So,
good morning, everyone, and, welcome to this full year 2018 Q4 2018 report. As usual then, it's me and our CFO, Micah and Patrick on the and the IR team that are here this morning. Let me start with the usual disclaimer slide and then go straight into the key highlights of the year. So very solid order intake 14.2 gigawatts across 40 three countries. A 27% year over year increase, leading to an all time high order backlog of more than 1000000000.
The guidance was met on all parameters on revenue on EBIT, free cash flow and net investment. Also, 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 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. And we recommend a dividend payment of 7.44dekay equal to a payout ratio 30%.
And 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. And I will come back to that. But starting then with order intake in Q4. So very solid 5.5 gigawatts. That is a 44% increase year over year.
And at the average selling price of 0.76 per euro per megawatt in the quarter. U. S, Australia, South Africa and China were the main contributors to the Q4 order intake. And we also then took in orders of 170 Megawatts of PTC. Qualifying components.
So that is then 60% pay to see qualification components. Looking at ASP, remained stable in the quarter at 0.76 But of course, as usual with ASP, we should remember that geography turbine type scope. And of course, the uniqueness of the offering, is still a factor. But overall then, of course, we are encouraged to see now five quarter in a row with a stable ASP. These are the countries.
So all in all, 43 countries where we took orders last year. And again, highlights our unique global reach and also a strong global demand that we see in the market. We had 4 countries that were new to us and all in all, we are up to 80 countries or 80 plus countries now where we've wind projects. Maybe this is my favorite slide over the presentation today that shows the ordering take well spread overall. 3 regions.
So as I said, up total, up 27% year over year. 25% up in Americas where we see increases coming from U. S. And Brazil, but I would say, overall, good activity in most markets. EMEA up 25%.
Strong development in markets such Norway, out of Scandinavian Countries, also South Africa, more than offsetting the projected decline that we also saw in Germany. But again, broad based as we talked about throughout the year on order intake. And then Asia Pacific up 38%. Australia coming back as we also talked about during the year with more than a gigawatt in order intake. But again, broad base and we actually saw order intake from 9 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 where and U. S. Of course remained on a high level, EMEA up 2%. And here, Scandinavia a delivery point of view offset the decline that we saw in Germany, France and Italy continue at high levels.
And up 100% in Asia Pacific, driven by strong development in Australia, India and Thailand. And we had then lower delivery levels in China. As I said, we have a record high order backlog of more than 26,000,000,000. It's a year over year increase of 25 percent or 5,300,000,000 And we saw the increase on the turbine side to the increase was 3.1000000000 to 11,900,000,000 and SEK2.2 billion increase in the service to SEK14.3 billion. Looking at our your intervention for the offshore market, of course, also had a busy year, some of the key highlights, the firmware intake of approximately 3.2 gigawatts and also the upgrade of the technology platform.
So the V106 turbine is now has now a nominal rating of 10 Megawatt. Also, we see penetrating new markets outside the North Sea and, of course, good progress of preferred supplier agreement both in the U. S. And in Taiwan. And overall a solid pipeline of firm and conditional orders 5.5 Gigawatts.
So with that, I'll leave the word to Maika, please.
Thank you, Anders. So if we start with the income statement for the full year, we have during 2018, as we have also said before, seen an increase 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 in service, which then as I alluded to earlier, partly being offset by the lower prices in the Power Solutions segment. Gross profit is down by 3.6 percent 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 and A development in a later slide. The result from the JV is JVs is 40,000,000. Remember here that the, of this 40,000,000 dollars, $13,000,000 is related to the stand alone profit in the JV, Mitsubishi. And the rest at 26 primarily comes from the 3 Megawatt platforms and the ramping projects.
If we have a look at the Q4, Again, lower profitability driven very much by the Power Solutions segment. Also here, we saw saw an uptick in the revenue lines. So we actually improved 8% year over year despite the price pressure. And, 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.
And SG and A cost continue to be fairly stable, although slightly higher in the Q4 numbers compared to 2017. EBIT is also here down by 3% and that is obviously driven primarily by the lower gross profit level that you see here in Q4. So if we have a look at the SG and A cost, that continues to be under control. We include here R and D admin and distribution cost for the full year. This is a 12 month rolling, just to be very clear, and we are down compared to last year to 6.6% and absolute numbers 6.72%.
