So, good morning, everyone, and welcome to this Second quarter 2016 earnings call for Vestas. Starting of course with usual disclaimer slide and then let me go straight into the key highlight and and of course overall I'm very satisfied with the extremely solid performance of Vestas in in Q2. We had a high activity level across the board. So delivery up 56% year over year. And driven by all regions.
Increased volume, a very favorable project mix and a solid execution, also led to strong earnings in the quarter. EBIT margin of 15.6 percent up 7.3% compared to Q2 last year. Also good to see order backlog continue at the high level 18,100,000,000 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. And we also launched, 2016 share buyback program of 400,000,000 in order to adjust the capital structure. So the agenda for today, as usual, I'm talking about the others and the the market and then, Micah will go into the financials and then we come back with outlook and the Q And A.
Looking at the the regulatory environment, I would say overall we continue to see supportive environment for renewable energy and for wind. Some of the key events in in the quarter. I will start with Americas then was that IRS, issued their guidance in May. And that also then clarified the the continuous construction, wording, which simply put means that, if you start constructing this year, you qualify for a 100% PTC as long as you finish in 2020. So, uh-uh a favorable guidance.
Latin America not much new market that has been, a tendering market for our auction markets 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 MA again and starting with Europe. As before, I would say that overall markets are driven by EU complying to the 2020, 20% and 2030 27% renewable energy targets. And we also continue to see as we do globally then the trend from feeding tariff to more tenders in auction. The news in Q2 was Germany announced the 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. 17. And also the expected volumes, within the Auckland framework are are on a healthy level. We have also, markets going in the in the other direction Poland, the regular touring situation has impacted the market and and we currently see a low activity level in that market.
And in the rest of the EMEA the same development as previous quarters. In Asia Pacific the sunshine at the end, the overall, plan from before remains, which means that there is a a drop down in in feeling tariff, and and also a transparent dropdown so that in the effort to make the market more long term stable, but, continued very good support for wind. We also see some changes in the priorities towards the grid and and we see that the first half of this year there were quite, some containment in the market that, on the back of the very high delivery during last year, that is now being, worked through the the system. And therefore, the first half compared to the the the first half last year, less activities on the order side. And, I would say in the in the other Asia Pacific region, you know, 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 gigawatts. So, on a solid level, down approximately 40% versus last year. But then of course, we remember that Q2 of last year was a very strong quarter on on order intake. So it is a tough year on year comparison. 70% of the orders in the quarter came from, US, Germany, Canada and Brazil.
So they were the main contributors. As expected, the average sales price on ordering take bounced back, in Q2 and was on 0.89000000 euro per megawatt. Overall, we experienced fairly stable pricing in a very competitive market. And of course, as before, I have to remember that the price per megawatt depends on a number of different factors. Surbine type geography scope and not least the uniqueness of the offering.
Looking out to Audrey and take them for the 1st 6 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 45%. Very much impacted by the US, where we, of course, this year, have a very different PTC cycle compared to, previous 2 years.
Slightly offset by improvements in in Canada and Uruguay. EMEA up 33% which, very positive, of course, positively impacted by by, Norway, France, good activity levels negatively impacted by offshore where we last year had 400 Megawatt, order on the 3 Megawatt platform. On the other hand, actually our joint venture for offshore in Mitsubishi has taken a similar size order, 14 100 Megawatt on the 8 Megawatt platform, the 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 1st of the year. And of course, the segment we are in in the market has have lower activities for the first half.
Looking at the platform and order intake on the different platform, I would say two key messages here. First of all, that the trend towards our 3 Megawatt platform continues can see the order intake for the 1st 6 months on 3 Megawatt close to 2.8 gigawatts at the same time, also a strong performance on the 2 Megawatt platform with orders of 1.4 gigawatts. And of course, a broad, platform program on both 2 and 3 megawatts with the different variances for the different win 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.
So up 56% q on q and up close to 30% on the first half of the year, totaling 3.7 gigawatts. In the Americas, mainly driven by the US, but also an overall improvement in various markets in Latin America, most notably, Chile and Mexico. EMEA also a strong development both, 6 months in Q on Q, 42% and 43%. Solid activity levels with good performance in Germany, Sweden, France. And the offshore delivery on the frame maker, what was then, slightly upset 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 then from, China, Thailand, to some extent in India and that offset a decline we see in Australia. Moving over to the back, excuse me, that continued to be record high at 18,100,000,000. An increase of $100,000,000 in the quarter. Some movements within the backlog where the wind turbine backlog decreased 0.4000000000 and the service backlog increased 0.5000000000 and now close to 1,000,000,000.
