Good morning, everyone. Welcome to this first quarter 2017 report. As usual, I appreciate your interest in calling in. The usual disclaimer slide. Let's dive straight into the first quarter and the highlights. Overall, a solid quarter executing on our strategy and a good start of the year. Revenue close to EUR 1.9 billion, 29% up year-over-year. Of course, very good. Also we got help in the quarter from PTC Components delivery as expected. Also improved earnings, a very solid EBIT margin at 11.2%. Order intake, approximately 2 gigawatts. Also that, solid, leading to an increase in the backlog that now stands at EUR 20 billion. As usual, the same agenda as we usually have. I will talk about the orders and the market.
Marika will talk to the financials. I come back to the outlook, and then we have the Q&A. This is the time of the year where we usually get the external reports on market share, and of course, it's been a pleasant reading for us at Vestas. Vestas remains the market leader. According to these analysts, about 16% global market share and also a good percentage improvements 3%-4% year-over-year. If I move into the regulatory and policy environment, I will first say that actually not much changes compared to a quarter ago. Very much the same overall drivers for the industry remains favorable for renewable. Also the same as before, of course, as wind becomes more and more competitive against other energy sources. We also see the trends to auction system that we now have present in most regions.
A little bit more into the details. Americas, continued strong U.S. demand, driven by the current PTC structure. Latin America, tendering regions, been for quite some time. We see new auctions in several markets, such as Argentina, Chile, and Mexico. Also, actually the same short-term challenges in Brazil with the macro condition, and there we saw a postponement of one planned auction. In EMEA, the overall framework for Europe continues to be the renewable energy targets in 2020 and 2030. Here we see a general move towards auctions. First bids in the German auction was submitted very recently, and we expect results in mid-May. It's also an auction coming up soon in Spain. Another example of the market moving to an auction system. Repowering start to add some meaningful volumes.
It's still in Germany, primarily to some extent, of course in Denmark, but it's a much smaller market. Also repowering, we see in the U.S. with the current PTC structure. In Middle East and Africa, we see a continued good development from a low base. Also here we see many markets, I would say, planned for auction. One example is Saudi Arabia, where an auction is expected towards more the end of the year. In Asia Pacific, China driven by the 13th Five-Year Plan with a wind target of 210 gigawatts up to 2020. If this pans out, it would mean annual volumes in China around 20-25 gigawatts. There is also curtailment in the Chinese market, but that is being addressed. India also remains very interesting, a target of 60 gigawatts up to 2022, and that remains in place.
We saw India was a strong market last year. The first auction has been held. Short term, of course, we see some normal uncertainty when you switch from one system to another. Positive in the broader Asia-Pacific region, where we see renewable energy targets in place in most markets. We had a solid order intake in the quarter of approximately 2 gigawatts. The average selling prices at EUR 0.88 million per megawatt also remains fairly stable. Looking at it year-over-year, the order intake was down 354 MW, but of course, we had to consider that it was a hard comparison for us because we booked the 1 gigawatt Norwegian order in Q1 2017. U.S., Germany, and China were the main contributors to the order intake in the first quarter, accounting for more than 70%.
As I said, average selling price on order intake at EUR 0.88. Very much in line with the previous four quarters. We should remember, as usual, that the price per megawatt depends on a number of different factors, turbine type, geography, scope, and in the end of the day, of course, the uniqueness of the offering. Looking at the order intake a bit more in detail, we saw a big increase in the U.S., or in Americas I should say, but it was driven by a strong U.S. order intake, also some good development in Argentina, up 100%. EMEA down 57%. Of course, the decline very much impacted by the 1 gigawatt in Norway. Good activities in many markets, actually, across Europe, primarily Germany and France.
Asia-Pacific, very big percentage increase, of course, from a very low level, we saw some good solid development in China in the first quarter order intake, we also took the first order in India after opening the blade factory. Looking at delivery. Again, Americas, very strong, up 63%. Here, we definitely got tailwind from the PTC components that was delivered to the U.S. markets, also good activity levels in Uruguay and Mexico, all contributing to the growth. EMEA up 10%. Here, year-over-year, we had strong deliveries in the U.K., again, good activity levels in Germany, France, and Turkey. In Asia-Pacific, we saw a decline in delivery of 36% from a low base. As I said, order backlog at EUR 20 billion, with an increase of EUR 0.8 billion sequentially for the quarter.
Of that, EUR 0.5 billion on the turbine side and EUR 0.3 billion on the service side, taking it to EUR 11 billion for service and EUR 9 billion for the wind turbine. The 50/50 joint venture that we have with MHI was off to a good start of the year. Highlights is that the biggest order ever for the joint venture was taken, the 450 MW Borkum Riffgrund 2 order, taking the total announced firm order intake up to 2.5 GW. On top of that, 1 gigawatt in announced conditional and preferred supplier agreements. A good position in the market. Busy from an operational delivery point of view, added now 2 more projects on the 8 MW to the start of the project, which was the Burbo Bank, and continue to deliver on the 2 three MW projects.
On the technology side, the joint venture upgraded the 8 MW platform to reach 9 MW at specific site condition, making it the biggest offshore turbine in the market. With that, I hand over to Marika. Please.
