So, good morning, everyone. And Thank you for calling in. Welcome to this second quarter 2017 update. The usual disclaimer slide and then let me jump straight into the key highlights. Overall, a solid performance in the quarter, order intake increased almost 50% year over year and reached 2.7 gigawatts.
And on the first half of the year, we saw an increase of 12%. Revenue was 1,000,000,000, a decrease year over year, but for the first half of the year, basically on par with 16. Solid earnings with an EBIT margin of 12.6%. Also good to see, a good strong performance in the service business both from a revenue point of view. And from an EBIT margin point of view.
And we have then launched a share buyback program of 1,000,000. As usual then, I will talk about the orders in the market. Micah will talk about financials. And then we'll come back to outlook and Q And A. So the overall regulatory environment I would say, basically unchanged compared to last quarter and the trends to auctions and competitive tenders continue, we now, as expected, see it in all our regions and anticipate that that will be the new normal going forward.
So the market is transitioning to an auction and competitive tender market. Looking a bit more in detail. In Americas, no major change. We see the PTC structure is what drives the market in the current PTC cycle. And of course, also the increased competitive of wind as we have talked about before.
And of course, again, I'm really satisfied with the order intake and the strong position we have in the U. S. Market. In Latin America, probably the first region that started with auctions and we've seen good success for Vestas in Latin America. We expect auctions to continue.
We will see Mexico, Argentina, I believe we are probably to Chile. And there is an announced auction in Brazil for Q4. Those have been postponed before, but that at least what has been announced. In EMEA, and starting with Europe, we've seen the first 2 auctions being here in Germany. The seats and wind park has taken out the absolute majority of those auctions.
In Spain, in total for renewable energy, 8 gigawatts has been auction and wind has taken about 4 of those 8 gigawatts. Sweden has done an extension on the green certificate system. Which is positive and we've had a good order intake from there. And we're also seeing then auctions in markets such as Turkey and Russia. Very much the same, but of course, from a much lower base in the Middle East where we expect an auction in Saudi in Q4.
China, keep the 5 year plan. And is executing on that plan. There are exist containment in the market, but we also see good progress of addressing that curtailment. India also go into auctions that create some short term uncertainty, but the 2020 target remains in place. And I would say for the broader Asia Pacific region, we see targets in place in most it.
Vestas is in this transition, continue to building our leadership position. And the transition is, of course, fundamentally positive. It's a sign of winds competitiveness against other technologies and will longer term create a market that is less reliant on policy decision and therefore, reduce volatility. We are confident in our strategy and our financial ambitions. We know the levers It is about levelized cost of energy, and it's about operational excellence.
And we will continue to leverage on our global reach our scale and our technology and service leadership. So going a bit more into the details, as I said, order intake very, very good in the quarter, 2.7 approximately gigawatts, a 49% increase year over year. U. S, Sweden, Argentina, Germany and China were the main contributors to the order intake and accounted for more than 70%. We saw a drop in the average price per megawatt in the quarter to 0.81 This is due to a mix of, factors.
Firstly, we have a negative currency effect in the quarter. Secondly, a fairly high proportion of the Chinese orders where the scope is very different from the rest of the world. Thirdly, in the quarter, we had no turnkey orders that, of course, again, is the scope issue. And lastly, the dynamics of the market remains very competitive and especially with the increased number of auctions and competitive tenders. Looking at the order intake also on a regional basis, you see Americas up 68% very much driven by U.
S, also good activity levels in Dentina offsetting decline in markets such as Brazil and Canada. In Europe, or MA, I should say. We see good activity level across many markets in Europe, primarily then German in Sweden. The difference, year over year is primarily the Statcraft order. In Asia Pacific, strong development in China, we saw that in Q1, and we see that also in Q2.
With a good increase in orders and also good activity levels in India, Australia and South Korea. In the quarter, we have also further strength our product offering and Vestas is in a very good position. We are the only company in the industry with significant volume and track record both on the 2 and what used to be a 3 and now is the 4 Megawatt platform. So on the Tier Megawatt platform, we have announced a new rotor sizes that will increase the production with up to 7%. And on the 4 Megawatt platform then, We have reduced increased the power rating as well as the rotor sizes with the potential to increase production more than 20%.
And again, a broad portfolio covering all different wind conditions and markets. Looking at the delivery then, both in the quarter. And for the 1st half year, we see a decline in delivery. It is basically in Europe and Asia. So, America strong, very much, of course, driven by the U.
S. And in Q1, We, of course, also have helped from the PTC components that was delivered in the U. S. In EMEA, we see a good improvement and strong development in the UK, but also solid activity levels in markets Germany, France Turkey, but not compensate for the drop we're seeing from South Africa, which basically is standing still for the moment and also a low activity level in Sweden. From a low level, we saw a decline in a Pacific here actually the E and D are in China are stable on their levels, but the decline counts that we've seen very low activity from other markets in Asia Pacific for the beginning of this year.
Order backlog increased by, 200,000,000 equally between wind turbines and services and now stand 1,000,000,000. And that is despite then a negative FX impact of approximately 1,000,000. The focus for the joint venture that we have on offshore together with partner Mitsubishi Heavy Industry. The focus for them in the quarter was to complete the first V 164 project and get that fully commissioned, which it is now. And also launching a new power upgrade of the 8 Megawatt platform to 9.5.
And continue to look at a very healthy order backlog. With that, I hand over to Maike.
