Okay. So good morning, everyone, and welcome to this presentation on the second quarter 2014. So I will start and talk about the orders and a bit about the market, and I will hand over to our CFO, Marika Fredriksson, who will do the financials. And then I will come back with a summary outlook, and then we are both available for Q&A. So to start with the order then, we had a solid order intake in the quarter of close to 2 gigawatt, an 18% increase year-over-year. In the US, we had order intake of 800 megawatt in the Q2. That correspond to more than 40% of the total order intake, so a big contribution on the order side from the US market.
Looking at the average selling price in euro per megawatt, we saw, as in recent quarters, that the price per megawatt was impacted by a larger amount of supply-only contracts. Again, very- which is a very typical contract in the US market. And as we talked about before, the price per megawatt depends on a number of different factors, the wind turbine type, geography, scope, and of course, the uniqueness of the offering.
I would say compared to last couple of quarters, a fairly stable development. Looking at the backlog, the combined all backlog increased like-for-like with EUR 900 million to EUR 13.9 billion, excluding the offshore service backlog that was transferred to Mitsubishi Vestas joint venture in the quarter. So that was EUR 0.8 billion.
That means that onshore service backlog increased with EUR 0.4 billion to EUR 6.5 billion, and the wind turbine backlog increased with EUR 0.5 billion to EUR 7.4 billion. So to talk a little bit about the market development and the activities we see in the market, if we compare then the first half of this year compared to the first half of last year, we see an overall increased activity in the market. For Vestas, we increased our delivery with 26% on the half year compared to the same period last year. The activity level is very much driven on a global basis, on a market basis from Americas and also Asia Pacific, while we see Europe, Middle East, Africa being stable.
G oing a little bit into the different regions, then, both what we see overall market development and also then, what we have done from Vestas. As I said, we see a growing market in the U.S., due to the PTC cycle that we are in. Deliveries in the first half of 2014 already doubling the total, full year figures for 2013. In the first half, Vestas, delivered almost 500 MW more than the previous, period, last year, and contributing to a more, and then doubling of deliveries to Americas. And we also saw increased activity in Latin America. As I said, Europe, Middle East, Africa, a big region with many countries and a lot of differences between the different countries.
In general, we see a good growth in delivery, you can say, Northern, Western Europe, markets like Germany, France, UK, but we also see stagnation or very low activity in Southern Europe. We have also started from, of course, a low-level delivery in South Africa during this period. So that's the overall market picture, and very much corresponding to what we have done from Vestas. We more than tripled deliveries in Germany, driving the total growth for us in this region to 26%. In Asia Pacific, we also see a global market that is growing, improved activity, very much driven by the economic growth in China and India.
For Vestas, our deliveries in this region more than halved compared to the same period last year, but that was primarily due to that we last year had a big project in Australia and nothing during this first half of this year. So with that, Marika, please, financials.
Thank you, Anders. That takes us into the income statement for Vestas. One of the main highlights in the P&L is, of course, the much improved gross profit level. And I would like to highlight here that the cost out on the products continues, and of course, is a contributor to the improved gross profit level for Vestas. But it also is a positive mix in the gross profit that has an impact in Q2. And also volume driven, as you can see, revenue is higher compared to Q2 of last year. I would like to highlight also that we keep the fixed capacity cost at the more or less the same level as of last year, despite the higher activity level in the quarter.
That gives us an improved EBIT, so we are actually delivering in Q2 EUR 104 million. Special items as is mainly from the joint venture that was concluded now in April. That gives us an EBIT after special items of EUR 154 million. So again, a big improvement from the negative EBIT of last year. We delivered 7.48% margin in the quarter, again, a big improvement compared to Q2 of last year. And you can see here also the income from our joint venture investment has a negative EUR 19 million, and I will get more into the details of that in a coming picture. So here is more illustrative example.
We recognize revenue, we TOR at the time of selling the V112 to the joint venture, and consequently, we also have the P&L effect on the contribution margin. That means that the joint venture will TOR when they actually deliver to the customer. So you have a timing difference, but of course, that will have an effect, will be transferred back to us in when the joint venture actually recognize revenue. Service, we see if we do a like-for-like, i.e., excluding the offshore wind, we have an increase in the service business of 6% compared to Q2 of last year. We also show what impact over the quarters that the offshore service business has.
