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Executives Anders Runevad – Group President & CEO Marika Fredriksson – EVP & CFO Analysts David Vos – Barclays Pinaki Das – Bank of America Merrill Lynch Claus Almer – Carnegie Alok Katre – Societe Klaus Kehl – Nykredit Markets Sean McLoughlin – HSBC Shai Hill – Macquarie Patrik Setterberg – Nordea Jose Arroyas – Exane Vestas Wind Systems A/S ADR ( OTCPK:VWDRY ) Q2 2015 Earnings Conference Call August 19, 2015 4:00 AM ET Anders Runevad So, good morning, everyone and welcome to this second quarter report. As usual, I appreciate everyone that has called in. So let us start the usual disclaimer statement, and then – let me then start with the highlights overall. I’m really satisfied with the quarter. It is a strong execution on our profitable growth strategy. Order intake really strong at approximately 3 gigawatts, up 56% year-over-year. The order backlog close to €17 billion, actually the largest order backlog ever for Vestas, also very encouraging. The value creation continues, ROIC increased to 55%, also that on record level. Earnings continued to improve, EBIT before special items over €145 million, up 39% year-on-year, and also a continued strong cash flow impacting by an increasing cash flow from operating activities. So, again a lot of highlights in the quarter and a very strong execution. As usual then, the agenda for today, I will start talking about orders and markets, Marika, our CFO, will guide you through the financials, and then I will come back on the summary and outlook, and then we will open for Q&A. So let me start then with the regulatory environment that we view as generally supportive. We see strong support or solid support both for renewable energy and ambition to reduce CO2 levels. Starting then with Americas, the Tax Extenders Bill, including a two year PTC extension passed in the Senate finance committee with a solid majority vote. This is the first step and there are more to come, but it is a positive signal. Also a bit more long-term, the President Obama’s Clean Power Plan to reduce the carbon emission by 32% by 2030 is more a long-term positive signal. Looking at the EMEA region then, Germany, as we have talked before, continues the transition from a set feed-in tariff system to an auction system. The draft paper has been released, and what is positive is that the renewable energy ambitions are intact. In France, a new energy law was passed that will cut greenhouse gas emissions to 40% by 2030, and estimates are that that will be bring renewable to 32%. On the negative side is in the UK, where the government has proposed to end the onshore support one year earlier than previously planned. In Asia-Pacific, we have had almost two years of uncertainty as the RET targets has been discussed. What is positive now is that the target has been adopted by the Australian parliament and that should mean that we see some increased activity in that market. [Indiscernible], I would say China, India and several other markets we see a continued support for renewables. As I said, order intake, one of the key highlights for the quarter, very strong at 3 gigawatts and a 56% increase year-over-year. US offshore, the 3 MW platform, Mexico, Germany and Chile were the main contributors in Q2, accounting for almost 80% of the increase. If you look at the average selling prices of order intake in million euro per megawatt, we see a stable development in the quarter as we have seen actually in the last several quarters. You should remember that price per megawatt depends on a number of different factors, the scope, the turbine type, and of course, the uniqueness of the offering. Moving on down through order intake, we see improvement mainly in Latin America, US offshore, Poland and China, but I must say very broad-based we see good progress on order intake from a number of different markets. If you look at the first half, let me start with Americas, up 74%, so very solid growth driven by US, Brazil, Mexico and Chile and in the quarter then up 81%, so actually even stronger. EMEA also very positive development, for the first half up 37%, again driven by offshore, Nordics, Poland, Turkey and Germany and also in the quarter then up 53%. Asia Pacific, from a lower level up 24% for the first half of the year, again as I talked about during Q1, to a large extent due to China. And then in the quarter then a smaller quarter for Asia Pacific, so down 67%. Also worth mentioning that new markets for Vestas in top 5 for the first half is Brazil, Poland and China. A key competitive advantage for us is our global reach. I have talked to that before, and that is something that we all leverage on and we will continue to leverage going forward. Also proven in the first half, where we have taken 4.8 gigawatts of orders, very well balanced and broad in 27 countries and 5 continents. What enables our global reach besides our manufacturing footprint, and of course, the market presence in services, is really our broad well proven product portfolio. Our order intake was fairly equal between all 2 MW and 3 MW portfolio for the first half. And Vestas offers a broad range of turbines for all wind classes. On the 2 MW side, we have four models actively selling in the market, where we see a very solid demand, especially the V110, that is a flagship model, in the US. On the 3 MW platform, we have five models, with different power ratings, rotor size, and we continue to develop this platform, for example the V126, a perfect match for [Indiscernible] for medium to low wind. And also with features that fulfils specific market requirements, such as the [Indiscernible] large diameter steel towers and this is also part of the offshore application and offering. Traditionally 3 MW has been used in land constrained markets. But with increased energy production and cost efficiency we see a clear trend, where 3 MW is taking share in more traditional 2 MW markets, and one such an example is in Q2, where we have taken a number of big 3 MW orders in the US, a traditional 2 MW market, and we see – we expect this trend to continue. Looking at delivery then was up 35% in the first half. Sorry, the microphone was a bit – so I have adjusted that now. Hope you can hear me. So as I said delivery up 35% for the first half, solid growth in Americas and Asia-Pacific and EMEA stable. Starting with Americas then, up 85% six month and 151% quarter-on-quarter, very much driven by the US, up almost 650 MW. EMEA, as I said stable. Talked about Germany last call, and as expected we see a slight decline in the German market on delivery this year, but at the same time that is compensated with the increases in markets such as Turkey, Finland, Italy, and we should of course remember that we continue to see an overall good level in more mature markets like France and Germany. Actually in Q2, Turkey was our biggest market in EMEA when it comes to delivery, again showing the importance of a global reach. In Asia-Pacific, we saw solid development both in the first half and in the quarter, up 162% and 69% driven by primarily