So, good morning, everyone, and welcome to this first quarter 2017 report. As usual, I appreciate your interest in calling in. The usual disclaimer, slide, and then let's dive into straight into the first quarter and the highlights. So overall, a solid quarter, executing on our strategy and a good start of the year. Revenue, close to 1,900,000,000.
So, 29 percent up year over year. So of course, very good. And also, we got help in the quarter from PTC components delivery as expected. Also improved earnings, very solid EBIT margin at 11.2 percent. Order intake approximately 2 gigawatts.
So also that, solid main event or an increase in the backlog that now stands at 1,000,000,000. As usual then, the same agenda as, we usually have. I will talk about all those and the market. Micah will talk to the financials and then we can I come back to the outlook and then we have the Q and A? This, is the time of the year where we usually get the external reports on on market share.
And of course, it's been a pleasant reading for us at Vestas. Vestas remains the market leader. And we, according to these analysts, then about 16% market share, global market share, and also a good percentage improvements, 3 to 4 year over year. If I then move into the regulatory and policy environment, I will say you first say that actually not much changes compared to a quarter ago, so very much the same overall drivers for the industry remains favorable for renewable, also the same as we 4, of course, as wind becomes more and more competitive against other energy sources, and 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, attendering regions been for quite some time. We see new auctions in several markets. That's just Argentina, Chile, Mexico.
Also, actually, the same short term challenges in Brazil with a macro condition, and there we saw a postponement or one planned auction. In EMEA, also, the overall framework for Europe continues to be the renewable energy targets in 20202030. Also, here, we see annual move towards auctions. First bids in the German auction was submitted very recently. And we expect the results in mid May.
It's also an auction coming up soon in Spain. So 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. And all array powering, we see in the U.
S, really current PTC structure. In Middle Eastern Africa, we see continued good developments from a low base. And also here, we see most, many market, 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 then, China driven by the 13th 5 year plan with a wind target of 210 gigawatts up to 2020. And if this pans out, it would mean annual volumes in China around 2025 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, and there was strong market last year.
The first auction has been held and short term. Of course, we see some normal uncertainty when you switch from one system to another. And also positive in the broader Asia specific region where we see renewable energy targets in place in most markets. Then, we had a solid order intake, in the quarter or approximately 2 gigawatts. And, the average selling prices at 0.88,000,000 per megawatt also remains fairly stable.
Looking at it year on year, the order intake was down. 354 Megawatts, but of course, then we had, have to consider that, it was a whole comparison for us because we booked the 1 Gigawatt Norwegian order in Q1 of last year. 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 0.88 So 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 order intake a bit more in detail, we saw the 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, so up 100%. It may add on 57%. Also, of course, the decline very much impacted by the 1 Gigawatt in Norway. But good activities in many markets, actually across Europe, but primarily Germany and France. Special Pacific, very big percentage increase, but of course, from a very low level, but we saw some good solid development in China.
In the first quarter order intake. And we also took the first order in India after opening the blade factory. Looking at delivery then. Again, America is very strong, up 63%. Here, we definitely got some tailwind from the PTC components that was delivered to the U.
S. Markets, but also good activity there in Uruguay and Mexico, all contributing to the growth. EMEA, up 10%. Here, year over year, we had strong deliveries in the UK, but again, good activity levels in Germany, France and Turkey. And in Asia Pacific, we saw a decline in delivery of 36% from a low base.
As I said, all the backlog at 1,000,000,000, with an increase 0.8 sequentially for the quarter. And of that 0.5 on the turbine side and 0.3 on the service side, taking it to 11,000,000,000 service and billion for wind turbine. The fifty-fifty joint venture that we have with MH was also off to a good start of the year. Highlights is that the biggest order ever, for the joint venture, it was taken to 450 Megawatts, Walker Riffgren, 2 order, taking the total announced firm order intake up to 2.5 gigawatts. And on top of that, a gigawatt in announced conditional and preferred supplier agreements.
So good position in the market, also, BC from an operational delivery point of view, and added now to more projects on the 8 Megawatts to the to the start of the project, which was the double bank and continue to deliver on the 2 or 3 Megawatts project. Also, on the technology side, the orange Vansure upgraded the 8 Megawatt platform to reach 9 Megawatt at specific site condition, making it the biggest offshore turbine in the market. So with that, I hand over to Megan, please.
Thank you, Anders. So in the both the P and L as well as the balance sheet, you will see another solid quarter for Vestas. And as Andreas highlighted, sorry, 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 so that there you see an improvement in absolute numbers from 85 to 211.