Y ou can clearly see that the majority of the service business is onshore, because obviously of the installed base we have onshore. The balance sheet, the equity is considerably higher compared to last year, and we did an equity increase in February of this year, as you recall. We also have a favorable net debt situation, and obviously impacted by both, our own capability of generating cash, but also the activities that took place in February. Solvency ratio is now above 30%, and our capital structure target is 30, as we have communicated earlier.
Change in working capital, if you look at the working capital and the performance over the last 12 months, you see a significant improvement, and that is, of course, that working capital is one of our focus areas. We have a lot of changes in the process that we have implemented. Over the last quarter, you see that we are building up inventory, but that, again, is as anticipated. The divestment of the joint venture also has an impact negatively on the working capital, as there were prepayments and inventory in the joint venture or in the offshore business. If we look at the warranty provisions, we keep them at 1.5%, but in absolute numbers, of course, it is increasing because revenue is increasing for us.
Lost production factor remains stable below 2%, also in this quarter. The cash flow statement, please note that the cash flow from our operating activities is significantly improved compared to last year, driven, of course, by the improved earnings. You see the change in working capital, again, as anticipated, as we knew we were gonna build up inventory to meet the demand in the second half of this year. That gives us a negative free cash flow, but again, as anticipated, and please remember, compared to last year, we had a one-time effect from one of the divested projects in Romania that actually gave a very big positive contribution in Q2 of last year.
If you look at the investments, we continue to invest, as already communicated in our—in molds for, in particular, the V110 and V126, so to meet demand again, and we are tracking in the order of EUR 250 million, and also guided for earlier. The capital structure, as we communicated, also our target is to be below one net debt to EBITDA, and we are clearly below that in the quarter, and a solvency ratio of above 30%, so we meet both targets in Q2. That leads us to the ROIC, which is also one of our more long-term indicator, and we have said we will be double digits over the three to five-year period covering the strategic framework.
We are in the quarter 19%, so you see a big improvement quarter-over-quarter compared to last year, but also Q1 versus Q2. That's mainly driven by the improved earnings for Vestas. Over to you, Anders.
Thank you, Marika. So, moving on, if I do a summary, a solid quarter where we see improved profitability, executing on our midterm plan, or that we have talked about before with our key objectives. So solid order intake and an increased order backlog. As I said, we see increased revenue and greatly improved quality of earnings, both year-on-year and quarter-on-quarter.
The service business, another key pillar, other key objective for us, is on track. We announced internally the new organization yesterday. We see a 6% growth in our onshore service business for the quarter, and renewal rates are back up compared to the lower than normal renewal rates that we saw in Q1. So, I would say on track. Net working capital under control.
We are building up for a more hectic second half, but we feel that overall, we have control over the working capital. And the mid-term financial targets continue the positive trend with a ROIC in the quarter of 19%. So looking forward then, we have raised our EBIT margin target from a minimum 5% to a minimum 6%, based on the improved cost base that we see, and also with a greater visibility now, when we have soon done eight months, and of course, look into the projects that we will deliver for the second half of the year. The other target remains, so revenue minimum EUR 6 billion remains unchanged. EBIT, as I said, margin before special item, minimum 6%.
Total investment, approximately EUR 250 million, and a free cash flow of minimum EUR 300 million, and our predictions on the service side is also unchanged. So with that, welcome back, Marika, and we are ready for questions. So I will first ask then if there are any questions here from the floor. Looks a bit empty, I have to say. So, operator, please, any questions?
Thank you. We will now begin the question-and-answer session. If you have a question, please press star, then one on your touchtone phone. If you wish to be removed from the queue, please press the hash key or the pound sign. Once again, if you have a question, please press star, then one on your touchtone phone. Our first question comes from Kristian Johansen from Danske Bank. Please go ahead.
Yes, good morning. A couple of questions from me. First, you, you've previously mentioned that you expect Net Working Capital at the end of this year to be fairly unchanged to the end of last year. Is that still your expectation?
Well, we haven't, obviously, guided for the Net Working Capital for the full year. We expect what I have said is that we expect that the activities that have taken place will continue. And if weather permits and everything goes in our favor, we expect to flush out a lot of inventory in the latter part of the year.
