Thank you very much. Good morning, everyone. Thank you for calling in. As you have noticed, we changed the format a bit based on feedback. This should work better for all of us. The first quarter result, our usual disclaimer slide. Let me start then with the key highlights and by saying that, of course, I am very satisfied with the good start of the year and delivering a strong result in the first quarter. Actually, in many aspects, we see record performance historically for a Q1. For example, order intake, that was record high at 1.75 gigawatts. Also very solid development in the order backlog. That stands now at EUR 15 billion. Return on Invested Capital also at the highest level ever at 44%, and also very good progress on earnings with an EBIT margin before special items at 5.2%, up 2.1% compared to a year ago.
Overall, due to higher than expected order intake year to date, of course, also a greater visibility and a strong development of the USD, we have increased our minimum guidance for the full year of 2015. The agenda, starting as usual, orders and markets, financials, and then the summary with the Q&A. This is also the time of year where we see the results of external market analysts on market share in megawatt. As you can see from this slide, three out of four analysts have Vestas as a clear market leader with around 12%. That is, of course, encouraging for us and something that we obviously follow closely.
If I then go in and talk a bit about the market and start with the regulatory trend, I would say that overall we see the trends as clarifications ongoing, transitions from different support schemes, and of course, negotiations around the different systems. In Americas, I would say the update that has happened since we last talked is basically around the PTC, and the IRS has now clarified the continuous construction qualification method. A summary of that is that it is the same as previously, just one year longer. That, I think, is the easiest way to think about that. If you qualify a project as continuous construction, it is not prolonged for one more year. In EMEA, Germany, there are discussions ongoing to an auction system.
We are still waiting for the detail on how that system will work, and the first auction expected end of 2016, start of 2017. In the Nordics, Norway and Sweden, we see government putting forward a supportive proposal to increase the support for renewable, which is obviously positive. In Poland, also getting ready for a new auction system, and here the estimate is that that will be happening by the first half of 2016. In Asia Pacific, there is currently an ongoing political discussion about the RET in Australia. As always, hard to predict the outcome, but it is definitely on the agenda. In China, we see a continuous support for renewable and for wind with a discussion on potential increase in the 2020 targets.
If I look at the order intake, as I said, Q1 was the highest order intake ever in Vestas, 1.75 gigawatts, an increase of 47% year-on-year. The selling prices remained fairly stable in the quarter. Looking at the order intake, the improvement was 562 megawatts. U.S., Brazil, Poland, and China were the main contributors to the order intake in the quarter, accounting for more than 60%. It is encouraging to see that we start to see traction with improvement year-on-year in Brazil and China, two of the key markets to focus on on our midterm strategy. On the price development, as I said, the price per megawatt is EUR 0.92 in the quarter.
Here we see some positive effect on the dollar. If you take that out, I would say it is probably the same as the quarter a year ago, confirming also what I said, that in general, we see a stable price situation in a competitive market. I also want to point out that, of course, the price per megawatt depends on a number of different factors, the turbine type, the scope, and of course, the uniqueness of the offering. If I then look at the order intake. In the quarter, we had order intake in 20 different countries, again, confirming our strategy of global reach. It is important to Vestas, and we see that we deliver on that with a broad geographical order intake. Overall, the main year-over-year improvement is seen in Brazil, Poland, China, and Sweden.
Looking a bit in the different geographies, America is up 60%, primarily driven by Brazil, but also good activity levels in many other Latin American countries and in the U.S. EMEA up 18% year-on-year. Also broad-based improvements, especially then in the quarter, driven by Poland and Sweden. But as I said, solid activity levels across a wide range of countries. Asia-Pacific, of course, from a percentage point of view, is very high, but coming from a low level. What is encouraging then to say is that the year-on-year improvement in the quarter is solely driven from improvement in China. If I then look at delivery was up close to 30% in terms of megawatts. Here the improvement is mainly seen in the U.S. and Asia-Pacific region. America is up 49%.
