Vestas Wind Systems A/S (VWDRY) CEO Henrik Andersen on Q1 2020 Results - Earnings Call Transcript

Vestas Wind Systems A/S (OTCPK:VWDRY) Q1 2020 Earnings Conference Call May 5, 2020 4:00 AM ET

Company Participants

Henrik Andersen - Group President & CEO

Marika Fredriksson - EVP & CFO

Conference Call Participants

Kristian Johansen - Danske Bank

Vivek Midha - Deutsche Bank

Akash Gupta - JPMorgan Chase & Co.

Lars Heindorff - SEB

Supriya Subramanian - UBS Investment Bank

Casper Blom - ABG

Dan Togo - Carnegie

Martin Wilkie - Citigroup

Frans Hoyer - Handelsbanken

Sean McLoughlin - HSBC

Claus Almer - Nordea Markets

Mark Freshney - Crédit Suisse

Rajesh Singla - Societe Generale

Henrik Andersen

Good morning, everyone, and welcome to Vestas' Q1 presentation. First of all, I will say we didn't choose the music ourselves, so would you just leave that out to another atmosphere on another day.

I will also say, on behalf of Marika and myself, we've been looking forward to this investor call. First of all, it comes on the back of very intensive communication with a lot of our other stakeholders, namely customers and colleagues. And therefore, let's go through our first quarter and also how we have performed, but not least also how we are addressing the current lockdown due to COVID-19.

Disclaimer, you know all about. So the key highlights of Q1. First of all, safety first in this very challenging environment. I will comment on it much further in the coming slides on how we are doing in the COVID-19 crisis and what we have put in place and how we're dealing with it.

The increased order intake, you knew from the 7th of April when we said we had an order intake of 3.3 gigawatt, up 10% compared to Q1 2019. That leads us to an all-time high order backlog of €34 billion.

And in the quarter, we had revenue and profitability broadly in line with our expectations. Revenue increased 29% to €2.2 billion. And profitability was impacted by some low growth margin in the quarter, and we'll come back further to that. We had, again, a stellar performance in Service in the quarter. Organic growth of 12% compared to Q1 2019, and EBIT margin of 26%.

But before we go into the financials, let me just give you an overview of how we are, first of all, impacted by the COVID-19 and how we are dealing with it and a bit more comment on also how we are continuing performing throughout this crisis. So I'll ask you, on the left chart, sort of here, start up in the corner, where throughout the last couple of decades, we have seen that renewable has been clearly aspiring to become critical infrastructure on the energy side. That has, indeed, happened. So I think, in all of our plus-70 countries where we are working, we are deemed critical for both the production of energy and also the infrastructure country by country.

That also means that when we have all our employees out working diligently on site, in factories and others, then of course the health and safety measures of all our employees are absolutely top priority to us. We will comment on it. But as I said here, throughout this crisis, we have had 25,500 people working diligently around COVID-19. And in all in all, we, as of last night, we had 30 cases, where 21 people have recovered. So actually, our protocols works really well.

We very early on said when we had the discussion in China in February, we absolutely insisted on that we will run Vestas under the business continuity of all our Vestas operations globally. I think also here that has led to - that there has been a clear ambition and also an insisting of both ourselves, but also to all our partners working across the supply chain, to have continuity as one of the prime drivers throughout.

What we can see now, where countries start talking about reopening again, I will say, still, our mobility and access to site, of course, is very important. We can also see that access and mobility to site has, in a number of cases, been questioned or challenged. But I will also say here thanks to a lot of both internal colleagues and also to a lot of external stakeholders, namely by customers, we have had an enormous support in getting access to all of the sites where we are required to perform work either as a service or as a construction, and also in our factories, which has been really, really strong.

If we then take the global situation and the business environment in and around that, as I said, clearly, now it's deemed critical infrastructure and we have seen that. And to give you an example of that, if we take most of our countries, the longest we have had any of our factories been closed down has been 2 weeks. That was the time we took until we partly were allowed to start opening in China. And we have had similar stop and go in some of the European countries. But for instance, in the U.S., we have had hardly any days off from our performance and opening of the factories.

We are in Denmark, and therefore, I also need to extend a thank you to our colleagues working at the factories in Denmark. You hear Denmark has been closed completely down. In reality, since 13th of March, where Denmark did close their borders, we have had a very close relationship and very close cooperation with DSV. So at any given point in time since then, we have managed to get all our components and needed raw materials into the factories, and we have managed to get our manufactured assets out again as well. So it does actually work.

We will also say here, from the global situation, it is important to see that we went from a pandemic to now, clearly, as everyone talking about, the economic crisis. We won't comment on how deep it would be. But clearly, we are now asking everyone to also really consider and put the green agenda as part of the recovery programs when we start rebuilding and opening societies again.

When it comes to Vestas and the running of Vestas, I think we have - we established we had some time practicing that in the days of China in February, but we put a cross-functional crisis management team together. These colleagues have been worked absolutely tirelessly throughout this whole crisis, and I can't thank them enough for keeping Vestas really tight as an entity.

You will all appreciate, most countries have taken their own separate measures to either close or partly close or do something on their own. So therefore, I think, running a global company with that many countries in operation actually requires a special thing when it comes to the crisis management team and the whole discipline to running the protocols.

So again, a deep-felt thank you to how this is, but I think also it proves some evidence to everyone that this is possible to run even large companies and operations safely while the society is open.

I think, also here, thank you again to some of our partners because they have worked closely with us. They have followed the same protocols. And that also meant that they have also been allowed to have an exceptional opening in most of the countries where we have operations.

