Good morning, everyone, welcome to this third quarter 2015 earning call. As usual, it's me, Anders Runevad here, and our CFO. The same procedure as normal. Let's get straight into the key highlights for the quarter. High activity level and good solid quarter with improvement in both the financial and operational performance. Earnings continue to improve, EBIT before special items at 10.9%, up almost 2% year-over-year. Backlog also continues at a high level, EUR 16.4 billion. A well-managed P&L and also a well-managed balance sheet means that the ROIC continued with upward trend and in the quarter was 71%. We now have better visibility for the remainder of the year, and we have increased the guidance on revenue, EBIT margin, and free cash flow. We have also decided to adjust the capital structure and therefore launched a share buyback program on EUR 150 million.
As usual, I will talk about the orders and the markets. Marika will talk about the financials, and I will come back on the summary and outlook, we have the Q&A. Starting with the regulatory environment, I would say overall remains positive and favorable for renewable. In the Americas, of course, timing of PTC is an important milestone. I would say that we and the rest of the industry expect this to be considered by the Congress late this year, so in Q4, and probably towards the end of Q4. Looking at EMEA, the trend continues, moving from feed-in tariff to auction systems. A little bit different timings in different countries, the trend is definitely there. Germany are working on the time schedule and also actually on clarifying the rules so there is a smooth handover in between the current system and the new system.
In the U.K., we're also seeing that the government has proposed to extend the grace period for the Renewables Obligation. That, of course, gives also some more certainty into the U.K. market. Southern Europe, where we've seen very low activities and continue to see fairly low activity, we see some positive signals in Spain, for example, where a new power auction is planned towards the end of the year. In Asia Pacific, I would say not much changes since we talked last quarter. Still good support for renewables from the two main markets, China and India, but also actually from many smaller market in Asia Pacific. Of course, the talks between China and U.S. overall of limiting the CO2 is positive for the overall regulatory environment. Looking at the order intake, it was 1.5 GW in the quarter, a 29% increase year-over-year.
We also saw an uptick in the price per megawatt, mainly due to mix in the quarter to EUR 0.96. Orders in the quarter was 338 MW, higher than the same quarter last year. U.S., Germany, Finland, France, and Thailand were, in absolute terms, in that order, the main contributor for the increase. If you look at the average selling price, as I said, we saw an uptick in the quarter. I would say overall, prices remains stable in a competitive market, and the uptick sequentially is mainly due to mix. Of course, if you compare year-over-year, you also have a certain currency effect. Talking about orders, looking at the global picture. First of all, very satisfied that we see growth in order intake in all regions across Vestas' large footprint. Nine months, we're up 46% year-over-year.
A very good development on orders. Americas up 61% on nine months and 20% in the quarter. Overall strong performance from the U.S., but also very good growth actually in Latin America, markets like Brazil, Mexico, Chile, and in the quarter also in Uruguay. In EMEA, we also see a positive development, both nine months, 27%, and quarter 5%. Fairly well spread activity levels, I would say, but driven Nordics, Germany, offshore, and then I talk about 3-megawatt offshore platform, Poland and France, and similar looking at the third quarter. Asia Pacific, also good growth, of course, from a lower volume, so percentage-wise, very high. Encouraging to see that for the nine months we see improvements, and they are primarily driven by China, Thailand, and India. In the Q3, from a lower level last year, increased activity level in Vestas.
Looking at deliveries, starting with nine months, also up 26%, a total 4.8 gigawatts. Again, a strong performance in delivery from the U.S., but also, I would say, growth in Asia Pacific and a stable Europe, Middle East, and Africa. The delivery follow, of course, very much the order picture. We see a strong performance in the U.S., but also in Latin America, both nine months and in the quarter. In EMEA, we've seen a decline in delivery in Germany this year compared to last year, as anticipated, but we also see that we have many other markets that actually makes up for that decline. Many markets actually has a very positive trend in EMEA. In the quarter, that contribution basically came from Poland, Italy, and Jordan.
In Asia Pacific, again, smaller numbers, but good improvement for nine months, and in the quarter, a very low activity level. Of course, that could happen when you have less projects, that you have a quarter with less project activity. As I said, a strong backlog, EUR 16.4 billion, and equal size between wind turbines and services. Sequentially, a decline in the turbine backlog of EUR 0.6 billion and an increase in the service of EUR 0.1 billion. U.S. market and an update on where we are on the Master Supply Agreement. Started out here with a potential of up to 3 gigawatts in Master Supply Agreement. Orders here today is 2.2 gigawatts, and the split is under Master Supply Agreement 45% and outside 55%. That leaves a potential of up to approximately 2 gigawatts in Master Supply Agreements.
We should, of course, also remember, as I talked about before, that projects are traded in the market between customers and therefore also could be traded between customer that we have a Master Supply Agreement with and customers that we don't. Also evident if you look at year-to-date order intake. In the quarter, we have also further strengthened our broad product portfolio. We talked about that before. A key differentiating factor for Vestas, and the reason for our global reach, is that we have a strong 2-megawatt and a strong 3-megawatt platform. In the quarter, we have announced our new V136-3.45 MW/3-megawatt platform that will reduce the annual production by approximately 10% compared to previous platform. Very well suited for low wind sites and also not just more efficient when it comes to energy production, but also the possibility to open up new markets.
