Hello. Good morning, everyone, and welcome to this the third quarter 2017 earnings call. Thank you for calling in. As usual, then it's me and Mike here. Starting with the disclaimer on the slide.
And then let me get straight into the key highlights of the Q3. Order, a solid increase, up close to 50% year over year, 2.6 gigawatts. Revenue of EUR 3,700,000,000, a decline of 6% year over year. But looking at the 9 months actual, basically on par with last year. A bit of 1,000,000, 12.9 percent margin.
So a solid earning in the quarter, but a decrease of 18% compared to the same quarter last year. Service continued to develop well. Revenue increased 18%. Year over year and the EBIT margin at 17.9%. Cash flow reached 100 and $93,000,000, a 25 percent year over year improvement.
The outlook for 2017 has been adjusted mainly based on visibility for the remainder of the year. Seriously, and I will talk about the orders and markets and then hand over to Marika for the financials and then come back with the outlook and Q And A. So when the industry continues to evolve and as we have talked about before quickly moves into auction and competitive tendering systems. Auctions really started in Latin America, moving over to, of course, the U. S, with the Android system, And this we see now is present in all regions.
With this, we have also seen continued power prices coming down in the new auctions. So basically the market that is transition quickly. At least a bit more in detail then, starting with the U. S, This strong year as demand is driven by the current PTC structure that we are in. And of course, also the increased competitiveness of wind.
The proposed host tax legislation creates uncertainty. Or most likely scenario or the scenario that we plan for is that the current PTC structure will stay and rebase that assumption on that it has a broad bipartisan support in the CNAD that we saw in the vote in 2015. Having said that, of course, this, as I said, the
house
tax legislation creates uncertainty and we'll come back a bit on how that is reflected. Latin America then, as I said, was the 1st 3 d moving to auctions. We see that continue. We've had seen some auctions being held in Bolivia. We expect new auctions in the quarter in in Brazil and Mexico and then also Colombia.
Looking at the ARM and starting in Europe, Europe is discussing a market reform to better cater for more renewable energy that is of course positive in order to increase the penetration and even further. In Germany, free auctions have been healed. We today only know the results from the first two, the majority of the awards were to sit and win parks, and we expect that, that will be the same in deferred auction. After that, we actually expect the rules to change and that the preferential treatment for system with a windfall would not be there. Also in Europe, we expect the 1st auction in France towards the end of the year.
And that means that basically, most of the markets in Europe has gone over to an auction system, except markets in the Nordics. In Middle East And Africa, also the same movement here we've seen for some time aspirational targets on renewable being case in most markets, it's encouraging now to say that those targets are transformed into real plants and one such an example it's in Saudi Arabia, where an auction is coming up. Asia Pacific, China, overall, probably be down on delivery this year. But overall, 5 year plan remains We see curtailment in some markets. It's being addressed, but it's hard to judge the exact timing.
India, as we talked about before, is currently a and see in the market. The overall target again remains. And of course, we expect at some point that the market will return through previous volumes. But currently, through auctions has been held, announcement of 3 more, the for March next year, but we've also seen before delays in an on store and so a bit of uncertainty in the medium term. Broad ratio specific region Also, good activity levels, renewable energy targets in place in most markets.
We see an increase in activity in several markets also reflected in our numbers. And also here then Australia remove 2 options in Q1 of next year. So overall, as the market continues, This transformation, we see increased competition. We maintain our global leadership session invest us, deliver on our KOB active growing faster than the market, delivering best in class margins, and maintaining a strong balance sheet. So we remain committed to our strategy to build on and leverage on our global reach or scale and our technology and service leadership.
Going a bit more into the details on the order intake then, as I said, up close to 50%. So, solid development, I would also say that it was fairly broad based, but to point out some markets then Mexico Funds UK And U. S. Accounted for approximately 60%. The average selling price came down to 800,000 per megawatt in the quarter.
And we see, of course, the trend over the last four quarters is that ASP is coming down and in the quarter primarily due to the highly competitive market leading to price pressure. As usual, we should remember that there is p contains many parameters and will depend on the turbine type and the switch between lower megawatts turbines. So high megawatt turbine, the geography, the scope, and the uniqueness of the offering. Looking at the order intake for 9 months then, an increase of 23%. Compared to last year.
And this year, the growth mainly comes from developing markets key contributor to this was Argentina, Mexico and China. A bit more in detail. And Americas up 48%. Again, Mexico oil Argentina, but also U. S.
Then strong contributors. EMEA down 15% here If I look at the absolute numbers, actually broad based again activity level in in EMEA, but strong from Germany and Sweden. And if I look at the year over year increase, basically France, UK and Germany, not fully offsetting the Norwegian order of last year. In Asia Pacific from a lower level, a strong growth, over 300% Here we see strong development in China, India and Thailand, but also good activity level in ordering order intake from Australia, Mongolia and South Korea. Looking at the regional split then, delivery on in Q3 were down 14%, mainly driven by Americas, as expected, we see the phasing of delivery in the U.
S, as we talked about some time ago. In the quarter end, Americas was down 41%. And on the 9 months, 17%. So very influenced by lower deliveries in the U. S, but good activity levels in markets such as Canada and Brazil.