Thank you, Anders. In both the P&L as well as the balance sheet, you will see another solid quarter for Vestas. As Anders highlighted earlier, the revenue increased by 29%, but even more worth highlighting is obviously the continued work on the continuous improvements and also the cost control, which gives us a leverage in the EBIT line, that there you see an improvement in absolute numbers from EUR 85 to EUR 211. The income from investments is less negative this quarter, we're talking about EUR 11 compared to EUR 19 Q1 of last year. To summarize then, we basically see, or you see improvements of both on the gross margins, the EBITDA margin, and also the EBIT margin, which is one of our targets. We delivered 11.2% EBIT in Q1 of this year.
If we go back to how we leverage or how we do the cost control and how we're leveraging the SG&A, here you can see we are down to 6.6% of revenue. Again, here, bear in mind that it is, from a revenue perspective, a high level. Thanks to the PTC components that we said were going to be delivered in Q1 of this year, and so have happened. The cost control continues, we are down to very good levels despite the increase in activity overall in the quarter. The service business continues to deliver good growth. You see a 23% improvement compared to Q1 of last year. We also continue to deliver solid, stable margins at a high level of 19% also in this quarter.
If we go to the balance sheet, as I said, another solid quarter when it comes to the balance sheet. Net debt continued to be at a very low level. You also see compared to Q1 of last year, you see improvements in the working capital, and solvency ratio is well within our target frame of 30%-35%. Still a very strong balance sheet. The change in net working capital, if you look at the change over the last 3 months, we are building up inventory as we are in that period of the year. Nothing strange from that perspective. That is primarily driven by higher activity. You also see obviously the same pattern if you look at the development over the last 12 months.
You see also higher inventories and trade payables increasing, that is a reflection of the activity level that you see at this time of the year. The focus and the control of net working capital obviously continues and is a very important parameter for us. If we go to the warranty production, the quality focus continues. You see that we have taken down the warranty provisions here in Q1 as also communicated on the back of Q4. That's the assessment we've done, and we continue to consume less than what we provide for. You also see that loss production factor due to the focus on quality continues at a low level below 2%. If we have a look at the cash flow, here you see that cash flow from operating activities continues to improve. Obviously, a consequence also of the good performance and activity level of the company.
The free cash flow in the quarter is positive EUR 8, but primarily driven from the divestment of the facilities in Aarhus, as we communicated, I think as early as 2014. That is now concluded, and we got the offer we wanted. You see a positive impact of EUR 99 million from that divestment. If we look at the total investment, and I think this slide is valid, as you both in Q1 of last year, as well as Q1 this year, have some extraordinary items. Last year, we concluded the acquisition of Availon in Q1, and this year we concluded the divestment of the facilities. Therefore, a positive of EUR 99 million in the quarter. But if you look at the comparable numbers of CapEx, we continue to invest, as we have done previously, in primarily capitalized R&D as well as the molds as we have communicated.
If we have a look at the capital structure, net debt to EBITDA continue at a very low, good level for Q1. The solvency ratio is also here, as I said earlier, well within the boundaries of 30%-35%. We managed to be slightly better than Q4, but at a 32% level. Very good, solid performance also on that parameter. If we go to our ROIC, is obviously, and I don't think I have to highlight it, at a very high level. That is obviously a consequence of the improvement that you see both in our operating result as well as our focus on the balance sheet. By that, I leave the word to Anders.
Thank you, Marika. Looking at the outlook is unchanged for 2017, meaning revenue between EUR 9.25 billion-EUR 10.25 billion, an EBIT margin before special items between 12%-14%, total investment approximately EUR 350 million, and a free cash flow of minimum EUR 700 million. At the last Q update, the full year and the strategy outlook, I talked about our ambition in market leadership, and I also talked about the three business areas that we are in, the onshore business, the service business, and the offshore business with our 50/50 joint venture with MHI. Looking at the 12-month rolling, we are clearly executing on our ambition and our strategy with a combined revenue of EUR 11 billion. Good indication from the external market share report. We feel that we are growing faster than the market, which is our midterm ambition. On EBIT, EUR 1.4 billion.
Our ambition is to generate best-in-class margins, which we feel we are. That is, of course, also important to maintain the largest R&D investment in the industry. A reason why we can generate this and a key differentiator for us is our asset-light and flexible low-cost manufacturing footprint. Combined backlog at EUR 22 billion and order intake of EUR 11 billion. Another leverage for us is our installed base of more than 83 GW combined and of that then 74 GW under service. With that, we go over to Q&A.
Thank you. Ladies and gentlemen, if you do 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. Our first question comes from the line of Claus Almer from Nordea Markets. Please go ahead. Your line is open.
Thank you. First of all, congratulations with a strong first quarter. I have two questions. The first goes to the margin you achieved in the first quarter. Has any product mix or regional mix impacted the margin? That would be the first one.
If we look at the overall gross margin in the quarter, you will always have a certain mix, nothing extraordinary in this quarter. We have a good volume increase, obviously. Then I would say that the continuous improvement that we work with, both on the gross profit line as well as the fixed capacity cost continues, and obviously, that's why you see a very good leverage from the overall volumes in the quarter.
From the last three or four quarters, there's not been any unusual, favorable or unfavorable projects delivered?
I would say it's a solid, fairly normal quarter in Q1. You also remember that you saw growth compared to last year in the service business that obviously with these type of margins also have a very positive impact on the quarter. As a general remark, I would say it's a fairly normal quarter.
Okay. Then my final question or last question is about your order intake. You showed a slide with market shares, and order intake continues to exceed consensus or expectations, but how does it evolve compared to your own expectations?
