Good morning, everyone. Thank you for calling in, and welcome to this first quarter 2016 earnings call. As usual, it's me and Marika that will present the slides to you. Let's start. First, the normal disclaimer slide, and then we go into the key highlights for the first quarter. I would say solid performance with inventory build-up for an expected busy 2016. Of course, very encouraging to see the record high Q1 order intake of 2.4 GW, also leading to the highest ever combined backlog for Vestas at EUR 18 billion. Improved earnings in the quarter with an EBIT margin of 5.8%, 0.6% improvements year-over-year, and a negative cash flow impacted by net working capital and the acquisition we did in the quarter on the services.
I will start to talk a bit about the order situation a bit more in detail, the markets, and then I will hand over to Marika on the financials and come back and conclude, and then we go to Q&A. This is the time of the year when external consultants publish their reports on market share development in megawatts. The measures differ a little bit if it's installation or grid connected or delivery, and therefore, of course, there are variations in these reports. From our point of view, it is encouraging to see that it confirms the view that we have that Vestas is retaining a strong position in the market and actually improve our market share year-over-year.
And megawatt is, of course, important, but, for us, the main objective, and that we also express in our strategy and vision, is, of course, based on revenue and not megawatts. Here, on a revenue base, this, of course, also clearly confirms what we've said before, that we did outperform the market during 2015 in revenue growth. Overall, regulatory environment, I must say, not that much news in the quarter. One key event that we and the rest of the industry are waiting for is the IRS guidelines on the PTC extension. Always hard to predict when IRS will come out with this, but I would say we think that it's likely to be now in the second quarter of this year. Otherwise, as I said, not much news on the regulatory front.
We see markets moving to tender systems, we see that in Latin America, and we definitely also see that in the European markets. Overall, in Europe, I would say that what drives a big part of the market is, of course, the renewable energy targets 2020 and 2030 that are in place. Within those targets, the market shifts to more tender-based systems. We also see positive signals in Middle East and Africa, where renewable targets are being developed, and in some cases are in place in Middle East and Africa. In Asia-Pacific, not much changes in the China and India target plans. In the broader Asia-Pacific region, we also now start to see markets putting in renewable energy targets in their local markets.
Getting a bit more into the order intake, and as I said, of course, very satisfying with 2.4 GW, a 37% year-over-year increase. We also saw that the average selling price declined, very much impacted by the big 1 GW order that we took in the quarter. In numbers, orders were up 653 MW, primarily due, of course, then to Norway, but also good development in the U.S. and Germany. The average selling price of order intake was EUR 0.82, and as I said, impacted by the 1 GW order in the quarter. We should remember as before, that price per MW depends on a number of factors, turbine type, geography, scope, uniqueness of the offer. This is actually a good example of what we have been talking about before with a big order in the quarter.
Of this size order, we can, of course, optimize due to scale, transport, closeness to the factory, construction, and also here, use our latest power mode of 3.6 MW at the fairly ideal site. Looking at the orders on a regional basis, as you can see, again, of course, a good development in EMEA and actually also even without the 1 GW, an increase in orders come from a broad base of countries. In Americas, we were down 35%. This is on a year-on-year comparison very much due to lower activity level in Brazil. It also, of course, shows the lumpiness of orders. As you know, about two weeks after we closed the quarter, we took close to a 200 MW order in the Brazilian market.
Asia Pacific, low overall and also low activity level in the quarter and especially comparison to last year where we had a significant order intake in China in the Q1. If I look at deliveries, even if we saw regional differences, we saw a stable overall delivery situation, and again highlights the benefit of our unique global reach. Main improvements came from Germany, Thailand, Sweden and the U.K. As I said, down on delivery 33% in Americas, primarily due to U.S. and Chile. Up 40% in EMEA and here it's really a broad mix of countries contributing to the growth and again fairly stable development on a low level in Asia Pacific. That leads us to the order backlog of EUR 18 billion and of course very encouraging, increased by EUR 1.2 billion in the quarter.
