Good morning, everyone, and welcome to this call for the first quarter of 2018. Let me start with the usual disclaimer slide and move straight into the key highlights of the quarter. An all-time high order backlog combined at EUR 21.6 billion, up 8% year-over-year. Revenue close to EUR 1.7 billion, which is 5% organic decline compared to the very high Q1 of last year, where, of course, we had a lot of the 100% PTC components delivery. Now back to a more normal seasonality. An EBIT margin of EUR 126 million, corresponding to 7.4%. Solid performance again from our service business, organic revenue growth of 5% and a very healthy EBIT margin of 26.8%. As usual, I will talk about the orders and the market.
Marika here with me today will talk about financials, and we come back with the outlook and Q&A. This is also the time of year when we get an external view on market share when it comes to installation or grid connected for last year in gigawatts. Of course, we are satisfied that we keep our market leadership, both according to Bloomberg New Energy Finance and MAKE, with a bit over 16% on the global market share. Looking at order intake in the quarter, it was 1.6 approximately gigawatts and average selling price of EUR 0.73 million per megawatt. The year-over-year decrease in megawatts was 420 or 20%. U.S., Italy, and France were the main contributors to the order intake in the first quarter, accounting for approximately 65%.
The ASP, as I said, in Q1 was 0.73, a stable development compared to previous quarter, but a market that remains highly competitive. As usual, we should remember that geography, the scope, turbine type, and uniqueness of the offer is factors in the ASP definition. We changed a little bit in the market regulatory environment, delivery order, quarter and comment slides for this quarter, try to summarize it in one per region. Let me start with Americas, where we continue to see a high demand in U.S. and Latin America. U.S., as before, very much driven by the current PTC structure and good high activity levels in the market. We also saw that the U.S. signed an order for 25% tariffs on steel imports, but the final outcome is still uncertain. On the Vestas side, we are localizing our 4-megawatt platform in the U.S.
We see good demand on that platform. As we talked about before, we see a shift from 2 to 4-megawatt platforms in the U.S. market. In Latin America, we had a restart of auctions in Brazil, actually started already last year, but also one in the quarter called A-4, and an A-6 auction is expected in Q3. On the Vestas side, we established manufacturing capacity in Argentina to support our leading market position and growth. Looking at delivery, down 65% year-over-year, primarily due to the high delivery of 100% PTC components that we had last year. We also saw a bit lower activity level in Latin America. Orders down 12%, continued high order intake in the U.S., but year-over-year, not matching the strong orders we took in Argentina in Q1 of last year.
From a market share position, we are the market leader in Americas. Of course, we are also very satisfied that we remained number 1 in the U.S. market and increased our market share in Latin America during last year. Moving into the EMEA region. Here, we remain the leader in a region that is in transition. Starting on the regulatory side, as I said before, I think within EU, fair to say that the demand is driven by the 2020 and 2030 targets for renewable energy. A positive is, of course, that the European Parliament has proposed a 35% renewable energy target for 2030, compared to the earlier 27%. It is still no decision, but a positive indication of that lower prices for wind can drive higher volumes. Russia had an auction last year, we expect another 900 MW auction for this year.
We also see positive signs in Middle East Africa. It has been a 400 MW auction completed in Saudi Arabia, and South Africa has started to sign PPAs for the 1.4 GW that has been at a standstill for quite some time, and also there are expectations of new auctions starting up. From a delivery point of view, fairly stable, down 5%. Some changes between U.K., partly offset by Denmark, and continued high delivery in Germany. On order intake, down 18%. Here we see the impact of lower orders from Germany, where the recent auctions have not yet materialized as orders. On the other hand, good order intake in Italy as a result from the auction in 2016, and our first-ever order in Kazakhstan.
Again, last year, we are the market leader in the region with a well-established footprint and strong position in core markets such as Germany, France, and the Nordics. Moving over to Asia Pacific, which of course, geographically it is a very diverse region, and where we have presence in many of the markets. On the regulatory side in China, the wind target has been increased with 50 GW, 2020. On the Vestas side, we have decided to start up production together with TPI of the V150 blade. India has had executed two auctions in Q1. I will say also, we see good activity level in the broader region. Australia executed about 550 MW auctions in the first quarter. Delivery up 328% from a very low base, from a number of different geographies, but primarily India and Australia.
Order intake down 51%, that is primarily the drop in China year-over-year, where we had a strong order intake last Q1. From a market share point of view in this region, we are on single digits, the reason is, of course, that the region is highly dominated with China and volumes in China. Here we have a very small market share, but of course, still the biggest non-domestic supplier. As I said, we have a record high order backlog of more than EUR 21 billion. The combined backlog increased with EUR 700 million sequentially, despite the negative FX impact of EUR 250 million. The increase on the turbine side was EUR 0.5 billion, and on the service side, EUR 0.2 billion. One slide about offshore, that, of course, we have with our partner, MHI.
