So, good morning, everyone, and, welcome to this 2nd quarter, report, as usually usual, I appreciate everyone that has called in. So let's start. The usual disclaimer, statement. And then let me then start with the highlights, overall. I'm really satisfied with the quarter.
It's a strong execution on our profitable growth strategy. Orders intake really strong at approximately 3 gigawatts up 56% year over year. The order backlog close to 1,000,000,000, actually, the largest order backlog ever for Vestas also very encouraging. The value creation continues, Royce increased to 55 percent or so that, on record level. Earnings continue to improve.
EBIT before special items, of 1,000,000 up 39% year on year and also, a continued strong cash flow. Impacting by an increase in cash flow from operating activities. So again, a lot of highlights in the quarter and a very strong execution. As usual, the agenda for today, I would start to talk about the orders and markets, Mauryk, our CFO, will guide you through the financials. And then I will come back on the summary and outlook and then we open for Q And A.
So, let me start then with the regulatory environment that we view as general supportive. We see a strong support or solid support both for renewable energy and ambition to reduce the CO2 levels. Starting then with Americas, the tax extended bill, including we have PTC extension passed in the Standards Finance Committee with a solid majority vote. This is a first step. And there are more to come, but it's a positive signal.
Also, a bit more long term, the president UBAMA's clean power plan to reduce the carbon emission with 32% by 2030. Is a more long term positive signal. Looking at the EMEA region then, Germany as we have talked before continues the transition from a a state fade in tariff system to an auction system. The draft papers has been released. And what's positive is that renewable energy ambitions are intact.
In France, a new energy law was passed that will cut the green caused gas emissions with 40% by 2030. And estimates are that, that will be bring renewable to 32%. On the negative side, is in the UK, where the government has proposed to end the onshore support one year earlier than previously planned. In Asia Pacific, we've had almost 2 years of uncertainty as the risk targets has been discussed. What's positive now is that a target has been adopted by the Australian parliament and that should mean that we see some increased activity in that market.
And in general, I would say China India and several other markets, we see a continued support, for renewables. As I said, order intake, one of the key highlights for the quarter very strong at 3 gigawatts and a 56% increase year over year. U. S. Offshore, the 3 Megawatt platform, Mexico, Germany, and Chile were the main contributors in Q2 accounting for almost 80% of the increase.
If you look at the average selling prices, of order intake in, 1,000,000 euro per megawatt. We see a stable development in the quarter as we have seen actually in in the last several quarters. You should remember that the price per megawatt depends on a number of different factors. The scope, the turbine type, and of course, the uniqueness of the offering. Moving on then to order intake, we see improvements mainly in Latin America, U.
S. Offshore, Poland and China, but I must say very broad based. We see good progress on order intake from a number of different markets. If we look at the first half and start with Americas, up 7%, 4%. So very solid growth.
Driven by U. S, Brazil, Mexico and Chile. And in the quarter, then up 81%. So actually even stronger. EMEA also very positive development, for the first half, up 37%.
Again, driven by offshore, Nordics, Poland, Turkey, and Germany and also in the quarter then up 53%. Asia Pacific, from a lower level, up, 24% for the first half of the year. Again, as I talked about during Q1, to a large extent due to China, And in the quarter then, a smaller quarter for Asia Pacific, so down 67%. Was worth mentioning that, new markets for Vestas in Top 5 for the first half is the Brazil, Poland and China. A key competitive advantage for us is our global reach.
I've talked to that before. And that is something that we are leveraging on and we'll continue to leverage you on going forward. Also proven in the first half where we have, taken 4.8 gigawatts of orders very well balanced and broad in 27 countries and 5 continents. What enables our global reach beside our manufacturing footprint. And of course, the market presence in services is really our a broad well proven product portfolio.
Our order intake was fairly equal between our 2 Megawatt and 3 Megawatt portfolio for the first half. And the STAS offers a broad range of turbines for all wind classes. On the 2 Megawatt side, we have 4 models actively selling in the market where we see a very solid demand, especially the V-one hundred and ten that is a flagship model in the U. S. On the free Megawatt platform, we have 5 models with different power ratings, rotor size, and we continue to develop this platform example, the V126, a perfect match for medium to low wind.
And also with features that fulfilled specific market requirements such as de icing, large diameter steel towers. And this is also part of the offshore application and offering. Traditionally, 3 Megawatt has been used in land constraints market. But with increased energy production and cost efficiency, we see a clear trend, where 3 megawatt is taking share in more traditional 2 megawatts markets. And one question example is in Q2, where, we've taken a number of big three megawatts, all those in the U.
S. A traditional 2 Megawatt market. And we see we expect this trend to continue. Looking at the delivery, then, was up 35% in the first half. Sorry.
The microphone So I have adjusted that now. Hope you can hear me. So as I said, delivery up 35%. For the first half, solid growth in Americas And Asia Pacific and EMEA stable. Starting with Americas then, up 85% 6 months and 151 quarter on quarter.
Very much driven by the U. S, up almost 650 Megawatts. EMEA, as I said, stable, talked about the Germany last call. And as expected, we see a slight decline in the German market on delivery this year. But at the same time, that is compensated with increases in markets such as Turkey, Finland, Italy.
And we should, of course, remember that we continue to see an overall good, level in more mature markets like France and Germany. Actually, in Q2, Turkey was our biggest market in EMEA when it comes to delivery, again, showing the importance of a global reach. In Asia Pacific, we saw a solid development, both in the first half and in the quarter, up 162% 69%. Driven by primarily China and to some extent, Australia. As I talked about before, we see it on an order backlog that is highest ever close to 17,000,000,000.
