Hello, welcome and good morning to this Vestas Q2 presentation. It's the voice of Henrik Andersen, and I think that was probably the best introduction I could do. From a personal point of view, I look very much forward to connect and talking and seeing many more of you over the coming quarters, and not least when we do the particularly road show as well. I also think it's in good order here to thank my new colleagues here in Vestas for also presenting the Q2 result, as you would appreciate, with a start date of 1st of August, I owe them quite a big thank you for doing what they have just done in Q2. With that in mind, let's go into the presentation here. The usual disclaimer, I think we all know of, and then if we come to the key highlights of Q2.
Surely it's the highest-ever quarterly intake we have had, 5.7 GW in Q2, and we'll come back more on that, but also includes the first order for our new EnVentus platform. We had a total revenue of EUR 2.1 billion. It's slightly down compared to Q2 of 2018. Ended with an EBIT of EUR 128 million, equaling to a margin of 6%, where we say as well, it's impacted by surely the competitive market. We have some tariffs, and then, of course, we are looking into a very busy second half of the year. We had the best quarter on service yet, strong service performance. We are up 15% in revenue, and we had an EBIT margin of 28.4%. A very good quarter in service.
We also saw increasing profits from MHI Vestas Offshore. As such, we'll talk more about it's all about the execution in there. Net profit of EUR 22 million means an underlying improvement of EUR 49 million year-on-year. In terms of our outlook, we have narrowed our guidance for 2019 in both terms of revenue and EBIT, surely down to that we also see an improved visibility for the full year at this point in time. On the second slide here, if we look at the quarterly order intake, as we said here, 5.7 GW in Q2 2019, that was 1.9 GW higher than it was in Q2 2018, therefore representing almost an increase of 50% Q-on-Q. Also really nice to see that it's above the Q4 2018.
Particularly here, it's U.S., Brazil, Finland, that were the main contributors to the order intake in Q2. A really good, strong quarter. In terms of the ASPs in the quarter, we ended at EUR 075. As we say here, it's stable, and it's also down to that in Q1 versus Q2, we have a slightly lower part of the EPC in Q2 versus Q1. As always, there is differences in terms of geography, the turbines, and also the scope. That I'm sure we'll talk more about. In terms of the status of the order backlog, it is now all-time high, more than EUR 31 billion in. We have a year-on-year increase of 37%. On the turbines, we are close to EUR 16 billion, and on the services, we are just above EUR 15.5 billion, which is very well supported when we look into the future of Vestas.
We come into the regional markets, surely we start with the regional highlights from Americas. A continuing strong demand in the U.S. with the current PTC. We know it's a very busy 2019 and 2020 before the PTC goes down in 2021. At the same time, we also appreciate in the U.S. right now, we both have the tariff and steel mitigation, which we are working closely with through our supply chain and also with our customers. In Latin America, we have seen the new government in Brazil, introducing the first auction. We expect more auctions to come, also in the coming quarters, so really well. We have seen Argentina announcing an auction in second half of 2019, which, of course, will be discussed considering Argentina's current state. We've seen an auction in Colombia as well being announced.
Deliveries half year 2019 versus 2018, up almost 60%, mainly in the U.S. We also seen Argentina, Canada, and Mexico contributing, as you will find in the announcement to that number. Order intake more than doubled compared to first half 2018. Again, U.S. and Brazil are having the main contribution to that. Again, U.S. continues to be at a very high level.
In terms of the midterm volume outlook, as you can see, we use the external source, Wood Mackenzie, and I think it's fair saying they, of course, put in that there will be historic high installations with the PTC at 100 in 2020, and then some sort of drop-off in 2021, where we also know that part of that will be mitigated, for instance, from Brazil and other parts of Americas. If we go to Europe, Middle East, and Africa, I think it's fair saying here, Europe right now, positive from all, both EU and the countries. We see a 2.5 gig auction being confirmed in Poland for the second half of 2019. Being in Denmark, we also know we have had a new government that has introduced a 70% greenhouse gas reduction by 2030, which means also means and targets and also tools to achieve that.
