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Edited Transcript of NDX1.DE earnings conference call or presentation 14-Aug-19 12:00pm GMT

Half Year 2019 Nordex SE Earnings Call

Norderstedt Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Nordex SE earnings conference call or presentation Wednesday, August 14, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christoph Burkhard

Nordex SE - CFO & Member of Management Board

* Felix Zander

Nordex SE - Head of IR

* Jose Luis Blanco Diéguez

Nordex SE - Chairman of Management Board & CEO

* Patxi Landa

Nordex SE - Chief Sales Officer & Member of Management Board

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Conference Call Participants

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* Alok Katre

Societe Generale Cross Asset Research - Equity Analyst

* Anis Zgaya

ODDO BHF Corporate & Markets, Research Division - Analyst

* Ji Cheong

Citigroup Inc, Research Division - Senior Associate

* Markus Schmitt

ODDO BHF Corporate & Markets, Research Division - Fixed Income Analyst

* Sean D. McLoughlin

HSBC, Research Division - Associate Director of Clean Technology

* Sebastian Growe

Commerzbank AG, Research Division - Team Head of Industrials

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Presentation

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Operator [1]

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Dear ladies and gentlemen, welcome to the conference call of Nordex SE.

At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Mr. Zander, who will start the meeting today. Please go ahead, sir.

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Felix Zander, Nordex SE - Head of IR [2]

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Thank you very much for the introduction. Good afternoon, ladies and gentlemen. [Herewith] I would like to welcome you on behalf of Nordex to our today's conference call.

Our Board member José Luis Blanco, our CEO; and our CFO, Christoph Burkhard; and our CSO, Patxi Landa, will give a presentation guiding you through the latest developments, the markets and the financials of the first half of 2019. Afterwards, as you have heard, there will be a Q&A session. (Operator Instructions)

And now I would like to hand over to our CEO, 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. Thank you to all of you for participating in our half 1 2019 results presentation and analyst call.

We have prepared for you today a standard agenda. I will start with an executive summary, as usual. Patxi is going to guide us through good development in market and orders. With Christoph, we will dig into the financial performance of the company. I will go back to share with you news on operation and technology as well as a review on evolution on executing the -- our strategy, to finalize with the guidance for 2019, opening the floor for Q&A and a final remark and takeaway from our side.

So with this, let's move to the executive summary. I will say the headline here is half year in line with expectations and, to be more specific, sales approximately EUR 991 million. We will see later on that the revenue number is different, preparing the company for second half of the year. EBITDA margin in the first half, 1.7%. Working capital ratio, minus 4.7%. It's very remarkable that second quarter was a very strong, I will say, record-high quarter with order intake of 2 gigawatts. Very remarkable as well the success of U.S. market, together with the introduction of Delta4000 in U.S. market. As a consequence, book-to-bill ratio stands of 2.61 in the first half, clearly signaling the future growth expected in -- for the Nordex Group.

We announced today the introduction of a new product, an evolution of a bigger rotor of our Delta4000 platform. With this new rotor 163 meters, we can achieve more than 20% annual energy production on a typical low-wind site and offering the same flexibility with the different power modes and sound modes as the normal 5-megawatt range. As well worth mentioning, in Q1, and the same is to be said in Q2, the key structural patterns for 2019 still remain valid as already presented, which means a high level of activity planned and expected in the second half.

With this -- with the visibility we have in hand, guidance for 2019 is confirmed. And we would like as well to mention that the CapEx for 2019 was decided to increase to around EUR 160 million in order to support profitable growth in 2020 and beyond driven mainly by, I will say, additional demand than previously planned for Delta4000. And you'll remember that we already signaled you the possibility in our Q2 call that we were starting that. We saw good volume margin opportunities that require further investment in supply chain, and we decided during the quarter to take that volume and to prepare the company moving forward.

With this, I would like to hand over to Patxi to share with us market and customer as well as order intake and order development.

Thank you.

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

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

Let me share with you a view on the main markets this quarter.

We see a positive momentum in the U.S. beyond 2020, but we start to see evidence now that 2021 might actually exceed initial expectations and be another big-volume year. As well, we continue to see good activity levels in most of the main European markets, like Spain, France, Turkey or the Nordics, with the exception of Germany where the market does not yet show signs of recovery and continues to experience very low levels of activity, with significant undersubscriptions in the auctions. Despite this, we achieved 2 gigawatts of new turbine orders in the second quarter, for a total of 3 gigawatts of new orders in the first half of the year. That represents a 45% increase over the first half of 2018. In monetary terms, this corresponds to EUR 1.3 billion new orders in the quarter and EUR 2.1 billion of new orders in the first half of the year.

To have achieved this growth in a moment of significant weakness of a traditional main market like Germany proves our phenomenal global market footprint and customer base. Additionally, we will benefit from the German market recovery, whenever that takes place, as we are achieving a very good penetration with our newest turbines in the projects that are currently undergoing the permitting process.

ASP for H1 2019 was EUR 0.70 million per megawatt, consolidating the price stabilization experienced over the last quarters.