The higher activity level is primarily driven by the U.S., but also improvement in countries like Chile, Uruguay, Canada, while we saw a decline year-over-year in Mexico and Brazil. In EMEA, delivery decreased 8%, primarily driven by lower activity levels in the quarter in Germany. That, of course, had a very high level during last year. On the other hand, then we see improvements in markets like South Africa, Finland, Poland, and France. Asia-Pacific, again, of course, extremely low level last year, but we see improvement in delivery in all markets from a low level. That leads me to the backlog. The backlog increased EUR 1.3 billion, and we now have a record high backlog at EUR 15 billion. The turbine business increased to EUR 0.8 billion and the service business, EUR 0.5 billion. A few words about our joint venture with Mitsubishi Heavy Industries around offshore.
In the quarter, we have received a type certificate for the V164 8-megawatt turbine, which, of course, is very important, and also confirm that we are on track on the technical milestones that we have set up. We have a prototype, as some of you know, up and running, and with this prototype, we have actually set the world record in electricity production for 24 hours. The operational performance is progressing according to plan. I had talked about it before, but the basis for the joint venture was both technical and commercial milestones that were agreed between the two parent companies, and they also trigger payment into the joint venture. Here we are progressing as planned, both on the commercial and on the technical side. I would like to hand over to my trusted CFO, Marika, to go through the financials.
Thank you, Anders. We start as we normally do with the P&L. As you can hear from Anders, there is a lot of positive development here in the quarter, and that is also well reflected in our P&L. You see revenue is increasing significantly. I would say 18% change compared to Q1 of last year. That also has an impact on the gross profit, where you see in absolute numbers an improvement of 23%. That is an improvement in gross profit percentage by 0.6. Fixed cost remains under control. Despite, I would say Q1 of last year being very low, you see the drop-down effect on the EBIT is 98% improvement compared to Q1 of 2014. The income from investments that is here, the EUR 4 million, is the joint venture that Anders just finished with.
The joint venture did a profit of EUR 4 million, and EUR 2 million of them is allocated to Vestas. They invoice at a profit from their turbine sales of EUR 17, EUR 15 of those were corrected as we normally do according to the accounting principles. That gives us two. The two plus two is the EUR 4 million from the joint venture, to be very precise. That gives us a record net profit of EUR 56 million, and you can see clearly a huge improvement compared to last year. The margin we deliver in Q1 is 5.2% compared to 3.1% last year. The service business, just to remind everyone again, this is onshore only. There you see compared to Q1 of last year, where we have already eliminated the offshore impact. You see a 21% increase year-over-year.
This is a very important part of our strategy, and the mid-term target in the strategy is growing 30% on revenue. We continue to deliver stable margins. You see an EBIT margin before special items of 21%. Anders have already talked about the order backlog, and you see up EUR 500 million compared to Q4 of 2014. The average duration in the order backlog is eight years, and I think that's also very important to highlight. The balance sheet, not a lot of news apart from the net cash position continues to be strong. It's EUR 1.7 billion of net cash. You see, consequently, the net debt is also improving compared to last year. Net working capital is also improving. Here you also have a slight currency effect of EUR 140 or slight.
You have a currency impact of EUR 140 on that, on the balance sheet, and we deliver a 31.4% solvency ratio compared to 31% last year. The change in net working capital. The net working capital focus continues. We think it is both in an upturn and downturn, very important to have the focus and having the right processes in place, and I would say that net working capital is clearly representing that. You see a positive development over the last 12 months, primarily driven by higher prepayments. Prepayments, in this case, is both down payments and milestone payments. You also have an impact from payables, majority because of the high activity in the company. That is slightly offset by higher inventories over the 12 last months. You see an improvement over the last three months, and the drivers are the same.
It is payables and prepayments that are driving this. Prepayments, primarily. The warranty provisions, we have focused, as you know, a lot on quality, and that is well reflected in the consumptions and the provisions. Provisions based on revenue, obviously. Consumptions continues to be stable. We also have a production loss factor that is very stable below 2% at this point. If I go to the cash flow, here you see what we said also for the full year 2014. You see a cash flow that is to a large extent driven by the improvements in the operating activities. You also see the net working capital here being currency excluded, so it's a clean cash flow that you see you have no currency impact on this. We managed to deliver EUR 146 million in the quarter compared to negative last year. Total investments continue to be stable.
