Good morning and welcome to this release of Vestas' Q1 2022. As everyone, I'm sure have now appreciated with a different timing caused by, of course, the number of both special item one-offs and also the changed outlook. Suggest we go through, first of all, the performance and also the list of items that most significantly relates to the changed environment and also the worsening of the revenue environment directly connected to what has been going on in in Russia and Ukraine most recently. First, let us go to the key highlight for the quarter. We had an order intake of 2.9 GW which continued increasing in pricing.
That's leading to a wind turbine order backlog strongly of EUR 18.9 billion, as you can follow in our release. We had revenue in the quarter of two and a half billion. That means it's a year-on-year revenue growth of 27% despite those supply chain disruptions. We've also had that's leading to an evaluation of our business activities. We went through a strategic review, triggered of course, by these geopolitical changes, leading to both looking at manufacturing, but also the technology reprioritization in the offshore, which I think everyone will appreciate when we, when we go through it. On the profitability, it was hampered by the supply chain disruptions and those one-offs. Underlying, we had a negative EBIT margin of 6.2%, while reported margin was negative with 13.2%.
More details to come in both Hans and my presentation later. Then in Q1, we completed the two sustainability-linked bond issues, two tranches of EUR 500 million, with sustainability-linked bond KPIs, that was significantly oversubscribed in the beginning of March, in also what has since been a challenged bond market. If we go back and go into the business, I think the global business environment in some ways it speaks a little bit for itself. In other ways, I wish we might not feel that we had the right when we in Q3 last year said we think that the supply chain and the disruption will remain throughout 2022. I think we feel today that that is definitely right, and even it has worsened throughout Q1.
That doesn't take away with our priorities are still the same. Keep employee health and safety, keep the safety right at all the sites and all the construction sites we are working. It's a top priority. Then as a second priority, as we have kept all along, is to maintain business continuity. That is now and has been throughout this quarter, severely challenged in some locations more than others. I'm sure we can talk more about that. When we then look at it, if there is a positive to take away from this quarter is that the energy crisis that underlines the wind power's both criticality, but also importance to meet electricity demand, both in the short, medium, and definitely in the long run.
That is the energy supply that is so critical these days and being discussed at various, including highest political levels. We also see, of course, still the climate link, which is how do we lower the CO₂ emission over time. We saw the cost inflation and the supply chain disruptions. Some of it, yes, combined with now further COVID-related lockdowns, particularly in Asia-Pacific and particularly in China. That, of course, continues to impact timelines and also increase cost, with us trying to mitigate some of these ripple effects. The Russian government's invasion of Ukraine has worsened the global business environment significantly. That's causing negative ripple effects to global trade and also a cost inflation that seems to be in many areas unheard of previously.
Investors, we condemn the Russian military invasion of Ukraine, and we also withdraw from Russia in an orderly manner, which says, again, what we also said at our AGM in beginning of April. Some of that is pure reflection of executing on that decision-taking in beginning of April. We will give you more details, of course, of that from here. Here is the overview of market shares. I think this is just for information. In the investor presentation, it's the annual release with McKinsey. I think I will just highlight here, global onshore, offshore installations in 2021 came to around 103 GW. Out of that, Vestas keeps in 2021, 15.7%.
It also seems when you drop down and exclude China, then it was 47 GW in 2021, coming from 43 GW in 2020. Our market share has remained within the range of from 34.6%- 33.2%. I think most notable in this one is the top four OEMs still represents 85%+ of the installations outside China. Again, here it's normally one we share with you in this format. I think it's also just for having it as part of the deck of today. When we then get to Power Solutions, I think the overall here is really a quarter where we see increased pricing is the key factor for any value creation. That both in the short, medium, and long term.
When we look at it, we've had an increased order intake driven by Americas and Asia Pacific. It's still impacted by accelerating cost inflation and timing of individual markets, and there are significant differences in individual markets which we have also experienced in the last quarter. It ended, as said, with a total of 2.9 GW, which is actually for us very satisfying given the very volatile and challenging market conditions. We've seen there again the increased focus on energy independence, accelerating ambitions for renewable transition, and I keep repeating again and again, it is of an enormous importance that everyone understand how we contribute, and also how along with our customers we can also be part of fulfilling that ambition on political part to increase renewable around the world.
One thing is the discussion, another thing is the permitting and the acceleration of commissioning of it, and I think here it's fair saying this is where we talk beyond 2022. It should be, and it must be one of the primary focuses for Vestas, but also with our customers and not least governments around the world. The pricing continues to increase. We continues to do that to mitigate the cost inflation, both experienced and seen. We highlight again and again it's the discipline needed across both onshore and offshore, and it does start at the time of order intake. This is something we are absolutely committed to continue to do, and we ask also here the industry to come to the same conclusion in both onshore and offshore.