Some who else also about the joint venture, continue to execute on the plan and be on track good activity level on the order side. Backlog now stands at 1.6 Gigawatt of firm orders and the additional, conditional orders of 4.50 megawatts, so slightly above 2 gigawatts, well received by the market. As I also mentioned in the quarter, signed a 400 Megawatt, Horns Reef project. Looking at the delivery has now started to the 1st 8 Megawatt project in which is Burbank so the delivery have now started to a harbor in Northern Ireland. Work has also started on a 3 Megawatt project noble wind, where we expect deliveries in 2016.
With that, I hand over to Micah to talk about the financials.
Thank you, Anders. And, as you can see on the on what Anders has described in terms of the Q2. The positive impact is again well reflected in our P and L. And you see their revenue is a good reflection of the very high activity level that you see in the companies where have actually improved compared to last year with 46%. So it is a very, very high Q2 And we have also alluded to earlier that we try to move some of the activity levels earlier in the year.
But 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. And mix again is scope type of turbines 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 big improvement compared to last year of 6.3%. This is not in any shape or form the run rate, I. E. The 24% should also highlight that we have a one timer in the gross profit here. It's 26,000,000 from an insurance case and it comes from insurance case on fundamentals of the turbines.
Fixed cost has increased 31%, partly a reflection of, of the activity level that we have said previously. But should again, and I come back to that note that in percentage, we are continuing down on the fixed cost. So I would say still, well controlled, and, well, under good control of the company. So net profits increased by 122%. And if you look at the JV accounting, we're using the equity method.
As we have said previously, And in the negative of 2017, 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. So the leveraging on the fixed cost continues. So 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 our content, I should say.
But 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. So 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. So we have in revenue improved by 12%. A lot of that comes from the 2 that of the 2 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 too earlier, but again, a very solid and good offerings from the 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 So we are continuing to be self financed, and having a positive net debt position. Networking 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. But at this point, with the activity level that we see and have had, M4C, we are very content with, which keeping it more or less flat in the period. Solvency ratio, you remember our midterm target is to have a solvency ratio in between 3035. We are within that range, although a slight decrease compared to Q2 of last year. But 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 3 months, I.
E. The last quarter. And you can see it is the same pattern. We continue to receivables and inventory based on, on activity level in, in the two parameters that we measure. But that is on both 12 3 months well offset by increased payables.
And that is again also a reflection of just the very high activity level with investors. So 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're 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 lost production factor that continues to perform below 2% and have actually done for a very long time.
So the focus on quality pays off in both from a customer perspective, but also internally in terms of of the cost level that we have. Cash flow statement, and 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's few, if any, one timers in in the cash flow.
And the change in net working capital negative as expected with the activity level that we have. And you'll see also the cash flow from investing activities. And this gives us a very strong cash flow in Q2 of this year. We have an improvement 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 222, the vast majority of that comes from the dividend that were paid in April of this year. So we are at the breakeven free cash flow from from year to date of approximately 34,000,000 or I would say rather precisely 34,000,000 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 again, adjusting for the acquisitions that we made in Q1 of this year. And that is primarily or it's only available. If we have a look at the capital structure, there's 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. So we are in the quarter delivering 30.5%. And if we have a look at the priorities for capital allocation, which we spoke about when we had the capital market day There's no change in how we view this and also our ambitions. So you see that we will continue to invest in the organic growth that is also well reflected in the strategy that Anders have presented. And we will also use proceeds for acquisitions We've done that in terms of upwind and Availin, 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% to 30% of the net result. And again, just to highlight that we have paid out 201,000,000 in April of this year. And we will adjust the capital structure with a share buyback in the second half of this year. And as Anders said at the beginning, we are now starting that 400,000,000 buyback in this, this or after this quarter. And again, coming back to the share buyback program, we have launched now 400,000,000 And to be precise, it's Danish Crown's 2,984.
And 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 and 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. And the dividend policy remains, we have the 25 to 30 percent dividend policy, of the net profit.
And that has, will not be affected or impacted by the share buyback that we're proposing. And not the least, we have the return on invested capital, which are at a very high level. And 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. And mid term, we have said we, our target is to be double digit when it comes to the ROIC.
