Anders Runevad - CEO Marika Fredriksson - CFO

Kristian Johansen - Danske Bank David Vos - Barclays Claus Almer - Nordea Marcus Bellander - Carnegie Dan Togo - Handelsbanken Capital Markets Casper Blom - ABG Sundal Collier Akash Gupta - JPMorgan Fasial Ahmed - SEB Gurpreet Gujral - Macquarie Alok Katre - Societe Generale Pinaki Das - Bank of America Merrill Lynch Sean McLoughlin - HSBC Klaus Kehl - Nykredit Markets

Good morning, everyone, and welcome to this third quarter '17 earnings call. Thank you for calling in. As usual, and it's me and Marika here. Starting with the disclaimer, a normal slide, and then let me get straight into the key highlights of Q3. Overall solid increase, up close to 50% year-over-year, 2.6 gig watts. Revenue of €2.7 billion, a decline of 6% year-over-year but, looking at the 9 months actual, basically on par with last year. EBIT of €355 million 12.9% margin, so solid earnings in the quarter but a decrease of 18% compared to the same quarter last year. Service continues to develop well. Revenue increased 18% year-over-year and EBIT margin at 17.9%. Cash flow reached €193 million, a 25% year-over-year improvement. The outlook for '17 has been adjusted, mainly based on visibility for the remainder of the year. As usually, I will talk about orders and markets, and then hand over to Marika for the financials, and then come back with the outlook and Q&A. So, the wind industry continues to evolve and, as we have talked about before, quickly moves into auction and competitive tendering systems. Auctions really started in Latin America, moving over to across the U.S. with a tendering system. And this, we see now is present in all regions. With this, we have also seen continued power prices coming down in the new auctions, so basically a market that has transitioned quickly. A little bit more in detail then, starting with the U.S. The strong U.S. demand is driven by the current PTC structure that we are in and, of course, also the increased competitiveness of wind. The proposed House Tax legislation creates uncertainty. Our most likely scenario or the scenario that we plan for is that the current PTC structure will stay. And we base that assumption on that it has a broad bipartisan support in the Senate that we saw in the vote in 2015. Having said that, of course, this, as I said, the House Tax legislation creates uncertainty, and we'll come back a bit on how that is reflected. Latin America then, as I said, was the first region moving to auctions. We see that continue. We've seen some auctions being held in Bolivia and Chile. We expect new auctions in the quarter in Brazil and Mexico and then also Colombia. Looking at EMEA then and starting in Europe. Europe is discussing a market reform to better cater for more renewable energy. Europe is discussing a market reform to better cater for more renewable energy. That is, of course, positive in order to increase the penetration even further. In EMEA, three auctions has been held. We, today, only know the results from the first two. The majority of them want citizen wind parks, and we expect that, that will be the same in the third auction. After that, we actually expect the rules to change and that the preferential treatment for citizen wind would not be there. Also in Europe, we expect the first auction in France towards the end of the year. And that means that basically, most of the markets in Europe has gone over to an auction system, except the merchant markets in the Nordics. In Middle East and Africa, also the same movement. There, we've seen for some time, aspirational targets on renewable being in place in most markets. It's encouraging now to see that those targets are transforming into real plans. And one such example is in Saudi Arabia where an auction is coming up. Asia Pacific. China, overall, probably a bit down on delivery this year. But the overall five-year plan remains. We see curtailment in some markets. It's being addressed, but it's hard to judge the exact timing. India, as we talked about before, is currently an uncertainty in the market. The overall target again remains. And of course, we expect at some point that the market will return to previous volumes. But currently, two auctions have been held, announcement of three more before March next year. But we've also seen before delays in announced auctions, so a bit of uncertainty in the medium term. In broader Asia Pacific region, also good activity levels. Renewable energy targets in place in most markets. We see an increase in activity in several markets, also reflected in our numbers. And also, here then, Australia will move through auctions in Q1 of next year. So overall, as the market continues its transformation, we see increased competition. We maintain our global leadership position in Vestas, deliver on our key objectives of growing faster than the market, delivering best-in-class margins and maintaining a strong balance sheet. So, we remain committed to our strategy to build on and leverage on our global reach or scale and our technology and service leadership. Going a bit more into the details on the order intake then, as I said, up close to 50%, solid development. I would also say that it was fairly broad-based. But to point out some markets then, Mexico, France, U.K. and U.S. accounted for approximately 60%. The average selling price came down through €0.8 million per megawatt in the quarter. And we see, of course, the trend over the last 4 quarters is that ASP is coming down and, in the quarter primarily due to highly competitive market leading to price pressure. As usual, we should remember that ASP contains many parameters and will depend on the turbine type and the switch between lower megawatt turbine to high megawatt turbine, the geography, the scope and the uniqueness of the offering. Looking at order intake for nine months then, an increase of 23% compared to last year. And this year, the growth mainly comes from developing markets. The key contributor to this was Argentina, Mexico and China. A bit more in detail, Americas up 48%; again, Mexico, Argentina but also U.S. then strong contributors. EMEA down 15%. Here, if I look at the absolute numbers, actually broad-based, again, activity level in EMEA but strong from Germany and Sweden. And if I look at the year-over-year increase, basically France, UK and Germany not fully offsetting the Norwegian order of last year. In Asia Pacific from a low level, a strong growth, over 200%. Here, we see strong development in China, India and Thailand but also good activity level in order intake from Australia, Mongolia and South Korea. Looking at the regional split then. Delivery in Q3 were down 14%, mainly driven by Americas. As expected, we see the phasing of delivery in the U.S., as we talked about some time ago. In the quarter then, Americas was down 41% and, on the nine months 17%. So very much influenced by lower deliveries in the U.S., but good activity levels in markets such as Canada and Brazil. EMEA in the quarter, up 26%; strong development in Germany and France; and for nine months, basically flat. So, increases in UK compensated for the drop that we saw in South Africa and Sweden. Asia Pacific, again, down from earlier level. Good increases in the quarter where we see positive development in Asia Pacific region, Mongolia, South Korea and Japan. And overall, for nine months, stable development in China and India. Backlog remains at a high level and increased 18% year-over-year, now stands at more than 20 billion. Sequentially, we saw a decrease in the turbine backlog with 0.3 billion and an increase in the service backlog of also 0.3 billion. A few words also about the joint venture that we have together with MHI for offshore, and it continues to develop well; on the execution side, the first two 8-megawatt project was completed. The joint venture took a 252-megawatt firm order and with announced preferred supplier to two large UK projects of 860 and 950 megawatts. So, since the start of the joint venture on the order side, they have recorded 2.7 gigawatts of orders, firm orders, and another 2.5 gigawatt of orders that are conditional or preferred supplier agreements. With that, I hand over to Marika for the financials.

