Good morning, everyone, welcome to this second quarter 2016 earnings call for Vestas. Starting, of course, with the usual disclaimer slide, let me go straight into the key highlights. Of course, overall, I'm very satisfied with the extremely solid performance of Vestas in Q2. We had a high activity level across the board. Delivery up 56% year-over-year and driven by all regions. Increased volume, very favorable project mix, and a solid execution also led to strong earnings in the quarter. EBIT margin of 15.6%, up 7.3% compared to Q2 last year. Also good to see order backlog continue at a high level, EUR 18.1 billion. Due to the better visibility for the remainder of the year and year-to-date performance, we increase the guidance for 2016 on revenue, on EBIT, and free cash flow.
We also launch 2016 share buyback program of EUR 400 million in order to adjust the capital structure. The agenda for today, as usual, I'm talking about the orders and the market, Marika will go into the financials, then we come back with the outlook and the Q&A. Looking at the regulatory environment, I will say overall, we continue to see a supportive environment for renewable energy and for wind. Some of the key events in the quarter, I will start with Americas, was that IRS issued their guidance in May, that also then clarified the continuous construction wording, which simply put, means that if you start constructing this year, you qualify for 100% PTC as long as you finish in 2020. A favorable guidance. Latin America, not much new.
Market that has been a tendering market or auction market for quite some time. A little bit lower activity level the first half, but we see auctions coming up in several markets for the second half of this year. Moving over to EMEA, starting with Europe. As before, I will say that the overall markets are driven by EU complying to the 2020 20% and 2030 27% renewable energy targets. We also continue to see, as we do globally, the trend from feed-in tariff to more tenders and auction. The news in Q2 was Germany announced the auctioning frameworks. Also positive. There was a lot of speculation on this before. Now there are clear, transparent transition rules to the tendering system, and the auction is projected to start in May 2017. Also the expected volumes within the auction framework are on a healthy level.
We have also markets going in the other direction. Poland, the regulatory situation has impacted the market, we currently see a low activity level in that market. In the rest of the EMEA, the same development as previous quarters. In Asia-Pacific and China, the overall plan from before remains, which means that there is a drop-down in feed-in tariff, also a transparent drop-down so that in the effort to make the market more long-term stable, but a continued very good support for wind. We also see some changes in the priorities towards the grid, we see that the first half of this year, there were quite some curtailment in the market that on the back of the very high delivery during last year, that is now being worked through the system.
Therefore, the first half compared to the first half last year, less activities on the order side. I will say in the other Asia-Pacific region, not much change. Continue to develop or implement renewable energy targets in most markets. If I look at the order intake, the order intake in the quarter was 1.8 GW, on a solid level. Down approximately 40% versus last year. Of course, we should remember that Q2 of last year was a very strong quarter on order intake, so it is a tough year-on-year comparison. 70% of the orders in the quarter came from U.S., Germany, Canada, and Brazil. They were the main contributors. As expected, the average sales price on order intake bounced back in Q2 and was EUR 0.89 million per MW. Overall, we experienced fairly stable pricing in a very competitive market.
Of course, as before, have to remember that the price per MW depends on a number of different factors: turbine type, geography, scope, and not least, the uniqueness of the offering. Looking at the order intake then for the first six months, we have a balanced order intake from 24 countries across five continents, and again, proven our unique global reach in the market. In a bit more detail, we see Americas down 45%, very much impacted by the U.S., where we, of course, this year have a very different PTC cycle compared to previous two years. Slightly offset by improvements in Canada and Uruguay. EMEA up 33%, which, very positive, of course, positively impacted by Norway, Germany, France, good activity levels. Negatively impacted by offshore, where we last year had a 400 MW order on the 3-megawatt platform.
On the other hand, actually, our joint venture for offshore with Mitsubishi has taken a similar size order on 400 MW on the 8-megawatt platform, and those numbers are obviously in the joint venture. In Asia Pacific, we saw a decline for the first half, partly due to, as I described, that we see a market that has worked through curtailment in the first half of the year. Of course, the segment we are in the market have lower activities for the first half. Looking at the platform, and the order intake on the different platform, I will say two key messages here. First of all, that the trend towards our 3-megawatt platform continues. You can see the order intake for the first six months on 3 MW, close to 2.8 GW.
At the same time, also a strong performance on the 2-megawatt platform with orders of 1.4 GW. Of course, a broad platform program on both 2 and 3 MW with the different variances for the different wind classes globally is the enabler for our global reach into the marketplace. Moving over to delivery, we saw a really strong development actually across all regions, as I said. Up 56% Q-on-Q and up close to 30% on the first half of the year, totaling 3.7 GW. In the Americas, mainly driven by the U.S., but also an overall improvement in various markets in Latin America, most notably Chile and Mexico. EMEA, also a strong development, both six months and Q-on-Q, 42% and 43%. Solid activity levels with good performance in Germany, Sweden, France. The offshore delivery on the 3 MW was then slightly offsetting that.
