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Vestas Wind Systems A/S
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So good morning, everyone, and welcome to this second quarter report.As usual here, it's me and Marika and the IR team.So let me start, of course, with the usual disclaimer statement and then straight into key highlights.So a strong order intake in the quarter of 3.8 gigawatts, 43% increase year-over-year, leading to an all-time high order backlog. EBIT of EUR 259 million, corresponding to 11.5%. And good -- or I will say very good Service performance both on the growth side with revenue growth of 17% in -- organically and also a solid EBIT margin of 25%. The free cash flow, negative as a result of a backend-loaded activity level in the year, as we previously have talked about. We also launched a share buyback program of EUR 200 million in order to adjust the capital structure.And on the outlook, within our previous outlook, we have narrowed the outlook for revenue and EBIT based on improved visibility.As usual then, I will talk to the orders and markets, make more details on the financial. And then I will come back to the outlook.So starting with the orders then. As I said, 3.8 gigawatts in the quarter and an average selling price of EUR 0.71 million per megawatt. So this is an increase of 1.14 gigawatts or 43% year-over-year. The order intake was broad based across 21 countries, led by the U.S., and again a good testament to our global reach.We look at the ASP then. We see overall stable levels observed in the recent quarter. Of course, now it's the second quarter sequentially that we see a stable ASP. As usual then, we should remember that ASP is influenced by a number of factors: geography; scope; turbine type; and of course, the uniqueness of the offering. And on that topic of the scope and turbine type, the trends that we have seen before continues, which means more 4 megawatts, 3, 4 megawatts compared to the 2-megawatt platform; and also the trend that we continue to take more order on power modes. One specific thing, fairly small in the quarter, but I can mention, we had a repowering order on around, I think, 200-some megawatts with very limited scope. And if we adjust for that theoretically, then the ASP would have been EUR 0.72 million.As I said, the trend on the platform continues. The demand is shifting towards 4-megawatt platform. And we can see here that, in the first half of this year, we've taken orders of 4.1 gigawatt on the 4 megawatt and 1.3 on the 2 megawatt. We continue to invest in technology and to release new products based on our platforms. And in the quarter, we received our first order for the V150-4.2 MW, a product that will increase the production more than 20%. And of course, we are really pleased by having a broad range of 3- and 4-megawatt products that covers both a broad range of markets but also different wind condition. The same thing of the 2 megawatts platform, we continue also to upgrade this platform. And in the quarter now, we have installed the -- both on the rating and the rotor sizes. And in the quarter, we have installed a prototype of the V120.If I then talk a bit about the market environment and start with the Americas region, where we see strong order intake in U.S. and Latin America. Looking first at the market, continue to see a very strong U.S. demand driven by the current PTC cycle. We also see tariffs impacting the costs of wind energy projects. And here, of course, we are working on a range of mitigation strategy utilizing our global footprint and the full value chain. Latin America, as we talked about before, probably the continent were -- was first with auction. And here we expect auctions in the second half of this year in Argentina, Brazil and Colombia.Looking at delivery then, was down 41% in the first half of this year compared to last year. And U.S. declined primarily due to the PTC components of last year but to also a lower activity level in general across Latin America. Order intake, strongly up, 100% up. And see -- and here we see continued high levels in U.S. and Argentina, while the increase primarily is driven from markets in Latin America such as Mexico, Bolivia and Panama. If we look at the external forecasts for market volume, and these are MAKE numbers, we see a continued strong development and growth in megawatt or gigawatt in the region, primarily driven by the U.S. and a stable Latin America market.If we then go over to EMEA or Europe, Middle East and Africa, also here good, high activity levels. On the market side, we are, of course, pleased that Europe has increased the 2030 targets, I think we discussed the possibility of that last quarter, from 27% to 32%, which is good more long-term or mid-term sign. A bit closer to the home, we have a new energy agreement here in Denmark, which we are really pleased with. Also a bit closer to here, we see Poland is restarting auctions from being a market that's basically came to a standstill.New markets coming up in this region, Russia such an example. And in the quarter, a 900-megawatt auction was completed, on top of the, I think, close to 1 gigawatt previous auction. And we continue all our plans on localization after the successful auctions. We'll also see some positive moves outside the European area. South Africa, that of course has been a market basically frozen for the last 2, 3 years. And we now see that PPA has been awarded through the last auction and also then new auctions being planned for.Looking at delivery then, down 20%, 1.2 gigawatts, mainly then the decline in the U.K., partly offset in France and Italy. We continue to see solid levels of delivery in Germany, although a decline compared to last year. Order intake, 2.3 gigawatts, 16% decline, here very much due to Germany where recent auctions still not have materialized in firm and unconditional order, on the other hand then compensated by solid development in order intake in the Nordics, market like Sweden, and also in Mediterranean countries like Italy. Here if we look at the external forecast up to 2020, we see a fairly flat forecast. I believe that there could be some upsize on that once the target, the increased target in Europe is calculated, maybe a bit after 2020.In Asia Pacific then, quite a lot of changes in the market, you can say, still early days. So China has decided to move from a feed-in tariff system to auction in -- starting in 2019. And very little today known the -- about the auctions, so very early days to have a firm view on what it means. Of course, we are hopeful that a well known -- auction system is well known for us and that we will get more focus on lifetime IRR. In India, as we said before, we've seen targets being increased to 2022, from 60 to 80 gigawatt. However, execution in