And the activity just continues this is one of the levers we have to monitor and offset some of the lower margin projects that comes from primarily beginning of 2018 2017. The service performance continues very well. And something that is very positive. So we have both grown the business 10% and organically. It excluding ForEx or currency, 13% and we have managed to deliver 25.2 percent for EBIT margin on the service business.
So obviously something that is very stable and continues to improve both on EBIT as well as revenue. The balance sheet remains strong and we continue to have a very strong cash position of over 3,000,000,000 the return on capital employed is 20.4 percent and that is lower compared to 7 and that is again driven primarily by the lower operating profit. I will also come back to both the net working capital 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. And 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 pace milestone payments and that is a consequence of the strong order intake that we have seen throughout 2018, I would say. But especially in Q4. And again, the higher level of inventory is really to cater for the strong order intake that you have seen, which obviously creates a good visibility for 2019.
Cash flow statement, full year free cash flow was in line with the updated outlook of approx 400. That we had in the beginning of the year and the decline that we have seen is primarily driven by lower net profit as well as higher investments. Networking capital, again, is impacted by noncash, just that is currency primarily of so no cash impact really, 1,000,000. So that's why the 169 is coming from. So all in all, we delivered 4 18 so very close to the original guidance that we had beginning of 2018.
Total investments is up. We are seeing 668 for the full year. But remember that if I look at the primarily investment focus that we have, which is again capitalized R and D as well as as most, we have seen 100,000,000 increase. So the 'ninety nine that we saw in 'seventeen positive is primarily the sale of the Ahus building. The warranty provisions and the lost production factor continues at a satisfactory level.
So focus on qualities there. And I would say quality is also delivered. So 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%. So a very stable performance from a quality point of view.
The capital structure and net debt to EBITDA is well below threshold. It's negative 2.2 the target is no more than 1.1. The solvency ratio is 26.1 So, 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 for the full year. And as said earlier, the dividend we are proposing is 7.44 And including the share buyback program issued, total distribution for 2018 is anticipated to be 6 7 for the full year 'eighteen. By that, I'll leave the word to you, Anders.
Thank you, Marika. So then moving into to strategy and strategy execution and starting with the major overall trend. And of course, the future looks very bright when it comes to growth in our industry. This slide is the forecasted growth in electricity consumption in petrovertowars, which is expected then to grow more than 40% to 2035. And this includes then our the sort of normal structure oil change, so population growth, GDP growth, but also reflects then, what we start see a transition from fossil fuel based systems, for example, transport, heating and cooling to electricity, And of course, also the amount of data centers and communication networks that we rely on today and will rely on going forward.
Key takeaway is that renewable will take the majority of this growth. An estimated U. S. Dollar will be invested in the sector by 2030. And renewable will overtake coal as the dominant source of generation also in the 2030 timeframe.
Looking a bit more shorter term then and into our three segments for Vestas, the onshore market, the service market and the offshore market. And starting with onshore, we see a large market with healthy growth, a CAGR between 5% 7%. On external numbers or where does this come from? I would say a 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 cooperation and actually increasing. The other part is of course the new build market where electricity consumption is driving the growth in more emerging markets.
And a bit beyond 2022, we also see an attractive repowering market. On the service side, which is more a midsized market with higher growth, 8% to 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%. And here I would 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 safety rounds coming up. But we also see new areas open up U. S. And Taiwan.
Are two good examples. And 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.
But of course, it's also when when global reach when it comes to manufacturing footprint, when it comes to service print in the market. It's technology and service leadership. About 2 weeks ago, we announced Enventus, the new turbines or the new generation of turbines. That's a good example. Or what we believe it takes to continue to stay, as a technology leader.
And in service, we did important, I 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 Megawatts and we are now servicing around 80 megawatts. But of course, it's also about scale in sourcing and manufacturers. Manufacturing. And last but not least, of course, it's about proven execution, towards our customers.
As I said about 2 weeks ago, we launched Enventis. 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 therefore, the customer's 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 will and require us to do that with a faster time to market.