We have seen lack of, both from a discipline point of view and also from an action point of view, to say, and do the same. I think this is where we stand tall on that one. In the quarter we have seen an ASP ending at 0.89, positively, for the onshore, and 1.01 in total. That also means we have wind turbine backlog orders at EUR 18.9 billion. When we compare Q1 with Q1 from 2021, then of course it's also means that the value of the order intake is just around EUR 3 billion in Q1, compared to EUR 1.6 billion a quarter last year. We then go to the service business.
I think the service business, another stellar performance, in a world that is definitely considering the surroundings we are working in. Well-positioned for further growth. We saw in the quarter strong operational performance, increased activity level, also associated with the high transactional sales which we discussed in Q4, as part of ending and concluding 2021. I think here all owners of turbines with the electricity price experience they have in local markets, of course we want to make sure and customers want to make sure that turbines are generating electricity in the current environment. We also had a 589 MW offshore wind order service agreement to the offshore in Taiwan, which comes with a 15-year full scope service contract.
To the right here you will see that the service backlog now stands at EUR 30 billion, of which EUR 26 billion comes from onshore. We look after 132 GW, of which 125 GW comes from onshore, and we have an average contract duration in excess of 10 years. It is here timely to thank everyone involved in the service business for another really positive and strong performance in the quarter, and being able to mitigate some of these challenges that has been thrown at you throughout the last quarter. Below you will see the growth in all of the regions, which of course we are positively pleased with because it shows the progress we are doing across all our regions at the same time.
When it then comes to sustainability, yes, we were awarded the most sustainable company in the world in January of this year. That's what we refer to in the subheading here. Other key highlights. We did the issuance of the sustainability-linked bond, two tranches of EUR 500 million. One of them used to repay an existing maturity of a bond.
That was well executed in Q1 with investors from Hans and the team in Treasury and Finance. Over the lifetime CO2 avoided in the quarter by produced and shipped capacity decreased by 6% in Q1 2021, but that is due to that we had slightly lower produced and shipped turbines, which of course will deviate quarter-over-quarter.
Nothing that gives us reason to any other things than just here saying that the produced and shipped turbines in Q1 2022 come to 118 million tons of avoided CO2 of the lifetime of those turbines, which of course is a number we track both on quarters but also especially on the full year when we get to that. The carbon emission from our own operations decreased by 4%. That is mainly due to the transition of the Daimiel factory heating system, where we have gone from gas to biomass positively, and of course then also with a positive from that we had a lower overall activity levels. Positively downward 4% in the quarter. Most notable here, I will also conclude on the safety.
We remain at 3.1 in TRIR, which is, considering what we have had to do in a, I will call it an extremely challenging Q1 when it comes to getting people in and out of sites, but not least also handling the situation around Ukraine. I'm really pleased to see that we have been able to keep the safety records at the same level and therefore taking good care and safely of each other, working around the world. With that, I would also just like to extend here a big thank you to customers, suppliers, partners and not least employees that are able to hold our activities running and operating across the world. This is tough and it is hard operational environment and therefore, your effort and commitment and support are really appreciated.
Now I would like to pass over to Hans to go through the financials.
Thank you, Henrik. As you pointed to, as part of our Q1 review, we have carried out a business review to assess our activities in light of the geopolitical challenges that we have witnessed in the last quarter. These are part of a strategic prioritization to improve our profitability. As it is our imperative here that we want to stay adjusted to the new world that we are facing. The first point listed here is that we have reviewed and looked at the business case for our legacy offshore activities. Before going into the details there, let me reiterate that we continue to see fantastic and very strong prospects for the offshore segment. The Blue Marlin turbine, the 236, has been greatly received.
That also means that we are obviously also seeing that the demand for the legacy platform is being impacted by that. We have done a total of adjustments of EUR 176 million, which is split roughly equally between impairments and provisions. Assets, these all link to the legacy V164, V174 platform. Next on the list is related to the Russia-Ukraine situation. There we have special items of EUR 400 million, which is split between write-downs of inventories, impairments of tangibles and VAT and provisions. This represents a list that we will be actively working with in the coming months. There are, say, discussions and negotiations ongoing. Of course, this is something that we’ll be spending more time on also going forward.
I should mention also that of course fulfilled revenue and profits are not included in these figures. Due to the low demands locally as well as challenged landed cost in, say outside the region, so to say, we have also reassessed our footprint in China and India. Hence we are looking at write-downs there of EUR 183 million for that particular part of our footprint. This is coming from impairment of tangible and intangible assets, but there's also an element of impairment of inventory and other costs linked to this.
Finally, we are then doing a reversal of part of the write down we did for the Lauchhammer and Viveiro facility, and this just highlights the diligent work that we are carrying out when we step into working with these types of elements in the P&L. Turning then to the income statement and looking at the effects of what it is that some of these things has meant. Let me start by saying actually that when you look at this table here, which is slightly different to what you normally see. When we look at the underlying figures, which excludes the offshore adjustment, I think we come out with very strong activity levels, but obviously with a challenge still on the profitability, as you also alluded to earlier, Henrik.
