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Edited Transcript of GAM.MC earnings conference call or presentation 4-Feb-20 8:00am GMT

Q1 2020 Siemens Gamesa Renewable Energy SA Earnings Call

Vitoria Feb 8, 2020 (Thomson StreetEvents) -- Edited Transcript of Siemens Gamesa Renewable Energy SA earnings conference call or presentation Tuesday, February 4, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Cristina Perea Sáenz de Buruaga

Siemens Gamesa Renewable Energy, S.A. - Director of Financial Markets at Gamesa Corporación Tecnológica SA

* David Mesonero Molina

Siemens Gamesa Renewable Energy, S.A. - CFO

* Markus Tacke

Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director

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Conference Call Participants

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* Akash Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Fernando Lafuente Seseña

Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst

* Mark Freshney

Crédit Suisse AG, Research Division - Research Analyst

* Sean D. McLoughlin

HSBC, Research Division - Associate Director of Clean Technology

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

* Supriya Subramanian

UBS Investment Bank, Research Division - Equity Research Analyst of Industrials

* Vivek Midha

Deutsche Bank AG, Research Division - Research Associate

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Presentation

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Cristina Perea Sáenz de Buruaga, Siemens Gamesa Renewable Energy, S.A. - Director of Financial Markets at Gamesa Corporación Tecnológica SA [1]

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Good morning, ladies and gentlemen, and welcome to our Q1 fiscal year '20 presentation that corresponds to the October-December quarter.

Before we start, let me draw your attention to our disclaimer in Page 2. Our CEO, Markus Tacke, will explain the period highlights, the outlook for the company and the sector, and will make the closing comments. Our CFO, David Mesonero, will conduct the rest of the presentation. We will finish with a Q&A session. We will take your questions over the phone.

And with this, let me hand over to our CEO, Markus Tacke. Markus?

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [2]

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Thank you, Cristina. Good morning. Thank you for joining this call today with myself and our CFO, David Mesonero. We will proceed to present you with the results for the first quarter of the fiscal year 2020. I will shortly pass over to David to go into more detail of our financial performance.

But first, I would like to give you an update on our actions with regards to sustainability. This is a paramount for our company, and we will continue striving to meet the best principles in this field. Our work over the past year has been -- has seen us implement sustainability criteria across all of our lead lending, covering syndicated loans, guarantee lines and foreign exchange. I believe we are pioneers in this regard, and this will help boost our profile in the leading global sustainability share indices at the time of increasing focus on environmental, social and governance issues.

We also committed once more at past climate change talks in Madrid in December packed of multinational companies aspiring to become carbon-neutral by 2050. Our work in this regard is ceaseless across all of our business units. And lastly, I would like to mention our recent inclusion in the Bloomberg Gender Equality Index. We recognize we still have work to do in this field, but we are truly committed to promoting and developing talent for every person across the company.

And now on to our update for the company for the first quarter of fiscal year '20. While our long-term growth prospects remain solid, we are obliged to provide a new EBIT margin guidance to the market last week, for the year, 4.5% to 6% from 5.5% to 7% previously forecasted. Due to unforeseen circumstances at 5 projects in Northern Europe, results were negatively impacted on our Onshore operations in the first quarter of fiscal year '20, leading to one-off extra execution costs of close to EUR 150 million. Our EBIT pre-PPA and I&R costs were EUR 136 million minus compared to plus EUR 138 million in the same quarter of fiscal year '19.

The company registered a fall of 11.6% in revenues from same quarter last year to what was still a strong EUR 2.001 million (sic) [EUR 2.001 billion]. We saw a record order intake in the quarter to EUR 4.628 billion, which was an 82.1% increase from the same quarter last year. Indeed, following a record backlog of EUR 28.1 billion, our revenue guidance for this year is now firmer and remains at the EUR 10.2 billion to EUR 10.6 billion.

We do not take the setback lightly. However, we are fully focused on assuring excellence in project execution for the rest of the year. Despite the hit from the first quarter results, we will remain in a robust position financially for the long term and improve conditions for our financing agreements and the net cash position around EUR 600 million higher than in the previous last 12 months.

That means our long-term growth prospects are unaffected in what we already communicated as a transitional year of the company. I remain confident that we have the right people and technology in place to help us through a bumpy period for the sector and continue to build our position as industry leader. Our focus is firmly on serving our customers, developing and delivering market-leading technology for a sustainable future.

Coming back to the impact of our first quarter result. These unforeseen one-off costs of around EUR 150 million in 5 projects of 1.115 gigawatt, mostly in Norway, are due to delays in execution. These delays have occurred as a result of both roads and adverse weather conditions resulting from an early arrival of winter. As a result, the delivery and installation window has been reduced and postponed for some projects until the third quarter of fiscal year '20, leading to additional costs of estimated around EUR 150 million, which have been accounted for in quarter 1 fiscal year '20.

We have acted quickly to make sure this impact is not seen again. This includes putting in place improved risk assessments, making changes to our team and strengthening our project management governance. There is no evidence that suggests that the impact -- that these impacts will hit the balance sheet further.

I would again underline that these one-off charges do not take away from the long-term fundamentals and our growth strategy we have in place. And indeed, we continued to make solid progress in our 3 business units over the past quarter.

Our Onshore business signed the first contract for our 5-megawatt platform only a month after it was presented to the market. The first of the 35 units, all with flexible power rating, operating, given local conditions, up to 6.6 megawatts, will be installed in the second quarter of 2021 in Skaftasen project in Sweden. This 231-megawatt wind farm is a significant milestone for the company as it is the most powerful turbine in the market and one that can be adapted to all types of geography and climate. We firmly believe this will become a benchmark in the Onshore segment.