The first conditional orders was taken on the 9.5 MW turbine on the product side, Taiwan added as a new market opportunity. We start to see now that the offshore market is not only concentrated in Northern Europe. The joint venture has a good track record with over 1,000 turbines installed and also a healthy pipeline, excuse me, both when it comes to under installation and firm orders of 1.6 GW and conditional orders and preferred supplier of 2.5 GW. In the quarter, the final commission was done of the Rampion project, which was a 3 MW project also shown then in our Vestas P&L. The joint venture are well-positioned for the Taiwanese market with local MOUs in place. You can also see that on the near-term project execution now is very focused on the 8 MW turbine. With that, I hand over to Marika.
Thank you, Anders. If we have a look at the income statement, I would like to highlight here that we have a tough comparison against our own numbers in Q1 2017, which was a record quarter for more parameters. We are delivering according to our own expectations, but we also said that on the back of Q4, that you will see a normal distribution of the quarters here in 2018, that's also what we are delivering. Revenues decreased by 10%, that is driven by both FX and also lower deliverables in deliveries in Power Solutions. Gross profit as a consequence of lower activity is down, that is volumes, but also lower average project margins in the VTG or Power Solutions segment.
You can also see that SGA cost is lower compared to last year, which I will come back to in more detail on another slide. EBIT is down, driven by the explanations given on the revenue and gross profit. The result from the joint venture, the positive EUR 18 million, is primarily the result from delivery of the Rampion project that Anders was alluding to earlier. If we have a look at the SGA, we are 7.4% compared to, or in line with last quarter. Obviously, the percentage is a consequence of lower activity level, but bear in mind that what's shown here is the 12-month rolling. This continues to be a focus area and one that we are controlling. Obviously, part of one of the controlling elements we have in the group.
Good performance on the SGA, well in line and above expectations compared to the lower revenue that we had in the quarter. If we have a look at the service, the performance continues to be strong. You see a slight revenue decrease in actual numbers compared to 2017. Main factor there is a negative effective impact of EUR 22 million, that is resulting in 5% organic growth. As you can see, we are delivering a very strong EBIT margin, 26.8% to be exact, that obviously is a consequence of good performance, good cost control, and also good performance of the turbines. The service order backlog also grew compared to Q1 of 2017. Good growth, good margins, excluding effects, also a growth in the organic side for the service business.
The balance sheet remains strong. Obviously provides flexibility for us as a group. This is, as you know, something that we have been working towards and gives us a strong position, but also flexibility in the market. We deliver a net cash position of EUR 2.6 million. That is impacted by the acquisition of Utopus, the net working capital element that I will come back to, and the share buyback program. The net working capital increased. Again, I will elaborate more on that note when you see the performance over the last 12 months and the last three months. Solvency ratio is above the minimum 25% that we have put up as a target. The change in net working capital. As you can see, we are building inventories, and that is well in line over the last 12 months with the prepayments.
You can also see that we have a contract asset liability of EUR 171 million. I would like to highlight here that we have said now for the last two quarters that we will use the balance sheet and the possibility to build inventory based on firm order intake and nothing but firm order intake to avoid some of the investments because of capacity needs, primarily for the molds. That story remains, or rather that fact remains. You can see the net working capital change over the last three months is following the same pattern. The quarter is impacted by increased revenue and reduced payables, and that is to a certain extent offset by higher prepayments. No surprises on this note.
The warranty provision and the lost production factor, the high quality of the turbines continues. You can see on the lost production factor that we are continuing to be below 2%. You also see a slight decline here in the quarter. Bear in mind, despite that we have a higher consumption than provision, that the consumption is based on previous provisions. It's not related to the quarter as such. Cash flow is negative. It decreased if you look at compared to Q1 2017. The decrease is primarily driven by lower profits, as you can see, a negative change in net working capital, as I was alluding to earlier, and negative non-cash adjustments. Cash flow from investing activities, no surprises here. It's the Utopus, EUR 65 million.
You also see cash flow from financing activities that is primarily driven by the share buyback program that we launched at full year 2017 result. Total investment are more or less in line with the Q1 of 2017. The methodology is not changed. We continue to invest in capitalized R&D and molds primarily. You also see the impact from the quarter of increase of EUR 65 million compared to last year is Utopus. Capital structure is well below the threshold when you look at net debt to EBITDA. Despite a slight uptick, we are well in the negative territory. The share buyback causes the solvency ratio to decline to 27.6%, but still above the minimum 25% target that we have put forward. Anders?
Thank you, Marika. Going over to the outlook for this year, we maintain the outlook. That means revenue between EUR 10 billion and EUR 11 billion, an EBIT margin of 9%-11%, total investment approximately EUR 500 million, and a free cash flow of minimum EUR 400 million. We have not either changed our view on the service with growth and stable margins. With that, we will move over to your questions.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad now. We ask you kindly to limit your questions to two at a time. Please hold until we have the first question. The first question comes from the line of Claus Almer from Nordea. Please go ahead. Your line is open.