Again, built on our well-proven three-megawatt platform that we have installed close to seven gigawatts across 27 countries. A short update on offshore, our joint venture with Mitsubishi Heavy Industries. We have, offshore, I should say, have now received all milestones payments, so that means EUR 300 million all in all. If you recall, the milestone payment was the plan when we set up the joint venture, and the triggers for the payment are a mix between technical milestones and commercial milestones. This is, of course, very satisfying that we see that the joint venture is on track and that those milestones has been fulfilled and the resulting payment now has been received by the joint venture. Looking at the order situation, the joint venture has announced firm orders of 846 megawatts and also announced conditional orders of 780 megawatts.
I would say that from an order point of view, the joint venture is off to a good start. If you look at the three-megawatt platform offshore projects, you see here some examples of projects that have been completed, and also new orders on the three-megawatt platform has been taken, for example, the Rampion 400-megawatt project that was taken last quarter, and also the Nobelwind project. Also the three-megawatt part of the business continues in the intervention. With that, I hand over to Marika to go through the financials.
Thank you, Anders. Obviously the positive story is well reflected in the P&L. You see an increase of the revenue, and consequently, the activity level of the company of 17%. That generates a gross profit of EUR 389 million in the quarter, so a 22% increase, compared to last year. That is primarily driven by the revenue increase that you see, but also various mix effects in the quarter. On the revenue side, the total translation impact is around EUR 150 million, on a totality basis. The gross profit, I should also mention, is obviously reflecting the EUR 19 million of write-offs in the obsolete inventory, but still very healthy underlying margins overall for Vestas. If you look at the fixed capacity cost, you see a slight increase, compared to last year.
We are at very stable levels also when it comes to the fixed capacity cost, and we have another slide that show you more about the outcome of that. EBIT is EUR 232 million, so a 42% increase compared to last year, and that generates an EBIT margin of 10.9% in the quarter compared to 9% last year. Net profit is more than doubled to EUR 206 million, so 102% increase, also here quarter-over-quarter. Overall, a very good performance, and good earnings in the quarter. If we look at the net fixed capacity cost, which has been a big focus and continue to be a big focus for us. That's also what we see now is really the leveraging effect of the cost cuts that were made previously.
We are now down to a level of 8.1%, so we're certainly leveraging the volume increase that we see right now, and that is compared to 9.9% last year. A very satisfactory path on the fixed capacity cost. If you look at the service business, we're well underway to reaching our midterm target of an increase of 30% in the revenue. You see quarter-over-quarter, you see 19% increase, so the quarter generates EUR 280 million. You have translation impact also on the service business, and that's in the order of magnitude EUR 10 million, and to be very specific, EUR 11 million. The service revenue, or rather the margin, was impacted by the write-off, as I said earlier, so you had a EUR 19 million write-off of obsolete inventory. This is nothing we do on a regular basis, but it can occur randomly in the quarter.
It's nothing underlying that we're worried about. We still see a very healthy development in the service business. The service backlog is also at a very high level, as Anders alluded to earlier. Also in that backlog quarter-over-quarter, you have close to EUR 200 million of translation impact. The balance sheet, which is the next slide, is still very healthy. I will not talk about the equity. As you know, we, in Q1 rather of last year, did raise the equity. We see a very healthy development also on the working capital, and when I say healthy, it's all planned for because of high activity level anticipated in Q4. Solvency ratio is approaching 34%, and you also see the development of the net debt. If we go to the change in net working capital, and here you see the change over the last 12 months.
I would say that what we said in the beginning of the year is that we see that all the efforts that we made to improve the net working capital are still having a big impact. We also see that it's becoming more and more difficult to further improve as it is at such a satisfactory level despite the high activity. Over the last three months, you see a negative impact as, again, planned for, and it's primarily on inventory and receivables where we see the increases. You also, on the net working capital in the quarter, have around EUR 80 million of currency impact. If we go to the warranty provision and the lost production factor, as we said earlier, this is certainly a proof of the quality effort that we made in the company. It continues to have a big impact.
When we provide for warranty, it's based on the revenue in the specific quarter. We have not changed the underlying 1.8% of provisioning, but in the quarter, you have a 2.1% in Q3, and that's because of reclassification. The underlying remains the same. We have made no changes to that. If you look at the lost production factor, that continues at a very satisfactory level below 2%, so no change in that performance. Cash flow statement. I would like to say here that it's totally stripped from currency impact. This is, again, we're very happy to see the cash flow that is generated from earnings. We have very few or no one-timers in the cash flow. It's a pure cash flow, and we managed to generate EUR 158 million in the quarter. Again, a very good performance, as you can see.