China and to some extent Australia. As I talked about before, we sit on a order backlog that is the highest ever, close to €17 billion and we see an increase of €1.9 billion, turbines on €1.3 billion and services on €0.6 billion. Some more words then about the US market, we continue to see a very high activity level, and I am very confident with all precision in the US market. We have frame agreements with a potential of up to 2.3 gigawatts, and year-to-date order intake is 1.7 gigawatts, approximately 40% within the frame agreements and therefore 60% outside. Looking at the Mitsubishi Vestas Offshore Wind performance, we see also positive development. It is well received by the customers and we can see that in the order situation with firm orders of 681 MW, conditional orders close to 500 MW, and also announced the third supplier agreement of 1.8 gigawatts. We’re also progressing according to plan. I have talked about before that the basis for the joint venture was a milestone agreement with both technical and commercial milestones that has now been fulfilled. There is actually just one payment left of the 12.5, so all other milestones has been met. Manufacturing is ramping up of the V164 8 MW and the Burbo Bank project will be the first and installation is expected to start in the beginning of ’16. So with that I will leave over to the financials and Marika. Marika Fredriksson Thank you, Anders. So if we have a look at the income statement and some of the KPIs that we have for the company, you can see that the earnings continued to improve in the quarter. We had a revenue increase of 30% compared to last year that is obviously driven by the higher volume but also impact from currency. And when I talk about income from currency, you will recall that it is translation impact as we report in euro. The gross profit in absolute values obviously improved by the volume by 21%. We continue to deliver a solid gross profit in the quarter of 18%, although lower compared to last year, but again that was an exceptional quarter in terms of positive mix. Fixed cost, we will get back to in one of the coming slides, but we continue to deliver well and leveraging our fixed cost effort in previous years, so the primary increase comes from currency, but also higher activity level in the company. Consequently we deliver a higher EBIT before special items, and that leads us to an EBIT margin of 8.3% compared to 7.8% last year. Net profit also you see a good improvement of 33% in absolute values. I should just mention here also on the income from investments, that is our joint venture with Mitsubishi, that Anders just took you through, and you have a slight profit in the joint venture in itself, but the primary part is really that the project we have sold to the joint-venture now has a transfer of risk and consequently you will see a positive impact, but it is still below EBIT and we are just following the accounting principles here. So that leads me to how we leverage on the fixed cost. We have, as we have spoke about previously a very tight control of our fixed cost. We have increased activity level continuously since we took down the cost, so you saw a higher activity level in 2014 and that also continues now in ’15. Despite that we have a very tight control of our fixed capacity costs and we are now down to 8.4% of revenue. So the primary increase really comes from currency as I just alluded to earlier and to some extent also from the higher activity level, but we are very happy with the performance. If you go to the service margin, you will see the service increased compared to last year by 20%, and as you remember that is one of the key parameters in our strategy going forward. So we definitely continue to execute on that strategy. Margins are solid. We have an EBIT before special items of 16.8%. Please bear in mind here that we have some one-timers in the cost and as the revenue in the service business is smaller than the turbine business, a 2 million to 3 million extraordinary item in the fixed capacity cost has an impact. But that is the primary reason for a slightly lower margin. You will see continue to see fluctuations in the quarter, but we deliver a high solid margin in the service business. We have a very strong order backlog and that continues to grow. As you saw on Anders previous flight, we also have an average duration of the service order of approximately 8 years. So a very good lifecycle security in the service backlog. If we go to the balance sheet, which is obviously also one of the parameters that we are tracking and continuously improve, we have a very strong balance sheet right now, and we have a big focus on the balance sheet. We have great performance as you can see on the net working capital, we are in negative territory despite the high activity level in the company. I will come back to some of the details in that improvement. You will also see that we have net debt that is very positive. So we are definitely tracking on our key parameters for the company. We also have a solvency ratio that improved compared to ’14, we haven’t still met our target of 35% with a very solid improvement and solvency ratio obviously also have an impact as we have a very portion of prepayments in the company right now because of high order intake. I will come back to the overall cash at hand in one of the coming slides, but very good performance both on the P&L and the balance sheet. If we go to some of the changes you see in the net working capital, I have said to you before that we continue the working capital project. We have been very good in keeping our tight control from previous years, when we were more challenged. So we have not changed the approach. The work in progress, in particular the process for work in progress, has stayed and continues to be very good. In the last three months, and also the last 12 months, we because of high activity level have a high portion of prepayments. We also have a high portion of payables and obviously that helps our working capital. So a very, very positive development. It has improved more than we have anticipated to be very clear. Warranty provisions, which is on the next page and the lost production factor continues at a good level. You see that we are providing more than what we consume. Just to be very specific here, we follow the same principle that we had in 2014. So there is no changes to the percentage that we provide for in 2015. The lost production factor is a reflection of our good quality work that we have in the company, and we continue our journey to be below 2% on a very consistent basis. If you look at the cash flow statement, and here I also said in the last quarter that you see the cash flow from operating activities continues to be the main contributor. Obviously that has been the focus area for us and you also see the change in net working capital here having a positive impact. I should just say here that this is excluding any currency. So it is free from currency on the working capital. And free cash flow that we deliver is consequently 183 million. The