VWSYF - Vestas Wind Systems A/S (VWDRY) Q2 2023 Earnings Call Transcript
2023-08-09 19:49:02 ET
Vestas Wind Systems A/S (VWDRY)
Q2 2023 Earnings Conference Call
August 9, 2023 4:00 AM ET
Company Participants
Henrik Andersen - Group President and Chief Executive Officer
Hans Martin Smith - EVP and Chief Financial Officer
Conference Call Participants
Kristian Tornoe - SEB
Claus Almer - Nordea
Sean McLoughlin - HSBC
Martin Wilkie - Citi
Gael de-Bray - Deutsche Bank
Dan Togo Jensen - Carnegie Investment Bank
Mark Freshney - CS
Akash Gupta - JP Morgan
Benjamin Heelan - Bank of America
Ajay Patel - Goldman Sachs
Henry Tarr - Berenberg
William Mackey - Kepler Cheuvreux
Lucas Ferhani - Jefferies
Presentation
Henrik Andersen
Good morning, everyone, and welcome to our Q2 and First-Half of 2023 Presentation. And with that, I would like to go to our key highlights on the presentation. So if we take the key highlights, our order intake in the quarter was 2.3 gigawatts. The wind turbine orders in gigawatt grew by 8% year-on-year with Q2 ‘22 with an onshore ASP back and increased to EUR0.97 million from the Q1.
Revenue of EUR3.4 billion, that's growth 4% year-on-year, driven by a very impressive growth of 29% in the service business, higher average pricing on deliveries and partly offset by the lower volume in the quarter. EBIT margin ended at negative 2%. Profitability is improving due to the strong service business and the increased pricing as we execute on the backlog that we have shared with you in -- now the previous quarters.
Vestas continue to drive industry discipline and maturity. It gives itself that strong operational and commercial discipline across the industry is imperative to ensure value capture and at least also the quality shared with our customers and partners. When we look at our outlook for the year that's maintained, we are on track to deliver on our outlook for 2023 and also with a slight change due to the higher service growth.
With that, I would like to take us to the business environment. And on the business environment, you know this chart, especially to the left side of the slide here very well. It is improving, but it is also an operating environment that will still remain challenging throughout 2023. Priorities remain the same. Health and safety top priority to our colleagues working around at Vestas, but then at the same time also that remain business continuity. When we look at that, I think the observation here for us in this quarter is that the market design and permitting poses a barrier to new installations. It is a concern. We will talk more about it when we come to the power solution.
The industry still needs to mature to ensure operational efficiency, quality and scalability. We work with that. It's a fact, and we also wanted to raise our voice as one of the industry's leader. When we look at the supply chain, the supply chain disruptions remain, but they are easing. They are easing, and especially within the transport and logistics sector while, of course, we can also see that the inflation has become more sticky in part of our core markets. And of course, that is a concern. Having said that, we are executing to plan order by order, and we are seeing improvements in how we execute that. But as we all along said, this year is a year that caused a bit of frustration, and we're executing orders that also pose a red negative EBIT number on the turbine deliveries.
With that, go to the Power Solution. So the Power Solution, when we look at that, the order intake of 2.3 gigawatt, that was up 8% year-on-year, driven mainly by EMEA and the Hibiki offshore project in Japan. The onshore ASP returned to EUR0.97 per megawatt in Q2, despite very few EPC orders, and it raised an increase from EUR0.89 in the prior quarter. Overall, satisfying mix was more typical in the second quarter, and therefore, also, we see pricing reflecting that.
When we look at the permitting process and the regulatory uncertainty, that remains a challenge causing delays in order intake. I think, I speak on many market participants throughout the value chain here that it causes some concern that we still don't find the right agreement between governments, developers, owners and us as the OEM. So we need to find that. We need to see proper actions on the permitting, and we need to see people not only setting targets, but actually following through with proper actions to accelerate that. That is still an outcry of concern for the industry. We can see it. It takes more time. So therefore, our backlog of projects being discussed have probably never been better or bigger than it is.
At the end of Q2, Vestas had more than 12 gigawatt of total preferred supplier agreements for the V236-15 megawatt offshore turbine. So again, positive and also positive with the progress the offshore colleagues are making. You will see the normal chart to the right hand side showing, first of all, where the orders are placed and also the ASP on a trend line back from the quarter, similar quarter last year.
Now to service. When we look at service, a very strong quarter and of course, supported by continued high activity and again, a strong operational first-half of the year. The service order backlog increased to almost EUR32 billion with also strong support from the inflation indexation that continues to work as it should, and therefore, also protecting the backlog the profitability and not least also the many variables that are through the service business on a daily basis. You will see here to the right, the service order backlog is, as said, close to EUR32 billion. We got 150 gigawatt under active service contracts, and we have an average duration in the service backlog in excess of 11-years. Positively, you will also see below the split of the growth between the individual regions. And of course, we welcome that very much and thank customers for the trust in investors.
If we then look at the development business, I think here, at the end of Q2 2023, our pipeline on development projects amounted to 13.5 gigawatts with Australia, the U.S. and Brazil being the countries with the largest pipeline. During the quarter, we secured 0.3 gigawatt of new pipeline projects. And we also took 168 megawatt of order intake was generated in Q2 from two projects in the U.S. and in Brazil. So actually pretty positive. But of course, this also links back to what I mentioned in the previous slide on the Power Solutions on how we come around the local markets and how we also see the progress in permitting. So therefore, growth, yes, but it is still quality over quantity when we access the development business across the world. And for that, thank you to many of the colleagues doing so well in this quarter.
You will see the breakdown of [Technical Difficulty] and I won't drill more on that. I think it speaks for itself and only minor changes towards what we had in Q1. When we then go to the sustainability, highlights here is in the second quarter of 2023, Vestas and Erste announced a partnership in which Erste will buy a minimum of 25% low emission steel towers and blades made from recycled materials for Vestas in an all joint offshore wind projects and where we're also there add to the partnership together with good colleagues that sits around the caller in Erste.