No, as I said, I'm happy with the order intake in Q1. I'm happy with our position in the market overall and of course the performance in market share during last year. Those reports that we show here and refer to, methods differ a little bit between grid connectivity, installed, and so on. Of course, I'm really pleased with the overall trend that I think is pretty clear.
Should we read that as order intake is also exceeding your own expectations?
I would say that the order intake in Q1 is solid.
Okay, thanks.
Thank you. Our next question comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Yes, thank you. First question is on the U.S. outlook. Anders, back in November, you stated you expected the U.S. market to decline in 2017, which you repeated in February. I would assume you have much better visibility being in May now. Do you still expect the U.S. to decline in 2017? Obviously, we have seen you take decent market share in the U.S. Is it fair to assume that your delivery should not decline in 2017?
No, I haven't changed my view since, as you said, we still expect. By the way, it wasn't just my view, it was actually the external market analyst that we collected that expected 2017 to be lower than 2016 in the U.S. from a delivery point of view. No change there. I will not comment on our specific volumes in the market during the year.
If you look forward on the U.S. for 2017 now and compare to how your outlook was in November, is it still the same outlook or has anything changed?
No, it's still the same outlook. As I said, our expectation is a build-up to 2020 as we communicated Q3 last year. That's still our best estimate as well.
Fair enough. My second question is on the service margin. If you adjust for these EUR 14 million in inventory write-downs, you have an EBIT margin of 23%, which is, of course, extremely strong compared to what you have delivered after the acquisitions. Can you just elaborate a bit on what drives this margin level?
I would say that the overall performance, as obviously in the service business, is good. The continuous improvement and the leverage also here from a cost out perspective continues and starting to pay off because the volume is certainly getting bigger. That gives definitely a leverage. The integration of the two acquisitions have been quicker than what we anticipated and also as we communicated, although it's not fully integrated, it has been quicker than the original plan that we have. The write-off, as you rightly point out, is EUR 14 million in the quarter. I would say that the write-off of obsolete inventory is the regular assessment we do every quarter. This quarter, it was the right decision to make the write-off of obsolete inventory of EUR 14 million. Overall it's continuous improvements and focus on the cost level also in the service business.
Would it be fair to assume that this margin level should continue going forward?
We say stable margins, that is what we have communicated. That is the continuous answer.
Thank you. That was all for me.
Thank you. Our next question comes from the line of Akash Gupta from JP Morgan. Please go ahead. Your line is open.
Yeah. Hi, good morning, everybody. Thanks for taking my questions. My first one is on China, where you are looking to increase market share. There were some headlines around AOM that you're looking for partnership in the country to get a bigger share of the market. Maybe if you can update on what you mean by that.
No, I'm really pleased with the performance, of course, in China in the first quarter on order intake. To be honest, not just the first quarter. I have said that the objective is year-on-year growth, I have also said that we need to put enablers in place to achieve that, which is deeper localization of our products, bringing the latest technology and products to the market, including the three megawatt. We have also done some changes on the organizational setup. At the same time, I've also been clear on that we are also dependent on the segment of the market that is the sort of 20-year IRR segment, which is the segment that we address, that that also grows over time. Of course, I'm really pleased with the performance in Q1.
I must say that, of course, I expect orders to be, by nature, orders is lumpy and probably even lumpier from our point of view in China. I prefer to still look at the development of year-over-year in China, but off to a good start. When it comes to partnership, I think nothing has changed in our strategy on how to address China. It is about organic growth. Of course, to partner with customers in a deeper sense in China, I think is always an objective for us. We will continue to work on that side. As you know, many of the big customers in China are a conglomerate in the utility industry. For us, the strategy is to sell our products to those customers.
My second question is on U.S. Just wondering, have you delivered all the PTC components ordered in Q1, or is there any left for Q2?
No, the absolute minority is delivered in Q1. The grace period was 105 days, absolute minority in Q1.
Thank you.
Thank you. Our next question comes from the line of David Vos from Barclays. Please go ahead. Your line is open.
Good morning, Marika. Good morning, Anders. Thanks for taking my questions. I would like to look a bit more into the U.S., really, unsurprisingly perhaps. What are you hearing about the developers pipeline for 2017? I hear your comments on a slow ramp up towards 2020, but it occurs to me that, now that we're in May, we should be firming up on what 2017 is going to look like. Certainly, I would expect you to be quite on the ball there and be looking into your own production plans for 2017. If you could provide us just with a little bit more color than that you have so far, I think it would make it a lot easier for us. I'll have a second question after that.
Yeah. As I said, or maybe I didn't say that, but if you look at the order intake in Q1 in the U.S., we're definitely happy with our order intake. As usual with the U.S., we are in constantly close contact with our customers and of course also use the flexibility we have with a very U.S.-based supply chain. There is nothing new in that, I will say. From my point of view, we are happy with, as I said before, with the market share that we've taken, happy with the share of PTC components that we have secured. We are happy with the order intake in Q1 that we've done, it's full speed ahead now to firm up the projects according to customers' demand.
Okay, fair enough. A question on the service business. I noticed that you increased your megawatts on the service by quite a large number, about three gigawatts versus Q4. That clearly triggered a lot of volume increase, which in turn then drove that great margin. Could you comment on the big increase, firstly? Secondly, maybe going back to the inventory write-offs, is that a problem that has been generated in the past where you build up a lot of inventory, and that is now needing to be written off? Or is that something that is still occurring, you still need to be building up those inventories ahead of some future five or 10 years out, you just can't see when you would need it or if you would need it, therefore, this write-off issue that we have would continue for the foreseeable future?