So with that I will say, yes, we will also have done things. Probably we could have done better. But I think if I put a percentage to it, we are - 9 out of 10 decisions, we are absolutely pleased with how we have performed so far in COVID-19, and we have now a really broad experience to bring forward if this is a continuing or recurring thing for us. But we are very convinced that we can keep Vestas operating even under such severe difficult conditions.

Let me give you just a short overview of market share. I won't spend much time on that one, just to say that when the final numbers came out between '18 and '19, when you include China, as you will see to the left of '19, we end with a market share of 18.1% out of a total market of onshore installations of 53 gigawatt.

If you then look to the right, which is also when you exclude China, then we have a more or less unchanged installation from '18 to '19, and we are running between 36% to 35% on that. I think also a note of this slide is just to sort of say '19 also illustrated that it now becomes a further and further play among the 3 top global companies here that now sits with a total consolidated market share in excess of 75% with the three global OEMs. Then let me go more into the details of the quarter. As you saw already on the 7th of April, we had an order intake of 3.3 gigawatt. That come from 21 countries and namely China, Sweden, Poland, Brazil, were some of the top takers in Q1 2020.

When we look at the ASP, the ASP ended at €0.72 million, but you will also appreciate here that with a slightly lower scope in China, then when we correct ASP for China, then the underlying ASP is €0.77 million, corrected for China. So again, prices remained stable in also Q1. That leads us to a consolidated order backlog on the turbine side of just shy of €16 billion and on the service side of €18 billion, when we look at that. And that is a €6 billion year-on-year growth, almost 20% compared to the same quarter last year.

When we look at the Power solution, just a short update, we have installed now 115 gigawatts globally of installed turbines. That also means that we displaced 154 million tonnes of CO2 emissions every year and leads us with a 17% cumulative market share globally of all installed turbines. If we look at the Q1 '20 highlight, I will say our utmost strong globally effort to secure the business continuity has been very outspoken throughout this quarter. We can see that some of the auctions that were scheduled in and around 2020, some of them have either been postponed or delayed within, at least what we can see, from 1 to 2 months. And I think that is just as expected when some of the auctions require both physical presence and, to some extent, also knowledge of land and land allocation.

When we then look at the order increase and the order taking in Q1, you will really appreciate that we have had increased order intake, and especially also when we look at across EMEA, where we have had a very, very good Q1. We have seen lower order intake in Americas. I think we already, by the end of last year, highlighted that we believe it will take a bit more time to see how 2021 will pan out for the U.S. because we are still in a very, very busy year in executing on the existing order pipeline in the U.S. Brazil partly offset that and therefore also contributed positively to the order intake in Q1.

So just below, you can see the order intake across Americas was 612 megawatt, down 63%. We had 1.9 gigawatt in EMEA, which was 166% higher. And we had 0.8 gigawatt in APAC, 27% up. So with that, go to the Service business. As mentioned here or can see here, we are closing in on celebrating our Service business passing 100 gigawatt of onshore turbines under service. Clearly, it's something we expect to happen in the coming quarters.

In the quarter, we also saw that 18 years was the average duration on new contracts signed, which is up from the 17 years we had by end of last year. And we are now active in 70 countries in total. When we look across Q1, I think encouraging for our long-term strategy in China. We've seen an order of 20-year full-scope services in China, which is very much in line with what we are aspiring to achieve in China under both the orders and also the setup for our operations in China.

You've also seen on the multi-brands that we took a Senvion turbine order in Australia of 126 megawatts, and we will continue focusing on both the own - our own capture and also the multi-brand. The split of the service fleet below, I will just leave to you. Then on the offshore MHI Vestas Offshore, again, a more active quarter here in terms of the order intake. So we have 5 gigawatt order installed. We have 3.4 gigawatts under installation and as unconditional orders. And then we have 2.1 gigawatts of unconditional orders and preferred supplier agreements overall.

The Q1 highlights here, I will actually start in reverse order in just saying MHI had exactly the same commitment to keep operations running. It's really nice to be there last week and meet some of the colleagues there because they have also been working diligently with the operations and service throughout this whole COVID-19. They also, therefore, managed very limited interruption, for instance, with the Northwester 2 project. So that is near completion as we speak. When we then take a look at the order intake, we had 589 megawatts of firm orders in Taiwan. And then also, we had firm orders in Japan, 2 wind parks, Akita and Noshiro offshore wind parks, that are now consisting of 33 V111 - V117 turbines in Japan.

So with that, I will hand over to Marika for the financials.

Marika Fredriksson

And thank you, Henrik. And if we have a look at the income statement, I just want to say, first of all, that the income statement is in line with our own expectations. And you can see also that we have an increase in revenue with 29% compared to last year. So obviously, the activity level, we're trying to keep as best we can in these circumstances.

Gross margin took a dip down by 6.5 percentage points, and that is primarily driven by the logistical challenges that we have spoken about numerous of times and supply chain bottlenecks. And unfortunately, that has been further amplified by the COVID-19 situation. The other two parameters that have a big impact here in the quarter is COVID-19 in isolation and also lower share of service and higher provisions have a negative impact on the gross margin.

EBIT, obviously, took a step down, and that is primarily driven by the lower gross profit. And I will get back to the SG&A performance later on. Special items is €58 million here in the quarter, and that is driven by a write-down of a platform to further optimize our technology and also simplify the platform further. If we have a look at the SG&A cost, I would say that's continued to be well in control. And you can see, obviously, driven by volume. Remember now, this is a 12-month rolling. We're down to 6.1%. So I would say well under control and, obviously, a very important factor for us in the circumstances everyone is in right now.