And, we see an increase of 1,900,000,000, turbines on 1.3 and services on 0.6. Some more words then about the U. S. Market, continue to see a very high activity level. And I'm very confident with our position in the U.
S. Market. We have frame agreement with a potential of up to 2.3 gigawatts and year to date order intake is 1.7 gigawatts approximately 40% within the frame agreements and therefore, 60% outside. Looking at the Mitsubishi Vestas Offshore Wind Performance We see also positive development. It's well received by the customers, And we can say that in the older situation, with firm orders of 6 81 Megawatts conditional orders close to 500 and also announced the 3rd supplier agreement of 1.8 gigawatts.
We're also progressing according to plan. I've talked about before that the basic, the basic for the joint venture was a milestone agreement with both technical and commercial milestones. That has now been fulfilled. It's actually a one payment left of 12.5. So all other milestones has been met.
Manufacturing is ramping up of the V 164, 8 Megawatts and the global bank projects will be the first. And installation is expected to start in the beginning of 'sixteen. So with that, I'll leave over to the financials and Marika.
Thank you, Anders. So if we have a look at the income statement and some of the KPIs that we, we have for the company, you can see that The earnings continue to improve in the quarter. We have a revenue increase of 30% compared to last year. That is obviously driven by the higher volume, but also impact from currency. And when I talk about income from currency, you all recall that it's translation impact as we report in euro.
The gross profit in absolute values, of your improved by the volume by 21%. We continue to deliver a solid gross profit in the quarter of 18% although lower compared to last year, but again, that was an exceptional quarter in terms of positive mix. Fixed cost we will get back to in one of the coming slides, but we continue to deliver well and leveraging our fixed cost efforts in previous years. So the primary increase comes from currency, but also higher activity level in the company. Consequently, we deliver a high EBIT before special items.
And that lead us to an EBIT margin of 8 point 3% compared to 7.8% last year. Net profit also, you see a good improvement of 33% in absolute values. I should just mention here also on the income from investments. That is our joint venture that Anders just, took you through. And you have a slight profit in the joint venture in itself but the primary part is really that the project we have sold to the, to the joint venture now is has a transfer of risk and consequently you see a positive impact, but it's still below EBIT and we're just following accounting principles here.
So that leads me to how we leverage on the fixed costs. We have, as we have spoke about, previously, a very tight control of our fixed cost. We have increased the, activity level, continuously since we took down the cost. So you saw a higher activity level in 2014. And that also continues now in 2015.
Despite that, we have a very tight control of our fixed capacity costs. And we are now down to 8.4 percent of revenue. So the primary increase really comes from currency, as I alluded to earlier, and to some extent, also from the higher activity level, but we're very happy with the performance. If we go to the service margin, you see service increase, compared to last year by 20%. And as you remember, that is one of the key parameters in our strategy going forward.
So we definitely continue to execute on that strategy. Margins are solid. We have an EBIT before special items of 16.8%. Please bear in mind here, that we have, some one timers in the cost And as the revenue in the service business is smaller than the turbine business, a 2,000,000 to 3,000,000 extra Mary item in the fixed capacity costs has an impact, but that is the primary reason for a slightly lower margin. You will continue to see fluctuations in the quarter, but we deliver a high solid margin in the service business.
We have a very strong order backlog, and that continues to grow, as you saw on Anders previous slide. We also have an average duration of the service order of approximately 8 years. So, a very good, cycle security in the, in the service backlog. If we go to the balance sheet, which is obviously also one of the parameters that we are tracking and continuously improve. We have a very strong balance sheet right now.
And we have a big focus on the balance sheet. We have great performance. As you can see on the net working capital, we are in negative territory despite the high activity level in the company, I will come back to one some of the details in that improvement. You also see that we have a net debt, that is very positive. So we're definitely tracking on our key parameters, for the company.
We also have a solvency ratio that improved compared to 14 We haven't still met our target of 35% but a very solid improvement. The solvency ratio obviously also have an impact as we have a very high portion I will come back to the overall cash at hand in one of the coming slides, but very good performance both on the P and L and the balance sheet. If we go to some of the changes you see in the net working capital, I have said to you before that we continue the working capital project we have been very good in keeping our site control from previous years. When we were more challenged or we have not changed the approach. The work in progress, in particular, the process for work in progress has stayed and continues to be very good.
In the last 3 months, and also the last 12 months, we, because of high activity level, have a high portion of, prepayments we also development, it has improved more than we anticipated to be very clear. Provisions, which is on the next page. And the loss production factor continues at a good level. You see that we are providing more than what we consume. Just to be very specific here, we follow the same prints all that we had in 2014.
So there is no changes to the percentage that we provide for in 2015. The lost production factor is a reflection of our good quality work that we have in the company. And we continue our journey to be below 2% on a very consistent basis. If you look at the cash flow statement, and here, I also said in the last quarter, that you see the flow from operating activities continues to be the main contributor. Obviously, that has been the focus area for us.
You also see the change in net working capital here having a positive impact. I should just say here that this is, excluding any currency, so it's free from currency on the, working capital. And free cash flow that we deliver is 1,000,000. The cash flow from financing activities is primarily our payment of, of dividend in April. If you go to the total investments, we announced in Q1 that we had an intentional increasing to 350.