those auctions still timing uncertain. And of course, very recently, we saw some slippage in planned auctions for this year.We'll also say positive signals in the broader Asia Pacific and where we see development in new or semi-new markets such as Indonesia, Philippines and Thailand; and also good outlook for Australia, with 650-megawatt expected auctions in Q4.Delivery then up considerably from a very low base, of course, so 448 percentage points. Here a strong development for us in India, Australia and Thailand. Order intake, down about 30% in the half year. This is very much due to the China order intake we had in Q1 of last year, but on the other hand we see continued success in, as I said, a broad scale of markets outside the big 2 volume drivers.If we look at the external outlook, again you see solid growth close to 30%, of course volumes very much expected to come from India and China, but as I said, we see good activity levels in several markets outside the 2 volume drivers.So that leading then to an all-time high order backlog of EUR 23 billion, which is a sequential increase of EUR 1.4 billion: on the turbine side EUR 10.2 billion, an increase of EUR 0.9 billion; and on the Service side EUR 12.8 billion, an increase on EUR 0.5 billion.And it's also been a busy quarter for our joint venture with MHI for offshore, starting with the product side. And we have the largest turbine in the world. And we have now received the certification for the V164-9.5 MW turbine. Also, on the sales side, a firm and unconditional order, Borssele III and IV; and also a preferred supplier announcement of 900 megawatts in Taiwan. All in all, both a solid track record and a solid pipeline of 5.1 gigawatts of unconditional order and conditional orders -- preferred supplier agreement.So with that, I hand over to Marika.
Thank you, Anders.So what you can see here in the income statement is obviously a reflection of what Anders have gone through here in terms of what have impacted us in Q2. So you can see revenue which underlines the high activity level that we have spoken about earlier. You see a positive change of 2% year-over-year. Gross profit is down 14% in absolute numbers; and primarily due to the margins in the Power solutions segments, i.e. the turbine segment. The SG&A continues to be well under control in this -- also in this quarter and is -- and continued to be a very important factor for us.And you can see here EBIT is down to 11.5%, still double-digit margin in Q2, so down 1.1% year-over-year. So clearly less impact on the EBIT than what you see on the gross profit here in the quarter.If I continue on leveraging on the SG&A. Remember here that you see a rolling 12 month, so year-over-year Q2, you see an increase in percentage but still well and tightly controlled. You see that it's in absolute numbers the last 12 months rolling is below last year. So obviously, as I said earlier, a very important factor and again something that we keep well under control, have been and continue to do.Have a look at the good Service performance that Anders was alluding to earlier. We don't only have a very good order backlog for the Service business. We also have a growth here, 11% year-over-year, and organically in constant currencies 17%, so a very good growth also in this quarter; and on top of it, a very solid, good margin also in this quarter, actually approaching 25% here in the quarter. So very satisfactory.The balance sheet remains strong and also provides the flexibility that we have been looking for, and that's how we have managed the balance sheet. The net interest-bearing position is above EUR 2 billion and obviously negatively impacted by the increase in net working capital, which I will come back to on a later slide. And also the cash flow from financing activities. We see an increase that we actually have planned for, in particular for the inventory, by EUR 82 million here in the quarter. Solvency ratio remains in the boundaries. So we are delivering here in Q2 of 25.9%. And also remember here that we did -- also obviously impacted by the working capital but also the fact that we did a share buyback starting of year 2018.The change in net working capital. Over the last 12 months, you see the increase in inventories that we have talked about earlier. And that is well offset by the prepayments over the last 12 months. And you see the same trend here over the last 3 months, according to our expectations. And here the inventory increase is also offset by prepayments and payables. So it just underlines the high activity level that we have in the company. And we said that, Q2, we will also continue to use the balance sheet and therefore increase the inventory, but also bear in mind that we feel comfortable with the fact that we will reduce the inventory due to high activity level in the second half of this year.If we have a look at the warranty provisions and lost production factor quality, very important for us. And we continue to deliver reasonable and good levels. So we are in this quarter consuming less than what we provide for. We are now providing approximately 1.5%. And you see also that the lost production factor continues at a stable level below 2%.The cash flow statement. We are generating cash flow due to good performance in the business. And obviously, the net working capital, as I was alluding to earlier, you see the negative impact from that. And the free cash flow before financial investments is negative EUR 173 million compared to negative EUR 158 million last year. And the cash flow from financing activities is obviously driven by the dividend payment that we made in April of this year.If we have a look at the total investment. It's in line with last year, a slight increase also reflecting on the high activity level in the company. So we continued to invest in primarily modes, as we have said earlier, and also capitalized R&D., so no change in sort of the overall investment pattern that we have. Also bear in mind that we are investing in the local content requirements that take place. So we are investing in India, in Argentina and also in Russia.The capital structure. We continue to be within the thresholds. So if you look at net debt-to-EBITDA, we're well within the boundaries being in negative territory. And the solvency ratio is still within the boundaries, but obviously impacted by the share buyback early this year. We are now pleased to announce a share buyback program up to EUR 200 million, which means that we have adjusted the capital structure or will address the strong cash position to a total amount of approximately EUR 400 million this year. And we have also done the dividend, and the dividend policy remains the same. So we are -- have a policy of 25% to 30% of net profit, and that remains.By that, Anders?