In Offshore, we took -- we continued to show why we are global leaders in the sector following the preferred supplier agreement for the largest Offshore wind farm to date in the U.S. This 2.6-gigawatt contract with Dominion Energy Virginia takes our Offshore pipeline to 9.6 gigawatts and provides significant long-term visibility. We are fully committed to helping the U.S. Offshore market truly take off. We will play our part to ensure that the right infrastructure and supply chains are in place for this to happen.

In addition, we recently began testing our Offshore 10x platform at the Osterild national test center in Denmark with a flex rating of up to 11 megawatts, which will help us to manifest our leading position in this area.

In Service, we also saw a record order intake of EUR 1.5 billion, which contributed to a significant backlog of EUR 13 billion. Equally important, recently, we concluded a deal for selected assets of Senvion. I will talk about this a little bit later, but we are certain it will be a transformation for our Service.

I will now turn over to David to give you more financials. David?

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [3]

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Thank you, Markus. Good morning, everybody, and thank you for being here with us today. What is essential is that the not so good -- sorry, this has been a quarter with good and not-so-good news. But what is essential is that the not-so-good news is contained in the scope and time, while the good things belong to the foundations of our business. And we can say that we are building strong foundations: outstanding commercial performance with price discipline; solid balance sheet with our long-term financials secure and green; progressively implementation of our cash generation culture in the organization with a strict control of working capital and investment; and a clear ESG strategy that is already showing results and leading us to the first position in the rankings within the sector.

For example, we have been included as part of the list of sustainable leaders by Standard & Poor's RobecoSAM Index, one of the most important benchmarking publication in the ESG field. There is still an amount of work to do in a very competitive onshore market and in our Onshore organization to get to the results we need, but we have the tools to get there.

Starting on Page 9. We began fiscal year '20 with an extraordinary commercial performance. We signed EUR 4.6 billion in firm orders in Q1 '20, 82% more than in the first quarter last year, equivalent to a book-to-bill ratio of 2.3x group revenue.

Our order intake for the last 12 months amounts to EUR 14.8 billion, 29% ahead of what we signed in the last 12 months to December '18 and equivalent to a book-to-bill ratio of 1 point -- 1.5 group revenues, well above our long-term target of a book-to-bill ratio higher than 1.

Within the quarterly order intake, it is worth highlighting the contribution of our Service unit with an all-time high order intake of EUR 1.5 billion, 4x more than what was signed in Q1 '19 and equivalent to a book-to-bill ratio of 4x Service revenue. Around 60% of the Service orders correspond to the Offshore segment as the Offshore contracts signed in Taiwan, Scotland and the Netherlands came all with important Service orders.

In the last 12 months, Service signed orders worth EUR 3.5 billion, 79% more than in the same period in fiscal year '19, equivalent to a book-to-bill ratio of 2.6 revenue -- Service revenues. The strong performance in Service reflects the improvement of the renewal rate that reached 71% in Q1 '20, 10 percentage points above the renewal rate in Q1 '19.

We signed Onshore orders worth EUR 1.6 billion in the quarter, down 10% year-on-year, reaching a book-to-bill of 1.4x Onshore revenue. The annual decline reflects further dilution coming from the larger contribution of the 4-megawatt-plus products and the limited product scope in China, the leading contributor to the Q1 '20 order volume. In the last 12 months, we have signed EUR 6.7 billion, practically flat year-on-year, equivalent to a book-to-bill ratio of 1.3x revenue.

Solid performance also in Offshore with EUR 1.5 billion in order in the quarter, 4x more than the last year. But this is also a reflection of the standard volatility in the offshore market. But looking to the previous 12 months, to take part of the volatility away, we can see a powerful performance with EUR 3.8 billion in orders, 66% up year-on-year and equivalent to a book-to-bill ratio of 1.3x Offshore revenues. So a strong performance, not only quarterly, but also since December '18. And we conducted all this commercial activity with a strict price discipline.

We reached a record order backlog, EUR 28.1 billion, 22% above last year backlog, and will fully cover the low end of revenue guidance range for fiscal year '20 with 98% coverage of the midpoint, 8 percentage points ahead of the coverage at the beginning of the year. This coverage level provides a strong visibility of our top line growth prospects in fiscal year '20 and comfort at the midpoint of revenue guidance.

46% or EUR 13 billion, 22% up year-on-year, is in Service orders with an average contract duration of 8 years, higher return and faster cash conversion. The acquisition, as Markus explained, of selected service assets of Senvion that was completed in January will add another EUR 1.6 billion to our Service backlog and will further strengthen our position, especially in Northern Europe.

27% or EUR 7.5 billion, up 27% year-on-year, is in Onshore; and 27% or EUR 7.6 billion is in Offshore, 17% up year-on-year. That means that 73% of our order backlog is in a very attractive business with above-average profitability levels and long duration. And we are working in the profitability of the remaining 27%. That, although it is still far from the normalized level we are targeting, has started to improve.

Good geographic diversification of our backlog with 55% in EMEA, 22% in Americas and 23% in APAC. The larger weight of EMEA reflects the influence of Offshore, a market that is still based mainly in Europe. Our Onshore backlog is split between EMEA that contributes 33%, Americas with 43% and APAC with 24%.

Now moving to Page 10, WTG Onshore commercial activity. 2.6 gigawatts in Onshore orders signed in the quarter, which is a record for a first quarter, 8% up year-on-year; 9.6 gigawatts signed in the last 12 months, 5% up year-on-year. Americas and APAC are the drivers of the volume growth, both in the last 12 months and in the quarter, compensating for the expected decline in EMEA.

In the last 12 months, the U.S. contributed 25% of the Onshore order intake volume and 2.4 -- or 2.4 gigawatts. India added 15% with 1.4 gigawatts and China 11% with 1 gigawatt. Chile, Canada and Brazil follow with 9%, 6% and 5%, respectively. In Q1 '20, China and Canada led the contribution with 18% and 16% of the volume signed in the quarter, followed by Brazil and Sweden with 9% and Spain with 7%.

