Good morning, everyone, and thank you for calling in to this third-quarter earnings report. It's me, Marika, and Hans Martin, and the IR team that are here today. The normal disclaimer slide, let me jump straight into the key highlights for the quarter. Overall, very satisfied with a strong performance, good execution across the board. High activity level, delivery up 44% year-over-year, driven by all regions. Good earnings improvements, EBIT before special items of 14.9%, 4 percentage up year-over-year. A solid free cash flow of €155 million on par with the same quarter last year. Combined order backlog remains high at EUR 17.1 billion, the turbine order backlog impacted by high activity level in the third quarter. Outlook for 2016, that has proven to be an extraordinary year.
As we have done the last two years, based on better visibility for the end of the year, performance year to date, we update our outlook to a range, increase on all parameters. I will start talking about the orders and market, Marika will talk about the financials. Looking at order intake in the quarter increased by 17%, 1.8 gigawatts. The 17% correspond to 261 megawatts, the order intake in the quarter was primarily from U.S., China, Germany, and Morocco. That accounted for 75%. The average selling price of order intake in EUR million per megawatt was 0.88 in the quarter. A fairly stable development in a competitive market.
As usual, we should remember that the price per megawatt depends on a number of different factors: turbine type, scope, geography, the uniqueness of the offering. If I look at order intake, nine-month actual, we are keeping the pace from last year. Our global reach continues to pay off, we've taken orders in 29 countries across five continents. I should also say here that the normal regulatory environment slide is taken out in this quarter, simply because we don't see any significant new event or changes. We feel overall that we have a favorable regulatory environment. Looking a bit more into the details on order intake for nine-month actual, we see a decline in Americas of 23%.
We see that this is primarily due to the different PTC cycle than previous years, while we see positive year-on-year changes in markets such as Canada and Argentina. EMEA up 22%, as we have talked about previous quarters, driven by a range of countries, especially Germany, Norway, the big order we received in Norway, Morocco contributing positive while offshore. I talk about the 3 megawatt offshore, which is the Vestas own product, has a negative impact compared to last year. In Asia Pacific, we see a decline, mainly impacted by last year's order in Thailand. On the positive side, we have secured Vestas' first-ever order in Mongolia during Q3. Moving on to deliveries. Continued strong growth across all regions. On nine-month actual, deliveries are up 35%, close to 6.5 gigawatts. As I said, that's across the board.
Starting with Americas, we see up 36% and 66%, primarily driven by the U.S., but also general improvement across Latin America, especially in these numbers, Chile and Brazil. We have received a lot of questions on how we see the delivery volumes in the PTC cycle 2017-2020, for the U.S. market. Our assessment currently is in line with most external reports, and that is going to be a build-up towards 2020. Relatively speaking, a lower level in the U.S. for delivery in 2017. In EMEA, solid good development, 29% on nine-month actual, 8% in the quarter. Higher activity levels, basically Germany and Sweden, and also Belgium, which is, again, a 3MW offshore project. In Asia Pacific from, of course, a lower level, but good growth numbers. Here, the increased activity comes from China, Thailand, and India.
Looking at the combined order backlog, remains strong at EUR 17.1 billion. Decreased sequentially on the turbine side with EUR 1 billion in the quarter. On the other hand, year-over-year, we saw an increase of EUR 0.7 billion in the backlog. Service backlog remains constant or flat, EUR 9.9 billion. Some word about the joint venture as well, that we have together with Mitsubishi Heavy Industries for the offshore market. Deliveries are progressing according to plan, and also sales activities remains high. Looking at the order situation, the backlog grew to 1.7 GW. The new project in the quarter was close to 100 MW on the 8MW turbine. Conditional orders stand at 450 MW, and preferred supplier agreement increased to 620 MW. As I said, also an installation quarter where Burbo Bank, the first 8MW project, is under installation, progressing as planned.
About half or a bit more than half of the turbines have been installed. The joint venture is busy also installing two 3MW projects, Nobelwind and Rampion. With that, I leave the word to Marika to go through the financials.
Thank you, Anders. If we go to the income statement, we are delivering another strong quarter, I would say more or less on all parameters, and also reflecting, I think in a very good way, what Anders just went through. You see our strong revenue performance, it's increased by 37%. Well reflected in the gross profit, where we have a 52% improvement. Please remember also the positive impact from the volume that you see in the quarter. Note that in the gross profit, you have an impact from a write-down of EUR 54 million in Q3, and that is related to development and construction activities from prior years. You also see a good development or a very solid performance on the SG&A, we are more or less flat year-over-year. All that obviously contributes to a very positive EBIT performance, with an 87% improvement year-over-year.
