Good morning, welcome to this presentation of Vestas' Full Year Results of 2019, 5th of February. With me here- it's Henrik and, of course, Marika next to me. We will take you through our presentation of the results for 2019 and also looking into what we expect for 2020. With that, let's get going. First of all, key highlights for 2019. We came out of the year with our highest ever order intake. It ended at 17.9 GW, and that is up 26% compared to our order intake for 2018. That also leads to that we have now a combined all-time high order backlog of EUR 34 billion, and we will see the breakdown a little later.
We also there see that our full year 2019 guidance were met on all parameters. We ended at a revenue of EUR 12.1 billion, which actually is in the high end. We just have to say coming out of Q4, helped also by favorable weather conditions in the Northern Hemisphere. We saw EBIT margin of 8.3% for the year, and we ended at net investments of EUR729 million. We had a very successful year for the Service business, continues to grow, 12% up, and we ended with an EBIT of 26% for the year in the service, so another stellar performance of that business.
We also, end of the year and in January, launched our ambitious sustainability targets. First of all, to incorporate sustainability in everything we do, and last- but also because it's the right thing to do, and we'll talk more about that a little later in our presentation here. Of course, with pride, we recommend a dividend for the sixth year in a row- r ecommended dividend payment is of EUR 7.93 per share, equaling to a payout ratio of 30% of our net profit.
With that, let's go into sort of the details. When we look at the fourth quarter order intake, the fourth quarter order intake ended at 4.4 GW, which is slightly lower than fourth quarter 2018. Also what you would appreciate, we had a more equal spread of large quarters of order intake throughout the whole year of 2019. Especially in Q4, U.S., Poland, and Finland were the main contributors to that order intake. Importantly as well, in Q4, we saw stable pricing.
We ended at a pricing for the quarter of EUR 0.79, which of course has the usual relation to geography and scope and turbine type, but we are very happy with the remain stable on the pricing here, which led us to have an average pricing for the whole year of EUR 0.77. That, of course, combines into an all-time high order backlog of EUR 34 billion. It's up EUR 7.6 billion year-on-year, an increase of 29%. For the turbine part, we are at EUR 16 billion now. It's up EUR 4.1 billion compared to a year ago.
For the Service, we are now at an order backlog of EUR 17.8 billion, which is up EUR 3.5 billion in total. When we click on these sort of the regional highlights, if we start with the Americas first, I think it's clear for everyone that we now saw an extension of the PTC, clearly favorable and friendly to the industry, but also the owners of the assets. There is a 60% now PTC solution in place for 2024. Positive because it creates more parity with solar in that period, and o f course, it also leads to greater transparency for a bit longer period.
We also say here in the Americas, or especially the U.S., we still work hard on the steel and the tariff mitigation, because even though that there has been an ease of tension with an agreement of a stage 1 agreement between China and the U.S., it is also fair saying we didn't have any positive effect of that yet from a stage 1. We then look to outside the U.S., I think it's fair saying most of other countries in the Americas are still making positive steps towards renewable.
Latest here we see Chile now is allocating 1.3 GW of a technology-neutral auction in 2020. We see new rounds of auctions in Brazil, there are various other countries in that region that are making steps into the renewable part. We look at some of the detail, we had deliveries of 5.8 GW in the full year of 2019. It's up 17%. We then look at the order intake, we ended at 10.2 GW. It's up 64%. Main drivers here, U.S. and Brazil, equally contributing to the increase over 2018.
We then look at the revenue. We ended at EUR 5.2 billion from the region, up 18%. Of course, out of that revenue, service contributes 12% of the EUR 5.3 billion. We delivered in nine countries, and we have service deliveries in 18 countries in Americas. Go to Europe, Middle East, and Africa. Goes without saying that the market highlights over here is something everyone talks about, that you have a European Green Deal in Europe, which of course, puts us on a trajectory for 2050 towards a carbon neutral Europe, which of course, will be underlying very well supported and also underlying positive for the trend towards renewable.
We see it in a more detailed part. We see a 2.2 GW onshore wind being allocated in Poland in 2019, and we know there is another GW auction expected in 2020. We have seen a late year Germany smaller auction being oversubscribed, which is positive. We've also seen something in the beginning of this year, where I still think we are now seeing a start of Germany, but still with some of the same bottlenecks around permitting and some around the distance rule still being in place and being discussed. We expect to have a 1.2 GW auction in Italy, and I think we could make the list even longer in and around Europe because plenty of positives there.
The positives outside just main Europe is Middle East- Saudi Arabia leading, still aiming for a 16 GW and finding a program for 16 GW of wind in 2030. Besides that, fairly positive across also Africa with initiatives for that. The region as such, deliveries 5.3 GW in 2019, up 29%. If we look at the order intake, total order intake of 6 GW in the year, and we had a revenue of EUR 5.4 billion in 2019, up 26%. Here, as I said, in the order intake, Finland overall, we're leading in Europe, among order intake of 21 countries, so really a positive development.
Out of the EUR 5.4 billion in revenue, Service accounted for 19%, and we had deliveries in 25 countries, and we do services in 40 countries overall. We get to Asia-Pacific, and I think Asia-Pacific, probably the one where we will say from an order intake point of view, a little disappointed, but of course, that is also difficult when you have such stellar performance in other regions. Here we will say, we see an increased commitment in China. Clearly, they are right now finishing 2020, where there will be new market rules applying 1st of January 2021. Of course, we are part of those discussions as well.
We see in India that there has still, and there will still be some challenges in and around the way the auctions are set and orchestrated for players like us. Therefore, target is still the same 140 GW by 2030, but we still need to see how we can, together with the Indian government and ministers, open that way of getting the auctions to flow more freely than they are today. Then last but not least, it goes without saying the whole region has their eyes turned toward renewables, and just Vietnam is a good example of where we also seen initiatives, and we also seen orders coming through in 2019.
