Vestas Wind Systems A/S

SIX:VWS

Earnings Call Transcript 2020-Q3

[Henrik Andersen, Group President & CEO]

Good morning, and welcome to this Q3 of -- from Vestas. And then, of course, it's nice to present Q3, and it's also especially considering a week after that we spoke last about the offshore last week. So if we jump straight to it, key highlights of this quarter is that it's the highest-ever quarterly deliveries we have had despite what is going on in the world around COVID and the whole challenges we see there. We will go through that in short moments. When we look at the revenue, revenue was up 31% compared to Q3 '19. We had net revenue of EUR 4.8 billion and an EBIT margin before special items of 8.6%. We had another solid performance in Service, so organic growth in the quarter of 14% compared to Q3 2019 and ended with an EBIT margin in the quarter of 28.6%. Especially also when we look at the sustainability, we continue contributing to the Paris Agreement target. So with what we now have installed fleet at the end of Q3, we displaced 165 million tonnes of CO2 on an annual basis. This is part of also the key indicators we will share with you going forward because we think it's important as part of the sustainability journey we are on. Last but not least, you've seen that, we discussed that, but I'm sure also today, we will have more questions and comments on the Vestas and the MHI announcing the strengthened partnership as of last week and also how we plan to embark into a stronger position in the offshore wind market. But let me first jump to the current COVID crisis, so to say. And let me start by absolutely reaching out and thanking our customers, our nearly 26,000 employees and colleagues around the world and our partners through suppliers and others that have contributed to the full both supply chain and value chain in the Q3 of this year. I think it is absolutely outstanding how we have all seen that people have come together and cleared the deliveries we have had. It is with the clear priority to health and safety first; but secondly is in terms of the business, it is with the continued focus on the business continuity of total Vestas operations globally. And I think here, we can say in this quarter, it is really well done to everyone here. We also see now that we are in -- some will say we are in the acceleration of Season 1 or Phase 1 in a number of continents. And for some of us, I think we in countries using the expression that we are in the second season of COVID-19 with a generally, still-the-same challenges about how we can move across countries and markets freely under the current quarantines and closedown of borders. When we look at it, we can, as of today, say that, yes, we are having our manufacturing footprint and we're having the supply chain up running. And of course, we constantly monitor that. And generally speaking, in the quarter, we have had days where we have had challenges. And then we have some of the transport logistic challenges we have seen. However, I think most importantly here is we have managed to deliver 12.2 gigawatts so far in 2020. That is up more than 50%, and it is a testament to everyone that we, by end of the first 9 in this year, have done nearly 14 gigawatt of manufacturing and shipped assets. So takeout of this slide is really thank you to everyone involved, and let's keep that both attitude and focus for the remainder of the year and especially also for the remainder of the challenges from the COVID-19 crisis. We then go to the third quarter order intake. We ended the quarterly order intake of 4.2 gigawatts, which had an ASP of EUR 0.73 million per megawatt. I think here, when we look at it, order was taking across 22 countries, really positive over that we, in the third quarter, have managed to do that across that many locations. And here, where we have had, it's slightly lower, 11% lower than Q3 in 2019. But please be aware, Q3 2019 was heavily influenced by the U.S. order intake in that quarter. Having said that, we have seen in this quarter U.S., Brazil and the U.K. were the main contributors to the order intake in Q3, and we'll come back to that a little later with the breakdown. When we look at the ASP, remained underlying stable when we look at Q3 here. And correct for what has happened on the FX, ASP would have been EUR 0.75 million and again here always deviating from what location and turbine type we are using. But in this quarter, again, underlying stable and positive for us when we look across the full value chain of Vestas. When we look at the order backlog, we are now at EUR 34 billion. We had a combined increase year-on-year of EUR 1.1 billion despite a negative FX impact of approximately EUR 700 million. We saw the wind turbines coming slightly lower, EUR 14.6 billion, especially because we have had the high deliveries in the quarter balanced off against Service, where we had an increase of EUR 3 billion year-on-year, ending at EUR 19.3 billion. So again, a very robust and healthy backlog to work with. When we go a bit more into Power Solutions, we have now installed 123 gigawatt across the global operations. We are in 82 countries and, as I said, 165 million tonnes of displaced CO2 emissions every year from what we have installed so far. But I think the Q3 '20 highlights, especially here, we talk a lot about short term, but we also should focus on what are the underlying megatrends. And one of the underlying megatrend, I think, has been highly illustrated in this quarter. We have seen the EU Green Deal get more and more traction, getting closer and closer to country action point as well. We have seen South Korea, Japan pledging carbon neutrality by 2050 and not least China by 2060. None of these sort of statements and none of these sort of ambitions will add anything else than positive to the underlying for renewable energy. When we then come to lit here and now on the Q3, we have seen the pipeline builds for U.S. '21 deliveries with close to now 1.5 gigawatt of order intake. We've also seen now the first PTC qualifications that looks towards '23 and '24 projects. And I think here, as we have discussed in the previous quarters, the visibility for customers and the visibility for us in terms of how we will look at capacity and opportunities in -- after year-end '20 has become much better for both of us, and therefore, we are seeing those discussions being ongoing also for future years. When we then see in Europe, we are -- and in Asia Pacific, we are very positive over the, first of all, increasing activity levels. And here, we can say U.K., Poland, Vietnam and China are some of the main contributors to the green arrows seen below in order intake. And then as you can see, we generally have a very, very high activity across the delivery type in all regions. That lead me to think more about the Service business. First of all, we have now reached 108 gigawatts of onshore turbines. We have the 19 years of average duration on new contracts signed, which is, again, very positive for us, and we deliver that across 75 countries. Big highlights from the quarter is that we took the Viking order in the Shetland Islands of 443 megawatts at a 30-year service agreement. We have increased, again, the long-term commitments in China with plus 15-year service agreements. And then we have secured 0.75 gigawatt of multi-brand service contracts across different geographies and platforms. I would just highlight below in the Service fleet that when you look at the regions compared to Q3 2019, we, of course, really appreciate that when we look at Americas, we are up 29% in gigawatt on the Service from what was 35 to now 45 gigawatt a year later, very positive. When we then look at offshore, and I think it's fair saying the effects of the offshore quarter is probably a little bit overwritten by our announcement last week. It shouldn't reflect from that or take the action or attention away from that we have 5.6 gigawatt installed, more than 1,230 turbines. When we look at our Q3 2020 highlights, we are completing and progressing in the supply chain in Taiwan, which is positive for, again, working closely with customers and our sort of local requirements there. When we look at the floating, we are -- again, Windfloat Atlantic is fully operational outside Portugal's coast and also connected to the Portuguese grid. And then we have the installation and commissioning of the 731 megawatt Borssele project, which is, of course, ongoing, and it's with the V164 turbines of ours. Other projects in progress you can see below. And that's highlights from the businesses. So I'll hand over to Marika on the financials.