Thank you, Anders. And as you can see, on the income statement, what Anders have highlighted here in the quarter is also reflected on the P&L that we are providing here. We have a low activity compared to Q3 of last year. But in all comparisons, still a high activity level in the quarter but reduced by 6% compared to last year. Gross profit is also consequently reduced by 11%, and that is driven primarily by the power solutions segment but, to a certain extent, offset by higher revenue in the service business. What you can see is that also that SG&A, which I will come back to, is -- continue to be well in control and percentage still at a low level, although a slight decrease in absolute numbers. EBIT is solid, although lower, 2% compared to last year at 12.9%. That leads me with the SG&A cost. And you can see again, good performance. So, we are 6.9% compared to 6.7% in the last quarter, so a slight increase compared to the quarter. But again, you will see some changes in between the quarters. But in percentage, it's clearly better than Q3 of last year. This is a high focus area, and will continue to be, and we try to manage the volume increase and the activity level with still keeping the low SG&A and also focusing on getting some flexibility in the fixed capacity cost. The service continues a strong performance and that is driven by high activity levels. So, if you compare with Q3 of last year, you see an 18% revenue improvement. And obviously, the focus on the service business, which has been there for quite some time, continues and is clearly paying off in terms of activities that we have in place. And we also continue to deliver solid high-level EBIT margin. So, in the quarter here, you see 17.9% EBIT. And as Anders highlighted, the service order backlog grew €0.3 billion compared to Q2 of '17. So again, a very good level of activity and also a very good profitability in the service segment. The balance sheet remains strong. And you can see here that our net cash position increased to €2.6 billion which, obviously, is something that we're very happy and proud of. So, you saw an increase compared to last year of 23%. There was also a positive net working capital development of €266 million, obviously, having an impact on the cash flow that we are presenting going forward. The change in net working capital, we are showing here as we always do, the change over the last 12 months. So, the improvements are primarily driven by prepayments and trade payables, to a certain extent, offset by higher inventory. But again, the higher inventory methodology has not changed. We continue to build inventory for farm order intake. It's more of a timing question. The net working capital change over the last 3 months increased in Q2 due to higher activity levels, and the development is primarily driven by timing of receivables and trade payables. So, a reflection, again, of the activity level. The warranty provision and lost production factor. And here, we continue to consume less than what we provide for then you will always see some fluctuations in between the quarters when it comes to consumption. That is also reflected in the lost production factor. That is continuing below 2% on also historically and, as you can see here, in the quarter. And you will see certain fluctuations also here, a reflection of the warranty provision and how much we have consumed, but still well below 2% and good quality performance. The cash flow statement. We continue to deliver a good cash flow from operating activities, although slightly lower compared to last year due to a lower activity level, as we have spoken about. You also see the positive change in net working capital, leaving us with a free cash flow of €193 million compared to €155 million in Q3 of last year. Remember that we also -- more than 50% of the share buyback is completed, and that is the biggest or the largest in Vestas' history. Total investment is increased compared to last year by 14, no surprises here. We have a high activity level. That is also reflected in the investment of tangible blade investments. So, no change in methodology. We invest in [modes], and we also invest in capitalized R&D, but a good reflection of the activity level in the company. The capital structure on the net debt-to-EBITDA, we continue to deliver well within the boundaries. Our solvency ratio, we have stated 30% to 35%. And here, you can see we're slightly below, and the decrease is primarily driven by the share buyback program. The return on invested capital continues to increase. And here, you see a reflection of the still strong delivery on the balance sheet elements so, again, improved compared to last quarter Q2 '17.