We continue to have a very strong Service business and not only on growth but also high profitability here in the quarter. So a very stable business also in more difficult times as now. And obviously, Service business is also very dependent on access to sites. So there, we have done a good job trying to keep as normal a situation as possible. MHI Vestas. I think Henrik mentioned the overall performance. Activity level is, to no surprise, down here in the quarter and in this year, but EBIT margin has improved year-over-year. And consequently, there's a €6 million net profit here in the quarter in total.

So let's have a look at the change in net working capital. We continue to build inventories. So obviously, we are expecting and we also see a continuous high activity level. Obviously, the visibility is much higher the closer you are to a quarter, and you understand that we are in Q already as we speak. We also have down- and milestone payments partly offsetting the liabilities we have here in the quarter in terms of inventory. And we have paid out a global employee bonus in this quarter.

If we have a look at the cash flow in the quarter, obviously negatively impacted by the operating activities. But apart from that, we are - the biggest impact is, again, to no surprise and planned for, the change in net working capital. We continue to have a strong net interest-bearing position. And we have, obviously, a continuous focus on the cash discipline in the company. Here, you can see the total investments are slightly down compared to last year, and we are also talking about below €700 million in CapEx for this year. And obviously, that is a consequence of the optimized product platform I was alluding to in the P&L.

Warranty provision and lost production factor. Here, you see we have increased warranty provision compared to last year, and we have a slight increase in the lost production factor. Remember that we have launched a lot of new products. We also have a very big volume that we are exercising as we speak, and that has a consequence on the lost production factor here in the quarter. The capital structure continues to be strong and well below the target, and the liquidity position remains strong with €2 billion cash at hand. And we also have credit facilities of €1.55 billion, and we have a new loan facility amounting to €1 billion that we signed on May 1, 2020.

By that, I leave the word to Henrik.

Henrik Andersen

Thank you, Marika. I just think - here, I just want to also really say thank you to the executive team, but also Marika here, because you've been here since 2013. And as I said, you have seen variations to both cyclical part of the world economy and others, and really appreciate also the prudent and conservative view of the classic disciplines we are seeing here. We have the facilities in place if this also upsets the world economy in a broader scale. But cash, EBIT and growth is clearly namely on our priority list.

When we go to the outlook, I will just shortly comment on here that you saw clearly on the 7th of April, where we suspended the guidance. It is also fair - and this is how we run Vestas and this is how we will continue be running Vestas as we see it, we're absolutely still running Vestas as accordingly to the initial plan. We still have the same targets, how we work through diligently, both the projects region by region and also the manufacturing. And I think we are assured from our daily discussions with operations that we are actually doing that pretty well, and we are positively assured how that is running.

That is also why we are saying there is still - an achievement of guidance is still realistic, and that is how we run internally. We don't accept COVID-19 as an excuse for not doing the right things. But then it's also clear that we are just now, and most of the societies around the world, start opening again. And therefore, it's also fair saying until we have that full visibility, we won't resume any guidance for the year.

But what at least we will say here of today is, of course, that the Service business keeps performing very well. We expect it to grow approximately 7% for the year and having an EBIT margin of around 25% for the year. And then as Marika rightly alluded to with the changes, we have made in our late April press release, yet in total investment with the optimized product portfolio will be below €700 million.

And with that, I will say thank you and also hand over to the operator.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question is from Kristian Johansen from Danske Bank.

Kristian Johansen

Yes. So first of all, you mentioned, I think, several times that Q1 results was in line with your original expectations. But obviously, looking at where consensus expected the gross margin to be, it's not quite in line with what we had expected. And therefore - I mean, especially, you mentioned logistic challenges and supply chain bottlenecks and also commissioning of delayed projects from 2019, if you can elaborate a bit further on this impact and especially to what extent the logistical challenges and supply chain bottlenecks have accelerated versus Q4. And for both these factors, what you expect in the coming quarters. Will this level off? Or what are you seeing right now?

Marika Fredriksson

Yes, yes. And we have here in the quarter, obviously, a few projects that have been delayed. And any - I think we have said it numerous of times, any changes to our planning or any rerouting or corresponding to that will have a higher cost. And that we clearly see here in Q1. But having said that, Q1 is more or less in line with our own expectation. We expected it to be a more modest quarter from a profitability point of view.

Then we have also increased the warranty here in the quarter, so that is a €34 million gap. And we have also had, if you call it, in-isolation corona impact. It's around €10 million in the quarter. And we also have a lower percentage from the Service business simply because the volume or the revenue is higher here in Q1 of this year compared to last year.

But it is the logistical challenges and the transportation is what is costing us the most here in the quarter. And the visibility we have going forward is that we will not have the same headwinds when it comes to that.

But then, obviously, going - we have visibility over Q2, but the crystal ball on what will happen going forward, we don't have fully, but there's no indication it will be bad for us. But I mean, the logistical challenges and the cost for them, my expectation is that, that to some degree will continue.

And just to give you a very simple example, Kristian, is - I mean, we have a lot of inbound. And when we have delays for suppliers or we cannot even transport and to compensate for customers, we do air freight. And right now, there's not even flights available. So the logistical part is extremely cumbersome to get the supply, but it's also costly when we get someone that can actually transport for us.

So what we're trying to do is, obviously, honor the customer agreements. Because if we don't, that will be even more costly for us in isolation, but also going forward in terms of customer trust.

Kristian Johansen

Okay. So just to make sure I understand correctly, you expect these headwinds from the logistical challenge should be less, but still be there. Is that what you're saying?

Marika Fredriksson

Yes.

Kristian Johansen

Perfect. Then my second question, you also mentioned on auctions that you've seen delays for a few months. If you look at the order pipeline and the negotiations you have with customers on potential new orders, what level of delays or cancellations are you seeing here?

