So, good morning, everyone, and welcome to this second quarter report. As usual, it's, me, my HR and the IR team. So let me start, of course, with the usual disclaimer, statement and then straight into key highlights. So speaking with strong order intake in the quarter of 3.8 gigawatts, 40 3 percent increase year over year. Leading to an all time high on the backlog.
In a bit of EUR 259,000,000 corresponding to 11.5 sense. Good or I would say very good service performance, both on the growth side with revenue growth of 17%, in organically, and also a solid airbit margin of 25%. The free cash flow negative as a result of a backend loaded activity level in the year, as we previously have talked about. We also launched a share buyback program of $200,000,000 in over 30 years, the capital structure. And then on the outlook, within our previous outlook, we have narrowed the outlook for revenue and ARB based on improved visibility.
As usual, then I will talk to the others and the markets make more details on the financial, and then I would come back to the outlook. So, starting with all of them, as I said, 3.8 gigawatts in the quarter and an average selling price of 0.71000000 per megawatts. So this is an increase of 1.40 Gigawatt or 40 3% year over year. The order intake was broad based, it was 21 countries led by the U. S.
And again, it was a testament to our global reach. Look at the ASPM, we say overall stable levels, observed in the recent quarter. Of course, now it's 2nd quarter sequentially that we see stable ASP. As usual, and we should remember that ASP is influenced by a number of factors, geography, scope turbine type and, of course, the uniqueness of the offering. And on on that topic, your the scope and turbine types, the trends that we have seen before continues, which means more 4 Megawatt, 3, 4 Megawatt compared to the 2 Megawatt platform and also the trend that we continue to take more order on, power nodes.
One specific thing fairly small in the quarter, but as I can mention, we had a repowering order on around, I think, 200 something megawatts with the very limited scope. And if we add yes for that, theoretically, then the ASP would have been 0.72. As I said, the trend on the plan funds continues, the demand shifting to us for Megawatt platform. And you can see here that in the first half of this year, we'll take an order of 4.1 gigawatts on the 4 megawatts and 1.3 on the 2 megawatts. We continue to invest in technology and to release new products based on our platforms.
And in the quarter, we received our 1st order for the 350, 4.2 Megawatt a product that will increase the production more than 20%. And of course, we are really pleased by having a broad range of 3 and 4 megawatt products that covers both a broad range of markets, but also different wind conditions. The same thing on the 2 Megawatt platform. We continue also to upgrade this platform and, in the quarter now, we have installed the, both on the rate thing and the rotor sizes. And in the quarter, we have installed a prototype of the the 120.
If I then talk a bit about the market environment and sort with Americas, Radian, where we see a strong order intake in U. S. And Latin America. Looking first at the market, continued to see a very strong U. S.
Demand driven by the Calendly fee cycle. We also see tariffs impacting because of wind energy project And here, of course, we are working on a range of mitigation strategy utilizing our global footprint and the full value chain. Latin America, as we talked about before, probably the continent where was first rewatching and how we the auction in the second half of this year in, Argentina, Brazil and Colombia. Looking at delivery then was down, 41% in the in the first half of this year compared to last year. US declined primarily due to, the PSA components of last year.
But also a lower activity level, the annual across Latin America. Order intake strongly up, 100% up. And so, and here we say continued high levels in U. S. And Argentina, while the increase, primarily is driven from markets in Latin America, such as mix secure delivery and Panama.
If we look at the external forecast for market volume, and based on make numbers, we see a continued, strong development and growth in megawatts of Gigawatt in the region, primarily driven by the U. S. And a stable Latin American market. If we can go over to, EMEA or Europe, Middle East And Africa, also here, a good high activity levels. On the market side, we are of course placed that, Europe has increased the 2030 targets if you could discuss the possibility of that last quarter from 27 to 33%.
Which is a good more long term or midterm sign. A bit closer to the home, we have a new MOB agreement there in Denmark, which we are, really pleased with. Also a bit closer to air. We see Poland is restarting options from being a market that's basically came to a standstill. New markets coming up in East region, Russia, such an example, and in the quarter, a 900 Megawatts auction was completed, on top of the, I think, close to a gigawatts previous auction.
And we continue our plans on local estate after their successful auctions. We also see some positive moves outside the European area, South Africa, that, of course, has been a market basically frozen for the last 2, 3 years. And we now see that PPA has been awarded to the last auction and also the new auctions being planned for. Looking at delivery then, down 20%. 1.2 Gigawatts, mainly then the decline in UK, partly offset in France and Italy.
We continue to see solid levels of delivery in Germany, although a decline compared to last year. Folder intake, 2.3 gigawatts, 16% decline. They're very much due to Germany, but race since their auctions still not have materialized in infirm and unconditional order. On the other hand, I'm compensated by, solid development and order intake in the Nordics, market like Sweden and also, in Mediterranean countries like Italy. Here, if we look at the external forecast, up to 2020, we see a fairly flat forecast I believe that there could be some upside so that once the the target, the increased target in Europe is calculated maybe a bit after 2020.
In Asia Pacific then, quite a lot of or changes in the market, you can say, still early days. So China has, decided to move from a trading tariff system to auction in, it was starting in 2019. Very little today known about the auction. So very early days to have a firm view on what it means. Of course, we are hopeful that, and we have no auction systems well known for us.
