So, good morning, everyone, and thank you for calling in to this third quarter earnings report. As usual then, it's me, Marika, and Hans Martin and the IO team that are here today. So the normal disclaimer slide and then let me jump straight into the key highlights for the quarter. Overall, very satisfied with a strong performance, a good execution across the board. High activity level, delivery up 44% year over year and also driven by all regions.
Good earnings improvements, EBIT before special items of 14.9%. 4 percentage up year over year. Also a solid free cash flow of 1,000,000 on par with the same quarter last year. Combined order backlog remains high. At $17,100,000,000 and the turbine order backlog impacted by high activity level in the third quarter.
Outlook for 'sixteen, that has proven to be an extraordinary year. And then as we have done the last 2 years based on better visibility for the end of the year and of course also performance year to date. So as usual then, I will start talking about orders and market, and then Marika will talk about the financials. So looking at the order intake then in the quarter increased by 17%, 1.8 gigawatt The 17% correspond to 261 Megawatt and that And 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 1,000,000 per megawatt was 0.88 in the quarter. So a fairly stable development in a competitive market. And as usual, of course, we should remember that the price per megawatt depends on a number of different factors. Turbine type, scope, geography and of course, the uniqueness of the offering. If I look at order intake and 9 months actual, we are keeping the pace from last year.
Our global reach continues to pay off and we've taken orders in 20 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 change year. So we feel overall, that we have a favorable regulatory environment. Looking a bit more into the details, on order intake then for 9 months actual, we see a decline in Americas of 23%. We see that this is primarily due to the different PTCs cycle than previous years.
While we see positive year on year changes in market such as Canada and Argentina. EMEA up 22% as we have talked about previous quarters driven by a range of countries, but especially then Germany Norway, the big order we received in Norway and Morocco contributing positive while offshore. And then I'm talk about the 3 Megawatt Offshore, which of course is Divestas 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 then to deliveries, continued strong growth across all regions.
So on 9 month actual deliveries are up 35%, close to 6.5 gigawatts. And as I said, that's across the board. Starting with Americas then, we see, up 36% 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 17 to 20 for the U.
S. Market. And our assessment currently is in line with most external reports and that is going to be a buildup towards 2020. So relatively speaking, then a lower level in the US for delivery in 'seventeen. In EMEA, also solid good development, 29% on 9 month actual, 8% in the quarter, higher activity levels basically Germany and Sweden and also Belgium, which is, again, a 3 Megawatt offshore project.
Also, in Asia Pacific from, of course, a lower level, but good growth numbers And here, the increased activity comes from China, Thailand and India. Looking at the combined order backlog down, remained strong at EUR 17,100,000,000. Decreased sequentially on the turbine side with SEK 1,000,000,000 in the quarter. On the other hand, then Year over year we saw an increase of 1,000,000,000 in the backlog Service backlog remains, constant or flat, 9,900,000,000. Somewhat about the joint venture as well that we have together with Mitsubishi Heavy Industry for the offshore market delivery are progressing according to plan and also sales activities remains high.
Looking at the order situation, the backlog grew to 1.7 Gigawatts the new project in the quarter, was, close to 100 Megawatt, on the 8 Megawatt turbine. Contitional orders stand at 4.50 megawatts and preferred supplier agreement increased to 620 Megawatt. As I said, also an installation, quarter where Globalbank, the first eight megawatt, project is under installation progressing as planned, about half or a bit more than half of the turbines have been installed. And then, the joint venture is BC also installing to 3 Megawatt, projects, noble wind, and ramping. So with that, I leave the world to Marika to go through the financials.
Thank you, Anders. And 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. So it's increased by 2037 percent. Also well reflected in the gross profit where we have a 52% improvement.
Please remember also the the positive impact from from the volume that you see in the quarter. And also note that in the gross profit, you have an impact from a write down of 54,000,000 in Q3. And that is related to development and construction activities, from prior prior years. You also see a good development or a very solid performance on the SG and A. So we are more or less flat year over year.