Let me start out by saying that we actually do see an increase in activity level by 27% year-on-year, driven in particular by service and by offshore and onshore installations. We are then seeing, adjusted for the offshore effects, a gross margin decreased by 4.3 percentage points, driven mainly by external cost inflation and very disrupted supply chain elements going into the P&L. When we then look at the EBIT margin before special items, this decreased by 2.3%. Again, we are here comparing, say, the underlying P&L, so that is without the offshore adjustment. This is driven by the lower gross profit, but there's actually a positive coming from the better fixed cost absorption due to the higher top line.
In the Power Solutions segment, profitability is challenged, but actually the activity levels are up 30% year-on-year, driven by the onshore activities we have seen in the quarter. EBIT is impacted EUR 164 million by the offshore adjustments in the quarter. Underlying, I think it's important to say that the 20% negative margin you have there, actually when you adjust for this, sits at negative 11.6%, which is a decline of 4 percentage points. It's driven by the same elements as I mentioned on the previous slide.
Again, I think it's just important to say that underlying, there is of course the development that we are working on addressing, but it looks a little less bad than what you can see on the chart to the right-hand side. In the service business, you pointed to already, Henrik, that we are seeing very strong performance. Service revenues were up 19% compared to Q1 last year. This is driven by high activity levels overall. Transactional sales, but also inflation adjustments in the contracts, which is natural in today's environment. We need to remind you also that the offshore adjustments do have an impact of EUR 12 million on the EBIT levels.
If we adjust for this and look at the underlying margin in the service business, we actually sit with 22.3% performance, which is higher than what we saw last year in Q1. SG&A naturally also impacted by some of the specials in the quarter. Relative to activity levels, we are sitting at 7.5%, which is an increase of 1.7 percentage points compared to last year. This is mainly related to the offshore impairment, but there is also an effect coming in from higher cost of transportation equipment. There is an impact here of EUR 64 million, specifically from the offshore adjustment that is also mentioned here on this slide.
Clearly, again, as said before, this effect should not be underestimated when looking at the SG&A for this quarter. Net working capital, we are seeing an increased net working capital in the quarter. It follows by and large what we probably would expect for a Q1, in that we are seeing that we built inventory, and this is clearly also what you can see here on this page, that there has been an increase in the level of inventories. This is then partly offset by down in milestone payments, but we have also seen in earlier years that Q1 would follow a similar pattern to what we are seeing in Q1 this year.
This links naturally into the cash flow statement then, where due to the working capital movements, we are seeing a negative cash flow in the quarter. It's also driven by lower profitability, of course. All in all, this leads to a negative cash flow from operating activities of EUR 928 million. You mentioned already the bond issuance, Henrik, at EUR 1 billion. When we then adjust for the repayment of the previous facility, we have a net effect from financing activities of roughly EUR 500 million, positive. Investments total out at EUR 193 million in the quarter. This is an increase from Q1 2021, and it is mainly driven by investments in construction equipment and transport and transfer tools.
When we look at that, where the increase is coming from. Provisions and LPF is then naturally a topic that requires a great deal of attention, from everyone and not least also from management. There is, say, a high degree of focus on warranty provisions and on the LPF. If we turn to the LPF first, it continues at a high level, but this is a quite natural consequence of the extraordinary repair and upgrades that we are carrying out. The warranty provision sits at 7.8% in the quarter of revenue. This high level is driven by the offshore adjustments that we have made, but is also driven by a bit by general cost inflation and logistic challenges for the repair and upgrades we're doing for the existing cases.
That is all in all what takes us to EUR 195 million you're seeing there on the lower right-hand side on this slide. Finally, capital structure. Our net debt to EBITDA remains well below the thresholds of 1.0 that we have defined. We are currently at 0.0 in Q1 2022. Our commitments to cash focus and our capital policy remains. There is absolutely no change to that part of what we do. With that, I give it back to you, Henrik, to take us through the outlook and the Q&A.
Thank you, Hans. I think the outlook, of course, goes without saying it's a guidance that is given under particularly lower visibility as we have also seen in the previous quarter. We unfortunately believe and also see that will continue for the coming quarters under the circumstances. It comes with larger volatility, and it comes also with changes that are many and also suddenly arising to us. The guidance here is in that environment. When we then look at it, the revenue also have to reflect that we have a stop and a withdrawal from Russia and Ukraine. We are adjusting revenue from previous EUR 15-EUR 16.5, down to EUR 14.5-EUR 16.
That is in this environment still kept with a range of EUR 1.5 billion considering the quarters we are looking into. Service is now expected to grow a minimum 10%. That is up from the 5% we ended sort of when we looked from the ending of last year. That is due to the market condition, and that is also due to the market condition of what we have seen in Q1, a very high level of transactional sales. Positively for that, of course, is something we believe the service business will be able to continue it over this year. The EBIT margin has been changed to reflect both some of these changes, some of the volatility we look into, but definitely also the one-offs we have described here from the offshore.
