Good morning, a very warm welcome to this third quarter investor call. First of all, it's another strong quarter from Vestas. Very positive ramp-up, and therefore also a very high activity quarter for us. Personally, I will just say here it's a pleasure to say thanks to a lot of colleagues, but also having the pleasure of sharing that much of the business and operations, and customer insights over the previous couple of months since 1st of August. With that, let's begin the presentation for the third quarter. Next to me here, I have Marika. We of course look forward to take you through the presentation here today. The disclaimer first, and then our key highlights for the third quarter. The third quarter here is, again, increased order intake, and leads to an all-time high order backlog.
We had a 4.7 GW of order intake in Q3, and that also means if we look at the backlog, it's 38% higher year-on-year, and it comes close to EUR 33 billion. We have a total revenue in the quarter of EUR 3.6 billion. Positively here stems from all our regions. All regions are having a positive growth compared to same quarter last year, and it's an overall 30% increase compared to Q3 2018. We had an EBIT of EUR 429 million and EBIT margin of 11.8%. We had a stellar performance in our Service business, revenue growth of 8% and EBIT of total EUR 125 million in the quarter. That also means due to the visibility and where we are in the year, we are also by this third quarter launching a share buyback program of EUR 200 million, surely to adjust the capital structure.
On the outlook, we keep unchanged guidance for the year. We have slightly adjusted the service, so it's a minimum growth target for the year, but that's all we had on the outlook. Let's jump into the markets. As you see here from it's 4.7 GW order intake in Q3. It's 1.5 GW higher than it was in Q3 2018. When we look at it's mainly driven by U.S., Brazil, and Saudi Arabia as main contributor in this quarter. When we look at the ASP on the other side, we come out of the quarter of an ASP of 0.75, remains stable. We have a relatively lower proportion of EPC in the quarter. Therefore we are quite pleased with the stable ASP for the quarter and with the normal sort of variances due to geography and type of orders.
We look at the order backlog, as mentioned in the beginning, we are now at an order backlog of more than EUR 32 billion. It's up EUR 9.1 billion year-on-year, which is an increase of 38%. Very pleased to see that we have the turbines at EUR 16.5 billion. It's up EUR 6 billion compared to a year ago in Q3 2018. We have a service backlog that is now EUR 16.3 billion, and it's up at a bit more than EUR 3 billion, compared to third quarter 2018. A very positive backlog for us, both to work with for the coming quarter and the coming years. We deep dive a bit more into the regions, it's clearly we have had a very increasingly busy quarter in Americas. Not surprisingly, we were pleased to see the ramp-up working.
We have had deliveries of 3.7 GW in the first nine months this year. It's 39% higher than it was for the first nine months in 2018. If we look at the order intake, we are now 8.3 GW of orders in the first nine months. As said in the left side, we have seen very strong order intake from U.S. and Brazil. Generally, we see a very positive development in Brazil. More auctions are launched and carried out, and other countries are coming to it in Latin America. When we then look at the revenue breakdown, we have 14% of the relative revenue in the first nine months. Of course, with the increasing ramp-up of deliveries and turnover, we will also see that percentage being a bit under pressure, but very nice to see still that 14% is related to service.
When we then look at Europe, Middle East, and Africa, I would just say from a market highlight point of view, very positive development. We have an auction here in Poland, which is happening in Q4. We're probably a bit mixed on the climate proposal in Germany. We won't hide that we have hoped and expected a bit more, to also see how we could loosen up what we probably see as a locked situation around some of the permitting in Germany. They're putting a target up for until 2030, but we are surely following that with big interest and also pushing for how we can participate in helping. If we look at Italy, they announced a 5 GW technology- neutral auction , in 2021.
Generally across the piece in outside Europe, we see positives here also mentioning of South Africa, where they will work towards 2030 with probably something in excess of 1.5 GW a year, which of course is very pleasing to see. We then look at the performance in Europe, it's actually a very good quarter. We now see deliveries first nine months in Europe. The backload is start to work. We had 2.9 GW in delivery. It's 34% higher than it was in the first nine months of 2018. We have had a very strong order intake in the region. We are in excess of 4 GW for the first nine months. It is also based in more than 20 countries, very pleasing to see.
Just to mention a few here, we have Finland, Greece, Turkey, and France as main contributors to it, but it's really nice to see that that works across Europe. Credit to our European setup. In the revenue breakdown, first nine months, we had a breakdown which equals a service of 23% out of the EUR 3.2 billion of total revenue. When we then go to Asia-Pacific, I think Asia-Pacific is, again here, couple of comments to China. We know there is a very high attention to China before year-end 2020, where the feed-in tariffs are ending. I also think that probably leads into a more market-based discussion around the LCOE for the future. That, of course, is a thing we are following and also discussing intensely with both policy and customers in China. We have seen the India auctions being launched.