Lifetime CO2 avoided in the quarter by produced and shipped capacity increased by 9% from Q2 2022. That is due to the higher produced volumes in general. And then last, carbon emission from our own operation Scope 1&2 increased by 45%, compared to the second quarter in 2022. This can be attributed to higher activity levels in offshore, construction and also service.
I also wanted just to highlight here, when you look at the carbon emission on our Scope 1&2, we are approaching zero. And of course, 0.024 in million tonnes means that it is 24,000 tonnes of CO2 it also means that the number is easier to affect when you do have high activity levels or when you have large individual projects. So therefore, we will see some of those deviations. But as always, we will just explain to you. So you can also relate to why we are having a change either in up or downward movements.
When we look at the safety in the quarter, we had a safety that is 4.3, that is up that's not satisfying. And of course, we are addressing that on sites where we have seen some of these recordable injuries and everyone is having that focus, because that actually is against what we plan to do with our first priority.
With that, I will hand over to Hans with the financials.
Hans Martin Smith
Thank you, Henrik. And as usual, we turn to the P&L, the income statement first, where we can see that the gross margins continue to improve. Revenue increased 4% year-on-year to a bit more than EUR3.4 billion, driven by the increased service activity, higher value of turbine deliveries, which was then partly offset by lower megawatts delivered in the quarter.
Gross margin was at 6.4%, which is 3.5 percentage points up from the 2.9% we had last year. This improvement was coming from the Power Solutions, as well as increased pricing and continued growth in service. We had income from JVs and associates to the tune of EUR16 million in the quarter. And all in all, that takes us to an EBIT margin before special items of negative 2%, but actually an improvement from minus 5.5% last year. All of that, of course, coming from the above mentioned factors that I spoke to just a few seconds ago.
In the Power Solutions segment, we can see how profitability has improved. Revenue decreased by 3% year-on-year with around EUR80 million, driven by lower activity levels in the Asia Pacific region, partly offset though by a higher activity in South America and in offshore, where we had a five-fold increase in activity levels, roughly speaking, compared to a year ago.
EBIT margin before special license improved by 2 percentage points to a negative 6.9%. And I would say the bulk of this improvement was coming from improved project pricing and also from execution. Underlying profitability, I think it's important to say it continues to improve, but it's, of course, also hampered by execution of low-margin projects that we have coming in from the backlog.
Turning to the service segment. We see continued strong growth and also a solid EBIT margin. Revenue increased by 29% year-on-year, actually the same number as in Q1. And as such, I mean, it's good to see that the growth in the segment continues. You spoke a bit to that already also, Henrik. This was driven by higher overall activity levels, but also for our inflation indexation.
Interestingly, transactional sales were slightly down for the first time in several quarters. And furthermore, we also had a drag on growth from currency translation effects to the tune of 4%. All in all, that gives us a service margin of about EUR200 million of EBIT, corresponding to a percent margin of 21.9%. SG&A remains pretty much at the same level when we look at the fixed cost here.
Relative to activity levels, that’s an 8.4% on a trailing 12-month basis. The increase compared to Q2 last year is mainly driven by, of course, relative effect coming from revenue. But we're also seeing additional IT and employee-related costs other than only partly offset by lower R&D cost. But again, I'd say on rough terms, this is pretty much the same as we also saw a year ago. That takes us to the net working capital, which is largely stable over the quarter and exhibiting what I would say is a somewhat typical profile, compared to what we have also seen in previous years.
As mentioned, stable over the quarter with an increase in the level of inventories, offset by down milestone payments from customers, but also observing here a decrease in receivables. It does reflect the typical seasonality that we have in the business in the first-half of the year as we prepare for what is typically a more busy second-half of the year. So as I said, nothing atypical necessarily about what we are looking at here.
That naturally leads to the cash flow statement, where we had a positive operating cash flow in the quarter. It increased to EUR48 million, driven by the improved profitability that I've spoken to already, but also by lower warranty consumption, compared to Q2 last year. We did, of course, do other things and just say, operating cash flow related activities. So the negative free cash flow ends up at a negative EUR140 million, but that is actually also an improvement, compared to last year. And I mean, it's improving actually from EUR360 million, as you can see on the slide. So while it is negative, we are seeing that it's coming up from past periods.
The investment levels, I mentioned briefly already. We are looking at EUR188 million in the quarter, which was slightly up, compared to Q2 last year, albeit not that much. The increase was driven by higher CapEx for the 236 platform, which were then offset by lower investments in intangibles. But I would say, overall, the investment levels pretty much stable and on the same levels as we also saw in Q2 of 2022. That takes us to provisions and to loss production factor. The LPF is actually showing signs of improvement, but of course, remains high at high levels from the extraordinary repairs and upgrades that we're carrying through.
Warranty provisions stood at EUR171 million in Q2 this year, corresponding to 5% of revenue, which is an increase from the 3.7% we had last year. On the other hand, provisions consumed in the first-half was EUR254 million, which is a decrease from the EUR313 million we had in the first-half of last year.
That takes us to the last slide in the finance section, which is the capital structure where we can see that the financial leverage continues to -- not continues, but at least decreases, compared to the last quarter as our earnings slowly recover. Net debt-to-EBITDA decreased to multiplier 4.5 in Q2, due to the high EBIT that we had on a trailing 12-month basis as the earnings recovery journey continues. We have an investment-grade rating with Moody's at BA2 with a stable outlook as well.
With that, I would like to hand it back to you, Henrik, for some words on the outlook.
Henrik Andersen
Thank you so much, Hans. And then to our outlook for the year. So revenue unchanged, EUR14 billion to EUR15.5 billion. We have changed the service, so we changed service. So it's now expected to grow around 10% previously, as we stated, minimum 5%. The EBIT margin before special items remained between minus 2% to plus 3%, and the service margin in there is expected to be approximately 22%.