Service segment grew 12% quarter-on-quarter, with EBIT margin of 17.3% in the first half of the year, continued with this solid performance. Service backlog increased as well to EUR 2.3 billion. As a consequence of the good sales performance, turbine order backlog increased to EUR 5.3 billion at the end of June 2019, which represents a 65% increase over June 2018. 44% of the backlog sits in Europe, 41% in the Americas and 15% in the rest of the world. Combined order backlog rose to EUR 7.6 billion at the end of June 2019.

And with this, I hand over to Christoph [who will walk you] through our financials.

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

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Thank you, Patxi. Good afternoon, ladies and gentlemen. Welcome also from my side.

So I would like to guide you now through our first half 2019 financials. The first half 2019 went according to plan on an anticipated lower level compared to the second half, as communicated previously, and also José Luis mentioned that already.

And now starting with the income statement.

Sales of EUR 991 million do show the back-end-loaded structure of the financial year, but in contrast to the Q1 sales number, the Q2 sales number and, as a result, the H1 sales number are already exceeding the first half in 2018. And to our best knowledge today, we still expect the roughly EUR 1 billion in sales in H1, accounting for approximately 30% of the total year-end sales number, as I have already indicated in our calls in March and May. The significantly increased total revenue number of EUR 1.6 billion compared with EUR 1.090 billion of the previous year gives a clear indication of the steep sales curve ahead of us in H2.

Also in line with previous indications, gross profit margins start to normalize. The margin has come down in Q2 to 27% from the exceptionally high level of 35% in Q1, leading to a combined 30.6% in H1. And eventually also the EBITDA number of EUR 17.1 million, representing an EBITDA margin of 1.7%, is a consistent H1 result stemming from the still low sales volume and the consequence of still a higher proportion of fixed costs.

Now going to the balance sheet.

Also here the effects of the preparation efforts for the high installation volumes in H2 are clearly visible. Current assets, hence inventories, have further increased compared to Q1, leading to a further temporary prolongation of the balance sheet, impacting the equity ratio. Net debt stood at EUR 204 million at the end of H1.

And now let me comment on our working capital development. The working capital showed at the end of H1 a strong ratio of minus 4.7%. This improvement versus Q1 has mainly 2 reasons: firstly, the contribution from high prepayments as a result from our strong order intake. Secondly, we were able to finance the inventory ramp-up needed for project execution in H2 with stringent working capital management. Again, this is a result of our preparation work for the mentioned increase of our execution activities later this year.

Now going to the cash flow statement.

Free cash flow at the end of H1 stood at minus EUR 161 million, and the deterioration of the free cash flow despite good work in the capital performance is driven by the following factors. Firstly, Nordics is still incurring net losses. Secondly, our investment activities and related outflows have increased. The nonworking capital relevant outflows in H1 have partially been caused by VAT phasing effects in the context of our ongoing internationalization. And last but not least, you can see in -- the repayment of the Schuldschein and -- the promissory note tranche in April reflected in the cash flow from financing activities. And just to be precise: We repaid a tranche of 43.5 million Schuldscheindarlehen in April and have the usual tranche of our research and development loan from the EIB repaid, so that adds up to roughly 50 million.

With this, going to the investments. Investments in H1 amounted to EUR 60 million, largely consisting of investments into our blade facilities in Spain and Mexico. In addition, we have invested in more tooling equipment needed to support our increasing installations, plus further investments for our production in India. And as already mentioned by José Luis and as indicated in our Q1 call, we have revised our total CapEx outlook for 2019 against the background of the continuous dynamic order intake momentum. We now concluded to revise our CapEx guidance upwards to approximately EUR 160 million. And maybe to anticipate already potential questions: You might certainly ask, what is normalized going forward? We believe that and we plan that this EUR 160 million, which is largely also advancing investments or speeding up investments, is extraordinary, and we rather look at a normalized number in the ballpark of EUR 120 million.

And that's, last but not least, leads me to our capital structure. And here we do see the leverage curve increasing to a temporary peak level of 2.5, but we do expect the curve coming down again. And we have already touched upon the factors influencing the equity ratio due to a prolonged balance sheet; and also that, I've mentioned that, we expect towards year-end to reduce in terms of balance sheet -- in terms of total balance sheet sum.

Now let me sum up the Q1 -- the H1 financials of the Nordex Group with the following 3 takeaways.

Nordex numbers in H1 do show the expected low sales volume compared to what is ahead of us, and corresponding EBITDA reflecting the communicated structural pattern in 2019. Nordex is well prepared for the planned increase of execution activities during the second half of the year, which amongst others is reflected in working capital and cash flow. And Nordex is confirming its guidance for sales, EBITDA and working capital; and is adjusting its guidance for CapEx, in accordance with our previous guidance communication, due to continued strong order intake momentum for the Delta4000 in 2019.

And with this, 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 very much, Christoph.

Let's share with you the operational performance in first half of the year. And important to mention before bringing to the numbers is that the Nordex Group as a whole works with a pool system. It means that we don't reproduce, so we produce when ordered or customers are requesting us to produce.

So the installation number is a consequence of the customers' demands and of the production level of H2 2018. We are installing in first half of the year mostly the production of second half of last year. With this, you remember production volume second half of last year was low. So we are installing 778 megawatts, decreasing 17% compared to last year; installations in 13 countries; 242 turbines well, I will say, balanced between geographies.