Henrik Andersen

I don't think, generally, we see a lot of delays. There are some physical delays, which probably we are talking about right now, which is just carrying papers and other stuff around to each other that delays things. And then making it firm, there can be some delays because not all parts of the world works as electronic as you would think. So therefore, Kristian, there will be some delays on some of those projects. But so far, as we said already in Q1, actually positive over how well that part of it still works. And we don't see any effect sort of for - at the near-term quarters here.

Marika Fredriksson

And just to confirm what you asked, it's also on the cancellation side, we haven't seen anything of that. And I think it's also good on the order intake we have here in the quarter. You clearly see there's a good activity level on a continuous basis.

Operator

Our next question is from Vivek Midha from Deutsche Bank.

Henrik Andersen

I didn't...

Vivek Midha

Sorry about that. So firstly, could I ask about the U.S.? You touched on that and it's difficult to get any indication there. But I mean, could you maybe give us some idea of your conversations with customers and how they may or may not be changing their plans into '21 into the midterm? Secondly, you mentioned the 20-year service contract in China. I'm just curious to see what's your thoughts are on how that - how you see that market developing post auctions both from a service standpoint and also in terms of market share development?

Henrik Andersen

Okay. I will just start with the U.S. And I think we all along said from an order point of view in '21 and '22, I think still a lot of planning is going on. But I also think here, customers are, of course, probably 99% focused on what is going on in 2020. So I think here, diligently, we are working with both the current pipeline. We are working with the scheduling. And of course, as you can imagine right now, there are some rescheduling going on, which probably pushes some of the weeks.

And I think it's also fair saying we will now start seeing some of the projects start taking some weeks into Q4. I think everyone tried to avoid Q4 when we spoke a quarter or 2 ago, but I think it's fair saying right now that delivery focus is 100% to what is going on in 2020. That is what you can see also we are preparing well for. And therefore, I'm also very pleased that our manufacturing and supply chain are working to the extent it is right now, because that gives us the confidence towards it.

So I think as we all along said, it probably needs to be midyear before we start seeing some tractions. We know there are a lot of discussions, but I think there is also a discussion of how will the PTC sits end of the year and how will that potentially affect '21. And I will come - I don't know more than probably you have seen as of yesterday, so there isn't any news accordingly to the discussions.

In terms of China, we have all along said profitable growth in China, and that also means that it is a profitable growth that relates to customer discussion. And generally, we don't take any orders that doesn't sit with the threshold of our profitability globally. And of course, for us, it is really nice to see that we believe after the feed-in tariff will schedule to end, end of December, that probably China will come more into the free market and therefore also suddenly maintenance and service becomes a part of also the value proposition and also the way you try to increase your efficiency of your renewable investments in China.

We believe we will play a role in that. We haven't put up any percentages, market share targets on that one. We want and we will still be a leading global player in China, but it will be a profitable market share we will have.

Operator

Our next person to ask question is Akash Gupta from JPMorgan.

Akash Gupta

I have two questions, please. My first question is on Service business. So you are reiterating your guidance at the full year results. Question is, how much of the 7% revenue growth is covered from your over €18 billion Service backlog? And what sort of new or more input of sales you will be needed to meet this 7% growth target?

Henrik Andersen

I don't think we have any clear - we have the orders. As you can see, we have the order backlog, which is not influencing activation of different - it goes live when it goes live. And we started the services contracts, so therefore that is more plane running. Then you would appreciate that when you compare quarter-on-quarter, it's not evenly set from a Service business when we see the quarters. So therefore, we expect that this is the visibility we have for the quarters ahead in the Service business, indicating that some of the quarters will be slightly lower than the first quarter's 12% when you compare to the quarter - first quarter 2019.

Akash Gupta

And my follow-up question is, a couple of years ago, you announced - or Vestas announced a strategy to invest in projects to drive growth, which we haven't seen much investments going on in co-development in past couple of years. My question is that, will you be more open for co-development in current environment where there may be some headwinds in credit market that may lead to some projects may struggling otherwise?

Marika Fredriksson

I don't think we have sort of a view of compensating. We have said all along that if customers want us to participate in co-development or development of projects, we are prepared to do that. So we haven't changed our view. And we will have - we will do the same valuation of a co-development project as we would do with any other project. It has to be the right terms and conditions before we enter into it. And obviously, wind conditions and the assessment of that is as adequate as for our normal business. So we haven't changed methodology from that perspective, Akash.

Henrik Andersen

And it's minor. So therefore, it won't...

Akash Gupta

We shouldn’t - so we shouldn't be expecting any step-up in co-development in rest of the year,

Marika Fredriksson

No. I mean, as I said, we do it when we have the right project ahead of us, but - and that is what we're performing. We have, obviously, the Lake Turkana that we are already in and that we have a stake in. And we also have the project in Sweden with PKA and Vattenfall that will - we have a 40% stake, and that is materializing next year.

Operator

The next person is Lars Heindorff from SEB.

Lars Heindorff

Two questions from my side as well, please. The first one regarding the order intake and your capacity for this year. The first quarter saw an, I would say, maybe an unusual high share of orders from China all for deliveries for this year. And actually, we saw another one here the other day. You've been stating for quite a while that the backlog has been completely full for 2020, and yet we see these orders to China. The question is actually, I mean, do you have room for more of that kind of orders, i.e., can you actually cope with more? And do you have the capacity to deliver those for this year? That's the first one.

Henrik Andersen

I can assure you we haven't signed them if we couldn't deliver them. So we had - and when you have that, of course, you have some supply chain in China which has an open window for that, and therefore, we have allocated some capacity in that space. And therefore, it's fair saying, when we have a situation like we have in China, where we have both ourselves and some of our partners, we work closely with that has a capacity, then we will take advantage of it.