Overall, the region ended with deliveries more or less exactly the same as in 2018, 1.7 GW. We saw an order intake being 1.6 GW. That is down 30%. There I will also just highlight that we are in a region where smaller orders of a certain size can influence that a lot, and I think that is more down to a timing perspective than it is anything else. Lastly, but not least, we ended with a revenue of EUR 1.4 billion. It's up 5%. Therefore, we can also conclude all regions positively contributed to the revenue growth of Vestas in the 2019 account.
In the region, 13% of the revenue comes from Service. We did have deliveries in eight countries, and we do services in 11 countries. With that good way of getting and entering into the Service business. We had a stellar year again. Clearly now we got 96 GW of onshore turbines where we have active service contracts with. It's a big increase this year. We have seen that we have 18 years of average duration on new contracts signed, which is very long, and we also now deliver contracts in 69 countries across.
I will say on key highlights over here- yeah, that we repowered one of the world's most northern wind farm with a 30 years full scope service contract as part of it. We are doing more and more fleet optimization, both improving efficiency and also life extending for some of the older turbines. Not least here, we also saw that we took orders for 3.5 GW of contracts signed across 12 countries in multi-brand.
Of course, there you would appreciate when we have a contract length of six years and ending up with 18 years, then there are underlying in the own captures and others, a very long contract maturity developing here, super positively for us when we look years ahead. Then there's just the normal breakdown of how many gigawatt we look after in the three regions below.
With that, I will jump to the offshore, where the offshore here probably had a slightly disappointing year in terms of order intake. As we also have said all along, it's much longer. They come in bigger clusters when they do the tenders here. Just the short here is track record. We have 4.8 GW under both installed and operation. We have a pipeline of 2.8 GW under installation and unconditional orders. By year-end, we had 3.8 GW of conditional orders where we preferred supplier.
On the highlights over here, we become preferred supplier on the Hibikinada offshore wind farm in Japan, which is the first sort of project where we also feature the V174-9.5 MW. We had a conditional agreement to supply same for the Arcadis Ost in the German Baltic Sea. We have installed again the V164 9.5 at the Northwester 2. Of course, the first turbine that in reality exceeds 9 MW, which was the old powering of it. Below here you will see the projects in progress in Q4 2019. I will leave that with you to go to read. With that, I'll pass over to Marika on the financials.
Thank you, Henrik. If we start with the full year, you can see that revenue increased- w e saw a change of 20%. Really good performance and really good performance in terms of the extreme back-end loaded profile we had in 2019. The growth is driven by both Power Solutions and Service. You can see also that gross margins are down 1.6 percentage points. That is impacted by tariffs, transport, and raw material prices, as discussed before. The positive on the gross margin is the sale of the Romanian project. As a consequence, you see that EBIT margin decreased by 1.2 percentage points, and that is again driven by the lower margin presented here.
If we have a look at the Q4, a record high quarterly activity levels, really high revenue growth compared to last year of 38%. That is primarily driven by the Power Solutions and again, due to the back-end loaded profile we had in 2019. You see gross margin down by 1.7 percentage points, so actually higher than for the full year. That is again driven by the external factors, as well as a lower percentage of service on the overall activity in Q4. EBIT decreased by 0.1%, mainly driven again by increased leverage on SG&A. That is to a certain extent offsetting the lower gross margin that we present here.
SG&A cost continues well under control. On a 12 months rolling, you have the 6.2%, so a slight increase in absolute number compared to Q4 of last year, to cater for the higher activity level. You see an increase of depreciations and amortization, as we have spoken about before. That is primarily due to the introduction of new products. Altogether, well under control and very slight increase compared to the overall activity level that we have presented.
Service business continues to grow. Compared to last year, you see a 12% increase, and that again is driven by higher activity levels. For the full year in 2019, we delivered 25.8% compared to 25.2% in 2018. The quarter is also strong. EBIT is EUR 110 million at a margin of 20.8%. MHI Vestas, you can also see here, full year activity level in 2019 is higher compared to 2018. Net profit is down to EUR 6 million. Our share of those EUR 6 million is EUR 3 million. Revenue is up 29%, also not only in the onshore space but also in the offshore space, high activity level.
EBIT performance improved year-over-year, that was more than offset by additional non-operational costs. Change in net working capital is negatively impacted by increased level of inventory to cater for the high activity levels, obviously underlying positive development in the overall business. The down payments as well as milestone payments partly offset that. Payables is obviously a consequence of the overall high activity level that we have presented. Cash flow from operating activities before change in the net working capital for the full year 2019, higher than 2018.
Good performance from an operating point of view. We are negatively impacted by change in net working capital and also higher investments that are plus EUR 700 million. Our net interest-bearing position continues at a high level of 2.5. Ultimately, we have a EUR 94 million positive cash flow in 2019. Total investment methodology is unchanged. We continue to invest in capitalized R&D as well as primarily molds, I would say. Here, this is a good reflection of the high activity level we have in the company. We are investing EUR 729 million in 2019 to cater for the really strong demand that we see in the market right now.
Warranty provision and lost production factor. You can see here in Q4 2019, we are consuming less than what we provide for. The warranty provisions made corresponds to 2.5% of revenue in Q4 2019, and is a result of the steep delivery ramp-up and the acceleration of new product introduction. The LPF continues at a low level. Capital structure. You can see that net debt-to-EBITDA is well below threshold at 1.6 negative. The solvency ratio is 23.3 here in Q4 2019, and the lower level is primarily driven by the increase in total assets. By that, Henrik.
