Edited Transcript of GAM.MC earnings conference call or presentation 5-Nov-19 7:30am GMT

Q4 2019 Siemens Gamesa Renewable Energy SA Earnings Call

Zamudio Nov 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Siemens Gamesa Renewable Energy SA earnings conference call or presentation Tuesday, November 5, 2019 at 7:30:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* 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. - Head of Corporate Development, Strategy & Integration and CFO

* Markus Tacke

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

================================================================================

Conference Call Participants

================================================================================

* Ajay Patel

Goldman Sachs Group Inc., Research Division - Executive Director

* Akash Gupta

JP Morgan Chase & Co, Research Division - Research Analyst

* Benjamin Michael Heelan

BofA Merrill Lynch, Research Division - Analyst

* Fernando Lafuente Seseña

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

* Miguel Medina

JB Capital Markets, Sociedad de Valores, S.A., 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

* Vivek Midha

Deutsche Bank AG, Research Division - Research Associate

================================================================================

Presentation

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good morning, and thank you for being here today and joining us for our full fiscal year '19 results. You have our presentation in our web page, and apologies because we had a technical problem to send it. And I would -- ask you to have a look to our disclaimer page before we start.

And with that, I will hand over to our CEO, Markus Tacke. Markus?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

(foreign language) Good morning, ladies and gentlemen. Thank you for joining the call today where we will present Siemens Gamesa's results for the fiscal year 2019. I will provide you with an overview of the company's operations for the final quarter and for the full fiscal year before handing over to our CFO, David Mesonero, who will give you more detailed analysis of our performance.

This year has been one of progress for the company while navigating through tough times in the industry. We have managed to meet our guidance for the year in terms of EBIT and revenue in the face of regulatory and political uncertainty, a slow -- slowly -- slowing global economy and trade tensions among several countries. The industry is also immersed in a period of rapid consolidation that will leave only the most robust and innovative companies left. As a business, this has provided us with opportunities to help secure our future strategy, strategic growth through acquisitions, and we envisage the sector will continue to evolve towards a new era with fewer but stronger players.

We are not immune to those external headwinds. But while profitability has been affected in the short term, our company and the industry, our results still show we are strong -- on a strong growth path. Our transformation will plan -- will be reinforced in these tougher times to ensure that profitability is maintained.

The fiscal year 2019 has been essential one for organic growth. Our record order backlog shows that investments in wind energy are strong. We have seen numerous indications this year of public support in the industry while demanding governments to step up their commitments to renewable energy. Forecast for the industry looks as bright as ever.

Our L3AD2020 strategic program has helped us to successfully steer us through those tough times by staying profitable. We believe that adapted to do -- to new market conditions, offering the best technology to our customers and searching for opportunities in fast-growing segments such as Offshore and Asia -- in Asia and U.S. and in Onshore emerging markets will help us to maintain a robust profile and continue to grow.

Turning to our highlights for the year. We look at the strong order intake of EUR 12.7 billion during fiscal year '19, which has led to a record order backlog of EUR 25.5 billion, an increase of 11.9% year-over-year, underlining the strength of interest and investment we are seeing in the sector and in the business. This also provided us with significant certainty for our business in coming years.

We have achieved our guidance in the face of challenging market conditions. Principally, fiscal year '19 saw a 12.1% year-over-year increase in revenue to EUR 10.227 billion. This is a testament to the work across all our business units and is impressive in a tough market. The EBIT margin pre-PPA and I&R costs were 7.1%, which met our guidance for the year. Our L3AD2020 transformation program is also on track and helps to compensate the impact of a tough pricing condition.

Quarter 4 2019 was the strongest quarter for Siemens Gamesa since the merger and an encouraging sign that our transformation and growth story is on the right path. Specifically, our cash position has also increased considerably to EUR 863 million from 200 -- up EUR 248 million year-over-year. And we have also worked towards a continuous optimization of our debt structure. This has seen us reduce gross debt by around EUR 1 billion year-over-year. While it is clear that short-term headwinds will affect the return to more normalized margins, we are convinced we are well positioned to capitalize on the huge potential of the wind industry.

Looking now at performance from the last quarter, I would like to highlight some strong milestones for our company. The final quarter of the fiscal year concluded on a much more positive note in India. We saw 1.2 gigawatt on orders in this quarter, taking the order entry to 1.8 gigawatt out of India, increased 21% year-over-year. This was great news for a country where we are leaders and where regulators' issues had overshadowed progress for some time.

Indeed, our Onshore business finished the year with the highest ever order entry at around 9.4 gigawatt. We also installed the last of the 174 wind turbines in Hornsea 1 in the U.K., the world's largest offshore wind plant. Its 1,200-megawatt capacity is enough to supply over 1 million homes, and we are delighted to have this done safely and in record time. This underpins our unmatched execution capability in Offshore. We retain our leadership in the U.K. and are committed to continue playing a part in the government's ambitious wind energy plans.

And the largest milestone for the quarter, and that will have a considerable bearing on the future of the company, was the acquisition of selected assets from Senvion for EUR 200 million. This acquisition may well prove a game changer for Siemens Gamesa Renewable Energy. The assets were acquired at an attractive price, and it offers us a great strategic fit with our business. It will provide a timely boost for our Service business, where margins are healthy, and bolsters our presence in Europe, particularly in mature markets like Germany and France.

The acquisition is also a clear example of the market transition that we are facing and shows that Siemens Gamesa Renewable Energy is actively shaping the next leg of market consolidation while significantly improving our position compared to our rivals. This transaction will clearly add business value in the mid and the long term. It also helps our risk profile through the purchase of the Senvion's Vagos plant in Portugal. This will not reduce our -- this will not only reduce our [Asian] dependence on agency supply chain but also will prove a useful export hub to -- as affordable location.

Lastly, on this operation, we have acquired the comprehensive IP portfolio from Senvion, which will help us develop and optimize our product portfolio even better going forward.

So let me pass over now to David who will give you a more detail on our financial performance.

