Anders Runevad - Group President & Chief Executive Officer Marika Fredriksson - Chief Financial Officer, Executive Vice President

Dan Tutu - Handelsbanken Sean McLoughlin - HSBC Casper Blom - ABG Claus Almer - Carnegie Phuc Nguyen - Citigroup Pinaki Das - Bank of America Merrill Lynch Fasial Ahmad - SEB Alok Katre - Societe Generale Klaus Kehl - Nykredit Markets David Vos - Barclays Gurpreet Gujral - Macquarie Jose Arroyas - Exane Jakob Magnussen - Danske Bank

So, good morning, everyone and welcome to this Second Quarter 2016 Earnings Call for Vestas. Starting across with the usual disclaimer slide and then, let me go straight into the key highlights. And, of course, overall, I'm very satisfied with the extremely solid performance of Vestas in Q2. We had a high activity level across the board, so delivery up 56% year-over-year, and driven by all regions. Increased volume, very favorable project mix and a solid execution also led to strong earnings in the quarter. EBIT margin of 15.6%, up 7.3% compared to Q2 last year also good to see order backlog continue at a high level 18.1 billion. Due to the better visibility for the remainder of the year and the year-to-date performance, we increased the guidance for 2016 on revenue, on EBIT and free cash flow. And we also launched 2016 share buyback program of €400 million in order to adjust the capital structure. So the agenda for today, as usual, I'm talking about the orders and the market; and then Marika will go into the financials and then we come back with outlook and the Q&A. Looking at the regulatory environment, I will say overall we continue to see a supportive environment for renewable energy and for wind. Some of the key events in the quarter, I will start with Americas then, was that IRS issued their guidance in May and that also then clarified the continuous construction wording, which, simply put means that if you stop the constructing this year, you qualify for a 100% PTC as long as you finish in 2020, so a favorable guidance. Latin America, not much new market that has been tendering market for our auction markets for quite some time. A little bit lower activity level in the first half, but we see auctions coming up in several markets for the second half of this year. Moving over to EMEA then and starting with Europe. As before, I would say that overall markets are driven by EU complying to the 2020, 20%, and 2030, 27% renewal energy targets. And we also continue to see as we do globally then the trend from feed-in-tariff to tenders and auction. The news in Q2 was Germany announced their auctioning framework, also positive; there was a lot of speculation on this before. Now, they're all clear transparent transition rule to the tendering system and the auction is projected to start in May 17th, and also the expected volumes within all auction framework or on a healthy level. We have also market going in the other direction, Poland, the regulatory situation has impacted the market, and we currently see a low activity level in that market. And in the rest of the EMEA, the same development as previous quarters; in Asia-Pacific and China, the overall plan from before remains, which means that there is a dropdown in feed-in tariffs and also transparent dropdown so that -- in the effort make the market more long-term stable, but continued very good support for wind. We also see some changes in the priorities towards the grid and we see say the first half of this year that were quite some curtailment in the market that on the back of the very high delivery during last year that this now being work through the system, and therefore the first half compare to the first half last year less activities on the order side. And I would say in the other Asia-Pacific region, not much change; continue to develop or implement the renewable energy targets in most market. If I look at the order intake, the order intake in the quarter was 1.8 gigawatt so on a solid level, down approximately 40% versus last year, but then of course we should remain where Q2 of last year was very strong quarter on order intake with this tough year-over-year comparison. And 70% of the orders in the quarter came from U.S., Germany, Canada and Brazil, so they were the main contributors. And as expected, the average sales price on order intake bounce back in Q2 and was on €0.89 million per megawatt. Overall, we experienced fairly stable pricing in very competitive market. And of course, as before, have to remember that price to megawatt depends on a number of different sectors, turbine type; geography scope and not least the uniqueness of the offering. Looking at the all the intake down for the first and six months, and we have a balanced order intake from 24 countries across 5 continents and again proven our unique global reach in the market. In a bit more detail, we see America is down 45% and very much impacted by the U.S. where we of course this year and have a very different PTC cycle compare to previous two years. Slightly offset by improvement in Canada and Uruguay, and they are up for 3% which very positive of course and positively impacted by Norway, Germany, France. Good activity levels negatively impacted by off shore where we last year had a 400 megawatt order on the 3 megawatt platform. On the other hand actually our joint venture for offshore in Mitsubishi, has taken a similar size order, on 400 megawatt on the 8 megawatt platform and those numbers are obviously in the joint venture. In Asia-Pacific, we saw a decline for the first half partly due to as I described, that we see a market that has worked through curtailment in the first half of the year. And of course, the segment we are in the market has had lower activities for the first half. Looking at platform and order intake under different platform, I will say two key messages here. First of all, that trend towards our 3 megawatt platform continues, you can see the order intake for the first six months on 3 megawatt, close to 2.8 gigawatt. At the same time, also a strong performance on the 2 megawatt platform with orders of 1.4 gigawatt. And of course, the broad platform program on both 2 megawatt and 3 megawatt with the difference there in for the different wind classes globally is the enabler for our global reach into the marketplace. Moving over to delivery with a really strong development, actually across all regions as I said, so up 56% Q-on-Q and up close to 30% on the first half of the year totaling 3.7 gigawatt. In the America, mainly driven by the U.S., but also an overall improvement in various markets in Latin America, most notably Chile and Mexico; EMEA also a strong development both six months and Q-on-Q 42% and 43%, solid activity levels with good performance in Germany, Sweden, France. And the off shore delivery on the 3 megawatt was then slightly offsetting that. Also good growth in Asia-Pacific, on the back of the order intake last year, the best performance year-over-year both first half and in the Q is especially then from China, Thailand, to some extent India and that offset a decline with in Australia. Moving over to the backlog then that continue to be record high at €18.1 billion, an increase of €0.1 billion in the quarter. Some movements within the backlog where the wind turbine backlog decreased €0.4 billion and the service backlog increased €0.5 billion and now close to €10 billion. Some words also about joint venture, we continue to execute on the plan and be on track. Good activity level on the order side, backlog now stands at 1.6 gigawatt or firm orders and additional conditional orders of 450 megawatts, so slightly above 2 gigawatts, well received by the market. As I also mentioned in the quarter signed 400 megawatt Horns Reef project. Looking at the delivery has now started to the first 8 megawatt project, which is Burbo Bank, so the delivery has now started to a harbor in Northern Ireland. Work has also started on a 3 megawatt project, Nobelwind, where we expect deliveries in 2016. With that, I hand over to Marika to talk about the financials.

