backlog, there will be adjustments. And that happens on a single and a customer-to-customer dialogue. But passing it directly to the customer in the current environment doesn't work either because there are places where the customer is heavily reliant on getting the solution commissioned, getting it online also under strict conditions. So therefore, Kristian, it is down to a customer-to-customer discussion and an area-to-an area of discussion. But of course, what comes into the backlog, cautious about in the current environment as well.
Okay. Then let me use my second question to maybe address the same topic in a different way. So if the current supply chain pressure remains at the current level, will you then be better off next year, I mean, looking at your backlog?
I'll say, first of all, as we also said here, the longer and the closer we get to a year, the better we will be off in the backlog. But it is in the sense of can we just get some stability in it? And that's probably what has cost us also in this quarter. Last quarter has given us further increases. It has given us further delays in some of the things. And therefore, as we right now see it, Kristian, we expect that to continue for the next 4 to 5 quarters. That's the visibility we have. If it is positively for us, if it continues at this level, then we still have to have that mitigation quarter-on-quarter.
What I think is important to say also, Kristian, is if you look at '21, it's just been a continuous increase on all the challenges that we have mentioned and the cost of them. So we haven't seen a stabilization in any shape or form. And that has obviously impacted the visibility here in '21. And that's also what we're coming out with to the market right now. And just to be very clear, it changes on a weekly basis. So for next year, it's going to have an impact. And what we see today, it's at a much higher level than what we anticipated getting into '21. The cost is at a different level. And obviously, that has been reflected in the negotiations with the customer. But it is the sort of changes and lack of stability that is the most tough part right now.
So maybe just to make sure I fully understand what you're saying, so if we just see a stable development but at the current high level, you should still be able to make a better margin going into next year?
No, we're not committing to a better margin. But it creates a better visibility and how to deal with it than what we see today because the changes are so rapid and so significant.
Our next question comes from the line of Casper Blom from ABG.
I will wait with saying goodbye to you, Marika, and do a follow-up two questions here instead. Because one thing is supply chain, another thing is raw materials. And it's my impression that especially the higher steel prices will probably burn you somewhat more in '22 than in '21. Can you confirm that thesis that you might see some -- let's say, some relief from higher prices and better visibility on the supply chain matters, but then you will have issues on, yes, core raw material prices next year?
Yes, I think it's fair to assume, Casper, that it's going to have an impact. Obviously, we're trying to mitigate as much as possible. But we cannot secure everything. And with the price level, where they are right now, it's significant. And it's also other components or raw material that are increasing and having a much, much bigger impact next year than what we have seen this year, and one of them being resin.
Okay. Then another question regarding the onshore turbine business. And I think when you slightly lowered the revenue guidance in connection with Q2, it was because you saw that some projects were maybe delayed and being pushed into '22. Now in this quarter, there's been high activity in offshore. And I think onshore deliveries were a bit behind The Street expectations. Can you put any number or try to quantify how much onshore deliveries are being postponed into '22 compared to the initial plan for '21?
I think it's a little bit too early to say. But it's also fair to say that, yes, it could be some slippage. But I think Q3 of this year clearly proves that from an execution level, we are doing pretty well in the environment we're in. But if we see further challenges here in Q4 -- and when I say further challenges, it's not only sort of the very evident ones, but it's also the usual explanation of weather conditions and so forth, could also have an impact on the Q4. But having said that, we're obviously anticipating high activity level and try to do as much as we can. But I think it's fair to assume some slippage into next year.
Okay. Can you, in any way, talk about whether such slippage is hitting you on the project margin? Or do customers understand that now with special situations and it's -- yes, no one's fault, things are just being delayed?
No, I think that is obviously -- we, together with the customers, we try to help each other as much as possible in the environment we're in. And I think everyone is trying to do their best in terms of how we execute and how we support at this point in time. But it's very hard to be very precise in what will happen in the latter part of the year. We've provided a guidance. And that, we obviously feel comfortable within as we speak.
Our next question comes from the line of Akash Gupta from JPMorgan.
My first question is on product cycle. While it may be a bit premature to talk about new products now, given you are ramping up on latest turbines as we speak, but historically, price pressure was addressed through new products. And we now see in China, your competitors are stepping up the game with 190-, 200-meter rotors agreement that have been announced last month at Expo. So my question is that, do you think we will see an accelerated product cycle that will lead to high investment in onshore lasting for longer?