Thank you. A few questions from my side. The first question goes to the service margin. Marika, you also mentioned this, nearly 27% margin in Q1. Is that a new level, or is more extraordinary for the first quarter? That would be the first question.
As you are alluding to, Claus, it is a very high margin in Q1. We have not set a new level for the service business. What we're continuing to say is that we will deliver high, stable margins for the service business also going forward. We're not setting a new standard. You will see certain lumpiness, but it's obviously with efficiency gain and growing the business, we see that stable performance is crucial for the service business.
It's just the second quarter in a row where you're making a really amazing margin in this division.
Yeah. I understand, obviously, where you are coming from, Claus, we see stable high margins. If it's going to remain at this level, obviously remains to be seen, we have delivered very high, stable margins for the service business.
Okay. The second question goes to your revenue per megawatt in the revenue, obviously. The delivery per megawatt, which is around EUR 1.1 million. I thought it was going to decline closer to your backlog ratio. In the same time based on the rounded numbers, your backlog ratio is actually going up despite the order intake megawatt ratio. Maybe you can shed some light on these trends.
The EUR 1.1 on deliveries that you are alluding to obviously is impacted by the scope of the projects, also the mix of the projects. If you have an EPC project, that will have to be deducted from that number as such. The other question, Claus was? Sorry.
We have the math that your backlog ratio was 0.77 end of 2017. Your order intake ratio was 0.73 in this quarter. When you're delivering significantly above the ratio, one should think that the backlog ratio end of Q1 would go down, but it's actually going up quarter-over-quarter. Just wondering what was going on in these numbers.
A little bit what I was trying to say, Claus. The backlog will be impacted by also the new accounting standards that we have. It will shift both backward and forward. If you have deliveries, that will obviously also impact the revenue. To which extent, it's hard for me to speculate, but you will see the same impact. Some of the projects from 2017 has been pushed into 2018, but you will also push out some of the projects from 2018 into 2019, depending on delivery time. That will have an impact both on the backlog, the revenue, and also on the deliveries, the 1.1 that you were alluding to earlier.
Does it have any margin impact?
As I said, I don't expect that to have a significant impact on the revenue for this year, and consequently not a significant impact on the profitability in this year. It depends on, I don't have the exact number because it obviously depends on how flawless we can be on the delivery, if it's exactly according to expectation. My expectation is that we will push out some from 2018 to 2019. You have also consequently done the same from 2017 into 2018.
The line has dropped out. We've got the next question from the line of Akash Gupta from JPMorgan. Please go ahead. Your line is open.
Yeah. Hi, good morning. Thanks for your time. My first question is on pricing and order intake, given that ASPs are flat sequentially, at the same time, raw materials are going up. Maybe there would be some impact because previously it might be hedged but may not be hedged for new orders. Basically, if you can comment on the pricing and here particularly you can talk about how the impact of higher steel price will reflect in your financials. That's my first question.
Okay. If I look at the ASP, of course it was, as I said, EUR 0.3 in the quarter, so stable compared to last quarter. Compared to last quarter also I wouldn't say any bigger change in scope. We had a little bit more supply only in the quarter and on the other hand then, no China order intake in the quarter, so fairly comparable. We had a headwind of FX of EUR 0.02 in Q1. Yeah, sequentially the ASP stable with those variations that I talked about. On the sale, I think two comments, also as you said. First of all, of course, we are dependent on steel in our products for sure, of course if and when steel prices go up, it has to be absorbed by the chain.
Having said that, I think it's also fair to say that there are still quite a lot of uncertainty around both import tariffs and different local steel prices. You're also correct when it comes to the backlog and the firm order, we are hedging with different means, so to speak, either indexation or customer discussion or supplier discussion. We don't expect any major impact on daily price increases for 2018, but potentially then, of course, except then for auto orders in 2018 and then potentially more, let's see what happens for 2019.
My second question is on share buyback. Given the stock is still down year-to-date, I thought of you may going to renew share buyback. If there are any reasons why that you would like to highlight behind not renewing a share buyback, that would be great. Thank you.
Our methodology remains, and we were pretty clear on why we did the share buyback here at the beginning of the year. We will follow our normal pattern and come back with what we are intending to do on the share buyback on the back of Q2 this year.
Thank you.
The next question comes from the line of Casper Blom from ABG Sundal Collier. Please go ahead. Your line is open.
Thanks a lot. Two questions from my side also. When you gave your guidance for 2018, you also talked about a longer term guidance, and in that connection, you described 2018 as a transition year. Have you come any further to whether you would also describe 2019 as a transition year? That's my first question.