We are more or less in line with Q1 of last year, EUR 63 million. The investment continues again to be primarily in molds for V110 and V126, and also capitalized R&D. The capital structure continues to be strong, and we are net debt to EBITDA in negative territory, as we've been for quite some time. The target remains of one, that is clearly improved by our net cash positions and also improved EBITDA. The solvency ratio dropped compared to Q4, but increased compared to Q1 of last year. The Q1 development is primarily working capital elements and also the improved dividend. As you recall, we issued a green bond to strengthen our capital structure even further. We have thereby secured long-term financing, seven years to be precise, and we have strengthened our balance sheet, and this clearly supports what we want to achieve as solid capital structures.
We also maintain a presence in the debt capital markets, which is also very important. The green bond is unique to that sense that it's used for general corporate purposes as we are considered a green company, and being in the wind energy. I think a good performance by the company. Return on invested capital continues to be high. ROIC is now approaching the 44% territory, and this is the focus that we have. It's both earnings as well as our net cash position and balance sheet items that is improving this. Over to you, Anders.
Thank you, Marika. To summarize, as I said, very satisfied with the Q1 result. Good start of the year. We affirm that we progress well on our overall strategy on profitable growth. A few highlights on the market and grow faster than the market and the turbine side order intake of close to 1.8 gigawatts in the quarter. Also on the service side, another key objective, as Marika said, 21% growth in revenue year-over-year. A solid order backlog of EUR 15 billion, well on track. On improved earnings, we see improvement in the EBIT margin year on year and in the quarter at 5.2%, and ROIC, which of course is a combination of all different operational excellence activity at 44%. Looking ahead in this year, as I said, higher order intake year to date than expected.
Of course, also being further into the year, a greater visibility, and the strong development of the US dollar to the EUR, are the prime reasons for our revised upgraded outlook for the rest of the year. On the revenue side, we have minimum EUR 7.5 billion. On the EBIT margin before special items, minimum 8.5%. Total investment, we have increased with approximately EUR 50 million to approximately EUR 350 million. The free cash flow, minimum EUR 600 million. We have no change view on the service business that we expect to continue to grow with stable margin. With that, we open up for Q&A.
Okay, thank you. We will now begin the question and answer session. If you have a question, please press star then one on your touch-tone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. Once again, if you have a question, please press star then one on your touch-tone phone. We have the first question coming in from Kristian Tornøe from Danske Bank. Please go ahead.
Yes, thank you. First of all, congrats on the results, very impressive. A couple of questions from me. First of all, you stated in the report that revenue is positively affected by EUR 150 million due to currency. Could you give us the same number for the impact on EBIT that is due to currency?
Yes, you are correct. Just to remind everyone again, this is the translation impact. It is obviously more on the revenue. When you cascade down further in the P&L, you have a negative impact on the fixed capacity cost, as well as the depreciations. The impact on the EBIT is in single-digit numbers for the quarter.
Okay, very clear. Next question, you come up with a positive cash flow, increase your cash position, upgrade cash flow guidance. Obviously you're going to continue to increase your cash position. How much cash do you need on the balance sheet?
Yes, you are right. We indicate that we will continue to improve our balance sheet, we are, as we have said earlier, continuing to evaluating our capital structure and consequently our net cash position as well.
Okay. Last question, in connection with Q4, you stated you had three gigawatts in MSAs in the U.S. Can you give us an update on that number?
Yeah. We have a potential frame agreement up to 3 GW in the U.S., that still holds true. That's still the case. Nothing really have changed there. It is MSAs, as I said, and it's a potential up to 3 GW. We are still, as in Q4, positive on the U.S. market, no real change from last quarter.
Okay, very clear. Thank you. That's all for me.
Thank you.
Okay, the next question on line comes from Patrick Setterberg from Nordea. Please go ahead.
Yes, good morning. Some of the same topics I'm going to ask, too. I just wondering on your Revenue guidance for 2015, how much of the upgrade is explained by FX?
The majority of the upgrade is relating to operational improvement, as we see it. One-third is in the order of magnitude now, or one-third is currency.
Okay, thank you. My second question is related to U.S. Regarding your capacity situation for 2015 and 2016, are you able to squeeze any more orders or deliveries into 2015?
Generally speaking, of course, we try to balance demand with capacity. We have full production capability in the U.S., both nacelles and blades, and towers. As I said, we have the full manufacturing capability there. We are confident that we will be able to fulfill the demand that we see in the U.S. market. Exactly how much capacity we have versus competition, for competitive reasons, I will not go into.
