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Edited Transcript of NDX1.DE earnings conference call or presentation 14-Aug-18 12:00pm GMT

Q2 2018 Nordex SE Earnings Call

Norderstedt Sep 12, 2018 (Thomson StreetEvents) -- Edited Transcript of Nordex SE earnings conference call or presentation Tuesday, August 14, 2018 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christoph Burkhard

Nordex SE - CFO and Member of Management Board

* Felix Zander

Nordex SE - IR

* Jose Luis Blanco Diéguez

Nordex SE - Chairman of Management Board & CEO

* Patxi Landa

Nordex SE - Chief Sales Officer and Member of Management Board

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Conference Call Participants

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* Alok Katre

Societe Generale Cross Asset Research - Equity Analyst

* Haiyan Ding

ODDO BHF - Analyst

* Ji Cheong

Citigroup Inc, Research Division - Senior Associate

* John Sykes

Nomura Securities Co. Ltd., Research Division - Anlayst

* Michael Boam

Sona Asset Management - Analyst

* Sebastian Growe

Commerzbank AG, Research Division - Analyst

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the Half Year Results 2018 of Nordex SE. At our customers' request, this conference may be recorded. (Operator Instructions)

May I now hand you over to Mr. Zander who will lead you through this conference. Please go ahead, sir.

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Felix Zander, Nordex SE - IR [2]

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Thank you very much for the introduction. Good afternoon, ladies and gentlemen. Here, I would like to welcome you on behalf of Nordex to our conference call for the first 6 month of 2018. With me are our CEO, José Luis Blanco; our CFO, Christoph Burkhard; and our CSO, Patxi Landa, and they will share the latest developments about the markets, about the company and the financial review. After the presentation, as you have already heard, we do a Q&A session. (Operator Instructions)

And now I would like to hand over to our CEO, José Luis. José Luis, please go ahead.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [3]

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Thank you, Felix. Good afternoon, ladies and gentlemen. Thank you for your participation. This is José Luis Blanco speaking. Here with me, my board colleagues, Christoph and Patxi. We will guide you through this agenda. First, I will give a short introduction of the situation of explaining first half results and, eventually, some comments around those. Patxi will guide you through the order intake, installation and market evolution. Christoph will share with you -- with us the financial performance of the company. And then I will close with a follow-up in strategy implementation, as well as the guidance for 2018. Then we'll open the floor for questions, and I will finish with the key takeaways for now with you.

So with this, please, if we move to the next slide, the executive summary for the first half of the year. Sales were EUR 957 million, substantial drop compared to the EUR 1.5 million half -- first half of '17. No surprises, as planned. EBITDA margin stands at 4% compared to the 7.8% in previous -- in the same period of the previous year. Again, no surprise. We are executing the year as planned. A good evolution in the working capital ratio, 5.8%, reduction from 9.8% in the same period of the last year. Order intake, a positive evolution in the last 3 quarters. In the first 2 quarters of the year, 2.1 gigawatts compared to the 0.9 gigawatts in the same period of last year. And out of those, 1.1 gigawatt in the second quarter, which is almost double compared to the same period of the previous year.

So with this, a book to bill ratio of 2.02, just talking about Projects business compared to 0.67 in the same period of the previous year.

It's worth to mention, as well, the first unconditional orders of the new turbine, Delta4000, received and we are in the prototyping phase of this new platform.

We received, as well, the largest order in company's history, nearly 600 megawatts in Brazil, one of our big global customers that continually repeat business with us. We -- this is very -- showing the commitment with our company.

And last, with the level of visibility we have today, we are clearly optimistic in meeting our full year 2018 guidance. So we confirm the guidance for 2019, the information we have in front of us.

So with this, I hand over to Patxi to talk about market, customers, installations and service.

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Patxi Landa, Nordex SE - Chief Sales Officer and Member of Management Board [4]

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Thank you very much, José Luis. Good afternoon, ladies and gentlemen.

Transition to auction-based mechanism has been mostly completed in the main European markets, where we see activity normalizing across the continent. The increase from energy targets are expected to underpin demand in the region midterm.

Germany passed the building permit requirement for participation in auctions. And therefore, now, this consolidates our expectations for 2020 to be the activity normalization year in that market.

LatAm continues to deliver volumes supported by auctions in Brazil, Mexico and Argentina this year. And India, as well, is expected to continue to deliver growth as well as South African market being back with the financial closing of around 4 projects and the announcement of around 5 later in the year.