I f nothing goes unexpected, you should still be able to keep it unchanged year-over-year?
I'm not confirming that we will keep it unchanged year-over-year, but we see a flush out of inventory in the latter part and a buildup of inventory to meet the demand now for the second half of this year, the buildup taking place in Q2.
Okay, fair enough. Then in terms of your project margins, you mentioned both a mix effect and your cost out program. Can you sort of give us an indication of the split here? Is it equally the cost out and a mix effect, or is it primarily the cost out program we're seeing here in Q2?
Well, the quarter as such, again, is driven by volume, and also the mix, so the project mix in the quarter. I will not go into the details of the split, but it is a big contributing fact is the project margin, but also the Cost Out and also the total volume. Those three are the main parameters for the improved margin in the quarter.
Okay. Then you mentioned your Fixed Capacity Cost was unchanged year-over-year. Is that also the case quarter-over-quarter, and what should we expect going forward?
Well, we have a fairly flat Fixed Capacity Cost compared to last year. So, despite a busier quarter in this year compared to last year. So we have reduced it slightly by 1, and we will not give any indication on the performance. We strive, and the focus is on Fixed Capacity Costs, not only for this quarter, but obviously for the full year and going forward.
Okay. But should we expect Fixed Capacity Costs to go up now that your activity is gonna increase significantly in the second half?
We are striving to maintain the fixed capacity level the best we can. But of course-
Okay
... you have some effect from the increased capacity, or the increased capacity, or the increased activity level is the correct word, for us.
Okay. Then just my last question. On your previous guidance on margin, the at least 5%, I think you've said that the 5% will not result in any bonus payment. How does that look now that you've upgraded guidance? I mean, the 6%, does that include any sort of expected provision for bonus?
It's correct, as you said, that on the previous guidance, we have said that on that level, we have no bonus payment. But we will not disclose the levels we have in the bonus program this year, as we have also previously said. We will, if we get the bonus territory, we will accrue for that cost, yeah, normally, runningly in the business.
But can you confirm whether the 6% will result in a bonus or not?
No, I will not comment on that.
Okay. Fair enough. That's all for me. Thank you.
Thank you.
Thank you.
The next question comes from Lars Heindorff from ABG. Please go ahead.
Yes, good morning. A question regarding the number of turbines on the completion. I'm curious to find out whether the ramp up you're gonna see here into the second half, you're still able to, in absolute terms, to keep that, sort of fairly steady, or how we should view that? I mean, we've seen over the past couple of years that the, at least by the end of the year, that the turbines on the completion have declined, slightly. Is that still gonna be the case?
Well, it is a seasonality related to the inventory buildup. And of course, the first half is less busy, the second half is busier, and then you prepare yourself in Q2 and Q3 to meet the demand in the last part of the year. And as I said earlier, if everything permits, and that the uncontrollable factor again is the weather, we expect to have a lot of reduction in the latter part of the year in terms of inventory.
Okay, all right. Thank you.
Thank you.
The next question comes from Daniel Patterson. Your line is open, please go ahead.
Yes, good morning, Daniel Patterson from SEB, with a couple of questions. I think the, the most important point here in the results is obviously the, the very strong project margin, and I know that you don't disclose it. But, is it correctly understood that it is also positively affected by delivery of offshore projects in the quarter?
Correct. We have invoiced the joint venture, as I said, and consequently have a positive effect from the project invoice. But again, and that's obviously part of the favorable mix I was alluding to, but there is also cost out, and it is volume impacting the improved margin equally.
Okay, and just to be crystal clear here, when I look on page nine of your report on all the deliveries, you're summing up all the different countries, are there any offshore included in these 1,145 megawatts?
We had deliveries of one project, yes, so it is included. So it has an impact on the favorable mix, as I said earlier.
Okay. And then, on the bonus scheme, I think, Christian's question was quite important in the sense that, are there any provisions made throughout the year for the bonus, or will that happen in Q4 like last year? I think that's important to understand.
We will not comment on that.
You have not changed your accounting policy versus last year on this topic?
I will not comment on that, Daniel.