We are still a bit uncertain around how that will unfold in India. There are initiatives, there is also a very high step-up to reach the 140 GW target in 2030. More needs to come there to fulfill that target. When we look at the broader, of course, in Asia-Pacific, a lot of individual positive messaging from individual countries. Among others, Australia is now set to meet its renewable energy target for 2020, and I'm sure that inspires Australia to do more when we look ahead to 2030. When we look at the numbers for the region, we have seen a slight decrease in deliveries. We are 1.2 GW for the first nine months. That's 16% down.
It is harder when you have a size of a region of this, so you will be up against tough comparison with single orders, but mainly driven by lower in Thailand, China, and Mongolia. Australia remains stable, which is positive. On the order intake side, we are 14% up compared to the same nine months in 2018, and there Australia, China, and New Zealand underlying positive. Overall for the region, we see a 15% of Service in the region that is up 4% year-on-year. I would just say out of a total revenue of EUR 1 billion, we actually see a lot of positive movements in Service in that region.
I will also say from a Chinese point of view, when you get into a grid parity market and an open market, we actually hear a lot more attention to how to look after your assets in both 10, 20, and 30 years. That's a good way of jumping to our Service business. Stellar performance in Q3. We are now gone from 86 GW to 91 GW of onshore turbines with active service contracts in the quarter. Very good performance in this quarter. We cover 67 countries with active operations. I would just say here, 18 years of average duration coming on the new contracts, very encouraging for Vestas, very encouraging for the Service business, and backed by long customer relations. When we look over here, we actually had four contracts that had more than 25 years signed in Q3.
We saw power upgrades of more than 25 contracts, which of course makes efficiency gains for the customers. We had more than 500 MW of multi-brand contracts across U.S. and Europe. Below there, we see the normal splits in the regions, and again there, positive over the progress for the Service business across. That leads me to the offshore wind, MHI Vestas Offshore . I will just say here, similar to last quarter and similar to this year, full focus on executing on where we are executing on the pipeline. We're putting up our turbines. It works well. Key highlights for the quarter is we have become preferred supplier to Seagreen. It's up to 114 wind turbines. It supports the U.K. track record. Also, it will be the largest project in Scotland.
We were selected as a preferred wind turbine supplier of 29 MW in Groix & Belle-Île, floating offshore wind farm in France. As you would appreciate, it's not necessarily the 29 MW of order that is the takeaway here. It's the innovation that goes into also here make an effort to see the floating platform start working offshore. That's an important innovation and technology for us. When we then look at it, there was an inauguration of the Horns Rev with Vattenfall in Q3, and that brings the total to 143 offshore wind turbines operating in Denmark. Below here, we're just mentioning the projects that are ongoing and progress in Q3, and we look forward to update you on progress when we come to the future quarters. With that, let me hand over to Marika.
Thank you, Henrik. If we have a look at the income statement, I would say that this clearly reflects a lot of the positives already mentioned by Henrik. You see revenue is up 30%, and this is also a reflection of the extremely back-end loaded profile that we have for 2019. The increase is driven by both Power Solutions and Service. Gross margin, as a consequence, up by 1.4 percentage point, and that is also positively impacted by sale of the Romanian project. The external factor remains negative, I would say, and that's primarily tariffs, but also transportation and raw material. We still have a challenge on the increased cost. EBIT margin increased by 2 percentage points, mainly driven by higher gross profit and increased leverage on the SG&A cost, which I will come back to.
Altogether, I would say that the very positive is that the high activity level is something that we can clearly deliver here in the quarter. The SG&A cost continues to be under control. In absolute numbers, it is up compared to Q3 2008, but in percentage points is only a 0.2 point increase. The increased cost is again related to the higher activity level, and again, planned for and as expected. Service business, which Henrik already highlighted, very strong service performance. We see compared to last year, both in terms of revenue, it is up, but also from a profitability point of view. A very strong performance in the Service business. The offshore wind, we had a very good Q3 2018, so it is a tough comparison, and both revenue and profit is, as a consequence, down.