And of course, you would appreciate, if it's manufactured and produced in China, the transport and supply chain challenge in the current environment is substantially less. So that is how we have planned it.

Lars Heindorff

Okay. And this is not - because I understood a little bit that it was related to maybe cancellations elsewhere, which enabled you to handle those orders to China.

Henrik Andersen

No.

Marika Fredriksson

No. We don't have any calculations.

Lars Heindorff

Okay. The second one is regarding your - the write-down that you've been doing on the EnVentus platform. I just want to sort of get a feel for whether this is actually caused by lack of demand or this is more a cost exercise.

Marika Fredriksson

It's not a lack of demand. I think that is clearly with the order intake that we have. And secondly, it is - we were optimizing. We're looking at how can we simplify. And obviously, from a cost perspective, as we have a lot of extra cost this quarter, we're trying to be as diligent as we can. But it's not a random exercise looking at the platform because we have a 5-year planning of that. So we have, obviously, looked at other opportunities that looks more fruitful for us, and that's why we have a write-down.

Lars Heindorff

Okay. So the likelihood of any further that kind of write-down is - I assume is very, very low?

Henrik Andersen

And when - Lars, when you start a product development, namely on this one, then it means a stop. And then also related employees and colleagues are then laid off related to it. And that is simply we have the broadest and most deep product portfolio towards onshore in the industry. And that is here simply saying if 1 or 2 of those products we were planning to develop doesn't give us any new and can be covered by some of the existing, that is then the only right thing to do if it doesn't yield the right return on those investments.

Operator

And next person is Supriya Subramanian from UBS.

Supriya Subramanian

My first one relates to sort of back on the profitability for the quarter as well as for the full year. As you mentioned, there is still a plan to target the original guidance, especially on margins of 7% to 9%. Given that the cost headwinds would at least continue to some extent through maybe not the whole of the rest of the year, but maybe into 2Q and into 3Q as well. How do you - what's your plan to offset this that still meets the guidance? Or rather, what would have to go right to still achieve the 7% to 9%?

Marika Fredriksson

Yes. So just to be very clear on Q1 here, we expected that to be more or less in line of what we have presented. Obviously, we didn't expect the COVID-19 situation, just to be very clear. But all indications that we have for the full year, and we're obviously doing a monthly assessment of that, is there's still a possibility for us to reach the guidance that we have provided to the market. The obvious is the best visibility we have now is Q2, as we are in the midst of it as well, and that is what we're basing our comments on. Then we don't have the crystal ball and no one else, obviously, but the low-margin project that we are alluding here to that has a big impact here in the quarter, we don't expect in the coming quarters.

Supriya Subramanian

Okay. Okay. And just I have a question on - in terms of - you also mentioned there are some projects that have seen delays. Is there any risk of liquidated damages related to those contracts? And sort of in this context, more specifically on the U.S. market, given that it is a critical year in terms of the deadline, there's an absolute deadline of December 2020, so what happens if a project in the U.S. slips into 2021 both from the customer perspective and what happens to PTC? Is there any chance for them to still recover and sort of claim 100% PTC even if it slips into 2021? And then what would Vestas be liable for as well?

Henrik Andersen

Yes, I'll rather stack by. And I think the current environment and the current legislation is it's a hard stop on 31st of December, then it can be sort of deemed and commissioned, and that will then be decided under the legislation. But I think that will be a longer conversation, Supriya. But if we then look at ourselves, we generally don't have any LDs towards the PTC end of December, but we will have LDs for delays as normal in our industry. And therefore, we work diligently with all customers to get that plan. And that is, in more or less all of the cases, a very close partnership with the customer both in terms of managing the construction on site and also be ready on site and getting commissioned at time.

Supriya Subramanian

Okay. Just a quick follow-up. In terms of the sort of projects, maybe not in the U.S. but other geographies which have seen some delays, are - I mean, based on your initial conversations at least with customers, how - sort of how well do you see it potentially being - sort of being able to invoke - or maybe not invoke, but the force majeure clauses in the contract is - so that you are not liable for any damages?

Henrik Andersen

No, I think it's right. I think probably the whole world is in a kind of a force majeure state right now. So I think we cannot avoid having that force majeure is a legal frame, but of course, it also is a force majeure that actually invites the 2 parties to pick up the phone and start talking about how we are mitigating these things.

But if you take in certain countries around the world where you have to put, for instance, some of our specialists, foreign specialists into quarantine, where they are put into two weeks or even longer quarantine, but then you will have to have some of those replacement and done and other things that, of course, will push some of these weeks. And I think there is a generally good understanding that this is not only a Vestas issue. This is a world issue rather than a Vestas issue. So I think, generally, our customers in the other end wants to have insight, they want to have the deep discussions on the details, which is absolutely understandable. But I don't think anyone have yet called me and said Vestas is to blame for it. That's for sure.

Operator

And the next question is from Casper Blom from ABG.

Casper Blom

Two questions from my side also. We saw a bit surprisingly, by the end of 2019, that the production tax credit was extended in the U.S. and even with 60%. Are you already now sort of seeing an interest from customers to sign up for that sort of possibly making up for the PTC contracts that were not signed yesterday - or sorry, last year? And do you have any indications on the levels of that? That's my first question. Secondly, given that you've had some delays and so forth year-to-date from COVID-19 and factories being shut down, are you kind of already sort of to make up for that lost time, given that you sort of say that reaching the original guidance is still possible?