--------------------------------------------------------------------------------

David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - Head of Corporate Development, Strategy & Integration and CFO [3]

--------------------------------------------------------------------------------

Thank you very much, Markus. Good morning, everybody, and thank you for being here with us today and also the ones that are in the room and in by phone. As Markus has said, it has been a strong quarter and it has been a year in which we met our financial guidance despite challenging condition and geopolitical uncertainty, and we continue to prepare the company to lead the industry in the future. In the next 2 sections, I will go through the building blocks of our future, our strong commercial activity and our solid financial performance, including a potential -- including an update on the L3AD2020 program and our balance sheet.

Starting on Page #9. As Markus just said, this year has been a year of commercial successes, a year in which we have reached several records in our commercial activity and we have done within our strategy of profitable growth and price discipline. The transition into a fully competitive market in Onshore has led to low profitability levels. Some levels are so low that we are not interested, and that means that we have walked away from some tenders. And even doing that, we have managed to sign EUR 12.7 billion in new orders in fiscal year '19, 7% more than last year, reaching a book-to-bill of [1.2] group revenues. We signed Onshore orders worth EUR 9 billion in the year, up 4%, reaching a book-to-bill of 1.3x. And despite the volatility we experienced during the most of the year in some key emerging markets, we are able to close fiscal year '19 with record Onshore order in Q4.

We also signed EUR 3.1 billion worth of Offshore orders, 11% up from last year, reaching a book-to-bill of 0.9% impacted by peak project execution in fiscal year '19. And Service order intake reached EUR 2.7 billion, up 13% year-on-year and equivalent to a book-to-bill of 1.8x. The strong performance in Service also reflects the improvement of our renewable rate that reached 75% in fiscal year after a difficult fiscal year '18. This very strong commercial activity led to a new record backlog of EUR 25.5 billion, 12% above last year's backlog. 47% or nearly EUR 12 billion, 10% up year-on-year, is in Service orders with higher returns on faster cash conversion.

The acquisition of selected assets of Senvion, once it's completed, will help us strength our position in Service even further. Our CEO will give you more information on this agreement later, an agreement that is the result of a great job done by our M&A and Strategy Manager, Carlos Albi and his team.

28% or EUR 7 billion, up 38% year-on-year, is in Onshore; and 26% or EUR 6.5 billion is in Onshore -- is in Offshore. That means that 72% of our order backlog is in attractive business with above average profitability levels, but it also means that we need to continue working to increase the profitability of the remaining 28%. But this is still not in the normalized levels we are targeting. In addition to the business diversification, our backlog also shows a good geographical diversification, with 55% in EMEA, 24% in Americas and 21% in APAC.

The lighter weight of EMEA reflects the weight of Offshore, a market that is still largely based in Europe. Our Onshore backlog is split between EMEA that contributes 33%, Americas with 43% and APAC with 24%. A strong and well-balanced backlog, which clearly contributes to our company resilience. Thanks to the backlog strength, we started the year with 90% coverage of the midpoint of our revenue guidance for '20 -- for fiscal year '20 or EUR 9.4 billion. This is 10 points above the coverage we had at the beginning of fiscal year '19 for fiscal year '19 revenues. That coverage provide us a strong visibility of our top line growth [versus in] fiscal year '20 and comfort on the midpoint of our overall guidance.

Moving to Page #10, the Onshore commercial activity. Another commercial record, this time in order intake in Q4 '19. Fiscal year '19 Onshore order intake amounted to 9.4 gigawatts, up 5% year-on-year, well above our target run rate of 2 gigawatts of Onshore order intake per quarter. Annual order intake was driven by the U.S. with 2.5 gigawatts representing 27% of the total volume, and India with 1.8 gigawatts, representing 20%. China and Chile came next, both with 7% each.

As I mentioned before and in previous quarters, volatility in emerging markets, especially India and Mexico, has been impacting the performance of our order intake during the year, postponing the entry of expected orders both in Latin America and in India. In Q4, we could finally materialize our commercial expectations in India, with 1.2 gigawatts in orders signed in the quarter. This strong performance in India led the overall Onshore order intake to reach a record of 3.1 gigawatts in the year -- in the quarter, 20% above last year, quarter 4. Besides the contribution of India to the Q4 order intake, 38% of the total, we had strong orders in Chile representing 12% of the quarterly order volume, China with 9% and Sweden with 8%. We continue to make good progress with our 1.5 -- 145 megawatt -- 1 -- 4.5 megawatt, 145 turbine. We signed our first order in China, 189 megawatts in Q4 '19; and also 2 orders, sizable orders, one in Chile, 369 megawatts; and one in the U.S., 162 megawatts.

Moving to the charts at the bottom of the page, very important message that we have conveying for a number of quarters already, a stable ASP. Understanding the stability as a single-digit price decline between 3% and 5% that can be compensated by traditional productivity. In the left-hand side chart, we can see the annual ASP evolution. After a [normal] decline of 9.5% in fiscal year '18 and a cumulative decline of 20% from fiscal year '16 to fiscal year '18, we see a stable ASP in fiscal year '19 at EUR 0.73 million per megawatt.

In the right-hand side, you can see the evolution of the ASP on a quarterly basis. It is normal to see more volatility on a quarterly basis. The ASP is impacted by product mix, geographic mix, scope, et cetera. But within the quarterly volatility of the ASP, we can still talk about price stabilization and more important, price discipline.

In Q4 '19, we had a similar impact what we saw in Q2 '19, a higher contribution from orders in China where the tower is bought directly by the client. This has a dilutive impact on ASP. Taking that effect out, the ASP in the Q4 amounts to EUR 0.74 million per megawatt.

The ASP of the order backlog for current year, fiscal year '20, sales activity shows a decline 4% year-on-year, fully in line with our expectations of a stable underlying pricing in the range of 3% to 5% negative. The [order] backlog ASP variation also includes the change in expected mix of our Onshore top line for fiscal year '20. Onshore is one of the growth drivers for fiscal year '20. Within Onshore, Americas and APAC are the 2 major contributors to revenue versus a higher contribution from EMEA in fiscal year '19. So in fiscal year '20, we are moving to execute orders that come from more competitive onshore markets. This also explain our group margin expectation for fiscal year '20.