cash flow from financing activities is primarily our payment of dividend in April. If you go to the total investments, we announced in Q1 that we had an intention of increasing to 3.50. We’re trailing below that as of now, but we have anticipated that we will consume the 3.50 that we have put forward. That again is primary to meet our high activity level and the high demand in the market right now. And it is primary investments in [molds], so as you remember, the [molds] are movable, but it is also in our R&D and the capitalized R&D is approximately one third of the Capex that you see. The capital structure, you will remember, the two targets we have, net debt to EBITDA below 1 and also solvency ratio of 35. As you see, we’re tracking well on the net debt to EBITDA. The solvency ratio is lower than 35%. We are still happy with the two targets, and we also understand and respect that we have a very strong balance sheet at this point. Obviously with a strong balance sheet we have a lot of flexibility, we also have a big and solid possibility to execute on our strategy and invest in the strategy if need be. And what you can see now is that we have calculated and are confident on the cash we need over the cycles. So it is not a short-term cash need. It is over the cycle, and we will consequently have excess cash that will be primarily invested in the execution of the strategy. Having said that, we are not ruling out a dividend or a share buyback. The next slide show I would say the amazing journey on the return on invested capital. We are approaching 55%. This is a consequence of the focus on earnings and also the balance sheet improvement that you have seen in the past. So 54.6% is the accurate number for the quarter. So a very, very good performance that we are very happy with. By that I leave the summary and outlook to Anders. Anders Runevad Thank you, Marika. So let me then summarize the quarter. So again a strong quarter executing on our strategy. We will look at all four strategic objectives starting with growth in mature and emerging markets and growth in the market see a very good performance, high order intake and largest ever combined order backlog. On the service business, also good progress on the strategy of growing the service business more than 30% midterm, a good increase in revenue in the quarter, backlog increasing, and we see a good trend on the average duration of our service contracts. On the reduced level of cost of energy, which is of course, all about the competitiveness of our portfolio, we see a strong performance across both the 2 MW and 3 MW platforms, and as I said it is important for Vestas and it is important to have a offering for all different wind classes. On R&D, we continue to invest as we have done before in new releases of both of our platforms. We have a number of operational excellence programs, of course, ultimately with the aim to improve earning capability and we see the value creation continue with ROIC at 55%. [Indiscernible] And also a well-managed operation during high activity levels. All in all, we continue to leverage on our key three competitive advantages, global reach, technology and service leadership and scale. And to summarize this after Q2, on the global reach side, we are present in 74 counties across all wind classes. On technology and services, as I talked about, the depth of our product portfolio is what enables this global reach and the lost production factor firmly now below 2%, we feel is industry leading, and it is of course a combination of the quality of our product and the service offering. And on the scale, we’re now at approximately 70 gigawatts of installed base and of course a very solid order backlog. Moving on to the outlook and outlook is unchanged from the upgrade we made in May this year, and we also maintain a minimum guidance on revenue, EBIT and cash flow. So for revenue, a minimum €7.5 billion, service business as before, also unchanged, I expect it to continue to grow. EBIT margin before special items of minimum 8.5% and here also as before the service business is expected to have stable margins. Total investment approximately €350 million and a free cash flow of minimum €600 million. And as , the dividend policy we have and the board’s intention is to recommend a dividend of 25% to 30% of the net result of the year. So with that we are ending the presentation and can start the Q&A. Question-and-Answer Session Operator Thank you. [Operator Instructions] Our first question is from the line of [Indiscernible] of Danske Bank. Please go ahead with your questions. Your line is open. Unidentified Analyst Yes, thank you. First question is regarding free cash flow, if we look at the past two years, you have delivered a much stronger free cash flow in the second half of the year, versus the first year free cash flow guidance of at least 600 million, so implicitly to reach that lower end of the minimum level you are guiding for a lower cash flow in the second half. I understand that it is the minimum guidance, so my question is there anything that makes you believe that this seasonal pattern in inventory we have seen in the past few years will not be repeated this year, or anything else that would drag down free cash flow in the second half of the year? Marika Fredriksson Well, first of all, if you look at the working capital as we have highlighted before, the focus continues, and as I said, we have performed even better than we have anticipated for this year. So clearly all the activities that we have in the working capital and primarily the process changes we see in the work in progress have really improved the overall situation. We have – because of high order intake we have a large proportion of down payments. We also have a higher payable because of simply high activity level in the company. So in a way we have as I said performed better. We obviously see what we always see in the second half, a very high activity level. That high activity level causes some – for us to be a bit cautious because you will see weather having an impact, you will grid having an impact, so the minimum 600 is as you have stated, a minimum guidance, but it is also a best estimate for what we know right now. But first half has certainly performed better than we anticipated. Unidentified Analyst Okay, then my second question is regarding the profit from the MHI Vestas joint venture, these 27 million, can you help us understand what volume lies behind this deliveries with transfer of risk that you mentioned? Marika Fredriksson I am not sure about the exact value, but if you recall, we had a negative impact when we sold the projects and it is the 3 MW obviously to the joint venture of approximately 30 million on the items below the EBIT, and as they now have – I don’t have this exact value for you, but I am sorry for that, but to give you some perspective, we had a profit in the joint-venture of approximately 8 million, so we obviously had our 50% of that included in the 27, but the vast majority is really transfer of risk, but I don’t have the exact project for