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

Q1 2019 Nordex SE Earnings Call

Norderstedt May 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Nordex SE earnings conference call or presentation Tuesday, May 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

* Glenn Zahn

Commerzbank AG, Research Division - Analyst

* Ji Cheong

Citigroup Inc, Research Division - Senior Associate

* Sean D. McLoughlin

HSBC, Research Division - Associate Director of Clean Technology

* 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 Q1 2019 report of Nordex SE. At our customer's request, this conference will be recorded. (Operator Instructions)

May I now hand you over to Felix Zander, who will lead you through this conference. 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. This is Felix speaking, and I would like to welcome you on behalf of Nordex to our call for the results of the first quarter 2019.

Here with me is our whole management team; and our CEO, Jose Luis Blanco; our CFO, Christoph Burkhard; and our CSO, Patxi Landa, will give a presentation sharing the latest information with you including our latest order intake coming from the U.S. After the presentation, we will open the floor for questions and answers. (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. Good afternoon, and thank you for participating in our Q1 analyst call. As always, here with me, Christoph, CFO; and Patxi, CSO.

We have prepared for you a standard agenda. I will share with you an executive summary of the evolution of the quarter. Patxi will share with you the situation in markets and orders. We will review with Christoph the financial performance of the company as well as on important relevant information. We will then spend some time in talking about the current operation performance as well as the plans for the rest of the year, sharing with you as well some recent announcements in new product evolution; to conclude with the guidance for the year, opening up the floor for Q&A.

So let's move on. As a executive summary, we will summarize that we are executing 2019 as planned. Q1 results we have delivered sales volume of EUR 398 million, EBITDA margin of 0.8% and working capital of minus 1.5%.

A remarkable order intake in the first quarter, more than 1 gigawatt. And worth to mention as well this is the sixth quarter in a row delivering more than 1 gigawatt per quarter.

Profitability in Q1, as expected, is affected by low sales volume resulting in lower absorption of overheads. Remarkable and important for the future is we started as planned this year production of Delta4000 platform, the 149/4.0-4.5 megawatt machine in this case in Rostock. Remarkable as well is that we landed the first international orders for this product. Q4 last year we've handled big volumes in Europe and in Sweden among other countries. This quarter remarkable performance of this turbine coming from Argentina and Australia. And not in the quarter, but today you saw as well a remarkable order coming from the U.S., very important, 350 megawatts.

Worth to mention as well, during the annual result presentation was mentioned and was shared with our customers at WindEurope -- past WindEurope in Bilbao, we're entering the 5-plus megawatt class turbine. It's the first evolution of the platform derivative with very positive customer feedback.

And operationally, the year, the key structural patterns for the year that were discussed with you in the annual call remain valid as present. Last but not least, with all the information we have at hand, the guidance for 2019 is confirmed.

And with this, I hand over to Patxi for guiding us through the market and orders.

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

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Thank you very much, José Luis. Good afternoon.

We see increasing commercial activity in the market generally speaking supported by EU goals in Europe with good activity level in a number of markets like Spain, the Nordics and France. We see as well now Poland coming back and new markets like Ukraine developing as well.

On the other hand, Germany continues to be at low activity levels, and we expect it to start picking up in the next year. We see significant activity in the U.S. as expected as well as in the rest of the world with some key markets coming back like Brazil, South Africa and India.

Looking into order intake, we started the year with 1.035 gigawatts of new orders in the first quarter. That represents a 3% increase quarter-on-quarter. This corresponds to EUR 810 million and EUR 0.78 million per megawatt ASP, consolidating the stabilization of prices that we are experiencing over the last quarters. Importantly, we secured our first orders for the Delta4000 turbine outside of Europe in Argentina and Australia, and as announced this morning, in the U.S. confirming the very good acceptance of this new product by our customers globally.

Service segment grew 11% quarter-on-quarter with EBIT margin of 16.5% in the period consolidating as well a solid performance. Service backlog increased to EUR 2.2 billion.

As a consequence of the good sales performance over the last quarters, turbine order backlog increased by 63% to EUR 4.4 billion, and the combined order backlog increased to EUR 6.6 billion at the end of the first quarter.