And that we will get more focus on, lifetime, IRR. You mean the up? As we said, we said before, we've seen the targets being increased to 2022 from 60 to 80 gigawatts. However, execution in those auctions still timely uncertain. And of course, very recently, we saw some, slippage in planned auctions for this year.
I want to say positive signals in the broader Asia Pacific, where we see development in new or see many new markets such as Indonesia, Philippines, and Thailand, and also a good outlook for Australia with the 650 megawatts expected or in Q4. Deliver it up considerably from a very low base. Of course, so 4.48 percentage points. Here, a strong development for us in India, Australia. Thailand order intake down about 30% in the half year.
This is very much due to the China, our brilliant tech we had in Q1 of last year. But on the other hand, we see continued success in in, as I said, a broad scale of markets, outside the big 2 volume drivers. If you look at the external outlook again, you see a solid growth close to a solid percent. Of course, volumes, they're much, expected to come from India and China. But as I said, we see good activity levels in several, markets outside the 2 volume drives.
So, that leading then to, an all time high or the backlog of the €23,000,000,000. Which is a sequential increase of 1,400,000,000, on the turbine side. 1,000,000,000, an increase of 0.9, and on the service side, 12.8, an increase of 0.5000000000. It's also been a busy quarter for your own venture with MHI for offshore, starting with the product side, We have the largest, turbine in the world, and we have now, received a certification for the 864, 9.5 Megawatt turbine. Also on the sales side, from an unconditional order, both the 3 and 4 and also a preferred supplier, announcements of 900 megawatts in Taiwan.
All in all, about a solid track record and the solid pipeline of 5.1 gigawatts of unconditional order and conditional order the preferred supplier agreement. So with that, I hand over to Maika.
Thank you, Anders. So, what you can see here in the income statement is, obviously, a reflection of what Anders have gone through here. In terms of what have impacted us in Q2. So you can see revenue, which underlines the high activity level that we have spoken about earlier, you see a positive change of 2% year over year. Gross profit is down 14% in absolute numbers and primarily due to, the margins in the Power Solutions segment.
Eye the the turbine payments. The SG and A continues to be well under control, in this, also in this quarter. And it's and continues to be, a very important factor for us. And you can see here, EBIT is down to 11.5 in double digit margin in Q2, so down 1.1% year over year. So clearly, less impact on the EBIT and what you see on the gross profits here in the quarter.
I continue on leveraging on the SG and A, remember here that you see a role in 12 months, So year over year, Q2, you see an increase in percentage, but still well, and PIEtech controls, you see that it in absolute numbers, the last 12 months rolling is below last year. So obviously, as I said earlier, a very important factor. And again, something that we keep while under control, have been and continue to do. Have a look at the good service performance that Anders was alluding to earlier. We don't only have a very good order backlog.
For the service business, we also have a growth here, 11% year over year, and organically in constant currencies, 17%. So, a very good growth also in this quarter. And on top of it, a very solid good margin. Also in this quarter, I was actually approaching 25 percent here in the quarter. So very satisfactory.
The balance sheet remains strong and also provides the visibility that we have been looking for, and that's how we have managed the the balance sheet. The net interest bearing position is above 2,000,000,000, and obviously negatively impacted by the increase in net working capital, which I will come back to, on a later slide. And also the cash flow from financing activities. We see an increase, that we actually have planned for, in particular, for the inventory by, EUR 82,000,000 here in the quarter. Solvency ratio, remains in the boundaries.
So we are delivering here in Q2 of 25.9%. And also remember here that we did obviously impacted by the working capital, but also the fact that we did a share buyback starting of year 2018? The change in net working capital over the last 12 months, you see the increase in inventories that we have, talked about earlier, that is well offset by the prepayments over the last 12 months. And you see the same trend here over the last 3 months according to our expectations. And here, the inventory increase is also offset by prepayments and payables.
So it just underlines the high activity level that we have in the company. And we said that Q2, we will also continue to use the balance sheet and therefore, increase the inventory. But also bear in mind that we feel comfortable with the fact that we will reduced to inventory due to high activity level in the second half of this year. If we have a look at the warranty conditions and not production factor, quality is very important for us. And if we continue to deliver, reasonable and good levels.
So we are in this quarter consuming less than what we provide for. We are now providing approximately 1.5%. And you see also that the lost production continues at a stable level below 2%. The cash flow statement, we are generating flow, due to good performance in the business, and obviously, the net working capital as I was alluding to earlier, you'll see the negative impact from that. And the free cash flow before, financial month is negative 173 compared to negative 158, last year.
And the cash flow from financing activities is obviously driven by the dividend payment that we made in April of this year. If we have a look at the total investment, it's in line, with last year, a slight increase, also reflecting on the high activity level in the company. So we continue to invest in family mode, as we have said earlier and also, capitalized R and D. So no change in sort of the overall investment pattern that we have. Also bear in mind that we are investing in the local content requirement that take place.
So we are investing in India in Argentina and also in, Russia. The capital structure, we continue to be within the thresholds. So if you look at net debt to EBITDA, we're well within the boundaries of being in negative territory. And the solvency ratio is still within the boundaries but obviously impacted by, the share buyback here earlier this year. We are now pleased.
So that's to announce the share buyback program up to 200,000,000, which means that we have adjusted the the capital structure or will address the strong cash position to a total amount of, approximately 400,000,000 this year. And we have also done, the dividend and the dividend policy remains the same. So we are have a policy of 25% to 30% on net profit, and that remains. By that, Anders,
Thank you very much, Marika. So then let's go to the outlook, for the year. And as I said, we have now our outlook, compared to, previously on the revenue side, from 10 to 11 to 10 to 10.5, and we expect the service business to grow. I should say that we continue to see a good activity level overall and also, confirmed by our strong order intake in Q2. But However, as you know, we are a project business, and we are also seeing some delays in some larger orders.