The wind turbine side increased by EUR 0.7 billion and the service backlog increased by EUR 0.5 billion. Joint venture with Mitsubishi Heavy Industries for the offshore also on track. Two things in the quarter to comment about. The ownership ratio will remain at 50/50. Of course it's a good signal of the confidence of the current setup that now have been running for a couple of years. The joint venture is busy ramping up the production on the 8 MW platform. The order backlog is solid at 1.2 GW, showing a stable and plannable ramp up until 2019. First project of the 8 MW will be Burbo Bank. That installation is expected to begin in the autumn of this year. Of course preparation are also underway for the two 3 MW turbine project that is firm orders. With that, I hand over to Marika.
Yes, thank you, Anders. If you look at the income statement, you can see that also what Anders have alluded to for Q1 is reflected in the P&L. You see a little bit of a mixed bag, which was also anticipated from our side. Revenue is down compared to last year. Not as much I would say that we anticipated, but still down according to plan. If you look at the gross profit, we have managed to further improve that in the quarter despite Q1 of last year being a good quarter. We have increased the gross profit not only in absolute numbers, but also in percentage. That is primarily coming from a positive mix in the quarter. You can also see the negative would be fixed cost increasing by 10% in the quarter, again according to plan and it's primarily in R&D innovation but also in distribution cost.
Really a reflection of the volume increase and the guidance that Anders has provided. EBIT before special items then improve despite the slightly lower revenue in the quarter by 8%, so a very good performance. And you can also see that our EBIT margin is up from 5.2 to 5.8 in Q1 of 2016. And then just to highlight the accounting for the JV. You see the income from investments accounted for is negative EUR 19 and this is one thing that we have tried to comment on earlier, that you will see the depreciations coming in from the V164 at the beginning of this year 2016.
If we look at the cost side and how we're leveraging, you can see that we compared to Q1 of last year are down in percentage 7.9, slightly up according to plan again in absolute number, but still very well kept expenses or fixed capacity cost for the company also going forward. Just to reiterate that this is a key focus area and we're continuously trying to be more efficient. If you look at the service business, there is an increase of 17% in revenue year-over-year, Q1. So we are EUR 299 in Q1 of 2016. That includes both Vallen and primarily Upwind, because that is a longer timeframe. And you see, of the increase compared to last year, it's around EUR 17 million that comes from the two acquisitions.
EBIT is still with stable margin, not as high as last year, but we deliver a 17+% margin in the quarter. And as Anders showed you earlier, our backlog continues to be very strong for the service business. If we go to the balance sheet, I wouldn't say that there is a lot to comment on, but you see our equity position continues to be strong. Net debt continues to be negative. The only thing that we have consumed in the quarter is net working capital, and it's primarily inventory, and I will come back to that. This is, again, according to plan, and this is, again, what I would like to reiterate. This is the beauty with a strong balance sheet, that we can actually, in a flexible and cheap way, prepare for higher activity level in the coming month by consuming working capital in a quarter.
You also see that we changed our solvency ratio in last quarter, but we are slightly exceeding that solvency ratio in Q1 of this year. We are at close to 31%. If you go to the change in net working capital, this is what I said earlier. If we look at the last three months consumption, you see that inventory is clearly up and you can see that it's, to some extent, compensated by prepayments and payables. Payables is, again, as we have said, is not that we're not paying suppliers, but we have a high activity level and that's consequently why it is up. You see the same development to a large extent for the last 12 months. If you look at the warranty provision and loss production factor, which is, I think, a solid receipt of our good quality work.
We continue the loss production factor below 2% on a continuous basis. Obviously, it is paying off the quality work we're doing throughout the company. You also see that we consume less than we provide for when it comes to provisions for our warranty. Cash flow statement. Cash flow from operating activities continues to improve before working capital, which is a good performance. The negative change is really the net working capital. As I have said before, we are tying up more inventory. Cash flow from operating activities is consequently negative. When you look at the investing activities, that is a reflection of the Vallen acquisition that we made in Q1, and that corresponds to EUR 83 million. We are, from an operating basis, negative a little bit more than EUR 200 million.
On top of it, we have the acquisition, again, as planned for Vallen in March of last quarter. You see cash flow from financing activities is positive compared to negative last year, and that is really the refinancing of the bond. If we look at the total investment for the company, we are investing more than last year, same quarter, and that is primarily, again, R&D or capitalized R&D and molds for the blades. Here you see both in Q4 of last year and Q1 of this year, the money spent on the two acquisitions, UpWind and Vallen. The capital structure continues to be strong. You see that we have actually increased our net debt to EBITDA. You can see that our solvency ratio is slightly down compared to Q4, again, as planned for, but we are above the target of 30%.