Thank you, Marika. So, going on to the outlook. As I said in the highlights, we made some adjustment on guidance based on year-to-date performance and the visibility for the remainder of the year. On the revenue side, we narrowed our guidance a bit, and now we see it between €9.5 billion to €10.25 billion. We have experienced good activity but also some uncertainty linked to the U.S. House Bill. On the EBIT margin, we narrow our guidance between 12% and 13%. A mix of different factors causes this specification to the lower end of the range. Firstly, we've had additional execution cost. And furthermore, we are seeing that the increased competitive environment and pricing is impacting our average product margin. Total investments we adjust from approximately €350 million to approximately €400 million. And on the free cash flow, we now introduce a range between €450 million and €900 million. Our updated range mainly reflect the uncertainty around the U.S. market, and especially the expected level of 80% PTC components order. We have not changed our outlook for the service business, expect it to continue to grow with stable margins. So, with that, we move over to Q&A.

[Operator Instructions] Our first question comes from the line of Kristian Johansen from Danske Bank.

So, first question is about the EBIT margin guidance, and then just to elaborate on these two effects that you highlight. So, I understand how increased competition can impact earnings for next year, but considering you didn't mention this in August and infra-out orders over the past couple of months must be fairly low. Just help me understand why this negatively impacts margin for this year? And then secondly, can you just elaborate on what execution costs you're seeing weighing down this quarter?

Okay. First, your first part of the question in terms of the infra-out orders impacting here in the quarter. We have said that, yes, you always enter into the year with a certain portion of infra-out. The infra-out orders this year actually came in a bit later than we anticipated because of -- normally, you'll get them as early as possible in the year. And here, we have quite a number of them coming in the latter part. And as we say, yes, they are coming in clearly with lower margin than anticipated. And primarily, you see a price pressure on those deliveries. And the thing is that the closer you are to the delivery time when you take the order intake, the less you have to mitigate with in terms of cost out, in terms of product improvements. So that is what have happened. And then we also have had a number of extra cost in the quarter, pure, I would say, operations. So, no one-time effect or anything, it's just operations. So, you had lot of double-craning. You had transport cost impacting the quarter. You also have the transport, and the lower activity level is also impacting, so you see a lower volume. And that's obviously, to a certain extent, impacting the observation in the factories. So those together are impacting the overall view of the quarter but, obviously also having an impact on what you see on the guidance. Kristian Tornøe: Okay. And then just on the cranes and transportation cost, is that sort of carried into Q4 and into 2018 as well?

I mean, it sounds fairly simple, but the double-craning is costing a lot because there's few cranes in the world, and they are very, very expensive. So, it will have an impact on the overall year for sure. And that's also why we have chosen to update or narrow the guidance. But bear in mind, we're still within the original boundaries of the guidance. Kristian Tornøe: Okay. Then my second question is regarding the PTC component at 80% level. And you stated you expect the PTC to continue as it is currently. But how are you going to manage component orders given that it's very likely the tax reform will not be completed or not completed before the end of the year. Can you take in orders sort of with a clause that if the PTC's changed then they are canceled? Or how do you manage these?

Of course, what we have shown an -- reflect in the outlook is that there is, of course, a big uncertainty on an 80% PTC potential, just as you say. So, I can't really speculate on when we will get clarity on the tax reforms in the U.S. Of course, the sooner the better from our point of view. I mean, we are currently of course, now in deep discussions with the customers. I think it's fair to assume that there is a greater hesitation on the 80% PTC than what we saw before, everything else equal. But of course, there is also the fact that if you don't qualify for it now then sort of that opportunity is gone. So, I mean that we'll be in a close dialogue with our customers now. And unfortunately, as I said of course, it creates more uncertainty. But we have definitely not given up on securing 80% PTC component as well. But we think it prudent then to reflect the range in the updated outlook. I will not go into sort of specific terms and condition we're discussing with customers for competitive reasons.

And now our next question comes from the line of David Vos from Barclays. Please go ahead. Your line is open.

I just wanted to delve a little bit deeper on the 2017 margin provision and how it actually interplays with the order intake. If I have done my homework correctly and looking at your announced orders for Q3, there's remarkably few that are infra-out orders. So that suggests that they -- those infra-out orders may be found in the unannounced bucket. It will be very helpful if you can shed some light on where those are, what is the type of price erosion that you've been experiencing on those orders and how much crucially of that erosion you feel will be hitting the bottom line. And it would really be helpful if you could give some actual numbers on that this time around so we can start figuring out what's what in relation to the new reality.

If you look at the margin revision and the impact from the infra-out orders and, as I said, I mean you have a good blend from volume, obviously, for the full year, and PTC components is one of those element, then you have also the infra-out orders and, as I said, they are coming in pretty late in the year, and they are coming in with lower margin than what we anticipated. Then, I mean, the overall competitiveness and the acceleration of competitiveness, I cannot give you any specific market because it's actually a global phenomenon, if you would like to call it that, so -- and then we have operational cost. I mean we have launches of products, we have swapping in between the product just to manage time lines for our customers. And in a lot of cases, we have been able to mitigate those extra costs. And what we see now, we are not able to the same extent in this quarter. So all-in-all, with the infra-out, with the PTC changes, that we think it's prudent to reflect in the guidance. And also with the acceleration of price pressure, in particular for the infra-out, that's obviously what is reflected here for the remainder of the year. I will not give you any specifics on each element, but it is a good blend of all the elements that is impacting the guidance of EBIT for '17.