And By that, I leave the word to you, Anders.
Thank you, Marika. So let me then go into the raised outlook for this year. Starting with the revenue. So previous minimum, 9,000,000,000 now we have raised that to minimum 1,000,000,000 on air bit before special items, from minimum 11 to minimum 12.5%. We have not changed our view on the service business, so expected to continue to grow with stable margins.
We have not we have also not changed the guidance on the total investment is still approximately 500,000,000. And we have increased the outlook on free cash flow from minimum 1000000 to minimum 800,000,000. And, as Marika said, the dividend policy remains the same. Thank you. So with that, we move over to Q And A.
Thank you.
And our first
question comes from Dan Tutu from Handelsbanken. Please go ahead. Your line is now open.
Yes, good morning and congrats with a fantastic performance here in Q2. Could you elaborate maybe a bit on on the mix effects that you highlight here in in the report I mean, on regions, some platforms, some projects, etcetera. And how do you see that changing going into second half? Because looking at guidance, it implies at least a lower margin in second half. That is the first question.
Yes. And, the mix effect is a big, an important factor in what we deliver this year. You see the levers we are at when it comes to gross profits. So it is exceptional, but you will also see the regular difference in the quarter. We cannot.
We would like but we cannot control exactly what what we TUR in each quarter. We're trying our best but not 200% is what we achieved. That's why you see the high volume, which has a big impact on the mix. And then when I talk about mix effects, it's primarily a scope. It is a platform.
It to certain degree countries, but you see a good mix in the countries also in the quarter. And in this case, very less execution. And just to highlight a little bit is the accelerated earnings that we have presented to you previously. If you have a 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 product bags that kick in, in this specific quarter.
And 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. So it's a lot of factors that actually constitutes of the mix effects that you see, but it in this quarter, it's a perfect blend of everything.
So it's a bit of caution. You could argue maybe that, that, since you are implicitly guiding down a bit on the margin in the second half. Why why shouldn't you you'll be able to sustain that high margin level?
No. And and the the the margin that you see now in q 2 is not a run rate. Uh-uh because you will see fluctuations. It it is just very, very perfect in Q2. That makes the it in the guidance that we're providing.
Okay. And then just one question, looking a bit into the future. Do you see any potential bottleneck coming up into your production, sort of, say, platform at the moment, anything that can constrain you in pushing through even motorbines?
But I mean if I if I saw it and this continues, if you look at the assessment that we're making now in Q2, which we're basing the guidance. This is the same methodology that we'll use all the time. So a certain risk element is also is all in the guidance, then that's how we make the assessment and provide the best estimate at this point. I don't know if you wanna highlight more on this.
Yeah. No. I mean, on on on pure production, I think, we are confident, that, I think we have shown a good track record of scaling up production and and that we have a flexible, uh-uh, production set up. It is primarily blades as we have talked about many times that should be the on the critical edge because that's the most capital intensive and and we had the technology change. We did know about 2, two and a half years ago.
I I think we have a we feel confident in the track record of scaling up when it comes to to our, 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. I just want to understand really what's changed from for Market Stay in June. You were talking really of a very back end loaded delivery year. So I mean, how much has the Q2 being a surprise to you and what is it down to specific projects coming in ahead or is it down specific projects being unexpectedly the profitable?
Secondly, just some visibility on when you think the JV contribution might turn positive.
Thank you. Thank you. If you look at the backend loaded profile that we have spoken about, I don't see that, have changed in terms of overall methodology. That, that is how the industry is built. And, yes, q 2 came in obviously much better than what we anticipated.
So a lot of the volume, we we're 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. So we try to pull in a little bit earlier the best we can. That is, again, as I I try to look to a bit random, unfortunately, because you cannot control because it's also depending on when the customers are ready. And this quarter came out very, very good in terms of of the revenue, and that has a positive impact on basically all parameters. And on top of that, we had a very flow less execution in terms of no extra cranes or extra cost for deliveries.
So the cost level was also despite the high activity level, extremely well controlled. Then what was your second question, Sean?
It was about the JV contribution, which, again, I noticed is still firmly negative. And if you have any greater visibility on when you connect that to be turning positive.