The income from investments is less negative this quarter. So we're talking about 11 compared to 'nineteen, Q1 of last year. And just to summarize then, we basically see you see improvements of both on the gross margins, the EBITDA margin and also the EBIT margin, which is one of our targets. So we delivered 11.2 percent 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 and A And here you can see, we are down to 6.6 percent of revenue.
And again, here, bear in mind, that it is from a revenue perspective, a high level. And thanks to the PDC, components that we said were going to be delivered in Q1 of this year and so have happened. So the cost control continues. And we are down to very good levels despite the increase in activity overall in the quarter. The service business continues to deliver good growth.
So you see 23% in compared to Q1 of last year. And 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, no Another solid quarter when it comes to the balance sheet. Net debt continue 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 well within our target frame of 30% to 35%.
So, 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. So nothing strange from that perspective. And that is primarily driven by higher activity. You also see the, obviously, the same pattern.
If you look at the development over the last 12 month, you see also higher inventories and trade payables increasing, and that is collection of the activity level that you see at this time of the year. The focus and the control of networking 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 lost 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. And the free cash flow in the quarter is positive, 8, but primarily driven from the divestment of the facilities in August. As we communicated, I think, as early as 2014, and that is now concluded.
And we got the offer we So you see a positive impact of 1,000,000 from that divestment. If you look at the total investments, 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 Availin in Q1. And this year, we concluded the divestment of the facilities. So therefore, for a positive of 99 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 and D as well as the modes as we have communicated.
If we have a look at the capital structure, net debt to EBITDA continue at a very low, good level and for Q1. And the solvency ratio is also here, as I said earlier, well within the boundaries of 30% to 35%. So we managed to be slightly better than Q4, but at the 32% level. So 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.
And 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. And by that, I'll leave the word to Anders.
Thank you, Micah. So looking at the outlook is unchanged for 2017, meaning revenue between EUR 9.25000000000 to EUR 10,250,000,000. An EBIT margin before special items between 12% 14%. Total investments approximately 1,000,000 and a free cash flow of minimum 1,000,000. 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 3 business areas that we are in. The Oneshore business, the service business and the offshore business with our fifty-fifty joint venture with MHI. And looking at the 12 month rolling, we are clearly executing on our ambition and our strategy with a combined revenue of 11,000,000,000, a good indication from the external market share report. So we feel that we are growing faster than the market, which is our midterm ambition. On EBIT, 1,000,000,000.
And course, 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 and D investment in the industry. And the reason why we can't generate this and a key differentiator for us is our asset light and flexible low cost manufacturing footprint. Combined backlog at 1,000,000,000 and, order intake of 11. Another leverage for us is our installed base, of more than 83 gigawatts combined.
And of that, then 74 gigawatts under service. So with that, we go over to
Thank Our first question comes from the line of Klas Almer from Nordea Markets. Please go ahead. Your line is open.
Thank you. Yeah. And first of all, congratulations on the strong first quarter. I have two questions. The first goes to the margin you achieved in first quarter.
Has any product mix or regional mix impacted the margin? The first one?
So if we look at the overall gross margin in the quarter, I mean, you will always have certain mix but nothing extraordinary in this quarter. But we have a good volume increase, obviously, and Then I would say that the continuous improvement that we work with both on the gross profit line as well as the the fixed capacity cost continues. And obviously, that's why you see a very good leverage from the overall volumes in the quarter.
Sure. From the last 3 or 4 quarters, there's not been any unusual favorable or unfavorable projects delivered
I would say it's a solid normal, fairly normal quarter in Q1, but you also remember that you saw growth compared to last year in the service base that obviously with these type of margins also have a very positive impact on the quarter. But I, as a general remark, I would say it's a fairly normal quarter.
Okay. And then my final question or last question is about your order intake you showed a slide with market shares, and honestly continues to exceed sensors or expectations, but how does it evolve compared to your own expectations?
No, I mean, as I said, I'm happy with order intake in Q1. So, and I'm, I'm happy with our position in the market overall and, of course, the performance in market share, during last year. I mean, those reports that we show here and referred to, methods differ a little bit between grid connectivity installed and so on. But of course, I'm really pleased with the overall trend that I think is pretty there.
So should we read that as a, it's also exceeding your own expectations?
I would say that the order intake is in Q1 is solid.
Thank you. Our next question comes from the line of Kristin Johansen from Danske Bank. Please go ahead. Your line is open.
Yes. Thank you. So first question is on the U. S. Outlook.
Ana, say, back in November, you stated that you expected the U. S. Market to decline in 2017, which you repeated in February I would assume you have a much better visibility being in May now. So do you still expect the U. S.
