Good morning, everyone, and welcome to this second quarter report. As usual, I appreciate everyone that has called in. Let's start. The usual disclaimer statement. Let me then start with the highlights overall. I am really satisfied with the quarter. It is 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 EUR 17 billion, actually the largest order backlog ever for Vestas, also very encouraging. The value creation continues. ROIC increased to 55%, also that on record level. Earnings continue to improve. EBIT before special items of EUR 145 million, up 39% year-on-year. Also a continued strong cash flow impacting by an increase in cash flow from operating activities. Again, a lot of highlights in the quarter and a very strong execution.
As usual, the agenda for today, I will start to talk about orders and markets. Marika, our CFO, will guide you through the financials. I will come back on the summary and outlook. We open for Q&A. Let me start then with the regulatory environment that we view as generally supportive. We see a strong support or solid support both for renewable energy and ambition to reduce CO2 levels. Starting then with Americas, the tax extender bill, including a 2-year PTC extension passed in the Senate Finance Committee with a solid majority vote. This is a first step. There are more to come, but it is a positive signal. Also, a bit more long-term, President Obama'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, Germany, as we have talked before, continues the transition from a set feed-in tariff system to an auction system. The draft papers has been released, and what's positive is that the renewable energy ambitions are intact. In France, a new energy law was passed that will cut the greenhouse gas emissions with 40% by 2030. Estimates are that that will bring renewable to 32%. On the negative side is in the U.K., where the government has proposed to end the onshore support one year earlier than previously planned. In Asia Pacific, we have had almost 2 years of uncertainty as the RET targets has been discussed. What's positive now is that a target has been adopted by the Australian Parliament. That should mean that we see some increased activity in that market.
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. onshore, 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 million EUR per megawatt, we see a stable development in the quarter as we have seen actually in the last several quarters. 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 to order intake.
We see improvements mainly in Latin America, U.S. offshore, Poland, and China. 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, we start with Americas, up 74%. Very solid growth, driven by U.S., Brazil, Mexico, and Chile. In the quarter then, up 81%, actually even stronger. EMEA, also very positive development. For the first half, up 37%. Again, driven by offshore Nordics, Poland, Turkey, and Germany. 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. In the quarter then, a smaller quarter for Asia-Pacific, down 67%.
Also worth mentioning that new markets for Vestas in top five for the first half is Brazil, Poland, and China. A key competitive advantage for us is our global reach. I've talked to that before, that is something that we are leveraging on and will continue to leverage 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 five continents. What enables our global reach beside our manufacturing footprint, and of course, the market presence in services, is really our broad, well-proven product portfolio. Our order intake was fairly equal between our 2 megawatt and 3 megawatt portfolio for the first half. Vestas offers a broad range of turbines for all wind classes.
On the 2 megawatt side, we have four models actively selling in the market, where we see a very solid demand, especially the V110, that is a flagship model in the U.S. On the 3 megawatt platform, we have five models with different power ratings, rotor size. We continue to develop this platform. For example, the V126, a perfect match for medium to low wind. Also with features that fulfills 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 markets, but with increased energy production and cost efficiency, we see a clear trend where 3 megawatt is taking share in more traditional 2 megawatt markets.
One such an example is in Q2, where we've taken a number of big 3 megawatt orders in the U.S., a traditional 2 megawatt market. We expect this trend to continue. Looking at delivery then, was up 35% in the first half. Sorry. The microphone was a bit. I have adjusted that now. Hope you can hear me. As I said, delivery up 35% for the first half. Solid growth in Americas, Asia-Pacific, and EMEA stable. Starting with Americas then, up 85% six months and 151 quarter-on-quarter. Very much driven by the U.S., up almost 650 megawatt. EMEA, as I said, stable. Talked about Germany last call, as expected, we see a slight decline in the German market on delivery this year. At the same time, that is compensated with increases in markets such as Turkey, Finland, and Italy.