Also good growth in Asia Pacific, on the back of the order intake last year. The better performance year-over-year, both first half and the Q, is especially from China, Thailand, to some extent India, and that offset a decline we see in Australia. Moving over to the backlog, excuse me, that continued to be record high at EUR 18.1 billion, an increase of EUR 0.1 billion in the quarter. Movements within the backlog, where the wind turbine backlog decreased EUR 0.4 billion and the service backlog increased EUR 0.5 billion and now close to EUR 10 billion. Some words also about the joint venture. It continues to execute on the plan and be on track. There was a good activity level on the order side. Backlog now stands at 1.6 GW of firm orders and additional conditional orders of 450 MW, so slightly above 2 GW, well received by the market.
As I also mentioned, in the quarter, signed a 400 MW Horns Rev project. Looking at the delivery has now started to the first 8-megawatt project, which is Burbo Bank. The delivery has now started to a harbor in Northern Ireland. Work has also started on a 3-megawatt project, Nobelwind, where we expect deliveries in 2016. With that, I hand over to Marika to talk about the financials.
Thank you, Anders. As you can see on what Anders has described in terms of the Q2, the positive impact is again well reflected in our P&L. You see the revenue is a good reflection of the very high activity level that you see in the companies. We have actually improved compared to last year with 46%. It is a very high Q2. We have also alluded to earlier that we try to move some of the activity levels earlier in the year. That is unfortunately a bit random, and this is the outcome now in Q2. If you look at the gross profit in absolute numbers, you see a great leverage from the volume. You also have a very positive impact from the mix.
Mix again is scope type of turbines cost out to a certain degree and, in this case, a very flawless execution in the quarter. That is again well reflected in the gross margin, where you see a big improvement compared to last year of 6.3%. This is not in any shape or form the run rate, i.e., the 24%. We should also highlight that we have a one-timer in the gross profit here. It is EUR 26 million from an insurance case, and it comes from insurance case on fundament of the turbines. Fixed cost has increased 31%, partly a reflection of the activity level that we have said previously. We should again, and I come back to that, note that in percentage, we are continuing down on the fixed cost. I would say still well controlled and well under good control of the company. Net profits increased by 122%.
If you look at the JV accounting, we're using the equity method, as we have said previously. In the negative of EUR 17, that is a big part of that, or the vast majority of that comes from the depreciation of the V164 that we have highlighted previously. The leveraging on the fixed cost continues. We, despite being up in absolute numbers compared to last year, we are continuing down on a percentage level. We are now at 7.8%, something that we're obviously very happy with or content, I should say. This continues to be a focus area, and the focus is also to make sure that we actually have the fixed cost where the activity takes place. That is also one of the focus areas, not only absolute terms.
If you have a look at the service business, you see an increase again compared to Q2 of last year. We have, in revenue, improved by 12%. A lot of that comes from the two acquisitions that we made, i.e., UpWind and Availon, but also organic growth. Despite that, we were disclosed that the profitability of the two acquisitions was not that high. We continue to deliver very solid margins on the high level on the service business. The order backlog, Anders commented to earlier, but again, a very solid and good offerings from the service business side has made this improvement possible. If we have a look at the balance sheet, which continues to be a strong focus, but also strong performance from our side, you can see the equity improvement, and you also see the improvement of net debt.
We are continuing to be self-financed and having a positive net debt position. Net working capital, as we have alluded to earlier, one of the key focus areas is to keep that under control. We have done a lot of activities to get it down further. At this point, with the activity level that we see and have had and foresee, we are very content with keeping it more or less flat in the period. Solvency ratio, you remember our midterm target is to have a solvency ratio in between 30%-35%. We are within that range, although a slight decrease compared to Q2 of last year. Still a very strong position when it comes to the balance sheet. We also have a very strong net cash position. I don't think that's any secret.
Change in net working capital, as I said earlier, and I think this is a good reflection of what we have done during the last 12 months, but also what we've done during the last three months, i.e., the last quarter. You can see it is the same pattern. We continue to increase receivables and inventory based on activity level in the two parameters that we measure. That is, on both 12 and three months, well offset by increased payables, and that is, again, also a reflection of just the very high activity level with Vestas. I think that Again, we are very content with keeping the net working capital flat at this activity level, which also proves that we are rigorous in what we're doing within the company.
Warranty provisions is something we are obviously very proud of, and we continue to consume less than we provide for, which is a reflection of the good quality. That is, again, well reflected in the loss production factor that continues to perform below 2% and have actually done for a very long time. The focus on quality pays off both from a customer perspective, but also internally in terms of the cost level that we have. Cash flow statement. This is one thing we have a strong performance on, and that is again coming now from the operating profit, which we have highlighted previously. There is fewer, if any, one-timers in the cash flow. The change in net working capital, negative as expected with the activity level that we have. You see also the cash flow from investing activities.
This gives us a very strong cash flow in Q2 of this year. We have an improvement of 147%, but please note that a lot of the positive cash flow actually comes from the operating activities. If you look at the cash flow from financing activities, negative EUR 222. The vast majority of that comes from the dividend that were paid in April of this year. We are at a break-even free cash flow from year to date of approximately EUR 34 million, or I would say rather precisely EUR 34 million. Total investment continues to be, I would say, stable quarter-over-quarter. An increase compared to Q2 of last year, again, as planned for and also what we have highlighted.