To decline in And obviously, we have seen you take decent market share in the U. S. So is it fair to assume that your delivery should not decline in 2017?
No, I mean, I haven't changed my view since, as you said, I mean, we still expect, And by the way, I mean, it wasn't just my view. It was actually the external market analysts that we collected are expecting 2017 to be lower than 2016 in the U. S. From a delivery point of view. So no change there.
And, I mean, I will not comment on on our specific volumes in the market, I mean, during the year.
But if you look forward on the U. S. For 2017 now and compared to how your outlook was in November, is it still the same outlook or is, I mean, has anything changed?
No, it's still the same outlook. So as I said, I mean, our expectation is, build up up to 2020 as we communicate in Q3 last year. And I mean, that's still our best estimate as well.
Fair enough. Then my second question is on the service margin. If you adjust for these 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. They continue improvements and the leverage also here from a cost out perspective continues and starting to pay off because the volume is certainly getting bigger. So that gives definitely a leverage. Then the integration of the 2 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 than the plan, the original plan that we have.
And then the write off off, as you rightly point out, is 40,000,000 in the quarter. I would say that the write off of obsolete inventory is, is the regular assessment we do, every quarter? And this quarter, we decided or it was the right decision to make the right of obsolete inventory. Of 14,000,000. But overall, it's continuous improvements and focus on the cost level also in the service business.
But would it be fair to assume that this margin level should continue going forward?
I mean, we say stable margins, so, and that is what we have communicated. So that is the continuous answer.
Thank you. Our next question comes from the line of Akash Gupta from JPMorgan. Please go ahead. Your line is open.
Hi, good morning, everybody. Thanks for taking my questions. My first one is on China where you are looking to market share there were some headlines around the GM that you're looking for partnership in the country to get a bigger share of the market. So maybe if you can update on what you mean by that?
No. With that, I'm I'm really pleased with the performance, of course, in China in the first quarter on order intake And, and to be one that's not just the first quarter. We have said or I have said that, objective is, year on year growth. And I have also said that we need to put the enablers in place to shave that, which is, localization, deeper localization of our products, bringing the latest technology and products to the market, including 3 Megawatt We have also done some changes on, on the setup, an organizational setup, but At the same time, I've also been clear on that we are also dependent on that, the segment of the market, that this, the sort of 20 year IRR segment, that, that, which is the segment that we addressed, that, that also grows all the time. So Of course, it's, it's I'm really pleased with the performance in Q1.
I must say that, of course, I expect orders to be by nature, all of us is lumpy and probably even lumpy from our point of view in China. So I prefer still look at the development year on year in China, but off to a good start. When it comes to partnership, I think Nothing has changed in our strategy on, on how to address China. It is about organic growth, then of course, to partner with customers, in a day percents in China, I think it's always an objective for us. So, so we will continue to work on that side.
And as you know, many of the big customers in China, are, conglomerate in the utility industry. But for us, it's the strategy is to sell all products to those customers.
And my second question is on U. S. Just wondering, have you delivered all the PTC components order in Q1, or is there any left in? Left for Q2?
Oh, the absolute majority is delivered in Q1. The grace period was 105 days. So absolute majority in Q1.
Our next question comes from the line of David Boss from Barclays. Please go ahead. Your line is open.
Good morning, Mauricio. Good morning, Anders. Thanks for taking my questions. I would like to look a bit more into the U. S.
Really. Surprisingly perhaps. What are you hearing about the developers' pipeline for 2017? I mean, I hear your comments on a slow ramp up to towards 2020, but it occurs to me that, you know, now that we're in May, we should defirming up on what, 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.
So if you could provide 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. I mean, as I said, or maybe I didn't say that, but, I mean, if you look at order intake in Q1, in the U. S, we're definitely happy with our order intake. And as usual, with the U. S, we are in, in constantly close contact with our customers.
And of course, also use the flexibility we have with, a very U. S.-based supply chain. So so I mean, there is nothing, nothing sort of new in that, I would say. So, I mean, from my point of view, we're happy with, as I said before, with the market share that we've taken. We're happy with the share of PTC components, that we have secured.
We are happy with order intake in Q1 that we've done. And it's 1st paid ahead now to firm up projects according to customers demand.
Okay. Fair enough. Then a question on the service business. I noticed that you increased your megawatts on the by quite a large number, about 3 gigawatts for this Q4. That clearly triggered a lot of volume increase, which in turn then drove that, that great margin.