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% and 69%, driven by primarily China and to some extent, Australia. As I talked about before, we sit on an order backlog that is the highest ever, close to EUR 17 billion. We see an increase of EUR 1.9 billion, turbines on EUR 1.3 billion, and services on EUR 0.6 billion. Some more words about the U.S. market. We 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 GW. Year-to-date order intake is 1.7 GW, approximately 40% within the frame agreements and therefore 60% outside. Looking at the Mitsubishi-Vestas offshore wind performance, we see also positive development. It is well-received by the customers, and we can see that in the order situation with firm orders of 681 MW, conditional orders close to 500 MW, and also announced preferred supplier agreement of 1.8 GW. We are also progressing according to plan. I have talked about before that the basis for the joint venture was a milestone agreement with both technical and commercial milestones. That has now been fulfilled. There is just one payment left of EUR 12.5 million, so all other milestones has been met. Manufacturing is ramping up of the V164 8 MW, and the Burbo Bank project will be the first, and installation is expected to start in the beginning of 2016.
With that, I leave over to the financials and Marika.
Thank you, Anders. If we have a look at the income statement and some of the KPIs that 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. When I talk about income from currency, you all recall that it is a translation impact as we report in EUR. The gross profit in absolute values obviously 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. 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. 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 8.3% 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 with Mitsubishi that Anders just took you through. 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 joint venture now has a transfer of risk, and consequently, you see a positive impact.
It's still below EBIT, and we're just following the accounting principles here. That leads me to how we leverage on the fixed cost. 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 over our fixed capacity cost, and we are now down to 8.4% of revenue. The primary increase really comes from currency, as I alluded to earlier, and to some extent, also from the higher activity level. We're very happy with the performance. If we go to the service margin, you see service increase compared to last year by 20%.
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 EUR 2 million-EUR 3 million extraordinary item in the fixed capacity cost has an impact. 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 eight years, so a very good life cycle security 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. 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 some of the details in that improvement. You also see that we have a net debt that is very positive. We're definitely tracking on our key parameters for the company. We also have a solvency ratio that improved compared to 2014.
We haven't still met our target of 35%, but a very solid improvement. Solvency ratio obviously also has an impact as we have a very high portion of prepayments in the company right now because of high order intake. I will come back to the overall cash at hand in one of the coming slides, but very good performance both on the P&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 projects. We have been very good in keeping our tight control from previous years when we were more challenged. 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 three months, and also the last 12 months, we, because of high activity level, have a high portion of prepayments. We also have a high portion of payables, and obviously, that helps our working capital. Very positive development. It has improved more than we anticipated, to be very clear. Warranty provisions, which is on the next page, and the lost 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 principle that we had in 2014. There is no change 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 we look at the cash flow statement, here I also said in the last quarter, that you see the cash 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. Free cash flow that we deliver is consequently EUR 183 million. The cash flow from financing activities is primarily our payment of dividend in April. If you go to the total investments, we announced in Q1 that we had an intention of increasing to EUR 350 million. We are trailing below that as of now, but we have anticipated that we will consume the EUR 350 million that we have put forward.
That, again, is primarily to meet our high activity level and the high demand in the market right now. It is primarily investments in molds. As you remember, the molds are movable, but it's also in our R&D, and the capitalized R&D is approximately one-third of the CapEx that you see. The capital structure, you remember the two targets we have, net debt to EBITDA below one, and also solvency ratio of 35%. You see, we're tracking well on the net debt to EBITDA. The solvency ratio is lower than 35%. We're still happy with the two targets, and we also respect that we have this flexibility to our strategy and invest in the strategy if need be. What you can see now is that we have calculated and are confident on the cash we need over the cycle. It's not a short-term cash need.
It is over the cycle. 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 shows 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. 54.6% is the accurate number for the quarter. A very, very good performance that we're very happy with. By that, I leave the summary and outlook to Anders.
Thank you, Marika. Let me then summarize the quarter. Again, a strong quarter executing on our strategy. You look at all four strategic objectives, starting with growth in mature and emerging markets and grow faster than the market. We see a very good performance, high order intake, and largest ever combined order backlog. On the service business, also good progress on the strategy of growing the service business more than 30% midterm, a good increase in the 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. As I said, it is important for Vestas, and it is important to have offering for all different wind classes.