If you look at the return on invested capital, you see that we are at very high level, 119%, and this is primarily a reflection of the earnings capability that we're proving in the quarter. We are actually increasing despite the efficiency on the balance sheet when it comes to working capital. By that, I leave it to you, Anders.
Thank you, Marika. Looking at the outlook for 2016, it's unchanged. To repeat it, revenue of minimum EUR 9 billion. EBIT margin before special items of minimum 11%. Total investment, approximately EUR 500 million, and a free cash flow of minimum EUR 600 million. Also unchanged on the service business when it comes to growth and stable margins. Before we then open up for Q&A, I also would like to remind you or invite you to our Capital Market Day on June 21st, and we will be in London this year. With that, we can open for question.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. We ask you kindly to limit your questions to two at a time. The first question comes from Christian Johansen from Danske Bank. Please go ahead. Your line is now open.
Yes, sir. Thank you. My first question is regarding your project margins in the quarter. Can you elaborate on what drove the high level of project margins, and also how this compares to the average project margin of your backlog?
We have said it before, but it's very hard to give you a general project margin. The only thing I can say when it comes to project margin and how we treat them is that we are very, very rigorous both for the service business as well as the turbine business, that you go through a process so we make sure that we have the profitable growth that we have stated in our strategy. We had a very good month. We had a good mix in the quarter of different projects. And whether this is a reflection of the coming quarters, it's hard for me to say, because you can basically have a big project tipping over into a quarter and dilute the picture or further improve the picture. It is a good product mix. It's also a good mix of service business in the quarter.
We are obviously happy with the margin that we have provided here in the quarter.
Okay. Fair enough. My second question is regarding the increase in R&D cost. You describe a higher innovation cost. Can you elaborate exactly what you mean and also how we should think about this going forward?
What Anders have said earlier is that obviously at the size of the business, we are leveraging that by spending a little bit more on the innovation. That is something that we have said that we are prepared to do, and we are the technology leader in the industry and will take that opportunity when we find that appropriate. We have done here for 2016.
We should expect a higher level in the coming quarters as well then, yeah?
Overall, we are spending more on innovation, but it's not extreme in any shape or form. It's following the overall business. We will, as I said, continue to invest in innovation.
Okay. Thank you.
Thank you. Our next question comes from the line of David Vos from Barclays. Please go ahead. Your line is now open.
Good morning, Anders. Good morning, Marika. I have a couple of questions, please. First, with regard to the service margins again, I think the comment around stable margins has been a stable feature on your slides for a couple of years now. Can you just remind us what the baseline is that you see as stability? Just for the record there, and then also comment particularly on the impact of the two acquisitions in the service business, i.e., how have they weighed on the margin in Q1, and how do we see that developing in the rest of the year? Then I'll have another question.
The service margins, we are very confident on that we deliver stable margins in the service business, we have also been fairly explicit on that you will see fluctuations in the quarter. It is very, very hard to have a consistent service margin. I think you saw that clearly in 2015, where we were bouncing up and down in the quarter. The two acquisitions obviously don't have the same profitability level as our own service business. Also to bear in mind that we will do depreciations on the PPA, so it will not be accretive from the beginning. Also capturing the synergies of the two acquisition will take some time for us. It will be more a reflection on the revenue than on the profitability when it comes to the two acquisition.
Having said that, David, we are very happy with the performance of the two service business and how we've quickly have managed to integrate the people. Obviously we are cautious in how we integrate and at what speed we will integrate the two companies. Again, just to reiterate, it will have a positive impact on the revenue, but not necessarily on the margin for this year.
Okay. Yeah, that's very clear from a conceptual point of view. I think I couldn't agree more with you on that. I would like to query you once more on what the baseline for the margins really is right now. If I look at last year, for the full year, the margin was around 18%. If I X out all the provisions that you took in Q2 and Q3, I get to almost 21%, 20.6% or so. That's a big difference, of course, and I'm just not sure where the baseline is. With the moving parts on PPA and the acquisitions, et cetera, it's just very hard to get a view on what we should be looking at here going forward.
You will probably think I'm a bit blurry in my answer because I know where you're coming from. I would say that we have been hovering around a 17%-21% margin. Even if it's a gap in between, we consider that bandwidth still to be a stable margin, and that's basically what we're working within.