The underlying trends, already on a high level, said again by Henrik, we have a positive view on the offshore space. The net profit in this case is impacted by delay in a project. Change in net working capital. The net working capital in the quarter is negatively impacted by an increased level of receivables and also a higher inventory. Having said that, on an inventory side, we're following the principle that we have. We only have firm order intake in the inventory. Down and milestone payments partly offset the increased level of receivables and inventory. Cash flow statement. The cash flow from operating activities is positive. We see a free cash flow before financial investments of EUR 205 million, compared to a negative in the same order of magnitude in 2018. Altogether, a positive cash flow here in the quarter.
The net interest bearing position is still at a high level of EUR 1.2 billion. Total investments is down compared to Q3 of last year, but still at a fairly high level, and also mentioned before. We're following the same methodology, no changes. We are capitalizing R&D, and we are also investing in capacity, and in this case, primarily molds. No changes to what we have highlighted before. Warranty provision and lost production factor. We see that the lost production factor continues at a low level, below 2%. We see we have slightly increased compared to last quarter on the warranty provision consumed, and you can also see that we have increased the percentage of revenue to 2.6%, and that is really to cater for the steep ramp-up that we have right now, and also the acceleration of new product introductions. Capital structure.
Net debt to EBITDA continues well below threshold, so we are -1.3%. Solvency ratio is 23.3% here in Q3, and that is primarily impacted by the increase in total assets. By that, I leave it to you, Henrik.
Thank you, Marika. That leaves us with the outlook, as we said here, unchanged outlook. We have, though, changed the service from approx to say we grow the year Service business minimum 10% for the year, otherwise, we'll keep the other unchanged as the outlook for 2019. Still between EUR 11 billion to EUR 12.25 billion in revenue, EBIT margin between 8% and 9%, and total investment approx EUR 800 million. With that, I will leave it back to the operator for any Q&A.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. We ask you kindly to limit your questions to two at a time. Please hold until we have the first question. The first question is from Claus Almer from Nordea.
Thank you. Yeah, a few questions from me. The first question goes to the very strong order intake. When I look at the order intake for the last 12 months and at the service revenue, I'm getting to a level of revenue 25% above consensus for next year. Is that the right way to look at your order intake momentum and how that is going to be converted to revenue? That would be the first question.
If I should take that, Claus. When we release our full year, we will also come back and comment on what is the outlook. We have had a super strong year, we don't say in what periods or what year they are coming to, so you can't make a close assumption of that. We are generally very positive over it, what you will probably see also here, we are also looking into 2020 from activity and a top-line point positive to that. Let us comment on it when we get to the first week in February.
Sure. It was worth trying, at least. My second-
It's a good try, Claus, actually.
Thank you. Well, the second question goes to these extra costs from rerouting you mentioned after Q2. What is the impact in Q3 from rerouting, and maybe also what impact did you have from tariffs?
Okay, what we see, Claus, is basically what we said in Q2. It's going to be an overall impact of 1.5 percentage points this year. The exact split in the quarters, we haven't communicated that, but it's definitely compared to the assumptions when we enter into 2019 with the reduction we saw at that point is not materializing. It's going to be a - 1.5 percentage point this year.
Okay, thanks. This divestment of the wind farm, the cash flow will first come in Q4, right?
Correct.
Will that also be paid out to the shareholders as you have done in the past when you do these one-off divestments?
I think we have just said we are paying out when we are starting the share buyback of EUR 200 million. That's all included.
Okay. Thanks a lot.
Thank you. The next question is from Kristian Johansen from Danske Bank.
Yes, thank you. First question is regarding project margins, which you highlight in the quarter as negatively impacted by trade tariffs, transport, and raw materials. I'm just curious, just assuming we look at the world as it is today, will these three effects continue to have a negative impact year-on-year on project margins in 2020?
Altogether, Kristian, the positive is the volume. The other positive is the stable price level that we see right now. As we see it, unless there's any dramatic changes, it's going to be a negative or a headwind for us in terms of the overall cost base. Also remember that the overall activity level that we have, and also the localization that we're doing, and all the new product launches that we have is putting a lot of pressure on the operations at this point. That is also definitely impacting us.
Okay. That's clear. My second question, I continue to hear a lot of concern from investors regarding how you will be impacted by the phase down of the PTC in 2021. Henrik, your predecessor has previously indicated that he was optimistic that other markets could mitigate a potential decline in the U.S. Considering you already and very soon will have to sign a lot of orders for deliveries in 2021. I'm just curious to get an updated view on how you look at the delivery mix in 2021.
I will then follow in the footsteps of Anders and be optimistic on that one. I think overall, externally, we don't see anything right now from a trend and a recognition of the renewable energy and especially wind from an LCOE perspective, that we have been recognized, we have been competitive in all continents. I think right now what we see positively in Americas, we see, first of all, a U.S. market that also has a life after 2021. Generally, we see some of the forecasts there being upgraded. Secondly, as you will also appreciate what you can see from our landscape of order intake, South America is picking up more and more, especially with Brazil, but there's also individual countries outside in South America.