Yeah, I think that of course we will come back to 2019 and guidance for that in due time. Currently, of course, we're focusing on 2018. Having said that, we are clear with our long-term financial ambition. We also put both what kind of market condition we will see for that to happen and also a time frame where we think that this is a likely scenario. We said that three to five years, which is our strategy horizon. Yeah, that's where we are today, and I would say that not much has changed there.
Okay, fair enough on this. Secondly, we've seen some of your competitors that were struggling a little bit to get orders last year are having a bit of a bounce back in their order intake, both Siemens Gamesa and Nordex, just to mention two names. Are you seeing any changing in sort of the competitive dynamics? I understand if you don't want to comment on competition specifically, but do you see any change to what you could call your technological leadership in the industry?
We feel very confident with our technology leadership, because of course, you're right. The competition, as we have said many times, is really on the levelized cost of energy from the customer, and that is the combination of products, technology leadership, also future products and future product commitment. It's the tower heights, the fit to the customer sites, and of course, then also last, price. It is all those factors, and it continued to be, as I said, a very competitive market to get to the levelized cost of energy. I feel very comfortable with our technology leadership position, which I think also reflects in that we are generating best-in-class margins.
If I could just try and ask in a different way and see if that works. Fair enough that you remain comfortable in being number one, but are you starting to feel someone catching up on you a little bit? How would you else explain the comeback that we've seen from some competitors?
I think that if you look at our order intake in 2017, as we also said then, I was very satisfied with our order intake. I agree with you. We've seen a bit higher order intake here now in Q1 from some of our competitors. To draw a big conclusion on a single quarter, I think is a bit too hasty, honestly. I think that, as I said, we feel very good with our order intake compared to the competition for the full year last year. We see a healthy volume in the market, going forward. Of course, we accept that between quarters, the orders can be a bit lumpy.
You are not worried by what some might have read as a slightly disappointing order intake from your side in Q1?
If I look at our forecast, if I look at the market overall, I see healthy levels in the market, a good activity level. I feel that we have a good position. I feel that we have a good market share, as I talked about. Of course, we need to execute on that, and we need to get orders firm and do that announcement. Yeah, I will not guide on orders, so to speak, but that's how I see it.
That's very helpful. Thanks a lot, Anders.
The next question comes from the line of Markus Almerud from Carnegie. Please go ahead. Your line is open.
Thank you. First question regarding warranty provisions. Why were provisions made so much lower this quarter than in previous quarters?
Well, that is obviously based on how we perceive the performance of the turbines and if we have any specific cases. This is quite a rigorous process that we go through on a regular basis together with the VTG segment. We have reduced because of the good performance of the turbines, as you can see also on the very stable delivery on the lost production factor.
Does that mean we should expect lower provisions going forward as well?
I mean,
Turbine performance doesn't change from quarter to quarter.
Yeah. That's obviously, as I said, that will be dependent on how the turbines are performing and if we have any specific cases. As we see, what we see now, it is well within the coverage of how we are performing.
All right. Thank you. Second question, regarding the strong service margin following up on Claus Almer's question. Just to understand, is turbine performance the most important parameter for the service margin?
Yeah. Turbine's performance definitely is also dependent on how much efficiency we get out of the service organization as such. Primarily it is a consequence from the high quality of the turbines. Therefore, you will also see certain fluctuations as we take the revenue when we do a physical servicing. If we don't have any major costs related to that, obviously that will have a positive impact.
Is there any seasonal variation to that? I imagine turbines produce more power in Q4 and Q1, at least in Europe. Does that boost your-
No, it's not. I think, a bit more generic, if you look at the lumpiness that we've seen also before, we have had also a pattern where if the revenue has been a bit lower or the revenue growth has been a bit lower, the margin has been high. Of the simple fact, as Marika said, that if we, for example, have anticipated a major component change at a certain point in time, that doesn't happen because the quality is better, then we don't take the revenue that we take when we do the activity, we don't have the cost either. That is more the pattern, and it has nothing to do with seasonality.
Understood. Thank you.
The next question comes the line of Dan Togo from Handelsbanken Capital Markets. Please go ahead. Your line is open.
Yes, good morning. Thank you. A couple questions as well. I'd like to hold on to the service margin here, because you're guiding for a flat service margin compared to 2017 i.e. around 20%, now you are at 27. Could you maybe share some thoughts around what could potentially or will potentially take the margin below the 20% in order to reach 20% for the full year? What's in store basically for the rest of the year? Otherwise you should increase your guidance. That is the first question. The next question will be around ASP. Could you give Comments around the pricing environment at the moment, yes, sequentially, ASP is almost flat, but it's still on a decline scale. Is that, so to say, continuing, and in what pace? How should we look at ASP going forward? Thank you.
Yeah. I will probably not give you any different answer than what you heard previously on the service margin. It continues to be stable, and again, at a high level. That's also what we have softly indicated on the service margin. There is a lumpiness in the service business, and it's absolutely performing very well from a profitability point of view. We will stick to stable margins for the service business. We have no intention of changing that.