The total investments have increased, as planned, 20% quarter-over-quarter. We are, in Q3 of this year, spending EUR 79 million. No changes in where we spend the money. We spend the money on the capitalized R&D, and also investing in the molds for the capacity need that we see right now. Capital structure, we have today, as you know, launched a buyback program, but capital structure and the long-term targets we have is to be net debt to EBITDA below 1 time. Obviously, in this part of the cycle, we're at the very positive levels. Solvency ratio, we have also a midterm, long-term target of 35%. We're approaching 34% in the quarter. Overall, the long-term capital structure targets are well underway.
The share buyback program, as I alluded to earlier, we have launched a program as of today, and we have the intention to buy back EUR 150 million worth of share program. The purpose of this program is obviously that we are adjusting the capital structure. As to no secret, we have a good net cash position on the balance sheet. We are not committing to any frequency in the share buyback program. Having said that, we're also continuing to invest in our midterm strategy. That is certainly the priority from our side. The dividend policy has not been impacted or affected by us issuing the share buyback program in 2015. That leaves us with the return on invested capital.
Here we clearly see the impact of the improved earnings, as we've seen also in the previous quarters, but we are now at very high levels of above 71%. Again, very satisfactory levels considering the high activity level that we have in the company. Earnings and balance sheets are well controlled. By that, I leave it to you, Anders.
Thank you, Marika. Let's go to the summary and outlook. I would say, of course, we are very satisfied with the quarter, good execution, and a strong improvement in most parameters. If I link it a bit to our four strategic objectives, starting with the market, as I said, we are experience growth in orders in all our regions, and we've taken orders in 31 markets across five continents for the first nine months and increased 46%. In the quarter, 26%, as I said before, also a good development. On deliveries, we have a high activity level. We increased deliveries last year considerably, and this year, for the first nine months, delivery is up 26%, and in the quarter, actually up 15%. All in all, confident with the position we have in the market, and of course, that is extremely important.
Looking at the service business, we are growing the revenue this quarter 19% year-over-year, last quarter 20%, a good development, and well on track on our midterm target. We also saw a backlog increase in the quarter. On the competitiveness and of course, the reduction of levelized cost of energy, we also see good development in the quarter. We have announced the V136 turbine, and again, I am very satisfied with the broad portfolio we have on both two and three-megawatt turbines. We will continue to invest in both our platforms moving forward. On operational excellence, which is about improved earnings capability, clearly have delivered in the quarter with an EBIT of 10.9% and ROIC of 71%.
All in all, we have to continue to leverage our three key advantages, the global reach in Vestas, now present in 74 countries, the technology and service leadership, and last but not least, the scale. We have now passed 71 gigawatts in the installed base, and of course, it is also the scale in purchasing and simply number of people dedicated to the wind industry. Looking at the rest of the year and the upgraded outlook, as I said before, we now have a better visibility for the rest of the year. We expect Q4, as usual, to be a busy quarter, but we also expect to have the usual challenges with weather, primarily that we normally look at in a fourth quarter. On the revenue side, we expect to be between EUR 8 billion and EUR 8.5 billion. Service business is expected to continue to grow.
EBIT margin before special items, between 9% and 10%, and stable margins in the service business. Total investment, we keep at approximately EUR 350 million, and on free cash flow, we expect to be between EUR 800 million and EUR 1 billion. The dividend policy remains as before. With that, of course, first of all, thank you all for your interest and call in, and then we go over to the Q&A.
Thank you very much, sir. Ladies and gentlemen, should you wish to ask a question, please press 01 on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, you may press 02. There will be a brief pause while questions are being registered. Once again, it is 01 if you wish to ask a question. Our first question comes from the line of Kristian Johansen from Danske Bank. Please go ahead.
Thank you. My first question is regarding your assumptions for the updated free cash flow guidance. Do you include any effect from a possible PTC extension? Here I'm, of course, thinking of potential prepayments for new framework agreements. Secondly, do you include any effect from a potential sale of your headquarters in your free cash flow guidance?
Okay. I didn't hear. Can you please repeat the last question, Kristian?
Yes. It was regarding if effect from the PTC extension is included in free cash flow guidance and a potential effect from the sale of a headquarters. Yes.
I would say no on both parameters. When we anticipate the cash flow, it's with what we know now, and the same with any sale of facilities or similar. Both are excluded from the guided cash flow.
Okay. That's very clear. My second question, if we do a bit of math on your free cash flow guidance and your share buyback and dividend payment this year, I get that you should end the year with a net cash position between roughly EUR 1.9 and EUR 2.2 billion. Is this the level we should expect you to be comfortable with going forward as well?
Well, I will give you a very generic answer to that one. We are very satisfied with the levels we are at, and we have now adjusted the capital structure. Having said that, we will also continue to invest in the midterm strategy that we have.
Okay. Well, maybe a follow-up on that one. You state that you plan to build a blade factory in India. What's the cost and timeline of that?
Yeah, that will be next year, primarily. Cost will be roughly normal for a blade factory, somewhere in between EUR 50, something roughly around EUR 50 million. That's the plan.
Okay. Thank you. That was all for me.
Thank you. Our next question comes from the line of Claus Almer from Carnegie. Please go ahead.