And all that obviously contributes to a very positive EBIT performance with an 87% improvement year over year. And again reflected in the margin that improves by 4% year over year. Gross profit is solid. I would say quarter over quarter. So we are generating in Q3 20.4 percent 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 and A and that continues to be under control and is a very important parameter for us, And 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 in the numbers you have the impact of the 2 acquisitions that obviously have an impact on the SG and A. But all in all, we continue to leverage the SG and A also in Q3 of this year. The service business improves 11% quarter over quarter or the year over year and you have both organic as well as growth in the 2 acquisitions. EBIT is at 14% in this quarter to be compared with 18% in Q2. So 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 in improvement. Sorry, 21% to be very precise. Yes. Balance sheet is continues to be strong and the 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. Networking capital is year over year, flat, a slight worsening compared to to lost quarter but again as anticipated because of high activity level. Solvency ratio is well within the boundaries. So we are close to 33% and the target is to be between 30% 35%. The change in net working capital, which continues to be a focus area and we have as I've stated before been very efficient on the working cap considering the high activity level that we have in the company.
So 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 and that is primarily receivables, and also prepayments going down. And 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 than what we provide for. And 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%. So still good quality performance in the company. Cash flow statement, cash flow continue 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.
And that brings us to a positive free cash flow of 155,000,000, 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 German 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. So trailing 12 months including the acquisitions, we are trailing at 1,000,000. But the underlying net investments excluding that is 1,000,000.
So in line what we have communicated earlier. If we look at the capital structure, we are, as I alluded to earlier, well within the boundary we are bringing a negative net debt to EBITDA also in Q3. And the solvency rates ratio is picking up from last quarters 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. So we are now at 162 point 5.
And so solid improvements on basically all parameters to generate the ROIC. By that, I give the word to you, Anders.
Thank you, Micah. So as I said in the, in the highlights and also remind you as we've done last 2 years based on better visibility for the reminder of the year. And of course, performance year to date, we now go to an outlook that is a range. So on the revenue side from minimum 9,500,000,000 to between 10,000,001,000,000,000 On the EBIT before special items from minimum 12.5% to between 13% 14 on total investment from approximately $500,000,000 to approximately $600,000,000 and on the free cash flow from minimum 1000000 to minimum 1000000000. We have not changed our outlook on the service business expected to continue to grow with stable margins and the dividend policy is also unchanged.
So with that, we move into
Thank Our first question comes from the line of Christian Johansen of Danske Please go ahead. Your line is open.
Yes, thank you. My first question in this is regarding the U. S. And whether you can update us on the level of client activity you're having here in the fourth quarter when it comes to negotiations on PTC contracts?
Yeah. I mean, of course, US, it's currently extremely high activity levels. And, of course, our sales team there is is is very busy in this end of the of this, PTC cycle. So very high activity level, and And and I expect that to continue actually to, probably for the 1st December this year. So, I I feel good about our position in the US market.
And as I've said before, I've seen we have seen good progress actually during the last 3 years when it comes to our development and our market share in the So very high activity level and of course, a lot of, negotiations with customers.
Okay. That's very clear. Then my second question, Akshay, your backlog is down 1,000,000,000 and you are calling 2006 seem extraordinary. I mean, is what you're trying to say here that we should expect lower activity in 2017?
I think if you first say 16 extraordinary, I think in 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. And And of course, we are moving into an overall market situation now where we've seen 2 or 3 years of very, very high growth levels. And we're moving now to the next 3 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. And of course, as we also commented on Q2, we saw a very, very favorable Q2.
So, on the U. S. Specifically then, it's of course where we see a new scenario. And 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 'seventeen to to 20 20. And therefore, we expect the U.
S. Specifically 2017 to be a lower activity level than 16.
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 and congrats with yet another strong set of results. After your second quarter results, you mentioned that everything had just gone your way and you could hardly imagine a better quarter with the gross margin up some 600 basis points And if we now clean up for the write down that you're taking there 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. And then when you look at the Q2 and Q3, I agree. We have managed to deliver very high gross profit margins in those two quarters. But that is also a reflection of the high activity level and the volume increase that you see in those 2, two quarters because simply because of high activity level, you have very high absorption. And that obviously have a positive impact on the gross profit.
So, that is something that I again yet again wanna highlight then. We did, a write down of, the older projects that we have still by 54,000,000 and then you can look at the the the write downs as 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. But it is a volume impact on the gross margin and that is well reflected both in Q2 and Q3.