In Germany, it seems that we still have the underscription of the auction in Germany continues, but I think from a German government perspective and country, they definitely have still the commitment also to speed up the retirement of the coal-fired power plants, and therefore, also committing strongly to renewables going forward. In the rest of the region, Middle East and Africa, you have also seen us that it's probably coming down to country by country. There are countries that announce themselves entering into the renewable arena, and some picks up some of the former programs they had, and we'll deal with them country by country or order by order.
In terms of deliveries in first half of 2019, up 20%, mainly in Spain, Italy, and Ukraine, where we also sort of mitigate the decline we have seen in Germany in the first half of the year. Surely in the region right now, we see that there has been a relatively low level of deliveries in the first half, but therefore, there's also an expectant backend loading of delivery for second half of the year. In terms of order intake, slightly lower than first half last year. Finland, France are the main contributors, offsetting some of the shorts from Italy and Sweden. We sort of had Poland, with two orders where we see that that is sort of the restart of that renewable market again.
In terms of the external midterm volume outlook for the region, we see that that is actually looking to increase both in 2020 and 2021, signaling that EU generally takes up a positive, and that will mitigate surely some of the effect from potentially U.S.'s decline. We see Germany in this number, going from somewhere around 1.5 in 2019 toward four, 4.5 in 2021, which, of course, is very positive. When we come to Asia Pacific, we see an increased commitment in China. We have seen the auctions and the tender started, and of course, that's well supported by the feed-in tariffs, which sort of have also a 2020 timeline to it. So there is a positive market ongoing, both in the short, but also in the longer run.
In India, we have seen that the ambitions are still to achieve 140 gig in 2030, but I think it has, and we have all seen that, some short-term uncertainties around how that is being executed and how that is being supported by also the permissions locally. In the broader Asia-Pacific region, it's positive to see the countries generally committing more and more to the renewable energy. Here we've most recently saw South Korea doing exactly that. In terms of deliveries, we are 35% lower than first half of 2018, primarily driven by Thailand, China, and India, and as a comparison, and then we see Australia remains pretty stable in here.
A good increase in order intake, 100% up from H1 2018, and therefore, we see an increased growth from or still a strong order intake from Australia, and we see China and India also contributing to the increase here. As I mentioned, well supported by the Chinese feed-in tariffs. From an external point of view in the midterm volume outlook, surely they put some reduction in China post-2020 and the current policy there, and then that will be, to some extent, sort of mitigated by some of the other areas, and still with an uncertainty to India as well. Overall, the region is forecasted in 2021 to come somewhere around 15% lower. If we then go to our own business, starting with the service business first, clearly we have had a, as I mentioned, a very strong quarter.
You know us well, so we have 36 GW under service, with some equals to somewhere around 42,000 turbines, which gives us an enormous coverage in that. 67 countries where we have active operations, and those still goes up depending on when and where we get the service contracts on also some of the new countries. We have an average backlog around eight years, but as you will also appreciate and you have probably seen in our order intake, the service contracts generally, both as new and renewables, becomes with a longer and longer tenure in general. Key highlights here, we had the first EnVentus order in Finland, which is supported by a 30-year service agreement. We have had a couple of multi-brand deals. We had a 300 MW multi-brand deal in the U.S., and then we had a 14-year full scope service contract with an extended multi-brand project in Europe.
In lower right-hand corner, you can see the split where we are a service business where it is very well represented in Americas and EMEA, and building well in APAC as the countries come along. If we then go to the offshore, I think the heading says very much of this. It's the operational excellence that also secures how we execute on the existing projects. This is really where we can see, Marika will come back to the numbers on that one, where we can see turnover goes up because we start having a real execution and installation of the turbines. We have so far 1,100 turbines installed across 30 projects, 4.6 GW. We have a pipeline which is under installation, unconditional, of 3 GW, and then we have conditional orders and preferred suppliers of 2.2 GW currently.
I think the key highlights here in the quarter and first half is we've had a massive improvement in the installation time for the Norther project, where we are literally cutting the installation time in half compared to where we were three years ago. Then we have had the inauguration of the Borkum Riffgrund 2, which is 56 turbines of V164, and actually today that's the most powerful turbine installed in the German offshore wind market. I think in the lower right-hand corner, you will also appreciate, as we will say, a lot of activities is ongoing. Projects in progress from Q2 are mentioned here. Really nice to see the progress in how they execute on that pipeline. With that, I will hand over to Marika on financials.
