Good morning, everyone, and welcome to this full year 2018 and Q4 2018 report. As usual, it is me and our CFO, Marika, and Patrik, and the IR team that are here this morning. Let me start with the usual disclaimer slide and go straight into the key highlights of the year. Very solid order intake, 14.2 GW across 43 countries at 27% year-over-year increase, leading to an all-time high order backlog of more than EUR 26 billion. The guidance was met on all parameters, on revenue, on EBIT, free cash flow, and net investment. A very solid performance from our service business, both when it comes to revenue growth with an organic growth of 13%, and when it comes to EBIT and EBIT margin improvements, EBIT landed at 25%.
Another highlight was, of course, from our joint venture with MHI for the offshore business, breaking even on net profit. We continue to improve our safety performance with a 25% improvement in total recordable injury year-over-year. We recommend a dividend payment of DKK 7.44, equal to a payout ratio of 30%. This is also the time of the year where we do an update on our strategic plan and, of course, also check our execution on that plan during the year. I will come back to that. Starting with order intake in Q4. Very solid 5.5 GW. That is a 44% increase year-over-year. At the average selling price of EUR 0.76 per MW in the quarter. U.S., Australia, South Africa, and China were the main contributors to the Q4 order intake.
We also took in orders of 170 MW of PTC qualifying components. That is 60% PTC qualification components. Looking at ASP, remained stable in the quarter at EUR 0.76. Of course, as usual with ASP, we should remember that the geography turbine type scope and of course the uniqueness of the offering, is still a factor. Overall, of course, we are encouraged to see now five quarter in a row with a stable ASP. These are the countries. All in all, 43 countries where we took orders last year. Again, highlights our unique global reach and also a strong global demand that we see in the market. We had four countries that were new to us and all in all, we are up to 80 countries or 80+ countries now where we've done wind projects.
Maybe this is my favorite slide of the presentation today that shows the order intake well-spread over all three regions. As I said, up total, up 27% year-over-year, 25% up in Americas, where we see increases coming from U.S. and Brazil. I would say, overall good activity in most markets. EMEA up 25%, strong development in markets such Norway, other Scandinavian countries, also South Africa, more than offsetting the projected decline that we also saw in Germany. Again, broad-based, as we talked about throughout the year on order intake. Asia-Pacific up 38%. Australia coming back, as we also talked about during the year, with more than a GW in order intake. Again, broad based, and we actually saw order intake from nine different countries that shows the region's potential. Delivery was also up in all regions.
America up 30%, very much driven by Mexico and Argentina, and U.S., of course, remained on a high level. EMEA up 2%. Scandinavia, from a delivery point of view, offset the decline that we saw in Germany. France and Italy continue at high levels. Up 100% in Asia-Pacific, driven by strong development in Australia, India, and Thailand. We had then lower delivery levels in China. As I said, we have a record high order backlog of more than EUR 26 billion. It's a year-over-year increase of 25% or EUR 5.3 billion. We saw the increase on the turbine side, the increase was EUR 3.1 billion to EUR 11.9 billion, and EUR 2.2 billion increase in the service to EUR 14.3 billion. Looking at our joint venture for the offshore market, of course, also had a busy year.
Some of the key highlights, the firm order intake of approximately 3.2 GW, and also the upgrade of the technology platform. The V164 turbine has now a nominal rating of 10 MW. Also busy penetrating new markets outside the North Sea, and, of course, good progress of preferred supplier agreement both in the U.S. and in Taiwan. Overall, a solid pipeline of firm and conditional orders of 5.5 GW. With that, I leave the world to Marika, please.
Thank you, Anders. If we start with the income statement for the full year, we have during 2018, as we have also said before, seen an increased competition that clearly impacts profitability. Despite that, we are increasing revenue by 2% compared to last year, and that is primarily driven by increased revenue and service, which then, as I alluded to earlier, partly been offset by the lower prices in the Power Solutions segment. Gross profit is down by 3.6% full year, mainly driven again by the lower average margin in the Power Solutions segment. Consequently, EBIT margin before special items is down 2.9%, and that is also driven primarily by the lower gross profit. I will come back to the SG&A development in a later slide. The result from the JVs is DKK 40 million.
Remember here that of the DKK 40 million, DKK 13 million is related to the standalone profit in the JV, Mitsubishi, and the rest DKK 26 million primarily comes from the 3 MW platforms and the Rampion project. If we have a look at the Q4, again, lower profitability driven very much by the Power Solutions segment. Also here, we saw an uptick in the revenue lines. We actually improved 8% year-over-year despite the price pressure. We have also increased the service revenue in Q4. The gross margins are down 3.7 percentage points, and that is, again, primarily driven by the lower average margins in the Power Solutions segment. SG&A costs continue to be fairly stable, although slightly higher in the Q4 numbers compared to 2017. EBIT is also here down by 23%, and that is obviously driven primarily by the lower gross profit level that you see here in Q4.