And of course, with a lower levelized cost of energy, any increased capacity factors. We feel that we can meet this customer demand with Inventis and at the same time, continue to utilize the scale benefit that we have and optimizing our CapEx. These are the 2 products that we will start with the V155.6 Megawatt and 162, 5.6 And then they have the potential then to give increased annual energy production of up to 30% a little bit depending on the wind regime. So the overall strategy has not changed and division remains. We have a clear objective of market leadership both in the wind power solution area and in the wind service area.
And we have identified the critical mid term 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. So a 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. And we have actually done one change and that is that we have changed ROIC to ROSA and set and put the target of minimum 20%.
So to summarize then the year and also, including our share of the joint venture for offshore. We have a revenue of 11,000,000,000 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 SEK 1,000,000,000, 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 SEK 30,000,000,000 and all this intake of almost 16 gigawatt last year. And as I said, the largest installing installed base of more than 100 gigawatts.
So with that, let me go in on this year then and the outlook. So on revenue, we expect 10.75 to 12 point 1,000,000,000. And our service business is expected to grow approximately 10%. The EBIT margin before special items, between 8% 10% and here, we expect the service margin to be approximately 24%. Total investment approximately 700,000,000.
And 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. But we also again have a very backend loaded second half and loaded year in 2019. And actually that is as we see it more back end loaded than last year. And 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 in a backend loaded year ahead of us.
So Yes. One more slide here. The financial calendar, we have the AGM. And then you see the date here for the quarters of this year. So with that, Ian, thank you for your attention.
And then we go into Q and
you. Our first question comes from the line of Cristina Hansen of Danske Bank.
In this regarding execution risk. So obviously you're going to be incredibly busy in 2019. And unless you highlight that it's going to be even more banging loaders. So how are you ensuring you will not run into execution problems and to what extent this is reflected in guidance? Are you assuming a flawless execution in the upper end of your guidance?
Yes. I mean, of course, We work with a lot of different scenarios on the guidance, but of course, the range of the guidance reflects flawless or not so flawless execution in a sense of course. But and of course, we do mitigating actions I mean, we do mitigate the actions on the supply side. We have a global supply chain. We can do rebalancing over the year.
We, of course, have a detailed follow-up on our production plans and ramp up plans. So I mean, we work with all those different scenarios. So and what we can't control is, of course, the weather or the, especially towards the busy second half where we need to do a lot of the construction. And another part that is how to control is, of course, customers' availability to get grid connect for example. So something that is not in our hands, but more in our customer hands.
And those are normal executional risks. And having said that, I think it's also of course fair to say that with this good volume increase that we see. And in the market, there is a tighter supply chain, not something that we have identified at we don't think that we can solve. But an overall higher activity, a level in the market, of course, leads to a certain type in the supply chain.
All right. Maybe just to follow on that, does that we should expect accelerating cost inflation?
Accelerating, sorry.
Cost inflation, if the supply chain tightens.
No, I mean, as I said, all the all the I mean, all the factors that I talked about now is of course reflected in the in the guidance range that we, of course, we are working with them on a daily basis. So that is reflected in our best estimate for the year.
But just to follow-up on what Anders said, Christian, as we have a good visibility for 'nineteen, 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. So it goes a little bit hand in hand with the full visibility or very high visibility.
Okay. Very clear. Then my second question is on the development on project margins. During the year. So 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's still an element of these orders taken in competitive, 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?
I think all in all, yes, you clearly say it, and we saw a very big impact here in Q4 from the lower price level or the lower contribution margin. And the price level is very hard for us to impact, but 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. Then we are obviously continuing taking actions on optimizing from a production point of view as well as transportation point of view. Then 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. So I would say it's a mix of, technology operational and obviously also negotiating price with the customers and we also see a stabilization in the price level, which is very clear. We're looking at the slide that under presented earlier. So I think technology is where we have said that we will take the quantum leap And then 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.
But 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 end being the lowest in Q4?
But if, I mean, the lower project margin would have would take place in the beginning of the year, but you have so many other factors impacting overall but 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. So you would have volume obviously also impacting the overall gross margins. Because you absorb more in the high volume scenario.
Thank
you. Our next question comes from the line of Akash Gupta of JPMorgan. Please go ahead. Your line is now open.
Yeah. Hi. Good morning, Anderson, Marika. It's Akash from JP Morgan. I have two questions, please.
