Good morning, and welcome to our release and presentation of our Avesda's Q2 Results for 2021. Warm welcome to everyone, and let's go to the key highlights of the quarter immediately. So first of all, we had a strong order intake, And we also released a 1st preferred supplier agreement on our 15 Megawatt Offshore Platform. That ended in a total order intake of 5.3 gigawatts with both onshore and offshore contributing to that number. Revenue was €3,500,000,000 impacted by lower offshore activity and also, to some extent, the continued supply chain constraints, which we have seen in Q2.
EBIT margin of 2.9 percent, profitability impacted by the higher fixed cost base from the offshore business and therefore also the integration and also cost inflation into it. We had a solid performance again from service, revenue growth of 23% compared to Q2 2020 and an EBIT margin of 28.6%. And on the ESD side, we had another important step towards the 0 waste turbine, where we also entered a C Tech project, which is all with the purpose of trying to find 100 percent recyclability of the blades of our turbines. And then last, but we will also discuss more, of course, the outlook for the year, which we have revised and adjusted in this quarter to reflect what we will talk much more about in the supply chain constraint and also from the cost inflation. Starting and immediately moving to the global business environment.
I think it goes without saying, as we also say here, the longevity of the pandemic is still causing ripple effects and entails some challenges. And I will try to talk of some of the direct things here, but also have thoughts with A lot of either colleagues or citizens die affected right now by the 4th wave because it's a reality in a number of countries. I think for the first of all, it's very positive for us that energy and wind power remain a critical infrastructure in all the countries we are operating in. That is a continued support to the business continuity for Vestas and it also is a strong commitment from the countries we operate in. We've also seen here that some of the logistical challenges and supply chain bottlenecks have probably been amplified by the COVID-nineteen restrictions in some of our strategic markets.
I will say not a lot of news, but we are just still being impacted and but of course also here able to mitigate because we learn our way around them. We have seen a cost inflation further accelerated. You can especially, say, in not only the quarter here, but also probably for the year. We've seen transportation. We've seen a number of raw materials and also components being cost inflated in this part.
We will talk more about that, but also here how we mitigate. We also see a reduced mobility, especially for the service technicians and the construction workers. And I think here, we right now have still either the same or a higher number of colleagues being in quarantine or wait and hold positions to enter or exit some of the sites or even countries we work in. May I also just take this opportunity here to extend a big thank you and a gratitude, especially to our 29,081 employees globally. They are working incredibly hard and committed to mitigate a lot of those challenges and have found ways around, I will call them there, in some extent, in some sites, nearly mission impossibles, which they are dealing with and mitigating.
It's an incredible thank you and incredible examples and evidence of that it does work in a global company like ours. Also here, thanks to the customers and partners for mitigating these issues and continuing putting the best effort in to find solution. Let's go then to Power Solutions. And if we look at Power Solutions in the quarter, we had a strong total order intake of 5.3 gigawatt. It's supported from both the onshore and offshore, of course, therefore, utilizing Vestas' global REIT.
We saw an onshore ASP that remains underlying stable and supportive for the industry and not least also for Avesta's continued value creation. Our first offshore order intake after the integration of the offshore business were seen. And we also had the 1st preferred supplier on the new 15 Megawatt platform with EMBW in Germany. We saw that led to an all time high order backlog at €21,200,000,000 across the onshore and offshore backlog. And of course, here, it goes without saying a very, very strong focus on project execution and project profitability.
When we then look at the Q2, I will just highlight here, it is in onshore 4.5 gigawatt versus 2 gigawatt in Q1. This is to take a note of because in Q1, we already, at that point in time, talked about that there was some that was on weight and hold in the discussions because there were a number of variables coming from the supply chain and the cost increases. You can see some of those have found their solutions and also the agreements because we saw that, that's the increase in the order intake to now 4.5 gigawatt in Q2. Especially in EMEA, we have seen nearly 2.8 gigawatt of order intake. And I will again highlight within EMEA that Germany, for the first time now in many years, have just executed the 2nd auction round this year.
First auction round was on 1.5 gigawatt, 2nd auction round on 1.5 gigawatt. But we now also see permitting flowing to it. So the uptake was 46% in the first auction and now 74% in the second auction, all leading to that one off probably de leading one of the leading markets in EMEA is now restarting and catching up momentum. When we just say the ASP, you will see down here ASP overall was €0.84 And as I said, in onshore, €0.79 compared also to previous quarters. When we then go to the Service business, as said, a stellar performance in the quarter.
So we progress well with the integration of both the offshore and onshore. And we now start having that operating model in place. Still more to come for 2021 is that year where we get that done. That gives us the leveraging in the global supply chain and also the scale not only to our customers but also back to our partners in the supply chain. We also continued to focus on long term service contracts on the Inventors platform.
You've seen us taking several wins both across Europe and also in Australia. We also had a full scope multi brand contract with a 15 year duration signed in the U. S. So again, and evidence of that we still work both on own capture but also on the multi brand arena. When we look at the Service backlog, it is now €26,900,000,000 And of course, it's up €8,000,000,000 compared to Q2 in 2020.
But also be aware that out of the EUR 26,900,000,000, EUR 23,200,000,000 steams from the onshore part. We have 119 gigawatts under service, and we have an average years of contract duration in excess of 10 years. Below, you can see the split of the regions. And for us, again, here the positive is that we are seeing increase in the regional coverage in all three regions, both in Americas, EMEA and APAC. With that, go to also the highlight from our sustainability strategy and what we are embarking in as a journey.