Okay. It was fair to assume that you have some capacity left for 2015 and quite plenty capacity left for 2016?
It's fair to assume that we have the capacity left that we need. I think I can also remind you that we, of course, have changed, especially on the blade side and with a more flexible setup with the new structure shell. As you're also seeing on the investment side, the absolute majority of our new investment goes into molds for V110, which of course is the key thing to increase the capacity.
Okay. My last question is regarding your order intake in China in the first quarter. Could you just give some wording about the success and the reason why we're seeing such a high number of orders from China in the first quarter?
I think, of course, as you say, we are really encouraged, or I'm really encouraged that we see a good year-on-year increase in China. We have taken orders in the quarter of 220 megawatts, which of course, is a considerable improvement compared to the year ago. We have launched a new strategy in China. We have put in a new management team in China. We have worked on all customer relation, of course. We have changed our service offering. We've done a number of different strategic initiatives to get more traction in the Chinese market. I have also said before, it's a mid-term strategy. Our objective is to increase Vestas' performance year-on-year. Of course, there is a lot of work that remains to be done in China, and it's really encouraging to see the signs now also on orders.
Okay, thank you.
Yeah.
Thank you.
The next question in line comes from Klaus Kehl from Nykredit Markets. Please go ahead.
Yes, hello, Klaus Kehl from Nykredit Markets. Two questions, if I may. First of all, yeah, congrats with the strong order intake. It was, yeah, pretty solid. Anyway, I was a bit disappointed about the unannounced orders. Could you say anything about the weakness in the small orders? Is that due to Germany perhaps? Secondly, we are now starting to see a solid order intake in especially China and Brazil, and there's no doubt prices in these two countries are lower than we are used to. Could you confirm that margins in these countries are on par with the group? Thank you very much.
Yeah. First of all, I'm not disappointed on the order side. On the contrary, I'm very satisfied with the orders both in Q1, as I said, record high for Vestas and also year to date. Of course, we have a clear policy on announcing orders, both from a size point of view and when they are firm and unconditional. How many smaller orders you can have in a quarter will, of course, vary quite a lot. When it comes to the prices, and then again, price is very related to scope and local market condition. Of course, it is fair to say that in China, the price levels are usually lower, but also the scope is lower. Quite often in China, for example, we don't sell towers, so you have a different scope. Of course, you have a lot of different sites also in China.
It's a big country with different fit of the turbine type to the site, and therefore different margin profiles. In Brazil, actually, the price per megawatt is not low, contrary. It's a fairly, compared to global average, high price level. On the other hand, in Brazil, you have a lot of local content requirements that actually then also push up the cost. On a price level point of view, Brazil is not a low price market. On the other hand, then, from a cost point of view, it's not a low-cost market either, due to the local content rule. You can't say really that it's low price in Brazil. In general, we don't comment on margins in specific countries.
As we have stated before, I would say that the uniqueness of the site, the fit with the turbine, all the factors I talked about, the content of the delivery, and the requirement of local content has, in most cases, a bigger influence on margins than the geography.
Okay. Just to sum up, we should not expect a margin squeeze if Brazil and China starts to constitute a bigger part of your revenue?
We do the guidance on what we see as the overall margin with the total mix of Vestas.
Okay. Thank you very much.
Okay, the next question in line comes from Mark Freshney from Credit Suisse. Please go ahead.
Hello, Mark Freshney from Credit Suisse. Two questions. Firstly, on the foreign exchange, can you talk about how you use financial products to hedge ahead, i.e., your hedging process? Secondly, just on the large amount of cash on balance sheet, clearly you've laid out a number of target criteria for the balance sheet, and you're still falling short on the solvency ratio. If you meet all of those targets, at what point would you consider ways to reduce capital? Would you consider share buybacks, acquisitions, or capital returns? Thank you.
Okay. If we start with the Forex question, as I said, we are, to a very large extent, naturally hedged, and that is also the type of business we're in, as it's a long distance to ship this kind of product. The remaining part that is not hedged, which is in the order of magnitude 15%, is hedged by project, more or less. That is the part that we hedge when we have a firm and unconditional order, then we would hedge that specific project. That is relating to the Forex. If we look at the cash position we have, there are sort of different options we have on whether it's a share buyback or a dividend. We have, obviously, paid a dividend. When we pay that, it was also stated from our board that this was reinstalled. We haven't paid anything in 12 years.