I don't think there's any in the current environment that makes us either doubt or see any changes to the current. I think we're all working in both countries and continents around the product road map and that we are working with customers on. So Akash, I don't think there's any imminent changes reflected on that. We are comfortable with our range, and not least our broad range of both onshore and now also entering the offshore. But the onshore, we are fairly confident in where we are today.
And my follow-up question is on margin. I mean, usually, if I look at last many years, at Q3, you always had a range. While this time around, you have a more precise margin guidance than what we have seen in last few years. And at the same time, we also see high uncertainty in the market. Maybe if you can reconcile why you have given more specific guidance, margin guidance for the year at a time when uncertainty is a bit higher than what we have seen in the last few years.
Yes. I mean, what we do and always have done is to provide the market with our best estimate of where the year will end. And that is representing the around 4% that we have provided cash. And it's nothing more to it than that.
Our next question comes from the line of Gael de-Bray from Deutsche Bank.
The new guidance for 2021 implies a margin apparently between 5.5% and 6% in Q4. So if we exclude the EUR 50 million extra provision in Q3, there seems to be a clear deterioration on a sequential basis. So what will be the drivers of this, please?
I think we're just giving you very clear indications of where we are in that sense. Because we are executing on a backlog, we see the full value chain having those cost inflationary measures coming from either the raw materials, where a very large degree haven't changed anything in control of the process and the hedging of it. But they are just part of the raw materials. They are part of the components right now that are either in scarcity, where we just have to work through that. And that, of course, gives us a dilution effect to what we're executing on, Gael. So I don't think there is surprise in that. And when you look at the logistics and transport, whether that's the incoming or it's the outbound or outgoing transport, there will be suffering to it. Because if you are delayed, then you will have reschedules. And reschedules in this current transport market is almost prohibitively expensive. And when you get to the outbound, there you will have some of the things where you are either late to site. And if that happens, of course, it causes the same. So we are cautious. We're in control. We are managing. But we are down-managing in not only our day-to-day but also on a weekly basis, which is posing us changes almost daily.
So what are the various options, if any, to make yourself less dependent on -- in particular, of some of your components or some materials like steel?
I think to start talking about being independent in the current environment, which I think for anyone on the call, is absolutely unprecedented. You have electricity prices that has gone up with more than tenfold in very near countries like Spain and other parts of the world. Right now, I think it's about that the supply chain and the full value chain, including customers and also including off-takers, are standing together and saying we're on the right path for medium and long term. There are some short-term challenges, which we all have to remain sensible of. And I will just say here, talking directly to a number of our customers, most customers understand perfectly what conditions we are in and also understand why the industry has to act sensible on it. So right now, start talking about replacing or being independent on this, it's not possible to be independent of a product that is highly sophisticated, highly technical-driven of both raw materials and components.
Okay. Can I have a follow-up on the margin side?
Yes.
Sure, sure, sure.
Okay. I was just wondering, given the margin of probably below 6% you're guiding now in PTC for Q4, it's obviously a quarterly run rate exiting 2021 that looks well below the current consensus expectations of, I think, 6.9% for 2022. So how do you feel about that? And how shall we interpret your statement according to which the full focus will be on protecting profitability?
Gael, just to be very clear, we're not guiding for '22 at this point in time. We are assessing the '22 numbers as we speak. I think what is clear, and I think is clear to everyone, that the continuous challenges when it comes to both logistics as well as supply chain continues also in '22. And then how big they will be is something we obviously come back to on the back of Q4 of next year. But they are there and they are continuously increasing as we speak.
Our next question comes from the line of Supriya Subramanian from UBS.
Basically around profitability as well, just wanted to get your thoughts on if -- and I think this was sort of asked earlier as well, but just phrasing it slightly differently. If cost levels remain and challenges remain at current levels, flat, and the pricing actions that we've taken so far in the 9 months, have you done any analysis on what that means in terms of margins or costs into 2022? And also, one of your peers, of course, has started introducing price escalation clauses even in the onshore business earlier this year. Is that something that you are also introducing in your contracts? And my second question is more on the medium-term profitability. You, of course, have a guidance of double-digit margins over the medium term. What does sort of the current scenario and current [ management ] will imply in terms of potential timing of achieving those targets?