What you're saying is basically it's too optimistic to factor in 27% flat in margin for coming quarters for Service.
Yes.
Okay.
ASP
Again, as I said, of course, sequentially, ASP is flat. As we also talked about many times, of course, ASP can vary a bit, especially between when we have different scopes in ASP. Generally speaking, ASP, of course, will decline due to technology, just due to the fact that we see a shift in the portfolio to more 4 MW and less 2 MW. Of course, those trends will continue. Very hard to say the exact timing of those scopes in between the quarters, but that general trend will of course continue.
You don't see a new 2017 coming up where prices take, so to say, a big dip down. You're sort of saying, seeing we are reversing to the old trend to that modest decline.
Of course, we're now seeing sequentially more modest decline for two quarters, and that is, of course, positive. Again, I don't have full visibility of what competition will do going forward.
Okay. Thank you.
The next question comes the line of Katie Self from Morgan Stanley. Please go ahead. Your line is open.
Hi, Anders. Hi, Marika. Thanks for taking my question. I just had a couple. Firstly, I wanted to clarify, I think it was the first question that was asked around the pricing of deliveries versus the pricing of orders. Obviously, there's still quite a big discrepancy in those numbers from 1.1 to 0.73. What I really just want to understand is how long that gap can stay or at what point those two numbers are going to collide, which they'll have to at some point. Yeah, I'll give you that question first, and then I've got another one to follow up.
If you look at the ASP on the deliveries, yes, I agree, it is higher than the 0.73 for order intake. The ASP, as you know, is driven by scope of contracts and differences in timing, combined also with the regional mix. The turnkey projects will have an impact on the difference between these two numbers as that is recognized over time. You don't include that in the deliveries until you have fully completed the project. Therefore, you have to adjust for EPC to get to the exact number on the deliveries. You understand what I mean? Sorry.
Yes. That's a bit clearer. Yeah. Okay. I guess you're not gonna give us the adjusted number.
No, I think you can probably calculate that based on what we have shown.
All right. Thanks.
And, um-
Sorry, go on.
No, no. Go ahead. Second question.
My second question was just on the price cost dynamic, because as you've already discussed with the raw material and the steel prices, a lot of people in our industry have also been talking about labor wage inflation, and then obviously in just the wind industry in general, the prices are coming down. What I was wondering is just what kind of levers are you looking at that you can pull in order to offset that price cost challenge?
Yeah. First of all, I think extremely important to continue to bring out new technologies and new turbines, more efficient turbines with more production. I think that is, of course, probably the biggest lever and the one that we have used in the industry for quite some time, and there I see continued good opportunity. The second part is, of course, to continue with the cost out program that we see. That comes with standardization of components and with volumes, and with manufacturing gains. Then the third thing is, of course, to make sure that we have our fixed costs under tight control in the company.
Okay, thanks. Understood. If I could then maybe just one last one, just a quick one probably for.
Yes. Remind everyone that please only two questions per person, otherwise, all your colleagues will not have the time to ask their questions. Please, only two questions per person.
The next question comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Yes, thank you. My first question is around the timing of deliveries. Obviously, we had strong order intake last year and deliveries going up or sorry, backlog going up. I was a little surprised to see your deliveries going down here in Q1. Can you just help us understand the timing of your backlog in the coming quarters?
I would say if you compare to Q1 of last year, also bear in mind that we had a lot of activity in the U.S. because of the PTC components. That is obviously something that's not materializing here in Q1 of this year. That is the major explanation why you see a deviation from Q1 of 2017.
Still, would it be fair to assume that your backlog points towards growing deliveries?
I mean, the backlog, as you say, is big, and both for the service business and the VTG business. We are sticking to our guidance, obviously, expectation is that it will go up.
There's nothing you want to flag in terms of deliveries for the next three quarters we should be aware of?
Absolutely not.
Fair enough. You mentioned this localization of the four-megawatt platform in the U.S. Can you just elaborate a bit more on what that means or also in regards to CapEx?
That is, of course, a trend that we've seen for quite some time, and I think that's actually good for us because, of course, we have a very strong four-megawatt platform as well. It's not the whole of the U.S. It's still then different parts of the U.S. where the four megawatt delivers a better levelized cost of energy. We have already from the construction of the blades factories that we have in the U.S., catered for, that we can put in four megawatt molds for the blade. From a factory CapEx investment, we handle it within our existing setup then. The investment for those products is very much what Marika talked about. It is the molds to produce them on.
In terms of the timing, are you fully up on this and can produce 4 MW locally this day or?
We have started production of the longer blades in the U.S. already, yes.
Excellent. Thank you so much.
Thank you.