Thank you. Yeah. A few questions from my side. The full year guidance or the new impressive full year guidance, does that include any material production issues or other extra cost in Q4?
When we give an estimate of the overall result, obviously, we're not expecting it to be a free ride. Again, are we exact in the issues we might have? You never know, this is the best estimate that we have for this point. It includes that not everything will be smooth.
Right. When you look at incremental margin, especially in the higher end of your guidance range, the EBITDA sounds a bit low, I would argue, at least.
Yeah. As I said, Claus, it is the best estimate for with what we know now. Obviously, we're striving to do the best we can, this is the best estimate.
Okay. My second question goes to the U.S. frame agreement, these two gigawatts outstanding. What should we think about those contracts? Could they be converted to firm orders in 2015, are they more PTC-dependent?
No. I would say in general, nothing has changed. They can be converted. The potential is there, definitely. U.S. team is working hard as normal, especially this time of the year. I would say timing probably, of course, this year, it could also very well be next year, where the customer chooses to convert the frame agreements to firm an unconditional order. Of course, it's very hard to know exactly when the customers will do that and to what extent they will do it. Nothing has really changed since a quarter ago. It is the frame agreement. It is a potential Most likely timing is during this year and the beginning of next year, if you want to fit them into the current PTC cycle. If we get a PTC decision towards the end of the year, of course things can change a bit.
That is, of course, we are in a close dialogue with the customer in the U.S. When things get firm and as normal, we will come back and announce them.
Sure. Okay, just the final question. Your fixed cost base, you have this slide showing the $640 million on 12-month rolling basis. Is that the ongoing rate, or how should we think about that going forward?
Obviously, we have had a very little increase in the fixed capacity cost despite the very high activity level. We have also had a negative impact from the U.S. dollar, from a translation point of view on the fixed capacity cost. We're not committing to any level because obviously you have to adjust if the activity level is very high. We are at a satisfactory level for the rolling 12 months.
Okay. Thank you so much.
Thank you. Our next question comes from the line of Patrick Zetterberg from Nordea. Please go ahead.
Yes, hello. A couple of questions from my side as well. The first one is related to your project division in the third quarter. Obviously some good margins in this business. You usually say sometime that the project you have been executing on a quarter, they have been having an above average project margin or a normalized project margin or below. How has it been in this quarter?
Well, it has been a good quarter, and that is also what we stated. We've had a good mix in the quarter and consequently also higher volumes. From a margin point of view, it's been a very satisfactory quarter.
We should be careful of using the leverage we see in this quarter.
Well, there is obviously a certain leverage, it's been a good quarter and one that we're satisfied with.
Okay. My second question is relating to the impairments and the write-offs you make in the service business. Could you give a little bit more flavor to what you're actually doing?
If I give you the longer story, we have two divisions in the company that we're focusing on, that is turbine and it is service. We have the management in place, and we have the structure in place for that business. We now decided that we also have obsolete inventory. Saying obsolete inventory, even if we make a write-off of EUR 19 million in the quarter, obviously with the numbers in service, it has a big impact on the margin in the specific quarter. We are very happy with the overall performance of the service. Also the obsolete inventory, even if we take the write-off, there's never that we sort of don't have any hope to sell it is appropriate to make the write-off at this point.
Just to be clear, you haven't reassessed any value of your service contracts?
No.
No.
Okay. Then here, just finally, is there an impact from this impairments and write-offs in your cost of goods sold?
Yeah, it has an impact on the margin, obviously.
Okay.
Not on the cost of goods sold. It comes below.
It comes all below?
No, I'm correcting myself, Patrick. It's in the cost of goods sold.
Okay.
For service.
Yes.
Thank you very much. Our next question comes from the line of David Vos from Barclays. Please go ahead.
Yeah. Good morning, both. I have a couple of questions, please. First, regarding the PPAs that your customers are able to pact at the moment, how do you see those developing? Clearly, forward base load prices in California are $28. Also in Germany, electricity prices are below EUR 30. Gas in the U.S. is at $2.30. Is that impacting your customers' ability to generate new business at all?
No, I would say that, I'm not an expert on the customers' negotiation on PPAs, but if you look at our orders growth and orders booked for the first nine months, I must say that I don't see any impact of lack of orders for us, and therefore, of course, that there are plenty of projects in the market.
Do those projects depend on the PTC still being there?
Of course, in the U.S., the projects of today is with the PTC components. Of course, if your question is what will happen with or without the PTC in the U.S., I think it is, of course, very hard to predict. I think the good news is definitely that wind is getting more and more competitive. I saw a study from, I think it was Lazard, about the U.S. market on levelized cost of energy for the last five years that showed that, as a market, the levelized cost of energy for wind has gone down more than 50%. Of course, it's also something that we see, that wind is getting more and more competitive. At the same time, of course, when policies are changed, you always get question mark in a market. There are definitely projects being discussed longer term, with and without PTC.