On the R&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 creation 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 three competitive advantages: global reach, technology and service leadership, and scale. To summarize this after Q2, on the global reach side, we are present in 74 countries across all wind classes. On technology and services, as I talked about, the depth of our product portfolio is what enables this global reach. The lost production factor firmly now below 2%, we feel is industry-leading, and it's, of course, a combination of the quality of our product and the service offering.
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, the outlook is unchanged from the upgrade we made in May this year. We also maintain a minimum guidance on revenue, EBIT, and cash flow. For revenue, minimum EUR 7.5 billion. Service business, as before, also unchanged, expected to continue to grow. EBIT margin before special items of minimum 8.5%. Here, also as before, the service business is expected to have stable margins. Total investment, approximately EUR 350 million. A free cash flow of minimum EUR 600 million. As you know, the dividend policy we have and the board's intention is to recommend a dividend of 25%-30% of the net result of the year. With that, we are ending the presentation and can start the Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question, could you please press zero and then one on your phone keypad now in order to enter the queue? After I announce you, just ask that question. If I could please ask you to only ask a maximum of two questions per participant. There will be a brief pause while questions are being registered. Our first question is from the line of Christian Johansen of Danske Bank. Please go ahead with your question. Your line is open.
Yes, sir. Thank you. First question is regarding free cash flow. If we look at the past two years, you have delivered a much stronger free cash flow in the second half of the year opposed to the first, primarily due to this buildup of inventory in the first three quarters and the release in the fourth. Looking at this year, you have so far reported a free cash flow of EUR 329 million, while you are keeping your free cash flow guidance of at least EUR 600 million. Implicitly, to reach that lower end of the minimum level, you are guiding for a lower cash flow in the second half. I understand that it is a minimum guidance.
My question is: Is there anything that makes you believe that this seasonal pattern in inventory we have seen the past two years will not be repeated this year or anything else that would make
Well, first of all, if you look at the working capital as we have highlighted before, the focus continues. As I said, we have performed even better than we have anticipated for this year. Clearly all the activities that we have in the working capital and primarily the process changes we see in the work in progress, have really improved the overall situation. 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. In a way we have, as I said, performed better. We obviously see what we always see in the second half, a very high activity level. That high activity level causes some for us to be a bit cautious, because you will see weather having an impact, you will see grid having an impact.
The minimum EUR 600 is, as you stated, a minimum guidance, it's also a best estimate for what we know right now. First half have certainly performed better than we anticipated.
Okay. My second question is regarding the profit from the MHI Vestas joint venture. These EUR 27 million, can you help us understand what volume lies behind these 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. It's the 3 MW, obviously, to the joint venture of approximately EUR 30 million, on the items below the EBIT. As they now have to what, I don't have this exact value for you, I'm sorry for that. To give you some perspective, we had a profit in the joint venture of approximately EUR 8 million. We obviously had our 50% of that included in the EUR 27, but the vast majority is really transfer of risk. I don't have the exact project for you, so you can turn to IR, they would be able to provide that.
Sure. What should we expect for the full year on this line?
We haven't anticipated because that will obviously be more of a joint venture as it doesn't reflect on our EBIT.
Okay. Thank you.
Thank you.
Our next question is from the line of Casper Blom of ABG. Please go ahead, your line is open.
Thanks a lot. My first question relates to the gross margin development. Sales up 30% 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, how can 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. Clearly last year, we had a very, very good performance. This year we have a good volume, but less favorable mix. The volume clearly offsets some of the good impact from the higher volume that we see. 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 spoiling us. Second question, you mentioned that you're seeing a fairly stable price for megawatt development. 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 market and in competitive behavior in a broader perspective also? Thanks.
Yeah. No, you're right. I mean, overall, of course, we see a solid market across many different countries. When it comes to the price levels, we see stable pricing. I can't really speak for the competition, but what we see is stable pricing overall and no specific geographical differences either. Actually, across the markets.
Are you sensing that your competitors are trying to patch orders through pricing in a more aggressive way than maybe six months ago?
