Good morning, everyone, and welcome to this third quarter 2017 earnings call. Thank you for calling in. As usual, it is me and Marika here. Starting with the disclaimer, the normal slide. Let me get straight into the key highlights of Q3. Order, solid increase, up close to 50% year-over-year, 2.6 gigawatts. Revenue of EUR 2.7 billion, a decline of 6% year-over-year. Looking at nine-month actual, basically on par with last year. EBIT of EUR 355 million, 12.9% margin. 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. The EBIT margin at 17.9%. Cash flow reached EUR 193 million, a 25% year-over-year improvement. The outlook for 2017 has been adjusted, mainly based on visibility for the remainder of the year.
As usual, I will talk about the orders and markets, hand over to Marika for the financials, and come back with the outlook and Q&A. The wind 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 a tendering system. We see now it is present in all regions. With this, we have also seen continued power prices coming down in the new auctions. Basically, a market that is transition quickly. A little bit more in detail, starting with the U.S. The strong U.S. demand is driven by the current PTC structure that we are in, and of course, also the increased competitiveness of wind. The proposed House tax legislation creates uncertainty.
Our most likely scenario, or the scenario that we plan for, is that the current PTC structure will stay, and we base that assumption on that it has broad bipartisan support in the Senate that we saw in the vote in 2015. Having said that, of course, as I said, the House tax legislation creates uncertainty, and we will come back a bit on how that is reflected. Latin America, as I said, was the first region moving to auctions. We see that continue. We have seen some auctions being held in Bolivia and Chile. We expect new auctions in the quarter in Brazil and Mexico, and also Colombia. Looking at the map 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 even further. In Germany, 3 auctions have been held.
We today only know the result from the first two. The majority of the awards went to citizen wind parks, and we expect that that will be the same in the third auction. After that, we actually expect the rules to change and that the preferential treatment for citizen wind parks would not be there. Also in Europe, we expect the first 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 the merchant markets in the Nordics. In Middle East and Africa, also the same movement. Here we have seen for some time aspirational targets on renewable being in place in most markets. It is encouraging also to see that those targets are transformed into real plans, and one such an example is in Saudi Arabia, where an auction is coming up.
Asia-Pacific, China overall probably a bit down on delivery this year, the overall five-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 an uncertainty in the market. The overall target again remains, of course, we expect at some point that the market will return to previous volumes. Currently, two auctions have been held. Announcement of three more before March next year, we've also seen before delays in announced auctions. A bit of uncertainty in the medium term. Broad Asia-Pacific 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. Also here, Australia will move to auctions in Q1 of next year.
Overall, as the market continues its transformation, we see increased competition. We maintain our global leadership position in Vestas, deliver on our key objective, growing faster than the market, delivering best-in-class margins, and maintaining a strong balance sheet. We remain committed to our strategy to build on and leverage on our global reach, our scale, and our technology and service leadership. Going a bit more into the details on the order intake, as I said, up close to 50%. Solid development. I would also say that it was fairly broad-based, to point out some markets, Mexico, France, U.K., and U.S. accounted for approximately 60%. The average selling price came down to EUR 0.8 million per megawatt in the quarter.
We see, of course, the trend over the last four quarter is that the 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 the ASP contains many parameters and will depend on the turbine type and the switch between low-megawatt turbine to high-megawatt turbine, the geography, the scope, and the uniqueness of the offering. Looking at order intake for nine months, an increase of 23% compared to last year. This year, the growth mainly comes from developing markets, and key contributor to this was Argentina, Mexico, and China. A bit more in detail, Americas up 48%. Again, Mexico or Argentina, but also U.S., strong contributors. EMEA down 15%. Here, if I look at the absolute numbers, actually broad-based, again, activity level in EMEA, strong from Germany and Sweden.
If I look at the year-over-year increase, basically France, U.K., and Germany, not fully offsetting the Norwegian order of last year. Asia-Pacific, from a low level, a strong growth, over 200%. Here we see strong development China, India, and Thailand, also good activity level and order intake from Australia, Mongolia, and South Korea. Looking at the regional split, delivery 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, Americas was down 41%, and on the nine months, 17%, very much influenced by lower deliveries in the U.S., good activity levels in markets such as Canada and Brazil. EMEA, in the quarter up 26%, strong development in Germany and France, for nine months, basically flat.