Total investment sits around EUR1 billion. And then when we look at the outlook for 2023, yes, we are at half-year now, two quarters in, two quarters to go. Still, there sit some conditions that around the guidance is still pretty uncertain in a year. But outside that, pretty okay with the progress we have made.
And I just want here also to take the opportunity to thank not least customers and partners externally, but also colleagues internally in actually walking through a Q2 that has progressed as planned, and we are doing what we have promised each other and therefore, also having all eyes towards a completion of the year, where we still would absolutely do our best to bring investors back in black and therefore have a positive EBIT number.
So with that, I will just say thank you to one that listened in and pass over to the operator for the Q&A.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Kristian Tornoe with SEB. Please go ahead.
Kristian Tornoe
Yes. Thank you. So obviously two questions for me. First one goes to pricing. So obviously, we have seen some volatility in the onshore ASP, which I understand is primarily driven by mix effects. So obviously, it makes it slightly hard for us to see what the underlying price development is. So if you take your Q2 orders here and compare that to, say, Q4 how much is sort of an underlying like-for-like price up?
Henrik Andersen
Okay. We'll take that first, Kristian, and thanks for that. As we say, we try to give you the much there we would like. Because on the ASP, it covers quite a number of countries. It covers quite a number of splits, both from a local geographical point of view, but also from a mix point of view. What we like to say in this quarter is compared to last quarter, where we had a quite a significant order intake also that related to, for instance, repowering and others. In this quarter, we have very little EPC. And therefore, if you compare that back to Q4, then where there was more EPC in Q4, then you will have a comparison and also a difference explaining part of that.
Besides that, as we always follow here, we take the orders from a broad range of countries, and they all have to come into the same and be compared to the same profit expectation. So for us, pleased with the order intake on the pricing side, and it just illustrates our discipline on the overall volume probably hinted here. A quarter in itself shouldn't be seen only as the 2.3. It should as much be compared as where are we year-to-date, because we also had a couple of large orders that tipped into Q1. So we think that's the right way of saying it. And of course, we are working hard also not only to keep the momentum, but also see where we can do more. Positive in there, a bit more orders from the U.S., as you've seen in the Q2. And that, of course, is a good indication where we think the world will be going in the coming quarters.
Kristian Tornoe
Okay. Thank you. You didn't answer it exactly. So I guess my question is, is underlying price still trending up?
Henrik Andersen
I think pricing here is staying, as we probably will come at a pretty okay level. Is it up or down? There's some that is up and there's probably some one or two that is down. But that probably depends a little bit related back to my comment also on that there are things in the supply chain that also starts easing. So where there is an ease related to transport and others, of course, that's also reflected in your customer discussion.
Kristian Tornoe
That was very clear. Thank you. Then my second question goes to margin development. So last year, we heard you say sort of quarter-by-quarter, the current quarter orders fulfilled your margin threshold, but then we saw this rapid margin dilution afterwards. So more specifically, looking at the orders you took towards the end of last year in the onshore business, how much are expected margins deviating from the margin which you calculated at the time you signed the orders?
Henrik Andersen
I think here, Kristian, I think we -- last quarter's -- last year is not a quarter deviation this year. It's very -- we have said the very, very little in trout, and there's very, very little that has a lead time of only four quarters in an order intake. So therefore, the orders we are executing on in a backlog of turbines that sits at the level is at approximately EUR20 billion. There is a significant part of that relates back to the late part of ‘20 and ‘21, and those pricings are not significant attractive to compare to. You can also do that with -- you can do that math by seeing what's come in and what goes out. So there, we still have a gap, and that's where we were hedge also for our hedging with the components and the raw materials we saw on that pricing.
Kristian Tornoe
I think you misunderstood otherwise, I rephrase my question. Probably my question was rather looking at the orders you took towards the end of last year, are you equally happy with the expected margin on those orders today as you were the day when you signed these orders?
Henrik Andersen
Yes, because there hasn't been much changes since end of last year. So for us, in reality, and we spoke about that a number of times, it's the volatility in some of the underlying components that creates the challenges for us. Of course, you can always argue if it drops down, then it's a positive overall in hedging the orders, but that we haven't seen much of in the prior three years. So in that sense, we are very pleased with that pricing level that has come over the last quarters.
Kristian Tornoe
Very clear. Thank you so much.
Operator
Our next question comes from Claus Almer with Nordea. Please go ahead.
Claus Almer
Thank you. I have also two questions. I will do them one by one. Henrik, you have already touched upon the guidance, but I have one question regarding the unchanged full-year EBIT margin guidance. This is leaving a rather wide range for the second-half of the year. So the low end of the range reflects a minus 3% EBIT margin in second-half of this year.
So there's two questions, actually. What kept you for narrowing the margin? And secondly, what scenario really reflects the lower end of the margin guidance? Not least because you have at least 25% higher revenue in the second half versus the first half of this year. That will be the first question.
Hans Martin Smith
Yes, Claus, Hans here. I'll address that first one. Of course, there is a wide range, but it's also reflecting the different types of outcomes we are seeing. There is a multitude of different things, I would say, that can happen in what is typically a very, very busy second quarter in itself. There are volumes effect. We have also have, let's say, a range on the top line outcome that is maintained. So of course, that will drive effects on the margin. Then we're seeing also that there is continued, and we mentioned that also execution challenges. It's not that things are just simple out there. And that means that we are looking also there at challenges that might or might not come.
And furthermore, of course, and I guess we'll get back to discussing that also later on. We have also seen a bit of variance in, say, the quality cost that we have on to provisions. And of course, that can also move around a bit. And if we add all of that up together. This is, of course, something that might have an impact on how the year plays out. I think it is still, as I mentioned before, there's a lot of lumpiness and a lot of things that can go in either direction. And hence, that is why we see fit to have the kind of margin range that we have guided for in the outlook.
Claus Almer
Now quality has been a hot topic in this industry. So as you said, there might be some execution issues. There might be some other things in the second half. So where is your key concern if we're going to see some quality issues, is it on the existing already mentioned problems? Or could it be new issues arising?