In the first half of 2018, we closed 2.1 gigawatts of new turbine orders, totalizing over EUR 1.6 billion, which meant an increase of 125% in megawatt terms with respect to the equivalent period of 2017. ASP for the period was EUR 0.77 per megawatt. And close to 60% of the new turbine orders came from the America, 1/3 coming from Europe, is consolidating the diversified market mix in which the company currently operates.

Service sales rose by 8% in the period with respect to 2017 with a 17.5% EBIT margin and with a stable 97.7% average service fleet availability.

Turbine order backlog increased by 83% in the period with respect to 2017 to over EUR 3.1 billion, with an equally, well-balanced geographical mix. Service order backlog increased, in turn, to over EUR 2 billion.

Turbine installations declined by 17% with the supply chain showing the flexibility to adapt production capacity to the demand accordingly.

And with this, I hand over to Christoph, who will lead you through the financials.

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [5]

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Thank you, Patxi. Good afternoon, ladies and gentlemen. Also a warm welcome from my side.

Now I would like to guide you now through our first half 2018 financials. And as a starting summary, basically underlying, again, what Patxi and José Luis have said, I can say that our second quarter financials have fully developed according to plan.

After our decent order intake performance already in Q1, we expect it to continue at a similar level in Q2, which we were able to fully accomplish. At the same time, and also as communicated previously, we still had a lower operational activity level in Q2, but we expect the activity level to step up now throughout Q3 and Q4. So in a nutshell, the first half year came without any surprises.

Now if you go to the income statement, we look at sales of EUR 957 million and an EBITDA margin of 4.0%. All 45-by-18 measures are well on track. And the PPA depreciation of EUR 30 million is in line with the expected annual PPA depreciation of EUR 60 million.

Now going to the balance sheet. The main change in the balance sheet in Q2 is the second part of the special effect in the context of our green bond refinancing. We have already talked about it in Q1. And so as communicated earlier, we applied the full proceeds from the bond placement to an early repayment under the existing Schuldschein in order to extend our maturity profile. And as you know, we executed the first repayment in the amount of EUR 100 million in Q1 and the second payment in the amount of EUR 166 million in April, hence, in Q2. And as a consequence, our temporarily higher cash position and relating noncurrent liabilities in Q1, we discussed that we are now reduced again back to normalized levels.

With this, I would like to comment on our working capital development. When comparing the quarterly working capital levels in 2018 with 2017, we do see, so far, the same seasonality between the quarters, albeit on a significantly reduced level in 2018. And the increase that you see in Q2 2018 to 5.8% compared to the 4.8% in Q1 is related to the preparation for higher operational activity level that we will see in the second half of 2018. And that, of course, is reflected in the increased inventory levels shown on the right-hand side of the slide.

This brings me to the cash flow statement. The following 3 effects have mainly contributed to the cash flow development in Q2. Firstly, we do see the increased working capital, as just explained, resulting in a decrease of the operating cash flow. Secondly, we have a special effect occurring in the cash flow from investing activities. You only do see minus EUR 9 million and that, of course, is not in accordance with the CapEx slide you'll see later on. And this is the result of the received payment of EUR 30 million for our office building in the context of the sale and leaseback transaction. I think we have also touched upon it previously.

And thirdly, obviously, the outflow of the EUR 166 million due to the repayment of the second Schuldschein tranche in Q2 is reflected in the cash flow from financing activities. Our cash position at the end of Q2 stood at a solid EUR 484 million, I think, a very solid number.

Now going to the total investments. Looking at CapEx in Q2, total investments at the end of Q2 stands at EUR 41 million. And we do expect to catch up with our CapEx spend during the second half of the year, also fully exploiting the frame set by our guidance of approximately EUR 110 million for the financial year 2018.

And this brings me, last but not least, to our capital structure. And here, you do see, obviously, the increase of the leverage caused by the increased working capital, as previously explained.

So in order to sum up our first half financials, I would like to highlight the following 3 takeaways for you here. Again, the H1 financials are fully in line with our plan and expectations with an overall lower activity level during the first months stepping up in the second half of the year.

Secondly, working capital and cash development compared to Q2 2017 and continues to point into the right direction and follows the communicated trend. We expect to reach our working capital guidance. And we will see a positive impact on the cash flow accordingly.

And thirdly, José Luis mentioned it already, we confirm our 2018 guidance.

And with this, I hand back to José Luis.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [6]

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Thank you, Christoph. We would like to take this opportunity, as always, to follow up on the implementation of our strategy, the main pillars of the strategies. First, leveraging our global market presence. And as has been reported, order intake is mainly coming from Brazil, South Africa, Mexico, Chile, U.S., Turkey, France and Sweden. So we are considered a top 4 global player of the industry, and this is paying back.