Could you comment on the big increase firstly? And then 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 a need to be written off? Or is that something that is still occurring. You still need to be building up those inventories ahead of, you know, some future or 10 years out, you just can't see, you know, when you would need it or if you would need it. And therefore, you know, this, 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 us for as long as we, 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. Then, I mean, To start from the beginning, I mean, we under decided to divide the 2 businesses. So 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. And the inventory write offs have happened before, maybe in a more lumpy way. But It's not that we're building up for anything. It shows that we do a much 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. So it's nothing random or surprising in the quarter. It's just a regular run business from that perspective. And then your order intake question, David, if you can repeat that one.
No, so it was more on the megawatts under service in the service business, clearly, which ticked up to 74 gigawatts for the 71 at Q4. And 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. So nothing extraordinary.
Mean, 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, in the megawatt number, that you will be fairly lumpy.
Okay. So there were no kind of big project wins or the type that you announced last year with sure, something like that.
No. And 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 there is it's a type of business where you will see lumpiness That's why it's probably easy to see it on a 12 month rolling.
Our next question comes from the line of Francois Blom from ABD. Please go ahead. Your line is open.
Thanks a lot. A couple of questions from my side also. First of all, regarding the mark and then 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. And do you think that we are now sort of 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. Is your view on that? That's my first question.
I think, I mean, from an industry perspective, I think that the consolidation that we have seen, is probably fairly natural. I mean, that's, I think, what we've seen in Albert in reached our work quite a lot of, of players with, then limitation when it comes to to, footprint and, independent on sort of a strong home market. So I think that we see a consolidation in the industry overall, I think it's a fairly natural development. Then of course, it remains to be same if this is it, so to speak. I mean, remember, we did all your intention with MHI fairly early on all shore side because we felt that that made a lot of sense on the size of the offshore type of project.
So I think natural development, then, it's always hard to speculate on, on the future. I mean, for Vesta, point of view, I mean, the K difference for us is to global reach that we had established since before. It is about scale, which we have, about the flexibility in manufacturing and a good manufacturing for print with scale and geographical spread. It's about the scale in the installed base and number of people. And, I mean, it's about the technology and service leadership.
So I feel, as I've said before, comfortable with our position. And then of course, I also think it's a natural thing that this industry is consolidating.
Okay, Anders. But wouldn't you say that sort of these sort of 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 And it's, it's not and maybe it was me who expressed myself a bit unclear. I think auctions and competitive Thendos is, is for me, about the same thing. It's just, so I think if you look at It's not new. It's just that it sort of penetrates more and more markets.
I mean, I would argue U. S. With, compared 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. And I mean, we're seeing the same thing in Europe and Middle East.
So it's a, it's a tram has been ongoing for, I would say, the last one and a half year, at least, maybe 2, probably, and U. S. Even longer. So But I agree with you that a market based tendering system overall, of course, makes it even more important with the factors that AES talked about.
Okay, that's clear. Then my second question is 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 what do you see in these repowering projects? How much of the projects that are being dismantled are actually being replaced by onshore Windhauer, is there any threat of sort of that market share being being lost to, for example, solar or offshore wind?
No, that's that's what we say. I mean, it's still I would say that the market where there is a more substantial share of the market that is repower is Germany in all euro And then, of course, sorry, in Denmark, where, where the fleet is, yes, the aging. So, and then the repowering in, in, that we've seen in the U. S, is very much built on how you can qualify under the current PTC system, with the repowering. So they are still not yet specific.
I have to come back if we have some estimate of Germany on how much is we him because I don't have that on top of my head. But it's there, it's a more substantial part of the business. And But then you're repowering the same, parts, but with the latest technology. And And 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 to permitting and so on. It's usually a very positive business case.
So I expect, after 2020, we will see a substantial repower in market, more broad based when we start to reach the 2025 year lifetime of the installed base. But I haven't seen any examples of, okay, we skip the park and do another technology to speak. It's usually wind pork by wind pork, so to speak.
Thank you. Our next question comes from the line of Marcus Belanda from Carnegie. Please go ahead. Your line is open.
Thank you. Two questions for me as well, please. First of all, your revenue in Q1 was $400,000,000 higher than last year and your order backlog at the end of the quarter was about the same level as last year. In which scenario do you see your annual your revenue for 2017 end up in the lower end of your guidance range?
Okay. So yes, you're right. The revenue is 29% higher in the quarter. And as both me and Anders alluded to, we had the PTC components for natural reasons also delivered here in Q1. But I would say also you have a good spread in the quarter, if you, if you so like.
And then the guidance that we have provided, and Anders said earlier, is something that we feel comfortable with. And what we normally, what we will do this year as well as previous years is obviously going for the higher range of of the guidance. But I mean, there's nothing, no changes in the methodology that we have used. And 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, but the risk assessment remains.