In Q2 of this year, you see an increase because of capitalization in R&D, but also higher activity within IT that we now continue to invest in to make sure that we can deliver the efficiency gains that we are expecting. We are, again, adjusting for the acquisitions that we made in Q1 of this year, and that is primarily or it is only Availon. If we have a look at the capital structure, there is no new targets. We remain well within the targets, I should say, in particular on the net debt to EBITDA, but we are also well within the targets for the solvency ratio. We are in the quarter delivering 30.5%. If we have a look at the priorities for capital allocation, which we spoke about when we had the Capital Markets Day, there is no change in how we view this and also our ambitions.
You see that we will continue to invest in the organic growth that is also well reflected in the strategy that Anders have presented. We will also use proceeds for acquisitions. We have done that in terms of UpWind and Availon, but we see acquisitions we prefer both on acquisitions that we can integrate and make sure we get the relevant synergies from. We will also continue to use our dividend policy, which is 25%-30% of the net result. Again, just to highlight that we have paid out EUR 201 million in April of this year. We will adjust the capital structure with a share buyback in the second half of this year. As Anders said at the beginning, we are now starting that EUR 400 million buyback after this quarter. Again, coming back to the share buyback program, we have launched now EUR 400 million.
To be precise, it's DKK 2,984 billion. That is in accordance with the safe harbor rules. The program was launched August 18th, and we are running to the end of this year. The main purpose is really to adjust the capital structure, as we alluded to earlier. The frequency of the share buyback is nothing different from what I just presented, and we will, when we see fit, propose a share buyback. The dividend policy remains. We have the 25%-30% dividend policy of the net profit, and that will not be affected or impacted by the share buyback that we're proposing. Not the least, we have the return on invested capital, which are at a very high level. This level is obviously extremely high due to the good performance on the earnings, but also well-managed balance sheet.
It is at an extreme level. Midterm, we have said our target is to be double-digit when it comes to the ROIC. By that, I leave the word to you, Anders.
Thank you, Marika. Let me then go into the raised outlook for this year, starting with the revenue. Previous minimum EUR 9 billion. Now we have raised that to minimum EUR 9.5 billion. On EBIT before special items, from minimum 11% to minimum 12.5%. We have not changed our view on the service business, expected to continue to grow with stable margins. We have also not changed the guidance on the total investment. It's still approximately EUR 500 million. We have increased the outlook on free cash flow from minimum EUR 600 million to minimum EUR 800 million. As Marika said, the dividend policy remains the same. Thank you. With that, we move over to Q&A.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. We ask you to kindly limit your questions to two at a time. Please hold until we have the first question. Our first question comes from Dan Togo from Handelsbanken. Please go ahead. Your line is now open.
Yes, good morning. Congrats with a fantastic performance here in Q2. Could you elaborate maybe a bit on the mix effects that you highlight here in the report, on regions and platforms and projects, et cetera, and how do you see that changing going into the second half? Looking at guidance, it implies at least a lower margin in second half. That is the first question.
Yes. The mix effect is a big and important factor in what we deliver this year. You see the levels we are at when it comes to gross profit, so it is exceptional. You will also see the regular difference in the quarter. We would like, but we cannot control exactly what we [deliver] in each quarter. We're trying our best, but not 200% is what we achieve. That's why you see the high volume, which has a big impact on the mix. When I talk about mix effects, it's primarily scope. It is platform. It's to a certain degree, countries, but you see a good mix in the countries also in the quarter. In this case, a very flawless execution. Just to highlight a little bit is the accelerated earnings that we have presented to you previously.
If you have very good achievements in that program, which is very forward-thinking, for natural reasons, because you have to deliver before you realize anything, and if you have exactly the right mix in terms of product and scope, that will have an impact. You could also have mix effects in terms of very good performance or upgrades on certain products that kick in in the specific quarter. As I said, all of these elements are not controllable. You would have also flawless execution is that with the volume, if you are very good at your logistics, you could have benefits from that, and the larger the volume, the better that impact is. It's a lot of factors that actually constitutes of the mix effects that you see. In this quarter, it's a perfect blend of everything.
It's a bit of caution, you could argue maybe that since you are implicitly guiding down a bit on the margin in the second half, why shouldn't you be able to sustain that high margin level?
No, the margin that you see now in Q2 is not a run rate, because you will see fluctuations. It is just very perfect in Q2 that makes the 24% that we deliver. We don't foresee that in the second half, and that is also reflected in the guidance that we're providing.
Okay, just one question, looking a bit into the future. Do you see any potential bottlenecks coming up into your production, so to say, platform at the moment? Anything that can constrain you in pushing through even more turbines?
If I start and Anders continues. If you look at the assessment that we're making now in Q2, which we base in the guidance, this is the same methodology that we'll use all the time. A certain risk element is always in the guidance, that's how we make the assessment and provide the best estimate at this point. I don't know if you want to highlight more, Anders.