Second, developing a comprehensive and COE optimized product portfolio to cope with the price pressure and to continuously lower the cost of wind turbines. We are optimistic that we can keep lowering cost of energy high single digit, as previously reported. And in this line, the first turbine of the new-generation Delta4000 already show that this is possible. We expect additional order intake from this platform in the second half.

On top of that, the best-selling AWP3000 (sic) [AW3000] is getting the confidence from the customers and, in that aspect, we are as well prototyping as we speak, a 140-meter rotor for this machine, very relevant for low wind markets, India, among others. So well on track on developing cost of energy, optimize products and supply chain for those products, which is point number 3.

As previously reported, we are shifting production and procurement to best cost countries to serve demand. We are progressing as planned. This is especially relevant, India and China. In India, as we speak, we are ramping up blades, and we are ramping up nacelle capabilities. We plan to produce there close to 20% of the nacelles in 2019, which is going to help to improve profitability in 2020.

Number 4, operational efficiency. As previously mentioned by Christoph, the 45-by-18 program that was concluded last year is very much bringing the expected savings. And we are continuously adapting our structural cost to the requirements of the market. And as well as previously mentioned by Patxi, the service business is growing based on very good order intake development as well as a high renewal rate.

So with this, just to reiterate our high visibility for 2018, so the guidance keeps unchanged. Sales, EUR 2.4 billion to EUR 2.6 billion; EBITDA margin, 4% to 5%; working capital below 5%; and CapEx, which is somehow the normalized CapEx for the company, around EUR 110 million.

With this, I would like to open the floor for Q&A, and I will get back to you for the takeaways.

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Felix Zander, Nordex SE - IR [7]

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Thank you very much. And after that, the line is now open for questions, and we are happy to take them.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Sebastian Growe, Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [2]

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Three questions, obviously. And the first one to start with is on the gross margin. And overall, I think, a pretty decent development in the first half of the year, in part, driven, I think, by the, how can I say, seasonally strong contribution of the service business. However, what I'm trying to get a better understanding of is clearly the margin quality and the order backlog. So can you just talk us through what you see currently with orders on hand? And what is the related COE or COE reduction in order to, say, maintain the gross margin at the mid-20% level in the coming years?

And then the second question is on the recent turmoil we've seen in, for example, Argentina and also Turkey with the related currencies. And given that you have a pretty strong exposure to both countries, can you just remind us of what the potential translation -- transaction effect might be in those markets, how you simply build up a line of defense, if I put it this way, and what the eventual counterparty risks might be going forward?

And then thirdly, and to finish with, on Germany, I think, last time around on the quarter 1 conference call, you were pretty, what can I say, hopeful that we would see a final decision on the rather near future on what is going to happen to you on special auctions, et cetera. We have now seen, obviously, (inaudible) presenting a new net plan -- or network plan. And can you just talk through the German market, what you see there, what you expect in terms of the special auctions, in particular, and how you feel prepared for capturing growth if and when growth comes back in the German market?

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [3]

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Good. Thank you very much, Sebastian. It's Christoph here. Let me start to answer question number 1 and then also number 2. And my colleagues will simply jump in and -- it seems as appropriate. With respect to the gross margin question and the underlying quality of the backlog and also your question related to COE and looking ahead, let me comment on that as follows. Our Q1, Q2 gross margin is, as you already mentioned, also with the addition of service, but also with respect to a favorable scope mix, is good, but not necessarily representative for the overall backlog. I mean, we are looking at a very strong gross margin here, which should not be taken as a basis for the entire backlog and as a basis for potential expectations in 2019. That would be -- certainly be overoptimistic.

With respect to COE and the outlook, I would like to refer to our strategic outlook as per Q3 of the previous year where we mentioned that, of course, we do -- our aspiration level in terms of COE is high single digit. That is unchanged, and that's what we are striving at. And at the same time, we have mentioned for '18 and '19 that we will not be able to fully compensate the price pressure by the respective COE. And that is also as mentioned there, and I think we haven't changed our views on that. That is still true also with respect to 2019. So we will not be able to fully compensate this COE. We still do see price pressure. And the baseline to apply those calculations is lower than the existing margin level as per today because this is definitely benefiting from legacy projects, from scope and from service. And I hope I can -- could answer your question in that direction.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [4]

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May I just quickly follow up on that one, sorry for that, on the COE reduction? And the price comments you made with (inaudible) on other conference calls that most other turbine suppliers are, what can I say, a little bit more -- relaxed is maybe the wrong phrase, but at least not as bearish on the current pricing trends. So can you just share with us what you see? So do we see pricing stabilizing from a pretty, pretty steep decline in the year 2017? And do you see still irrational behavior for one of the other suppliers in the market? So can you just give us a bit more light on that one?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [5]

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I mean -- this is José Luis. I mean, the delta between price and COE reduction, which is expected margin, we see a trend towards stabilization. But this doesn't mean that this is going to kick in, in the P&L of next year because this is the order intake that we will -- are landing and we are about to land on a 3-year revenue in 2020. And it's 2020 where we will see the result of this stabilization between price pressure and COE. So COE able to compensate price pressure. We will see the P&L result in 2020, not this year, not next year.

