Good morning, everyone. Thank you for your interest. Thank you for calling in to this full year 2016 and Q4 earnings call. As usual, it is me and Marika here, and also part of the IR team. Let me start with the usual disclaimer slide and then go straight into the key highlights of 2016. All in all, of course, a very solid execution leading to record high financial and operational results. And of course, a year that I and the rest of the management team are extremely satisfied with. Looking at some of the highlights then, full year guidance, met on all parameters on revenue, EBIT, free cash flow and investments. Also very satisfied with the high order intake of 10.5 GW across 33 countries. Again, a testament to our global reach. Also leading to the highest backlog ever for Vestas at EUR 19.2 billion. Very high ROIC at 265%.
Also, the safety performance continued to improve both year-over-year and compared to our internal targets. We recommend a dividend payment of DKK 9.71 per share, a total of DKK 2.2 billion and per share, almost a 50% increase year-over-year. We have also initiated a share buyback of EUR 95 million based on the expected net proceeds from sales of the office building in Aarhus, here in Denmark. Overall, strategy firmly on track, good execution. As normal at this part of the year, we have also done a revision, an update you can say, that we do of the strategy every year. And I will come back to that as well. Let me start then with orders and markets and then hand over to Marika for the financials.
Looking at Q4, strong order intake at 4.5 GW, up 40% year-over-year for the quarter. Average selling prices remain stable. We saw an uptick to 0.95 in the quarter, very much impacted by scope, mix and to some extent FX. Looking at the order increase, the main contributor, actually about 70% to the order increases were U.S., Australia, Germany and France. All in all, of course, a very good development and especially in the U.S. that we will come back to. As I said, we feel that the prices remains fairly stable. We saw an uptick in the quarter. It is and continue to be a competitive market. We definitely have to fight for every order. But good to see a stable development.
Should remember as usual that the price per megawatt depends on a number of different factors, turbine type, scope and of course, in the end of the day, the uniqueness of the offering. Looking then at orders for the full year at 10.5 GW. Also good to see that we saw a growth from all our regions, starting with Americas, up 5% for the full year and 84 in the quarter, driven very much by U.S., but also good activity levels in markets such as Brazil and Argentina, fairly new markets. Of course, in Q4, the big impact was the PTC orders in the U.S. EMEA, that I have talked a lot about, being a stable region, think very encouraging to see orders growth of 32% year-over-year.
Of course, Norway with 1 GW had a significant contribution. Also a very good activity level in many countries such as Germany, France and Sweden. Those are the same markets actually plus U.K. in Q4 that drove the growth to 56%. Also good improvement in Asia Pacific from a considerably lower level, but up 10% year-over-year and 72% in the quarter, driven by Australia to a large extent, but also China almost on par with 15% from an order intake point of view. Looking at delivery, up 29%, so really high activity levels throughout the year. Again, also encouraging to see that actually for the full year, all regions contribute to the growth. Starting with Americas, up 44% for the year, 62% in the quarter. Very good development in the U.S. also on the delivery side, as well as several countries in Latin America.
In the quarter, 64%, of course, also helped by part of the PTC components that were delivered in Q4. EMEA up 9% year-over-year, broad-based as I talked about, Nordics, Germany, offshore, the 3 MW platform here, I should say. U.K., to some extent, Belgium slightly, more than offsetting the decline that we saw in Poland over the year. In Q4, a decline very much due that we had an extremely strong Q4 in 2015 in Poland. Good increases, again, from lower level in Asia Pacific, plus 83% for the full year and over 100% in the quarter, very much driven by China. We took orders in 33 countries across six continents in 2016. We also installed in one new country, taking our total footprint now to 76 countries, and signed orders in two new countries over the year.
Global reach, important leverage for Vestas and also important to continue to build on. Looking at the backlog, as I said, a record high at EUR 19.2 billion, EUR 2.1 billion improvement in the quarter. We saw an increase on the turbine side of EUR 1.3 billion and on the service side of EUR 0.8 billion. Again, a good development. Of course, U.S., a lot of interest in the U.S. market. I must say I'm really pleased with our performance. Deliveries of approximately 4 GW during the year and an order intake of approximately 3.5 GW, enabling a significant future potential. As we expected, and we talked about in Q3, we had a very busy quarter in the U.S. up to, I would say, the last day of the year. We actually had a very busy year also on the delivery side.
Our factory output from our factories in Colorado were up considerably on delivery also compared to 2015. On the order side, we took orders on PTC components, so future product pipeline potential of 1.64 GW, including repower, and normal orders or non-PTC components order of 1.8 GW. All in all, for me, a very satisfactory result. We have, over the last year, improved our market share in the important U.S. market. As I also talked about in Q3, our focus was on the order side to qualify the maximum potential in this market. If we look at overall market expectations, and again, these are numbers from MAKE Consulting, as were the numbers that we referred to in Q3.
MAKE has a number of the overall market of 4.5 GW in PTC qualification and then around 10 GW of start of construction, and estimate the market approximately 40 GW, again, MAKE numbers from 2017 to 2020. Of course, as you can see on the numbers, there are considerably upside to that estimate, looking at the qualification and start of commenced construction. I also think it's a fair estimate to assume that there are some over qualifications in the number of PTC components. A very good, very stable market with good visibility. Of course, now we need to maximize the potential of the qualification that we have secured.
Looking at the joint venture that we have for offshore together with Mitsubishi Heavy Industries, we've also had a good year with both building the backlog that now is at 2.5 GW year to date, or year to yesterday, I should say. Announced orders was at 1.4 GW and preferred supplier 1 GW. From an execution point of view also, a year with a lot of activity where the joint venture started the manufacturing ramp-up and started to deliver, I should say, because it's not completed, the first 8 MW project. With that manufacturing ramp-up, also employed about 500 additional people. With that, I leave over to Marika to talk about financials.
Thank you, Anders. Again, what Anders have gone through with you in terms of good activity throughout 2016 is also well reflected in the full-year P&L. Here you see revenue increase of 22%. More importantly, you see the leverage on the EBIT. We have an EBIT in absolute numbers increasing by 65%. Gross profit is up 41% year-over-year and well reflected in the gross margin in percentage. We're delivering 20.8% compared to 17.9%. Gross profit is driven by the higher revenue, very good absorption in the production yet again. A very favorable product mix and the improved average margins, also coming back to the stable price development that we see in the market. Fixed cost is well under control, we have increased 9% compared to the revenue increase of 22%.