And mentioning the highlights, we entered the new C Tech project. It's launched. It's an important step. It's one now of several projects we have for actually looking into the technology that will cause the zero waste turbine to be a reality in 2,040 or before. We saw an increase in carbon emission, not to be sort of talked anything else than it's a reflection of that we are now integrating the offshore activities.
And therefore, that we have to work with from a new level. You will see the level on the right side of the slide. We also fully support the European Wide Landfill Band on decommissioned wind turbine lanes by 2025 initiated by WindEurope. And again here said it is also well connected to the project launched around the 0 waste turbine. Lastly, I think very importantly in the environment we are in and a continued focus on ensuring a workplace safety, not least when it comes to our factories, our sites and also our service technicians.
Really proud to see that we're in a quarter where or the first half of the year where we have had that many external factors and challenges, we're able to even reduce the safety measures from first half twenty twenty. We can also see here on the right side that Displaced CO2 in 1,000,000 tonnes have gone up to 201,000,000. It's up 14% for on an annualized basis in Q2. And that is a quite a large number. In a comparison, we work with a country like, for instance, Denmark that has a total emission less than 40,000,000 tonnes a year.
So it is quite an impressive number to deal with in displacement of CO2. With that, I will hand over to Marieke and walk through further details of the financials.
Thank you, Henrik. So as you know, the income statement is It's a good reflection of what Henrik have been through here. So we see stable activity levels compared to Q2 of last year, If not very stable. The stable revenue is primarily driven by the increased activity in service as well as offshore. So obviously some slippage here in the quarter from the onshore activities.
Gross margin up By 4.2 percentage points year over year. That is driven both by Power Solutions as well as Service. EBIT margin before special items had an increase by 1.9 percentage points. That is primarily driven by the improved and higher gross profit, which to a certain extent is offset by the higher SG and A cost as a result of the offshore integration. And I will get back to that.
Income from JVs and associates is a positive of €33,000,000 It's primarily co development projects in the U. S. As well as the contribution from CIP. Power Solution, We had an increase in profitability, but we are still not where we want to be. Revenue decreased by 4% year over year, mainly driven by a decrease in the onshore activity level.
Offshore revenue is driven by strong Installation levels primarily in the U. K. And EBIT margin before special items improved by 1.7 percentage point year over year. And that is primarily driven by lower warranty provisions and improved, which is very important, underlying project profitability despite the external cost inflation. So having a look at the service business, We see continued strong performance.
You see a revenue increase here quarter over quarter, year over year increased by 23%. That is primarily driven by higher onshore activity levels as well as the integration of the offshore business. So you see the Q2 EBIT before special items amounting to €178,000,000 And that corresponds to a 28.6% margin here in the quarter. So very good performance. SG and A cost continues to be under control and also continues to be very focused from our side.
Depreciation and amortization excluding the impairments increased by €66,000,000 year over year And that is to the very large extent related to offshore. So nothing unplanned for obviously. Relative to activity levels, SG and A cost amounted to 6.3%, which is an increase year over year of 6 point no, 0.6 percentage points. And that is obviously driven by lower absorption here in the quarter. Net working capital improved in the quarter And it is primarily positively impacted by down the milestone payments as well as payables.
We have an increase in inventory and that is primarily to cater for the anticipated High activity level here in the Q2, so again as planned for. Cash flow Statement very positive cash flow from the operating activities. And I would say if I compare with last year It's obviously the change in net working capital that makes a big difference here in the quarter. And we see a positive cash flow of SEK183 1,000,000 Net interest bearing position is SEK 334 1,000,000 And we obviously have a continuous focus on cash and cash discipline. Total investments year over year, very stable.
So you see €177,000,000 here in Q2, which It's €20,000,000 higher than last year. And the methodology is the same. So we continue to invest in molds as well as capitalized R and D and in cases where needed also localization. Provision and lost production factor, you see here As we also anticipated, you see an increase in the consumption in Q2 of this year. And the LPF also have an increase and that is a consequence of the extraordinary repair that we have indicated.
So the 2 cases that we have discussed. Warranty provision for this year is stable at Around 3%, 3.1% to be very precise. And again consumption is obviously driven by the two cases that we have indicated and that we provided for last year. Capital structure. Net debt to EBITDA is still well below our threshold.
So we are at the level of negative 0.2 And also to highlight that following the Board of Directors proposal at the AGM, we have done here in the quarter a dividend of €230,000,000 By that, I leave the word to you, Henrik.
Thank you so much, Marika. And But now to the last one, and that's, of course, the outlook. So coming from the status of the business and not least the financials, we have decided to revise our guidance with the effects of what we see from the raw materials and components and to some extent also the transport. So revenue right now will be guidance for the full year of 15.5% to 16.5%, where we previously had an outlook of 2016 to 2017. So we're still expected to grow approximately 15%.
On the EBIT margin, we say now 5% to 7%, where the previous outlook was 6% to 8%. And we like you to think of that is the moving of the midrange from 7% to 6% is also what we reflect here, which is equal to a 1% adjustment. Service margin is expected to be approximately 24%. The total investment now below €1,000,000,000 from previous outlook ultimately, dollars 1,000,000,000 And then I think here, again, with the same as we have discussed in after Q1, The warranty provision in 2021 is expected to be around the 3% level, as you've seen in the revenue from include both the on and offshore. The special items, which we haven't had anything of in H1, is still expected to be around €100,000,000 for the full year.
Relating to the integration of the offshore activities and therefore also putting especially the platform and the manufacturing together in the second half of the year and those announcements to come. When we also look at this, it is without saying that we see still a number of countries being affected by COVID-nineteen. So therefore, the guidance will come in this year with the normal sort of that the base assumptions behind the guidance will and will probably for the rest of this year remain more uncertain than under normal circumstances. With that, thank you for listening in. And I will therefore open up to the operator for the Q and A.