In EMEA, in the quarter, up 26%, strong development in Germany and France. And for 9 months basically flat. So increases in UK compensated for drop that we saw in South Africa and Sweden. Asia Pacific, again, from a lower level, good increases in the quarter. Where we see positive development in Asia Pacific region, Mongolia, South Korea and Japan.
An overall for 9 months stable development in China and India. Backlog remains at a high level and increased 18% year over year. Now stand on at more than SEK 20,000,000,000. Sequentially, we saw a decrease in the turbine backlog with SEK 300,000,000 and an increase in the service backlog of also ARS0.3 billion. A few words also about the joint venture that we have together with MHI for offshore and continues to develop well.
On the execution side, the first two 8 Megawatt project was completed. The joint venture took, 252 Megawatts order and was announced preferred supplier to 2 large UK projects of 860 and 950 Megawatts. So there's a thought of your intention on the order side. They have recorded 2.7 gigawatts of orders from orders and another 2.5 gigawatts of orders that are conditional or preferred supplier agreements. With that, hand over to Micah for financials.
Thank you, Anders. And as you can see on the income statement, what Anders have highlighted here in in the quarter. It's also reflected on the P and L that we are providing here. We have a lower activity compared to Q3 of last year, but in all comparisons, still a high activity level in the quarter. But reduced by 6% compared to last year.
Gross profit is also consequently reduced by 11% and that is driven primarily by the Power Solutions segment, but to a certain extent, offset by higher revenue in the service service business. What you can see is that also that SG and A, which I will come back to is continue to be well in control and as percentage, still at a low level, although a slight decrease here in absolute numbers. EBIT is solid, although lower 2% compared to last year at 12.9%. That leaves me with the SG and A cost. And you can see again a good performance.
So we are 9 6.9% compared to 6.7% in the last quarter. So a slight increase compared to the quarter. Again, you will see some changes in between the quarters, but in percentage clearly better than Q3 of last year. This is a high focus area and will continue to be. And we try to manage the volume increase and the activity levels with keeping still keeping the low SG and A and also focusing on getting some flexibility in the fixed capacity costs.
The service continues a strong performance and that is driven by high activity levels. So if you compare with Q3 of last year, you see an 18% revenue improvement. And obviously, the focus on the service business, which has been there for quite some time continues and is clearly paying off in terms of activities level EBIT margin. So in the quarter here, you see 17.9% EBIT. And as Andreas highlighted, the service order backlog grew $300,000,000 compared to Q2 of 2017.
Again, a very good level of activities and also a very good profitability in the service segment. The balance sheet remains strong. And you can see here that our net cash position increased to 1,000,000,000, which obviously is something that we're very happy and proud of. So you saw an increase compared to last year of 23%. There was also a positive net working capital development of at 1,000,000, obviously having an impact on the cash flow that we are presenting going forward.
The change in net working capital, we are showing here as we always do, we change over the last 12 months. So the improvements are primarily driven by prepayments and trade payables. To a certain extent, offset by higher inventories. But again, the higher inventory methodology has not changed. We continue to build inventory for some order intake.
It's more of a timing question. The net working capital change over the last 3 months increase in Q2 due to higher activity levels. And the development is primarily driven by timing of receivables and trade payables. A reflection again of the activity level. To and here, we continue to consume less than what we provide for, then you will always see some fluctuations in between the quarters when it comes to consumption that is also reflected in the loss production factor that is continuing below 2% on and also historically and as you can see here in the quarter.
And you will see certain fluctuations also here, a reflection of the warranty fruition and how much we have consumed, but still well below 2%. And good quality performance. The cash flow statement, we continue to deliver good cash flow from operating activities, although slightly lower compared to last year due to lower activity level as we have spoken about. You also see the positive change in net working capital. Leaving us with a free cash flow of $193,000,000 compared to 155 in Q3 of last year.
Remember that we also more than 50% of the share buyback is completed, and that is the biggest or the largest in rest of history. Total investment is increased compared to last year by 14. No surprises here. We have a high activity level that is also reflected in the investments of, tangible blade investments. So no no change in methodology.
We invest in modes and we also invest in capitalized R&D. But a good reflection of the activity level in the company. The capital structure on the net debt to EBITDA, we continue to deliver well within the boundaries. Solvency ratio, we have stated 30 to 30 percent. And here you can see we're slightly below, and the decrease is primarily driven by the share buyback program.
The return on invested capital continues to increase. And here you see a reflect of the sale strong delivery on the balance sheet elements. So again improved compared to last quarter, Q2 2017. But as I leave the word to Anders.
Thank you, Marika. So going on to the outlook, as I said in the highlights, we made some adjustments to our guidance based on yesterday performance and the visibility for the remainder of the year. Narrow guidance a bit, and now see it between 1000000000 to 1000000000. We have experienced good activity, but also some uncertainty linked to the U. S.
House build. On the EBIT margin, we narrow our guidance between 12 and so 10%, a mix of different factors, of course, is the specification to the lower end of the range. Firstly, we've had additional execution costs. And furthermore, we are seeing that the increased competitive environment and pricing is impacting our average project margin. Total investment with the from approximately 3.50 to approximately 400.
And on the free cash flow, we now introduced a range between $450,000,000 $900,000,000. Our updated range mainly reflects uncertainty around the U. S. Markets and especially the expected level of 80% PTC components order. We have not changed our outlook for the service business expected to continue to grow with stable margins.