Moving to Page 11, Offshore commercial activity. In this slide, we have our last record in fiscal year '19 and a key pillar of our future performance. We signed 2 gigawatts in [firm] orders in Offshore in fiscal year '19, 8% less than in fiscal year '18, but we did reach a record in Q3, thanks to a very successful performance in Taiwan, one of the 2 main new Offshore markets.

We signed 1.5 gigawatts in firm orders in Taiwan in Q3 '19, Yunlin and Greater Changhua 1 and 2. I won't go again through these 2 projects and the reason behind the success of our Offshore performance that we can discuss -- that we discussed at length last quarter. Q4 order intake, 72 megawatts in fiscal year '19 and [none in] fiscal year '18 is just a reflection of the standard volatility of the Offshore market.

Moving to the lower part of the page, a picture of our success in Offshore, success that is built upon our technology expertise, innovation and product portfolio but also upon our execution track record. Markus discussed earlier in our success story, our strong delivery of Hornsea 1, one clear example of our execution capabilities. Another example of our Offshore technology leadership is the collaboration with Equinor to develop the largest floating Offshore wind power plant. Last week, we announced a firm order to be the supplier of Hywind Tampen, 88 megawatt, located 140 kilometers from shore in an area with water depth of 260 meters. This collaboration has made it possible to unlock new offshore areas, and hence, the best potential for floating offshore wind power.

We ended fiscal year '19 with 5 gigawatts in firm order backlog worth EUR 6.5 billion, which gives us 100% coverage of fiscal year '20 expected revenues, and more than 7 gigawatts in pipeline, very well diversified. This gives us good visibility on our future potential beyond fiscal year '20 as the pipeline is confirmed into firm orders.

Last week, we also announced Formosa 2, 376 megawatts, with Macquarie’s Green Investment Group [and] Swancor Renewable Energy. This contract includes a 20-year service agreement, and the construction will start in 2020.

And before we move to the financial section, I would like to congratulate our 3 CEOs, Alfonso Faubel, Andreas Nauen and Mark Albenze, for the commercial success in all our businesses.

In Slide #13, we have an overview of our fiscal year '19 performance. There is no need to get into each of the numbers. I will explain the main of ones in detail in the coming slide, just a few comments.

Fiscal year '19 performance, fully in line with guidance. Record performance in Q4 '19, both in revenue with nearly EUR 3 billion and in EBIT terms, with 8.5 margins per PPA and I&R costs. As Markus said, the strongest quarter since the merger. Net income doubled. CapEx also in line, close to EUR 500 million and a ratio of 4.9 percentage to sales.

We need to invest for future growth. Next year is Onshore, the one growing, but then we see significant growth in Offshore, and that's why we see an increase in investment in fiscal year '20.

Provision is down EUR 268 million in the year mainly driven by Adwen with EUR 180 million in provisions used and some releases that we explained in Q2 '19. Beyond that, very stable movement in provisions, charge and use in Q3 and Q4.

Finally, net cash, EUR 863 million, that we will discuss later. But also very important to highlight, 2 things that we are doing at group level. One is the optimization of our balance sheet. As Markus said at the beginning, we reduced our gross debt in EUR 1 billion; and second, we launched our green financing strategy as part of our commitment to sustainable development. We have started the exercise to make all our financing green and sustainable. Last week, we announced our first sustainable ForEx hedging contract deal with BNP Paribas totaling EUR 164 million.

We not only want to be the leader in the industry, but also a leader in efficiency and ESG principles. We will continue to keep you informed in the next earnings release, and thank you very much to the treasury team to achieve it.

Moving to Slide 14, group revenues. We had a strong performance at revenue level growing 12% year-on-year during fiscal year '19 to reach EUR 10.2 billion and 12% in the last quarter to reach nearly EUR 3 billion. Revenue growth is supported by all businesses, but especially by Offshore that had peak activity levels in fiscal year '19, 6 projects and 2.6 gigawatts [at turbine]. Offshore revenue grew 18% year-on-year to EUR 3.5 billion and contributed 34% to group revenues, contributing in fiscal year '18 was also above 30%.

Service also delivered a strong growth, 17% year-on-year to EUR 1.5 billion. Growth in Service was driven by strong performance in maintenance contracts and also strong performance in value-added solution, especially during the first 9 months of the year.

Onshore grew 7% year-on-year as delays on commercial activity, especially in India but also Mexico, mean we could not execute all the volume we had originally expected. A strong growth in Q4 '19 with Onshore revenues growing 22% year-on-year as the back-end loaded planning was executed successfully.

Moving to the bottom part of the page, Onshore volume up 4%, both in the year to 6.9 gigawatts and in the quarter, to 2 gigawatts. EMEA is the main contributor in fiscal year '19, with 49% of the sales volume. Within EMEA, Spain, with 17% of the sales volume; and Norway, with 13%. Americas follows with 30% of the volume and the U.S. contributing 24%, and then APAC with 22% and India contributing 13%. The same countries are the largest contributors in Q4 '19. U.S., with 22%; followed by India, with 18%; and then Spain, 12%; and Norway, 10%. We can see then Spain was a significant contributor to our revenues in fiscal year '19. Recent political volatility has put on hold further renewable development in the country. After this next Sunday elections, we will expect to see a stable and more predictable renewable framework from the new government, which is a must for a country with such large industrial base.

The split and contribution of growth revenues next year will change materially as our Offshore division is impacted by delay of some projects. Fiscal year '20 group growth is supported by Onshore and Service. Fiscal year '20 will be the first year with an Offshore contribution below 30% of total group volume. Beyond 2020, it goes back to be the key growth driver.

Moving from revenue to profitability in Page 15. On the left-hand side, the quarterly bridge, quarter 4 '19 versus quarter 4 '18. And in the right-hand side, the annual bridge, fiscal year '19 versus fiscal year '18. Same drivers of what our profitability has done. We can clearly see a drop in the pricing bar. We have been saying that we will see this in the last quarter, and this bar includes a second quarter of slightly more competitive pricing in Offshore as auction-driven project are executed. But Offshore remains very far from -- very [far productivity] with the largest pricing impact in the last 12 months. A strong impact from the transformation program, productivity, other EBIT improvements and fixed cost, with cumulative savings compensating the impact from lower pricing. This is very positive, because it attests our capacity to offset pricing competition through productivity improvements under normalized conditions.