Hans Martin Smith
I think, Claus, to heat a little bit hands from the slide also, we see a trailing off in our LPF. We follow the same process, as we always do. We have seen a lower sort of consumption of our warranty provisioning, which also indicates that we feel at a pretty good place. On the other hand, we provided 5% in the quarter. There will always be some deviations quarter-on-quarter when you have relatively lower turnover in first-half of the year. But we are also here just saying, come on. We come from something that was significantly higher last year. We all want to go to a lower level, and that's what we are targeting, but it won't happen overnight.
So therefore, probably also a little coming from last year, we just give ourselves here also an opportunity to let the organization execute on our backlog. And I will be honest, no in the backlog that creates a little bit of frustration, because we are not going to sit here end of the year and see a different number. The power solution will be a negative EBIT loaded by the end of the year, and that means we spend a whole year in executing on a backlog. We actually haven't made money on in terms of turbine orders. So that's the reason for our guidance. So a narrowing of guidance in our world here will happen probably when we get after Q3.
Claus Almer
Okay. Fair enough. My second question, going to the backlog. The EMEA backlog is down nearly 20% year-over-year. How are this going to impact your future profitability?
Hans Martin Smith
Not going to impact the future profitability, because if what we look here at, we see that, that when you have deliveries or when you have order intake, the order intake that comes right now, the closer, of course, it gets to our factories, the less risk, of course, we also, in that sense, have on our outbound transport. So therefore, we do that. We do that cost, and that is actually not where we expect to have any of those deviations. Clearly, there are some European markets closer to us where we normally have a better structure or a better positive effect. But overall here, we are quite pleased that it sits in some of our major markets with the order intake in the previous quarter.
Claus Almer
Okay, thanks so much. That was all from me.
Operator
Our next question comes from Sean McLoughlin with HSBC. Please go ahead.
Sean McLoughlin
Thank you. Good morning. My first question just around these delays to order intake. Firstly, is this a global trend? Is this concentrated in certain markets? And in particular, what has been delaying the U.S. given obviously the IRA backdrop? And how do you see that improving over the next quarter or two? That's my first question.
Henrik Andersen
Thanks, Sean. I think on the order intake, you've probably seen end of last year with always effects beginning of this year. You saw end of last year that a couple of European countries got their -- and I call it a little bit the PPA ambitions a bit wrong. So when you have European countries coming out and doing public auctions or target auctions or volume that then sits with a PPA level that is actually a bit out of range. But of course, it will look like if you could take it to the voters and saying you secured the order intake or auction results of EUR45 per megawatt hour or similar.
When you have a levelized cost of energy and now it sits above that in certain countries. So I think there has been over the last couple of quarters, some governments that have had just to adjust to what is actually practical possible and at the same time, getting capacity increase that we have seen in a couple of Southern part. We saw it in France, where there was almost a non-subscribed and then almost fully subscribed. And we have seen Spain taking various decisions on similar nature after a fail auction in the back end of last year.
And of course, when you have such an auction that goes wrong one or two quarters before, then you will have a slowdown in the following quarters. So that's what I referred to. When you then have a question around the U.S. U.S. as such, actually pleased to see that there is a slightly higher activity with the order intake this quarter. We think quarter-on-quarter, it will continue improving. We've seen in this quarter that there is more details on the guidance. Therefore, there is also a better cooperation and collaboration between market participants and the government that needs to get it to role.
So therefore, it's a little bit -- if you ask me what's the date or what's the quarter? Don't know. But I can just see that the activities are picking up, and we can also see some of the order intake are coming. And not surprisingly, some of us will spend a fair bit of our second half of the year in the U.S.
Sean McLoughlin
My second question is just around free cash flow. We've seen another negative number. In the absence of free cash flow guidance, I mean, what kind of comfort can you give us on that free cash flow coming -- becoming positive and helping to support the balance sheet? Or would you expect further degradation of the equity ratio?
Hans Martin Smith
Yes. So I think we discussed it at an earlier call in connection with Q1 also that for this year, given how we see things moving around, we don't see that we can deliver a positive cash flow this year, positive free cash flow that is Sean. Of course, that would be nice. But with the levels of profitability, the levels of CapEx and then the working capital movements that we're currently forecasting, I think that is just not realistic. And hence, for this year, that's kind of what you should expect. Of course, this is not something we expect to be permanent.
But as mentioned, this is how we see the world right now for this year. How much that's then going to be? I mean, as you say, we don't guide on it, and we can also see some fairly substantial swings in the numbers. So I guess we'll have to see where we end when we get to the end of the year. We’re working very diligently and addressing cash flow working capital to, say, get into a better place. But unfortunately, this is what we expect as the outcome for this year.
Sean McLoughlin
Thank you.
Operator
Our next question comes from Martin Wilkie with Citi. Please go ahead.
Martin Wilkie
Yes. Hey, good morning. It's Martin from Citi. The first question I had was on the supply chain. Earlier last month, one of your blade suppliers TPI warned on some quality challenges it was having. And it wasn't clear as to which suppliers were impacted by it. And I'm not sure what extent you can comment on the specifics. But I mean, are you seeing any constraints on delivery to you that could put your revenue guidance at risk? Or any quarter issues in supply chain that we should be thinking about in terms of risks through the second-half? So that was the first question. Thanks.
Henrik Andersen
Thanks, Martin. As I said, we don't comment on specific companies issuing sort of notes on warranties and other stuff. And we generally have a TPI where we have a very strong partnership with. So for us, we work closely with them to plan for the remainder part of the year. So far, we are on plan, and therefore, there's nothing in our planning together that gives sort of further race to any concerns. So no, that's not what we are saying. But as I said here, on the other hand, we plan for the second-half of the year, and it seems like that the constraints are easing, but it's not over yet.
Martin Wilkie
Thank you, guys. And then the second question I had was, obviously, you've now got this 12 gigawatts of preferred supply agreements on the offshore side. It sounds like on your firm backlog, you're very happy with the implied level of gross margin and the hedging and so forth, you've got in place. Obviously, elsewhere in the industry, we've now seen some concerns from other players that some of these frame agreements could have terms and conditions that might not be fully covered by inflation, hedging and other protection mechanisms.