Increases in U.K. compensated for drop that we saw in South Africa and Sweden. Asia-Pacific, again, from a low level, good increases in the quarter, where we see positive development in Asia-Pacific region, Mongolia, South Korea, and Japan. Overall for nine months, stable development in China and India. Backlog remains at a high level, an increase 18% year-over-year, now stand at more than EUR 20 billion. Sequentially, we saw a decrease in the turbine backlog with EUR 7.3 billion and an increase in the service backlog of also EUR 7.3 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 firm order, and was announced preferred supplier to two large U.K. projects of 860 and 950 megawatts.
Since the start of the joint venture on the order side, they have recorded 2.7 gigawatts of firm orders and another 2.5 gigawatts of orders that are conditional or preferred supplier agreements. With that, hand over to Marika for the financials.
Thank you, Anders. As you can see on the income statement, what Anders have highlighted here in the quarter is also reflected on the P&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 business. What you can see is that also that SG&A, which I will come back to, continues to be well in control, and as percentage, still at a low level, although a slight increase here in absolute numbers. EBIT is solid, although lower 2% compared to last year at 12.9%.
That leaves me with the SG&A cost, you can see again a good performance. We are 6.9% compared to 6.7% in the last quarter, 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, we try to manage the volume increase and the activity level with still keeping the low SG&A and also focusing on getting some flexibility in the fixed capacity cost. The service continues a strong performance, that is driven by high activity levels. If you compare with Q3 of last year, you see an 18% revenue improvement.
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 that we have in place. We also continue to deliver solid, high level EBIT margins. In the quarter here, you see 17.9% EBIT. As Anders highlighted, the service order backlog grew EUR 0.3 billion compared to Q2 of 2017. Again, a very good level of activity 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 EUR 2.6 billion, which obviously is something that we're very happy and proud of. You saw an increase compared to last year of 23%.
There was also a positive net working capital development of EUR 266 million, 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, the change over the last 12 months. The improvements are primarily driven by prepayments and trade payables, to a certain extent, offset by higher inventory. Again, the higher inventory methodology has not changed. We continue to build inventory for firm order intake. It's more of a timing question. The net working capital change over the last three months increased 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. The warranty provision and loss production factor, here we continue to consume less than what we provide for.
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% also historically and as you can see here in the quarter. You will see certain fluctuations also here, a reflection of the warranty provision 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 EUR 193 million compared to EUR 155 in Q3 of last year.
Remember that more than 50% of the share buyback is completed, that is the biggest or the largest in Vestas 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 investment of tangible blade investment. No change in methodology. We invest in molds, and we also invest in capitalized R&D, 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%-35%, here you can see we're slightly below, the decrease is primarily driven by the share buyback program. The return on invested capital continues to increase, here you see a reflection of the still strong delivery on the balance sheet elements.
Again, improved compared to last quarter, Q2 2017. With that, I leave the floor to Anders.
Thank you, Marika. Going on to the outlook. As I said in the highlights, we made some adjustments to our guidance based on year-to-date performance and the visibility for the remainder of the year. On the revenue side, we narrow our guidance a bit, now see it between EUR 9.5 billion and EUR 10.25 billion. We have experienced good activity, but also some uncertainty linked to the U.S. House bill. On the EBIT margin, we narrow our guidance between 12% and 13%. A mix of different factors causes the specification to the lower end of the range. Firstly, we have had additional execution costs. Furthermore, we are seeing that the increased competitive environment and pricing is impacting our average project margin. Total investment, we adjust from approximately EUR 350 to approximately EUR 400. On the free cash flow, we now introduce a range between EUR 450 million and EUR 900 million.
Our updated range mainly reflects the uncertainty around the U.S. market, 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. With that, we move over to Q&A.
Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. We ask you kindly to limit your questions to two at a time, please hold until we have the first question. Our first question comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Yes, thank you. First question is about the EBIT margin guidance, just to elaborate on these two effects that you highlight. I understand how increased competition can impact the earnings for next year. Considering you didn't mention this in August, that in-for-out orders over the past couple of months must be fairly low, just help me understand why this negatively impacts margins for this year. Secondly, can you just elaborate on what execution costs you're seeing weighing down as well?
Okay. Your first part of the question in terms of the in-for-out orders impacting here in the quarter. We have said that, yes, you always enter into the year with a certain portion of in-for-out. The in-for-out orders this year actually came in a bit later than we anticipated, because normally you get them as early as possible in the year, here we have quite a number of them coming in the latter part. As we say, yes, they are coming in clearly with lower margin than anticipated. Primarily, you see a price pressure on those deliveries. 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. That is what have happened.
We also have had a number of extra costs in the quarter. Pure, I would say, operational. No one-timers effect or anything, it's just operations. You had a lot of double craning. You had transport costs impacting the quarter. You also have the transport and the lower activity level is also impacting, you see a lower volume. That's obviously, to a certain extent, impacting the absorption in the factories. Those together are impacting the overall view of the quarter, but obviously also have an impact on what you see on the guidance.
Okay. Just on the cranes and transportation costs, does that sort of carry into Q4 and into 2018 as well?
It sounds fairly simple, the double craning is costing a lot, because there's few cranes in the world, and they are very, very expensive. It will have an impact on the overall year for sure. That's also why we have chosen to update or narrow the guidance. Bear in mind, we're still within the original boundaries of the guidance.
Okay. My second question is regarding the PTC component at 80% level, you stated you expect the PTC to continue as it is currently, 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 orders sort of with a clause that if the PTC is changed, then they are canceled? How do you manage these?
Of course, what we have chosen now to reflect in the outlook is that there is, of course, a big uncertainty on the December's PTC potential, as you say. 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. We are currently, of course, now in deep discussions with customers. 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. Of course, there is also the fact that if you don't qualify for it now, then sort of that opportunity is gone. That will be in a close dialogue with our customers now. Unfortunately, as I said, of course, it creates more uncertainty.
We have definitely not given up on securing 80% PTC components as well. We think it's prudent then to reflect the range in the updated outlook. I will not go into specific terms and conditions or discussing with customers for competitive reasons.
Okay. Thank you.
Thank you. Now our next question comes from the line of David Vos from Barclays. Please go ahead. Your line is open.
Hi, guys. Thank you very much for taking my questions. I just wanted to delve in a bit deeper on the 2017 margin revision, how that actually interplays with the order intake. If I have done my homework correctly in looking at your announced orders for Q3, there's remarkably few that are in-for-out orders. That suggests that those in-for-out orders may be found in the unannounced bucket. It would be very helpful if you could shed some light on where those are, what is the type of price erosion that you've been experiencing on those orders, and how much, crucially, of that erosion you feel will be hitting the bottom line. It would really be helpful if you could give some actual numbers on that this time around, so we can start figuring out what's what in relation to the new reality. Thank you.
If you look at the margin revision the impact from the in-for-out orders, as I said, you have a good blend from volume, obviously for the full year, PTC components is one of those elements. You have also the in-for-out orders, as I said, they are coming in pretty late in the year, they are coming in with lower margin than what we anticipated. The overall competitiveness and the acceleration of the competitiveness, I cannot give you any specific markets because it's actually a global phenomena, if you would like to call it that. Then we have operational costs. We have launches of products. We have swapping in between the product just to manage timelines for customers. In a lot of cases, we have been able to mitigate those extra costs.
What we see now, we are not able to the same extent in this quarter. All in all, with the in-for-out, 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-out, that is obviously what is reflected here for the remainder of the year. I will not give you any specifics on each element, but it is a good blend of all the elements that is impacting the guidance of EBIT for 2017.
Yeah. That is unfortunate because clearly the question is how much of this will stick going forward, like in 2018 and 2019? It would be very helpful if we could just get a slightly better grasp on what this means for the gross margin. If you are really not willing to commit any numbers to that right now, I will ask a second question, which is around the U.S. Clearly, I understand the uncertainty around whether you get any 80% PTC orders, but what about the fill-in orders, so to speak, under the 2016 PTC? What do the events in Washington of last week, how do they affect those orders as they pertain to volumes realized in 2018? Can you answer that question?