If we have a look at the SG&A cost, that continues to be under control. We include here R&D, admin, and distribution cost for the full year. This is a 12-month rolling, just to be very clear, we are down compared to last year to 6.6%, an absolute number DKK 672. The activity just continues. This is one of the levers we have to monitor and offset some of the lower margin projects that come from primarily beginning of 2018 and 2017. The service performance continues very well, something that is very positive. We have both grown the business at 10% and organically, excluding Forex or currency, 13%, and we have managed to deliver 25.2% for EBIT margin on the service business. Obviously, something that is very stable and continues to improve both on EBIT as well as revenue.
The balance sheet remains strong. We continue to have a very strong cash position of over DKK 3 billion. The return on capital employed is 20.4%, and that is lower compared to 2017, and that is again driven primarily by the lower operating profit. I will also come back to both the net working capital or the working capital, as well as the solvency ratio in a later slide. Satisfactory net working capital management. This is something that we have discussed throughout the year. As a consequence of the strong demand that we have seen, we have also utilized our balance sheet in terms of building up inventory to mitigate some of the investments need for capacity, also enable investments in localization. But the improvements that you see here at the year-end is primarily driven by very high down and milestone payments.
That is a consequence of the strong order intake that we have seen throughout 2018, I would say, but especially in Q4. Again, the higher level of inventory is really to cater for the strong order intake that you have seen, which obviously creates good visibility for 2019. Cash flow statement full year, free cash flow was in line with the updated outlook of approx DKK 400 that we had in the beginning of the year. The decline that we have seen is primarily driven by lower net profit as well as higher investments. Networking capital, again, is impacted by non-cash adjustments, that is currency primarily, so no cash impact really, DKK 225 million. That's where the DKK 169 is coming from. All in all, we delivered DKK 418, very close to the original guidance that we had beginning of 2018. Total investments is up.
We are seeing DKK 668 for the full year. Remember that if I look at the primarily investment focus that we have, which is again, capitalized R&D as well as molds, we have seen DKK 100 million increase. The DKK 99 that we saw in 2017 positive is primarily the sale of the Aarhus building. The warranty provisions and the lost production factor continues at a satisfactory level, focus on quality is there, I would say quality is also delivered. In Q4, you see that we have consumed less than what we have been provided for, and the lost production factor continues at a satisfactory level below 2%, a very stable performance from a quality point of view. The capital structure, net debt to EBITA, is well below threshold. It's -2.2. The target is no more than 1.1. The solvency ratio is 26.1%.
I would say still above the 25%, and the 26.1% we have delivered here for the full year is primarily driven by the share buyback programs that we have issued in 2018. The capital allocation for the full year, Anders said earlier, the dividend we are proposing is DKK 7.44, and including the share buyback program issued, total distribution for 2018 is anticipated to be DKK 6.07 for the full year 2018. By that, I leave the word to you, Anders.
Thank you, Marika. Moving into strategy and strategy execution, starting with the major overall trend, of course, the future looks very bright when it comes to the growth in our industry. This slide projects the forecasted growth in electricity consumption in petawatt hours, which is expected to grow more than 40% to 2035. This includes our sort of normal structural change, population growth, GDP growth, but also reflects what we start to see, a transition from fossil fuel-based systems, for example, transport, heating, and cooling to electricity. Of course also the amount of data centers and communication networks that we rely on today and will rely on going forward. A key takeaway is that renewable will take the majority of this growth.
An estimated $3 trillion U.S. will be invested in the sector by 2030, renewable will overtake coal as the dominant source of generation, also in the 2030 timeframe. Looking a bit more shorter term, into our three segments for Vestas, the onshore market, the service market, and the offshore market. Starting with onshore, we see a large market with healthy growth, a CAGR between 5%-7% on external numbers. Where does this come from? I would say strong support for renewable in replacement markets, primarily in the OECD markets, and we see also a very strong demand for renewable in these markets from corporation, and actually increasing. The other part is, of course, the new build market, where electricity consumption is driving the growth in more emerging markets.
A bit beyond 2022, we also see an attractive repowering market. On the service side, which is more a mid-sized market with higher growth, 8%-10% predicted, driven by a continued high pace of installation, more advanced service offering, and of course, we also see a large multi-brand opportunity. Offshore, a smaller market, but a higher CAGR of around 15%-20%. Here I will say, of course, North Sea is the key region, and the key driver in this scenario is U.K., in that North Sea market and the CFD rounds coming up. We also see new areas open up, U.S. and Taiwan are two good examples. Of course, we also see high ambitions from China in the offshore segment as well as in onshore. For Vestas, we continue to leverage and build on our key differentiator.