Thank you, Henrik. We start with the income statement, and here you can see compared to Q2 in 2018, that revenue is down 6%. The power solution have, as we've said before, a very backend loaded activity profile. You can also see here that service revenue increased year-over-year, so a continued good performance, and also highlighted by Henrik earlier. As a consequence of the lower activity, gross margin is down 4.2 percentage points. You have, as we also said before, we have a negative impact from the orders that we took late 2017, also beginning, I would say, in 2018. We are starting to phase them out quite significantly. Q2 is still impacted by those projects. We also have external factors such as tariffs and raw material price increases, and that's also impacting the quarter here.
EBIT margin down as a consequence of the above by 5.5 percentage points. That is primarily driven by the lower gross profit and an increase in the SGA cost. If we have a look at the SGA, that continues to be well under control, is one of the controllable parts from our side. You see that we are going up to 7.2% compared to Q2 of last year. That is a reflection of the activity level that we anticipate here in the second half of the year. I wouldn't say any surprises. It's planned for. Depreciation and amortization increased by EUR 23 million year-over-year. That is primarily due to the introduction of new products. If we have a look at the service business, we see a very strong service performance. Here you can see that revenue is increasing quarter-over-quarter.
The EBIT or the profitability is, in the quarter, 28.4%. As we have said previously, you will always see some fluctuations in between the quarters, but the performance continue to be very strong in the service sector, and primarily due to really high quality, but also a very fruitful cost out program in the service business. MHI Vestas Offshore, you heard about the highlights in the joint venture from Henrik. Here we're talking a little bit more about the P&L. Revenue is clearly increasing compared to Q2 of last year. We are starting to install the V164, obviously having a positive impact on the P&L. Profit as a consequence of the installations increasing to EUR 22 million here in Q2 of 2019. The change in net working capital is, I would say, fairly flattish.
We are continuing to build the inventory, and again, as planned for because of the high activity level we see in the second half of the year. That is offset by higher down payments and milestone payments, but also an increase of payables as the activity level is very high. Cash flow. Here you can see that cash flow from operating activities is lower compared to last year, and the positive is obviously the net working capital also having a positive swing compared to last year. We are delivering a free cash flow before financial items or investments of negative, but a positive swing compared to last year. As I said before, this is driven by the working capital primarily. Total investments continue to be fairly flattish, I would say, compared to Q1 this year, and an uptick compared to last year by EUR 54 million.
Again, very much as planned for. This is to cater for both all the new products or the capitalized R&D, as well as capacity and the planning for the second half, and to also plan for the high order intake that we have at this time. The warranty provision and lost production factor continues to be a high focus, so high focus on quality. Also remember that we increase the provision as we have a lot of new product introductions. Well-performing lost production factor continues below 2%. Quality, again, very high on the agenda for Vestas. The capital structure net debt to EBITDA, well below threshold, I would say fairly flattish compared to Q1 of this year. A very good performance on the net debt to EBITDA.
If you look at the solvency ratio, it's 22.1%, and that's clearly below the end of the year target, and that is driven by the increase in total assets. I will also talk about the outlook for 2019. We see here on the revenue, we have changed the guidance to, or uplifted the lower end to EUR 11 billion, and the higher end remains at EUR 12.25 billion. Again, the lower level increased EBIT margin as we have more visibility of the remainder of the year. Also the cost for primarily the tariffs and the transportation. We have decided to narrow the guidance to 8%-9% compared to the previous outlook of 8%-10%. Total investments also catering for the higher activity level as well as the capitalized R&D, but primarily the higher activity level as a consequence of the order intake.
We are now guiding for an approx EUR 800. The service, not the least on the revenue side, is expected to grow to approximately 10%, and we are anticipating a minimum of 24% on the EBIT line for the service business. That's an uplift compared to approximately. By that, I open up for Q&A for the quarter.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. We ask you kindly to limit your questions to two at a time. Please hold until we have our first question. Our first question comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is now open.