Yes, I mean that's unfortunate because, clearly, the question is how much of this will stick going forward like in 2018 and 2019. It will be very helpful if we could just get a slightly better grasp on what this means to your gross margin. But if you're not really willing to commit any numbers to that right now, I'll ask a second question, which is around the U.S. Clearly, I understand the uncertainty around whether you get any 80% PTC orders, but what about the fill-in orders, so to speak, under the 2016 PTC? What do -- the events in Washington of last week, how did they effect those orders as it pertain to volumes realized in 2018? Can you answer that question?

You mean the PTC.

The 100%.

The 100 -- the [indiscernible] the 5%?

Yes. So, the orders -- sorry, the projects that were already safe-harbored last year in 2016. In your conversations since last week, and I appreciate there may not have been many, but are you seeing customers going ahead, pressing ahead with their plans for 2018? Or are they also somehow affected, some more uncertainty around those. Is that clearer?

I think that -- I mean generally speaking, I think one way to look at it is, of course, that majority of projects in '17 probably have to be qualified as continuous construction. If you then look at '18, from a market standpoint, my guess, and this is a guess, it's probably a bit more 50-50 between continuous construction and PTC component. And then, of course, when we go further out, it's more qualified as PTC components. So, I think that is the sort of general market on continuous construction and PTC qualification. When it comes to discussion with the customer, I mean, of course, we are in a close dialogue with the customers and their view on this for the moment. But I think it's way too early to draw sort of any conclusion on rollout plans and things like that. I -- the reports I have is that the customer has the same main planning assumption as us that this language around the PTC from the proposal in the House will not be -- will not stick, so to speak, so that we will have the PTC structure that is the current in the market. But again, I think it's way too early to speculate, there are also many different scenarios.

And our next question comes from the line of Claus Almer from Nordea.

I've also got a couple of questions. The first goes for the Q3 margins, can you disclose whether the lower gross margin is based on mix? Or is it due to this lower level? That will be the first question.

Well, the Q3 gross margins are basically impacted from all the elements that I spoke to about earlier. So, you have volume, it's definitely impacting. You also have the infra-out orders that were delivered with lower margins. And you also have the extra cost on the operations side impacting the gross margin. So, it is these bigger buckets. And then you, obviously, have elements in between the buckets, but -- and in particular, the operations side. But those three are clearly impacting the margins, the gross margins in the quarter.

Okay. And then my second question, would it be fair to assume that this change in full year EBIT margin guidance of taking it down by 1 percentage point, two/third of that is based on this additional execution costs and the rest is lower margins. Would it be a fair assumption?

Then you get very specific, Claus. And as I said earlier, I mean it is a good -- it is a blend of, obviously, the PTC that we have taken [indiscernible] for, so that will have an impact on the -- from a volume perspective and, consequently, also observation perspective. You have some infra-out that will have an impact, then you have the operational side that also will have an impact, and that's why we have decided to get -- to narrow the guidance in this quarter. But just to give some further, I don't know, if it's explaining or further complicating, but the thing is when we take in orders now, you obviously have a shorter time frame for the infra-out then you have more of a normal time frame for delivery, and then you have a longer time frame for delivery. And the longer the time frame, the more of the -- what we have done previously on the accelerated earnings, on getting -- creating more flexibility on the fix capacity cost and also upgrades of the product, it's possible to mitigate some of the shortfalls you would have when you take in the order. That is one element. And that is the methodology that we have used in the past. And obviously, if the competitiveness increases extremely quickly and to a very large extent then the elements are short-term, very hard to have an impact on. But longer-term, there's more opportunity. So it's a lot of timing in the deliveries as well from when you take in the orders.

And our next question comes from the line of Marcus Bellander of Carnegie.

First question regarding the average order intake price. In Q2, you quantified impact from the weaker U.S. dollar. Could you do the same for the Q3 number?

There is FX impact in this quarter as well. But I mean, to a lesser extent, influencing then the competitiveness of the industry over price. As I said, I think I said many times when we discussed this average selling price per megawatt, of course, there is a number of factors. And I think what is important to look at is more the trend and the trend overtime and, of course, to see if it accelerates or not because we will have -- FX is, of course, one thing, as you say. But I mean, otherwise, the price per megawatt will come down by just pure the nature of turbines mix. Higher rating, for example, we have increased the 3 megawatts to 4 megawatts. If we sell more of the 4 megawatts and the 2 megawatts, you have an impact there. You have an impact on where in the geography, as we said, I mean, especially, China. So, I think it's important to look at the sort of trend on the ASP. And if we look back at the last four quarters, we, of course, see an acceleration of the decline in the ASP.

All right. Understood. Second question regarding the inventory build or the increase in orders under completion. Could you say something about the dynamics there? Is it orders being pushed into Q4 or Q1? Or is it the effect, which you talked about last quarter that you're producing against inventory for future U.S. deliveries?

Well, again, the inventory -- the underlying methodology of firm orders have not changed. And yes, we have used the balance sheet or have that as an opportunity to increase inventory rather than having additional investments, as I spoke about last quarter, but it's also a reflection of the activity level in Q4 and Q1. So that is a fair comment.

And our next question comes from Dan Togo from Handelsbanken Capital Markets. Please go ahead. Your line is open.

I'd like to go back to the ASP. Is it fair to say that on all-things-equal basis, ASP would actually increase in Q3 compared to Q2 just due to the fact that you have less China and you have at least 1 turnkey project here in Q3 disregarding the price pressure? Would that have been a fair assumption?