[Marika Fredriksson, Executive VP & CFO]

Thank you, Henrik. If we have a look at the income statement, I think that is a fair reflection of what Henrik already described to you. We see a very strong activity level in both the Power Solution as well as the Service business. And you see the revenue is up 31% here in the quarter. Gross margin is down 4.1 percentage point, and that is, again, impacted by the logistical challenges that we have and some supply chain bottlenecks that you have seen previously, and that is obviously further amplified by the COVID-19. Also remember that Q3 of last year, we had a reversal of the inventory write-down in Romania that positively impacted the gross margin. EBIT as a consequence is decreased, and that is again driven by the lower gross profit that you see here. SG&A cost continues to be well under control, and we're certainly leveraging the SG&A, and that is obviously a focus area for us. Depreciation and amortization, excluding the impairment, increased EUR 27 million year-over-year, and that is primarily due to the introduction of new products. And we are on 1 percentage point down compared to Q3 of last year, down to 5.4% here in Q3. Service business continues to deliver a strong revenue increase. So we are up 14% here in the quarter and, as I said earlier, obviously, is a reflection of the higher activity level that we see. We have a margin of 28.6% in the quarter, so fairly similar to last quarter and as well as Q3 of last year. MHI Vestas revenue in the joint venture is EUR 580 million, and that is up 27% from Q3 of last year and, again, planned for as the activity level is higher. We have a net profit that is positive EUR 30 million here in the quarter. The change to net working capital is, I would say, positively impacted by the decreased level of inventory. And I think everyone recall that we are utilizing balance sheet to accommodate the high demand that we see and the high activity level that we see in the market right now and, therefore, a positive development of the net working capital here in the quarter obviously having a positive impact also on the cash flow, as we will speak about later. Cash flow is a good impact from the operating activities. So you see we are delivering EUR 611 million, an improvement with EUR 161 million compared to last year. And you also see a positive change in the net working capital. All together, we managed to deliver a free cash flow of EUR 546 million. And the net interest-bearing position is EUR 1.6 billion, so obviously a constant focus on the cash discipline within the company. Total investment continues at a very stable level compared to last year. And also remember that we have further optimized the platform and the focus, and that focus remains. So a very good development and expected development on the CapEx here in Q3. Warranty provision. Here, you see that we are providing more than what we consume. We have consumed EUR 62 million here in the quarter. LPF is having a slight increase here, and that is a consequence of the extraordinary repair and upgrade level that we spoke about in the last quarter. Capital structure. Net debt to EBITDA is well below threshold. We are negative 1.1, and the liquidity position remains very strong. And we have close to EUR 2 billion cash at hand. Henrik, I leave over to you.