You mean the PTC, they qualify the 5%?
Yeah. 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? Is there more uncertainty around those? Is that clearer?
I think that, generally speaking, I think one way to look at it is, of course, that majority of projects in 2017 probably had qualified as continuous construction.
Looking at 2018, from a market standpoint, my guess, and this is a guess, it's probably a bit more 50/50 between continuous construction and PTC components. Of course, when we go further out, it's more qualified as PTC components. I think that is the general market on continuous construction and PTC qualification. When it comes to discussion with customer, of course we are in a close dialogue with the customers and their view on this for the moment. I think it's way too early to draw any conclusion on rollout plans and things like that.
The reports I have is that the customer have the same main planning assumption as us that this language around the PTC from the proposal in the house will not stick, so to speak, so that we will have the PTC structure that is the current in the market. 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. Our next question comes from the line of Claus Almer from Nordea. Please go ahead, your line is open.
Thank you. Yeah, 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 would be the first question.
Well, the Q3 gross margins are basically impacted from all the elements that I spoke to about earlier. You have volume, it's definitely impacting. You also have the in-for-out orders that were delivered with lower margins. You also have the extra cost on the operation side impacting the gross margin. It is these bigger buckets, and then you obviously have elements in between the buckets, and in particular the operation side. Those three are clearly impacting the gross margins in the quarter.
Okay, then my second question, would it be fair to assume that this change full year EBIT margin guidance of taking it down by one percentage point, two third of that is based on these additional execution costs and the rest is lower margins. Would that be a fair assumption?
You're getting very specific, Claus. As I said earlier, it is a blend of obviously the PTC that we have taken height for, so that will have an impact from a volume perspective and consequently also absorption perspective. You have some in-for-outs that will have an impact, and you have the operational side that also will have an impact, and that's why we have decided to narrow the guidance in this quarter. 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, then you have more of a normal timeframe for delivery, and then you have a longer timeframe for delivery.
The longer the timeframe, the more of what we have done previously on the accelerated earnings on creating more flexibility on the fixed capacity cost and also upgrades of the product is possible to mitigate some of the shortfalls 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. 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. It's a lot of timing in the deliveries as well from when you take in the orders.
Okay, thanks.
Thank you.
Thank you. Our next question comes from the line of Marcus Selander from Carnegie. Please go ahead, your line is now open.
Thank you. First question regarding the average order intake price. In Q2, you quantified the impact from the weaker US dollar. Could you do the same for the Q3 number?
Yeah, there is a FX impact in this quarter as well, to a lesser extent influencing than the competitiveness of the industry over price.
Okay.
I think I've said many times when we discussed this average selling price for megawatts, of course, there is a number of factors. I think what is important to look at is more the 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 otherwise, the price of megawatts will come down by just pure the nature of turbines mix. Higher rating, for example, we have increased the 3 megawatts to 4 megawatts. If we sell more of the 4 megawatts than the 2 megawatts, you have an impact there, you have an impact on where in your geography, as we said, especially China. I think it's important to look at the sort of trend on the ASP.
If we look back at the last 4 quarters, we of course see an acceleration of the decline in the ASP.
All right. Understood. Thank you. Second 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 Q4 or Q1 or is it the effect which you talked about last quarter that you're producing against inventory for future U.S. deliveries?
Well, again, the inventory, the underlying methodology of firm orders have not changed. Yes, we have used the balance sheet or have that as an opportunity to increase inventory rather than having additional investments as I spoke about last quarter. It's also a reflection of the activity level in Q4 and Q1. That is a fair comment.
All right. Thank you.
Thank you. Now our next question comes from Dan Togo Jensen from Handelsbanken Capital Markets. Please go ahead, your line is open.