Generally, when the preferred supplier agreements, are you also comfortable there that the entity is happening within the industry even before these could become term orders are sort of covered within those preferred supplier agreements in terms of any pricing level that you may have pre-agreed or anything like that?
Henrik Andersen
As I said here, the preferred supply agreement is a prewarning of going into further discussions, Martin. And you will also see that a number of places around the world right now, PSAs have probably either come into challenges, either for 2 reasons.
First of all, there might be changes to the PSA on either content pricing or cost levels or the PSA, together with the developer, has become into a tense or discussion with typically a government or offtaker like the state or others where you say, well, the PPA right now doesn't stack up with the PSA level cost. So therefore, I think you are right in saying that a PSA is not a firm order intake. And therefore, there will be adjustments between PSA timing and until we don't sit and watch the PSA as a sort of a sleeping. That's not the intent.
The PSA is just that you spend an enormous time together as partners when you sign the PSA level and then there will be changes to that. Some of them will cause some tensions. And I think we see some of those tensions in the usual triangle described as the government authorities, the developer and the OEM. So that's generally to, I think, the industry, and it will also be that for us.
Martin Wilkie
Okay, thank you very much.
Operator
Our next question comes from Gael de-Bray with Deutsche Bank. Please go ahead.
Gael de-Bray
Well, thanks very much. Good morning, everyone. I have two questions too. So firstly, why were onshore delivery so low this quarter? I mean, I'm still wondering why you don't manage to convert the backlog more quickly. That'd be great if you could describe a bit more the various execution challenges that you continue to see?
And the second question is on the outlook, I mean do you share the concerns of some of your peers that 2024 could be another transition year for the wind industry and that the expected increase in volumes may actually not materialize until closer to 2025?
Hans Martin Smith
Yes. So I'll take the first one on deliveries in the quarter onshore. As we have often times been saying things can be lumpy in terms of what happens in individual quarters dependent on what types of projects that are being executed and what's not been executed in particular when you're looking at the first-half year quarters that are typically so relatively smaller.
So in that sense of the works in terms of what small and what's not. I don't think that's necessarily at our end of discussion. We've had of things being unusual in the quarter and just and how that gets converted from the backlog into deliveries. So, to make a long story short here as mentioned for Q2, I would not say that the onshore deliveries this quarter exhibiting something that would be out of the ordinary, compared to what we had planned for what we had expected. That's probably how I would look at it.
Henrik Andersen
And to your question around 2024 first observation is probably a couple of quarters too early to say about 2024. We are still full-motion on executing on '23. The order intakes we are having will contribute to our value creation as such Gael and therefore will come to 2024 by also watching what we're doing in terms of order intake in both Q3 and Q4. And by the way, have a backlog of executing on. We don't have to further one on other things in the backlog, you can see from the ASP and also the progress we have made, we probably have been early on with the price adjustments and therefore we work into '24 as a year of execution, but still with some spillover from some of the lower priced orders as well.
Gael de-Bray
Understood. Thanks very much.
Operator
Our next question comes from Dan Togo Jensen with Carnegie Investment Bank. Please go ahead.
Dan Togo Jensen
Yes, thank you, two questions from my part as well, one by one. Henrik, you said earlier in the call that nothing has really changed, compared to end ‘22. Still implied in your guidance, you take down Power Solutions by about 10% at the midpoint of the guidance range. Can you may be give some color on what has caused this, what is to say taking down profitability underlying in the Power Solutions, is it warranties? Is it still the disruptions you're seeing in the supply chain, et cetera, some color here would be helpful? Thanks.
Henrik Andersen
I think you just probably take a lead extra EBIT from the Service business and it the Power Solutions said that means there is a problem in Power Solutions. That's not the case Dan. It's just we keep the guidance range for the year. And if that means that as part of recurring and getting back to a black number that contributes with service EBIT then we believe that that's the right way to do so. So I don't, don't want to sort of go further into that, that math. So, there isn't any implied worsening or whatever.
Dan Togo Jensen
Okay, so nothing think nothing has changed in the Power Solutions on the back of your still raising service, but keeping the group unchanged?
Henrik Andersen
No.
Dan Togo Jensen
Okay. Then a question on pricing, you previously also highlighted that there is a lack of discipline in the industry as general you have now increased your price, compared to Q1, you on par with where you were last year, we still see Nordics and Siemens Gamesa were in their reports at least being somewhat below where you are, is that a concern or is it just a matter of makes some scope or do you still see that there is a lack of discipline in the industry?
Henrik Andersen
I only know our costing and our pricing and our customers, thereby only comment on our pricing and if it turns out that somebody is aspirational in either predicting the market forecast of raw materials or component pricing or transport pricing you feel free. I think we, we have had our, our experience with it. So therefore we are super disciplined and if somebody else has a different costing then address the questions to the employees, I won't comment more on that.
Dan Togo Jensen
But yeah, maybe just comment. And one of the questions you really get on this is, I guess you're still happy with the 0.97 that you report for Q2 then?
Hans Martin Smith
Just to supplement here, Dan I think the orders we have taken we are happy about those. I think of course pricing is important and of course, I can understand why you're focusing on it. I think our core focus is to make sure that the profitability underlying is at a level that we are happy about. And of course, you always want to see higher profitability generically speaking. But that being said, I think what's important is the profitability that we've seen in this quarter is a profitability that we can improve of. So I think that's where our focus is.
Dan Togo Jensen
Thanks, Hans.
Operator
Our next question comes from Mark Freshney with CS. Please go ahead.
Mark Freshney
Hello, good morning. I have a question for Hans Martin just on technical accounting. So as I recall it provisions in any company requires a lot of time and judgment, and clearly there were issues in the process, one of your competitors, which resulted in a large number being booked. So my question to you, Hans Martin is, can you talk us through the process, because we -- look you're carrying EUR1.5 billion warranty provisions on your balance sheet, which requires a lot of judgment?