Again, reflected in the margin that improves by 4% year-over-year. Gross profit is solid, I would say quarter-over-quarter. We are generating in Q3 20.4% gross profit. Again, a reflection of not only the volume, but volume certainly have a positive impact in the quarter. If we have a look at the SG&A, that continues to be under control and is a very important parameter for us. You see that quarter-over-quarter in percentage points, we are continuing to leverage the volume. Obviously, we have a slight increase, but remember also in the numbers, you have the impact of the two acquisitions that obviously have an impact on the SG&A. All in all, we continue to leverage the SG&A also in Q3 of this year. The service business improves 11% quarter-over-quarter or year-over-year, and you have both organic as well as growth in the two acquisitions.
EBIT is at 14% in this quarter, to be compared with 18% in Q2. Obviously not a margin level that we're satisfied with, but it also proves the lumpiness that you see in the service business in any given quarter. Underlying business continues to be good. You see backlog is increasing 19% in improvement. Sorry, 21%, to be very precise. Yes. Balance sheet continues to be strong. Net debt is performing again another quarter well. You see a negative net debt, and that obviously is reflected in our net debt to EBITDA. Net working capital is year-over-year flat. A slight worsening compared to last quarter, but again, as anticipated because of high activity level. Solvency ratio is well within the boundaries. We are close to 33%, and the target is to be between 30% and 35%.
The change in net working capital, which continues to be a focus area. We have, as I've stated before, been very efficient on the working capital considering the high activity level that we have in the company. If you look at the changes over the last 12 months, obviously we are performing fairly similar and you see a flat development of the negative working capital. Over the last three months, you see a worsening. That is primarily receivables, and also prepayments going down. This is again a reflection of the high activity level in the quarter. If we go to the warranty provision and loss production factor, we are continuing to consume less than what we provide for. Obviously that is a position you want to be in. That is again reflected in our loss production factor that continues below our target of 2%.
Still good quality performance in the company. Cash flow statement. Cash flow continues to be driven primarily from cash flow from operating activities, i.e. the result of the company. You see the negative impact again from the net working capital, as I explained earlier. That brings us to a positive free cash flow of EUR 155 million, so fairly similar as Q3 of last year. Total investments are trailing, more or less as anticipated. There is a slight increase here as we have decided to acquire one of the facilities that we have in Germany. That was a lease agreement, and simply looking at the time of extension, it was cheaper for us to acquire the facility in Germany. That is not part of our strategy to own facilities, but in this case it was just more financially viable to acquire the facility.
Trailing 12 months, including the acquisitions, we are trailing at EUR 591 million, but the underlying net investment excluding that is EUR 431 million. In line what we have communicated earlier. If we look at the capital structure, we are, as I alluded to earlier, well within the boundaries. We are bringing a negative net debt to EBITDA also in Q3, and the solvency ratio is picking up from last quarter to 32.9%. Again, the efficiency that we have shown, both in terms of earnings but also the efficient balance sheet that we have and our efficiency on the working capital, is generating a very high ROIC also in this quarter. We are now at 162.5%. Solid improvements on basically all parameters to generate the ROIC. By that, I give the word to you, Anders.
Thank you, Marika. As I said in the highlights, and also remind you as we've done last two years, based on better visibility for the remainder of the year and of course performance year to date, we now go to an outlook that is a range. On the revenue side, from minimum EUR 9.5 billion to between EUR 10 billion and EUR 10.5 billion. On the EBIT, before special item, from minimum 12.5% to between 13% and 14%. On total investment from approximately EUR 500 million to approximately EUR 600 million, and on the free cash flow from minimum EUR 800 million to minimum EUR 1 billion. We have not changed our outlook on the service business, expect it to continue to grow with stable margins, and the dividend policy is also unchanged. With that, we move into Q&A.
Thank you very much. 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 of Danske Bank. Please go ahead. Your line is open.
Yes, thank you. My first question is regarding the U.S. and whether you can update us on the level of client activity you are having here in the fourth quarter when it comes to negotiations on PTC contracts.
Yeah. Of course, U.S. it's currently extremely high activity levels and of course our sales team there is very busy in this end of this PTC cycle. Very high activity level, and I expect that to continue actually to probably 31st of December this year. I feel good about our position in the U.S. market, and as I've said before, we have seen good progress actually during the last three years when it comes to our development and our market share in the U.S. Very high activity level and of course a lot of negotiations with customers.