I think in generally speaking, of course, on your overall question also against the competition from traditional fossil fuel, I will say that wind has a very positive cost development. I think that is the reason why we see, overall, a good market this year, despite then, many countries moving into more type of auction systems.
Okay, that's clear. My second question is on the service backlog. I picked up that you now see that having a length of about six years. I previously calculated it at eight years. Could you please elaborate on what the change has been there?
Yeah. Pretty straightforward, we have discovered an error in the formula, and consequently, that we have corrected, and we are, unfortunately, seeing it six years instead of eight years. It is an error, and it has been corrected. Having said that, though, on the new order intake that we see, the tenure is eight years. It is the order backlog, but the order backlog value, as such, is unchanged. It is an error in the formula.
Okay. Is my understanding, I did some broad high-level math there, on the prospective revenues that you might have in the backlog, then I come to roughly six years. Is that not a methodology that you're applying?
No. We can go into a long discussion on how we have calculated. Unfortunately, there was a small error in the formula, as I said, and the six years is now the correct tenure of the order backlog.
All right. Let's take that one offline then. Thank you. That's all my questions for now.
Thank you. Our next question comes from the line of [Faisal Ahmed] from SEB. Please go ahead.
Yes, [Faisal Ahmed] from SEB. Two questions from my side. Firstly, on order pricing, I know you said that the quarterly order pricing is partly driven by mix, but could you provide us with some more granularity on this? It's such a big deviation compared to the previous quarters, and that's my first question, please.
Yeah. No, I think that as usual, of course, the mix in scope has a big impact on the average price per megawatt. That will vary between the quarter, depending on the scope mix that we have in the quarter. That is the biggest reason for the variations, if you look at it quarter-to-quarter. You can have different scopes in different quarters. Just turbines, even turbines without towers, in some example, compared to full scope. That is if you look at this from a sequential point of view. I feel, as I said, that overall pricing in the market is fairly stable.
Of course, if you compare also then year-over-year, you have a currency effect, if you look at in our price per EUR per megawatt compared to the, I think, EUR 0.89 that we had in the same quarter a year ago.
Are you indicating that we should be reverting to the trend pricing, which we've seen the last few quarters? Is this what you're indicating?
I'm not indicating any of that. I think I'm explaining what we see. In the market overall on pricing, and that we will see variations between quarter very much depending on mix. I think if you look at it on an average basis for a longer term, that is what we have seen.
The second question is related to the project margins. I appreciate that you're saying that it's a very good quarter, how does it compare to your backlog margins?
Overall, that is also a consequence of what have been explained by Anders, we see very stable price development across the board. We also have a huge number of markets. With the order backlog, as we don't comment on any level, but it's a very healthy order backlog, and we're very happy with the quality that we see
Okay. Just one final question here. You've seen a lot of turmoil in the U.S. in the yieldco market. Should we expect that to impact any of your Master Supply Agreements?
Overall, that is also what we have indicated. We have a broad base of different customers, so we're not exposed in any direction when it comes to customers. We also have very good payment terms that we're very consistent with. That also makes us very little exposed to what's happening in the market. To be very specific, the yieldcos is not the vast majority of our customers in any shape or form.
To add to that, I think what we're primarily seeing from the yieldco is less appetite of buying already constructed projects.
Okay, perfect.
Thank you. Our next question comes from the line of Pinaki Das from Bank of America Merrill Lynch. Please go ahead.
Hi. Good morning, everybody. Many thanks for taking my questions. I've got a couple of them. The first one is just on your margins upgrade. You're looking at 9%-10% for this year, clearly your orders are up over 40% this year, so next year should be a growth year in terms of revenues. Trying to understand, if you do more revenues next year, shouldn't your margin next year be above the 9%-10%?
Pinaki, we're not guiding for 2016, with what we see on the order backlog and the order intake, we're very happy about the situation.
Okay. Secondly, my other question is probably more on the cautious side. I've seen your backlog is actually down EUR 6.6 billion for the quarter. That's obviously a mix of good revenues offsetting the orders. I just wanted to understand if I do some sort of quick math, it looks like you probably need over EUR 2.3 billion of orders probably in Q4 just to maintain the backlog where it is. This is a more general question. If your backlog is at slightly over EUR 8 billion, you probably need to, and your sales are around EUR 7 billion in the turbine business, probably need EUR 7 billion of orders next year to just keep it flat.
I just wanted to understand, are you seeing order trends which sort of help you have some confidence on next year as well in terms of order that you will get EUR 7 billion, EUR 8 billion of orders so that you can maintain the backlog and the backlog doesn't go down in value terms?
Okay. I'm not sure that I follow your questions. To comment on what we're showing here in terms of the reduction in the order backlog for the Q, you also have a EUR 200 million currency impact if you look quarter-over-quarter.
Okay. Of the EUR 600 million, EUR 200 million is just currency.
Yes.
Yes.
Okay, cool. The last question is, I've seen that in your European port deliveries and orders are relatively flattish now. I don't know if there's already some offshore included in the orders in EMEA. Just wanted to understand, are you seeing any slowdown in Europe for wind orders as well as deliveries?