Volume also positive, as we deliver growing revenues in all 3 businesses. Next year, as I have just mentioned, we will have a mix in sales volume as Onshore and Service grows, but Offshore comes down double-digit, and that means that this bar will not be there to the same extent supporting our margin evolution.

And finally, 3 impacts that drove profitability down in fiscal year '19, 2 of which might remain in fiscal year '20. Weaker project mix. This might continue next year as more competitive Onshore, Americas and APAC outweighs EMEA in the revenue mix. One consequence of the political volatility we are seeing in some mature markets is the more slowly development of wind installations. Spain is a clear example, after the strong fiscal year '19. Inflation, including the impact of U.S. tariffs to Chinese imports, again, a driver that might remain impacting next year profitability.

Onetime negative impacts. Here, we have, among others, the weak execution in Northern Europe explained in Q3 '19.

Continuing with profitability, an update of the transformation program, L3AD2020, in Page 16. What we have seen in the profitability bridge is the result of our transformation program that has delivered productivity improvements despite challenges in the supplier market. We have over EUR 1.4 billion in cumulative savings, including over EUR 300 million in synergies. The net impact of our profitability has been less visible due to the additional headwinds that have impacted product affordability like inflation driven by tightness in the supply chain and by the imposition of tariffs to Chinese imports in the U.S. These headwinds will require an acceleration of our L3AD2020 program and additional measures to get our group profitability back in line with our normal targets.

Finishing with the profitability part before we move to the balance sheet, Slide 17. We can see the evolution of our quarterly margins. Nothing new we have not said in Slide 15. The margin level and the evolution reflect the impact of pricing coming down progressively and being compensated by the transformation program, all quarters benefiting from a positive impact from volume as revenues have continued growing through the year.

Some specific impacts on Q2 and Q3. In Q2, margin was positively impacted by the release of provisions linked to improve service productivity and better reliability of our 7-megawatt Offshore platform. As said and explained in the Q2, this is very positive as it will translate to lower outflows in the future.

In Q3, margin was impacted by execution challenges in Northern Europe and India. Without those, we would have seen a margin about 7% in that quarter. In Q4, record performance as a result of lower pricing impact as Onshore price stabilization [fits] through the P&L, continued good performance of the transformation program and positive volume impact in all businesses.

All in all, fiscal year WTG EBIT margin of 4.4% remains below the normalized target largely due to a very competitive Onshore market with some irrational pricing practices in the past. We need to continue working to return this margin to normalized levels in the coming years. On the contrary, Service margin of 23% remains strong, slightly above the normalized target, and in our view, sustainable above 20% in the long term.

Moving now to the balance sheet in Page 18 and 19. And before we start, just a reminder of how important balance sheet strength becomes in a volatile macro and political environment, with external market headwinds and in an industry that is still in transition.

In Page 18, our working capital evolution. An exceptional performance in working capital within the year. Over EUR 1 billion improvement quarter-on-quarter, as a result of the execution of the planned back-end loaded sales activity, and EUR 291 million improvement year-on-year to reach a negative working capital of EUR 833 million, equivalent to a ratio of minus 8.1% of our sales, more than 2% points better than the working capital to sales ratio at the end of fiscal year '18. The improvement of working capital has been driven by a strict working capital control policy, increased level of down payments driven by commercial activity, renegotiation of payment conditions and project execution milestones.

In fiscal year '20, we will continue with our working capital program with a strong focus on project execution milestones and inventory management. With this, we expect that this strong performance in working capital in fiscal year '18 and '19 become sustainable in the medium to long term.

Moving now to the last page of the financial section but perhaps the most important page, the evolution of our net cash position. Net cash at the end of the fiscal year '19 amounts to EUR 865 million, EUR 248 million more than in fiscal year '18 even after Adwen-related outflows of EUR 180 million. Before Adwen and dividend payments of EUR 180 million and EUR 17 million, respectively, this variation of net cash in the balance sheet amounted to EUR 445 million. This has been driven by gross operating cash flow generation amounting to EUR 555 million with which we have paid our growth investments; and second, working capital improvement amounting to EUR [191] million, EUR 341 million impact on cash terms.

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

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, David. Let me conclude and give an outlook. To begin the conclusion of this report, I'd like to highlight again that the fiscal year '19 guidance was achieved in the light of a challenging market, including a global macroeconomic slowdown, political and regulatory uncertainty and emerging market volatility and global trade tensions. Guidance for revenue was EUR 10 billion to EUR 11 billion was met with EUR 10.227 billion, and the EBIT margin was 7.1% with the guidance of 7% to 8.5%. Market headwinds will continue to impact fiscal year '20 performance in a transitional year for the company. However, top line growth is assured.

Revenue guidance for fiscal year '20 is EUR 10.2 billion to EUR 10.6 billion. We have a strong top line visibility with fiscal year '20 revenue coverage of around 90%, 10% points above fiscal year '19 coverage. EBIT margin for fiscal year 2020 is 5.5% to 7%. This reflects ongoing market transitions, certain company developments and external headwinds.

Where do we stand with this guidance today? We are very confident. We are very confident about the midpoint of the guidance. However, given the current uncertainty in the market and somehow irrational behavior, we find the guidance range adequate. PPA impact is around EUR 260 million and I&R costs of EUR [200] million. CapEx to sales target is around 6% to allow for strong growth in Offshore after 2020. This includes investments in France, Taiwan and investments in new Onshore technology.

Looking in more detail at our profitability guidance. It is impacted by a change in business mix with lower revenues from Offshore, which nonetheless remains an attractive business. While in Onshore, we anticipate higher sales volumes for more competitive regions like U.S. and APAC, here, India and China, in particular. Fiscal year '20, being a transitional year, is also impacted by an increase in CapEx spend by over 20% to expand our industrial base in Offshore and an increase by around 10% of R&D to strengthen our product portfolio. To counterbalance, our transformation program is expected to deliver over EUR 600 million in productivity savings in fiscal year '20 and will continue to compensate adverse effects.