Yes. So if I start with your first question, Supriya, obviously, we are again assessing the order backlog that we have at this point in time and what we have signed the firm order intake at. And every time we sign a firm order, we're obviously trying to mitigate as much as we possibly can. But I think you're also aware of that we cannot, on the outbound side, sign any agreements with vessels for a longer term. So that is something that is addressed ongoing, depending on when you have signed a firm order intake. Having said that, stability is easier to plan for than continuous increases, and that's also what we're doing. Exactly how big impact it will have will also depend on shortages that we have been faced with in '21, both from a transport and vessel point of view, congestions, as Henrik has said, and especially around our biggest hubs when it comes to the production. So I mean, if we are dealing with everything. Will we be unimpacted? Absolutely not. Then escalation clauses is something we have worked with as long as I have been in the company, so no changes to that in terms of how we secure our pipeline the best we can. And we are by no means perfect. So I mean, we're using all the means that we can. And I think Henrik also described how we are continuously negotiating with customers. But you also want to keep your customer for the future. So I think it's a mutual agreement to get to the best solution also going forward.
Thanks, Marika. And I can assure that those clauses will also remain in place long after you have left Vestas, that's for sure. On the double-digit here, as you can hear on us, if you just take the Page 10 in our announcement as well, we have delivered in more than 30 countries. And of course, in 30 countries, with the current instability and volatility, I think it's fair saying, Supriya, that's not the time of forecasting. I think on the internal side, on the processes and the controls and what we have done also when it comes to executing the project, we are actually very pleased. We are very pleased with the progress. But unfortunately, on a day like this, all the effort of 29,000 colleagues around, which has also managed in a country like Vietnam to get a far and a long way into delivering within the tariff deadline of end of October, I think it is hard to say that, that was definitely not in a quarter or in a year where 10% will be in the reach. On the mid-term, don't change. We see the same. We see the same upside for 10% EBIT in the industry. But with the current volatility and instability, that is not right to talk about that in a quarter like this.
Our next question comes from the line of Deepa Venkateswaran from Bernstein.
My two questions. So firstly, Marika, would you comment on the warranty provisions, which was 4%. What's driving this? And should we assume that for the overall year, is it sort of closer to 4% for the overall year as well and maybe that explains 100 bps of the margin reduction? And related, the lost production factor that has been going on. And is that in line with your expectations? Or has that worsened? Is there any consequence of that getting closer to that [ 97 ]? And secondly, I guess, with the CMD coming up in December, it seems like there is still a lot of instability in the supply chain, raw material and so on. So maybe could you just talk about what you might like to highlight? Because certainly, investors would want to see things like the bridge to the 10%, which -- and that you mentioned is not maybe something you want to talk this quarter, but that seems to be something that investors really want to have. So would you try and give us maybe more visibility on the longer-term trajectory and how you would get to -- how you would seek to get there?
Thank you, Deepa. So if we start with the warranty provision, and as we have stated, it is a cost inflation also for -- I mean, it's impacting everything we do, also on the repair and the upgrades in terms of both component costs as well as transportation also for that matter. And I think it's fair to assume that it could be an increase also here in Q4 simply because of the speed of the changes that we see in the market. When it comes to the lost production factor, I think we have been very clear that it will continue to increase simply because we are doing the upgrades and the repair, and I would say also as we planned for. And that will have a continuous impact also throughout the beginning of next year. I would say probably the first half is where you will see -- before you will see a decrease in the lost production factor. But this is following the plan. It's, from a timing perspective, slightly delayed. But that's also because of the environment we're in. And from a cost perspective, definitely more costly and as you also see in the warranty provision. But we are following, we have the solutions, and that is what we're delivering into the market. What I would like to highlight before getting into how we will get to a 10%, Deepa, is also if you look at what we are doing internally, I think the efficiency part is a big component that is continuing. We are continuing to grow the Service business. And we are keeping the SG&A more than under control in this environment we're in right now. And I think the most important thing is to look at the underlying efficiency. I mean, it's a lot of things that is not under our control, and that is the supply chain and the logistics, which is very heavy burden and obviously not only for us as an industrial company but other industrial companies. And we will obviously try to highlight where we are and how that is impacting us at this point in time. But I think we will get back to that on the Capital Markets Day.