Yeah, no, on pure production, I think we are confident that we have shown a good track record of scaling up production, and that we have a flexible production setup. It is primarily blades, as we have talked about many times, that should be on the critical edge, because that's the most capital intensive. With the technology change we did now about two and a half years ago, I think we feel confident in the track record of scaling up when it comes to our production.
Okay, thank you.
Thank you. Our next question comes from the line of Sean McLoughlin from HSBC. Please go ahead. Your line is now open.
Good morning. Thanks. My two questions are, I just want to understand really what's changed from the Capital Markets Day in June. You were talking really of a very back-end loaded delivery year. How much has the Q2 been a surprise to you, and is it down to specific projects coming in ahead, or is it down to specific projects being unexpectedly profitable? Secondly, just some visibility on when you think the JV contribution might turn positive. Thank you.
Thank you. If you look at the back-end loaded profile that we have spoken about, I don't see that have changed in terms of overall methodology. That is how the industry is built. Yes, Q2 came in obviously much better than what we anticipated. A lot of the volume, we're trying to make sure that we have less of the risk in terms of Q4, and in particular, November, December for weather conditions. We try to pull in a little bit earlier, the best we can. That is, again, as I tried to allude to, a bit random, unfortunately, because you cannot control, because it's also depending on when the customers are ready. This quarter came out very good in terms of the revenue, and that has a positive impact on basically all parameters.
On top of that, we had a very flawless execution in terms of no extra cranes or extra cost for delivery. The cost level was also, despite the high activity level, extremely well controlled. What was your second question, Sean?
It was about the JV contribution, which again, I noticed is still firmly negative. If you have any greater visibility on when you can expect that to be turning positive.
Yeah. I think we have actually been very explicit about the depreciation of the V164, which is a big contributor to the negative result that you see here using the equity method. Once we start ToR-ing, what we have potentially invoiced to the joint venture, but also the V164, when you see the deliveries, that will obviously have a positive impact on the result.
Thank you.
I cannot be more specific than that, Sean.
Yeah. Thank you.
Thank you. Our next question comes from the line of Casper Blom from ABG. Please go ahead. Your line is now open.
Thanks a lot. Also a big congrats on these amazing results from my side. Marika, a question for you on the R&D and administration cost in the quarter, that takes a pretty big jump. It seems to be related a bit to depreciation. Can you go into a bit detail on what's happening here, and also, if we should sort of return to the usual levels from Q3 on those items? That's my first question, please.
Yeah. If you look at the run rate, you're absolutely right, Casper. We are not changing the run rate of the fixed capacity cost. When it comes to R&D, we have depreciated or impaired some of the testing facilities that we have. On the admin side, we also have VAT costs. Those are the primary, the two big ones. Also, we should not forget that we have actually moved the building in Aarhus from assets held for sale, into the company. Again, that doesn't mean we're trying to sell it, but we don't foresee that we do that within this year, and that's the reason we have also increased the depreciation for the buildings. Those are the major components.
If you want to call them one time or so, whatever, we do that assessment, obviously, every quarter, and see if we are at the right level. The run rate remains fairly stable.
Okay, good to hear. My second question, regarding the U.S. PTC qualifications, where we've seen at least three firm orders coming through here this year. Can you shed any light sort of on your expectations on when timing will be for the remaining part of these orders? Will we see most in 2017, 2018, 2019, or how should we think about it? Is it just to sort of model it equally spread across the coming three, four years?
I think, of course, as you said, we see some orders coming through. Definitely seeing that, both for PTC and components, and also for project in 2017. I must also say that I'm really satisfied overall with our position in the U.S. market. I think we clearly gained share there during last year. I will not give an outlook on orders for the remaining of the year. We have the policy of when orders becomes firm that we will stick to. I will say that, of course, it is still a very high activity level. It is a new scenario both for us and for the customers in the U.S. to plan for when they now plan for a much longer period of time, up to 2020, of course, in the first case with the 100% PTC support.
It is a really hectic period in the U.S., and I expect that activity level definitely to remain to the last day of December for this year.
Understood, Anders, just to try to ask the question again, maybe a little clearer. If you get a PTC component order today, which, for example, makes up 10% of the total order, the remaining 90% of that order is the best guess right now to just equally distribute that over the coming years. I mean, all else equal, without you having to give any guidance on your expectations.
Yeah. I think so. I don't know how it will pan out. I think your assumption of starting with an equal distribution is a solid assumption because the reality is that before the customer have decided how they see the volumes between the year, it is as good assumption as any. Probably there are a lot of benefit to that assumption because there are a certain amount of projects that you realistically can do in a year, so to speak.
Thank you.
Okay.
Our next question comes from the line of Claus Almer from Carnegie. Please go ahead. Your line is now open.
Thank you. My first question is about your new guidance. How do you embed the uncertainty for the U.S. market?