The next question comes from the line of Pinaki Das from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi, good morning. Thanks for taking my questions. The first question is around orders. Obviously, you had a somewhat slow quarter for orders, but Anders, you mentioned that you see good activity levels. You also are in the press saying you expect a pickup in activity in the second half. I am not sure whether that is for orders or for general earnings. I wanted to understand what gives you the confidence that order levels should be normalizing, as you said, and the quarterly fluctuations should become better. Which markets give you the confidence that the overall order activity level should keep you happy, as you mentioned?
Yeah. I do not know which press, but I think what is clear is, of course, that we are back to a bit more of a normal seasonality, which means higher activity levels, generally speaking, in the second half. On the order side, as I said, we see good activity levels in the market. We see healthy activities level in the market. When I look at the customer discussions we have, the potential we are discussing, I see a good high activity level in the market. Our regional sales organization is, of course, working hard to capture that activity level. That is what makes me feel sort of confident that there is a healthy activity level in the market. Then, of course, the timing of those orders. As you know, we have a very good and very thorough process to declare orders firm that serves us well.
Those milestones has to be achieved and has to be for us to take it firm. That I think, as I said, serve us well, but also, of course, means that we will have a bit of lumpiness in order intake as we have seen before. On top of that, when it comes to our competitiveness, I am also confident. Of course, again, coming back maybe a little bit to a longer period and look at last year and our record high order backlog, gives me confidence on our ability to take orders also going forward.
Okay, cool. Great. The second question is regarding your guidance. Obviously, you've kept your guidance unchanged for the full year. I think at the full year results, you sort of mentioned that you would aim to be towards the higher end. The consensus seems to have gone to the middle of the range now. Considering what had happened in orders or in steel prices and FX and whatnot, how do you feel about the range in terms of which side of the range would be more comfortable with at this point, the midpoint or towards the higher end or lower end?
Yeah. First of all, I think we haven't indicated any ends of the range. We have kept the range. Just to make that clear. Also, as we said, at that point in time, we have a good order backlog. We have, of course, a good visibility, what we need to do for both the lower part of the range and the high part of the range. We still need some in-for-out orders for this year, but we had a very good coverage coming in. Of course, we have, from that standpoint, even a little bit better coverage now. We then have the normal seasonality, which means the anticipated high level towards the second half of the year. We have the normal risk that is associated with that, and therefore, revenue recognition.
As you said, the sale prices could have a minor impact this year, but then on the in-for-out, which as also said, of course, indicated is not enormous for this year, but potentially, of course. Then we have a general FX headwind, of course, that is where we have different scenarios for how that will play out for the full year, depending on the geography, which is a bit hard also, of course, naturally, to predict. We continue to work with different scenarios as we have done in the past, and therefore we also continue to keep the range.
Thank you so much. I just have a quick comment to make is that, you haven't disclosed the megawatt equivalent under completion, like you used to in the past. Perhaps, is that deliberate or you're not going to disclose it in the future?
Also, we are disclosing, it's a balance how much we disclose. If you look at the overall disclosure that we have here in Q1, it's much more than previously. You can get that number if you choose from the IR team, so no problem with that.
Okay. Thank you.
The next question comes from the line of Mark Freshney from Credit Suisse. Please go ahead. Your line is open.
Hi. Just a question on the inventory build. On the turbines under completion, I think the data can be put together easily, and I estimate the turbines under completion have reached 5.9 gigawatts. Inventory has caused your free cash flow to be, I think, one of the worst quarters I think I can remember. Can you give some more clarity on exactly what is causing the turbines under completion to rise? You alluded to some issues with the molds, but why would that impact this year and not in previous years when you've also had very high levels of utilization? It just seems that there's something going on within the business operationally that is not clear to us.
Okay. That's what I tried to confirm is that the methodology, that we don't produce for anything apart from the firm order intake remains. It's based on firm order intake. That's how we build the inventory, and that's what we obviously always will do. Because you will also have a certain part of the inventory being what I tried to explain before with EPC projects. The volume will not be flushed out until you have a full transfer of the project. There you will take revenue, you will take profitability, but you will not take the deduction in deliveries until you have fully completed the project. That's one factor that will have an impact.
What we have said, and I would say for the last two quarters, is that if we can see a possibility to extend the lifetime of the molds, and use them fully so we don't have anything idling there, we will do that instead of investing in new molds. That usage of the balance sheet has not changed. Obviously that have a big impact on our cash flow here in Q1.
Okay. Thank you.
The next question comes from the line of Michael Ray from Redburn. Please go ahead. Your line is open.
Hi there. Thanks for taking my two questions. The first one's just on steel prices. How should I think about your rough sensitivity to the steel price? Just if I can see things like hot rolled coil or plate steel prices rising 30% year-to-date, should I imagine that your steel input costs are rising by that amount? Or by the time you buy the actual machine steel product, is the proportional increase less than that for you? Is the first question. The second question is just on Taiwan, and the offshore opportunity. What's the timeframe for any orders that you could win there, making it into the backlog? Thanks.