Thank you. It's also the time of the year- when we finish 2019. We also just do at least a short recap of where are we in terms of our strategy, what do we see as underlying fundamentals, and also give you a bit more of where do we see the market outlook going in both short and long term. When we first of all look for the growth outlook for the sector, I think it is very positive that when we look from where we are today and towards 2035, we see a general part which is called the electrification, which of course is very strong underlying at the same time, the demand and consumption in the global world is still forecasted to pick up.
We are looking into an electricity consumption, or demand at least, that is expected to grow with somewhere around 40% towards 2035. As you will also appreciate, there will be some variables in the forecast of when we then look at the energy sources provided and trying to help with that increase in demand. As you will see here from us, we appreciate renewable will take a fairly large proportion of that increase in demand. I think here it's very positive- it's also very positive that the forecast numbers is underlined by also what we see as the underlying mega trends in society generally of the focus on renewable.
Last but not least, this time we also see an enormous capital allocation. In 2019, 2020, we had a capital allocation to the industry of somewhere around $105-$107 billion, and that is actually there to be expected and forecasted to grow to the renewable part of wind industry of around $200 billion when we get to 2035. That is actually what we are talking about when we look in the very long horizon for wind.
If we then go to what we have said here, these are our three strategic areas for both growth and investment and also our input. When we look at the onshore wind, clearly the onshore wind, we have a leadership, and we have a leadership both from size, technology, and solution in there. What we have seen, of course, is in 2019, that we ended up having new installations of somewhere around 35 GW if we exclude China. That we see continuing- so w hen we look towards 2023, then we also see that that is continuing to be predicted somewhere around the same high level. There is an underlying compounded average growth rate of 1%-3% in this outlook from the external.
When we look at our Service business, it's a business we keep investing in, and it's also a business we keep scaling. It makes us very proud to see the progress the Service business is making quarter on quarter and year on year. As you can see here, underlying from an installed fleet expected to grow from somewhere around 400 GW in 2019 to around 550 GW in 2023. An underlying continuing growth in these markets, and that leaves with a growth rate somewhere around 8%-10%.
If we then come to the offshore, we've said here we want to remain one of the top players in the offshore wind industry. It is, as you would appreciate, a younger market. It has high growth predictions, we also see it becomes more lumpy because certain countries come and do a tender and then maybe pull out and work with the permitting and the projects for some years. I think here we will see that the underlying growth is definitely there, predicted to be from around 7 GW in new installations in 2019, towards 11 GW in 2023.
Underlying a 10%-15% increase in new installations when we look ahead, which of course also will support the offshore interest of investors and of course [MWOW] in that sense. Next thing is, for those of you who have seen this a number of times, I just want to reiterate here- we stick with our strategic framework. Why? It works, it supports us on our daily focus, and I'm very pleased to see that every one of our employees around the world know our focus areas and also how we work with this strategy. Expect a lot more of the same in the years to come.
Overall, yes, we want to remain the global leader in the sustainable energy solutions, which you have seen examples of on quarterly basis. Yes, we want to lead the global leader in the wind power plant solution, which I think we do with a certain evidence and credibility. Of course, we want to be and remain the global leader in the service solution, which I also think you will agree with, that we are absolutely taking a leadership there.
When it then comes to our financial medium targets, stays the same. We are fully committed to grow faster than, relatively faster than the market. Yes, we are aiming at best-in-class EBIT margin, which means minimum 10%. We will aim for free positive cash flow every year. We also aim for a return on capital employed by minimum 20%. As you saw, it was 19.7 in 2019. When we get to something that also ties us more and more together is also the sustainability in everything we do.
We have to be honest here in saying great to have one of the most sustainable solutions in the world, but it's also how do we arrive at that most sustainable solution, and how is our journey towards what we now have set out to be fairly ambitious targets to become a fully carbon neutral company in 2030 without any offset. We also want to work very diligently with how we then recycle and how we get around the zero waste of our wind turbines by 2040.
Honestly speaking, we don't have all the solutions there. There, we also very much inviting others to partner with us to find some of those solutions. When it then comes to our lower part, our employees here- we absolutely want to be the company, the employer that ties our employees together. We want to have the safest, most inclusive, and also socially responsible workplace in our industry.
That includes, of course, a higher proportion of women in leading positions and also how we work constantly on our safety records in what becomes a more and more busy execution environment, and also a more and more diverse path to execute on site level. Last but not least, the square is here. It's, I will say for some, probably an open invitation to come to us and also work in a partnership of how to develop and make stronger partnerships to actually develop this together.
You have seen it, we are mentioning it, and most recently, a couple of weeks ago, when we announced the partnership with DSV. Part of it is also driving that sustainability agenda together as global partners. With that, one thing outstanding, and that is our outlook for 2020. We aim for a revenue here between EUR 14 billion-EUR 15 billion, so up materially from 2019.
We expect Services to grow approx 7% from what we can see in the order intake, and we have an EBIT margin here of 7%-9% for the year, and we have a service margin that is expected to be around 25%, the level of this year as well. We have total investments of EUR 700 million, which of course is very close to what we also saw from 2019 of EUR 729. I think that is the outlook for 2020. I will just hand over to the operator and also open up for questions from the audience.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypads. We ask you kindly to limit your questions to two at a time. Our first question comes from the line of Kristian Johansen of Danske Bank. Please go ahead.
Yes, thank you. My first question is around the lower end of your 2020 guidance and then how to get from 2019 to that. Firstly, you made bonus provisions of EUR 107 million in 2019. How much of that was booked in Q4?
Thank you, Kristian. If we start with the bonus, I think what we do is obviously, we book when we see adequate, as we have done previously, but it is also fair to assume that most of the activity took place in the latter part of the year. That is reflected also in the provision for bonus. When it comes to the guidance, we're doing different scenarios as we always do. The 7%-9% is representing those different scenarios.