you. So you can return to IR. They would have – be able to provide that. Unidentified Analyst Sure, and then what should we expect for the full year on this line? Marika Fredriksson We haven’t anticipated because that will obviously be more of a joint-venture as it doesn’t reflect on our EBIT. Unidentified Analyst Okay. Thank you. Marika Fredriksson Thank you. Operator Our next question is from the line of [Indiscernible]. Please go ahead. Your line is open. Unidentified Analyst Thanks a lot. My first question relates to the gross margin development, sales up 30% and cost of goods sold up 30%, normally we would expect to see a bit more leverage when sales improve, this development that we are seeing here in Q2, is this a reflection of a can you say, not too fortunate mix in the quarter or is it more a reflection of Q2 last year being extremely strong? Marika Fredriksson Well, I would say it is a combination of both. So clearly last year we had very, very good performance. This year we have a good volume, but less favorable mix. So the volume clearly offset some of the good impact from the higher volume that we see, but still bear in mind that the 18% that we deliver is a really solid margin although lower compared to last year. Unidentified Analyst [Indiscernible] Second question, you mentioned that you are seeing a fairly stable enterprise for MW development, but we have seen some of your competitors talk a bit about pricing pressure, can you give a few comments on what you see in the market and in competitive behavior in a broader perspective also, thanks? Anders Runevad Yes, now but you are right. We – overall, of course, we see a solid market across many different countries. When it comes to the price levels, we see stable pricing and so I can’t really speak for the competition, but what we see is stable pricing overall, and no specific geographical differences either, so actually across the markets. Unidentified Analyst But are you sensing that your competitors are trying to catch orders through pricing in a more aggressive way than maybe six months ago? Anders Runevad No, not generically speaking. I mean, of course, you will always have projects here and there, but nothing that you can see as a trend or anything like that. No. Unidentified Analyst Okay, thank you. Operator We now go to the line of David Vos at Barclays. Please go ahead. Your line is open. David Vos Good morning to both. I have two questions if I may, you made reference to having done some calculations around the cash levels that are very good for the business, I may have missed a number there, but if you haven’t given that already could you kind of indicate where you see that kind of normalized cash level that will be helpful. And my second question is around the quite positive remarks you made on the front of the regulatory support that the wind industry continues to enjoy, to my mind that now takes away some of the volatility that we have seen in the past to a degree at least. My question to you is does that also mean that you would perhaps be more willing to commit to some longer term targets as the visibility has increased? Marika Fredriksson Okay. If we start with your first question, I guess that what you are referring to is the working capital? David Vos No, I actually I heard you say that you have done some calculations about the cash level that is required in the business. Marika Fredriksson Okay, sorry. Then I misunderstood you. Yes, I did. Obviously internally we have done that calculation. I will not share that fully transparently with you, but we have a cash level that we are happy with over the cycle and we will continue to be prudent. It is a cash intense business when you start consuming cash. But we will certainly have excess cash is what I was very clear on that. We will be invested in our strategic targets and enable us to execute further on the strategy. But we’re not as I said also ruling out a dividend and a share buyback from Vestas side. That is not entirely a management decision. As it will be a board decision, but we are not ruling out that. David Vos Okay, maybe as a follow-up for the second question then, investing in the business and into the strategy, how do we think about that, where would that money be deployed, and is that purely an organic strategy or will that perhaps also have an inorganic component to it? Marika Fredriksson Well, primarily what we’re looking at and also what you see us deliver operationally is organic growth and organic growth is our primary focus. So when I talk about investing in the business it is primarily to deliver and execute on the strategy organically. But you also know that we have certain focus areas where we have less presence, so you would see countries like India, we have started investing in Brazil, for example. So there is definitely places where we can continue to invest and further execute on the strategy. David Vos Excellent. Anders Runevad A bit about your second question, on the regulatory support, so that is definitely what we see, a stronger support for renewable in most markets, not all, but in most markets, and of course we also have a bit more for the longer term, the COP21 coming up. Having said that it is, of course, very, very hard to forecast political support. It also tends to change every now and again, depending on the political parties or the [Indiscernible] support, of course it is something that is very, very hard to forecast for the future, but again if I look at the current regulatory environment it is positive. Some of that are very concrete that we of course, also discussed, like for example, the support mechanism in individual countries to [say] international levels and so on. And some of these things are of course much more long-term ambitious than hard targets that we can translate to renewable market share. But it’s moving in the right direction, what we also should remember, it moves in the right direction at the same time is of course the competitiveness and we then – and that is for us then the primary focus. I am a strong believer of controlling what you can control and influence where you have the most influence and what we can do in order to have a market that is easier to predict also long-term and of course increase the market share is to continue to drive down the cost of energy for wind. And that’s of course the other part and that plays a big role in our strategy. We will — as every year do strategy seminar in September where we look ahead for the next three years. And if we after that have anything else to share on that we will definitely do so. David Vos Many thanks. Operator Next question is from the line of Pinaki Das of Bank of America Merrill Lynch. Please go ahead, your line is open. Pinaki Das Hey good morning. Good morning everybody. Thanks for taking my questions. My first question is on guidance, you’ve kept your guidance unchanged I guess the market is sort of looking — not sort of very happy about that guidance that you haven’t changed the guidance despite actually having very good performance in the first half. So, I