We paid, and we didn't have the intention to do this as a one-timer. Again, that is a board decision when we meet the two targets that we have put up for ourselves. The solvency ratio, yes, it is not as strong as it was in Q4, but it's still a good level, and it will vary in between the quarters. It's nothing that sort of keeps me awake during the night.
Thank you.
Thank you.
The next question in line comes from Claus Almer, Carnegie. Please go ahead.
Yeah. Hi, congratulations with the Q1 report. I also have a few questions. When it comes to U.S. orders, you have had a very busy start to 2015. Do you still see other PTC-qualified projects in the market that have not yet signed a turbine contract? That would be my first question.
Yeah. It could very well be. As we announced in Q4, during the hectic time of last year, we signed MSAs with the potential up to three gigawatts, majority of those with PTC-qualified components. Yes, there might very well be additional projects in the market that qualifies with a safe harbor qualification. I guess that's what you mean.
Yeah.
There are two ways then to get the PTC components, the safe harbor and the continuous construction. There might very well be projects in the U.S. market, both on the safe harbor side of the PTC qualification and, of course, on the continuous construction.
Okay. Do you see a different product cycle when you compare the frame agreements you have and those projects you have signed during 2015?
No, I wouldn't say so. Of course, on this PTC qualification and frame agreement, we should also remember that, of course, customers buy and sell projects, so to speak. That could be a project that the customer had an intention to do under a frame with us that contains PTC-qualified components from us, but they then decide to sell that project to another customer. For us, that is of course the customer decision, and of course, we have the qualified components. That means that you can say, dependent on the customer's movements, that projects actually are bought and sold between customers as well. On the product side, the clear dominant product for Vestas in the U.S. is the V110, but we also see interest now coming up for our three-megawatt platform, which we think is very encouraging, actually, in the U.S.
The majority for the short term, at least, as we see, is around the V100 or V110.
Okay. Just to follow up, just to be sure, you have still three gigawatt of frame agreements in the U.S., right?
Approximately.
Right. Okay. Thank you so much.
Thank you.
Okay, the next question in line comes from Sean McLoughlin from HSBC. Please go ahead.
Good morning. Two questions from me. Firstly, on services. If I think back to February, you guided for stable service margins year-on-year in 2015. Given the strength of the Q1 margin, do you stick by that, or should we be expecting actual year-on-year margin erosion in services later this year? Secondly, on the JV, when do you expect the next milestone payment, and what does that depend on specifically? Thanks.
Okay, if we start with the service margin. Yes, we are continuing reiterating our stable margin guidance or soft guidance, if you would like to call it that. You will see fluctuations in between the quarters, I think that has been the case also before. We consider the margins to be at a stable level.
On the joint venture payment scheme, as I said, or the joint venture, I should say, have received a majority of the payment according to the schedule. We will not go into the details on the agreement between us and Mitsubishi Heavy Industries on the few that remains.
Okay, thanks.
The next question in line comes from David Vos from Barclays. Please go ahead.
Yeah, good morning. I have two slightly more strategic questions, if I can. Last week, we had a very interesting development coming out of the U.S., where Tesla announced it will be unveiling its stationary storage business, pitching that solution as a missing piece in transforming the electricity grid. It occurs to me that that could potentially be quite significant for Vestas. I would just like to hear your thoughts on how you are thinking about positioning yourself in a world where you might have utility-level energy storage, and that's question one. Two, I would also be very keen on hearing your thoughts on, kind of stepping away from Vestas for a moment and thinking about the wind industry as such, on how you see the level of consolidation at the moment. Is that adequate? Do you see room for improvement there?
Very keen to hear what you think about that. Thank you.
Yeah. Thank you. If I start with energy storage, I can't say I'm an expert on Tesla's release, but of course, energy storage and the development in energy storage is obviously a benefit for renewable and for wind. That is a positive development in itself. Of course, we have seen battery technology getting better and better and the cost points getting lower and lower. That is definitely a positive development for renewable and for wind. Of course, that development happens in a number of different areas. Tesla, of course, also being involved in the transport area, which is one way of storing it in the car. Then also this type of, as I understood it so far, residential storage systems. Also there are test projects being built of more utility, big storage systems. That is positive.