So with that, we move over to Q And A.
We ask you kindly to limit Our first question comes from the line of Christian Johansen from Danske Bank. Please go ahead. Your line is open.
Yes, thank you. So first question is about the EBIT margin guidance. And then just to elaborate on these two effects that you highlight, So I understand how increased competition can impact earnings for next year, but considering you didn't mention this in August and that in for our orders over the past couple of months must be fairly low. Just help me understand why this negatively impacts margins for this year? And secondly, can you just elaborate on what execution costs you're seeing weighing down as well?
Okay. First, your first part of the question in terms of the in fraud orders impacting here in the quarter And we have, have said that yes, you always enter into the year with a certain portion of in for outs. In for out orders this year, actually came in a bit later than we anticipated because of normally you get them as early as possible in the year and here we have quite a number of them coming in the latter part. And as we say, yes, they are coming in clearly with lower margin than anticipated. And primarily, you see a price pressure on those deliveries.
And the thing is that the closer you are to the delivery time when you take the order intake, the less you have to mitigate with in terms of cost out, in terms of product improvements, So that is what have happened. And then we also have had a number of extra costs in the quarter. Sure, I would say, operational. So no one timers effect or anything. It's just operations.
So you a lot of double craning. You had transport costs impacting the quarter. You also have The transport and the lower activity levels is also impacting. So you see a lower volume, and that obviously to a certain extent, impacting the observation in the factories. So those together are impacting the overall view of the quarter, but obviously also having an impact on what you see on the guidance.
Okay. And then just on the cranes and transportation costs, does that sort of carried into Q4 and into 2018 as well?
I mean, because it sounds fairly simple, but the double cleaning is costing a lot because there's few cranes in the world and they are very, very expensive. So it will have an impact on the overall year, for sure. And also what why we have chosen to update or narrow the guidance. But bear in mind, we're still within the original boundaries of the guidance.
Okay. And then my second question is regarding the PGC component at 80% level. And you stated you expect the PDC to continue as it is currently, but how are you going to manage component orders given that it's very likely the tax reform will not be completed or not completed before the end of the year. Can you take in order sort of with a clause that if the PDC is changed and they are canceled? Or how do you manage these?
I mean, as I mean, of course, what we have shows an auto reflect in in the outlook is that there is, of course, a big uncertainty on the 80% CTC potential, that's what you say. So I can't really speculate on when we will get clarity on the tax reforms in the U. S, of course, the sooner the better from our point of view. I mean, we are currently, of course, now in deep discussions with the customer, I think it's fair to assume that there is a greater hesitation on the 80% PTC than what we saw before. Everything else equal.
But of course, there is also the fact that if, if you don't qualify for it now at the end of sort of that that opportunity is gone. So I mean, that will be in a close dialogue of with our customers now. And I Unfortunately, as I said, of course, it creates more uncertainty, but we are definitely not given up on on securing 80% P2C component as well. But we think it's prudent and to reflect the range in the updated outlook. I will not go into sort of specific terms and condition or discussing with customers for competitive reasons.
Okay. Thank you. Thank
you. And our next question comes from the line of David Foss from Barclays.
Questions. I just wanted to delve in a bit deeper on the 2017 margin revision, and how it actually interplays with the order intake. If I have done my homework correctly and looking at your announced source for Q3, the remarkably few that are in for in fraud orders. So that suggests that they those in fraud orders maybe in the unannounced pocket, it
will be very helpful.
If you could shed some light on where those are, what is the type of price erosion that you're you've been experiencing on those orders and how much crucially of that erosion you feel will be hitting the bottom line and it would really be helpful if you could give some actual numbers on that this time around so we can we can start figuring out what's what in relation to the new reality? Thank you.
If you look at the more in revision and the impact from the in fraud orders. And as I said, I mean, you have a good blend from from volume. Obviously, for the full year, MPTC is components is one of those elements. Then you have also the in for out orders. And as I said, they are coming in pretty late in the year, and they coming in with the with lower margin than what we anticipated, then you I mean, the overall competitiveness and the expiration of the competitiveness is I cannot give you any specific markets because it's actually available phenomena if you would like to call it that.
So and then we have operational costs. I mean, we have launches of products we have, we have swapping in between the product just to manage timelines for customers. And in a lot of cases, we have been able to mitigate those extra costs. And what we see now, we are not able to the same extent in this quarter. So all in all, with the in for out, with the with the PTC, changes that we think is prudent to reflect in the guidance.
And also with the acceleration of price pressure, in particular for the in for us. That's obviously what is reflected here for the remainder of the year. I will not give you any specific specific on each element, but it is a good blend of all the elements that is impacting the the guidance of EBIT for 2017?
In this, how much of this will stick going forward like in 2018 2019, it will be very for if you could just get a slightly better grasp on what this means to the gross margin. But if you're really not willing to commit any numbers to that, right now, I'll ask a second question, which is around the U. S. Clearly, I understand the uncertainty around whether you can any 80% P2C orders. But what about the fill in orders, so to speak, under the 2016 P2C?
What do the events in Washington of last week, how do they affect those orders as has it pertain to volumes realized in 2018? Can you answer that question?
Around the quota scale, the 5%.