When we go to Europe, I don't think any of us would have particularly forecasted that Finland would be at the level they are now in 2019 if we go a year and a half back. That suddenly also comes and supports. I think there are many countries that suddenly pick up to actually cover for some of that comes down. What we see generally across in Asia and Pacific, I think out there we see countries that suddenly picks up and start on either 3, 5, or 10-year programs. As you will appreciate, we don't have a particularly strong order intake record, for instance, in a market like China. As I said recently in China, there is a changing environment and a changing view what will happen in China after 2020. We are generally on that one.
We are positive, and that is also why we are saying we are scaling for a higher capacity and therefore also a higher activity in Vestas for the future.
Just to be clear, you do expect you can deliver growth on deliveries in 2021 as well?
That was a long guidance, but what we say here, we are optimistic both for 2020 and 2021. Yes.
All right. That's quite clear. Thank you so much.
Thank you. Next question is from Dan Togo from Carnegie.
Yes, hello. First question from me is on the unannounced orders, 2 GW here in the quarter. Surprisingly strong, I would say. What is your visibility into this? Is this sort of a new level we should expect, or is there any sort of, say, unusual events that affects this in Q3? Also, these orders, do they come at a favorable margin or on par, so say with Vestas? That's the first question.
I would say, Dan, that you would see fluctuations between the quarter, as we have seen before. For us, the level is high. It's well spread across many countries. Altogether, positive. When it comes to margin and average sales price, we have the same requirements across the board, so it's no discrepancy or variances, whether it's announced or unannounced.
Nothing unusual in this quarter, as I understand?
No.
On Asian orders, the order intake, it seems a bit weak here in Q3, and we are seeing others announcing rather big orders from Asia. Has competition been particularly fierce and you've been walking away in some tenders, or how should we look at this at the moment?
When you look at a region there, and you look at also the size of the region, we're very humble and respectful for that. We only need one or two orders to change a picture like that. If somebody puts a lot of effort into winning an order, we generally, as you know, we are focused on that it has to create value for shareholders and you, therefore, if we walk away from something, it's generally because either the price or the project margin was not sustainable for us to say yes to. In all honesty, in Asia-Pac, as I said earlier we are very positive over the progress. We have also a growing unannounced order which we are negotiating and looking into, therefore, we are just working diligently towards both end of the year for next year to look at new orders.
Nothing particularly to say there.
Can you comment in particular on India right now? Some are announcing orders here and on that market, what's going on there?
India is a market which we have followed closely. We're also fully aware of that there are certain restrictions and constraint in the auction system with the ceiling in India. Generally, if we can't make our project profitability to work on some of these or the technology there is not the one that is required for or asked for in the auctions, then we don't win. We have taken some, we are fine, but we also see that the steep ramp- up in India is still ahead of us, if they want to reach the target of 140 GW in 2030.
Okay, thanks a lot.
The next question is from Martin Wilkie from Citi.
Thank you. Yes, it's Martin from Citi. Just a couple of questions. Firstly, you'd highlighted execution risk given the size of your backlog. I think the third quarter was probably a stronger quarter of delivery than many expected. Were projects pulled forward for delivery or was this the phasing that you'd always anticipated? Does that in any way alleviate some of the delivery risk in Q4, which always looked like it was going to be quite a busy quarter? That was the first question, and I'll follow up with a second. Thank you.
The Q3, I think from our point of view, the positive is in terms of the activity level, we are delivering, and we are coping with the high activity level anticipated in Q3. Obviously, if you look at the overall guidance that we have now for 2019, that implies that it's going to be another very busy quarter in Q4. Altogether, if you have evenly spread quarters, obviously better, but on top of it, you have a very high activity level anticipated for this year. That is a constraint right now. On top of it, we have the tariffs and all the changes that incur because of the tariffs, and that is what you saw in Q2, and that we had to accommodate at that point in time.
Apart from that, it is the normal steep ramp-up that we see and that we are mitigating at our best, and it's going to be continuously busy.
Thanks. Then just my follow-up, just coming back to this question on tariffs and transportation costs. You've talked about your cost base being higher next year, and obviously there is an annualization effect of tariffs. If you could just clarify, are you expecting incremental tariffs from here as well, or is it really just the annualization effect that you're referring to? Also on the transportation side, I know you've not called them out separately, but is that sort of a months overall drag. Does that incremental cost still hit you in the first half of next year? Or are the projects that experience those transportation incremental costs, is that just a sort of one or two quarter type of incremental cost? Thanks.