That, of course, also then in connection with better grid connectivity, with connections between, for example, hydro, which today in the Nordic region works as one storage mechanism between Sweden, Norway and Denmark that enables Denmark actually to have 40% of the electricity generated by wind. All those things are, of course, positive trends for the industry and therefore for Vestas. On the level of consolidation, I would say that what we've seen recently in the market is, of course, more type of joint venture setups and primarily towards the offshore market. We did that some time ago, of course, with our joint venture with Mitsubishi Heavy Industries. We see now some competitors also announcing joint venture on the offshore side. There is a certain amount of consolidation activity that happens in the market. Of course, we're also seeing an acquisition from one of our competitors.
Of course, it's something as a market leader that we monitor closely.
Okay, fair enough. Just coming back on the storage question then, is that something that Vestas is already involved in itself? Are you partaking in these pilot projects or indeed, do you feel a need to invest yourself in some kind of storage solution there, perhaps also with a partner, but does Vestas need to invest? Then finally, if I may, the point is well made on the fact that the dividend is a board decision, which we understand. I was just wondering if any potential acquisitions are also a matter of the board to decide on or if that's the management team indeed that would drive such a decision.
I think on your first question around the energy storage, we will not invest in battery technology as such. I think there are other companies who are doing that, which is good for us. What we will invest in and what we will participate in is, of course, trials, we will focus on the grid connectivity for now also, how we can optimize the connectivity to those kind of systems. We have a very advanced solution in our current turbines, especially for the more strict grid markets. There we put a lot of effort in, as also done in the past. That interface towards the grid and how we can optimize that is the area for Vestas to invest in and participate in trials, not in the battery type of technology.
Understood.
When it comes to the dividend policy, you're absolutely right. It's, in the end, a board decision. Of course, executive management can do propositions to the board in a normal way. When it comes to acquisitions and so on, I will not go into the details on the roles and responsibility more than what we describe in our annual report between the executive management and the board. Of course, should a situation like that occur, of course, we will be completely aligned with the board.
If I can just underline, we have a very strict governance like all other companies on what decisions can be taken where, just to underline that. We're not different in that perspective.
Very clear. Thank you very much.
The next question in line comes from Pinaki Das from Bank of America. Please go ahead.
Hi, good morning, everybody. I've got a few questions. The first one is on FX. You mentioned that about one-third of your guidance upgrade is because of FX. Could you give us a rate that you've used? What rate have you used for full-year guidance for 2015? That's the first question. Second question is around U.S. PTC. It seems like it's not entirely clear what's happening. Obama wants permanent PTC, the Republicans don't want PTC at all. Could you give us some thoughts around where do you see this thing going over the next year, sort of end of this year or beyond? The last thing is just on the eight-megawatt offshore turbine. It's been almost one and a half years since the Mitsubishi JV was formed. When do you expect to see meaningful orders for the eight-megawatt turbine? Thank you.
Thank you. If I start with the Forex, the guidance, as we said, we see a very strong development from beginning of 2015 to the point we are at now. That strengthening of the U.S. dollar is part of our guidance as we stated. I just would like to state again that the vast majority of the upgrade comes from really operational improvements that we see at this point.
Could you give us a rate around what rate you have used for the guidance?
You would be able
In U.S. dollar.
You would be able to see what the rate is end of March this year, and the beginning of the year. That is a difference that is reflected in the guidance.
Regarding PTC, I would say that of course, now with the clarification of continuous construction, all since 2016. We of course then see a good solid market in the U.S. for 2015, 2016 delivery. What will happen later this year on extension, of course, that is a very interesting question for us as for many others in the wind industry. We are working with AWEA, the wind association organization in the U.S., and that's our way to influence and lobby for an extension of the PTC. I think as usual, it's very hard to predict, but I can just conclude that so far it's been extended in one form or another 12 times. From a probability point of view, that, of course, looks fairly probable.
Okay.