just wanted to either check a couple of things if somebody has already asked about the [CF] clearly looks – your guidance looks quite conservative on that side, but even on revenues , if you take the last two or three years , typically you do only about less than 40% of your revenues in the first half and clearly sort of Q4 is quite big. So if I just use the ratios that happened in the last four years it should be somewhere between 8 billion and 8.5 billion of revenues already for this year and if that is true then clearly your gross profit was somewhat less than expected or the growth in – gross profit was less than expected, but if you have more than 8 billion of revenues then clearly there is operating leverage as well. And on top of that this probably that in benefit of lower input costs for example steel or just generally the commodity macro, but I just wanted to understand why haven’t you changed your guidance or is it that you want to see more progress in the next few months before actually updating your guidance? Anders Runevad Okay, so let me start and then see if Marika will want to add something. But, I mean overall of course, we are very comfortable with our position. We have a very strong orders backlog, so of course we anticipate a high activity level. We are also early in the year still we expect the seasonality in the business as we have seen before and that also means that we have other uncertainties that we have seen previous years on the later part of the year with a high activity level. And uncertainty is of course very much sort of within the calendar year. We have this Catch-22 environment where we have a lot of delivery and transfer risk and probably recognize the revenue and we do that in areas with a lot of wind, because that’s the [indiscernible] for us and that’s – at the same time of course where we are very dependent that that we can execute the projects towards the end of the year. So that is an uncertainty that and that’s why we maintain or be at safe or remain the guidance from May this year. The other thoughts – the equation and we have a high activity level as I said, we increased delivery about 35% to 40% last year, we increased delivery again for the first half to 35%, so of course we are running on a high activity ramp up plan. We are delivering according to that plan which I think is very obvious in the performance that we have had so far. But of course, it is a plan where you have risks I feel again comfortable with our ramp up plan both with number of people and material but we also of course are dependent on sub suppliers on that we get all the material in at the time that we need to get it in into the supply-chain, so that we can execute in the timely matter. One such example of sort of unforeseen events is of course the accident that has been in China very recently. And we of course have a manufacturing facility in China, the good news is that the manufacture is not affected its bit away from the Tianjin port area so it’s not affected at all and also of course very good that’s known of the Vestas same place are affected. We have also been lucky in the sense that our blade that was ready for shipment was actually porting in different harbor in the same port, so they are not affected and they will go it as planned, but we have an uncertainty in sub supplier components coming into that harbor that we have currently then working through and evaluating. So I must say that’s one example of fairly unforeseen event that good news is that nothing has been affected by manufacturing capability but we obviously can’t rule out some sort of delay at this point in time. Pinaki Das And what about the sort of 8 billion to 8.5 billion of revenues where you are just looking at last few years trends at least at, if that analysis valid or would you still stick to the 7.5 billion? And also I mean just on that front, you obviously are doing much more supply only installations front does that change the sort of risk profile? Marika Fredriksson Well I mean I cannot – I will not – disagree with your calculation obviously the pattern with the investors and the industry is that you have a higher activity level in the second half. Yes, hope we will have a certain impact on the revenue for sure, but what we – I mean what you are referring to is obviously the [indiscernible] if everything works our job is obviously to see what make the stimulation what if and therefore we have chosen to stick here with the guidance that we have and please bear in mind it is a minimum guidance. Pinaki Das My second question is just relating to sort of input costs, , clearly we’ve seen the commodity macro going down quite significantly, how does that affect your input costs and you’ve already mentioned that pricing is – been probably stable , how do you benefit from lower commodity prices have you already seen it in some of your numbers or you yet to see it in the next few quarters and probably how do your contracts work with your suppliers and sort of end customers? Marika Fredriksson Well obviously, the product cost is high on the agenda when it comes to commodities it’s also dependent on how you have purchased whether you are on spot or if you potentially would store some of it, with the team that we have certainly have the focus and they continue to leverage on the commodity pricing as it sits right now. Obviously that is also dependent on volumes, so you will see impacts in lumps but that is part of the program that is running within the purchasing area. Pinaki Das Is it fair to say that you would benefit from the lower commodity macro if you are pricing in stable? Marika Fredriksson I mean if we would be right in the timing of purchasing, yes we would definitely benefit from it yes. Pinaki Das Okay, thank you. Marika Fredriksson Thank you. Operator We now go to the line of Claus Almer of Carnegie. Please go ahead with your question. Claus Almer Thanks. I have two questions one is about the cost space and one is about the product mix in the quarter. As you showed Marika in the slides that your fix costs base has been, looking rather nicely over the last couple of quarters on 12 months rolling basis. But if you compare Q2 to Q1 is actually an increase. Is that effects or is just it was a high activity level as you said and should we expect the Q2 levels to continue rest of the year? That will be the first question. Marika Fredriksson So basically what I try to say Klaus is that company’s high focus obviously we have a negative impact, translation impact from the strong dollar right now on our fix capacity costs. But having said that we also have a certain portion although less simply because of higher activity level. But overall we are very strict and as I said we are extremely cautious on making sure that we leverage on all the efforts we have done to get the fixed capacity down. But as Anders said, I mean also in terms of activity level both last year and this year. I think we have been extremely good at leveraging, but the vast majority of the increase is for sure currency. Claus Almer But Q2 level will