Thank you, Anders. And as you can see on what Anders has described in terms of the Q2, the positive impact is again well reflected in our P&L. And you see the revenue is a good reflection of the very high activity level that you see in the Company, so we have actually improved compared to last year with 46%. So it is a very-very high Q2, and we have also alluded to earlier that try to move some of the activity levels earlier in the year, but that is unfortunately a bit random and this is the outcome now, in Q2. If you look at the gross profit in absolute number, you see a great leverage from the volume. You also have a very positive impact from the mix. And mix again is scope type of turbines, cost-out to certain degree and in this case, a very flawless execution in the quarter. That is actually well reflected in the gross margin where you see a big improvement compared to last year of 6.3%, it is not in any shape of form the run rate, i.e., the 24%. Should also highlight that we have a one timer in the gross profit here that is 26 million from an insurance case, and it comes from insurance case on fundaments of the turbines. Fixed costs have increased 31% partly reflection of the activity level that we have said previously, but should again and I come back to that note that in percentage, we are continuing down on the fixed costs. So I would say till well controlled, and well, under good control of the Company. So net profit increased by 122% and if you look at the JV, accounting using the equity method as we have said previously. And in the negative on ’17, that is a big part of that or the vast majority of that comes from the depreciation of the V164 that we have highlighted previously. So the leveraging on the fixed cost continues so despite being up in absolute numbers compared to last year. We are continuing down on the percentage level. So we are now at 7.8%, something that we obviously very happy with, or content, I should say. This continues to be a focus area and the focus is also to make sure that we actually have the fixed costs where the activity takes place. So that is also one of the focus area, it's not only absolute terms. If you have look at the service business, you see an increase again compared to Q2 of last year. So we have in revenue improved by 12%, a lot of that comes from the two acquisitions as we made i.e. UpWind and Availon, but also organic growth. And despite that we disclosed that this profitability of the two acquisitions was not that high, we continue to deliver very solid margins on the high level on the service business. The order backlog there Anders commented to earlier, but again a very solid and good offering from the service business side has made this improvement possible. If we have a look at the balance sheet which continues to be strong focused, but also strong performance from our side. You can see the equity improvement and you also see the improvement of net debt. So we are continuing to be self financed and having a positive net debt position. Networking capital as we have alluded to earlier, one of the key focused areas is to keep that under control. We have done a lot of activities to get it down further, but at this point the activity level that we see and have had and foresee, we are very content with keeping it more or less flat in the period. Solvency ratio, you remember our mid-term target is to have a solvency ratio in between 30 and 35, we are within that range, although a slight decrease compared to Q2 of last year, but still a very strong position when it comes to the balance sheet. We also have a very strong net cash position, I don’t think that’s any secret. Changing net working capital, as I said earlier and I think this is a good reflection of what we have done during the last 12 months but also what is done during the last 3 months, i.e. the last quarter. And you can see it, it is the same pattern, we continue to increase receivables and inventory based on activity level in the two parameters that we measure. But that is on both 12 and 3 months well offset by increase payables and that is again also a reflection of just the very high activity level within this. So I think that again we are very content with keeping as a networking capital flat at this activity level which also proves that we are rigorous in what we’re doing within the Company. Warranty provisions is something we’re obviously very proud of where and we continue to consume less than we provide for which is a reflection of the good quality. That is again well respective in the lost production factor that continues to perform below 2% and have actually done for a very long time. So the focus on quality pays off in both from a customer perspective but also internally in terms of the cost level that we have. Cash flow statement, this is one thing we have a strong performance on and that is again coming now from the operating profit which we have highlighted previously, if any one timers in the cash flow. And the change in net working capital, negative as expected we’ve reached a level that we have and you’ll see also the cash flow from investing activities. And this gives us a very strong cash flow in Q2 of this year. We have an improvement of 147%, but please note that a lot of the deposited cash flow actually comes from the operating activities. If you look at the cash flow front from financing activities, negative 222. The vast majority of that comes from the dividend that was paid in April of this year. So we're at breakeven free cash flow from year-to-date of approximately 34 million or I would say rather precisely 34 million. Total investment continues to be I would say stable quarter-over-quarter, an increase compared to Q2 of last year, again as planned for and also what we have highlighted. In Q2 of this year you'll see an increase because of capitalization in R&D, but also higher activity within IT that we now continue to invest in to make sure that we can deliver this efficiency gains that we're expecting. We're again adapting for the acquisitions that we made in Q2 of this year and that is primarily or it's only Availon. If we have a look at the capital structure there's no new targets. We remained well within the target I should say in particular on the net debt to EBITDA but we're also well within the targets for the solvency ratio, so we're in the quarter delivering 30.5%. And if we have a look at the priorities for capital allocation which we spoke about when we had the Capital Markets Day, there's no change in how we view this and also our ambition. So, you see that we'll continue to invest in the organic growth that is also well reflected in the strategy that Anders have presented. And we'll also use proceeds for acquisitions. We've done that in terms of UpWind and Availon but we see acquisitions, we prefer both on acquisitions that we can integrate and make sure we get relevant synergies from. We will also continue to use our dividend policy which is 25% to 30% of the net result and again just to highlight that we have paid out 201 million in April of this year. And we will adjust the capital structure with a share buyback in the second half of this year. And as Anders said at the beginning we're now starting that 400 million buyback in this -- or after this quarter. And again coming back to the share buyback program we have launched now 400 million and to be precise, it's DKK2.984 billion, and that is in accordance with the Safe Harbor Rules. The program was launched August 18th and we're running to the end of this year. The main purpose is really to adjust the capital structure as we alluded earlier and the frequency of the share buyback is nothing different from what I just presented and we will when we see fit propose share buyback. And the dividend policy remains, we have this 25% to 30% dividend policy of the net profit and that has -- will not be affected or impacted by the share buyback that we're proposing. And not the least, we have the return on invested capital which are at a very high level and this level is obviously extremely high due to good performance on the earnings but also well managed balance sheet, it is at an extreme level and meet we have said, our target is to be double digit when it comes to the ROIC. And by that, I leave the word to you Anders.