Thank you so much.
Ladies and gentlemen, if you have a question for the speakers, 21. 21. Our first question comes from the line of Christian Johansen from Danske Bank. Please go ahead. Your line is now open.
Yes. Thank you. So two questions for me. First, in regards to your comment that underlying project profitability It's improved. Slightly puzzled about this, obviously, considering the cost inflation you're seeing.
So maybe if you can Clarify a bit, how do you define project profitability? So is that including all raw material and transportation cost? Exactly what do you mean in this definition?
Yes. I understand, Christian. So when I say improved Project profitability is obviously I mean, clearly, we don't see the full impact simply because of the cost inflation that You are alluding to, but it obviously includes all the variances that we have. But if I look at the underlying profitability on the project as such Before any changes or any rerouting as we have discussed numerous times, I see that the productivity in what we're doing is improving. And especially when I refer to the contribution margin of the project, it's really the pre and post calc in terms of having as little deviations as possible.
Then obviously as we did last year, we had the warranty provision and didn't do anything similar this year apart from sort of more of the normal. But excluding that I still see that a lot of the Initiatives that we have are having an impact. And also obviously the stable pricing Is one of the factors that I'm including.
Okay. That makes sense. Then second question is on cost inflation and just to what extent We have seen sort of the full impact yet. And secondly, what you are doing to mitigate this Looking ahead for the second half, should we expect you better hedged? Or are we still going to see the full effect to come?
And then how should we view this into 2022 In terms of new actions you have taken under this?
Christian, thanks for that. And I think for 20 '21, when we released the guidance today, we haven't changed the methodology we constantly work with. So that means we look into the backlog and we look what we are executing and plan for executing in second half of the year. And there, we basically assume that what we are experiencing now and you would appreciate, we are now in beginning of August. So a lot of those things are either underway or already towards sites.
So therefore, we have a fairly good visibility in that part. But of course, having said that, I think right now one thing is the cost inflation, the other thing which Marieke mentioned here a little bit like rerouting, we also work in a market right now where it is extraordinary circumstances. So where you just see that it can be either put on wait and hold outside a harbor or you can actually have the unfortunate situation where somebody leaves without taking your ex works finished goods with on the ship because they have prioritized somebody else's. So I think right now, that is where we talk about its mitigation down to the single asset and down to the single shipment. So that matter, we are very, very strengthened and very, very strict in following.
I understand. Can you provide any flavor on sort of the magnitude of impact on the supply chain versus the cost inflation?
I would say that the biggest part and probably answered the same way as we have done Christian is that the biggest cost increase that we see right now And that is to a large extent due to both rerouting. So you have cost increases, but you also have scarcity. So it is the changes that is the most costly part. We also see an impact from raw material, But the biggest part is really the transportation. Then you would have also because as Henrik said On the lockdowns that we now see in Asia, you have complete lockdown, so you cannot install the projects.
Therefore, you get a slippage. We get additional costs because we have to have cranes what have you longer period at the sites. Getting people in is very difficult. So it is the sort of unprecedented situation due to The pandemic as well as the cost inflation. So a little bit unfortunately of a double whammy from that perspective.
Understood. Thank you very much.
Thank you. Our next question comes from the line of Arsalan Obadula from Deutsche Bank. Please go ahead. Your line is now open.
Good morning and thanks for taking my question. Just one, I just wanted to understand whether in terms of in the near term, We're seeing sort of any negative demand for onshore turbines just coming from the rise in raw material costs and the quarterly turbine prices as well? And also from the regulatory uncertainty in the U. S, are you sort of seeing anything here in the near term on the demand side?
Aslan, thank you. I think there's a couple of questions in your question here. So I think on the Onshore, first of all, I think it's clear that what we also alluded to here in Q1 and we discussed that in some details after Q1 with an order intake of 2 gigawatt in Q1. It was also a signal of that there were quite a number of adjustments and discussions, because whenever you have a price or a cost adjustment to the magnitude of what we are experiencing now, customers will go back they will Some extent, they will go back and revisit their internal processes, either for internal approval of investment committees or external financing. And of course, that takes time.
That pushed a lot of the discussions from Q1 to Q2. Some of these discussions are now reflected in order intake. And there, we are adamant with the same process. We have the robust process of order intake. And there, one of the priorities is they don't drop below the threshold.
And I think the threshold here is the same, which we always work with, and we are just disciplined around that. So that has affected it, but I will just say the numbers here in Q2 also confirmed that we shouldn't underestimate that the price of energy has also gone up. When we sat here a year ago, we struggled to find, at least in Europe PPAs, there were electricity prices around €20 per megawatt. Now that is up 2 40% compared to a year ago. So I also think on the electricity side, that has suddenly become more valuable in most of the markets.
So from a customer point of view, I think it's about connecting also the full value chain of this. And unfortunately, it seems like coal has gone up 100%, which means there is an increasing demand for coal as well. So the onshore, we don't see a change in the underlying. We actually see it the opposite as mentioned, for instance, the example in Germany. When it comes to the U.
S, a particular situation is still there is a is in some ways, there's a clearance on the PTC. You can also see we have taken some orders, but not to the extent we would like to. We are in progressed discussions in the U. S. And therefore, I think we will hopefully see more clearance on what to come from that.
But you all appreciate PTC is an ongoing discussion point in the U. S. And also compared to the local manufacturing and employees in the U. K. So that I've to in the U.
S. So that we have to wait probably a bit longer into H2 to await the administration and their decision on PTC.
Thank you very much.