Regarding the offshore, I must say that I don't know exactly what to count as a significant order, but I'm very satisfied with both the interest and the announced order we've done. It fits very well, actually, with our timing. We have taken an order with Dong on Burbo, and of course, Dong is, on the customer side today, the leader in offshore. We will start those delivery in 2016, and that actually fits very well with the timing we have when we are ready with the product. Of course, besides that, we are working on a lot of other offers for the future, and we get a lot of interest from the customer. The joint venture will at least today follow the same principle then on order announcement on firm and unconditional.
Do you expect to see any orders in Japan anytime soon?
I would say very hard to predict. There is definitely an interest for renewable energy in Japan. I think, of course, for obvious reasons, very dependent on import of fossil fuel. It's also a market where, at least historically, it's taken its time. I think there is a good potential. I will not speculate in exactly when.
Okay. Thank you.
Thank you.
Thank you.
Our next question comes from Alok Katre from Société Générale. Please go ahead.
Hi, thanks for taking my question and congrats on a good quarter. Two questions, if I may please. Firstly, just in terms of the margins. Could you just talk about how the project mix and project margins fared in Q1, and how does the margin in the backlog look like versus, let's say, what you saw in February? The second part of the margin question, of course, is now that the target for this year is greater than 8.5, that's a five-year high level. Orders seem quite good. Pricing and cost discipline seems to be impact. Are we looking at double-digit margins in 2016 and 2017, perhaps, so to say? If not, then what are really the hurdles to achieving that, given what we're seeing in terms of what I said, in terms of the trends? That was on the margin side.
Generally, just outside of BNDES. Well, on Brazil specifically, what we are hearing from some of the industry players is that the execution environment is quite tough with the macro uncertainty, inflation, currencies, and so on and so forth. Just wanted to maybe get a sense from you on how you see that sort of an environment and what gives you the confidence of executing well in this sort of an environment, and are there any sort of safeguards in the contracts generally?
Okay. If I start with the margin and the mix impact. As we are in a project business, as you're fully aware, and we are rigorously negotiating each project. That is also why Anders has said now a few times that the scope impact has an impact, but I would say it's really how we negotiate each project. Scope is obviously different, but the cost picture also depends on the scope. We are, I would say, managing the margins on each project in a very solid way. Your more speculative question on, we have said bases in the midterm strategy that we want to have best-in-class margin. That's what we're striving for. We're also striving to do better as a company. That is my comment to EBIT margin development.
Yeah. Some comment on Brazil specifically. I think if I try to answer it in different parts, the things that we can control as a company. Of course, the things that is a bit out of our control and where we can have more mitigation type of action. It's, of course, first of all, the BNDES approval for local content requirements. There we are confident. We follow the process that has been set up, which means that you have a pre-approval, so to speak, an engagement where you get approval for your plans. Then there is an auditing process for Vestas and all other turbine manufacturing that you fulfill those requirements and therefore get the qualification on the local content side. As I said, that process I'm confident with and that we follow and execute on according to the agreement we have and therefore qualify.
When it comes to the more specific wind, which I think was part of your questions on grid connectivity and so on, we have seen that there have been challenges in the market with the grid connectivity. Nothing completely unique for Brazil, I would say. I think that we face that situation in several of the emerging markets where the grid definitely had to be built out, not just for renewable actually, but because for all kind of new electricity generation. Since the electricity demand is increasing, there is a need to build out the grid and the capacity of the grid. That is sometimes not, in timing point of view, not 100% aligned, and that is, of course then when you see this mismatch between build generation or build wind generation with grid availability.
That is, of course, a concern. I think overall, the positive is, of course, that there is an increase in energy demand. Wind is very competitive in Brazil. It's more of a timing concern for that. Brazil as a market and currency and so on. Of course, historically, it's always been more volatile on the currency side. I have no sort of predictions on the currency going forward in Brazil. The counter-measurement. It's not something that we, as Vestas, speculates in. We focus, of course, on our business. What we can do on that aspect is, of course, again local content to a higher degree, so you get more of a natural hedge. That is what you can work with in order to limit your exposure on different currencies.
I think if you saw the last auction now in Brazil, that was a reflection of a lower currency and actually the PPA prices went up in the market. That is the sort of counter-measurement that we can do. I think you have to accept that in those kind of market conditions. You have to accept the conditions, so to speak.
Thanks. Just to follow up for Marika, how do the margins in the backlog look today versus, let’s say, in February? Are we seeing stable, better maybe or?