As was previously mentioned before and with the production number we will explain better, the project execution will significantly increase in the second half of the year in order to secure the guided, the revenues. Finally, installation number for '19 is going to depend mainly on availability of civil work from our customers; as well as the usual weather, winter mainly, in the North Hemisphere. But everything is prepared to install the projects that bring the guided numbers.

We move to production, we see a substantial increase in our production activity, and this is again only driven by the contract obligations with our customers. We have increased the turbine assembly output more than 50% compared to last year; as well as the blade, internal blade manufacturing output almost 50% compared to last year. This means 517 units in the first half of the year: 180 in Germany, 222 in Spain, 28 in Brazil -- for Brazil, ramping up India to 80 units and ramping up as well Argentina. For Argentina, 5 units were produced.

Last but not least in production, I think it's important to mention that, last year, Nordex Group produced less than 3 gigawatts. This year, we are planning to produce more than 4 gigawatts. And with the decision we took, driven by demand mainly for the new products, we are preparing the company to produce in 2020 more than 5 gigawatts. Everything is planned in that way.

Okay. So this is regarding output and production. Regarding new products, I think it's very important today to report as well that, despite having very good acceptance on the current variance of Delta4000, we are not just stopping there but thinking and keep developing technology and products that support the order intake 2020, 2021 and beyond. And in that regard, we announced today the launch of a new evolution of machine, new rotor 163 meters 5.X megawatts. This, as usual, was designed purely focused on the lowest cost of energy. It's developed on the same nacelle as the traditional Delta4000 for class S sites, same tower configuration as previous. We decided for a single-piece blade based on the 149 design and mainly is based on the same hardware. With this turbine, we can deliver 20% more annual energy production per turbine site in a low wind -- in a typical low- to mid-wind site. So this will contribute to support the future growth of the company.

Moving towards reviewing how Nordex is executing on the strategy. Remember we want to be sustainable, global, COE leader and focused on being flexible and fast and always COE mindset.

Regarding global presence, I think the numbers are self-explanatory. 3 gigawatts order intake in first half well regionally balanced, with very little German contribution, is very remarkable, the success. COE-optimized products, as we mentioned before. In the supply chain transformation and with the new products, we are well equipped to deal with the growth expected in the future. Regarding supply chain transformation, as we show in the second quarter numbers, ramping up India. And as you heard as well from some of our blade producers, we are as well committing to ramp up blade production in Turkey; in summary, preparing the company, first, for the 4 gigawatts, for the more than 4 gigawatts that we need to produce this year, but second and most important, preparing the company for the more than 5 gigawatts that we plan to produce next year. And ramping up as well the production capacity for the new product Delta4000.

Regarding operational cost efficiency, we discussed about supply chain transformation; and very important in current times, was mentioned by Christoph, successful and very, I will say, detailed working capital management program implemented; and nonetheless, in the Service business growing organically, driven by the order-intake momentum of the company and as well bringing added value solutions to our customers. So in summary, in the path to become a leading, global onshore wind turbine supplier.

And with this and just to conclude before the Q&A, we would like to go with you through the guided 2019 numbers. The headline is self-explanatory. We as a management board confirm the guidance for 2019. And we have, as mentioned, decided to increase CapEx in order to prepare the company for a profitable growth 2020 and beyond. With these, sales, we are planning in the range of EUR 3.2 billion to EUR 3.5 billion; EBITDA margin between 3% to 5%; working capital below 2%; and CapEx, as was mentioned, in the range of EUR 160 million.

This is what we have prepared for you as a standard, so now we would like to open the floor for Q&A.

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Felix Zander, Nordex SE - Head of IR [7]

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Yes. Thank you very much, gentlemen. And yes, please, operator, go ahead. And now we are happy to take the questions.

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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 - Team Head of Industrials [2]

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The first one would for -- be for Patxi, on the U.S. market. You said that the 2021 year might be like another big-volume year. And after the more than 1 gigawatt you secured in quarter 2 alone, can you just shed some light on what the pipeline looks like in that particular market; and related to it, also, yes, provide some more color on how you do expect the market to trend; and then what your volume assumption is for 2020, '21 both market and ideally also for the company?

The second question would be more, then for Christoph, on the free cash flow side and particularly around working capital. Obviously, we have seen working capital trending much better than what you have been guiding so far and also what everybody would have expected until year-end, with the guidance still at plus 2% of revenues versus the minus 5% in H1. What is holding you back at this point to take a more positive view on working capital? That would be the question here.

And then lastly and as related to the gross margin trajectory, I think, in the past, you indicated that with the Delta4000 series you were to expect like-for-like higher gross margin to the tune of 5 percentage points Delta4000 compared to the old turbine generation. Would you confirm that at this point in time? And can you also give us at least a sense how we should expect the more than 30% share of H1 orders to convert in revenues, i.e., megawatt deliveries in 2019 and particularly then also the ramp for 2020?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [3]

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Thank you, Sebastian. Let me take the first questions. My comment on the U.S. market 2021 was in the context of the cliff that we were seeing post 2020 when 100% of the value of the PTCs would cease to be the norm and 80% of the value would start kicking in. It was some sort of a consensus that the cliff would have been significant at one point in time with the drop in the market to, different sources, 5-, 6-, 7-gigawatt size volume market for 2021 install. What we see now given the flow and the momentum that we see in the market is that it is adapting to a scenario that we may see a 10-gigawatt volume year or even beyond.