Thank you, Marika. So let me then go into the raised outlook for this year, starting with the revenue, so pervious minimum €9 billion now we have raised that to minimum €9.5 billion on EBIT before special items from minimum 11 to minimum 12.5%. We have not changed our view on the service business so expected to continue to grow with stable module. We have also not changed the guidance on the total investment, still approximately €500 million and we have increased then the outlook on free cash flow from minimum €600 million to minimum €800 million. And as Marika said, the dividend policy remains the same. Thank you. So, with that, we move over to Q&A.

Thank you. [Operator Instructions] And our first question comes from Dan Tutu from Handelsbanken. Please go ahead. Your line is now open.

Congrats with a fantastic performance here in Q2. Could you elaborate, maybe a bit, on the mix effects that you highlight here in the report? I mean on regions and platforms and projects, etc. And how do you see that changing going into second half, because looking at guidance, it implies at least a lower margin in second half? That is the first question.

Yes and the mix effect is a big an important in what we deliver this year, you see the levels we are at when it comes to gross profit, so it is exceptional, but you will also see the regular difference in the quarter. We cannot -- we would like but we cannot control exactly what we ToR in each quarter. We're trying our best but not to 100% is what we achieved that's you see the high volume which has the big impact on the mix. And when I talk about mix effect, it's primarily scope, it is platform, it's to a certain degree country but you see a good mix in the countries also in the quarter. And in this case very flawless execution and just to highlight the little bit is, the accelerated earnings that we have presented to you previously. If you have very good achievements in that program which is very forward thinking for natural reasons because you have deliver before you realized anything. And if you have exactly the right mix in terms of all products and scope that will have an impact. You could also have mixed effects in terms of very good performance or upgrades on certain products, but that's kick-in in the specific quarter. And I said all of these elements on those controllable you would have also flawless execution is that with the volume, if you're very good at your logistics you could have benefit from that and the larger the volume the better that impact is. So it's a lot of factors that actually constitute of the mix effects that you see, but it's in this quarter it's a perfect blend of everything.

So it's a bit of caution you could argue maybe that since you are implicitly guiding down a bit on the margin in second half. Why shouldn't you be able to sustain that high margin level?

No. And the margin that you see now in Q2 is not a run rate because you will see fluctuations. It is just very, very perfect in Q2 that makes the 24% that we deliver we don't foresee that in the second half and that is also reflected in the guidance as we're providing.

Okay and then just one question looking a bit into the future. Do you see any potential bottlenecks coming up into your production, so to say, platform at the moment, anything that can constrain you in pushing through even more turbines?