It's about global reach, I think obviously last year with orders in 43 markets. Of course, it's also global reach when it comes to manufacturing footprint, when it comes to service footprint in the market. It's technology and service leadership. About two weeks ago, we announced EnVentus, the new turbines or the new generation of turbines, as a good example of what we believe it takes to continue to stay as a technology leader. In service, we did important acquisition in the digital space for analytics and asset management during the year. It is about scale. We celebrated in the beginning of this year that we have installed 100 MW, and we are now servicing around 80 MW. Of course, it's also about scale in sourcing and manufacturing. Last but not least, of course, it's about proven execution towards our customers.
As I said, about 2 weeks ago, we launched EnVentus, the next step in wind turbines based on advanced modular design. This is really our response to the changes that we see in the market, and therefore, the customers' requirements on us. The market has moved from feed-in tariff to auction, and the next step, we believe, is a combination of auction PPA, corporate PPA, and a certain amount of merchant exposure. This means that the customer require us to deliver more customized solutions, more variants, and require us to do that with a faster time to market. Of course, with a lower levelized cost of energy and increased capacity factors. We feel that we can meet these customer demands with EnVentus, and at the same time, continue to utilize the scale benefit that we have and optimizing our CapEx.
These are the two products that we will start with, the V150 5.6 MW and the V162 5.6. They have the potential then to give increased annual energy production of up to 30%, a little bit depending on the wind regime. The overall strategy has not changed, and the vision remains. We have a clear objective of market leadership, both in the Power Solutions area and in the wind service area. We have identified the critical midterm priorities and the values that supports these objectives. Our ambition on how we measure this success and where we want to be is also the same. Market leader in revenue and grow faster than the market, to generate best-in-class EBIT margins with a minimum of 10%, a positive free cash flow every year.
We have actually done 1 change, and that is that we have changed ROIC to ROCE, and put a target of minimum 20%. To summarize then the year, and also including our share of the joint venture for offshore, we have a revenue of DKK 11 billion, and we clearly saw last year also on the order side that we are confident that we are in the lead, both from a revenue absolute point of view and from a market growth point of view. An EBIT of DKK 1 billion, clearly best-in-class margin, which of course is important per se, but also enable us to continue to invest in new technology for the future.
A backlog of [EUR 30 billion], an orders intake of almost 16 GW last year, and as I said, the largest installed base of more than 100 GW. With that, let me go in on this year then, and the outlook. On revenue, we expect EUR 10.75 billion-EUR 12.25 billion, and our service business is expected to grow approximately 10%. EBIT margin before special items, between 8% and 10%, and here we expect the service margin to be approximately 24%. Total investment, approximately DKK 700 million. To give you a little bit more color than pure numbers on the year, we have, of course, as you also see on the order backlog, a very high coverage on the revenue coming from our order backlog, and I would say a higher coverage than normally. We also, again, have a very back-end loaded, second half-end loaded year in 2019.
Actually that is, as we see it, more back-end loaded than last year. That, of course, means that we feel that it's appropriate to continue to guide for a range with a normal seasonality uncertainty that we have in a back-end loaded year ahead of us. One more slide here, the financial calendar. We have the AGM, you see the date here for the quarters of this year. With that, again, thank you for your attention, we go into Q&A.
Thank you very much. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. We ask you kindly to limit your questions to two at a time. Our first question comes from the line of Christian Johansen of Danske Bank. Please go ahead. Your line is now open.
Christian. It's regarding execution risk. Obviously you're going to be incredibly busy in 2019, and unless you highlight that it's going to be even more back-end loaded. How are you ensuring you will not run into execution problems, and to what extent is this reflected in guidance? Are you assuming a flawless execution in the upper end of your guidance?
Yeah. Of course, we work with a lot of different scenarios on the guidance, but the range of the guidance reflects flawless or not so flawless execution in a sense, of course. Of course, we do mitigating actions. We do mitigating actions on the supply side. We have a global supply chain. We can do rebalancing over the year. We, of course, have detailed follow-up on our production plans and ramp-up plans. We work with all those different scenarios. What we can't control is, of course, the weather, especially towards the busy second half, where we need to do a lot of the construction. Another part that is hard to control is, of course, customers' availability to get grid connectivity, for example. Something that is not in our hands, but more in our customer hands. Those are normal executional risks.
Having said that, I think it's also, of course, fair to say that with this good volume increase that we're seeing in the market, there is a tighter supply chain. Not something that we have identified, that's something we don't think that we can solve, but an overall higher activity level in the market, of course, leads to a certain tightness in the supply chain.
All right. Maybe just to follow up on that, does that mean we should expect accelerating cost inflation?
Accelerating, sorry?
Cost inflation, if the supply chain tightens.
No. As I said, all the factors that I talked about now is, of course, reflected in the guidance range that we have. We of course know the supply chain really well. We're the biggest in the industry. Of course, we are working with them on a daily basis. That is reflected in our best estimate for the year.
Just to follow up on what Anders said, Christian. As we have a good visibility for 2019, obviously we have taken measurement to, regarding your question on the cost inflation, we have already taken means to cover so we avoid any penalty towards customers. It goes a little bit hand in hand with the full visibility, or very high visibility.