Maybe a long-winded way of asking, will the write-offs end somewhere in the near term, or will they continue for as long as we're doing this business because it's just business as usual? Thank you.
Okay, thank you. If we start with the inventory write-off, which was your longer part of the question. To start from the beginning, Anders decided to divide the two businesses. You have a turbine business and you have a service business. Obviously, the service business, both by experience and volume, get more experience and get more run as a regular business. The inventory write-offs have happened before, maybe in a more lumpy way. It's not that we're building up for anything, it's just that we do a regular assessment of the service business. We also get more experience on what is obsolete inventory and what is not, because we run it in a different way, and therefore, you will see write-offs when we need to make them and when we have obsolete inventory. It's nothing random or surprising in the quarter.
It's just a regular run business from that perspective. Your order intake question, David, if you can repeat that one.
No, it was more on the megawatts under service in the service business, clearly, which ticked up to 74 gigawatts versus 71 at Q4. I was just wondering whether there was anything unusual there given deliveries in the quarter were only a gigawatt and a half.
No, it's nothing unusual, and there's no relation to that. Nothing extraordinary.
You will see lumpiness in that for sure, because of course, it depends on what kind of renewals that comes up and the size of those in the megawatt number. That will be fairly lumpy.
Okay. There were no kind of big project wins or of the type that you announced last year with Berkshire, something like that?
No. That's what basically, as Anders said, that's what we have said before. There will always be a certain lumpiness, and obviously, you try to have as even quarter as you possibly can, but it's a type of business where you will see lumpiness. That's why it's probably easier to see it on a 12 months rolling.
Yeah. Perfect. Thank you so much.
Thank you.
You, too.
Thank you. Our next question comes from the line of Casper Blom from ABG. Please go ahead, your line is open.
Thanks a lot. A couple of questions from my side also. First of all, regarding the market and consolidation, we saw a lot of acquisitions and mergers happening last year. This year we've heard some of the smaller players talk a little bit about price pressure, probably because of technology. We also hear you talk that we see more and more markets moving towards auction-based systems. Do you think that we are now at a point in time where consolidation starts to be driven more organically, where you basically reach the point where you need to be big to really make it in this industry? What is your view on that? That's my first question.
From an industry perspective, I think that the consolidation that we have seen is probably fairly natural. That's I think what we've seen in other industries. There were quite a lot of players with limitation when it comes to footprint and dependent on a strong home market. I think that we see a consolidation in the industry overall. I think it's a fairly natural development. Of course, it remains to be seen if this is it, so to speak. Remember, we did our joint venture with MHI fairly early on the offshore side because we felt that that made a lot of sense on the size of the offshore Type of project. I think natural development, then it's always hard to speculate on the future. I mean, for Vestas' point of view, the key differentiators for us is the global reach that we had established since before.
It is about scale, which we have, about the flexibility in manufacturing and a good manufacturing footprint with scale and geographical spread. It's about the scale in the installed base and number of people, and it's about the technology and service leadership. I feel, as I've said before, comfortable with our position. Of course, I also think it's a natural thing that this industry is consolidating.
Okay, Anders, wouldn't you say that these recent trends of, for example, auctions, is something that makes it even more important to be large and to have scale than it has been before?
I would agree to that. I think the auction, maybe it was me who expressed myself a bit unclear. I think auctions and competitive tenders is for me about the same thing. I think if you look at, it's not new. It's just that it sort of penetrates more and more markets. I would argue U.S. with the competitive tendering there is the same kind of system that we've had for a long time. Latin America has been an auction continent for quite some time. We're seeing the same thing in Europe and Middle East. It's a trend that has been ongoing for, I would say, the last one and a half year, at least, maybe two probably, and U.S. even longer.
I agree with you that a market-based tendering system overall, of course, makes it even more important with the factors that I just talked about.
Okay. That's clear. My second question is a bit about repowering. You mentioned that you're starting to see some of that in Northern Europe. Could you comment a bit on what do you see in these repowering projects? How much of the projects that are being dismantled are actually being replaced by onshore wind power? Is there any threat of that market share being lost to, for example, solar or offshore wind?
No, that's not what we say. I would say the market where there is a more substantial share of the market that is repowered is Germany, in Northern Europe. Of course, sorry, in Denmark, where the fleet is just aging. The repowering that we're seeing in the U.S. is very much built on how you can qualify under the current PTC system with the repowering. They are still market specific. I have to come back if we have some estimate of Germany on how much is repowering, because I don't have that on top of my head. There, it's a more substantial part of the business. You're repowering the same parks, but with the latest technology.
That is, of course, with the development that we've had in the technology for the last 20 years, it's, of course, provided that you can get the permitting and so on, it's usually a very positive business case. I expect after 2020, we will see a substantial repowering market, more broad base when we start to reach the 20, 25-year lifetime of the installed base. I haven't seen any examples of, okay, we skip the park and do another technology, so to speak. It's usually a wind park by wind park.
Okay. That's good to hear. Thanks a lot.
Thanks.
Thank you. Our next question comes from the line of Marcus Wallander from Carnegie. Please go ahead. Your line is open.
Thank you. Two questions from me as well, please. First of all, your revenue in Q1 was EUR 400 million higher than last year. Your order backlog at the end of the quarter was about the same level as last year. In which scenario do you see your revenue for 2017 end up in the lower end of your guidance range?