Yes. And I think we have actually been very explicit about the the, depreciation of the V164, which is a big contributor to the negative result that that you see here using the equity method And, you know, once we start touring, what we have potentially invoice to the joint venture, but also the V164 when you see the deliveries that will, obviously, have a positive impact on the result. And I I cannot be more specific than that, Sean.
Thank you. Our next question comes from the line of Casper Blum from ABG. Please go ahead. Your line is now open.
Thanks a lot and also a big congrats on these amazing results from my side. And Marika, a question for you on the R and D and administration costs in the quarter that 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 to the usual levels from Q3 on those items?
That's my first question, please.
Yes. And if you look at the run rate, you're absolutely right, Casper. We are trailing on on we are not changing the run rate of the fixed capacity costs. So when it comes to R and D, we have, depreciated or in had some of the testing facilities that we have, and on the admin side, we also have VAT costs And those those are the the primary the 2 big ones that we And also the should not forget that. We have actually moved the building in Ahus from assets held for sale into the company.
Again, that doesn't mean we're trying to sell it. Not trying to sell it, but we will, we we don't foresee that we do that within this year. And that's the reason we have also increased the depreciation for for, the buildings. So those are the major components that that's, if you wanna call them one timers or whatever, we do the that assessment, obviously, every quarter, and see if we are at the right level. But the run rate remains, fairly stable.
Okay. Good to hear. Then my second question regarding the U. S. PTC qualifications, where we've seen at least 3 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 3, 4 years?
I think, I mean, of course, as you said, we see we see some orders coming through. Definitely seeing that both for PTC and components and also for for project in in 17. I I must also say that I'm really satisfied overall with our position in the US market. I think we clearly gained share there during during last year. I mean, I will not give an outlook on on orders for the remaining of the year.
I mean, we have the policy of of when orders becomes firm that we will stick to. I would say that, of course, it is still a very very high activity level. I mean, it is a new scenario both for for us and for the customers in the US to to plan for when when they now plan for a much longer period of time up to to 2020, of course, in the first case with the 100% PTC support. So, it is a really hectic, period, in in the US. And I expect that activity level definitely to remain to the to the last day of December for this year.
Understood, Anders, but just you sort of 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 dispute, dispute that over the over the coming years. I mean, all else equal without you having to give any guidance on your expectations.
Yeah. I I I I think so. I mean, that's because I don't know how it will pan out. So, I think your assumption of of starting with an equal this distribution is is a solid assumption because uh-uh because the reality is that uh-uh before the customer have cited how they see the the the the the volumes between the year. It it is as as good assumption as as and probably there are a lot of benefit to that assumption because there are certain amount of projects that you realistically can can do in a year, so to speak.
Thank
you. Our next question comes from the line of Claus Almer Kanege. 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 for the US market.
Okay. If you look at the guy again, it is the best assumption. I think the biggest positive question mark that we have is obviously the harder PDC, will pan out, I. E. How they will intend to qualify for the 100% that we have a positive view, but the guidance that we have provided is based on a best estimate.
And obviously the the U. S. Is part of that, best estimate. So it is nothing different from what we normally do when we come when it comes to guidance. And assessment of, performance of the company.
But do you assume that a lot of the PDC qualified qualification orders will move to Q1 2017 from a revenue point of view or to assume it all will come in 2016 just try to get a bit of flavor on the, volatility on the revenue recognition.
Yeah. And I understand that, Claus, but I would say, that remains to be seen. It depends on how it's pan out obviously once they place an order, they have we have 100 days 105 days to deliver. So when an and how the orders come in that remains to be seen. So we just have to come back on that.
But again, having said that, I mean, the guidance that we provide is a reflection of all the upsides and downsides that we foresee.
Okay. And then my second question goes back to this question about the product mix in the quarter and understand that the guidance for us second half is assuming a lower margin than we're seeing in
the first half. But if
you look at the full order backlog, the scope and country mix and etcetera, etcetera, is that equal to what we saw in q 2 or was q 2 just a more favorable?
I think that that goes without saying that Q2 was a very favorable mix. Having said that, we have a healthy order backlog, and I will not comment more on that. But I would also like to say that margins, 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. And maybe just a final question about your free cash flow guidance, looking at your share buyback program and your dividend, your 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 is relevant. And we have also been very specific on how we want to use, the cash we want to invest in 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 a share buyback when we see, see that fit and that is what we have proposed.
So it is nothing more to it than that, Claus.