Okay. Very clear. My second question is on the development on project margins during the year. In 2018, we saw sort of increasing pressure on project margins as this price pressure sort of had a higher proportion of deliveries. Looking into 2019, I assume there is still an element of these orders taken in very competitive markets. You also have the impact of import tariffs and potentially also some impact from ramp-up of new turbines. Can you just elaborate a bit on how we should think on the quarterly development, just on a directional level in terms of project margins?
Yeah. I think all in all, you clearly say it, we saw a very big impact here in Q4 from the lower price level or the lower contribution margin. The price level is very hard for us to impact. You also see that we have invested in new technology. Obviously, that is one mean where we mitigate some of that price level to further improve on the contribution margin side. We are obviously continuing taking actions on optimizing from a production point of view, as well as transportation point of view. We have the U.S., where there are tariffs impacting us, but we have also mitigated some of that here in 2019, not fully, but to some extent, due to the global footprint.
I would say it's a mix of technology, operational, and obviously also negotiating prices with the customers, and we also see a stabilization in the price level, which is very clear, looking at the slide that Anders presented earlier. I think technologies is where we have said that we will take the quantum leap. The guidance is really based on your operational questions, if we have headwinds or not on the operational side. That's catered for in the overall guidance.
Just looking at prices and tariff impacts, would it be correct to think about the headwinds being the largest in Q1 and then easing during the year being the lowest in Q4?
The lower project margin would take place in the beginning of the year, you have so many other factors impacting overall. We don't have a quarterly guidance. Only what Anders said is that we see we are even more back-end loaded than we are in a normal year. You would have volume obviously also impacting the overall gross margins because you absorb more in a high-volume scenario.
Sure. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Akash Gupta of JP Morgan. Please go ahead. Your line is now open.
Yeah. Hi, good morning, Anders and Marika. It's Akash from J.P. Morgan. I have two questions, please. My first one is on margin guidance. You and your competitors are agreeing that the pricing has stabilized, and you have also given service margin outlook of 24% for 2019. Despite that, margin guidance is still 200 basis points wide, similar to what we've seen last year. Maybe you can talk about what you have assumed for U.S. tariffs and assuming if we have any favorable outcome or unfavorable outcome, then how it could impact your realization of 2019 margins. That's question number one. The second one I have is on R&D. R&D spend increased last year by more than 40% and capitalization ratio increased by 10 percentage points. Can you talk about what should we expect on both of the numbers in 2019? Thank you.
Yeah. Let me start. As you said, I think on the price stabilization, what we see is, of course, five quarters now sequentially on a stable ASP. Of course, there are some good arguments why that should continue, both if our competition says the same, it's, of course, always a good argument, but I think perhaps even more so the increased volume and the favorable volume that we see in the market. Of course, also all our needs to improve profitability. If you look at your specific question around tariffs and the U.S., as Marika also said, we talked about before that up to 1.5% of production cost impacted by the tariff. That was an estimated number, of course, already at the time.
The tariff is a complicated thing. Of course, our objective with mitigation is to avoid paying tariff, and actually then move supply around so that we avoid tariff situation. It's very hard to give an exact estimate. If I try, we feel that we probably have managed to mitigate maybe a third of that. That, of course, then consequently means that we have a negative impact that is included in the guidance for 2019 of about 1% related to tariffs. Any change there would actually have a fairly limited impact from 2019 then, if we have a change now in the tariff situation, as we said, we are very well covered for 2019, which of course means that we have worked with our normal process that we secure our margin on orders when they go firm.
That of course means that we have very little exposure, actually, to additional changes from 2019 on the tariff side. Of course, if we should see positive development there, it will have an impact. As I said, not in 2019 primarily, but probably then in 2020.
If I continue on the R&D question, we're very happy that we can continuously invest in R&D and new products, and that's also how we differentiate ourselves in the market. I would say that's why you also see that we have a very high order intake, because we have something to offer the customers. We have also said when at the beginning, when we saw the price decline coming, that one means of taking more of the quantum leaps in terms of margin improvements is the product and the levelized cost of energy improvement. In 2018, we capitalized EUR 258 million. I would say that considering the EnVentus and the new modular design, we will stay at that level also in 2019. The PTC are slightly reduced from 2017 or the R&D cost in the P&L is slightly reduced compared to 2017.
I would expect that also to be in the same level. Again, we are very happy to be able to invest in further technology, and consequently, we do it to further improve the margins.
Thank you.
Thank you. Our next question comes from the line of Supriya Subramanian of UBS. Please go ahead. Your line is now open.
Yes. Hi, thank you, Supriya here from UBS. Just again, on the guidance, sorry to harp on this, especially on the margin front, quite a broad range of 200 basis points from 8%-10%. If I could put it this way, what would make you achieve, let's say, the higher end of this guidance, or what would have to go wrong for you to achieve the lower end of the guidance? I'll start with that as my first question.