Okay. And then just another margin question. The service margin still being solid, it comes out a bit lower than we would expect here in the quarter. Can you explain what is what's happening there, please?
Yeah. And and that that also is a reflection of the lumpiness that we have, alluded to earlier. You see a fairly low activity level in the in the quarter. We also have 2 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 to the size of of of their contribution.
So all in all, we're not happy with the 14% but it also shows that in Q2 we delivered 18% and this a quarter 4% below. So it is a reflection of of the lumpiness, but we are overall content with the underlying performance of the business.
Okay. And and going forward, we would still expect some 17, 18% or so.
I mean, our intention is obviously to be at the levels that we come from. But remember that the the 2 acquisitions will not be fully integrated until end of next year.
Our next question comes from the line of David Foss of Barclays. Please go ahead. Your line is now open.
Two questions from my side as well, please. So if you look at the PTC orders that you've received to date, which, you know, 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 1. How that was clear?
Yeah. I I I think it's, I mean, without going into too much detail. Of course, it's a it's It's between us and the customer. And of course, it is a very high activity level in the U. S.
Now to sort of secure order and part of your competitiveness is of course when you can deliver as well. So I don't want to go into too much detail. On that. But, as you know, there is a 105 day period so to speak after orders, and delivery. So of course, that the sooner the orders.
And of course, this, 660 are are ticking. So to speak, once the order is there and the down payment is done, then the 105 days are ticking. So of course, for our, for us and for our planning purpose as well, it's, of course, good to start to deliver immediately. So I think on that, you should assume that the majority will will be in 16.
Oh, okay. I I understand. It's just that if I look at the America's order intake, which is which is down 25 percent. I cannot help but notice that if this were a regular PTC here, if you like, of the type that we had in 2015, 23% number would, would look a lot different. And 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, you know, we know from the mid American order that, a 200 megawatts, you know, order you received this year actually corresponds to something like 2 gigawatts over the next 4 years, right? So I'm just trying to gauge and was hoping for a steer from you what you think that the, you know, that on a like for like basis, the the order book development in the US has actually been
I yeah. I I think it is, of course, very hard to do a like for like because, of course, it's a complete different pizza cycle this year. So, so, I mean, it's a it's up to 2020 of course. So, So it is it is very hard to do a a like for like because the scenario is completely different. I think what my main point would be that we see US as a very, very strong market.
Up to 2020. We, for sure, and I actually believe it will be a strong view on that as well. But I think it's fair to say that everyone is focusing now on the 100 percent paid C cycle first. So up to 2020. So we see a very strong US market.
And, and, as I said, I think we an external sources believe it's around 50 to 60 gigawatts during this period in time. But I also think it's fair to believe that if you look at the phasing on delivery, we will see it a buildup over time as well. So 17, we be a bit lower and then volumes will start to to build up. So I I think it's with such a different scenario from from from previous PTC cycles that was very late in, in the year and was just for 1 year. It's very hard to do year on year compare I think what you are saying that the, the sort of rule of thumb that, 10% the PTC components scale up, as you said it.
So if you have a a 200 Megawatts PTC order for the customer that scale up to 2 gigawatts project. I think that rule of thumb is still there. For sure.
Okay. Thank you so much. Those will be my 2 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 for me as well. As you're guiding here clearly for lower activity in the U. S. Here 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 or low activity for Vestas in 2017 compared to 2016? That's the first question.
Yes. No, I was, I mean, I will not comment on 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.
And of course, that has a big impact, on Vestas overall. If I look at the other regions and market, I would say EMEA is is very stable as we, as we have talked about before, we have a positive order, 9 manufacturer compared to last year. So there is a lot of movements within the individual mark but overall we see a stable development. And in Asia Pacific, we of course from a lower level, we also see a fairly stable market. So, I will not, go in to do any kind of outlook for overall Vestas for next year.
That we will come back to in, after Q4 as normal.
Okay. Then just a question on the GP. You do the GP is of course higher due to the higher revenue. But you also in the reports indicate that the mix has been favorable underneath, can you give some more flavor on that favorable mix, what has turned that more favorable?