Bear in mind that we have higher depreciation in 2020. We have no special projects in 2020. Also, as we're growing very fast on the turbine side, the percentage of revenue coming from service is less. If we also assume that we have a warranty provision at the same level as in 2019 Q4, that will also have a negative impact. Then you have the regular of the overall weather conditions. All of that is represented in the 7%-9%.
Okay. If you do end up at the bottom of your guidance, so the EUR 14 billion and then 7% margin, will that trigger a bonus payment of similar size to what you booked in 2019?
No. We're not disclosing the absolute levels of the bonus, but obviously, 7% is the lower end. Again, we're not striving for the lower end. We're striving as best as we can. There will also be external factors that will potentially have an impact on the overall performance.
Okay, it is fair to assume that the bonus level would be substantially lower?
That's right.
Yeah, absolutely.
Good. Just the last one on this. You did not mention anything about the impact from trade war on tariff supply chain and so on. What is your assumption here in your guidance and especially towards the lower end? Is that an unchanged impact? Is it a further headwind, or how should we view that?
No, I think, Kris, it's fair to assume we are at the same level as we were in 2019. It's fair to assume the 1.5% in all scenarios. Obviously, with the good order intake that we've seen in 2019 is well reflected in the overall guidance for the company. We have a very high activity level. We have a good set of firm order intake. A lot of the planning has already taken place, and now any changes, as we've said before, to that, obviously have a negative impact. Visibility is good, but it's also a very high activity level that we're planning for.
Okay. Just the last question for me then...
That was a little bit more than two, Kristian, if I wouldn't be...
Can you just quantify exactly how much depreciations are going to increase?
It's around EUR 100 million increase in 2020.
All right, thank you. I think I'm done with my two questions.
Thank you, Kristian.
Our next question comes from the line of Claus Almer of Nordea. Please go ahead. Your line is open.
Thank you. I also have a few questions from my side. Coming back to the guidance for 2020, when I'm calculating the incremental EBIT margin, excluding the divestment of wind farms, the mid-range is around 7%, and high end is close to 8%. Not a very high level, at least. Is that really the most realistic scenario if you are delivering on your revenue guidance?
Well, fair question, Claus, we have now guided for 7-9. There's different impact that I highlighted before. Apart from those, you have the normal weather conditions. Bear in mind also that we have a continuous steep growth in activity level, and we don't see the same leverage as we are outsourcing more of the activities. We are also investing quite heavily to accommodate the overall revenue target for 2020.
I guess it's fair to assume that the quality of the backlog in 2020 is better than it was in 2019.
If you're referring to pricing level, you have the 076. It's probably a fair assumption. It's also we have a very high activity level, very good visibility. That also means that we have planned for everything. To be realistic, different scenarios could pan out, and that is reflected again in the 7%-9%. As I backtracked earlier, we have higher depreciations that will have an impact on the EBIT.
We have no special projects as you're referring to, and there is a less percentage stemming from service revenue. Also you could assume that we would have a 2.5% warranty provision or at the same level as Q4. All of those have a negative start from the beginning. As I said, we're obviously striving to do better, and that's why we think it's adequate to guide for 7%-9%.
Sure. You're using the normal way, you are aiming at least for the high end of the guidance range. That's at least what you have communicated in the past.
That's why we put it up, Claus, obviously...
Claus, there's 330 days as of today to last day of December. We will do nothing else than strive for that. That's how we work, but we also want to see that we use the tool in the toolbox to get there before we're saying it.
Obviously. Order intake 2020- I know you don't guide on this. Will your order intake be restricted by your lack of capacity for 2020 and client might be postponing when they're paying prepayments until 2021? How should we think about order announcements?
I think in terms of order announcement, there, we would probably say it's a little early in the year. I think we also here saying we are scaling. We have been scaling both in 2019 and will be further scaling in 2020 for activity that goes up and where we can support further order intake or where we have scarcity of that. Of course, we will look at that, Claus. We will continue doing that. We will have to see- c ertain markets has better availability. There can be localization restrictions, which of course, we are better and better dealing with.
Okay. Thank you so much for the answers.
Thank you, Claus.
Our next question comes from the line of Casper Blom of ABG Sundal Collier. Please go ahead. Your line is open.
Thank you very much. Henrik, as you mentioned, you still have a 10% EBIT margin target for the longer term, and you're now guiding 7%-9% in what looks to be an extremely busy year. What is it that will take you from 7%-9% up to at least 10% in the years to come? That's my question.
It's sort of- not a surprise. We are working super diligently with our supply chain. What you would appreciate here, when we have said EUR 14 billion-15 billion in what I think is quite a narrow range for our top line in a full year like this. Also means we have fairly good visibility of how that year would sit in terms of turnover. Leaves us an enormous execution and also an upside in turning some of the tools internally and seeing how can we then execute better.
Means discipline on the projects, trying to become better on controlling that, and therefore getting better execution power in the very last site where we are putting it up. Ultimately, you will also see some of the initiatives we are doing now, where we are putting global partnerships in place to actually drive some of those cost and scale-out that will overall, over time, support that we will aim for hitting 10%.
As I said this morning to somebody else, let's also just take one step back, because when you came out of 2018, you had EUR 10 billion in turnover, and you came out of a fairly busy year at that point. If we exit this year with EUR 15 billion, we are 50% up. When we then go in and we also see that, then this year we would have then increased another 23%. If we hit 9% in EBIT, you will have increased your EBIT margin with 35 in absolute terms.