Yes. Thank you. I'd like to go back to the ASP. Is it fair to say that on an all things equal basis, the 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. Yeah, I understand what you're looking at. I would say again, we had some currency impact, yes, in the quarter. As you say, there's turnkey impact, and that will obviously impact the ASP in a positive way simply because the scope is bigger. It's all the underlying elements that are really important when it comes to the ASP. If you look at the trend on the ASP, which is probably the more fair description of what's happening, that is, if anything, going down. It's not only the last few quarters, but if you look at even a longer timeframe, that's clearly what the whole industry is focusing on, is getting that trend down, and by that, really lowering the LCOE for the customers.
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. This trend line, as I understand it, has gained some pace. This, of course, will impact the prices you need to deliver at in coming years. Does this give you any reason to, so to say, be more aggressive on cost outs? 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?
What we have done, and that's also, it's important, 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. All of the operational elements continues. Obviously, what we see is that the pressure is higher simply because we're entering into a totally new market with the transition taking place in the market. We have to be even quicker, but the elements that we can influence and the activities that we have in place continue. It's not that we've taken down something new, but we are accelerating also those elements. As I said earlier, the longer timing you have from order intake to delivery, the more impact you can have from all the activities that you have in place.
The fact remains that there is a transition period, both for us as suppliers, but also for the customers, when they are aggressive at bidding into the auctions.
Okay, thank you.
Thank you. Our next question comes from the line of Casper Blom from ABG Sundal Collier. 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 down ASP. 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 aggressive pricing? That's my first question, please.
Yeah, I think that, of course, as you say, we're seeing also a consolidation in the industry and a little bit, what should I say? Not so good performance from some of our competitors who are a bit stressed. Of course, that adds to the competitiveness of the whole market. 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. 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, how can you say, new reality. Would it, all else equal, be fair to assume that the operational margin in the project business would also be lower in 2018 than in 2017?
As you said, we will follow our normal process and come back on the guidance on how we see margins in 2018. Of course, it also depends a lot what happens in the competitive environment. What we have talked about, and of course, what we have seen actually for quite some time, and remember that we also already now deliver a lot of the projects that we won in auctions, for example, in Latin America. As I've said before, U.S. has always been a competitive tendering market, so it's not new. It's more that it's accelerate. We see for each auction that the power prices are coming down further, and that puts a pressure on the whole chain. Of course, to your first question, it's also a relative game. Of course, I'm happy about generating the best-in-class margins that we do.
Of course, we are also depending on what the competition is doing and what kind of margins that they feel are sustainable. Of course, there is a relationship in the market between us competing for the orders in the market. 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. There are all kinds of scenarios once we are through this transitional time. For us, as Marika said, to maintain our best-in-class margins is, of course, that we focus on the levers that we have, which is the cost out program, the accelerated earning program, which is the product program that generates higher production.
Great. If I then just 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.?
Highly speculative, I would say. What we have given you is everything that we see, obviously, what's happening in the U.S. has an impact, we have been prudent enough to consider that. We also, again, on the in-for-out orders, having, as you can see here in the quarter, also on the operational issues. It's fair to assume it is a good blend, obviously, the 80% PTC is a reflection, you clearly see that also on the cash flow range.
Thanks. Fair enough. Thanks a lot.
Thank you. Our next question comes from the line of Akash Gupta from JP Morgan. Please go ahead. Your line is now open.
Yeah. Hi, good morning. My first question is also on pricing, maybe given the moving parts in the ASP, how you define. If you can comment on ASP in terms of unit terms, or basically, ASP of platforms that you are selling last year versus this year, because that will offset some of these technical factors. If we also talk about the pricing in local markets, that will offset FX. Maybe if you can comment on pricing 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. 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. Then again, generically, there is no one-to-one correlation on if it's a good project or a bad project. The timing elements have a big impact because obviously, if you have a bit more time to mitigate some of the shortfalls from a pricing perspective. 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. Having a big impact on the price.
I think that if you look at the pricing environment also, it's not only us as suppliers trying to adapt to the new reality, it is also customers trying to adapt to the new reality in auctions. Obviously, sometimes they are very aggressive in their pricing, which obviously puts a great demand on suppliers all in all. 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. Continue to do what we have done, 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. The competitiveness is clearly accelerating in this transition period. I don't know if you're any wiser.