Thank you. Our next question comes from the line of Dan Togo from Carnegie. Please go ahead. Your line is now open.
Yes. Thank you. Maybe a bit more flavor on the, let's say, incremental margin that we could be looking out for here, because when I calculate through and try to do some reverse engineering, you are guiding for €1,500,000,000 more in revenue in second half twenty twenty one compared to second half twenty twenty. What sort of incremental margin Should we push put into that? So that would be the first question.
2nd question would be on deliveries. You delivered in second half last year Some 10 close to 11 gigawatts. Is that feasible here in second half twenty twenty one given the circumstances and the environment we're in right now?
Yes. Obviously, I think you say it yourself, Don. It's a lot of uncertainty with COVID and the restrictions. Obviously, I think we have shown for a few years now that the extreme push In second half, which is sort of a normal profile, but the extreme has probably been higher Both last year's well last year and expected this year. So expectation is obviously that we can.
And as I said, there is a slippage here from Q1, so Q1 and Q2, so first half. But we still expect and intend to be able to manage that situation. On the margin side, I mean, we continuously work with further improvements. As I said, on the productivity We also have a very handsome average sales price also in the backlog. So if we can avoid changes too much changes and too much rerouting, too much extra cost, Then obviously we are in a better position and that is also reflected in the 5% to 7% EBIT guidance.
Just to understand, so what are the risks here? And which markets Is it 1 gigawatt we are talking about here plusminus? And which markets are we should be looking out for where this And additional service could appear. Is it Brazil, Vietnam, etcetera, where I mean in these emerging regions?
Yes. I would say that Latin America has its So it's definite challenge. But I would say that the bigger challenges are in Asia right now. So I think you mentioned one of the markets that is a good market for us That is Vietnam. And there we have a complete lockdown.
So we obviously are installing at the best of our capacity right now, but there are Severe limitations and that obviously have an impact. But we are doing what we can and also Trying to mitigate the cost increases that we see due to this. But I mean, so far there's no indication that we cannot do What we intend to do. But again, as I said, the EBIT is reflecting a positive and a negative and something in between. And that is obviously why we're putting up 5% to 7%, so a pretty big range still here in August.
Understood. Thanks a lot.
Our next question comes from the line of Supriya Subramanian from UBS. Please go ahead. Your line is now open.
Hi, good morning and thank you for taking my question. I have two questions. One is, into 2022, I know Still early days, but I just wanted to get your thoughts on what proportion of the backlog, let's say, is potentially at risk In terms of unhedged position, if there are any and what are the mitigating measures that we are taking to offset that? And also on pricing, one of your peers, of course, has stated that they have started putting through Pass through closes in the onshore business as well since March of this year, is that something that Avesta is also exploring or Looking at absolute price increases?
So, Praia, thank you so much For your question, first of all, to the 2022 and the backlog as such, we haven't changed our way of working. And I think that probably served us well through some of these times where there are many variables. And that's the reflection of what you also see and what we adjust in 2021. We generally therefore work with the backlog. And then of course, what we now see is that they are also in both the backlog and also for this year, they are in effect from price inflation when it comes to some either of the raw materials or the components.
And can I also hear, with now I praise and giving a lot of praise to a lot of people understanding how to mitigate in this situation? But we also have to deal with some of the, what I call, cases of probably bad behavior, where people forget the long partnership and probably forget the long contract or try to get out of it because they could earn more to deliver it to somebody else. That we are dealing with at the same time. So when we look into the backlog, we are, as we will normally be, hedged when it goes firm. And then we work with some of the residuals.
There are some markets where you have a less possibility of being fully hedged. And therefore, there are always a residual which we work with. And then as Marieke rightly said, when you have a backlog, where you have a transport, some of those transport measures will either have to be rescheduled. And rescheduling from a timing perspective now is just prohibitive expensive right now and that we have to deal with. And I wouldn't say become better at because it is an ordinary market.
So that we are doing. So when it comes to the 2022, we work diligently through what we are doing right now. And as you've seen today, I think we can be counted on that we keep working on the project level and at the same time with the global supply chain as such. When it comes to pricing, I don't want to go into contract clauses and that sort of the name of the game. We work and we have been here for now decades of business.
So I don't think we will start saying that we have invented something new. They are for some customers, when you're regulated, then absolutely, when you come into some of these things, you need to have a price and it needs to be firm so you can get the approval. And at that point in time, we have certain ways of helping each other by hedging the price risk. From other customers, then it's clear that until it goes firm, then there is a variable in here, which, of course, as we spoke about, caused some delays in the order intake also in Q1. So I think we are well here.
And with the extent what we are seeing, I mean, prices of in renewable wind solution goes up right now. There's no other way of saying it. And I think our customers appreciate that. And they also see, by the way, that their offtake in pricing goes up as well. So I think it matches well together.
And there I say, there is probably a customer too that has also smiled and said even the electricity has gone more up than the turbine. It's probably a market that will find its natural in due time.
Sure. Sure. Thank you. Just One more question around profitability across geographies. Given that potentially the weight of U.
S. And the total sales share is likely to come off in the next couple of years. Could you just in line as in is profitability broadly even across Regions or is U. S. Higher profitability?
So would there be an adverse mix effect going into 2022 and
we see a robust process here. We don't favor or disfavor any locations in our markets. So we have the same thresholds. We work with the same thresholds in that sense. So therefore, we more see that the volume that comes out of our global supply chain will also be allocated to the customers that basically stays within our limit of threshold of taking the orders.
So we don't disfavor that. And therefore, as we always discuss, ASP will vary, but that's due to either scope or complexity or to some extent the geography where it's delivered in.
All right. Great. Thank you very much.