Therefore, the previous outlook was 0%-4%, which is now, with the current outlook, -5%-0%, where the service margin is expected to be approximately 23%, considering again the one-off effect of offshore and also the change in accounting standard, which has now been included in what we are saying here for the full year, which we didn't have the full overview of when we finished 2021. Total investments remain at approximately EUR 1 billion. Of course, we will give further update to that, but that is very much triggered by the continued investment into both the technology but also the manufacturing plants of the offshore activities we have.
Lastly, I will just mention here that 2022 outlook, of course, is based on the current foreign exchange rates, which has been updated as part of the Q1. As said, for us, definitely not anything usual with this quarter, with the exceptions of the underlying performance of the business. I think we have had a long list of things that has been where we have been forced to debate it not only in details. A number of those items, especially around Russia and Ukraine, are not concluded on, which is also why in part of this conference call, we will probably in a number of those areas simply respond that it's sitting in an ongoing discussion, and we'll give you further updates in the quarters to come.
With that, once again to thank everyone on the call, and again apologize for the timing of it, but that's how life is, when we do and have to do these things. With that, I will pass over to the Q&A, and we pass to the operator for taking that.
Thank you. If you have a question for our speakers, please press zero and one on your telephone keypad. We kindly ask you to limit yourself to two questions at a time. The first question comes from Claus Almer, Nordea. Your line is now open. Please go ahead.
Thank you. Yeah, I have a few questions, and we'll take them one by one. The first question goes to the offshore and these one-offs you have taken. I'm a little bit, you know, unclear what is actually causing these one-off costs. So maybe we put a bit more color to this. Is this a quality issue, or what is it? And secondly, do you think that you have taken necessary provisions to cover possible, you know, extra costs to solve these issues? That would be the first.
Thank you, Claus. I think on the offshore, it's actually a positive reflection of we are now that advanced in progressing with the Blue Marlin, the V236, 15 MW. When we go around in the world now, whether we are in Americas, whether we are in mainland Europe or we are in Asia Pacific, we have very little projects that will be coming on where there will be a permitting limitations that sits around the V164, the V174. So it's a reflection of that the technology is maturing to the end of its life cycle quickly because there will be very little allocated to that. That, of course, also means we basically take that as a technology separation now.
We've learned all the things, we are ramping up on the Blue Marlin, and that's the positive of it, that the Blue Marlin will simply overtake everything else remaining at it. There are no specific other things in the technology, and that's just us being cautious of when we look at us now ramping that's the two existing platforms down in the sense of both the tangibles, intangibles, but also how we then treat the warranties around it in the offshore.
Henrik, as I read the report, there is also some extra costs associated to already installed turbines. It was probably not linked to your new platform coming up or.
No, that's in some of the existing, and we can just see now that part of repairing offshore in some of those platforms with a capacity that is definitely limited also causes more either time or cost allocated to it. That's just us being cautious on when we look at some of these repairs. There are no other new things as such as a warranty-related cases to that, Claus.
Therefore, there will be no new surprises in the coming quarters as to these repairs.
There shouldn't be.
Okay. The second question goes to a growing concern in the equity market, I think. At least I've been hearing this a lot. Will investors need to raise new capital? Is there a scenario, you know, within, you know, decent likelihood that you will have to raise capital? Is there anything with these new bonds that we should be concerned about?
I think it's. We have no such plans. Let's make that clear. I also stressed at my last slide, there, Claus, that we remain committed to a policy of staying within the boundaries that we have defined. I think that's a short and simple answer to that.
Okay. That's all for me. Thanks a lot.
The next question comes from Kristian Johansen, SEB. Your line is now open. Please go ahead.
Yes, thank you. Two questions from me as well. First one, Henrik, you once again sort of call out to the industry and urge for improved discipline on pricing. Should we read this as that you have seen no improvement in pricing discipline in the sector in the quarter?
We're just highlighting, we don't break attitude and discipline down into neither weeks, months, or quarters, Kristian. I think here it's an ongoing, we can see that there are things going on that probably will hurt people from order intake and onwards, and that's just the only thing we are highlighting here. We are also highlighting here it has to be a discipline that is kept in both onshore and offshore. I think we have said what we need to say to both the industry, but also around our own participation in those discussions.
Okay. Fair enough. My second question goes to sort of your visibility, which obviously I know is low. But if we look into 2023, can you at this point already see some of the current challenges will sort of drag into next year? Or is there sort of still hope that 2023 could be much more normalized?
Christian, I probably feared somebody will ask me about 2023 today. We are battling through one quarter at a time. If we go back and see what we have done in order intake, how we diligently and disciplined are accessing that, I think we can sort of say we look into a quarter by quarter where we basically just need to have a world that comes a little bit better back together, then we will also see things improve. It is just right now, not today, and it hasn't been any day in the previous quarter where we can see any improvements. It has worked the wrong way, so to say. I think here, there were more ships in queue.