I would say, as I said, we are sort of having a strong focus on the margins. Consequently, there is absolutely stable margins in the order backlog.
Okay. Thank you.
Our next question comes from Jacob Pedersen from Sydbank. Please go ahead.
Hi, I have a couple of questions. First of all, on the order intake, it seems as if there's been a step up, a step change in the first quarter. Do you view that as structural, or is it a question of you gaining market share? Is it a coincidence, or is it a question of you moving forward on your customer initiatives, meeting the customers early in the development process, creating key accounts? Is this some of the success that we see in the improved order intake, or is it just improved markets overall?
Yeah. As I said, I'm very satisfied with the order intake in Q1, record high for Vestas. Of course, we all have different means of order announcement, us and the competition. If we are gaining share, so to speak, in Q1 or not, I guess the answer to that, we have to wait a little bit. We, of course, follow the market closely and try to estimate order intake from all different turbine manufacturers in the business, and I'm sure that you do that as well. I can just conclude, I think Q1, I'm very confident with our position, and that means both how we interact with the customers, how we execute on the strategic program that we have around account management, around early engagement, but also around the competitiveness of our products and services.
Okay. My second and last question is regarding the U.S. market. What is your feel when you look at the U.S. customers? They were quite stress tested with the way that the PTC was extended by the end of 2014. If we get a similar extension in mid-December 2015, will they be able to have projects ready to take advantage of such a short PTC extension to create some stability through 2017 as well? What is your view on that?
I think, of course, U.S. is a very dynamic market, just for the reasons that you described. Of course, as an industry and as Vestas, we would have preferred a long-term secure framework to plan on, and so on. I think there, of course, we are definitely not unique, and that is in the end, of course, our lobbying. Having said that, I must say it is a very dynamic market. It's a market that are fairly used to, by now, this way of operating. That means that there are a lot of potential project developers that are looking ahead on qualifying early into the pipeline. Then, of course, decisions are taken fairly late, one way or the other. I must say that the market has gotten used to these ways of working.
There is quite a lot of pre-qualification of projects that are put in pipelines and then maturing as the different deadline approaches. I think we also see in the U.S. now, the latest trend on the customer side is definitely setting up yieldcos to lower the cost of financing. Of course, they are also then dependent on availability of projects, and that projects actually are getting built and then dropped into these yieldcos.
Okay. That's very informative. Okay, thanks very much.
Thank you.
Okay, there is a last question on the line coming from Faisal Ahmed from SEB. Please go ahead.
Yes, this is Faisal Ahmed from SEB. One question from my side. Production, did that run smoothly in Q1? If you could comment on that. The reason I am asking here is that your deliveries are up almost 30% in the quarter, and your service business is also up quite nicely with margins expanding. Why is gross margins only expanding 50 basis points?
Okay. Yes, you are correct. The deliveries are up 30%. As we have said before, deliveries is not 100% measurement for the gross margin development. We think still that we delivered better margins, gross profit margins, compared to last year. Again, you will see some fluctuations in the quarter, but it is still a positive development that we are satisfied with. Also remember, we have lifted the overall guidance, obviously we are confident on the margins in the business.
Could you just comment on the production? I mean, was that running smoothly or did you have some ramp-up costs or? Because 50 basis points, it does not seem very much.
Yeah. I mean, generally speaking, we actually increased delivery last year also year-over-year 30%. We increased delivery this quarter 30%. Of course, we are very busy. Of course, it puts a strain on the organization to do the ramp-up. But having said that, we have changed the technology on the blade side. We have a flexible setup where we can go to three shifts, and we can sort of have flexibility between one, two, and three shifts. Of course, that kind of challenge to ramp up fairly quickly as we also did last year, has its challenges, no doubt. But I must say that I am happy with the performance. I am happy with the performance in the production unit for Q1 as well.
Okay, that's very helpful. Just to follow up on this point, should we expect a more smooth kind of production in Q2, Q3 versus Q1?
I think that is, we are obviously working on having things as smooth as possible, but just to highlight what Anders said, it is a high activity level. There could be fluctuations.
Okay, perfect. Thank you.
Thank you.
Okay, we will end the call. Again, thank you so much for calling in. Thank you for your interest and your questions.