Thank you, Anders. So if we have a look at the income statement, we continue to deliver a stable Q2 although very tough comparison compared to Q2 of last year, which you clearly see when you make the comparison. But I would like to highlight that deliver a very strong EBIT margin of that obviously have an impact of on the P and L or 1,000,000 So all in all, very strong performance and you can also see on the EBIT, although a decline in absolute numbers, it is a strong performance and we also in this quarter deliver a very healthy gross margin, getting close to 22% in the quarter. The SG and A cost continues to be of high focus for us. And you also see when it comes to the volume, and all the impact that we have from cost out on the products that we continue to get a good leverage from our position when it comes to revenue.
So we are down now to 6.7% here in Q2 of this year. So clearly in percentage of decline compared to last year. So very high focus on the SG and A also going forward. Service business, which is obviously a good mix in the quarter with a strong performance. So you see an increase of 14% compared to last year, which also have an impact on the gross margin, obviously.
And here, we deliver a very good margin of 19.4%. I would like to remind you that We continue to see very high good stable margins in the service business, but you will also, going forward, see certain lumpiness, but it definitely a good mix when it comes to the for the overall company. And Anders talked about the order backlog increase despite the headwind we have on currency. Balance sheet continues to be strong and obviously something that we have been driving at and continue to strive at having a very strong balance sheet. So our net cash position increased to 1,000,000 And you have a positive net working capital development of SEK 209,000,000, and I will come back to the movements The solvency ratio remains within the boundaries of 30% to 35%.
So we close to 31% solvency in this quarter. Again, a very strong performance on the balance sheet. And I would say, control over the position we had and continue to have. And if we have a look at the change in net working capital, you'll see more or less the same pattern over the last the 12 month and the 3 months. So what we have said in terms of using the inventory for instead of investing in additional capacity.
We have done that for the last two quarters and that's also why you see a negative cash flow in these two quarters. That doesn't mean that we have changed our methodology when it comes to produce for orders. The underlying methodology remains, but instead of again, investing in additional capacity, we utilize the inventory. So we build to a certain extent for inventory. But all in all, tight control over the net working capital over the last 12 months as well as the over the last 3 months.
Saw a positive control over the net working capital. Warranty provision and loss production factor is just a reflection of the focus on the high quality of our products. So you see the lost production factor remains below 2%. So a very stable performance, although also here you will see certain fluctuations among the quarters. And you see that in Q2, we are getting closer compared to other quarters in terms of consumption.
And so we are getting closer to the provision, but it's all in line with expectation and all in line with what we see as relevant provisions also in this quarter. The cash flow statement, again, no surprises, we continue to have good leverage from our operating activities. So we are, in that respect, very healthy. When it comes to generating cash flow from operating activities, you'll see a negative swing in the net working capital, again, as expected, and that generates a negative free cash flow of 151. The cash flow from financing activities is obviously impacted by the dividend payment made earlier this year.
The total investments again, solid. You see an increase compared to last year of planned 4, a good reflect over the technology and the activity in the company. So we continue to invest primarily in the capitalized R and D but also in molds. So obviously the molds have to be changed when we change technology just to be very clear. Capital structure.
Good performance. Also on the capital structure, you see here, we are net debt to EBITDA, well in the territory or well below continuously. So we are negative 1,400,000,000. So obviously the focus remains. Solvency ratio also here, solid performance well within the boundaries and slightly up compared to last year, but more or less in line.
The share buyback program that Anders announced earlier is 1,000,000. And also bear in mind that we actually did a share buyback earlier this year of 1,000,000 And we also pay dividends. So we are in the 1,000,000,000 range when it comes to return to the market. And there's no changes in our dividend policy and the priorities for capital allocation remains unchanged. The return on investing capital, obviously, more than double digit at this point, so very healthy levels and driven by the strong performance on both income statement and the control over the balance sheet.
That I give the word to Anders.
Thank you, Marika. So outlook, we maintained our outlook for 2017, which means revenue between 9.25% and 10.25%. EBIT margin between 12% 14%. Total investment approximately 1,000,000 and the free cash flow of minimum EUR700 million. Also worth noting is that it's based on current exchange rates and previous outlook, of course, based at the exchange rate at that time.
And since then, we have had headwind on the exchange rate, primarily U. S. Dollar to euro. So with that, we go over to
questions. Our first question is from David Voss, Barclays. Please go ahead.
Hi. Thank you for taking my questions. And I have the following. Could you please, on the U. S.
Firm up what your delivery schedule looks like? For the rest of the year. We've asked that question at Q1. You said you needed a little bit more time for that. Is that time now passing?
Can you be a little bit more specific about what you think in the U. S? And also could you comment on with respect to order intake there? How you are tracking versus your expectations going into 2017? And then the second question would be, if you could specify whether you can still offset the observed price erosion in the market with your usual mix of cost out productivity and engineering as you have been able to do in the past?
Thank you.
Okay. Thank you for your questions, David. Let me start then with the US. I think overall, of course, really happy with the performance of the U. S.
As we were also during the end of last year with the PTC components, but also, of course, what we see this beginning of this year when it comes to to take in new orders on that potential. I think when it comes to delivery, mean, of course, you never know what exactly falls into the year and what comes out of the year, but I think from a visibility point of view, of course, we do all those that we now have taken. We feel good about the U. S. Market and our position in the but I will not get into any sort of precise delivery schedule.
When it comes to the other part, there is course, the potential of PTC components for 2021. And There we have definitely started the discussions with the potential customers. There is an interest in that, but it's too early to to speculate on how that will pan out. And honestly, I don't think that we will know that for sure experience of previous PTC cycles until the very end of the year. The other question probably a bit on how we see PTC components on order compared to continuous construction.