Well, I understand your question, Martin. The overall is that getting into a year like this, where we have a full visibility, more or less, we plan rigorously, and that is also why we saw a reduction from the 1.5 percentage points cost pressure, down to 1%, and that is what we planned for. Everything was signed and sealed. We had started up production in Vietnam and in Korea. In the midst of the year, that was part of the tariffs. The whole rerouting started. You have the double cost. The other challenge when it comes to transportation, which is from a broader perspective, is also that our type of products require special vehicles, both on land and also on sea. There you have a shortage. You have to time those boats with what we need at any given point in time.
When we look into next year, the tariffs continues. We are not planning for new tariffs. We're planning for what we know. If there will be additional changes also in 2020, that will have a negative impact for us. With what we know, we continue with the cost base that we see right now, and that's the 1.5 percentage point cost base increase that we had for this year.
In terms of those transportation costs, I appreciate you've obviously got these expensive additional ships and so forth. That is also a cost that you'll be incurring into 2020 as well. It's not like it's a small number of projects that will be done by the end of the year that are incurring these incremental costs.
No, it's across the board, and simply because it is a shortage as well for the type of vehicles that we need.
Okay. Thank you very much.
The next question is from Akash Gupta, from JP Morgan.
Yeah. Hi, good morning, Henrik and Marika. My first question is a follow-up from Henrik comment earlier on Bloomberg. Henrik, you said, according to Bloomberg, that you can maintain service margins. Maybe if you can elaborate which base you are referring to, because we have 28% in Q3 and 27.7% in year-to-date, and that your guidance is at least 24%. When you say maintaining margins, if you can also refer the base. That's my first question.
The good thing here is I can say, and I know exactly what it was. I was asked to comment on if we can maintain the high margins we have in the Service business. On that, I answered yes, because the investment and the one we are running the Service business, I'm very encouraged by the way we run that. We have 10,000 people that works in and around our Service business. We built a value proposition that sits well with our customers. Generally quarter-on-quarter, we see customers more and more asking for also longer and longer commitments, in that relationship with customers based on our turbines.
We just said there, we foresee still that there are more things we can do in the Service business and that will maintain and also give us opportunities to still keep building both the Service business and the margins and profitability in the Service business.
Maybe a follow-up on your comment that customers are asking for longer commitments. You have a pretty strong balance sheet. I would say the risk of you disappearing is almost next to nothing. Therefore, when customers are asking for longer commitments contracts, what do they get in return from you?
What I will just say here, that depends all about what people are paying for, because we got different service agreements overall. I will just sort of say, when we look at that, some of it comes down to also in certain markets that they have a full service package. To some extent, no one knows the Vestas turbines better than we do, also from a sensor and digital point of view, so we are very happy with that. We don't generally give something we are not comfortable and ultimate creates big liabilities back. That's not how we work.
My second question is more about risk from the equipment that you have sold in recent years. Vestas commentary in the last few years has been that industry as well as you are selling equipment and services together on a levelized cost basis. Now we are seeing that some of these projects which have bid very aggressively a couple of years ago are coming online. The question I have is that what sort of guarantee do you generally provide in these contracts where you are bidding on LCOE basis? Let's say if the customers are not getting the desired project IRR, then do you have any liability in future, maybe let's say if they don't get the desired load factor or something, and they may ask for some sort of compensation from you. That's question number two.
I was just about to say, I was just almost jumping in and cutting you off in the middle of your question. We don't go in and take every financial risk you can imagine on and around a wind park or a turbine in that sense. What we know is we know the output. We know how the turbine will create and how it will work under certain conditions. When you have the upside as an investor in a wind park, you also have some of the downsides. If it comes to uptime of our turbines and also how they perform, that's what we generally stand on our behalf. The rest, when it comes to that, we won't take the risk on the weather either. Therefore, let people do that. The IRR, that's the final owner of the wind parks, which we don't do.
Thank you. Maybe a quick one for Marika. Marika, thanks for elaborating this one-off that you have from project sale this year. Can you also provide if you had any one-off in 2018 or 2017, just for comparison purposes?
Anything that we see we rarely take one-offs, as you know. We have positives and negatives, and that goes fully into the results. Anything that happens in the company, we have full visibility. We don't take anything as special items or similar.
Thank you.
The next question is from Supriya Subramanian from UBS.