Well, if I start and Anders continues. If you look at the assessment that we're making now in Q2 which we base in the guidance this is the same methodology that we'll use all the time, so a certain risk element is always in the guidance than that how we make the assessment and provide the best estimate at this point. I don't know if you want to highlight more Andres.

No, I mean on fuel production, I think we're confident that I think we've shown a good track record of scaling up production and that we have a flexible production set up. It is primarily blades, as we have talked about many times that should be on the critical edge because that's the most capital intensive and we had technology since we did now about 2, 2.5 years ago. I think we have, we feel confident in the track record of scaling up when it comes to our production.

Thank you. Our next question comes from the line of Sean McLoughlin from HSBC. Please go ahead. Your line is now open.

My two questions are I just want to understand really what's changed from the Capital Markets Day in June. You were talking really of a very backend-loaded delivery year. So how much has the Q2 been a surprise to you? And is it down to specific projects coming in ahead, or is it down to specific projects being unexpectedly profitable? Secondly, just some visibility on when you think the JV contribution might turn positive? Thank you.

Thank you. If you look at the back end loaded profile that we have spoken about I don't see that have changed in terms of overall methodology that is how the industry is built. And yes Q2 came in obviously much better than what we anticipated. So, a lot of the volume we're trying to make sure that we have less of the risk in terms of Q4 and in particular November, December for weather conditions. We try to pull in a little bit earlier the best we can. That is again as I tried to allude to a bit random unfortunately because we cannot control because it's also depending on when the customers are ready. And this quarter came out very, very good in terms of the revenue and that has a positive impact on basically all parameters. And on top of that, we had a very flawless execution in terms of no extra cranes or extra costs for deliveries. So the cost level was also, despite the high activity level, extremely well controlled. Then what was your second question, Sean?

It was about the JV contribution which, again, I noticed is still firmly negative, and if you have any greater visibility on when you can expect that to be turning positive?

Yes, and I think we have actually been very explicit about the depreciation of the V164, which is a big contributor to the negative result that you see here using the equity method. And once we start ToR-ing what we have potentially invoiced to the joint venture, but also the V164 when you see the deliveries that will obviously have a positive impact on the result.

Thanks.

And now I cannot be more specific than that, Sean.

Yes, yes.

Thank you. Our next question comes from the line of Casper Blom from ABG. Please go ahead. Your line is now open.

A big congrats on these amazing results from my side. Marika, a question for you on the R&D and administration costs in the quarter. That takes a pretty big jump; it seems to be related a bit to depreciation. Can you go into a bit detail on what's happening here and also, if we should return to the usual levels from Q3 on those items? That's my first question please.

Yes. And if you look at the run rate, you're absolutely right, Casper; we are failing on -- we are not changing the run rate of the fixed capacity costs. So when it comes to R&D, we have depreciated or impaired some of the testing facilities that we have. And on the admin side, we also have VAT costs. Those are the primary -- the two big ones that we -- and also, there, should not forget that, we have actually moved the building in Aarhus from assets held for sale into the Company. Again, that doesn't mean we're trying to sell; not trying to sell it, but we will -- we don't foresee that we do that within this year and that's the reason we have also increased the depreciation for the buildings. Those are the major components, so that's if you want to call them one-timers or whatever, we do that assessment obviously every quarter and see if we are at the right levels. But the run rate remains fairly stable.

Okay, good to hear. Then my second question regarding the U.S. PTC qualifications, where we've seen at least three firm orders coming through here this year, can you shed any light on your expectations on when timing will be for the remaining part of these orders? Will we see most in 2017, 2018, 2019, or how should we think about it? Is it just to sort of model it equally spread across the coming three or four years?

I think, I mean, of course, as you said, we see some orders coming through, definitely seeing that both for PTC and components, and also for projects in 2017. I must also say that I'm really satisfied overall with our position in the U.S. market. I think we clearly gained share there during last year. I will not give an outlook on orders for the remainder of the year; we have the policy of when orders become firm that we will seek to. I would say that, of course, it is still a very, very high activity level. It is a new scenario both for us and for the customers in the U.S. to plan for when they now plan for a much longer period of time, up to 2020, of course, in the first case with the 100% PTC support. So it is a really hectic period in the U.S., and I expect that activity level definitely to remain to the last day of December for this year.

Understood, Anders, but just to try to ask the question again maybe a little clearer; if you get a PTC component order today which, for example, makes up 10% of the total order, the remaining 90% of that order, is the best guess right now to just equally distribute that over the coming years? I mean all else equal, without you having to give any guidance on your expectations.

Yes, I think so; I mean that's because I don't know how it will turn out. So I think your assumption of starting with an equal distribution is the solid assumption because the reality is that before the customer have decided how they see the volumes between the year, it is as good an assumption as any. And probably, there are a lot of benefits to that assumption because there are a certain amount of projects that you realistically can do in a year so to speak.

Thank you. Our next question comes from the line of Claus Almer from Carnegie. Please go ahead. Your line is now open.

My first question is about your new guidance. How do you embed the uncertainty for the U.S. market?