Thank you very much, Marika.So then let's go to the outlook for the year. And as I said, we have narrowed our outlook compared to previously: on the revenue side, from EUR 10 billion to EUR 11 billion to EUR 10 billion to EUR 10.5 billion. And we expect the Service business to grow. I should say that we continue to see a good activity level overall and also confirmed by our strong order intake in Q2, but however, as you know, we are a project business and we have also seen some delays in some large orders. As you might have noticed, a large part of them came late in the Q2. And consequently, revenue recognition on those projects will not materialize -- will materialize later than we originally expected.On the EBIT margin, previous outlook 9% to 11%, and now we see 9.5% to 10.5%. And here we expect the Service margin to increase compared to 2018 (sic) [ 2017 ] and actually then compensate for the lower part of the guidance for the revenue. Otherwise, no changes.Total investment, with the same definition as before, at approximately EUR 500 million. And free cash flow of minimum EUR 400 million.So with that, we move into Q&A, but before we do that, I just want to take this opportunity to remind you that we have a Capital Markets Day coming up then in end of November, 29th of November, but hopefully, we will talk to each other earlier because we also have Q3 in November.So with that, let's go to Q&A.
[Operator Instructions] And the first question is over to ABG and Casper Blom.
My first question relates a bit to the guidance that you give for the full year or reiterate for the full year. If we kind of deduct the first half of the year from the mid of the guidance range, we are looking at a second half revenue will be up by around 60% or so compared to the first half of the year but where the margin will only be up marginally. I mean normally we would expect some operational leverage on the back of higher activity. Is it fair to say that, sort of roughly speaking, that operational leverage is now being eaten up by the price pressure really starting to hit the P&L? That's my first question.
Yes, thank you, Casper. The -- your assumptions in terms of lower leverage in the second half is obviously right, looking at the guidance that we are providing right now. And it's fair to assume that you see a higher portion of the low margin or the price pressure impact that took place in the latter part of last year that we haven't had time to mitigate at this point, that that will take place -- or that those will be ToR-ed in the second half of this year.
And just to follow up a bit on that. I mean it's roughly 12 months now since we started seeing the price pressure, and it's been hitting a year later. Is it then also fair to assume that we will kind of see the impact on the P&L the next 12 months before we'll sort of go into a more of a stable phase again?
No.
I would say that you will see a mixed bag. So you will see impact from the price pressure, but you will also see an impact from the stabilization on the prices. But also bear in mind that the longer lead time you have, obviously the more mean you have to mitigate some of the shortfalls that you saw on the prices and therefore the margins of the projects.
Okay. Then my second question, you did touch a little bit upon it in the slide where you mentioned tariffs, but could you elaborate a bit on your thinking about the higher steel price in the U.S., depending on the assumptions you do? I guess a windmill in the U.S. that has become 4%, 5% more expensive. Do you think that's something you can mitigate through higher prices?
Yes, I think -- I mean, first of all, of course, I have to say that, I mean, as you all know, it's a very fluent situation. So it's, of course, something that wouldn't change -- say, change daily, but fairly fluent. And of course, that also makes it it's very hard to predict. But of course, we are continuously trying to assess the situation and look at the potential impact and also then utilizing our global footprint and the procurement options we have with that in the entire value chain. But based on the current estimates, and I must point out estimates, then -- and what we've seen so far, our production costs could increase up to 1.5% for the group in 2019. But I stress then: could increase and up to. And as I said, it is a very fluent situation. We are, of course, monitoring this both when it comes to steel specifically but, of course, also these different waves that is currently implemented and under discussion. And of course, we have a number of mitigation actions, especially on the component side, since we to a very large extent has a dual sourcing strategy.
Okay. And just to be absolutely sure here I understood: The 1.5% higher production costs, I mean, you are referring then to the entire group, not just the U.S. market, so basically a 1.5% gross margin decline. Or the...
That's correct. The 1.5% is referring to the total group.
We are now over to Kristian Johansen of Danske.
Just a clarification on your -- the answer you just gave. So the 1.5%, is that excluding the mitigating actions you're working on?
That is, as I said, could increase up to. And of course, we are working on mitigating actions.
Good. That's quite clear. And...
And again I want to stress that, I mean, you all know that it's a fairly fluent environment to judge.
Sure. That's clear. Then my first question is just on the orders and the exceptional high level of unannounced orders. Can you just elaborate a bit on what has driven this and what we should expect going forward?
Yes. I think -- I mean, as I've said, I think orders are a bit lumpy, of course, in the quarters and so also on the unannounced side. So I mean there is no sort of real conclusion to draw from level of unannounced order going forward. It will continue to be lumpy, no specific market that sticks out.
All right, fair enough. Then in terms of your backlog and the delivery schedule. So we've now for quite a while seen this trend of continued increasing order backlog. While deliveries for many quarters declined, now we are seeing a bit of growth. Can you just help us sort of understand when will this continued increasing backlog really materialize into substantial deliveries growth? Will this be towards the end of the year? Or do we need to get into '19 before we will see that kick in?