As you might have noticed, a large part of them came late in the Q2 and consequently, revenue recognition of those projects will not materialize that will materialize later than we, originally expected. On the average margin, previous outlook, 9 to 11, and now we say 9 and a half to 10 and a half. And here we expect the service margin to increase compared to 2018 and actually then compensate for, the lower parts of the guidance, for the revenue. Otherwise, no changes, total investment with the same definition as before at approximately 500 and the free cash flow of minimum EUR 400,000,000. So with that, we move into Q And A.
But before we do that, I just want to take this opportunity to remind you. That we have a Capital Markets Day coming up then, in, end of November, 29th November, but hopefully, we will talk to each other earlier because we also have Q3 in November. So with that, let's go to Q and A. Thank
0 and then one on your phone keypad now in order to enter the queue. And because the amount of questions, we also ask you kindly to limit your questions to 2 at a time. And the first question is over to ABG and Casper Blom.
Thanks a lot. Thanks for taking my question and congrats with the strong numbers here in Q2. My first question relates bit to the guidance that you get for the full year or rate rate for the full year. If you kind of deduct the first half of the year, from the mid of the guidance range. And we're looking at a second half, revenue will be up by around 60% or so compared to the first half of the year.
But where the margins will only be up marginally. And I mean, normally, we would expect some operational leverage, on the back of higher activity If it's fair to say that sort of roughly speaking, that operational leverage is now being eaten up by the price pressure really starting to hit the P and L That's my first question.
Yes.
Thank you, Casper. The your assumptions in terms of lower leverage in the second half is obviously right looking at the guidance that we are providing right now. And, it's fair to assume that you see a higher portion of the low margin or the price pressure impact that took place in the latter part of last year that we haven't had time to mitigate at this point that that will take place or those will be if you are in the second half of this year.
And just to follow-up
a bit on that, I
mean, it's roughly 12 months now since we started seeing the price pressure, and it's been hitting a year later. Is it then also fair assume that we'll kind of see the impact on the P and L the next 12 months before we'll sort of go into a more stable phase again.
I I would say that you do you will see a mixed bag. So you will see, impact from, from from the price pressure, but you will also see an impact from stabilization on the prices. But also bear in mind that the longer lead time you have, obviously, the more mean you have to mitigate some of the shortfalls that you saw on the prices and therefore, the margins of the project.
Okay. And then my second question, you did touch a little bit upon it in the slide where you mentioned tariffs, but Could you elaborate a bit on your thinking about the higher steel price in the U. S, depending on the assumptions you do, I guess, a windmill in the U. S. Has become 4%, 5% works expensive.
Do you think that's something you can, communicate through, through higher prices?
Yeah. I think, I mean, first of all, of course, I have to say that, I mean, as you all know, it's it's a very fluent situation. So, so if you call something that, I wouldn't change pay change daily, but but fairly fluid. And, of course, and, of course, that's also nice. It's it's very hard to predict.
But Of course, we are we are continuously trying to assess the the the situation, and look at and look at the potential impacts. And also then utilizing our global footprints and the procurement options we have with us, in the entire value chain. But based on the current estimates. And I must point out the estimates then, and what we're seeing so far, our production costs could increase up to 1.5% for the group in 2019. But I stress then could increase and up too.
And as I said, it is a very affluent situation. We're, of course, monitoring this, both when it comes to steel, specifically, but of course, also these different waves. That is currently implemented and under discussion. And of course, we have a number of of mitigation actions, especially on the component side, since we do a very large extends has a dual sourcing strategy.
Okay. And just to be absolutely sure, Aaron, is it the 1.5% higher production cost. I mean, you are referring then to the entire group, not just the U. S. Market, so basically 1.5% gross margin decline?
1.5% is referring to the total group.
That's very clear. Thank you very much.
Yes. We are now over to Kristian Johansen at Panske. Please go ahead. Your line is now open.
Thank you. Just a clarification on your, the answer you just gave. So the one point 5, is that excluding the mitigating actions you're working on?
That is, as I said, could increase up too. And of course, we are working on mitigating actions. And then again, I I want to stress that. I mean, you all know that it's a fairly fluent environment to to yach. Sure.
That's okay. Then my first question is just on the orders and the exceptional high level of announced the orders. Can you just elaborate a bit on on what has driven this and what we should expect going forward?
Yeah. I I I think, I mean, as as I've said, I think all of us are a bit lumpy. Of course, in the quarters and so also on the unannounced side. So, I mean, there is no sort of, real conclusion to draw from level of unannounced order going forward. It will continue to, to be, to be lumpy.
No specific, market that that speaks out.
Alright. Fair enough. Then in terms of your backlog and the delivery schedule, so we've now I've seen this trend of continued increasing order backlog, while deliveries for many quarters declined. Now we're seeing a bit of growth Can you just help us sort of understand when will this continued increasing backlog really materialize into substantial delivery growth Will this be to towards the end of
the year, or do we need
to get into to 19 before we really see that kick in?