Okay, that's very clear. My second question, obviously, your backlog is down EUR 1 billion and you are calling 2016 extraordinary. Is what you're trying to say here that we should expect lower activity in 2017?
I think if you first say 2016 extraordinary, I think if you look at the growth that we have seen in 2016 year-over-year in both revenue and earnings, I think it's fair to say that it's been an extraordinary year. Of course, we are moving into an overall market situation now where we've seen two or three years of very high growth levels. We move in now to the next three-year outlook, which is a market that still shows growth overall in that midterm period, but of course not from the levels that we have experienced when we look at growth rate year-over-year in this year. Of course, as we also commented on Q2, we saw a very favorable Q2. On the U.S. specifically then, it's of course where we see a new scenario.
As I said as well, and I think as in line with most market expectation, is that the volume will be back-end loaded if you look at 2017 to 2020. Therefore we expect the U.S., specifically 2017, to be a lower activity level than 2016.
Okay. Very clear. Thank you very much.
Thank you. Our next question comes from the line of Casper Blom of ABG. Please go ahead. Your line is open.
Thank you very much. Congrats with yet another strong set of results. After your second quarter results, you mentioned that everything had just gone your way and you couldn't hardly imagine a better quarter with the gross margin up some 600 basis points. If we now clean up for the write-down that you're taking here in this quarter, we actually see the underlying gross margin being up 4%, or around 400 basis points. Is there something extraordinary in this, or is this merely an expression of leverage and improved efficiency in the business? That's my first question, please.
Yes, when you look at the Q2 and Q3, I agree, we have managed to deliver very high gross profit margins in those two quarters. That is also a reflection of the high activity level and the volume increase that you see in those two quarters. Simply because of high activity level, you have very high absorption, that obviously have a positive impact on the gross profit. That is something that I, yet again, want to highlight. We did a write-down of the older projects that we have still by EUR 54 million. You can look at the write-downs as an extraordinary event, or you look at that as something we do on a regular basis just to make sure that we have clean books also going forward.
It is a volume impact on the gross margin, and that is well reflected both in Q2 and Q3.
Okay. Just another margin question. The service margin, though still being solid, it comes out a bit lower than we would expect here in the quarter. Can you explain what's happening there, please?
Yeah. That also is a reflection of the lumpiness that we have alluded to earlier. You see a fairly low activity level in the quarter. We also have two acquisitions that are not fully integrated, so they have a negative impact on the overall margin, simply because they have a fairly high cost base compared to the size of their contribution. All in all, we're not happy with the 14%, but it also shows that in Q2 we delivered 18%, and this quarter, 4% below. It is a reflection of the lumpiness, but we are overall content with the underlying performance of the business.
Okay. Going forward, we would still expect some 17, 18% or so?
Our intention is obviously to be at the levels that we come from. Remember that the two acquisitions will not be fully integrated until end of next year.
Understood. Thanks a lot, Marika.
Thank you. Our next question comes from the line of David Vos of Barclays. Please go ahead. Your line is now open.
Hi. Good morning, Anders. Good morning, Marika. Two questions from my side as well, please. If you look at the PTC orders that you've received to date, which run in the mid 600 megawatt range, how would you characterize the portion of deliveries that you expect to execute from those orders in 2017? That will be question one. I hope that was clear.
Yeah. Without going into too much detail, of course, it's between us and the customer, of course it is a very high activity level in the U.S. now to sort of secure order. Part of your competitiveness is of course when you can deliver as well. I don't want to go into too much detail on that. As you know. There is 105-day period, so to speak, after orders and delivery.
Of course, the sooner the orders, and of course this 660 are ticking, so to speak. Once the order is there and the down payment is done, then the 105 days are ticking. Of course, for us and for our planning purpose as well, it's of course good to start to deliver immediately. I think on that, you should assume that the majority will be in 2016.
Okay. I understand. It's just that if I look at the U.S.'s order intake, which is down 25%, I cannot help but notice that, if this were a regular PTC year, if you like, of the type that we had in 2015, that 23% number would look a lot different. I think there is some level of confusion in the market perhaps as to what is the true economic value of the orders that you've taken so far year to date. Clearly, we know from the MidAmerican order that a 200 MW order you received this year actually corresponds to something like 2 GW over the next four years, right? I'm just trying to gauge and was hoping for a steer from you as to what you think that, on a like-for-like basis, the order book development in the U.S. has actually been.