hopefully go up in second half of this year. So fixed costs will go up as well? Marika Fredriksson As I said, no. I mean overall we are keeping tight control. So it’s fairly limited on the activity level, but also, I mean we cannot rule out that there will be some increases, but it’s going to be limited also going forward. Claus Almer Okay. Then my second question goes to the product mix in the quarter. The mix you had is that an average from base compare to the backlog or was it better over? Marika Fredriksson Yes Klaus, that’s the number one question. There is no normal quarter in invest unfortunately. So you will always see these types of swings. What I think is good is if we look at the gross profit underlying base improving, it is lower compared to last year. The strive and the activities are in place to continue to improve on the gross profit. But it is very-very hard for me to say that is defined what is a normal quarter. The mix is not as favorable as last year clearly and that is also why we see that despite the high revenue or volume impact that is certainly offset to a certain extent by negative mix. Claus Almer So we should expect once you start dealing with the remaining got of your backlog across, it could be improving that also be drawn, is that right? Marika Fredriksson Possibly, but what I can say is that if we look at the order backlog, we are happy with how there backlog is distributed. Operator We now go to the line of Alok Katre of Societe. Please go ahead with your question. Your line is now open. Alok Katre Just a couple of maybe. First and foremost in Brazil, obviously currency and the economic activities situation over there is a little tough, I’m not say the least. But maybe you could just help us with what your analytic [indiscernible] to the Real is and how well you are covered there not just for 15 but also for 2016 as well, if there is any cover over there? And related question on Brazil of course is having grown rapidly over the past three years in terms of installations. If you look at some of the consultant forecast, they seems to be suggesting it will go a high level for fuels and perhaps even decline in the outer areas. And that said do you see competition hitting up and therefore is which does even with this recent [indiscernible] a little late and to the Brazilian sort of party sort of speak. So this is question number one and then I have follow-up on different topic. Thanks. Marika Fredriksson So I will start with the translation impact and Anders will follow-up on the Brazil question. So if you look at the primary impact on vessels P&L is translation with the strong U.S. dollar that received right now we have a positive impact from a translation point of view. In Q2 you see an impact of 140 million on the revenue, where approximately 18 is for the service business. There is as I said, a negative impact on the translation on the fixed capacity costs, so consequently, you see approximately, 10 million to 12 million positive impact from translation on the EBIT line So basically what I’m trying to say is that we are fairly well naturally hedged as a company with, and that is also what Andres alluded to earlier. We have a competitive advantage with our industrial platform, so that is providing to a great extent natural hedge the part that we are not naturally hedged we hedge the project, so we are not hedging the EBIT, but we are rather hedging the margin of the company. Alok Katre Okay, any specific comments around the Brazilian Real, in terms of being social over there, I mean obviously, I guess you do the some of the components from either Europe or U.S. or China as well so… Marika Fredriksson Yes, I clearly understand your question on Brazil, yes, the Brazilian Real is a challenge. But, we have a taken the decision to further improve our local production also to meet the local requirements, so we make sure we get the tax benefits. So overall the currency is a challenge, we are trying to mitigate that challenge with actions locally. Anders Runevad We have about 300 megawatt in backlog in Brazil so it’s not that much and of course as Marika said, the local quantum through it will also actually enforce that you have to do a lot of local production, so it’s a smaller fortune between where we have to work with [indiscernible] the product module. So, I think that leading a little bit out of your questions about Brazil enroll and whether or not it was the right time or wrong time for us to say, I think in that aspect of course the Brazilian Real and more the sort of overall macro development in Brazil is of course is negative and of course something important for us as well as all other companies to watch and my belief also after having worked in Brazil for many a years is that it is going to be a market where there is ups and downs. I think what’s at least what you have to take into account in Brazil, I think if you look at it from a renewal perspective, it’s a market that has a growing need for more energy it’s a market with fairly lot of old of hydro, so it’s a market that actually for the foreseeable future will have a growing energy need and it’s also a market and with a very good wind resources. So I, from that aspect, I think it’s going to continue to be a very interesting market. I am very happy with the timing of Vestas entering the market. I think we have managed to avoid the big rush that first started and that has actually led to some other suppliers leaving the market, so that means that we missed out a bit on the volume but on the other hand, if I see reconciliation in the market that’s happened after as I said, I am very happy with our most step-wise approach to get in to the market. Alok Katre Okay, just a follow-up on different topic altogether, obviously the 3 megawatt platform is getting streamlined just in Europe but as you suggested in the U.S. as well, how should we think about this from the profitability point of view particularly on some of the newer 3 megawatt turbine facility V126 or so. Just to get a sense of the mix effect and as we see [indiscernible] of the 3 mega watt turbines? Marika Fredriksson Overall both on the 2 mega watt and the 3 mega watt and I understand what you are alluding to, we are very happy with the profitability on both platforms. You will always see differences because mix will also — always playing so how you construct this specific project will have an impact on the profitability of the two platforms? But a generic answer is that, we are very happy with the both platforms. We also have activities to take cost-out on both platforms and that continues. Alok Katre Okay, so should I take it as there is – let’s say there is not much or not much of a mix effect from higher 3 megawatt in the wind? Marika Fredriksson It will depend on the specific project that’s all I can say to be – answer you very generically, it is – next will always have an impact on either platforms. But there are, as I said, the activities to continue to take cost-out and as you understand that 2 megawatt is more mature so there is more cost-out to take out