We have said that we'll meet, not being specific on at what point, but this also depends on the scope of the different project that we have. So if we have an EPC project, we're just following the requirement. So there we can actually take revenue as we deliver the project, but we don't get the megawatts until we have fully ToR-ed the EPC project, which is obviously different then from our supply and installed project. And it's also different from a supply-only project. So it's I cannot give you an adequate timing because it depends on what type of projects we have in pipeline.
We're now over to the line of Akash Gupta at JPMorgan.
My first question is on megawatt under completion and inventory on balance sheet. Obviously both have gone up quite significantly year-on-year. And the question I have is twofold. One is that what sort of milestone do you need to occur. Or what -- how much cost do you need to spend on your project in order to qualify the volumes of that project into megawatt under completion? And then if you can explain this EUR 1 billion increase in balance sheet inventory year-on-year, how much of that is in the U.S.? And how much is rest of the world? That's question number one.
Okay, so if I understood your question correctly here. And you're right. Obviously, and that's what I said earlier, we are building inventory. We also see a trend going forward that, that, simply because of activity level, will be reduced here in the second half of the year. And when it comes to megawatt under completion, we cannot -- until the project have been fully ToR-ed, you don't get the megawatts out of inventory. So that is a little bit the same answer as the one that I gave to Kristian earlier. So it depends on a little bit the scope of the project, but the only sort of -- the confidence we have is obviously that the inventory we're building up now is what we also see a consumption for in the second half of the year.
Okay. And the second question is on gross margins. And you said previously that you hedge gross margin in orders as soon as the project becomes firm and unconditional. Now I -- if I look at your order intake, significant orders are for 2019 deliveries. So for those orders that you already have in backlog for '19, is there any risks from increased costs of components? Or they are all hedged as of now.
Well, a little bit was what Anders was alluding to earlier. And what we have said, that for this year, we have been well hedged on the steel in particular. And then you had the different waves, since we're talking about the U.S. specifically, that came pretty late. We also have the third wave that has not been implemented, and we don't know. And to answer your question a little bit different than a little bit what I said earlier: The longer lead time you have of the project, with the global footprint that we have, the more mitigating factors we can implement on the different projects that are to be ToR-ed.
Actually the question I have is not on steel but more on the other components like gearbox, like bearings and all. Well, basically let's say if you have signed a firm and unconditional order for next year. Has the pricing for that has -- been agreed? Or that can change later on. That was my question...
I think that is very specific negotiation, but if you have a firm and unconditional order, I mean, then you have agreed on everything. Then it's up to us what we can mitigate internally, but it doesn't have anything to do with the customer.
We're now over to Dan Togo of Carnegie.
I would like to get some clarification on the Service margin here because what surprised me and, I guess, also the market and including yourself as you are guiding up here now is the Service business. What has, so to say, surprised you? And what has performed better than you expected just when we left Q1? That is the first question.
Yes -- no, but -- I mean basically, as -- I mean, when we left Q1, of course, we had a very high EBIT margin in the Service business, as we also talked about then; on the other hand, fairly modest revenue growth. And we have seen that pattern before, which is more explained about when we do the activities. So if we have less activity, the margin percent goes up. But now again in Q2, we're, of course, really happy that we may -- are able to combine both a solid revenue growth and a healthy and better-than-expected margin. And the reason for that, as we say, it is that we have talked about it before, that of course a big part of the focus in the Service business is to work on the cost-out programs that we have. And we see very good traction on those cost-outs, again of course partly because we actually get more and more efficiency and, of course, also helped then by the good quality.
And the 25% that you have reached now in the EBIT margin, is this what we should be looking for also for second half? Or will that be some sort of, say, catch-up to what you had in '17? Or how should we look at it?
Yes, I mean what we said is that we expect margins to improve compared to last year. And we don't give any exact margin forecast for the Service business, but on the other hand then, we have of course narrowed our EBIT range for this year.
Okay, good. And then Anders, you were talking about ASP stabilizing. Still we see both a year-over-year decline, and we also see a sequential decline here. So I understand that -- I mean you argued to this somewhat when you referred to stabilizing. Is that we go back to sort of, say, the sequential year-over-year annual declines of, let's say, small single digits? Is that how we should look at ASP going forward?
When I looked at -- when I said stabilizing, of course, I referred to the sequential stabilization of ASP that we now then seen for the second quarter. And I think it was -- if you remember, last quarter, when I got that question, I said that I would like to have some more sequential quarters where we see a stabilization on the ASP. And that's, of course, positive, that we see that now. Then of course, you're right. I mean, if we compare it year-on-year, that's of course where we see the big impact on the ASP reduction. I think it's also to remember -- important to remember what I said, that if you look at just ASP, everything else equal -- I mean let's say the price is equal and you just look at ASP, because of the technology, ASP will, of course, mathematically continue to go down both from the fact that we have a change in the platforms. We sell more 4 megawatts, for example, than 2 megawatts. And also by the power upgrades that we have in the platform so we get out more megawatts per platform. So purely mathematically. Then of course, you will see an ASP decline even if the -- even if, in that example, the pricing element is constant. So that -- and I think that we have a view that we should go back to that kind of situation where we actually had before with a fairly -- with a modest sort of decline in ASP but then compensate by technology and cost-out, is of course our hope. But I will not really forecast what the competition will do going forward because I have limited visibility on that.