So it's difficult to quantify right now what we see today, but we certainly see that the momentum in the market is there and why not maybe expect a repeat to 2019 year and so in essence a significant volume in the market for that year.

And with respect to our pipeline, you know that we do not comment specific pipeline or market details, but what I can say is that we have been installing 800 megawatts over the last 3 years already now. And that is the number that we expect to install this year. And really, as you see, the order intake that was achieved last quarter will in full be installed in 2020, so the indication is that we will be installing well above 1 gigawatt in 2020. So in essence almost double the size of what we have been installing in the past in the U.S. market. And what I can confirm is the good momentum that we see from an order perspective, and we expect that momentum to continue over the next period.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [4]

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Yes. May I just have one more question related to the comment you made on the U.S.? Is the 2021 construct view more function of the market is limited capacity constraints, suppliers are constrained in 2020 and, with that, projects slipping into 2021? Or would you rather believe it's that's to one extent but also that the market itself, with the new product categories and with, obviously, the much better COEs, is simply willing to take more product because wind has become so more competitive?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [5]

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It's both things, the -- and the second part of your question the important one. And it's true that there have been some project slippage and delays that fall into 2021, but the good thing is evolution in the market to a plus-500-feet project unleashes the value of the new technology that is in turn absorbing the impact -- partially the impact of the loss of value from 100% PTC to 80% PTC. So the market is very dynamic, and the U.S. is probably the most dynamic market in across the globe and, once again, is showing the ability to adapt itself to new scenarios. And as a consequence of that, we start to see momentum, and therefore, volume for 2021.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [6]

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Okay, Sebastian? Then moving to your first question, around net working capital. You asked about the plus 2% guidance and what prevents us or me being here more positive, okay? So I take the opportunity and I will be more positive related to the plus 2%. On the other hand, already to put some realism in here, we have achieved a very good minus 4.7%, and that's somehow the benchmark we are running up against now. So we have already moved far away from the plus 2%. And maybe to already anticipate a question in that direction: Will we be able to further improve towards the -- and to basically to generate an offsetting effect beyond the minus 4.7%? To be honest, difficult and because in H2 it will become harder to realize further -- the further improvements in working capital.

We have a lot of activities, installation activities. We have year-end uncertainties. All milestone payments would have to fall in place right on time. You know that, of course, after invoicing, we also have to wait a couple of days until cash is coming in. Looking at the extremely back-end-loaded year, just to put some realism, and it's going to be very difficult to become even better than the minus 4.7% now.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [7]

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If you can stay at minus...

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [8]

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Sorry...

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [9]

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I said, if you can stay at minus 4.7%, then I think things are phenomenally good, yes.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [10]

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Absolutely, absolutely. Concerning your gross margin question: And we -- honestly, we don't want to be really very specific to the percentage point on how much. And please differentiate here between the gross profit margin and the contribution margin because this is always the -- we don't have the total -- the cost-of-sales method.

But we always -- also when we explained our strategic outlook, we always said that the improvement of profitability over time that we are expecting is going to be a combination of the company growing and economies of scale, operating leverage plus improved -- improvements from the product side. And that statement still holds, and absolutely this will happen. And with respect to the proportion of the 33% orders, it's going to be very, very, very little still in '19. The lion's share will be in 2020, turning into revenues.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [11]

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That's helpful. So the about 30% will be the best directional comment you could make for 2020 contribution.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [12]

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For the time being, yes. I mean, of course, there are still many moving targets around installation plans, as always, around that point in the year, but as a very rough indicator. Yes. Let's keep that. Yes.

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Operator [13]

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The next question is from Sean McLoughlin of HSBC.

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

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Just thinking about your additional CapEx. Could you specify what you're spending the additional EUR 40 million on? And is that enough to produce over 5 gigawatts to take you to above-5-gigawatt ramp rate? And secondly, am I correct in seeing sort of on Slide 15 that you are looking at greater levels of inhousing of blade production?

Second question is on the U.S., just wanting to understand your success in the U.S. in Q2. Was this price or product?

And the third is on execution risks in the second half. I mean, obviously, we've heard your peers talking about specific execution issues. I mean, how are you kind of preparing yourself and kind of hedging yourself, if at all possible, against any kind of bottlenecks or potential delays in the second half?

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

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Thank you very much for the questions. This is José Luis. I will take number one and number three, and Patxi number two. So regarding number one, additional CapEx, you remember that we were mentioning in the previous calls that we were analyzing opportunities to additionally grow the company.

We saw good projects and we decided to invest in additional CapEx. This additional CapEx is mainly to build new blade capacity with third-party suppliers. You saw some -- an announcement of a deal that we signed with TPI in Turkey to put 2 additional lines for Delta4000 blades there. And as we speak, we are in negotiations as well to furthering increased blade production capacity. This additional CapEx is all external. It's not in-house.

As a summary, in-house for the new -- or the carbon blades for the new platform is what was mentioned in the previous call, Germany, Spain, Mexico. And the additional CapEx was with third-party suppliers. With this new CapEx, with this EUR 160 million CapEx, plus a normalized CapEx that was mentioned by Christoph, we are well prepared to be a 5-plus-gigawatt company in 2020 and 2021. And with this CapEx, we have capacity, approximately a normalized capacity, in 2020, 2021 of around about more than 3 gigawatts. So maybe 3 gigawatts in 2020, 3.5 gigawatts in 2021 of the Delta4000 product.