Okay. If you look at the guidance again, it is the best assumption. I think the biggest positive question mark that we have is obviously how the PTC will pan out, i.e., how they will intend to qualify for the 100%. That we have a positive view, the guidance that we have provided is based on a best estimate and obviously the U.S. is part of that best estimate. It's nothing different from what we normally do when it comes to guidance and assessment of performance of the company.
Do you assume that a lot of the PTC qualification orders will move to Q1 2017 from a revenue point of view? Do you assume it all will come in 2016? Just try to get a bit of flavor on the volatility on the revenue recognition.
I understand that, Claus, I would say that remains to be seen. It depends on how it pan out. Obviously, once they place an order, we have 105 days to deliver. When and how the orders come in, that remains to be seen. We just have to come back on that. Again, having said that, the guidance that we provide is a reflection of all the upsides and downsides that we foresee.
Okay. My second question goes back to this question about the product mix in the quarter. I understand that the guidance for our second half is assuming a lower margin than we see in the first half. If we look at the full order backlog, does the scope and country mix and et cetera, is that equal to what we saw in Q2 or was Q2 just a more favorable mix?
I think that goes without saying that Q2 was a very favorable mix. Having said that, we have a healthy order backlog, I will not comment more on that. I would also like to say that gross profit margins of 18%-19% that we have shown previously, is very healthy margins. This is just a very exceptionally good margin in Q2 of this year.
Okay. That makes sense. Maybe just a final question about your free cash flow guidance. Looking at your share buyback program and your dividend, you're still not paying out, or you're paying out less than you're guiding for the free cash flow this year. What is the signal behind that?
There's no signal behind that. We made an assessment, what we think is relevant, and we have also been very specific on how we want to use the cash. We want to invest in the business. We also, if we see opportunities of bolt-on acquisitions, we are prepared to do that. We will use money for the dividend and, in the second half, suggest a share buyback when we see that fit, and that is what we have proposed. It's nothing more to it than that, Klaus.
Okay. Thank you so much.
Thank you.
Thank you. Our next question comes from the line of Phuc Nguyen from Citi. Please go ahead. Your line is now open.
Hi, guys. It's Phuc. Thanks for taking my questions. 2, if I may. The first one is on the U.S. market, and the order intake profile there. We know that 2016 will be quite back-end loaded, as you guys mentioned on the call. Can we assume that the order intake in 2017 will be significantly down? Or do you see customers that you have negotiations with that are happy to take a lower PTC in 2017 or potentially 2018 or 2019?
Yeah. As I said before, we see a very high activity level in the U.S. Also, the other question on how we see the market pan out, when it comes to revenue to 2020, we commented on that assumption. I will not guide on orders for 2017 on this call. As I said before, we announce the order when they are firm and unconditional, and how we look at 2017, of course, we will come back to. I just want to stress again that we see a very stable U.S. market from a revenue point of view, clearly up to 2020. I would also actually argue beyond that, because then we have a drop-down per year of 20% of the PTC for quite some more years. For the midterm, the U.S. market to me looks very stable.
Okay. My second question is again, coming back to the gross margin. Obviously, you had a very extremely strong quarter. I think it was one of the highest that you've ever recorded. From the accounts, you can also see that 1% was driven by this court settlement, but you're still somewhere around 23%. I'd like to understand a bit more, was this driven by a very strong ASP that you've seen across the regions, or was this cost-driven? In other words, did you see exceptionally strong product mix with high ASP in the quarter? Did you have a very strong quarter in terms of cost improvements and therefore you got to this gross margin?
I think that's a fair assumption. What we have talked about earlier is that we have a mix that is influenced by a very high volume. In the mix, you have the scope, and you have the type of products, you have the output of the products, and you have the execution. Obviously, cost is an element. Overall, it is a good blend of everything in terms of the margins of the projects. That's why we have a very high gross profit. Again, I just would like to say that even if we don't see that 23% as a run rate, because it will depend on the mix, each quarter you will see fluctuations. I think what we have provided over the last year is healthy margins for the company.
Then you have all the controlling element in between the EBIT that continue to be at a healthy level.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Pinaki Das from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Hi, good morning, guys. Thank you so much for taking my questions. I've got two questions. The first one is on some of the U.S. orders. I just want some color on that, the second one is on your full-year guidance. The first question on the U.S. orders, I know you don't guide on orders, I'm not going to push you on it. I just wanted a bit of color on some of the orders that you've already announced. I know that you've announced the 131-megawatt U.S. PTC component order as well as the EDF 160-megawatt order. From my understanding is that, although they're just PTC component orders, once you look at the sort of 5% criteria, these orders each could be almost 2 gigawatts once they're fully converted to firm orders.
I just wanted to confirm if my understanding is correct on the mechanics there. Although I do realize that ultimately they will need to be confirmed when they will be confirmed. Also related to that same question is, could you give us some color on the MidAmerican 2 gigawatt conditional order? Is there anything progressing there in terms of the conditions or whatever it may be? That's my first question. I'll give you the second question probably just after this.