There were more things potentially being threatened by lockdown, as when we are coming out with this report, Kristian. I think it's a reflection of that when you see that easing, then we believe it'll be improving. Right now, I don't dare guessing how long it will take. I think previously we've said it may take one or two quarters to clear out when we normalized. I think today is, you can sort of look for a normalization. You can also describe it, but it's just not present. We are not as such negative on either the future outlook beyond 2022, and we are not negative on the order intake beyond 2022.
We just have to face the challenges we are with, in 2022, which they are, of course, a consequence of the decision we have made.
Fair enough. Thank you for your answer.
The next question comes from Akash Gupta of J.P. Morgan. Your line is now open. Please go ahead.
Yes. Hi, good morning, and thanks for your time. My first question is also on offshore provisions. I mean, last year when you closed the deal, you took some additional warranty provisions around EUR 130 million-EUR 135 million, and now you are taking provisions again. Last year as well, you didn't say there was anything unusual, and you said it was because of under provisions in the past. Maybe if I come back on the topic, like how confident are you that we won't see any future warranty provisions in offshore? On the same point, I mean, outlook for V164 and V174 was pretty weak given competitors have better turbines. I mean, I want to understand what has changed in last three months that you are taking the write down now and not before.
Thank you.
Yeah. To your first point there, I think what we are seeing is that obviously the environment is challenged overall. That means that a lot of things have gotten more expensive also in the last few months in terms of, for instance, booking of ships and other things that takes place in the offshore space. I think this is our best assessment at this point in time. Obviously we believe for the same reason that this should cover what we are seeing, Akash. Hence, as said, we are seeing things have gotten more expensive here over the course of the last three months, and we have done this assessment.
It is then also part of the review we have done in terms of the demand picture we are facing right now, which leads us to come to this conclusion. To your second point then on the demand side, I think in some ways you mentioned it as a positive, Henrik, and it is definitely true, and I can only confirm that we are seeing an uptick in terms of demand generally. The 236 machine has been very positively received. That is what has then led us to sit and say one year after the acquisition, this is now what it looks like for this part of the business. Which has led us to then come to the conclusion that we need to impair certain parts of the asset.
Mind you, it's certainly not the entire lot that is being hit by this. It is a subset of the value. Akash, maybe I could add to that. It's six quarters ago since we announced the deal in offshore. As I said, as much as we would appreciate it to do some of these things at an earlier stage, we've also spent the first quarter basically getting the permit to acquire the business and integrate the business. Therefore, it's part of that roadmap coming through throughout the last quarters, which of course we completed in Q4 last year with the full integration of the system part.
I'm also pretty sure if you go back 6 quarters ago, your outlook for offshore and the forecast for offshore, for instance, towards 2030, would have looked dramatically different just 6 quarters ago to what it does look today.
Thank you. My second question is on manufacturing footprint optimization in China and India. I think you said that this is driven by higher landed costs, and I think it makes sense. The question I have is that do you need to invest elsewhere in the organization, like in your European or American footprint to offset lower production in China and India? Thank you.
Yeah. I think there's a couple of observations here. There's a twofold messaging in today's footprint. There's first of all, the landed cost, and therefore, don't manufacture necessarily certain parts of what is the most cumbersome and most expensive to transport. Secondly, it is also some of those manufacturing footprint are built in a handshake and commitment from countries where there was a local demand cycle coming. We are also here just highlighting a little bit the warning to governments and saying, "If you want it, don't just ask for it as turning into a 100% export play." It does require local demand side. When it again comes to capacity, we work closely with partners on all continents. That goes for Europe, and it also goes for Americas to build out that.
You have seen some of those announcements, and you've seen some of those partners. We are fully ready to build both internal investors, but also with partners when it comes to that. We don't see that necessarily changing what we are doing currently.
Thank you.
The next question comes from Dan Togo Jensen, Carnegie. Your line is now open. Please go ahead.
Yes, thank you. Carl from my side as well. First question may be a bit following up on what you were just saying here, Henrik. Is there a risk in the longer term that the way you sort of say step down or ramp down, at least in China and India, that you lose some scale advantages that could impact your 10%+ EBIT margin target in 2025? And along those lines as well, stepping away from producing your own blades, is that, you know, could that potentially risk leaving some money on the table in the longer run, and impacting that margin target as well? Maybe some wording on how you see this, you know, supporting the 10% margin target, or is there also a risk involved here?
That's the first question.
I think with having a global supply chain right now, everyone can see there is a risk associated with that. There is also an upside. I think here we have a good balance of doing that. Because if we haven't had that, we wouldn't be able to remain running the activity and the deliveries we have done. I think it is in one hand also appreciating what we have done quarter on quarter. This quarter is actually up more than 20% compared to the quarter last year. It also illustrates that the global supply chain are working.