And if I continue with question number three. How are we prepared for execution risks this year? I will say separate the question in three. I mean you need contracts. You need products to be produced. You need products to be installed. Contracts, we have in place. I mean there is no any contract needed to secure the revenue of the year. Production plans are absolutely in place. To give you a flavor: We were producing an average 10 nacelles a week during the first quarter, 15 nacelles a week during the second quarter, 22 nacelles a week during this quarter and 20 nacelles a week in the last quarter. So everything is prepared to produce the products that support the already-signed contracts in the year. Where we see, as always, a challenge is high volume in winter seasons; and availability of civil works in some of the projects, some of the big projects from our customers, which means worst case that some of the installations will shift to next year. The 3-year view of the company is the same, but due to the accounting method, it might be the case that some installations is just transferred to next year.

But with the view we have today, we are planning that we are going to complete the installations that give the revenue of the guidance. And for sure, we have a high degree of confidence that we are going to produce the components and no orders needed. So this is a summary. And going to your second question about price product U.S. Patxi please.

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [16]

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And with respect to that question, let's not forget that we have been building our position in the U.S. market for a number of years now. Last 3, 4 years were little by little we have been gaining the confidence of the market, of the different participants in the market, customers. And we have happy customers that repeat, and we are as well expanding customer base.

And we are very disciplined with pricing, extremely disciplined, and we take the good decisions in that direction. It is true that we have taken advantage of the situation in the market, and the timing for the introduction of the new product has helped us in that way.

And in that manner we have been able to significantly grow our position in the market with good profitability in the deals that we have done.

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Operator [17]

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The next question is from Alok Katre of Societe Generale.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [18]

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This is Alok Katre from SocGen. I have 2 questions actually. So first one, it's interesting to hear that you, obviously, have 4 gigawatt -- or more than 4 gigawatt production in '19 and more than 5 in 2020. That would in a way assume that you would continue your current order run rate and over the next few quarters as well. You, obviously, mentioned the U.S. and the orders and deliveries sort of that you expect in 2020.

But if you could just provide us with some color on the other markets where you either have a pipeline or orders in place that should drive this, let's say, continued growth. Because clearly Germany is still quite soft and -- in a way. So it would be great if you could provide us with some insights over there.

The second was a bit on Argentina and if you could just give us a sense of where we stand. And I think you had a 400- to 450-megawatt pipeline. Obviously, production has started locally. And the politics and currency, et cetera is, obviously, quite challenging at this point, so if you could just help us how the risk management is on some of those contracts. And what sort of headwinds and so on, if there are any, should we be thinking about?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [19]

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Thank you very much, Alok. With respect to the first question, the fact that -- as I was mentioning previously in the presentation, the fact that we have achieved such a significant growth with respect to the previous period last year, without the impact and the addition of the German market, shows how strong the geographical footprint of the company is.

So even if we are seeing a very positive momentum in the U.S., this does not mean that the rest of the markets are as well contributing. You can see that in the mix in the order backlog. Europe is contributing 44%, and you can see that in the mix of the order intake in the quarter as well, what -- Europe is still contributing very significantly in absence of German contribution.

So this means that the rest of the markets, France, Turkey, Spain, the Nordics, Ireland, will have a widespread position in Europe that -- and all of those markets are delivering significant volume, and we see the momentum continuing. And we see the momentum that -- is going to continue over the next quarters. And same situation with international markets as well. There are some short-term uncertainties in some of the markets where we operate, but that is classical to this industry, always has happened and always will happen. The good thing is that we are operating in a number of markets, derisking the potential risk that one of or a couple of markets might suffer short-term volatility, okay?

And that's -- it could be the case of Argentina. It's one important market for us but one market. I think, to the Argentina case, we are executing 4 projects at this time, more than 500 megawatts, projects with very good and solid customers. And with the information we have today, margin is not at risk. Projects are not at risk.

And it's worth to mention as well that there are only 2 companies with local content capabilities in Argentina at this stage, which might be a good opportunity, depending the scenario of the Argentinian election going forward, because you should not forget that Argentina is gifted with the best wind resources all over the world. So whatever is the political scenario, wind is going to grow and is going to deliver very cheap electricity costs into Argentina, and we are prepared for keep producing low-carbon products there. The...

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [20]

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Okay. So is it….

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Felix Zander, Nordex SE - Head of IR [21]

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Sorry. Go ahead, please.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [22]

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Sorry. Yes. So just wondered, I mean, from a risk perspective. Is it fair to say that your exposure to the peso net-net is quite limited in that sense...

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [23]

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It's very limited. I think we -- very much the rule is that we get pay in the currencies that we have the cost, so no relevant exposure. [Serious] exposure in the product, and the exposure is in the local services could be a timing effect in the local services, but I will say it's very manageable.

And regarding the CapEx, as -- remember we invested there with the help of a local player, Fábrica Argentina de Aviones, FAdeA, which is a state-owned company. That may be a good move as well. And the investment was planned for the existing volume, with the upside to bring more volume if there is more volume in the future. So I will say we are well equipped, yes, to deliver what we are -- what we have in hand without impacting margins. And we are well equipped for whatever is the future scenario in Argentina.