We are trailing, below that as of now, but we have anticipated that we will consume the 350 that we have put forward. That again is primary to meet our high activity level and the high demand in the market right now. And, it is primary investments in molds So as you remember, the modes are movable, but it's also in our R and D and the capitalized R and D is approximately 1 heard of the, of the CapEx that you see. The capital structure, you remember the 2 targets we have, net debt to EBITDA below 1 and also solvency ratio of 35. See, you were tracking well on the net debt to EBITDA.
The solvency ratio is lower than 35%. We're still happy with the 2 targets, and we also, and and respect that we have this point, flexibility with, to our strategy, and invest in the strategy if need be, And what you can see now is that we have calculated and are confident on the cash we need over the cycle. So it's not a short term cash need. It is over the cycle. And, we will consequently have excess cash that will be primarily invested in the execution of the strategy.
Having said that, we are not ruling out a dividend or a share buyback. The next slide show the, I would say amazing journey on the return on invested capital. We are approaching 55% This is, a consequence of, the focus on earnings and, also, the balance sheet improvement that you have seen in the past. So 54.6 percent is the, accurate number for the quarter. So a very, good performance that we're very happy with.
By that, I'll leave the summary and outlook to Anders.
Thank you, Marika. So let me then summarize the quarter. So, again, a strong quarter executing on our strategy. You look at our 4 strategic objectives, starting with growth, in mature in the emerging market and grow faster than the market, see a very good performance, high order intake, and the largest ever combined order backlog. On the service business, also good progress on the strategy of growing the service business more than 30% mid term, a good increase in revenue in the quarter backlog increasing, and we see a good trend on the average duration of our service contracts.
On the reduced levelized cost of energy, which is, of course, all about the competitiveness of our portfolio, we see a strong performance across both the 2 and 3 Megawatt platforms. And as I said, it is important for Vestas, and it is important to have offering for all different wind classes. On the R and D, we continue to invest as we have done before in new releases of both of our platforms. We have a number of operational excellence programs, of course, ultimately, we aim to improve earning capability and we see the value and continue with ROIC at 55% and also a well managed operation during high activity levels. All in all, we continue to leverage on our key 3 competitive advantages: global reach, technology and service leadership, and scale.
And to summarize this after Q2, on the global reach side, we are present in 7 4 countries across all wind classes on technology and services, as I talked about, the depth our product portfolio is what enables this global reach, and the lost production factor firmly now below 2%, we feel is industry leading, and it's, of course, the combination of the quality of our product and service offering. And on the scale, we are now at approximately 70 gigawatts of installed base and of course, a very solid order backlog. Moving on to the outlook and outlook is unchanged from the upgrade we made in May, this year. And we also maintain a minimum guidance on revenue, EBIT and cash flow. So for revenue, minimum, 1,000,000,000.
Service business, as before, also unchanged, expected to continue to grow. EBIT margin before special items of minimum 8.5% and here, as also, as before, in service business, is expected to have stable margins. Total investment, approximately 305 1,000,000 and a free cash flow of minimum 1000000. And as you know, the dividend policy, we have and the boards intend is to recommend a dividend of 25% to 30% of the net result of the year. So with that, we are ending the presentation and can start the Q And A.
Thank
0 and then one on your phone keypad now in order to enter the queue. And then after I announce you, just ask that question. And if I could please ask you to only ask a maximum of 2 questions per participant, and there'll be a brief pause or questions of being registered. First question is from the line of Christian Johansen of Danske Bank. Please go ahead with your question.
Your line is open. Yes, thank you. First question is regarding free cash flow. If we look at the past 2 years, you have delivered a much stronger free cash flow in the second half of the year post the first, primarily due to this buildup of inventory in the first three quarters and the release in the both. Looking at this year, you have so far reported a free cash flow of 1,000,000 you are keeping your free cash flow guidance of at least 600,000,000.
So implicitly to reach that lower end of the minimum level, you you are guiding for a lower cash flow in the second half. I understand that it's a minimum guidance. So my question is, is there anything that makes you believe that this seasonal pattern in inventory we have seen in the past 2 years will not be repeated this year or anything else that would down free cash flow in the second half of the year?
1st of all, if you look at the working capital as we have highlighted before, the focus continues and as I said, we have performed even better than we have anticipated for this year. So clearly, all the activities that we have in the working capital. And primarily, the process changes we see in the work of work in progress have really improved the overall situation. We have, because of high order intake, we have a large portion of down payments. We also have a higher payable because of simply high activity level in the company.
So in a way we, we, we have, as I said, performed better. We, of see what we always see in the 2nd half, a very high activity level. That's high activity level, courses, some, for us to be a bit cautious because you will see whether having an impact, you will see grid having an impact So the minimum 600 is, as you stated, a minimum guidance, but it's also a best estimate for what we know right now. But 1st half have certainly performed better than we anticipated.
Okay. Then my my second question is regarding the, profit from the MH Highway Investors joint venture. These 27,000,000. Can you help us understand what volume lies behind this deliveries with transfer of risk that you mentioned?
I'm not sure about the exact value. But if you recall, we had a negative impact when we sold, the projects, and it's the 3 megawatts obviously to the joint venture of approximately 30,000,000 on the, the items below the EBIT. And as they now have T Watch, I don't have this exact value for you, for you, but I'm sorry for that. But to give you some perspective, we had a profit in the joint venture of approximately 8,000,000. So we obviously had, our 50% of that.