[Henrik Andersen, Group President & CEO]

Okay. Thanks, Marika. And with that, on the outlook 2020, very much remains so on revenue, still work with an outlook of EUR 14 billion to EUR 15 billion for the full year. Service is now expected to grow minimum 7%, which is a slight adjustment from approx from last quarter. When we look at the EBIT margin before special items, we are saying 5% to 7% for the full year, where we now say Service margin is expected to be minimum 25% from, again, approximately in the last quarter. And on the total investment side, with what we are seeing now, we say it will be below EUR 700 million for the full year. I will also point everyone to the bullet -- sub-bullet #2, which is that due to those circumstances we're in right now with the COVID-19, we will just say and highlight on the outlook that if it comes with a normal or higher uncertainty than under normal circumstances for this time of the year. So with that, thank you so much. And I will just hand over to Q&A. Hello, operator?

[Operator]

[Operator Instructions] Our first question comes from Kristian Johansen from Danske Bank.

[Kristian Tornøe Johansen, Senior Analyst]

So my first question is regarding operating leverage. So obviously, you see very substantial growth on deliveries. But looking at the margin in Power solutions adjusting obviously from the rehearsal in Romania last year, it is a very minor increase. So can you speak a bit about how the incremental margin works when you are delivering these many projects? And along that note, when we look at your order intake and into next year, it seems obvious that you will have a geographical shift with lower volumes in the U.S. and more volumes elsewhere. So how will that impact margins?

[Marika Fredriksson, Executive VP & CFO]

Okay. So if I start with your first question, Kristian, on the margin side, I think we have highlighted several times that we're obviously growing very fast. And that obviously takes some time before we get the leverage from the fast growth. And that is, for obvious reasons, further amplified due to the COVID situation. It doesn't make it less costly, I would say, to grow as fast as we're doing. But there are certain parameters that sort of make up for the difference. I think you mentioned one of them, and that is Romania, compared to Q3 of last year. We also have a higher provision for warranty. That also makes up -- I think, it's around EUR 53 million here in the quarter. And obviously, even if we're performing extremely well on the Service side, simply the growth in the turbine segment has an impact on the overall profitability. And then, as I said, the logistical part is a further challenge for us, and we have -- I think it's a direct cost of around EUR 15 million related to COVID. So that's why you don't see the further uptick. And then on the order intake side and the composition for next year, obviously, we're not sort of guiding for next year. But I think it's fair to say that further optimizing, getting further efficiency into our operations is the main focus right now as we're trailing at a very high level. So hopefully, the situation is at least slightly different from a COVID situation than what we see this year.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. And just to follow up what you said in the beginning that it takes time to get this leverage, if we then think about a revenue profile going forward, which will be more flattish, should that then allow you to get the time to optimize the markets to a high degree? Is that what you're saying?

[Marika Fredriksson, Executive VP & CFO]

I think, I mean, everything else being equal, the more predictable you are, the better you can perform on the efficiency side. I think in this environment, growing fast, having a COVID-19 situation, having shortage in transportation, having increases in cost for transportation obviously makes it more difficult to get the efficiencies in. But that is a clear focus.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. That's clear and understood. And then my other question was on the share buyback or the lag of share buyback, if you can elaborate on the decision not to announce share buyback.

[Henrik Andersen, Group President & CEO]

I think we like banks and we like investment banks, but we are right now trying to complete and conclude on a transaction where we issue shares. So let's work with the current substructure, and therefore, we haven't announced that. And therefore, you can probably also look into the year, there are no plans of share buybacks this year.

[Operator]

Our next question comes from Claus Almer from Nordea.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Yes, also a few questions from my side. So my question goes to the guidance or the implicit guidance for Q4. And I appreciate or I noticed the high uncertainty given the COVID-19. But if you look at the high end of the guidance range, both from a revenue and market side, you are implicitly guiding by 14.6% EBIT margin in Q4. That will be a significant improvement from Q3. And if you just look at the midsized -- mid-range of your guidance, which is actually based on lower revenue than we saw in Q3, you're still going to see a significantly better margin than in Q3. Can you put some color to what is going to happen with the margin in Q4? That is the first question.

[Marika Fredriksson, Executive VP & CFO]

I think you know, Claus, that Q4 is always a challenge for us because we normally have a high activity level. And also COVID, at this point in time, doesn't make it easier, and we also have the weather conditions. But I mean the methodology that we are using haven't changed, and you're absolutely right in your anticipation. But also remember that we see in the quarter, we see a more positive composition of projects in terms of profitability and location, so less changes needed. And obviously, that will enable a better performance in the quarter. But having said that, obviously, we don't see that Q4 will be easier in any shape or form. But I think the big question mark right now is obviously how COVID affects the market that we are present in. But I mean the big difference is really the composition of projects but also some initiative -- cost initiatives that we have especially on the logistical side that we expect to have a positive impact in the quarter. So those two would enable us.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

So everything equal, so the mix you are going to deliver in Q4, that's a more normal mix. So what we see in the backlog is also represented to what we have seen in Q4, there's no favorable projects to be shipped in Q4. Is that how I should understand your reply?