I think here, maybe just a short comment, I think not to either raise or disappoint your expectations to our Capital Markets Day. But I think it is important here to say you will get an insight into some of the tools and some of the handles we have been moving towards the 10%. But I'm also sure you will appreciate, it is an industry with relatively few market participants. So we won't do a deep dive into the individual details of basis points. We've always said it's the onshore, it's the offshore, it's the Service and it's the external factors. And in the onshore, it goes for both customers, technology, supply chain and how we leverage that. There are several handles in there, which we're actually quite pleased with in terms of progress. But of course, we are not pleased with seeing the headwinds we are faced with on the external world. But we will give you more insight, but don't expect to get a basis points opportunity to look into to that day.
Our next question comes from the line of Sean McLoughlin from HSBC.
You highlighted the imbalance for customers because they're seeing the dilutive business case and projects challenged by higher pricing. I mean, are you seeing an increasing pushback on volume at current turbine prices? Or would you say that the pass-through, if I take the Q3 ASP, now adequately reflects higher raw material cost, let's say, supply chain to one side? That's my first question.
If I take that, Sean, I don't think you can create a -- within 90 days, a full balance of what's going on in terms of volatility and discussion with customers. In some of the markets, you simply have that big variances, not only in the renewable solution between us and the customer but also in the customer circumstances in making the construction, the grid connection and potentially also on the offtake. I think where we are a long way in, I think where the markets are moving and adjusting quickly, there is a better understanding because, of course, there, the customers offtake moves up with the energy price increase we are seeing. It is probably where there are more rigid conditions in some of the markets where PPAs are not moving. That's, of course, where we have a slightly higher detailed review and probably also tense discussions because that is where it's more difficult for the customer to get into a business case that looks as attractive as it did just 90 days ago. We've also shown in this quarter a number of cases around the world where customers have continued with the order intake and where project was still very attractive. So therefore, I think it comes down to, right now, project-by-project and customer-to-customer. But it is difficult to pass these level of changes around with basically a day-to-day basis. That's not what actually the industry lives off in the long term.
Understood. And I mean, could you indicate where -- any market specifically where PPAs haven't moved and customers are therefore having to be more aggressive on pricing?
I would say it's -- in some of the main markets, there are still PPAs that have -- start increasing but are increasing to the level what you have seen in the short-term spot market for electricity. So there is a very steep curve. And it is a little bit here what gives in first. Does it, the short term, because there is an ease on the whole world and supply chain which then settles the energy pricing down? Or is it the PPA that has to move towards what is going on in the short-term pricing? It can be both. I think right now, unfortunately, that's not the visibility neither our customers or we are offered in the current environment. But I think it will adjust. It is some of also our main markets. But it's also in some of the main markets, where the offtake from especially private industries are absolutely keen to have more renewable electricity coming towards them in the PPAs. And there, there is a different way of doing it.
Understood. And then my second question around higher spend on construction equipment and transport tools, just, Marika, to understand what is this and where and why is this needed?
No. It is -- obviously, we have a number of new launches of products, and we obviously have to change the tooling, both for construction but also on the vessel side, so we can transport more and more efficient. And I mean, basically, the more products we develop, the more cost will be related to that fact. And in the cost inflation we're in, obviously also have an impact on those items at this point. So it's nothing strange or nothing new, but it's more costly again.
Our next question comes from the line of Ben Heelan from Bank of America.
So I wanted to come back on these contracts because I feel that the messaging has changed, where in Q1 and around the half year, the messaging was actually we're relatively comfortable that we have protection against some of the raw material inflation. You highlighted that you had protection through indexation from raw materials. You highlighted that you hedged firm orders when they came in. And it feels like that has changed. So I want to understand in a bit more detail exactly where you are protected against raw materials and why are you seeing raw materials be such a big headwind, when previously we were feeling fairly comfortable about the situation because of those protections that you had.