Thank you. Our next question comes from the line of Fook Nguyen from Citigroup. Please go ahead. Your line is now open.
Hi, guys. It's Fook. Thanks for taking my questions too, if I may. The first one is on the US market, and the order intake profile there. We know that 16 will be quite back end loaded as as you guys mentioned on the call.
Can we assume that the order intake in 17 will be significantly down, or or do you see customers that you have negotiations with that are happy to take a lower PTC in 17 or potentially 18 or 19?
Yeah. As I said before, I mean, we see a very high activity level in in the US. Also the other question on how we see how we see the market pan out. When it comes to revenue to to 2020. I I we we commented on that assumption.
So we will I will not guide on on orders for 17 on on this call. As I said before, I mean, we announced order when they offer them an unconditional and how we look at 17. Of course, we will come back to. But I I I just want to stress again that we see a very stable, US market, from a revenue point of view, clearly, I to to 2020 and I would also actually argue beyond that because then we have a drop down per year of 20%. Over the PTC for quite some more years.
So, for the midterm, the US market, to me, looks very stable.
Okay. And and my second question is is again, coming back to the gross margin, obviously, you had a very extremely strong quarter. I I think it was one of the highest that you've ever recorded. And, from from the accounts, you can all also see that 1% was driven by this cost settlement, but you're still somewhere around 23%. I'd like to understand a bit more was this driven by, very strong ASB that you've seen across the regions or was this cost driven.
In other words, do you see exceptional strong product mix with high ASP in the quarter that you have a very, strong quarter in terms of cost improvements, and therefore, you got to this gross margin.
I think that a fair assumption and what we have talked about earlier is that we have a mix that is, influenced by a very high volume. And in the mix, you have, the scope, and you have, the type of products you have the output of the program products, and you have the execution. And obviously, cost is an element. But overall, it is a good blend of everything in terms of the margins of the and that's why we have a very high gross profit. But again, I just would like to say that even if we don't see 23% as a run rate because it will depend on the mix each quarter.
You will see fluctuations. I think what we have provided the over over the over the last year is healthy margins for the company. And then you have all the controlling element in between the EBIT that continue to be at a healthy level.
Thank you. Our next question comes from the line of Manaki Das from Bank of America Merrill Lynch. Please go ahead. Your line is now open.
Yeah, 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 and I'm not going to push you on it. Just wanted a bit of color on some of the orders that you've already announced. So I I know that you've announced the 131 Megawatt US PTC component order as well as the EDF 160 Megawatt order. And now from my understanding is that you know, they could although the other PTC component orders, once you once you look at the sort of 5% criteria, these orders, each could be almost bigawatts once they're fully converted to 4 models. So I just wanted to confirm if my understanding is correct on the mechanic there, although I do realize that ultimately they will need to be confirmed when they will be confirmed.
And also related to the same question is could you give us some color on the Mid American 2 Kigawatt condition on order? Is there anything progressing there in terms of conditions or whatever maybe? My first question. I'll give you the second question probably just after this.
Okay. Yeah. No. That was that was almost 2. But, I I counted as 1.
So, I think that the one of the PTC component again, of course, it it remains to be seen but I mean, as a rule of thumb, what we've seen before is about when it comes to turbine value or components value about around 10% of of a total project value. But of course I have to stress that it's not a firm and unconditional order. It's a competitive market and of course, uh-uh we have to to continue to fight with the competition to to take that order in the end of the day. Or even if, if they're all PTC components. So But as a rule of thumb, I would say, more that that the PTC part is is 10% of the project.
On on the the mid American, which of course, is an order that we are conditional order that we are extremely happy about and extremely proud for. It's It's a potentially a very big project and, and and to some extent, a new customer for us. But I will not comment on on the expectation of when it will the firm, I mean, that we will come back to when, when we have news, on that.
Okay. Great. So and then just thank you so much. And on the second question on guidance, I understand that you know, some of the PTC components that you're getting ordered for might have to be delivered already in 2016. Does the guidance include some element of PTC debt component deliveries already in 2016?
Guidance, is, I mean, anything that we anticipate both positive and negative is part of the assessment that we make when we make the guidance. So Obviously, all parameters is is reflected in in the guidance that we, we have. And 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 the whether it is up or downside to the guide? I just wanted to understand if some of the PTC components are also part of the guidance already.