We have said that, that that will need, not being specific on, at what point, but this also depends on the of of the different project as we have. So if we have an EPC project, we're just following, the requirements for there. We can actually take revenue as we deliver the project, but we don't get the megawatts until we have fully toward the EPC project. Which is obviously different than from a supplier and install projects, and it's also different from a supplier only project. But I cannot give you an adequate timing because it depends on what type of projects we have in pipeline.
Alright. Fair enough. Thank you.
We're now over the line of Akash Gupta at JPMorgan. Please do go ahead.
Yes, hi, good morning, everyone. Thanks for taking my questions. My first question is on Megawatt and recompletion and inventory on balance sheet. Obviously, both has gone up quite significantly year on year. And the question I have is twofold.
One is that, what sort of milestone do you need to incur or what about how much cost do you need to spend on a project in order to qualify the volumes of that project into megawatts and recompletion And then if you can explain this 1,000,000,000 increase in balance sheet inventory year on year, how much of that is in the U S? And how much is the rest of the world? That's question number 1.
So if if I understood your question correctly here, and you're right. Obviously, that's what I said we are building inventory. We also see a trend going forward that's, that's simply because of activity level will be reduced here. In the second half of the year. And when it comes to megawatt under completion, we cannot until the the project has been fully to to us.
You don't get the megawatts out of inventory. So that is a little bit the same answer as the one that I gave to Christian earlier. So it depends on a little bit the scope of the project. But the only sort of, the the the confidence we have is obviously that the inventory we're building up now. Is what we also see a consumption for in the second half of the year.
Okay. And the second question is on on gross margins, you said previously that you had gross margin in orders as soon as the project becomes permanent and conditional. And now I if I look at your order intake, significant orders are for 2019 deliveries. So, for those orders that you already have in backlog for 2019, Is there any risk from increased costs of components or they are all hedged as of now?
Well, a little bit was what Andreas was alluding to earlier. And, what we have said that for this year, we have been, we have been, well hedged on the scene, in particular. And then you have the different ways if we're talking about the U. S. Specifically, that case pretty late.
We also have the 3rd wave, that has not been implemented, and we don't know. And to answer your question, a little bit different and a little bit what I said earlier. The longer lead time you have of the project, so the global footprint that we have, the more mitigating factors we can implement on the different projects that are to be to you.
Actually, the question I have is not on steel, but more on the other components like gearbox, like bearings and all, who are basically, let's say if you have sign different and then conditional order for next year, has the pricing for that has been agreed or that can change later on? That was my question. To be precise.
I think that that is very specific negotiation. But if you have a permanent unconditional order, I mean, then you have agreed on everything, then it's up to us what we can mitigate, internally, but it doesn't have anything to do with the customer.
Thank you.
We're now over to Dan Togo at Carnegie. Please go ahead. Your line is now
Thank you. I would like you to get some clarification on the service margin here because what surprised me I guess also the market. And including yourself, as you're guiding up here now, is the service business What has, sort of, say, surprised you and what has performed better than we expected? Just when we left, when we left Q1, That is the first question.
[SPEAKER STEPHEN ROBERT BINNIE:]
Yes. No, but I've been basically asking, I mean, we're really Q1, of course, we had, very high, EBIT margin in the service business as we also talked about then. On the other hand, fairly modest revenue growth. And we're seeing that part of it, which is more explained about when we do the activity So if we have less activity, the margin percentage goes up. But now again, in Q2, we're, of course, really happy that we're now may all able to combine both solid revenue growth and, a health stream, better.
Than expected margin. And the reason for that, as we say, it is, that we have talked about it before. That's, of course, a big part of the focus in the service business is to work on the cost health programs that we have. And we see very good traction on those cost outs. Again, of course, partly because we actually gets more and more efficiency and, of course, also helps them by, the good quality.
And and the the 25% that you reached now, even Martin, is this what they should be looking for also for the second half of And will that be some sort of, say, a catch up to what you had in 2017? How should we look at it?
I mean, what we said is that we expect the margins to improve compared to last year, and we don't give any exact margin forecast for the service business. But on the other hand, then we have, of course, narrowed our air base range for this year.
Okay. Good. And then Anders, you were talking about ASP stabilizing. Is there a way to see both your cytokine and you also see a decline here. And so I understand that, I mean, you are muted for this somewhat, but when you prefer to stabilizing.
Is that we go back to sort of say the sequential year over year annual declines of, let's say, small single digits, if how we should look at ASP going forward?
When I when I said stabilizing, of course, I refer sequential stabilization of ASP that we now have seen for the 2nd quarter. And I think it was If you remember last quarter, when I got that question, I said that I would like to have some, some more sequential portals where we see a stabilization on on the ASP. And and that's, of course, positive that we that we say that now. Then then, of course, you're right. I mean, if we compare, you know, here, that's, of course, where we say the big, impact on, on the ST reduction.
I I think what it's also to remember, it's important to remember what I said that if you look at Yes. ASP. Everything else equal. I mean, let's let's say the price is equal and you, yes, look at the ASP because of the technology ASB will will, of course, mathematically continue to get on, from from the fact that we have a change in the platforms, we sell more 4 megawatts, for example, than 3 megawatts and also by the the power upgrades that we have in the platform. So you get out more megawatts, for platforms.
So purely mathematically, then of course, you will see an ASP decline, even if the, even if in that example, the pricing element is is constant. So that's, and I think that we have a view that we should go back to that kind of situation where we actually had before with a fairly, with a modest the sort of decline in ISP, but then compensate by, by technology and forced out is,
of course, our,
whole but I will not, really forecast what's, what's, the competition will do going forward because I have limited visibility on that.