I think it's fair to say as as expected, the majority of the early orders are around continuous construction, but also fair to say that we see a P2C components order also coming in. On your other question on how we how we handle the market and the competitive situation that we see in the market. The labels we have in place as before, it is very much about focusing on levelized cost of energy. And that, of course, are 2 main components in that. 1 is the technology, and that is, more generation from new technology as we have also then launched this quarter.
So it is about the product And the other big part of the equation is, of course, the cost out, that we will continue to drive I think we are familiar with the labels to continue to increase our competitiveness in the market. And, and of course, we made and how it will influence margins. I think what we say there is, of course, that we maintain our margin outlook for this year.
Okay. Thank you very much. I'll rejoin the queue. Thanks.
Thank you. Our next question is from Akash Gupta from JP Morgan. Please go ahead.
Yeah. Hi, good morning, everybody. My first question is on the price per megawatt development And I mean, if you look at the headline numbers, then obviously it implies down 9% year on year, but you have cited various factors behind it. What I'm after is
that if we if we strip
out this factor and look for like for like price development, then maybe if you can help with that because your US competitor reported that it was like flat pricing in their renewable orders? So that's question number 1.
Yes. I mean, it's actually very hard to single out. It is a mix effect, as I said. I mean, what is be a little bit easier to see single out is of course the currency effect and that is 0.02, I think, in in the quarter. But then it is really the factors that I that I talked about.
It is about the scope. And in this case, then, mainly two parts of the scope, which is a higher proportion of orders from China, which I mean rule of thumb before has been that megawatt there from a scope point of view, it's about half the value of a megawatt outside China. So the scope is very different there. And the other part is that, that was in this specific quarter end was that we had no turnkey orders. And as I also said lastly, we see an increase competitive and as in the market.
It's very much driven by the auctions and the competitive tenders that also nothing new as I said, I mean, we've of course seen auctions in parts of the markets before. I would argue very compared tendors in the U. S. And an auction like system, especially in the PTC cycle where I know that is a longer cycle. But what's different now is of course that we see this now in all different markets.
So exactly on the 0.8 year over year, what are what in these different buckets very hard to say, but of course, they are all they will play a role.
And my second question is on the guidance, which is still 9.25000000000to10.25000000000 wide So, I was expecting maybe you would be narrowing the guidance at this point of time, but you have left it unchanged. So two questions here. One is on do any maybe some revenues moving from this year to next year? Is that the reason why the guidance is so wide? And secondly, does this guidance factor in announced orders so far in third quarter at all?
Okay. So the guidance we have, well, we have done the similar analysis as we do and the similar forecasting and simulations as previously. And just to highlight that nothing new actually for us is that we have a bit say second quarter, but that also means that we have a lot to deliver. And a lot of it is you also see a currency headwind at this time that also taken into consideration when we talk about the low range of the guidance. And we also have a lot of deliveries late in the year that actually have to be performed as expected and there we would have the regular weather crane and everything else that could potentially go wrong.
So no differences in how we have made the analysis. We're still striving for the higher end as we always do.
Thank you.
Our next question is from Christian Johansen from Danske Bank. Please go ahead.
Yes, thank you. So my first question is on the in fraud order service, the order intake has been quite strong. Can you just give a bit of flavor on the level of in for out orders you've received this year versus what you expected at the beginning of the year?
Okay. On the order side, in terms of the in crowd, you would see normally in the earlier part of the year is when you see most of the in for out orders. And but having said that, you would also see that some of the U. S. PDC components would qualify for in for out to a certain extent.
And the portion of in for out in this particular quarter, is not is high, but or a fairly evenly spread. China could be one of those countries, for example. So nothing abnormally high or abnormally low at this point in Q2.
So in line with sort of what you expected at the beginning of the year?
That's what I'm saying, Christian, yes.
Okay, great. Then my second question, obviously, there's a lot of focus on the impact from auctions here. As you mentioned, Latin America has sort of been a mover with Orfins, which has been around for a while. And is there, I mean, when you look at sort of the average project margin, for your Latin American business where all concerns been around for a while. Is there a notable difference to the rest of your business?
No. And that's a little bit what we have said also. Even if, I mean, you will have a low China scope you would have a fairly low U. S. Scope, you would have a higher India scope, for example, all in all, what is important for us and as Anders have highlighted when it comes to scope is obviously the price per megawatt.
But having said all of that, the request even if we have very little in Q2 when it comes to EPC contracts or nothing. We see that all in all, that is increasing a little bit, or the demand for EPC contracts is increasing. But the margin is not related. Obviously, when you have a higher scope, you have more parameters to work with. But all in all, the margin is fairly similar independent on the scoping of the projects because you also have a lower cost on lower scope.
Okay. So despite the average price dropping here in Q2 on all land take, we shouldn't expect a similar impact the margins?
Correct.
Excellent. That was all for me. Thank you.
Our next question is from Kesta Plon from ABG. Please go ahead.
Yes, thanks a lot. My first question is regarding your payout of of cash to investors you're paying out roughly 1,000,000,000 this year, which I think on a normalized basis is roughly also your free cash flow given the timing differences around New Year this year. Is this also sort of the a fair assumption going forward? That you will now have the balance that you want and you can more or less pay out your entire free cash flow. That's my first question, please.
Well, what we have said is that the dividend policy remains, and I mean, that's a 20 5% to 30%. The, the share buyback will be the cash that we have or if you have any excess cash, during the course of the year, we will obviously invest in the business first hand and we will also do bolt on acquisitions as we have said, haven't found anything at this point, obviously. And then we have said also that then we will revisit whether we return to the market. And in this case, we saw that the timing and the sizing was appropriate, but we are not committing to any certain level because obviously we want to have and continue to have the strong balance sheet we have at this point.