My second question is on consensus, which is basically looking for 13.8% operating margin for next year, given the anticipation of higher U.S. volumes. I know you will be coming up with the guidance in February, but I'm just wondering if you can provide any comment on the consensus based on what you see in your backlog. Should you think that the consensus is too high or maybe any comment whether the market expectations are realistic, also given the today's share price reaction.
I will give you a fairly generic answer as we're coming up with the guidance for next year. First of all, with the proposal now in the U.S., it's very hard for us to say anything about 2018. We are doing different scenarios, it would all in all be wrong to comment on that at this point, as no one knows. That is one comment. Then secondly is that the order backlog and the order intake that we have so far is obviously nothing but very positive. The perception of us in the market and the products and the power that we can generate from our product is positive. We also see a good development on the service business.
How the market 100% pans out and what will happen and the competition or customer behavior is very hard for us to comment on at this point. We will come back with the overall guidance. The competitiveness, if anything, is clearly increasing.
Finally, on restructuring costs, if the guidance includes any restructuring costs for this year, also given that your peers are doing sizable reduction in capacity or moving that away from mature markets to growth markets. Is there any need for you to also react faster than what you previously thought because of the competition?
Our overall methodology has been and continue to be very CapEx-light solutions. We are also having the focus on cost 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. Obviously, there's a timing element, so we will speed up activities if necessary.
Thank you.
Thank you. Now our next question comes from the line of Anders Roslund from SEB. Please go ahead. Your line is open.
Hi, Anders Roslund at (SAS Finance) from SEB. One question from my side. Pricing has been discussed quite a lot during the conference call, 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.
I can't really comment on what our competitors are saying, I don't know how they even define pricing in this element. Again, it's like before, we are seeing a levelized cost of energy to fit into the customers on their PPAs, there are many levers on that. Exactly what is price, what is product, what is fit to the site and so on. I can't comment on what they are saying. Again, we are satisfied with our position and our earnings absolutely compared to the competition. We have all the intention in the world to make sure that we continue to deliver best-in-class margins. Of course, I have also noticed, as far as I have seen, we are the only one who deliver clearly double-digit margins.
Of course, we also have a relationship to what the competition is doing.
Okay. That's very fine. Historically, there's also been price erosion in the market. Can you remind us what price erosion has been annually for the last two
We should definitely have that somewhere, I don't have that on top of my head.
Change, sorry for jumping in here, 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 picture. Now it is a global picture. It is how much power you can generate. You're clearly competitive without subsidies. That puts higher demands on all the suppliers. That is the big change if you compare to the past. It's hard again there also to have a one-to-one comparison.
Okay. Is it fair to say that you're not, unlike underlying price inflation, you're seeing less than double-digit price declines at the moment?
Yeah. Again, I will not give you a number on the price elements specifically.
Okay. That was all from my side. Thank you, Anders Roslund. Talk to you later today.
See you.
Thank you. Our next question comes from the line of Gurpreet Sahi 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 four and a half in the second quarter. Can you give us some context around why this is the case? It seems like a pretty steep jump. Has this actually impacted your 2017 guidance change? Thank you.
The build of inventory, as I spoke about in Q2 as well, because we build there also, is that we are utilizing the balance sheet simply because we have the opportunity. 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 straight on that. We are building for firm order intake. The timing of the deliveries can vary, but we are preparing for a good high activity level here in Q4, but also in Q1 of last year. That's why Pardon?
Next year.
Next year, yes. That is the underlying reason.
Is it fair to say that the 2-2.5 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. Again, the methodology on the firm order intake also continues. There's no change in the focus, but we have used the balance sheet differently, simply because we had the opportunity.
Okay. Second question, sorry, just to go back onto the order intake ASP. When I compare the number to Q2, it's actually broadly flat, right? When you talk about the acceleration of price pressures, is this something in reference to what you've seen specifically in October and November that's led you to choose those words? Or is this order intake at EUR 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 trends in the ASP during the last couple 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. I think it's more important to look at the trend.
Okay. 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 levels.
Yeah. Okay. Brilliant. Thank you.
Thank you. Our next question comes from the line of Lucas Ferhani from SocGen. Please go ahead. Your line is now open.