Again, very good leverage, as you can see on the EBIT line. You also see the income loss from our joint venture of DKK 101. That is both a reflection of the operational result in the joint venture, also you have a certain degree of elimination in that number, as we have discussed before. This is, I would say, a reflection of the ramp-up of the V164 and therefore also the depreciations on the same technology. Q4 income statement is also an improvement compared to last year. You see revenue up 9%, gross profit up 16%, and EBIT up 25%. Yet again, a good leverage on the performance of the company. You also see that we have delivered 15.2% compared to 13.3% last year. Again, a good improvement in the overall margin.
The leveraging on the SG&A continues to be a focus area, obviously important that we continue to control. I think we have proven that for the last few years, that we manage growth well without increasing the cost base. We are now down to 6.9% of revenue in Q4. I would say a very good achievement in the company. Again, well under control. Service business continues to grow. You see a growth of 15%. That is including both the two acquisitions and organic growth. More importantly, despite two new acquisitions and integration of the two in 2016, we deliver a margin of 17.2%, so more or less flat compared to last year, which I think is a great achievement. The integration obviously is well on track of the two acquisitions.
The backlog of the order backlog, Anders mentioned, is growing at a good and satisfactory level. Balance sheet continues to be strong. You can see the net debt performance. Again, a very good improvement. We'll come back to that later. You know that we got a lot of orders in late in the year and considerably high amount of prepayment, i.e. down payment. Net working capital, therefore also because of the prepayment, is at a very good level, an extremely good level that is also well reflected in the cash flow for Q4, which again, I will come back to. Solvency ratio is well within the boundaries of the midterm, 32.1%, and we have stated we should be in between 30% and 35%. Again, a good level. Change in working capital over the last 12 months, we ended the year at a negative of 1.9%.
That is again, a reflection of the prepayments that you can see also for the last quarter and obviously have a great impact on the cash flow. Net working capital, we are not expecting to be at this low level. I know we're not guiding for the net working capital, but it is an unusually good performance because of the late incoming payment in the latter part of the year. I would say that together with the cash flow is probably a combination, is a fair assumption for 2016 and 2017. We will make deliveries in the beginning of the year, but we got paid late in 2016. Again, well under control and a very good performance. Warranty provisions and loss production factor, we continue to consume a low level of warranties. You can see that we have increased, so we are up 2.2%.
This provision is obviously reflected in the Q4 numbers. We have chosen to increase because of very high activity level, more outsourcing. It's no specific reason for it, and we will go back to the normal 1.9% is the expectation for next year, or this year rather, sorry. Loss production factor continues at a good level, below 2%. Again, the good work really pays off. Cash flow statement for the full year. Here you can see what we have been striving for is obviously to continue to improve the earnings. Cash flow from operating activities continues to improve for the full year. The change in net working capital here you see a more reasonable level. You will see the difference in Q4. Cash flow from operating activities obviously also improved and at a good level. Investing activities is again what we have guided for.
Therefore you see free cash flow excluding securities is DKK 1,564, and cash flow from financing activities which is share buyback program and dividend that we paid in 2016. Q4, here you see the change in net working capital. You see a positive swing of DKK 638. That is a reflection of the late down payments that we received in the year. Some of that will be now delivered in Q1. That, again, is why I think it's more appropriate to look at the cash flow as a combination in terms of 2016 and 2017. Free cash flow for the quarter is, for obvious reasons, very high. You see here the latter part of the financing activities, i.e. the share buyback. Total investment increased compared to 2015 by close to DKK 200 million.
The main reason for CapEx is investing in blades and also technology as we have done previously. You see some extraordinary items, and that is the acquisition of Availon that materialized in Q1 of 2016, and also the transfer of the facility in Lauchhammer from a lease to owned building, which have also reduced the cost. Capital structure continue to be met. We have a net debt to EBITDA well below one. We are actually -1.8. The solvency ratio is again well within the boundaries of 30%-35%. Good performance on the balance sheet. Capital allocation. The dividend per share proposed in DKK is, for full year, DKK 69.71. The dividend payout ratio, as you know, it states 25%-30% of the net profits. We are proposing the higher level. This needs to be approved at the AGM.
This is the proposal from our side. We also performed a share buyback program late 2016, or not, from August 2016. We are now, as we have, are selling the offices in Aarhus. We are suggesting a share buyback of EUR 95 million to start from February of this year. Again, that is the proceeds from the building sale in Aarhus. The overall methodology when it comes to share buyback has not changed. We will revisit that at the latter part of 2017. Return on invested capital continues because of extremely efficient balance sheet, but also good earnings continues to grow. We are at a very high level of 265%. Obviously, very good improvement compared also to Q3 that was at a high level. Very efficient on both P&L and balance sheet. By that, Anders will tell you more about the strategy.
Okay. As I started to say, this is of course the time of the year where we do an update on the strategy and any adjustment that we think are needed. Starting with the overall picture that at least some of you have seen before. Looking at the long-term forecast from the International Energy Agency, we see a very solid forecast for renewable and especially for wind. Renewable energy is expected to be about half of the additional capacity up to 2040, overtaking coal around 2030. Wind is forecasted to take the majority of this growth. The main drivers for this also remains. In OECD, it's a replacement market where the speed of the replacement depends on financial end of life of the existing generation and on the CO2 target reductions. Those are the main drivers on the timing in the replacement market.
While in non-OECD, the new build is to cater for the increase in overall electricity or energy demand. We also saw that wind estimated to approximately 18% of the new build capacity last year, the global penetration of wind around 7% today. The key to drive growth is of course wind's increasing competitiveness. Already today, wind is on par or below fossil fuel in many markets, and it's the most competitive renewable energy technology. We see that on a global global average base, but also within different regions, where, of course, the levelized cost of energy varies greatly, not just for wind, but also for the alternative sources. We have seen a very good development in the last 5 years.