Yeah. I think it is, of course, very hard to do a like for like, because, of course, it's a complete different PTC cycle this year. It's up to 2020, of course. It is very hard to do a like for like because the scenario is completely different. I think what my main point would be that we see U.S. as a very, very strong market up to 2020. For sure, and I actually believe it will be strong beyond that as well, but I think it's fair to say that everyone is focusing now on the 100% PTC cycle first, so up to 2020. We see a very strong U.S. market. As I said, I think we and external sources believe it's around 50-60 GW during this period in time.
I also think it's fair to believe that if you look at the phasing on delivery, we will see it build up over time as well. 2017 will be a bit lower, and then the volumes will start to build up. I think with such a different scenario from previous PTC cycles that was very late in the year and was just for one year, it's very hard to do year-on-year comparison. I think what you are saying that the sort of rule of thumb that a 10% PTC component scale up, as you said it. If you have a 200 MW PTC order for the customer, that scale up to 2 GW project. I think that rule of thumb is still there, for sure.
Okay. Thank you so much. Those will be my two questions. I'll go back in the queue afterwards. Thank you.
Thank you. Our next question comes from the line of [Dan Jojo] of Handelsbanken Capital Markets. Please go ahead. Your line is now open.
Thank you. A couple of questions from me as well. As you're guiding here clearly for low activity in the U.S. in 2017, do you see any markets, outside the U.S. of course, that can compensate for that lower activity, i.e., so that we can expect overall more or less flat activity level in 2017 compared to 2016, or are you implicitly guiding for overall low activity for Vestas in 2017 compared to 2016? That's the first question.
Yeah. No, I will not comment on our expectation on activity levels overall next year. I will only comment on what I said, what we see in the U.S. market specifically. Of course, that has a big impact on Vestas overall. If I look at the other regions and market, I would say EMEA is very stable as we have talked about before. We have a positive order nine-month actual compared to last year. There is a lot of movements within the individual markets, but overall, we see a stable development. In Asia-Pacific, of course, from a lower level, we also see a fairly stable market. I will not go in to do any kind of outlook for overall Vestas for next year. That we will come back to after Q4 as normal.
Okay. Just a question on the GP. The GP is of course higher due to the higher revenue. You also in the report indicate that the mix has been favorable underneath. Can you give some more flavor on that favorable mix?
Yeah, it is basically the same components as we alluded for in Q2 when it comes to the gross profit impact. Volume is obviously, again, due to absorption, having a positive impact. You also see a positive impact from the mix, as you're saying, and we have written. Mix in this case is scope of projects, in particular, and type of turbines in any given country. It is overall the projects that have panned out very favorable for us. We also have continued the journey on the cost out, which also have been performing according to plan also in this quarter. It's all of those parameters that brings us to a positive gross profit.
Okay, thank you.
Thank you.
Thank you. Our next question comes from the line of Akash Gupta of J.P. Morgan. Please go ahead. Your line is now open.
Yeah. Hi, good morning, thanks for taking my question. My first question is also on U.S., there I have noted that there hasn't been any announcement by you or your peers in last many weeks on orders, I'm wondering how much of that slowdown is due to elections. Maybe if you can talk about what to expect, if there are any surprise to election outcome compared to what the exit polls are seeing?
Yeah. No, I don't think so. I don't know. I mean, to be really honest, I don't think so. As I said, the activity level is really, really high in the U.S. I was there myself two weeks ago met a lot of customers and potential customers, that was sort of It was never part of the discussion, the election, actually. I don't say that. To just reiterate what I said before, maybe I said the wrong numbers, we see the U.S. as being a very large and stable market in the current PTC cycle, so between 40 and 50 gigawatts.
Our focus for the time being is, of course, to lock in as much possible of that market share as we can now, that is both PTC qualification components if customer wants to go that route, it is continuous construction if a customer wants to take that route. That is the discussions that we have for the moment. As I said, I really don't know what's, of course, in the customer's mind, at least in all the discussions I had two weeks ago, it was never mentioned that they wait for the election results.
Thank you. My second question is on services. There was a step down in margins in Q3, and you still expect flattish margin for the stable margins for the year. Does that mean that we should see a step up in Q4 service profitability? Also, if you can help us better understand what is the underlying service growth in your business, given the two acquisitions and currency move?
Yeah. All in all, as you say, we delivered 14% in the quarter. Last quarter, Q2, we delivered 18%. We have always been clear on that there is a certain lumpiness in between the quarters. Stable margins would clearly be in the range of Q2, as we see it. Also remember that it is a negative impact from the two acquisitions that we made, simply because they are not fully integrated at this point. Underlying, when we say that the underlying business is performing well, and we are satisfied with that, is that we see order intake increasing by 21%, so I say the right number now. Obviously there is a strong growth underneath, even if we have a slight drawback in this quarter, and that we're not satisfied with.