Yes, sir. Thank you. My first question is regarding these factors which you argue for the change, the EBIT margin guidance. You mentioned tariffs, transportation, and scarcity in the market. If you can just elaborate a little bit more on those. First of all, tariffs. You previously said that you expect tariffs to increase cost of goods sold by up to one percentage point. Is that still the case? Also in terms of transportation, you mentioned rerouting. Can you go a bit more in details on what is going on here? The scarcity in the market you also highlight, what should we think about that? Is that simply your suppliers raising prices?
Yes. I understand your question, Kristian. What we said last year, we said that the tariffs that we knew at that time would have an impact of 1.5% before any mitigation. I would say that we have been good at mitigating the additional cost that we anticipated for this year. Unfortunately, there has been changes in the tariffs meanwhile. When we say that we see an increase not only in the tariff, but also the fact that the positive is that we can definitely reroute because of the tariff, because the overall global platform that we have. The negative is obviously that this rerouting costing us. The more we could plan for 2019, the better. Now we have surprises, I would say, from external factors. There is definitely a scarcity. Also remember that the type of products that we are shipping is very bulky.
There's definitely a scarcity from that perspective. If we have other conditions or we have to do more land transport that we plan for, that's definitely also costing more. It's a double effect on both the new tariffs as well as the rerouting that we see at this point in time.
Just to understand, the rerouting partly reflects tariffs and sort of change supply patterns?
Yeah.
It also reflects higher volumes or?
Obviously, we have a high activity level, and that's the positive as we see it. We are changing or narrowing the guidance as we see we have a very strong order intake, and as a consequence, very well covered for 2019. There are surprise factors that we need to change the planning, and changing of the planning because of tariffs and rerouting is a cost factor as the prices have increased.
Okay. I understand. My second question is on the same topic, but obviously you highlight this as surprise factors. How will you mitigate and compensate for this going forward? Is it possible to raise prices?
I would say that you see that in any given year, the more visibility you have over your TOR or installations that you will do in a year, you plan for it well in advance. That's the cheaper option for us. Anything that causes changes of that, and tariffs obviously being one of them, is costly. If you have a signed contract, I think you know as well as I do that it's very hard to come back and ask for something. Obviously the price picture that we see right now is very stable, and I would say a lot of discussions, both not only with customers but also with suppliers, is ongoing at this point in time.
In Q2 you signed a lot of contracts. Do these contracts then reflect these surprise factors that you mentioned?
The contracts that we have signed already, we cannot change. Ongoing, we have these type of negotiations and discussions with customers and supplier.
All right. Fair enough. That was all for me. Thank you.
Thank you. Our next question comes from the line of Claus Almer from Nordea. Please go ahead. Your line is now open.
Thank you. Also a few questions from my side. The first is also about this change of EBIT margin guidance, because one thing is 2019, but the read over to 2020 is probably more interesting. I know you're not guiding yet on next year, but maybe you could put some color to the headwind we should reflect in our estimates. Broadly calculated, your change of guidance is EUR 100 million more or less of profitability impacting only a few months of 2019. If you just do the math, the impact on next year could be even more severe.
Yeah. As you say, Claus, we're obviously not guiding for next year. If you look at the order intake that we have had and continue to have, we have a very positive view on the market. Obviously, a fairly good visibility of 2020. We're also launching a number of new products that are very positively received. I cannot say anything, but we having a positive view on the 2020. I think when you look at the numbers and all the changes that we're seeing and happening in the market, we are pretty successful in mitigating those. Of course, we cannot mitigate 100% of all the surprise factors that are out of our control at this point in time.
Sure. Would it be fair to assume that you will have a larger negative impact next year than this year? If there is a EUR 100 million headwind this year, it will be even larger next year.
We are in the planning of next year. You cannot draw those type of conclusions, Claus.
Okay. A question regarding share buyback. In the past at least, you have announced share buyback after the Q2 results. As far as I see, you haven't done that today. What should we think about your distribution to shareholders?
We wouldn't exclude to do that after Q3, and we've always done that in the second half of the year. Considering also the activity level in the second half of the year, Klaus, we will come back to it, and we think it's better timed after Q3 this year.
Fair enough. Just service margin. You had a very strong first half, as you also mentioned. First half EBIT margin is 27.4%, and you're now guiding for a minimum 24% for the full year. Is there anything we should be aware of in the second half when it comes to EBIT margin?