My first one is on margin guidance. So you and your competitors are agreeing that the pricing has stabilized and you have also given service in outlook of 24 percent for 2019, but 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?
And that's question number 1. The second one I have is on R&D. So R and 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.
Yes. I mean, let me start then. And as you said, I think on the price stabilization, I mean, what we see is, of course, five quarters now sequentially on a stable ASP. And 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 it was perhaps even more so the increased volume and the favorable volume that we see in the market And of course, there are also all our needs to improve profitability.
If you look at your specific question around tariffs and the U. S, as Mike also said, I mean, we have, we talked about before that up to 1.5% of production costs impacted by the tariff I mean, that was an estimated number of course already at the time. The tariff is a complicated thing. And of course, our or be active with mitigation is to avoid paying tariff and actually then move supply around so that we avoid terrorist situation. It's very hard to give an exact estimate, but if I try, we have we feel that we probably have managed to mitigate maybe a third of that.
And 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. How that was the only change there would actually have a fairly limited impact for 'nineteen then if we have a change now in the tariff situation because 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 And that of course means that, that we have a 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. But then, as I said, not in 2019 primarily, but probably then in 2020.
And if I continue on the R and D question, we, 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 And 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 mean of taking more of the quantum leaps in terms of margin improvements is the product and the levelized cost of energy improvement So in 2018, we capitalized to 1,000,000. I would say that considering the inventors and the new modular at this time, we will stay at that level also in 2019. And the FCC are slightly reduced from 2017 or the R and D costs in the P and L is slightly reduced compared to 2017, but I would expect that also to be in the same level But 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. Our next question comes from the line of Supriya Subramanian of UBS. Please go ahead. Your line is now
Yes. Hi. Thank you, Sabrina here from UBS. Just again, on the guidance, sorry to harp on this. Actually on the margin front, quite a broad range of 200 basis points from 8% to 10%.
If I could put it this way, what would make you achieve, let's say, the higher end of this guidance of what would have to go wrong for you to achieve the lower end of the guidance? I'll start with that That's my first question.
Yes. I mean, let me start. I come back to I mean, we are, of course, a project business. And And as I said also looking at the backend loaded year next year, which means that if, I mean, let's take an example. We are having a lot of activities in Q4.
We do a lot of constructions in Q4. If we then have and of course, we construct this wind park on windy sites. If we then have weather problems, for example, the construction gets delayed then 2 things can happen. Take a theoretical example. One is of course that the whole revenue in that margin moves over The other thing that could happen is that we can save the project in the year, but we have extra cost.
For example, the time the time schedule gets squeezed and we then have to instead of using 1 crane on construction, we have to use 2 cranes. For example. And then of course, the cost of that construction goes up due to that risk, that weather disturbance. So in the 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 or, for example, tacking a little bit lower on our attack time on on production that could be an internal execution issue that then leads to a high, of course. So it is very much down to, the execution in a very busy second half.
And 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. And then of course also the customer's ability to get grid connectivity, which is also a bit out of our hands. And of course, the other parameters we constantly work on to optimize.
Okay. All right. Thank you. And my second question is on the U. S.
Market. Just wanted to get your thoughts on potential outlook post 2020 essentially post the 100% BTC error because one of your competitors have said that customers right now are not interested in 60% PCC project, which I mean, you have booked some orders for that. So 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. And of course, we expect as before that the volume will from a delivery point of view will continue to build to 2020. So I mean, the market will go down somewhat in 2021.
I don't think it will be a very drastic reductions. We qualified quite a lot of percent PTC components. And of course, we will also see that there are some projects actually moving probably it's a tight market of course. I mean, it's a very high activity level market to 20 21. And then of course for 2022, can't speak for the competition, but of course, we are very happy to have secure then 170 megawatts of PTC components that customer have paid for and that we have.
So and that, of course, gives us also a very good base and outlook for construction in 2022.
Thank you. Our next question comes from the line of Klas Almer of Nordea. Please go ahead. Your line is now open.
Thank you. Yes, also a few questions from my side. The first question goes through 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 will be the first question.
Yeah. No, approximately means approximately. So that doesn't rule out a downside on 24% and it doesn't worry about an upside on 24%. So then theoretically, you could easily get to the same margin as last year.
Okay. So you don't see any change in pricing dynamics within the service division?