Yes. And it is basically the same components as we alluded for 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 you're saying and we have written. And mix in this case is scope of projects in particular, and the type of turbines in in any given country. So 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.
So it's all of those parameters that brings us to a positive gross profit.
Thank you. Our next question comes from the line of Akash Gupta of JPMorgan. Please go ahead. Your line is now open.
Yes, hi, good morning. Thanks for taking my question. My first question is also on U. S. And there, I have not that there hasn't been any announcement by you or your peers in last many weeks in in on orders.
And I'm wondering how much of that slowdown is due to elections. And maybe if you can talk about what to expect, if there are any surprise to, an election outcome compared to what what the exit polls are saying?
Yeah. No. I don't think so. I don't know. I mean, to be really honest, but I don't think so.
I mean, as I said, the the activity level is is really, really high in the US. I was there myself, 2 weeks ago and and and met a lot of of customers and and potential customers and and, that that was sort of, yeah, it it didn't it was never part of the discussion, the the election actually. So, so I I don't I don't say that. And, I mean, to ask reiterate what I I said before and maybe I said the wrong numbers. But, I mean, we we see the US as being a very large and stable market in the current PTC cycles.
So between 40 50 gigawatts. And our our focus for the time being is of course to look in as much possible of that market share, as we can now. And that is both PTC qualification components if customer wants to go that route. And it is continuous construction if customer wants to take that route route. So that is the discussions that we have for the moment and as I said, I I I really don't know what's of course in the customer's mind, but at least in order discussions, I had 2 weeks ago, it was never mentioned that they they wait for the election results.
Thank you. And my second question is on services. And there was a step down in margins in Q3 and you still expect flattish margin for the stable margins for the year. So does that, does that mean that we should see a step up in Q4 service profitability? And also, if you can help us, better understand what is the underlying service growth in your business given the 2 acquisitions and currency model?
Yes. So 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 in the range of q2 as as we see it.
But also remember that it it is a negative impact from from the two acquisitions that we made simply because they are not fully integrated at this point. Underlying when we say that we underlying business is performing well and we are satisfied with that is that we see order intake increasing by 21% as aid right number now. So obviously there is a strong growth underneath even if we have a slight drawback in this quarter that we're not satisfied with.
Thank you.
Thank you. Our next question comes from the line of Fu Nuan of Citi. Please go ahead. Your line is now open.
Hi. It's Luke. Thanks for taking my question, guys. The first one is on order intake in q 4. If the spin pretty weak so far in in in the quarter in terms of announced orders, what what we are seeing.
What do you expect for the full q 4 and in connection with that US orders, you mentioned you you think there's going to be a market size or external consultant say there's a market size of 6.50 to 60 gigawatts between 17 2020. What what market share do you think you can get off that?
I I corrected myself, on the last question. So I said we believe between 40 and 50 gigawatts, in the period, 17 to 20. Just to to be clear on that. And I'm sorry that I
Sure.
I said the wrong number first. We will not give any outlook for Q4 order intake. We stick the principle we have that we will announce to others when they become firm and, unconditional. I'm very satisfied with our market share in the US. If you look at the external estimates, we are somewhere around 30%, maybe plus minus 5% and that is an improvement from around 10% 3 years ago.
So I'm I'm really happy with the the performance we have in the US market and our ability to take market share and where we are today.
Okay. Can can you give us maybe just on that 30% plus minus 5%? The more upside or more downsides? Is that number you reckon?
No. I I think that, I mean, the reason why I say plus minus 5% is that, I I think it if you look also at external reporting on market share, which of course is what we are looking at, they vary a bit because the some look at at, delivery. Some look at, connected to the grid. It can vary because of the projects are big, it can vary a little bit over time. So we can have a period of sort of Viestas project during a 6 month and then our market share, shoots up a bit So so I think that's why I say that there is a uncertainty probably around a plus minus 5%.
And again, I I will not predict our market share going forward. I can just say that I'm I'm I'm really satisfied with the development that we've had and the increases that we've seen the last 3 years. And of course, our ambition is always to do to do better. And then we'll see it's a competitive market for sure.
Okay. Sure. Thank you. And my second question then is on the gross margin. You expect to stay on that 20% adjusted, that you achieved for the quarter as as as a run rate going into 17.