Okay, if you look at the guidance again, it is the best assumption. I think the biggest positive question mark that we have is obviously how the PTC will pan out, i.e., how they will intend to qualify for the 100%. That, we have a positive view, but the guidance that we have provided is based on a best estimate and obviously, the U.S. is part of that best estimate. So it's nothing different from what we normally do when it comes to guidance and assessment of performance of the Company.

But do you assume that a lot of the PTC qualification orders will move to Q1 2017 from a revenue point of view? Or do you assume it all will come in 2016? Just trying to get a bit of flavor on the volatility on the revenue recognition.

Yes, and I understand that, Claus. But I would say that remains to be seen. It depends on how it pans out. Obviously, once they place an order, we have 105 days to deliver. So when and how the orders come in, that remains to be seen. So we just have to come back on that, but again having said that, the guidance that we provide is a reflection of all the upsides and downsides that we foresee.

Okay. Then my second question goes back to this question about the product mix in the quarter, and I understand that the guidance for our second half is assuming a lower margin than we've seen in the first half. But if we look at the full order backlog, does the scope and country mix, etc., etc., is that equal to what we saw in Q2 or was Q2 just a more favorable mix?

I think that goes without saying that Q2 was a very favorable mix. Having said that, we have a healthy order backlog and I will not comment more on that. But I would also like to say that gross profit margins of 18%, 19%, that we have shown previously, is very healthy margins. This is just a very exceptionally good margin in Q2 of this year.

Okay. Then, that makes sense. And maybe just a final question about your free cash flow guidance. Looking at your share buyback program and your dividends, you're still not paying out -- or you're paying out less than you're guiding for the free cash flow for this year. What is the signal behind that?

There's no signal behind that. We made an assessment what we think is relevant and we have also been very specific on how we want to use the cash. We want to invest in the business. Also, if we see opportunities or bolt-on acquisitions, we are prepared to do that. We will use money for the dividend and in the second half suggest a share buyback when we see that fit. And that is what we have proposed. So it's nothing more to it than that, Claus.

Thank you. Our next question comes from the line of Phuc Nguyen from Citigroup. Please go ahead. Your line is now open.

Two questions if I may. The first one is on the U.S. market and the order intake profile there. We know that 2016 will be quite backend loaded, as you guys mentioned on the call. Can we assume that the order intake in 2017 will be significantly down? Or do you see customers that you have negotiations with that are happy to take a lower PTC in 2017 or potentially 2018 or 2019?

Yes, as I said before, we see a very high activity level in the U.S. Also, the other question on how we see the market pan out when it comes to revenue to 2020, we commented on that assumption. So I will not guide on orders for 2017 on this call. As I said before, we announce orders when they are firm and unconditional. And how we look at 2017, of course, we will come back to you. But I just want to stress again that we see a very stable U.S. market from a revenue point of view, clearly up to 2020. And I would also, actually, argue beyond that. Because then we have a dropdown per year of 20% of the PTC for quite some more years. So, for the midterm, the U.S. market, to me, looks very stable.

Okay. And my second question is, again, coming back to the gross margin. Obviously, you had a very, extremely strong quarter. I think that was one of the highest that you've ever recorded. And from the accounts, you can also see that 1% was driven by this court settlement, but you are still somewhere around 23%. I'd like to understand a bit more. Was this driven by very strong ASP that you've seen across the regions? Or was this cost driven? In other words, did you see exceptional strong product mix with high ASP in the quarter? Did you have a very strong quarter in terms of cost improvements and, therefore, you got to this gross margin?

I think that's a fair assumption. And what we have talked about earlier is that we have a mix that is influenced by a very high volume. And in the mix, you have the scope and you have the type of products. You have the output of the products and you have the execution. And, obviously, cost is an element. But overall, it is a good blend of everything in terms of the margins of the projects. And that's why we have a very high gross profit. But, again, I just would like to say that even if we don't see that 23% as a run rate, because it will depend on the mix, each quarter you will see fluctuations, I think what we have provided over the last year is healthy margins for the Company. And then you have all the controlling elements in between, the EBIT that continued to be at a healthy level.

Thank you. Our next question comes from the line of Pinaki Das from Bank of America Merrill Lynch. Please go ahead. Your line is now open.

I've got two questions. The first one is on some of the U.S. orders. I just want some color on that. And the second one is on your full-year guidance. The first question on the U.S. orders; I know you don't guide on orders and I'm not going to push you on it. I just wanted a bit of color on some of the orders that you've already announced. So I know that you've announced the 131 megawatt U.S. PTC component order, as well as the EDF 160 megawatt order. And from my understanding is that although there's the PTC component orders once you look at the 5% criteria, these orders each could be almost 2 gigawatts once they fully convert into firm orders. So I just wanted to confirm if my understanding is correct on the mechanics there, although I do realize that, ultimately, they will need to be confirmed, when they will be confirmed. And also, related to that same question is could you give us some color on the mid-American 2 gigawatt conditional order? Is there anything progressing there in terms of the conditions or whatever maybe? So that's my first question. I'll give you the second question probably just after this.