Included in the 27, but the vast majority is really transfer of risk. But I don't have the exact project for you. So you can return to IR, they would have be able to provide that.
Sure. And then what should we expect for the full year on this line?
It, we haven't anticipated because that will obviously be more of a joint venture as it doesn't reflect on EBIT.
Okay. Thank you.
Thank you.
Our next question is from the line of Casper Blum of ABG. Please go ahead. Your line is open.
Thanks a lot. My first question relates to the gross margin development, sales up and cost of goods sold up 30%. Normally, we would expect to see a bit more leverage when sales improve. This development that we're seeing here in Q2, is this a reflection of a having you say not too fortunate mix in the quarter or is it more a reflection of Q2 last year being extremely strong?
Well, I would say it's a combination of both. So clearly, last year, we had a very, very good performance this year, we have a good volume, but less favorable mix. So the volume clearly offsets some of the good impact from the higher volume that we see. But still, bear in mind that the 18% that we deliver is really solid margin, although lower compared to last year.
I know you're just following us. 2nd question, you mentioned that you're seeing a fairly stable price per megawatt development, but we have seen some of your competitors talk a bit about pricing pressure. Can you give a few comments on what you see in the than in competitive behavior in a in a policy perspective also? Thanks.
Yeah, no, but you're right. I mean, we overall, of course, we see a solid market across many different countries. When it comes to the price levels, we see stable pricing. And, so I can't really speak for the competition, but what we see is, stable pricing, overall and no specific geographical differences, hydro. So actually, across the markets.
But are you sensing the competitors are trying to catch orders through pricing in a more aggressive way than maybe 6 months ago?
No, No, no, not generically speaking. No, I mean, of course, you will always have a odd project here and there, but nothing that you can see as 300 or anything like that. No.
Okay. Thank you.
We now go to the line of David Foss at Barclays. Please go ahead. Your line is open.
Good morning to both. I have two questions, if I may. You made reference to having done some calculations around the cash levels that are appropriate for the business. I may have missed a number there, but if you haven't given that already, could you kind of indicate where you see that, that kind of normalized cash level? That would be helpful.
And my second question is around, yeah, the quite positive remarks you made on the front we supported wind industry continues to enjoy. To my mind, that now takes away some of the volatility, that we've seen in the asked to a degree, at least. My question to you is, does that also mean that you would perhaps be more willing to commit to, some longer term targets as the visibility has increased.
Okay. If we start with your first question, I guess that what you're referring to is the working capital,
No, I I actually I heard you've done some calculations about the cash level that's required in the business.
Okay, sorry. Then I misunderstood you. Yes, I did. Obviously, internally, we have done that calculation. I will not share that fully transparently with you.
But we have a cash level that we're happy with over the cycle. And we will continue to be prudent. It is a cash in intense business when you start consuming cash, but we will certainly have excess cash is what I was very clear on. That will be invested in our, strategic targets and enable us to execute further on the, on the strategy. But we are not, as I said, also, ruling out a dividend and the share buyback, from vessel side.
That is not entirely a management decision. As you know, it will be a board but we are not ruling out that.
Okay. Maybe as a follow-up before the second question then, investing in the business and into the strategy, how do we think about that? Where will that money be deployed? And is that purely an organic strategy or will that, perhaps also have an inorganic component to it?
Well, primarily, what we're looking at And also what you see us deliver operationally is organic growth. And organic growth is our primary focus. So when I talk about investing in the best this primarily to deliver and execute on the strategy organically. But you also know that we have certain focus area where we have less presence. So you would see countries like, India.
We have started investing in, in Brazil, for example, so there is definitely places where we can continue to invest and further execute on the strategy.
Excellent.
Hey, Amit, about your second question then on the regulatory support. So that is definitely what we see, a stronger support for renewable in most markets, not all, but in most markets. And of course, we also have a bit more for the longer term, the COP 21 coming up. Having said that, it's, of course, very, very hard to forecast the political support, it also tends to change, every now and again, depending on the political parties or the annual support. So of course, something that is very, very hard to forecast for the future.
But if I, again, if I look at, at, at the current regulatory environment, it is a positive. Some of that are very concrete. That we, of course, also discussed, like, for example, the support mechanism in individual countries, the feed in tariffs levels and so on. And some of that or some of those these things are of course much more long term ambitions than hard targets that we can put, that we can translate to a renewable, market share. But it's moving in the right direction.
What we also should remember, moves in the right direction at the same time is, of course, the competitiveness of wind. And that is for us then the primary focus. I am a strong believer of controlling what you can control and the influence where you have the most influence. And what we can do in order to to have a market that is easier to predict also long term. And of course, increase the market share is to continue to drive down the cost of energy for wind.
And that's the other part, and that plays a big role in our strategy. We will, as every year, do strategy seminar, in September, where we look ahead for the next 3 years. And if we, after that, have anything else to share on that, we will definitely do so.
Many thanks.
Our next question is from the line of Penekei Das of Bank of America Merrill Lynch. Please go ahead. Your line is open.
My first question is on guidance. You've kept your guidance unchanged. I guess, the market is, sort of looking not sort of very happy about that guidance that you haven't changed the guidance despite actually having very good performance in the first half. So I just wanted to you know, check a couple of things. You know, somebody's already asked about FCF, you know, clearly looks your guidance looks like conservative on that side.