Yes. So under so the orders sorry, the projects that were already safe harbored last year in 2016, in your conversation since last week, and I appreciate there may not have been many. But are you seeing customers going ahead, pressing ahead with their plans for 2018, or are they also somehow affected, if I'm more certainty around those. Is that clearer?
No, I think that I mean, yeah, I think one way to look at it is, of course, that, a majority of projects in in 2017, we probably had qualified as continuous construction. If you then look at 2018, from a market standpoint, my guess, and this is a guess, it's probably a bit more fifty-fifty between continuous construction and PCC component. And then of course, when we go further out, it's more qualified as PTC components. So I think that is the sort of general market on continuous construction and P2C qualification. When it comes to discussion with customer, I mean, of course, of course, we are in a close dialogue with the cash and they are view on this for the moment.
But I think it's way too early to draw sort of any conclusion on row out plans and things like that. I one of the reports I have is that the customer have the same name planning assumption as us that this language are on the to say from the proposal in the house will not be we'll not stick those mistakes so that we will have the PTC structure that is the current in the market. But again, I think it's way too early to speculate. There are so many different scenarios.
Yes, absolutely. I'll go back into the queue. Thank you so much.
Thank you. And our next question comes from the line of Klas Olma from Nordea. Please go ahead. Your line is open.
Thank you. Yes, I have also a couple of questions. The first goes for the Q3 margins. Can you disclose whether the lower gross margin is based on mix or it is due to this lower level? That will be the first question.
Well, the Q3 gross margins are basically impacted on all the some of the elements that I spoke to about earlier. So you have volume, it's definitely impacting. You also have the in for out orders that were delivered with lower margins. And you also have the extra cost on the operation side, impacting the gross margin. So it is these bigger buckets and then you have elements in between the buckets, but, and in particular, the operation side.
But those 3 are clearly impacting the margins the gross margins in the quarter.
Okay. And then my second question, would it be fair to assume that this change full year EBIT margin guidance of taking it down by 1 percentage point. 2 third of that is based on these additional execution costs and the rest is lower in margins with a PFS assumption.
Then you're getting better at specific levels. And as I said earlier, I mean, it is a good it is a blend of of obviously the PTC that we have taken high 4. So that will have an impact on the from a volume perspective and consequently also observation perspective. You have some in for us that will have an and you have the operational side, that also will have an impact. And that's why we have decided to get to narrow the guidance in this quarter.
But just to give some further, I don't know if it's explaining or further complicating, but The thing is when we take in orders now, you obviously have a shorter timeframe for the in for out and you have more of a normal timeframe delivery. And then you have a longer time frame for delivery. And the longer the time frame, the more of the what we have done previously on the accelerated earnings on getting creating more flexibility on the fixed capacity costs and also upgrades of the product is possible to mitigate some of the the short force you would have when you take in the order. That is one element and that is the methodology that we have used in the past. And obviously, if the competitiveness increases extremely quickly and to a very large extent, then the elements are short term, very hard to have an impact on, but longer term, there's more opportunities.
So it's a lot of timing in the deliveries as well from when you take in the orders.
Okay, thanks.
Thank you.
Thank you. And our next question comes from the line of Markus Belander from Carnegie. Please go ahead. Your line is now open.
First question regarding the average order intake price. In Q2, you quantified the impact from the weaker U. S. Dollar. Could you do the same for the Q3 number?
FX the impact in this quarter as well. But I mean, through a lesser sense influencing than the competitiveness of the industry over price.
Okay. And you And I mean,
as I said, I think I said many times when we discussed this selling price for mega, but the cost there is a number of factors us. And I think what is important to look at is more that trend and the trend over time. And of course to see if it accelerates or not, because we will have FX is of course one thing, as you say. But I mean, otherwise, the price to measure what will come down by just pure the nature of of turbines mix. Higher rating, for example, we have increased the 3 megawatts or 4 megawatts.
If we sell more of the 4 megawatts and the 2 megawatts. Do you have any impact there or you have an impact on on where in your geography as we said, I mean, especially China. But so I think it's important to look at the sort of trend on the ASP. And if we look back at the last four quarters, which of course see an acceleration of the decline in the ASP.
All right. Understood. 2nd question regarding the inventory build or the increase in orders under completion, Could you say something about the dynamics there? Is it orders being pushed into Q44 or Q1, or is it the effect which you talked about last quarter that you're producing against inventory for future U. S.
Deliveries?
Again, the inventory, the underlying methodology of orders have not changed. And yes, we have used the balance sheet or have that as an opportunity to increase inventory rather than how additional investments as I spoke about last quarter, but it's also a reflection of the activity level in Q4 and Q1. So that is a fair comment.
Thank you. And our next question comes from Dan Togo from Handelsbanken Capital Markets. Please go ahead. Your line is open.
Yes, thank you. I'd like to go back to the year to the ASP. Is it fair to say that on all things equal basis, ASP would actually increase in Q3 compared to Q2 just due to the fact that you have less China and you have at least one turnkey project here in Q3. Disregarding the price pressure. Would that have been a fair assumption?
Okay. The, yes, I understand what you're looking at. And I would say again, I mean, we had some currency impact, yes, in the quarter. And as you say, there's turnkey impact and that will obviously impact the ASP in a positive way simply because the scope is there. But it's all the underlying elements that are really important when it comes to the ASP.