Oh, understood. Thank you.
We're now over to the line of Katie Sales from Morgan Stanley. Please go ahead.
Hi, good morning. Thanks for taking my question. Just one actually because my other ones have been covered. I wanted to ask on the Schafer IFRS 15, I see that it's essentially added about 1,000,000 to EBIT in the first half of this year. I just wanted to know how we should think about that into the second half.
Does that reverse for a sort of neutral impact overall or something different?
I mean, uh-uh, I we're just following the standard and you will see that some some projects have been shifted from 17 in into 18, and you will see the same trend depending on on type of projects that they will shift from 18 into 19. So it's very hard for me to to predict exactly what is will be the impact in the second half because it depends on what we will deliver. Okay. Thank you. That's good.
We're now over to Claus Alma at Nordea. Please go ahead. Your line is
Thank you. A few questions from my side too. Honestly, after Q1, you said the pipeline of orders looked really, really promising, and you were definitely right. Can you put some color to the Q2 level? Is this a new level or is more a quality variation?
That would be the first question.
Yeah. No. But, of course, as I said, before, all those by nature are all lumpy and And of course, when we get to all the firm and unconditional, within the quarters and within the year, that is Lampi will continue. We expect it to continue to be lumpy. So I will not give any any outlook on order intake.
But of course, we are really pleased with order intake in in q 2. And and and I and and of course, it reflects a high activity level in the mall. It overall. And also, that we have a good competitive position in order to capture those orders.
Okay. And then my second question goes to this possible higher input cost or production cost next year, as you mentioned, which, obviously, you mentioned 1 a half percent, which is a negative part of the equation. Maybe it's also possible to get a color on what savings do you see, both internal and or external?
Yeah. No. Of course, we continue on our operational excellence program and and that we have been running now. At least for the 4th 5th year. And, I mean, we, for competitive reasons, we don't really go out with a percentage or a number.
And on that, I can just say, as I think I've said before, that our targets on efficiency and costs are all in the same or the same, actually, the same magnitude as we have targeted previous years. And so we see those opportunities. And then, of course, we have to make sure that we also realize those opportunities, during the year. So that should also
mean you should more
be able to mitigate this high, production costs, given what you've said in the past. Is that rightly understood?
I mean, I I don't think you can see it like that. I think you have to see it that you have a baseline and then we work on that, that cost. At that baseline. And of course, that's, we break that down, that program down in a 3 year rolling and a 1 year rolling. And and we actually try to, to find, the candidates on a 3 year basis.
So I mean, that's an ongoing activity on the whole on the whole, course based based on the baseline at the time, that we we set the targets. Of course. So If you have movements in that, I don't think you can sort of come to the conclusion that you can eliminate certain parts. It's if the part if the cost then goes up, then, of course, you have to do more than your previous theoretically, you have to do more than you previously anticipated. Because your baseline has no.
Okay. Then I would try to ask, ask in another way. So your comment about 1 a half percent increase Was that a, you know, a try to to talk to the consensus number for 2019, maybe being too ambitious Although you're officially not guiding on 2019?
No. I mean, our our intention is yes. To put as much information forward as we possibly can and see in the market and And of course, of course, it's, it's a well known situation that are all tariffs that we've seen still increases on prices in the U. S. And of course, we, we, it's an attempt to qualify, as I said, what it could mean, on a group, on a group level.
So nothing else
Okay. Thanks so much.
We are now over the line of Mark Freshney at Credit Suisse. Please go ahead, Mark.
Hello. Good morning. Can I please ask on the nature of the contract in the United States? My understanding is that some of your competitors are waving still pass through costs, provisions, is that something that you've done on a lot of your US orders, I. E.
Are the contracts index to spiel and other general costs as well. And secondly, just on the turbines under completion on my estimates, they've gone above 7 gigawatts, which is well over twice what they'd been in a on a flu cycle basis, you you spoke about managing bloke blade mold investments, are you using the balance sheet to avoid doing extra CapEx, but would we ever be would we ever expect that turbine's under completion number to come down and the the inventory and the prepayments to also come down in tandem? Thank you.
Okay. So I see a long question. If we start with the the inventory and the megawatts and the completion is, basically, again, what I said, your number is obviously correct. It's around 7 gigawatts. And, what we have, we're not disclosing the number.
But obviously, if you want more information, you can you can get that. And when it comes to the type of contracts and when we sort of recognize the, the revenue is, again, dependent on, on, on the type of contracts. Did I understand it correctly when you add about the correlation with the megawatt under completion and inventory? Or
Oh, well, my point is, will we ever
see a destocking, will we ever see you bring that inventory number down here?
Yeah. And that that's what I try say earlier. So if you look at the use of inventory, we obviously are planning for a higher activity level in the second half of this year. And that we will definitely see, a reduction of the inventory that that is part of the planning process. But what I have also said to be very specific is that as we've been extremely good, at managing the overall working capital, and you have seen a significant flash out at the end of in every calendar year for the last few years.
We'll not see that same trend because we're also obviously planning for next year. So we are, avoiding capacity investments to make sure that we can actually invest in capacity, especially for certain markets. And that also is also what we've done when you look at Argentina, as I said earlier and also India.
Yeah. I mean, if I should give some also on the steel question. I would say that, I mean, as you've seen, and as we said, this year, in 'eighteen, we have no significant impact on the margin from, from sale. And of course, that means that with different methods, towards our suppliers, indexation towards customers, but also, herching, we have mitigated that. So, I can't really comment on on what our competitors are doing or saying, but but that has been our method.