Yeah. Let me start. We are, of course, a project business, as I said, also looking at the back-end loaded year, next year, which means that Let's take an example. We are having a lot of activities in Q4. We do a lot of constructions in Q4. Of course, we construct these wind parks on windy sites. If we then have weather problems, for example, the construction gets delayed, two things can happen. Take a theoretical example. One is, of course, that the whole revenue and that margin moves over. The other thing that could happen is that we can save the project in the year, but we have extra costs. For example, the time schedule gets squeezed, and we then have to, instead of using one crane on construction, we have to use two cranes, for example.
Of course, the cost of that construction goes up due to that risk, that weather disturbance. In a project business where we recognize revenue on completion and where we have a certain timeline, of course, if we have disturbance on that from external factors as weather, or if we are, for example, tacking a little bit lower on our tack time on production, that could be an internal execution issue that leads to a higher cost. It is very much down to the execution in a very busy second half. Of course, the big unknown for us is, the ones that are harder to work on is, of course, the weather. Not too much to do about that. Of course, also the customer's ability to get grid connectivity, which is also a bit out of our hands.
Of course, the other parameters we constantly work on to optimize.
All right. Thank you. My second question is on the U.S. market. Just wanted to get your thoughts on potential outlook post-2020, essentially post the 100% PTC era, because one of your competitors has said that customers right now are not interested in 60% PTC projects, which you have booked some orders for that. What is your thought on where the U.S. market will land beyond 2020?
I think overall, of course, again, we see a very strong U.S. market. Of course, we expect as before that the volume, from a delivery point of view, will continue to build to 2020. The market will go down somewhat in 2021. I don't think it will be very drastic reductions. We qualified quite a lot of 80% PTC components. Of course, we will also see that there are some projects actually moving, probably. It's a tight market, of course. It's a very high activity level market to 2020-2021. Of course, for 2022, can't speak for the competition, but of course, we are very happy to have secured then 170 MW of PTC components that the customer have paid for, and that we have. That, of course, gives us also a very good base and outlook for construction in 2022.
All right. Great. Thank you so much.
Thank you. Our next question comes from the line of Claus Almer of Nordea. Please go ahead. Your line is now open.
Thank you. Yeah, also a few question from my side. The first question goes to the service business and your 2019 guidance, where you're guiding the margin a bit down from what you achieved in 2018. Why is that? That would be the first question.
Yeah, no, approximately means approximately, that doesn't rule out a downside on 2024, it doesn't rule out an upside on 2024. Theoretically, you could easily get to the same margin as last year.
Okay, you don't see any change to pricing dynamics within the service division?
We see the same pricing dynamics in the service business as we talked about the whole year. No changes, really.
A question regarding the Q4 performance. Obviously, you ended in the low end of your full year EBIT margin guidance, but slightly above mid-range of the revenue. That combination, is that caused by less flawless execution, or say the mix of orders that were delivered in the quarter? Can you put a little bit more color to that?
The vast majority of the lower performance is the mix or rather a lot of low-margin projects in the quarter. We also had, as it is late in the year, we had some ramp-up costs, so additional craning to make sure that we deliver the projects on time. Also some air freight. The vast majority of the low-margin impact in Q4 is really contribution margin on the projects.
Marie, would you say that the mix of the projects in Q4 is equal to what you see in the 2019 backlog?
That's a leading question, Claus. I would say that a lot of the lower contribution margin projects have taken place in 2018. You will see some of them in 2019. To be even more direct on your question, I wouldn't say that the margin level in Q4 is representative for any given quarter.
Okay. That was very helpful. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Casper Blom of ABG Sundal Collier. Please go ahead. Your line is now open.
Yeah, thanks a lot, guys. Well, we've been touching about the guidance quite a lot already, but just to make sure that I also understand it, in the 8%-9% EBIT margin guidance that you give, let's assume the midpoint of 9% versus the nine and a half that you reached in 2018. Could you point to the moving factors here, i.e. price, tariffs for materials, leverage, and maybe give an indication on what sort of size do you see on the different brackets? Anders has already touched upon the tariffs. That's my first question, please.
Okay, Casper. I'll see if I can clarify it for you. Overall, the range is based very much on operational ability. I would say that since we have more than a good visibility of 2019, obviously, the prices in the year are already set. It is a lot of operational potential headwinds or tailwinds. The most uncertainty is because we are back-end loaded, which we are normally, but 2019 is even more back-end loaded. Obviously, if we have a lot of projects in the latter part of the year, even more than what we have forecasted, that will give us a higher risk simply because of weather conditions. Also being able to order, for example, it sounds very trivial, but order cranes in time, so we actually have them at site when we need them, and also avoiding double craning because it's super expensive.
It's a good blend of everything. Obviously, we have the cost out, the accelerated earning continues, and if that performs according to plan or not. The tariffs in the U.S., that is catered for in the 8%-10%. I would say fairly normal performance is what we base those headwinds on. It is very much timing of projects, if they are on time or not. There's nothing specific that I can point at giving us a 9% or a 10% or even an 8% EBIT margin. The prices is not the major impact in 2019 because that we have a visibility for.