Okay, thank you very much. Very quickly, if I may still, on the offshore business, you haven't taken any orders there for, I think, three or four quarters now, while Siemens is clearly still doing so. Can you comment on why that is? Is that a deliberate strategy? Is your backlog filled now to a certain degree? That'd be very helpful.
Yeah. I need to check when the joint venture actually took their latest order intake. I don't think that we have not taken any orders in the last two, three quarters, but I need to check on that. Of course, I'm obviously not as close to that business as the Vestas business is. It is run by the joint venture. To comment on the order situation, the joint venture have 1.2 gigawatts in firm orders. They have taken two fairly large three-megawatt orders, as we mentioned also in the presentation. Otherwise, it is very much on the eight megawatt turbine. As I also commented, we are now in the startup phase, or the joint venture is in the startup phase on manufacturing and deliver these eight megawatt turbines. Of course, in that phase, there is a limit on how quick you can ramp it.
We are very confident with the 1.2 gigawatt of orders that we have, and we are also very confident on the timing and therefore the rollout of those orders, which of course has to fit to the plan on starting up the production of the eight megawatt. I must say also, a bit positively surprised of the three megawatt offshore orders that also still are in the market.
Okay. Thank you very much, Anders.
I think our next question comes from Claus Almer from Carnegie. Please go ahead. Your line is now open.
Thank you. Yes, I have also a few questions. The first one is also about the product margins. Just to be sure, in Q1, you did not have any projects being either very good or very bad executed?
No, that is correct, Claus. Well, I see where you are coming from now. Well, we are, again, happy with the margins in the quarter, but it is very hard, and I just underline that to be very specific on margins in a quarter, because if you have a project slipping over or a project coming in the quarter, that could potentially change the whole picture. It is very hard for me to say that this is a reflection of the coming quarters, what you see in Q1. It is a good level. We are happy with the improvement. What I can say as an overall comment, Claus, is that I think that the overall view is a reflection on that we are working on all parameters to further improve our performance on the margin side.
Sure. Okay. Just extra to this question, when you look at your fixed cost base, that level we saw in Q1, is that sustainable for rest of the year, or should we expect any increase?
Overall, the fixed capacity cost will be, in absolute numbers, a reflection of the activity level in the company. What we have said, and I think what we're proving with what we're delivering, Q1 is slower than the remainder of the year, which is a normal pattern for us. You could see definitely changes in the fixed capacity cost.
Still overall in smaller size?
Very controlled.
Yeah. Okay. My second question goes to the order intake, which again, was very strong in the first quarter. Also, when we look at the smaller projects, maybe you give some more flavor to what you see in the market. What is driving this solid order intake?
Yeah. As I said, we see a broad-based, solid activity level, I would say. In EMEA, it's hard to pinpoint any additional countries. We see a good flow of order also in Q1 that traditionally is a bit lower also on the order side. It is fairly broad-based, I must say.
Okay. Thank you so much.
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, Anders and Marika. Thanks for taking my questions. I've got two questions. The first one is on SunEdison. I believe some in the market were worried about SunEdison's bankruptcy. You've already said that it should not have any material impact or may not have any impact at all. Could you give us some color around what's happening, why you feel so confident around it? What are your orders pending from SunEdison or any other framework agreements? Some color on that whole thing. My second question is regarding your June 21st Capital Markets Day. On that, could you give us some color for what prompted you to do that Capital Markets Day? Is it that you are seeing more activity levels that you need to plan forward? What are the sort of triggers that you had to do a Capital Markets Day?
Thank you.
Okay. If I start with SunEdison and Anders can fill in. We don't have, or if we have, we have very insignificant exposure towards SunEdison, because we have the relevant guarantees for any exposure. Then I think that if SunEdison have an impact on our future activities in the U.S., we have a 5-year PTC extension that obviously is very beneficial for us. We don't see that as a big impact on the overall business for Vestas. I don't know if you have anything else, Anders.
No, I agree. As you say, we don't have any impact. The projects and the ownership structure of the projects is solid, and the projects that are good will most likely go ahead in a different shape or form, also when it comes to future projects. That, of course, remains to be seen, and as normal, we will announce the orders when they are firm and unconditional. On the Capital Markets Day, nothing dramatic, but of course, I hope you still will attend. We typically do a Capital Markets Day every other year, so it's definitely time to do it. Our intention is, of course, to do a general update on our business and on our outlook for the business.
