Ringkøbing Aug 19, 2015 (Thomson StreetEvents) -- Edited Transcript of Vestas Wind Systems A/S earnings conference call or presentation Wednesday, August 19, 2015 at 8:00:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Anders Runevad Vestas Wind Systems A/S - Group President & CEO * Marika Fredriksson Vestas Wind Systems A/S - EVP, CFO ================================================================================ Conference Call Participants ================================================================================ * Kristian Johansen Danske Markets - Analyst * Casper Blom ABG Sundal Collier - Analyst * David Vos Barclays - Analyst * Pinaki Das BofA Merrill Lynch - Analyst * Claus Almer Carnegie Investment Bank AB - Analyst * Alok Katre Societe Generale - Analyst * Klaus Kehl Nykredit Markets - Analyst * Sean McLoughlin HSBC Global Research - Analyst * Shai Hill Macquarie Research - Analyst * Patrik Setterberg Nordea Markets - Analyst * Jose Arroyas Exane BNP Paribas - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [1] -------------------------------------------------------------------------------- Good morning, everyone, and welcome to this second quarter report. As usual, I appreciate everyone that has called in. So let's start. The usual disclaimer statement, and then, let me then start with the highlights overall. I'm really satisfied with the quarter. It's a strong execution on our profitable growth strategy. Order intake, really strong at approximately 3 gigawatt, up 56% year over year. The order backlog, close to EUR17 billion; actually, the largest order backlog ever for Vestas, also very encouraging. The value creation continues: ROIC increased to 55%, also that on record level. Earnings continue to improve: EBIT before special items of EUR145 million, up 39% year on year. And also, a continued strong cash flow, impacting by an increase in cash flow from operating activities. So, again, lots of highlights in the quarter and a very strong execution. As usual then, the agenda for today. I will start to talk about orders and markets; Marika, our CFO, will guide you through the financials; then, I will come back on the summary and outlook; and then, we open for Q&A. Let me start then with the regulatory environment that we view as generally supportive. We see a strong support, or solid support, both for renewable energy and ambition to reduce the CO2 levels. Starting then with the Americas: the Tax Extenders Bill, including a two-year PTC extension, passed in the Senate Finance Committee with a solid majority vote. This is a first step, and there are more to come, but it's a positive signal. Also, a bit more long term, the President Obama's Clean Power Plan to reduce the carbon emission with 32% by 2030 is a more long-term positive signal. Looking at the EMEA region then: Germany, as we have talked before, continues the transition from a feed-in tariff system to an auction system. The draft paper has been released, and what's positive is that the renewable energy ambitions are intact. In France, a new energy law was passed that will cut greenhouse gas emissions with 40% by 2030 and estimates are that that will bring renewable to 32%. On a negative side is in the UK, where the government has proposed to end the onshore support one year earlier than previously planned. In Asia Pacific, we have had almost two years of uncertainty as the RET target has been discussed. What's positive now is that a target has been adopted by the Australian Parliament, and that should mean that we see some increased activity in that market. And in general, I would say, China, India, and several other markets, we see a continued support for renewables. As I said, order intake, one of the key highlights for the quarter, very strong at 3 gigawatts, and a 56% increase year over year. US offshore, the 3 megawatt platform, Mexico, Germany, and Chile were the main contributors in Q2, accounting for almost 80% of the increase. If we look at the average selling prices of order intake in million euro per megawatt, we see a stable development in the quarter, as we have seen, actually, in the last several quarters. Should remember that price per megawatt depends on a number of different factors: the scope, the turbine type, and, of course, the uniqueness of the offering. Moving on then to order intake: we see improvements mainly in Latin America, US offshore, Poland, and China but, I must say, very broad based. We see good progress on order intake from a number of different markets. If we look at the first half, and start with Americas, up 74%, so very solid growth, driven by US, Brazil, Mexico and Chile. And in the quarter [end], up 81% so actually even stronger. EMEA also posted very positive development: for the first half up 37%, again driven by offshore, Nordics, Poland, Turkey and Germany. And also, in the quarter end, up 53%. Asia Pacific, from a lower level, up 24% for the first half of the year, again, as I talked about during Q1, to a large extent due to China. And in the quarter end a smaller quarter for Asia Pacific, so down 67%. Also worth mentioning that new markets for Vestas in top five, for the first half, is Brazil, Poland and China. A key competitive advantage for us is our global reach. I've talked to that before, and that is something that we are leveraging on, and will continue to leverage on, going forward. Also proven in the first half, where we have taken 4.8 gigawatts of orders, very well balanced and broad, in 27 countries and five continents. What enables our global reach, besides our manufacturing footprint and, of course, the market presence in services, is really our broad, well-proven product portfolio. Our order intake was fairly equal between our 2 megawatt and 3 megawatt portfolio for the first half. And Vestas offers a broad range of turbines for all wind classes. On the 2 megawatt side, we have four models actively selling in the market, where we see very solid demand, especially the V110. That is the flagship model in the US. On the 3 megawatt model, we have five models with different power ratings, rotor size. And we continue to develop this platform; for example, the V126, a perfect match for medium to low wind. And also, with features that fulfill specific market requirements, such as deicing large diameter steel towers. And this is also part of the offshore application and offering. Traditionally, 3 megawatt has been used in land constrained markets, but with increased energy production and cost efficiency, we see a clear trend where 3 megawatt is taking share in more traditional 2 megawatt markets. One such an example is in Q2, where we've taken a number of big 3 megawatt orders in the US, a traditional 2 megawatt market. And we expect this trend to continue. Looking at delivery then, was up 35% in the first half. Solid growth in Americas and Asia Pacific, and EMEA stable. Starting with Americas then, up 85% six months, and 151% quarter on quarter, very much driven by the US, up almost 650 megawatts. EMEA, as I said, stable. Talked about Germany last call and, as expected, we see a slight decline in the German market on delivery this year. But at the same time, that is compensated with the increases in markets such as Turkey, Finland, Italy. And we should, of course, remember that we continue to see an overall good level in more mature markets like France and Germany. Actually, in Q2, Turkey was our biggest market in EMEA, when it comes to delivery, again showing the importance of a global reach. In Asia Pacific, we saw solid development both in the first half and in the quarter, up 162% and 69%, driven by, primarily, China and, to some extent, Australia. As I talked about before, we sit on an order backlog that is highest ever, close to EUR17 billion. And we see an increase of EUR1.9 billion: turbines of EUR1.3 billion, and services on EUR0.6 billion. Some more words then about the US market. Continued to see a very high activity level, and I'm very confident with our position in the US market. We have frame agreements with a potential of up to 2.3 gigawatts and year to date, order intake is 1.7 gigawatts; approximately 40% within the frame agreements and, therefore, 60% outside. Looking at the Mitsubishi Vestas offshore wind performance, we see also positive development. It's well received by the customers, and we can see that in the order situation. We had firm orders of 681 megawatts, conditional orders close to 500 megawatts, and also, announced preferred supplier agreements of 1.8 gigawatts. We're also progressing according to plan. I've talked about before that the basis for the joint venture was a milestone agreement with both technical and commercial milestones. That has now been fulfilled. There's actually just one payment left of EUR12.5 million, so all other milestones have been met. Manufacturing is ramping up of the V164-8 megawatt. The Burbo Bank project will be the first and installation is expected to start in beginning of 2016. So, with that, I leave over to the financials and Marika. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [2] -------------------------------------------------------------------------------- Thank you, Anders. So if we have a look at the income statement and some of the KPIs that we have for the Company, you can see that the earnings continue to improve in the quarter. We have a revenue increase of 30% compared to last year. That is, obviously, driven by the higher volume, but also impact from currency. And when I talk about the income from currency, you all recall that it's a translation impact as we report in euro. The gross profit, in absolute values, obviously improved by the volume by 21%. We continue to deliver a solid gross profit in the quarter of 18%, although lower compared to last year, but again, that was an exceptional quarter in terms of positive mix. Fixed costs we will get back to in one of the coming slides, but we continue to deliver well and leveraging our fixed cost efforts in previous years. So the primary increase comes from currency, but also higher activity level in the Company. Consequently, we deliver a high EBIT before special items, and that leads us to an EBIT margin of 8.3% compared to 7.8% last year. Net profit, also you see a good improvement of 33% in absolute values. I should just mention here also on the income from investments, that is our joint venture with Mitsubishi that Anders just took you through. And you have a slight profit in the joint venture in itself, but the primary part is really that the project we have sold to the joint venture now has a transfer risk and, consequently, you see a positive impact. But it's still below EBIT and we're just following the accounting principles here. So that leads me to how we leverage on the fixed cost. We have, as we have spoken about previously, a very tight control of our fixed cost. We have increased activity levels continuously since we took down the cost. So you saw a higher activity level in 2014, and that also continues now in 2015. Despite that, we have a very tight control of our fixed capacity cost and we are now down to 8.4% of revenue. So the primary increase really comes from currency, as I alluded to earlier, and, to some extent, also from the higher activity level. But we're very happy with the performance. If we go to the service margin, you see service increased compared to last year by 20%. As you remember, that is one of the key parameters in our strategy, going forward, so we definitely continue to execute on that strategy. Margins are solid. We have an EBIT before special items of 16.8%. Please bear in mind here that we have some one-timers in the cost and, as the revenue in the service business is smaller than the turbine business, a EUR2 million to EUR3 million extraordinary item in the fixed capacity cost has an impact. But that is the primary reason for a slightly lower margin. You will continue to see fluctuations in the quarter, but we deliver a high, solid margin in the service business. We have a very strong order backlog and that continues to grow, as you saw on Anders' previous slide. We also have an average duration of the service order of approximately eight years, so a very good lifecycle security in the service backlog. If we go to the balance sheet, which is obviously also one of the parameters that we are tracking and continuously improve, we have a very strong balance sheet right now, and we have a big focus on the balance sheet. We have great performance, as you can see, on the net working capital. We are in negative territory despite the high activity level in the Company. I will come back to some of the details in that improvement. You also see that we have net debt that is very positive, so we're definitely tracking on our key parameters for the Company. We also have a Solvency ratio that improved compared to 2014. We haven't still met our target of 35%, but a very solid improvement. And Solvency ratio, obviously, also has an impact as we have a very high portion of prepayments in the Company right now because of high order intake. I will come back to the overall cash at hand in one of the coming slides, but very good performance both on the P&L and the balance sheet. If we go to some of the changes you see in the net working capital: I have said to you before that we continue the working capital projects. We have been very good in keeping our tight control from previous years when we were more challenged, so we have not changed the approach. The work in progress, in particular the [process] for work in progress, has stayed and continues to be very good. In the last three months, and also the last 12 months, we, because of high activity level, have a higher portion of prepayments. We also have a higher portion of payables and, obviously, that helps our working capital. So very, very positive development; it has improved more than we anticipated, to be very clear. Warranty provisions, which is on the next page, and the lost production factor, continues at a good level. You see that we are providing more than what we consume. Just to be very specific here, we follow the same principle that we had in 2014, so there is no changes to the percentage that we provide for in 2015. The lost production factor is a reflection of our good quality work that we have in the Company, and we continue our journey to be below 2% on a very consistent basis. If we look at the cash flow statement and here, I also said in the last quarter that you see the cash flow from operating activities continues to be the main contributor. Obviously, that has been the focus area for us. And you also see the change in net working capital here having a positive impact. I should just say here that this is excluding any currency, so it's free from currency on the working capital. Free cash flow that we deliver is, consequently, EUR183 million. The cash flow from financing activities is primarily our payment of dividend in April. If we go to the total investments, we announced in Q1 that we had an intention of increasing to EUR350 million. We are trailing below that as of now, but we have anticipated that we will consume the EUR350 million that we have put forward. That, again, is primarily to meet our high activity level and the high demand in the market right now. And it is primary investments in molds, so, as you remember, the molds are movable, but it's also in our R&D. And the capitalized R&D is approximately one-third of the CapEx that you see. The capital structure, you remember the two targets we have: net debt to EBITDA, below 1, and also Solvency ratio of 35%. As you see, we're tracking well on the net debt to EBITDA. The Solvency ratio is lower than 35%. We're still happy with the two targets and we also understand and respect that we have a very strong balance sheet at this point. We, obviously, with the strong balance sheet we have, have a lot of flexibility. We also have a big and solid possibility to execute on our strategy and invest in the strategy if need be. And what you can see now is that we have calculated and are confident on the cash we need over the cycle. So it's not a short-term cash need; it is over the cycle. And we will, consequently, have excess cash that will be primarily invested in the execution of the strategy. Having said that, we are not ruling out a dividend or a share buyback. The next slide shows the amazing journey on the return on invested capital. We are approaching 55%. This is a consequence of the focus on earnings and also, the balance sheet improvement that you have seen in the past. 54.6% is the accurate number for the quarter, so a very, very good performance that we're very happy with. By that, I leave the summary and outlook to Anders. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [3] -------------------------------------------------------------------------------- Thank you, Marika. Let me then summarize the quarter. So, again, a strong quarter executing on our strategy. Look at our four strategic objectives, starting with growth in mature and emerging markets, growth as per the market, see a very good performance: high order intake, and largest-ever combined order backlog. On the service business, also good progress on the strategy of growing the service business more than 30% midterm. Good increase in the revenue in the quarter, backlog increasing, and we see a good trend on the average duration of our service contracts. On the reduced levelized cost of energy, which is, of course, all about the competitiveness of our portfolio, we see a strong performance across both the 2 and 3 megawatt platforms. And as I said, it is important for Vestas, and it is important to have offering for all different wind classes. On the R&D, we continue to invest, as we have done before, in new releases of both of our platforms. We have a number of operational excellence programs, of course ultimately with the aim to improve the running capability. And we see the value creation continue with ROIC at 55%, and also a well-managed operation during high activity levels. All in all, we continue to leverage on our key three competitive advantages: global reach, technology and service leadership, and scale. To summarize this, after Q2, on the global reach side, we are present in 74 countries across all wind classes. On technology and services, as I talked about, the depth of our product portfolio is what enables this global reach. The lost production factor firmly now below 2% we feel is industry leading and it's, of course, a combination of the quality of our product and service offering. And on the scale, we are now at approximately 70 gigawatt of installed base and, of course, a very solid order backlog. Moving on to the outlook: the outlook is unchanged from the upgrade we made in May this year. And we also maintain the minimum guidance on revenue, EBIT and cash flow. So for revenue, a minimum EUR7.5 billion. Service business, as before, also unchanged, expected to continue to grow. EBIT margin before special items of a minimum 8.5% and here, also as before, the service business is expected to have stable margins. Total investments approximately EUR350 million, and a free cash flow of minimum EUR600 million. As you know, the dividend policy we have, and the Board's intention, is to recommend a dividend of 25% to 30% of the net result of the year. So with that, we are ending the presentation and can start the Q&A. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions). Kristian Johansen, Danske Bank. -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [2] -------------------------------------------------------------------------------- The first question is regarding free cash flow. If we look at the past two years, you have delivered a much stronger free cash flow in the second half of the year, opposed to the first, primarily due to the spill-up of inventory in the first three quarters and the release in the fourth. Looking at this year, you have so far reported a free cash flow of EUR329 million, while you are keeping your free cash flow guidance of at least EUR600 million. So, implicitly, to reach that lower end of the minimum level, you are guiding for a lower cash flow in the second half. I understand that it's a minimum guidance, so my question is, is there anything that makes you believe that this seasonal pattern in inventory we have seen in the past two years will not be repeated this year, or anything else that would drag down free cash flow in the second half of the year? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [3] -------------------------------------------------------------------------------- Well, first of all, if you look at the working capital, as we have highlighted before, the focus continues. As I said, we have performed even better than we have anticipated for this year and so, clearly, all the activities that we have in the working capital and primarily the process changes we see of work in progress have really improved the overall situation. Because of high order intake we have a large portion of down payments. We also have a higher payable because of simply high activity levels in the Company. So in a way we have, as I said, performed better. We obviously see what we always see in the second half, a very high activity level. That high activity level causes for us to be a bit cautious because you will see weather having an impact, you will see grid having an impact. So the minimum EUR600 million is, as you stated, a minimum guidance, but it's also a best estimate for what we know right now. But the first half has certainly performed better than we anticipated. -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [4] -------------------------------------------------------------------------------- Okay. Then my second question is regarding the profit from the MHI/Vestas joint venture, these EUR27 million. Can you help us understand what volume lies behind this delivery, the transfer of risk that you mentioned? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [5] -------------------------------------------------------------------------------- I'm not sure about the exact value but, if you recall, we had a negative impact when we sold the projects, and it's the 3 megawatts, obviously, to the joint venture of approximately EUR30 million on the items below the EBIT. And as they now have ToR, I don't have this exact value for you, I'm sorry for that, but to give you some perspective, we had a profit in the joint venture of approximately EUR8 million. So we obviously had our 50% of that included in the EUR27 million, but the vast majority is really transfer of risk. But I don't have the exact project for you, so you can turn to IR. They would be able to provide that. -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [6] -------------------------------------------------------------------------------- Sure. And then what should we expect for the full year on this line? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [7] -------------------------------------------------------------------------------- We haven't anticipated, because that will obviously be more of a joint venture asset. It doesn't reflect on our EBIT. -------------------------------------------------------------------------------- Kristian Johansen, Danske Markets - Analyst [8] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- Casper Blom, ABG. -------------------------------------------------------------------------------- Casper Blom, ABG Sundal Collier - Analyst [10] -------------------------------------------------------------------------------- My first question relates to the gross margin development; sales up 30% and cost of goods sold up 30%. Normally, we would expect to see a bit more leverage when sales improve. This development that we're seeing here in Q2, is this a reflection of a, how can you say, not too fortunate mix in the quarter, or is it more a reflection of Q2 last year being extremely strong? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [11] -------------------------------------------------------------------------------- Well, I would say it's a combination of both. So, clearly, last year we had a very, very good performance. This year, we have a good volume but less favorable mix, so the volume clearly offset some of the good impact from the higher volume that we see. But still bear in mind that the 18% that we deliver is really solid margin, although nowhere compared to last year. -------------------------------------------------------------------------------- Casper Blom, ABG Sundal Collier - Analyst [12] -------------------------------------------------------------------------------- I know, you're just spoiling us. Second question, you mentioned that you're seeing a fairly stable price per megawatt development, but we have seen some of your competitors talk a bit about pricing pressure. Can you give a few comments on what you see in the market and in competitive behavior in a broader perspective also? Thanks. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [13] -------------------------------------------------------------------------------- Yes, you're right, overall, of course, we see a solid market across many different countries. When it comes to the price levels, we see stable pricing, so I can't really speak for the competition. But what we see is stable pricing overall, and no specific geographical differences either, actually, across the market. -------------------------------------------------------------------------------- Casper Blom, ABG Sundal Collier - Analyst [14] -------------------------------------------------------------------------------- But are you sensing that your competitors are trying to catch orders through pricing in a more aggressive way than maybe six months ago? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [15] -------------------------------------------------------------------------------- No, not generically speaking. Of course, you will always have one project here and there, but nothing that you can see as a trend or anything like that, no. -------------------------------------------------------------------------------- Casper Blom, ABG Sundal Collier - Analyst [16] -------------------------------------------------------------------------------- Okay. Thank you. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- David Vos, Barclays. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [18] -------------------------------------------------------------------------------- I have two questions, if I may? You made reference to having done some calculations around the cash levels that are appropriate for the business. I may have missed a number there, but if you haven't given that already could you indicate where you see that kind of normalized cash level, that would be helpful? And my second question is around the quite positive remarks you made on the front of the regulatory support that the wind industry continues to enjoy. To my mind, that now takes away some of the volatility that we've seen in the past, to a degree at least. My question to you is, does that now also mean that you would perhaps be more willing to commit to some longer-term targets as the visibility has increased? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [19] -------------------------------------------------------------------------------- Okay, if we start with your first question. I guess that what you're referring to is the working capital. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [20] -------------------------------------------------------------------------------- No. Actually, I heard you say that you've done some calculations about the cash level that's required in the business. And you tied that into -- -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [21] -------------------------------------------------------------------------------- Then I misunderstood you; yes, I did. Obviously, internally, we have done that calculation; I will not share that fully transparently with you. But we have a cash level that we're happy with over the cycle and we will continue to be prudent. It is a cash intense business when you start consuming cash, but we will certainly have excess cash is what I was very clear on. That will be invested in our strategic targets and enable us to execute further on the strategy. But we are not, as I said also, ruling out a dividend and a share buyback from Vestas' side. That is not entirely a management decision. As you know it will be a Board decision, but we are not ruling out that. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [22] -------------------------------------------------------------------------------- Okay. Maybe as a follow-up before the second question then, investing in the business and into the strategy, how do we think about that? Where would that money be deployed? And is that purely an organic strategy, or will that perhaps also have an inorganic component to it? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [23] -------------------------------------------------------------------------------- Primarily what we're looking at, and also what you see us deliver operationally, is organic growth and organic growth is our primary focus. So when I talk about investing in the business it's primarily to deliver and execute on the strategy organically. But you also know that we have certain focus areas where we have less presence. So you will see countries like India; we have started investing in Brazil, for example. So there is definitely places where we can continue to invest and further execute on the strategy. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [24] -------------------------------------------------------------------------------- Excellent. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [25] -------------------------------------------------------------------------------- And about your second question on the regulatory support, that is definitely what we see, stronger support for renewable in most markets, not all, but in most markets. And of course, we also have a bit more for the longer term, the [COP21] coming up. Having said that, it's of course very, very, hard to forecast the political support. It also tends to change every now and again, depending on the political parties or the [annual] support. So of course, it's something that is very, very, hard to forecast for the future. But, again, if I look at the current regulatory environment it is positive. Some of that are very concrete that we, of course, also discussed, like for example, the support mechanism in individual countries, the feed-in tariff levels, and so on. And some of these things are, of course, much more long-term ambitions than hard targets that we can translate to a renewable market share. But it's moving in the right direction. What we also should remember moves in the right direction at the same time is the competitiveness of wind. And that is, for us then, the primary focus. I am a strong believer of controlling what you can control, and influence where you have the most influence. And what we can do, in order to have a market that is easier to predict also long term and, of course, increase the market share, is to continue to drive down the cost of energy for wind. And that's of course, the other part and that plays a big role in our strategy. We will, as every year, do a strategy seminar in September where we look ahead for the next three years. And if we, after that, have anything else to share on that, we will definitely do so. -------------------------------------------------------------------------------- David Vos, Barclays - Analyst [26] -------------------------------------------------------------------------------- Many thanks. -------------------------------------------------------------------------------- Operator [27] -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [28] -------------------------------------------------------------------------------- My first question is on guidance. You've kept your guidance unchanged; I guess the market is looking not very happy about that guidance, that you haven't changed the guidance despite actually having very good performance in the first half. So I just wanted to check a couple of things; I know somebody's already asked about SCF, clearly your guidance looks quite conservative on that side. But even on revenues, if we take the last two or three years, typically you do only about less than 40% of your revenues in the first half, and clearly Q4 is quite big. So if I just use the ratios that happened in the last four years, we should be somewhere between EUR8 billion and EUR8.5 billion of revenues already for this year. And if that is true, then clearly, your gross profit was somewhat less than expected, or the growth in gross profit was less than expected. But if you have more than EUR8 billion of revenues then clearly, there's operating leverage as well. And on top of that, there's probably the added benefit of lower input costs, for example, steel or just generally the commodity macro. So I just wanted to understand why haven't you changed your guidance, or is it that you want to see more progress in the next few months before actually updating your guidance? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [29] -------------------------------------------------------------------------------- Okay, so let me start then, and see if Marika will want to add something. But overall, of course, we are very comfortable with our position. We have a very strong order backlog, so we anticipate a high activity level. We are also, early in the year still, we expect the seasonality in the business as we have seen before. And that also means that we have the uncertainties that we have seen previous years, on the later part of the year with the high activity level. And the uncertainty is very much within the calendar year. We have this catch 22 environment where we have a lot of delivery and transfer of risk and where we recognize the revenue. And we do that in areas with a lot of wind because that's the good sites for us and, at the same time, of course, where we're very dependent that we can execute the project towards the end of the year. So that is an uncertainty and that's why we maintain our best efforts of the minimum guidance from May this year. The other part of the equation, again we have high activity level, as I said. We increased delivery about 35%, 40% last year, we increased our delivery again for the first half to 35% so, of course, we are running on a high activity ramp-up plan. We are delivering according to that plan, which I think is very obvious in the performance that we have had so far. But it is a plan where you have risks; I feel again comfortable with our ramp-up plan, both with the number of people and material. But we are also all dependent on sub-suppliers, that we get all the material in at the time that we need to get it in into the supply chain so that we can execute in a timely manner. One such example of unforeseen events is the accident that has been in China very recently. And we have a manufacturing facility in China; the good news is that the manufacturing is not affected, it's a bit away from the Tianjin port area so it's not affected at all. And also, of course, very good that none of the Vestas' employees are affected. We've also been lucky in the sense that our blade that was ready for shipment was actually parked in a different harbor in the same port, so they are not affected and they will go as planned. But we have an uncertainty in sub-supplier components coming into that harbor that we are currently then working through and evaluating. So I'm just saying it as one example of a fairly unforeseen event, that good news is that nothing has been affected by manufacturing capability. But we obviously can't rule out some sort of delay at this point in time. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [30] -------------------------------------------------------------------------------- And what about the EUR8 billion to EUR8.5 billion of revenues where you're just looking at the last few years' trends. Is that analysis valid, or would you still stick to the EUR7.5 billion? And also just on that front, you obviously are doing much more supply only installations now. Does that change the transfer of risk profile? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [31] -------------------------------------------------------------------------------- Well, I will not disagree with your calculation. Obviously, the pattern within Vestas and the industry is that you have a higher activity level in the second half. Yes, scope will have a certain impact on the revenue for sure, but what you're referring to is obviously the perfect world if everything works. Our job is obviously to see or make the [assimilation] what if and, therefore, we have chosen to stick with the guidance that we have. And please bear in mind it is a minimum guidance. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [32] -------------------------------------------------------------------------------- Okay, good. My second question is just relating to input costs. Clearly, we've seen the commodity macro going down quite significantly; how does it affect your input costs? You've already mentioned that pricing has been broadly stable. How do you benefit from lower commodity prices? Have you already seen it in some of your numbers, or you're yet to see it in the next few quarters? And how do your contracts work with your suppliers and end customers? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [33] -------------------------------------------------------------------------------- Well, obviously, the product cost is high on the agenda. When it comes to commodities, it's also dependent on how you have purchased, whether you're on spot, or if you potentially would store some of it. With the team that we have, we certainly have the focus and they continue to leverage on the commodity pricing as it sits right now. Obviously, that is also dependent on volume, so you will see impacts there in lumps, but that is part of the program that is running within the purchasing area. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [34] -------------------------------------------------------------------------------- But is it fair to say that you would benefit from the lower commodity macro if your pricing remained stable? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [35] -------------------------------------------------------------------------------- If we would be right in the timing of purchasing it, we would definitely benefit from it, yes. -------------------------------------------------------------------------------- Pinaki Das, BofA Merrill Lynch - Analyst [36] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Claus Almer, Carnegie. -------------------------------------------------------------------------------- Claus Almer, Carnegie Investment Bank AB - Analyst [38] -------------------------------------------------------------------------------- I have two questions. One is about the cost base and one is about the product mix in the quarter. As you showed, Marika, in the slides that your fixed cost base has been developing rather nicely over the last couple of quarters on a 12-month rolling basis, but if you compare Q2 to Q1, it's actually an increase. Is that FX, or it's just the higher activity level as you said and should we expect the Q2 level to continue rest of the year? That would be the first question. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [39] -------------------------------------------------------------------------------- So basically, what I tried to say, Claus, is that cost base high focus. Obviously, we have a negative translation impact from the strong dollar right now on our fixed capacity cost. But having said that, we also have a certain portion, although less, simply because of higher activity level. But overall, we are very strict and, as I said, we are extremely cautious on making sure that we leverage on all the efforts we have done to get the fixed capacity down. But as Anders said, also in terms of activity level, both last year and this year, I think we have been extremely good at leveraging. But the vast majority of the increase is, for sure, currency. -------------------------------------------------------------------------------- Claus Almer, Carnegie Investment Bank AB - Analyst [40] -------------------------------------------------------------------------------- But the Q2 level will, hopefully, go up in second half this year, so fixed costs will go up as well. Is that how we should look at it? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [41] -------------------------------------------------------------------------------- As I said, no. Overall, we are keeping tight control so it's fairly limited on the activity level. But also we cannot rule out that there will be some increases, but it's going to be limited, also, going forward. -------------------------------------------------------------------------------- Claus Almer, Carnegie Investment Bank AB - Analyst [42] -------------------------------------------------------------------------------- Okay. Then my second question goes through to the product mix in the quarter. The mix you had, is that on average from the base, or compared to the backlog, or was it better or worse? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [43] -------------------------------------------------------------------------------- Yes, Claus, that's the number one question. You know there is no normal quarter in Vestas unfortunately, so you will always see these types of swings. What I think is good is, if you look at the gross profit, underlying it is improving, it is lower compared to last year. The [strive] and the activities are in place to continue to improve on the gross profit, but it's very, very hard for me to say that it's -- define what is a normal quarter. The mix is not as favorable as last year, clearly, and that is also why we see that, despite a high revenue or volume impact, that is certainly offset to a certain extent by negative mix. -------------------------------------------------------------------------------- Claus Almer, Carnegie Investment Bank AB - Analyst [44] -------------------------------------------------------------------------------- So we should expect, once you start delivering the remaining part of your backlog, that the gross margin could be improving? That's how to read your answer, right? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [45] -------------------------------------------------------------------------------- Possibly, but what I can say is, if we look at the order backlog we are happy with how the backlog is distributed. -------------------------------------------------------------------------------- Claus Almer, Carnegie Investment Bank AB - Analyst [46] -------------------------------------------------------------------------------- Okay. Thanks very much for the answers. -------------------------------------------------------------------------------- Operator [47] -------------------------------------------------------------------------------- Alok Katre, Soc Gen. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [48] -------------------------------------------------------------------------------- Just a couple, maybe. First and foremost, on Brazil, obviously the currency and the economic activity situation over there is a little tough, not to say the least. But maybe you could just help us with what your net exposure to the real is, and how well you're covered there, not just for 2015 but also for 2016 as well, if there's any cover over there? Related question on Brazil, of course, is, having grown rapidly over the past three years in terms of installations, if you look at some of the consultant forecasts they seem to be suggesting it will plateau off at a high level for a few years and perhaps even decline in the outer years. In that sense, do you see competition heating up and, therefore, is Vestas, even with its recent order wins, a little late to the Brazilian party, so to speak? That's question number one. Then I have a follow-up on a different topic, thanks. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [49] -------------------------------------------------------------------------------- I will start with the translation impact and Anders will follow up on the Brazil question. If you look at the primary impact on Vestas' P&L is translation, and with the strong US dollar that we see right now we have a positive impact from a translation point of view. In Q2 you see an impact of EUR140 million on the revenue, whereof approximately EUR18 million is for the service business. There is, as I said, a negative impact on the translation on the fixed capacity cost so, consequently, you see approximately EUR10 million to EUR12 million positive impact from translation on the EBIT line. Basically, what I'm trying to say is that we are fairly well naturally hedged as a Company, and that is also what Anders alluded to earlier. We have a competitive advantage with our industrial platform, so that is providing, to a great extent, a natural hedge. The part that we are not naturally hedged we hedge the project, so we are not hedging the EBIT but we're rather hedging the margin of the Company. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [50] -------------------------------------------------------------------------------- Any specific comments around the Brazilian real in terms of the exposure over there? Obviously, I guess you do import some of the components from either Europe, or US, or China as well, so perhaps you could help me a little bit [there]. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [51] -------------------------------------------------------------------------------- I clearly understand your question on Brazil. Yes, the Brazilian real is a challenge, but we have taken the decision to further improve our local production also to meet the local requirements, so we make sure that we get the tax benefits. Overall, the currency is a challenge; we're trying to mitigate that challenge with actions locally. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [52] -------------------------------------------------------------------------------- We had about 300 megawatts in backlog in Brazil, so it's not that much. Of course, as Marika said, the local content will also actually enforce that you have to deal with lots of local production. It's a smaller part in between where we have to work with hedging the project margin. I think that a little bit leading to your other questions about Brazil in general, and whether or not it was the right time or wrong time for Vestas. I think in that aspect, of course, the Brazilian real and more the sort of overall macro development in Brazil is negative, and something that is important for us as well as all other companies to watch. My belief, also after having worked in Brazil for many years, is that it is going to be a market with its ups and downs; I think that is what you have to take into account in Brazil. I think, if you look at it from a renewable perspective, it's a market that has a growing need for more energy. It's a market with a lot of old hydro, so it's a market that actually, for the foreseeable future, will have a growing energy need. It's also a market then with very good wind resources. So from that aspect, I think it's going to continue to be a very interesting market. I'm very happy with the timing of Vestas entering the market. I think we managed to avoid the big rush that first started, and that has led to actually some other suppliers leaving the market. That meant that we missed out a bit on the volume. But on the other hand, if I see the consolidation in the market that happened after I'm, as I said, very happy with our more step-wise approach to get into that market. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [53] -------------------------------------------------------------------------------- Okay, thanks. And just a follow-up on a different topic altogether; obviously, the 3 megawatt platform is gaining steam, not just in Europe, but, as you suggested, in the US as well. How should we think about this from the profitability point of view, particularly on some of the newer 3 megawatt turbines such as the V126 or so? Just to get a sense of the mix effect as we see greater proliferation of 3 megawatt turbines. And maybe you could just help us with the overall (multiple speakers)? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [54] -------------------------------------------------------------------------------- Overall, both on the 2 megawatt and the 3 megawatt I understand what you're alluding to. We've very happy with the profitability on both platforms. You will always see differences because mix there will always play in. So how you construct the specific project will have an impact on the profitability of the two platforms. But a generic answer is that we're very happy with both platforms. We also have activities to take costs out on both platforms, and that continues. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [55] -------------------------------------------------------------------------------- Okay. So should I take it as there's not much, or not much of a mix effect from higher 3 megawatt deliveries? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [56] -------------------------------------------------------------------------------- It will depend on the specific project. That's all I can say to answer you very generically. The mix will always have an impact on either platforms. But there are, as I said, activities to continue to take cost out. And as you understand, the 2 megawatt is more mature so there's more cost to take out on the 3 megawatt simply because it's a newer platform. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [57] -------------------------------------------------------------------------------- Okay, fine. And how much was it in terms of overall installed base and in terms of revenue share perhaps in each one? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [58] -------------------------------------------------------------------------------- On installed base, I think we have to have -- I don't have those numbers in front of me. On order intake, first half it's fairly equal, so IR can come back to you on the installed base. -------------------------------------------------------------------------------- Alok Katre, Societe Generale - Analyst [59] -------------------------------------------------------------------------------- Sure, okay. Thank you. -------------------------------------------------------------------------------- Operator [60] -------------------------------------------------------------------------------- Klaus Kehl, Nykredit Markets. -------------------------------------------------------------------------------- Klaus Kehl, Nykredit Markets - Analyst [61] -------------------------------------------------------------------------------- First question would be on your current capacity. Could you give us an update on that one, and potentially also capacity constraints, going forward, if the order intake continues at the same run rate as we're seeing right now? That would be my first question. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [62] -------------------------------------------------------------------------------- So if we look at the current capacity, as you know the business, and that's the reason for your question, is developing quite fast. We have, as Anders alluded to earlier, we have really met the demand in the market in a very good way, both in 2014 but also 2015. We have some order intake, we have a strong order backlog, and we have, consequently, decided to make further investments in capacity, and that is primarily molds. Obviously, with what we're doing now we have the right activities in place to meet the demand that we see and have in front of us. -------------------------------------------------------------------------------- Klaus Kehl, Nykredit Markets - Analyst [63] -------------------------------------------------------------------------------- Okay, but could you give some kind of indication of megawatts? Are we talking about a capacity of 8,000 megawatts, or is that a Company secret? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [64] -------------------------------------------------------------------------------- I don't know if it's a Company secret. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [65] -------------------------------------------------------------------------------- We definitely have the required capacity and we have a very scalable capacity. If you look at the nacelle, it's actually a variation on the manufacturing footprint we have to scale up. Of course, it could happen that we have to take from different parts of the world, and of course, it's always an optimization that we are trying to do on closeness to the factory where we have the project. But from a capacity point of view it's a very scalable part. The blade part is what usually sets the number, so to speak, and, as Marika said, and I think we have said on these calls for the last three or four calls, that we are investing in new molds. They are actually then also possible to move around. And from a brick and mortar point of view, also on the blade we are [less] and, therefore, we can also flex there. -------------------------------------------------------------------------------- Klaus Kehl, Nykredit Markets - Analyst [66] -------------------------------------------------------------------------------- Okay. And then my second question would be on service revenues. I must say that I'm somewhat positively surprised about revenues in this quarter, so I just wanted to check if there's any unusual things included in the top line for this quarter in the service business? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [67] -------------------------------------------------------------------------------- I think that what you see in the service business, as you remember we carved out the service business and made it a separate business. Obviously, it takes some time before you get traction on that focus, and I think it is a reflection on the focus, so it's, again, a very strong organic growth in the service business. Obviously, also a reflection of the strong turbine order intake that you see. -------------------------------------------------------------------------------- Klaus Kehl, Nykredit Markets - Analyst [68] -------------------------------------------------------------------------------- Okay. Thank you very much. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Sean McLoughlin, HSBC. -------------------------------------------------------------------------------- Sean McLoughlin, HSBC Global Research - Analyst [70] -------------------------------------------------------------------------------- Can I just clarify on FX? You said EUR10 million to EUR12 million of positive translation of the EBIT; is that the total effect in Q2? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [71] -------------------------------------------------------------------------------- Correct. -------------------------------------------------------------------------------- Sean McLoughlin, HSBC Global Research - Analyst [72] -------------------------------------------------------------------------------- Great. Then two questions, if I may? Firstly, on a share buyback, if you can just talk about what might trigger that? Secondly, I'm intrigued about your comments on 3 megawatt replacing 2 megawatt. I just want to understand what's driving that; is that purely economics and [already your] 3 megawatts turbines are actually much more competitive on a megawatt hour basis? In low and medium wind speeds is it down to permitting, or is there anything else? And particularly, what other markets could we begin to see that? And most of all, how does that shape the way that you think about future product launches? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [73] -------------------------------------------------------------------------------- Okay, if we start with a quicker question, which is the share buyback, we will obviously, when we have a solid proposal from our side we're not ruling out a share buyback as I said, and neither a dividend. We will give a recommendation how much that is in either a dividend, so we will give a recommendation when we have recommendation in place to the Board, and then they will make ultimate decision on how much that can be. But obviously, we understand and respect the requirements and also see that ourselves to make the balance sheet even more efficient. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [74] -------------------------------------------------------------------------------- On the 2 megawatt and 3 megawatt platform question, I would say that 95% of the driving is, of course, pure economics, as you alluded to. So it's levelized cost of energy production. And, of course, we see then very good progress on the 3 megawatt, both when it comes to increase the power rating, we can all go up to [3.45 megawatt] and also increase the rotor size. But it's also so that with our new tower design, we can reach higher and, therefore, get a better wind condition. We can also go to new places with new features; that's both the grid features, but also, for example, the deicing solution. We also have solutions on more humid conditions. So it is very much, to the absolute highest degree, it's driven by levelized cost of energy and more efficient energy production. So that is what sort of drive this trend. We have seen, of course, since before that we have, for example, in Latin America quite a lot of 3 megawatt projects. US we see now in Q2 clearly, and the reason why we see more -- in a market the tradition has been only 2 megawatt, we now see a good order intake on 3 megawatt, is that there are sites now where the economics are better for our 3 megawatt platform. -------------------------------------------------------------------------------- Sean McLoughlin, HSBC Global Research - Analyst [75] -------------------------------------------------------------------------------- So does this mean that, in terms of future product development, you'll have more of a 3 megawatt, or go for a 3 megawatt plus focus? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [76] -------------------------------------------------------------------------------- I think the trend in the market is definitely there. And also, if you look at the age of the platform, of course, the 3 megawatt platform, as Marika said as well, is a much newer platform for us. And the potential for us both on improving that further, both from a cost point of view but also from energy production point of view, is higher from the pure fact that it's a newer platform. -------------------------------------------------------------------------------- Sean McLoughlin, HSBC Global Research - Analyst [77] -------------------------------------------------------------------------------- Thank you. -------------------------------------------------------------------------------- Operator [78] -------------------------------------------------------------------------------- Shai Hill, Macquarie. -------------------------------------------------------------------------------- Shai Hill, Macquarie Research - Analyst [79] -------------------------------------------------------------------------------- So my two questions. I think the first one, Marika, could I just ask you, sorry I'm not getting this, but to explain the difference, in terms of the offshore joint venture, between the EUR27 million reported and the EUR8 million that you say is stand-alone. Is the difference basically sale of equipment from Vestas to the joint venture? Perhaps you could just explain it to me; I'm not getting it. The second question was just, Anders, maybe you could comment a bit on Germany. A very big market for you last year, about 18% of your deliveries and, obviously, there've been some regulatory changes. And your first half deliveries in Germany are slightly less than half of what they were in the first half of last year. Do you think that's fair to assume that would be the picture for the full year basis, that you'd do less than half of what you did last year roughly? Or is there some seasonal rebound of deliveries I should expect in Germany? Thank you very much. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [80] -------------------------------------------------------------------------------- So if we start with your first question; the joint venture had a profit in itself, a net profit of EUR12 million. We get 50% of that, so it's EUR6 million and not EUR8 million as I said. And besides that, we had profits from the joint venture sales of turbines, so transfer of risk to the end user of some EUR50 million, I think it was. And then you have adjustments; that's the additional EUR15 million of turbines sold from Vestas to the joint venture. So we end up in the territory of EUR27 million. The thing is, just to take it from the beginning, is we sell the 3 megawatt platform to the joint venture. We then recognize revenue and, consequently, have the gross profit on that particular project, so it has an impact on our EBIT. But then following the accounting rules and principle, we have to deduct that profit under the EBIT line. So that will show negative figures from the joint venture. And now, as we sold last year into the joint venture, they have now transferred the risk of these projects and that, consequently, have a positive impact once they ToR out below the EBIT line for Vestas. So it is purely accounting principle. I don't know if I explain it very well, but that's the best effort. -------------------------------------------------------------------------------- Shai Hill, Macquarie Research - Analyst [81] -------------------------------------------------------------------------------- Okay, I think I got that. You had a profit in Q2 last year of sales to the joint venture, which reversed out below the EBIT line. And -- -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [82] -------------------------------------------------------------------------------- That's correct. -------------------------------------------------------------------------------- Shai Hill, Macquarie Research - Analyst [83] -------------------------------------------------------------------------------- You book a positive? Okay. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [84] -------------------------------------------------------------------------------- So a bit about Germany then. You're right, and as we expected, and as we talked about as well, we saw a decline in delivery in Germany in this year. We've seen a decline in the market from a very, very high market the year before on delivery. And also, as we expected, that's compensated for with a lot of increased delivery activities in several other markets in EMEA; talked about Finland; talked about Turkey; good activity levels in France and so on. So as expected, coming from a very strong delivery last year in Germany we saw a decline in delivery for the first half, but well compensated in other markets in Europe. If we look at orders, the picture is a bit different. As you can see, orders for the first half in the EMEA region is up 37% year on year, and in the quarter actually up 53%. So a good development on the order intake side and here, we actually see a good development also in Germany on the order side. So compared to last year, as we have said before as well, we've seen Germany smaller from a delivery point of view this year, but longer term we see Germany as a big stable market. -------------------------------------------------------------------------------- Shai Hill, Macquarie Research - Analyst [85] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [86] -------------------------------------------------------------------------------- Patrik Setterberg, Nordea. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea Markets - Analyst [87] -------------------------------------------------------------------------------- Two questions. The first one is regarding -- or both of them is regarding the development on the US market. You now have 2.3 gigawatt in master supply agreements, I'm just wondering, if the clients want to utilize all these 2.3 gigawatt of orders, would you be able to produce all of them in 2015 and 2016. And my second question regarding USA is that, during the first half of 2015, you have been able to book orders -- out of the order intake in USA, 60% of the orders is outside these master service agreements. Is this a more positive development than expected, or is it demand what you have budgeted for when you started the year? -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [88] -------------------------------------------------------------------------------- So if I start with your first question. If we can confirm the potential of the frame of 2.3 to [a firm and conditional] order we will be able to produce and deliver that really in 2015 and 2016. That we definitely have the capacity for. On your second question it's, of course, positive that we've taken also a large share outside the frame agreement in the first half. And, again, I am very satisfied with our performance in the US and our ability to take market share and orders. Then, of course, we should also remember that the borderline in between is somewhat fluent. So you could have projects that was in the frame before and the customer then -- and they signed, therefore, with Vestas' components for PTC qualification. And then those projects or one of those of projects can move out. The customer can sell that to another customer that we don't have a frame agreement with. But of course, it's still then the signed Vestas' components are possibilities to secure that order is fairly good. So it is a bit of a moving market as well when it comes to projects in the frame and outside the frame. But overall, we definitely have the capacity in 2015 and 2016, but we expect both years to be very busy in the US. And, of course, we are happy also to take even more orders outside the frames. -------------------------------------------------------------------------------- Patrik Setterberg, Nordea Markets - Analyst [89] -------------------------------------------------------------------------------- Okay. Thank you for the clear answers. -------------------------------------------------------------------------------- Operator [90] -------------------------------------------------------------------------------- Jose Arroyas, Exane. -------------------------------------------------------------------------------- Jose Arroyas, Exane BNP Paribas - Analyst [91] -------------------------------------------------------------------------------- A couple of questions. First one on the service margins. During the prepared comments section you alluded to about EUR2 million to EUR3 million of one-off costs in the service unit; could you explain to us if that's ForEx related? If there is a geographic mix or seasonal effect that we should know about and, if so, if that will reverse in the second half? That's question number one. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [92] -------------------------------------------------------------------------------- Okay, so to be very clear on that then, it's nothing that we will see on an occurring basis. But, of course, you can in a quarter or in a month have that type of a cost, but it's nothing that we plan for. And that's a little bit my point is, when you have an extraordinary cost in a fairly small business on a comparable basis, you will see an impact on the EBIT margin. As I said, it is still very high margins and also very stable margins overall in the service business. So it's nothing that we are worried about or have a concern about. -------------------------------------------------------------------------------- Jose Arroyas, Exane BNP Paribas - Analyst [93] -------------------------------------------------------------------------------- Where do those costs come from? What's the nature of those costs, if I may ask? -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [94] -------------------------------------------------------------------------------- Well, I don't have the precise description of the cost base for you, so I would suggest that you look or check that with our Investor Relations. -------------------------------------------------------------------------------- Jose Arroyas, Exane BNP Paribas - Analyst [95] -------------------------------------------------------------------------------- Okay. And my last question is on the offshore JV. What is the amount of milestone payments that you have received from Mitsubishi year to date, and where have they been booked in the balance sheet and the cash flow statement? Thank you very much. -------------------------------------------------------------------------------- Marika Fredriksson, Vestas Wind Systems A/S - EVP, CFO [96] -------------------------------------------------------------------------------- The amount that we have received from the joint venture is, at this point year to date, EUR187 million and -- yes, balance sheet obviously. And as Anders said, we have still EUR12.5 million to be received from the joint venture. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [97] -------------------------------------------------------------------------------- And that, of course, goes into the joint venture balance sheet. So it's the joint venture, the overall deal with Mitsubishi, was that Mitsubishi had a payment of, all in all, EUR300 million into the joint venture. EUR100 million was transferred at the start of the joint venture; the remaining EUR200 million was transferred on milestones to the joint venture, and it's now EUR12.5 million left out of the total of EUR300 million. -------------------------------------------------------------------------------- Jose Arroyas, Exane BNP Paribas - Analyst [98] -------------------------------------------------------------------------------- Okay, very clear. Thanks very much. -------------------------------------------------------------------------------- Operator [99] -------------------------------------------------------------------------------- Okay. We'll now hand back to you, Anders, to close. -------------------------------------------------------------------------------- Anders Runevad, Vestas Wind Systems A/S - Group President & CEO [100] -------------------------------------------------------------------------------- Okay. So with that, we close this call. Again, thank you for calling in, thank you for your questions, and thank you for your continued interest.
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