Okay, then, on the market outlook, the U.S., obviously, you've been getting a lot of orders in the second quarter, and particularly from the U.S. But where do you stand now? There were some talks about perhaps the PTC guidelines were a little bit unclear still. What are your views here on the U.S. market? Do you think you're gonna get more orders, or is it just drawing off the frame agreements or, you know, some flavor on the U.S. market would be very helpful.
Yeah, no, we of course still have some room to go before we have filled the frame agreements. So, of course, our US sales team is busy trying to get the orders in, and of course, as we have communicated, we have frame agreements up to a point. We will continue to stick to our principle that we announce orders when they are firm and unconditional. But of course, there is a high activity level in the US to work on getting as much as possible of the frame agreements we have to firm and unconditional orders.
The first reaction on the clarification on the PTC is positive as far as we can read it, that you have two ways to qualify the safe harbor that we knew before, but also, construction started mechanism. So the first reaction, our reaction on reading that, is positive. So I think that should be a positive thing for stabilizing the uncertainty that existed then around PTC.
Okay. And then just a final point there on the US. You've been ramping up employees, hiring, I guess, rehiring a lot of employees in the US. How has that gone? I mean, is it easy to get people, or is it hard as the market is sort of recovered now? And do you have the people that you need now in the US?
Yeah, we, I mean, as you say, we have talked about the ramp up for, for quite some time now, and we have been ramping up for quite some time because, of course, we, we saw these framework agreement coming at a fairly early stage. So we are, according to our internal plan, we, we are on our plan. It's always, of course, difficult to hire so many people, even if, even if it's over a period of time. So of course, there are always challenges. U.S. economy, I would say, it seems to be doing fairly well, so, but there is no scarcity of... It's, it's not so that we are struggling to hire the amount that we, we need to take in. But of course, it's, it's hard work.
It's a big ramp up and something that we need to be carefully follow up on.
Okay. Thank you, very much, and congrats on another strong quarter.
Thank you.
Thank you.
The next question comes from Patrik Setterberg from Nordea. Please go ahead.
Yes, hello. A couple of questions. My first question, I have to follow up the discussion regarding the mix, the positive mixes in the quarter. Is there any other things you would point out beside this offshore contract you're delivering in the quarter? I noticed as well that your German installation has been developed very well during the first or during the second quarter of 2014. Is that a, is this another aspect of the positive mix effect you're seeing in the quarter?
Well, as I said earlier, offshore is one of them, and country is part of the mix, but also scope of the project and specification of the project is another. We have delivered projects into the European territory, and of course, because of the scoping of the projects, that has a positive impact on the quarter. But I would like to highlight again that we have also taken out costs on the products in the quarter that contributes to the positive effect on the gross profit level.
Okay. It's more to understand if you want to highlight that this has been extraordinarily strong, or if you can, we could expect this positive mix to continue for the next couple of quarters?
Well, this is a small quarter with a positive mix effect in the quarter, so we are not saying that this quarter is fully representative for the full year.
Okay, thank you. My second question is relating to your service business. You have been having two quarters with a very strong margin, and you're still guiding with a stable margin for your service business for the full year 2014. Why you are not more aggressive, given the margins you have been delivering in the first half?
Well, the profitability level in the service business as well as the WTG business fluctuates quarter-over-quarter. And yes, we have had two good quarters, but we still see stable margins as the right indicator going forward because of the fluctuations that we have in between the quarters.
Okay. My last question is regarding, as I touched upon earlier, your very strong development in the German market. Could you give us some flavor what you're expecting from the German market going forward, both for the remainder of 2014 and as well going into 2015?
Germany this year we believe will be a stable market from a delivery point of view. There is a discussion on the support mechanism going forward, and we will see where that ends up. It's very hard to predict, but as I said, when I talked about Europe, Germany is a stable market with a good delivery activity during this year. It could, depending on the final decision on the support mechanism, reduce a little bit going forward, but we still expect it to be a good, stable market. So from a stability point of view, it's probably the most stable market in Europe.
Okay. Thank you very much.
Thank you.
Thank you.
...The next question comes from Mark Freshney from Credit Suisse. Please go ahead.