I think we just need to sometimes also don't get so lost into this, that this has happened 50% up in activity in only 24 months in a global organization like Vestas, where you will also appreciate our assets are not easy just to get around and transport in the world. I think we're just saying here, we're not putting a quarter, we're not putting a year on it, but rest assured that we are finding the tools to do that.
Is it fair to think about it in a way that right now you are so busy that internal initiatives, optimization, cost out, et cetera, is maybe a little bit difficult to do, and that this is more sort of a matter for 2021 and 2022- you sort of have better grip on the very high activity level?
No. What you have seen here is, and I have to give credit to 25,500 employees and colleagues of mine. We have just executed more or less flawless on a Q4 in Vestas terminology. We've actually come out of a Q4 highest activity ever. There are some of those practices we absolutely need to take with us for the full year of 2020, and then it will look better.
I think there are learnings coming all over, and I think here, we haven't come out this morning and said we have issues or whatever. We have actually just come out and said we did what we promised and also expected to in Q4. That's the spirit we need to build on in the year we are in to get us to the next level.
Thank you. Number two question.
That was a sneaky one, number two question then. Okay.
The outbreak of coronavirus in China, I suppose is affecting your supply chain quite significantly. I know no one knows exactly where this ends, but could you give some sort of insight to your sensitivity? What do you do if people cannot return to work shortly, and if it's not possible to transfer things into China and also out of China?
Yeah. I think it's fair here. Our thoughts right now are with nearly 3,000 colleagues of ours in China. Personally, I can say I was probably the last one traveling out because I actually visit China in the second week of January. For us to see out there right now, we are thinking, "How can we restart, and when it's safe to restart?" There we are doing that on a daily basis because it's also how to review that. So, good company and also team practice here in Vestas is every day we have that conversation and update.
When we then look at it's clear that China will then have to restart from something they had to restart anyway because it was just after Chinese New Year. The country as such are normally good in restarting after some periods like that. Having said that, we are not the one that can decide on when we start in China, because the whole supply chain and the country has to decide to restart. So far, it seems that there are plans to start slowly in restarting in a week's time. If that's the case, we will see how the supply chain, and we mean the full supply chain, is there.
We haven't made any scenarios because we cannot do our own scenario based on our own thinking here. We all appreciate if China is remaining closed for weeks or even worse, months, I think it is the whole world that will have a pandemic force majeure somehow. That, of course, we will have to deal with as any other in the world of this within a supply chain. Full supply chain is affected by commodities and components, so transport is not the highest worry right now.
Okay. Thank you.
Thank you. Our next question comes from the line of Dan Togo of Carnegie. Please go ahead. Your line is open.
Yes. Thank you. Maybe a view on the ASP going into 2020. You are basically on a flat to slightly increasing trend at the moment, and we assume your peers are struggling with profitability. Any change in behavior in how they price themselves in the market, and how we should view 2020 ASP-wise? That's the first question.
I would say that, yeah, we ended the year at 0.79. As said earlier, the average in the order backlog is 0.76. It was still very competitive market. Obviously, we're still expecting a stable price level. How the market overall is acting is hard to tell. I think we're in a good position. We have a strong order intake. We've proven that we can deliver under tough circumstances or a lot of changes in the overall market.
We don't have any sort of anticipation that that would be a quick change. If our competition also get into a different view on the pricing, that's obviously positive for us. What I said, the change is increasing the average prices. That's also what we hear in their communication. Our focus is obviously what can we deliver to our customers, and so far, our strategy and our view has turned out very well for us.
Thank you. Just on the Service business, are there any things unusual, one-offs, weather-related in Q4 that we should be aware of in this business? Maybe an elaboration on the lower growth, at least compared to 2019, 7% you're guiding for. This slowdown in growth, shouldn't that normally have a positive impact on the EBIT margin that you guide down slightly in 2020?
I think let's one thing first. I think when we look at the Service business, when you look at Q4, it is fairly- as Marika alluded to earlier here, we probably did provide as the year progressed, and it's clear that our execution was better in the end of the year, and therefore, service have had, they have a proportionate much larger part of our colleagues, Vestas on their payroll, and therefore the bonus provision was much more for them in their top line and their P&L in Q4. That's the main reason why you saw a dip in the EBIT in the Service business.
Having said that, when you then look into 2020, there are a couple of things here. Normally, when you get better and better top line, you will also see an increased EBIT, and that's generally how we see our Service business developing. In the Service business here, don't forget there will be years that are slightly different from a growth perspective. We're saying 7%, approximately 7% here. You also now would appreciate a lot of our contracts gets much longer- that also gives us a better visibility, but not necessarily as high a turnover in year one.
There are a few changes. There are just what I say, you would like to have everything at the same time, but you can't. Now we are getting an enormous extension of the maturity of the service contract, which is super supportive for the business in the long run. I think that's the main reason why. We don't see any other material reasons for that in 2020.
Understood. Very helpful. Thank you.
Thank you.
Our next question comes from the line of Akash Gupta of JP Morgan. Please go ahead. Your line is now open.
Hi, good morning, Henrik and Marika. My first question is follow-up on China situation. First of all, to be clear, either guidance of 7%-9% doesn't include any scenario for this outbreak. Also, if you can say what sort of flexibility do you have in manufacturing? Let's say if we have two weeks of additional shutdown, is it fair to say that would be something that is manageable? Let's say if it is more than two weeks, then it could be started impacting the P&L?
I can't give you a week's sort of, this is where you just need to start worrying. I think it is worrying as much as when you have a China, then it does affect the whole global world of supply chain because it is right from the commodity part to the components part to, for us also, very high level of assets that we transport. That is going to hurt us as much as it's going to hurt the rest of the world in supply chain.