Industry trends are characterized by continued price stabilization in Onshore, although on low level. Adversely, Offshore is normalizing from extraordinary high margins in the past, with still attractive levels driven by price competition led by execution of auctions-driven projects. Service is less affected by pricing changes, while we take the opportunity from ongoing industry consolidation.

With regard to the particular headwinds we mentioned, we see ongoing cost inflation from the tightness in supply chain and tensions in global trade, including tariffs in the U.S. and other regions. We also forecast an impact on wind demand in the short term for political and regulatory uncertainty in mature markets, including Spain and Germany as well as emerging market volatility in India, Mexico and Brazil. Uncertainty from the ongoing Brexit negotiations adds another element of unpredictability, while the full impact is still to be seen.

Given the resilient business model of Siemens Gamesa across our business, our geographically well-diversified revenue base and our strong balance sheet, we are perfectly positioned to overcome these short-term impacts quickly. This leads to the midterm to long-term outlook. Turning our long-term view, we are extremely well-supported by a strong competitive position in the industry, driven -- driving cost out and developing best-in-class technology.

Looking at the growth, we see a CAGR in 2018 to 2025 in Offshore of around 21% per year; and in emerging Onshore, CAGR of 28% to 25%, around 10% per year. We hold leading positions within these markets and aim to keep this leadership. This positioning will positively benefit us going forward.

We underline the impact of the Senvion transaction, which will strengthen our competitive position in the high-growth Service business and help us to supply -- and help our supply chain strategy. It will be a minor burden in fiscal year '20. However, it will already contribute positively in fiscal year '21 with increasing trend towards '22 and beyond.

We see an ongoing consolidation in the Onshore OEM market towards a 4-player scenario driven by tough competition. In Offshore, the likelihood of having 3 major players is established as being high. Our next-generation technology portfolio will help us to position us ahead of the field in both areas. Mainly in Onshore, we will further optimize our factory footprint and supply chain structure. Differently, in Offshore, where we will expand our footprint, taking the right steps to benefit from strong growth in Offshore, specifically in Taiwan and France.

As part of the L3AD2020 program, we will retain our focus on cost-out, including optimized structural costs through headcount reductions of up to 600 over the next 2 years. This will help us to further drive our competitiveness, assuring a cost-focus in all activities of our company. The summary of these factors will help us to continue to drive profitable growth towards fiscal year '22, with an improvement of EBIT margin towards 8% to 10% by fiscal year 2020 and beyond.

The acquisition of some of the service assets of Senvion will be a key milestone in the strategic development of our company. It will provide us with a 15% enhancement of our Siemens Gamesa Service fleet and a 50% increase in fleet under maintenance in Europe. Finally, the acquired assets will contribute from 2021 onwards primarily in the Service business but also improving our Onshore business through the manufacturing plant in Portugal. This will take us to the next level in our L3AD2020 growth strategy.

There is a EUR 1.3 billion backlog excluded from the operation. With the Senvion IP being part of the deal, Siemens Gamesa is uniquely positioned to attract a significant portion also of this. It will provide an additional upside backlog potential, and SGRE will compete for those service contracts. The Vagos plant will provide significant scale with production of over [1,003] plates a year. This will primarily help us to reduce our dependency from the Asian supply chain, specifically within this volatile trade environment and contribute to a significant cost optimization.

Overall, the acquisition significantly accelerates our growth ambitions and bolsters our position as a leading global service partner in a very competitive landscape. It will give us -- give our multibrand sales business the scale and reach that will enable us to meet and surpass customers' expectations.

The strong potential of the sector is intact. According to BNEF, wind installations need to double and reach EUR 5.3 trillion of investments in wind by 2050 for sustainable development. Meanwhile, Offshore wind is forecast to expand 50x to reach at least 340 gigawatt by 2040. Within Europe, Offshore wind could become the largest source of power generation by 2040 with a share of 25% versus under 2% today. In total, installed -- and the total installed base of 1,000 gigawatt by 2050. In summary, Siemens Gamesa Renewable Energy is well positioned to benefit from high growth coming from Offshore and emerging markets in Onshore where we are ideally positioned.

In conclusion, our financial performance was in line with the guidance provided despite challenging market conditions. The agreement to acquire selected assets on Senvion supports our profitable growth strategy in the mid and the long term. We are seeing strong -- we see strong long-term prospects for the market as well for our company, with a record well-balanced order backlog of EUR 25.5 billion. Fiscal year '20 guidance shows top line growth as well as profitability in the year of transition for the industry. And lastly, we do look forward to welcome you to our Capital Market Day to be scheduled in the first half year of 2020.

Thank you very much. And back to Cristina.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Markus. We're going to take the questions from the audience here first, and then we'll move to take the questions from the ones that joined us over the phone.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Miguel, at the back?

--------------------------------------------------------------------------------

Miguel Medina, JB Capital Markets, Sociedad de Valores, S.A., Research Division - Research Analyst [2]

--------------------------------------------------------------------------------

Yes. Miguel Medina from JB Capital. 2 questions, both on the Senvion transaction, and apologies if you covered that in the beginning of the presentation. The first question is you are going to pay, I think it's EUR 150 million. There is a EUR 200 million provision. Is that going to become eventually a cash item? Can you give us some information on that?

And then the second question, also on the Senvion transaction. I think that the market perception goes that Senvion had been very aggressive in terms of the pricing of its onshore turbines. Were they as aggressive in the pricing of the services contract? I'm sure that you have done a proper due diligence, but just, if you could comment on the quality of that services portfolio and why that quality is different from what they did on the turbine itself.

--------------------------------------------------------------------------------

Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Allow me to answer the second part of the question first, and then I will hand over to David. We had the opportunity, given the insolvency situation of the company, to be very selective on the assets we are putting in the scope of the deal. So there has significant due diligence to take those service contracts that have a good margin, a very low-risk profile and a long duration. So there was selective -- selecting process going on taking those very good service deals.