Excellent news for our product portfolio, as explained by Markus. We continue to make good progress with our new products in the 4-megawatt-plus categories that contributed 44% to the orders signed in Q1 '20, up from an average contribution of 26% last year. When we presented our business plan in 2018, we said that the new Onshore products will play an important role in our profitability improvement, and we see this is in orders we signed in Q1 '20 with significantly better margins.

We will need to continue improving our internal productivity, but from our product portfolio, we see what we were expecting to see. A significant milestone during Q1 '20 was a signed order of our first order for the latest addition to our portfolio, 5.8 megawatt 155. This product offers an excellent value proposition to our clients: on the one hand, higher annual production, double-digit increase and optimized CapEx with customer configuration for each projects on site; on the other, a flexible design that facilitates logistics, construction and maintenance, resulting in a lower LCOE.

Moving to the ASP, I would like to make 2 remarks. First and foremost, comparable underlying pricing, trends remains stable. Q1 '20 ASP shows 2 main aspects, 50% each. Project scope, this quarter, China has been the most significant contributor, which means more megawatts without the tower. Eliminating assets coming from China, the ASP amounts to EUR 0.68 million per megawatt. Beyond China, there is also a lower contribution from projects that included more scope, more election or development activities last year, like Spain. So scope in general and not only in China is one of the relevant factors.

Higher product rating. The dominant rating in our order intake continues to move from 3-megawatt to the 4-megawatt platform in the coming quarters. As it did this quarter, we are likely to see continuous in the year-on-year dilution in the ASP. This is not to say that all nominal rating increase are ASP dilutive. There are many other elements involved. And here, we are not necessarily expecting further dilution as we move from 4 megawatts to the 5 megawatts in the future.

Moving now to Page 11, Offshore commercial activity. This slide tells a lot about what happens when you have a unique product portfolio and outstanding track record. 15.7 gigawatts between firm order backlog and pipeline to execute in this ticket. This means that if we continue to transform the pipeline into firm orders the way we have done in Q1 '20, we have already secured 50% of what we want to do in this decade. Quite incredible, a great job and a big congratulations to the Offshore team.

We have signed 3.3 gigawatts in firm orders in Offshore in the last 12 months, twice the level signed in the 12 months to December '18. Of this volume, 1.9 gigawatts correspond to APAC and show the previous year's success in Taiwan. One of the new Offshore markets, 1.4 gigawatts has been signed in EMEA.

In Q1 '20, we have signed 1.3 gigawatts contract in Taiwan, the Netherlands, Norway and Scotland. These contracts come from our conditional pipeline, which shows the progress made in materializing the pipeline into firm commitments from our clients. They also show that we are at the front -- at the forefront of the technology innovation with the most innovative floating project to date in Norway.

On the right-hand side, you can see the breakdown of our firm order backlog of 6.1 gigawatts and our pipeline of 9.6 gigawatts. We have 4.4 gigawatts in the U.S., 2.8 gigawatts in Taiwan and 8.5 gigawatts in Europe; 50% in mature markets and 50% in new Offshore markets. After last year's successes in both the Taiwanese and the U.S. market, we have started fiscal year with a new achievement in the U.S. Siemens Gamesa was chosen as preferred supplier for the 2.6 gigawatts Dominion Energy Offshore Wind project, as Markus explained.

All in all, and before moving to the financials, we have done a great job on the commercial side of the business, Service quadrupling the order intake, Onshore driving the presentation of the new platform that will help in the recovery of our profitability in Offshore. This is the result of technology, sales, operation and corporate, so excellent job from the teams.

In Slide 13, we have an overview of our fiscal year '19 financial performance. There is no need to get into each of these numbers as I will explain the main ones in detail in the following slides. I will make a few comments.

On the P&L side, you see, as it was guided, the expected revenue seasonality with a lower start to the year. And the impact of that, therefore, see onetime costs driven by execution challenges and delays in Northern Europe. PPA impact, I&R cost and the net interest expenses are all in line with company expectations.

On the balance sheet side, we have the effect of the introduction of the IFRS 16 in fiscal year '20. We have an increase of EUR 583 million in financial liabilities, corresponding to the capitalized leases starting the year October 1 fiscal year '19, with a net cash position of EUR 200 million compared to the net cash figure of EUR 863 million at the end of fiscal year '19, September 30. Excluding this noncash accounting impact, we have generated nearly EUR 600 million of free cash flow in the last 12 months, which is an achievement.

CapEx is in line with our expected CapEx-to-sale ratio of 6% for fiscal year '20, and award provision in the balance sheet amounts to EUR 655 million after using EUR 40 million in the quarter.

Moving now to Slide 14, group revenues. This slide helps to understand the underlying performance of this quarter. In Q1, we executed EUR 2 billion in revenues, less than 20% of our expected annual revenues and 12% below last year's first quarter revenue. And this is entirely in line with our fiscal year '20 guidance.

There are several reasons. First, the most important is that we have planned to ramp up the manufacturing of the new Offshore 8-megawatt platform in Q1 '20, which translate into below-regular manufacturing activity in the quarter. That is why Offshore revenues fell 35% year-on-year in Q1 '20 versus our expected rate of 15% for the full year. We only manufactured 185 megawatts in the quarter. In Q1 '19, we produced 3x more. In Q2 '20, we will see a recovery of the activity level that will lead us to our expected annual revenue.

Second is related to Onshore. Onshore revenues have seen the effect of delays in installation activity in the Northern pipeline, the 5 projects in Norway and Sweden that have driven revenue growth from the high single digit, low double digit expected for the quarter to low single-digit revenue growth. This lower revenue growth also reflects the introduction of a manufacturing-to-cash model, linking manufacturing to billing and collection in India given the market volatility.