[Marika Fredriksson, Executive VP & CFO]

I mean you know the focus that we have had in further strengthening the stability in the ASP and also, as a consequence, delivering a better performance on our projects. And that focus is there. It's not that we see any extraordinary kicking in, in the quarter.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. That's also good. Then my second question goes to the inventories which in Q3, took a drop despite, at least your backlog and your order intake. Can you give some color on how your inventories are developing and how you're planning for 2021?

[Marika Fredriksson, Executive VP & CFO]

Yes, I mean the planning horizon of the inventory is obviously dependent on how the order intake perform as from now. The reduction you see in the inventory here in the quarter is according to plans. And that is also what we said at the beginning of the year, that we will build up inventory for a high-activity level at the end of the year. We're not sort of guiding specifically, as you know, Claus, for the inventory, but this is in line with our planning process. And then it remains to be seen how the order intake takes place here now in the latter part of this year.

[Operator]

Our next question comes from Supriya Subramanian from UBS.

[Supriya Subramanian, Equity Research Analyst of Industrials]

I have 2 questions. Maybe one is on the onshore market development, if you could give a bit of light on where do you see sort of offsetting markets coming up to offset the -- let's say, the reset in the U.S. market now expected over the next couple of years. And sort of as add-on to that question, in the recent few quarters, we've seen an increased traction in China. There traditionally, of course, it's been to be closed for the non-Chinese OEMs. Do you see a shift in attitude in customers there? Or is it just a function of the higher volumes in that market for this year? And my second is related to the offshore business. And here you had -- last week, you mentioned that there is an aim to reach market leadership position by 2025. But given that, let's say, Vestas right now is maybe a bit lacking in terms of the latest platform. And for 2025, market share -- orders need to start coming in this year or the next couple of years given the long lead time. So how do you see that progressing? And do you think that it is achievable based on sort of value R&D new product development phase?

[Henrik Andersen, Group President & CEO]

Thank you, Supriya, and I will try to address those. I mean in the onshore market, I think here, what gives us great confidence is that when we look down over the order intake, in this quarter and also the previous quarters, it comes from broad sense many markets. And as I said, when we walk through also the overview here, I don't necessarily think that some of the packages and some of the ambitions that comes out will potentially affect Q4, Q1 order intake in the coming couple of quarters. But the conversations you are seeing both across all countries in Europe, you see them across the countries in Asia, you see Vietnam, which has certainly become a large and important market for us, you see India making plans, and there, you can always see, yes, we would be sometimes disappointed with certain markets, then there will be a delay. But generally, also speaking, when then markets and countries get the framework right, then we generally see a release in it. And there is -- in some markets, we all know, both in Europe and in Asia Pacific, there is generally a backroom that needs to be caught up in the declared intention of either retiring nuclear coal. So we still believe Germany will move at some point in time. We still see India that will move sometime, and therefore, we are continuing our footprint to address those things. In China, we welcome the development. We will not sort of talk out of terms in either 3- or 5-year programs. We are making the right relationships. And then we are pleased to see that our region in China are making good progress in those relationships, and that has been, what you've also seen, confirmed in the quarter. We also fully appreciate that a lot of those markets are still being discussed from a political part and also what needs to be addressed going forward. And some clearly was part of the feed-in tariff ending in '20, but then I will also say some of the volumes and some of the plans in the programs in China, of course, will be attractive both for Chinese OEMs and also for global international OEMs. Your last point of offshore, I'll maybe sort of keep my answer a little bit convoluted insomuch as saying we are waiting for a closure of the transaction we have announced. We are doing it because, as we said, we aspire to have the clear leadership. And I know your question is probably framed more about when can we expect to hear more about our product road map in offshore, and we fully appreciate, with the current product we have out there, we will not have that leadership. So therefore, I'll wait to announce anything on the product road map until we have something to tell more about or also tell you about when we closed the MHI transaction.

[Operator]

Our next question comes from Akash Gupta from JPMorgan.

[Akash Gupta, Research Analyst]

My first question is on Blade issue. Since you reported Q2 results, we have seen 6 publicly reported cases of blade failures which is covering V110, V136 and V150 from relatively new turbines. I wanted to ask you if you have any visibility on -- this has not been a bigger issue than you initially thought. And how confident are you at the moment that we don't need any additional charges for these issues?

[Henrik Andersen, Group President & CEO]

Akash, thank you for that question. And I will say you know how both diligent and also robust we have our process and procedure around our warranty provision. So I don't think we have any reasons to believe here that we question what we have done in neither this quarter or previous quarters. We also know when we announced the extraordinary provision for the blade that I was looking ahead, not looking to the past. So we are right now addressing both those repair and upgrades accordingly to plan. We are doing that around the world. And therefore, we probably should and have seen some of those come to it as either examples are being discussed or related to that, that must be related to that extraordinary. And we will just say, guys, as a wind turbine is out there, it will always be exposed too lightly, and therefore, we address that under the warranty provision we have made, and we are going around that right now. It is not a surprise to us that we see some of those stories popping up more than we have seen in the previous quarter. And we also said that in last quarter, those are the things we now go through in the coming quarters when we repair and upgrade.