That was almost two, but I count it as one. I think on the PTC components, again, of course, it remains to be seen, but as a rule of thumb, what we've seen before is, when it comes to turbine value or components value, around 10% of a total project value. Of course, I have to stress that it's not a firm and unconditional order. It's a competitive market, of course, we have to continue to fight with the competition to take that order in the end of the day, or even if they're all PTC components. As a rule of thumb, I would say more that the PTC part is 10% of the project. On the MidAmerican, which of course is a conditional order that we are extremely happy about and extremely proud for.
It's a potentially very big project and to some extent, a new customer for us. I will not comment on expectation of when it will be firm. That we will come back to when we have news on that.
Okay, great. Thank you so much. On the second question on guidance, I understand that some of the PTC components that you're getting orders for might have to be delivered already in 2016. Does the guidance include some element of PTC component deliveries already in 2016?
Guidance is, anything that we anticipate, both positive and negative, is part of the assessment that we make when we make the guidance. Obviously, all parameters is reflected in the guidance that we have. Then obviously you do the regular risk assessment and the best estimate that we have at this point is what we're providing.
Okay. No, I'm not asking you whether there's upside or downside to the guide. I just wanted to understand if some of the PTC components are also part of the guidance already.
Obviously, we have taken orders up to this point of 344, they are part of it, then you make an assessment what you think is likely for the remainder of the year.
Okay, great. Thank you so much.
Thank you. Our next question comes from the line of Fasial Ahmad from SEB. Please go ahead. Your line is now open.
Yeah. Hi, a few questions from my side. Firstly, on free cash flow guidance, the upgrade you're making here. Is the upgrade purely driven by higher expectation for operating cash flow? Or are you also changing your assumptions for working capital? Maybe if you could also comment how U.S. PTC orders are impacting that line. Thank you.
Yeah. How we sort of view and make the assessment on cash flow is nothing different from what we previously do. Obviously, net working capital is part of that, but we have also been very explicit on the net working capital that we don't see a lot of positive moments on the networking capital with the activity level that we foresee, and also the activity level we consequently guide for. When it comes to the PTC, that's basically what I said just previously. The cash flow is a reflection of what we know, the cash flow guidance is a reflection of what we know, but also a reflection of what we can anticipate. That is how orders will pan out, is part of the guidance on the free cash flow.
Sorry for asking this question, it's regarding gross margins, which you've been grilled on quite a few times here earlier during the call. When we look at gross margin for the second half of the year, do you want us to think about the trailing two to three quarter gross margin when we're doing our margin assumptions for the second half of the year?
As you know, we're not guiding on the margins, as I said, the 23% is at a very high level. We have also been down to below what we delivered last year in terms of gross margins. You can just make the sort of your best qualified assumptions on the margins going forward. We are at a healthy level with what we provided last year and then what the margins will, how they will pan out for the second half, remains to be seen.
This may sound a bit crude, Marika, when I ask this question, you've been stating for the last at least three quarters that your gross margins have been helped by very good project margins. Why should we take your comments regarding contribution margins for the Q3 on face value this time?
Yeah. That you can probably only respond to yourself, what you believe in. If you look at Q4, last year, we delivered 18%. You have a good mix up and down on the gross margins. Even if it sounds like we have that explanation all the time, the mix, and the volume is a big portion of that. Also remember that we have the cost out programs and obviously if that hits exactly the right platform, that's very beneficial in that particular quarter. We cannot 100% we wish that we could say to the market that these are the type of projects that will come in in Q1, these are the type of projects that will come in in Q2 and so forth.
The only thing I can say is that we're trying to mitigate the risk with Q4 by pulling in some of the projects a bit earlier, as best as we can.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Alok Katre from Societe Generale. Please go ahead. Your line is now open.
Yeah. Hi. First of all, congratulations on a really, really great quarter or rather, another great quarter. Thanks for taking my questions. I have a couple, actually. Firstly, just following up on the U.S. It seems to me generally just looking at the order announcements from yourself and also the peers that the customers are not really in a particular hurry to place orders, even though, if you look at the projects being started, then we are well north of 15 gigawatts.
Is this something that you see as linked with the IRS clarification that allows for a four-year commissioning pipeline, therefore generally, should we sort of expect a lot more stable book-to-bill as we sort of go through the next three or four years, even if the activity is at a pretty high level, you sort of see a more stable order flow relative to deliveries? That is my first question. Second question is a bit on the European side. Clearly, orders were much weaker in Q2, and I know there is the Rampion and so on as well, which is affecting. Even adjusting for that, it is still quite sluggish.
You sort of talk about Poland being weak because of the shift in regulatory mechanism over there, then we have seen U.K. being quite sluggish in 2015 and also this year. Just wondering how you view the ongoing trend towards the auction system in Europe, both from a volume perspective and also given what you have seen so far on the pricing perspective. Is it something that we should be a bit worried about on either low volumes or risk of pricing being a bit more worse than the cost out trajectory for the industry and for yourself as well? Thanks.