But if you look at the trend, on the ASP, which is probably the more fair description of what's happening. And that is if anything going down. And it's not only the last few quarters, but if you look at even a longer time frame, that's And that's clearly what the whole industry is focusing on is getting that trend down. And by that they're really lowering the NCOE for the customers. But there are elements that obviously will have an impact on the ASP, but I think look at the trend line and that's where the market is.
Okay. Thank you. And then this trend line, and as I understand it, it has gained some pace. Does this, and this, of course, will impact the prices you need to deliver at in coming years, does this give you any reason to sort of say be more aggressive on cost to house? And are there any low hanging fruits, so to say, in the cost base that you can turn to in order to mitigate this increased price pressure?
Well, the what we have done, and that's also mean, it's simple and we have always for the last few years worked on the cost out. You work on the efficiency in the production you try to be efficient on the transportation. So all of the operational elements continues. And then obviously if we see that the what we see is that the pressure is higher simply because we're entering into a totally new market with the the transition taking place in the market. So we have to be even quicker.
But the elements that we can influence and the activities that we have in place continue. So it's not that we've taken down something new, but we have, we are accelerating also those elements. And then as I said earlier, the longer timing you have from order intake to deliver the more impact you can have from all the activities that you have in place. But the fact remains that there is a transition period, both for us as suppliers, but also for the customers, when they are aggressive bidding into the
Okay. Thank you.
Thank you. And our next question comes from the line of Bob from ABG Santo Colier. Please go ahead. Your line is now open.
Thanks a lot. Obviously, a
lot of questions regarding prices today. You mentioned of course that the auctions are and lower power prices have been a driver for bringing it out ASP. But to what degree is this also a reflection of an increased competitiveness between the turbine manufacturers can you sort of feel that maybe some of your European competitors are a bit stressed right now and therefore really need to secure orders by offering acquisition pricing. That's my first question, please.
Yes, I think that I mean, Of course, as you say, I mean, we're seeing also consolidation in the industry and, a little bit Yeah. What should I say? Not so, yeah, good performance from some of our competitors or it'll be expressed. And of course, that adds to the competitiveness of the whole it. I mean, it's, of course, not helpful if I put it like that.
Okay, fair enough. Looking into 2018, I'm pretty sure you don't want to comment too much on that, but all else equal, I assume that here in 2017, you have a mix of how can you say old prices and then you have some newer prices at a lower level. In 2018, I would assume that you have a greater proportion of prices provided under the I can say new reality would it then all else equal be fair to assume that the, operational margin in the project business would also be lower in 2018 than in 2017?
I mean, as you said, I mean, we will follow on our forces and come back on the guidance on how we see margins in 2018. But and of course, it also depends a lot happens in the competitive environment. What we have talked about and of course, what we have seen actually for some time. And I mean, remember that we also already now deliver a lot of the projects that we won in auctions example, in Latin America. And as I've said before, U.
S. Has always been a competitive tendering market. So not new. It's more that it's Excel, right? I mean, we see for each auction that the the power prices are coming down further and that puts pressure on the whole chain.
And then of course, to your first question, it's also a relative game. Of course, I am, I'm happy about generating the best in class margins that we do. But of course, we are also depending on what the competition is doing and what kind of margins that they feel are sustainable. So of course, there is a relationship in the market between us competing for the orders in the market. And And I think there is also a lot of different scenarios, but of course, there is also a very likely scenario that power prices now is so competitive on wind compared to other technologies that after this transition, we will see much more stable power prices in auctions going forward.
So there are all kinds of scenarios once we are through this transitional time. For us, as Marika said, to remain attain our best in class margins is, of course, that we focus on the labels that we have, which is the cost out program, the accelerated learning program, which is the product program that generates higher production.
Great. And if I then just have may have one follow-up on your changed EBIT margin guidance for this year. Would you also have done the narrowing to the lower end of the range had it not been for the recent bill from the house in the U. S?
Hi, let's speculative, I would say. I mean, now what we have given you is everything that we see and obviously the what's happening in the U. S. Has an and we have been prudent enough to consider that. But we also, again, in product orders having, as you can see here in the quarter and also on the operational issues.
So it's fair to assume it is a good blend, but obviously the 80% PTC is a reflection and you clearly see that also on the cash flow range.
And our next question comes from the line of Kash Gupta from JP Morgan. Please go ahead. Your line is now open.
Yeah, hi, good morning. My first question is also on pricing and maybe, I mean, given the moving parts in the ASP, how you define. If you can comment on ASP in terms of unit terms obviously, I mean, ASP of platforms that you are selling last year versus this year because that will offset some of these technical factors. And if we also talk about the in local markets and that will offset FX. So maybe if you can comment on pricing or at a unit level, that's my first question.
I hope I understand your question now. If you look at the ASP as presented here, Yes, it's a lot of factors influencing the overall ASP. And I think you remember one of the orders that we took in Norway, a big project, obviously having a big impact on the average sales price. But then again, generically, there is no 1 to 1 core on if it's a good project or a bad project. The timing elements have a big impact because obviously if If you have a bit more time to mitigate some some of the shortfalls in from a pricing perspective, But there is also, I mean, you don't see huge differences in price overall globally, especially now the market is entirely global.