So overall, and maybe to give you and the rest of the participants a little bit overview how we see the company and the market, I mean, '19, we are, as we speak, in the planning phase, so it's too early for us to make a judgment on how '18 is going to -- or '19 is going to look like.

With that being said, we see substantial increase in activity in our plants in '19. In Germany, in both plants; in Spain; and especially in India. How much of this increase in activity is going to translate to revenue? Not all of the increase in activity is going to translate to revenue because the consumption, most of it is in the America. There is 6 weeks lead time, plus the installation, so this will somehow have -- is due to IFRS 15. Not all the increase -- not all the substantial increase in plant activity is going to translate to revenue in '19. Margin '19, as explained before, margin '19 is a result of the price pressure of the past and of the ability to reduce COE of the present.

So as Christoph mentioned, '19, we will not fully compensate. 2020 is a different thing. I mean, 2020 we have in the history of this -- or at least, in the recent history of this company, the best long-term visibility ever in terms of volumes where we see big volume in 2020 to be delivered. And there, we will see the effect of this stabilization in the price pressure versus COE, combined with the German volume coming back, that Patxi will speak about that, and some good South Africa projects as well other projects where concrete towers bring a competitive advantage versus the deterioration of margin in steel.

So all in all, '19, we are more confident to have improvement in '19 -- in '20. In '19, we'll see. I don't know if this has bring clarity or more uncertainty.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [6]

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No. That's very clear. So if we could then take the questions around the Argentinian and Turkish currency.

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [7]

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Yes, Sebastian. You were asking about transaction and translation risk, and I would like to answer that as follows. If we now start with the example of Turkey, I mean, Turkey has a feed-in tariff system that is basically pegged to the U.S. dollar. And our contracts are all, and that is also valid for service, not only the project contracts denominated in euro. So contractually, we do not have any exposure here. And now you can, of course, ask the question looking forward, how does the market risk and also potentially the counterparty risk develop here? I think that we're all dependent, and we all can only speculate here how will Turkey manage now the short-term challenges with adjustments in the economic policy.

We believe that they will stick to some economic rationality here because any intervention in basically cutting the current mechanism of the feed-in tariff impact to the U.S. dollar would, of course, cause major disruptions in the credibility of -- with respect to (inaudible) and the entire financing. So we believe -- or we don't see, for the time being, any specific counterparty risk coming up here. But of course, that depends on how will they now continue with -- or how will they react in terms of economic policy.

But again, as far as transaction, translation risk is concerned, none for us, so far. Translation risk, any way, for us, that I can say Q2, the importance of the currency, you would rather see then in the relation to the U.S. dollar. There, and depending on the currency developments, you could eventually see visible translation impacts on revenues, which we do not see for the time being and that, to a certain extent, is similar for Argentina here. I hope I could answer your questions.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [8]

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Very helpful. And then finally, on Germany, I guess Patxi (inaudible)?

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Patxi Landa, Nordex SE - Chief Sales Officer and Member of Management Board [9]

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Sebastian, yes. With respect to Germany, regardless of what the final position of the regulator is, because there have been some backwards and forwards in that sense, what we are doing is trying to capture as much permit market share as we can. And in that sense, what I can share with you is that due to the right time to market of the N149, I can share with you that customers are having a very favorable reception of that product, and that we are doing our job in that sense. So that when the market comes back, we are already in the permits.

And in that sense, this is what I wanted to share with you, this will not have an effect in 2019. We still see the recovery of the market in 2020. And therefore, the work that we are doing will have a P&L effect in 2020 only.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [10]

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Okay. And just for clarity, on the special auctions, in particular, is there anything that you can update us on? I think you will let [Frankfurt] sitting in Berlin and...

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Patxi Landa, Nordex SE - Chief Sales Officer and Member of Management Board [11]

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Yes. The assumption that we are taking in the business plan is that they will not take place. We are taking the conservative assumption that the volumes will stick to what the plan was. And then if special auctions or auction mechanism change, we will adapt accordingly. But so far, we are taking the conservative approach of no change in that sense.

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Operator [12]

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The next question is from Ji Cheong, Citigroup.