Thank you. Thanks for your questions. If I start with the U.S. again, as we have said as well, I think we have to acknowledge that it is a new situation both for us and our customers. Of course, there was a wait for the IRS guidance, that came now in May, so that, of course, clarified things also as well. I think that the way to look at it in between safe harbor and continuous construction is obviously, you should probably ask the customers these questions as well, obviously that if a customer has an existing project, it is probably more likely that you will do the continuous construction qualification. On the other hand, if you have more an ambition on certain volumes, of course, the safe method is more to qualify on the safe harbor qualification.
It is, of course, now for the customers to mature their projects as much as possible to decide what kind of qualification. Also, since this is now 100% up to 2020, at the same time, of course, the development of more and more efficient turbines continue, you do not want to lock in everything and all parameters too early in the process. That is probably the overall thinking in the market. Again, the positive news is, of course, that it provides a very stable market on a high level for many years to come. Exactly how it will pan out over the quarters and years, I think we have to come back to when we get a bit more clarity.
On your question on Europe in the quarter, I agree, in the quarter. Orders will be lumpy in the quarter. If you look at our order intake for the first six months of this year in EMEA, we are up 33%. That I would say is very satisfying. As I've said before, we see a stable market in EMEA and also within Europe, even if we see movements in between markets. As we talked about before, now activity level is a lot lower in Poland, for example, than it was last year. On the other hand, activity level is picking up in France, for example. Germany, I would say, overall is a very stable market.
There is, of course, now probably a certain pull-in, which we probably will expect for 2017 as well, because of course, the transition rules for the auction depend very much on when you have permits. It's very clear, transparent transition rules. It drops down more on a monthly basis in order to have a smooth transition to the auction system and avoid this kind of big pull-in and big push-out. That's a very sensitive policy that will create a stable market in Germany. Again, if I just look at the actual first six months when we are up 33%, I must say I'm happy with order intake development.
Sure. If I could just make a quick sort of follow-up. On the U.S., when you say you look for a high-level, stable market, are we talking? Last year, the volume in the U.S. market was about 8.5 gigawatts in terms of installations. When you say high level, are we talking something more like 10 gigawatts per annum, sort of? Just to get a sense, are we sort of more looking at 8.5 as a stable, when you say stable and high level of market? Just to get a sense of what exactly would you mean in terms of stable and high level.
No, I would say that if you look at most of the prediction in the industry now, it's around 8 to 10 per year. I have no other information than if I look at the external market analyst, that's likely. How that will play out exactly during the years, it's very hard to say.
Yeah, fair. Thank you.
Thank you. Our next question comes from the line of Klaus Kehl from Nykredit Markets. Please go ahead. Your line is now open.
Yes, hello. Klaus Kehl from Nykredit Markets. One question. That's related to India. Could you update us on your Indian strategy, and could you tell us whether you have received any orders here in the first half of the year? Yeah, just give us a status update. Thank you.
Yeah. Thank you. Basically, no major changes as we said before. We need to complete our factory in India before we feel that order intake there qualify for what we would consider acceptable margin. It is a market where you need to supply locally in order to generate an acceptable profitability. The factory is on track. We've taken some small orders, but it's very insignificant in the total scheme, I would say. Our strategy is to complete the factory, start the delivery in the beginning of next year, and based on those capabilities that we then build up in India, take a look at our ambition in the market. No major change from a global perspective. Of course, locally, there is a need to update the delivery plan.
There is certain seasons in India, depending on monsoon seasons and when, in which windows you have to deliver and so on. That's local strategies. From a global standpoint, I would say, the full focus now is on the factory build-out and then also partnership around the development side and the land issues that we've talked about before that exist in the Indian market.
Okay, just to follow up, when will the factory be ready? Is it about to be completed? I read something about September.
We expect the delivery beginning next year.
Okay. Thank you very much.
Thank you. Our next question comes from the line of David Vos from Barclays. Please go ahead. Your line is now open.
Good morning. Thanks for taking my questions. I have one on Germany to start with. The gold rush you referred to over at the Capital Markets Day, is that still well on track? Are you seeing elevated order intake for this last year? It's always a bit hard for us to track that, as most of that ends up in unannounced orders. If the increase in those is due to Germany, if you could confirm that would be helpful. If you could also comment on whether you're experiencing any issues in obtaining permits on part of your developers. That'd be very helpful. Thank you.
Thank you for your question. I think it's fair to say that we see a higher activity level in Germany. I think that that will actually continue for some time. As you also mentioned, it has to do, of course, with the permitting and actually, if you also have a permitted project within the 2017 timeframe that you then deploy during 2017, you will then qualify into the old system. It's not a sort of, what should I call it, super rush with a very clear deadline in this year. I think that you will see, to some extent, certain pull in for delivery this year and for delivery next year as well, in anticipation of the auction system.
At the same time in the auction system, the megawatt under the auction system is expected to be somewhere around 2.5-3 GW, was the latest I saw, which again, I must say, is a stable, good market in Germany. We've seen this a little bit before. Last year, Germany wasn't so strong. The year before it was also a pull in anticipation of a change in the feed-in tariff. Compared to many other of these regulatory changes, I must say it's relatively to them, very stable. I was in Germany just a couple of weeks ago, and I met a lot of customers. I didn't hear anything about lack of permitting, but I must admit, I didn't ask either, but it's not something that I'm aware of.