Our next question comes from the line of Akash Gupta from JPMorgan. Please go ahead. Your line is now open.
Hi, good morning, Henrik and Marika, and thanks for your time. My first one is on the U. S. I think you've been saying that we might get some Clarity on extension of PTC by end of this year. We saw your U.
S. Competitor was saying that And this extension will likely result in near term uncertainty and pushes out some investment because of the longer duration of subsidies. Any thoughts from your side in terms of how if we get 10 year extension, it might impact Your orders and could there be any risk of some delays because the customers don't need to act quickly and they may want to maximize their returns by And waiting for some of these inflationary pressure to come down. And the second one I have It's on extent of price increases. And we heard from one of your competitors that this raw material headwind needs to be absorbed by the entire supply chain as well as customers.
And it's unlikely that And we would be able to pass it on to customers completely. Do you have any thoughts on that? Thank you.
Akash, thank you for your question. First of all, on the PTC, I think you're asking me to comment on the unknown. And I will try to avoid that. I think we are in a current regime when there is, as we have seen in the extension there was earlier, We have in the last 24 months seen the PTC either have extensions, positive commitments. And in this case, it might be that there comes slightly the new flavor to it either in the number of years it covers percentages or localization.
So I think anything there will just be adding to the speculation. I think customers being said, everyone actually prioritize, whether that's onshore or offshore in the U. S, an acceleration of how we can get more projects. So therefore, I would rather say, when there is clearance of the frame and therefore the legislative frame around the PTC and therefore the projects, then I think positively, we will also see a quite a strong flow. That might be that it then has a 12 months lead time to the delivery.
But let's see when that comes, Akash, rather than speculating to it. But right now, As we commented on Q1, customer generally will be on a wait and hold until they can calculate the complete effect on the projects and the business. When it comes to price increases, if you ask for a percentage of fairness in the world about costs coming up in raw materials and components and transport. That doesn't exist. What is important for us to say is we have the firm discussion based on the order intake.
And when it comes to us and we do that costing update regularly currently because it is that variable. The price and the percentage change of some of these things require us to do it regularly and frequent. So therefore, that will come into the customer conversations. But having seen that somebody thinks that it's to be forgotten and there is no price increases to the turbine, that's probably not something we will encourage. And I don't think that serves the industry at all actually, because we want to be a professional partner.
And a professional partner also know how the pricing of the product and solution works.
Thank you.
Our next question comes from the line of Kasper Blom from ABG Sundal Collier. Please go ahead. Your line is now open.
Yes. Thanks a lot. First of all, a question we haven't really talked about yet. And now we get, as you mentioned, you had a bit of a tailwind from co development projects in the U. S.
Affecting the income statement this quarter. Could you give any kind of guidance on whether that is a sort of sustainable level to assume for coming quarters also? Or is that Too lumpy a kind of business to put anything in there? That's the first one. Thank you.
Yes. And I think Casper that you're Somewhat answering the question yourself. It is lumpy. But obviously, I mean, this is more and more Becoming a part of sort of the overall business. This is I mean, when you're starting to divest, it's more late stage.
And if I look at the portfolio, you have a good mix of it. So it is very lumpy and very hard to be precise. But obviously as we're having co development as part of the business, we're expecting this to be on a more frequent basis. Then to be to give you an exact number what that frequent basis is, I cannot do that At this
point. Is it fair to assume that it's a number that will grow year after year as you do more and more of this?
Yes. I mean, obviously, we that is the expectation and that's why we have focused on the business. But it is lumpy and it takes time. That's Just my experience.
Okay. Then my second question regarding the EBIT margin in the Power Solutions business, I know you don't give a breakdown between onshore and offshore, but I do note that you had much more revenue from offshore in this quarter. Can you give any indication on whether you are sort of approaching a breakeven level on the EBIT margin in offshore with this kind
of revenue that you saw in the quarter?
As I said, when you do that, Casper, you can't and we gave the guidance of the basically the journey we're on because we got the sort of the insight and that with the backlog we took over. And therefore, this year and the following years until we are into basically end of 2024, it will be a margin dilutive effect of the offshore business. So in a quarter where we have some turnover, of course, that helps sort of dilute the fixed capacity cost, as Marika also argued. But we are integrating a business. We have also done deintegration, so synergies will come over 2021.
But that's just how it is. We don't expect on a full year basis to change any of the guidance we did in Q4 'twenty when we acquired the business. There's no indications of anything else.
And you don't want to say whether this revenue seen in the quarter is sort of enough to cover the fixed costs in offshore?
No, I don't think I will comment on that one because then we start commenting on part of what is being delivered on the certain projects. And that One is not in anyone's interest in a market where there is few projects and very few competitors.
Fair enough.
Thanks a lot, Henry.
Thank you.
Our next question comes from the line of Martin Wilkie from Citi. Please go ahead. Your line is now open. Yes.
Thank you. Good morning. It's Martin from Citi. Two questions. The first one just coming back on pricing.
And from the outside, when we look at raw materials and so forth, we a layman sort of assessment might be that pricing has to go up by Maybe 10% or so. I understand that's obviously too simplistic because there's many, many things that come through the supply chain. All these raw materials are not Necessarily bought by best after. When you look at your comments that pricing is stable on a reported basis, the ASPs are up 1% year on year. What are we sort of externally doing wrong in that calculation to see that pricing that is stable is still supportive for margins when It does look like raw mats would suggest that pricing has to be far higher.
So that was the first question. And the second one was just on service because obviously Very good level of profitability in the Q2.
It does imply a
deceleration of service margins in the second half. I'm just to understand if there's any specifics around Why that might be or if it's prudent in the guidance, just to understand a little bit about the implied service profitability in the second half? Thank you.