Fair enough. But it's fair to say that you're comfortable with the balance sheet you have then today, I suppose. You can decide whether you want to comment on that. My second question is also a little bit about the prices here in the quarter, getting a lot of attention. Do you have sort of, when you participate in these auctions where, as Ana said, things are getting very, very competitive, And is it your impression that you are sort of getting a higher proportion of orders today than you did before the introduction of auction systems on the back of competitive levelized cost of energy.
You can talk a little bit about the maybe the dynamic of these of LOCE really coming in spotlight in the introduction of auction systems?
I think, I mean, it's very dangerous to generalize, but I think, of course, there are some common themes on the auctions, but I mean, if I look, as I said, I would say that we're seeing auctions for quite some time. The difference now is that we actually see it in all rates. Jens. And if I look at our performance the last year, the last 2 years with auctions and competitive tendering, as I said, in the U. S, very similar to an auction kind of system where you have a longer period usually to deliver on because they are a bit more forward.
Not I mean, maybe Brazil is the most extreme example where there has been some auctions that are called A-five, which means that the customer bid for an end of the PPA 5 years from now. So there are a bit more forward looking in that, even if Brazil maybe is the the most aggressive in that. So that, I would say, is very characteristic of the current PTC scheme we are in as well. So having said all of that, I must say I'm really confident with our position when it comes to growing faster than the market during these last 2 years that I have talked about. So So I'm confident in the competitiveness of Vestas.
And But then having said that, of course, on there are also differences between auctions. I mean, sometimes It's differences in timing. Sometimes there are high requirement of local content. Sometimes there are other type of local requirement, which of course also have to take into account. And And that means that the levelized cost of energy from the turbine, as such, is the percentage that that plays in to the overall PPA price that is then bid in the auction can vary quite a lot dependent on the different other requirements that are in place in order participates in the auction.
So it's a generic answer, but also with the caveat that it's it's very hard to say that all auctions have the same criteria.
If I can just follow-up on it,
you mentioned that some of
these auctions have have very long lead times. Is that also sort of a policy explanation why there sort of seems to be a general impression that the prices come down in connection in together with the auctions, basically since we are talking about technology that will available 3, 4 years from now where mineralized cost of energy is expected to be lower and hence people can also bid a lower price?
Yes, no, that's correct. I mean, if I I mean, very, very simply put it in a fade in, and probably a little bit simplistic, but I mean to take the the extremes. I mean, in a very stable feed in tariff environment, of course, we and the rest of the market, we sold the product we had on the shelf. And if that qualified with the PPA within the feed in tariff, the project was being built. And if you then take the other extreme, as I talked about, probably Brazil, then that has an auction that is where the customer then builds for a PPA that is 5 years from now when it's going to be built.
Of course, if we then use the current technology, you will never win that auction, obviously. So of course, there you have to partner with the customer and anticipate the liberalized cost of energy to some extent on the technology you have. And I mean, those are the 2 extremes and then you have everything in between that when it comes to timing and And as I said, different other qualification criteria into the auctions.
Thank you.
Thank you. Our next question is from Dan Sogou from Handelsbank Capital Markets. Please go ahead.
Yes, thank you. If I just can follow-up on the last comment you made here on us, because in an event, like you mentioned, for Brazil, if you commit 5 years, 3 years down the road, together with a partner, what kind of commitment do best this take here. And what are the risks, so to say? That's the first question.
Yes. I mean, for competitive reasons, of course, I will not go into exactly how we partner with our customers and what kind of commitment we are doing that it's, as I said, a very competitive market.
Assuming you need to make a commitment of some kind of
No, of course, I think we, of course, all have to be the technology that we feel confident we will have at that point in time. Okay.
Thank you. And then a more upstate question relating to the strong sort of say pipeline that you have of 4.38 gigawatts, which you mentioned as being on the completion how should we think about that in the coming quarters? Is that more or less all to be delivered throughout the second half? And And how will it be split between Q3 and Q4?
Oh, if you look at the Megawatt or the projects on the completion. Are you asking in terms of how we see the, you're looking at the completion for, on our inventory or?
Exactly.
Yes. So, there you have to note that also we have the turbines booked under inventory that is supply only, but then you also have turnkey project on top of that, that would sort of have an impact on the P and L. So it's hard to make a one to one But the underlying sort of methodology when it comes to what we how we book and what we book remains unchanged but you cannot make sort of the match in that perspective. But we obviously are busy if that's sort of the underlying question.
Well, I guess the majority of the 3.4 points per kilowatt will be delivered throughout second half.
Yes. And that's a fair assumption.
Yes. Thank you.
Our next question is from Binetti Das from Bank of America Merrill Lynch. Please go ahead.
Hi, Mimi, thanks for taking my questions. I'd like to follow-up on this megawatt equivalent on the completion that number is up significantly compared to last year you were at 4.3 gigawatts now at this stage last year you were 3 gigawatts just wanted to understand, if you, when you look at the second half, what has changed that you have a much higher inventory number, although you're not expecting higher volumes year on year in 2017 versus 2016? Why is the inventory so much higher now and at the same stage last year?
Yes, fair question, Pinaki. And basically what I said is that that in terms of activity level, we can decide obviously to invest in overall capacity and we can decide that we use our position when it comes to networking capital and thereby increase the inventory. And that is basically what you have seen this year. And that is a deliberate choice. And the activity level, if everything goes so into plan will be high definitely.
But you also have to bear in mind, even if the vast majority is for activities 'seventeen, you would also have some some activity entering into 2018. So it's sort of it's not everything in 2017. But then obviously the higher activity level also means certain uncertainty and that's why we have made the simulation and have the similar view as we had beginning of this year.