Hi. Thanks for taking my questions. firstly, on the follow-up in terms of pricing, there's been a lot of discussion around that. One thing, what has sort of changed between, let's say August and November, and previously as well? You've never been so vocally, let's say, cautious around the pricing dynamics before in the last 3.5 years or four years that I've been covering Vestas. What has suddenly changed that is sort of making you so very cautious? Is it just the competition and you have a new competitor with (Arm), with synergies, and firing a quarter of its workforce, et cetera, and therefore flowing those back into pricing? Is it just levelized cost of energy due to auctions? Is it a case where you probably read the market a bit wrong as well? That's question number 1.
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? sort of seem to be building up inventory for Q4 and Q1 and Q2, but usually Q1, Q2 is seasonally weak for you guys, so you should have extra capacity in that quarter. just, I'm at a loss a bit on that front. The prepayments are lower or flat here on QOQ as well, despite very strong orders. just trying to understand what's going on in the working capital a bit more. Thanks.
Let me try to answer your first question a bit then. I think we have talked about a very competitive market, increased competition actually for quite some time. I think that is, of course, what we have seen in the market. To your question, of course, the indicator on that is the power pricing and the development of the power pricing in the market. There, we have seen power prices coming down, coming down quicker during this year for sure, and also quicker in this quarter. I think we talked about the very competitive market, which of course means that's still the case. It's not just competitive on levelized cost of energy. It's also competitive on delivery times, and it's a competitive market.
I think that for sure, we have talked about for quite some time, and what we are saying now is that we see also an acceleration in that. On the inventory, maybe you can-
Absolutely. On the working capital elements, the prepayments, as you're referring to, we don't have any changes in our payment methodology. There could be a timing difference if you're just in between a quarter. That can very well happen, there's no changes. We get the prepayments are in between 10% and 15% still, no change. The working capital elements, whether it's components or if it is a ready product, that's also nothing that we comment on. As I said earlier, the inventory buildup is for firm order intake, nothing but firm order intake. The intention is, if that weather holds and everything else holds, to be delivered here in the coming two quarters. We're in the midst of one of them.
We are obviously also here, as we always say, weather dependent, and the latter part of the year and the beginning of the year obviously have an impact. Nothing has changed in terms of methodology. We have just used the balance sheet as I've explained, simply because we have the opportunity.
Sure. Just to confirm, you haven't really built up anything in anticipation of 80% PTC orders? Because those come in towards the end and you can't obviously, let's say, deliver components unless you have some stock, right?
Also remember, because now obviously the guidance is reflecting that there is a lot of uncertainty on the 80% PTC. Remember last year when we had 100% PTC, we had 105 days to deliver. That element is still there. Big impact is really on the cash flow as Anders have given you.
Okay, thanks. Perhaps, Anders, I think the market hasn't been listening to your question then. Thanks. I'll leave it there. Thank you.
Thank you. Our next question comes from the line of Pinaki Das from Bank of America Merrill Lynch. Please go ahead. Your line is open.
Yeah, hi. I've got a couple of questions. I wanted to understand your pricing and margin outlook. 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. I 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 other changes, and that pricing has fallen by about 10%, can you give us an idea over a 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? That's my first question.
Yeah. I understand obviously what you're asking for, Pinaki. As Anders have stated, the price, the ASP decline has been there for quite some time. Obviously, we have done a lot of cost out on the products. We have also upgraded the products over time. What we see now is an acceleration of the competitive landscape, which means also price pressure. It is really a transition, as we said earlier, in terms of getting more and more auction-based, getting very similar across the board. It is a global phenomena more than any country specifics. That's clearly it. If you have a shorter timeframe of, as I said earlier, to mitigate the price pressure, that will have an impact on your margin, clearly. If you have a longer delivery time, also you have more potential to mitigate. All the activities remain.
It's nothing new, and it's not that we are all of a sudden figuring out new things. We are definitely, if this acceleration continues, obviously there is a timing element and then we are speeding up. There is no change in our behavior in the market. 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. The product upgrades will be a crucial element also going forward and have been a crucial element in the past. We have never within the last two years seen an uptick in pricing. It has been down, and we have been able to mitigate it. The speed of the price decline will obviously have an impact.