So on the pricing side thanks, Martin, for the question. As I said, when you see pricing, you can't just to put the sort of equal between an ASP and a pricing. So I said in Q1, we have seen it a number of times now we have also seen projects by projects being escalated. So when we say stable pricing, it means stable pricing also considering the value creation of the individual projects for Vestas. So therefore, we are satisfied with the development in the ASP.
And as I said, we booked an overall €84,000,000 €79,000,000 in the quarter. And that actually fulfills and respects some of those conversations. So you shouldn't forget, there are more than 20 countries where we have done order intake in a quarter like this. So you can't scope and other things. You can't really say that, that's then unchanged or whatever.
We say it's stable. It fulfills what we also set up it should do, and that's what we're working diligently towards. So be careful of it. It's here. We can see it.
And some of the projects, we know that there is a percentage increase. And I won't comment on your 10% calculation? Or is it 5% or it's more than 10% because there are areas where it is quite a lot that changes in the current profile.
And if we go to the service margin and I obviously Understand your point here, Martin. But the only thing I will repeat myself, you will see also Here, lumpiness. So the 24% that we have indicated is something we feel Comfortable providing to the market, but you will see a little bit ups and downs depending on which quarter you're in. But obviously, it is overall on a 12 month rolling a very stable business, good performance. And that is what we are indicating at this point in time.
Okay. Thank you very much.
Our next question comes from the line of Deepa Venkateswaran From Bernstein, please go ahead. Your line is now open.
Thank you so much. I had one follow-up question on one new question. So on the Commodity inflation, Henrik, you mentioned that there's some residual exposure. Would you mind elaborating a bit more on what commodities you're talking about here. And is it also fair to assume that the guidance change today is 100 bps on margin and 500,000,000 Can we say that that's mainly because of the logistics cost and constraints on the physical side as opposed to any of these raw math Inflation?
And my second question is for Marika. On the SG and A, I know overall the ratios have increased Because of offshore, but if I compare with last quarter, seems like SG and A has trickled up a bit more to €275,000,000 versus €260,000,000 Should we read anything more into it? And how do you see the evolution for the rest of the year or next year?
Okay. So if we I think if I answer a little bit on Henrik's behalf here on the commodity side, It's a rigorous process. So if there's any residual that we I mean, it depends on whether it's indirect or direct, obviously having an impact. And that is What Henrik is alluding to. And I would say I think it's fair to say that the biggest exposure from a commodity point of view is the steel when it comes to our business.
And obviously, there you have a very direct impact from the tower and indirect on other components. And that is what obviously changed the picture. And I would also say that at the speed of increasing right now, you will see a timing gap from offering to when you firm up any order. And we haven't seen anything like this Overall. And when it comes to cost inflation, the biggest part this year to be very clear is Transport and the second one is raw material.
So there's 2. And both of them are just further amplified by the COVID situation we're in because that's Causing a limitation on the flexibility you have as a global company. And then on the SG and A side, I mean, now we see we have situations normalizing a little bit in parts of the world Going back and forth again. But you also have remember that you have depreciations increasing and that is Together with offshore, depreciation is the other part that is going up due to previous investments.
Okay. Thank you.
Thank you.
Our next question comes from the line of A. J. Patel from Goldman Sachs. Please go ahead. Your line is now open.
Good morning. Thank you for the presentation and the question allowing me to ask questions. I just wanted to maybe add to the first one just to Make sure if I could get a clarification. Is the vast bulk of the downgrade on the margin, the logistics and the potential cost Increases you made from project delays? Or I'm just trying to understand if the raw material bit is a third to 25%, fifty-fifty.
Just any sort of rough guide would be really helpful just to make sure I understand everything. And then I guess just If you could give us some form of guidance on at least what you can see, which is the order intake you've had year to date. Is that order intake consistent with margins of 6% to 8%, which was your Previous outlook before these additional costs came through? Or is it
too early to tell because
of the residual exposure you have
on the commodity there? I'm just trying to Get a sense of what sort of risk do we see for next year and raw math effectively?
Okay. So if we start With the cost inflation, transportation is the absolute Major part, but the second one is also the raw material. And I would say it's To a certain extent, it's direct, but also indirect. But the logistics is a big impact. And then you have Other costs relating to slippage due to in particular what we see this year, it's lockdowns, But it could also be weather conditions.
But what we see right now is more from COVID situation and limitations in different countries.
And in terms of your, I think, very charming question around how the pricing relates to a previous guidance for a 2020 one, I think it's clear also what Marika said, the initiatives and the tools we are having internally is diligently working towards the goal of an EBIT margin of 10%. So therefore, when we work with price and adjustment here, we also diligently work towards what we also said as a longer term. So you can't read anything out either related to a previous 6% to 8% or a current 5% to 7%. We constantly try to do better at JE.
Okay. Thank you very much. That's very clear.
Thank you.
Our next question comes from the line of Rajesh Singhla of Societe Generale. Please go ahead. Your line is now open.
Yes, hi, good morning. Thanks for taking my question. This is regarding the LCOE of your 5.x megawatt turbines. Is it possible to comment on like how that LCOE number has changed over the last 1 year and where it stands currently? And second question would be on the pricing front.
So last time when we had a discussion, you mentioned that we hedge everything whenever we receive From order and I just want to make sure that we are on the same track for the future as well. And the order book currently we have reflects that factor?