Last, in Service. We see the impact of the usual volatility in the 2 lines of Service revenue that are not maintenance contracts: spare parts and value-added solutions. Given the strength of value-added solutions in Q1 '19, general comparison was tough, but the spare parts sales and maintenance contracts grew double digit year-on-year, the later supported by growth in their fleet under maintenance that stood at 63.5 gigawatts, up 12% year-on-year. Senvion's Service assets will add another 9 gigawatts to our fleet under maintenance in the Q2.

On the right-hand side of the page, we have also volumes by geography. We can see the strong growth in Americas, 822 megawatts, up 74% year-on-year. The U.S. contributed with 485 megawatts. By the end of December 2019, our installation in the U.S. amounted to 21.2 gigawatts after installing 1.7 gigawatts in the last 12 months. According to the ARENA in the Q4 '19 reported that just -- that was just released, Siemens Gamesa was third in terms of the installed fleet to September with 16% share versus 8% captured in fiscal year '18.

The geographic split of volumes shows, on one hand, what we said in fiscal year '19 results, that EMEA will reduce its contribution to annual revenues in fiscal year '20 in favor of Americas and APAC and that this -- and that the change in the real mix would half the group profitability. The decline of volumes in APAC shows the volatility of the India market. I think everybody is aware that the government has not yet managed to fix the different programs faced by the wind players in India.

We remain fully committed and continue to believe that India will become the second or third largest onshore in the midterm, but we also acknowledge that the normalization of the market is taking longer than what we had initially expected.

On our benefit, I would like to say that we are reducing our dependency and compensating for India with other markets. And we expect to hear positive news in markets where we have a consolidated position like Spain where the government is very committed to renewables. We expect to hear soon about new auctions.

Moving from revenue to profitability on Page 15. We have consolidated on 1 page what was previously in 2, but all the information is here. On the left-hand side of the slide, we can see the rose performance of Service, which we expect to continue in the coming quarters, and then the performance of WTG business. Here, Offshore performance is entirely in line with expectations given the planned lower activity level in Q1 '20 and all the losses come from Onshore.

Markus has explained a little what has happened, but we are not happy, but measures have been taken for this not to be repeated. Risk management system, project management, corporate governance and the Northern Europe organization have been all reinforced. It is a onetime event and contained in terms of where then the performance comes from. And third, there are some opportunities to claim back part of the extra costs in the future.

Two more comments on the one-off cost. We have accounted in Q1 '20 for our best estimate of total cost incurred and to be incurred until full delivery of these 5 projects. Part of the cash outflows will come related to the extra cost in Q2 and Q3. In terms of the split, transport cost will be the main item, followed by liquidity damages and other warranty costs and then installations.

Moving from this extra cost impact that is within the other bar in our profitability bridge, I would like to focus on the underlying profitability because despite very low, it was entirely in line with what we were expecting for our first quarter.

We can see the negative pricing bar. Competitive pricing is common to all markets we operate: Onshore, Offshore and Services. Some good news is that we are nearly done with our less-profitable Onshore contracts, and we see better margins in our new order intake. And more important than is that we are -- that our transformation program continues delivering the expected results, and hence, more than fully compensating pricing pressure.

Then we have the volume bar also impacting negatively. This comes from the drop in Offshore volumes and the cost of sup activity. The cost of sup activity will come down in the coming quarters as Offshore activity normalizes and we see a stronger growth in both Onshore and Services. And last, product mix, that we also said that would impact negatively in fiscal year '20. According to this and if everything continues to go according to our planning, profitability should improve starting in Q2 '20, but especially in the second half of the year to get us to the new guidance range.

Moving now to the balance sheet-related information on Page 16 and 17. In my introduction, I said that we continue to set good foundation for the long-term performance of this business, and one of this was the work we are doing on the balance sheet side, the financing side. In the last 12 months, our group has first been awarded investment-grade by the 3 main rating agencies. Moody's has reconfirmed its rating after Q1 '20 preliminary results, which tells a lot about their confidence in our business model, our capabilities and our competitive position.

Second, reduce our gross debt in EUR 1 billion and increase our net cash position in EUR 600 million. Secure -- third, secure our long-term financing, extending the maturity of our EUR 2.5 billion syndicated loan under significantly better conditions; fourth, improve the working capital, thanks to our asset management program; and five, introduced ESG metrics through all financing products we use, and I want to thank the finance organization of Siemens Gamesa for all their hard work to deliver this.

In Page 16, our working capital evolution. Last year, we delivered an incredible working capital performance. Ending September fiscal year '19 with a negative working capital to sales ratio of minus 8.1%. This quarter, we have continued the good work, ending with minus EUR 939 million and a negative ratio to sales of minus 9.4%. This is an improvement of EUR 911 million year-on-year or 9.1 percentage points over sales, an improvement of EUR 100 million quarter-on-quarter, equivalent to more than 1 percentage point improvement in the ratio of working capital to sales.

This improvement in working capital has been driven by: first, a strict control of working capital with an asset management program acting in all key lines, bringing organization payment conditions and improving receivables; second, increased level of down payments driven by the strong commercial activity; and third, project execution milestones. In Q1 '20, the lower level of manufacturing activity has also contributed to the working capital performance. And in this regard, we will see part of this being reverted in Q2 '20.

Moving now to the last page of the financial section, Page 17, the evolution of our net cash position. We can see the impact of the introduction of the IFRS 16, as explained, EUR 583 million in our reported net cash position that now includes liabilities corresponding to the long-term leases. Excluding that, we see that our level of net cash during the quarter has remained reasonably stable at EUR 175 million despite the quarterly P&L performance. And as said at the beginning, when looking into a longer time frame, we have managed to deliver a net cash increase of EUR 600 million in the last 12 months.

And with this, I will hand the presentation over to our CEO, Dr. Markus Tacke.