And with this, I hand over to Christoph, who will go through the 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. I would like to guide you now through our first quarter 2019 financials. Our first quarter 2019 went according to plan on an anticipated low level without any surprise.

And starting with the income statement, sales of approximately EUR 400 million do show the back-end loaded structure of this financial year. And in contrast to Q1 2018, the total revenues of EUR 583 million are already exceeding sales by EUR 185 million, which is an indicator for higher activity level reflecting increased inventories in order to be prepared for sharply rising installations in Q3. As a consequence, the overall low -- overall volume in combination with revenues significantly exceeding sales plus favorable project mix is leading to the exceptionally high gross profit margin of 35% in Q1. However, in line with the overall structural pattern of this financial year, gross profit margin will normalize hand in hand with increasing sales volume and will come down accordingly.

Eventually, also the EBITDA number of EUR 3.3 million representing an EBITDA margin of 0.8% is a consistent quarterly result stemming from the lower sales volume and the consequential high proportion of fixed costs and also that of course will change in accordance with the increasing volume over the next quarters to come.

If we now go to the balance sheet, the solid structure of our balance sheet remains unchanged compared to year-end 2018. And if you look at the equity ratio, there you see a deviation compared to year-end 2018, and this is due to a prolongation of the balance sheet mainly driven by 2 effects. Firstly, in preparation of the steep ramp-up during the second half of the year, inventory levels went already up significantly. Secondly, we have the first-time application of the new -- further new accounting standards, IFRS 16, which stipulates to display all leasing contracts on the balance sheet, and total balance sheet prolongation effect of the IFRS 16 implementation amounts to EUR 76 million. And last but not least, we are looking at a net debt of EUR 110 million at the end of Q1.

And now I would like to comment on our working capital development shown on the next slide. The working capital ratio was at the end of Q1 with minus 1.5% of sales, again clearly negative. Nevertheless, we can see an overall increase of working capital compared to Q4 2018 of approximately EUR 58 million due to the mentioned buildup of inventories. And again, this is a repeat feature now that we're seeing also due to the preparation work that we are doing in order to be prepared for the increase of our execution activities and to be on time for everything what we need to do very soon.

And this brings me to the cash flow statement. If you look at the cash flow numbers, I mean they are really one-to-one translation, very straightforward of what I've just mentioned. Looking at the working capital, free cash flow stood at the end of Q1 at minus EUR 76 million. And that's again largely due to the outflows for increased working capital and obviously the investing activities.

That leads me to the total investments. We started in Q1 with EUR 22 million for total investments. That's obviously below the quarterly average of EUR 30 million. If you look at our guided number of EUR 120 million, but this number as well will go up now over the quarters to come. And as mentioned already in March, we are constantly monitoring now our CapEx spend or the need for our CapEx spend against a background of the dynamic order intake momentum. It's yet too early to realize anything. That's not our intention to do. And we will certainly have a much better transparency to the remaining financial year at our H1 call in August. But for the time being, we keep our outlook for total investments in 2019 unchanged.

Last but not least, looking at our capital structure, we do see the leverage curve staying with 1.3 at the end of Q1 2019 below our long-term target level of 1.5. And with respect to the equity ratio, we have already touched upon the factors that are influencing the equity ratio due to a prolonged balance sheet.

And with this, I would like to sum up our Q1 2019 financial results with the following 3 takeaways. Firstly, Nordics numbers in Q1 2019 do show the expected low sales volume and corresponding EBITDA reflecting the communicated quarterly pattern in 2019. Secondly, we are preparing for the planned increase of execution activities during the second half of the year, which amongst others is reflected in the working capital and cash flow numbers. And last but not least, Nordex is confirming its guidance for 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, Christoph.

Operations in Q1 very much follow the schedule and demand and as per the request of projects and customers, somehow a reflection, a physical reflection of what was mentioned by Christoph and what we saw in the P&L and balance sheet.