I mean, we see the same pricing dynamics in the service business as we talked about the whole year, no changes, really.
Okay. Then 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's combination, is that caused by less florida 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 than a heavy a lot of low margin projects in the quarter. Then we also had, as it's late in the year, we had some ramp up costs, so additional cleaning to make sure that we deliver the projects on time. And also some air freight, but the vast majority of the low margin impact in Q4 is really contribution margin on the projects.
Maybe would you say that the mix of the project 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. And to be even more direct on your question, I wouldn't say that the margin level in Q4 is representative for any given quarter.
That was very helpful. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Kasper Blom of ABG Sundal Collier. Please go ahead. Your line is now open.
Yes, 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% to 9% EBIT margin guidance that you give, let's assume the midpoint of 9% versus the 9.5% that you reached in 2018. Could you sort of point to the moving factors here, I. E. Price, tariffs, raw materials, leverage?
And maybe give an indication on what's 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. I mean, the overall, the range is based very much on operational ability. And I would say that since we have a good more than than a good visibility of 2019. Obviously, the prices in the year are already set. So it is a lot of operational potential headwinds or tailwinds.
So So the normal is really the most uncertainty is because we are back end loaded, which we are normally, but nineteen is even more backend loaded. So 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 and also being able to order. For example, it sounds very trivial, but order cranes in time. So So we actually have them at site when we need them and also avoiding double craning because it's super expensive.
So I mean, it's a good blend of everything. Then 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. Is that is catered for in the 8 to 10.
So I would say fairly normal performance is what we base those headwinds on. So it is very much timing of projects, if they are on time or not. So, there's nothing specific that I can point out giving us an a 9% or a 10% or even an 8% EBIT margin. But the prices is not the major impact in 2019 because that we have a visibility for.
Okay. But then I think I formulated myself a bit bad here because really what I was hoping for was sort of like a way to bridge the margin. I mean, if Anders has already said that that a third of the tariffs would have been mitigated, are you leaving a leaving 100 basis points for COGS, then 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 if possible?
I understand that Casper. We don't give that level of detail.
Okay. Then maybe you
can answer if there are any specific moves or changes in, for example, the geographical mix or is 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. So that we will always have And then obviously if we have a more China in 1 quarter or we have a lot of EPC contract increases the complexity level, but 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 supply installed or a supply only. So 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, but then leave the margin aside. Then if Jen, my second question is more about the levelized cost of energy. If you sort of compare 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 very theoretical discussions. I mean, 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% and we feel that we have probably done a little bit better than the market. So And I think that's all that is clear in if you compare our margins to the market were also performing better. And that is, 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 And 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, but exactly to put that year over year in the market, I would say, is probably almost impossible, if not impossible.
Fair enough. Thanks a lot guys. Thank you. Our next question comes from the line of Alok Katri of Societe Generale. Please go ahead.
Your line is now open.
Hi, thanks. Maybe I just have a follow-up first on the R and D side. I mean, obviously the capitalization was around 100 basis points of margin benefit in 2018. Marika, did I get this right that it's you expect 100 basis point effect or benefit to the margins in 2019 from the R and D side? Is that how we should understand?
This. So that's question number 1, and then I'll ask the other one later on.
Okay. So I'm not sure I understand your question, 100% on the 1%. Can you please repeat?
Yes, I mean, so if I look at the R and D capitalization in the P and L, so the cash R and D and the P and L charge, then roughly due to the capitalization in 2019, you had 100 basis point benefit to the margins. And 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 and L charge the 2018 level and the P and L charge should be around the 2018 levels as well. So does it mean another 100 point. So that's just wanted to and then how should we think about this whole capitalization versus?
First of all, we're sort of as what I said is that I expect the capitalization to be in the same level as in 2019 compared to 2018. And obviously, you saw an increase, but I guess the benefit that you are talking about is that I didn't address the depreciation and amortization part for 2018.
So should we expect an equal benefit or I
mean, that we are not guiding on that. I'll just give you the level of how we look at the capitalization for 20 'nineteen. And that will be in the same range as 'eighteen.
Okay. And is this driven by the new platforms that you are sort of Yes, definitely.
And that's what I said. I mean, 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 quantities where we see the biggest increases. So I mean, we invest in technology to further improve margins. So that goes hand in hand.