We're over to the line of Katie Self of Morgan Stanley.
Just one actually because my other ones have been covered. I wanted to ask on the shift to IFRS 15. I see that it essentially added about EUR 30 million to EBIT in the first half of this year. I just wanted to know how we should think about that into the second half? Does that reverse for a sort of mutual impact overall? Or is there something different?
I mean I -- we're just following the standard. And you will see that some projects have been shifted from '17 into '18. And you will see the same trend, depending on type of projects, that they will shift from '18 into '19. So it's very hard for me to predict exactly what is -- will be the impact in the second half. Because it depends on what we will deliver.
We're now over to Claus Almer of Nordea.
A few questions from my side too. Anders, say, after Q1, you said the pipeline have also looked very promising. And you were definitely right. Can you put some color to the Q2 level? Is this a new level, or is it more a quarterly variation? That will be the first question.
Yes -- no, but of course, as I said before, orders, by nature, are lumpy. And of course, when we get orders firm and unconditional within the quarters and within the year, that is lumpy. It will continue. We expect it to continue to be lumpy, so I will not give any outlook on order intake, but of course, we are really pleased with the order intake in Q2. And I -- and of course, it reflects a high activity level in the market overall and also that we have a good competitive position in order to capture those orders.
Okay. And then my second question goes to this possible higher input cost -- or production costs next year, as you mentioned, which obviously you mentioned 1.5%, which is the negative part of the equation. Maybe it's also possible to get a color on what savings do you see both internal and external.
Yes -- no, we're -- of course, we continue on our operational excellence program and that we have been running now at least for the fourth, fifth year. And I mean we -- for competitive reasons, we don't really go out with a percentage or a number. And on that I can just say, as I think I've said before, that our target on efficiency and cost-out are in the same -- or the same actually, same magnitude as we have targeted previous years. And so we see there are also opportunities. And then of course, we have to make sure that we also realize those opportunities during the year.
So that should also mean you should more than be able to mitigate these higher production costs given what you've said in the past. Is that rightly understood?
I mean I don't think you can say it like that. I think you have to say that you have a baseline and then you work on that cost at that baseline. And of course, that's -- we break that down, that program down in a 2-year rolling and a 1-year rolling. And we actually try to find the candidate on a 3-year basis. So I mean that's an ongoing activity on the whole cost base based on the baseline at the time that we set the targets, of course. So if you have movements in that, I don't think you can sort of come to the conclusion that you can eliminate certain parts. It's if the -- if the cost then goes up, then of course you have to do more than your previous -- theoretically we have to do more than your previously anticipated because your baseline has moved.
Okay, then I will try to ask in another way. So your comment about 1.5% increase, was that a try to talk to the consensus number for 2019 maybe being too ambitious, although you're obviously not guiding on 2019?
No. I mean our intention is just to put as much information forward as we possibly can and say in the market. And of course, it's a well-known situation that there are tariffs, that we see in steel increases on prices in the U.S. And of course, we -- it's an attempt to us to qualify, as I said, what it could mean on a group level, so nothing else.
We are now over to the line of Mark Freshney of Crédit Suisse.
Can I please ask on the nature of the contracts in the United States? My understanding is that some of your competitors are waiving steel pass-through costs provisions. Is that something that you've done on a lot of your U.S. orders, i.e. are the contracts indexed to steel and other general costs as well? And secondly, just on the turbines under completion, on my estimates they've gone [ above ] 7 gigawatts, which is well over twice what they've been in a -- on a full cycle basis. You spoke about managing blade mold investments, i.e. using the balance sheet to avoid doing extra CapEx, but would we ever be -- would we ever expect that turbines under completion number to come down and the inventory and the prepayments to also come down in tandem?
Okay. So long question. If we start with the inventory and the megawatt under completion is basically again what I said. Your number is obviously correct. It's around 7 gigawatts. And what we have, we are not disclosing the number. And obviously, if you want more information, you can get that. And when it comes to the type of contracts and when we sort of recognize the revenue is again dependent on the type of contracts. Did I understand it correctly when you asked about the correlation with the megawatt under completion and inventory? Or...
Well, my point is, will we ever see a destocking? Will we ever see you pulling that inventory number down?
Yes, yes, okay, yes. And that's what I tried to say earlier. So if you look at the use of inventory, we obviously are planning for a higher activity level in the second half of this year and that -- we will definitely see a reduction of the inventory. That is part of the planning process, but what I have also said to be very specific is that, as we've been extremely good at managing the overall working capital, and you have seen a significant flush out at the end of every calendar year for the last few years, you will not see that same trend because we're also obviously planning for next year. So we are avoiding capacity investments to make sure that we can actually invest in capacity, especially for certain markets. And that also -- is also what we've done, when you look at Argentina; Russia, as I said earlier; and also India.