Hello, yes. Good morning. I had a couple of questions. One is around, given that the execution ask is quite high for 4Q and likely to be even higher for 2020, I am sure the supply chain will be quite stretched. Do you see risks of slippages from fourth quarter into 2020 and correspondingly 2020 into potentially 2021? Related to that to some extent is 2020 as well going to be as heavy backend loaded as 2019? Do you see a more even phasing of revenues across the quarters?
If I start with your question on slippage in between the quarters, the more we have at the end of the year, the more slippage risk you have towards the coming year. It's not, again, any lost revenue. It's just you could potentially see something spill over from Q4 into Q1 of next year. That is, again, to be anticipated, looking at the guidance, we will have a busy fourth quarter this year, and a very busy fourth quarter. If you look at next year with the visibility that we have in terms of that very high order backlog, obviously, it's going to be a busy year. We don't see that it's going to be equally skewed amongst the quarters, and bear in mind that we are in the midst of the budgeting process as we speak.
It's going to be a more normal distribution amongst the quarter, and that's obviously easier to deal with than what we have this year. It's not going to be a walk in the park next year from an operation point of view either.
Okay. Got it. Again, sort of into 2020, I know you can't guide right now, but if I may put it this way, if all else being the same, that is there are no further tariff escalations, et cetera, net of all the headwinds and tailwinds, do you see margins expanding potentially in 2020?
It's hard to give a commitment on margins. We will come back again for the guidance of next year in February. What we have said remains. We have a strong order backlog both in the Service business as well as the turbine business. We have a stable price picture as we speak, and that is sort of a positive. From an operation point of view, it's going to be a hectic year looking at the visibility that we have right now. That's all we will comment at this point in time.
Okay. If I may, just one more quick question. On the offshore business, do you see a risk of pricing pressure here given that there was this recent news flows of offshore as well expecting lower- than- expected IRRs for certain projects? I know that's related to only a certain set of projects of offshore, does that then put risk on to the turbine makers in terms of pricing this?
I don't want to comment on that specifically. I think we know the value. We know the value of the turbine. We have had the offshore turbine, our V164 out there for the longest, so we also know the value of that. We don't generally work around to give a price pressure on it. We know also that the projects generally will be competitive. Therefore, we participate in that market with joy, and we also look forward to see that the offshore market is gaining more and more momentum at several continents outside where it originally started in Europe.
Okay. All right. Thank you very much.
The next question is from Casper Blom from ABG Sundal Collier.
Thank you very much. Two questions from me as well. First, on the working capital. You have been using your working capital to build inventory towards this very high number of deliveries that you are doing now. Should we start to expect some sort of release of working capital here in Q4, or will you maintain a high level of inventory into a 2020 that is looking to be even busier? That's my first question.
If you look at the, as you're stating, Casper, we have used the ability to actually build inventory to cope with the high activity level that we see right now, which you don't have. We're following our anticipation in terms of how we reduce inventory here in the quarter. We are also building up for a very busy Q4. If everything works as it should, also looking at the high activity level that we are anticipating in 2020, we will build up. You will see us utilizing, at this point in time, the possibility to have inventory, also going forward, considering the high activity level that we have. We're not giving, as you know, any exact numbers. You will see a reduction, but at the same time, an increase to build up for 2020.
Unless we have some slippage, because that will obviously change the picture in between Q4 and Q1. That was a very unclear answer. I hear that myself. Did you get it, Casper?
As I understand it, you're saying that we shouldn't sort of expect a huge relief of working capital when we get the annual results.
Short summary, yes.
That was nice dancing around that, right, Marika?
A little bit connected to that, your balance sheet. You have the last couple of years when presenting the annual results, you've had net cash hovering around EUR 3 billion. Is that sort of still a level to look for, where you are uncomfortable? Would you actually be more comfortable at a higher level, given that the company is somewhat bigger in terms of delivery now than it was just a few years ago?
I would put it like this, Casper. The cash that we have served us well and will also continue to serve us well. If you look at the activity level, you look at the level of investments that we're doing. We haven't changed our philosophy. We will still have a very prudent view on the balance sheet and the cash that we have. That will continue. We're not easing up on that requirement internally.
No, actually, what I was pointing to was not an easing up, but more a tightening where you would say we would actually like to have more cash given how much bigger we are now in terms of activity and also in light of basically how weak some competitors are to really stand out competitively on that parameter.
We still do with the cash we have. As I said, it depends on where we are in the cycle, how much we have to invest, and what we have on the balance sheet right now in terms of our organic growth profile has served us well. We haven't changed anything, neither more prudent or less prudent. We are satisfied with the balance sheet that we have at this point in time.
Great. Thanks a lot.