Okay. That's very clear. Thank you. One more question on Egypt. There was a bit of talk in the market back in May, I think it was, around a fairly big contract perhaps being on the board in Egypt. Hasn't materialized yet. Is that because you've found it not attractive or are talks still ongoing?
No, I can confirm that we have discussion with Egyptian authorities of possible business development, memorandum of understanding type of agreement. Those discussions continues. Egypt has actually very good wind potential, it's in a very early stage, and at this point, far from a firm and unconditional order. I can confirm that we have ongoing discussions with the Egyptian authorities around a framework.
Okay, perfect. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Gurpreet Gujral from Macquarie. Please go ahead. Your line is now open.
Hi, guys. Two questions from me. Firstly, are you seeing any more interest in turbine demand coming from utilities in the U.S.? If so, do you think they will be operating on a much quicker timeline in terms of commissioning than traditional wind farm developers in the U.S.? Secondly, could you provide any color on the ASP of your firm orders that's announced for Q3, and whether you're seeing any price tension from potentially some of your U.S. customers looking in to locking in the 2016 PTC? Thanks.
Yeah. We have an example, of course, MidAmerican Energy looking at potentially put more wind into their regulated side. Sure. We see increased interest on the utility side, both on the unregulated side, which we've seen before, but also now as one example on the regulated side. I don't think that will not mean that there are any change in the speed, so to speak. The regulatory side is, of course, a little bit different on the process, where you need to go to the regulatory state board with the suggestion, and you have to show on how that will influence the rate plans overall, if any. So it's a little bit different process on the regulated side on utilities. Of course, MidAmerican Energy is one example of interest of doing things there on that side.
I don't think that it will impact the project implementation speed. The reality is, of course, that once a project is mature, it's financed, it's defined, of course, it's in the customer's interest to start to generate a return on that as quickly as possible. That goes for independent power producers as well as utilities. On the ASP side, as expected, of course, it came back in the Q2 to EUR 0.89. Of course, that's fairly much in line in what we had in Q4 and also in Q2 last year. Overall, I would say fairly stable. As I said on my comment as well, that doesn't mean that this is not a very competitive industry. It is for sure.
I expect it to continue to be a competitive industry, in the U.S. for sure, which of course is a big stable market now. It's not any major geographical sort of differences in the competitiveness that we have competitors all across.
Okay, thank you.
Thank you. Our next question comes from the line of Jose Arroyas from Exane. Please go ahead. Your line is now open.
Good morning. Just another question on pricing. Can you speak of the level of turbine pricing that you are now seeing in the U.S. and not yet visible in your order intake, but based on your negotiations and also in the auctions that have taken place in Latin America, in Chile, for example, yesterday. Is the level of price pressure rising above normal levels seen in previous years? If so, do you feel the industry, and Vestas in particular, can continue to offset this price pressure with cost savings or on the back of more efficient turbines that include better pricing? Thank you.
As I said, if you look at our ASP in the quarter at 0.89, we think that is on what you could call fairly normal level as if I compare to Q4 and Q2. I can just reiterate what I said before. It's a competitive market. It's of course, so that big markets attract competition. We see a fairly stable pricing in a very competitive market. I don't see any changes compared to what I have said during the last quarters. I think, auctions, as I also talked about, is definitely the trend. It's not new, I would argue. Vestas has taken more than three gigawatts in auction and tenders, we are very comfortable in that situation. We need to continue to leverage our scale, our global reach, and our technology.
Of course, continue to work diligently on our cost out programs that we have also delivered on so far. Thank you. I think we go to the last question.
Thank you. The last question comes from the line of Jakob Magnussen from Danske Bank. Please go ahead, your line is now open.
Thank you. Two questions. First of all, you still have this outstanding bond of EUR 500 million against a massive cash position of over EUR 2.5 billion. Can you update us on your thinking around if you're still happy with this bond, with a negative carry of two and three quarters percentage points? That's my first question. The second question, can you update us on your thoughts about getting a rating? I realize you don't need any new debt, maybe in terms of requirements from your customers, are they still not demanding a rating from you guys? Thank you.
Thank you. On the bond, we're still pleased that we have a bond out there. I think when we do all the financial planning, whether it's internal or external sources, we don't only view the present situation. We obviously have a longer time horizon on that, and that is also reflected in the tenor of the bond as well as the RCF. When it comes to the rating of the company, we have been very specific there that the experience from the rating institutes on our type of business is fairly limited. Also the other thing is why should we be the first runner in terms of getting rated as a company?
Thirdly, when it comes to our customers, the main thing they look at is our solvency and the balance sheet going forward because they enter into a very long-term agreement with us, and that picture hasn't changed.
Okay. Thank you very much.
Thank you.
Okay. I would like to thank you all for your interest and calling in, I'm sure we will see plenty of you during this day and next, otherwise, the financial earnings call for Q3 is on.
Q2
Q3 is on 8th of November. Thank you very much for calling in, and thank you for your interest.