Okay, okay. Fair enough. The other question was, I think, I heard Andrew's quoted on the wires saying, that there's more cost adaptation measures that they're thinking of, including which markets to perhaps expand in and which markets to pull out, etcetera. So I just wondered if you could elaborate a little bit on, what are the cost actions that you are thinking about? And I'm a bit surprised at the timing of those comments because I don't I mean, obviously, had it been, let's say, 6, 8 months earlier, it could have been understandable where the pricing was dropping quite fast.
Now we think we're seeing stable order prices and yet see some of these comments. So just wondering what we should sort of read into that.
Can you repeat what was what I was quoted as saying?
Yeah. Well, I think you quoted on the wise saying about new cost adaptation sort of Yeah.
It's okay. Okay. Okay. Now I get it. Yeah.
Okay. Now I mean, what I said very clearly is that And of course, the question was further Europe cuts. And of course, we did some Europe cuts last year. And but that is very much in line with our overall strategy that of course as we as we follow the market from a footprint production point of view. So for example, I mean, last year, we we did some Europe cuts in Europe, in our factories in Europe.
And on the other hand, then we increased in India in Argentina and a bit in the U. S. So So my comment was very much around that you can never rule out cost cuts or Europe cuts in part of the geography because of course, we adapt our footprint to the market. So that was really the comment.
Okay. And you're thinking of anything in terms of 2019, 2020 as you could sort of see the shifts across your markets?
No, I would say that the, I mean, as we said before, if I look at this, long term, There is no doubt that, of course, we will see shifts in the market. And the big trend, like all other industries is, of course, a move from a more mature OECD markets to emerging markets and 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 percent in Americas, 25% in EMEA and 38% in Asia Pacific. So we will be for 'nineteen, we will be busy in all our 3 regions.
Thank you. Our next question comes from the line of Klas 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, Then it came in at the 0.76, I think it was. And I must say that I'm actually positively surprised because, you have a very large repowering order in the US and you also had 2 very large orders in China. Which ought to drag down the average selling prices.
So could you just perhaps comment on the underlying prices? And what is going on there? That would be my first question.
Yes. So you're right. I mean, we had to repowering projects in the U. S. And a higher sequentially higher order intake in China, which of course takes down, the ASP.
But on the other hand, we had an increase in APC contract I think they were about 19% in the quarter and they were 14% in the quarter before. And that then puts it drags up, so to speak, sequentially comparison. So that's why we feel that those 2 ups and downs are basically a wash and therefore we didn't specifically mention that where we see underlying then prices as stable.
Okay. And then on the delivery prices here in Q4, they look on the other hand very, very low. Could you comment on that? Is that due to some EPC contracts or is it perhaps even due to a Lake Turkana or what is going on with that?
Yes, fair question. And it is artificially low simply because, in Q4, we have now aligned to 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. But here in Q4, you see an impact because we don't have revenue or very limited being definitely one of them. And Easter menu is the other one. So that creates an artificially lower delivery ASP as 0.62.
But that is because of the discrepancy we have seen on the deliveries and the revenue recognition.
But does that also mean that you have booked the profit from Lake Turkana in the 1st 3 quarters of the year and then here in Q4, you booked the megawatts but with 0 earnings?
Yes, more or less. That's correct.
Okay. So that also explains the low margins in Q4?
Correct.
Thank you. Our next question comes from the line of Sean McLoughlin of HSBC.
Thank you. Good morning. 2 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 Florence orders to get to that, level?
I mean, what we said, of course, clearly, you're right. And that, I mean, compared to a normal year or compared to last year, we have a high visibility this year. And of course, that means that we have less dependency of in fraught. But of course, it's also true to say that we it's not 100% and therefore, of course, the higher we go on the range, the more in fraught we would need.
Yes, okay, clear. The second question
is on
offshore. So you've reached net profits positive 1 year early. Just thinking what can we expect this year?
I mean, we're not guiding for it overall, but I mean, we have a positive view on performance in the offshore. So 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. So the 1,000,000.
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 for 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 just down to the volatility or any other reason?
And then secondly, just on working capital, obviously, there's been quite a high inventory build as you talked about to meet the firm order intake. But through 2019, do you see the need for a continued uptick in that build, or do you have sort of comfortable level at the moment?