No, not generically speaking, no. I mean, of course you will always have odd project here and there, but nothing that you can see as a trend or anything like that, no.
Okay, thank you.
We now go to the line of David Vos 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 kind of normalized cash level? That would be helpful. My second question is around the quite positive remarks you made on the front of the regulatory support that wind industry continues to enjoy. To my mind, that now takes away some of the volatility that we've seen in the past. Does that now 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, actually, I heard you say that.
Yes
You've done some calculations about the cash level that's required in the business.
Sorry, I misunderstood you. Yes, I did. Obviously, internally, we have done that calculation. I will not share that fully transparently with you. We have a cash level that we're happy with over the cycle, and we will continue to be prudent. It is a cash-intense business when you start consuming cash. 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 strategy. We are not, as I said also, ruling out a dividend and a share buyback from Vestas' side. That is not entirely a management decision. As you know, it will be a board decision, but we are not ruling out that.
Maybe as a follow-up before the second question. Investing in the business and into the strategy, how do we think about that? Where will that money be deployed? Is that purely an organic strategy, or will that perhaps also have an inorganic component to it?
Primary, what we're looking at, and also what you see us deliver operationally, is organic growth. Organic growth is our primary focus. When I talk about investing in the business, it's primarily to deliver and execute on the strategy organically. You also know that we have certain focus areas where we have less presence. You will see countries like India. We have started investing in Brazil, for example. There is definitely places where we can continue to invest and further execute on the strategy.
Excellent.
Comment a bit about your second question on the regulatory support. That is definitely what we see, a stronger support for renewable in most markets. Not all, but in most markets. 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 political support. It also tends to change every now and again, depending on the political parties or the annual support. Of course, it's something that is very hard to forecast for the future. Again, if I look at the current regulatory environment, it is 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 tariff levels and so on.
Some of these things are, of course, much more long-term ambitions than hard targets that we can translate to a renewable market share. 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. That is for us then the primary focus. I am a strong believer of controlling what you can control and influence where you have the most influence. What we can do in order to have a market that is easier to project also long term, and of course, increase the market share, is to continue to drive down the cost of energy for wind. That's, of course, the other part, and that plays a big role in our strategy.
We will, as every year, do a strategy seminar in September, where we look ahead for the next three years. If we, after that, have anything else to share on that, we will definitely do so.
Many thanks.
Thanks, Mark. I think we'll
Our next question is from the line of, I think, Pinaki Das of Bank of America Merrill Lynch. Please go ahead. Your line is open.
Hey, good morning. Good morning, everybody. Thanks for taking my questions. My first question is on guidance. You've kept your guidance unchanged. I guess, the market is sort of looking not very happy about that guidance, that you haven't changed the guidance despite actually having very good performance in the first half. I just wanted to check a couple of things. Somebody's already asked about FCF. Clearly, your guidance looks quite conservative on that side. Even on revenue, if you take the last two or three years, typically, you do only about less than 40% of your revenues in the first half, and clearly Q4 is quite big. If I just use the ratios that happened in the last four years, you should be somewhere between EUR 8 billion and EUR 8.5 billion of revenues already for this year.
If that is true, then clearly your gross profit was somewhat less than expected, or the growth in gross profit was less than expected. If you have more than EUR 8 billion of revenues, then clearly there's operating leverage as well. On top of that, there's probably the added benefit of lower input costs, for example, steel or just generally the commodity macro. I just wanted to understand, why haven't you changed your guidance, or is it that you want to see more progress in the next few months before actually updating your guidance?
Okay. Let me start then and see if Marika will want to add something. Overall, of course, we are very comfortable with our position. We have a very strong orders backlog, of 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. That also means that we have the uncertainties that we have seen previous years on the later part of the year with a high activity level. 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.