Thanks, Ben. I don't think neither our tone of voice or anything else has changed from Q-to-Q in a sense of we're working with very diligent process on how we hedge things and also how we go about it. But it's also fair saying, in the current environment, it is not possible and has never been possible to hedge completely raw materials and components going into a full turbine. So therefore, some of the shortages and some of the disruptions and scarcity of the supply chain, which basically comes from some of the raw materials, like the resins and others, will have an effect on us. So I don't think any of that has changed. And you can hear that on my and Marika's tone of voice has not changed. We do the same. The model we work, works. But it is also, and I think I like to hear that from you, Ben, then, this is not something that is normal business running. We got something that has changed with not only several hundred percent, but in some cases, 600%, 700%, 800% when it comes to either the scarcity of logistics and transport possibilities or even getting the raw materials to some of our factories. So I don't think we will call any of this normal business running right now.
Is there a way to understand what proportion of the raw material headwinds or the raw materials going into the turbine are hedged? Because I think -- I do feel that a lot of people, clients as well, have felt that there was a degree of protection. And that protection isn't there. And obviously, you're seeing the impact today. So is there a way to understand how much of the -- as a percentage of COGS that is actually open and you physically can't hedge?
I think if we start from the beginning, Ben, when it comes to raw material, the one factor or the one part that has impacted us the most previously is steel. We said from the beginning of the year that we didn't expect a material -- or we expected an impact from steel this year. But that was not the major headwind. And again, we have done everything that what we have said previously. And that is we have secured steel to the largest extent possible. But if you have any firm order in a given year, obviously, you have to deal with it at that point in time. So it is the firm order intake you try to secure as much as you can, but you can never secure 100%. What we are referring to here, when we talk about the big, big challenge, it is logistical challenges. And I think we have been very clear with that, that has a much, much bigger impact today simply because of prices as well as shortage at this point in time. Then what we have -- if we go to resin, for example, it is both, the price level simply because we had fires, we had different things happening from a production point of view or suppliers have that is impacting us. But I want to be clear on the raw material, we have -- it's not the most significant part of the headwind this year. That will be bigger this year with what we see right now and the prices, how they are developing. I hope I make myself clear on that.
Okay. No, that is helpful.
Our next question comes from the line of Ajay Patel from Goldman Sachs.
Probably the 18th question on cost pressure, but let me try at least. So I have this first -- I guess, my first question is just in a really simplistic way, if you have a 4.2-megawatt turbine today versus the beginning of the year, how much has the cost of that type of turbine increased? And then I guess, the other bit that I wanted to sort of understand is which is the bigger force? Is it ultimately trying to pass these costs to the end user and then a proportion of them just can't be done in such a short space of time? Because obviously, you want to preserve a partnership to some degree. Or is it the -- over the course of the year, some of the base assumptions that you have for your deliveries have changed so much that actually underlying profitability of those projects have changed? I'm just trying to understand sort of the broad sort of -- which is the bigger issue and then just the broad sense of just a generic turbine, where we are.
Ajay, thank you so much for your question. I will also probably relate a little bit to Ben's point before. We won't give you, of course, a direct price comparison of a 4-megawatt platform, too easy and not the forum for that. So that's an internal one. What we can just see here, we know what the effect would have been because we do that basically on a daily basis, what would have been the cost-ins. While we just said if we have done nothing from beginning of the year to where we are today, it would have been long in many markets into the double-digit percentages because that's what you are faced with right now. Of course, then each project will be different because is it shorter? Is it longer? Is it more complex delivery from a transport point of view? And that's where the transport is a part of it and then the single turbine cost of the turbine is, of course, part of it. But I would say here, when you look at that, then it is down to the individual turbine. And that, we adjust on an ongoing basis. And some of the projects we have seen have had not only once but several price increases while the project has been discussed and planned, between planning, conditional to it confirmed in our order backlog. But it is also fair saying 99% of the customers we see around the world is ongoing customers. It's customers we have had for decades-long and it's customers that will play a role in this energy transition for the next decades to come. So therefore, it's about finding solutions to overcome and mitigate some of those cost-ins right now. So we cannot say we can avoid it. But I can also say we can document to customers how that price and cost increases are arriving.
Okay. And then I guess, the second question, if you don't mind, is there any sort of -- in regards to U.S. activity, has that completely slowed down relative to your expectations at the beginning of the year? And would you expect for that to shift into next year, just with what's happening with potential PTCs and extensions around this?