Yes. I mean, if I should give some also on the steel question, I will say that, I mean, as you've seen and as we said, this year, in '18, we have no significant impact on the margin from steel. And of course, that means that, with different methods towards our suppliers, indexation towards customers but also hedging, we have mitigated that. So I can't really comment on what our competitors are doing or saying, but that has been our method. How that will work going forward will, of course, all depends on the competitive situation in the market. And -- but there, of course, you, we should also remember that we all know it's a very competitive market, continue to be competitive markets, but we are not -- we are not selling a price per turbine to our customer. We still sell or customer takes a decision on the IRR that they get in their business case with different turbines. So of course, price is one such factor. Another way to compensate it theoretically is, of course, then to have a more -- turbine that produce more, so to speak because that's, in the end of the day, how we are judged compared to the competition by our customers.
We're now to the line of Alok Katre at Societe Generale.
Alok Katre from SocGen. A couple from my side as well. I was just thinking about how the dynamics of costs and margins within the inventory or, let's say, the megawatts under construction are. I mean you're obviously all producing today to manage capacity, so you get the benefit of fixed cost absorption, but then it also means that your inventory and production [indiscernible] value at today's unit cost, which is higher than, let's say, what you would perhaps have 12, 18 months down the line. So I'm just wondering how we should think about that in the context of effectively, when you convert these megawatts under completion into sales, what sort of margins would kind of get reflected into your P&L [ over the next ] 18 sort of months. So that's question number one, and then I have a follow-up also.
Okay, so if I understand you, if I -- just to verify if I understand you correctly is that, with the activity level we have in the megawatt under completion, if that's beneficial for us. So if it's a difference on the margins, depending on that. And there I can only confirm that it's not, that it's not having a positive or a negative impact on what will be delivered going forward.
Yes, I was just thinking. I mean whatever inventory you build up is based on today's unit cost dynamics, but say if theoretically you wouldn't build up the inventory today, you would have to of course invest in capacity, but then your cost dynamics on, let's say, production for 2019 done in 2019, for instance, obviously perhaps is going to be more different and even lower than what you would have today. I mean I'm just trying to -- whether the inventory and megawatt under completion that you have in the -- in your books today -- given the fact that it's based on current unit cost dynamics where the pricing actually is obviously going down, I'm just wondering how we should think about those dynamics...
I mean it's very, very hard to give you an exact number on that. What I said earlier is basically, when you receive the order, you start producing, dependent on what -- depending on the time line in between when you produce and you deliver. Obviously, the longer lead time you have there, in between, you can actually influence. And then you have the scope of the project potentially would have an impact, but you also have which turbines are used for the project. So you have a lot of means that you work on to sort of improve the overall margin for the project. And I will say time line is an important factor, but also as Anders have alluded to before, we have rolling activities to further improve the efficiency internally. We obviously have the global footprint that we have, which means that our sourcing capability on a global basis is very good. So it's very hard to, say, give you a generic answer to when and how. And then you have -- depending on customers and so forth, it -- that -- everything depends on the negotiations you have.
Okay, okay, fair enough. Maybe I can take that offline. And the second question, from perspective of housekeeping as well. I mean, could you outline what your exposure to Turkey, Argentina and Russia is in terms of -- obviously of sales and backlog, where it's applicable? And how are you managing the risks over there not just currency but also in terms of counterparty risks and so on. Essentially I'm trying to understand how well ring-fenced your backlog is. And how confident are you about the business given the uncertainties that we have?
Okay, I'm not sure I -- I mean, if you look at Russia specifically, we only have 50 megawatt in Russia that is firm at this point, so obviously not a big impact on us today. But what are you alluding to on the markets here?
Well, really Turkey, Argentina and Russia in terms of, given the uncertainties, how are -- let's say, how -- the contracts that you've structured, how do they sort of help you hedge from things like currency or even counterparty sort of risks; or the fact that, okay, maybe the risk that projects may get delayed or not done? That's -- sort of that is what I'm trying to understand.
Well, I think you maybe -- I mean we can definitely give you a rough idea on the announced firm order in these different markets. And as I said, our firm order intake in Russia so far is 50 megawatts. So when it comes to the security of those projects, I mean, remember that in Argentina, in Russia, in many other -- all those countries, actually our counterpart there is our normal global customers. And of course -- before we take an order firm, of course, we have a good, solid process of looking at the security on our customer sites. And it's in several of those markets the PPAs that are issued by the government are in euro- or dollar-denominated currency. So nothing specifically that we feel nervous about.
And just to underline. I think it's also important, I mean, we are global. So the level of complexity on a global basis is obviously high, and that's the environment we're managing. And then you -- so far, we've proven that we manage complexity in a very good way. And that's also how we can mitigate some of the complexity, is the overall global experience that we have.
Sure. And could you quantify the backlog for Turkey and Argentina?
That, you have to take [ secondary ].
I don't know straight off my head. I mean we'll have to get IR getting back to you on that. Turkey, now I get the information, is 0 in the backlog, so -- and Russia was 50s. And then we have to come back on Argentina, but it's not, as I said...
Significant.
Significant that I have it on top of my head.
We're now over to the line of Philippe Lorrain at Berenberg.