No. As you say correctly, we see a very strong performance, and that's also why we have uplifted to a minimum rather than approximately. We don't, at this point in time, expect any negative surprises, but obviously, depending on how the contracts will be performed and if we have the opportunity of the further cost out remains to be seen as we are delivering now the second half. Altogether, it's a positive in the service, and we're not expecting any very negative surprises.
Okay. Thank you so much.
Thank you.
We'll move on to the next question. The next question comes from the line of Dan Togo from Carnegie. Please go ahead. Your line is now open
Yes, hello. Thank you. Marika, you previously announced or communicated at least that in the previous EBIT margin range from 8%-10%, the 10% was, so to say, a flawless execution for 2019. Do you now see the 9%, so to say, as a flawless level? Does that include some sort of disruption, you can say, in the second half? That would be the first question.
Yeah. Fair question, Dan. The 8%-9%, as we are guiding for because of the higher visibility, obviously includes the different scenarios that we had in the 8%-10%. It will be the same methodology, it's just that we have better visibility as we had external factors impacting the overall cost for us executing. It's fair to assume it's a similar methodology as we had for the 8%-10%. Definitely.
Also on the distribution between the half years, do you now see this year actually being a bit more back-end loaded than you previously thought? What has caused that, if that's the case?
I wouldn't say it's more back-end loaded than what we anticipated. It's very much in line because so far we have been very good at executing. It is an extreme year, and that's what we have said all along in terms of the back-end loaded profile, and that is materializing clearly.
Okay then, and just one question on CapEx. You increased it by EUR 100 million. Where, in which geography is that taking place, and is it for molds, or can you be a bit more specific?
Yeah. It's primarily for molds simply because of the strong order intake that we have had and continue to have. It's, I would say, you know our global footprint, obviously it's a reflection of the fact that we have a global footprint. I would say that altogether, we are fairly even in where we have the overall demand. Don't forget that we're also investing in capacity locally and have done so. In general, it's molds and fairly evenly spread.
Thank you.
Thank you. Our next question comes from the line of Akash Gupta from JPMorgan. Please go ahead, your line is now open.
Yeah. Hi, morning, Henrik, and morning, Marika. I have two questions, please. My first question is on outlook. I see you are taking down top end of the range by 100 basis points on issues that were very well known to the market, and you have been flagging since start of the year. My question is that, if you look at this rest of the year, execution issues, particularly on installations, given you would be ramping up production of V150 and other large turbines, what sort of headroom do you have in your guidance, and how realistic it is, 8%? That's my question number one.
Okay, we are guiding for 8-9, as I said earlier. That is a reflection of different scenarios as we had for the 8-10. Nothing has changed from that perspective. As I said earlier, the execution part internally is very satisfactory. It's more external factors that we see now coming in and impacting us. It is primarily the cost for transportation or as a consequence of the rerouting that we have had to do.
My follow-up is for Henrik. If I look at the industry outlook that you presented, we have decline in Americas in 2021, and same we have for Asia Pacific, while the growth in EMEA is depending on Germany, where basically current auction under subscription is not painting a bright picture for 2021 installations. My question for you is that we have a good growth in 2020 and maybe a double-digit decline in 2021. How you are going to focus on cost base, and what are your key priorities for the, let's say, next six months?
For the next six months, I think it's fair saying, here we continue the road we are on. We are investing a lot in the technology that will also be addressing some of these things in 2021. I think we're just coming out of a quarter where we've had a record order intake. I think there's a lot of positives in this industry that we have quite some time to address when we get into 2021. I think we need there to see that there is a big drop forecasted both from U.S. and China. I think, let's see when we get a little further, three, six months on how that actually is coming off, both from a PTC point of view and our feed-in tariff in, for instance, a country like China, which you also know we are probably not as dependent on.
Thank you.
Thank you. Our next question comes from the line of Mark Freshney from Credit Suisse. Please go ahead, your line's now open.
Hi, Mark Freshney. Two questions, please. Firstly, on consolidation within the sector. I think it's fair to say that the upheavals in the industry over the last couple of years have increased your market share at Vestas. Of course, the
The ongoing internal work, how do you see consolidation and M&A playing out over the coming months? Just secondly, trying to understand the EUR 800 million per year, or for this year, capital investments. Should we expect that going forward? Because you lent very heavily on working capital for the last couple of years. Now you're having to invest in new facilities at the same point. You've got the EnVentus product R&D coming through. Should we envisage that EUR 800 million per year, extrapolating it forwards?