But even on revenues, you know, if you take the last 2 or 3 years, you know, typically you do only about, you know, less than 40% of our revenues in the first half. And clearly, sort of q q 4 is quite big. So if I just use the ratios that happened in the last 4 years, it should be somewhere between $8,000,000,000 $8,500,000,000 of revenues already for this year. And if that is true, then clearly your gross profit was somewhat less than expected or the growth in gross profit was less than expected, but if you have more than $8,000,000,000 of revenues, then clearly there's operating leverage as well. On top of that, you know, you just probably had a benefit of lower input costs, for example, steel or just generally the commodity macro So I just wanted to understand, you know, do I happen to change your guidance, or is it that you want to see more progress in the few months before actually updating your guidance?
Okay.
So let me start then and see if Marika will want to add something. But I mean, overall, of course, we are very comfortable with our position. We have a very strong orders backlog. So course, we anticipate a high activity level. We are also early in the year, still, we expect the seasonality in the business as we have seen before.
And that also means that we have the uncertainties that we have seen previous years on, on the later part of the year with a higher activity level. And the uncertainty is, of course, very much sort of within the calendar year. We have this catch 22 environment where we have a lot of delivery and transfer of risk, and, where we recognize the revenue. And we do that in areas with, a lot of wind because that's the good size for us. And that's at the same time, of course, where we are very dependent that we can execute the projects or towards the end of the year.
So that is an uncertainty that And that's why we, maintain our best efforts of a minimum guidance from from May this year. The other parts of the equation, again, we have an high activity level, as I said. We increased, delivery about 35%, 40% last year. We increased our delivery again for the first half of to 35%. So of course, we are running on a high activity ramp up plan.
We are delivering according to that plan, which I think is very obvious in the, in the performance that we have had so far. But of course, it is a plan, where you have risks, I feel again, comfortable with our ramp up plan, both with the number of people and material, but we also, of course, all dependent on, sub suppliers on, that we get all the material in at the time that we need to get it in into the supply chain so that we can execute in the timely matter. One such example of, of sort of unforeseen events is, of course, the accident that has been in China very recently. And we, of course, have a manufacturing facility in China. The good news is that, the manufacturing is not effective.
It's, a bit away from the staging port area. So it's not affected at all and also, of course, very good that none of the Vestas employees are affected. We've also been lucky in the sense that, our blade that was ready for shipment was actually part in a different harbor in the same thoughts. So they are not affected, and they will grow as planned. But we have an uncertainty in in sub supplier components coming into that whole boat that we are currently then, working through and evaluating.
I'm just saying it as one example of a fairly unforeseen event that good news is that nothing has been affected by manufacturing capability but we obviously can't rule out some sort of delay at this point in time.
And then what about the sort of $8,000,000,000 to $8,500,000,000 of revenues where you're just looking at the last few years trends? Is that analysis valid or would you still stick to the 7,500,000,000? And also, I mean, just just on that front, you know, you you obviously are doing much more supply only installations now. Does that change the transfer of risk profile?
Well, I mean, I cannot I will not disagree with your calculation. Obviously, the pattern, with investors and the industries that you have a higher activity level in the second half yes, scope will have a certain, impact on the, on the revenue for sure. But what we I mean, what you're referring to is obviously the perfect world, if everything works. Our job is obviously to see it will make the simulation what if. And therefore, we have chosen to stick with the guidance that we have And please bear in mind, it is a minimum guidance.
My second question is just, relating to, sort of input costs. Clearly, we've seen the commodity macro going down quite significantly. How does it affect your your input cost and you've already mentioned that pricing has been broadly stable. I mean, how do you benefit from lower commodity prices you already seen it in some of your numbers or you're yet to see it in the next few quarters? And how do your contracts work with your suppliers and sort of end customers?
Obviously, the product cost is high on the agenda. When it comes to commodities, it's also dependent on how you have purchased, whether you're on spot or or if you, potentially would store some of it. With the team that we have, certainly have, the focus and they continue to leverage on the commodity pricing as it sits right now. Obviously, that is also dependent on volume. So you will see impacts in lumps, but that is part of of the program that is running within the purchasing area.
Okay. Is it fair to
say that you would benefit from the lower commodity macro if your pricing remains stable?
I mean, if we would be right in the timing of purchasing, yes, we would definitely benefit from it. Yes.
We now go to the line of Claus Alba of Carnegie.
Thanks. I have two questions. One is about the cost base and one is about the product mix in the quarter. As you showed in that your fixed cost base has been developing rather nicely over the last couple of quarters on 12 month rolling basis. But if you compare Q2 to Q1, it's actually an increase.
Is that FX or is just, you know, the high activity level, as you said, And should we expect the Q2 level to continue rest of the year? That will be the first question.
Yes. So basically what I'll try glosses that causes, a high focus, obviously, we have a negative impact, translation impact from the strong dollar right now on our fixed capacity cost. But having said that, we also have a certain portion, although less, simply because of higher activity level. But overall, we are very strict. And as I said, we are extremely cautious on making sure that we leverage on all the efforts we have done to get the fixed capacity down.
But as Andreas said, I mean, also So in terms of activity level, both last year and this year, we, I think we have been extremely good at leveraging. But the vast majority of the increase is, for sure, currency.
Absolutely, it will hopefully go up in the second half of this year. Fixed cost will go up as well?
As I said, no, I mean, overall, the, we are keeping tight controls. So it's fairly limited on the activity level. But also, I mean, we cannot rule out that there will be some increases, but it's going to be limited also going forward.
Okay. Then my second question goes through to the product mix in the quarter. Is the mix you had, is that on average from base or compared to the backlog or was it better or worse?