I mean, you're almost suggesting that there's some sort of constrained and therefore they're investing in their inventories now. But as we know that 2017 is a slightly lower year than 2016, there should not be that much of a a constraint?
I mean, overall, what we have, if you see how much we have increased our capacity without making any major investments, we obviously optimize the usage of our capacity. And that's also why we and at this point, we can afford to build inventory to meet the overall demand. But what I'm saying is that not everything is for 2017. We can also, some can ship into 2018.
My second question, thank you so much. And my second question is around your FX, sort of headwinds. And you mentioned that obviously in your guidance, you hadn't you obviously didn't factor in whatever FX might change over the year, which is fair enough. And also have the backlog, which has now been adjusted down by FX. What I wanted to understand is, most of the PTC components have already been delivered in Q1.
So that FX is kind of already gone. So you would have still some orders that you booked maybe end of last year or early this year, which will probably be delivered in Q2 and also Q3, Q4. And what is your strategy around? Do you hedge the FX on the orders that you've already booked? And going forward when you look into new orders, setting white book?
Is FX an issue or is it more like a it's an ongoing thing where you'll just the pricing will be slightly different because of FX?
I see where you're coming from. Again, all in all, we try to be as naturally hedged as we possibly can. And that's where obviously the global industrial footprint and also the sourcing capability that we have. Is extremely important. But in when we talk about the currency effects and the headwind on the guidance is primarily translation in So you don't see the transaction impact.
But at any time, if we don't have sort of the perfect hedging position, then we hedged a specific project, but that we don't do until we have a firm order intake.
Again, sort of reconfirming on that when you had booked orders in the U. S. End of last year, for delivery in 2017, That
has already been dealt with in terms of Yes.
Do you already hedge the FX on it?
Yes. When we book the farm order intake, yes, then we had the contracts.
But then so that you basically have a negative impact on your backlog but you might have a separate positive financial item somewhere. Is that the wish I should think about it?
Yes, I mean, the translation impact yes, if you have a negative impact from the U. S. Dollar, you would see certain positive impact on, in particular, capacity cost, but that would be fairly minor as we still have a big euro base.
But do you have a financial asset in front of it? Like do you have an FX contract, which is in the positive territory now and obviously you have a negative impact in the backlog
Okay. Do you mean the contrary? I would say that's fairly insignificant. It is all in all, when it comes to the backlog, it's the translation. And also when you look at the forecast going forward.
Our next question is from Pasell Ahmed from SEP. Please go ahead.
Good morning, Marika, and Anna's Bass Lemus from SEB. Two questions from my side. Firstly, production in second half. Will you continue to produce at full speed in the second half of the year? That's my first question, please.
Yeah. I mean, we don't we will continue to produce on full speed or sort of current level. And then of course, I mean, as you know, I mean, we have production facilities in all the major geographies. And of course, and that's a little bit common to the last question as well that of course, you have an overall production capacity. And then you had, have individually regional capacity production as well.
And of course, advantage of being global is to try to always match the utilization with the demand in the market, but there is of course a physical limitation a little bit depending on how the market goes on how much you can optimize that. But I mean, there is no slowdown in, in manufacturing. And if you look at the blue color work as the they are fairly constant.
Okay. And how should we be thinking about the inventory level by the end of the year? Normally, you draw down on the inventories in the second half of the year. How should we think about that in 2017?
Well, I mean, obviously, we will utilize the inventory at the end of the year. So but then exactly what position we would have we're not sort of commenting on, but that would be a normal pattern, yes.
Okay, perfect. And then just a question relating to guidance, a lot of questions relating to your top line guidance, but when I look at your margin guidance, the lower end of the 12% and can you explain why we should not see the normal kind of seasonality for for margins in the second half? I mean, you're essentially indicating flat margins in the second half compared to the first half of the year. Why shouldn't we we see a positive impact from leverage? Are there some one off costs or is it pricing which is hitting your margins in second half if you could elaborate on that, please?
Well, all in all, if everything goes according to plan, yes, there would be a very high activity level, but that also means that you that your suppliers works perfectly, that all the logistics works perfectly that you get all the cranes that you have ordered and that you don't have any snowstorms at the wrong timing. So This is when we make the analysis and do the simulation, this is the considerations we have. And that's why we have chosen to keep the guidance because there will be a normal uncertainty. And then on top of it, you have a currency headwind at this point. When it comes to translation.
But no one offs, which we should be factoring in, in the second half of the year?
Not that we foresee.
Sorry, my memory, I didn't understand that.
No, we don't, we don't foresee any major one timer in the second half.
Okay. And then just one final question. You're launching a number of new products for your 4 megawatt platform should we be expecting any significant ramp up in R and D or tangible CapEx from that?
I mean, we, we feel very comfortable with the the CapEx level, I. E. Capitalized R and D in that respect then I think we have proven to be very efficient, both on accommodating new technology and capacity. So I mean, the guidance that you see this year, we, we feel comfortable with the level that we are at. And then obviously, you would have an impact from activity level, primarily when it comes to molds.
Okay. So the 450,000,000 their level and annually, we can also extrapolate that to 18, 19 due to to due to these product conscious?
Well, as I said, the CapEx level that we have is something that we feel comfortable with.
Okay. Thank you very much. That's all from my side.
Thank you.
Our next question is from Marcus Dalander from Carnegie. Please go ahead.
Thank you. My first question is also regarding the guidance and FX effects. If you could quantify how big of a negative impact the currency movements we've seen thus far have had on the top line or will have had on the top line by year end?
Well, most of the negative headwind will come in the forecasting part when it comes to currency and that's again translation. And what we see is around 2% to 3% impact from currency.