Okay, yes. No, that was almost two, but I count it as one. So I think on the PTC component, again, of course, it remains to be seen. But as a rule of thumb, what we've seen before is, when it comes to turbine value or components value, around 10% of the total project value. But, of course, I have to stress that it's not a firm and unconditional order. It's a competitive market and, of course, we have to continue to fight with the competition to take that order in the end of the day, even if there are PTC components. But as a rule of thumb, I would say more that the PTC part is 10% of the project. On the mid-American, which, of course, is a conditional order that we are extremely happy about and extremely proud for, it's potentially a very big project and, to some extent, a new customer for us. But I will not comment on the expectation of when it will be firm; we will come back to when we have news on that.

Okay, great. Thank you so much. And on the second question on guidance, I understand that some of the PTC components that you're getting orders for might have to be delivered already in 2016. Does the guidance include some element of PTC component deliveries already in 2016?

Anything that we anticipate, both positive and negative, is part of the assessment that we make when we make the guidance. So, obviously, all parameters is reflected in the guidance that we have. And then, obviously, you do the regular risk assessment. And the best estimate that we have at this point is what we're providing.

Okay. No, I'm not asking you whether there's upside or downside to the guidance. I just wanted to understand if some of the PTC components are also part of the guidance already.

Obviously, we have taken orders up to this point of 344, so they are part of it. And then you make an assessment what you think is likely for the remainder of the year.

Thank you. Our next question comes from the line of Fasial Ahmad from SEB. Please go ahead. Your line is now open.

A few questions from my side. Firstly, on free cash flow guidance, the upgrade you're making here. Is the upgrade purely driven by high expectations for operating cash flow? Or are you also changing your assumptions for working capital? And maybe if you could also comment how U.S. PTC orders are impacting then that line? Thank you.

How we view and make the assessment on cash flow is nothing different from what we previously do. So, obviously, net working capital is part of that. But we have also been very explicit on the net working capital; that we don't see a lot of positive movements on the net working capital with the activity level that we foresee and also the activity level we consequently guide for. When it comes to the PTC, that's basically what I said just previously. The cash flow is a reflection of what we know and it is also -- or the cash flow guidance is a reflection of what we know. But also, a reflection of what we can anticipate, so that is -- how orders will pan out is part of the guidance on the free cash flow.

Okay. And sorry for asking this question; it's regarding gross margins, which you've been grilled on quite a few times here during the call. But when we look at gross margin for the second half of the year, do you want us to think about trailing two to three quarter gross margin when we are doing our margin assumptions for the second half of the year and how we should look at it?

Actually no, we're not guiding on the margins. But as I said, the 23% is at the very high level and we have also been down to below what we delivered last year in terms of gross margins. You can just make your best qualified assumptions on the margins going forward. But we are at the healthy level with what we provided last year. Then what the margins will -- how they will pan out for the second half remains to be seen.

Okay, okay. This may sound a bit crude, Marika, when I ask this question, but you've been saying for the last, at least, three quarters that you've been -- your gross margins have been helped by very good project margins. Why should we take your comments regarding contribution margins for the Q3 on face value this time?

That you can probably only respond to yourself, what you believe in. But if you look at Q4, last year we delivered 18%. So you have a good mix up and down on the gross margins. And even if it sounds like we have that explanation all the time, the mix and the volume is a big portion of that. Also, remember that we have the cost-out programs and obviously, if that hits exactly the right platform, that's very beneficial in that particular quarter. We cannot 100% -- we wish that we could say to the market that these are the type of projects that will come in, in Q1; these are the types of projects that will come in, in Q2 and so forth. And the only thing I can say is that we're trying to mitigate the risk with Q4 by pulling in some of the projects a bit earlier as best as we can.

Thank you. Our next question comes from the line of Alok Katre from Societe Generale. Please go ahead. Your line is now open.

Just as well, congratulations on a really, really great quarter and/or rather another great quarter. Thanks for taking my questions; I have a couple actually. Firstly, just following up on the U.S., it seems to me generally, just looking at your announcements from yourself and also the peers, that the customer are not really in a particular hurry to place orders, even though, if you look at the projects being started, then we are well now to 15 gigawatts. But is this something that you see is linked with the IRS clarification that allows for a four-year commissioning pipeline? And therefore, I know you've partly responded to it, but generally, should we expect a lot more stable book to bill as we go through the next three or four years? Even if the activity is at a pretty high level, you see a more stable order flow relative to deliveries? So that's my first question. And then the second question is a bit on the European side. Clearly, orders were much weaker in Q2, and I know there's the ramp in and so on as well, which is affecting. But even adjusting for that, it's still quite sluggish. You talk about Poland being weak because of the shift in regulatory mechanism over there and then you've seen UK being quite sluggish in 2015 and also this year. So just wondering how you view the ongoing trend towards the auction system in Europe, both from a volume perspective, and also given what you've seen so far on the pricing perspective. Is it something that we should be a bit worried about on either low volumes or risk of pricing being a bit more worse than the cost-out trajectory for the industry and for yourself as well? Thanks.