We do that in areas with a lot of wind, because that's the good sides for us, and that's at the same time, of course, where we are very dependent that we can execute the project towards the end of the year. That is an uncertainty, and that's why we maintain our best efforts of a minimum guidance from May this year. The other part of the equation, again, we have a high activity level, as I said. We increased the delivery about 35%-40% last year. We increased our delivery again for the first half to 35%. 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 performance that we have had so far. 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, we also, of course, are 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 a timely manner. One such example of unforeseen events is, of course, the accident that has been in China very recently. We, of course, have a manufacturing facility in China. The good news is that the manufacturing is not affected. It's a bit away from the Beijing port area, so it's not affected at all. 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 parked in a different harbor in the same port, so they are not affected, and they will go as planned. We have an uncertainty in sub-supplier components coming into that harbor that we are currently then working through and evaluating. I'm just saying it as one example of a fairly unforeseen event that the good news is that nothing has been affected by manufacturing capability, we obviously can't rule out some sort of delay at this point in time.
What about the sort of EUR 8 billion-EUR 8.5 billion of revenues where you're just looking at last few years trends? Is that analysis valid, or would you still stick to the EUR 7.5 billion? Also, just on that front, you obviously are doing much more supply-only installations now. Does that change the transfer of risk profile?
Well, I will not disagree with your calculation. Obviously, the pattern within Vestas and the industry is that you have a higher activity level in the second half. Yes, scope will have a certain impact on the revenue for sure. I mean, what you're referring to is obviously the perfect world, if everything works. Our job is obviously to see or make the simulation, what if, and therefore, we have chosen to stick with the guidance that we have. Please bear in mind, it is a minimum guidance.
Okay, cool. 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 input cost? You've already mentioned that pricing has been broadly stable. How do you benefit from lower commodity prices? Have you already seen it in some of your numbers, or you're yet to see it? In the next few quarters, how do your contracts work with your suppliers and end customers?
Well, 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 if you potentially would store some of it. With the team that we have, certainly have the focus, they continue to leverage on the commodity pricing as it sits right now. Obviously, that is also dependent on volume, you will see impacts in lumps. That is part of the program that is running within the purchasing area.
Is it fair to say that you would benefit from the lower commodity macro if your pricing remains stable?
If we would be right in the timing of purchasing, yes, we would definitely benefit from it. Yes.
Okay, thank you.
Thank you.
We now go to the line of Klaus Albert of Carnegie. Please go ahead with your question. Your line is open.
Thanks. I have two questions. One is about the cost base, and one is about the product mix in the quarter. As you showed, Marika, in the slides that your fixed cost base has been developing rather nicely over the last couple of quarters on a 12-month rolling basis. If you compare Q2 to Q1, it's actually an increase. Is that FX or is just the high activity level, as you said? Should we expect the Q2 level to continue rest of the year? That would be the first question.
Yeah. Basically, what I try to say, Casper, is that cost is a high focus. Obviously, we have a negative impact, translation impact from the strong dollar right now on our fixed capacity cost. Having said that, we also have a certain portion, although less, simply because of higher activity level. 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. As Anders said, also in terms of activity level, both last year and this year, I think we have been extremely good at leveraging. The vast majority of the increase is for sure currency.
Activity level will hopefully go up in the second half this year, so fixed costs will go up as well?
As I said, no. Overall, we are keeping tight control, so it's fairly limited on the activity level. Also, we cannot rule out that there will be some increases, but it's going to be limited also going forward.
Okay. My second question goes to the product mix in the quarter. Is the mix you had, is that on average from based or compared to the backlog? Or was it better or worse?
Yes, Casper, that's the number one question. There's no normal quarter in Vestas, unfortunately. You will always see these types of swings. What I think is good is if you look at the gross profit underlying, it is improving. It is lower compared to last year. The drive and the activities are in place to continue to improve on the gross profit. It's very hard for me to say that it's define what is a normal quarter. 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.
We should expect once you start delivering the remaining part of your backlog, that gross margin could be improving. That's how you reach your answer, right?
Possibly, what I can say is that if we look at the order backlog, we are happy with how the backlog is distributed.
Okay. Thank you so much for the answers.
Thank you.
We now go to the line of Alok Khatri of SocGen. Please go ahead with your question. Your line is now open.