You have auctions. And auctions are clearly a transition period for the whole industry. So having a big impact on the price. And I think that if you look at the the pricing environment also, it is our customers trying to also to it's not only us, so suppliers trying to to the new reality. It is also customers trying to adapt to the new reality in auctions.
And obviously, Sometimes they are very aggressive in their pricing, which obviously puts a great demand on suppliers all in all. But I think the most important factor is obviously short term. You have a big impact from the ASP, if you don't have a good timing element in between. But continue to do what we have done. And then, if we can mitigate all of the pressure, that remains to be seen.
Obviously, that is one of the great efforts that we're doing right now and have done in the past as well. But the competitiveness is clearly accelerating in this transition period. And I don't know if you're any wiser.
I mean, my second question is on consensus, which is basically looking on looking for 13.8 percent operating margin for next year. Given the anticipation of higher US volumes. I know you will be coming up with the guidance in February, but I'm just wondering if you if you can provide any comment on the consensus list on what you see in your backlog and should you think that the consensus is too high or maybe any comment that the market expectations are realistic? I mean, also given the today's share price reaction?
I believe give you a fairly generic answer as we're coming up with the guidance for next year. And first of all, with the the proposal now in the U. S, it's very hard for us to say anything about 2018. We are doing different scenarios. So it would all in all, be wrong to comment on that at this point as it's no one knows.
That is one comment. And then secondly is that the order backlog and the order intake that we have so far is obviously nothing but very positive. So the perception of us in the market and the product and the power that we can generate from our products is positive. We also see a good development on the service business then how the market 100% pans out and what will happen and competition or customer behavior is very hard for us to comment on at this point. But we will come back with the overall guidance the competitiveness, if anything, is clearly increasing.
And finally, on restructuring costs, if the guidance includes any restructuring cost for this year, also given that your peers are doing sizeable reduction in capacity or moving that to moving that away from mature markets to growth markets. So is there any need for you to also react than what you previously thought because of the competition?
Our overall methodology has in and continue to be very Capric slide solutions. We are also having the focus on when it comes to production, we're having focus on sourcing, we're having focus on the fixed capacity cost and we have no current plans to make any big changes. What we have done, we will continue to do. And then obviously there's a timing element. So we will speed up activities if necessary.
Thank you.
Thank you. And our next question comes from the line of Basil Ahmed from SEB. Please go ahead. Your line is open.
Yes. Hi, Anderson, Marie here. It's Seth Weber from SEB. Just one question from my side. Obviously, pricing has been discussed quite a lot during the call, but one of your competitors, earlier this week talked about double digit pricing declines.
Is that also the sort of underlying pricing declines you've seen during Q3? That's my first question, please.
Yes, no, but I mean, I can't really comment on what our competitors are saying. And I think And I don't know how they even define pricing in this element. I mean, again, it's like before, we are selling a levelized cost of ammo to fit into the customers on their PPAs and there are many levers on that and exactly what is price price and what is products and what is fit to the site and so on. I mean, I can't comment on on what they are saying. I mean, again, we are satisfied with our position and our earnings absolutely compared to the competition.
And we have all the intention in the world to make sure that we continue to deliver best in class margins. But I mean, of course, I have also noticed that the and as far as I have seen, we are the only one deliver clearly double digits margins. But of course, we also have a relationship to what the competition is doing.
Okay. And that's very fine. And this and then the historic there's also been price erosion in the market. Can you remind us what price erosion has been annually for the last
We should definitely have that somewhere, but that I think we I don't have that on top of my end.
Change and sorry for jumping in here, but the big change when it comes to call it prices is that you have more of a global picture now before you had more of a country pick Now it is a global picture. It is how much power you can generate. You are clearly competitive without subsidies that puts puts higher demands on all the suppliers. So that is the big change if you compare to the past. So it's hard again there also to have a one to one comparison.
Okay. But is it fair to say that you're not like underlying price inflation. You're seeing less than double digit price declines at the moment?
Yeah. I mean, again, I will not give you a number on the price elements specifically.
Okay. That's that was all from my side. Thank you. Anderson, America. We'll talk to you later today.
Thank you. And our next question comes from the line of corporate goodwill from Macquarie. Please go ahead. Your line is open.
Hi, guys. Just a couple from me. Your turbines under completion number has gone up to 5.2 gigawatts from what I can see up from 4.5. In the second quarter. Can you give us some context around why this is the case?
It seems like a pretty steep jump And has this actually impacted your 2017 guidance change?
I mean, the, the build of inventory, as I spoke about in Q2 as well, because we've been there also is that we are utilizing the balance sheet simply because we have the opportunity. So there's basically no change from that perspective. The methodology, the underlying methodology is we are not building inventory for speculation just to be very, very straight on that. We are building for some order intake. Then the timing of the deliveries can vary, but we are preparing for a good activity level here in Q4, but also in Q1 of last year.
That's why you first?
Next year.
So that is the underlying reason.
Okay. And so So is it fair to say that the sort of 2 to 2.5 gigawatts is the normal run rate and you'd expect to revert back to that?
The focus on the working capital elements and that has not changed. And again, the the the methodology on the farm order intake also continues. So there's no change in the focus, but it's we have used the balance sheet differently simply because we had the opportunity.