Okay. Yes, I understand what you are looking at. And I would say again, we had some currency impact, yes, in the quarter. And as you say, there's a turnkey impact and that will, obviously, impact the ASP in a positive way simply because the scope is bigger. But it's all the underlying elements that are really important when it comes to the ASP. But if you look at the trend on the ASP, which is probably the fairer description of what's happening and that is, if anything, going down, and it's not only the last few quarters but if you look at even a longer time frame. And that's clearly what the whole industry is focusing on. It's getting that trend down and, by that, really lowering the LCOE for the customers. But there are elements that, obviously, will have an impact on the ASP. But look at the trend line, and that's where the market is.

Okay. And then this trend line, I understand it has gained some pace. Does this, of course, will impact the prices you'll need to deliver in coming years? Does this give you any reason to, so to say, be more aggressive on cost-outs? And are there any low-hanging fruits, so to say, in the cost base that you can turn to in order to mitigate this increased price pressure?

Well, what we have done and that's also, it's important. We have always, for the last few years, worked on the cost-out. You work on the efficiency in the production. You try to be efficient on the transportation. So, all of the operational elements continue. And then obviously, if we see that the -- what we see is that the pressure is higher simply because we're entering into a totally new market with the transition taking place in the market. So, we have to be even quicker. But the elements that we can influence and the activities that we have in place continue. So, it's not that we'd taken down something new but we are accelerating also those elements. And then as I said earlier, the longer timing you have from order intake to delivery, the more impact you can have from all the activities that you have in place. But the fact remains that there is a transition period both for asset suppliers but also for the customers when they are aggressive bidding into the auctions.

And our next question comes from the line of Casper Blom from ABG Sundal Collier. Please go ahead, your line is now open.

Obviously, a lot of questions regarding prices today. You mentioned, of course, that the auctions are -- and lower power prices have been a driver for bringing down ASP. But to what degree is this also a reflection of an increased competitiveness between the turbine manufacturers? Can you sort of feel that maybe some of your European competitors are a bit stressed right now and, therefore, really need to secure orders by offering aggressive pricing? That's my first question, please.

Yes. I think that -- I mean, of course, as you say, I mean, we're seeing also a consolidation in the industry and a little bit, yes -- or should I say not so, yes, good performance from some of our competitors or a bit stressed. And of course, that adds to the competitiveness of the whole market. I mean, it's, of course, not helpful, if I put it like that.

Looking into 2018, I'm pretty sure you don't want to comment too much on that, but all else equal, I assume that here in '17, you have a mix of, how can you say, old prices and then you have some newer prices at a lower level. In 2018, I will assume that you have a greater proportion of prices provided under the, how can you say, new reality. Would it then, all else equal, be fair to assume that the operational margin in the project business would also be lower in 2018 than in '17?

I mean -- as you said, I mean, we will follow our normal process and come back on the guidance on how we see margins in '18 but -- and of course, it also depends a lot on what happens in the competitive environment. What we have talked about and, of course, what we have seen actually for quite some time -- and I mean, remember that we also already now deliver lot of the projects that we won in auctions, for example, in Latin America. And as I've said before, U.S. has always been a competitive tendering market. So, it's not new. It's more that it accelerates. I mean, we see for each auction that the power prices are coming down further, and that puts pressure on the whole chain. And then of course, to your first question, it's also a relative gain. Of course, I'm happy about generating the best-in-class margins that we do. But of course, we are also depending on what the competition is doing and what kind of margins that they feel are sustainable. So of course, there is a relationship in the market between us competing for the orders in the market. And I think that is also a lot of different scenarios, but of course, there is also a very likely scenario that power prices now is so competitive on wind compared to other technologies that after this transition, we will see much more stable power prices in auctions going forward. So, there are all kinds of scenarios once we are through this transitional time. For us, as Marika said, it -- to maintain our best-in-class margins is, of course, that we focus on the levels that we have, which is the cost-out program, the accelerated earning program, which is the product -- program that generates higher production.

Great. And if I then just have -- may have one follow-up on your changed EBIT margin guidance for this year. Would you also have done the narrowing to the lower end of the range had it not been for the recent bill from the house in the U.S.?

Highly speculative, I would say. I mean, now what we have given you is everything that we see. And obviously, the -- what's happening in the U.S. has an impact, and we have been prudent enough to consider that. But we also -- again, on the [infra] orders having -- as you can see here in the quarter, and also on the operational issue. So, it's fair to assume it is a good blend but obviously, the 80% PTC is a reflection that you clearly see that also on the cash flow range.

And our next question comes from the line of Akash Gupta from JPMorgan.

My first question is also on pricing. And maybe, I mean, given the moving parts in the ASP, how you define -- if you can comment on ASP in terms of unit terms or basically, I mean, if the old platforms that you are selling last year versus this year because that will offset some of these technical factors and if we also talk about the pricing in local markets that will offset FX. So maybe if you can comment on pricing at the unit level. That's my first question.