If I start with Taiwan, of course that's really a question for you want me to answer, what kind of timing they have there. I honestly don't know. Let them speak for their activities there.
If we talk about the steel prices, what Anders was saying earlier, for this year, 2018, we are not expecting any impact from higher raw material prices, steel primarily, because of the steel content in the product. Obviously for the coming years, that's also something we will have to come back to when we guide for 2019. We have a certain methodology that I have been alluding to earlier. We have indexation in the contracts. We also pre-buy and we hedge steel, and that's why we are confident in saying that the steel input price for 2018 is not significant.
Okay. I understand the timing effects on 2018, are you also saying that these kind of commodity steel benchmarks are not a useful indicator for your costs?
No, obviously, we have a certain methodology that I don't want to be, how we secure ourselves within different time frames. The methodology is that you look at certain time frames, how much you want to be covered, and then you have different means of doing that. Again, what impact that potentially could have for next year and the coming years, we will come back to.
Okay. Thank you.
Thank you.
The next question comes from the line of Sean McLoughlin from HSBC. Please go ahead. Your line is open.
Thank you and good morning. Firstly, a clarification. What is your current coverage of the minimum end of your sales guidance for 2018 at the end of Q1?
Sean, that we have not disclosed. What we have said earlier is that compared to 2017, we have a higher coverage entering into 2018. Obviously with further order intake here in Q1, the visibility has increased further. How much exactly, we have not been disclosing.
Okay, thanks. A second question on the U.S., just a general comment on the U.S. market post the tax reform. We understood that everyone was digesting the implications of the tax reform or the BEAT provision. How are your customers feeling about the 2018 to 2020 ramp under the 100% PTC level? Should we expect U.S. order intake to really pick up through 2018?
Yeah, I think that, as you say, after the turbulence and all the speculation on changes in the PTC that we saw towards the end of last year, I would say that the good news that it's now back to the same situation as before those discussions started. We see a very healthy market in the U.S. up to, I would say, also 2021. We still say that it will, from a delivery point of view then, or installation point of view, will be a phased market. 2020 will be probably the biggest year. It's of course hard to speculate exactly how this will pan out over the years. I think it will be a ramp up, so to speak, from now until 2020 on delivery.
I've seen different external forecasts that 2017 to 2020 time period volume should be around 40 gig. I think that is a fair assumption for us to base the market size planning on.
Okay, thank you.
The next question comes from the line of Gurpreet Gujral from Macquarie. Please go ahead. Your line is open.
Hi, guys. Just a couple from me. Marika, just going back to the 1.2 gigawatts of turbines delivered in the quarter. I know you said, compared to last year was a bit of an anomaly given the PTC cycle. Hence, it's not a fair comparison. If you look back in 2016 and 2015, the turbines delivered was also in that sort of 1.2 gigawatt range. It does suggest that in this particular year, the Q1 deliveries are relatively low, especially against guidance. Is this primarily to do with the EPC side of how you recognize deliveries, or is there something else?
No. As I said, one comparison is obviously the PTC, if I compare with 2017, I don't recall the numbers exactly for 2016 and 2015. You would also have deliveries, if it's EPC contracts in a given quarter, that will have an impact, but that's nothing I recall from those quarters specifically. As we're not recognizing those from a volume point of view, that will have an impact, yes. You're right.
Okay. Yeah. To be clear, when it comes to revenues. You do recognize clearly EPC contracts, from a volume perspective on deliveries, you do not until there is a full commissioning of a particular project?
Yeah. Correct.
Okay. All right. Second question. On the order intake in the U.S. specifically, I think you talked about 800 odd megawatts in the Americas. Could you give us a guide as to how much of the 4-megawatt platform featured in this order intake relative to last year? I just want to get a sense of what the mix change is here.
I don't have that on top of my head, sorry. I think we have to come back to you on that to be more sure about the numbers. Our team is nodding here. We can definitely come back to you on that. I don't have the exact numbers, but we're seeing a clear shift, and it depends a little bit, you still have them in the wind belt. The 2 MW is dominant in what we call the Rust Belt. We start to see more of the 3 MW, and then on the coastal side, it's more of the 3, 4 MW. You still have different markets within the market where the 2 MW platform is more dominant and where the 3 MW platform starts to be dominant. I think it's better that we come back with a bit more exact numbers than that I guess.
Okay. Thank you.
The next question comes from the line of Alok Katre from Société Générale. Please go ahead. Your line is open.
Hi. Alok Katre from Soc Gen. Thanks for taking my questions. My two questions really, Marika, just in terms of the activities of levels and the differential between shipments and deliveries, I know you sort of mentioned that you're using the balance sheet to build inventory only against a firm order and so on and so forth. How comfortable are you with the kind of inventory levels that you now have with the risk associated, let's say, with having these inventory levels in terms of we're seeing price declines or in the risk of deferrals or push-out of deliveries by the customers, let's say in the U.S. with all those uncertainties, and perhaps even a risk of obsolescence from the perspective of changing technology and price pressures? That's question number one.