Hi, could I ask a longer-term question, please? If next year is similar to this year in terms of the profitability and the cash flows and the FCF, then by the end of 2015, you potentially have over EUR 1 billion of net cash. Clearly, Marika, you spoke about the need for bonding, et cetera, at your capital markets day. But is there any color, or anything you would rule out on potential for deploying that capital?
Well, bonding is what we still foresee to be a necessity from our point of view, and I would not elaborate more on the capital structure that we have. You know, the two targets we have also in terms of net debt to EBITDA and the solvency ratio, so that's what we're working against for the full year, but also long term.
Thank you. Secondly, can I please ask on the mix of products within the services business? I understand that a lot of the services business is availability guarantees, the AOM 4000 and 5000 products. Have those renewal rates for those been a big chunk of the 77% renewal rate in the quarter?
We're not elaborating on the mix in the service business. It is a considerably improvement compared to last quarter in terms of renewable rate. That's all I can comment on.
Okay, thank you.
Thank you.
The next question comes from David Voss from Barclays. Please go ahead.
Yeah, good morning. I have two questions, please, if I may. I want to come back on the German market outlook, because you point to that market, and you say that's probably one of the most stable markets out there. I just wanted to challenge that slightly, because if I look at 2013, when 3.2 GW were installed in the German market overall, that's onshore, and I compare that to the 2.4-2.6 GW of kind of band that the German government is aiming for going forward, I see quite a big gap there.
That question, I suppose, may have an answer in terms of repowering turbines, because there is an additional gigawatt of repowering allowance in that band, on top of the 2.4-2.6. So I guess my question is, you know, do you count on repowering to drive that market going forward? And if you could provide a bit of color around how much repowering you already do in Germany, and I guess, for the group as a whole? That's question one.
Yeah, I mean, first of all, if I should clarify what I meant with stable, then I think that, as you said, of course, we see fluctuation in Germany as well. And what I meant was we see a fairly stable delivery during this year. And I also said that there is, of course, a discussion on the support mechanism going forward. And I think what you alluded to was that there are some analysts believing that that could then mean a 2-2.5 GW market going forward, if those rules now then get decided. So that is what I see as well, and that is still what I would consider fairly stable in the different volatilities that we see in these wind markets.
Okay, and if you could give any color on the repowering point?
Yeah, no, I mean, I think it's an interesting part of the business that, of course, over time, will open up more and more. We are in early discussions with our customers, of course, and of course, it will start in the more mature markets, where the big wind sites was built some time ago. But from a P&L point of view, I would say today it's very insignificant, and that's really a question for how strong that will develop going forward. And I don't have any more detailed comments on that.
Okay, thank you very much. Then I don't want to belabor the point on the, you know, the gross margin expansion, but I think the one thing that hasn't been mentioned yet so far is the delivery pricing that you've achieved in this quarter. So I have that down to EUR 0.96 million a megawatt from EUR 1.07 million last quarter, and also in Q2 2013. You know, that's about a 10% drop, and we've seen a 5%, you know, gross margin expansion, five percentage points that is, of course. You know, I struggle to, you know, reconcile the two. I hear what you're saying, that there's maybe a bit of offshore mix involved there, and there's some projects that are better than others.
S till, you know, I feel that there is, you know, a gap that's just too wide there to be explained by those two factors alone. And I also just, on a more conceptual level, wonder if there's any way you could devise to guide us a bit better as to the quality of your backlog, because you mentioned earlier that earnings quality has improved. But I-
Yeah, I would say, earnings have improved for sure. But the quality of those earnings, I'm not sure if I agree with you that they have improved also, if we're looking at these kind of fluctuations that are, you know, very, very difficult for the market to get their head around. Any comment on those two things, I would very much appreciate it. Thank you.
Yeah. And, what we have said earlier, yes, you are on the megawatt, the price per megawatt, it has decreased, but having said that, that is also a matter of the scoping of the project. It is dependent on the country, and it's also dependent on the specification. But I would also like to highlight again, as I said, that the cost out is also a strong driver of the profitability. But apart from the mix, we again see fairly stable margins for the company as such. So, we are mitigating through mix, through specification, and also cost out. But I will not give you the bridge on how we're mitigating any factors in that bridge.
Okay, thank you very much.
Thank you.