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [4]

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Thank you, David. To conclude, let's look at where we -- where that leaves the company for today. We are now more confident about our revenue guidance for this year, which remains in the range of EUR 10.2 billion to EUR 10.6 billion. Yet, the one-off costs seen in the first quarter at 5 projects in Northern Europe led to extra costs of around EUR 150 million. In turn, these costs have set back our margin guidance to 4.5% to 6% from a previously announced 5.5% to 7%.

Over the last quarter, we continued to lay the foundation for a solid growth path. This also included the completion of the acquisition of selected assets in Senvion. The purchase added Senvion service fleet of 9 gigawatts, taking a total -- taking the total fleet to around 72 gigawatts under service, and we have already begun to integrate processes, welcoming our new colleagues on board. This deal is a game-changer for our service and multi-brand operations. It will help us deliver in key European markets as France and Germany.

We also expect to conclude the acquisition of the Senvion's Ria Blades plant in Vagos, Portugal during this quarter, quarter 2, 2020. The facility will help us to improve the geographical distribution of our production capacity. And in time, we expect it to become a hub for exports, reducing the dependency on supplies from Asia.

All in all, the acquisition of these Senvion assets marks an important step in the company's growth strategy, part of the company's L3AD2020 strategy program and strengthens our competitive position. In the midterm, this acquisition will add above EUR 50 million per annum to our bottom line.

In summary, we remain confident in the long-term prospects for the company and the sector as a whole despite current headwinds. Siemens Gamesa has now installed over 100 gigawatts of capacity, and we know much lies ahead of us and the sector as we embark on what will be a key decade to growth. According to ARENA, $3 trillion were invested in renewables in the decade from 2010 to 2019, but investments will have to double in this new decade if we are to meet sustainability renewable targets. Our objective is to play a fundamental role in delivering cost-efficient wind energy and helping the world meet most ambitious climate goals.

This does not hide from disappointing results for the first quarter, but I'm convinced that these one-off extra costs that we have quickly addressed to assure will not happen again in the future.

We have a robust financial profile and the long-term financing facilities that position us well to transverse a transitional period for the company. And despite headwinds, Siemens Gamesa has record order backlog across the 3 business units that enhance future revenue visibility. This competitive position was undoubtedly fortified following the acquisition of Senvion assets.

I would add that we continue to further develop our technology and are well positioned to continue driving energy transition as this decade opened.

I would also like to remind you all that we will hold our next Capital Markets Day on May 6 where we will present more details to our shareholders, explaining the company's strategy in the years to come. I look forward to seeing you at that day.

Both myself and David would now welcome any question you may have. Thank you. Back to Cristina.

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Cristina Perea Sáenz de Buruaga, Siemens Gamesa Renewable Energy, S.A. - Director of Financial Markets at Gamesa Corporación Tecnológica SA [5]

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Thank you, Markus. We can now start taking the questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Akash Gupta from JPMorgan.

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Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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I have a clarification question first. Maybe if you can talk about, on Slide 19, at the bottom, you say that the guidance excludes impact from change in composition of SGRE shareholder base. I mean can you explain what that means? Is that due to some projects from Iberdrola that might get canceled or something? Like, if you explain why you have added that comment?

And then my question is, can you quantify impact from this ongoing China coronavirus outbreak there? I mean this industry supply chain in China is far more bigger than it used to be 5 years ago, and if you can help us understand whether that could have some impact on your execution.

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [3]

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Akash, thank you for your questions. I will answer the first one, and I will let our CEO to answer the second one. So regarding the first one, the footnote that you see in the Page 19 is exactly the same that we presented in the Q4 results, so nothing has changed. What we want to reflect is that, of course, there are some topics that we need to agree with our shareholders if there is any change in the shareholder base of SGRE today, Siemens Energy spin-off. That's all.

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [4]

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Thanks, Akash. This is Markus speaking on the possible impacts of the coronavirus currently reviewed. I have to say we are now making an assessment what the impact could be. So far, Chinese New Year had been following the same period. So there was a slow period planned anyhow in the Chinese supply chain in that period. So, so far, our assessment is that the impact is marginal.

However, we depend on that the factories now are allowed to open again from the Chinese governments and that the transportation routes will continue to flow, that supplies will continue to move basically starting from this or next week. We're very closely monitoring such situation. So we need to see how this develops. Until now, if we go back to work after Chinese New Year and the situation is contained, as we see it today, we have gotten control of the situation. If this develops into a long-term slowdown of international logistics, we are not yet ready to estimate the impact.

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Operator [5]

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The next question comes from Mark Freshney from Credit Suisse.

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Mark Freshney, Crédit Suisse AG, Research Division - Research Analyst [6]

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To ask on the EBIT margin guidance. I mean there was a EUR 150 million exceptional charge, which would suggest a 140 bps downwards movement in the EBIT margin, but that only went down by 100. So if you could give us some clarity there, that would be much appreciated.

Secondly, you spoke about the retooling of the Offshore factory ahead of it producing 8-megawatt turbines. Can you give us any more color on that and some reassurance that we would go back to the typical Offshore margins from H2 this year?

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [7]

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Thank you, Mark. I will answer the first one regarding the adjustment in the EBITDA guidance, and I will let our CEO, Markus, to talk about the second question.

So you are right, we have suffered EUR 150 million unforeseen onetime cost, and we have only adjusted 100. The main reason for that are 2. First is that, as I was explaining -- we were explaining the Q4 results in the guidance, we felt very comfortable with the midpoint and that we see ourselves with opportunities to be in the upper part of the guidance.

Unfortunately, with this one-off time, we needed to reduce our guidance, but we see still some recovery opportunities in our hands. Another side, as I explained, there are some potential claims associated to these 5 projects in Northern pipeline that we consider could be recovered over the next few months.