We are not including any Onshore new units -- projects in that deal. That remains with the company. So we are taking basically the highly profitable, and these are highly profitable service contracts out of the company. We're taking the IP, which is not to be underestimated, as it allows us to address the remaining out-of-scope service contracts but giving new contractual conditions as we are in a negotiation position there. So we have been very selective. We are not taking those aggressive margins that you might refer to. To the [purchase] price, I'm sure you have to comment...

--------------------------------------------------------------------------------

David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - Head of Corporate Development, Strategy & Integration and CFO [4]

--------------------------------------------------------------------------------

Thank you, Miguel. I think that in the annex, we have some additional details on the pricing. I think that just to make it very clear, it's EUR 200 million of equity value that is going to be a payment in cash. There is EUR 150 million that we consider that we will need for the carve-out process, I think that's very important; second, for [operator] at a stand-alone basis for a while; and third, to do some I&R restructuring cost. This is purely 100% related cash associated to that EUR 150 million that will be -- have an impact in the years 1 and 2.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Next question? Nobody from the audience, so we are going to take the questions over the phone now.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [7]

--------------------------------------------------------------------------------

My first question is on bridge from 2019 to 2020. And if you can talk about more -- if you can give us more details about Onshore, Offshore and Services on revenues on the EUR 600 million productivity savings that how -- that will freeze in the 3 segments as well as margins, like what was Onshore margins in 2019 and what do you expect in 2020. So that's my first question.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks for the question. I will give an introductory, and then I'm sure, David has additional information.

First, the transition, fiscal year '19 to fiscal year '20, as elaborated, is impacted by a reduction of revenue contribution from the highly profitable Offshore business. So you've seen the project, and the major trigger item behind it is the project [versus] the half. It had been delayed out of permitting reasons that reduces the Offshore contribution to the overall business, below 30%, as elaborated by David. And this is one effect. And the other effect is that the Onshore mix is moving from EMEA, which is historically a higher-margin business, to more competitive regions like U.S. and APAC. I mean those effects have a significant impact on the transition from fiscal year '19 to fiscal year '20 profitability.

--------------------------------------------------------------------------------

David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - Head of Corporate Development, Strategy & Integration and CFO [9]

--------------------------------------------------------------------------------

Yes. I think that -- thank you, Markus. You have said 90%, I think that there are other 2 small elements that we need to consider our cash.

The first, of course, is what we have been discussing over the last few quarters is the external headwinds that this industry is suffering. We are a capital-rich company and, of course, we cannot ignore in the world that we are living.

And the second is that we are investing for growth. We are increasing our R&D spend next year in order to capture all the growth that we see, especially in Onshore, in emerging markets and in Offshore.

--------------------------------------------------------------------------------

Operator [10]

--------------------------------------------------------------------------------

The next question comes from Ben Heelan from Bank of America.

--------------------------------------------------------------------------------

Benjamin Michael Heelan, BofA Merrill Lynch, Research Division - Analyst [11]

--------------------------------------------------------------------------------

Yes. I just wanted to come back on the guidance and get some color from you what the guidance assumes in terms of tariffs and also potential impact from Brexit.

And then secondly, in your CapEx guidance, which is going to increase quite significantly, you said that this is about local supply chain development in France and Taiwan. Can you expand on these requirements a little bit? And also why can't you fund these more out into third parties and go to outsource that supply chain a little bit more?

And then I think also adding that high CapEx guidance with the margin guidance would imply free cash flow negative this coming year. I assume that you will be not having any shareholder returns in the following year. Can you clarify that?

--------------------------------------------------------------------------------

David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - Head of Corporate Development, Strategy & Integration and CFO [12]

--------------------------------------------------------------------------------

Thank you very much. I think that there are 3 questions. The first, the impact on the Brexit and the trade war. I think that we have been quite vocal on it. Of course, Brexit, we are suffering the uncertainty coming from Brexit. As you can see, for example, in the inventory, there is a small increase in inventory compared with the last year. This is partially related to the Brexit in which we need to more or less manage internally in our U.K. plant but also in our U.K. projects. Somehow, the potential [imports] to be executed between the European Union and the U.K. in the future. But of course, we have been saying this for the last few quarters, and it seems that there is going to be a delay. In any case, we maintain the same speech that we have been saying. Brexit will be a double-digit impact EBIT in our potential year, but this is already included in our midpoint of the guidance.

Second, regarding CapEx. As you said, yes, EUR 100 million more or less, more than expected. I think that more than expected, more than -- it was in our financial framework but also anticipated in the last few quarters that fiscal year '20 is a year in which we want to invest. I think that not all the companies in the industry can afford it. And I think that we can be the one benefiting from the strong balance sheet that we are showing at the end of the year.

Regarding the potential suppliers in France, there is a historical commitment regarding the 2.5 gigawatts that we have in France, in backlog for Offshore, that we expect partially to be transformed into order intake this year. And regarding Taiwan, as Markus is always explaining, we are trying to take a very light-asset approach.

And finally, regarding free cash flow. I think that we have not changed our financial framework in that respect, so we expect positive free cash flow after Adwen payments for the next year, even with the increase of EUR 100 million of the CapEx.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

The next question comes from Sean McLoughlin from HSBC.

--------------------------------------------------------------------------------

Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [14]

--------------------------------------------------------------------------------

Looking at the external headwinds that you highlight, you talk of cost inflation driven by tightness in the supply chain, which would imply that maybe your suppliers are pulling up prices. Could you talk a little bit more about this, how significant is this impact in 2020? Is this happening globally or regionally, and which components?

--------------------------------------------------------------------------------

Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [15]

--------------------------------------------------------------------------------

Happy to take that question. You see from the overall market volumes, these fiscal year '20 and fiscal year '21 to some extent, but specifically, fiscal year '20 is a year of specifically high installations, predominantly in the U.S. and in China. So there's a significant demand on various elements of the supply chain. It goes beyond turbine components, it includes installation capabilities and so on. And given that situation, there is, as I said earlier, there is a tight competition in that supply chain in turbine component manufacturing, but as well as installation. Our current assumption is we are well prepared and we are well prepared for that one but we see still some irrational behavior in order to meet deadlines, and that is what might affect us going forward in fiscal year '20.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

The next question comes from Sebastian Growe from Commerzbank.