Okay. Thank you very much. And then the second question, the million in impairment charge. Could you just provide some more details on that? What is the difference?
Yes, absolutely. That is the 28,000,000 impairment is a reflection of usage of a test facility. And therefore, as the usage of this particular test facility, we assume going down. And that's why we have impaired by CHF 28,000,000. So that is a reflection of how much we anticipate as we will use it going forward.
And then obviously we have other test facilities that we're moving the testing to. It depends on the type of turbine, obviously.
Okay. And stupid question maybe, but does this have anything to do with the burning turbine in Denmark?
No, absolutely not.
Our next question is from Ketri from Societe Generale. Please go ahead.
Hi, thanks for taking my questions. Maybe first one, just following up on the CapEx and the old inventory production capacity sort of issue. Are we sort of getting into a stage where capacity is starting to become constrained? And is that sort of partially reflective of the expectations of how the U. S.
Sort of market will pan out with the high volumes in the next few years. And then obviously we don't really know how how it pans out later on. And then, of course, related to that being, some of the new markets Russia, Turkey, etcetera seem to be insisting on a high level of local content that requires factories. So should we sort of expect CapEx to creep up in terms percentage of sales going forward. So that was number 1.
The second one was if you could just comment on developments on the end markets, then particularly U. S. And Germany, U. S, of course, some of your peers flagging off a push out of installations from perhaps 2018 to 'nineteen, digital tax equity issues. And then Germany where, of course, the whole community went from unpermitted, let's say, community went from willing the auction seem to be creating some sort of a vacuum potentially in latter part of 2018 early 2019.
So any comments over there would be helpful. Thanks.
Okay. So if we start with your CapEx questions, I think that, as I said earlier, the overall platform that we have is extremely useful also not only when it comes to production but also sourcing. So and the increases we have seen when it comes to capacity within the range that we have guided for this year we are very comfortable with. We have also said that as we have a very strong working capital position and a very efficient one. We will, when we see fit use the inventory or use the position to actually being able to build inventory without having a major impact on the overall position that we have on net working capital and cash flow.
So there's no changes. But what I would say that when it comes to local content requirement, the global footprint and the know how that we have to enter into new markets both when it comes to production sourcing is extremely valuable. And also on that note, we are extremely efficient when it comes to accommodating any local content requirements.
Should that drive higher CapEx? I mean, if you have to build factories in Russia, Turkey,
And that's what I said. We as we are extremely efficient in the use of our CapEx and also moving modes if necessary because they are movable. We're talking about a lower level of investment and so we don't see any changes in our CapEx requirements going forward.
Okay, great.
Okay. Let me try to see if I can answer your other questions. I think on the U. S. Tax equity, there are no news in this quarter compared to what we said in the last quarter.
I think it's, of course, to start with extremely hard to speculate about U. S. A politics situation and a possible tax reform to start with. And And of course, there is a theoretical then possible impact on the tax equity, but I think that's that is, of course, a theoretical impact. So if I look at the market again, if I look at order intake, we take in the U.
S. And if I look at the discussions we have with our customers, we have not really changed our view of of the market size, of the U. S. In the concrete sales cycle. Yes, Manelian, I think that is a good question.
I think it remains a little bit to be seen. The runs between the seats and wind park and the non seats and wind park is, of course, as you say, that the seats and wind power have a longer time before I have to complete the projects and they don't need a building permit to participate in the auction. So there is potentially a longer lead time on seats and wind park projects compared to non seats and wind park projects. So how that will pan out? And of course, the 2 first auctions now, we are at the absolute majority went sits and wind parks.
So I think how that will pan out will of course depends a lot on their internal time schedule. A negative there is that they don't have a building permit that would point to a longer process, a positive is, of course, like like always, time to generation is always positive for your business case if you are if you have a project. So of course, there is a natural tendency to to try to get the projects done as quick as possible from a tag to money point of view. So I think it's very very hard to see how these two pans out. But from an overall timing perspective, no doubt that they have a longer time to completion.
And then I think that will be 1 more auction with accounts ruling. And then the auction after that, will there will be no preferential treatment for the seats and windpock.
Are you seeing a push out of the U. S? I mean, I can appreciate that the overall market size view over 2017, 2020 hasn't changed. But just the phasing within that, is it would you agree with some of your peers saying that the phasing within the 2017, 2020 timeframe is shifting out a more towards 'nineteen, 'twenty rather than 'seventeen-'eighteen?
I mean, what we said before was, think in line with the overall market that we expect 2017 from a delivery point of view to be lower than 2016. I think and that will maintain. I think then it's very hard to predict again, if I look at it more short term and order intake and the projects we are firming up now as firm orders for the first half, I'm fairly, I feel fairly good about the position.
Our next question is from Kapurra from Macquarie. Please go ahead.
Hi, good morning guys. Just a follow-up on the last question around the German mark So, Ana, do you think next year, the German demand for 2018 will be quite bleak given this sort of push out on the citizen based projects as well as the fact that those feed in tariff projects awarded in 2016 were most likely to be mentioned in 2017?
I think likely, from a delivery point of view, of course, 'eighteen will be be down on 2017. But exactly how much I think it's very hard to predict now. I mean, that we will get clarity on once we start to see orders firming up around this sits and wind park. But of course, there will be a point in time where the market goes to the sort of the the auction volumes that has been decided. And exactly when that will happen, I think it's it's hard to predict because of what I ask them.
They have a longer lead. They have a possibility of a longer lead on the other hand, of course, I have an incentive to get the generation as early as possible. So Yes. I mean, that's, of course, something we have to stay close to and understand better now as we start to see those auctions turning into orders.