I think this is a much more also in saying, if you have localized technology that is also asking and looking for a local demand and it's not there, then it's a natural reflection and conclusion from our side that we are not going to remain with a capacity. If it comes back, we will consider it. If it's not there, then it's a natural reflection of that. We are not leaving. We are not leaving any stone untouched in a global supply chain with any value behind as such. This is more on saying, in the current environment, we see that's the most natural to do because it doesn't make sense to have that transportation on top of it.
Okay. Understood. A question relating to offshore. Here you have also previously provided some guidance towards 2025. The more challenging, so to say, market environment for the 10 MW platform, does that in any way affect the way you have guided for the market towards 2025? I'm referring here to the EUR 1 billion-EUR 2 billion, you know, revenue in 2023 and 2024 and the break-even-ish margin you have alluded to here.
No. That doesn't change those facts. I think it's just for us now to say that I don't think we will together with customers participating in many other conversations. They're just delivering on that. That's just a positive reflection on the new technology roadmap that comes in. No other changes to that.
Understood. Thanks.
The next question comes from William Mackie, Kepler Cheuvreux. Your line is now open. Please go ahead.
Yes. Good morning, gentlemen. Thank you for the time. My first question would be with respect to the great success you've had on booking orders in the quarter. Could you reflect on the expected level of gross margin, given the dynamic cost environment that you've received in those orders relative to the historic norms that we've seen in the period 2016 through 2020? That would be the first question. The second question relates to pricing and the competitive environment. I note on your slide six that when we look at the market share outside China, there's a growth in other, and it seems there is an opportunity for Chinese producers to make headway in Western markets. How would you describe the competitive environment at the moment and its effect on price development going through 2022? Thank you.
Thank you. I think on the price development and especially on a question towards your gross margin and margin on products individually, that I think is the wrong so to say conference call and have that conversation. That's very much an internal discussion. We got the same, exactly the same, way of handling sign off on order intake, which means we sign them off. We also align with it. It's a very important part of our moving towards the 10% EBIT, which also means that we don't allow things come into our backlog that is not fulfilling at the time of order intake, the profitability targets we have. That goes for the world.
By the way, it's the same alignment and the same way of signing off the orders across the world with the same threshold, by the way. When it comes to a specific discussion around China and Chinese OEMs, I think it's fair to say we see various input on that in various markets. We price consistently off the cost of the turbine from both raw materials, components and others. From time to time, we see that others have available pricing that are basically not for us to consider. I will keep it with that response, William Mackie.
Thank you very much. A short follow-up just related to the guidance. Very wide range. Could you perhaps talk to what scenarios push you to the bottom or the upper end of the range?
I guess, I mean, there's a lot of different element that goes into providing a guidance range like the one we have provided here. What I would say is, as you say, it is wide, and it's also wider than what we saw earlier. I think it's also fair to say that when you look at what the world looks like today, it is a very different place to where we were only a couple of months ago. That is what we have tried to reflect that in the guidance range. We have tried also to give a picture of the world as we see it now. Clearly you can sit and speculate a lot about different kinds of scenarios.
I think we'll come back to that also as we go through the following quarters. I think generally speaking to the wideness of the guidance range, it is a reflection of the fact that, say, uncertainty is very high, as it looks right now in the world.
I think also here, guys appreciate right now market conditions. You got historical high electricity prices. We don't have a customer globally that is not looking for delivery on time or even early generation in discussions with ourselves. We have seen that in countries where we've had, for instance, feed-in tariffs, expiries early on in others, but now with today's electricity price, it's simply just full attention to that. You will also appreciate the volume when you then consider that and compare to other industries right now that there are an effect of some of those lockdowns. There are an effect on some of the supply chain constraints. I'm pretty sure if you've had a car under order, you could be one of the ones that have had to wait for it for a long time.
That's just not right now in anyone's interest in where the whole world is looking to get more availability of energy supply. That energy supply is across every country in the world currently. I think it's just be mindful of, it's a tense and it's a tough operating environment.
Thank you.
Next question comes from Deepa Venkateswaran. Bernstein, your line is now open. Please go ahead.
Thank you. I had two questions too on the guidance. On the revenue, just a clarification, the change, is that really from foregoing the Russia and Ukraine orders, or is there any uncertainty on volume delivery or something? On the guidance, assuming midpoint of the guidance prior and now, there's a swing of almost EUR 700 million. All the disclosures you've made in Q1, we can probably get to EUR 265 or something. There's a delta of EUR 430. I just wanted to understand within that EUR 430, again, is there anything specific for loss of profit from Ukraine? Any other elements? Presumably anything you would have had certainty, you would have already had to book provisions already. It's a pretty wide range.
If you can at least even qualitatively give us some idea of what are the other buckets of uncertainty, that you know, you might see as the year unfolds. Is it logistics? Is it raw materials? Something else?