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [8]

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To the question of the Offshore revenue, I think that it is the underlying question. As you know, we are -- have installed one of the last 7-megawatt-class machines. We are now deploying on the next projects, 8-megawatt class. And we are testing in our test field in Osterild now 11-megawatt machines. So there's a continuous upgrade of versions, model versions. And it is a natural process, so nothing unexpected. It's a natural process that we retool from a 7-megawatt manufacturing line, upgrading the line to the 8 -- to run the 8-megawatt model on the same line.

That normally has an implication that the revenue in this period is somewhat lower as production capacities are not utilized because of the time it requires for retooling, upgrading tools, structures, et cetera, et cetera. Nothing unexpected. That was planned for this quarter. And we will go back to normal revenue in Offshore in quarter 2 and quarters to come.

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Operator [9]

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The next question comes from Sean McLoughlin from HSBC.

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Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [10]

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Just on cost overruns, it's interesting that you talked about a one-off event in Q1. I do believe you had another one-off event in Q3 as well. Can you remind us of the volume of turnkey delivery that you have currently in your backlog? And why we shouldn't be concerned about potential cost overrun to that?

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [11]

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Sean, thank you very much for your question. The cost -- let me start explaining what we discussed in the Q3 last fiscal year and what we are now including in our onetime-off cost adjustment.

So you are right, we announced in the same level of projects or in the same kind of projects an impact of between EUR 30 million and EUR 40 million in the Q3. That now has been transforming an additional 100 -- close to EUR 150 million. It's important, as I have explained, that this includes the total cost that we see at completion, so that probably some of the cash outflows will happen in Q2 and Q3. So in that regard, we feel comfortable that we are taking the appropriate measures in order to contain the cost.

On the other side, you are questioning about how we feel comfortable that it's not going to be repeated or what could be the impact in the company. I want to remind you that in the last year, we have executed, and we explained you in different road shows and conference calls that we were focusing on the key elements of the execution potential issues in the year.

We highlighted Offshore in which we installed more than 400 turbines in 1 year. We focus in Spain in which we were installing more than 25 projects at the same time. And we focus, for example, in a country like the U.S. that is living a peak because of the PTC topic. And in that regard, we face no any single issue. We executed according to plan or even, as I explained in Offshore, better than expected.

So we consider, again, that it's an isolated case that we needed to reflect according to our POC accounting methodology. And in that EUR 150 million, we see, to our best knowledge, that there are not going to be additional necessities to be adjusted in the coming quarters.

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Operator [12]

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The next question comes from Vivek Midha from Deutsche Bank.

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Vivek Midha, Deutsche Bank AG, Research Division - Research Associate [13]

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I have a couple, if I may. So firstly, on Onshore ASPs, thank you for your commentary around that, maybe if you could just be a bit more concrete on that. So when you talk about the dilutive effect of larger turbines persisting in future quarters, just to be clear, are you effectively guiding for maybe the EUR 0.68 that you talk about ex China has to be a similar kind of run rate for what we see in future quarters?

And secondly, I guess, the longer-term question around Offshore. You have further built out the Offshore pipeline in the U.S. At what sort of time point or critical mass of orders do we start thinking about investing in local offshore capacity in the U.S.?

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [14]

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Thank you for the question. It is Markus speaking. Let's first allude what David, I think, has very consistently explained about the ASP. This quarter's ASP is impacted by a significant order entry out of China where the volume of the tower is missing. So simply, ASP goes down. The other effect is, and it is a more complex one to consider, the machines with larger ratings and reducing the effort to build those machines by optimizing structures and optimizing towers. You're also driving needed steel, for instance, per megawatt down in order to improve cost positions, and that might have an impact. And that needs to be seen, again, with the potential upside of building larger orders, so creating a larger AEP of the turbine to produce.

So you need to put those elements together to get cost reductions, less material used in terms of design optimization, at the same time, increased AEP. That is a consideration that needs to be done turbine by turbine. We see now for our 4-megawatt-class machine that, that has the tendency to lead a little bit lower ASPs, not related to margins. And it is important to say, long term and also looking at the 5-megawatt platform to come, I see ASP levels around EUR 0.68 to EUR 0.7 going forward in the market looking at the quarters to come and the other engine you see there.

The second question was on the Offshore pipeline, on potential investments. I think we have demonstrated with our possibilities what we have done in Taiwan to be very -- we call smart CapEx, low CapEx investments in order to realize a lot of content requirements as required from the Taiwanese government. Here, Dominion was mentioned. And we are, certainly, and what I've said, we are there to support this industry to build an infrastructure also in the U.S. That, of course, starts with harbor facilities, loader facilities you need to look at, and it might guide down -- go down to further always smart CapEx -- what we continue to call smart CapEx investments.

So we are ready to support the local industry with our efforts as we have done it elsewhere. But it is too early to make concrete comments on how this could look like. But keep in mind, this normally starts with harbor facilities, possibilities for tower manufacturing, loader facilities, things like that.

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Operator [15]

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The next question comes from Fernando Lafuente from Alantra Equities.

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Fernando Lafuente Seseña, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [16]

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Two, please. The first one, on the net cash position, you've done a great effort to keep working capital under control. I was wondering if you could give us an indication of where do you expect net cash by the end of the year? And how much of this improvement in working capital is structural going forward?

And the second question is a follow-up on this potential one-off effect of the IPO of Siemens Energy. I was wondering if you could give us a little bit more of information of where can these negative impacts come from and how could you basically offset or compensate them?

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [17]

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Fernando, thank you very much for your question. I will answer the first, and I will allow my CEO to answer the second one. So regarding working capital, yes, we confirm what we have said, we see a significant improvement in the working capital. We consider, as we have been repeating, that we see ourselves with a negative working capital as sustainable. So in that regard, we do not expect major shrinks in the year.