Okay. Okay. Fine. And second question, sorry, on the just to go on back onto the order intake ASP. I mean, when I compare the number to Q2, it's actually broadly flat right.
So when you talk the acceleration,
of price pressure. Is this something in
reference to what you've seen specifically in in October, November? That's led you to choose those words? Or is this order intake at 0.80 in Q3? Artificially high because of a greater level of EPC contracts in your unannounced order intake?
Again, I think you should look at the ASP, the trend in the ASP during the last capital of quarters and more than sort of in the individual quarters because they can vary a bit up and down. On all the things that we talked about. So I think it's more important to look at the trend.
Okay. Well, maybe if I can ask you a quick follow-up, then just in relation to that, when I think about the EPC mix specifically, in your order intake in Q3, is the EPC mix in your unannounced bucket equivalent to that of what you've announced to date? Or is that somewhat different?
I would say fairly normal level.
Thank you. And our next question comes from the line of Luke Katre from Societe Generale. Please go ahead. Your line is now open.
Hi, thanks for taking my questions. Well, firstly on the follow-up in terms of pricing, there's been a lot of discussion around that. One thing, I mean, what has sort of changed between, let's say, August November? And previously, so you've never been so vocally, let's say, cautious around the pricing dynamics before in the last three and a half years or 4 years that I've been covering, covering investors. So what has suddenly changed that, that is, sort of making you so, so very cautious.
Is it just, is it just the competition and you have a new competitor with the armed with synergies and you're acquiring a quarter of its workflows, etcetera, and then they're deploying those back into pricing. Is it just levelized cost of energy due to auctions or is it just the way that where is it a case where you probably read the market a bit wrong, as well? So that's question number 1. And then the second question, just on the working capital build, is could you just identify for us, how much is components within your inventory and how much is final products? And so seem to be building up inventory for Q4 and then Q1 and Q2, but usually Q1, Q2 is seasonally weak for you guys.
So you should have of capacity in that quarter. So just am I at a loss a bit on that front? And the prepayments are lower or flat year on Q on Q as well despite very strong orders. So just trying to understand what's going on in the working capital a bit more. Thanks.
Okay. Let me try to answer your first question a bit. And I think we're talking have talked about a very the competitive market, very competitive market and the increased competition actually for quite some time. And so I think that is, of course, what we have seen in the market. And I mean, to your question, of course, the indicator on that is the power and the development of the power pricing in the market.
And We have seen power prices coming down and coming on quicker during this year, for sure, and also quicker in this quarter. So But I think we talked about the very competitive markets, which of course means, and I mean, that's still the case. It's not just competitive on it's competitive when we have large cost of energy. And it's also competitive on delivery times and it's yes, it's a competitive market. And I think that for sure we have talked about for quite some time.
And what we're saying now is that we see also an acceleration in that. Correct. On the inventory, maybe you can.
So on the working capital elements, the prepayments, as you're referring to, I mean, we don't have any changes in our payments methodology, then there could be a timing difference if you're just in between a quarter. So that can very well happen, but there's no changes. We get the prepayments are in between 10% 15% still, so no change. And then the working capital elements, whether it's components or If it is a ready product, that's also nothing that we comment on, but as I said earlier, the inventory buildup is for far more intake, nothing but far more intake. And then the intention is if that weather holds and everything else holds to be delivered here in the coming two quarters.
And we're in the midst of one of them, but we are obviously also here as we always say with the dependent and the latter part of the year and the beginning of the year obviously have an impact. So, but it's Nothing has changed in terms of methodology. We have just used the balance sheet as explained simply because we had the opportunity.
Sure. So just to confirm, you haven't really built up anything in anticipation of 80% PTC orders, because I mean, those come in towards the end and you can't obviously come, let's say, deliver components unless you have some stock, right?
But also remember, because now obviously the guidance is reflecting, that there is a lot of uncertainty on the 80% PPC, but remember last year when we had 100 percent C2C, we had 105 days to deliver. So that element is is still there. So it is a big big impact is really on the cash flow as under Tarver given you.
Okay. Thanks. And perhaps Anders, I think the market hasn't been listening to your caution then. Thanks. I'll leave it there.
Thank you.
Thank you. And our next question comes from the line of Pina Kidas from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hi. I've got a couple of questions. I wanted to understand your pricing and margin outlook. So last year, you had a pricing of around 0.9. Now it looks like it's closer to 0.8.
So it's almost a 10% roughly double digit decline. This is not completely unknown to us, but obviously the market hasn't figured it out yet. Wanted to understand if you made 13% margin in your turbine business when you had an ASP of 0.9 And I understand there are a lot of changes and that pricing has fallen by about 10%. Can you give us an idea over 2, 3 year period once you have the opportunity to take out costs. How much of that 10% pricing decline can you reasonably offset, over a course of 1 to 2 years?
I understand that you don't want to give any guidance on 2018, but normally what would you be able to do? So that's my first question.
And then, I understand, obviously, what you're asking for, Finaki. And the the, as as and let's have Stacy, I mean, the price, the ASP decline has been there for quite some time. And obviously, we have done a lot of cost out on the products. We have also created the products over time. What we see now is an acceleration of the competitive landscape which means also price pressure.