Okay. Yes, you're right. The revenue is 29% higher in the quarter. As both me and Anders alluded to, we had the PTC components for natural reasons also delivered here in Q1. I would say also, you have a good spread in the quarter if you so like. The guidance that we have provided, and Anders said earlier, is something that we feel comfortable with. What we will do this year as well as previous years is obviously going for the higher range of the guidance. There's no changes in the methodology that we have used. We do the regular risk assessment, and the more that passes throughout the year in terms of quarters, obviously, the more comfortable you feel with exactly what you're delivering.
The risk assessment remains, and it's hard to say exactly how that will pan out, as only one quarter has passed so far.
All right. Understood. Thank you. Second question, some offshore developers just about to build wind farms at zero subsidies in Germany. What do you think the implications for onshore of that will be? Is there a risk that there will be additional price pressure on the onshore segment?
First of all, I think it's, of course, very encouraging that also in offshore, we see a path to grid parity or subsidy free or many name on a state where we all want to come to. I think that's my first comment. If you look at the timing of this, I think it's also very clear that from a levelized cost of energy point of view, onshore has some big advantages. I don't expect that to disappear, the sort of levelized cost of energy advantages that we see in onshore compared to offshore in the midterm.
For me, it's overall, of course, a positive development that we actually get access to more sites than what we have in a pure onshore scenario, or that the industry see a path to grid parity also for offshore, even if those estimate is that will take a little bit longer time. I also feel that we greatly contribute to that, of course, with the bigger turbines that we can deliver to the market and that we have in the market.
Okay, thank you. Just to follow up, do I interpret that correctly? You're saying basically that onshore wind will reach grid parity before offshore wind?
Grid parity is, of course, another big discussion. Yeah, everything else equal, I'm saying that the levelized cost of energy on onshore wind is, of course, today considerably more favorable than offshore.
All right. Understood. Thank you.
Thank you. Our next question comes from the line of Peter Testa from One Investments. Please go ahead. Your line is open.
Hi. Thanks so much. Two questions. One is just on China, where you talked about you obviously had a good quarter and you gave some conversation. Just to be more clear, are you suggesting that your Chinese business pickup has now kind of returned and is sustainable? I understand it'll be lumpy, but is it a sustainable pickup now? If so, what has changed in either the official setup or your setup to lead to this? The second question is just looking at Europe or Germany and given the setup changes in quotas and so on, do you have any sense as to whether orders are being front-loaded or back-loaded this year?
On China, what I can say is that our objective or ambition on year-on-year improvement, that remains, and we deliver on that last year, and we're off to a good start this year. That will remain as part of our midterm strategy going forward. I said also that I am confident in the enablers that we have put in place because we have seen result of that when it comes to localization, new technology, general go-to-market model. I also said that, of course, the segment that we are relevant in China is the segment that look at the 20 years, 25 years IRR segment. We are less relevant in the pure CapEx segment. We are also dependent on how those different segments develop over time in the Chinese market.
On your questions on Europe or Germany, as I said also, we had the first auction in Germany, I think it was the other week, and we expect the results of that in mid-May. On the other hand, we have a very, what you, I say, a very controlled phase out, phase in. We have the current feed-in tariff system that is, and has been for some time then dropping down over time. You have the auction system kicking in before the feed-in tariff system, so to speak, completely drop off because the trigger point is permits that you have got in under the different schemes. Our expectation is that in 2017, of course, we will see a lot of the volumes will come from the old system and the old permitting.
You will probably see those volumes also coming into 2018 in the market. Towards the mid-end of 2018, the auction system and the auction targets is going to be the one that dominates the market.
Right. You don't have a sense on how that affects phasing?
I think that remains to be seen. I think the best indications on that, on the total market size, is to look at the permitting volume in Germany. I don't remember exactly, but I think there is about a six-month lag on those numbers coming out.
Right. Okay. Thanks very much.
Thank you. Our next question comes from the line of Alok Katre from Societe Generale. Please go ahead. Your line is open.
Hi. Alok Katre from Soc Gen. Thanks for taking my questions. A couple of ones. One is just to follow up on the PTC. Just wanted to confirm, you said you delivered most of the PTC components in the first quarter. I was trying to reconcile that with the prepayment changes in the working capital bridge on slide 17, because it didn't seem like there was much of a reversal within that. Also in the context of that, looking at deliveries and the production, where the differential is quite large in this quarter versus what we've seen previously. Just wanted to confirm how those dynamics are sort of playing out. The second question was just a bit on the capital allocation. I think there were some comments from Bert Nordberg recently about investing in energy storage and related areas.
Just wondering what is driving this thinking. Are we talking a big sort of M&A-related investments there or more R&D style investments? Just what's driving this diversification outside of wind? Are we sort of looking a bit more beyond wind into other renewable energy areas as well? Thanks.
Okay. If I start with your question on the prepayments or the down payments for the PTC. As you rightly point out, we delivered here in Q1 but we got paid in Q4 of last year. No cash flow impact from that. I would say that the overall cash flow that you do see in the quarter, from a positive point of view, is primarily because of the one-timer divestment of the offices in Aarhus, as I pointed out. The overall working capital element that you allude to here in the first quarter, if you compare to last year, it is a regular development in the overall working capital. We are building inventories. We see an increase in payables, which is normal in a Q1, as that's when you prepare for the remainder of the year.
If the prepayments came into the fourth quarter, then they flew out in the first quarter, you just produce and sell the inventories in the first quarter, sorry, shouldn't that have a sort of negative impact on the cash flow line? That's what seemed to be within consensus estimates.