No, if you look at EMEA on the order side, we are up 27% for the first nine months, we also increased our orders in EMEA 5% in the quarter. I would say that we see a good solid EMEA region from an order point of view.
Do those quarterly orders actually include offshore as well?
They include the 3 MW offshore order that we had in Q2, but not in Q3. There is actually an order after Q3 that was announced, the Nobelwind, you will see that in Q4.
Okay, great. Thanks. Many thanks for the good results.
Thank you. Our next question comes from the line of Alok Katre from Societe Generale. Please go ahead.
Hi, thank you for taking my questions and congratulations on a pretty good, solid quarter. Maybe I just perhaps thrash the margin question again. If I look at the Q3 margins and just do the math, there was probably somewhere like 160, 170 basis point positive margin with the project mix effect. Could you just elaborate on what the moving parts were on the mix side? Geographies, products, and something else. Also whether there was any effect from the Tianjin port issue during the quarter. That was question number 1, then I have a couple of follow-ups.
If we start with the Tianjin explosion, obviously we have been impacted from a cost point of view by the explosion, but it has been overall very little. Some has been booked in Q3, or some will have had an impact in Q3, but we will also see some impact going forward, but the order of magnitude is fairly limited. If you look at the mix in the quarter, it is a good mix. I mean, it's not only a mix of countries, but it's also scope of projects. Overall, offshore projects, obviously, but that is more or less scope that you see has an impact in the quarter. Underlying, we're still seeing improvements in the margin, and that's also what we're working with the accelerated earnings program.
You see a lot of things, a lot of activity to continue to improve the margins. Whether it is an average margin or not, we are very happy with the margins that we see. We are happy with the activities that we have.
Right. Okay. Thanks for that. Just on the share buyback, there was this question around the net debt position and being roughly around the EUR 2 billion mark at the end of the year, doing the math. I would have thought that perhaps the magnitude of the share buyback could have been much higher, probably somewhere like EUR 500 million-EUR 600 million or so. Just in that context, should we see the EUR 150 million as a starting point? Just thinking a bit more forward, how much surplus cash do you actually need on your balance sheet to support your growth and also to maintain a good balance sheet point? Just to understand what the follow-up, whether it is ongoing capital adjustments via share buybacks could be.
We have not indicated the levels. What we have said is that obviously last quarter, we have access to cash overall, but we are still very happy with the balance sheet that we have. We are in a cyclical industry, so basically when we calculate a level, we include the cyclicality, and you would in a lower cycle consume 50% more or need 50% more. Based on that, we have excess cash, and we decided that we will do an adjustment by buying back shares, but we are also investing in the strategy going forward. We have not committed to any levels. The commitment that we have is that we will continue the dividend policy that is in place, and any further adjustments, we will have to get back to you.
Sure. Just to clarify, when I say the consumption of cash at the low point in the cycle should be 50% more, are we talking working capital side of things? Are we talking free cash flow?
It's cash at hand that we're talking about. To secure the company to continue the consistency that we have in place, we see that the need or the level should be 50% higher at that point.
Okay. Fair enough. Lastly, in terms of a bit on the offshore side, how do you see the pricing development given what LCOE or levelized cost of energy that we've seen from the recent bids? I'm sort of referring to some of the projects in Denmark, for instance, where reportedly the cost of energy that's being bid for is closer to EUR 100 per megawatt hour mark versus probably somewhere like EUR 150, EUR 160 that's for projects that are ongoing. Just to get a sense, do you think pricing is coming back too fast in the offshore market, and is that creating a bit of a challenge for you guys?
If I comment first on the 3 megawatt platform, which of course is where we have the visibility in the offshore now primarily since that is Vestas platform that the joint venture is selling. We actually didn't have any delivery of that in offshore during Q3. Your question on offshore in general, that question is actually for the joint venture that handles the offshore business. The Vestas Mitsubishi Heavy Industries joint venture. We are, of course, participating there as an owner, and I'm part of the board. When it comes to how they view the pricing in those details, that question, we have to refer to them.
Okay. Thank you.
Thank you. Our next question comes from the line of Sean McLoughlin from HSBC. Please go ahead.
Thank you. Two questions. Firstly, on the service margin. You've mentioned this EUR 19 million write-off, but you haven't included that as a special item. You're guiding for flat year-on-year margins. Is that excluding or including this write-off? If I add EUR 19 million back to EUR 29 million, I would come up with a 17% margin. Am I thinking about this in the right way? Second question, you sound very confident about the PTC extension. I think more confident than I've heard you sound in previous cycles. What makes you so confident?
If we start with the margin on service, as we have said before, we see stable margins in the service business. Stable margins could be anything between 17% and 19%. We still consider the range very stable. When we talk about stable margin, we do include the write-off of the EUR 19 million that we have in this quarter.
Then talking about the PTC extension, I think what I said was that we, and I think as the rest of the industry, believe that it will come up to the Senate by the end of this year in December. How that will go, I think, remains to be seen. I haven't speculated in that, what will happen, if it will be a two-year extension, one-year extension or a more phased-out multi-year plan or no extension at all. I think there are still a lot of different opinions on that. I would say, just purely based on history, and of course, also the fact that there was a good bipartisan support in the finance committee of the Senate. Of course, there are reasons to be optimistic that we will see some form of PTC extension.