Yeah. We start with the first one on revenues. I think, what we're looking at there is obviously when you sit and assess this, and as we have done in the last few days, then you look at what is the composition of the different building blocks we have that leads to the guidance that we end up with. Clearly, there is an impact from the situation in Russia and Ukraine that is factored in. We have looked at what are, say, the different ways that we can build the P&L in terms of what the year looks like. Yes, of course, that has been part of where we have arrived at in terms of where the revenue guidance is ending.
I mean, I guess the numbers are well known. Clearly there is an effect that goes into the top-line guidance from that.
When it comes to then the guidance range on EBIT, you mentioned some numbers there, so I'll talk a bit to some of the building blocks that goes into the difference between where we were and where we now sit. I guess a lot of this can be seen already in the accounts that were sent out. There is the offshore adjustment, which is EUR 176 million. There is the impact from Russia and Ukraine that I just mentioned, where the top-line effect of that, as said, is I guess, fairly well known. There are some of say the more difficult to quantify, but obviously that's what we have tried to do nonetheless in the guidances. An effect coming from, say, the lockdowns we're seeing in China.
There is also what we would say are the ripple effects coming from Ukraine and Russia, which is impacting and severely disrupting the entire supply chain that we're working with, and which has also back to the warranty part in part given us challenges on what we have been working on the in for out projects that we've had also for the year, as well. Finally, when we look at where the impacts are coming from, we also have included now the accounting change for the software as a service, the cloud solutions. All in all, these I say some of the main things that have been cooked into the change we have done on the guidance.
I think it's important to say, you said it already, Henrik, so let me say it again. It's. I mean, the world is a different place today than what it was before. There is a lot of uncertainty, and there's a high degree of disruption seen right now linked to China, linked to, say, ripple effects from the China lockdowns, and linked also to the Russia-Ukraine situation, which continues to impact freight markets and all kinds of raw material markets as well. That is what we have then tried to cater for, that uncertainty in the guidance that we now have.
Okay, thank you. The next question comes from Lucas Ferhani. Jefferies, your line is now open. Please go ahead.
Good morning. Thanks for taking my question. My first one is on pricing again. Can you, I mean, describe a bit the pricing discussion you're having with clients. Are you seeing still protracted negotiations? Do you think there's some impact on demand from the higher prices, not only from you walking away, but also from clients potentially walking away? Do you see any impact also on pricing from the difficulties of one of your largest competitors in onshore?
I think on the pricing right now, I think as we spoke detailed around from coming out of Q4, I think there is still a number of projects left in a discussion for projects and go live, because I think still it's fair saying the world has and the customers have a number of projects that are left with much lower PPA agreements. Therefore, any price disruption to the level of what we are seeing now, of course, on the turbine and the solution does make it very, very difficult for customers to get to get their investment decision to actually stick together. I think for those who have done a PPA agreement before they got the sort of the locked-in turbine and renewable solution, it's a difficult world.
When we get to new projects and permitting coming on being discussed, then I think we can all see on the current market condition that that is a different discussion point. Of course, with the variations that are to the theme, we just have more and higher volatility on both some of the raw materials, like the steel, like the transport cost, which relates to fuel, which also relates to availability. Of course, that affects the discussion with customers. As I said, when we look back on the Q1, really pleased with the order intake. Some of the things that came in Q1 has been discussed for a very long time, and others have also come into that queue.
I think we can expect the Q on Q this year again to be varied depending on how much we can have as a sort of say a normal working period, because otherwise we will have to update our outstanding offers to customers. Of course, that makes many of the process to be repeated again and again.
Okay, thank you. My follow-up one is on free cash flow. Historically you said that you should be positive each year. After this Q1, do you still expect for year 2022 to have positive free cash flow?
I think the free cash flow guidance is not really. I mean, let's not talk about it as guidance because it's ambitions we have, first of all, in terms of our longer term aspirations. Second, I think in a year like this where we are looking at, say, the profitability that we're facing and the supply chain disruptions, there's some hard work that obviously goes into having to manage the cash flow. Of course, that is a challenge right now when you look at what, say, the developments are in the world that we're in. You have to here also appreciate, as you can see on our inventory, we are running higher inventory to protect the ongoing activities as well, for delivery.
We have a backlog to deliver on customers, and that of course triggers that as much as we do, we have to do that to secure deliveries to our customers as well.
Perfect. Thank you.
The next question comes from Martin Wilkie, Citi. The line is now open. Please go ahead.
Yeah, thank you. Good morning. It's Martin Wilkie from Citi. A couple of questions. The first one's coming back to pricing. Obviously, stronger CPI-pricing in onshore. You mentioned that the pricing has to be at a level that gives you the profitability that you want. We've seen a couple of your competitors talk about escalation clauses and inflation is passed through now getting embedded into pricing for the first time. Is that something that you've also seen? And just to clarify, what sort of costs can be reflected in that? Is it freight? Is it raw materials? You know, what sort of costs could possibly get included in those escalation clauses? That's the first question. Thanks.