The next question is from Sebastian Growe from Commerzbank.
Yes, good morning. Thanks for taking my questions. The first one is around the headwinds we discussed before on the U.S. tariff mitigation. I personally believe we need to distinguish here between what is really the mitigation as such and then the underlying volume growth, which seems to go stronger than what eventually everybody had been expecting before. My question then is, if you are seeing a greater tightness in the overall supply chain, be it on the components, be it on the ships that you mentioned before, Marika, anything that is really changing to the bad, so to speak, that you are losing some of the eventually nice volume gains that we should expect for fiscal 2020? That's the first question. The second question is around the CapEx and mix.
You still guide for the EUR 800 million for the full year 2019, obviously a significant step-up required in quarter four. I would be interested in what the key areas of the spending are. You referred to molds before. Is there anything you have to do to the footprint as well? If I may then also pick your brain on mix, and could you just give us some sort of insight into how much the EnVentus platform has been contributing to order intake year to date? With that also then the expected contribution in fiscal 2020 compared to what it might land at in fiscal 2019. Thank you.
You managed to squeeze in a lot in two questions here. If I start with the CapEx and what it is in reality. It is, as I said, it's no change from the philosophy we've had previously. You will see that the capitalized R&D will be in the same order of magnitude as 2018. That means EUR 250 million-EUR 260 million. The molds to further expand the capacity remains. We also have localization investments because that is a requirement in many of the countries that we sell into, and that also continues. On the order intake for EnVentus is fairly limited. It's 300 MW at this point in time that we have firm order intake. Also remember that the full launch for EnVentus is 2021. It's still the 3 MW and 4 MW platform that we continue into 2020. Sorry, what was your first question again?
Around the headwinds and the distinction between what is U.S. tariff mitigation and escaping that pressure, and at the same time, I think, better than early expected volume growth. I think it's really.
Yeah. The overall headwinds is, as I said, 1.5 percentage point. The risk on suppliers is always there when you have a high activity level and high demand. The good thing, though, is that as we have visibility over 2020, the strong order backlog that we have, as soon as you have a firm order intake, we start firming up all of the supplies, all of this transportation. If everything is according to that plan, we have a good overview. It is the changes in the midst of that planning period that causes additional headwinds. I don't see any ease- up in the cost base for next year. It's still going to be in the order of magnitude as we see this year. If you have changes to it, that will be on top of.
You're not seeing any sort of greater greediness on behalf of suppliers either. Is that the right takeaway?
Yeah. If you look at the overall heavy industry, they have different challenges than we do because they don't have the demand in the market. Obviously, we're trying to balance that without being too specific on our negotiations.
Clear. Thank you so much.
Thank you.
The next question is from Frans Hoyer from Handelsbanken.
Hi, thank you. Also a question on the 1.5% tariff pressure on margins in 2019. What was it year- to- date? Q1, Q2, and Q3 together?
We haven't been specific here in the quarter. It is 1.5 percentage point for the full 2019. As I said, it's 0.5 percentage point higher than what we anticipated when we went into this year, and that's based on the cost base that we have globally.
Okay. When I look at the margin guidance for the year, I try and look at Q4 separately, what's implied for the final quarter, and it looks to me like you are assuming some pressure, even, of course, adjusting for the one-off gain in Q3. That pressure perhaps, I understand the tariff issue is a factor in Q4, but we also have the increasing importance of service, and we have the presumably higher volumes and better fixed cost absorption in the fourth quarter. I'm just trying to, is there something I'm missing here in that progression in the Q4 margin?
No, but I think your assumptions on Q4 is correct. Remember that the high activity level that would be anticipated is at record high, and that is the steep ramp-up, and that will cost us something. Again, it's not a walk in the park to have that kind of volume to be exercised in a single quarter. The other thing is obviously that the later you get into the year, the more headwinds you see also from an installation point of view. It could be delays, and delays is also a very costly exercise. It's going to be a lot of pressure on us to exercise what we have left to be executed here in Q4.
An element of safety margin is in there as well?
You have the guidance, it's a range, I would say there's no safety margin. It is very factual what I'm describing to you. That is what we're facing at this point in time.
All right. Thank you.
Thank you.
The next question is from Lars Heindorff from SEB.
Yes, morning. Two questions from my side as well. Firstly, in the first half of this year, we've been talking quite a lot about leftovers, if you can call it that, from very low project margins that you took in in 2017 and 2018. Are there anything left here of that kind in the third quarter? Is it relatively clean now? That's the first question.