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Ji Cheong, Citigroup Inc, Research Division - Senior Associate [13]

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Ji with Citigroup. I have a couple of questions. On -- first, on your EBITDA margin target for 2018. Given that your first half margins were at 4%, I mean, now for the full year, where -- around where do you expect? Do you expect that your full year margins to be at the lower end or the mid-range or if -- at the higher range? The -- where do you expect the pickup, if the latter? And then on -- secondly on the steel price hike, so what -- are you seeing any impact on your external suppliers then potentially trying to pass on the cost to you?

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [14]

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Ji, this is Christoph here. I will start with the first question on -- to be honest, I still do not feel comfortable to further specify the guidance at that point in time. I would rather basically stick to what we have been communicating so far, 4% to 5%. And again, looking at the overall relatively low level of revenues that we are looking at in 2018, to me, there is, let's say, limited scope to -- for already seeing operational leverage kicking in big time. So I would rather keep it as it is, yes.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [15]

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Regarding steel price, you know that almost 1/3 of our towers -- well, first of all, towers is a big ticket for steel consumption in order to supply the committed volume that we have closed with -- back to back from our suppliers. So we will see margin deterioration due to steel increase. Steel increase could affect future business. But we do think that we are well prepared, or I will say, slightly better prepared than other competitors to deal with this situation. We have a concrete tower technology. We do 1/3 of our towers in concrete in Mexico, in Brazil, in Argentina, in Chile, in South Africa, in India, in Spain, in Germany. And if steel is getting more expensive, we -- the natural tendency is that customers are going to procure more concrete towers that are less sensitive to steel price.

So to make a long history short, the year is not affected by the steel price. Deferred commitments are backed up by deferred commitments from our suppliers. The future business impact, at least, we have a solution that is going to help the company to deal with that better than other competitors eventually.

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Operator [16]

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The next question is from Alok Katre, Societe Generale.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [17]

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Alok Katre from SocGen. Well, perhaps, just maybe following up on the steel tariff. I kind of appreciate that you would have backup technology in terms of concrete towers and 1/3 sort of seems quite a good number to go there. I just wondered also whether you are seeing any sort of recourse to customers by way of higher prices where you're not, let's say, using concrete towers in that case because, clearly, one of your peers was quite downbeat in terms of the ability to pass any prices down to customers and then specifically in the U.S., of course. So that's question number one and then I have a couple of more.

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Patxi Landa, Nordex SE - Chief Sales Officer and Member of Management Board [18]

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Yes. Specifically, this applies to the U.S. where we are not selling our products with concrete towers there. Given the dynamics of the market, it's very little that we can pass through pricing increases into the contracts to our customers. So therefore, any potential future impacts that we might see, would mean margin deterioration in those projects. However, as José Luis was saying, there is no short-term impact of those increases as they are back to back with the suppliers in the existing contracts that we have.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [19]

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Okay. Okay. Fair enough. Then my second question is -- I mean, I was just looking at your commentary on 2019 and the cost of the COE versus price differential. And by the looks of it, you should still see negative difference between the pricing and the COE in 2019, as well. Should we take that as a bit of a warning in terms of 2019 margins versus, let's say, where consensus expectations are today at around 60% EBITDA margins?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [20]

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I think we cannot guide you one direction or the other. I mean, honestly, we are about 4 weeks to finalize our planning process, to submit our budget, to communicate, to prepare ourself to guide the number. So our normal calendar is that, now, as we speak, we are in the planning process for budgeting '19. As we mentioned before, nice volumes still to be seen in the margins. We gave you a pendency in the next quarterly call about trends. And we will give you the guidance in first quarter of next year. This is the best we can do at this time.

So optimistic about volume. We need to further analyze the EBITDA margins. We see that there are, I would say, positive effects for 2020 because this is, let's say, margin stabilization that we see today and the order intake will kick in, in 2020. We see German coming back in 2020. We see that the production capacity that we are ramping up in India where we plan to produce 25% of our nacelles are going to have an impact on the margins, on the revenue recognition and margins of 2020. That margins in 2019, too early.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [21]

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Okay. Okay. Fair enough. I mean, what's -- what -- I mean, is it then fair to say that only volumes are not going to be enough for you to offset the COE price differential? Is that what you are sort of trying to hint at? And then, therefore, are there any other steps that you are sort of looking at, as well, to, let's say, improve margins, forget, well, nothing specific for '19?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [22]

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The 2019 margin is mainly a function of volume, cost of energy reduction and price of the order intake. And if the price -- if the order intake in the -- if the per unit price COE is not capable of compensating, then it's a question of volume and deterioration, what weights more. And -- but it's too early for us to comment on that. We just don't have the information.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [23]

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Fair enough. And my last question was really on the free cash flow side of things. I guess, if we do the math then, this year should be pretty low in terms of the free cash flow level, if positive at all, if I exclude the headquarter sort of sale and leaseback proceeds. I was just wondering where we stand in terms of the cash flow or interest coverage, covenants on some of the sort of bonds and how much headroom do we really have against those. Clearly, I mean, what the cash flow has been, let's say, a bit weak and you still would need to invest, I guess, even in the next 12 to 18 months in terms of products as well. So...