Marika Fredriksson

Yes. So if I start with the 60% PTC, I think it's too early, Casper, to see the outcome of that. And I think that one will follow the normal pattern. So you will see a signature of that at the end of this year, not early. That is not our expectation as everyone is so busy to - not only us, but also customer to fulfill the obligations that we have this year.

And then on the factory side, I would say that we've been very good. We have challenges across the world or globally in our industrial platform, but we have been good in keeping up the activity level and at the same time securing and protecting our people from COVID-19, just to be clear on that.

Where we have most challenges right now is Brazil and India. Apart from that, we're pretty much up and running, as you heard Henrik said before. And here in Denmark, I think people have been pretty fantastic in going to work, and we've done - our primary focus is really protecting the people, and that has worked fine.

And then from a revenue perspective, I will say that compared to last year Q1 is good, but we also expected that to be the sort of slowest activity level of this year. So it's following the normal pattern when we started the year. And obviously, normal in these circumstances, it's hard to define. But it looks - what we can see, we are picking up the activity level. And - but we obviously need access to sites to make sure that we can execute on the projects.

Casper Blom

But just to be very clear, those, let's call it, on average, 1 or 2 weeks that you've lost around the world, is it able to catch up on that?

Henrik Andersen

We try to balance capacity from factory to another factory. And I think, generally, we have very few factories that only does something that is depending for the whole value chain. So therefore, we are able to compensate that to a large extent.

Then we also know that there will be some of the components that are right now in either in shortage or whatever. And there, of course, we work closely with partners to see how we can catch up that either with having extra shifts or something. But that's - so far, it's working. But there are, as Marika kindly alluded to right now, in Brazil and India, there are some stop and go which comes from changes in the local instruction, so to say, from the country on a day-to-day basis.

Operator

And the next question is from Dan Togo from Carnegie.

Dan Togo

Yes. First question is regarding Power and EBIT there, trying to bridge, so to say, the delta from last year of a little more than €100 million at EBIT level. And Marika, you started out pointing up to both currency and warranties impacting here. Remaining is some €60 million, €70 million in this bridge. That's a low-margin order impacting as well here, and there's logistical challenges and bottlenecks. Can you elaborate a bit on the remaining part here? Just to get a grip on what exactly is caused by these bottlenecks and logistical challenges.

And could we assume basically that these additional costs will escalate in coming quarters as you start, sort of say, to actually deliver more? You should think that these costs will not actually be less as you will push through more in coming quarters? That's the first question.

Marika Fredriksson

Yes. That's a long question, Dan. Yes. So if you look at the EBIT, and I think what I said is you have a pure isolation impact from COVID-19, no currency that I haven't spoken about. But the COVID-19 in isolation in the quarter is €10 million. You also have the warranty increase, that is €34 million compared to last year. And you also have Service portion being less as the volume is higher or the revenue is higher here in the quarter. Those three are a big component together.

And then you have, as I said, the - or you were saying the logistical challenges, supply chain challenges and delayed projects. And I think, just to be very clear, when I say delayed projects or low-margin project, it is primarily a cost factor in those. It's not that it's low-priced projects. It is a cost factor, because of the delays and the changes in our planning in the first place costed us more on these projects.

And then everything has just been amplified by corona in terms of challenges on the logistical side. We haven't been explicit on the impact from logistics or transportation compared to the project, but they are equally important here in the quarter when it comes to negative impact.

And then if you look further on, yes, I mean, what we're trying to manage on a continuous basis is obviously the overall cost and to exercise - as we are right now to exercise volume, it looks more costly. And when and if that will disappear throughout that year, we're not sure. But again, we have said that we're still striving for what we have said at the beginning of the year. And one important factor to keep those commitments towards the market is obviously that we can execute on the revenue and the projects.

Dan Togo

Yes. Because that would be my next question, what is exactly required of execution, yes, from Q2 and onwards in order to reach what you allude to that the guidance actually is still achievable? What is required of execution here? Is it flawless? Or is it actually - can it embrace, so to say, that these challenges on logistics, et cetera, and bottlenecks, they continue because - struggle a bit combining those comments with actually a flawless execution, if that is what is required?

Henrik Andersen

That is probably then why we still say there is a possibility, but we don't have the visibility to say and take that. I think you are right now sitting as part of also an ongoing discussion in countries across just to reopen societies within probably the next 4 to 8 weeks. And then, of course, that will also make it easier for us to avoid any delays or any people further in quarantine moving across borders. And as I said, just a natural simple thing to get somebody back and across countries in a plane is still causing most of us a super big issue.

Dan Togo

Okay. And then just maybe a - kind of one on that one. Because where exactly are you seeing the largest risk right now from a geographical point of view? I mean, China has opened up. Europe, U.S., there are also starting slowly to open up now. The U.S. really, sort of say, remains the key to sort of say reaching guidance going forward?

Henrik Andersen

Yes. But you can say here that the plan - the largest deliveries, of course, are Europe and Americas and U.S. in particularly, so those will naturally be our biggest risk areas. But as I said, our factories has, in reality, been fully opened in the U.S. all along with great support from both customers and other stakeholders. So I think we are positively - with that commitment from everyone. But as I said there, we also have to live some of these things week by week.

Operator

The next question is from Martin Wilkie from Citi.

Martin Wilkie

This is Martin from Citi. The first question is just about the electricity market overall. One thing we've seen during the crisis is obviously demand has fallen, and so wind and renewables are a record level of electricity supply. Maybe this is more a question for your customers, but have you heard anything as to whether there are concerns that the system is unstable or there's any sign for the future as to whether or not this is proving that wind can actually be actually a much larger percentage of power going forward? Just intrigued as to - if you've heard anything around that.