--------------------------------------------------------------------------------

Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [17]

--------------------------------------------------------------------------------

The first one is around Onshore and related pricing that you regard as attractive in specific regions and also your point of irrationality of some of your competitors. My question is -- and if you could comment on your expectations regarding the new 4-megawatt platform and the expected net gain eventually versus a prior turbine generation price, this sort of positive impact from bringing new generations to the market entirely eaten up by shifting the mix, the regional mix, to more competitive regions. That's the first question.

And then the second one, it's around the integration and restructuring charges. In our budget, EUR 200 million for 2020. First part here is if you could provide us with a drill-down between what is relating to the legacy as Siemens Gamesa business and what's the part related to Senvion integration in fiscal '20.

And if I may then take that discussion to a bit of a higher level. If we look back now at the most EUR 500 million of charges that you've been consuming or booking between 2017 and 2019, now there's another EUR 200 million lined up for 2020. What -- or when do you think this can go back to normal? Or is there sort of a structural need to come up with ever more restructuring every year going forward?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Let me answer your question on Onshore. As I said, we continue to iterate margins, and prices are stabilizing in the Onshore business despite on low level.

In order to counterbalance that, your second question was on products, what products are the main revenue carriers for fiscal year '20? That is our 4.5-145 machine that we're taking in the market. That will be the main revenue carrier. That is the machine also we were winning in China recently. We announced it is a global product that has been developed. At the same time, the market dynamics are so that new products need to be launched in order to stay competitive, and that's our next-generation platform, the 5.8-155,-170.

Revenue. The prototype will be erected in fiscal year '20, and revenue contribution from this new product will start from fiscal year '21, giving ourselves a new level of competitiveness with this technology. And that is why I clearly see fiscal year '20 a transition year, impacted by R&D, growth CapEx and so on, as elaborated by David. But clearly, giving a new product portfolio in '21 and beyond, and I can positively report on it attracts a significant interest out of the market. New technology will help us to drive LCOE further down but also improve our margins going forward.

On the integration, I will hand over to David.

--------------------------------------------------------------------------------

David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - Head of Corporate Development, Strategy & Integration and CFO [19]

--------------------------------------------------------------------------------

Yes. I think that in the integration were 2 questions. The first is if we are including this EUR 200 million, the integration costs from Senvion acquisition. The answer is no. I think that we have said that the guidance is excluding in all the KPIs, the acquisition of Senvion, but also we are guiding that the EUR 150 million associated to the full enterprise value that we can assign to these selected assets is included in that EUR 150 million of restructuring cost and carve out costs coming from Senvion.

Regarding what is coming from this EUR 200 million, I think that there are 4 elements that we would like to discuss. The first is, of course, simplification or accelerated simplification of our Onshore portfolio. As Markus explained, we want to accelerate the introduction of the 6 -- 5.8-megawatt platform and, of course, that means that we need to accelerate the phaseout of the former -- both legacy and Siemens Gamesa wind turbines past variants in our I&R cost.

Second is offshore simplification. I think that we were working in a kind of a 2 concept in Offshore. Now we are working into one concept. The third is, of course, restructuring, we have announced a restructuring effort to be done during the year. As we were saying, we are fully committed to achieve the 8% to 10% of -- in the midterm. And in that sense, we need to adapt to permanently adjust our footprint but also our structural headcount. And finally, we need to be also the leaders in the IT and digitalization, and this is part of the Offshore I&R cost.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

The next question comes from Akash Gupta from JPMorgan.

--------------------------------------------------------------------------------

Akash Gupta, JP Morgan Chase & Co, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

My question is on 8% to 10% medium-term target. If I'm not wrong, then this was originally floated by legacy Gamesa in a different market backdrop compared to what we had today. And this cold renewable space is very dynamic. And as you can also see from your 2020 guide and what you expected in CMD last year, I mean giving the medium-term guidance is very difficult in this environment. And given you have very limited visibility post 2020, have you considered lowering this 8% to 10% guidance or like -- I mean what gives you more confidence that this can be achievable after 2022?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Akash, thanks for the question. You rightfully said that is clearly communicated basically with the quarter 3 results that we will see a delay to arrive to that margin band, which we consider as a normalized margin band for the industry to be achieved.

Some of the adverse effects that we're currently facing had not been out there as we were discussing the industry perspective in earlier meetings. Seeing the short-term headwinds impacting fiscal year '20, and I have mentioned that and David has mentioned that, in terms of revenue change and revenue mix, investments in growth, in R&D, technology, but also some headwinds, some unforeseen headwinds out of the supply chain. I believe that the industry needs to size itself to achieve -- to arrive at those margins, and this is how we have set up our plans going forward. That, of course, includes further unforeseen by nature. But overall, I believe that is a margin the industry should target at.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

(Operator Instructions) The next question comes from Vivek Midha from Deutsche Bank.

--------------------------------------------------------------------------------

Vivek Midha, Deutsche Bank AG, Research Division - Research Associate [24]

--------------------------------------------------------------------------------

I just want to follow up on the 2020 margin guidance. Regarding the upper and lower end of the range, what sort of scenarios do you have embedded within that margin guidance that could get you to the upper and lower end?

--------------------------------------------------------------------------------

Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [25]

--------------------------------------------------------------------------------

As I said during my presentation, I feel -- we feel very confident with the midpoint of the guidance, and I mean that. There is, given the volatility of the market and you have seen that, all have seen that over the past month and year, there's certain upside potential and you've seen us performing quite well in a number of our businesses, so we will continue to work on our productivity increases. We will continue to work on bringing products earlier to market and other improvement potentials. We clearly see that. At the same time, I've mentioned and I think the most relevant there is some irrational behavior is still in the market due to an ongoing consolidation process. And so as I said, the midpoint, we feel very confident. At the same time, if the irrational behavior continues, the lower end -- the range of the guidance we have given is considered to be adequate. However, I reiterate the midpoint of the guidance is where we feel very confident.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

The next question comes from Ajay Patel from Goldman Sachs.