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [24]

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I can tell you -- Christoph here. I can tell you that there is no change, whatsoever, from what we have mentioned previously. We do have ample headroom in every respect. Everything that you have been seeing now over the previous 2 quarters was absolutely planned and reflected in our covenants. And you see our cash position. We believe that our free cash flow will, in accordance with working capital, develop positively. I'm not saying positive, but positively, just to be clear first. We need to get the steps back to, what, 0. But we will see a further positive development. We have EUR 484 million cash end of June. Covenant situation is with ample headroom, so there shouldn't -- anything to fulfill or to follow our CapEx planning on the liquidity side. Absolutely no problem.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [25]

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Okay. Fair enough. Yes. I was just wondering because the bonds are trading at very high sort of yields close to 8.5%. So I just wondered if the debt markets were seeing this a bit more differently.

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Operator [26]

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The next question is from Michael Boam, Sona.

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Michael Boam, Sona Asset Management - Analyst [27]

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I just want to pursue a bit further on 2019. I appreciate the point has been somewhat labored. You must have a feel for your gross margin on the backlog just coming through in 2019. And I'm slightly surprised that you're not prepared to commit to any EBITDA margin guidance for that year. I would have expected -- or I think the market expects, at least, some improvement in 2019. And then, obviously, significant improvement in 2020. What is stopping you giving guidance at this point in time?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [28]

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Because that's not responsible from our side. I mean, we are in just in the middle of the planning process. I mean, we don't have visibility. Although we have a good visibility of the order intake and of the order backlog, we are still in the middle of the negotiation with our suppliers to know where the cost is going to land. We need to understand the delivery schedule of the backlog. And we need to budget 2019. And we should be more comfortable to adhere to the normal financial calendar of the company. I think we -- there is no reason why we should do an exception to the financial calendar of the company. I mean, we are executing our strategy. We are following our roadmap to supply chain transformation, to launch securing long-term order intake. So things are very much as planned, so there is no reason for doing an exception.

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Operator [29]

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There is a follow-up question of Sebastian Growe of Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [30]

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So it's mainly on the order guidance. Patxi, you made a comment on, for example, the South African H2 situation, talking about 5 projects that expect clarification in the second half of the year. So the basic question is, after we have seen really very, very strong order intake for the last 3 quarters with always shipping 1 gigawatt or more, can you just give us a feel of how the pipeline looks and, yes, where you see the greatest potential, particularly for the second half of the year?

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Patxi Landa, Nordex SE - Chief Sales Officer and Member of Management Board [31]

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Thank you, Sebastian. As you know -- very well know, given the great nature of the business, we are not guiding order intake. But what I can provide to you is some flavor with respect to second half of the year, which we see in a similar evolution to the first half of the year. This will include, as you were questioning, specifically to the South African projects. This will include part of the South African pipeline that we have had in the past that will materialize into order intake. But generally, the trend will be in the second half in similar terms with respect to what we have seen in the first half of the year.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [32]

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Okay. Impressive. And then second question on the order backlog. You don't really disclose the megawatt volume that is sitting in the project's order backlog. But assuming that it's around 4 gigawatts or a little higher, eventually, can you just give us a sense of how much really should come into execution for 2019? Are we talking now 3 quarters or whatever would be a realistic assumption for an outsider? That would be very, very helpful to model the company a bit better.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [33]

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Yes. No. Thank you for the question, but this is -- at this stage is hard to give you a number because we just haven't finalized the planning process, which we can share with you is the level of activity in our plants. We see substantial increase in activities in both plants in Germany, a substantial increase in activity -- or strong increase in activity in Spain and a very substantial increase in activity in India. How much and how many of those units are going to translate into revenue? Too early. Again, we need to finalize the planning process. And given the new IFRS 15, figure out how many units are going to be landing in the destination, how many units are going to be installed and how many units are going to translate from inventory to sales. But the expectations for activities is very positive and without CapEx involved because we were running our supply chain due to the drop in Germany with very low level of utilization. We plan to do substantially more activity in the plants without a special CapEx involved other than the normalized things to do.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [34]

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Yes. That's well understood, especially the IFRS impact and how difficult it is really to have a credible assessment at this point. I mean, I think it's not -- it shouldn't be understood really as a half guidance, but indicates at least we know about the Brazilian projects. Roughly 600 megawatts is going to a very large extent in 2020. And it's difficult, obviously, to keep track of all orders announced. And yes, it's just really the question, how much if you just look on the order announcements and of what currently is in the books, if it's really roughly 4 gigawatts, if that is the right ballpark number on the order backlog? And how much of that, at least, is planned status quo on the base of the announcements? How much of that roughly should flow into 2019? That's basically the question I'm absolutely happy with.