Okay. Do you want to start, Thor?
No, you go.
I'll start with the CapEx. Mark, the EUR 800 is really a reflection of, first, the capitalization of the EnVentus projects that we have. That will continue throughout this year. Also investment in mills to cater for the high demand that we have in the market right now. Should you expect the EUR 800 going forward? I would say you should expect anything from EUR 400-700. We are definitely at a higher level at this point because we have the two factors that I mentioned. Under normal circumstances, we're talking about anything between EUR 400-700. Obviously the EUR 700 is part of new product introductions.
Okay. Thanks, Mark. I will just sort of comment on, as I said, I won't comment on how competitors are generally doing in our industry, but it's clearly that what you just commented on is our investment level. If you want to have a lead in the technology and therefore also being able to mitigate some of these things, you have to keep investing. Of course, that requires that you also both have the earnings and cash on it. How would that affect the industry structure? I think we have seen some of the effects already. As we always said, we are following the clear path of a strategy of organic growth. From time to time, we do for us, value accretive acquisitions, which we will consider also going forward. That's in reality how we see that.
Okay. Thank you.
Thank you. Our next question comes from the line of Alok Khatri from Societe Generale. Please go ahead. Your line is now open.
Hi. Thanks for taking my question. Alok Khatri from Soc Gen. Two questions that I had, please. Henrik, first one to you. Now that you obviously had a bit more closer ringside view for the past three months, where do you think there's the biggest areas of improvement or even areas that you would like to pull back from, if that's the case? If you could also lay your thoughts on the resource allocation, just following up from the previous question. Also in the context of some of the speculation that we've seen in the local media here in India about your strategic involvement with one of the local OEMs over there. That one's for Henrik. Second, Marika, just in terms of the factors that you talked about, is it fair to say that some of these factors are temporary in terms of the supply chain tightness?
As we look at the next year when you got to deliver a lot more in terms of volumes and I guess not just in the U.S., do you think we should think about these factors as a lot more entrenched, and therefore as a risk even into 2020? That would be great. If you could also shed some light on whether there's any specific geographies where you're seeing these, let's say, tightness. Thanks. Those are the two.
Okay. Alok, I think I will start. First of all, I really appreciate your direct question, especially also that I'm not normally known for having a long patience, but riding me into a job in already now three months is probably a little bit over. I started 1st of August. I came out of a pretty active other CEO job. I have stepped out of the board 1st of August, and literally since then, I've used all my wake hours to be around and seeing as much as I could. I simply don't have the opportunity to be able to cover the world and the regions within just working day number 15. Having said that, coming from the board and having what we call hopefully a non-event succession with Anders is that strategy is not changing.
I've been part of the board since 2013, and I think that one is clear. We are continuing on the same path, and that's part of also, I think, the non-eventful succession here. I will let you know if I find something really extraordinary to pick up on, but so far, I'm just super keen to continue what is going to be the busiest year, both for 2019 and 2020, for the history of Vestas. In terms of local rumors on companies in the industry or whatever, as I said, we don't comment on those. If we do have something to comment on, we will simply just send out our sort of under these rules and regulations, we will send out appropriate company announcements. We don't comment on rumors in that nature.
Okay, Alok.
Is that the sort of thing that-
Go ahead.
Sorry?
Sorry, just quickly, is that the sort of thing that fits into your definition of organic growth and small bolt-ons?
I won't comment on speculations, because now you're asking me to comment on exactly rumors of that nature. We will always look at it and look at a number of cases from time to time, and if it comes to something, we will announce, and if it doesn't, we won't comment on it.
Okay. Fair enough.
To comment on your question around the supply chain tightness and our view on, I think what you said is 2020. We are in the midst of planning. We have a very strong order backlog, continuous strong order intake. That creates visibility, and a very positive one for 2020. I cannot give you any concerns or any positives on that note, on the supply chain. This is really what we are in the midst of planning right now. We will get back to that when we provide the guidance basically for next year.