I'm not sure I fully capture your question, maybe you can take that afterwards.
Offline. Yep.
Yep.
Okay. On the second question, I'm happy I got that one a bit easier. Our investment strategy hasn't changed, as we said before or our M&A strategy, both on acquisition, service space, technology space, the normal make or buy type of decision early on in the technology process. That hasn't changed. We are, as I also said in the strategy update, the type of technology that we can integrate wind turbine with in order to increase penetration of wind or, for that matter, in order to continue to lower the levelized cost of energy for wind, that is of course of interest for us. Just also to be clear on that, I don't see Vestas as a battery manufacturer or as a solar panel manufacturer.
I think it's very important that we, for example, have technology cooperation with leading storage battery providers so that we are sure that we can optimize our part of that energy system and that energy management system. If we can also find ways to reduce the total cost in hybrid type of system integration between, as we see in the market now, from a scale point of view, they are very small. We see Requests for proposals in the market of hybrid wind solar storage, and that we participate in those projects always with the wind angle. That, I think, is definitely of interest for us.
Yep, thanks. Sorry, if I could just follow up on the auction and the pricing as well, just on some discussion previously. Simple, straightforward question there is, are we getting to a stage where customers are getting more aggressive, let's say, with the hopes for levelized cost of energy reduction on the onshore and offshore side, and therefore to a point where this becomes a bit of a unsustainable decline for the wind industry as well? Some of the auction numbers seem very low.
I think, as you say, of course, the auctions is new. It's a thing that we see all over the market, but it's not new. Our estimate is that we have taken a considerable amount of gigawatts in auctions during the last two years, and of course, delivered a lot of those auction projects already. Probably around 45 gigawatts, something like that, is what we have taken in auction system. If you then put on competitive tender thing like we've seen in the U.S., we have a big volume there. It's a very competitive market. Both competitive tendering and auction. As I said last quarter, it's for sure so that we have to fight for every deal.
It's also so that an auction type of system compared to the old feed-in tariff system, simply put it, in the old feed-in tariff system, the projects that could get under the hurdle rate, they got billed. You had many winners, so to speak. An auction type of system, of course, you have fewer winners. For us, that's influenced our way of go to market, how to partner earlier with the customer, how to optimize our offer together with the customer. Of course, there is a pressure on all parties in the chain to get to the lowest possible energy prices and therefore win the auction.
It becomes even more important with the fit of the turbine to the site, that you time your turbine offering when the project is going to be built, that the cost of capital on the customer side is optimum, that IRR rates reflects the markets, and so on. There are so many parameters in an auction to reach an electricity prices, and turbine prices is one of those parameters, but there is a lot of parameters in that kind of setup.
Fair enough. Thank you.
Thank you. Our next question comes from the line of Klaus Kehl from Nykredit Markets . Please go ahead, your line is open.
Yes, hello. A follow-up question to these discussions about the auctions. I was just wondering whether you are prepared with the new turbines for the auctions in Germany, France, and Spain. I believe actually that you launched an optimized version of a turbine the other day. That would be my first question. Secondly, you had a pretty low cost base here in Q1, and very tight cost control. I was just wondering, can you keep cost at current level for the coming quarters, or should we expect an increase? That would be my questions.
Yeah. If I start with the product side. You're right, we launched some new two megawatt turbine variants last week, where we again then take another step in lowering the levelized cost of energy by increasing the rotor sizes and also then that we cover the different wind classes. You will continue to see new product releases from us because, of course, that is our way, as we have shown the last four or five years, that there is a difference between price per megawatt and levelized cost of energy. No doubt that levelized cost of energy for the wind industry has developed very favorably, and that is to a large extent to introduce this new technology. Of course, our aim is to have as good fit as possible into these different auction and competitive tendering markets.
Therefore you need a broad portfolio, which I feel confident that we have on both the three megawatt side and the two megawatt side with different rotors and different power ratings. That's going to be the ambition going forward as well, to have a competitive portfolio.
Then the cost control, as you were saying, for me, the cost control is really efficiency, and also flexibility, so we can adapt to changes in the market. It's also obviously flawless execution and as Anders alluded here also on the LCOE, cost control is essential also from that perspective.
To answer your question in very short, it's yes, that will continue, and we see continuous improvements possibility also on that side.
Okay. Thank you very much.
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.
Hi. Good morning. Thank you so much for taking my questions. I've got two questions. The first one is on orders, mainly around intra-year orders for 2017 delivery. I remember when you had the full year results, I think you mentioned that the lower end of the guidance is already covered by your orders, and in the next few months, you will have some intra-year orders, which should sort of support or which will impact what happens for the year. I just wanted to get some color on for the orders that you've announced for Q1, could you give us some indication around how much of that is 2017 delivery? Or perhaps some additional color around the U.S. because there's obviously some continuous construction type orders or conversions from your PTC component orders.
Also in Germany, there were the building permits at the end of last year, and orders were expected this year. Some color around the intra-year orders would be quite helpful. That's my first question, and I'll follow up with the second one.
Yeah. I don't think we said our order coverage for the year last quarter or related that to any range in the guidance. At least not to my memory. What I can say on the intra is that, and on the order coverage in general, is that we are in line with our internal expectation. We are in line with sort of what you could consider a normal pattern. You're right, that is, of course, one key parameter in our revenue guidelines. It follows our normal pattern, and of course, as I said, it's a parameter on that, but we don't talk about the type of percentage order coverage over the year.