For example, the levelized cost of energy in the U.S. has decreased by more than 50% in the last 5 years, we see similar development in other markets. The global average, according to Bloomberg New Energy Finance, estimated around 15%. $3.1 trillion is expected to be invested in wind up to 2040, and we expect a positive development in levelized cost of energy for wind to continue going forward. Looking a bit more in detail in the different segments of our business on the market forecast up to 2020, these are forecasts from Bloomberg New Energy Finance and from MAKE. On onshore wind up to 2020. We see stable high volumes in both forecasts up in this time period. A slight decline between 2016 and 2017, then a global CAGR around 3% up to 2020.
That is if I take the average of the two. Of course, China is forecasted to show a decline, a slight decline. If we exclude China, that of course, have a fairly big impact on the number, the CAGR from 2017 is around 4%. Again, these are forecasts that we think are relevant to use for us in our planning of the strategy. Looking a little bit more into the different regions, we can say that in Americas, the growth is primarily driven by the U.S. market, the current PTC structure drives the demand, is the main driver for the demand from 2017 to 2022, 2023. Also, a generally good support in several markets in Latin America. Brazil, short-term challenges, but the mid-term potential definitely in place, giving an overall CAGR for Americas around 5%, again, referring to the same analysts.
EMEA continue to be a key driver for the wind industry and definitely for Vestas as well. In Europe, it is the 2020 and 2030 renewable energy targets that provide stability. We see a general move to auctions in the different markets, that is, by the way, not just in EMEA, but globally. Germany will transition in the 2017-2018 timeframe. Good growth opportunities in Middle East and Africa from a lower base. On repowering, we see that market to start in this time period, primarily in Germany and Denmark, and also actually in the U.S. That's where we see the market during this period, then more global, after 2020. In Asia Pacific, the forecast is flattish for the total period, but there are some large changes within the different markets.
China is addressing curtailment challenges. Therefore, we see a reduction in the overall volumes in China, still on a good, healthy level. The commitment to wind remains. In India, there are ambitious targets in place. This is also a market that starts a transition to auctions and will start with the first auction this year, scheduled for March. We see good growth in Australia coming back. Then good growth opportunities in single markets throughout the region, all in all compensated for the slowdown in China. That's onshore business. If you then look at services, we see a good growth scenario. Again, this is from MAKE Consulting, showing about 9% CAGR during the next 10 years. Offshore also is forecasted to show an impressive growth from a CAGR point of view, even if absolute numbers are still small compared to onshore.
The market will start. We're seeing that in Northern Europe. Over time then move to Asia. We're seeing activities in China. Then more mid to long-term also to Americas. That leads me then to the overall strategy. We remain well-positioned for these market trends. The strategy is on track. We have fine-tuned our activities to reflect new opportunities and changes that we see in the market. Our two enabling objectives are to deliver the lowest cost of energy solution. That is really about the competitiveness of our wind turbine portfolio and our service portfolio. Best-in-class global operation. That remains. With this in place, we can deliver on our objective to be the leader in wind power solution and service solutions.
We have adjusted our vision somewhat to be the leader in sustainable energy solution. The reason for this is that we see more and more requests from our market, from our customers, to participate in projects and activities with the aim to increase the penetration of wind. That could be grid integration projects, wind storage projects, and how we can optimize the energy distribution, the energy control system by, for example, combining wind, solar, hydro, and storage. For us, always with the aim to optimize and penetrate wind further. The definition of the global leader remain. For us, it's about leader in revenue and generating best-in-class margin. Of course, to be the preferred partner to our customers.
If you look at the execution on our strategy, and the key achievements 2016, I would say that we do great progress on grow faster than the market. We had a 30% growth in delivery during last year. Also a record high 15% year-over-year improvement in orders. On the service business, we are delivering on our midterm strategy of growth of more than 40%. During last year, as you heard, revenue increased 15%. The order backlog was up DKK 1.8 billion. We have also further strengthened our capability in multi-brand services. On the lowest cost of energy solution, we have the broadest product portfolio in the market on two, three, and eight megawatt platforms. We continue to improve the energy production. For example, the three megawatt, we've seen improvements of up to 35% since launch.
Our industrialization and cost targets are met, and we have delivered to our joint venture the world's most powerful turbine in the eight megawatt platform. We continue to invest in innovation, multi-concept rotor, such an example, and also in new technology that can enable further reduction in levelized cost of energy. Best-in-class operation, it's all about margin improvement, and here we have delivered on both EBIT and gross profit improvement during last year. To summarize a bit our different business area and how we see them, we see stable growth in the planning period up to 2020 for the onshore market. Of course here, our objective remains to grow faster than the market. To do that, it will be important to continue to gain market share.
In the service business, as I said, we see an overall high growth in the market, and our objective here is more than 50% growth by end of 2020 compared to 2016. A high ambition to grow faster than the market, also in the service area. In offshore, where we have a partnership with MHI, the objective is to double the revenue over the next three years and the pre-tax profit breakeven by 2019. Of course, from a CAGR point of view, this is also an area where we see solid growth. As always, for us, it's important with the execution of the strategy. To do that, we need to continue to both build on and leverage our key differentiators. That will continue to be the global reach. Again, good progress on new orders and delivery during last year.
It's about technology and service leadership that will deliver the lowest levelized cost of energy, a full range of turbines and service offering, and also that we actually have the largest R&D investment in the industry. It's about scale, with the largest installed base of 82 GW now in 76 countries, 71 GW under service, and the data insight we get from monitoring 32,000 turbines. Our ambitions remains on revenue to grow faster than the market and be the market leader in revenue, to generate best-in-class margin on the ROIC over the cycle double digits, free cash flow positive, and we have also maintained our capital structure and distribution policy targets. With that, we go into outlook for 2017.
In 2017, we expect another year with a solid financial performance, with a revenue in the range of EUR 9.25 billion-EUR 10.25 billion, with an EBIT margin before special items of between 12%-14%. Total investment, approximately EUR 350 million and a free cash flow of minimum EUR 700 million. We should also say that we have accounted for the sale of the building in both the investment numbers and the free cash flow numbers. On the service business, no change. We expect to continue to see growth with a stable margin. With that, we move over to Q&A.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. We ask you kindly to limit your questions to two at a time. Our first question comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is now open.
Yes, sir. Thank you. My first question is regarding the U.S. outlook for 2017. Going back to your Q3 conference call in November, you stated you expected lower activity in the U.S. in 2017. Can you update us on whether that is still your outlook and also whether you have gotten more or less positive on the activity level in the U.S. for 2017 compared to how you saw the outlook in November?