Thank you. Thanks for your questions. If I start with the U.S. again, as we have said as well, I think we have to acknowledge that it is a new situation both for us and our customers. Of course, there was a wait for the IRS guidance and that came now in May so that, of course, clarified things also as well. But I think that the way to look at it in between Safe Harbor and continuous construction is obviously -- and you should probably ask your customers these questions as well, but is obviously that if the customer has an existing project, it's probably more likely that you will do the continuous construction qualification. Or on the other hand, if you have more an ambition on certain volumes, then of course, the safe method is more to qualify on the Safe Harbor qualification. So it is of course now for the customers to mature their projects as much as possible, to decide what kind of qualification. And then also, since this is now 100% up to 2020, and at the same time, of course, the development of more and more efficient turbines continue, you will have a fairly fluent market that you don't want to lock in everything in all parameters too early in the process. So that is probably the overall thinking in the market. Again, the positive news is, of course, that it provides a very stable market on a high level for many years to come. But exactly how it will pan out over the quarters and years, I think we have to come back to when we get a bit more clarity. On your question on Europe then and in the quarter, I agree in the quarter, but orders will be lumpy in the quarter. I think if you look at our order intake for the first six months of this year in EMEA, we are up 33%. So that I would say is very satisfying. And I think, as I've said before, we see a stable market in EMEA and also within Europe, even if we see movements in between markets. As we talked about before, now activity level is a lot lower in Poland, for example, than it was last year. On the other hand, activity level is picking up in France, for example. And Germany, I would say overall, is a very stable market. There is, of course, now and then probably a certain pull-in, which we probably will expect for 2017 as well because, of course, the transition rules for the auction depend very much on when you have permits. But it's very clear transparent transition rules; it drops down more on a monthly basis in order to have a smooth transition through auction system and avoid this kind of big pull-in and then big push-out. So I think that's a very sensitive policy that will create a stable market in Germany. But, again, if I just look at the actual first six months, when we are up 33%, I must say I'm happy with the order intake development.

Sure. If I could just make a quick follow-up on the U.S., when you say you look for a high-level stable market, last year the volume in the U.S. market was about 8.5 gigawatts in terms of installations. When you say high level, are we talking of something more like 10 gigawatts per annum, just to get a sense? Or are we more looking at 8.5 gigawatts as a stable -- when you say stable and high level of market, just to get a sense of what exactly would you mean in terms of stable and high levels?

No, I would say that if you look at most of the predictions in the industry now then, it's around 8 gigawatts to 10 gigawatts per year, and I have no other information than if I look at the external market analysts that that's likely. Then how that will play out exactly during the year, I think it's very hard to say.

Thank you. Our next question comes from the line of Klaus Kehl from Nykredit Markets. Please go ahead. Your line is now open.

One question, and that's related to India. Could you update us on your Indian strategy? And could you tell us whether you have received any orders here in the first half of the year, and just give us a status update? Thank you.

Thank you. And basically, no major changes, as we've said before. We need to complete our factory in India before we feel that there are any that the order intake there qualify for what we would consider acceptable margins. So it is a market where you need to supply locally in order to generate an acceptable profitability. So the factory is on track; we've taken some small orders, but it's very insignificant in the total scheme, I would say. So our strategy is to complete the factory, start the delivery in the beginning of next year. And, based on those capabilities that we then build up in India, take a look at our ambition in the market, so no major change from a global perspective. Of course, locally, there is a need to update the delivery plan. There are certain seasons in India, depending on monsoon seasons and when, in which windows you have to deliver and so on, but that's local strategies. From a global standpoint, I would say the full focus now is on the factory build-out and then also, partnership around the development side and the land issues that we've talked about before that exist in the Indian market.

Okay. And just a follow-up; when will the factory be ready? Is it about to be completed? I read something about September.

We expect the delivery starting beginning next year.

Thank you. Our next question comes from the line of David Vos from Barclays. Please go ahead. Your line is now open.

I have one on Germany to start with. The gold rush you referred to over at the Capital Markets Day, is that still well on track? Are you seeing elevated order intake versus last year? It's always a bit hard for us to track that as most of that ends up in unannounced orders, but if the increase in those is due to Germany, if you could confirm that, that would be helpful. And if you could also comment on whether you're experiencing any issues in obtaining permits on the part of your developers, that would be very helpful. Thank you.

Yes, thank you for your question. I think it's fair to say that we see a higher activity level in Germany, and I think that that will actually continue for some time. As you also mention, it has to do, of course, with the permitting and actually, if you also have permits in projects within the 17 timeframe that you then deploy during 17, you will then qualify into the old system. So it's not a, what should I call it, super rush with a very clear deadline in this year. I think that you will see, to some extent, certain pull-in this year, for delivery this year and for delivery next year as well, in anticipation of the auction system. At the same time, in the auction system, the megawatt under the auction system is expected to be somewhere around 2.5 gigawatts to 3 gigawatts was the latest I saw, which, again, I must say is a stable, good market in Germany. And we've seen this a little bit before. Last year, Germany wasn't so strong; the year before, it was also pull-in in anticipation of all the change in the feed-in tariff. But compared to many other of these regulatory changes, I must say it's relatively, to them, very stable. I was in Germany just a couple of weeks ago and I met a lot of customers, I didn't hear anything about lack of permitting, but I must admit, I didn't ask either. But it's not something that I'm aware of.