It's part of the equation to come up with the outlook that we have, and the other part is, of course, the normal risk assessment that Marika talks about on what then finally will be transferred to the customer within a year. I think Germany, I have talked about and your questions there, we saw and see a high permitting rate in Germany. That, of course, then it's beneficial for the customer, probably. That, of course, we don't know since there is also a fall in the feed-in tariff, and we don't know the prices in the auction. If it follows a normal pattern, then it's probably beneficial to get it in the older feed-in tariff if you have a permit.
Again, it's really a question for our customer judgment in the end of that period with the falling tariff and their expectation on the prices in the auction on how that volume transition will play out. From our point of view, we have a good activity level in Germany, as I talked about in Q1. I feel we have a good position in the market, and we have the ability to deliver on customer request. Those are the parameters that we are working on to optimize for Vestas' part.
Okay, cool. Would you still kind of expect some intra-year for 2017 delivery orders in the coming months? Is that reasonable to expect?
That's probably reasonable to expect. We haven't changed our order announcement policy, so we announce orders when they are firm and unconditional.
Cool. Thank you. Moving on to my second question. In your comment on the press release, you mentioned that you got a good start to the year, which is quite obvious. Then towards the end, you also said that there's a lot of hard work to be done for the rest of the year while you maintain the guidance. It feels as if you are a bit cautious on delivery into the rest of the year. What prompted that sort of lot of hard work left?
Maybe I shouldn't read too much into that. Maybe I just pointed out that we always work hard. There was no other consideration or secret code words in hard work. It was just concluding that for the organization as well, that we are off to a good start. We have a solid quarter, good start of the year, but of course, as everyone knows, it doesn't come by itself. You have to continue to work hard as always. Nothing, not harder, but just make sure that we continue with executing really well, and that is hard work.
Okay, cool. Just a small accounting, reporting question. You used to report these megawatts under completion, and we see from the report that there's no megawatt under completion now. That was quite a useful indicator for the market to understand the next few quarters, and you've stopped reporting that, so can we expect it to come back at some point, or are you not going to report it?
Yeah. Point taken, Pinaki. Yes. It will come back. We understand.
Cool. Very good. Many congratulations. Thank you.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Sean McLoughlin from HSBC. Please go ahead. Your line is open.
Good morning, and thank you. Firstly, on the Indian market, good to see the first order coming through. How is this market shaping up for you, and how much are you investing in project development to compete in this market? There is a mention in the annual report that you might be increasing development spend, so just curious to get comments around that. Secondly, are you surprised by DONG's expectation that 13-15 MW offshore turbines will be available by 2023, 2024?
If I take India first, I think for sure, it is a very interesting market. The 60 GW target that the Indian government have to 2022, I think it is a ambitious target, and if I look at the delivery that went into India last year from a market perspective, it is definitely a very interesting market for us. That is, of course, the reason why we have done the investment we have in the factory, and also now in the setup. We are working to get our enablers in place, and when we have those enablers in place, then of course we get more relevant in the market. What has also happened in India very short term then, is that there was an auction sometime back now, where we saw a drop in, again, not in the necessarily turbine prices, but in the energy prices in the auction.
As usual, I was about to say, and I think you heard me talk about this before, that if you do not have a very clear phase in, phase out type of rules in a market, of course, when you change regime for natural reasons, you get a little bit of a short-term uncertainty until the new regime then kicks in. That is, I would say, what we see short term in the Indian market now because of this change in going to auction, but not auctioning out the full volumes of the market. Short term, I think that it is fair to say that there is a bit uncertainty on volumes, but mid-term, I am confident that it will be a big market. When it comes to development, we have done none or extremely little on development so far in India. It is something that we are looking at.
As I think I've said before, we prefer to work with local developers that set up. That is difficult in India because it doesn't exist to the same degree as in many other markets. We are still working on finding the, for us, best way forward on that. We have signed agreement with some local development where they do the normal development work. If that is enough to cover the market, that remains a bit to be seen. What was the second question?
DONG.
Yeah, DONG. Sorry, yeah. It comes back to what we discussed before. I think it's also important to remember that in those predictions through 2024, 2025, of course the turbine part of that compared to also an onshore project is a fairly small part, maybe 35% of a levelized cost of energy. Then you also then have to predict what you think about the gas prices in 2024. You have to think about what you think about the electricity prices in a big electricity market. For me, looking at it from a pure turbine point of view, of course I have a piece of that puzzle that we control, but far from the overall assumption that you refer to that DONG has done in this case. When it comes to turbine sizes and so on for us, we haven't changed our policy.
When we have a new turbine to announce, we will announce that new turbine. We haven't changed our methods at all on that. We are actually fairly happy, I must say, to have the biggest turbine for the offshore market today in the 9 MW.
Thanks. If I could just come back to the Indian point, or rather, on project development. Where are you spending more on project development? Which markets?
No, we are not spending on. What do you mean with project development?
In the annual report, I believe you had mentioned that there would be greater project development spend.
Well, if you look at the co-development, Sean, it's more of what we said in the annual report, is that we will follow the market, and, in particular, our customers. So far, it's an insignificant participation we are talking about.
Got it. Thank you.
Thank you. Our next question comes from the line of Guthrie Gatrell from Macquarie Securities. Please go ahead. Your line is open.
Hi, guys. Two questions from me. Firstly, global steel prices have fallen quite a lot since your full year guidance was set earlier this year. Could this be a possible tailwind for 2017, or are you effectively hedged in this regard? I'll follow up with a second, if I can.