If we talk about installation, 261 megawatts installed, 84 turbines, 8 countries, very low level of installation consequence reflecting in the sales. The project execution will significantly increase in the second half of the year in order to secure the revenue of '19. Everything is operationally planned for that. We are planning for slightly more than 4 gigawatts of installation coming from 2.4 gigawatts last year. And I will say that the main challenges are eventually customer delays in the civil works of some of the projects. Other than that, the operational site machine of the company is prepared for dealing with this increased demand. The effect of this eventual delays might be shifting some units year-on-year.

If we talk about production, you will see in production the reflection of the working capital and inventory. We see substantial increase in turbines assembled and blades produced in-house and in third-party supplies. If we talk about turbines, 214 units were assembled in Q1, 81 in Germany, 93 in Spain, 80 in Brazil, 32 in India. And these, as mentioned before, is -- I would say slightly more than 15% of the volume that we plan for the year. But as mentioned, everything is planned. In-house blade production increased as well to 300 units, 84 units in Spain -- 84 in Germany, 216 in Spain plus all blades were contracted in the Chinese plants, ramped up in India, Turkish plants, Brazilian as well as the ramp-up in Mexico.

So as you can see, we are ramping up production to support the high pace of project demand and installation in second half of the year. Special to mention here is the ramp-up in India. You saw that in nacelles. The ramp-up is on track in nacelles as well as in blades produced with a third-party player in India.

Special to mention as well, as we speak, we are producing our first blade in the new Mexican plant and the ramp-up of that plant goes as planned. Other than the ramp-ups, I would say other than the extraordinary ramp-ups in India or our new plant in Mexico, the rest of the plants overall combined, we are going to be producing record volume. But individually plant by plant, we are running most of the plants below maximum capacity.

We talk about plants. We'll talk a little bit about products. It was mentioned that we were one of the few companies as well running in the 4- to 5-megawatt machine. Now we are again one of the first OEMs to jump into the 5-megawatt class machines.

Today is a great day because as we saw in the announcement this morning, we landed a big 350-megawatt deal in the U.S. with the 4.X machine. And it's an important milestone because it's not just Europe, it's not just Lat Am, it's not just Australia, we're selling this machine in U.S. and financing this machine in the U.S. has a -- is of relevant importance for Nordex. That is not only 4.X. We are evolving this platform to 5.X machine. This was announced in WindEurope. The turbine is fully designed with a cost of energy in mind to deliver the lowest cost of energy in its class. We decided to go with a staggered approach philosophy enhancing existing platform based on proven technology. And it's, I will say, the only 5-megawatt machine with this philosophy of enhancing existing platforms.

It's a class S machine. Dimensions in order to optimize logistic and installation are unchanged. Difference here, customized lifetime for the turbine from 20 to 25 and even more years. We keep the same rotor as the 4-megawatt machine for manufacturing synergies and global production. We keep the same tower portfolio as the 4-megawatt machine. And as an example, we can run this machine in several modes. As an example here, we have that at 104 decibels. We can run the machine at 5.5 megawatts. And more important is that the first contract have already been signed for delivering of this machine in 2021. And that's important that this contract is that the machine is very well affected by customers supporting Nordex as one of the frontrunner OEMs in the 5-megawatt class.

With this, and approaching to the end of the presentation for today, we'd like to confirm the guidance for 2019. And as you remember, sales are going to be in the range between EUR 3.2 billion and EUR 3.5 billion; EBITDA margin in the range of 3% to 5%, with working capital below 2%; and CapEx, approximately EUR 120 million. And as was mentioned by Christoph and mainly related to the CapEx, we do see increasing demand for more competitive and profitable products, the 4.X and the 5.X as discussed today. Examples are the U.S., 350-megawatt deal as well as we saw in the last slide, the first units of the 5.X megawatt machine.

So with this increasing demand, we are closely monitoring and starting the possibility and the feasibility to accelerate the capacity development to a faster place doing a faster supply chain transformation to the 4- and 5-megawatt machine accelerating mainly investment in blade most to harvest this opportunity.

This is what we have prepared today for you. So with this, we open the microphone for Q&A. Thank you very much.

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

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Yes. Thank you very much. Operator, please be so kind and open the lines for the Q&A.