What we referred to very clearly in Q3 was the external market that expected, on the delivery side, a bit lower delivery in 2017 than in 2016. We also confirmed that we thought that was a reasonable planning assumption. I think as far as I've seen from the external numbers and also the external numbers I referred to here, that's still the case. It's not a significantly lower activity level in the overall market, but the expectation is that it will be a somewhat lower activity level. For Vestas, our guidance for 2017 is the guidance we just gave. That's our best estimate overall for next year. I have to say overall in the U.S., there are still quite a lot of unknowns, of course, exactly how the delivery will be phased over the years.
I remain as confident as I were in Q3 that the U.S. will overall be the second-largest market in the world for wind. It will be a very stable market now in the current PTC cycle. Exactly how it will pan out over the years, I think it's still very hard to predict.
just to see if I understand correctly, have you also included a drop in your U.S. deliveries in your guidance for 2017?
We haven't guided specifically for specific markets for 2017. We provided an overall guidance on revenue for 2017.
All right. Fair enough. My second question is, if we stick on the topic of your revenue guidance, you're expecting revenue growth between -10% to 0%. Your backlog for projects at the end of the year is up 8%. You're expecting increasing service revenue, the expected drop in your project revenues must be even larger than what you're guiding for the group. Can you just help me understand why you're expecting this drop despite the backlog being up?
There were many questions in that. The guidance is our best estimate for the time being. As you say, the upper end is very close to this year, lower end is a drop in revenue. If I look at the overall market that I talked a lot about, looking at, again, external forecasts, we see an expectation of a certain drop in delivery. It's not major at all, but there is an expectation that delivery globally can be a bit lower in 2017 compared to 2016. Of course, that's one input for us. The other input is, of course, as usual, this is a project business with the same profile as usual. The sum of the projects that we will deliver and reach customer milestones from during the year will be the revenue for 2017.
Of course, we have the normal uncertainty when it comes to project completion during an expected very busy second half.
Okay. Thank you very much.
Thank you. Our next question comes from Casper Blom from ABG. Please go ahead. Your line is now open.
Thanks a lot. A bit of a guidance question from my side. You're changing a bit the way you guide. We used to have this minimum guidance, now you're giving us a range both for the top line and for the EBIT margin. How should we really read this? Is the bottom of these guidances sort of comparable to your old minimum guidances? Is that a fair assumption? Also, I know it's really difficult to quantify, but do you sort of feel that you are more or less cautious in this type of guidance than you were in the old one? That's my first question, please.
The reason why we changed to a range is that we felt that that was the most appropriate guidance at this point in time. I think it's fair to say that We also see, in a sense, maybe a bit more stable market going forward than what we've seen before. Of course, we continuously, hopefully, improve our accuracy over time as well. Actually also, to be fair, we have gotten feedback on the minimum guidance that has not maybe been completely understood all the time. We also have received feedback on a preference that we go more to a range. It's a number of different factors that we feel that this is the appropriate way to guide for now. I will not comment about anything within the range. It is a range, and there is no change in people. It's still me and Marika.
Okay. A question regarding the U.S., and the different types of PTC qualification orders. We know that you've now announced some safe harbor component orders. Can you give some sort of flavor to what do you think is the split between what is PTC safe harbor, and what is commenced construction orders?
Yeah, I think that is actually really hard to say. As I think I said many times also in Q3, our focus in Q4 has been very clear, and that is to maximize our share of the available orders, independent on if the customer preferred one in front of the other. That's been our focus, and I think we've been successful on that. Then, of course, it's up to the customers to decide what type of qualification they will use depending on the product they have and the timing they have. I think that remains to be seen. I have no reason to change the sort of speculation we had before on the percentage. I also have to caution that there are no further clarity on that today than before, I think.
Our focus has been on maximizing our potential going forward in this market.
Fair enough. Just finally, a quick question maybe for Marika. Can you give any sort of guidance to the contribution from the joint venture in 2017? Will it start to be a bit better?
Well, I think we have said something very softly. In 2017, we will continue to see the ramp-up. We will also continue to see, consequently, the amortization of the R&D or the V164. We are expecting a break-even EBITDA for the joint venture, not until 2018, and a positive net profit in 2019. Nothing specific on 2017, although obviously depending on the volume in the year or the revenue in the year, we will see the development, but not a positive impact on the EBITDA in 2017.
Okay, maybe just better than the impact that you've seen here in 2016?
Yeah. I think to be very specific, you have around one-third is the eliminations that we have talked about previously, and two-thirds is really operation. Yes.
Fair enough
We're going in for that. Thank you.
Okay. Thank you.
Thank you. Our next question comes from Akash Gupta from JPMorgan. Please go ahead. Your line is now open.
Hi, good morning, everyone. My first question is on pricing in Q4 orders. You said that it was stable overall, but maybe if you can comment by regions, because we had one of your U.S. competitors saying in their Q4 conference call that negative pricing in Q4 accelerated due to PTC dynamics. Maybe if you can make a comment, then I will come back for my second question.
Of course, I will not comment on what our competitors say on pricing. I think that has to stand for them. As I've said, we see stable pricing. As you can see on our average selling price on order intake, we actually saw a bit of an uptick in Q4. Of course, as you know, we had quite a lot of U.S. orders in the quarter. We also had a lot of orders from other markets. Overall, we see the trend being fairly stable and as you can see also in our report. Having said that, of course, it's a very competitive industry for sure. As I said before, we definitely have to fight for every order that we take in. Then I can't really comment on what the competition is saying.
Basically, you haven't seen anything unusual in pricing in U.S. orders. Is that a fair assumption?
We don't give any pricing on specific regions. I think you can look at the numbers. You know where we took orders in Q4. I think that should tell you some about.
Yeah. Then my second question is also on the U.S. If you can talk about how much localization you have, in terms of local content and then potential impact from any border tax or maybe reduction in corporate tax.