Thank you.
Thank you. Our next question comes from the line of Phuc Nguyen of Citi. Please go ahead. Your line is now open.
Hi, it's Phuc. Thanks for taking my question, guys. The first one is on order intake in Q4. It's been pretty weak so far in the quarter in terms of announced orders, what we're seeing. What do you expect for the full Q4? In connection with that, U.S. orders, you mentioned you think there's going to be a market size, or external consultants say there's a market size of 50-60 gigawatts between 2017 and 2020. What market share do you think you can get of that?
I corrected myself on the last question. I said we believe between 40-50 gigawatts in the period 2017 to 2020, just to be clear on that.
Sure
I said the wrong number first. We will not give any outlook for Q4 order intake. We stick to the principle we have, that we will announce orders when they become firm and unconditional. I'm very satisfied with our market share in the U.S. If you look at external estimates, we are somewhere around 30%, maybe ±5%, and that is an improvement from around 10% three years ago. I'm really happy with the performance we have in the U.S. market and our ability to take market share and where we are today.
Okay. Can you give us, maybe just on that 30% ±5%, the more upside or more downside to that number, you reckon?
The reason why I say ±5% is that, if you look also at the external reporting on market share, which of course is what we are looking at, they vary a bit because some look at delivery, some look at connected to the grid. The projects are big, it can vary a little bit over time. We can have a period of Vestas project during six months, and then our market share shoots up a bit. I think that's why I say that there is uncertainty, probably around ±5%. Again, I will not predict our market share going forward. I can just say that I'm really satisfied with the development that we've had and the increases that we've seen the last three years. Of course, our ambition is always to do better. We'll see.
It's a competitive market, for sure.
Okay, sure. Thank you. My second question then is on the gross margin. Do you expect to stay on that 20% adjusted that you achieved for the quarter as a run rate going into 2017? Also maybe you can give a bit of color around how much of that high gross margin you're achieving this year so far is due to the high utilization that you see in 2016 so far.
I would say rather that the 18% that we delivered last year in gross profit margin, we have been clear that we see an improvement from that level. I would say Q2 and Q3 are clearly high volume quarters, so contributing to the high gross profit margin. You will also see impact from cost out. You will see, again, the absorption from the high volume, but you will also see positive mix from projects. You will see impact from the service margin in any given quarter. The only thing I can confirm is that we're anticipating an improvement for full year 2016 compared to 2015, where we exited with 18%.
Okay. Thanks, guys.
Thank you. Our next question comes from the line of Faisal Ahmad of SEB. Please go ahead. Your line is now open.
We're here. Two questions from my side. Firstly, on the activity levels. You're very clear about the short-term high activity levels in the U.S. at the moment. How do you see EMEA short term progressing? If I look at your order intake for the first nine months and strip out the big Norwegian orders, your order intake for EMEA is actually down compared to last year. How should we expect the full year to add up? That's my first question, please.
Yeah. As I said, I think EMEA is a stable region. It's a lot of countries in that region. We for sure see up and downs. If I look at it combined on first nine months, we see a stable region. Of course, you can strip out certain orders, but it's orders, we prefer to keep them in. There is a lot of ups and downs as we have talked about. We see a strong development in Germany. We see a strong development in markets like France and so on. We see markets like Poland going the other direction. We see opportunities in Middle East. We see improvements, for example, in Morocco. Overall, I would say with a lot of movements within a specific country, it adds up to the sum as a stable region. As usual, I will not forecast the Q4 orders.
We stick to the policy we have that we announce them when they become firm and unconditional. A big region with a lot of movements within specific markets, but overall then, we see a stable development, which I think also shows in our nine actual numbers.
Okay. A question to Marika on margin guidance for the full year. If I do the maths, then you are basically guiding for an EBIT margin of somewhere between 12.5%-15.5% for Q4. I mean, the low end at least seems quite conservative compared to what you've been delivering historically in Q4, but also compared to what you've been delivering the last few quarters. Any comments to why margins could land in the lower end of your range here?
We have given you the range for the full year. You obviously have the nine-month results, any anticipation, I guess you can calculate yourself in terms of realistic or not. The guidance that we have given now is the outlook for the full year. We will not guide in a specific form for Q4 of 2016.
Okay. Have there been any specific events in Q4, or can you just merely see in your backlog that contribution margins are significantly lower than the volumes you've been executing for the last few quarters?