The next question comes from Klaus Kehl, from Nykredit Markets. Please go ahead.
Yeah, hello. Two questions from my side. First of all, about these new Cost Out initiatives. You have obviously come a long way on your Cost Out projects that was initiated a couple of years ago. But at the capital market day, you also showed us that you were looking into some new areas. And could you try to comment on what size of new Cost Out initiatives we could see from here? And yeah, could you give us any comment on that?
Well, we will not comment on any value of future activities. I think what is important is that the cost out on the product continues. So it is a strong focus area for us. We also continue to focus on the fixed capacity cost with different activities. We will not communicate the programs, how they look like, what they constitute of. What is important is that we continue on that path and also that consequently has a big impact in the quarter, and also is part of the upgraded guidance that you see.
Okay, and then just a follow-up question. Would it be fair to say that the cost base that you are looking at, on these new initiatives, that would be a cost base of around EUR 5 billion?
I will not comment on that.
Okay. Then my second question would be, how much do you expect to deliver in the US in the second half of 2014?
We, we, we-
Rough, roughly.
Yeah, we don't break it up on regions. So we keep our target of minimum EUR 6 billion for Vestas for the full year.
Okay, but would it be fair to say that the 2015 will be much stronger in the U.S. than 2014 will be?
We will come back to guidance on what we see in 2015 when we're done this year.
Okay. Thank you very much.
Thank you.
Thank you.
The next question comes from Pinaki Das from Bank of America. Please go ahead.
Hi, good morning, everybody. Thank you for taking the questions. I've got a few. The first one actually is on U.S. PTC. I think I missed some of your comments there. So just to be clear, could you confirm what is your expectation on U.S. PTC? Do you expect it to be revived by the year end? So that's question number one. And secondly, if relating to that, you know, if the PTC extension doesn't happen, you know, what's the scenario you're looking at in terms of the ongoing rate of installations in the U.S. post-2015, you know, as a whole market with and without PTC? You know, what's your understanding right now? And secondly, this is my second question, is relating to emerging markets.
You obviously highlighted that as a big growth area at the investor day. So I just wanted to get an update on, you know, how things are going there, and when do you expect to see orders on that front? Or you already have emerging market presence, but, you know, the major step up in emerging market growth that you'd like to see. Third question is relating to offshore. You know, obviously, could you give us an, you know, you've had the 8-megawatt now. Could you give us an update on where you are on that, and when do you expect to see orders on the 8-megawatt? And last question is around the supply, and the ASP that you had.
I think a lot of people are asking about that, but I just wanted to understand one thing is: Is installation, which you have, which you are not doing anymore in the US, is it a lower margin, business than the supply itself, and therefore it can help margin if you're doing only supply? And how does it work in other countries? You know, can you see a similar trend in other countries in future where people may take on installation on their own rather than us, the turbine manufacturers? Thank you.
Yeah. First of all, the question I answered on the U.S. and PTC was the recent clarification around qualification in the current PTC cycle. That came out, I think about a week ago or something. So that was my answer, that that was a positive clarification. When it comes to the PTC, the next PTC cycle, if it will be extended or not, after 2015, beginning of 2016, I think, I will not really speculate on, that's of course very hard to have any call on that. So of course, we are following that development very closely.
Of course, we have a lot of interest, as well as many other companies we will see an extension, but I will not speculate whether or not that will come. The impact, also, of course, very hard to say for sure. Of course, the PTC is supporting the U.S. markets, and of course, without the PTC, we will see an impact on the volume. And if we have a PTC, we will see a positive case. So we are working with different scenarios there, of course. When it comes to emerging markets, as I said, it is a midterm plan. We have no news to report in this quarter when it comes to the emerging markets.
We saw growth in Latin America in the quarter on delivery, but we are continue to execute on our plan, which is to make sure that we have a relevant product offering, that we have the cost out in place on the product to get the relevant product offering with an acceptable return, and that, of course, also implies that we look at local sourcing to get to the right cost out. We are continuing to building our capabilities in the organization with a new leadership in place. We are reviewing our go-to-market model. So all that internal activities, as we also talked about, continues.