And and also maybe you can give a bit of color around how much of that the high gross margin you're achieving this year so far is due to the high utilization that you see in 2016 so far?
We have not and I would say rather that the 80, 18% that we delivered last year, in gross profit margin. We, have been clear that we see an improvement from that level. Then I would say Q2 and the Q3 is clearly high volume quarters. So, contributing to the high gross profit margin But 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 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 'sixteen compared to 2 15 where we exited with 18%.
Okay. Thanks guys.
Thank you. Our next question comes from the line of Faizal Ahmed of SEB. Please go ahead. Your line is now open.
2 questions from my side. Firstly on the activity levels. I mean, you're very clear about the short term high activity levels in the US at the moment. But how do you see, EMEA, short term progressing? If I look at your intake, for the 1st 9 months and strip out the big, you know, vision orders, then then your order intake for me is actually down.
Compared to last year. And how should we expect the full year to add up?
That's my first question, please.
Yeah. Now, as I said, I think, EMEA is, a stable region. Mean, it's a lot of countries in that region and we for sure say up and downs. But if I look at it combined on 1st 9 months, we see a stable region. Of course, we can strip out certain orders, but I mean, it's orders, so we prefer to keep them in.
And, and I mean, there is a lot of ups and downs as we have talked about. I mean, we see a strong development in In Germany, we see strong development in Mocks like France and so on. We see markets like Poland going the other direction. We see opportunities in in Middle East. We see improvements, for example, in Morocco.
So overall, it's it's it's, I would say, with a lot of movement within a specific country. It adds up to the sum as as a stable, as a stable regions. And then as usual, I will not forecast the Q4 orders, I I we we stick to the policy we have that we we announce them when they become firm and unconditional. So, 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, on 9 actual numbers.
Okay. And then 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 12a half to 15a half percent for Q4. I mean, the low end at least seems quite conservative compared to what you've been delivering, historically in in in 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 for the full year. You obviously have the 9 months results. So any anticipation, I guess you can calculate yourself in terms of of realistic or or not. The the the guidance that we have given now is the outlook for for the full year and we, we will not guide in in this 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 what one of 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.
Yeah. I understand the market of range, but I'm just trying to understand the dynamics behind the lower end of the guidance, if there's anything specific, which is impacting, which we should be aware of.
No, it's nothing specific. It's just regular business. You will see, see, I mean, it's a latter part of the year. We're gonna be dependent weather, as we are every year. And if things pan out to our favor in that respect, we performance we have done in some quarters, if weather is not that good, it's going to have an impact on what we can install.
So I mean, we just have to wait and see, as we get closer to to year. And so far, whether have been working in our favor and Hopefully, it does so for the remainder of the year as well.
Our next question comes from the line of Alok Katri of Societe Generale.
Hi, thanks for taking my questions. Alok Katre from SocGen. I have a couple actually as well. Firstly, on the services side, can you just talk about what happening over there. If I exclude, let's say, Avalon and upwind, then the service growth that I come out to is probably around low single digit And I get to the same result, again, for second quarter as well.
The backlog is also flat year on year. So I'm just trying to square that with the strong penetration in food service orders for the past several quarters and also the higher installed base. And then the related thing is also the margins, if exclude the inventory write down last year, then actually profits would have been down year on year. So just trying to understand what's happening there. Is it just just the way your, you know, pricing on services is being done, particularly in the US, or or or is there something else?
Okay. So, in general, as, as, I said earlier, I mean, we were fully aware of, that 14% is not a satisfactory level, and we have no intention of staying at that level And again, you saw last quarter, I. E. Q 2 of this year, we delivered 18%. You have, an impact from the 2 acquisitions on profitability level.
And that's simply because of them being fairly small with a in comparison, a 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. So that's when we will be able to see less of a dilutive effect from from the acquisitions. If I look at the underlying, business performance, yes, I agree with you most of the 2, two quarters that you have seen Q2 and Q3, the growth is bigger from from the 2 acquisitions, compared to the underlying growth from from our own business.
We also have, 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. So 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.
And just to clarify on this one, when you said you know, there's, you know, 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.