Of course, we want more wind and as much volume as possible. And we understand that this might have some timing effects, depending the final scenario, but nothing that is not manageable. In the sense that Patxi mentioned, it is the trend worldwide. Markets come and go or delayed a little bit if a new policy is in place, but the good news is that the worldwide market is growing. Nordex is global, and Nordex is growing more than the market. So this is the positive.

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Operator [24]

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And the next question is from Ji Cheong, Citi.

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Ji Cheong, Citigroup Inc, Research Division - Senior Associate [25]

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Ji from Citi. I got three, please. First is on the market. So for Mexico specifically, if -- I mean, obviously, we had that change of government and so on. And there have been views on how -- the market turning sour, but like -- so what is your expectations for this market in the near term? And then are you -- what kind of pipeline are you expecting of -- in Mexico going forward?

And also my second question is on the expected evolution from revenue. So just wondering. I mean, obviously, your -- you have a very back-end-loaded schedule but just wanted to get a sense of, say, how your backlog conversion would be in Q3 and Q4. Would it be somewhat evenly spread across, or is it going to be more heavily towards Q4?

And then the last one, more of a housekeeping question, is on your interest expenses. So we've seen somewhere around EUR 15 million per quarter for the last 3 quarters. Is this something we can expect going forward?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [26]

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Thank you very much. I will take the first question. It is true that Mexico is in short-term uncertainties given the change of government that took place. We have, therefore, internally diminished our expectations in the market over the next 12 months.

However, we are not completely ruling out the market, as we are working on some operations and potential deals supported by corporate PPAs, but internally we have diminished the expectations with respect to the market.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [27]

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Okay. Ji, it's Christoph here. Let me take the other 2 questions. As always, we'll try to provide you really with maximum transparency. Q3, Q4: No, it's not going to be equal quarters. It's as every year. We, I would love to have equal quarters, but it's again not happening. So Q4 will be the strongest quarter. Q3 will be already pretty much stronger than this Q2, but Q4 will be record quarter. I think that we can already -- that we already see.

And then eventually the final number will depend on what José Luis has mentioned, largely around EPC preparation being down, not -- but nevertheless, Q4 is going to be stronger than Q3. And that should give you a kind of picture based on the 30/70 expectation, yes. And housekeeping with respect to the interest expenses, yes, you are right. You can expect a fairly equal amount going forward. So with a similar amount, sorry, to be precise.

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Ji Cheong, Citigroup Inc, Research Division - Senior Associate [28]

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Similar, got it.

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Operator [29]

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The next question is from Zgaya Anis of ODDO BHF.

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Anis Zgaya, ODDO BHF Corporate & Markets, Research Division - Analyst [30]

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I have 2 questions, if I may. The first one, regarding the average selling price, which decreased significantly from end March to end June. I guess that is related to orders mix with maybe more order, turbines orders, in Q2. Could you give us some granularity on the reasons of this decrease? And my second question is on the U.S.-China tariffs. Could you please give us an order of magnitude of the potential impact on Nordex?

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

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Thank you very much for your question. ASP, and we have discussed this on previous calls. ASP as a KPI has flaws in terms of being a rather good KPI to follow the price evolution because it's very much affected by very simple things like generator size. And we are in a moment where we as an industry are increasing dramatically the size of the product that we are selling.

And as a consequence of that, it's affecting very significantly the ASP downwards, whilst at the same time, from our contribution margin per turbine that we are selling, in absolute terms margins are increasing. So that is one of the elements. In the -- in Q2, we were selling on average in the mix a greater amount of turbines with higher nominal capacity as well as scope and geography as well, we'll say.

And in the U.S., as you know, the norm in the market is that the sales of turbines are done without installation. That is generally in the scope of the customer. And as a consequence of that, per se in the U.S. the average selling price is lower than in other geographies. And as a consequence, in the mix we are seeing an ASP that is lower than previous quarters, which does not at all signal that -- a price decline or a profitability decline.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [32]

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Regarding the U.S.-China tariff, to give you a little bit overview of the situation. In the case of Nordex, the China-based supply chain was the solution to deliver to the U.S. When we saw these tariffs, we needed to deal with that as quickly as possible, and as a consequence, we decided to invest in Mexico around our blades production in Mexico.

We decided to produce as well more carbon blades in Spain. And we closed a deal with TPI in Turkey in order to still competitive selling to the U.S. So long history short, we needed to react as quickly as possible to do a supply chain reconfiguration. This supply chain reconfiguration has had an impact in P&L for Nordex. And we'll quantify in the low double-digit -- in low double-digit million euros, which is already factored in the performance of the company and in the guided numbers. And 2020 and 2021, I think we are well equipped. We have already decided, and we are in the implementation of the supply chain reconfiguration in order to have this as a one-off cost and not as a permanent cost for Nordex.

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Operator [33]

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The next question is from [Mr. Hayat] of Handelsbanken.