And it's hard to say exactly how that will pan out as only 1 quarter has passed so far.
All right, understood. Thank you. And second question, some offshore developers just about to build wind farms at 0 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?
I think that first of all, I think it's, of course, very encouraging that, that also in offshore, we see a path to grid parity or subsidy free or, or, yeah, many name name on the state where we all want to counter. So I think that 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. So, I don't expect, I don't expect that to disappear the sort of levelized cost of energy advantages that we see in one shore compared to offshore, in the mid term. So, I mean, for me, it's overall, of course, a positive development that we actually get access to, more, more sites than what we have in a pure onshore scenario, and that we see, or that the industry see a path to grid parity also for offshore, even if that, those estimate is that, that will take a little bit longer time.
And I also feel that we, greatly contribute to that, of course, with the, the bigger turbines. That we can deliver to the market and that we have in the market.
Okay. Thank you. Just a follow-up. So do I interpret that correctly? Are you saying basically that onshore wind will reach grid parity before offshore wind?
I mean grid parity is, of course, a very another big discussion. But yeah, I mean, everything else equal. I'm saying that the liberalized costs, we are not the one 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 Pete Natesto from One Investment. Please go ahead. Your line is open.
Hi, thanks very much for two questions. One is just on China, where you talked about, you obviously a good quarter, and you gave some conversation. Just to be more clear, are you suggesting that the Chinese business pick app is now kind of returned and is sustainable? I understand it'd be lumpy, but is it a sustainable pickup now? And if so, is changed in either the official setup or your setup to lead to this?
And the second question is just looking at Europe or Germany. And given the setup changes and quotas and so on, do you have any sense as to whether orders are being front loaded or back loaded this year
Yeah. I mean, we shine, what I can say is that our objective on on, 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. So and that will will, will remain as part of our strategy, midterm strategy going forward. And I I said also that I'm, 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. And then I also said that, of course, the segment that we are relevant in, in China is the segment that look at, at the 20 years, 2025 years, IRO segment. We are less relevant in the pure CapEx segment. So we are also dependent on how those different segments developed over time in the Chinese market. On your questions on Europe or Germany, I mean, as I said also, we had, the first auction in Germany just, I think it was the other week when we expect the result of that in mid May.
So I think it's And on the other hand, then we have a very, what you say, a very controlled face out facing from, so we have the current feeding tariff system that is and has been for some time, then, dropping down over time. And then, you have the auction system kicking in before the feed in tariff system so to be completely dropped off because it's the trigger point is, is a permits that you have got in under the different schemes. So I mean, our expectation is that, in 'seventeen, of course, you will see a lot of the volumes will will come from the old system and the old permitting, and then over and you will probably see those volumes also coming into '18 in the market. And then towards the mid end of 'eighteen, the auction, system and targets is going to be the one that dominates the market.
Right. But you don't have a sense of how the FX phasing
No, I think that remains the same. I think the best indications on that on the total market size is to look at the the permitting volume in Germany. And there is, I don't, I don't remember exactly, but I think there is about, 6 month lag on those numbers coming out.
Thank you. Our next question comes from the line of Alok Katre from Societe Generale.
Hi. Alok Katri from SocGen. Thanks for taking my questions. Just had a couple of ones. One is just a follow-up on the PTC.
I 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 there wasn't much it didn't seem like there was much of reversal within that. And then 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. So just wanted to confirm how those dynamics are sort of playing out. And my second question was just a bit on the capital allocation.
I think there were some comments from Bert, not Berg recently about investing in energy storage and related areas. So just wondering what is driving this thinking? Are we talking a big sort of M and A related investments there or more R and D style investments. And then just what's driving diversification outside of wind and are we sort of looking a bit more beyond wind into other renewable energy areas as well?
Okay. If I start with your question on the prepayments or the down payments for the PTC, And as you rightly point out, we delivered here in Q1, but we have paid in Q4 of last year. So no cash flow impact from that. And 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, the, offices in a house, as I pointed out. And then the overall working capital element that you alluded to here in the first quarter.
If you compare to last year, I mean, it is it is a regular development in the overall working capital. So we are building inventories we see an increase in payables, which is normal in a quarter in a Q1, as that's when you prepare for the remainder of the year.
I just want to, I mean, if the prepayments came into the fourth quarter, and then they flew out in the first quarter and then you just produce and sell inventories in the first quarter then. 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, but maybe you can take that afterwards. Yes.