I can only answer again that we have given you the range. That is our best estimate at this point in what we see that we have ahead of us.
I understand, Marika, to the range, but I'm just trying to understand the dynamics behind the lower end of the guidance, if there is anything specific which is impacting, which we should be aware of.
No, it's nothing specific. It's just regular business. It's the latter part of the year. We're going to be dependent on weather, as we are every year. If things pan out to our favor in that respect, we perform as we have done in some quarters. If weather is not that good, it's going to have an impact on what we can install. We just have to wait and see as we get closer to year-end. So far, weather have been working in our favor, and hopefully it does so for the remainder of the year as well.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Alok Katre of Societe Generale. Please go ahead. Your line is now open.
Hi, thanks for taking my questions. Alok Katre from Soc Gen. I have a couple actually as well. Firstly, on the services side, can you just talk about what's happening over there? If I exclude, let's say, Availon and UpWind, then the service growth that I come out to is probably around low single digits. I get to the same result again for second quarter as well. The backlog is also flat year-on-year. I'm just trying to square that with the strong penetration in full service orders for the past several quarters, and also the higher installed base. The related thing is also the margins. If I exclude the inventory write-down last year, then actually profits would have been down year-on-year. I'm just trying to understand what's happening there.
Is it just the way your pricing on services is being done, particularly in the U.S., or is there something else?
Okay. In general, as I said earlier, we're fully aware of that 14% is not a satisfactory level, and we have no intention of staying at that level. Again, you saw last quarter, i.e., Q2 of this year, we delivered 18%. You have an impact from the two acquisitions on profitability level, and that's simply because of them being fairly small in comparison to high cost level. We're working on the integration, and I would say the integration is performing according to plan, but we will not be fully integrated until the latter part of next year. That's when we will be able to see less of a dilutive effect from the acquisitions.
If I look at the underlying business performance, yes, I agree with you, most of the two quarters that you have seen, Q2 and Q3, the growth is bigger from the two acquisitions compared to the underlying growth from our own business. How we recognize revenue creates a certain lumpiness in the business activity, but underlying, if you look at the order backlog compared to last year, you see a solid growth. We don't see any alarming facts that we see a slowdown in the service business as a whole. We will continue to build up as we have done previously.
Right. Just to clarify on this one, when you said, depending on how you recognize the revenue that creates lumpiness, is that a change versus what the revenue recognition method was in the previous quarters?
We obviously use the same methodology as previously, there has always been a lumpiness in between the quarters in the service business. If you have a quarter where you see a lower activity level, obviously with smaller numbers compared to the [V2G] business, they will have an impact on the profitability. It is easier to look at a 12-month rolling rather than a single quarter and evaluate a single quarter in the service business.
Fair enough. Just on the margins, I know you probably don't want to specifically guide on Q4 and probably around 2017, but just thinking, one of the things that you've been mentioning is in the third quarter particularly, a big portion of the margin gain was driven by volume leverage. Should we then, particularly for the U.S. in 2017, then assume that the reverse will hold true as volumes, let's say, are weaker, then we should give up some of the margins? Is there any other reasons why we should think about the ability for Vestas to hold up margins? Even when volumes can be lower. Let's put that way.
I think that what we have said is obviously volume have an impact on the absorption rate, that obviously becomes more positive when you have a very high activity level. Anders have been very clear on our view, and in particular, how we interpret the external view on the U.S. market. It is a long extension of the PTC, how profitability level will pan out, I think we have to come back to when we guide for 2017.
Okay, fair enough. I'll get back into the queue. Thanks.
Thank you. Our next question comes from the line of Klaus Kehl of Nykredit Markets. Please go ahead. Your line is now open.
Hello. Klaus Kehl. You've talked a lot about the U.S. and EMEA, et cetera. Could you talk a little bit about what's going on in South America? Perhaps if you could divide it into two. First, an update on Brazil, and secondly, an update on the other South American markets, Chile, Mexico, et cetera. That would be great. Thank you.
Yeah, thank you. I think in Brazil, of course, we see a good delivery on the orders we've taken. As you know, we are improving our local manufacturing capability in Brazil. That is according to plans. We deliver both the turbines and the blades locally now to qualify for the rules. That is in a ramp-up process and perform according to plan. When it looks at the overall market, of course, we have seen delays in the auctioning system that they have in Brazil. There is an anticipation that the auction that were delayed will now happen towards the end of the year. I think remains to be seen, of course, but those are the official plans. From auction point of view, we have definitely seen delays in Brazil. You can, of course, always speculate in why it is.