I think that the way we deal with it in Vestas is as usual, working then with different scenarios, making sure that we capture this very good growth that we see in the U.S. today. That I think goes without saying. U.S. long term, with or without a short-term decision in PTC this year, will continue to be an extremely important market for wind energy. Actually, last year, more than 20% of all new capacity added in the U.S. was wind. There is no doubt in my mind that U.S. long term will continue to be an extremely important market for wind industry and therefore as well for Vestas.
Thank you.
Thank you. Our next question comes from the line of Shai Hill from Macquarie. Please go ahead.
Thank you. Marika, I wonder if you could, I'm sorry, we're coming back to the product margin question. I calculate it as 200 basis points up year-over-year, which is a great performance. I just wonder if you can give me a rough split between operational leverage effects and sales mix effects in terms of splitting that 200 basis point improvement.
Well, I will give you the same answer as I said before. Yes, we have an impact from the revenue or the increase in revenue, definitely. We also have a good mix in the quarter. We also see that we are doing the cost out to a very large extent as planned. You have different factors impacting the positive margins in the quarter.
Okay, maybe I could just follow up that, Marika, just in terms of U.S., because obviously you've got a lot of supply only deliveries coming through now into the income statement in the States, which, does that have a positive or a negative or a neutral effect on the gross margin?
Say fairly neutral. Even if the scope is less, you would also have, say, a lower cost because of a smaller scope. It's fairly neutral.
Okay, thanks very much.
Thank you. Our next question comes from the line of Klaus Kehl from Nykredit Markets. Please go ahead.
Hello, Klaus Kehl from New Credit Markets. Just two questions. First of all, are there any offshore deliveries included in your Q3 numbers? For Vestas, not for Vestas HI.
No
Secondly, the fact that we are moving towards this auction system in Germany, what will that mean going forward for the dynamics in the market?
There is no offshore delivery for Vestas three megawatt in Q3. I think when it comes to the German market, again, as I said, if I compare this year to last year in delivery, the market is slightly down as expected. At the same time, if I look at the order situation, we see an increased intake for Vestas on orders in the German market. I would say that we view it as a very stable market. When it comes to the change to the auction system for the feed-in tariffs, I think remains to be seen, both actually timing and how it will be implemented. I think there is very positive discussion today with a long-term grace period on phase out and phase in.
Of course, if that becomes the rules, which we still don't know, I would say that's very positive. I think what this industry has been good at handling is as long as there is a clear longer-term policy with clear rules on how one system is phased out and another system is phased in, then the industry are able to plan for that and handle those things. That is what we foresee for the German market.
Okay, thank you.
Thank you. Our next question comes from the line of Jose Arroyas from Exane. Please go ahead.
Good morning, gentlemen. I have three questions, please. The first one is on the Indian market. You seem to be taking the market more seriously with your new investment. A couple of questions. How long will it take you to have the new plant up and running, and what volumes are you targeting? If to do that, you need to become a developer of wind farms. That's question number 1. Question number 2 is on the shares to be canceled following the buyback. I believe you will have about 6% of treasury shares when you finish your buyback. How many of these will not be allocated to employee stock options and can therefore be canceled at the next AGM? Lastly, it's on offshore orders. Apologies if you have covered this question already. How many offshore orders have you taken in the Q3 in the manufacturing business?
Thank you very much.
Okay. Let me start about India then. You are right, India is part of our strategy, as many other markets in the emerging market. We think that there is a good opportunity in India. We have taken some smaller orders in India in the year. Obviously think that there is a solid business case to actually produce also blade in India. We have a nacelle factory since before. The construction time, I would say, is normal for this kind of blade factory, so probably around a year. As I said, we can, of course, and have done so in the past, also import blades. For competitive reasons, I will not go into volumes that we target or that we can do on the factory.
We will, of course, do it in a flexible way so that we can manufacture different types of blade that fits well to the different type of turbines we have, dependent on how the market develops in the future. When it comes to owning wind farms in India, that is not our primary business model. We will work with partners when it comes to the construction and, of course, with normal customers when it comes to the ownership of the wind farms. When it comes to land development, our prime strategy is to work with strategic alliances and partners.
If we go to your second question, which is the buyback program, and you are right in the around 6%. The vast majority of the treasury shares bought is for the program, basically close to all of it. The vast majority is the capital structure adjustment. Thirdly, there is no offshore in the quarter on down to EBIT line.
On the three megawatt.
Yeah, on the three.
For Vestas.
For Vestas.
Sorry to come back on the share buyback. Of the 6% treasury shares that you will hold, what percentage will you be canceling based on your expectations at this point? Thanks.
We're canceling what we're buying, but up to this point, we have 1.4% of treasury shares related to, so that covers the programs that we have internally.
Thank you.