Yes, Claus. That's the number one question. There's no normal quarter in, investors, unfortunately. So you will always see these types of swings. To last year.
The strive and the activities are in place to continue to improve on the gross profit. But it's very, very hard for for me to say that it's, define what is a normal, normal quarter. It is it The mix is not as favorable as last year, clearly, and that is also why we see, that despite the high, revenue or volume impact, that is certainly offset to a certain extent by negative mix.
So we should expect once you start to during the remaining part of your backlog that the gross margin could be improving. That's how we should reach you on to right?
Possibly, but we we what I can say is that if we look at the order backlog, we are happy with how the backlog is distributed.
We now go to the line of Alok Katri of SocGen. Please go ahead with your question.
Hi, this is Alok Katre from SocGen. Thanks for taking my questions. Just a couple maybe. First and foremost on Brazil, of the currency and the economic or activity situation over there, is a little tough, not to say the least. But maybe you could just help us with what your net exposure to the real is and how well you're covered there, not just for 15, but also for 2016 as well, if there's any cover there?
And related question on Brazil, of course, is having grown rapidly over the past 3 years in terms of installations. If you look at some of the felt in forecast, they seem to be suggesting it'll plateau off at a high level for a few years and perhaps even decline in the outer years. That sense, do you see competition heating up? And therefore, it is west us, you know, it's even with its recent daughter wins a little late to the Brazilian, sort of party, so to speak. So that's question number 1, and then I have
a follow-up on different topics. Thanks.
So I will start with the translation impact and Anders will follow-up on the Brazil question. So if you look at the primary impact on Vetha's P and L is translation with and with a strong U. S. Dollar that we see right now, we have a positive impact from a translation point of view. In Q2, you see an impact of 1,000,000 on the revenue, whereof approximately 18 is, from for the service business.
The, negative days, as I said, a negative impact on the translation on the fixed capacity So consequently, you see a, approximately 10,000,001,000,000 to 12,000,000 positive impact from translation on the, on the EBIT line. So basically what I'm trying to say is that We are fairly well naturally hedged as a company with the, and that is also what Anders alluded to earlier. We have a competitive advantage with our, industrial platform. So that is providing, to a great percent natural hedge. The part that we are not naturally hedged, we hedged the project.
So we are not hedging the EBIT, but we're rather hedging the margin, of the company.
Okay. Any specific comments around the Brazilian real in terms of the exposure there? I mean, obviously, I guess you do, let's say input some of the components from either Europe or U. S. Or China as well.
So perhaps.
Yes. And I clearly understand your question on Brazil. Yes, the, the Brazilian real is a challenge. But we have taken the decision to further improve our local production also to meet the local requirement. We make sure that we get the tax benefits.
So overall, the currency is a challenge. We try to mitigate, that challenge, with actions locally? Yeah.
I mean, we have, about 300 megawatts in backlog in Brazil. So it's not that much. And, of course, as Marika said, we, the low call, content, we will also actually enforce that you have to deal with lots of local production So it's a smaller portion between where we have to work with, here, change the project margin. So I think that little bit leading to your other questions about the Brazil in the general and and whether or not it was the right time or wrong time for Vestas. I think in that aspect, of course, the Brazilian reais and and more the sort of overall macro development in Brazil is of course negative.
And of course, something that important for us as well as all other companies to watch. My belief also after having worked in Brazil from NES is that it is going to be a market with its ups and downs. I think what's, that is what you have to take into account in Brazil. I think if you look at it from a renewable perspective, it's a market that has a growing need for more energy. It's a market with fairly old, a lot of old hydro.
So it's a market that actually for the foreseeable future, will have a growing energy need. And it's also a market then with very good wind resources. So I So from that aspect, I think it's going to continue to be a very interesting market. I'm very happy with the timing of Vestas entering the market. I think we managed to avoid the the big rush that first started and that has led to actually, some other suppliers leaving the market.
So that meant that we missed out a bit on the volume, but on the other hand, if I see the consolidation in the market that's happened after. I am, as I said, very happy with our most optimized approach to get into that market.
Okay, thanks. And just to follow-up on your different topic altogether, obviously, the 3 Megawatt platform is gaining steam, not just in Europe, as is suggested in the U S as well. How should we think about this from the profitability point of view, particularly on some of the newer, 3 Megawatt turbine such as the V126 or so on. I mean, just just to get a sense of the mix effect, as as we see greater proliferation of the 3 megawatt turbines.
Well, overall, both on the 2 megawatts and the 3 megawatts. And I understand what your alluding to. We're very happy with, with the profitability on both platforms. You will always see, differences because mix will also always play in. So how you, how you construct the, this specific project will have impact on the profitability of the 2 platforms.
A generic answer is that we're very happy with both platforms. We also have activities to take costs out on both platform and that continues.
Okay. So should I take it as there is, let's say there's not much or not much of a mix effect from higher three megawatt deliveries?
It will depend on the specific project. All I can say, to be answer you very generically. It is, the mix will always have an impact on either platforms. But there are, as I said, activities to continue to take costs out. And as you understand, the 2 megawatt is more mature.
So there's more cost out to take out on the 3 megawatts simply because it's a newer platform.
And how much was it in terms of overall installed base and in terms of revenue share perhaps in each one?
On install base, I think, we have to have, I don't have a SIM info out.
Our next question is from the line of Claus Kew of New Credit Markets. Please go ahead with your question.