Fair enough. I was hearing that you've had to make deposits against booking trucking capacity in the U.S., even 8, 10, 12 months out, just because of how tight the situation over there is on the specialized trucks that you need, for instance. I just wonder, some of those factors, would you say they are short-term specific linked to the fact that you have these second half loaded here this time around? Or is it something that you need to work on a lot more from a timing perspective?
I would put it like this, Alok, the more time we have to plan with, and that's where we are right now, and the more visibility we have in terms of activity level, obviously the better. It's the short-term changes that is difficult and costly for us. Now we're talking about 2020, obviously, we are in the planning process for that.
Okay. Is this just the U.S. that you're talking about in terms of the factors, just regionally, at least, if you could help us?
I would say if you look at the order intake we're having, it's very global. I would say it's a global question rather than a specific country question.
Okay, great. Thanks.
Thank you. Our next question comes from the line of Dee Chong from Citi. Please go ahead, your lines are open.
Hi, Dee from Citi. Thanks for taking my questions. A couple, please. First on the U.S. market, it seems like the market forecasts in terms of the expected installations for 2020 and 2021 have come up for North America, and this is probably the U.S. Just wondering if you're actually seeing signs of elevated growth in the U.S. for 2020 and 2021, given the expectations have heightened over probably, say, three, four gigawatts per annum. The second question is that, given that we're in August, well, mid-August, can we get a sense of where you stand in terms of project execution for Q3, and what kind of revenue and EBIT margin evolution we can expect for Q3 and Q4, please?
Okay. I'll take the U.S., thanks for the question. As I said, you can also see from the order intake in Q2, yes, it is very much focused still on the U.S. market. We're very pleased with that. It's a market we know and work very closely with, also from a customer side. I think it's probably a bit premature to start talking about 2021. There's clearly a lot of conversations, I think that also comes down to how would 2020 pan out as a year. If you have the consideration, I'm pretty sure you as a customer would appreciate to get it installed and put in place before year-end 2020. It seems like there is a positive, that was probably why I said there's still quite some time to start forecasting for 2021 and 2022.
Generally, we're in a good position, and we have a competitive product portfolio for also addressing 2021 and time beyond.
To your question regarding our forecast of Q3, that's obviously nothing we can provide. What I can say is what I have said before. We have a good visibility of the second half. It's going to be extremely busy, as you can see from the revenue guidance provided. Obviously with the higher leverage that comes from volume, that will have a positive impact on the EBIT line. That's what I can say about the second half of the year.
Thank you.
Thank you. Our next question comes from the line of Lars Hindorf from ACB. Please go ahead. Your line is now open.
Thank you. The first one is regarding EnVentus. I know you cannot give us any insight into negotiations with customers, but maybe you could help us a little bit about telling us the progression of EnVentus and how it has been perceived with the customers. You've got one order for EnVentus here in the second quarter, but maybe a little bit more flavor on that, how that is progressing and how that's been received with the customers.
I think it's been truly, generally well-received. I think they understand also what we are trying to achieve with the modular build on EnVentus. I will say from that point, it makes it easier also to address some of the local requirements from customers. I think in that sense, it's an easy and it's a good discussion to have. That's probably how it's perceived in generally, Lars.
A follow-up on that, which is regarding the local content requirement that you also mentioned earlier. You said that maybe will lead to higher CapEx, but on the cost side, how is that going to affect your operating costs going forward? Hence also, well, in a wider perspective, maybe also the margins.
Yeah. On a very broad discussion, the more external sourcing we do to cater for volume, obviously there's a price tag related to that. You also have the discussion with suppliers because they are, in general, very global, even if they are localized. On top of it, you have obviously discussions with the customers. Ultimately, how it pans out, it depends on the different negotiations. I think in a broader perspective, the more localized you get could have a certain price tag related to it. Again, that's a negotiation with both customers and suppliers. I think the most important thing in reality is that you have volume and are, as a company, interesting enough to actually find those that can support you in localization.
All right. Thank you.
Thank you.
Thank you. Our next question comes from the line of Casper Blom from ABG Sundal Collier. Please go ahead. Your line is now open.