Obviously, in the -- this quarter, we will benefit -- we were -- we received a benefit from a very high order intake in Offshore and in Services, probably beyond expectations, and also in Onshore that we have had a record with 2.6 gigawatts. So in that regard, one of the main topics were the down payments that we have been collecting in the last few months.

Also, it's important that we have imposed a cash culture in the company, and I think that this is a reflection of the introduction of this cash culture. And how we see the cash flow in the year, as I was explaining, in the last 12 months, we generated EUR 600 million of free cash flow. And in that regard, we expect that during the year, of course, we will be able to generate positive free cash flow, not including Adwen and not including the acquisition of Senvion.

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [18]

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On the second question about the implications of the spin-off of Siemens Energy from Siemens and possible implications on Siemens Gamesa out of that. First, I have to say or repeat what I have said before, that means for us that the shareholding of Siemens AG moves to Siemens Energy. So they will be a new 59% shareholder, and that is the biggest implication out of that.

Underlining that it was giving cause for that comment, is certainly that there is a number of agreements that had been in place just to pull the merger agreement, for instance, back into your mind where there were agreements like strategic alliance agreements, agreements on financing conditions, guarantees, brand that had been in place at the time of the merger. These agreements are currently reviewed, and this is the disclaimer that there is no consideration for that so far in the guidance. That is the background for that. So it's a review of current contractual agreements between Siemens Gamesa with Siemens and possible implications of moving that share package from Siemens AG to Siemens Energy.

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Operator [19]

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The next question comes from Sebastian Growe from Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [20]

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The first one is around the orders. You said in your outlook statement that the orders signed in quarter 1 showed clear margin improvement. I would be interested in what like-for-like margin improvement you would see in the Onshore space. And if you could also comment on how pricing on a like-for-like basis in the Offshore space has developed, that would be much appreciated.

And then for 2019-'20 EBITDA bridge, if I look at your guidance, then this implies about flat group sales for the quarter 2 to quarter 4 period, however, very divergent in the various provisions of about EUR 1 billion higher in Onshore; maybe Offshore, about EUR 0.5 billion down.

On Offshore, to start with that one, can you comment how you can mitigate eventually that EUR 0.5 billion decline on the revenue line in Offshore? And could you also comment on what the positive items impact on Off -- sorry, on Onshore should be from the better mix, especially owing to the 4-megawatt platform?

And if I then shoot then the last question around Onshore order intake expectations for the full year. You had now 44% contribution from the 4-megawatt-plus platform. Can you give us an idea what your planning looks at for the full year 2020 on the Onshore side and the contribution from the better margin product base?

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [21]

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Thank you, Sebastian. I think that there are a lot of questions at the same time, so let me try to answer what I think I have understood. And of course, my CEO will complete if necessary. And if we miss something, please let us know.

Regarding the Onshore order intake and what we have said regarding the margin improvement, what we have repeated these 2 things that we have been repeating the last quarters. The first is that in this quarter, we are finalizing the vast majority of the pipeline that we signed with probably worse conditions. And in that regard, that's one of the main issues for this pricing impact were in the [matrix].

And second, what we can -- what we are seeing is that due to these new platforms, and it was one of our main message in the Capital Markets Day, we will see a recovery in margins. I think that we cannot give you today what is going to be the margins of these Onshore new orders. You will see in the next quarters. And of course, we will give an update until 2022 and onwards in the Capital Markets Day that, as Markus explained, is going to be held in May.

The second question, I think that I have understood that you are questioning about the EBIT bridge and how we are going to absorb potential underutilization coming from sales. As I explained, in the Q1, we have felt -- we have seen a fell of 35% of Offshore sales. That's the main reason for that. And also in Onshore, we have suffered because of mainly these 5 projects are significant delay in some sales that we expected to be achieved in Q1.

So if we exclude these 2 effects, and we see that they're going to be excluding in the coming quarters, we continue to see ourselves in the range of EUR 10.2 billion to EUR 10.6 billion and in the midpoint of the guidance as a more realistic case. As I was saying, 98% of the midpoint of the guidance has been already signed, and we feel comfortable with that.

And regarding the future Onshore order intake by platform, we see a step-by-step improvement year-on-year. Last year, we have increased significantly from the 20s to the 40s in the 4-megawatt platform. And I think that should be the trend with new also turbines like the 5.8-megawatt platform that we have already signed in the first quarter.

So we will see how our order intake is moving from lower nominal capacity turbines, with the exception of some countries like India in which probably it's necessary, to higher nominal capacity ones. In that regard, we see ourselves totally aligned to improve margins, thanks to the technology that we are applying to the 4- and the 5-megawatt platforms.

I don't know, Markus, if you want to add something?

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [22]

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I think that was quite consistent, I believe. Thank you. If there is no more question from Sebastian, I think that it was...

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [23]

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Yes. The one question that I had around Offshore was on the order situation and pricing within the Offshore space. In particular, I think back in the day, you said that in Offshore with obviously the auctions coming in, you see an overall lower margin pool for the Offshore space. So if you could just update us on what you're currently seeing in the order pipeline.

And the other part of the question that I had on Offshore was around the overall sales decline that you had baked into your guidance for 2020. And if you just can quantitatively at least comment how you want to mitigate the overall revenue drag in the Offshore space.

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [24]

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I am happy to comment on this one. As we explained in quarter 4 in the road show, there is a decline in Offshore revenue for the fiscal year '20 and '21 compared to fiscal year '19 very high revenues. That is driven by some project delays, as we explained. Project mentioned at that time was a project in Denmark that was shifted from today's execution by 2 years out of permitting topics, still in our order backlog. So this decline had been just explained and is visible or had been visible for some time. We have baked that in our numbers compared to what we said in quarter 4.