Yes. 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.
But it's just our we haven't been very accurate in the forecasting. Internally, we have the same four And also long term, we anticipate to generate positive cash flow every year. So that has not changed. Then if you look at the working capital and the use of the balance sheet, you will see a buildup here in 20 in also, simply because we are so backend loaded. And then obviously inventory level depends on the order intake and the performance were anticipation for 2020.
But what we see now is primarily a buildup here at the beginning of the year on the working capital side. Any 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 a risk that it won't be positive this year?
No. I mean, that is part of what we have said earlier. So obviously, we're anticipating that type of a performance in 2019 as well.
Thank you. Our next question comes from the line of Dan Togo 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 where what the impact of that is on the pricing just to get some sort of feeling for prices heading into 2019 because 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. No. I I mean, as I said, I mean, we had an ASP of 0.76. And and if I compare that sequentially, then, then, as I said, I think we had 14% APC in Q3 and then 2019 in Q4. But on the other hand, then we had a drag quarter on quarter on ASP from we had a considerably higher order intake in China where ASP is half compared to markets outside China because the scope is very different.
And of course, we 2 fairly big repowering orders in the U. S. And so those 2 factors sort of we view as a wash more or less. And that means that it's the what you should compare with the quarters going back is the 0 point 76. And I think going forward, we don't guide on ASP per se, but I mean, if you use the the backlog ASP as a proxy for looking forward that of course will give you a proxy for that.
So look at 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 TUR price, that you have here in Q4 that dropped significantly compared to what you had in Q3 and of course compared to
The selling price for the revenue in 2019, of course, as I said, then you should look at you can use the ASP in the backlog as a proxy, of course, going forward. And that was 0.76.
Okay. And then on the mitigating effects of higher steel and tariffs in the U. S, you say you have compensated or communicate around 1 third of this that leaves one percentage point left, I guess, most of the mitigating effects have impacts in second half. What are the prospects of mitigating the latter parts, 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. I mean, of course, we all continue to work on that, but also, as we said, I think, for 2019, that's where we are. And if you look at, I mean, for example, still as one key component for us in 'nineteen. We have the same philosophy as before that of course when the order goes firm we look in the state at that point in time where we are so that we secure the margins. So Just like you 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 and the same phenomenon is on the other side of the coin.
Of course, if we should see for example, reductions in steel. So on the firm order intake, we look in. We continue to work on mitigating action on the supply side, of course. But again, it's very hard to be more size than that. And what we do is reflected in the margin guidance we have.
So we will then go to the last question please.
Our last question comes from the line of Mark Freshney of Credit Suisse.
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 third. How does that square with the comments, I think, at your Investor Day where one of your staff acknowledged that 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, I mean, you know, the 3 or 4 Megawatt platform now, the V112, is now some very late marks. And my understanding is that margins for products platforms expand over time? And 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 US situation, and I think, I mean, we we've said 2 things very clearly. First of all, that if you look at total mitigation factor on the tariff then of course, we have always said that our aim is, of course, to find a fair balance of the cost for tariff between the different players in the markets. So our customers as the suppliers as OEMs probably have to bear and of course, our suppliers. And 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, been clear that of course, we will, we are trying to renegotiate with the customers.
And as before, I will not go in and comment on on how successful we are on that for competitive reasons, but 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 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. So of course, he has a in the contractual negotiation that he is in, he has a little bit different timing perspective than the firm contract that we are executing in in 2019. And I think that's an important thing to think about when in light of his task.
And of course, I would also say that being the precedent for that region, it's of course very much in his work description of what he actually said he was trying to do. So the second question, I don't really understand because of course, I mean, all things equal, of course, we launched new products to actually gain margin and not to have worse margins on new products. So I mean, 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. But I mean, generally speaking, of course, the, I mean, coming back to what are the 2 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. And of the 2 of them, technology and new product is the biggest labor. So and of course, that is why we also, continue to invest in our portfolio. And I would say why we are also very satisfied with the product portfolio and the competitiveness of the product portfolio we have in the market today. I mean, we are clearly outperforming our competition when it comes to margin generation in today's market as well.
And a big contributed to that is the competitiveness of the portfolio. So 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. So looking forward to that.
And again, thank you.