[Akash Gupta, Research Analyst]

And my second question is on onshore pricing. If I look at 9 months orders for you, that taking down 13%. And if you look at for large -- for western OEMS which are listed and we can track publicly, they are tracking down 17% for the first 3 months -- for the first 3 quarters of this year. My question for you is that can you talk us through what kind of visibility do you have in Q4 and maybe early next year. And is there any risk of pricing when onshore demand continues to roll over given impact from Green Deal or some of the U.S. plans or maybe China 2060 plan won't be in the near term?

[Henrik Andersen, Group President & CEO]

I appreciate your question in terms of visibility on the deliveries. We -- as you will say, we -- you appreciate we are keeping our guidance, and we do that in the order side, we're actually quite positive. I think we have had a very good quarter. We are positive to see when we sit here in the end of Q3 that the order intake we have had so far this year is actually quite remarkable considering how much there has been a stop and go both from our customers and the countries we are dealing with. So we are quite pleased with that. When we then look at an ASP, we are pleased with that. We call it stable also when you adjust for the FX. And then it is super important for us, again, to highlight, when we look at the ASP, the ASP is not having an equal sign over to profitability on projects because there will be local projects that will be turbine types that actually yields us the required profitability. Otherwise, we wouldn't have taken the orders. So we are confident in that. And when we also look ahead, we have a good backlog, and we are executing on that. And at the same time, we are taking new orders, as you would appreciate here with the order intake in the quarter.

[Operator]

Our next question comes from Dan Jensen from Carnegie.

[Dan Togo Jensen, Financial Analyst]

First question, on deliveries, almost 6 gigawatts here in the third quarter, quite impressive. How should we look, say, at the run rate going forward? I guess you cannot just take the 6 and multiply it by 4. What does it take, so to say, in the setup to reach this? That's one thing. And the other thing is, has there been additional costs involved in pushing through such a high delivery here in Q3? That's the first question.

[Henrik Andersen, Group President & CEO]

Dan, I will always say, I think, one day, when borders open, you should come and you should come with us to see that. But as I think doing math, like you just say, multiply by 4 is a little bit not thinking of that there are 26,000 colleagues of ours that deserves a big thank you today because you have now seen that we are delivering 59% more than we did 9 months ago when we take year-to-date. And that is on an incredible, large activity level already. So I think it's a fantastic development. When you then look around how the planning of that, there are all sorts of planning going on because when we originally entered the year, we knew we had to finish most of it before end of 2020. And therefore, this is really, really well done. And of course, a lot of people have made sacrifices to deliver that in the Q3. So you cannot do that, as you just said, just put a linear equation on a quarter like this. But on the other hand, I will just sort of say here, it's quite impressive in the environment we are in. It gives us a lot of confidence. It gives us also a recognition of that the attitude to the execution the organization have delivered in Q3, I think, is close to be outstanding because we have managed to do this despite all the other things that goes around us. So in that sense, we are getting more confident on our own ability to execute on the multi-activity level. And of course, we -- that gives us a strength when we look to the quarters ahead.

[Dan Togo Jensen, Financial Analyst]

Understood. Then a question on ASP. I understand that there's a negative FX impact here. But also, could you maybe give some comments, are there any negatives from scope? I mean you're selling less in the U.S. and from China as well, where you also said selling a bit more. That should also, in my view, at least have a negative bearing on the ASP. So any color on that, please?

[Henrik Andersen, Group President & CEO]

Neither from Marika and I or the rest of executives, we have no change of tone of voice. We think the ASP has remained stable, and we are happy and pleased with it. And that's a good indication of that. We also, in this quarter, have taken orders where we fulfill our own internal profitability requirements.

[Operator]

Our next question comes from Gael de-Bray from Deutsche Bank.

[Gael de-Bray]

My first question relates to the gross margin development. I mean I do appreciate that this quarter is a little bit exceptional in terms of the major deliveries you had to do in particular in the U.S. and that there are some ongoing logistical challenges and more so amplified by COVID. But the gross margin as well is clearly looking pretty low for a business like yours with flat pricing right now. So how shall we think about -- going forward, how shall we think about normalized gross margin for your business? What do you think is actually a normalized gross margin for the group? I suspect it should be between 15% and 20%. But look, I wanted to get your views on that. The second question I have is on the Service profitability. For the coming years, you continue to guide for margins of around 24% in Service, right? But this year's performance was much, much stronger. So what makes you think that -- beyond conservatism, what makes you think that margin could decline by as much as 400 bps going forward?