on the 3 megawatts simply because it’s a newer platform. Alok Katre Okay, fine. And how much was it in terms of overall installed base and in terms of revenue share perhaps in H1 and if that could be? Anders Runevad On new installed base, I think we don’t have – I don’t have those numbers in front of me. [indiscernible] take first half it’s fairly it was, so I – can come back to you on the installed base. Alok Katre Sure, okay. Thank you. Operator Our next question is from the line of Klaus Kehl of Nykredit Markets. Please go ahead with your question, your line is open. Klaus Kehl Yes, hi, hello. Klaus Kehl from Nykredit Markets. Say and the first question would be on your current capacity, could you give us an update on that one and potentially also capacity constraints going forward if the odd intake continues at the same run rate yes as we are seeing right now, that will be my first question. Marika Fredriksson So if we look at the current capacity as , the business and that’s a reason for your question. It is developing quite fast, we have as Anders alluded to you earlier, we have really met the demand in the market in a very good way both in 2014 and but also in 2015. We have strong order in-take, we have a strong backlog and we have consequently decided to make further investments in capacity and that is primarily [indiscernible] and obviously with what we are doing now, we have the right activities in place to meet the demand that we see and having in front of us. Klaus Kehl Okay, but could you give some kind of indication of megawatts we are talking about the capacity of 8,000 megawatts or is that a company secret? Marika Fredriksson I don’t know, if it’s a company secret. Anders Runevad No we definitely have the required capacity and we have a very scalable capacity. I mean if you look at the nutshell it’s very – it’s actually very easy on the manufacturing footprint we have to scale up. Of course it would happen that we have to take from different parts of the world and of course it’s always an optimization that we are trying to do on closeness to the factory and where we have the project, but from a capacity point of view it’s a very scalable part. The blade part is what usually sets the numbers so just speak there as Marika said we have – and I think we have said on this call for the last three four calls that we are investing in new malls and they are actually — impossible to move around and from a breaking point of view was on the blade we loss and therefore we can also fix that. Klaus Kehl Okay. And then my second question would be on service revenues I must say that somewhat positively surprised about revenues in this quarter, so I just wanted to check if there is any unusual things included in the top line for this quarter and the service business? Marika Fredriksson I think that’s what you see in the service business, as you remember, we carved out the service business and made it a separate business and obviously it takes sometime before we get attraction on that focus and I think this is – it is a reflection on the focus so, it’s again very strong organic growth in the service business, obviously also reflection of the strong turbine order in-take that you see. Klaus Kehl Okay. Thank you very much. Operator We now go to the line of Sean McLoughlin at HSBC. Please go ahead, your line is open. Sean McLoughlin Good morning. Thank you. Can I just clarify on FX you said €10 million to €12 million of positive translation of EBIT, is that a total effect in Q2? Marika Fredriksson Correct. Sean McLoughlin Correct. And then two questions if I may, firstly, on the share buyback, if – you just talk about what might trigger that? Secondly, I am intrigued by your comments on 3 megawatts replacing 2 megawatts, just want to understand what’s driving that, is that fuel economic or just 3 megawatts turbine is actually much more competitive on a megawatt hour basis in low medium wind speed is it down to permitting or is there anything else and particularly what other markets could we begin to see that, and most of all, how does that shape relate to that you think about future for [indiscernible]. Marika Fredriksson Okay, if we start with the quicker question, which is the share buyback, we will obviously when we have a solid proposal from our side we are not ruling out the share buyback as I said and neither a dividend, so we will give a recommendation when we have recommendation in place to the Board and then they will make it ultimate decision on how much that can be. But obviously, we understand and respect their requirements and also see that ourself to make the balance sheet even more efficient. Anders Runevad On the [indiscernible] 3 megawatt platform question and I will say that – I mean 95% of the driving is of course pure economics as you alluded to. So it’s levelized cost of energy production and of course we see then very good progress, so on the 3 megawatts both when it comes to increased power rating we can now go up to 3.45 megawatt and also increased rotor size, but it’s also saw that with our new turbines we can reach higher and therefore we had to get the wind condition, we can also go to new places with new features that’s both grid features but also for example the deicing solution. We also have solutions on more humid conditions. So it is very much to the absolute highest grids driven by levelized cost of energy and more efficiency energy production. So, that is what sort of drive this trend we have seen of course since before that we have for example in Latin America a quite a lot of 3 megawatt projects U.S. we see now in Q2 clearly and the reason why we see more – in a market the tradition has been only 2 megawatt, we now see a good order in-take from 3 megawatt is that there are sites now where the economics are better for our 3 megawatt platform. Sean McLoughlin So does this mean that, in terms of future product development, you’ll have more of a 3 megawatt, or go for a 3 megawatt plus focus? Anders Runevad I think there is a trend in the market it’s definitely there, so and also if you look at the age or the platform of course, the 3 megawatt platform as Marika said as well it’s a much newer platform for us and of course the potential for us both on improving that further both from a cost point of view but also from energy production point of view is higher from the pure fact that it’s a newer platform. Sean McLoughlin Thank you. Operator Our next question is from the line of Shai Hill at Macquarie. Please go ahead, your line is open. Shai Hill Yes thank you very much. So my two questions, I think the first one, Marika, could I just ask you, sorry I am not getting this, but to explain the difference in terms of the offshore between the 27 million reported and 8 million you said [indiscernible] it’s the difference specially sale of equipment from [indiscernible] joint venture perhaps you can just explain it to me I’m not getting it? Second question was just, Andres maybe could comment a bit on Germany, very big market for you last year, about 18% your deliveries and obviously there