Henrik Andersen

I won't steal your thunder there, Martin, that's for sure. I'll probably just add to it. I think here, what we're seeing right now is, of course, there are some short-term, very high volatility in the energy prices. I think if you were sitting here right now and looking at a PPA for a certain period of time can be difficult to do. But I think as we are now also transitioning into - came from a pandemic, it is an economic recession. And then potentially, we also have to start dealing with what comes as part of the recovery.

Then of course, we will do ours, to do renewable and the agenda on green energy. And I think that is clearly in vogue. It's in vogue with everyone we talk to from a public governmental point of view. We haven't met a country where it's not on the agenda to discuss. And also, literally just to discuss with us how is it we can contribute and what is it we needed to do. And I think that probably has given something to everyone that there is something you can do in favor of both the energy supply and also the climate in the longer run.

Martin Wilkie

If I think of an unrelated question, just coming back to inventory, I mean, obviously, you have built up some inventory for the second half. But just to understand, do you think there's a structural need for higher inventory now if there's a risk of bottlenecks and, therefore, you might want to have a buffer of components or materials? Or if items are going to be in transit for longer, should we expect inventory just to be higher as a percentage of sales going forward? Or do you think this effect unwinds fully over the course of 2020?

Marika Fredriksson

Yes. And obviously, what we have built up now is according to our expectations in terms of activity level. But I think that is something we will definitely utilize to make sure that we can honor the commitments that we have. But so far, it's according to what we have in front of us. So we haven't exercised that yet, Martin, but that's definitely a lever that we could take, if necessary.

Operator

The next question is from Frans Hoyer from Handelsbanken.

Frans Hoyer

I have a question regarding this change or the write-down to the - in the first quarter. Does this change to the EnVentus strategy have a bearing on the minimum 10% EBIT margin target in due course at all?

Henrik Andersen

Yes. A straight answer to that is no. So we are actually internally here saying we are accelerating other parts of the modularization, which relates to the EnVentus. So that's the clear answer to that. And that is also still a very big supportive part of also getting to 10% EBIT.

Frans Hoyer

Okay. And second question relates to the low oil price. And I noticed that the EIA was talking about effects of the low oil price on renewable energy in general in due course. What are your thoughts along those lines, please?

Henrik Andersen

I think as I just said to Martin as well in this is, I think short term, there will be higher volatility because it's depending on when you have certain parts of the world and industry is opening, but I think we also learned a few things around climate and what happens in the last couple of months. So I think there is generally an underlying interest, which I also know I already told to everyone here, that there could be a trend and stronger support for renewable as part of that. And of course, we are clearly going to invest both our time and effort to accelerate that further.

Operator

And the next question is from Sean McLoughlin from HSBC.

Sean McLoughlin

Two questions from me. Firstly, on CapEx, how much below €700 million could you go without compromising new product development?

Marika Fredriksson

And Sean, just to be very clear on that, we will not compromise. And that's not why we have ceased the order write-down of the platform that we have just been talking about. And we haven't given an exact number, but we clearly see that we are getting below on the CapEx side due to the platform and activities as well related to that from a CapEx perspective. And I think it's also prudent under these circumstances to have a tight look on CapEx and cash, as we always do. But it's just, again, further amplified due to the situation we are in on a global basis.

Sean McLoughlin

Secondly, coming back to supply chain bottlenecks. I mean how quickly do you expect the ease in Q2? Or do these continue through 2020? It's a big delivery year for the industry. We know production, not just your production but supply chain production, has been impacted by COVID-19. And how crucial is this in terms of you potentially reaching the original guidance?

Marika Fredriksson

No. But I think we have - in terms of the supply chain recovery or quickness in getting back, I mean, it's hard to say. We have Q2 ahead of us. And obviously, we have a visibility of that. And we also have a certain visibility simply because we have a full order backlog and obviously a lot to exercise this year. And we are in continuous discussions. The good thing is we're a reliable customer and we're a reliable partner. And that obviously puts us in a good position with the supply chain.

The main - the big challenge is really the transportation if we have to change and we have to change quickly. But it's also, I would say, something we have been pretty accustomed to during last year. We did a lot of changes because of headwinds but it's obviously a matter of the cost that we have to bear for that as well. But we have certain visibility over the full year. We don't have the crystal ball though, and that is missing. And that's also why we are not prepared to get back to a full guidance of this year, but we have definitely visibility because of the strong order backlog.

Operator

The next question is from Claus Almer from Nordea.

Claus Almer

Also a few questions from my side. The first goes to the maybe more near-term order pipeline. You mentioned, Henrik, earlier on, on this call that some auctions has been postponed maybe a few months or so. But what about project financing? What is the feedback from, yes, clients when they talk about securing financing? That will be the first question.

Henrik Andersen

Yes. And I think here, I think it's probably a little bit like it is with Marika mentioned in that we got a facility. If you're early in, you would normally have the financing flowing. I think right now you can have less - or you can have less or more tight restrictions on closing financing if you are potentially a smaller developer. Or others, you could be faced with some challenges because it might be that the PPA or the PPA market doesn't live up to what you are required to perform.

So I think, in some of those things, it probably works, I don't know if I could say in favor or disfavor, but at least there is probably - the ones that are highly liquid, the ones that have sufficient capital, and you know at least a lot of our customers around the world, the utilities, the large developers and also the infrastructure funds, they have the capital anyway, Claus. So for them, it won't be an issue. At least, it's not currently an issue at all.

Claus Almer

Okay. That sounds good. My second question is about the production execution issues you also have mentioned for a couple of quarters. When do you think all of that will be behind you, when the efficiency on your factories are up as it should be?