[Marika Fredriksson, Executive VP & CFO]

Okay. Gael, if I start with your question on the gross profit, I think it's very hard to say what is a normalized gross profit. We've been growing the company quite significantly for the last couple of years. And I think we also have been pretty clear on that -- to be sort of further increased the gross profit requires all the suppliers, all the logistics, everything to work pretty flawlessly. And I think in an environment we're in right now, it's very hard to identify what is flawless because we do a lot of changes continuously. I would say if you look at the activity level that we are providing, we're -- and also what we're delivering to the customers, we do that successfully, but it requires a lot and a very relentless focus for us. So I think it's fair to say that a normalized gross profit is nothing that we put forward at this point in time, but obviously, that is a key focus to further improve on the EBIT line as well. So I think that is what I can comment at this point in time. On the Service profitability, yes, it is a very high profitability that we are providing. We still think that the 24% you are alluding to is irrelevant as a measurement, but we will also come out with a new guidance for next year, as you're fully aware of, in February of next year. But the main reason for the profitability to be at this level is because of successful cost-out that actually have been higher than what we anticipated. So people have been doing a very good job on that. And it's also relating to the high quality we have on the products as such.

[Operator]

Our next question comes from Casper Blom from ABG.

[Casper Blom, Lead Analyst]

Actually, just a follow-up on the previous question regarding Service profitability. As I recall last year, there was a bonus payment to the employees in the Service business that affected the Service margin quite a lot in Q4. Would it be fair to assume something similar this year given that they've done really, really well so far this year? And secondly, on the warranty provisions, it can matter quite a lot when trying to model 2021 profitability, what warranty provision levels to assume there. Is it fair to assume that you go back to the historical level of 2% to 3%?

[Marika Fredriksson, Executive VP & CFO]

Okay. So if we start, Casper, with the Service and the provision of bonus, I mean we follow the principle that we have in place. We provide when we see a need for it, and that is what I will comment on that side. The warranty provision, I understand your question because, obviously, the 3% that we are having right now makes a big difference compared to last year. But the sort of the overall comment I will give is that we've been anything in between 1.5% to 3% on the warranty side. And we, at this point in time, have quite a lot of new products. And obviously, that is also related to the warranty provision that we make at this point.

[Casper Blom, Lead Analyst]

But you can't help us in any way whether if 3% also a fair level too, or 3.1% a fair level to assume next year? Or is it to be seen as a little bit of an elevated extraordinary level at the moment?

[Marika Fredriksson, Executive VP & CFO]

No, I cannot help you on that. We are having a lot of new products. That is a reflection on the warranty. As I said, we will also have a number of new products next year.

[Operator]

Our next question comes from Mark Freshney from Credit Suisse.

[Mark Freshney, Research Analyst]

Firstly, on the offshore business, just the accounting, presumably it will remain as a joint venture until you complete the transaction. And secondly, on that business, presumably when it was spun out of Vestas and into the JV, there was a separate administrative function within there, and the business slowly separated over time. I would guess that there'd be a big cost-out plan as you collapse the various functions back into Vestas Group. Can you talk about when we might see those exceptional restructuring costs, et cetera? And thirdly, I mean is it fair to say that a consideration for the MHI Vestas or buying out the JV is basically the amount of capital that would need to be put in to develop any future platform that may or may not be announced?

[Marika Fredriksson, Executive VP & CFO]

Okay. Mark, if I start with your first comment, I think you answered the question yourself. Obviously, the merger have not taken place at this point in time. We're waiting for the antitrust. And so far, the accounting proceeds as we are doing it right now and what you see here in the quarter for the remainder of the year or until we close the transaction.

[Henrik Andersen, Group President & CEO]

And the second quarter, around your sort of expression of collapsing structures and other stuff, I think here, we have spoken with, of course, our colleagues in MMO. The work is ongoing right now, not necessarily of making any statements upfront but actually finding out how should the setup be. And if you visit us in MOA both from a Vestas and an MMO perspective, we have, in MOA, as an example, 2 offices, 300 meters in between. So what we are looking at right now, how do we actually work with each other as potentially that as an entity rather than 2 separate entities going forward. So Mark, we will say something there when we have agreed with our new colleagues to the family, so to say, of MOA, and we expect and we work diligently through that as part of this planning process and fully awaiting the final go and approval from the authorities. I think on the capital, as we said -- or our CapEx, as we said last week, we will follow the normal pattern as we also did and we have done for MOA when we established MOA and there, we will come out and give you more guidance when we both probably close but also have something new to announce in terms of the product road map going forward.

[Operator]

Our next question comes from Martin Wilkie from Citi.