So can you go through the process that you used to arrive at that briefly and what gives you confidence that, that's the right number to have. And I guess further to that if there is scope for that to come down with things like efficiencies and supplier contributions. Thank you.
Hans Martin Smith
I think if we were to go into extreme levels of details with the entire process around this, it would require an extension of the conference call. But I'll see what I can do here and briefly taking you through hard work, and then I suggest we talk a bit more about that if we have time for it somewhere.
But of course the way it works is that we continuously do assessments of say the cases that we know, the issues that we are aware of alongside new issues and things that come in and we have an entire organization that is tasked to only do this as part of -- not part of, this is what they do and who coordinates and works with us across the entire business. They do this also continuously and of course this is and what you see the outcome of when we sit in the quarters and report on provision that was for the quarter. So one we have here.
But as mentioned, this is a continuous process where on a daily basis, they take care of these cases as they come in, they get reporting’s from various parts of the organization and they take them in. They assess what do we think about this case, what is the likely outcome. You also point to the fact that of course there is a lot of judgment. There is a lot of statistics that goes into this as you sit and you try to establish failure rates and you do all kinds of other things. When you do this analysis and to the best of their efforts, they get to a conclusion as to what is likely going to be the outcome from this.
But it is of course quite difficult to do that and I think that's also what we have seen. And just to remind you of that I'm sure that you are already aware. Of course because it is a process that like the one I described. Then if you have surprises if there is a failure rate for instance the changes, then all of the sudden on a case you can see that all of a sudden your estimate changes on that for instance. We are working diligently with all of the things you mentioned. There in terms of trying to find efficiencies, trying to work with suppliers. I think as mentioned also on, in some of the notes, and of course, we are also trying to claim back with suppliers to the extent that is possible. So there is a huge effort going into all of the points you mentioned there.
What I'd like to say though is, as a final comment here when you look at the level of provisions we have, of course a reflection of what we see should be the level and as such. I think at this point in time a bit optimistic to sit and think that there is a basis for doing say reductions or anything like that right now, they are reflection of things that has been sent through the system. And this is an assessment of we see the world right now.
Henrik Andersen
But Mark, maybe I could add one maybe I could add at one credibility on that one also. The process is not something that is changing from quarter to quarter. And it's actually the same process that has served us well over the last decade. We are very transparent with it. You see our loss production factor, you see when we have cases we also talk to the cases with you and happens to be the Audit Committee Chairman, where it's being discussed every quarter since first since 2013, until I stepped out of the Board in ‘19 and therefore that process serves as well on a quarterly basis. So from a technical point of view, yes, but also from a leadership and management point of view, we are absolutely fully disciplined support as well as leadership team to continue to do that in details.
Mark Freshney
Thank you.
Operator
Our next question comes from Akash Gupta of JP Morgan. Please go ahead.
Akash Gupta
Yes. Hi, good morning everyone. I have two as well, the first one is a follow-up to Martin's question and that is in offshore we are seeing delays in final investment decision of projects, as well as some cancellations and giving customers, who have been stuck with legacy PPA, finding it difficult to work out economics. When we look at your preferred supply agreement, can you talk about any risk of cancellation or may be delays in converting the pipeline of firm orders? That's question number one.
Hans Martin Smith
I mean on the offshore side, as we said here probably is, what you referred to, then it probably is good to be a bit more latecomer to the offshore party, but we see some of the same challenges as you are mentioning. So you can also find that there are PSAs that sit there and potentially are not going to be built in this round, simply because there is a too low aspirational target from the current discussions in the area.
On the other hand, we also see a high commitment and a high degree of commitment from many of our partners and customers. We work within the PSAs, so I will say we definitely work. We haven't seen any of it. And of course, we will, if there is a cancellation of a PSA because the project is non-viable, and the developer was to give either the auction or the PPA back and then we will inform you about it, but so far, we haven't seen that in our PSAs.
Akash Gupta
Thank you. And the second question I have is on warranty provisions. So, I mean, in light of all the quality and product issues that we're seeing in the sector and at the same time, there are some reports that some Asian players are offering significantly longer warranty period than what is offered by western turbine makers. I'm wondering if you've seen any proactive demand from customers on higher duration for warranty, then what is typically I think two years in onshore and maybe if you can brief us through what sort of discussions, you're having on warranty period for with your customers on the orders. Thank you.
Hans Martin Smith
Obviously the customers read the news as well, but they also read the news last year and of course we were flagging some issues at our end last year and it is a continuous part of the discussion we have with our customers, of course, how they see the world and how they reflect on the things that they see. At the end of the day customers also signing up to service agreements and the like and so, I think, I mean it's the same types of discussions, we are having today as we had a year ago. I would say on the topic like this one. As you also pointed to Henrik, we have been following our prices for a long time and so in -- yes, that's probably how would see it.
Henrik Andersen
At the end of the day what's everyone can see giving the hard time. The world has been flu on executing and other stuff. I think first and foremost, it's a part of a building and standing behind not only your assets, but also your quality and also the execution of it, so again here repeatedly coming back to, we see now a slight improving LPF, and we also see that we have consumed less in this first-half of the year, compared to the first-half of last year. So, there isn't any unusual to report, Akash.
Akash Gupta
So just to clarify, you don't see any systematic risk that there may be higher warranty period for new projects in future than what it is right now?
Henrik Andersen
No, but haven't been -- haven't seen that. And for the other Hans, I think right now we are involved in that across many markets. So, we have that discussion, can't say that we have heard any of that.
Mark Freshney
Thank you.
Operator
Our next question comes from Benjamin Heelan with Bank of America. Please go ahead.
Benjamin Heelan
Yes, good morning. Thank you guys for the question. I wanted to come back on offshore if I could around these preferred supplier agreements. So we've seen a number of developers walking away from that PPA contracts. Within the preferred supplier agreements are you able to walk away from those preferred supplier agreements? If you just don't think they're going to meet what you need to see from a profitability standpoint, they become too risky. So how should we think about how should we think about kind of your stance within those preferred supplier agreements?