Just a rough estimate being, like, 70% or whatever you could feel comfortable with, but that would simply help to just overcome the uncertainties that currently cross the many market assessments we'll have.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [35]

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Let's give you some information around this. I would say, the best margin projects will have a P&L effect in 2020 or most -- or at least, the best gross margin of the order backlog or some of them are going to -- most of them are going to have installations in 2020.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [36]

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I was more asking about the volume impact for [your wallet].

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [37]

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I mean, volume, at this point, we just don't know because it's not even up to us. We are now in the final project management negotiation, project by project, installation schedule, permits from the customers. Very important to mention that what we report here is firm and unconditional order intakes. But the schedule is not in our full control. We are producing as a contract schedule, but this might slightly get delayed for whatever reason. We don't have this information available today.

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Operator [38]

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There's a next follow-up question of Alok Katre, Societe Generale.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [39]

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Just following up from the previous sort of question. If I look at some of the largest sort of orders that you've had in the last sort of few months that you've disclosed, by the looks of it, it seems it's -- a lot of those will be due for, let's say, the second half of '19 and beyond. Now I appreciate you probably have a few U.S. orders from the pipeline conversion that you might sort of see in the second half. But maybe, I can ask this differently and say, okay, how well covered is your production plan over the next sort of 12 months or so given just some of the timing that we've sort of seen in the orders? Maybe if you could provide some color on that.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [40]

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I mean, the production plant is, I will say, has one of the best-ever visibility covered by firm and unconditional orders. So this is not the concern. The -- I would say, the uncertainty is a little bit on the installation and schedule, which is what drives revenue recognition and margin recognition. And this is to a certain extent, as well, out of our full control. And the closer we get to the Q1, the more certainty we have because customers have more visibility about their installation schedules, I mean. If we ask today a customer, "Well, are you committed to this installation schedule?" They are going to get back, "Sure. We are committed to what we signed in the country -- in the contract." But reality is things sometimes get delayed. This is not going to have an effect into the activity of the company but might have an effect into the revenue recognition of some of the projects.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [41]

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And is there any particular region in which, let's say, this uncertainty is more than usual, let's say, versus the rest of your businesses?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [42]

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I will say that U.S. is quite clear because it's a hard stop normally end of the year. But U.S. order intake was not so good in the first half of the year. So we -- of course, we have our ambition to do so on order intake in the second half. That is going to translate into activity next year, so U.S. is not very much under question. But other than U.S., especially the big projects in LatAm, in South Africa are subject to the last-minute permit requirements here and there that affects our customers' planning and, as a consequence, our planning as well.

With -- so just to reiterate that this eventual delay is not going to affect our working capital because, in most of the cases, what real life is, is that most of the customers, they still want us to deliver the nacelles, to have the nacelles ready to install or store in a harbor in origin or mostly a destination, so not affecting. And inventory is paid by the cash flow of the projects, so there is no cash flow issue. It's a revenue recognition issue. And the closer we get to the end of the year and to the first quarter of next year, the more certainty we have to guide you through the real revenue and margin guidance.

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Operator [43]

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The next question is from John Sykes, Nomura.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Anlayst [44]

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Just kind of building on what you just said, can you just walk me through a little bit on the liquidity planning? I get what you're saying about cash flow if the schedule shifts, that's not going to impact that. But I guess, the other side is when you do your planning, what are you planning in terms of cash balances in terms of Q3 or at the end of the year? What is that telling you, I guess?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [45]

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I would say, 2018, we are fully committed to deliver our guidance. We have other than the -- some, I will say, logistic issue. But other than major project risk, we are fully committed to our guidance. 2019, we see substantial increase in activity. And it's too early to guide you in how much of this increase in activity is going to translate into revenue and what the margin of 2019 is going to be and the working capital. But 2019, the company is going to have a substantially -- substantial more activity than 2018. And 2018, full committed to the guidance.