Hi, it's Alok Khatri from SocGen. Thanks for taking my questions. Was just a couple maybe. First and foremost on Brazil obviously the currency, and the economic or activity situation over there is a little tough, not to say the least. 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 2015, but also for 2016 as well, if there's any cover there. Related question on Brazil, of course, is having grown rapidly over the past three years in terms of installations, if you look at some of the consultant forecasts, 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. In that sense, do you see competition heating up?
Therefore, is Vestas, even with its recent order wins, a little late to the Brazilian party, so to speak? That was question number one, then I have a follow-up on a different topic. Thanks.
Okay, I will start with the translation impact, then Anders will follow up on the Brazil question. If you look at the primary impact on Vestas P&L is translation, and with the 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 EUR 140 million on the revenue, whereof approximately EUR 18 is for the service business. There is, as I said, a negative impact on the translation on the fixed capacity cost, consequently, you see approximately EUR 10 million to EUR 12 million positive impact from translation on the EBIT line. Basically what I'm trying to say is that we are fairly well naturally hedged as a company with, and that is also what Anders alluded to earlier. We have a competitive advantage with our industrial platform.
That is providing, to a great extent, natural hedge. The part that we are not naturally hedged, we hedge the project. 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? Because obviously, I guess you do, let's say, import some of the components from either Europe or U.S. or China as well, perhaps.
Yeah. I clearly understand your question on Brazil. Yes, the Brazilian real is a challenge. We have taken the decision to further improve our local production also to meet the local requirements. We make sure that we get the tax benefits. Overall, the currency is a challenge. We're trying to mitigate that challenge with actions locally.
Yeah. No, we have about 300 MW in backlog in Brazil, so it's not that much. Of course, as Marika said, the local content rule also actually enforce that you have to do a lot of local production. It's a smaller portion between where we have to work with hedging the project margin. I think that little bit leading to your other questions about Brazil in general and whether or not it was the right time or wrong time for Vestas. I think in that aspect, of course, the Brazilian reals 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 for many years is that it is going to be a market with its ups and downs.
I think 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 a lot of old hydro. It's a market that actually for the foreseeable future, will have a growing energy need. It's also a market then with very good wind resources. 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 big rush that first started, and that has led to actually some other suppliers leaving the market. That meant that we missed out a bit on the volume.
On the other hand, if I see the consolidation in the market that happened after, I'm, as I said, very happy with our more stepwise approach to get into that market.
Okay, thanks. Just to follow up on a different topic altogether. Obviously, the 3 MW platform is gaining steam, not just in Europe, but 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 MW turbines, such as the V126 or so on? Just to get a sense of the mix effect as we see greater proliferation of the 3 MW turbines.
Well, overall, both on the 2 MW and the 3 MW, I understand what you're alluding to. We are very happy with the profitability on both platforms. You will always see differences because mix will also always play in. How you construct the specific project will have an impact on the profitability of the two platform. A generic answer is that we're very happy with both platforms. We also have activities to take cost out on both platform, that continues.
Okay. Should I take it as there's not much of a mix effect from higher 3 MW deliveries?
It will depend on the specific project. That's all I can say to answer you very generically. The mix will always have an impact on either platforms. There are, as I said, activities to continue to take cost out. As you understand, the 2 MW is more mature, there's more cost out to take out on the 3 MW simply because it's a newer platform.
Okay, thanks. How much was it in terms of overall installed base and in terms of revenue share, perhaps in H1 exactly?
On the installed base, I don't have info.
Our next question is from the line of Claus Wiinblad of Nykredit Markets. Please go ahead with your question. Your line is open.
Yeah. Hello. Claus Wiinblad from Nykredit 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, yeah, as we're seeing right now? That'll be my first question.
If we look at the current capacity, as you know the business and that's the reason for your question, is developing quite fast. As Anders 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 a strong order intake, we have a strong order backlog, and we have consequently decided to make further investments in capacity, and that is primarily molds. 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.
Could you give some kind of indication of megawatts? Are we talking about a capacity of 8,000 megawatts or is that a company secret?
I don't know if it's a company secret, to be honest.