Okay. On the second question, I'm happy I got that one a bit easier, or mean, our investment strategy hasn't changed as we've said before, or our M and A strategy. I mean, bolt on acquisition, service based, technology space, I mean, the normal make or buy type of decision early on in the technology process. So that hasn't changed. We are, as I also said, in the, in the strategy update, the type of technology that we can integrate wind turbines in order to increase, penetration of wind or that matter in order to continue to lower the levelized cost of energy, for wind, that is, of course, of interest for us.
But, just also to be clear on that, I mean, I don't see Vestas as a battery manufacturer or as a solar panel manufacturer, but on the other hand, I think it's very important that 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 NLD Management System. And that we, if we can also find ways to reduced the total cost in hybrid type of system integration, between as we see in the market, now they are from a scale point of view, they are very small, but we see, a request 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 a win for us.
Yes, thanks. And sorry, if I
could just follow-up on the auction and the pricing, as well as just on some discussion previously. Simple straightforward question over there is, are we, are we getting to a stage where customers are getting more aggressive with the, let's say with the for cost deductible, 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 because some of the production numbers seem very, very low.
I think, I mean, as you say, I mean, of course, the auctions is the new, new. It's a, it's a thing that we see all over the market, but it's not new. I mean, we, our estimate is that we have, taken a considerable amount of gigawatt in auctions during the last 2 years. And of course, to deliver a lot of those auction projects already. So probably around 4 to 5 gigawatts, something like that, is what we have taken in auction system.
And if you then put on compared the tender thing, like we've seen in the U. S, I mean, we have a big volume there. But it's a very competitive market. I mean, both competitive team tendering and auction. And as I said, last quarter, it's for sure so that we have to fight for every deal.
And it's also so that an auction type of system compared to the old feed in tariff system. I mean, simply put it in, in the old feed in tariff system, the projects that could get under the hurdle rate they got billed. So you had many winners, so to speak, in auction type of system, of course, you have, fuel or windlass. So, so for us, that's the influence the whole way we'll go to market, how to partner earlier with the customer, how to optimize our offer together with the customer. And of course, there is a pressure on all parties in the chain to get to the lowest possible due prices, and therefore, win the auction.
So it becomes even more important with the feet of the turbine to the site that your time, your turbine offering, when the project is going to be built, that the cost of capital on the customer side is optimum that the IRR rate reflects the markets and so on. I mean, there is so many parameters in an auction to reach electricity prices And turbine prices is one of those parameters, but there is a lot of parameters in that kind of setup.
Thank you. Thank
you. Our next question comes from the line of Klaskill from Nikolas Markets. Please go ahead. Your line is open.
Yes. Hello. And a follow-up question to these, yes, discussions about the auctions. I was just wondering whether you are prepared with the new turbines for the auctions in, yeah, in Germany, France, Spain, And I believe actually that you, yeah, you launched an optimized version of a turbine the other day. That would be my first question.
And secondly, you had a pretty low cost base here in Q1. And, yeah, very tight cost control. I was just wondering, can you keep the cost at current level for the coming quarters or should we expect an increase That would be my questions.
Yeah. I mean, if I start with the product side, You're right. I mean, we launched some new, 2 Megawatt turbine variants, last week. And I mean, where we again then take an out of step in lowering the levelized cost of energy by increasing the rotor sizes and also then, that we cover, the different wind classes. And you will continue to see, new product releases from us because of course, that is all way, as we have shown, the lost, 4, 5 years, that there is a difference between price per megawatt and levelized cost of energy.
So I mean, 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. And of course, our aim is to have, as good fit as possible in today's, different auction, and competitive tendering markets. And therefore, you need a broad portfolio, which I feel confident that we have on both the 3 Megawatt side and the 3 Megawatt side with different roles rotors and different power ratings. So that's going to be the ambition, going forward, as well as to have a compared the portfolio.
And 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, and as Anders alluded to here also on the LCOE, cost control is essential also from that perspective.
So, 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.
I've got two questions. The first one is on, 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 interior orders, which sort of support or which will, which will impact what happened 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?
Perhaps some additional color around the US because there's obviously some continuous construction type orders or conversions from your PTC component orders. And also in Germany, there was, there were the building permits at the end of last year. So and orders were expected this year. So some color around the the employer orders would be quite helpful. That's my first question, and I'll follow-up with the second one.
Yeah. I, I don't think we said, our order coverage for the year, loss quarter or related that to any range in the guidance. So, at least not to my memory. So I mean, what I can say on the infraut 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.