On the joint venture, also the joint venture will follow the same principle that we have when it comes to order announcements, so nothing to report there. A lot of interest from customers, as I talked about before, on the 8-megawatt, the 164. I'm confident that this is a product that will be, and is very well received in the market. So, we feel that the joint venture have the potential to be a global leader in the offshore segment. We are on track with the development. We follow the time schedule that we jointly agreed on when we set up the joint venture, and we are progressing with both the development of the turbine and the customer discussions that we have according to our plan.
Then I think I missed something on supply or... Yeah, that was margin.
Yeah.
Yeah, I mean, again, there are a number of different projects. We have a number of different projects in all, in 73 countries. Some supply, of course, some countries bigger than others, but that have different profiles. Supply only varies if it's above average or below average. So it's very hard to say a generic rule on margin generation or full turnkey compared to supply only. So to give a general guidance on that is, I can't do.
All right. Thank you so much.
Thank you.
The next question comes from Alok Katre from Soc Gen. Please go ahead.
Hi, this is Alok Katre here, from Société Générale. Thank you for taking my question, and congratulations on a good set of numbers.
Thank you.
Well, I had two questions, really. One is on the Free Cash Flow development and in particular, Working Capital per se. I thought Working Capital the buildup was perhaps greater than what we had in our numbers. So just wanted to get a sense of what are we looking at going forward? And I think I allude to one of the previous questions where I think the suggestion was that you can maintain Working Capital at previous year's levels. So just wanted to get some sense of that on the Working Capital side really. That was question number one.
Okay. So if we take the buildup that you see now in Q2, EUR 100 million is related to Vestas only, and you have 134, if I recall correctly, is related to the joint venture divestment, or not the joint venture, but the offshore divestment. So EUR 100 million is Vestas only, buildup. And again, as I said, this was entirely anticipated from our side, as we knew we're building up to meet the demand in the second half of the year, that will be much busier than what you have seen in Q1 and Q2. So again, no surprises. You will see working capital fluctuates among the quarter, as it has done traditionally, and you will also see...
a bigger improvement on the inventory level in Q3 as, a lot of the inventory is flushed out at that time.
Okay, okay, fair enough. Thank you. Then my second question really was in terms of if I look at your guidance for EBIT and for EBIT margins and for revenues and the CapEx numbers. So if you do EUR 6 billion of revenues, 6% margins, and EUR 250 million of CapEx, and looking at really run rate of depreciation, etc., I'm just trying to understand, you know, if you combine all of that with your greater than EUR 300 million of free cash flow expectations which have been maintained in this quarter, I'm just trying to sort of tie all of that together to what to the comments on the working capital side of things.
E ssentially, yeah, I mean, if I look at all of these put together, the EUR 300 million unchanged free cash flow guidance still looks quite, let's say, conservative. So, just wanted to understand, are there any other moving parts within the free cash flow guidance that I'm sort of not properly looking at?
Well, overall, if you look at the guidance, it is a best estimate. We have obviously upgraded the EBIT because we have a clearer visibility on the cost-out activities that are taking place and what impact they will have. But also, the second half that we're now basing our guidance on is busier. You have uncertainties. So what you see is our best estimate for the full year of 2014. I will not go into more details on that, but that is the... With the visibility we have right now, this is our best estimate.
Okay. Thank you. And then really the last question on my side is on the price per megawatt. Clearly, I know it's not a absolute one-to-one correlation between price per megawatt and the margins. I think we've sort of discussed this in the past. Just wanted to get a sense, you know, in Q2 there was a higher mix of European deliveries versus the U.S. deliveries, in particularly in Q2, yet we saw price per megawatt go down quite substantially YOY.
Now, as we see the U.S. supply-only contracts being delivered, should we sort of expect headline price per megawatt to gravitate towards what's in the backlog? And how soon should we, let's say, sort of expect that to happen?
Well, we are not guiding on price per megawatt for the coming quarter or what we have in our order backlog. And, again, yes, mix had a favorable impact in Q2, but, of course, as we have delivered the cost out in the first half of the year, we will continue on that path for the second half of the year, and that's also the reason for the upgrade on the EBIT line. But I will not be more specific than that.
We have delivered during the first half of this year about 500 MW to the U.S. market, so it's not that we have not started those deliveries.
Right. Okay. Thank you, and congrats for a great quarter again.