I think you're right in that. And I think we have been quite clear about that. We believe the U.S. market is an attractive market. It will be medium to long term. I think in the short and medium term here, everyone are waiting exactly the same, as you just mentioned, what will be the final outcome of the PTC structure. I think it has a material and a deciding factor for individual projects to be planned. We have seen a number of projects going into the order backlog also in the last quarter. So we are actually quite pleased to see in a time with a lot of uncertainties that there are still orders being both executed and planned. But there's no doubt that a higher volume and a higher market demand is, right now, fully relying on a final conclusion on the PTC structure for the coming -- and I will say, the coming years, which is also, I think, most of you probably have seen the proposal that are currently being discussed in the U.S.
And to add to that point, just in the negotiations or the conversations that you're having, even in the event that a PTC was put into place as in would there be a decent size lag before any ramp-up in orders? Or could they actually quite have a material impact if it was to be announced? What's the sense when you talk to your partners on that?
I think it's always a little bit, you can have projects where you have almost now permitting on approval already, you're just waiting to get the PTC confirmed to some extent, Ajay. So that's probably a minor part of it. The bigger volume of it will be something that is ongoing. And that probably has a lead time that more leads towards the 6, 12 and 18 months from now. But I'm pretty sure it will unfold pretty quickly in such a development market. It's probably the most developed market from a transparency point of view in the U.S. So capital is there, projects are there. And if there is a political will and intent, then we will see projects coming pretty quickly to live.
Our next question comes from the line of Rajesh Singla from Societe Generale.
Maybe if you can share -- a few questions on the margin side. Can you please share the offshore margins which you had during this quarter, if possible? Because I think offshore had a very good activity in this level -- in this quarter. And the second would be on the Service segment margins. I think somewhere, you had put a comment that less cost-out in Service contracts. So what exactly that mean, if you can elaborate a bit on that?And the third question would be on warranty provisions. So are there any indexation in those warranty contracts? Because it seems like your warranty cost increased because of cost inflation. So are we doing anything to include cost indexation clauses in those warranty provision or warranty contracts?
Yes. So if we can start with your last question, so on the warranty provisions, if there are any indexation, overall, in the service agreements, as they are very long term, there are definitely indexation in the contracts. Otherwise, it's very hard to enter into a 20-year or a 25-year contract with any customers. With what -- the warranty provisions, I think, is slightly different as they are normally -- the warranty is shorter term. And I think in this case, it's very clear what it's referring to is repair and upgrade that we have to provide to the customers. So I think it would be a bit strange if we would come with the cost inflation towards the customers in that case. Sorry, now I forgot -- I get so excited on...
Offshore margin.
Yes. Offshore margins, sorry for that. Offshore margins is what we have said earlier. It is, in general, lower margins compared to the onshore. And as you see here in the quarter, it has a higher activity level. So I think you can draw your own conclusions on that. And then it was -- sorry?
Yes. So Service segment margins that you had mentioned about less cost-out in service contracts. Can you please elaborate that?
Yes. So the cost out on the Service side, I mean, the focus continues. But I think it's also fair to say in this environment, probably have some cost-out that is mitigated by some cost-in because of the cost inflation that we are faced with. But from an efficiency point of view, in terms of how we act and what we do, that is continuing. And you will see fluctuations on that. It's not that the program is not in place and that we are not having the focus in any shape or form, that continues. But you will see changes in any given calendar year and quarters on the cost-out. So that is no change from previously.
Okay. Maybe I have one follow-up question on the general industry. So the wind industry has seen so many challenges in the past from auction system and then to tariffs and then COVID and now the supply chain issues. So is it possible to highlight like some of your key learnings from this challenge which you -- which could probably help you in mitigating these kind of effects in the future?