And we have also we we obviously use, the same methodology as previously but there has always been a lumpiness in in between the quarters in the service business. And, I mean, if you have, a a quarter where you see a lower activity level. Obviously, with with smaller numbers compared to the BTG business, there will have an impact on the profitability. Therefore, it is easier to look at 12 months rolling rather than a single quarter and evaluate a single quarter in the service business. Fair enough.
Fair enough. And then just on the margins, I know you sort of 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, sort of will hold true as volumes, sort of, sort of, let's say, are weaker, then we should give up some of the margins? Or is there any other reasons why we should think about the ability for us just to hold up margins? In, in, even when volumes have been, or volumes can be lower. That's what that means.
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 Andres 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 uh-uh extension of of the PTC. How profitability level will pan out?
I think we have come back to when we guide for 2017.
Okay, fair enough. I'll get back into queue. Thanks.
Thank you. Our next question comes from the line of Klaus Kelle of New Credit Markets. Please go ahead. Your line is now open.
Yeah. Hello, Carlos Kiel. We've talked a lot a lot about the US and the EMEA, etcetera. But could you talk a little bit about what's going on in South America? And perhaps if you could divide it into 2, first an update on Brazil and secondly an update on the, yeah, the other South American markets, Chile, Mexico, etcetera.
That would be great. Thank you.
Yeah. Thank you. I think in in Brazil, of course, we see a good, delivery on the orders we've taken. We, as you know, I mean, we are improving our local manufacturing capability in Brazil. That is according plans.
We deliver both the turbines and, the blades, locally now to qualify for the rules. So 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, sea system that they have in Brazil. There is an anticipation that, that the auction that were delayed will now have then towards the end of the year. I think, yeah, remains to be seen, of course, but that those are the official plans.
So from, auction point of view, we have definitely seen, delays in in Brazil. And you can, of course, always speculate in why it is. So that is, of course, a macroeconomic situation in Brazil that is, is cumbersome, and, of course, there have also been changes in the government. So I don't, 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.
So 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 will say that, fairly stable. I think the the auction systems, of course, from a water side, drives a bit more lumpiness than than, than when, we had a fade in tariff 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 in Mexico. We've seen it in Chile.
We've seen it in other Latin America. But, the volumes has been, has been, good. The, the, the drive to renewable energy with the auction mechanism is there, but of course, due to the the auction systems, you will, of course, see a bit more lumpiness, when the auctions happen. Mexico specifically. That was recently an auction.
I would say a good, a good, overall outcome for wind. We of course participate with the customers there and then yeah, we we remains to be seen who who was success will, in the auction.
Thank you. Our next question comes from the line of Mark Freshney of Credit Suisse. Please go ahead. Your line is now
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 2 to 3 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's going to put pressure on the industry?
And just secondly, with regards to your positioning, within the industry, you've had 4 major competitors merge into 2. This has created a lot of uncertainty, no doubt, within those organizations, you know, for key staff, particularly on the sales side, and it will also have have deterred customers from placing orders. So just what kind of volume uplift do you think you've had or will have from this kind of uncertainty amongst your competitors?
Two good questions and not not that easy to give one clear answer and to be very honest. But I think overall, of course, it's positive that the competitiveness of wind compared to other sources is improving all the time. So So of course, it's a positive development that we now see in more and more markets where 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. So of course, what we would like to see is is the subsidy free environment for all, a level playing field and also even better if we are could get the price on carbon, which is another discussion, which I think that there is a strong support for.
So 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 then result in an overall easier market to predict hopefully because of course, a challenge for the industry has and and what has contributed to a fairly cyclic industry in the past has been the the dependence on on regulation and and political regulation that creates an uncertainty. So I think the good The overall good thing with this is that it's a positive development. It gives hopefully then a more stable market outlook. So then exactly what it means from a volume point of view.
I think that a little bit harder to say. On the competitive side, as I have commented on before, I think it it's natural that, that this industry as it is maturing that we see consolidation among the players. Again, I'm very confident in Vesta's position. We have a global reach. We have a technology obvious 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 yes, happening or we speak or our plan to happen next year. So, so, of course, from, it's a bit early to to 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 McLaughlin 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. And it implies a quite a lot of CapEx in Q4 as well. I mean, what is driving this?
You've got the blades acquisition on one side. But 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. And 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.