Thank you.
Thank you.
The next question comes from Shai Hill from Macquarie. Please go ahead.
Yes. Good morning. It's Shai Hill from Macquarie here. Three questions, please. Firstly, it's coming back to this issue of price per megawatt, which fell despite the gross margin being up, as was highlighted in an earlier question. Would I be right to assume that you could be selling a lower spec product at a lower price, but you could still deliver a higher margin on that because it's a lower material cost in the product? I just wanted to check if my understanding is correct, Marika. Second question on the price per megawatt in the backlog, which is now down to about EUR 0.9 million.
I understand that a lot of your big U.S. orders are supply only, so they will naturally have a lower price per megawatt, but are there any other issues that is, creating a very low price per megawatt in the backlog? Third and final question.
Sorry.
Should I just ask the third one?
Yeah, yeah. Yeah, yeah.
Last question.
Please.
It's just on the. I don't want to be specific about years, but I just want to talk sort of generally about the sustainable EBIT margin in the medium term. You're probably going to say no comment, but basically, consensus is suggesting you can beat an 8% margin, EBIT margin, and sustain that through the medium term. Do you think that is a fair assumption?
We think, obviously, as we are guiding for a minimum 6%, that is a fair assumption for 2014, and beyond that, we're not guiding for, as you alluded to. If you look at the price per megawatt, and the favorable mix that we have right now, as I said earlier, yes, we are having an impact from the cost out. We are having an impact on the specification of the project. What we are, with all the parameters and all the levers we can, which is product mix, country mix, specification, cost out, we are managing the gross profit level of the company, and that obviously is what we have done in a very good way in Q2 and leads us to a good margin.
Sorry, the third question, I think I forgot. Do you remember?
Sorry.
No, but to complement a bit, I think your question was on specification of products. Of course, you are right that the U.S. market is primarily a 2-megawatt platform market with a 2-megawatt specification. And Europe is, to a large extent, a 3-megawatt market with a different specification and a different cost.
Okay. Thank you. The final question really was just add-on from that, was just on the order backlog. I assume the lower pricing in the backlog is mainly due to the higher weight of U.S. supply-only orders, but I just wondered if there was anything else, because it's the lowest price per megawatt in the order book for several years.
Well, again, as you're alluding to, it is a mixed, mixed question, and there is a lot of supply only in the in the order backlog. So that's a correct assumption.
Thank you very much.
Thank you.
So, operator, can we have the last questions, if any?
Yes, of course. The last question comes from Faisal Ahmad from Handelsbanken Capital Markets. Please go ahead.
Yes, Cecil Ahmed with two questions here. Firstly, on the U.S. market and the recent qualification by the tax authorities there. You obviously said that that's going to have a positive impact, and the positive impact you are alluding to, is that on your framework agreements? Or also do you also expect a positive impact for orders outside framework agreements? That's the first question.
Yeah, I said it was our initial read of the ruling was positive, and with that, to be clear, with that, I meant that it was a clarification of the rules so that our customers and the market knows what qualifies or not. I didn't say it was a positive impact on Vestas. When it comes to our situation in the U.S., the majority of the orders that we have announced, of course, the customer had the PTC qualification, as we have said before. We have framework agreements that gives the potential to get more orders in the U.S., framework agreements that we have announced.
I think it's positive that the customers that we just have those framework agreements with now have security on the rules for the PTC. And we will make sure that our sales force in the U.S. works hard on realizing the maximum potential of that opportunity.
Okay. Very, very clear. My second question then, to Marika. I was slightly distracted when you were commenting here, on the working capital. I believe you mentioned, a bigger improvement in Q3. Was that in inventories, or was that total working capital?
Well, I never commented on the Q3. I said that, as anticipated, again, build up inventory here in Q2 to meet the demand in the second half. The highest positive activity level is Q4, and that follows normal seasonality for Vestas when it comes to working capital. You normally build up in the beginning of the year and flush out at the latter part of the year.
Okay, so you didn't comment on Q3.
No
... at all?
No.
Okay. Thank you.
Thank you.
Okay. So, then I would like to thank you for your interest, those of you who are here, and also thank you for those of you who have called in. Thank you very much.
Thank you.