We definitely have the required capacity and we have a very scalable capacity. If you look at the nacelle, 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. Of course, it's always an optimization that we are trying to do on closeness to the factory and where we have the project. From a capacity point of view, it's a very scalable part. The blade part is what usually sets the numbers, so to speak. There, as Marika said, and I think we have said on these calls for the last three, four calls that we are investing in new molds. They are actually then also possible to move around.
From a brick-and-mortar point of view, also on the blade, we are well off and therefore we can also flex there.
Okay. My second question would be on service revenues. I must 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 the top line for this quarter in the service business.
I think that what you see in the service business, as you remember, we carved that out the service separately if we get traction. I think it is on the focus. It's again, a very strong organic growth in the service business. Obviously, also a reflection of the strong turbine order intake that you see.
Okay. Thank you very much.
We now go to the line of Sean McLoughlin at HSBC. Please go ahead. The line is open.
Good morning. Thank you. Can I just clarify on FX? You said EUR 10 million to EUR 12 million of positive translation of the EBIT. Is that the total effect in Q2?
Right.
Great. Two questions, if I may. Firstly, on the share buyback, if you can just talk about what might trigger that. Secondly, I'm intrigued about your comments on 3 MW replacing 2 MW. I just want to understand what's driving that. Is that purely economics? In other words, your 3 MW turbines are actually much more competitive on a MWh basis in low, medium wind speeds? Is it down to permitting or is there anything else? 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, either a dividend. We will give a recommendation when we have a recommendation in place to the board, then they will make the ultimate decision on how much that can be. Obviously, we understand and respect the requirements and also see that ourselves to make the balance sheet even more efficient.
On the two and three megawatt platform question, I will say that 95% of the driving is, of course, pure economics, as you alluded to. It's levelized cost of energy production. Of course, we see then very good progress on the three megawatt, both when it comes to increased power rating. We can now go up to 3.45 megawatts and also increase the rotor size. It's also so that with our new tower design, 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. It is very much to the absolute highest degree, it's driven by levelized cost of energy and more efficient energy production. That is 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 three-megawatt projects. U.S., we see now in Q2, clearly, the reason why in a market that traditionally has been only two megawatts, we now see a good order intake on three megawatts is that there are sites now where the economics are better for our three-megawatt platform.
Does this mean that in terms of future product development, you'll have more of a three megawatt or three megawatt-plus focus?
I think the trend in the market is definitely there. Also if you look at the age of the platform, of course, the three-megawatt platform, as Marika said as well, is a much newer platform for us. Of course, the potential for us both on improving that further, both from a cost point of view, but also from energy production point of view, is higher from the pure fact that it's a newer platform.
Thank you.
Our next question is from the line of Shai Hill at Macquarie. Please go ahead. Your line is open.
Yes, thank you very much. 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 EUR 27 million reported and the EUR 8 million that you say is standalone. Is the difference basically sale of equipment from Vestas to the joint venture? Perhaps you could just explain it to me. I'm not getting it. Second 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 assume 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, roughly? Or is there some seasonal rebound with deliveries I should expect in Germany? Thank you very much.
Okay. If we start with your first question. The joint venture had a profit in itself, a net profit of EUR 12 million. We get 50% of that, it is EUR 6 million and not EUR 8 million, as I said. Besides that, we had profits from the joint venture sales of turbines, transfer of risk to the end user of some EUR 50 million, I think it was. You have adjustments. That is the additional EUR 15 million of turbines sold from Vestas to the joint venture. We end up in the territory of EUR 27 million. The thing is, just to take it from the beginning, we sell the 3-megawatt platform to the joint venture. We recognize revenue and consequently have the gross profit on that particular project, so it has an impact on our EBIT.
Following the accounting rules and principle, we have to deduct that profit under the EBIT line. That will show negative figures from the joint venture. Now, as we sold last year into the joint venture, they have now transferred the risk of these projects, and that consequently has a positive impact once they TOR below the EBIT line for Vestas. It is purely accounting principle. I do not know if I explained it very well, but that is the best effort.
Okay. I think I got that. You had a profit in Q2 last year of sales to the joint venture, which reversed out below the EBIT line. It.