--------------------------------------------------------------------------------

Ajay Patel, Goldman Sachs Group Inc., Research Division - Executive Director [27]

--------------------------------------------------------------------------------

I just want to understand a little bit more on something. So you clearly highlighted a lower revenue contribution from your attractive Offshore business. Is there any indication you can give on the margins between Offshore and Onshore? Is 2020 numbers a decent [way] of the impacts that we're seeing here or just the delay of the Offshore wind project because it was a very large margin project?

And in terms of just helping us to look at how future margins will evolve, it would really be helpful if we could understand what the starting points were on Onshore and Offshore, even if it was just using 2019 numbers which you just reported.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Given the very good performance of Offshore in the last -- specifically, in the last year but also in earlier years, it has a significant impact if the Offshore revenue contribution goes significantly down from around 35% to under 30%, 25% going forward. So it is difficult reduction based on shifts of larger projects out driven by permitting requirements out of Denmark in these kind of projects. So that is a mechanical change and simply by shifting different revenue tools that we have. Having said that, we have enjoyed a very, very profitable Offshore margins in the past that is normalizing now. Still been accretive for the company, to be very clear. So this is a quite attractive business going forward. And at the same time, for a number of reasons, we don't disclose margins between On and Offshore. We disclose wind turbine generators as such in Service, and we will continue to do so.

--------------------------------------------------------------------------------

Operator [29]

--------------------------------------------------------------------------------

There are no further questions. Thank you.

--------------------------------------------------------------------------------

Cristina Perea Sáenz de Buruaga, Siemens Gamesa Renewable Energy, S.A. - Director of Financial Markets at Gamesa Corporación Tecnológica SA [30]

--------------------------------------------------------------------------------

Now we're going to take questions from the room. Fernando?

--------------------------------------------------------------------------------

Fernando Lafuente Seseña, Alantra Equities Sociedad de Valores, S.A., Research Division - Research Analyst [31]

--------------------------------------------------------------------------------

Fernando Lafuente from Alantra. The first one is on the revenue dynamics for 2021. I mean 2020 is going to be a transition year with this slowdown in Offshore, [decisional] slowdown in Offshore. I was wondering how we should expect this business to recover, on the one hand, and what do you expect from the Onshore business on the other? And in this sense, I would like you to also, if possible, to give us a sense of the commercial activity on the Onshore segment. You talked about this irrational behavior. How do you see this behavior going forward? It's possible still to have these players, or do they have a still cushion to be irrational for a long time? Or do you think they should stop at some point?

And the third question, it's a more specific one. You've done a great reduction of the gross debt on the potential savings. [What] this reduction could imply for the company.

--------------------------------------------------------------------------------

Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [32]

--------------------------------------------------------------------------------

So let me start with the -- going forward, with the Offshore business. Offshore is one of the growth potentials of Siemens Gamesa. Very clearly, we have a dip in 2020. But beyond 2020, it will continue to grow again above revenue contributions that we have seen in the past. So there is a clear growth prospect. The situation in Offshore is that this growth normally takes 2 to 3 years to grow through the revenue. So the order entry book, and we have talked about the backlog plus pipeline of over 12 gigawatts that takes 2 to 3 years to materialize in revenue. So we have that implications in -- specifically in 2020, already in '21, Offshore revenues will grow in 2020 to even stronger. So there is, as we said, the transitional year out of that one. So we see growth in Offshore. The second growth engine for Siemens Gamesa, as said, emerging markets, where we are from historically a very good performance, well positioned, and that's why we are especially proud to see the 1.2 gigawatt of order entry in India where we had been a question mark for a long time in the market without getting any awards. And we see now activity coming back in the market [where we could] very well position and have a leading position.

With regard to irrational behavior in the market, we are out of 6 global players, 2 are in [insolvency]. We are taking benefit from one, certainly when we do this, and I think in a very good way for the company, if you do the math behind the numbers we have given you. It is still an ongoing, it's still an ongoing struggle by one or the other players. Overall, price stabilization is there. But in specific pockets, we see still one or the other players acting in that way. However, I see a normalization of [that]. To some level I see the uncertainty with regard to fiscal year '20 more on the execution side than in the order entry side, as we have backlog average of 90%. So that is certainly firm. And part of our order backlog and the execution, having a very tight supply chain that poses some risks that we have addressed here. On debt.

--------------------------------------------------------------------------------

David Mesonero Molina, Siemens Gamesa Renewable Energy, S.A. - Head of Corporate Development, Strategy & Integration and CFO [33]

--------------------------------------------------------------------------------

Only to complement partially the commercial activity that you asked, Fernando, and I think that also it's very important to highlight the Service business. I think the Service business is growing at double-digit with what we have confirmed above 20% EBIT margin, and also the inclusion of the impact from Senvion after 2021 will help us to feel comfortable within the range of 8% to 10%. So it's very important to remark the Service.

Regarding the gross debt and the potential financial savings that we can save, we have reduced the gross debt in around EUR 238 million, the net debt, but because they have been more than EUR 1 billion, around EUR 1 billion. So yes, significantly, it has a significant financial improvement -- financial cost reduction, and we will more or less, say, around between EUR 4 million and EUR 6 million per year.

--------------------------------------------------------------------------------

Cristina Perea Sáenz de Buruaga, Siemens Gamesa Renewable Energy, S.A. - Director of Financial Markets at Gamesa Corporación Tecnológica SA [34]

--------------------------------------------------------------------------------

Thank you, David. And with this, we are going to conclude the call today. And if you have other questions, you can reach us through IR. And here's Markus.

--------------------------------------------------------------------------------

Markus Tacke, Siemens Gamesa Renewable Energy, S.A. - CEO & Executive Director [35]

--------------------------------------------------------------------------------

So let me thank you for participating in our earnings release for fiscal year '19 and the outlook for fiscal year '20 and beyond. And thanks for coming to Madrid, and thanks for joining the meeting via telecommunication. Thanks a lot.