I think here we will compensate as much as we can. We do, we put those initiatives in place. We also still rely on when it opens again, then we will see how much we can catch up by doing in China. You will also appreciate there are simply part of our assets that you can't rush or stress more. A blade has to have the time for curing as the blade has to cure. Therefore, that's just the nature of the beast.
We are not having, in our guidance, anything for a China shutdown for much more than potentially what is already now happening. Therefore, we'll have to deal with China when it comes and if it comes differently to what is in the plan. As of yesterday, schedule is that they will start slowly to have supply chain working again as of next week. That's what we sit and deal with right now.
Okay. Then on cash flow- I mean, 2019 saw mid outflow from working capital as you're preparing for busy 2020. Can you indicate what do we expect for 2020 in terms of working capital, especially given the U.S. situation on orders potentially rolling over in 2020?
As you know, we're not sort of guiding on the overall working capital. It's fair to assume with the activity level that we have right now, we will continue to use the balance sheet to manage that situation. Obviously depending on the order intake for this year, I think that's something we probably have to come back to. I don't see any immediate changes to the level as we speak.
Finally, on this medium term, more than 10% margin target, which you are reiterating today, do you need any minimum level of revenues to hit the target that we should be aware of?
You can't make that linear programming. I think it's more how do we get our improvement and our scale and therefore also to some extent our scale advantages and therefore cost out of what we have as a top line. You can't make that assumption.
Thank you.
Thank you.
Our next question comes from the line of Sean McLoughlin of HSBC. Please go ahead. Your line is open.
Good morning. Thanks for taking my questions. Firstly, on offshore, I want to understand what's driving the weaker than expected profitability and what you expect in 2020.
Okay- yeah. As you can see, the activity level remains, and obviously net profit is low. It's only EUR 6 million. As I said, EBIT level is reasonable. We're not disclosing that here. The primary reason for the lower net profit is really some operational costs related to the project in the U.S. We are expecting the same level of net profit in this year as well- so, p retty flattish and pretty low.
Thank you. Secondly, coming back to the 2020 guidance, Henrik mentioned the tighter range, relatively narrow. What is driving this?
If you're comfortable, of course, you can put a tighter range on the top line. We've said 14-15 because we have a very high visibility of both projects and orders for this year.
How are you preparing for this? I mean, specifically for the U.S., in terms of blade outsourcing, in terms of components, and in terms of actual capacity in the U.S. in what's going to be a huge year?
It's the normal planning. The tighter revenue guidance is a reflection of the overall visibility. The planning of any given year starts when you get a firm order intake. A lot of the planning has been made. You also see that we made a lot of investments to accommodate for the capacity increase. You see that we have-a high inventory.
This year, in terms of challenges, is really execution and obviously whatever we can have an impact internally, we do our best. Externally, there will be, hopefully not too many factors that we cannot influence. It all has been planned for, it's nothing that we start from day one in 2020. That has been prepared already last year.
Thank you.
Our next question comes from the line of Rajesh Singla of Societe Generale. Please go ahead. Your line is now open.
Hi, thanks for taking my question, good morning, everyone. My first question is on that we have been hearing that the orders which you had received or the industry had seen in 2018- 2019, had better margins than the orders which were from 2016- 2017. Your EBITDA margin guidance looks a bit weak. Can you please give me some more color on that guidance with respect to the pricing environment?
Yeah. Obviously, before the big drop in the overall price levels when the auction started, there has been a decrease in the overall margins. I would say that most of the really low-margin projects we exercised last year. We're at a different level today. The overall price picture in the order backlog is EUR 0.76. Remember, we ended the year at EUR 0.79.
On a margin level, on per projects per se, it's not the challenge. The challenge is really execution of 2020 because the activity level is very high. We have invested, we continue to invest. We have a high inventory. We're managing as best as we can the supplier base. 2020 is a lot around execution as flawlessly as we possibly can. That is reflected in the 7%-9% EBIT margin.
Okay. My second question is a general observation on the lost production factor on slide number 21. It seems to have increased slightly versus last year. Can you please share your views on that? How do you see that there is any reason for any concern in that or not?
Yeah. Overall, no concern on the lost production factor, but bear in mind the higher activity level that we have. Which means that the people we have to service the turbines, it might take longer, and that will have a consequence on the lost production factor. At this point, there's no impact on the overall EBIT from the lost production factor.
Thanks.
Our next question comes from the line of Martin Wilkie of Citi. Please go ahead. Your line is now open.
Thank you. It's Martin from Citi. Just a couple of questions. The first one is coming back to the service growth. You mentioned that the duration of the contracts are getting longer, if I look at your service installed fleet, it was up, I think 12% last year to 96 GW. Presumably, it's going to be growing at least that, given your revenue guidance in 2020. The 7% growth in Service does look lower than the installed base growth in for Service seems to be growing at. Just to understand, is it just it's phasing over longer contracts? There's no sort of adverse pricing or anything like that? I've got a second question on the turbine business. Thanks.
Okay. As I said, there is no adverse pricing in their sorts. Of course, when you get to a 30-year, and if it's new turbines you put up, then there might not be that high a turnover in start of the contract. Is life just as a fact. I think we are helped by a lot of longer maturity, and we are helped by that. As you are rightly saying, we have an underlying fundamental very strong growth.
The other factor in that, of course, are the contracts are becoming longer and longer, and that probably moves a couple of percentages away. I always say, well, also just again, there 1% of a EUR 2 billion business is EUR 20 million in variations. Yeah- l et's see when we get into the year, if it's seven or if it's eight or if it, I think we should be careful about judging too much on exactly the seven. That's what we see right now, and that's fundamentally stemming from the way the contracts are running, we are taking in.