Your line is open. Yes. Hello, Carlos Piel from New Fleet Markets. First question would be on your current capacity. Could you give us an update on that one?
And potentially also capacity constraints going forward. If the order intake continues at the same run rate, yes, as we're seeing right now, that'll be my first question.
Okay. So if we look at the current capacity, as you know, the business and that that's the reason for your question is developing quite fast. We have, as Andrew alluded to earlier, we have really met the demand in the market in a very good way, both in 2014, but also 2015. We have strong order intake. We have a strong order backlog and we have consequently decided to make further investments in capacity, and that is primarily modes.
And obviously with what we're doing now, we have the right activities in place to meet the demand that we see and have in front of us.
Okay. But could you give a some kind of indication of megawatts? Are we talking about a capacity of 8000 megawatts or is that a company secret?
I don't know if it's
a company that you're going to be honest.
No, but I mean, we definitely have to require capacity, and we have a very scalable capacity. I mean, if you look at the Nasile, it's very it's actually very easy on the manufacturing footprint we have to scale up Of course, it could happen that we have to take from different parts of the world. And of course, it's always an optimization that we are trying to do on closeness to the factory and where we have the project. But from a capacity point of view, it's a very scalable pot. The blade pot, is, was usually, set the the numbers, so to speak, and there, as Marika said, we have, and I think we have said on these calls for the last three 4 course that we are investing in new modes, and they are actually then also possible to move around and from a brick and mortar point of view also on the blade, we all wear a lot.
And, and, therefore, we can also flex there.
Okay. Okay. And then my second question would be on service revenues. Say that I'm somewhat positively surprised about revenues in this quarter So I just wanted to check if there's any unusual things included in in the top. Line for this quarter in the service business?
I think that what you see in the service business, as you remember, we called out out the survey separately before you get tracked. And I think this is the it is on the focus. So it's, again, very strong organic growth in the service business. Obviously, also a reflection of the strong, turbine order intake that you see.
We now go over the line of Sean McLoughlin at HSBC. Please go ahead. Your line is open.
Good morning. Thank you. Can I just clarify on FX? You said 1,000,000 to 1,000,000 of positive translation of the EBIT. Is that a total effect in Q2.
Then two questions. If I may, firstly, on the share buyback, if you can just talk about what might trigger that? Secondly, I'm I'm intrigued about your comments on on 3 megawatts replacing, 2 megawatts. I'm just trying to understand what's driving that. Is that purely economics in other words, your 3 megawatts, turbines are actually much more competitive on a on a megawatt hour basis in lower medium wind speeds?
Is it down to permitting? Or is there anything else? And particularly, what other markets could we begin to see that? Most of all, how does that shape the way that you think about future product launches?
Okay. If we start with a quicker question, which is the share buyback we will obviously, when we have a solid proposal from our side, we're not ruling out a share buyback, as I said, and neither a a dividend. So we will, give a recommendation, to the board and then they will make the ultimate decision on, how much that can be. But obviously, we, we understand and respect the requirements and also see that ourselves to make the balance sheet even more efficient.
On the 2 and 3 Megawatt platform, Christian, I would say that, I mean, 95 percent of the driving is, of course, pure economics, as you related to. So it's, levelized cost of energy production. And, and of course, we see then very good progress on the freemaker, what the growth when it comes to increased power rating, we can now go up to 3.45 Megawatt and also increased the rotor size. But it's also so that with, our new thought signed, we can reach higher, and therefore, get to better wind condition. We can also go to new places with new features, that's both grid features, but also for example, the de icing solution, we also have solutions on more humid conditions.
So it is very much to the absolute highest degrees driven by levelized cost of energy and more efficient So that is what, what sort of drive this trend. We have seen, of course, since before that we have, for example, in Latin America, quite a lot of 3 megawatts projects, U. S, we see now in Q2, clearly, and the reason why we see more in a market that tradition has been only 2 megawatts. We now see a good order intake on 3 megawatt is that there are sites now where the economics are better for, for all three megawatt platform.
So does this mean that, yeah, in terms of future product development, you'll have more of a 3 megawatt or or group 3 megawatt plus focus?
I think the trend in the market is definitely Darren. So And also if you look at the age of the platform, of course, the 3 Megawatt platform, as Marika said, as well, is a much newer platform, for us, and of course, the potential for us, both on improving that further both from, a course point of view, but also from, energy production point of view, is higher from the pure fact that it's a newer platform.
Our next question is from the line of Shai Hill at Macquarie. Please go ahead. Your line is open.
Yes. Thank you very much. So my two questions. I think the first one, Marika, could I just ask you Sorry. I'm not getting this, but to explain the difference in terms of the offshore joint venture between the 27,000,000 reported and the, $8,000,000 that you said standalone, is the difference basically sale of equipment from best assets to the joint venture.
Perhaps you could just explain it to me. I'm not getting it. 2nd question was just, Anders, maybe you could comment a bit on Germany, a very big market for you last year, about 18% of your deliveries. Obviously, there have been some regulatory changes and your first half deliveries in Germany are slightly less than half of what they were in the first half of last year. Do you think that's fair to team that would be, the picture for the full year basis, that you'd sort of do less than half of what you did last year or is there some seasonal rebound or deliveries I should expect in Germany?
Thank you very much.
Okay. So if we start with your, your first question. So the joint venture had a profit in itself, a net profit of 12. We get 50 percent of that. So it's, 6,000,000 and not 8, as I said, And then besides that, we had profits from, from the joint venture sales of turbines.