First of all, one thing, Rajesh, is you don't have to feel pity for yourself when you sit and doing the job like this because you just have to get used to that it seems to be a lot of headwinds. But on the other hand, it also shows in such a large energy transition that we are finding ourselves in, we are, of course, learning from it. But I think one thing you can never underestimate is also how well the industry and also together with customers stand on this one. Because all of us appreciate we are building a renewable energy system for the next 30, 40 years. And that, of course, has to take some bumps and some hiccups under the way. This is one of them. And if I look at it, this is not a particularly Vestas, this is not a particularly wind industry. And it's definitely not a renewable energy particularly issue. This is a worldwide global supply chain issue that hits the world right now. And therefore, I'm sort of saying here, we are learning. If there are some inefficiencies internally, we are taking that on the chin and we are learning that from day-to-day and month-on-month. We can always improve, and we are doing that. But then on the other hand, if we have not been able to mitigate what we just shown and shared in this quarter, we would never have gotten to a point where we were able to deliver projects in more than 50 countries and a revenue of more than EUR 5 billion. Guys, that shows the resilience and also the commitment from that many colleagues of Vestas. So we take that and we work hard with it on a day-to-day basis, Rajesh. But as I said right now, probably the most important thing is people have in Vestas at least to feel that they have done a good job but not always being treated fair in what we are faced with as headwind.
Okay. Maybe one last question from my side. Earlier, you mentioned that you have to take care of the customer relationship and you have been in discussion with them for mitigating the impacts. So are they getting good offers from other people? Like it seems like everyone is suffering in this kind of environment. And when we go to the customer saying that this is like the cost I'm incurring on this kind of project and need to escalate the prices, so what kind of pushback you are seeing from the customer which makes you say that we want to maintain our relationship with the customers? I don't think that they would have any other avenue to go for or buying from any other vendor, right?
If somebody can get turbine without any of the price increases we have just experienced, Rajesh, my general invitation to such a customer discussion is then he should buy the wind turbines and the solution from somebody that hasn't experienced any price changes. They don't exist around. So therefore, I will just sort of say customers are super sophisticated. They generally look at all what comes in to be priced under their renewable solutions. So we don't have that level of lack -- or lack of sophistication in our customer base. So this is in -- for many customers, it's a part of a global partnership and relationship. And they do their own allocation of capital based on also the discussions we have. It's long foregone when customers only had one partner to deal with. So therefore, competitive industry, and we are doing -- still doing well in it and trying to do and improve also under the circumstances.
Our next question comes from the line of Katie Self from Morgan Stanley.
I've got two and then just one brief clarification. Just to check, I think it was in response to Ben's question earlier. Marika, you did confirm, right, that the impact from the steel price increase will be more material next year, given that you prebought a lot of the components for this year right at the start, so just to clarify that. And then my two questions are just kind of big-picture ones for Henrik or for Marika. If we step back, I think a lot of people are trying to understand the same thing, where just qualitatively, when you look at all of these different issues, freight cost, availability of freight, components, raw materials, what has been your biggest headache or your biggest surprise? And I know it's very difficult to put numbers on it. But if you just had to kind of rank those over the last 3 months, when you talk about an acceleration in these headwinds or surprises from these headwinds, what has really been your biggest headache? And then kind of related to that, I was also a bit surprised to hear the conviction around the supply chain issues persisting for another 4 to 5 quarters. I think even when we were on, say, the Q1 results call, there was hope at least that a lot of these issues would be resolved by the end of the year. So at that point, there was just a few quarters of visibility. What gives you the conviction now that it's going to persist for another 12 to 18 months essentially?
If I start with the clarification, yes, you are correct in how you interpreted my answer to Ben. So that's very clear.
And in terms of the visibility, I will say here, Katie, when we stood there, you always have a little bit of hope that it stabilizes. What has happened in the last quarter is it doesn't stabilize, it actually turned worse. And it turned worse in both committing and timing and scheduling. But it also turned worse in even some of the very, very high prices you've already seen. And I know it sounds like that at least the degree of price increases are reducing. But when still key components and other things still increases with 20%, 30% in this quarter, then it is a difficult one for us. So I think right now, probably the worst part of it, Katie, is the instability. It's not having the visibility for anything in a quarter of either the deliveries or also the pricing of it. So I think that's the part. Then of course, we will here also listen to particularly the transport logistics industry. We will listen to the raw material and component supplier, and if you look at that, whether it's technical or key components. And then of course, we will hear them say that it probably takes another few quarters to work through some of the waiting backlog that has now been created in the world. And that's why we are saying it will last, if not all '22, then at least many quarters into 2022 before we see an ease of the current instability. So that's the only -- and I think we are not predicting that because we don't predict on behalf of other industries. But listening to some of those industries, where we are a valued customer, that's what we are told from them.