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Unidentified Analyst, [34]

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A question again on the more positive outlook that you mentioned for the U.S. market beyond 2020. Is that sufficient in -- as you see it overall globally to -- you mean that the global market will be on an upward path in '21 versus '20? Or is it that too far or too much of a stretch? And also, how does this reassessment of the U.S. outlook affect your scenarios around pricing and margins, please?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [35]

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The U.S., to put things in context, ex China is 1/3 of the global market. So has -- change in expectations in the market has some impact in global market, but my comment was, to put things in context, that a significant time ago, 1, 2 years ago, the post-2020 cliff had been quantified very significantly. And what we see today, for the good reasons that I was explaining before, is that, that cliff is going to be smaller. And as a consequence of that, the market will grow.

And let's put that in it's not that we have seen a huge evolution in the market that is going to alter the dynamics in the global market, by no means, because mathematically that is not feasible. The good, positive news is that, post 2020, cliff is going to be smaller than we all thought before.

And as a consequence of that, we will be enjoying the benefit of a very good volume year in 2021. And as a consequence of that, to take in your second part of the question, we are extremely well positioned in the market from every standpoint. And the expectation that we have is that we will continue with the very good momentum of orders in the market.

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Unidentified Analyst, [36]

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And pricing...

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [37]

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Price, too early to see. I mean it's too early to indicate what are going to be the dynamics, but what I can tell you is that, the good momentum that we are experiencing, we are expecting to continue with that good momentum.

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Operator [38]

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The next question is from Markus Schmitt, ODDO BHF.

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Markus Schmitt, ODDO BHF Corporate & Markets, Research Division - Fixed Income Analyst [39]

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That is on the promissory notes actually. I think you repaid now 44 million in April, and about 200 million is still left. In terms of the maturity profile, I think it's 175 million in '21, 19 million in '23 and 7 million in '25. Is this about correct?

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [40]

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Yes.

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Markus Schmitt, ODDO BHF Corporate & Markets, Research Division - Fixed Income Analyst [41]

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Yes. Okay. And I think you need to come to market in 2020 or use cash on hand to refinance the '21 tranche. Do you [observe more for] one way or the other? And how long can you wait here? Because I think the interest bill on the promissory notes is pretty low, and refinancing would probably increase your interest bill. So maybe you could provide some comments on how you think about your refinancing strategy.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [42]

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Well, yes, certainly. I mean those historically low interest rates of the Schuldschein. And that, of course, is something that we will not be able to repeat very soon again. That's absolutely true. However, with respect to the overall refinancing strategy, as you've mentioned, there is still enough time left. And then honestly, I don't want to comment any further on specifics here. That is very much depending on specific windows of opportunity in the market. It's depending on the usual factors. And once the opportunity is there, we will do something, yes.

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Markus Schmitt, ODDO BHF Corporate & Markets, Research Division - Fixed Income Analyst [43]

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Okay. But I mean, if you're up for a new instrument, I mean, until when do you think you need to launch this in order to avoid such investors or analysts like me ask stupid questions during the call? So when do you think [it's we're at that point] for...

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [44]

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No, no. Fair enough, fair enough. I mean, yes, of course, we will not wait until very last moment, absolutely. So I think, it would be fair, within the next 12 months just as an indicator, yes.

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Operator [45]

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And the next question is a follow-up question from Sebastian Growe of Commerzbank.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [46]

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So maybe come more to production. You, obviously, have seen a tremendous increase and the ramped volume output from India in particular. And you also -- José Luis mentioned the costs, low double-digit million, for recalibrating and readjusting the overall supply chain, et cetera.

Can you just give us some more color on what the current utilization plan -- sorry, utilization rates are and the plans that you have; and particularly, I think, in Argentina and India, how much headwind you still have? The second one would be on the Delta4000 ramp. And in particular, I think, on the quarter 1 call, you also said that you started the series production in Rostock.

Excuse my bad memory or ignorance. Can you provide some updates really how the ramp-up has progressing since; and also answer the question if that product can be exclusively, so far, produced in Germany? Or are you also preparing the ramp of the Delta4000 in other geographies? And then the last question, one finally for Patxi. And obviously, you have stressed a couple of times now that you are not dependent on Germany at all. And the numbers obviously prove that correct, but can you just give us a quick run-through on what you expect what are the key obstacles and if and when eventually the German market might come back?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [47]

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Okay. Thank you for the follow-up questions, Sebastian. Regarding production, we are ramping up India, as we speak, to recalibrate the supply chain. We are ramping up to 7 nacelles a week, so India is going to be the second biggest output, expected next year.

Argentina is a very small -- because India, remember, this is a India-for-India plan or India market, but as well we are exporting India to -- I will say other geographies have demand AW3000 product, [which it's a fairly good] producer.

Argentina is a local plant. It is to just to comply with local content rules. So nominal capacity of that plant is 3 nacelles a week, and we are producing there as per the demand of the projects. Regarding Delta4000, we are now, I will say, in a nominal production in Rostock, ramping up the production plan for the volumes that we have mentioned before to achieve the 5-plus gigawatt company that we want to be next year. Out of that 5.5-plus gigawatt company, more than half is going to be Delta4000. And we are preparing Rostock to do that in nacelles, but not only Rostock. We are as well preparing China or the non-U. S. markets to do certain parts of that. And we are as well ramping up one of the existing plants in Spain.