Yeah. Of course, we have the complete manufacturing capability in the U.S. Of course, we produce all our deliveries, basically in the U.S., Colorado factory. That also goes from components. The absolute majority of also the components in the turbines are U.S. manufacture. A very high degree. That is, of course, good. As you can see, they've been very busy, and we have been very busy scaling up that production, both nacelle, blades, and towers, in the U.S. We also have the capability to introduce our newer products into the factory set up in the U.S. We have the flexibility there also to balance if the markets are wishes, so to speak, more three megawatt, compared to two megawatt or new two megawatt platforms as well for that matter. Actually from employment point of view, U.S. is our biggest market.
We are close to 5,000 employees in the U.S., which is more employees than in any other countries for Vestas, including Denmark.
Yeah. Maybe a quick one on organic growth for services. Can you talk about what was organic growth in services for full year 2016?
It's around 8%.
Thank you.
Thank you. Our next question comes from the line of David Vos from Barclays. Please go ahead. Your line is now open.
Yeah. Good morning, Anders. Good morning, Marika. I have a question on the backlog, in particular, on the margin quality that you perceive in the backlog. Could you comment on that? Is it going up? Is it going down? I'll have another question after that.
If you look at the order backlog, we have our methodology when it comes to taking in orders or taking orders or not, or rather approving them. Consequently, we have a good quality of our order backlog.
I was more interested in kind of a sequential development commentary, if that's something you have to mind.
As I said, we're not commenting specifically on the margins. As we have a rigorous process in how we approve the orders, and that includes the pricing and consequently the margins, we have a good quality on our order backlog overall. Otherwise, it wouldn't be in there.
The second question around the JV here, I don't want to belabor the point, but I am a bit surprised to see that thing will only break even in 2019. How is the gross margin development there? You can probably see where I'm going at, right? Are these orders taken in at prices that are perhaps a little bit lower than they would be in a steady state? Or is this really, let's say, an accounting issue whereby you just have an enormous amount of amortization and depreciation running through a business that's just not scaled up fully yet?
Yeah, of course. Without going into the detail of margin, where we are in the timing of the joint venture is of course very much your later description. This is still not a run rate business. This is more of a project business where, of course, the joint venture have both big cost in scaling up the manufacturing, delivering the completely new turbine amortization on the R&D without much revenue. Of course, there are a lot further cost out possibilities in a new platform once you get into a bit more steady state, on a run rate on delivery.
Are you at kind of at liberty to say what a run rate looks like in terms of annual deliveries?
No, I will not go into specific run rate margins in the offshore business. Of course, our objective for the joint venture longer term is of course, that they should be on par with the onshore.
Okay, fair enough. Thanks so much.
Thank you. Our next question comes from Claus Almer from Nordea Markets. Please go ahead. Your line is now open.
Thank you. Two question from my side. The Q4 project margin seems to be somewhat better than we've seen in average in 2016. Can you try to explain what's behind that performance and also how the performance in Q4 is compared to the backlog? That'll be the first one.
Well, as I think I answered previously, there are no standard margins when it comes to Vestas because you have a blend. Overall, we have continued to improve the margins because volume plays a big role, and obviously we have a good absorption. We're also taking the cost out. We have the mix question that will always be there, which is a combination of all of them. Q4 is a good performance, but I think overall, 2016 was a good performance. You've also seen the guidance, which proves that we continue to have good quality of our orders, and consequently, the order backlog is very satisfactory. There's nothing particular.
Should we look at 2016 as the same level we see in the backlog? How should I understand your answer?
My answer is basically that I'm not commenting on the gross margins. Having said that, you see that we have improved the overall gross margins year-over-year. We continue to have as tight monitoring of the approval of projects, and obviously margin quality is one important factor, and I've said that we have good quality on the order backlog. That doesn't mean that we will not continue to improve from there. I don't see that we have a big hit on the margin side.
Okay. Thank you. The second question, one of the slides showed that margin improvement is part of the strategic direction of Vestas. Does that mean we should factor in margins to increase going forward or?
Margin focus is important because that's obviously how you get the overall leverage from your performance. That is part of the overall efficiency gains that we have stated in the operational excellence. Yes, focus on margins will be there, and obviously we will try to further improve.
Based on the same revenue level. It's not driven by leverage, but it's driven by underlying operational improvements.
Obviously there are factors like the market that we don't control. With what we know, we will try to further improve the margins. Yes.
Thank you so much.
Thank you. Our next question comes from Faizul Alim from SEB. Please go ahead your line is now open.
Hi, Anders and Marika. A couple of questions from my side. Firstly, regarding Q4 margins, especially the gross margins compared to the first three quarters of the year, the leverage in Q4 doesn't seem to be as high. Is that solely driven by the higher warranty provisioning in Q4, or have you also taken some other costs in Q4? Maybe if you could also comment on what specific events have triggered these higher warranty provisions in Q4?
Yeah. Obviously the warranty provisions that we have made in Q4, have an impact. Having said that, I still think that the margin that we managed to deliver of 20% is a good reflection of the overall performance in the year. As I stated earlier, the provisioning is for nothing specific, but we have a high activity, we have a global footprint. We also have some new technology. We're outsourcing more, all of the above, led us to the conclusion that, and the assumptions to increase the provisioning in Q4. As I said earlier, we will go back to the 1.9% in 2017. It's for nothing specific, but just general activities within Vestas.
New technology and new supply chain and so forth. It seems just very strange that you hike the provisioning for one quarter and then you just reverse to the old level again in the coming quarters. Any comment on that?
No, I don't think it's anything strange. We have done the assessment because of all of the above activities, I think what we show is also that the consumptions continues to be low. You see the LPF is below 2%. We have done an adequate assessment and therefore done the provisioning. Nothing extraordinary in that.
Then just one final question regarding capital allocation. You're making this small buyback program here in Q1. You do have a quite large net cash position. Would that decision, what to do with that net cash position come in during the second half of the year?
Yeah. We have also said that we will continue to invest in the business. I also stated that yes, the net debt is at a very high level at this point, but also that we have a very unusual Q4, that obviously has increased. We will continue to invest in the business. We will do the bolt-on acquisitions when we find them, and we will consider a share buyback in the second half of the year, as we have previously done. What we have done now is that we do an extraordinary share buyback because of the sale of the buildings in Aarhus.
Okay. That's clear. Thank you.
Hello, Fug. The line from Citigroup, your line is now open.