But it is really a transition as we said earlier in terms of getting more and more option based, getting very similar across the board. So it is a global phenomena more than any country specifics, that's clearly it. Then with the if you have a shorter timeframe of, as I said earlier, to mitigate the price pressure then that will have an impact on your margin. Clearly, if you have a longer delivery time, then also you have more potential to mitigate. But all the activities remain.
So it's it's it's nothing new and it's not that we are all of a sudden figuring out new things, but we are definitely If this acceleration continues, then obviously there is a timing element and then we are speeding up. So There is no change in our behavior in the market, but the customers are also trying to see how they work in this transition period and with very aggressive bid in the auctions obviously have an impact on all the suppliers. But know that upgrades will be a crucial element also going forward and have been a crucial element in the past. So we have never in within the last few years see an uptick in pricing. It has been down.
And we have been able to mitigate it, but then the speed of the price decline will obviously
that was my question. So if you have the time, how much of the 10% would you be able to offset?
But the 10% is your words is not mine, Pinaki. I mean, we see a great variety and we see what we commenting on is that we see an acceleration in the competitiveness and we have not stated any numbers. And that also highly, I would say, competitive. So that's something that you want to disclose.
Okay, good. And can I ask you second question? We had a just on your inventories, is there any risk of you having to write down any inventory or just like one of your peers did?
As I said, I mean, we don't feel for regulation. We have some orders behind the inventory that we have. I mean, as I said, we, the inventory that we have, for, for, based on firm order intake. And if you're alluding to the 80% P2C, that is something we did last year in terms of getting the payments in, but we had a different delivery schedule. So we are confident with the inventory that we have.
Great. Thank you so much.
Question comes from the line of Sean McLoughlin from HSBC.
In this new reality of auctions with lower power prices, acceleration of competitive landscape, How can you mitigate the pressure yet married that with your ambition to grow faster than the market? That's my first question.
Yes. That's, of course, a very good question. Over time, we have to say in this one specific time, of course, you can say, which is more important than the other. But I think longer term growth and profitable growth, it actually goes to hand in hand. And I don't think that I mean, you can't increase profitability without also increasing your your revenue, if you look at it from a longer term, on its own perspective, even though it's our target, then of course, you can have certain areas in the market where you prioritize 1 harder than the other.
I think for us, if I look at situation we are in today. I mean, we have a good order intake. Up 23% year to date, which of course, we indicate a high activity level for next year. And And that is important because, of course, volume also helps us drive all the things that we talked about when it comes to cost out, utilization of our factories and enable us to continue to invest in the product portfolio. So I'm happy with that situation.
So speak. I must say that I'm also happy of generating the best in class margin. Which we clearly do also this quarter and why we see quite some of our competitors have significant drop in profitability, we maintain a good level of profitability. So and that is, of course, also extremely important going forward and puts us, I would say, in a very good position as this market transformed.
Thanks. And my second question is on the free cash flow range. It's quite a wide range. I understand that the uncertainty around the 80 percent PTC orders is part of that range. But I mean, is there a greater level of delivery uncertainty in Q4 versus previous years as a part of that?
I would say that the range we are providing here is a reflection is 80% B2C doesn't materialize at all, I'm sure. That's fair to assume.
Thank you. And our next question comes from the line of Klabin from Nikke Credit Markets. Please go ahead. Your line is now open.
Yes, hello. We have talked quite a bit about the US and what's going on over there right now. But but could you please, and you have also stated that there is risk to the 80% PGC orders and I clearly understand that. But could you try to talk about all the PTC qualification and a qualifying component orders that you won last year, have these projects turned into continuous construction projects right now? So in other words, they would could be seen as rather safe here in Q4 or how should we look at these potential follow-up orders that I would have expected, let's say, 2 weeks ago.
Yes, I think, I mean, as I said, A large part of the projects, the majority of the projects this year, definitely was continuous construction projects. We expect a large part of the project to be executed in 2018 are also continuous project. And then there is also a fair bit of P3 qualified components project. I think it's it's way too early to speculate on this house bill will have any impact on the planning of those 4 day it's nothing that we foresee. No, as I said, I mean, our main scenario is that that the current PTC structure will remain.
So the uncertainty how that influences now is very much on on that we anticipate greater hesitation than possibly on the 80% PTC.
Okay. But then just to follow-up, that that does that mean that the qualifying, PTC contracts that you had last year, the developers has been working on these throughout the year. So in other words, they have kind of turned into continuous construction projects, perhaps, because they have built some infrastructure or whatever.
Mean, it's all the areas. I mean, of course, there is a lot of different strategies from different customers that I will not go in deeper on so to speak. But I mean, generally speaking, of course, if you have projects ready, there is a preference to sorry, to use the continuous construction there for just because that saves you So I mean, it all depends on the maturity of the projects that they have ready. But as soon as you have something that is more ready, then of course, you the customers generally speaking, preferred to use the continuous construction effort. But I think it's fair to say that, I mean, this, so for Bill being so fresh to speak.
I think it hasn't impacted any planning in the week that has passed by. And I mean, in all discussions with the customer in the U. S, share of the bill we have that the likely scenarios that we will continue with the current state state structure and And now a lot of effort within the wind association in the U. S, of course, goes into trying to secure that. So I would say that is the focus on the customer side for the moment.
Was last call. So again, thank you for your interest and calling in. And I'm sure that we will see at least some of you during the next couple of days. Thank you.