Okay. I think I formulated myself a bit bad here, because really what I was hoping for was sort of a way to bridge the margin. If Anders has already said that a third of the tariffs would have been mitigated, leaving 100 basis points for costs, maybe you could put a number on what impact do you see from prices, what impact do you see from leverage, what impact do you see from cost out, if possible?
I understand that, Casper. We don't give that level of detail.
Okay. Maybe you can answer if there are any specific moves or changes in, for example, the geographical mix or scopes or anything impacting 2019 versus 2018?
No, I would say that the only thing that is positive is that we see a widespread, both on a global basis and also from, I would say it's a fairly normal spread when it comes to scope of projects. That we will always have. Obviously if we have a more China in one quarter or we have a lot of EPC contract, increases the complexity level. On the other hand, when you have an EPC, you take revenue and profit on a more regular basis than you do if you have a supply install or a supply only. I would say from that perspective, it looks fairly normal in 2019. It's more the back-end loaded part that is more than usual.
Noted. Leave the margin aside. Then, my second question is more about the levelized cost of energy. If you sort of compare the average product that you sold in 2018 with the average product that you're expecting to sell in 2019, how much improvement in levelized cost of energy would you expect to see?
Again, very hard to estimate and very theoretical discussions. What we said before was that if I look at external numbers on levelized cost of energy for wind down the market, external benchmark puts that around 3%. We feel that we have probably done a little bit better than the market. I think that is clear if you compare our margins to the market, we're also performing better. That, of course, again, comes back to the levelized cost of energy that we can deliver with our turbines. We, of course, intend to keep that. We have levelized cost of energy targets internally on our product development organization, more to drive that thinking when it comes to develop new turbines. Exactly to put that year-over-year in the market, I would say it's probably almost impossible, if not impossible.
Fair enough. Thanks a lot, guys.
Thank you. Our next question comes from the line of Alok Lahoti of Societe Generale. Please go ahead. Your line is now open.
Hi, thanks. Maybe I just have a follow-up first on the R&D side. Obviously, the capitalization was around 100 basis points of margin benefit in 2018. Marika, did I get this right that you expect another 100 basis point effect or benefit to the margins in 2019 from the R&D side? Is that how we should understand this? That's question number one, and then I'll ask the other one later on.
Okay. I'm not sure I understand your question 100% on the 1%. Can you please repeat?
Yeah. If I look at the R&D capitalization, the P&L, the cash R&D and the P&L charge, roughly due to the capitalization in 2019, you had 100 basis point benefit to the margins. I think in the response to a previous question, you sort of said that the capitalization should stay around the 2019 level and the P&L charge, sorry, 2018 level, and the P&L charge should be around the 2018 levels as well.
Oh, yeah.
Does it mean another 100 basis points? How should we think about this whole capitalization versus-
First of all, what I said is that I expect the capitalization to be in the same level as in 2019 compared to 2018. Obviously you saw an increase, I guess the benefit that you are talking about is that I didn't address the depreciation amortization part for 2018.
Should we expect an equal benefit or-
We are not guiding on that. I just gave you the level of how we look at the capitalization for 2019, and that will be in the same range as 2018.
Okay. Is this driven by the new platforms that you are sort of-
Definitely. That's what I said. We are very happy to continue to invest in R&D. That's where we have a lot of differentiation and also from a margin perspective, taking more of the quantum is where we see the biggest increases. We invest in technology to further improve margins. That goes hand in hand.
Okay. Fair enough. The other question was, I think, Anders was quoted on the wire saying that there is more cost adaptation measures that they are thinking of including, which markets to perhaps expand in, and which markets to pull out, et cetera. Just wondered if you could elaborate a little bit on what are the cost actions that you are thinking about. I am a bit surprised at the timing of those comments because obviously had it been, let's say six, eight months earlier, it could have been understandable where the pricing was dropping quite fast. Now we think we are seeing stable order prices, yet we still see some of these comments. Just wondering what we should sort of read into that. Thanks.
Can you repeat what I was quoted as saying?
Yeah. Well, I think you quoted on the wire saying about new cost adaptation.
Yes. Okay. Now I get it. Yeah. Okay. No, what I said very clearly is that of course the question was further job cuts. Of course, we did some job cuts last year, but that is very much in line with our overall strategy that, of course, as we follow the market from a footprint production point of view. For example, last year we did some job cuts in our factories in Europe. On the other hand, we increased in India, in Argentina, and a bit in the U.S. My comment was very much around that you can never rule out cost cuts or job cuts in part of the geography because of course we adapt our footprint to the market. That was really the comment.
Okay. Are you thinking of anything in terms of 2019, 2020, as you can sort of see the shifts across your markets?