Okay, great. Can I probably just follow up on a very small one? You mentioned the Sweden, sorry, the order in Finland, the one gigawatt order, and the pricing is lower, but obviously you've got lower cost as well. Can we just assume that the margins would be similar on that order given the costs are also lower?
Yeah. It was in Norway, in fact, I can understand that the Scandinavian countries are almost the same. As I said, the margin depends, of course, on a number of different factors, as I also described, and the uniqueness of the turbine to the specific site. I will not comment on margins in a specific project, but I can of course say that this project passed through our normal margin approval process. It is within the expected margins that we have for the company. Nothing that went outside our normal process.
Thank you so much.
Thank you. Our next question comes from the line of Patrik Zetterberg from Nordea. Please go ahead. Your line is now open.
Yes, hello. A couple of questions from my side as well. I just wanted to pick up on the previous questions regarding the ASP trend. It is clearly stated that this big Norwegian contract is taking down the ASP in the quarter. I just wondering, is it due to the fact that the volume is so big in this contract, or is it due to the fact that the turbines are going to be delivered in quite a distant future, which is going to be between 2018 and 2020? That is my first question.
Yeah. Again, without going into specific of a single project, also for customer and competitive reasons, it's of course so that the volume as such is one parameter that makes it possible to optimize. You can optimize the transportation, you can optimize the construction. It also happens to be very good situated compared to our production facilities. Of course, you can do a lot of optimization on pure volume at one project. The other thing that I talked about is, of course, the turbine match to the site. In this case, we have a power mode of our 3.45 MW turbine that can run that turbine up to 3.6 MW. Of course, it's something, as you know, that we always work on, different power modes.
If you can match that very well to that specific site, you of course get also a big boost from the specific turbine type to the site.
Okay, thank you. Very clear. My second question is regarding to the service revenue. Could you split up how much the acquisitions was contributing in the first quarter and how much was organic growth?
When you look at the comparison, I think to be very precise, Patrik, it's EUR 17.5 that is coming from the two acquisition, EUR 12 and a half from UpWind and EUR 5 from Vallen. That is the revenue part in Q1 from the two acquisitions.
Okay, thank you. My last question, income from the joint venture, negative quarter. Is this the run rate we're going to expect for the coming quarter or do you see any bigger payments going to come in as well during 2016?
Well, that obviously depends on the overall activity level in the company for the coming quarters. What I can say is that again, depreciations obviously for the V164 will continue and they are, as you can see, on a higher level.
Okay, thank you. That's all from my side.
Thank you. Our next question comes from the line of Sebastian Growe from Commerzbank. Please go ahead. Your line is now open.
Yeah, good morning, everybody. Two questions from my side, obviously. The first one is on the reference that you make in the report to strong market demand in the country when it comes to Germany in particular. Could you comment, please, on your full year expectation for the market? i.e., what installation volume do you see in 2016, more for the market rather than for yourselves, to just get a better sense of where you really see the market, if it's going up, if it's going to be just stable or if it's going down? Yeah, please, your answer on this one.
Yeah, I think as we said before, we see a fairly stable market in Germany. Fairly stable on the same levels as last year as an overall market.
Okay, that is also a prediction, so to speak, that you would also see then for 2017 and, or, yeah, just reflecting then that the auction scheme is kicking in not before 2018. Is that basically what you have on mind?
I think that, of course, there are currently proposals on auction and both sort of rules of the auction in itself and also the transition rules to the auction. I think, of course, that will or could have an impact on the market short term when things change. I don't really have a forecast for 2017. I think that we have to wait for clarity on those rules. Having said that, I think when I look at the renewable energy targets for Germany, if I look at it more average in a number of years going forward, I look at a fairly stable market.
Okay, fair enough. The other question is on the order intake, sorry to get back to this one. If I just do the math, and I was to ignore the 1 gigawatt order from Norway, is it fair to assume that pricing on the remaining orders has been on about the same level as last year, i.e., from the EUR 0.92 million per megawatt?
Without commenting too much again on specific projects, I would say that if we take out that, we continue to see a fairly stable price development in a competitive market. No changes from what I've talked overall from previous quarters.