Okay, that's very clear, thank you. And then one more question on Egypt, there was a bit of talk in the market, back in May I think it was, around a fairly big contract, perhaps being on the Board in Egypt hasn't materialized yet. Is that because you found it not attractive or are talks still ongoing?

No, but there, I can confirm that we have discussion with Egyptian authorities of possible business development, Memorandum of Understanding type of agreement, and those discussions continue. Egypt has actually very good wind potential but it's in a very, very early stage and, at this point, far from a firm and unconditional order. But I can confirm that we have ongoing discussions with the Egyptian authorities around a framework.

Thank you. Our next question comes from the line of Gurpreet Gujral, Macquarie.

Two questions from me. Firstly, are you seeing any more interest in turbine demand coming from utilities in America? And if so, do you think they will be operating on a much quicker time line in terms of commissioning than traditional wind farm developers in America? And secondly, could you provide any color on the ASP of your firm orders that's announced for Q3 and whether you're seeing any price tension from potentially some of your U.S. customers looking into locking in the 2016 PTC? Thanks.

Of course, we have an example for MidAm as utility to looking at potentially put more wind into their regulated side, so sure. We see increased interest on the utility side, both on the unregulated side which we've seen before, but also now then, as one example, on the regulated side. I don't think that there is any -- that will not mean that there are any changes in the speed, so to speak. The regulatory side is, of course, a little bit different on the process where you need to go to the regulatory state board with the suggestion, and you have to show on how that will then influence the rate plans overall, if any. So, it's a little bit different process on the regulated side on utilities. And, of course, MidAm is one example of the interest of doing things there on that side. But I don't think that it will impact the project implementation speed. The reality is, of course, that once a project is mature, it's financed, it's defined, then of course, it's in the customer's interest to start to generate a return on that as quickly as possible. And that goes for the independent power producers, as well as the utilities. On the ASP side, as expected and of course, this came back in the Q2 to €0.89 million and of course, that's very much in line in what we had in Q4 and also in Q2 last year. So, overall, I would say fairly stable, and as I said on my comment as well, then that doesn't mean that this is not a very competitive industry; it is for sure. And I expect it to continue to be compared to the industry in the U.S. for sure which, of course, is a big stable market now, but it's not any major geographical sort of difference within the competitiveness. We have competitors all across.

Thank you. Our next question comes from the line of Jose Arroyas from Exane. Please go ahead. Your line is now open.

Just another question on pricing, can you speak of the level of turbine pricing that you are now seeing in the U.S., not yet visible in your order intake, but based on your negotiations? And also, in the auctions that have taken place in Latin America, in Chile for example yesterday, is the level of price pressure rising above normal levels in previous years? And if so, do you feel the industry, and Vestas in particular can continue to offset this price pressure with cost savings, or on the back of more efficient turbines that include better pricing? Thank you.

Yes. No, but as I said, if you look at our ASP in the quarter it's €0.89 million, we think that is on, yes, what you could call fairly normal level as if I compare to Q4 and Q2. So, again, I can just reiterate here what I said before; it's a competitive market. It's of course so that big markets attract competition. But we see a fairly stable pricing in a very competitive market. I don't see any changes compared to what I have said during the last quarters. I think auctions, as I also talked about, is definitely the trend. It's not new, I would argue. Vestas has taken more than 3 gigawatts in auction and tenders, and we are very comfortable in the situation. Really, we need to continue to leverage our scale, our global reach and our technology, and of course, continue to work diligent on our cost-out programs that we have also delivered on so far. So thank you. And then, I think we go to the last question.

Thank you. Then last question comes from the line of Jakob Magnussen from Danske Bank. Please go ahead. Your line is open.

Two questions. First of all, you still have this outstanding bond of €500 million against a massive cash position of over €2.5 billion. Can you update us on your thinking around if you're still happy with this bond, with a negative carry of 2.75 percentage points? That's my first question. Then the second question; can you update us on your thoughts about getting a rating? I realize you don't need any new debt, but maybe in terms of requirements from your customers, are they still not demanding a rating from you guys? Thank you.

Thank you. On the bond, we're still pleased that we have a bond out there, and I think when we do all the financial planning, whether it's internal or external sources, we don't only view the present situation; we obviously have a longer time horizon on that. And that is also reflected in the tenor of the bond, as well as the RCF. When it comes to the rating of the Company, we have been very specific there, that the experience from the rating institutes on our type of business is fairly limited. And also, the other thing is why should we be the first runner in terms of getting rated as a company? And then thirdly, when it comes to our customers, the main thing they look at is our solvency and the balance sheet going forward because they enter into very long-term agreements with us, and that picture hasn't changed.

Okay. Then I would like to thank you all for your interest and calling in, and then I'm sure we will see plenty of you during this day and next. But otherwise, the financial earnings call for Q3 is on November 8. So thank you very much for calling in, and thank you for your interest.