Hi. It's Fug from Citi. Thanks for taking my questions. My first one is on the average selling price of your order intake. I realize the first quarter was a bit special because of Norway. If I look at the second and the third quarter was below DKK 0.9. Fourth quarter, you are at DKK 0.95. I understand part of that, this is weighted towards the U.S. orders. Is this the run rate we should assume for the follow-up orders in the U.S.? My first question.
As I said before, we don't comment on specific price development in different regions. We show the global average selling price on order intake. We have, as I said, in the quarter, we see a positive development, but we can see these variations depending on scope. For example, more or less, EPC, mix, in the quarter, also a bit of FX. We are happy that we see a fairly stable price in the overall market, we see what the future will bring.
Okay. My second question is also related to the U.S. market. From the conversations that you have with your customers, do you get the sense that there's appetite for new PTC safe harbor orders? In other words, are customers happy to take 80% of the PTC for this year?
I think that's, of course, a very good question, but I will say that remains a little bit to be seen. I think it's fair to say that, of course, the customer has been very focused in Q4 on the period up to 2020 delivery and 100% PTC. I still feel that there will be an appetite for 80% PTC. It's still a fairly good level, but I think it's also fair to say that all the focus in Q4 has been on the 100% PTC cycle. Of course, it's been a rush to focus on that for now. I think that, as I said, it's a good question, but I don't have a feel for that now. I think we have to wait a bit and see towards the second half of this year.
Sure. Thank you.
Thank you. Our next question comes from Klaus Kehl from Nykredit Markets. Please go ahead. Your line is now open.
Hello, Klaus Kehl from Nykredit Markets. Two questions as well. The first question is related to your strategy, where you aim to become the global leader in sustainable energy, which could lead you to add some new services. Is that something you could add organically, or would that require acquisitions? That would be my first question.
No, the strategy as before is about organic growth. What we see happening in the market, both from customer requests and actually also we see some tenders now being out, is the combination of storage and wind, for example, and also some hybrid projects with a combination of wind, other renewables, and storage. From a technology point of view, we are also having cooperation with, for example, storage providers and on how we can optimize the interfaces between our wind turbines and those kind of systems. Also how we can optimize the energy management in new type of energy markets where you have a higher penetration of intermittent generation, such as wind or solar. So for us, it's to answer to those requests, and we think that they are very interesting requests for two reasons.
One, of course, the primary reason is to further increase the penetration of wind and also use more wind as a baseload. Secondly, of course, that it's an area where our knowledge from a technology point of view from the wind side, again, has a high contribution. That is why we also then want to reflect that in our long-term vision, that we see opportunities in those areas. It's not any sign of that we are looking at acquisitions outside our wind space.
Okay. Excellent. My second question would be, we have talked about these provisions that you have made in Q4, I was just wondering whether there are any other one-offs in Q4 that in any way has impacted the P&L numbers.
Well, as I said before, we do a regular assessment in every quarter, it's nothing unusual for Q4. We've definitely provided for warranties. You also have certain provision for bonus that could potentially impact the Q4 numbers, it's nothing that we don't do in any quarters. We have highlighted the provisioning for warranties because that's a high number.
Okay. No write-downs on projects or whatever that we've seen?
That we would disclose in that case.
Excellent. Thank you very much.
Thank you. Our next question comes from Gurpreet Sra from Macquarie. Please go ahead. Your line is now open.
Hi, guys. Just two questions from me. You mentioned a larger share of EPC contracts is one of the reasons for the order intake ASP increase this last quarter. Could you comment on whether this came from the U.S.? If so, what was the sort of changes in the market there to allow you to win those EPC contracts? I'll follow up with my second question afterwards, please.
Yeah. No, I mean, U.S. is more a typical supply-only region. We don't see any changes in that. It wasn't significant, we saw a slight more percentage of EPC, that is more the traditional markets where you have a bit more EPC. Not significant in any way. In the U.S., there was no change from previously. It's supply only.
Okay, fine. Just on the topic of the U.S., have you noticed any changes from a tax equity financing appetite from your customers?
No, not really. I think, of course, there are speculations on if the potential lowering of the corporate tax, what kind of impact that could have on the tax equity market. There is definitely an energetic discussion in the market, but nothing that has impacted our customers' appetite on securing PTC components as of now. As we also see in the fairly, I would say, good intake of PTC qualifying components. It's definitely a discussion in the market if that would mean a change in the customer mix potentially to the more bigger utility or the more bigger developer, compared to maybe smaller developer. It's possible that could happen if the tax rate would be considerably lower.
Okay, fine. My final question is, again, about the U.S. market. When you look at your customer base right now in the U.S., has there been a change over the last couple of years towards more traditional regulated utilities as opposed to independent wind developers?
Yeah, no, I think that's correct, as you say. I mean, we definitely, not a change, but a change in the sense that I think we have widened our customer base quite substantially in the U.S., and I think that is a big part of why we have managed to grow the market share as we've done during the past year, is that we have widened the customer base. Probably fair to say that a couple of years ago, our customers were mostly the well-known key accounts, European-based key accounts. We have now managed to penetrate a lot further into the big U.S.-based utilities.
Okay, thank you.
Thank you. Our next question comes from Pinaki Das from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Hi. Many thanks. Good morning, everybody. Thanks for taking my questions. I've got a question around the U.S., then I've got another question around input costs. The first one on the U.S., ultimately the way we look at it is, it depends on whether regulation in the U.S. is stable or not. You've had very good orders, that's clear. You expect a certain amount of revenue this year, that's also quite clear. Can you give us any idea about, or any insights into, how or if any changes you expect from the U.S.? Have you heard anything from the U.S. President's office? We haven't seen any tweet yet. What is your feeling around whether the President is going to look at wind, maybe potentially change something? Maybe look at the IRS rules, maybe even on the positive side, include wind in the infrastructure plan.
Any sort of idea around that would be quite useful from your lobbying efforts and your interactions with customers. A sort of related question to that is also in 2017, are you expecting some intra-year orders within 2017 for 2017 delivery? Also at the end of the year, are you expecting any PTC component orders for the next cycle, the 80% cycle? That's my sort of first question around the U.S. Second question is a very simple one. You're starting to see some input costs rising in various items. Is that already factored into your margin guidance? Thank you.