All right. Thank you very much.
Thank you. Our next question comes from the line of Dan Chavel from Handelsbanken. Please go ahead. Your line is now open.
Thank you and good morning. One question regarding the JV. You mentioned, Anders, that you will see Burbo Bank coming on or deliveries to Burbo Bank coming on in the second half. Will this mean that here in the short term or next quarter, there will be fairly limited transfer of risk, i.e., we should expect a more or less similar effect from the JV?
Again, it depends a lot on the activity levels. Again, they are a separate company, so I have a very hard time commenting on specific quarters for them. They will continue to depreciate the 8 MW, and as you said, and as I said, the delivery there is expected in the autumn. Of course, there is a run rate business in the joint venture since before. I will not really go in and comment on separate companies' different quarters.
Okay, understandably. On the 2.5 GW you are saying you have, and are working on right now and are building up on the inventory side, could you give some indication of how we should expect that delivered? Will that be throughout the remaining quarters of this year and very front-end loaded? How should we see the impact, so to say, in coming quarters from that? Thanks.
Well, you will see the same pattern as you normally do. We have a high activity level in the coming quarters. How that specifically will be divided, we cannot comment on. You also know our guidance for the full year, which Anders have not changed. It means that it's going to be high activity level, and that is what we're preparing for with the working capital and inventory levels.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Klaus Kehl from New Credit Markets. Please go ahead. Your line is now open.
Yes, hello. Klaus Kehl. I have two questions, please.
Yes.
The first one is again related to the service business. Could you just confirm whether there are any one-offs in this quarter due to the acquisitions and perhaps some integration costs? That would be my first question. Secondly, Anders, you mentioned that you're still awaiting the IRS guidelines in the U.S. Is that your impression that that is holding back the order intake? In other words, when this guideline is out, we could then expect the order intake from the U.S. to pick up? Thank you.
If I start then with the service business, as I said earlier, yes, you will see some depreciations going forward. Obviously, in an acquisition, you have some cost for integration, and that is also what I alluded to. That will be a pattern in 2016. You will see some additional costs for those two acquisitions.
Okay, could you give us a number? Are we talking about EUR 5 million or what are we talking about?
We will not provide a number, but it's below double digits.
Integration cost.
Okay. Well, we are not commenting on any specific number on the integration cost. As I said, in Q1, you didn't see accretive performance from the two acquisitions due to integration costs and also depreciations.
Okay.
The IRS, it's, of course, very hard to say. I think it's a fair assumption that you make that, of course, the market and the customers are as anxiously waiting on the IRS clarifications as we are. Of course, the more clarity you get on that, the earlier, the more secure you are in your decision-making on projects going forward, and therefore, of course, placing orders. I think there is a very high activity level in the U.S. market. There is a lot of discussions ongoing, and I think it's a fair assumption to make that, of course, as always, you want as much clarification of the rules as possible before you make the final decisions.
Okay. Thank you very much.
Thank you. Our next question comes from the line of Sean McLoughlin from HSBC. Please go ahead. Your line is now open.
Thank you. Two questions. Circling back to the U.S., I'm trying to understand, are your customers gunning to get projects construction-ready by the end of 2016 in order to qualify for the 100% PTC before the first scale-down? Or do you get a sense that customers are more relaxed about booking orders through next year and through 2018, provided they still have 60%, 80% of the PTC? Secondly, a more general question around pricing and auctions. We've seen very competitive bids for solar projects at auctions in LATAM. Do you see this as a competitive threat? Do you see greater pricing pressure in countries where capacity is being allocated auction?
Yeah. On your first question, of course, there is a benefit of getting the full PTC. Of course, there is an interest to lock down projects on the 100% level if possible, and if projects are mature. That, of course, have to then be weighted with more longer-term projects, and actually, also the continuous reduction in levelized cost of energy that we see over time. It is not a straight yes or no answer. Of course, it depends on the maturity of the project you have in the pipeline. If they are mature enough, of course, it's likely that you want to get them in on 100% PTC. But there are also projects that are less mature and maybe are stretching over more years from a pure timing point of view.