Our final question for the day comes from the line of Claus Almer from Nordea.
Yes, also a few questions from my side. The first question goes to, surprise, surprise, the orders and the ASP. So if we're going to look at the orders you are taking in today, does that meet your contribution margin threshold you had pre COVID-19? That would be the first one.
Yes, Claus, we take the orders and that comes to an average. And therefore, orders we have taken in the quarter follows the pricing and the costing we have done throughout that quarter. And again, here, we have accepted those. They also comply with what we will accept into our backlog with the profitability levels we see and have as a threshold.
So just be sure, so that's the same threshold you had pre COVID-19? Or have you actually lowered your threshold?
No, we haven't lowered. We haven't changed any of that. We have exactly the same robust process of saying yes and no to things that goes into the backlog. And what we have also said today is just that what is then in that backlog can never be fully 1:1 hedged.
Right. Okay. So that means with also ASP going up, should we expect the second half next year that from a delivery point of view that things look more, let's call it, normal?
I wouldn't, Claus. I wouldn't dare talking about looking more normal in a quarter like this. We are trying to do what we can, and therefore in that sense, executing on it. It's priced in as good as we can. But right now, I will say we need a little bit of stability before we can conclude on that one positively. But we see some of those headwinds right now continuing, Claus. So I don't think it's a day where we start talking about the positives in it because there hasn't been any positives in it so far.
Fair enough. Then coming back to the EUR 50 million in provisions, I just want to be sure, this EUR 50 million, are they linked to the two quality issues you had last year? Or should we more see the EUR 50 million linked to the overall provision you are doing every quarter?
I think it's clear, Claus, that the two cases, that we are addressing as we speak. And clearly, you see that on the consumption. They are relating to those two cases. And it is the cost inflation, again even if it sounds a bit boring by now, but it's just a mere fact.
Just because EUR 50 million out of the EUR 250-plus million of provisions you did on these two specific cases, now that's a quite dramatic increase at least, so it's just really behind my question.
Yes, I understand what you're asking, Claus. And I mean, we haven't changed the methodology, that remains. We see -- we follow the same principle as we have always done. If you're asking if it's any new cases that it's relating to, no, it is the cost side of that we are addressing. And it's a very big number of blades that we are addressing as we speak.
Okay. And then just a final question. As to order intake in Q3, your unannounced orders seem to be on a low level, at least what we have seen in the past. Are you more hesitant to take in orders? Is it just timing? And what about the pipeline? That will be my final question.
If the conditions are right, Claus, we will take the order on the spot. But I will just say right now, any process we are having, and you will appreciate that, if I was sitting and allocating capital for 30 years' project right now as a customer of Vestas, you would have a lot of variable parts that needs a lot more focus. So generally, all the projects are taking longer right now. And I think in some local markets -- Claus, you have even seen in some EU markets, where there has been suddenly changes to the legislation trying to mitigate the rapid increase in electricity prices. That is not good news for any planning of such long capital projects. So right now, it just takes a little bit longer. And of course, come on, on a day like this, we are cautious about the projects and also the order intake when it comes to pricing of it. If you price it wrong right now, it ends with a loss-making project.
Fair enough. As you also said many times now, Henrik, that there's a lot of volatility and lack of visibility. That could also indicate we should be a bit more cautious or conservative in our expectations for order intake in Q4, excluding whatever happens in the U.S. Is that a fair assumption?
That's a fair assumption. But then on the other hand, as I said here, and you will appreciate that, it is also really from both a medium- and a long-term perspective, I don't think the outlook and also the capital commitment into this industry has ever been bigger. So it is about now having a bit of patience with decision-makers on the capital allocation and the project permitting, which I think there are a number of countries that are actually doing acceleration of the permitting, acceleration of the auction. And Germany is not -- or is just the closest example of that as we speak, Claus.
But I think just as a final comment, Claus, I think consistency is very important in this environment. And we haven't changed methodology in terms of what we think is a good project to accept or not. Because if we don't have the consistency, then we're into a completely different situation. So that is the strength that we have right now.
Thank you so much. Look forward to seeing many of you over the coming couple of days. So thank you. This concludes the presentation of Q3. Thank you.
Thank you.