I hope -- I understand your question now. On -- if you look at the ASP, as presented here, yes, it's a lot of factors influencing the overall ASP. And I think you remember one of the orders that we took in Norway, a big project, obviously having a big impact on the average sales price. But then again, the -- generically, there is no one-to-one correlation on -- if it's a good project or a bad project. The timing element have a big impact because obviously, if you have a bit more time to mitigate some of the shortfalls in -- from a pricing perspective. But there is also -- you don't see huge differences in price overall globally, especially now the market is entirely global, where you have auctions. And auctions are clearly a transition period for the whole industry, so having a big impact on the price. And I think that if you look at the pricing environment also, it is our customers trying to -- also to -- it's not only us, the suppliers, trying to adapt to the new reality. It is also customers trying to adapt to the new reality in auctions. And obviously, sometimes, they are very aggressive in their pricing, which obviously puts a great demand on suppliers all in all. But I think the most important factor is, obviously, short term, you have a big impact from the ASP if you don't have a good timing element in between but continue to do what we have done and then if we can mitigate all of the pressure. That remains to be seen. Obviously, that is one of the great efforts that we're doing right now and have done in the past as well. But the competitiveness is clearly accelerating in this transition period and I don't know if you're any wiser.

And my second question is on consensus, which is basically looking on -- looking for 13.8% operating margin for next year given the anticipation of higher U.S. volumes. I know you will be coming up with the guidance in February, but I'm just wondering if you can provide any comment on the consensus based on what you see in your backlog. And should you think that the consensus is too high? Or maybe any comment whether the market expectations are realistic, I mean, also given today's share price reaction.

I will give you a fairly generic answer as we're coming up with the guidance for next year. First of all, with the proposal now in the U.S., it's very hard for us to say anything about '18. We are doing different scenarios. So, it would, all in all, be wrong to comment on that at this point as it's -- no one knows. That is one comment. And then secondly is that the order backlog and the order intake that we have so far is, obviously, nothing but very positive. So, the perception of us in the market and the products and the power that we can generate from our products is positive. We also see a good development on the service business. Then how the market 100% pan out and what will happen in the competition or customer behavior is very hard for us to comment on at this point. But we will come back with the overall guidance. But the competitiveness, if anything, is clearly increasing.

And finally, on restructuring cost, if the guidance includes any restructuring cost for this year also given that your builds are doing sizable reduction in capacity or moving that to mature -- moving that away from mature markets to growth markets. So, is there any need for you to also react faster than what previously thought because of the competition?

Our overall methodology has been and continue to be very CapEx-light solutions. We are also having the focus on cost when it comes to production. We're having focus on sourcing. We're having focus on the fixed capacity cost, and we have no current plans to make any big changes. What we have done, we will continue to do. And then obviously, there's a timing element. So, we will speed up activities if necessary.

And now our next question comes from the line of Fasial Ahmed from SEB.

It's Fasial from SEB. Just one question from my side. Obviously, pricing has been discussed quite a lot during the conference call. But one of your competitors, earlier this week, talked about double-digit pricing decline. Is that also sort of underlying pricing declines you've seen during Q3? That's my first question, please.

Yes -- no, but the -- I mean, I can't really comment on what our competitors are saying. And I think -- and I don't know how they even define pricing in this element. I mean, again, it's like before. We're all selling a levelized cost of energy to fit into the customers on their PPAs. There are many levers on that and exactly what is price, price and what is the product and what is built to the site and so on. I mean, I can't comment on what they are saying. Again, we are satisfied with our position and our earnings absolutely compared to the competition. And we have all the intention in the world to make sure that we continue to deliver best-in-class margins. But I mean, of course, I have also noticed and as far as I have seen, we are the only one who deliver clearly double-digit margins. But of course, we also have a relationship to what the competition is doing.

Okay. And that's fine. And then historically, there has also been price erosion in the market. Can you remind us what price erosion has been annually for the last two to three years?

I don't, I think we have to come back to. We should definitely have that somewhere but I don't have that on top of my head.

I think the big change and sorry for jumping in here. But the big change when it comes to, call it, prices is that you have more of a global picture now. Before, you had more of a country picture. Now it is a global picture. It is how much power you can generate. You're clearly competitive without subsidies that puts higher demands on all the suppliers. So that is the big change if you compare to the past. So, it's hard, again, there also to have a one-to-one comparison.

Okay. But is it fair to say that you're not [indiscernible] underlying price inflation, you're seeing less than double-digit price declines at the moment?

Yes. I mean, again, I will not give you a number on the price element specifically.

And our next question comes from the line of Gurpreet Gujral from Macquarie. Please go ahead. Your line is open.

Just a couple from me. Your turbines and the completion number have gone up to 5.2 gigawatts from what I can see, up from 4.5 in the second quarter. Can you give us some context around why this is the case? It seems like a pretty steep jump. And has this actually impacted your 2017 guidance change?

I mean, the build of inventory, as I spoke about in Q2 as well because we build there also, is that we are utilizing the balance sheet simply because we have the opportunity. So, there is basically no change from that perspective and the underlying methodology is we are not building inventory for speculation, just to be very, very straight on that. We are building for firm order intake. Then the timing of the deliveries can vary, but we are preparing for a good, high activity level here in Q4 but also in Q1 of last year. That's why, sorry?

Next year.

Next year, yes. So that is the underlying reason.

Okay. And so, is it fair to say that the sort of 2 to 2.5 gigawatts is the normal run rate and you would expect to revert back to that in the sort of Q1 to Q2 period? Is that what you're saying?

We are not, again, commenting or guiding on these elements. But what remains is obviously the focus on the working capital elements, and that has not changed. And again, the methodology on the firm order intake also continues. So, there is no change in the focus, but it's -- we have used the balance sheet differently simply because we have the opportunity.