[Martin Wilkie, Managing Director]

It's Martin from Citi. Just a couple of questions. The first one is on the COVID cost. You mentioned about some of the direct costs you've seen in Q3. Obviously, since you reinstated guidance back in August, we do have more lockdowns in Europe. To just to give some sort of sense, will that impact your ability to deliver in Q4? Or are the measures put in place by government still enabling you to deliver as planned? Just to give some sort of sense as to whether those costs or difficulties in deliveries get more challenging in Q4. And the second question was then just on some of the initial 60% U.S. PTC or as you seen in the quarter. Normally, we've seen qualification orders coming in Q4 rather than Q3. Just to give some sort of sense, are you seeing the interest in 60% PTC for 2023 and 2024, is that above your expectations? Or just some comments around what you're seeing on that side of things.

[Marika Fredriksson, Executive VP & CFO]

Thank you, Martin. If I comment on the first one on the COVID cost, what we see as a direct cost relating to COVID here in the quarter is around EUR 15 million. I think you also heard us say before that we've been pretty strict in not using COVID as an excuse not to deliver. And that's why you see that we're actually managing the overall activity level in a very good way. I think it's also fair to say that if we would know exactly how COVID pan out here in the last quarter of the year, we would probably get some sort of a prize for that. So it's very hard for us to say. We're not planning for a smooth ride. We're planning to have some obstacles. I think it's also fair to say that in Q4. But what we do when we have back -- I mean the profile of the business is back-end loaded. And obviously, you're trying to do as much as you can as early as possible. And that's what we are in the midst of doing also in this quarter. But I have been saying that it will be in any shape or form easy, I don't think so, but we don't want to use -- get an excuse for the COVID for people not to deliver either. So I would say we're doing what we have done throughout this year successfully from an activity point of view.

[Henrik Andersen, Group President & CEO]

On the PTC orders, we are working diligently through that, Martin, if there is a -- it's a 15th of September cut-off of Q3. So if it comes in Q3 and Q4, it generally just probably is a good signal of the visibility for both customers, partners and us are increasing both for '21 and beyond. So therefore, I think that is the positive signal of what we have seen in Q4 -- Q3. And then we work, as you would expect, diligently to push on with further in Q4.

[Operator]

Our next question comes from Sean McLoughlin from HSBC.

[Sean D. McLoughlin, Associate Director of Clean Technology]

Firstly, just on the unannounced orders, I mean this came in at less than half of the average that we've seen over the last 4 quarters. I'm wondering, is this a more normalized level? Or have we actually seen a very strong demand for small order volumes in -- over the last 4 quarters. Any color here would be helpful.

[Henrik Andersen, Group President & CEO]

Sean, I would just sort of say, we don't and we won't have a principle of unannounced orders. So if it comes in one quarter, we -- generally, if it unannounced, and it's unannounced. And as you will see here, we're actually quite pleased with the activity level. We work diligently with it. But you can't put a sort of static one and so on and what happens and what doesn't happen. I think right now, what we are seeing is that the world, both utilities, large infrastructure customers, with mid-sized developers are, in many cases, also still trying to accelerate some of the opportunities in what we have and see around in the countries. So you can't put that as an equal or try to do that as a fixed number per quarter.

[Sean D. McLoughlin, Associate Director of Clean Technology]

Understood. And just on the previous point that Marika made about the COVID costs, and I mean you're kind of saying that there's uncertainty around COVID continuing for the rest of the year. You still have a very wide guidance range. And on the back of this very strong Q3, I mean can you give more color as to how comfortable you feel about upper and lower ranges of that guidance range?

[Marika Fredriksson, Executive VP & CFO]

I think I commented on that earlier. I mean we have the same methodology as we always have for any given quarter, and we work with different scenarios. What will make it very positive, as I said, if everything works according to plan, is actually the mix of the projects that we see for the fourth quarter and also some of the cost initiatives that we have that will kick in, in Q4. That would be -- make a very positive impact for us. But obviously, everything remains to be seen as we are in the midst of the quarter at this point in time.

[Sean D. McLoughlin, Associate Director of Clean Technology]

And thus far in Q4, would you say that the cost burden from COVID has remained at a similar level? Have you seen an improvement, or have you seen worsening?

[Marika Fredriksson, Executive VP & CFO]

I think it's -- I mean, obviously, it's very hard to anticipate because we are in the midst of the quarter. We have been very picky in terms of what we choose to have as a COVID cost. And we have been pretty similar in any given quarter this year. And I say 15 now here for Q3, and that is the indication. We've been at a similar level also for the previous quarters.

[Operator]

Our next question comes from Lars Heindorff from SEB.

[Lars Heindorff, Analyst]

The first is regarding the delivery of ASP. ASP, this quarter, you mentioned that FX had a negative impact. Just browsing through some of the previous presentations, I don't recall -- maybe it's my memory just fails me, but I don't recall you're talking too much about FX impact. Has it been particularly pronounced this quarter, the FX impact on the delivery ASP?

[Henrik Andersen, Group President & CEO]

No, I think we follow normal practice here. So if there is a material impact or there is an impact to it, both from an order backlog and also from an ASP side, Lars, we will make you aware of that. So there's nothing particularly outside that. And as I said here, commenting on ASP, we are actually quite pleased with the order intake and also the related ASP because, of course, we know the project profitability on it.