Okay. And my second question
is about Mexico. So that's obviously not been a huge market for you guys. So what was the main drivers of winning the recent 424 Megawatt project? Did it come down to price? Was it technology?
Was it a 4 Megawatt platform?
We reached market, did you say?
The Mexican market.
I must say that we actually have a fairly good position in Mexican markets already from before. So so I I would say that our market share in Mexico is probably online or maybe slightly slightly as slightly below our global average. So I mean, Mexico always been a solid market for us. And of course, we are we're happy for the order.
Our
next question is from Sean Mc Cloughlin from HSBC. Please go ahead.
Thank you. Good morning. My first question, just coming back, Marika, to a comment you made earlier about demand for EPC contracts increasing. This doesn't seem to square with the argument that lower scope impact your order pricing in Q2.
So I was just wondering, can you
specify which regions, which markets are looking at more turnkey and how do you expect this to impact your pricing going forward?
I mean, normally, we would have a maximum around 5% of EPC contracts. And but we clearly see depending on markets, but I would say a very typical turnkey and EPC market would be India, for example, you also see other markets where you see certain requests. We didn't have anything in this quarter. Which obviously have an impact on the price per megawatt as Anders highlighted. So, I mean, this is not blowing anything out proportion, but we I think also from a competitive perspective that you can do any type of project or project is extremely valuable when you have a global footprint as we have.
And you I mean, obviously, the customers comes from anywhere in the world. And we have the possibility to provide any type of contracts and scoping of contracts.
Thank you. And the I mean, thinking as well about the buyback and the lack of M and A, you mentioned yourselves on acquisitions. I'm just wondering if in the context of that, you could give us any further thoughts on your strategic aims to broaden your offering into storage?
Yes. I mean, as I said, I think our strategy remains that And I mean, we have done some bolt on acquisitions, as you know, in the service business. So I mean, if we find the type of bolt on smaller acquisitions, we will, of course, look at it, but also clearly stated as before that our we don't see we don't see any attractive big type of acquisitions, consolidations for us. We are, but we are looking at, as we also talked about before, that we see an interest in the market for hybrid type of systems. It's from a megawatt point of view currently fairly small projects, but we think very interesting projects for the longer run.
They are quite often a combination between wind in some cases, solar, but almost in all cases, some kind of storage or increased capacity factor by new technologies towards the grid. And that could be different kind of storage. It can be pumped hydro. It could be batteries. It can be pure enhancement on how we handle, the grid connection.
And those projects, we think are very interesting. Again, our value add in those projects is, of course, to take the project responsibility it's to, invest and look at the technology of energy management is what kind of gains we can do on the wind side with a large project, but it's not sort of we're not looking to acquire a battery company, start manufacturing batteries or payday panel companies to start to manufacture in panels. We think that our other companies more suited and has the scale on those components into those projects.
That also mean that there's also an internal R and D ramp in this area?
No, we have actually had, as I think I've talked about before, we have an innovation part of our organization that are looking at a lot of different technologies. So I mean, when we see a bigger interest in a certain area, we remove the resources into that area and try to be prudent as usual of keeping the overall frame.
Thank you. Our next question is from Mark Freshney from Credit Suisse. Please go ahead.
Hello. I have 3 questions, please. Firstly, one of the things you didn't mention for the lower pricing in the backlog is the power mode. I'm just wondering if that's important because most turbines now come with this override stroke power mode. Secondly, on the FX rates, if we put aside all of the financial hedging that you do when you win an order, is it fair to say that you have had a large competitive advantage over the last 3 years in the U S as you've been able to ship sometimes complete systems from Europe into the U S for some of the 3 Megawatt projects and basically manufacture in Europe 20 percent cheaper than you would in the U.
S. So if you strip away hedging, there seems to be a big competitive advantage that you've had? And thirdly, just on the auctions, we're now in a system where auction prices are basically the marketplace for power, I'd be interested to hear on those whether whether you think the days of competitive auctioning are actually coming to an end and we'll move to a system where auctions won't matter and how or won't take place and how that would impact your business?
Okay. I mean, your first question, the promo definitely also is a factor in what we discussed. And as you sort of rightfully point out, of course, for example, had most 3.0 megawatt in our back in our order price per megawatt a capital quarters ago and now have mostly 3.6. Of course, that has an impact. Then of course, you can always discuss, and that's why it's so hard to say exactly what is worth.
And is that then a pricing issue or is it a product rating issue? That's of course what what makes the discussion a bit more complicated. But I mean, on a like on like basis, of course, that we have higher power rating and therefore more megawatts that, of course, has an impact. I mean, I would say on the U. S.
Question, I would say it'd be the opposite. I think the big compared advantage that we had during the last 3 years in the U. S. Is actually our U. S.
Manufacturing. And if you look at the absolute a majority of the volume we have sold in the U. S. And a very big part of what we expect to do, let's see, is on the 2 Megawatt platform that we have fully localized in the U. S.
And I think that is action and advantage. And we are currently in the process also because the good thing is that on the on the manufacturing side in the U. S. And on the blade side, we can also do the 3 megawatts. We're actually looking at at localizing the free megawatt now as well and started up that work for the U.
S. So that, I think, has been a key for us, 1 or the case for us in the U. S. Market. On the auctions and market price, I think that, I mean, as I said, I mean, we are in the transition.
We are reaching of wind is reaching, what you can call grid parity even if I don't really like the world because it's very hard to define, because it there will always be policy in the industry in the energy industry and that goes for renewable and that actually goes for fossil fuel as well. So, I think that, but of course, I mean, once we we reach the point where we clearly see no insight. It's possible that there will be another type of system, but for me, that will have been a similarities to what we now call the auction system. It will be then based on the electricity need in the different countries. And they are dependent on how the setup of the energy market is.