It's to look at the benefit of continued levelized cost of energy improvement, to see what is the most attractive scenario. I will say that there are all those discussions ongoing with customers in the U.S. market, but probably fair to assume that if you, by pushing a little bit, can get 100%, then, of course, that is a desirable situation. On competitive tendering, it's nothing new. We see that in many markets, as you say, in Latin America. We've seen it for quite some time in South Africa. We have a lot of experience of that in Vestas. They are quite often what you would call technology neutral, both from a renewable point of view, but actually also from a fossil fuel point of view.
Overall, I think it's a healthy development in the market, and it, of course, shows that renewable can compete on equal terms as fossil fuel. I also feel that, in most cases, wind and solar complement each other well. You shouldn't forget that last year, 20% of all new electricity generation being built was wind, and still wind is only 4% of the mix. I think there is a lot of opportunity going forward. You will always find sites, places where solar is more attractive, and you will find sites and places where wind is more attractive by the nature of the natural resources that both of us rely on. You will actually find in many places where it's fairly complementary, where actually the wind is generated by temperature difference and not by pressure system.
yeah, even in any given country, you will find sites that are more suited to solar and sites that are definitely more suited to wind.
Thanks.
Thank you. Our next question comes from the line of Mark Freshney from Credit Suisse. Please go ahead. Your line is now open.
Hello. I have two questions. The first one is following up on the backlog in North America and the U.S. Are you seeing customers seek to delay projects that are firm and unconditional and push them back into 2017? Just also on your own experience developing turbines, you clearly can't talk in depth about the MHI Vestas JV and the operational gearing there and the increased amortization. Is it fair to say that the offshore business needs substantially more orders in order to cover the development costs of the 8 MW platform? Thank you.
Let me start, again, comment on the Mitsubishi Vestas joint venture. The plan that we put together for the joint venture, the joint venture is following that plan. That means both from a commercial point of view, from an order point of view, from a technology point of view, and from a rollout point of view. The original plan holds, and I think as I have talked about before, the payment from Mitsubishi Heavy Industries into the joint venture, were milestones payment that was triggered both by order intake on expectation and on technology milestones. Those milestones has been fulfilled, and those payments has been done to the joint venture. It is on our original plan, both when it comes to commercial activity and technology and rollout activity. Your second question was around the U.S. Yeah.
Again, if I go back to the PTC, I think fair to say, as I said before, that the next milestone in sort of firming up the decision-making on orders and therefore timing of orders and therefore rollout will to a large extent be dependent on the IRS rules. If they are as before, which I would say most people in the industry believe, then you can qualify again in 2016 by two different means for rollout in 2017 and 2018. Then you can qualify either as the safe harbor, which is 5% of the project value, purchased and delivered within 2016. Then you qualify for rollout in 2017, 2018, or you can rely on the continuous construction language.
The timing of both firming up the orders and the method that the customers then rely on for the qualification will to a large extent be influenced by the IRS ruling.
Thank you for that. Just to follow up, my point is that for 2016 orders, middle of the year, the IRS confirmation is probably too late. A lot of the construction of the machine site preparation needs to be done now. For orders that you expect to do in 2016, is there any risk at all that those orders could be deferred to 2017?
No, I wouldn't say so. I think that there is still plenty of time to do 5% and start the construction or start the delivery of a fairly low volume that then would enable a very big project.
Okay. Thank you.
Thank you. Our next question comes from the line of Casper Blom from Citigroup. Please go ahead. Your line is now open.
Hi, guys. Thanks for taking my question. My first question is on the working capital situation. You guys mentioned that you have a lot of projects under completion. My question would be, should we expect inventories to be monetized in the second quarter and then also payables to pull back? Maybe you can provide us some color on how you see working capital developing throughout the year.
Okay. We are not commenting or guiding for any specific working capital levels. What we have communicated is that this is a key focus area for us. Again, the negative working capital is not a surprise. It was planned for because of high activity level. The high activity level that I'm referring to is for the remainder of the year. As you know that we are guiding for a high revenue, obviously, that is pointing at a high activity level for the remainder of the year. We are not talking about the specific quarter, in terms of activity level. Do I feel confident on the guidance? Yes, I can just reiterate that. On the payable side, again, it's a relation to the overall activity level. That is on a high level, and obviously with the activity level anticipated, it will continue to be that.
My second question is on your guidance policy. Can you comment on how frequently you assess this and which metric you guys generally look at?