has been some regulatory changes than your first half deliveries in Germany are slightly less than half of what they were in the first half of last year. Do you think aspect, to seem that would be the picture for the full year basis, that you sort of do less than a half of what you did last year roughly or is there some seasonal rebound, or deliveries that should expect to Germany? Marika Fredriksson Okay. So, if we start with your first question. So the joint venture had a profit in itself, a net profit of 12, we get 50% of that so it’s a 6 million and not 8, as I said. And besides that we had profits from the joint venture sales of turbine, so transfer of risk to the end user of some 50 million I think it was. And then you have adjustments, so that’s the additional 15 million of turbine sold from Vestas to the joint venture. So we end up in the territory of 27 million. The thing is just to take it from the beginning is, we sell this 3 megawatt platform to the joint venture, we then recognize revenue and consequently have the gross profit on that particular projects, so it hasn’t impact on our EBIT, but then for following the accounting rules and principal, we have to deduct that profit under the EBIT line. So that would show negative figures from the joint venture. [Audio gap] And now as we sold last year into the joint venture they now have transferred the risk of these projects and that consequently have a positive impact once they out below the EBIT line for Vestas. So it is purely accounting principal, I don’t know if I explain it very well, but I really — that’s the best effort. Unidentified Analyst Okay. I think I got that. You had a profit in Q2 last year of sales to the joint venture, which reverse out below the EBIT line and — Marika Fredriksson That’s the correct. Unidentified Analyst You book a positive. Okay. Anders Runevad Okay. So it will be about Germany, and you are right and as we expected and as we talked about as well we saw decline in delivery in Germany this year, we have seen the decline in the market from a very-very high market before on delivery. Then also as we expected that’s a compensated for with the lot of increase the delivery activities in several outdoor markets in Amea [ph] talked about Finland, talked about Turkey, good activity levels in France and so on. So as expected, it come from a very strong delivery loss here in Germany we saw a decline in delivery for the first half but well compensated in other markets in Europe. If you look at orders, picture is a bit different as you can see orders for the first half in, there may have a reason and is up 37%, year-on-year and in the quarter actually up 53%, so a good development on the order intake side. And here we actually see a good development also in Germany on the order side. So compared to last year as we have said before, as well we have seen Germany smaller from a delivery point of view with this year but longer term we see Germany as a big stable market. Operator We are now over to line of Patrik Setterberg of Nordea. Please go ahead. Your line is open. Patrik Setterberg Two questions, the first is regarding or both of them is regarding the development on the US market, you now have 2.3 gigawatt in master supply agreements, I just wondering if the clients want to utilize all of this 2.3 gigawatt of borders, would you be able to produce all of them in 2015 and 2016 and my second question regarding USA is that during the first half of 2015 you have been able to book orders out of orders in USA 50% of the orders is outside these small service agreements. Is this a more positive development than expected or is it demand what you have set forward in the start of the year. Anders Runevad Yes, so if I start with your first question. So if we can confirm the potential of the front 2.3 form an unconditional we will be able to produce and deliver that within ’15 and ’16 that will definitely have the capacity for. On your second question it is of course positive that we have taken also a lot share outside the framed agreement in the first half. And again I am very satisfied with our performance in the U.S. and our ability to take market share and orders. Then of course you should also remember that border line in between is somewhat fluent as of course you could have project that was in a frame before [Audio Gap] time therefore with components for P2C qualification and then those projects or someone one or two project can move out that, customer can sale that to another customers that we have the frame agreement but of course it’s still then designed with Vestas component across our possibilities to secure that order is fairly good. So it is a bit of a moving market as well when it comes to project in the frame and outside the frame but overall we definitely have the capacity in ’15 and ’16 but we expect both years to be very busy be rest. And of course we are happy also to take even more orders outside the frames. Operator The last question is from the line of Jose Arroyas of Exane. Please go ahead. Your line is open. Jose Arroyas Good morning, everybody. I had a couple of questions. First one on the service margins, given the prepared comment section you eluded to $2 million to $3 million of one off costs in a service unit. Could you explain to us if that’s ForEx related, if that’s geographic mix or seasonal effect that we should know about and if so that will reverse in the second half? That’s question number one. Marika Fredriksson Okay. So to be very clear on that and it is nothing to be, it’s nothing that we will see on a occurring basis, but of course you count it in a quarter or in a month have that type of cost, but it’s nothing that we plan for. And that’s a little bit my point is when you have an extraordinary cost in a fairly small business on a comparable basis, you will see an impact on the EBIT margin. But as I said we still have very high margins and also very stable margins overall in the service business. So it’s nothing that we are worried about or have a concern about. Jose Arroyas Where that cost comes from what’s the nature of those costs if I may ask? Marika Fredriksson Well, I do not have the precise description of the cost base for you. So I would suggest that you look or check that with our Investor Relations. Jose Arroyas Okay. And my last question is on the JV. What is the amount of milestone payments that you have received from Mitsubishi year-to-date and what have been booked in the balance sheet and the capital statement? Thank you very much. Marika Fredriksson The amount [Audio Gap] The overall deal with Mitsubishi was that Mitsubishi had a payment of all-in-all 300 million into the joint venture. A 100 million was transferred at the start of the joint venture, the remaining 200 was transferred on milestones to joint venture and it’s not 12.5 million left out of the total of 300 million. Operator We’ll now hand back to Anders to close. Marika Fredriksson Okay. So with that, we close this call. Again thank you for calling in, thank you for your questions and thank you for your continued interest.