You can view it as an auction or just a tendering for capacity. I think the key question there for me is that if you do an you have to have something that you auction out. And I guess that is a little bit what you are thinking as well. So So you have that is the end that you either have a monopoly of power in the market or I see as one gridlock rate or something, but you have to have, of course, in an auction, something that is auctioned out. Otherwise, it's as you say, I mean, it's a market where it's just sort of built when need arise.
But since energy market overall in the majority markets are policy. There is a policy. I think you will see this type of system where you plan for additional capacity and there is some party that sort of do the overall capacity planning. And therefore, it will be an auction like system.
Our next question is from Klaus Edma from Nordea Markets. Please go ahead.
Thank you. Yes, just one question from my side. There's been a lot of question regarding all these options and the impact on pricing, of course. Can you put a little bit of flavor on the quality of the backlog should we see the current backlog being of equal quality as what you're going to deliver in 2017? Will be the question.
Well, I would say what we have said earlier, first of all, we have a very high quality on the order backlog and we have no intent to lower the quality of the order backlog. And then how it will pan out exactly, but also bear in mind that you have anything from 20 or 6 months to up to 24 months. And when and how that potentially will increase in terms of deliveries because there's more forward sale, then we have to come back to that. But all in all, it's a very high quality on the order backlog.
So there will be the same answer when we asked this question in the past, where you normally remember, you're going to set well, yes, the quality is equal to what we have seen being delivered.
But that's a little bit the point also, Klas, when Anders talk about the price per megawatt because you would you don't necessarily see a correlation between the price per megawatt and the margin of the projects. And obviously, when I talk about the quality of the project, soon as well. So we take good healthy projects. That is the that's the methodology.
Yes. When I talk about quality, that will be on project margins, of course. Yes.
And that's what I say. I mean, there's no correlation on price per megawatt and the project margin.
Perfect. Thank you so much.
Our next question is from Lars Kjell from New Credit Markets. Please go ahead.
Yes. Hello. Also a question related to this, to these options. And, Ana, did you say that you you didn't expect all these options to have a negative impact on your margins going forward. Did you say that before?
And that would be my my first question. And secondly, also related to these currency movements, could you indicate just roughly how big of a percentage of your sales is in U. S. Dollar or U. S.
Dollar related currencies? That will be my questions.
Yeah. No, but we we have not started to guide for margins, third run than what we normally do. So, I mean, we keep our guidance on the margin for this year. I mean, overall margins, we have to, we will follow on all process for when we do the next guidance. So, what we talked a lot about, of course, was that there is a competitive pressure in the market.
There are lots of levers on competitiveness. And price is one of them. But as we have talked about now, there is a lot of other labels as well. When it comes to to the margins, we feel that we also are no delivers and those are the levers we are working on, but I have not given any indefinitely, promise on margin development for rest So I mean, we will follow our normal process there on, how we guide for our EBIT model going forward. What was the second question?
US dollar?
US dollar, okay, the order of magnitude of the U. S. Dollar. All in all, I would like to highlight again that we our assumption is to be as naturally hedged as possible. And when it comes to U.
S. Dollar all in all, I mean obviously the U. S. Market is U. S.
Dollar based market. And that's a good portion of our revenue. And there we are more or less 100% naturally hedged as we have a big operation in the U. S. So, and that's also what I would like to highlight again is that it is primarily as we report in euro, the primary currency impact that we see is translation.
So it's not transaction as we try to be very naturally hedged. Then exactly how much U. S. Dollar based, I would go for the U. S.
Market. That's where we primarily see it. And some of the emerging market, but vast majority of the U. S. Dollar basis, U.
S.
Okay. Excellent. Thank you very much.
Room for one more last question.
Our last question is from Geoffrey Fong from Morningstar. Please go ahead.
Good morning, everybody, and thanks for the question. I have two questions, if I may. The first one is going back a little bit on to the deliveries. We have seen lower deliveries in the quarter, but very strong and high manufacturing activity. And I think a lot of things has to do also with transfer of risk.
Can you give a little bit more color on that? Should we read something into that? That's my first question.
The second
question is also coming back a little bit on the share buyback. I appreciate the point which was raised on your earlier question regarding the flexibility but can you please come back a little bit on, let's say, the your decision to go for share backs instead of raising the dividend because in my opinion, the dividend can be raised given the fact that your profitability has has increased on a structural basis the last couple of quarters? Thanks.
Yes. If I start with the last question then and I think, I mean, we are happy with the policy that we have outlined. Our way of looking at the share buyback, the share buyback we've decided this year. And of course, the policy that we've also outlined of when we think it's prudent to maintain the balance of having a strong balance sheet, which we continue. I think it's very important.
And when we see rooms then for share buyback dividend policy is, of course, in at the end of the day, a question for the board, but as I said, from management, we are definitely happy with the policy we have. When it comes to the activity level also for the second half, it's As I think Mike explained, I mean, we are project business. We see timings of, as you say, when we recognize the revenue, so the completion of the project which of course we play a big part of, but also our customer. And also we're all then dependent on a normally a very high activity levels towards the end of the year and to do the revenue recognition, we have to look at things outside our control. We have mentioned all the normal warehouse, seasonality, supply from sub contractors.
And then we also have grid connections from the customer and things like that that the customer has to be ready for in order to do the final revenue recognition. And as usual, we have uncertainty of that timing towards the end of the year. Okay. With that, again, A reminder of the Q3 that we will have that on the 9th November. And then I just want to thank you for calling in.
Thank you for your questions. And thank you for your interest. And I'm sure I will see at least some of you during the next couple of days. Thank you.