How that will work going forward will, of course, all depends on the competitive situation in the markets. And and but there, of course, you should we should also remember that we all know it's a very competitive market, the market, but we are not we are we are not selling a price for turbine to our cash. Now we're still sell or or customer takes a decision on the on the IRR that they get, in their business. Case with different turbines. So of course, price is one such factor.
Another way to compensate it theoretically. So of course, tend to have a more, a turbine that produces more, so to speak. Because that's in the end of the day, how we are judged compared to the competition by all customers.
We're now to the line of Alok Katre at Societe Generale. Please go ahead.
Hi, Alok Katre from SocGen. Thanks for taking my questions. From my side as well. I was just thinking about how the dynamics of cost and margins within the inventory are, let's say, the megawatt and the construction, are mean, you're obviously overproducing today to manage capacity. So you get a benefit of fixed cost absorption, but then it also means that your inventory and action, is being valued at today's unit cost, which is higher than what you would perhaps have 12, 18 months on the line.
So I was just wondering you know, how we should think about that in the context of effectively when you convert these, like, what are the completion into sales? What sort of margins? You know, what would kind of get reflected, into your P and L over the next 18, sort of sort of months. So that's question number 1, and then I have a follow-up, sir.
So if I understand you, if I just verify if I understand you correctly, is that with with the activity level we have and the megawatt under completion, if that's beneficial, for us. So if it's a difference, on the margins, depending on that. And there, I can only confirm, that it's not that it's not having a positive or negative impact on what will be delivered going forward.
I was just thinking, I mean, you know, whatever inventory you build up is is based on today's unit cost dynamics. Let's say if theoretically you wouldn't build up the inventory today, you would have to, of course, invest in capacity, but then, you know, your cost dynamics on electric production for 2019 done in 2019, for instance, obviously, is gonna be more different, and and even lower than what you would have today. I'm just trying to, you know, whether the inventory and my daughter in the
completion that you have in the in in
in your works today, given the fact that it's based on current unit cost dynamics where pricing actually is obviously going down. I'm just wondering how how we should think about those dynamics. It
is very, very hard to give you an exact number on that what I said earlier is basically when you receive the order, you start producing dependent on what depending on the timeline in between when you produce and you deliver, obviously, the longer lead time you have there in between, you can influence. And then you have the scope of of of the project potentially would have an impact, but you also have which turbines are used, for the project. So you have a lot of means that you work on to sort of improve the overall margins for the project. And I would say timeline is an important factor. But also, as Andreas have alluded to before, we have, rolling activities to further improve the efficiency internally we obviously have the global footprint that we have, which means that our sourcing capability on a a global basis is very good.
So, it's very hard to say. I give you a generic answer to when and how. And then you have, depending on customers and so forth, is that everything depends on the negotiations you have?
Okay, okay, fair enough. Maybe I can get that offline. And the second question, from the perspective of just housekeeping as well? I mean, could you outline what your exposure to Turkey, Argentina and Russia it is in terms of, obviously, the sales and log where it's applicable, and how are, you mentioned the rest over there, not just currency, but also in terms of counterparties and so on. Essentially, I'm trying to understand how how well referenced your backlog is and how confident are you about this business, given given the uncertainties that we have.
Okay. I'm not sure. I, I mean, if you look at the Russia specifically, We only have 50 Megawatt in Russia that is firm at this point. So, obviously, not a big impact. On after date.
But what are you looking to on the market here?
Well, really Turkey, Argentina and Russia in terms of, you know, given the uncertainties, how are, let's say, how the contracts that you you know, how do they sort of help you, hedge from things like currency or even counterparty? Sort of risks or the fact that, okay, maybe the risk of projects may get delayed or not done. That's sort of, that is what I'm trying to understand.
Well, I think you might be, I mean, we can definitely give you a rough idea on the announced term order in this different markets. And as I said, there also a mode or intake in Russia so far is 50 megawatts. So when it comes to the security of those projects. I mean, remember that, in Argentina, in Russia, many other, all those countries are actually our counterparts there is, is our normal, global customers. And, of course, before we take an order form, of course, we have a good solid process or looking at the curiously on our customer side.
And it's in several of those markets, the PPAs that are issued by the governments are in, your or dollar or dollar denominated currency. So, nothing specifically that we feel know of us about.
And just to underline, I think it's also important. I mean, we are global. So the level of complexity on a global basis is obviously high. And that's the environment we're managing. And then you'll So far, we've proven that we manage complexity in a very, good way.
And that's also how we can mitigate some of the complexities the the the overall global experience that we have.
Sure. And and could you quantify the backlog for Turkey and Argentina? To have.
That that you have to take I'll just pray
to my head whenever you have to, you know, get everything back to me on that.
Okay. Great. Thanks.
Now I get the information is 0 in the backlog. So and Russia was 50s. And then, we have to come back on Argentina, but it it's not, as I said, a significant that I have it on top of my head.
Okay, great. Thank you.
We're now over to the line of Philippe Porer at Berenberg. Please go ahead. Your line is open.
Good morning. Thanks for taking my question. I've got 2 actually, the first one perhaps just on the service business, looking at your 20 5% margin in Q2. I was just wondering if there would be like any kind of mix impacts that would be helping a bit, this quarter because in Q1, we were mentioning that there was a bit less of spare parts revenues. So I did the performance linked revenue, in terms of your installed base might help sometimes.