That's absolutely correct, Lars. We have exercised the more, call it at this point historical, but the low- margin project that came in. We are today exercising on a more fresh base. Also remember that it is a very steep ramp- up. That means that we are again investing in capacity. That is, and also we are also outsourcing more than what we have done previously. That's obviously the other factor. The leverage will be different than what you have seen before, because then you had excess capacity that you filled up. Today we have the opposite. We don't really have excess. We are installing new capacity and at the same time, also outsourcing. From that point of view, the leverage will be different from what you have seen previously.
Okay. Sorry. The second question, I want to ask you about your headwind into 2020, but rather, turn it around and hear a little bit about what can you do to mitigate this, and you've been talking also in connection with the Q2 report about fairly good talks with the customers about passing at least some of this cost almost to the customers. Where are you on that, and to what extent can you sort of offset that by passing some of that cost and headwind onto the customers and into the prices?
I would say that has been contemplated for quite some time. Also remember that the firm order intake that we have in the backlog now is what we will be exercising next year. We have full visibility. It's nothing that's going to be on top of that to any significant degree. Next year is, I would say, as this year, very high visibility, so it's been exercising at the best we can.
Okay. Then, just to follow up on the outsourcing part that you mentioned, which is incremental margins. Back in the good old days, I think we talked about incremental margins of 20%-30%. Can you give us an indication of where you expect those to be now with higher degree of outsourcing?
That was my point earlier. The leverage that you have seen in the past is, if anything, it's going down.
Okay. Below 20%-30%.
Absolutely.
Okay. Thank you.
Well, it was also a slightly wide range, you have to appreciate there.
That's okay. Thank you.
The next question is from Klaus Kehl from Nykredit.
Yes, two questions from my side. You have highlighted a couple of times that you have this execution risk in Q4. I truly understand that. Can you talk about what you actually have done in order to reduce it? Have you, for instance, produced all the turbines here in Q3? Perhaps that's the reason why the inventories are so big? That would be my first question. Secondly, you mentioned these power upgrades in the Service business that drives efficiency gains for the clients. On average, how much can you raise efficiency for clients? Could you talk a little bit about that?
Do you want to start or?
No, please.
Okay. I forgot the question, sorry, Klaus.
You want me to repeat?
Power upgrades. No, power upgrades was the second one.
First one was-
Yeah
How does it look like? What have we done to mitigate the Q4 activity level? As said here, Klaus, as you will see in the inventory, absolutely, we have done what we can, but you will also appreciate some of that inventory is not always at the site of where we're putting up the final project. Here, it is still fourth quarter, and you won't get access to the site before the site is ready from preparation to it. Therefore, it is, as always, difficult to access site, and we are still subject to the usual. We've done everything we can, but we don't inventory or stock it at site. That's just not what life is. Therefore, there is still a transportation between ex- factory and to the various sites.
We are well prepared, but we are still subject to, and that is also why we have kept the range for the external guidance between EUR 11 billion and EUR 12.25 billion . I hope you appreciate that. You can see it in the inventory as well. I think it goes well hand in hand. It's something that the project teams are very much used to and working diligently through.
I would say that, sorry for filling in. The biggest risk in Q4 is that we have a lot of Nordic projects that have to be exercised really here in the latter part of the year. The weather impact is going to be bigger as it looks.
Coming to the power upgrades, we're measuring that in percentages. It is down to the customer of where the individual customers are, how much percentages we are able to affect that. As I said, I would not like to give that away as a statement to such a wide forum, because as you would appreciate, that is actually part of the value proposition and the competitive advantage to customers. Could we just due to the timing, could we say this is the last question, operator?
Thank you. We will now take the last question from Mark Freshney from Credit Suisse.
Hello. Thanks for taking my question. We've been discussing a lot of the potential negative impacts to try and bridge the 2019 to 2020 EBIT margin. Can you talk about the mix effect? Because my understanding is that it's only recently, in the last few months, that you've started shipping the V150 and the 4 MW products, which I understand provide a step shift down in the levelized cost of energy. Can you talk about how the product mix will change going into next year? What kind of percentage volume it is, and potentially what positive impact that could have on group margins? Thank you.
Well, Mark, we're not commenting on the margins for 2020. As we said, we have a good visibility. We have a strong order backlog. We have a good average sales price, because we see the stability in the price, and that's reflected in the order backlog. The V150 is going to be definitely a strong product for us in 2020, and that's all we can comment on at this point in time.
Okay, thank you.
Okay, I think that probably concludes this investor call. Thank you very much for your attention. Thank you very much for the very, to us at least, interesting questions, and we look forward to see many of you over the coming weeks. With that, thank you.