And then secondly, would you be able to help us understand how much of a drag offshore is to profitability at the moment in 2023 and how you see that trending over the next couple of years, given the kind of ramp up growth of offshore has been pushed to the right? Thank you.
Henrik Andersen
We started in the reverse order. There is a drag on the current offshore why there is we were coming from a period of time where we basically executing on a -- on a not very attractive technology road map in the joint venture and we have a backlog from the joint venture where we are basically down to see individual projects coming visible in our -- in our turnover. So that is, it is, it is a negative drag.
When you look at the PSAs, this is now down to single cost, there is PSA single customers and I think you can, you can follow those PSAs, and some of the PSAs might be handed back and of course, if this is the one that has the PSA then we will comment on. Otherwise, we won't comment on PSAs and clauses in PSAs, because it is simply down to a customer partnership which is then finding solutions to deliver against a offtake obligation. So that has its opening and it has its opportunities and clauses for both partners.
Benjamin Heelan
Okay. And then is there any kind of color you can give on the offshore profitability as we move into next year? Are you expecting it to get a lot better? Does it remain a drag, how should we think about that?
Henrik Andersen
I think ‘24 is still a year before we actually get the debt to our new turbine. And that will always said. So we are we investing in technology, we are investing in ramp-up of until ‘25 where we will start delivering and intended to be delivering our first two turbines in the new technology. So, next year is also going to be a slow activity year in terms of deliveries. But of course, still a relatively heavy year in ramp up to start delivering in '25 and '26.
Benjamin Heelan
Okay, great. Very clear. Thank you.
Operator
Our next question comes from with Ajay Patel with Goldman Sachs. Please go ahead.
Ajay Patel
Good morning and thank you very much for the presentation. Two questions if I may. Firstly, just on the backlog from Power Solutions. Is there any indication you can give of what percentage of that backlog is below your margin target? So we get a bit of a feel on how the evolution of margin may go for the business.
And then secondly on the preferred supplier agreements that's been discussed. Is there any sense that you can give any timing for when these will start to turn firm, and would you expect, say 20%-30% of that to be at a key decision point in the next 12 months and then the percentage beyond them? Or is there any there would be helpful. Thank you.
Henrik Andersen
Ajay. Thanks. I think we've been a little before we don't, we don't give individual breakdown in the industry consists of offshore for free players in onshore, I will say four players. We don't give that kind of level of details. Why is that because it is single-handedly down to single contracts, which is a competitive nature which we don't give and the FOI timing of PSAs rolling into FY comes also down right now to, how do you get to the final closure of your financing and other stuff, so therefore it comes when it comes.
And we will tell you when it goes into FY but we wouldn't say what we're saying today if we were not pleased with the progress we're making because we have coming from something we're offshore for us was close to be not really existing. When you then look at the percentage spread in the backlog, please do the calculation, see the progress. This is a journey, there will be some quarters and it cannot be described linear please because orders will move in and out of quarters from the backlog and therefore some orders look worse than others, but overall, the average is improving, but we are still a bit away from getting out of that, the notion of getting the last things out of the backlog. But a percentage of it, no, I will, if you do your own ASP comparison back in time, you can get, you can get some good indications of where, where we are still taking orders away from the backlog with a negative contribution.
Ajay Patel
Okay, thank you very much.
Operator
Our next question comes from Henry Tarr with Berenberg. Please go ahead.
Henry Tarr
Hi guys, thanks for taking my question. Just wanted to come back on costs and the supply chain, I guess perhaps all of the issues around logistics and shipping etcetera now more or less sort of fully cleared. And then as you kind of look at the cost base. What are the sticky or more problematic elements I guess labor is still there, are components and other issues still there still going up or what are the kind of moving parts in that cost base? Thank you.
Henrik Andersen
Thing on the transport and logistics Henry always there is a, there is a price development right now that has moved favorably, but also as we always said, it's also a time until you are through the backlog. Some of that came from the many, many, many ships in queue outside harbors and other stuff, and I will take some quarters to come through and then don't, don't forget we needed to have it back again through the, through the factories and often in many of the electronics, we needed to also have a program. So it works. So, therefore, it will take most of this year, but we can still see it's easing. You will also have picked it up from other OEMs in other parts, not in the wind industry, but other parts of heavy assets there.
You will also see that they are also worrying still on 2023 year delays on some of the -- on some of the components, but as said in here it's easing. On the inflationary you've seen it, you've seen some of the markets we just come out of also where you've had relatively long but also a period of strikes in our German operation and of course that affects our operating environment and it also results in an underlying inflationary pressure for some. So that's what we are related to and I think you stay in London. You know, you know right now that it's, it's not unusual to have one or two warnings of strikes or transport sector interruptions or even at the healthcare or public sector interruption. So I think that's what we are saying is that it seems in certain markets, there is a stickiness in some of the inflationary pressures.
Henry Tarr
That's great and then just secondly, as you're looking at the, at the market today for new orders it's taking a bit longer as you've referenced to get some of these new orders in. It's kind of discipline holding as you look across your -- the bids that you're involved in? Do you think kind of industry discipline is as firm as it was three, six months ago to try and get profitability back to where it should be?
Henrik Andersen
I will say on the disciplined side. Yes, I think on what I mentioned here when you have a country that suddenly has a subscription rates on an auction of zero, then of course things stopped for a period of time. Then there is a bit of soul searching between government and market players. So I think what I refer to here is a bit concerned bit disappointing over that we see countries not knowing their own offtake pricing in the country and I mean that's pretty simple for anyone sitting on a call like this to go in and see what's the average pricing of electricity in countries in Europe right now and therefore it is for us impairing that everyone has to adjust just because you saw a much slower build price two or three years ago, we still have market prices that are several times higher than the build price. So therefore adjust from the bottom up to something where it benefits your community and it benefits end of the day, also your voters.