So what's the what's the impact here on Q2? And, how should we expect that to actually evolve in the coming quarters?
Okay. So, so, I mean, what we have said on the service business is that you will see, fluctuations, I would say in between the quarters. And it depends also obviously with the higher quality you perform some of some of the activities and therefore, the revenue. So that's part of the lumpiness. On the profitability side, as Andres was alluding to earlier, the main cost of improvement is actually the cost out and the efficiency we're gaining in the business.
Having a a a big impact. And that's obviously we're using the same some some of the same methodology as we have used for the VTV. Over the last 5 years.
So if I understand you're right, actually, you just mean that in Q2, there was no particular mix effect, I guess, the margin?
No, correct.
Okay, thank you. And the second question is on the U. S. And I'm just asking if any if you are subject to any of the U. S.
Tariffs on imports from China for any of the products that you've got in the portfolio?
Yeah. No. Of course, there is, tariffs in, on components, in these different waves. And of course, some of those components, comes from China. And but as I said, we also have, on components, a dual source strategy.
And as I also said, it's a fairly fluent, when it comes to definition, which components are included and and which are not. So so it's something that we, of course, that as part of the mitigating actions are looking at. But on turbines as such, we produce in the U. S. So, I mean, we have the full fledged production in the U.
S. Of both turbine towers and, and blades. So it's more individual components in those 12 months, otherwise, we have a first lien production and local in the U. S.
Okay, great. Thank you. And if I understand you, as well, that means that all that you would see on the import of components from China that contaminated is also part of this 1.5 percentage points increase in production cost. That you are hinting at before mitigation?
That's, of course, part of our action plans to see how we can mitigate that and part of those actions is, of course, to reroute supply or components from other countries then.
Okay, great. Thank you very much.
We're now off the line of Sean Morochrom at HSBC. Please go ahead. Your line is now open.
Thank you. On the buyback, just your thought process around the sizing of this and, if there's any intention of offering more in 2018?
I mean, we, we, we haven't been explicit on what is the satisfactory level for us when it comes to the overall cash position. But obviously, as we are issuing another share buyback of 200,000,000, that reflects the how comfortable we are. But also bear in mind that we did another share buyback, at the beginning of the year. And we have also paid a dividend. And what we have said is that we will come back on how we will address, the the capital or the cash position, in the latter part or the second half of the year, which have turned out to be Q2.
So, at this point, there's no additional planned for share buybacks. So we're happy with announcing the SEK 200,000,000,000 at this point.
Thank you. And can I just return to the service margin? You had a 9 month margin,
if I look back over
the last 3 quarters of 25%. So you're consistently hitting this very a high level of reliability and satisfactory cost management. I'm just trying to understand what can actually happen in the second half to lower this margin? Why shouldn't we be thinking
of a
25% margin going forward?
Now as I said, I mean, we're really pleased with our performance and services and and the parts of our outlook now is of course we say, a better margin than previously, but we will not guide for a specific margin on the slowest basis.
Okay. We now go to Mark Wilke at Citi. Please go ahead. Your line is open.
Yes. Thank you. It's Martin from Citi. You mentioned that you did get a repowering order in the quarter. I think a couple of 100,000,000 there's some quite bullish forecast by some market participants about the number of wind farms in the U.
S. That are approaching or exceeding 10 years and for, might see a repowering impacts or potential repowering orders over the next 2 or 3 years. Is something you're seeing to the conversations with some of your U. S. Customers and can we expect the amount of repowering as a percentage of your total that you could actually quite a big step up over the next 2 or 3 years?
Thanks.
We definitely say a high interest for the way towering opportunity in the U. S, which, of course, is driven by the current paid safe structure. So if you're I think it's, if you change 80% or something like that, PayPal, then you can qualify for the new pay to save scheme, so to speak, which makes it attractive for some customers for sure. Then dependent on, of course, what turbines they have, how much you can do, how much you can really follow that and what you can reuse. So definitely an area of the market where we have taken some more orders and also an area of the market where we continue to engage with customers.
Technically, from your perspective, does that come as part of your service business, given that it's not a completely new wind turbine, although it could be in some cases, I guess, or would that be part of your Power Solutions business? Would you see this as incremental megawatts in Power Solutions if you were to have some of these recurring orders come through?
Now from a accounting point, we review it in the Power Solutions business because, of course, in the examples in the U. S, it is to a large extent, not a turbine as such that you will use in most cases. I would say. So it is, to to it's, of course, a fine definition, but but the way we say it is, is that we account for it in the power solution, part of the business.
Over to Pinkei Das at Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Hi. Good morning. This is Pinaki from Bank of America. So I had a couple of questions. The first one is just trying to run some numbers between your H1 and H2.
You know, metrics and I was just looking at, the service versus power solutions and it it came upon me that if I look at the deliveries, the ASP in your delivered volumes is around €1,000,000 per megawatt. And we kind of know that last year you had point 8 as an average for the year. So clearly, you'll be probably in H2, looking at your guidance for the for the full year. You'd probably be delivering, you know, at at you know, pretty much close to point 7 to, you know, around that level for H2, which is in line with your order intake. But if what
I wanted to ask, but
if even if I, you know, if I assume certain amounts on on the service revenue or self-service profitability, you still get to, like, 8 to 9%. EBIT margin on the turbines in H2, just from your guidance for the full year. And that is actually at an ASP, which is pretty much in line with the low point of of ASPs in in in your order intake. So I just wanted to see land. And there's probably already some input costs, effects as well in there, but clearly, obviously, you've said that you've hedged 18.