So transfer of risk to the end user of, some 50,000,000, I think it was. And then you have, adjustments. So that's the additional 15,000,000 of turbine sold from investors to the joint venture. So we end up in the territory of 27,000,000. The thing is just to take it from the beginning is we sell, the 3 Megawatt platform to the joint venture.
We then recognize revenue and consequently have the gross profit on that particular project. So it has an impact on our EBIT. But then for following the accounting rules and principle, we have to deduct that profit under the EBIT line. So that will show negative figures from the joint venture. And now as we sold last year, into the joint venture day and have now transferred the risk of these projects and that consequently have a positive impact once they turn below the EBIT line for vessels.
So it is purely accounting principle. I don't know if I explained it very well, but I really that's the best effort.
Okay. I think I got that used. You had a profit in Q2 last year of sales to the joint venture, which reversed out below the EBIT line. And
That's the correct.
You book a positive. Okay.
Okay. So a bit about you, I mean, then, you're right. And as we expected. And as we talked about, as well, we, we saw a decline in delivery in Germany in this year. We've seen a in the market from a very, very high market, the year before on delivery.
And also, as we expected, that compensated for with a lot of increased delivery activities in several other markets in EMEA, talk about Finland, talk about Turkey, good activity level in France and so on. So as expected, from a very strong delivery, yeah, last year in Germany, we saw a decline in delivery, for the first half, but well compensated in other markets in Europe. If you look at the orders, picture is a bit different. As you can see, orders for the first half in the EMEA region is up 37% year year and in the quarter actually up 53%. So a good development on the order intake side.
And here, we actually see good development, also in Germany on the auto side. So compared to last year, as we have said before, as well, we see Germany smaller from a delivery point of view this year, but longer term, we see Germany as a big stable market.
Thank you very much.
Thank you.
We're now over to the line of Patrick Setterberg of Nordea. Please go ahead. Your line is open. Yes, hello. Two questions.
The first one is regarding all both of them is regarding the development on the U. S. Market. You now have 2.3 Gigawatt in master supply agreements. I'm just wondering if if the client want to utilize all these 2.3 gigawatt of orders, would you be able to produce all of them in 2015 2016 And my second question regarding USA is that during the first half of twenty fifteen, you have been able to book orders for the out of the order and taking USA, 60% of the orders is outside these Monster Service Agreements.
Is this a more positive development than expected, or is it in line with what you have thought you said before when you started the year?
Yes. So if I start with your first question, so if we can confirm the potential of the frame of 2.3 to from an unconditional order, we will be able to produce and deliver that within 20152016. That we definitely have the capacity for. On your second question, it's, of course, positive that, we've taken also a large share outside the frame agreement in the first half. And again, I am very, I'm very satisfied fight with our performance in the U.
S. And our ability to take market share and and orders. Then, of course, we should also remember that the borderline in between is somewhat what fluent. So of course, you could have projects that, was in a frame before, and the customer ends and design, therefore, with VESTA's components for PTC qualification. And then that those those projects or some one of those projects can move out, the customer can sell that to another customer that we don't have a frame agreement with, but of course, it's still then designed with Vestas components.
So of course, our possibilities to secure that order is fairly good. So it is a, it is a bit of a moving market as well when it comes to project in the frame and outside the frame. But overall, we definitely have the capacity in 2015 2016, but we expect both years to be very busy in the U. S. And, and of course, we are happy also to take even more orders outside the frames.
Okay. Thank you for the clear answers.
Okay. So last question, please.
The last question is from the line of Jose Orez of Exane. Please go ahead.
Your line is open. Good morning, everybody. I had a couple of questions. First one on the service margins, during the prepared comments section you alluded to about 1,000,000 to 1,000,000 of one off costs in the service unit. Could you explain to us if that's related if there's a geographic mix or seasonal effect that we should know about.
And if so, if that will reverse in the second half, that's question number 1.
Okay. So, to be very clear on that then, it is nothing to be it's nothing that We will see on a occurring basis. But of course, you can in a, in a quarter or in a month have have that type of a cost, but it's nothing that we plan for. So, and that's a little bit my point is when you have an ordinary costs in a fairly small business on a comparable basis, you will see an impact on the EBIT margin. So but as I said, it is still very high margins and, also very stable margins overall in the service business.
So it's nothing that we, we are worried about or have a concern about.
Where do those costs come from? What's the nature of those if that, if I may ask?
Well, I don't have the precise description of the cost base for you. So, I would suggest that you, look or check that with our Investor Relations.
Okay. My last question is on the Upstream JV. What is the amount of milestone payments that you have received from Mitsubishi year to date? And what have they been booked in the balance sheet and the cash flow statement?
The amount that we have received from the joint venture is at this point, year to date, 187,000,000. And yeah, balance sheet obviously, And as Anders said, we have still 12,500,000 to be received from the joint venture.
That of course goes into the joint financials balance sheet. So it's the joint venture. The overall, deal with Mitsubishi was that Mitsubishi, had a payment of all in all 300,000,000 into the joint venture. 100,000,000 was transferred at the start of the joint venture. The remaining 200 was transferred on milestones to the joint venture.
And it's now 12,500,000 left out of the total of 1,000,000.
Okay, very clear. Thanks very much.
Okay. We'll now hand back to you Anders to close.
Okay. So with that, we close this call. Again, thank you for calling in. Thank you for your question and thank you for your continued interest.