Thanks a lot. First of all, hi, Henrik. Looking forward to meet you. Secondly, yet another question regarding your slightly lower margin guidance. Marika, could you give any kind of flavor to how much of this lower margin is due to cost actually coming up and due to other things such as contingencies? I suppose, normally you do a plan A and a plan B, now you have to do a plan C and a plan D also if tariffs increase somewhere in the world. How much is this also a preparation for something that could change tomorrow and become even worse? How much is actually the real cost that you know will be higher, if you can give any kind of split on that.
Secondly, a very broad question I suppose, but with growth in the world starting to slow down, are you seeing any kind of delays on projects or accelerations for that matter? To what degree does a lower interest rate also play into that? Very broad question. Thank you.
Okay, if we start with the overall cost, I would say what we are now telling you is what we know for, at this point, on the tariffs and the changes. Obviously the H2 9 is a reflection of pure higher cost for rerouting and transportation costs. That is more a fact. When we talk about the Plan C or D, that is the planning process that we are in the midst of for next year. As I said, the more we can actually plan for, the better. Obviously, that's part of the negotiations, both with customers as well as suppliers. There's a different opportunity to cover for those than when you are in the midst of execution. If that's understandable, Casper.
Yeah, I guess it is.
Okay, Casper, I'll take the more broad on the environment right now. I think there are two observations. I think generally we don't see projects being pulled or anything. I think we are benefiting here from that the industry has become much more mature, and that also means that the allocation of capital is not what I will call the short or the optimistic capital anymore. I think there is a lot of infrastructure, 20, 30 years money that goes into the industry, and those are not going out of it, even with a slightly more, maybe gray or bleak outlook for the world economy. I think there is a lot to be had still from the change in energy sourcing, generally from being the more fossils towards our part of the energy spectra in renewables. I think that's the positive.
In terms of low interest rate, come on, that just means that a return on some of our projects still seems to be very attractive. I can't see that right now doing anything else than just continuing the drive for our solutions around in areas. In reality, on the short term, no, we don't see anything. Clearly, if it becomes a really more bleak and dark, then let's discuss that when we see that a few quarters ahead. I think the other one is probably that if it does, at least we will probably benefit a bit from lower raw materials if it came to that. We haven't seen any of that yet. Thank you.
That sounds good. We'll hope for lower raw material costs.
Still super positive on the order intake. That's probably too much to hope for. Okay.
Yeah, high prices as well.
Okay.
Thank you. Our next question comes from the line of Sean McLoughlin from HSBC. Please go ahead. Your line is now open.
Good morning. Thank you. On turbine margins, these seem to be remaining stubbornly low across the industry. Could you help us understand a little bit better the improvement in the contribution margins that, particularly new products at this more stable pricing, can give you to help really see how turbine margins can recover from these low levels? That's my first question.
Yeah, Sean, that's what we have discussed a little bit before, is obviously we don't develop any new products or concept without seeing a clear path to both lower levelized cost of energy, as well as something in the pocket for us. Obviously, I would say the pipeline of new products that we have should generate something also for Vestas. Otherwise, we wouldn't spend the money. The more stable the price environment we have, the more positive, and that's what we're seeing right now.
That can be material already in 2020, or is this a two-to-three-year effect?
We're not being that specific, Sean. You know the order backlog, you know what type of product we're taking in those orders. We have a positive view of the 2020 year 2020. Next question will be the last question.
Thank you. Our last question comes from the line of Klaus Keilen from Nykredit. Please go ahead. Your line is now open.
Yes, hello. A question related to this strategic target that you communicated in connection with the 2018 report. I can't remember the exact wording, but I guess the point was that you were expecting a minimum 10% margin after the introduction or after the normalization of the market, after the implementation of all the auctions. Could you just elaborate a bit on this strategic target as of today?
Yeah. The strategic target of double-digit EBIT is obviously still there. As I have said before, on a higher level, as we are not guiding for next year, we have a very positive view on 2010-2020. We have new products, and we have a very strong order intake, so obviously visibility also over 2020. There will always be some unknown factors, apart from those that we know right now, that could impact, but altogether we have a positive view of 2020.
Okay. Thank you.
Thank you.
Okay. With that was the last question. We thank you again for both the attention and also your questions on this conference call. Again, look forward to speak and see you out there. Thank you.
Thank you.