There is, of course, a macroeconomy situation in Brazil that is cumbersome. Of course, there have also been changes in the government. I don't think it's a big surprise that auctions are being pushed in time. On the other hand, if you look at it a bit more midterm, you see that the electricity consumption is clearly growing in Brazil, and also that wind is the most competitive source of new electricity. Some big question marks short term on auctions and macro development, but for me, a very interesting market, a bit more midterm. Rest of Latin America, I will say that fairly stable.
I think the auction systems, of course, from a order side, drives a bit more lumpiness than when we had the feed-in tariffs because, of course, now auctions are collected at certain times of the year, and then you have an auction that we've seen, for example, in Mexico, we've seen it in Chile, we've seen it in other Latin America. The volumes has been good. The drive to renewable energy with the auction mechanism is there, but of course, due to the auction systems, you will, of course, see a bit more lumpiness, when the auctions happen. Mexico specifically, there was recently an auction, I would say a good overall outcome for wind. We, of course, participate with customers there and then, yeah, remains to be seen who was successful in the auction.
Okay. Thank you.
Thank you. Our next question comes from the line of Mark Freshney of Credit Suisse. Please go ahead. Your line is now open.
Good morning. I have two questions. Firstly, on your conversations with customers, I understand that customers will start talking to you about orders and penciling out production slots up to two to three years ahead of when they may need the turbines. We've already moved to a system of competitive tendering, and now it looks like ultimately we may move to a system where there are no subsidies at all. What are your customers saying? Do you feel that this will be an opportunity for them to install more or do you think it is going to put pressure on the industry? Secondly, with regards to your positioning within the industry, you've had four major competitors merge into two. This has created a lot of uncertainty, no doubt, within those organizations for key staff, particularly on the sales side, and it will also have deterred customers from placing orders.
Just what kind of volume uplift do you think you've had or will have from this kind of uncertainty amongst your competitors?
Yeah. Two good questions. Not that easy to give one clear answer on, to be very honest. I think overall, of course, it is positive that the competitiveness of wind compared to other sources is improving all the time. Of course, it is a positive development that we now see in more and more markets where subsidies are not needed for wind to compete. On the other hand, then, of course, we should also remember that the whole electricity market is a regulated market. Of course, what we would like to see is a subsidy-free environment for all, a level playing field, and also even better if we actually could get the price on carbon, which is another discussion, which I think that there is a strong support for.
Of course, it's a positive development overall to get to, I would not call it subsidy-free for wind, but a level playing field, and that we now see in more and more market in technology-independent auction, that wind takes its fair share without any type of political support. That will result in an overall easier market to predict, hopefully, because of course, a challenge for the industry and what has contributed to a fairly cyclical industry in the past has been the dependence on regulation and political regulation. That creates an uncertainty. I think the overall good thing with this is that it's a positive development. It gives, hopefully then, a more stable market outlook. Exactly what it means from a volume point of view, I think that's a little bit harder to say.
On the competitor side, as I have commented on before, I think it's natural that this industry, as it is maturing, that we see consolidation among the players. Again, I'm very confident in Vestas' position. We have a global reach, we have a technology and service leadership, and we have a scale that we will have to continue to build on and leverage in the new market scenario. I think currently it's hard to draw any conclusion because these mergers are either just happening as we speak, or are planned to happen next year. Of course, it's a bit early to draw any sort of short-term conclusion of behavior in the market.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Sean McLoughlin of HSBC. Please go ahead. Your line is now open.
Thank you and good morning. My first question is on CapEx. I know this has been creeping up through the year. It implies a lot of CapEx in Q4 as well. What is driving this? You've got the blades acquisition on one side. Are there more acquisitions here planned, and is this a kind of sustainable level going forward? Secondly, just a question on the U.S. market. Are you having to be more aggressive on pricing orders given there are more competitors this year? A comment on just how the competitive environment in the U.S. has changed compared to last year, specifically in the previous PTC cycle. Thank you.
If I start with the CapEx, I would say that the CapEx level, if we exclude the acquisitions of Availon, that is included in this year, I would say we are at a level that is satisfactory. Most of the investments that we have been making is really to follow the overall demand in the market. It is in molds for the blades. I think that the investment reflects very well the activity level. What we also have said earlier is that the blades we actually, or the molds, we write them off in three years. You run them flat out, and that is why we're doing it, not everything at the same time, but we're doing it in pieces to make sure that we utilize them to the full extent.