That is the correct.
You book a positive. Okay.
Okay, a bit about Germany. You're right, as we expected and as we talked about as well, we saw a decline in delivery in Germany in this year. We've seen a decline in the market from a very, very high market the year before on delivery. As we expected, that's compensated for with a lot of increased delivery activities in several other markets in EMEA. Talked about Finland, talked about Turkey, good activity levels in France, and so on. As expected, from a very strong delivery 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, the picture is a bit different. As you can see, orders for the first half in the EMEA region is up 37% year-on-year, and in the quarter, actually up 53%.
A good development on the order intake side. Here we actually see a good development also in Germany on the order side. Compared to last year, as we have said before as well, we see Germany smaller from a delivery point of view this year. 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 Sidelberg] of Nordea. Please go ahead. Your line is open.
Yes. Hello. Two questions. The first one is regarding, or both of them is regarding the development on the U.S. market. You now have 2.3 gigawatt in master supply agreements. I am just wondering if the clients want to utilize all these 2.3 gigawatt of orders, would you be able to produce all of them in 2015 and 2016? My second question regarding U.S. is that, during the first half of 2015, you have been able to book orders for the out of the order intake U.S., 60% of the orders is outside these master service agreements. Is this a more positive development than expected, or is it in line what you have budgeted for when you started the year?
Yeah. If I start with your first question, if we can confirm the potential of the frame of 2.3 to firm an unconditional order, we will be able to produce and deliver that within 2015 and 2016. That we definitely have the capacity for. On your second question, it is of course positive that we have taken also a large share outside the frame agreement in the first half. Again, I am very satisfied with our performance in the U.S. and our ability to take market share and orders. Of course, we should also remember that the borderline in between is somewhat fluent. Of course you could have projects that was in a frame before, and design therefore with Vestas components for PTC qualification, and then one of those projects the customer can sell that to another customer that we don't have a frame agreement with.
Of course, it's still then designed with Vestas components. Of course, our possibilities to secure that order is fairly good. It is a bit of a moving market as well when it comes to projects in the frame and outside the frame. Overall, we definitely have the capacity in 2015 and 2016, but we expect both years to be very busy in the U.S. Of course, we are happy also to take even more orders outside the frames.
Okay, thank you for the clear answers.
Okay, last question, please.
The last question is from the line of Jose Aras 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 EUR 2 million-EUR 3 million of one-off costs in the service unit. Could you explain to us if that's Forex related, if there is a geographic mix or seasonal effect that we should know about? If so, if that will reverse in the second half? That's question number one.
Okay. To be very clear on that, it's nothing that we will see on a recurring basis. Of course you can, in a quarter or in a month, have that type of a cost, but it's nothing that we plan for. That's a little bit my point is when you have an extraordinary cost in a fairly small business on a comparable basis, you will see an impact on the EBIT margin. As I said, it is still very high margins and also very stable margins overall in the service business. It's nothing that we are worried about or have a concern about.
Where did those costs come from? What's the nature of those costs, if I may ask?
I don't have the precise description of the cost base for you. I would suggest that you look or check that with our Investor Relations.
Okay. My last question is on the offshore JV. What is the amount of milestone payments that you have received from Mitsubishi year to date, and where have they been booked in the balance sheet and the cash flow statement? Thank you very much.
The amount that we have received from the joint venture is, at this point, year to date, EUR 187 million.
Balance sheet.
Yeah, balance sheet, obviously. As Anders said, we have still EUR 12.5 million to be received from the joint venture.
That, of course, goes into the joint venture's balance sheet. It's the joint venture. The overall deal with Mitsubishi was that Mitsubishi had a payment of all in all EUR 300 million into the joint venture. EUR 100 million was transferred at the start of the joint venture. The remaining EUR 200 was transferred on milestones to the joint venture. It's now EUR 12.5 million left out of the total of EUR 300 million.
Okay, making it clear. Thanks very much.
Okay, we'll now hand back to you, Anders, to close.
Okay, with that, we close this call. Again, thank you for calling in. Thank you for your question, and thank you for your continued interest.