I mean, obviously, we have taken orders after this point of 3.44. So they are part of it and then you make an assessment what you think is likely for the remainder of the year.
Great. Thank you so much.
Thank you. Our next question comes from the line of FFO Ahmed from SEB. Please go ahead. Your line is now open.
Yeah. Hi. A few questions from my side. Firstly, on a free cash flow guidance, the upgrade you're making here, Is the upgrade purely driven by, higher expectations for operating cash flow? Or are you also it's changing your assumptions for working capital.
And maybe if you could also comment, how than that line? Thank you.
How we sort of view and make the assessment on on cash flow is nothing different from what we previously do. So obviously, net working capital is part of that, we have also been very explicit on the networking capital that we don't see a lot of positive movements on the the the net working capital with the activity level that we foresee and also the activity level we consequently guide for. And, when it comes to to the PTC, that's basically what what I said just previously. The cash flow is a reflection of of what we know. And it is also or the cash flow guidance is a reflection of what we know, but also a reflection of what we can anticipate.
Guidance on the free cash flow.
Okay. And then sorry for asking this question. It's regarding a gross margins, which you've been grilled on quite a few times here earlier during the call. And but, I mean, when we look at gross margin for for the second half of the year, do you for us to think about the trailing 2 to 3 quarter gross margin when when we're doing our margin assumptions for for the second half of the year.
I mean, we're we're not, as you know, we're not guiding on on the margins, but as I said, the 23% is at a very high level. And we have also been down to below what we delivered last year in terms of gross margins. But I I can, you can just make the, sort of your best qualified assumptions on the margins going forward. But I mean, 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.
Okay. This may sound a bit crude, Marika, when I asked this question, but, but, I mean, you've been stating for the last at least three quarters that, you've been your pro gross margins have been helped by very good project margins. I mean, why should we take your comments regarding contribution margins for for for the q 3 on face value this time?
Yeah. Yeah. That you can probably only respond to yourself for what you believe in. But, If you look at Q4, last year, we delivered 18%. So you have, you have a good good mix up and down on the gross margins.
And even if it sounds very or it sounds like we have that explanation all the time. The mix and the volume is a big portion of that and also remember that we have the cost out programs. And obviously, if that hits the the exactly the right the right platform, we that's very beneficial in that particular quarter. And 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. And the only thing I can say is that we're trying to mitigate the risk with Q Four by pulling in some of the projects a bit earlier as best as we can.
Our next question comes from the line of Alan Katary from Societe Generale. Please go ahead. Your line is now open.
Yeah. Hi. First of all, congratulations on a really, really great quarter. And another another great quarter. And, thanks for taking my questions.
I have a couple actually. Firstly, just following up on the US, 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. But but this is this something that you see as linked with the IRS clarification that allows for a 4 year commissioning pipeline? And therefore, should we sort of, you know, I I know you partly responded to it. But generally, I mean, should we sort of expect a lot more stable book to bill as we, sort of go through the next 3 or 4 years?
Even if your activity is at a pretty high level, you still see a more stable order flow relative to deliveries. So that's sort of my first question. And then second question is a bit on the European side. I mean, clearly orders were much weaker in in Q2, and I know there's there's the ramp in and so on, as as well, which is affecting. But even even adjusting for that, it's still quite sluggish.
Can you sort of talk about Poland being weak because of the shift in regulatory mechanism over there? And then you've seen UK being quite sluggish in 2015 and also this year. So just wondering how you view the ongoing trend towards the system in Europe, both from a volume perspective and also given what you've seen so far on the pricing perspective, should should 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 thought with the US again, as we have said as well, I I think we have to acknowledge that it is a new situation both for for us and our customers and And, and, of course, there was a wait for the IRS guidance and that came now in May so that, of course, clarified things also as well. But I think that the way to look at it in between safe harbor and continuous construction is obviously and you should probably ask the customers these questions as well, but obviously that if if the customer has an existing project, It's probably more likely that you will, will do the continuous construction qualification. On the other hand, if you have more an ambition on certain volumes, then of course, the the safe method is more to, to qualify on the Safe Harbor qualification.
So it is, of course, now for the customers to mature their projects, as, as as much as possible, to decide what kind of qualification. And then also since this is, is now a 100% up to 2020 and at the same time, of course, the the development are more and more efficient turbines continue. You you will have a fairly fluent market that you don't want to lock in everything and all parameters too early in the process. So so, 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 for many years to come. But exactly how it will pan out, over the the quarters and years.