No, I would say that, as we've said before, if I look at this long term, there is no doubt that, of course, we will see shifts in the market, the big trend, like all other industries, is of course a move from more mature OECD markets to emerging markets. We have to follow that, looking at both the market and the cost base. If I look at 2019, as I said, we are increasing orders 25% in Americas, 25% in EMEA, 38% in Asia Pacific. For 2019, we will be busy in all our three regions.
Okay, great. Thanks.
Thank you. Our next question comes from the line of Klaus Kehl of New Credit Markets . Please go ahead, your line is now open.
Yes, hello. Two questions related to prices. First, if we look at the average selling prices on new orders, it came in at 0.76, I think it was. I must say that I am actually positively surprised because you have a very large repowering order in the U.S. and you also had two very large orders in China, which ought to drag down the average selling prices. Could you just perhaps comment on the underlying prices and what is going on there? That would be my first question.
Yeah. You are right. We had two repowering projects in the U.S. and a sequentially higher order intake in China, which of course takes down the ASP. On the other hand, we had an increase in EPC contract. I think they were about 19% in the quarter, and they were 14% in the quarter before. That drags up, so to speak, sequentially comparison. That is why we feel that those two ups and downs are basically a wash, and therefore we did not specifically mention that. We say underlying prices as stable.
Okay. On the delivery prices here in Q4, they look on the other hand very low. Could you comment on that? Is that due to some EPC contracts or is it perhaps even due to Lake Turkana, or what is going on with that?
Yeah, fair question. It is artificially low simply because in Q4 we have now aligned to avoid some of the discrepancy we have seen before deliveries, and to follow more or less the timing of revenue recognition for all types of contracts, including EPC contracts. Here in Q4 you see an impact because we do not have revenue or very limited revenue and profitability from EPC projects, and Lake Turkana being definitely one of them, and Isthmus is the other one. That creates an artificially lower delivery ASP, I think 0.62. That is because of the discrepancy we have seen on the deliveries and the revenue recognition.
Does that also mean that you have booked the profit from Lake Turkana in the first three quarters of the year, and then here in Q4, you book the megawatts, but with zero earnings?
Yeah, more or less. That's correct.
Okay. That also explains the low margins in Q4.
Correct.
Excellent. Thank you very much.
Thank you. Our next question comes from the line of Sean McLoughlin of HSBC. Please go ahead. Your line is now open.
Thank you. Good morning. Two questions. Just coming back to sales guidance. You said your visibility is very high, but it's really about execution. Does this mean that even the top end of your sales guidance range, you already have high visibility on, thus are less dependent on in-for-out orders to get to that level?
Yeah. What we said, of course, clearly you're right. Compared to a normal year or compared to last year, we have a high visibility this year. Of course, that means that we have less dependency of in-for-out. Of course, it's also true to say that it's not 100%, and therefore, of course, the higher we go on the range, the more in-for-out we would need.
Yes, okay. Clear. The second question is on offshore. You've reached net profits positive one year early. Just thinking, what can we expect this year?
We're not guiding for it overall, but we have a positive view on the performance in the offshore. Obviously, expectations from our side would be more or less, if not improved, at least in the range of what we delivered here in 2018. The DKK 30 million.
Okay, thank you.
Yeah. Thank you.
Thank you. Our next question comes from the line of Katie Self of Morgan Stanley. Please go ahead. Your line is now open.
Hi, good morning. Just two from me on the cash flow side. Firstly, just noticed that we don't have cash flow guidance for 2019. Is there a reason you guys are not guiding on cash flow this year? Is it just due down to the volatility or any other reason? Secondly, just on working capital, obviously there's been quite a high inventory build, as you talked about, to meet the firm order intake. Through 2019, do you see the need for a continued uptick in that build? Or do you have a sort of comfortable level at the moment?
Yeah, fair questions. The cash flow, first of all, I have to admit that there is a lot of volatility, simply because we are a project business, and I would be honest to say that we have not been 100% in our anticipation of cash flow. That obviously doesn't mean that we don't continue to have focus on cash flow. We haven't been very accurate in the forecasting. Internally, we have the same focus, and also long term, we anticipate to generate positive cash flow every year. That has not changed. If you look at the working capital, and the use of the balance sheet, you will see a buildup here in 2019 also, simply because we are so back-end loaded. Obviously, inventory level depends on the order intake and the performance or anticipation for 2020.
What we see now is primarily a buildup here at the beginning of the year on the working capital side, and inventory in particular.
Thanks. Just to clarify on the first answer around the cash flow guidance. Obviously, the longer term target to have positive cash flow each year. Does that longer term target stand for 2019 as well? Or is there a risk that it won't be positive this year?
No. That is part of what we have said earlier. Obviously, we're anticipating that type of a performance in 2019 as well.
Great. Thank you. That's clear.
Thank you.
Thank you. Our next question comes from the line of Dan Togo Jensen of Carnegie. Please go ahead. Your line is now open.