Yeah, that was a lot of questions in your first question. Let me try to answer it a bit on the U.S. As we see it is that, the midterm driver in the U.S. is, of course, the current PTC cycle. We don't expect any changes in that PTC cycle. We have not heard through our industry associations in the U.S., where we participate together with customers and competitors. We don't have any indication that there would be any changes to the current PTC ruling, with a strong bipartisan support. I haven't had any direct contact with the administration, so I don't have any insights, or I haven't read any tweets on your question on tweets that would indicate that there would be any changes in the current PTC cycle.
That is our planning assumption, that the current PTC rules and the current IRS guidelines rules remains. What the wind organization is also telling us, and our internal people in Washington as well, is that they see that as the scenario going forward. That's our planning assumption, and I think if I hear what other U.S.-based players are saying, it's very much in line with that. The second question was around delivery of components, of course, PTC components. As you know, there is 105-day delivery period from orders. We definitely delivered PTC components during last year in Q4, and it's definitely also fair to assume that we will have delivery of PTC components, during the start of 2017, on the orders that we took in the later part of 2016.
Probably fairly equal between the years, when it comes to delivery of the PTC components within the 105 days. On the appetite for the 80% PTC components, as I said, I think it's very early days. I think it's fair to say that the customer and the market really focused in Q4 on the current cycle, had quite a lot of work to be done to do that. I think that remains to be seen. I've seen some early estimates, again, from external sources, so not Vestas estimates from MAKE that showed a fairly reasonable potential on also PTC components towards the end of this year. I think that really remains to be seen.
Sorry, I was also asking about any intra-year orders that you might expect in 2017 for 2017 delivery, not just the PTC components.
Of course, we're always looking for inflow orders as well in a year. That's obvious. We feel we have adequate order coverage for our guidance overall for the year. Of course, we will continue to work on getting more orders, and we will do as previously, that once the orders are firm and unconditional, then we follow our normal order announcement process.
When you say adequate orders, you also mean the top end or just the midpoint?
I mean for the range.
The last question was just around the input costs. If you can give any insights on how you look at margins in rising input costs environment.
That is something we're mitigating and controlling on an overall basis. That's something you're faced with in a lot of countries. I don't see that should be anything specific in the U.S. We will follow if there are any changes. We have a very good footprint in the U.S. that we're happy with, both from our own production and assembling, but also from a sourcing perspective.
Great. Many thanks. That's really helpful. Thank you so much.
Thank you. Our next question comes from Jacob Pedersen from Sydbank. Please go ahead. Your line is now open.
Hi. Congratulations on a fine result. You seem to emphasize a bit more that you want to grow your market share, considering the more stagnant market looking forward. Now you clearly have above industry average margins at the moment. How is your view on compromising these margins in order to increase market share?
Yeah. I think that we have actually Had for the last three year, a clear ambition to grow faster than the market, and that remains. You're also right, as I pointed out, that of course in an overall market that is growing slower than before, then of course, market share gains will be as important as it has been for the last three years. To grow faster than the market continues to be a key ambition. I think we have succeeded really well on actually both growing our market share and the margins in the last three years. Then it of course also depends on what the competition is doing. Our strategy is still profitable growth.
Of course, our ambition is still the aim to grow the business in a profitable way.
Okay. Even if we look into a market that could become a bit more competitive in the future, you still feel confident on your margins of the guidance of 12%-14% in 2017. This is a level that you can hang on to?
We, of course, feel confidence on our guidance for 2017, and the range we've given. It is, as I said, a very competitive market, of course we have taken the competitive market into consideration when we do the guidance for 2017.
Okay. Thanks so much.
Thank you. Our next question comes from Sean McLoughlin from HSBC. Please go ahead. Your line is now open.
Good morning. Two questions from me. Firstly, on the guidance range, this new guidance style. Thinking about the bottom end of the range, historically, you've been able to beat and raise through the year. It looks like a roughly 30% drop through on the lower EBIT, on the lower sales guidance. Quite some decrease in profitability. How confident can you be that there is no further downside risk to the bottom end of this range, and we can look towards the mid/upper end as your style over the last three years would suggest? That's my first question.
The range is our best outlook for the time being. You're right, it's a fairly broad range. We are also fairly early in the year. We expect to have the normal seasonality over the year. That means, of course, that in the end of the day, it will be the sum of the project that we are executing on. We are, of course, basing our guidance on what we see, and what we plan for in execution, both when it comes to number of projects and margins in those projects. Of course, we always have the uncertainty of which projects falls in which period. I will say that we have a good visibility on what we expect in the different projects. As Marika talked about, we have a good process on approval of projects that we walk into.
Because of the nature of the business, of course, we do forward calculations on most, if not all of the projects that we have. We then check that with actual, and we feel fairly confident on our accuracy to forecast the different projects. We still have an uncertainty on the timing that we normally have. It is within those ranges that we guide for the business.
Thanks. I'll follow up on that, if I may. What about the sensitivity on the free cash flow guidance, which remains a minimum guidance on the top end and bottom end of that range?
The cash flow is probably the toughest one for us to predict, and I think you have seen that. We have guided for a minimum of DKK 700, when you look at Q4 of 2016, you know the inflow of cash in really late 2016, and we have delivery requirement based on those now in Q1 of 2017. Obviously a more fair assumption would actually be to look at the two years in combination. With that DKK 700 that we have now guided for, we feel confident, obviously, otherwise we wouldn't guide for it.
Thank you. My next question on service, is the integration of your service acquisitions complete now? Do you expect to see a positive benefit to the service margin in 2017 as a result?
Well, the integration is not complete. We have just been better and quicker at integrating the two acquisitions, and that's why you see very little negative impact from the two. We are delivering stable margins, as we have said previously, but the integration continues also in 2017, and we have never expected it to be finalized before end 2017, beginning 2018.
Thanks.
Thank you. Our next question comes from the line of Mark Freshney from Credit Suisse. Please go ahead. Your line is now open.
Hi. I have three questions. Firstly, on MHI Vestas. If the business is loss-making, I know that your MHI have put capital in because you've met the milestones, but would there be any incremental capital you have to put into that business? Secondly, on the offshore business, it seems that every order or every other order you get, you're using a new version of the eight MW platform. Is it actually possible to make money in offshore, given that your clients are incessantly pushing you for bigger turbines? Thirdly, I know in the past you've indicated, you try and hedge out naturally or financially FX risk, but you do have a lot of fixed cost in Europe. The U.S. dollar is about 20% expensive versus the EUR. I know you have been exporting complete wind systems on the three MW platform from Europe to the U.S.