I've got 2 actually. The first one, perhaps just on the Service business, looking at your 25% margin in Q2. I was just wondering if there will be like any kind of mix impacts that would be helping a bit this quarter because, in Q1, we were mentioning that there was a bit less of Service revenues. So I guess the performance-linked revenue in terms of your installed base might help sometimes. So what's the impact here on Q2? And how should we expect that to actually evolve in the coming quarters?
Yes, okay. So I mean what we have said on the Service business is that you will see fluctuations, I would say, in-between the quarters. And it depends also obviously with the higher quality you postpone some of the activities and therefore the revenues. So that's part of the lumpiness. On the profitability side, as Anders was alluding to earlier, the main cause of improvements is actually the cost-out and the efficiency we're gaining in the business having a big impact. And that's obviously we're using the same -- some of the same methodology as we have used for the V2G over the last 5 years.
So if I understand you right, actually you just mean that in Q2 there was no particular mix effect helping the margin.
No, correct.
Okay. And the second question is on the U.S. And I'm just asking if any -- if you are subject to any of the U.S. tariffs on imports from China for any of the products that you've got in the portfolio.
Yes.
Yes -- no, of course, there is tariffs in -- on components in these different waves. And of course, some of those components comes from China and -- but as I said, we also have on components a dual-sourcing strategy. And as I've also said, it's fairly fluent when it comes to definition of which components are included and which are not. So it's something that we, of course as part of the mitigating actions, are looking at, but on turbines as such, we produce in the U.S. So I mean we have the full-fledged production in the U.S. of both turbines, towers and blades. So it's more individual components in those turbines. Otherwise, we have a full-fledged production locally in the U.S.
Okay, great. And if I understand you as well, that means that, all the impacts that you will see on the import of components from China, that can mitigate also part of this 1.5 percentage points increase in production costs that you are hinting at before mitigation.
Yes, that's of course part of our action plans to see how we can mitigate that. And part of those actions is, of course, to reroute supply of components from other countries then.
And we're now over to the line of Sean McLoughlin of HSBC.
On the buyback, just your thought process around the sizing of this and if there's any intention of offering more in 2018.
I mean we haven't been explicit on what is a satisfactory level for us when it comes to the overall cash position, but obviously as we are issuing another share buyback of EUR 200 million, that reflects then how comfortable we are. But also bear in mind that we did another share buyback at the beginning of the year, and we have also paid a dividend. And what we have said is that we will come back on how we will address the capital or the cash position in the latter part or the second half of the year, which have turned out to be Q2. So at this point, there is no additional plan for share buybacks. We're happy with announcing the EUR 200 million at this point.
And can I just return to the Service margin? You had a 9 months margin, if I look back over the last 3 quarters, of 25%, so you are consistently hitting this very high level of reliability and satisfactory cost management. I'm just understand -- trying to understand, what can actually happen in the second half to lower this margin? Why shouldn't we be thinking of a 25% margin going forward?
Now as I said, I mean, we are really pleased with our performance in services. And part of our outlook now is, of course, that we see a better margin than previously, but we will not guide for a specific margin on the Service business.
Okay, we now go to Martin Wilkie at Citi.
So Martin from Citi. You mentioned that you did get a repowering order in the quarter. I think a couple hundred million. There's some quite bullish forecast by some market participants about the number of wind farms in the U.S. that are approaching or exceeding 10 years and therefore might see a repowering impact or potentially repowering orders over the next 2 or 3 years. Is that something you're seeing through the conversations with some of your U.S. customers? And can we expect, the amount of repowering as a percent of your total, that you could -- actually quite a big step-up over the next 2 or 3 years?
Yes, I mean we definitely see high interests for repowering opportunity in the U.S., which of course is driven by the current PTC structure. So if you -- I think it's, if you [ change ] 80% or something like that repowered, then you can qualify for the new PTC scheme, so to speak, which makes it attractive for some customers, for sure, then dependent on, of course, what turbines they have; how much you can do, how much you can repower of that; and what you can reuse. So definitely an area of the market where we have taken some more orders and also an area of the market where we'll continue to engage with customers.
And just technically from your perspective, does that come as part of your Service business given that it's not completely new in turbine? Although, it could be in some case, I guess. Or would that be part of your Power solutions business? Would you see this as incremental megawatts in Power solutions if you were to have some of these repowering orders come through?
Now from an accounting point of view, we view it in the power solution business because, of course, in the examples in the U.S. it is to a large extent not the turbine as such that you reuse in most cases, I will say. So it is to -- it's, of course, a fine definition, but the way we see it is that we account for it in the power solution part of the business.
We are now over to Pinaki Das of Bank of America Merrill Lynch.
This is Pinaki from Bank of America. So I had a couple of questions. The first one is just trying to run some numbers between your H1 and H2 metrics. And I was just looking at the Service versus Power solutions. And it came upon me that, if I look at the deliveries, the ASP in your delivered volume is around EUR 1 million per megawatt. And we kind of know that, last year, you had EUR 0.8 million as an average for the year, so clearly you've been probably hedged to -- looking at your guidance for the full year, you'd probably be delivering at -- pretty much close to EUR 0.7 million to -- around that level for H2, which is to be in line with your order intake. But what I wanted to ask was, even if I assume certain amounts on the Service revenue or sort of Service profitability, you'd still get to like 8% to 9% EBIT margins on turbines in H2, just from your guidance for the full year. And that is actually at an ASP which is pretty much in line with the low point of ASPs in your order intake. So I just wanted to feel I -- and there's probably already some input cost effects as well in there, but clearly obviously you've said that you've hedged '18. And I just wanted to understand. Like this 8% to 9% on turbines, is it quite a sustainable level now even with the low ASPs? That's my first question. And I'll come back with a second question.