Thank you. I'd like to go back to the pricing issue here in Q4. I understand that there's some impact from EPC here. Could you give any sort of indication of what the impact of that is on the pricing, just to get some sort of feeling for prices heading into 2019? I guess that the very low price we have at the end of Q4 is not what we should be looking for in the first quarters of 2019. That is the first question.
Yeah. As I said, we had an ASP of DKK 0.76. If I compare that sequentially, as I said, I think we had 14% EPC in Q3 and 19% in Q4. On the other hand, we had a drag quarter-on-quarter on ASP from, we had a considerably higher order intake in China, where the ASP is half compared to markets outside China because the scope is very different. Of course, we have two fairly big repowering orders in the U.S. Those two factors sort of, we view as wash more or less. That means that what you should compare with the quarters going back is the DKK 0.76.
I think going forward, we don't guide on ASP per se, but if you use the backlog ASP as a proxy for looking forward, that of course will give you a proxy for that. Looking at the ASP in the backlog.
Sorry if I wasn't clear enough because the question was more related to the selling price, the TOR price that you have here in Q4, that dropped significantly compared to what you had in Q3.
The selling price for the revenue in 2019, of course, as I said, you should look at. You can use the ASP in the backlog as a proxy, of course, going forward. That was DKK 0.76.
Okay. On the mitigating effects of higher steel and tariffs in the U.S., you say you have compensated or can mitigate around one third of this. That leaves one percentage point left. Most of the mitigating effects have impact in second half. What are the prospects of mitigating the latter part, i.e., the impact of this going a bit further ahead? Do you expect to mitigate all of it? How should we look at that?
No, of course, we all continue to work on that. Also as we said, I think for 2019, that's where we are. If you look at, for example, steel as one key component for us and also in 2019. We have the same philosophy as before that, of course, when the order goes firm, we look in the steel at that point in time where we are, so that we secure the margin. Just like when it went the other direction, if you remember when the steel went up fairly drastically, we didn't have a big impact in the beginning because we had locked in the steel. The same phenomenon is on the other side of the coin, of course, if we should see, for example, reductions in steel.
On the firm order intake, we look in. We continue to work on mitigating actions on the supply side, of course. Again, it's very hard to be more precise than that. What we do is reflect it in the margin guidance we have. We will then go to the last question, please.
Thank you. Our last question comes from the line of Mark Freshney of Credit Suisse. Please go ahead. Your line is now open.
Hi, yes. Thank you for taking my questions. I have two questions. Firstly, on the U.S. tariff impact, which is, where there's a 1.5% impact of which you've offset 1/3 . How does that square with the comment, I think, at your investor day, where one of your staff acknowledged they'd passed through most of the cost to customers? I'm just wondering, is there actually a 1% impact or has it been recovered from customers? Secondly, on the product mix, the 3 MW or 4 MW platform now, the V112 is now some very late marks. My understanding is that margins for products platforms expand over time. My understanding is some of the latest marks come out towards the end of this year. Does that bring a positive margin impact for the group, which is another reason why this year's profits might be back-end loaded?
If I start with the first on the U.S. situation, I think we've said two things very clearly. First of all that, if you look at total mitigation factor on the tariffs, of course we have always said that our aim is, of course, to find a fair balance of the cost for tariffs between the different players in the markets. Our customers, the suppliers, OEMs probably have to bear part and, of course, our suppliers. When we talked about the 1.5% of the production cost, that of course, was very much based on the supply side of the equation. I think also, of course, we have been clear that we are trying to renegotiate with the customers. As before, I will not go in and comment on how successful we are on that for competitive reasons. That's the other side of the mitigating factors.
I think when you look at the comments also from Chris, you have to also take into effect that the timing aspect of where he sits in customer negotiations. Of course, most of his customer negotiations are on contracts that are absolutely not firm yet, and probably not even conditional yet. In the current contractual negotiation that he is in, he has a little bit different timing perspective than the firm contract that we are executing in 2019. I think that's an important thing to think about in light of his task. Of course, I would also say that being the president for that region, it's of course very much in his work description what he actually said he was trying to do.
The second question I don't really understand because, all things equal, of course, we launch new products to actually gain margin and not to have worse margins on new products. Of course it could be that we have a good margin on a very old product that we sell in a project somewhere with a super long lead time. Generally speaking, coming back to what are the two biggest levers on getting back to the situation that we had before with improving margin and still a levelized cost of energy down to the market, that is technology, new products, and cost out. Of the two of them, technology and new product is the biggest lever.
Of course that is why we also continue to invest in our portfolio, and I will say why we are also very satisfied with the product portfolio and the competitiveness of the product portfolio we have in the market today. We are clearly outperforming our competition when it comes to margin generation in today's market as well, and a big contributor to that is the competitiveness of the portfolio. With that, again, thank you so much for your interest. Thank you for calling in, and I'm sure we will have the pleasure of talking to most of you during the next couple of days. Looking forward to that. Again, thank you.