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [46]

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If I can add one thing here, for me, there is -- if you want to little bit simplify it, there is one open topic as every year in that respect, as José Luis said. I mean, 2018 is very much planned. I mean, the schedules are what they are. Inflows, outflows are planned. The only variable, as always, are the prepayments to what year, and that's classical. And that's, of course, we try to steer with utmost discipline as every year. But there is always a certain movement. We saw that last year. We saw it the years before in that business. We always do see a home run at the end of the year, whether we like or not. Last year, we saw it extremely, again, in the U.S. And again, as per today, there is absolutely no reason to see any deviation from plan. That, from my point, is the biggest -- always the biggest short-term uncertainty. But even that is not really -- I mean, if worse things happen, then you see a shift of 2 weeks or whatever, which is not nice in terms of numbers. But otherwise, liquidity planning is fully clear and predictable.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Anlayst [47]

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You're confident with the cash on hand that you're fine for the foreseeable future, right, for 2018. Okay.

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [48]

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Yes. I mean, we are -- as you know, we are talking about varying levels according to seasonality between EUR 400 million and EUR 600 million. I think I've mentioned previously that because I have received also in the past from investors the question actually why we keep such a high level of average cash, and I kept explaining that within our industry and also to what our customers, it is simply experience tells you that this is a good level to have. We have never been, over the previous years -- many years, despite all seasonality, even coming close to falling below EUR 300 million. So this is a very, very decent buffer. However, on the other hand, this is, what we believe, is prudent to have. And therefore, that is basically our assumptions on which we plan our liquidity.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Anlayst [49]

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Okay. You said EUR 300 million, right, cash on hand. That's kind of what you use to operate. Is that...

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [50]

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That is basically -- if I'm being asked why we do carry such a high level of cash, then as a rule of thumb, we say that we want, at all times, be at EUR 300 million plus, yes? And so far, we have been with -- [the internet] we'll always be on that number, yes.

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John Sykes, Nomura Securities Co. Ltd., Research Division - Anlayst [51]

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Yes. No. Because -- I asked because it ties back with a question somebody asked before in terms of bond buybacks because, presumably, if you're over that number, you could use some of that cash to buy back the bonds because, I think, as you said, you are over 8% right now. So it's 90 -- it looks like 93.

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [52]

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But that's not our intention, no. I think we'd rather -- again, in terms of -- we would rather focus now on our investment planning and also keep, let's say, the key ratios as per market and the customers are used to and expecting us -- expecting from us to deliver. So there's no intention to buy back any bonds here.

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Felix Zander, Nordex SE - IR [53]

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This is Felix speaking. We can take one last from your side. All other, who can't ask questions, my team and I, we are happy to take them afterwards and -- since we are running out of time right now.

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Operator [54]

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The last question is from Haiyan Ding, ODDO BHF.

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Haiyan Ding, ODDO BHF - Analyst [55]

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Just a brief question. You mentioned Turkey. So I -- could you tell me maybe the range of how much does Turkey as a market make out of your order backlog of your current revenues? I don't need exact numbers.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [56]

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Yes. Turkey is to be second or third largest market in Europe for many years. The relative weight of the market in the overall sales of the company is decreasing, and to a level of less than 5% in the future of the total sales.

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Felix Zander, Nordex SE - IR [57]

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Okay. Thank you very much for all your questions and discussions. And now we are closing the Q&A. And I would like to thank you for your attention. And I'm happy to pass over the word to José Luis for his final remarks.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [58]

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Thank you very much, Felix. Thank you very much to all of you for your questions. As a key takeaways to close the session, I will say that first half is developing as expected. No surprise. Second half, as we speak, show higher activity level with increased revenue and installations consequently. In the technological side, it was mentioned the development of the Delta4000, the first orders, prototype as planned, as well as the new rotor for the best-selling 3 megawatt AW platform, prototyping as we speak and with good perspective to generate sales in the next quarters. Number three, diversification across volume and growth markets is paying out. And volume in the market is coming back. We have a good visibility and a nice level of activity for 2019, and one of the best visibilities 2 years ahead. In the recent quarters, we never had the level of visibility for 2020 as we have today. We are executing the supply chains' transformation towards competitive countries, adapting to follow the demand in the best profitable way, especially ramping up China and mainly -- and especially India for Indian market to support our Indian market needs as well as to support products from India to the neighboring countries, Africa, Australia and other countries. And last but not least, I think market recovery is expected in the midterms, especially in Germany, as Patxi mentioned, with a nice recovery in market share from the permits, which will translate in the future in orders and revenue.

So with this, thank you very much for your participation, and have a great day.

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Felix Zander, Nordex SE - IR [59]

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Thank you very much. Thank you.

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Christoph Burkhard, Nordex SE - CFO and Member of Management Board [60]

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Bye-bye.

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Operator [61]

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Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.