And you're right. I mean, that is, of course, one, one, one key parameter in our, in our revenue, guidelines. So, it follows our normal pattern. And of course, it's, as I said, it's a prem or on that, but we, we don't talk about the type of percentage order coverage over the year. It's spot part of the equation to come up with the outlook that we have and the other parties, of course, the normal, risk assessment that Marika talks about on what then finally will be transferred to the cash more within the year.
I'm thinking, Dominique, I have talked about and, all your questions there. And And, I mean, we see, we saw a saw and see a high plummeting rate in Germany, that, that, of course, then it's beneficial for the customer, probably, I mean, that, of course, we don't know, since there is also a a fall in the fade in tariff, and we don't know the prices in the auction. But if it follows a normal pattern, then it's probably, beneficial to get it in, in the older fading tariff, if you have a permit. And then, but 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. And I feel we have a good position in the market, and we have the ability to deliver on cash some more requests. And those are the parameters that we are working on to optimize for Vesta's part.
Cool. So would you still kind of expect some in prior year or 2017 delivery orders in the coming months? Is that reasonable to expect?
Yes. I mean, that's probably reasonable to expect. But I mean, we haven't changed our or order announcement policies. So we announce all those when they are film and unconditional.
Cool. Thank you. Moving on to my second question. In your comment on the press release, you mentioned that you had a good start to the year, which is quite obvious. And then towards the end, you also meant 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 were a bit cautious on delivery into the rest of the year, what prompted that sort of low hard work left?
Maybe I shouldn't be too much into that. Maybe I pointed out that we we always work hard. So, I mean, there was nothing no other consideration or or secret code was in Hamburg. It was, I mean, it's, yes, 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 hard or for, but just make sure that we continue with executing really well, and that is hard work.
Just a small sort of accounting sort of reporting question. You used to report this megawatts under completion. And we see from the report that there's no megawatt on the completion now. And that was quite a useful indicator for the market to understand sort of few quarters and we'll stop reporting that. So can we expect it to come back at some point or you're not going to report it?
Yeah, point taken, Pinaki. And if I see I actually have, yes, that it will come back. So we understand.
Thank you. Our next question comes from the line of Sean McLaughlin from HSBC.
Good morning. 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's 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 to 15 Megawatt Offshore turbines will be available by 2023, 24?
Yeah. If you'd say, if I take India, first, I, I, I think, for sure, I mean, it's a very interesting market. I mean, the the seats the Gigawatt target that, Indian government have to 2022. I think it's an ambitious target. And, And if I look at the delivery that went into India last year from a market perspective, it's definitely very interesting market for us.
And that's, of course, the reason why we've done the investment we have in the factory and also now in the, the setup. So we are working to get our in place. And when we have those enabled enable us in place, then of course, we can, we get more relevant in the mod. It. The market is, is a, then what has also happened in India, very short term, then, is that, there was an auction, sometime back, where we saw a drop in, again, not in the necessarily turbine prices, but in the energy prices in the auction.
And, as usual, I was about to say, and I think you, you helped me talk about this before, that if you don't have a a very, very clear phase in phase out type of rules in the market. Course, when you change regime, for natural reasons, you get a little bit of a, of a short term uncertainty until the new shamed, then kicks in. And that is, I would say that what we see short term, in the Indian market now, because of this change, in growing to auction, but not auctioning out the fuel volumes of the market. So short term, I think that it's fair to say that there is a bit uncertainty on volumes. But mid term, I'm confident that it will be a big market.
When it comes to development, we have done none or extremely little own development so far in India. It's, it's something that we are lurking at. I mean, we are as I think I've said before, we are, we prefer to work with the local developers that setup that is difficult in the India because, it doesn't exist to the same degree. As in many other markets. So we are still working on finding the for us best way forward on that.
We have signed agreement with some local developments where they do the normal development work. If that is enough to cover the market, that remains a bit to be seen. Yeah. Dong, no, no, sorry. I think, I mean, 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 the turbine part of that compared to, also an onshore project this is a fairly small pond, maybe 35% of over a levelized cost of energy. And then you also, I don't 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. So I mean, 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, far from the overall assumption that the, you referred to that the door has done in this case. When it comes to, turbine sizes and so on, for us, we have changed our policy when we have a new turbine to announce, we will announce that new turbine and, 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 Megawatts.
If I could just come back to the Indian point or rather on project development, I mean, where are you spending more on project development, which markets?
No. We are not spending on what 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, I mean, it 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, we, it's an insignificant participation we're talking about.
Got it. Thank you.
Thank you. Our next question comes from the line of Gregory Cottrill 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? And then I'll follow-up with a second if I can.