Thanks. The second question, just coming back to the turbines themselves. I know that steel prices are not necessarily as easy to look at because there's so many different products that you use. If steel pricing is probably lower now than it was a year or so ago, I appreciate you've obviously got longer term contracts and therefore a lag between orders and deliveries. Just to understand, are the raw material input costs for you effectively locked in for 2020? If we do see changes to that's more of a 2021 impact just in terms of hedging or long-term purchase agreements? Thanks.
Martin, I think you answered the question yourself. Yes, it's fair to assume- a s I said, when we have the firm order intake, we lock in everything, including steel. There's no immediate upside. We also have a pretty well-covered 2020 reflected in the revenue guidance that you have seen. If we would have any infra out orders in 2020, that would have a positive impact from a steel price perspective. Apart from that, we're well set, we don't see the upside from steel at this point. Yes, absolutely, in 2021, you can see the positive impact.
Thank you. Our next question comes from the line of Klaus Kehl of Nykredit . Please go ahead. Your line is open.
Yeah, hello. Two questions from my side as well. Henrik, you said that you had a flawless execution here in Q4. Maybe it's just me that has been overoptimistic on your behalf, but I must say, I'm not that impressed by the margins in Q4, actually. Especially if I look at the project business, it seems like they are falling behind at- at least my estimates. Could you talk a little bit about that?
Secondly, Marika, did you say that we should expect a net profit for the joint venture for 2020 in the range of what they delivered here in 2019? If that's true, then there is at least a major deviation compared to my forecast. If that's correct, then what on earth is going on there? Thank you.
Okay, maybe I should address that. Hopefully, Klaus, you will appreciate that, as I said, when I say flawless execution, I also measure it as how we are actually dealing with, first of all, the challenges we have thrown upon us throughout 2019. Of course, for me to see suddenly that in the fourth quarter we get things much better.
We know we can do that because we have projects where we have a pre- and a post-calc, which we complete every day. When we start getting better and have better outcome of those, then the discipline go up. Therefore, we are making progress. No one just wakes up from one day to another and then are perfect, but we are on that journey.
Therefore, for us, it has been really good to see that we have made an inroad to that excellent execution in 2019 Q4. If it hasn't impressed you, then I'm sorry. Hopefully we can continue that journey in the coming quarters, because that's what we are aiming for. From an overall year, I think we can definitely say that Q4 brought us back into where we want to be from a run rate perspective.
Yeah. If we have a look at the offshore again- yes, you were right, Klaus, in assuming that the same level of net profit, that's what I said. That's also stemming from, at this point, a lower activity level in the offshore space or in MHI Vestas.
Okay, it's due to lower activity rather than some non-operational issues?
Yeah. That's what we had in 2019.
Okay, the drop in earnings in 2020, that's due to lower activity and not non-operational issues.
Correct.
Okay, excellent. Thank you very much.
Thank you.
Our next question comes from the line of Lars Heindorff of SEB. Please go ahead. Your line is open.
Thank you. Thanks for taking my questions. The first one is regarding the guidance. If you decompose the guidance, it suggests at least the high end of the range, a revenue in Power Solutions around EUR 13 billion. My question is this a reflection of you having capacity limits in terms of production? Rather that you don't expect more orders coming there? That's the first one.
Maybe you didn't see that- w e know right now that we have put everything into 2020 we can possibly visible see us delivering on. You'll probably appreciate there, that's quite a step up from where we ended in 2020. This is, yes, absolutely, about getting the activity and the scale to match up, so not disappointing any customers. For us here, we are fairly well covered in visible terms for that 2020.
We have no intention of going around to find much more volume for 2020, that's for sure. That also means when you then do the math, of course, there is also on the EBIT margin, there is a mixed effect. Of course, as you're rightly saying here, if you do a EUR 13 billion from the turbine solution side, then you will also find there is a dilutive effect seen from that the Service business is therefore a proportionate lower part of our business at a margin side. Please also aware of that.
Yeah. I'm aware of that. The other part is regarding farm downs, including the guidance. If I understand it correctly, you include farm downs. Also, if I recall it correctly, I believe that you have two projects, one smaller in Africa and one in Sweden. Do you expect any of those to materialize or be farmed down during 2020?
Yeah. If you're referring to the one in Africa, that is commissioned, so it is up for sale- hh ow that will end up, I think, remains to be seen. Shouldn't expect any big EBIT contribution from that project. The Swedish project that you're referring to together with PKA Vattenfall is commissioned in 2021, so that will not have an impact on 2020.
Okay. The African project, when you say not any sort of big numbers, can you give us an indication of where we are roughly?
Yeah. If we close and if something comes into the numbers in 2020, we're talking about really low single-digit numbers.
Okay. All right. Thank you, then.
Thank you.
Our next question comes from the line of Mark Freshney of Credit Suisse. Please go ahead. Your line is open. Just bear with me one moment. We seem to have an issue with that. If we could go to the next question from the line of Supriya Subramanian, and we'll bring Mark Freshney back. Thank you.
Hi. Good morning. Yes, thank you for taking my question. Just a couple of quick ones remaining. On the guidance for 2020, in terms of the revenue pattern, is it likely to be more evenly spread or usual seasonality or something similar to what we saw in 2019?
Yeah, that's fair to assume, Supriya. We see a more normal distribution, but please remember that a normal distribution is still back-end loaded, but it's not to the same extreme that you have seen in 2019.
Something like 40/60 as we've usually seen in the past?
Yeah, that would be fair to assume that.
Second one is on your longer medium-term margin guidance of minimum 10%. Now, do you have any internal targets on timelines of when you are looking to achieve this? Is this a true cycle margin assumption, or that once it is hit every year would be minimum 10%?