Yeah. That was my question. If you had the time, how much of the 10% will you be able to offset?
The 10% is your words, is not mine, Pinaki. We see a great variety. What we are commenting on is that we see an acceleration in the competitiveness, and we have not stated any numbers. That's also highly, I would say, competitive. That's nothing that you want to disclose.
Okay, great. Can I ask you a second question? 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, we don't build for speculation. We have firm orders behind the inventory that we have.
Also the pricing doesn't.
We are confident with that.
any of your inventory or components?
As I said, the inventory that we have is based on firm order intake. If you're alluding to the 80% PTC, that is something we did last year in terms of getting the payments in, we had a different delivery schedule. We are confident with the inventory that we have.
Great. Thank you so much.
Thank you. Our next question comes from the line of Sean McLoughlin from HSBC. Please go ahead. Your line is now open.
Thank you. Good morning. In this new reality of auctions with lower power prices, acceleration of competitive landscape, how can you mitigate the pressure yet marry that with your ambition to grow faster than the market? That's my first question.
Yeah. That's of course a very good question. Of course over time, we have to say, well, in 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 hand in hand. You can't increase profitability without also increasing your revenue, if you look at it from a longer-term or midterm perspective. Those are our targets. Of course, you can have certain periods in the market where you prioritize one harder than the other. I think for us, if I look at the situation we are in today, we have a good order intake, up 23% year-to-date, which of course indicates a high activity level for next year.
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. I'm happy with that situation, so to speak. I must say that I'm also happy of generating the best-in-class margin, which we clearly do also this quarter. While we see quite some of our competitors have significant drop in profitability, we maintain a good level of profitability. That is, of course, also extremely important going forward and puts us, I would say, in a very good position as this market transforms.
Thanks. My second question is on the free cash flow range. It's quite a wide range. I understand that the uncertainty around the 80% PTC orders is part of that range. 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 if the 80% PTC doesn't materialize at all, Sean. That's fair to assume.
Thank you.
Thank you. Our next question comes from the line of Klaus Kiel from Nykredit Markets. Please go ahead. Your line is now open.
Yes, hello. We have talked quite a bit about the U.S. and what is going on over there right now. You have also stated that there is risk to the 80% PTC orders, and I clearly understand that. Could you try to talk about all the PTC qualifying component orders that you won last year? Have these projects turned into continuous construction projects right now? In other words, they could be seen as rather safe here in Q4? How should we look at these potential follow-up orders that I would have expected, let's say, two weeks ago?
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 projects to be executed in 2018 are also continuous construction projects. There is also a fair bit of PTC-qualified components project. I think it's way too early to speculate on this House bill will have any impact on the planning of those projects. It's nothing that we foresee now. As I said, our main scenario is that the current PTC structure will remain. The uncertainty, how that influences now is very much on that we anticipate a greater hesitation then possibly on the 80% PTC.
Okay. Just to follow up, does that mean that the qualifying PTC contracts that you had last year, the developers has been working on these throughout the year? In other words, they have kind of turned into continuous construction projects perhaps because they have built some infrastructure or whatever. Is that what you're seeing?
It all varies. Of course, there is a lot of different strategies from different customers that I will not go in deeper on, so to speak. Generally speaking, of course, if you have projects ready, there is a preference to use the continuous construction method just because that saves you cash. It all depends on the maturity of the projects that they have ready. As soon as you have something that is more ready, then of course the customers, generally speaking, prefers to use the continuous construction method. I think it's fair to say that this proposal for bill being so fresh, so to speak, I think it hasn't impacted any planning in the week that has passed by.
In our discussions with the customer in the U.S., they share the view we have that the likely scenario is that we will continue with the current PTC structure. Now a lot of effort within the Wind Association in the U.S., of course, goes into trying to secure that. I would say that is the focus also on the customer side for the moment.
Okay. Excellent. Thank you very much.
Yeah. Thank you very much. I think that was the last call. Again, thank you for your interest and calling in, and I am sure that we will see at least some of you during the next couple of days. Thank you.