Henry Tarr
Okay. That's great, thanks.
Operator
Our next question comes from William Mackey with Kepler Cheuvreux. Please go ahead.
William Mackey
Hi, good morning. Thank you for the time. My first question falls on the improving development of your technical performance in your installed base and with your equipment. You've highlighted your loan -- loss production factor declining, your warranty rates declining slightly. However, when you were answering a question earlier about clarifying the guidance in the range of the guidance, one of the uncertainties you gave was linked to the prospects of provisioning in the second-half of the year.
So, could you please tell us how far are you through the process of rectifying the technical underperformance in the installed base that's affected the Service business and rectifying the challenges through the production or the supply chain that we've heard about? That's the first question.
The second question goes to the outlook, but particularly in South America, there's been obviously a differences, very big differences in power prices around the world. South America and Brazil, particularly a one and some of the offtake prices are changing. I think your backlog falling, it's made the South American made a strong contribution in Q2, but could you talk a little bit to the outlook for Brazil and South America and the level of order cover you have into 2024.
Hans Martin Smith
Thanks. I'll try and address the first one. So of course when you sit and look at the LPF first off, as you mentioned, it is. I mean, at least in this quarter we have actually observed a small improvement. So that is nice to see. On the other hand, it's also clear back to what was mentioned earlier in the call. There's still a lot of provisions sitting in the balance sheet and of course that requires work and that will take time to work our way through. I think that's very evident that this is something that takes time to rectify.
I think for some of the cases we have had, we've gotten a long way, we have found solutions and we are working on implementing those, but I'd also say, at the same time of course this is a continuous process at our ends and where in some cases it does not really make sense to go out and do repairs very early on if the turbine is actually functioning as it's supposed to, which is why I said there is -- there is I mean in some cases, a fairly long time period between discovery and when you actually see the need to go out and do the repair works and an optimized schedule.
So from that perspective, we certainly see that this is a longer process and where it takes time to work with and work our way through it. But as mentioned before and as we have highlighted a few times, I was on this slide, it is of course bringing a degree of optimism to see that there is an improvement in the LPF in the quarter.
Henrik Andersen
Yes, William on the LatAm more specifically, I will just sort of, say, if you take the Brazilian market as you're rightly saying yes the PPA levels have dropped. Simply that was also a reflection of that you have had an unusual high amount of rain and wet season in Brazil, which of course have made the hydro relatively competitive. I think that is, that is positively in effect in so much. It takes everyone to question their projects, but also it drives people to say so, this is probably the time where we also plan for the future and we've seen that. So, don't forget, most of the orders, you -- we will see and plan for is also what happens in '25 and '26. and I don't think there's anyone saying that across the whole of LatAm, there is generally a need for more energy, more electricity and then they probably just take advantage.
So for us right now, it's actually advantages also of localizing the production because we get an advantage now of the cheaper energy prices in things like factories and others. So I think LatAm will settle in and it's not like there is a permanent shift in PPA, but probably more due to on, yes, at least unusual high wet season in Brazil has affected the PPA levels to lower levels. So, no, no other concerns. Maybe we could you now have the last question.
Operator
Our last question comes from Lucas Ferhani with Jefferies. Please go ahead.
Lucas Ferhani
Thank you. So my question again just to come back on the quality and warranty topic. Are there any kind of lessons learned from this period? Are you doing kind of more work on this topic to improve quality in the way potentially you're vetting suppliers and often components that are coming? Or do you think that kind of controls needed were in place? And I'll have one follow-up after?
Hans Martin Smith
I started has finished, so I will say here quality we haven't changed. And as I said, has it been painful for investors to go through some of the cases we have spoken to since especially the major cases we have had in 1920 and '21 yes it has, has we learned something from it, yes, we have.
Do we have a different both firewall against components coming in and testing regime. Yes, we have but does that exclude that can come components that either has the bad batch or something like that, that will always happen and we have to get used to that and that's what you will see in other mature industries where you also from time to time have components that either fail contrary to the testing environment.
But at that point in time we will share it with you. But in this quarter we have nothing new to share it works as we planned. And of course we have also have had a beating on our confidence. When we had some of those material cases, but I can promise you the organization and as an organization we learn from it, because we are also the one that have to re-period it.
Lucas Ferhani
Perfect, and just a follow-up on your recent investment in the U.S. You were relatively optimistic when talking about the U.S. market. I think previously, there was kind of comments regarding the IRA implementation and some clarity be needed. Did you have kind of that clarity now? Can you talk a little bit again with your kind of discussion with clients and on the investment in the new factory? Does that kind of come from discussions you have with clients and visibility on volumes or is it just in preparation of what kind of, you expect to happen?
Hans Martin Smith
Yes now, we can see that the pace is picking up quarter-on-quarter. So therefore we are encouraged by that. It's not necessarily announced quarters. We are bringing investment in, but as we always and have been talking to at least over the last four quarters, the ramp-up from basically having almost fully acquired factories in the U.S. is start happening that's positive, especially for our manufacturing footprint in Colorado. So that is ramping up as we speak. And that is a combination of what you have seen here in of course orders already now taken and coming in, but surely also orders that we see being discussed in a potential backlog.
So we worked diligently with our customers. And of course we -- to some extent rely on that partnership and that handshake of that we start ramping up and we have brought new technology into the U.S. as well. So it's a combination of the two. And then as many of you know, this is also Mathias' last quarterly year release. So Mathias is moving to the U.S. as Regional CFO for our business over there. So that's probably also why Mathias is moving there with the positive outlook.
Lucas Ferhani
All right, thank you.
Henrik Andersen
That was my way of saying, congratulations to Mathias, because it is his last quarterly release. With that, I will just say thank you so much for your -- first of all attention also your time allocated to us. I know you will see many of you over the coming days. And therefore, thank you again. Look forward to see you in person.
Operator
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Good-bye.
For further details see:
Vestas Wind Systems A/S (VWDRY) Q2 2023 Earnings Call Transcript