Okay. Yeah. We actually had that discussion today as well. Obviously, that is positive. We will say what we have said previously, and that is that we are effective still in capturing that. We don't see that as a tailwind or an obstacle then long-term. That is obviously a different question. How we negotiate prices with both suppliers and customers, we feel comfortable with what we have said in the guidance as of now.
Okay. Fine. Second question is about ASPs in terms of your revenue this quarter. You saw a 6% increase on the quarter in terms of your revenue ASPs for turbines. What's happened here? Is this product mix mainly? Secondly, how should we see this going forward?
Okay. You're talking about the average sales price on the turbines, I guess.
Yes, in terms of revenues recorded in Q1, not your order intake.
Okay. Well, I think I know what you're referring to, but there's nothing exceptional. You will just see the regular fluctuations in the quarter. Shouldn't read too much into that average sales price.
Okay, great. Can I follow up just with one more? In terms of your turbines and your product development, I know we talked about it earlier on in the call, and you had a couple of decent-sized new turbines being commissioned in the last few days. Could you give us a bit of color as to where you see further holes in your portfolio in terms of turbines and iterations of your turbines for specific markets? Can you give us a bit of color on that?
I think, overall, I'm very happy and confident with our turbine product portfolio and our technology. In the market today, you basically have 2-megawatt platforms and variants of 2-megawatt platforms and 3-megawatt platforms and variants of the 3-megawatt platforms. From a Vestas point of view, we have, for a long time, been active in both the 2-megawatt platform and the 3-megawatt platform. Of course, that is also what has enabled us to have a very good geographical reach. It's traditionally been so that the 3-megawatt platform has been more in markets with pad constraints, so with land constraints, then that market has gone on the 3-megawatt platform, and it's been where you have sort of no pad constraints, so plenty of land, the 2-megawatt platform has been dominating.
What we see now over time is, of course, that you start to get down the levelized cost of energy also on the 3-megawatt platform to the extent that where it becomes a little bit less clear cut that it is this pad constraint that determine the platform. We see, for example, U.S., who's been a traditional, very strong 2-megawatt platform market, we now start to see that the 3-megawatt platform comes in. It depends all on the wind speed and the turbulence of the air, the tip height you can have and so on. What's important for us is that we have a broad portfolio to cover the different market characteristics, and that we continue to upgrade the production in those portfolios. As an example, then you see the announcement for us on the V116 and V120. That development will not stop, so to speak.
That's a development that we will continue to do, and that determines then that you can cover as many markets and wind regimes as possible. Of course, time to market is also important then because, of course, it's also against the competition.
Okay. Great. Thank you.
I think we go to the last question.
Thank you. Our final question comes from the line of Faisal Ahmed from SEB. Please go ahead. Your line is now open.
Yeah. Hi, Anders and Marika. Two questions from my side. Firstly, on headcount. Both the average and quarter figures are up both year-on-year and sequentially. Can you try and help us in explaining what is driving this and how should this be panning out for the full year? That's my first question, please.
Okay. Headcount. I think it was fairly stable. Around 22,000.
It was still slightly up both year-over-year and also quarter-over-quarter. Just thinking, what is the explanation for this? It was up quite nicely, especially outside Europe and Africa.
I would say that, obviously, as Anders is alluding to, we see a stable workforce here in Q1. Depending on the overall activity level, you can see some fluctuations, but that will be adapted to the activity level. It's primarily blue collar, as you understand. There's basically no changes in the overall headcount.
Have you ramped up or ramped down in Q2 so far?
Not significantly. If I recall, some of the numbers was, there's a slight reduction, I think if I recall correctly, in the U.S., we are some 4,700. In Denmark, there was also a small reduction of some 100 people. We're down to 4,307-ish level. Again, a stable development in the workforce.
Okay. Since you are expecting a stable development in the workforce, should we interpret that as that revenues or volume shouldn't differ significantly from last year? Would that be a fair assessment?
No, sorry for bad memory, we also had an increase in India for obvious reasons as we inaugurated the factory. I think we have some 300-plus people in India. That's where you see definitely an increase.
Okay. That's clear. The second question that's relating to the U.S. market, can you, Anders, maybe comment on discussions regarding PTC components for the 80% PTC? Have you actively started those discussions with your U.S. customers?
Yeah, for sure the discussion has started, I would say it's way too early to have any firmer opinion on that. My expectation is that we will not really been able to conclude until Q4 or end of Q4. Of course, we discuss it with our customers.
Okay. That's clear. Just a follow-up question on the U.S. market and PTC. I noticed two out of three U.S. orders which you won in Q1, they were not PTC component orders, but they were started by sort of construction. Is that according to what you have been expecting originally? Have you won them in a competitive tender?
I don't want to confirm what you said until I've checked it myself. I think generally speaking, of course, it's natural that the earlier project, so to speak, is more continuous construction. Over time it will be more PTC components. It's hard to judge because you also have potential flow in between that you start the continuous construction and you could potentially use PTC components. I think generally speaking, I think it's fair to assume that you will see, of course, for a good reason on how you qualify it, you will see more continuous construction in the beginning of the period, it will turn to more PTC components towards the end of the period. There is also actually a bit of cannibalization probably in between.
Okay. That's very clear. That's everything from my side. Thank you.
Okay. Thank you so much. Again, thank you all for your interest and for calling in, I'm sure that we will see some of you during this next coming days at least. Thank you very much