It seems like everyone have gotten a catalog of wide things that can be included in new discussions. Martin, we've been here for many years, and most of things works well under normal circumstances. When it gets to extreme circumstances, as we have seen, some of it works less optimal, and therefore it's a customer to customer. We do both before and after and under the discussion with customers, and that will remain. We have included what we normally think is protective, especially when we are in a position where we have hedged and that we share with customers. The pricing we are doing right now reflects on that we keep doing what we say we do and stick discipline to it.
We don't have projects where we have had to provide onerous provisions or other stuff, which is also a reflection of that we do what we have now said for many quarters. The only thing is we cannot price, and we cannot do things we don't know of, and I think this is a quarter we came out of. A couple of days we actually saw, for instance, steel, European steel delivered and changed more than 40% within just a week. Martin, that's very difficult for customers and for an OEM to deal with within that short notice.
Thanks. If I could also ask on service. The margin outlook in service, is that solely to do with the offshore provision and the change in the SaaS accounting, for the cloud software or is it also a weakening of the underlying margin expectations in service for the year? Thank you.
This is largely linked to the technicalities you mentioned there. There's really nothing else going into that figure other than those two points.
Great. Thank you very much.
The next question comes from Casper Blom, Danske Bank. Your line is now open. Please go ahead.
Yeah, thanks a lot. I just had my answer, one of my answers answered there. I would just like to follow up then on the China and India shutdown of blade production. I mean, how quickly will that happen? And when should we sort of start seeing potentially an ease to transportation expenses as this is being near shore? Thank you.
Yeah, I think it's a combination, but when we announce this as part of today, Casper, you can sort of assume that starts with immediate effect. Therefore, that is what we plan for, and that's what we will do, and that's also why we will have the backup arranged for in advance to a certain notice. You'll be looking at something that is in transport, but you will also appreciate there is a rather long lead time until the last blades are at shore. That's throughout 2022.
Okay. From 2023, basically, we could say that now it's sort of the new setup, if you would call that.
Yeah. It's at least a setup which is an adjustment to some parts of the global supply chain, as you are seeing here.
Okay. Are there any plans of you also in establishing production elsewhere, or will it be solely through third-party suppliers?
We have a tendency, and we have a very strict that we announce that when we make decision on it. Similar when we close, we also announce when we open. You've seen we have done that in a couple of the parts of offshore, and we promise to keep doing the same in onshore when it's getting there.
Okay. Final thing on that matter is just could you kind of confirm that you will continue building the shelves in China and will still have that transport happening?
We have large hubs in both India and China for both components and various parts of the assets to the turbine. We'll continue to see a part of that. For sure, both India and China will remain important, but it is also an invitation for further discussions with local governments to look into local demand.
Okay. Thanks a lot, Henrik.
The last question will be from Claus Almer, Credit Suisse. The line is now open. Please go ahead.
Yes, hello. Two questions from my side. First of all, if we look at the long-term outlook, then it's pretty solid. But my question is more related to the short-term outlook. Because on one hand, we have a lot of uncertainty right now, and at the same time, we have a need for a lot of renewables and also fast. If you were an investor, how would you think about the short-term order intake outlook? That would be my first question.
Yeah, I think it's fair saying I think the short term here, as you can see, I think we are somehow positively reassured that what we are doing is right. We've also seen that the capital being allocated from customers have never been higher, Claus. I think on the short term, we simply have to work diligently through it. We're quite pleased to have a more or less status quo on our order backlog for turbines of EUR 19 billion. That's a testament to work through some of the challenges here in the short term. I think it's fair saying 2022 for most colleagues, investors, and ourselves included here, will be one of the toughest one we have done in operating terms. We come out of COVID. We had to overcome that in 2020 and 2021.
Did that well. There is an extra dimension to it now, and that we work through. I think therefore, 2022 will be a delivery year and an operating year, which we just have to come through. Then, we are, as we said here, both with an order intake and also looking into it, we are ready to help that government that wants to prioritize renewable in a faster fashion on permitting, because there are plenty of customers that are willing to finance it.
Okay. My second question is a follow-up question to one of the previous questions. Basically, I'm not looking for a lot of details here. Have you changed anything in your order discussions with your clients just in order to protect your earnings and your margins and basically in order for you to end up with this risk and perhaps adding a little bit of risk to the clients, which would be, I guess, fair?
Yeah, of course we have. That's just the short answer. I won't hold individual customer discussions on a conference call. Yes, everything is there in play. We also have something where when we are sort of stoked by what we are seeing right now, we will also be going back and opening some of our discussions in transport and other surcharges in the current environment. That's just how the nature of it must be. I think both you and I will have exactly the same if we have a transportation or a flight ticket or whatever. We are hit with exactly the same surcharges, and that will also come to our projects.
Okay, great. Thank you very much.
That's it.
Okay. With that, we have ended the Q&A for today. I know we are going to meet and see many of you over the coming days. We look forward to that. Also here, again, thank you for the interest and the support you are providing to Vestas in the current circumstances. Thank you on behalf of Hans and myself for today's Q&A.