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Questions and Answers

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Operator [1]

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

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

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The first one is on order intake and working capital side question. Would it be fair to assume that the ASP that we are seeing on the quarter of EUR 0.78 million, which is now the fourth quarter in a row with an improving trend here, this is not only a function of scope but also reflects your ability to command higher prices on some projects? I think you mentioned it then also in the closing remarks as, not least, the Delta4000 has superior features for now compared to competition. And related to that and come back to the working capital aspect, can you also comment on the most recent development around payment terms, which very much seem to have moved into your favor if I look at the quarter 1 in isolation? And then I would have 1 other question on the volume ramp-up, but maybe we can start with this.

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

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Thank you, Sebastian. I'll take the first one. As you know, ASP is the consolidation of a number of factors that affect directly the composition of the figure, one of which is the one that you mentioned but as well geographical mix and different scope. So this particular month, we had a number of projects that have an EPC scope and that was affecting as well the ASP. In general, what you can assume is that we are seeing really stabilization in the ASP in the different markets and that is a trend that we are -- have been seeing in the last quarters, and that we expect to be continuing in the future.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [4]

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And Sebastian, if I may continue with the working capital question, yes, we have received decent prepayments, but overall picture is not that I would say we now do also see changed payment terms. You also have to appreciate that on the prepayments, you have to sum up all payments, all the milestone payments. And so the overall picture from our point of view is largely unchanged with respect to the payment terms.

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

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And of course, the new upgraded products deliver better margins, and this is why we are considering if physically possible ramping up and accelerating the supply chain transformation for new products because demand is there and profitability is there.

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

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Yes. If I may take out that last comment to start with, is it possible to also review some of the project in the order backlog and eventually change the corresponding turbine? Or would that go way too far in order to just mix out for you on anything in terms of production, but also clearly on the gross margin potential related to those turbine sales?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [7]

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No. Technically, the contracts they have their own life and usually, it's very costly changing permits. I mean it's usually a year-to-year process. It's too late. I mean usually when suppliers and customers agreed, they start the civil work, so it's very difficult.

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

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Okay. Understood.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [9]

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But even in this theoretical scenario, doesn't improve substantially because if we can accelerate the transformation in supply chain, eventually, there are customers that buy this additional capacity. So we don't see a bottleneck currently in availability of customers.

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

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Yes. Okay. And on the comment you made on -- about 4 gigawatts of total installation volume in the year 2019, and you also referred to the ramp-up in production which is now at more than 200 turbines in the first quarter, is it fair to assume that you can take the overall production output in terms of number of machines to about 1,200 or so? And if I also then may refer to another comment you made that you are not expecting production plants to be fully utilized in the year 2019. Where do you see after the ramp-up of India, after the ramp-up of Mexico, the total numeric capacity in terms of machines produced once fully ramped up?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [11]

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I think we need to separate because one is physical capacity where is -- other is where the location is -- where the capacity is located and then the type of products in nacelles. Even with the 4 gigawatts, I think is substantial less than full capacity utilization. I mean if we analyze the current use of our plants globally other than India that we are ramping up, the rest of the plants are producing, I would say, 80% to 90% of the maximum volume that they have produced in several moments in the history of the plants.

If we talk about blades, the picture is different because there is a product transformation that requires new blades and new blade molds and new factories, so is very much product driven. I will say that the bottleneck for transforming the product portfolio to the 4- to 5-megawatt machine is the ability of the company to ramp up more blade suppliers, more blade plants to now harvest the demand. So in nacelles, full industrial capacity. I would say from supplier development, we are well on track and the ramp-up in India is well on track. Glass blades of the AWP platform running high volume. I would say the only slightly out of normalcy is the ramp-up in India and 1 ramp-up of 1 supplier in China. We are ramping up, as we speak, Mexico, but we are going to produce in Mexico only 5% of the glass blades for the year. So even facing some ramp-up delays in Mexico, the impact is very limited. And in the new carbon blade for the Delta4000, we plan to ramp up Mexico in the second half, but with no impact for installation this year.