I'll just say here, we don't have an internal- i t's the same as we don't do internal differences in either our budgeting and other processes, so we align the two. Let me just put it this way, we are relentless in aiming for that 10%, so I'm pretty sure everyone will here appreciate internally as well, that's what we talk about, that's what we have as the target. We are aiming for that. We don't have a specific date and quarter for it.
All right. Thank you. That's it from my end.
Thank you.
Thank you. We will now go to the questions from the line of Mark Freshney of Credit Suisse. Please go ahead. Your line is now open.
Hi. Thanks for taking my question. Can I please ask on the long-term minimum 10% EBIT margin aspiration and how you would arrive at that? Because, as I see it, last year on the margins you made in 2019, you still earned a 20% return on capital. Profitability was still good. Underlying cash flow generation was still good. What is it that gives you confidence that in the long term as industry leader, you should be making minimum 10 and not, say, minimum nine or minimum eight?
Two things, and then probably you could add also, we also had an EPS growth in 2019, which is also good. As I said here, for us, we find levers, and we do believe, because some of the exceptions we had- and we believe are exceptions that over time we will be able to deal with in 2019, of course, leads us to a 10% EBIT. We've been there before, and we will come there again. Some of the things you're seeing us announcing are also things that provide us with some of the scalability we need to get towards the 10%.
You will also have to appreciate that while we are celebrating here a historic high order intake and also a historic high backlog, that some of that also triggers that we have to do an increased localization. Some of those localizations both drives resources internally. It drives a lot of investments. Therefore, you will also see the depreciation going up, and that's part of us scaling to another level of activity in Vestas. I think there are a number of levers, and some of those we will have to, but definitely it should come with only one gain, and that is that stakeholders can see here it's for the benefit of what we end up contributing back to shareholders as well.
Okay, thank you.
Thank you. Our next question comes from the line of Frans Høyer of Handelsbanken. Please go ahead. Your line is open.
Thanks very much. Just to clarify the margin contraction in the Service business in Q4 in 2019, was that then all explained by the leap in bonus provisions?
Yeah, the vast majority is because of the leap in bonus provision.
Okay, understood. A question regarding your long-term vision and the bigger growth that is predicted for renewable energy. The renewable energy definition is obviously wider than wind. What are the pros and cons of wind maintaining its position within renewable energy in that kind of time perspective?
Well, as I said, it is always dangerous to sit here and be quoted for something that reads as far out as 2035. I think as we all say here, there are two main sources to the renewable. That is solar and wind today. I think we also see a world where we become better and better in combining the two sources in the renewable. I actually have to say, if I look at the graph there is no chance that the existing wind industry could scale to take it all.
Therefore, it is actually a partnership and a pairing for both solar and wind to try to address that increase in demand. I think we are working better and better together in also trying to do hybrids and other solutions around the world, where solar and wind will be a good combination. We are welcoming that in the renewable here. Maybe we could have the last question.
Our next question comes from the line of Ajay Patel of Goldman Sachs. Please go ahead. Your line is open.
Good morning. I just wanted to ask on slide 13, I mean, you highlighted external factors, I think to the tune of 1.5% on your margin for tariffs, transports, and raw materials in 2019, and maybe a similar level for 2020. To what degree, or how fast do these higher costs get passed through to the end user over time and result in, if everything else stays static, an improvement in margin?
The second question I had was just on investment. You're clearly investing in new product line, and as well as higher activity, you have a more elevated investment cost. Do we have a fallback of that investment, at least on the turbine side, as the R&D and investment sort of works its way through? You have a period where maybe that investment may be a bit lower from the EUR 700 million, and is that more sort of imminent in the next few years, or is it much further out? I just wanted to understand that profile. Thanks.
If we start with the 1.5%, which has been the overall exposure in 2019 and continuing to 2020, as I said, yes, there are changes in the raw materials, especially steel, that is going down. As we have good visibility, it will have less of an impact, if anything, in 2020. Obviously, as we move forward, that's going to be a positive for both us and customers. Not to be too explicit, as it is pretty competitive, and if you look at our average sales price compared to competition, I think we're doing a pretty good job in maintaining the stable price level.
That is obviously also a reflection of the exposure, but I think it's much more into it in terms of customers burnt their fingers a little bit also on being too opportunistic on players that have had issues previously. On the investment level, yes, you're absolutely right. We are investing heavily now. We're investing also in the capitalized R&D. We are at a high level here in 2019, at EUR 289 million. I would assume that that goes down slightly in 2020. Not dramatically, slightly.
But again, I would say a normal investment level, going forward, is probably in between EUR 500 million-EUR 700 million. The lower range, obviously depending on how many new products comes out, how much we're capitalizing, but also in terms of investment in capacity. Also bear in mind that we have been investing quite a bit. We continue to utilize the balance sheet, our strong balance sheet, and consequently, keep inventory.
Just to follow up on that point, just to take those two bits together- is there anything that suggests that as we go to full year 2021, that the U.S. tariff issue, to some extent, is abated, transport issues ease, raw material prices, if anything, become a tailwind rather than a headwind. Then the easing of investment into 2021 wouldn't naturally help margin, the offset being maybe lower volumes, and the reverse effect of operational leverage. Is that logic right? We've been arguing about the quantums but...
I will say, I mean, we could paint a picture of that much tailwind, and that will be wonderful, because that will solve almost most of the things without us doing much. I think a combination, yeah- if that's what we are helped with by externally, we will also clearly give you that. As I said, you are addressing something that is not here as a fact yet. We will comment on it if and when they are proven to be that much of a tailwind.
Fantastic. Thank you for that.
Thank you.
Okay. With that, thank you so much. We look forward to meet and see many of you over the coming weeks. Again, on behalf of us at Vestas, thank you for your attention, and see and speak to you soon.
Thank you.