Second question, sorry, on -- just to go on -- back onto the order intake ASP. I mean, when I compare the number to Q2, it's actually broadly flat, right. So, when you talk about the acceleration of price pressure, is this something in reference to what you've seen specifically in October and November that's led you to choose those words? Or is this order intake at 0.80 in Q3 artificially high because of a greater level of EPC contracts in your unannounced order intake?

Again, I think you should look at the ASP, the trends in the ASP during the last couple of quarters and more than, sort of, in the individual quarters because they can vary a bit up and down on all the things that we talked about. So, I think it's more important to look at the trend.

Well, maybe if I can ask you a quick follow-up then just in relation to that. When I think about the EPC mix specifically in your order intake in Q3, is the EPC mix in your unannounced bucket equivalent to that of what you've announced to date? Or is that somewhat different?

I would say a fairly normal level.

Thank you. And our next question comes from the line of Alok Katre from Societe Generale. Please go ahead, your line is now open.

Well, firstly, on the follow-up in terms of pricing, there's been a lot of discussion around that. One thing -- I mean, what has sort of changed between, let's say, August and November? And previously -- you've never been so vocally, let's say, cautious around the pricing dynamics before, in the last three and a half years or four years that I've been covering Vestas. So, what has suddenly changed that is sort of making you so very cautious? Is it just the competition and you have a new competitor with [indiscernible] synergies and firing one fourth of its workforce, et cetera, and therefore clawing those back into pricing? Is it just levelized cost of energy due to auctions? Or is it just the way that -- is it the case where you probably read the market a bit wrong as well? So that's question number one. And then the second question just on working capital build is, could you just identify for us how much is components within the overall inventory and how much is final products? And you sort of seem to be building up inventory for Q4 and then Q1 and Q2. But usually, Q1, Q2 is seasonally weak for you guys. So, you should have extra capacity in that quarter. So just -- I'm at a loss a bit on that front. And the prepayments are lower or flat here, Q-o-Q, as well despite very strong orders. So just trying to understand what's going on, on the working capital a bit more.

Let me try to answer the first question a bit. And I think -- I mean, I think we're talking -- have talked about a very competitive market, very competitive market and the increased competition actually for quite some time. And so, I think that is, of course, what we have seen in the market. And I mean, to your question, of course, the indicator on that is the power pricing and the development of the power pricing in the market. And there are -- we have seen power prices coming down and coming down quicker during this year, for sure, and also quicker in this quarter. So -- but I think we talked about the very competitive market, which, of course, means -- and I mean, that's still the case. It's not just competitive on -- it's competitive on levelized cost of energy, and it's also competitive on delivery times. And yes, it's a competitive market. And I think that, for sure, we had talked about for quite some time. And what we are saying now is that we see also an acceleration in that. Then on the inventory, maybe you can...

Yes, absolutely. So, on the working capital elements, the prepayments as you're referring to, I mean, we don't have any changes in our payment methodology. Then you -- there could be a timing difference if you're just in between a quarter. So that can very well happen, but there are no changes. We get -- the prepayments are in between 10% and 15% still, so no change. And then the working capital elements, whether it's components or if it is a ready product, that's also nothing that we comment on. But the -- as I said earlier, the inventory buildup is for firm order intake and nothing but firm order intake and then the intention if wet weather holds and everything else holds to be delivered here in the coming two quarters. And we're in the midst of one of them. But we are obviously also here, as we always say, weather-dependent in the latter part of the year and the beginning of the year, obviously, have an impact. So -- but it's -- nothing has changed in terms of methodology. We have just used the balance sheet that -- as I've explained, simply because we have the opportunity.

Sure. So just to confirm, you haven't really built up anything in anticipation of 80% PTC orders because I mean, those come in towards the end and you can't, obviously, let's say, deliver components unless you have some stock, right?

But also remember because now obviously, the guidance is reflecting that there is a lot of uncertainty on the 80% PTC. But remember, last year, when we had the 100% PTC, we had 105 days to deliver. So that element is still there. So, it is -- the big impact is really on the cash flow, as Anders have given you.

Okay. And perhaps, Anders, I think the market hasn't been listening to your caution then. I'll leave it there.

And our next question comes from the line of Pinaki Das from Bank of America Merrill Lynch.

I've just got a couple of questions. I wanted to understand your pricing and margin outlook. So last year, you had a pricing of around 0.9. Now it looks like it's closer to 0.8. It's almost a 10% or roughly double-digit decline. This is not completely unknown to us, but obviously, the market hasn't figured it out yet. I wanted to understand. If you made 13% margin in your turbine business when you had an ASP of 0.9 -- and I understand there a lot of changes. And that pricing has fallen by about 10%. Can you give us an idea, over a two to three-year period once you have the opportunity to take out cost, how much of that 10% pricing decline can you reasonably offset over a course of one to two years? I understand that you would all have given the guidance on '18 but normally, what would you be able to do? That's my first question.