I think it's it's, we have to come back to when we get a bit more clarity. On your question on, on, on Europe then in the in the quarter, I agree. I mean, in in the quarter, but I mean orders will be lumpy in the quarter. I think if you look at our order intake for the 1st 6 months of this year in EMEA. We are up 33%.
So, that I would say is is very satisfying and and I think as I've said before, we we see we see a stable market in 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, and it was, last year on the other hand, activity level is picking up in France. For example, and and Germany, I would say overall is, is a very stable market. There is, there is, of course, now then probably a certain, purely in which we probably will expect for 17 as well because of course the transition rules for the auction depends very much on on when you have permits. So, but 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 purlin and then big push out. So so I think that's a very sensitive policy that that will create, a stable market in Germany. But again, if I look at the actual 1st 6 months, when we are up 33% I I'm I must say I'm happy with order intake development. Sure.
If I can just make a quick sort of follow-up. When say, on on the US, when you say you look for a high level, stable market, are we talking, I mean, last year, the volume in the US market was about 0.5 gigawatts in terms of installations. Are we talking when you say high level? Are we talking something more like 10 gigawatts per annum sort of just just just to get a sense, are we are are we sort of more looking at 8 and a half as a stable when when you say stable and high level of market? Just just to get a sense of what exactly would would you would you, main in terms of stable and high level?
No. I I would say that, I mean, if you look at most of the predict in, in the industry now then, it's around 8 to 10, per year. And and, I have I have no other information than if I look at the the external market analyst, that that that's likely then how that will play out exactly during the years. I think it's it's it's very hard to say.
Yes, fine. Thank you.
Thank you. Our next question comes from the line of Claus Kelson from New Credit's Market. Please go ahead. Your line is now open.
Yes. Hello, Klaus Kiel from Nucleotide Markets. One question, and that's related to India. Could you update us on on your engine strategy and, could you tell us whether you have received any orders here in in the first half of the year? And, yeah, just give us a status update.
Thank you.
Yeah. No. Basic. Thank you. And, basically, no no major changes.
As we said before, we need to complete our factory in India before we feel that there are any that that order intake that they qualify for what we would consider acceptable, margins. So it is a market where you need to, supply locally in order to to generate uh-uh an acceptable profitability. So, the the factory is track. We've taken some small orders, but it's it's very insignificant in in the total scheme, I would say. So Our strategy is to 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. So no no major change from a global perspective. Of course, locally, of course, 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. But I mean, that's local strategies from a from a global standpoint. I would say, the full focus now is on on the factory build out and then also, partnership, around the side and and the land land issues that we've talked about before that exist in the Indian markets.
Okay. And just to follow-up, when will the factory be be ready? Is it about to be completed? I read something about September.
We expect to deliver starting, beginning next year.
Okay. Thank you very much.
Thank you. Our next question comes from the line of David Falls from Barclays. Please go ahead. Your line is now open.
Good morning. For taking my questions. I have one on Germany to start with the gold rush you referred to over at the for markets day, is, is that, still well on track? Are you seeing elevated order intake for this large year, it's always a bit hard for us to track that as most of that ends up in unannounced orders. But if the increase in those is the Germany, if you could confirm that, that would be helpful.
And if you could also comment on whether you're experiencing any, issues in obtaining permits on of your developers. That'd be very helpful. Thank you.
Yeah. Thank you for a question. I mean, we I think it's fair to say that we see a higher activity level in Germany. And And I think that that would actually continue for some time. I I as you also mentioned, it has to do of course with the permitting and and actually if you also have the permitted project within the 17 time frame that you then deploy during 2017, you are then qualify into the old system.
So It's not a a sort of, yeah, what should I call it? Superrush with a very clear deadline in this year. I think that you will see, to some extent, certain, poor in this year, for delivery this year and for delivery year as well, in anticipation of the, of the auction system. At the same time, in the auction system, the the the megawatt under the auction system is expected to be somewhere around, two and a half to to 3 giga, what what what the what's the latest I saw, which again, I must say is is is a is a stable, good market. So, and we've seen this a little bit before.
Last year, Germany, it wasn't so strong year before. It was also poorly in in anticipation of of, of a change in the feeding tariff. But compared to me any other of this, regulatory changes. I I must say it's it's relatively to them, very stable. I don't, I was in Germany just a couple of weeks ago and I I I I didn't hear any metalotor customer.