So I just wanted to understand, like, this 8% to 9% on turbines, is it, is it quite a sustainable level now, you know, even with the low ASPs? So that's my first question. And I'll come back with the second question.
Oh, that was a long one. Can I please? So if I if I thought I would just take some of it, of, of, your comments in the question. And then the rest, you probably have to dig into more details with with the IRT. If you look at the deliveries and and the higher value, if you look at the average sales price, that's also again the depending on the timing of the revenue recognition.
So you would have a need to see, impact also on average number. It's still the average ASP that you see in the order backlog, I would say is, is the relevant part at this point. And I think it stands around 0.74 in the order backlog. Then if I understand part of your question again in the second half, but also a little bit what I said earlier. The second half, we're not expecting the same leverage, on the music level, despite the the overall high high activity level from a revenue point of view, simply because you see some of the impacts of, of the price pressure we saw at the end of last year as though some of those orders are coming in here in the second half.
Okay. Cool. And then the second well, thank you so much. The second question I would just wanted to ask was you know, this is more of a theoretical slash broader question is that and maybe and that would be would be the right one to answer it. And just when you go into your discussions now, given that when the printer become much, you know, much more competitive now.
And we're kind of seeing it in the of orders is where, you know, are you feeling quite comfortable about the overall volume outlook of the industry given given the dynamic of costs and climate change and more awareness, so are you comfortable with the volume outlook in the market? And do you see actually a big pending over time as as as in some of the forecast, you know, how was your comfort level on that? And secondly, just related to that same question is that given we've seen some price stability in the turbine pricing in the recent quarters, are you seeing more rational behavior in the industry?
Yeah. I think as I as I, as I hopefully convey during my, round trip in the region, I mean, we see a high activity level. We also see a positive signs that on probably as we discussed before that on the back of lower price for for wind that we've seen now recently, actually, targets in auctions and also renewable energy targets is coming up. And And I I would say that it's, of course, still a fairly early days, but we definitely say this year, a high speed level on on on the auto side. And I would say from America, what point of view, we would probably also see an increase in delivery this year compared to last year on delivery megawatts.
A bit more midterm than, as I said, which, of course, all these targets, I come back to Europe where I think it is very positive that the renewable energy target has been increased. So, I mean, the overall activity and the overall targets on renewable energy on the back of a more competitive proposition for wind, we definitely see. And on the pricing side, I mean, Again, I think it is, of course, encouraging now that we've sequentially for the second quarter are seeing a stable ASP. And I think if you look at the competitive landscape, I must say I I'm really pleased with, with our performance in Vestas when it comes to balancing, to deliver a decent margin in this industry, which, yeah, again, I just stressed that. I'm really pleased with all performance.
And, and, hopefully, that also then actually underpins, a more stable, in pricing going forward, but we clearly see, profitability being challenged on several of our competitors front. So I think that's, of course, again, a positive sign. And then, we, as usual, have to say how it pans out. So with that, we go to the last question.
Can I can I just have a quick follow-up actually? You know, you you've started to give a new disclosure in the segments about, supply only and supply installation and turnkey. Could you give us a little bit of a color around what sort of price per megawatt difference do you have between these different types of contracts that you're reporting now in your, in your new reporting format?
I think that we we are not in disclosing the difference. We have just highlighted that it is a difference, and we wanna keep that, competitive position as we have the ability to deliver all kind of scope projects.
Okay. Our ultimate question for today is over to the line of Lalo Dela Ravione of One Investments. Please go ahead. Your line is now open.
Hi. Thank you for taking my question. Actually, we'll be going back to the to the inventory level that you, that you're that, I will then put you together with the comments on the outlook and on the on the project at the on hold and, I mean, some, slowdown in terms of of deliveries that impacted the revenue I was wondering if we look at the the the impact that you add on fixed costs in in the first half of the year, if you add any material one that, that affected the gross profit margin in terms of fixed cost absorption, which should come again, in the journal. In the second part of the year. And, also on inventory reduction that you mentioned, if I, if you see this, this, project in inventory.
So that, reduction, meaning that we should see that the reduction could expand faster, even after for the fourth quarter of this year. So also in, in Q1 of the start of next year. Thank you.
Okay. So if we if we start with the inventory, what I said is that, we have, build up and we alluded to that already in Q1 that we will continue to build up inventory here in Q2, which we have, all the visibility on and again, offset by prepayments of the farm order intake, yeah, principles, remain. And we, also saying that we see in the second half, considering the activity level that we have, that we will see a reduction of inventory. And some of the inventory, we have a longer lead time, simply because there is a high demand, and we are using the balance sheet for that. So obviously some of the projects could move into and will move into Q1 of next year.
Okay. But coming to the first part of the question, is there any effect that you did possibly affect here in the in the 1st part of the, so looking just at, on on course, on fixed cost absorbing the TUI which actually adds the the the gross profit line in the first half of the year or the effect was not material at all.
We don't have any fixed, capacity cost, impact in the first half, and we don't expect that in the second half. So you need a direction either. Okay. Sorry. And involve margin.
Okay. With that, I would like to thank for calling in. Thank you for your interest and questions. And I'm sure we will meet at least some of you during the next few days. So thank you.