Is it possible for you to quantify what the positive margin impact has been from three years of EUR weaknesses? Thank you.
Okay. Let me try to answer on the offshore side first. We don't expect the need for further cash into the joint venture on the offshore side. On the platform, it's actually not a new platform. It is the eight megawatt platform. I think the good news is that we have quite a lot of design upgrade, generator upgrades, and actually trimming, I would call it. Maybe the technical people would be a bit upset with that, but that we actually can increase the nominal power output of the existing eight megawatt platform. It's similar activities as you, for example, see on the three megawatt platform, where we have gone in a fairly quick time period from a three to now a power mode of 3.6 megawatts. We see further potential there to actually use the same platform but get more output power.
That is really the preferred method for us as well when it comes to delivering a competitive product with a lower levelized cost of energy. On the FX, I will hand it over to you, Marika.
Kindly. Well, what we have said and continue to say is we are as naturally hedged as we possibly can. In 2016, we had very little impact or translation impact from currency. Obviously in 2015, we had some tailwind, in particular on the revenue and the opposite on the cost side. We don't foresee any big translation impact at this point. Again, everything on the transactional side, we are either hedging or we try to be as naturally hedged as we possibly can. Translation is nothing that we obviously can impact. As we account for it in EUR, that is what it is. Transactional-wise, we don't foresee any big swings.
Okay, we'll take the last question.
Thank you. Our next question comes from Alok Kapur from Société Générale. Please go ahead. Your line is now open.
Hi, thanks for taking my questions. Congratulations for a pretty good quarter. Just to follow up previously, just on the margin side of things. The lower end of the range and the top end of the range, if you look at the revenue and the implied margin guidance that you have, then it calculates down to a 30% incremental margin, like my colleague said earlier. That would then imply that there's basically pure operating leverage with no benefits from any variable cost reductions, et cetera. Is that just a conservative view of the way you're sort of laying out the margins, or is it reflective of the fact that you might have to pass on pretty much all of your variable cost reductions down to the customers? That's one sort of follow-up, and I'll sort of lay out my couple of other questions. Thanks.
Well, I think we have been pretty consistent in improving the margin, therefore kept a lot of the benefits for Vestas, which we also obviously use as an opportunity to continue to invest in the products. That are clearly very competitive. When you look at the margin range, I would say that we do, obviously, the assessments, if everything goes well or if we have some headwinds, what is the likelihood in terms of both revenue and EBIT? That is what we have done, is nothing more dramatic than that. I would also say that when it comes to a range, we would always strive for the higher end of the range, but obviously this is a guidance, and we have given you the range and we are at the beginning of the year. We will see how it pans out. There's nothing dramatic.
It's regular business assessment that is weighted into our range guidance.
Fair enough. My follow-up, the other two questions. Just on the pricing, you have said in the past as well, and same for 4Q, that you're seeing stable pricing trends. If I actually just look back at the last two or three years, you're right, the ASP remains in that sort of 0.9 to 1 million megawatt range. Over the period, we've seen a big transition within the type of turbines that you're selling from 2 megawatt to 3 megawatt. I'm just looking at your annual report, and I think in 2016, you say two-thirds of the order intake was on the 3-megawatt platform. That's far more efficient, as you said, 35% more energy production since the launch.
Still, the price on that platform, despite being such a big contributor to your orders, it hasn't really moved your ASP on the order side, which basically would suggest to me that you're giving away most of the improvements pretty much without being compensated for it. Or alternatively, the 2 megawatt is seeing a far more hefty pricing pressure. Maybe I'm not reading this right. It would be great if you could comment on that front. It seems from the outside that the pricing is actually far more adverse than stable.
No, of course, you're right. When I comment on the average pricing per megawatt as stable, and I think, of course, also fair, as you say, that we and the rest of the industry, of course, has passed on to the market a very big part of the increased production that we get with more efficient machines. I think, actually, that is positive because, of course, that is what makes wind more competitive with other sources, and therefore our ability to grow the overall size of the wind market. I think that equation has worked well for us and for the industry. I must say, I'm also very pleased with the development that we have done in Vestas when it comes to improving our margins, both in absolute terms from a Vestas point of view, but also when I compare to the competition.
Of course, it's always a balance to make sure that we try to maximize our piece of the pie, as well as that we have a competitive offering compared to other turbine manufacturer, but also that wind continue to take a big increasing share of the overall electricity market. Long term, that is the key driver for the growth in the market, further improvement of the competitiveness of wind. If we can do that with a combination of more efficient technology and then on cost out, and we can keep our fair share, I think that's an equation that at least works for us.
Fair enough. Is it fair then to assume that the underlying price decline on a like-for-like basis for a similar sort of machine of similar variants is somewhere around the 3%-4% range?
That I don't quite understand you getting.
Maybe we take it offline. Thanks.
Yeah.
Just one final sort of question on the offshore side. We've sort of heard recently about Denmark sort of talking about ending the subsidy on offshore wind with a proposal apparently due to be tabled in the later part of the year. Do you see this as a risk for your offshore JV, given how strong you are in the Danish offshore market? Also the risk that some of the other countries then could follow suit, especially coming on the back of some very steep pricing for some of the offshore wind farms that we've seen in the recent past.
I think it's very positive that we start to see considerably lower levelized cost of energy also now from offshore. I think that we have actually contributed to that to a big extent because we develop a bigger turbine. You have to remember that for offshore, the equation changed a little bit. The turbine is about 50% or maybe 60% of the total cost of an offshore project. There is a lot of other components in an offshore project that also have to be optimized in order to drive down the levelized cost of energy on the turbine. I think Vestas or MHI Vestas, I would say, and also the competition in offshore has contributed quite a lot of the changes we see now in levelized cost of energy with developing bigger turbines.
I think, of course, like in onshore, the industry will grow quicker the less dependent you are on subsidies, so that's a positive. Of course, as with everything else, we need a stable policy over time. If we have that, we can drive the business in a good way. With that, we're out of time, so I would just like to thank you for your interest. Thank you for calling in, and I'm sure I will see at least some of you in the next two days. Thank you.