With regard to Offshore, Offshore profitability moving forward, there is no change compared to the comments. So we see revenues certainly coming back. We see the offshore market as such growing significantly fast. You saw that on the slide, that really, it's one of the growth potentials that we have. The dip in revenue for Offshore in '20 is as planned in earlier of -- basically, last year, earlier of this fiscal year. So there's nothing that has changed in that situation. And we said that by the time that from the extraordinarily high margins we had in Offshore in fiscal year '19, it goes back to a normalized level. And so also, in that view, nothing to update, just to reiterate what also has been said in quarter 4.

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Operator [25]

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The next question comes from Supriya Subramanian from UBS.

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Supriya Subramanian, UBS Investment Bank, Research Division - Equity Research Analyst of Industrials [26]

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I had 2 questions. One, on the one-off impact of EUR 150 million in the quarter. Now, even if you take that off, it would imply about EUR 70 million, EUR 75 million of losses in the equipment business. Is this according to plan? Or that's how sort of you had planned out the full year in terms of EBITDA margin progression?

And also related to this, in terms of the 1 to 1.1 gigawatt of orders are executed in 2Q and 3Q this year, do you see any other projects in your backlog which have, let's say, higher-than-normal execution risks?

And my second question is on pricing. At the EUR 0.68 sort of ex China level, yes, there is some dilutive effect from the higher proportion of 4-megawatt platform. Is there any quantification that you can share on to what extent, let's say, a higher-rated platform would be better on gross margins versus a 3- or a 2-megawatt platform?

And also pricing in Offshore, any comment on the trends? Do you expect similar trends to continue in 2021 as well?

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [27]

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Supriya, thank you very much for your couple of questions. So starting from the first one, and I will let our CEO, Markus Tacke, to answer the second one. So regarding the one-off, well, I assume that what you are trying to understand is if the underlying EBIT is according to expectations. And what we are saying is that it's totally according to our expectations with that, of course, with the section of the Q1 one-off effect.

The main reasons for that is that we were planning a back-end loaded budget and an execution program as we were anticipating in the year, even more -- with a more impact in the H2 of the year because of, as I explained, the ramp-up in the case of Offshore of the 8-megawatt platform. So in that regard, we will see how sales are increasing significantly and how the sup activity costs are totally compensating. So to the question, yes, it's totally according to our plan. Regarding -- and according to the former guidance if we exclude the one-off.

Regarding the 1.1 gigawatt, I mean, we see significant execution risk. I would like to highlight that this is a company that -- in which it's important, the approval, but it's also important that we have execution.

Of course, as I was explaining, we take a lot of efforts in understanding what is the product evolution case by case. We have suffered, as I was saying, significant challenges last year, and we're executing even better than expected. So in that regard, we don't see, as of today, significant potential additional one-offs to be replicated in the year.

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [28]

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With regard to your question on pricing, we see, as a general comment, stabilization of prices in the market. With regard to the implication of ASP, as I said before, I see ASP going forward, at least for this fiscal year, on levels EUR 0.68 to EUR 0.7 moving forward. The introduction of new products certainly is driving levelized cost of electricity down. And with introducing these products, these products carry higher margins than previous ones, but we will not quantify the impact out of that.

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Supriya Subramanian, UBS Investment Bank, Research Division - Equity Research Analyst of Industrials [29]

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And anything on the Offshore pricing? Any comment on the trends there?

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [30]

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As I said before, Offshore pricing, we also have an auction regime in Offshore pricing. The difference between Onshore and Offshore is that the long-term visibility in Offshore is significant, allowing us to introduce new products, new product features. You see us bringing now an 11-megawatt turbine on the test field, having put up that in the last couple of weeks. So that gives us time to compensate with technology solutions and cost-out activities, the price pressure in a much more long-term view as in Onshore. So as I said before, with that, we see margins stabilizing on normalized levels for Offshore going forward.

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Operator [31]

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The next question comes from Sean McLoughlin from HSBC.

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Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [32]

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Just a quick follow-up on India. I just wanted to understand how this cash -- the new model of manufacturing cash works. And are you actually looking at scaling down in India until it kind of ramps back again?

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [33]

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Thank you, Sean. Yes, the manufacturing to cash in India is pretty simple. In India, as you can imagine, the financial cost associated to India is very high. So we are working in reducing dramatically inventories in India and, of course, also the land banks associated to the development of activities. So in that regard, we continue focusing on investing in working capital only when it is totally necessary. We have seen an improvement in the last quarter.

Regarding how we see India, as I explained, we continue India to -- we see India to still be the second or third largest Onshore market in the medium term. But also, we need to know that the normalization of the market is probably taking longer than what we have initially expected.

So in that regard, both things go together. From one side, we need to be a little more cautious on the Indian development, and we are compensated with other regions; and at the same time, we are applying a strict control of working capital in India in order to review the financial expenses associated to this working capital.

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Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [34]

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Understood. And just to understand, in terms of fixed cost in India and presumably relatively low-capacity utilization there, I mean, is there any, let's say, short-term adjustment needed? Or will this be a drag on profitability through the year?

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David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - CFO [35]

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Also, we are working on India being a potential export hub, so we don't see an immediate adjustment in the Indian footprint in the next coming quarters.

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Cristina Perea Sáenz de Buruaga, Siemens Gamesa Renewable Energy, S.A. - Director of Financial Markets at Gamesa Corporación Tecnológica SA [36]

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We are going to take another question and then we'll finish the call.

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Operator [37]

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Ladies and gentlemen, there are no further questions, so I will give back the floor to the company.

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Cristina Perea Sáenz de Buruaga, Siemens Gamesa Renewable Energy, S.A. - Director of Financial Markets at Gamesa Corporación Tecnológica SA [38]

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Thank you. Markus, do you want to?

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Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [39]

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So thanks for joining us this morning on the call. I'm looking forward to meet you at the road show or any other possibility. Thanks for joining.