Yes. And I understand, obviously, what you are asking for, Pinaki. And the -- as Anders have stated, I mean, the price, the ASP decline has been there for quite some time. And obviously, we have done a lot of cost-out on the product. We have also upgraded the products overtime. What we see now is an acceleration of the competitive landscape, which means also price pressure. But it is really a transition, as we said earlier, in terms of getting more and more auction base getting very similar across the board. So, it is a global phenomenon more than any country specifics. That's clearly it. Then with the -- if you have a shorter time frame of, as I said earlier, to mitigate the price pressure, then that will have an impact on your margin clearly. If you have a longer delivery time, then also, you have more potential to mitigate. But all the activities remain. So, it's nothing new. And it's not that we are, all of a sudden, figuring out new things, but we are definitely -- if this acceleration continues, then obviously, there is a timing element then we are speeding up. So, there is no change in our behavior in the market, but the customers are also trying to see how they work in this transition period. And with very aggressive bid in the auctions, obviously, have an impact on all the suppliers. But the product upgrades will be a crucial element also going forward and have been a crucial element in the past. So, we have never in -- within the last few years, see an uptick in pricing. It has been down. And we have been able to mitigate it. But then the speed of the price decline will obviously have an impact.

Yes. So that was my question. So, if you have the time, how much of the 10% will you be able to offset?

Well, the 10% is your word. It's not mine, Pinaki. I mean, we see a great variety in what we are commenting on is that we see an acceleration in the competitiveness. And we have not stated any numbers. And that's also highly, I would say, competitive. So, there's nothing that you want to disclose.

Good. And can I ask you a second question? We had just inventories. Is there any risk of you having to write down nay inventory or just like one of your peers did?

No. And as I said, I mean, we don't build for speculation. We have firm orders behind the inventory that we have. So, we are confident with that.

To your components?

I mean, as I said, the inventory that we have is based on firm order intake. And if you are alluding to the 80% PTC, that is something we did last year in terms of getting the payments in, but we had a different delivery schedule. So, we are confident with the inventory that we have.

And our next question comes from the line of Sean McLoughlin from HSBC. Please go ahead. Your line is now open.

In this new reality of auctions with lower power prices, acceleration of competitive landscape, how can you mitigate the pressure yet marry that with your ambition to grow faster than the market? That's my first question.

Yes. That's, of course, a very good question and of course, over time, we have to say we're in one specific time. Of course, you can say which is more important than the other. But I think longer term, growth and profitable growth actually goes hand in hand. And I don't think that, you can't increase profitability without also increasing your revenue if you look at it from a longer-term or mid-term perspective. And that was all our targets. Then of course, you can have certain carriers in the market, where you prioritize one harder than the other. I think for us, if I look at the situation we are in today, I mean, we have a good order intake, up 23% year-to-date, which, of course, indicate a higher activity level for next year. And that is important because of course, volume also helps us drive all the things that we talked about when it comes to cost-out utilization of our factories and enable us to continue to invest in the product portfolio. So, I'm happy with that situation, so to speak. I must say that I'm also happy on the underwriting the best-in-class margin, which we clearly do also this quarter. And while we see quite some of our competitor have significant drop in profitability, we maintain a good level of profitability. And that is, of course, also extremely important going forward and puts us, I will say, in a very good position as this market transform.

And my second question is on the free cash flow range. It's quite a wide range. I understand that the uncertainty around the 80% PTC orders is part of that range. But I mean, is there a greater level of delivery uncertainty in Q4 versus previous years as a part of that?

I would say that the range we are providing here is a reflection if the 80% PTC doesn't materialize at all, Sean. That's fair to assume.

And our next question comes from the line of Klaus Kehl from Nykredit Markets. Please go ahead, your line is now open.

We have talked quite a bit about the U.S. and what is going on over there right now. But could you please -- and you have also stated that there is risk to the 80% PTC orders, and I clearly understand that. But could you try to talk about all the PTC qualification -- qualifying component orders that you won last year? Have these projects turned into continuous construction projects right now? So, in other words, they would -- could be seen as rather safe here in Q4? Or how should we look at this, yes, potential follow-up orders that I would have expected, let's say, two weeks ago?

Yes, I think, I mean, as I said, a large part of the project [indiscernible] projects this year definitely was continuous construction projects. We expect a large part of the project to be executed in '18 or also continuous construction project. And then there is also a fair bit of PTC-qualified components project. I think it's way too early to speculate on this house bill will have any impact on the planning of those projects. It's nothing that we foresee now, as I said. I mean, our main scenario is that the current PTC structure will remain. So, the uncertainty how that influences now is very much on -- that we anticipate greater hesitation than possibly on the 80% PTC.

But then just to follow up, does that mean that the qualifying PTC contracts that you had last year did develop but has been working on this throughout the year? So, in other words, they have kind of turned into continuous construction projects perhaps because they have built some infrastructure or whatever.

I mean, it all varies. I mean, of course, there is a lot of different strategies from different customers that I will not go in deeper on, so to speak. But I mean, generally speaking, of course, if you have projects ready, there is a preference to use the continuous construction effort just because that saves you cash. So, I mean, it all depends on the maturity of the projects that they have ready. But as soon as you have something that is readier, then of course, you -- the customers, generally speaking, prefers to use the continuous construction effort. But I think it's fair to say that this bill being so -- or proposal for bill being so fresh, so to speak. I think it hasn't impacted any planning in the week that has passed by. And I mean in our discussions with the customer in the U.S., they share the view we have that the likely scenario is that we will continue with the current PTC structure. And now a lot of effort within the wind association in the U.S., of course, goes into trying to secure that. So, I will say that is the focus also on the customer side for the moment Thank you very much. I think that was the last call. So again, thank you for your interest and calling in. And I'm sure that we will see at least some of you during the next couple of days. Thank you.