I wouldn't say it's anything surprising, and we have also said that, depending on where the market is, we will continue to be at fairly low levels compared to the activity level that we see right now. I think we have been extremely efficient in how we have adjusted to the higher activity level.
Yeah. To comment a bit on the prices, as you saw in the quarter, the price per megawatt was fairly stable, EUR 0.88, and has been fairly stable for some time. It's a competitive market, actually, in all parts of the world. It's definitely a competitive market. We have a lot of different competitors, and that goes for U.S. as well. It's definitely a competitive market, but it's also, of course, a lot of parameters and not just price that we compete in. It is, in the end of the day, the levelized cost of energy, and therefore, the sort of internal return rate that customers are looking at on the project.
Price is, of course, one of the parameters, but there is several other parameters as well that you have to master in order to win the deal in this market.
Right. If I could just rephrase that, are you suggesting that there's been no or little erosion of any competitive advantage on a cost of energy level of your offering versus your competitors?
I feel that we have a very good competitive product portfolio. We have a very wide product portfolio. We have both a two and a three-megawatt platform, which means that we can fit an offer into different wind regimes, different sites. We have a very good manufacturing footprint, which means that we can optimize where we get supply from, and therefore, transportation costs. These are things that we constantly have to stay on our toes on and constantly work on in order to maintain our good position in a very competitive market.
Thank you.
Thank you. Our next question comes from the line of Pinaki Das of Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Yeah. Hi, good morning. Thanks for taking my questions. I have two questions. The first one is just around profiling between 2016 and 2017. You've upgraded your 2016 revenue outlook quite significantly over the last year. Can you explain to us if you had any sort of leeway around on the deliveries, whether you could do it in 2017 versus 2016? Clearly, 2016 has been very good. Did it have to be so good? Could you have shifted some projects into 2017 if that made the year-on-year look somewhat better? That's my first question. The second question is just around Egypt. I know it's still at a sort of MoU stage right now, no order. In the meantime, obviously, you've had quite a big devaluation of the currency there. Any comments around that would be useful. Thank you so much.
Okay. If I take your first question, Pinaki, I think I understand where you're coming from, obviously, we deliver the projects to make sure that we are efficient in terms of our working capital and also to the need of the customer. There's nothing we can shift around, if that is your question. We're doing what we're asked to do in terms of customer requirements when it comes to deliveries. I'm not sure I got the second question.
It was regarding Egypt. I can comment on that.
Yeah.
Egypt, we are in the early business development phase, as you alluded to as well. There is a great potential, both when it comes to the wind resources in the market and also the need for electricity. The growth in consumptions is around 7%-8% per year. It is early development phase that we are in. We will continue to work on that, and once we have firm and conditional orders, if that happens, then we will come back to announce that. I think it has a great potential, and of course, there are also challenges that needs to be overcome before it materialize.
Thank you.
I think we are last question.
Okay. In that case, our last question comes to the line of Gurpreet Gujral of Macquarie. Please go ahead. Your line is now open.
Hi, guys. Two questions from me. We saw recently a letter of intent being signed by Goldwind in the U.S. Just wanted to know if this was something that Vestas was competing for, and if so, was there something specific about this deal that meant that you simply couldn't win this? Secondly, my question is on the German market. Just wanted a bit more color on activity, specifically on the Southern Germany region, given some positive news coming from one or two of your competitors in that particular region. Thanks.
Yeah. No, it was not an order that we competed on. I honestly don't know much about either the customer or the order. It was not something that was on our radar screen. I also read a notice somewhere, but that was the first I heard of it. I think it's more a question to them on the order, but it was not something that we were aware of. On the German market, I don't know exactly what competition have said, but what our view of the German market, and I think shows in the numbers as well, both on delivery side and order intake side, is that we see a strong German market. As we have said before, how it will pan out for next year, I think remains to be seen. The auction is coming in April, May of 2017.
If you qualify and have the permitting before the auction, you will qualify in the old setup that also have a falling feed-in tariff. Of course, it will very much depend on customers now then qualifying for permitting. It's a strong market. We see that in the numbers, and we expect Germany actually to continue to be strong. I'm aware of some regional discussions. I think for us, the good news is that we have a very good turbine for all the regions in Germany. We have a very good low wind turbines, and we have a very good mid wind turbines. I'm fairly confident that the regional differences will not have any major impact on our ability to continue to be a key player in the German market.
Okay. Thank you.
Thank you. Okay, I would like to thank you all for calling in. Thank you for your interest, and I am sure I will see at least some of you during the next couple of days. Thank you very much.