Wow, that was a long one, Pinaki. So if I sort of dissect some of it, of your comments in the question. And then the rest, you'll probably have to dig into more details with the IR team, but if we look at the deliveries and the higher value, if you look at the average sales price, that's also again dependent on the timing of the revenue recognition. So you would have an EPC impact also on that average number. It's still the average ASP that you see in the order backlog, I would say, is the relevant part at this point. And I think it stands around EUR 0.74 million in the order backlog. Then if I understand part of your question again, in the second half, that's also a little bit what I said earlier. The second half, we're not expecting the same leverage on an EBIT level despite the overall high activity level from a revenue point of view simply because you see some of the impact of the price pressure we saw at the end of last year, though some of those orders are coming in here in the second half.
Okay, cool. And then, as the second -- well, the second question I just wanted to ask was -- this is more sort of theoretical/broader question. It's that -- and maybe Anders would be the right one to answer it. It's when you're going through your discussions now, given that wind has become much more competitive now and we are kind of seeing it in the volume of orders as well, are you feeling quite comfortable about the overall volume outlook of the industry given the dynamics of costs and climate change and more awareness? So are you comfortable with the volume outlook in the market? And do you see actually it expanding over time, as in some of the forecasts? How much are you comfortable on that? And secondly, just related to that same question is that, given we've seen some price stability in the turbine pricing in the recent quarters, are you seeing more rational behavior in the industry?
Yes. I think, as I hopefully conveyed during my road trip in the regions, I mean, we see a high activity level. We also see positive signs that on -- probably as we discussed before, that -- on the back of lower price for wind, that we've seen now recently actually targets in auctions and also renewable energy targets is coming up. And I will say that it's, of course, still fairly early days, but we definitely see this year a high activity level on the order side. And I will say from a megawatt point of view we will probably also see an increase in delivery this year compared to last year on delivered megawatt. A bit more midterm then, as I said, which of course are these targets, I come back to Europe, where I think it is very positive that the renewable energy target has been increased. So I mean the overall activity and overall targets on renewable energy on the back of a more competitive proposition for wind, we definitely see. And on the pricing side, I mean, again I think it is, of course, encouraging now that we sequentially for the second quarter are seeing a stable ASP. And I think, if you look at the competitive landscape, I must say I'm really pleased with our performance in Vestas, when it comes to balancing, to deliver a decent margin in this industry, which yes, again I just stress that I'm really pleased with our performance. And hopefully, that also then actually underpins a -- more stabilization in pricing going forward, that we clearly see profitability being challenged on several of our competitors' front. So I think that's, of course, again a positive sign. And then we, as usual, have to see how it pans out. So with that, we go to the last question.
I mean, can I just have a quick follow-up, actually? You've started to give a new disclosure in the segments about supply only and supply and installation and turnkey. Could you give us a little bit of color around what sort of price per megawatt difference do you have between these different types of contracts that you're reporting now in your new reporting format?
I think that we are not disclosing the difference. We have just highlighted that it is a difference. And we want to keep that competitive position, as we have the ability to deliver all kind scope project.
Okay, our ultimate question for today is over to the line of [indiscernible] of One Investments.
Actually in going back to the inventory level that you reported. I will -- and putting this together with your comments on the outlook and on the projects that are on hold and, I mean, some slowdown in terms of deliveries that will impact the revenue line. I was wondering. If we look at the impact at year-end on fixed costs, in the first half of the year, if you had any material ones that affected the gross profit margin in terms of fixed cost absorption which should come again in the P&L in the second part of the year. And also, on the inventory reduction that you mentioned, if I -- if you see this project [indiscernible] impacting the inventory sort of reduction, meaning that we should -- that the reduction could expand further even after the fourth quarter of this year, so also in Q1 or first half of next year.
Okay, so if we start with the inventory. What I said is that we have a buildup. And we alluded to that already in Q1, that we will continue build up inventory here in Q2, which we have all the visibility on and as again offset by prepayments. So the firm order intake principle remains. And we are also saying that we see -- in the second half, considering the activity level that we have, that we will see a reduction of inventory. And some of the inventory, we have a longer lead time simply because there is a higher demand. And we are using the balance sheet for that, so obviously some of the projects could move into and will move into Q1 of next year.
Okay, but coming to the first part of the question. Is that any effects that you -- positive effect that you had in the first parts of the year. So looking just at -- on costs, on fixed cost absorption that you had, which actually helped the gross profits line in the first half of the year. Or the effect was not material at all.
No, we don't have any fixed-capacity cost impact in the first half. And we don't expect that in the second half, in either direction either, in the gross margin.
Okay, with that, I would like to thank you for calling in. Thank you for your interest and questions. And I'm sure we will meet at least some of you during the next 2 days.So thank you.