Okay. Yes. And I think you, we actually had that discussion today as well. Obviously, that is positive, but We will say what we have said previously, and that is that we are effective still in capturing that. So we don't see that as a tailwind or an obstacle than long term.
That is obviously a different question. But 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. The second question is about ASPs in terms of your revenue this quarter. You saw an increase an increase on the quarter in terms of your revenue ASPs for turbines. What's happened here is it is product mix mainly? Or and secondly, how should we see this going forward?
Okay. So the you're talking about the average sales price on the turbines, I guess.
On the, 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. So you shouldn't read too much into that. Average price, sales price. Great.
And can I follow-up just one more in terms of your turbine annual products of development? I know you talked about it earlier on in the call. And you had a couple of decent signs, turbines in commission over the last few days. Could you give us a bit of color as to where you see the further hold 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, I mean, overall, I'm very happy and confident with all turbine product portfolio and, our technology. So I mean, in the market today, you basically have the 2 megawatt platforms and variants of 2 megawatt platforms and 3 megawatt platforms and variants of the 3 megawatt platforms. And from a VESTS point of view, we have, for a long time, been in both the 2 Megawatt platform and the 3 Megawatt platform. And, of course, that is also what has enabled us to have a very good geographical reach. So 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 of plenty of land. You have the 2 Megawatt platform has been dominating. What we see now over time is, of course, that, that, you start to get actually, you start to get down the levelized cost of energy also on the free Megawatt platform to the extent where it becomes a little bit less clear cut that it is this pad constraint that that determine the platform. So we see, for example, U.
S. Has been a traditional, very strong tumor platform market. We knows though to say that the framework platform comes in. But it depends all on the wins paid, the, the turbulence of the air, the tip pipes you can have and so on. So what's important for 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 will be $160,000,000 and $120,000,000. So And that development will not stop, so to speak. I mean, that's a development that we will continue to do. And that, and that determines then, that you can cover as many markets and wind regimes as possible.
And, and, of course, time to market is all important then because of course, it's also against the competition. So I think then we go to the last question.
Our final question comes from the line of Versal Ahmed from SEB. Please go ahead. Your line
is now open. Hi, Anderson. Marika, two questions from my side. Firstly, on head count and both the average and quarter figures are up both year on year and sequentially. Can you try and help us explaining what is driving this and how should this be panning out for the full year?
That's my first question, please.
Okay. Here I can't. I think it was fairly stable or around 22,000.
It was still slightly up both year on year and also all in quarter. So just thinking what is the explanation for this? I mean, it was up quite nicely, especially outside Europe and Africa.
I would say that, obviously, as Sanders is looking to, we see a stable, stable work force here in Q1. Then depending on the overall activity level, you can see some fluctuations, but that will be adopted to the activity level. It's primarily blue color, as you understand. So there's basically no changes in the overall headcount.
And have you ramped up or ramped down in Q2?
Too 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 4700. And in Denmark, there was also a small reduction of some 100 people. So we're down to 4370ish level.
So again, a stable development in
thing a stable development in the workforce. Should we interpret that as that revenues or volume shouldn't significantly from last year. Would that be a fair assessment Oh,
and sorry for bad memory, but we also had an increase in India for obvious reasons as we inaugurate the factories. So I think we have some 300 plus people in India. That's where you see definitely an increase.
Okay. That's clear. And the second question that's relating to the U. S. Market.
And can you and just maybe comment on discussions regarding PTC components for the 80 percent PTC. Have you actively started those, the those discussions with with your U. S. Customers?
Yeah. I mean, for sure, the discussion as thought it, but I would say it's way too early to have any, firm or opinion on that. I, my expectation is that, that we will not really been able to conclude until Q4 or end of Q4. But of course, we discuss it with our customers.
Okay. That's clear. And then just to follow-up question on the U. S. Market and then PDC.
I noticed 2 out of 3 U. S. Orders, which you won in Q1, they were not PDC component orders, but they were started sort of construction. Is that according to what you have been expecting originally? Have you worn 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 it's natural that, the the earlier project so to speak is more continuous construction. And then over time, it will be more a PTC component. But it's hard to judge because you also have potential flow in between that you start to continue construction and you could potentially use speed components. But I think generally speaking, I think it's fair to assume that, you will see of course, for good reason on how you qualify it, you will see more continuous construction in the beginning of the period.
And then it will turn to more PTC components towards the end of, of, of the period. But that is also actually a bit of cannibalization. Session probably in between. Okay. Thank you so much.
And again, thank you all for your interest and for calling in. And I'm I'm sure that we will see some of you during this next coming days at least. So thank you