Okay. That's a different question. We are doing regular forecasts, and obviously in those forecasts we evaluate if we are continuously confident on what we have guided for the full year. As we are not changing the guidance, we are confident on the guidance that we have provided.
Okay. Thank you.
Thank you. Our next question comes from Jacob Pedersen from Sydbank . Please go ahead. Your line is now open.
Hi. A couple of questions from my side. First of all, your view on the provisions, how low can you go on this? You had a very limited consumption of the warranty provisions for the past year. My second question would be concerning the impact of fluctuations in, for example, the steel price. Have you got any meaningful tailwind from low input costs in the quarter?
Okay. On the provisions for warranty, we actually did reduce the percentage level last year. We are at a level that we feel comfortable on. Remember, the provisions are based on, obviously, the turnover in a specific quarter. You will never see an even spread of provisions throughout every quarter. When you calculate the overall provisions for warranty, you look at the average type of contract. We are confident that we are at the right level with the provisions that we are making. Obviously, we have slightly reduced it simply because quality overall is on improvement throughout the company. If we go to steel prices, what we have made very clear to the market is that we don't have any headwind or tailwind when it comes to raw materials, so we don't feel that we have a great exposure on steel.
Having said that, we obviously monitor the development on raw material in general, because ultimately it would be the customer that it could be beneficial for.
Okay. Thanks so much.
Thank you.
Thank you. Our next question comes from the line of Akshat Kedia from SCD. Please go ahead. Your line is now open.
Yeah. Hi Anders and Marika. Two questions from my side. Firstly, on the U.S., the window for taking orders under the old PTC, what is that, and do you still expect some orders to receive under the old PTC? That's the first question.
Sorry, I don't know if I quite understood it. The old?
Yeah. I'm thinking about not the extension of the PTC, but under the regimes orders which have maybe been safe harbored before the current PTC was extended.
Yeah. No. I would say that, of course, as usual, we announce orders when they are firm and unconditional, and we had those kind of orders in Q1. We actually had a fairly good, stable order intake in the U.S. in Q1. Then, of course, we will see.
Okay, we can still expect something in Q2?
That remains to be seen. We haven't changed policy. We announce orders when they are firm and unconditional.
Okay. Sure enough. Second question relating to the headcount development. Your headcount is up both year-on-year and quarter-on-quarter. What should we be expecting for the coming quarters?
Yeah, you're absolutely right. Of course, that is a reflection of the increased delivery that we have seen. It follows the pattern that we've seen also during last year with a high delivery level. Of course, we need to increase, and this is, as before, to a very large extent, the blue-collar worker for delivery. We also, of course, now in the quarter, had some additional headcount from the acquisition as we had in Q4 also for Upwind.
Sure. Okay. That's all from my side. Thank you.
Last question then, please. Go ahead.
Thank you. The next question comes from Josefin Eva from Exane BNP. Please go ahead. Your line is now open.
Yes, it's Josefin Eva, actually from Exane. Thanks very much. It's a couple of questions. First one, a follow-up on the German market this year. You mentioned before you see a stable market. Does this comment apply to the order intake activity you see in the market, or are you referring to your actual installations this year? That's question number one. Question number two is again on the profitability of the service segment. You've clarified the impact of the acquisitions, but you also mentioned in the release you were hit, but by less favorable mix. What does that mean exactly? If it's that related to any impact on the margin from availability warranties you are providing to your customers. Thanks very much.
Let me start then with Germany. If you look at what we said in the order intake, we see a strong development Q on Q, driven by Norway, France, and Germany. Germany definitely contributes positively on a Q on Q on orders. Actually, the picture on delivery as well is that Germany is doing well in Q1 compared to Q1 last year. I think that also confirms what I said about that we see a stable market in Germany.
If we go to the service business, This is the last question, yes. I explained the impact from the two acquisitions, I will not dwell on that, but what we said on a favorable or overall the mix situation in a quarter could be actually that you have planned for a bigger repair that doesn't materialize in the quarter. That means that you take the income but not the cost. That is the type of fluctuations that you can see in a quarter, and that will be the case, and that's why I'm also talking about the spread in margins because as it's not a super big business, smaller cost in terms being beneficial or the opposite will have an impact in a specific quarter, and that you will continue to see.
Okay. With that, I would like to thank you for your interest. Thank you for calling in. We end the call. Thank you.