So we are going to produce this product in a combination of 3 plants next year. Majority is going to be in Rostock but as well China and Spain. I think I answered all of your questions. And this is regarding nacelles. And regarding blades, we already mentioned we are redirecting the China production to other non-U. S. markets; and growing up in the new blades in non-Chinese suppliers, mainly Mexico, Spain, Turkey and a new supply.

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [48]

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And with respect to the market is a bit of a speculation to see when the market will recover, but as you know, the situation is that action has been taking place already in September now given the results of the last couple of auctions. Federal government is taking charge of that, understanding the different options that are material out there to foster permitting onshore. How that is going to play out is pure speculation, but it is our internal assumption that we will start to see pickup of the market mid-2020. So we do not expect actual market picking up in the next 12 months, and we expect the market picking up -- to start to pick up mid-2020 and beyond.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [49]

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Just to get that right. The market pickup is more what you would then see coming through in your order intake, with execution rather following either late 2020 or earlier part of '21. Is that the right interpretation?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [50]

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That's the right interpretation.

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Sebastian Growe, Commerzbank AG, Research Division - Team Head of Industrials [51]

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Okay. And anything you are currently discussing with people on project developments, et cetera that are leaning towards Germany, suggesting that you will take a very fair share of the market if and when this one is coming back?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [52]

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That is what I can tell you is I will phrase this another way around because it's difficult to assess given the uncertainties that are there, that we are having a very good acceptance of the new products and that we are seeing a very good penetration of the products into the permits. And that leads us to think that, when the market comes back, we will be in a very good position to achieve good results.

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Operator [53]

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And the next question is a follow-up from Alok Katre, Societe Generale.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [54]

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A couple of ones first. Just following up in terms of the pricing sort of comment, where if I look at the pricing or the order pricing over the last 2 or 3 years and if I look at how that's translated into the P&L, we still see consistently a pretty significant gap in terms of the pricing that you have in the P&L per megawatt delivered versus what we've seen in the order flow. I'm just wondering. Should we expect a convergence in the second half, i.e., therefore the second half of 2019 already -- the ASP in the P&L for every megawatt you deliver in the second half should be significantly lower than what we've seen so far so that the order pricing converges?

Or is there a structural reason why the pricing in the P&L has been so different from what you've seen in the order flow? So that's question number one. Question number two really is just on India; if you could just give us an update in terms of where you stand on the execution of the 300-megawatt order that you won, I think, earlier this year. And I think it was due from second half of '19 onwards. Just wondering, given all that we've seen and heard in India where -- if you could just provide us with some color on where we stand there.

And are you seeing any benefit from the trouble that some of your peers Senvion and Suzlon -- because one of your peers obviously announced a large order that was previously awarded, I think, Senvion. So just wondered if you are seeing any benefit from that as well in India. So those two.

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [55]

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Okay. To the first question. On an ASP perspective, to the arguments that we were mentioning before on scope, geography and the like, it's very difficult, the timing effect on when do actually we are taking orders and when actually those orders are hitting P&L. So if ASP was already a complicated KPI, if you want to do the translation that you are doing between order intake and P&L impact, the timing of it destroys any meaningful analysis that you can do in that respect. And as a consequence of that, it's very complicated to draw any conclusions as you were trying to -- yes, to do that way.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [56]

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And just to add one thing here, Patxi, and correct me here: I mean the U.S. is a good example basically to show that project profitability and ASP does not necessarily correspond.

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [57]

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Not at all.

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

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That's right. Regarding India. First, starting with execution of the 600-megawatt project. We are well advanced in the middle of civil work, more towards the end of the civil work completion. Nonetheless, the COD is expected next year. So I will say -- and I mean it's no different than any other customer when you do projects of this magnitude. And on top of the, I will say, rather execution of this project, more important thing is ramping up the supply chain for future projects in India and as well as to use the India supply chain base to produce competitive products to other markets.

Regarding the potential trouble of some of our competitors so far, I mean, the market share of those competitors in the bigger scale of things is limited. So you shouldn't expect substantial benefit for Nordex out of the problems of our competitors. I will say that it's better to have a sector without trouble than competitors in trouble because this is not good for the industry.

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Felix Zander, Nordex SE - Head of IR [59]

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Okay. Thank you very much. This concludes our Q&A session. Felix speaking. I -- thank you very much for your participation and for the fruitful Q&A discussion.

And now I would like to hand over to José Luis for the final remarks, okay?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [60]

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Thank you. Thank you very much for the calls.

As key takeaways, we wish to give you 3 messages. The first one is that the guidance for 2019 confirmed. Everything is planned to deliver the guided numbers. Second, that we discussed broadly in the presentation and in the Q&A that the strong order intake momentum continues and continues to support the profitable growth expected in 2020 and beyond, driven mainly by additional demand for Delta4000. This, as mentioned, was signaled as a possibility in the last call and was decided during the quarter to execute in order to be in a position to land this very good order intake with better margins.

And third is that we mentioned that we are not just focusing in 2020 and 2021 profitability recovery and growth. We are focusing in the future of the Nordex Group, and we keep investing in developing competitive products that will support Nordex beyond 2020 and 2021. And we hope as well that these products will have the same good acceptance from the market as their previous variants.

With this, thank you very much for your participation. And I, we wish you a wonderful day. Thank you very much.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [61]

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Thank you very much.

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Operator [62]

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