I didn't hear anything about, about lack of permitting, but I I I must admit. I didn't tell a skydos. So, but it's not something that that I'm aware of.
Okay. That's very clear. Thank you. And then one more question on Egypt. There was a bit of 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, you've not attractive or are talks still ongoing?
No, but I can confirm that, we have discussion with, Egyptian authorities, of possible business development the memorandum of understanding type of agreement. So, and those discussions, continuous, Egypt has actually very good wind potential, but it's in a very, very early state. And and and far from, at this point, far from the firm and unconditional order, but I can confirm that the that we have ongoing discussions with the Ypsian authorities around a a framework.
Okay. Perfect. Thank you very much.
Thank you. Our next question comes from the line of Gurpreet Gajara 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 America? And if so, do you think they will be operating on a much quicker timeline in terms of commissioning than traditional wind farm developers in America?
And, 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. I think of course, I mean we have example, of course, me and Emma's utility to looking at potentially, put more wind in their regulated side. So, uh-uh sure. I mean, we see increased, interest on the utility side, both on the unregulated side, which we've seen before, but also now then, as one example on the regulated side. I I don't think that there is any sort of that will not mean that there are any change in in the paid, so to speak.
I mean, the the regulatory side is is of course a little bit different on on the process where you need to go to the regulatory state board then with the suggestion and you have to show on how that will then influence, the rate plans, overall if if any. So it's a little bit different, process on the regulated side on on utilities. And and of course, Miriam is is one example of of interest of of doing things there on that side. But I don't think that it will impact the the sort of I mean, the the the project project implementation speed. I mean, the reality is of course that once a project is is mature.
It's financed. It's defined. Then of course, it's in the cash most interest to start to generate a return on that as as quickly as possible. And and and I mean that goes for independent power producers as as well as as utilities. I mean, on the ASP side, as expected and of course, it came back in the in the Q2 to 0.89.
And of course, that's fairly much in line in what we had in in Q4 and, and also in Q2 last year. So overall, I would say fairly stable. And as I said on my comment as well, then that doesn't mean that this is not a very competitive industry. It is for sure. And and I expect it to continue to be a competitive industry free in the US for sure where which of course is a big stable market now but it's not any major geographical sort of differences in the in the competitiveness that we have we have competitors all across.
Thank you.
Our next question comes from the line of Jose Arus 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 US and not not yet in 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 risk pressure rising above normal levels seen in previous years? And if so, do you feel the industry and investors 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.
Yeah. No. But as I said, if you look at our ASP in the quarter at 0.89, we we think that this on on Yeah. What you could call fairly normal level as if I compare to, Q4 and Q2. So, So, I mean, it's, again, I can just, reiterate what I I said before.
It's a competitive market It's, of course, so that, that big markets attract competition. So but I I we we see a fairly stable pricing in a very competitive market. I don't see any changes compared to what I I have said, during the last, 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 3 gigawatts in auction and and tenders and we are very comfortable in in that situation. We we need to continue to to leverage our our scale, our global reach and and our technology and and of course continue to work diligent on, on our cost out programs that we have also delivered on so far. So thank you. And then I think we go to the last question.
Thank you. And last question comes from the line of Jacob Magnuson 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 1,000,000. Against a massive cash position of over 1,000,000,000. 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. Then the second question, you update us on your thoughts about getting a rating? I realize you don't need any new debt, but 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. And I think when we do the older financial planning, whether it's internal or owner sources. We don't only view at the present view the present situation. We obviously have a longer time horizon on that.
And that is also reflected in the tenure of the bond as well as the RCF. When when it comes to, the rating, of the company. We have been very specific there that the experience from the Rating Institute on on our type of business is, fairly limited. And, also the other thing is why should we be, the first runner, in terms of getting rated, as a company. And then thirdly, when it comes to our the main thing they look at is our solvency and the balance sheet, going forward because they enter into entry into very long term agreement with us and that picture haven't changed.
Okay. Thank you very
much.
Okay. Then I would like to thank you all for your interest and calling in and then, I'm sure we will see plenty of you, during this day and next, but otherwise, the financial, earnings call for Q3 is on Q3 is on 8th November. So thank you very much for calling in and thank you for your interest.