[Lars Heindorff, Analyst]

Okay. Secondly, regarding the warranty, the specialty warranty provision, you've earlier indicated that you are likely to use the EUR 175 million over a period of 3 to 4 quarters. I just want to get an update on that. Is that still the case or if anything has changed since we last spoke about it in Q2?

[Marika Fredriksson, Executive VP & CFO]

No, Lars, nothing have changed. So we'll see us starting to consume that in the coming quarters.

[Lars Heindorff, Analyst]

Okay. And then lastly, a follow-up on actually many of your previous questions, which is, again, regarding the margins and the outlook that you have for the fourth quarter. If you follow the guidance, lower revenue compared to Q3 in Q4, at least what you guide for, and yet higher margins. And you indicated previously that you've seen fairly similar impact from COVID so far this quarter compared to the third quarter. So it just come across as being a little bit weird, to be honest. And does this actually -- the margin that you now are guiding for, is that something that we can take into next year? And how does that stack up with the ambition of reaching the 10% margin overall by 2022?

[Henrik Andersen, Group President & CEO]

I think you're probably, maybe I would say, call it, the guidance we had, I think maybe I will just distance a little bit, Lars, with all aspects. I think we are executing on. We started the first quarter with some projects that were very low. We had the transparency on that profitability on projects throughout the year. And it is a project business, so you can't put a rule in saying if you then have an overweight of what we say that this is the fourth quarter that will make our guidance, then everyone can see we'll be more profitable in Q4 with the projects we're executing on. Then that is completion of that year, and it's the fourth quarter, and then we have a new project pipeline for the coming year. Generally, we work towards our midterm EBIT guidance of 10%. But we will give you that guidance when we are planning to reach that guidance. So if we can just break the couple of points apart, and life isn't that you can say then we have a phasing in 2020 of the 4 quarters, and then you pick the quarter, that fits that link. It's not that easy.

[Operator]

Our next question comes from Katie Self from Morgan Stanley.

[Katherine L. Self, Equity Analyst]

I just wanted to follow up on a couple of earlier questions around the Service margin and looking at longer-term development rather than just what we saw in Q3 or what when we think in Q4. If we think about the improvement over the last few years from around 20% in 2017 to kind of mid- to high 20s that you see now, I just want to -- I wonder if you could clarify, have you seen any benefit during that period from the targeted acquisition that Vestas has completed, like insights? Or has that development purely reflected kind of organic improvements around growth and contract tenure? And if it is purely the latter, when would you expect to see some benefit from those acquisitions?

[Henrik Andersen, Group President & CEO]

I think what Marika rightly said early on, we have had a Service business that is developing positively over it. It comes down because the -- both of the execution of what is in the Service business and how they execute on the Service contracts, which we clearly are very pleased with, and therefore, a lot of that comes from internal efficiencies. As we have highlighted early on, we are also on a journey in Service. We have made some acquisitions. They are fully included in what we have here. But as we also said earlier on, the next step we are doing in Services, we are also now investing in both the tools and auto, so what needs to be the tools for both the service technicians on-site that can drive further efficiencies out from the technology but at the same time also for running the Service business as a unit. That one we won't compromise. We're investing in this year. We're investing in next year in some of those. And then we will see some of our business units within the service organization going live during 2021 so in general here investing in a very, very good business with a very solid value proposition to our customers.

[Operator]

Our next question comes from Ben Heelan from Bank of America.

[Benjamin Michael Heelan, Analyst]

I wanted to ask on the lost production factor increase that you've seen. Is that pretty much all related to the higher repair and upgrade from the blade issues that were mentioned earlier? And then secondly, could you share with us what proportion of the backlog is the Inventors platform now?

[Marika Fredriksson, Executive VP & CFO]

Well, Ben, if I comment on the LPF, I think you answered the question yourself. It is -- you will see the LPF -- LPS -- or the LPF related to the overall blade issue that we have at this point in time. It will be a reflection of that.

[Henrik Andersen, Group President & CEO]

Yes. And I think on -- Ben, on this one on the inventors and the volume taking into that, it goes as we plan. You can see we are taking some of the orders. You can see the announcement coming there. We don't hold externally what we have as an overall order backlog from a new turbine or individual models, and we will also refrain from that. So -- but it's going to plan. And as you probably -- some of you noticed, we have it up as a test site, and we're following that. And it's -- yes, we're just pleased with that. If I could say that, Ben, probably is the last question. I don't know if there's a follow-up in some of the things we have set here. Okay. With that, we conclude this Q3 presentation and also Q&A. We look forward to speak with many of you in the coming days. And also, I suppose we will see and see each other on virtual media in what has now become the new normal. So with that, thank you so much for Q3.

[Marika Fredriksson, Executive VP & CFO]

Thank you.