Thank you. Our next question comes from the line of Martin Wilkie from the Citigroup. Please go ahead.
Hi, it's Fuchs from Citi. Thanks for taking my questions. I have two of them. The first one relates to your U.S. business. How much fixed cost do you have in the U.S. business, maybe as a proportion of your overall fixed costs?
Well, we don't indicate any specifically, but the U.S. business is overall run very effectively, and because of the PTC profile of the country, obviously, we have a lot of flexibility to reduce the cost base as need be.
Maybe alternatively, is there a megawatt break-even that you can sort of tell us?
We're not sharing the megawatt break-even level, but obviously, we have a good control. It's well run, and as I said, we have a big possibility to adjust the cost level in the U.S. if the size of the business is becoming smaller.
Of the 4,000 plus employees in the U.S., the absolute majority, the vast majority, is blue-collar workers.
Okay, sure. The second question is on strategy. What is your current base case for the PTC that you are positioned for in 2017, in terms of ramp-up and your production setup?
As I said before on the PTC, I expect that we and the rest of the industry will get clarity around the PTC towards the end of this year. We are confident with the setup we have in the U.S., both when it comes to the ramp-up that we now are executing on. We, of course, expect also a good activity in the U.S. going into 2016. We are very happy with our position, the market share, and the gains we've done in the U.S., and we also feel that we have the necessary flexibility to look at different PTC scenarios when we have them more clearly towards the end of the year.
Thank you. Our next question comes from the line of Mark Freshney from Credit Suisse. Please go ahead.
Hello. If I could ask two questions, please. Firstly, conditions on the ground in Brazil. Can you talk about what your sales force and commercial departments are seeing there? Secondly, can you talk about potential payments made to staff? I recall two years ago, it was also a very strong year with guidance upgrades, and I think the total bonus payments to staff amounted to EUR 90 million from memory. Is it likely that there will be similar costs within the EBIT margin for this year, and is that within your guidance?
Well, that question, obviously, with the performance we have, we would be very happy if we can pay a bonus to our employees, so nothing strange with that. We have also said that we will provide when we see that we're reaching our targets. The thing that we can comment on, if it's 2013 that you're referring to, you will not see a similar spike of bonus provision in Q4 as you did in Q4 of 2013.
I talk a bit about Brazil. Of course, from a macro point of view, Brazil is a challenging market and also from a currency point of view. Of course, from a macro view, there are definitely concerns in Brazil as a market. From a wind point of view, we say that it is a good market. Wind is extremely competitive. We see auctions going ahead. It's a bit lumpy on the ordering side, of course, because of these auction rounds, and it's also a market where you have to stay very close to, because of course, there are big swings in currency, there are big swings in PPAs in the market, in the auctions, as we have seen in the past. We are comfortable with our position.
Maybe a bit lucky that we didn't go in so hard from the beginning, not perhaps by choice, but more sometimes you also have good timing. On the orders we've taken and on the investments we are doing, and we follow then, of course, order intake with investments that we are doing. We feel that we are in a good position as well for the future of the wind business in Brazil. Of course, as all other businesses, you also have to have a decent macro environment.
Okay. Thank you.
Thank you. Our next question comes from the line of [Jonathan Larsen ] from Berenberg. Please go ahead.
Hi. Good morning. Thanks for the update. I have a couple of questions about your market in North America. The first question is if you can give us an update on the negotiation process concerning the production tax credit. What's the latest you've heard?
Yeah. No, we don't participate in the negotiation around the PTC. Of course, the way we make our voice heard primarily in the U.S. on the PTC is through the American Wind Energy Association, where we are a member. Of course, also the lobbying activities we have, both in Washington and of course also in the general political landscape where wind actually contribute to a lot of employment in the U.S. It will be a political decision in the U.S., so of course it's something we monitor closely.
Okay. Can you say anything about how do you prepare yourself for a scenario that doesn't get extended?
No, not more than what we talked about before. That first of all, again, Vestas has taken orders in 31 markets across five continents for the first nine months. A global reach is very important for us, and I would say that we are probably the most global of the wind turbine manufacturers, and that of course means that we are less dependent on single markets over time. The second action that we are working on, and has done so for the last two years, is to have a flexible setup. The flexibility in the setup goes for the cost, of course, it goes for the people. It also goes for the technology choices we've done. One example is blade, where we actually can move molds from different markets as demands increases and contracts. A number of different activities also on the flexibility side.
Okay. My last question is, you mentioned the political landscape in the U.S. as well. How do you prepare yourself for the change in the political landscape in the coming 12 months with the presidential election coming up?
What we are focusing is, of course, potential impact on regulations on the wind business. The generically speaking is, of course, that the greater policy certainty, the better for the industry. That is what we are looking at. I think in most markets, including the U.S., you see bipartisan both support for and against, and I think that goes for many markets. For me, it's not so much a party political discussion.
Okay. Thank you so much.
Thank you. We have no further questions registered at this time, sir. We will hand the conference back to you.
Okay. Again, thank you so much for your interest. Thank you for calling in, and if not sooner, I hear from you for the fourth quarter.