Yeah. If I hear your question fully, that would mean if we were to have all those uncertainties, that would mean that we would be speculating in our inventory and how we build inventory. This is based on firm order intake, which obviously we have full visibility of price, scope of projects, and which products we are delivering. As we are building based on those facts, we don't foresee those kind of risks to occur.
Right. At what stage do you start to say, okay, maybe we don't build further inventories from this level going forward? Just wanted to get your sense of how you're thinking about deliveries versus inventories in the context of your backlog. Clearly, we've seen about three or four quarters now where you obviously built more and more inventories. I think the megawatt under construction was talked about, and so on and so forth. Just wanted to get a sense of where you stand in terms of.
When it comes to inventory, it's obviously finished goods that we are looking at based on the firm order intake that we see. We have been building for that purpose for the last two quarters, which obviously have served us accordingly. You also have a certain portion of PTC components in that, and you will also see EPC projects volume in that, again, based on firm order intake. Obviously, if things don't materialize as we anticipate, we're not speculating in the inventories. Obviously, if things are not panning out as expected, we will not continue to use the balance sheet. It's based on firm order intake and nothing else.
Right. Not building anything for in-for-out orders?
No.
My second question is just on the capital structure. Obviously, there's been some expectations, given your strong sort of balance sheet as well in terms of buybacks and so on, second half. Clearly, given where your solvency ratio is and how close it is to the, let's say, 25% floor that you have set, does this kind of act as a bit of a limiting factor in terms of when we think about potential buybacks and utilization of, let's say, excess cash on the balance sheet? Are you a bit more open to flexing this range as well?
Well, as I said earlier, this is something we will come back to on the back of Q2. Our methodology has not changed from that perspective. Also bear in mind, what we have also said is that we will do a share buyback when we see fit, but we will also use excess cash for opportunities in the market, which comes from, as we have said earlier, acquisitions of companies within the service sector, but also technology, so that has not changed. There's two means of having this strong balance sheet, which have served us extremely well and continue to serve us well in the industry.
The 25% is that kind of cast in stone for you? You lowered it last year or so. Just wondering.
No, what I want to be specific, we have targets for a specific purpose. If we would have any change in those targets, we will get back to you on that.
Okay.
The next question comes to the line of Klaus Kehl from Nykredit Markets. Please go ahead. Your line's open.
Yes, hello. First, a follow-up question on these pretty low deliveries in Q1. Could you just confirm that there aren't any problems with your deliveries, it's just a matter of timing? Therefore, if it's just timing, then it would be fair to assume that in the coming quarters, you will complete the projects and deliveries will go up, and so will your revenues. That would be my first question.
Yes. We can only confirm that, yes.
Okay. Pretty simple. Excellent. Next questions. In this quarter, you have a quite high percentage of EPC revenues in your power business. I think the percentage is up from 4% to 20%. What kind of margin impact does that have in the quarter, or yeah?
Yeah. I agree, in this quarter it is high, as you say, again, you will see a difference in the different quarters from that perspective. Also, in this quarter, in particular, we had a supply and install project that is qualifying as an EPC project, because we cannot use these turbines for any other purpose. Then the accounting principle therefore will be the same as an EPC contract. It's a bit awkward in this quarter specifically. If you want to get more details, you can speak to the IR team on that, and we also have that in the notes, if you go through that in our report.
Thank you. We now go to the last question.
The final question comes from the line of José Arroyas from Bestinver. Please go ahead. Your line is open.
Good morning, everyone. I just had one question on your cost-cutting plans, I want you to refer to the ambitions that some of your competitors have announced, particularly Siemens Gamesa, aiming for about 15% of last placement revenues worth of cost-cutting, and that's by 2020. I was wondering, given that Vestas has not announced a similar target to the market publicly, if this is a reasonable level that Vestas could also achieve by 2020, if this is a run rate level we should expect for the company. Thank you.
Yeah, of course, for obvious reasons, I can't really comment on the competition, and I think when it comes to cost levels and cut levels, we come from, of course, two very different places. Where, as everyone know, they are going through a merger, and we are not. We will continue with our efficiency programs, both when it comes to the cost out program on the product side, on the supply side, and of course, we will continue with our technology roadmap, both when it comes to the current product line out, but actually also when it comes to the next generation of turbine, because the longer term, the product will increase the output is actually the best driver for both in generation. You can definitely not do only that.
You have to work on both the cost outside and on the technology roadmap, and of course, the internal cost savings. I think it's very hard to compare to the competition also from the point of view that we come from very different situations. With that, I would thank you very much for your interest and your call in today, and I'm sure that we will meet all of you, or at least most of you, during the next week. Thank you for your interest and have a nice weekend.