Henrik Andersen

I think if you ask me that on the 5th of May, having dealing with here, that we are right now reopening and opening factories on the go, Claus. That I would refrain from giving you a date and a quarter on. We are absolutely scaling at the same time as we are also being met now with that, we certainly have countries that suddenly says you are not allowed.

But let me give you just from a couple of examples. We were one of the first one that were allowed to be back in full operations in China because we had diligent protocols. We had a list of our employees. We have everything disciplined on that. And we're doing the same in India and others. So we are among the first one that are allowed to have opened. So therefore, our protocols, our discipline is second to none. That also proves that when you have 30 cases of COVID-19 out of 25,500, we have asked some people to stay home for health reasons. We have asked a lot of people to protect each other, behave absolutely disciplined. And we have more - of the 30, we have 20 already recovered.

So when we look at that, then in that quarter, don't ask me when we will be finished in putting the efficiencies up because that's not fair in a sense. But we are comfortable that if we're able to run it with this amount of efficiency on these challenges, we have something to achieve afterwards.

Claus Almer

Sorry. But I was not questioning your ability to absorb COVID-19. I am pretty sure you're doing all the right things. It was more about when you are in a factory that is up and running, like you were in Q4, that your peak count - the improved count maybe not reached the same level. So it's more about that part when you're introducing new turbines.

Henrik Andersen

Yes. We know we open things in Q4 from a manufacturing point of view. And when we get to 2 quarters later, we will normally see the learning curve start helping us when it comes to TAC time and everything else in the factories. But there, of course, as I said here, and that's why I responded that way because when you're then suddenly in the middle of improving the TAC time, has a stop and a go and having people out of the factories for a couple of weeks, then it's difficult to see.

So I think we are working diligently through this year. And I will say, yes, let's take it quarter-by-quarter. We have actually improved. I mean if you asked one of the factory managers in part of Denmark, he actually think he has been the most efficient he's ever been in this previous quarter because everyone probably helped each other very well in the factory. So I'm just sort of saying here let's come back to that when we have a bit more visibility on how the factories work. But generally, a couple of quarters after we've opened, we are back.

Operator

The next question is from Mark Freshney from Crédit Suisse.

Mark Freshney

A question from me, please. Firstly, on the input costs, i.e., your supply chain, are you seeing your supply chain try to put through any higher costs given any challenges that they might be facing? And secondly, it's more thematic, but we've had - we've had Brexit planning. We've had - not big for you, but we've it. We've had tariff mitigations. We've now got COVID. Do you think, generally, that you'll be following these, you'll be having a less globalized supply chain, i.e., you'll get much more local content rather than moving equipment across borders?

Henrik Andersen

If I take the last one first, and I will give supply chain to Marika. But I think here, I think it's obvious that countries are taking national decisions right now and probably, to a lesser extent, a global decision across. But on the other hand, we are dealing with that. But I also think a lot of our localization of manufacturing are actually put in place to deal with some of these challenges.

So I think we have put the supply chain in that works also and actually worked well here. But then, of course, I don't think we should let ourselves influence if a country closes for border transport for a period of time here because I think we will also learn from that when we come out of this crisis. So we believe there is plenty of room still for global supply chain and also for global companies like ourselves. And in terms of cost to us, Marika, I will leave that to you.

Marika Fredriksson

Yes. So obviously, I think related to what Henrik said as well, I think we have a very good and loyal supply chain. And we haven't seen that they are unfairly putting an extra cost to us to make more money. I think we all have a big respect for making things work the best we can. But obviously, as I said, due to delays and the limitations in supply from their side, there could be additional cost for us altogether. And that we have seen here in the quarter, and we'll most likely see that also going forward. Then the order of magnitude is very hard to define longer term.

Henrik Andersen

Thanks. And if we could maybe from - take the last question.

Operator

Our last question is from Rajesh Singla from Societe Generale.

Rajesh Singla

Given that scope of project is quite different from region to region, can you please share some insight into your project margins in Asia Pacific region versus Americas or Europe? Like are they comparable? Or are they better? And my second question would be on the supply chain. Do you see offshore supply chain a bit more better positioned than onshore supply chain in current market environment?

Marika Fredriksson

Okay. If I start with the first one on margins depending on regions, we have the same thresholds that needs to be fulfilled before we take a firm order intake. And that hasn't changed because of the current situation. So the scope can be different from country to country. But in terms of how and how much we make per project in terms of margin, there's no difference. We have the same thresholds.

And then if you look at the supply chain difference from - if they have a more solid supply chain in offshore compared to onshore. I would say, if you look at the volume in onshore and the experience with onshore, I would say, we have a good supply chain today. And obviously, we're all trying to honor the commitments that we have towards our customers and our supply chain. We are their customers. Obviously, everyone is making a big effort to honor their commitments. And that is what is ongoing, and that is also why we can actually present the revenue increase we have here in the quarter.

Rajesh Singla

Okay. One of my follow-up question would be on - the order backlog has been quite strong for Vestas. But how much of the unexpected cost inflation like logistics or any other cost in the near term, because logistics might - supply chain might take a few months to come back to a pre-COVID level or maybe a few quarters to come back to the pre-COVID level. So can we pass on this increase in cost to the customer? Are there any clause with respect to that?

Marika Fredriksson

I think you understand as well as I, I mean, we are having a dialogue right now. Honor the commitments at the best cost possible is what we're doing. And then we're obviously having a dialogue with customers, if need be, as well as we would have for suppliers. But that is obviously pretty confidential and nothing that we want to share.

Henrik Andersen

Thank you for that. Thank you for your questions and also the interest. So we look forward to speak to many of you over the coming days. And thank you for all of us here.

Marika Fredriksson

Thank you.