So if I start with the CapEx, I would say that the the the CapEx level, if we exclude the the acquisitions of of a valent that is included in in in this year. I would say we are, at the level that we that is satisfactory. And most of the investments that we have been making is really to to follow the overall demand in the market. So it is in molds for the blades. So I think that very well the activity level and what we also have said earlier is that the place we actually order molds.
We write them off in in 3 years. So you run them flat out, and and that is why we're doing it. Not everything at the same time, but we're doing it in in in pieces to make sure that we utilize them to to the full extent. So I wouldn't say it's any anything surprising and we have also said that depending on where the market is. I mean, we will continue to be at a fairly low levels compared to activity level that we we see right now.
So I think we have been extremely efficient in how we have adjusted the to the higher activity level.
Yeah. I mean, it took comment a bit on the prices. As you saw in the quarter, the The price per megawatt was fairly stable 0.88, and and has been fairly stable for for some time. Of course, it certainly not, any increase in the average price per megawatt, but, I I would say the fairly stable level. I mean, it's a competitive market actually in all parts of the world.
I mean, it's definitely a competitive market. We have a lot of competitors. So, and that goes for U. S. As well.
So it's definitely a competitive market, but it's also, of course, a lot of parameters and not just price that we compete in. And I mean, it is, in the end of the day, the liberalized cost of energy, that we are all and therefore the sort of internal return rate on that customers are looking at on the project. So price pay is, of course, one of the parameters but there is several other parameters as well that you have to master in order to to win the deal in in this market.
Right. So 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 mean, I I feel that, that we have a very a good competitive product portfolio. We have a very wide product portfolio. We have both a 2 and a 3 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. And but these are things that we constantly have to stay on our toes on and constantly work on in order to, 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.
Yes. Hi, good morning. Thanks for taking my questions. I have two questions. The first one is on just around profiling between 2016 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 what on the deliveries, whether you could do it in 2017 versus 2016? Clearly 2016 has been very good, but did you really have 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. So that's my first question. And the second question is just around Egypt.
I know it's still at a sort of MoU stage right now, no order, but in the meantime, obviously, you've had you've had quite a big devaluation of the currency there. So 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, but obviously we deliver the project to make sure that we are efficient, in terms of our working capital and also to the need of the the the customer. So there's nothing we can shift around is that if that is your question, we're doing what we what we're asked to do in terms of of customer requirements, when it comes to deliveries. I I'm not sure I got the second question.
Egypt, I can comment on that. And I mean, Egypt, we are in the early business development face as you alluded to as well. So, I mean, there there is a great potential both when it comes to The wind resources in the market and also the need for electricity, the the growth in consumptions is around 7% to 8% per year. But it is early development phase that we are in. So, we will continue to work on that.
And once we have the firm and conditional orders, if that happens, then we will come back to announce that. So I think it has a That's a great potential. And of course, there are also challenges that needs to be overcome before it, it materialize.
Thank you.
I think we are last question.
Our last question comes from the line of Gurpreet Goedral 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 US. Just wanted to know if this was something divestitures was competing for and if so, was there something specific about this deal that meant that you simply couldn't win this? And 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 1 or 2 of your competitors in that particular region?
Yeah. No. It was not an order that we competed, on. So I I I honestly don't know much about either the customer or the order. So but it it was not something that was on on our radar screen.
I also read a notice somewhere, but that was the first, I heard of it. So, I think it's more a question to them on on on on the order but it was not something that that we were aware of. On the Yum! And Market, I I don't know exactly what competition have said, but the what Our view of the Omen market and I think shows in the numbers as well both on delivery side and order intake side is that we see a strong Omen market. And, as we have said before, how it will pan out, for next year, I think we may be seen.
It is very much up to, I mean, 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 the falling, fade in tariff, And of course, it will very much depend on, customers now then qualifying for permitting, but it's a strong market. We see that in the numbers, and we expect Germany actually to continue to be strong. There will be there are 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 good very good mid wind turbines. So I'm fairly I fairly confident that regional differences will not have any major impact on our ability to continue to be a key player in the German market. Okay. Then I would like to thank you all for calling in. Thank you for your interest and I'm sure I will see at least some of you during the next, couple of days.
So thank you very much.