Andreas, thank you so much. I think here, I do appreciate that we have quite a large audience. And as you are not necessarily a customer buying the turbine of a specific nature, then I will avoid commenting on the development in LCOE because that is simply too much information to a broad audience. We generally work diligently with all our platforms to increase either by power motor upgrades or new models to reduce the levelized cost of energy, and you would appreciate that. And that is also one of the reasons why, of course, we embark on the journey in offshore and also become a leading player there.
When it again comes down to fully hedged, yes, that's right. And generally, when it goes firm, we, of course, hedge as we can to the tune of it comes into the global supply chain. But then when we come and get into the global supply chain, you will have certain raw materials and components that are, to some extent, not hedgeable from just buying a future price security of that. Of course, there we work with the partners, the supply chain that works really well. And probably in this case, guys, except also it demonstrates the strength of the supply chain in what we are working with considering the environment we are in.
So I think here, it's also finding that it is a 100 basis points midpoint adjustment, which actually gives quite a lot of credit to how the supply chain works, both with the hedging, but also mitigating exactly those bottlenecks that we have in major harbors of the whole world. So I think here, a little bit of credit back to that internal team and internal teams that are working so diligently with that and the partners that support us externally.
Thank you. Maybe just one follow-up on the hedging part. So For how long we can hedge all these raw material costs? I think last time we heard that you can hedge quite longer into the future. So maybe a bit more clarification on like how long you can hedge these Ram Drill costs?
But the hedge timing is not necessarily the importance here. It's the how that connects to the project order intake. So we generally can hit in the same time frame as we have the order intake or you have other clauses that will then have the discussion. So that hits, you can't sort of say that, that runs out on a project.
And to phrase it slightly different is that we have different methodologies. So I mean you can Hedge as such, but you can also pre buy, you can store. So and you can index. And we're obviously using That means that we have I would say also the longer period you have if you would do more of financial hedge It's very costly. So then that is something you try to avoid.
But we have different means and we have Over time, used all of them where we see is most appropriate.
Thank you. Thank you very much.
Our next question comes from the line of Klas Amer of Nordea.
I will take them 1 by 1. The first question goes to the in and out orders, which in 2021 is at a very low level. Why is that? And is this one of the reasons for the lower revenue guidance? That will be the first one.
Yes. The no, I mean, yes, you're You're right that we have a lower in fraught this year. But The change in revenue guidance is primarily how the slippage will pan out. And Slippage means that we haven't lost anything, but it's a timing question. So it's not relating to in for out orders at all.
Is a pretty firm comment from my side. But slippage definitely, because we have such a high activity level in the second half. So things will have to be, if not flawless, at least pretty good. And that's also why we're providing a slightly big range on the EBIT side.
Should we expect Some in and out orders being announced in Q3, for instance, or has the year gone and it's too late?
I think you will we shouldn't exclude. But as you are rightly saying, you're in August. So you are with a supply chain of ours. You will have a less and
less impact of that. So there's no as Marika said, it was a
backlog for this year. After that. So there's no as Marika said, it was a backlog for this year that was different and to a much lesser extent depending on infarout orders. And you have seen very little, for instance, which normally is one of the market in China, which is also just an acknowledgment of how the Chinese market is currently.
But even excluding China, it is a low level. And is this by choice of Vestas? Or is this the nature of Yes. The wind market or why is it so low?
As I said here, I think it probably goes that It's maybe reflecting some of the things both from China and U. S. They come out of a year where there are certain things that changed in their way of dealing with it. That might be that it was more predominantly in a year where you want to take advantage of a tariff or a different regime coming to an end. And therefore, you push for some of these in for out orders with very short notice.
I would also say from a manufacturing point of view, it's much better and much easier to mitigate some of it because if you came and ask for an infra order right now, come on, we all have to appreciate we know exactly what the cost of that will be, and that's going to be quite a lot higher.
Okay. Makes sense. The second question goes to the lost production factor. And that continues to increase And is now at 3% high level. When should we expect it to have peaked?
And does this high level Actually have a negative P and L impact excluding the provisions obviously.
If I answer the latter part of your First, the lost production factor increase doesn't have a P and L impact. It's obviously the warranty provision that has the P and L impact. The consumption is increasing. And obviously, even if it's Not good to make the provision, but it's as anticipated. And it means that things are going according to plan.
So we have Seid, if I remember correctly, and also expected that to increase here in the quarter. The lost production factor is a consequence Of that we are now addressing the issues the 2 issues that we had. And I would say expect a higher level this year. And then obviously going forward, we haven't been that precise, But we should see an improvement, although not down to the 1.5% in the early timeframe. But we should definitely start seeing the improvement in the latter part of next year.
Okay. Thank you so much. That's all for me.
Thank you.
Our next question comes from the line of Sean McLoughton from HSBC. Please go ahead. Your line is now open.
Thank you. Good morning. Two questions. Firstly, on cash generation, which looked pretty strong, Seasonally strong in Q2. So just wondering how you're thinking about potential for a buyback in 2021?
And secondly, on offshore, we note the first signal of interest for the 15 megawatt turbine. When would you expect to be booking the 1st firm orders for this machine? Thank you.
I think on the cash flow side, Sean, as Smirke already said, we have a tremendous focus on cash because it links well with the profitability and therefore the value creation. When it comes to timing of it, it's fair saying we are in a year where there are variables coming from the especially on the external environment we are working in. So there, we will always be more prudent, more sort of wait and see. So we haven't decided anything on that after Q2, and we will evaluate that on an ongoing basis. So if cash continues, then we will look when we are later in the year, how we will deal with that, but exclude or include nothing in that sense.
When it comes to the offshore, you will appreciate the offshore market works with slightly longer lead times. And therefore, the FOI is is sort of the order intake is not necessarily the Holy Grail for us. We work diligently in a number of cases around the world. As you probably picked up, they are good there is enormous good momentum into the offshore approval process on governments in major markets of the world. And we are quite keen exactly in participating in those discussions.
That comes both from customers, but it also comes from the localization of manufacturing and supply chain into those countries. And there we are, I think, a fair partner for many countries right now. So have a bit more patience when it comes to firm order intake because it is a different cycle compared to the onshore.
Thank you.
Our next question comes from the line of Sebastian Growe from Commerce Bank. Please go ahead. Your line is now open.
Yes, good morning. Thanks for taking my questions. I'm Marika Heinrich. The first one is also around offshore and the preferred tire supplier agreement with ENVW. I've read from their press release that the FID It's only during 2023.
But my question would nevertheless be how we should think about terms and conditions for the margin thresholds, working capital terms, etcetera, This is obviously so far the first project based on the V236. And sorry for bringing really down to a specific project in this case, but it is of Utmost importance and answer the question. The second question, that would be more on services, but let's eventually better start with the offshore first.
I think I will again hear Sebastian, first of all, again, a charming question. I will just say here, with respect of the audience and The wide respect of the audience in a single project like that, we won't give any details of that. That will be wholly unfair against the customer discussion we appreciate so much on the partnership. And I will also say here, I know this one is too open and old. We work diligently with that.
We also said that when we come beyond 2025, we have the same profit targets for the two businesses. And therefore, you can assume that we work diligently on the same value creation metrics as we would do for the what you know us well for in the onshore. So that's how we work, and that's how we work well with the partners also in offshore. And I think that will be my very, very further details to also a fair and open in press release from our customers and partner in EMBW.
Yes. That's fair. Okay. Thanks. The second one is on service and a quick follow-up on the mix question for the Q2.
Can you just shed some more light if Offshore has eventually contributed much more meaningfully in a more sequential comparison? That will be the first Quick question on the other one I had is more
on the structural nature of
the business because you mentioned in the quarterly report that you are obviously seeing some Greater synergy potential between onshore and offshore. So my question would rather be if you could be a bit more specific which areas or eventual financial impact you might be seeing here.
Okay. Do you take the service part?
Yes. So on the service, the increase obviously, I think I said both from onshore as well as offshore. So it's clearly contributing to the increase Quarter over quarter. But we also again saying that we have an increase in the onshore space as well. When it comes to the lumpiness of the quarters and the profitability is that We see that.
It depends on how long the components are lasting. So that depends on which given quarter you actually have The cost for it and that will have an impact on the profitability. We have also been very successful on the cost out. That will also have an impact. And if it's in this environment we're in right now with COVID, if we didn't have Too much hinder when it comes to the flexibility in terms of sending people into different sites that will also have less of a cost.
All of those are impacting to a great extent to the positives that we see here in the Teves that we see here in the quarter.
Yes. And overall on the service side, we are rightly building a global operating model where we actually align both the on and offshore colleagues in our regional setup, but we can talk more about that in the 1 to 1. With that, I would just like to maybe also to the operator, pass to the last question, if we can do that. So last question, operator, please.
Thank you. Our final question comes from the line of Marc Freshnay of Credit Suisse. Please go ahead. Your line is now open.
Thank you for allowing me
to ask my questions. So firstly, On your margin, I mean, over the last 5 years, your share, your economic profit, your share of The benefit that these turbines bring to customers has been eroded. Now that the raw materials cost is going up or has gone up, Is there a scope for you to actually add a percentage margin onto that, I. E, surely the discussion should not only be about Passing through raw materials, but passing through a fair economic margin for yourself. And secondly, All of the discussions so far has been on logistics and raw materials.
What about your own labor costs? Surely, the higher input costs are going to manifest itself into WageWises, Probably more in some regions than the others. But surely, within your cost base, That should be rises there. How are those something that you would have to absorb yourself? Because I would expect in the backlog those are extremely hard.
Okay. Marc, thank you for the Two questions. If I just take the EBIT question first, is this the time of recovering a percentage of margin. And as I said, you know us well enough, we work diligently towards our midterm EBIT margin target. And therefore, we will never shy away from that.
So therefore, on a day where we revise our guidance 100 basis points down, I don't want to sit here and then saying this is the day where we then start talking about how we then we constantly every day work towards a 10% EBIT target, and we will continue to do so. But we are not going to sit here and say we will not be impacted when the world turns as it has done here, which also then relates back to your second question, which is what do we do in terms of, first of all, the competitiveness of our solution, because that's the cost inflation we get either from the raw materials, the components or for that matter transport, which is a material part, not least our own employee cost. We work with a global supply chain that over the last years have also proven it can be scaled. And don't forget, part of the capacity we have scaled to over the last 3 years is now serving a much higher capacity in terms of gigawatt annually, which also puts us in a position that we, in a quarter like this, can take orders in more than 20 countries.
That in itself will have to come. And therefore, we also prove there that the levelized cost of energy is competitive in the country. And therefore, we will have to also there look at what is then the output from a customer's point of view. As I just mentioned, probably the most important part is the price of electricity. And I think that will find itself in respect of the whole value chain from our customers as well.
So it is implied here. We work with efficiencies in the supply chain from an efficiency cost reduction point, but we also work with an opportunity to scale up so that we will constantly work with. And we won't shy away from that the recovery of EBIT from here absolutely is one of our key priorities besides delivering on our promised solutions. Mark, I hope we didn't upset you or you lost your connection there. So I hope to speak with you over the coming couple of days.
So with that, could I just thank everyone for the attention and also for the interest? I'm sure we look forward to speak to many of you over the coming days. And again, thank you from
here.
Thank you.