So long history short, nacelles we are confident. We have the industrial capacity to grow more, I would say substantially more without big investments. Blades, no. Blades we need to invest if we see opportunities in Delta4000 with good margins and good cash flow. And if physically possible, we will accelerate the investment in more blade molds in the second half.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [12]

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And if I may a very final question...

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Felix Zander, Nordex SE - Head of IR [13]

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Very last question, Sebastian.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [14]

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I promise that. When are you going to have the decision made in terms of are you going for an expansion of capacity in the blade molds, et cetera? Is it just a function really of the order intake in the quarter 2? Or what's really the make or break?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [15]

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I think there are 2 factors: one is the order intake that we are very optimistic and the second factor is management. I mean physically, we need to now focusing ramping up Mexico. After ramping up Mexico, we need to transfer one of the Spanish plants to produce the 4- to 5-megawatt machine. And once this is secure, we will start the next project. So it's more at this point a physical limitation of trying to do things properly and assuring that we don't make mistakes in those ramp-ups than availability of customers.

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Operator [16]

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The next question received is from Sean McLoughlin from HSBC.

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Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [17]

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Can I just come back to Mexico? The independent blade supplier in the market has had a lot of problems there, and I just wondered given that you're building in exactly the same location in Matamoros, I understand, what you are seeing, first of all, in terms of ability to hire staff and let's say, your relations with the local unions and how that may impact your ramp for the second half of the year? Secondly, just wanted to dig into costs. I mean SG&A costs are coming up, higher staff numbers, finance costs are also coming up. Can we extrapolate the Q1 numbers into a full year trend?

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

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Okay. Thank you very much for the question. I will take the first one. José Luis and Christoph will take the second one. Regarding Mexico, what we can share with you is that the ramping up is moving as planned. We saw some instability in the region due to political reasons, but things looks like are settling. And in our case, no effect. We secure our agreements with the union, with our people. We have the plant ready. The molds arrived to the plant, the training program ongoing, producing the first blade. We are of course cautious, but at the same time optimistic about our ability to ramp up this plant as expected. So far, no impact at all for us.

Worth to mention as well that as we are ramping up the plant, we are producing limited amount of numbers this year. Only 5% of the glass blades are going to produce in that plant. So to give you an order of magnitude, 50 rotor out of 100. So the impact in the glass blades is very limited. And the impact in the carbon blades, we are planning to produce, I would say, 20 rotors, but those rotors this year are not going to be installed. So the impact for the revenue of the company in 2019 is limited. But for me the important thing is not the impact of revenue, is that our project there so far has not been impacted and things are running as a normal ramp-up. Looks like the situation around Matamoros is settling.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [19]

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And Sean, Christoph here. If I may now complement the statement with your second question with our response here around SG&A, OpEx and personnel expenses. As you know, we do not have due to the total costs method, not a split of the classical SG&A as you would see it if in case we would do cost of goods sold method. Why I'm saying that because you see the increases in OpEx as well in tax, very much also related to the ramp-up of blue collar workers which in the concept of cost of goods sold of course would not fit in the SG&A. So the related increases that you see here are very much volume-driven, and they are a combination of on-boarding of blue-collar service people plus blue-collar factory people and related OpEx in that context. So again, this is very much to be seen in the preparation for the ramp-up.

And I don't want to give you now a very specific OpEx, tax guidance for 2019. However, I think if you look at our EBITDA guidance, then you can almost one-to-one derive the proportion of OpEx and tax from that. Main message is, this is not the classical SG&A ramp-up. We are very disciplined on that side. This is related to volume-driven factors mainly around blue-collar workers.

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Sean D. McLoughlin, HSBC, Research Division - Associate Director of Clean Technology [20]

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That's clear. And on the finance cost? [It's around] EUR 15 million a quarter.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [21]

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I can't see any exceptional topics here, to be honest. Sean, if you allow me, we can get back to you afterwards and give you a very specific answer on that. At least there is nothing unusual in our financing costs.

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Operator [22]

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The next question we received is from [Sean Dijoni] from Citi.

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Ji Cheong, Citigroup Inc, Research Division - Senior Associate [23]

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Ji from Citi. So a couple of questions, please. First on the tariff impact. So can you update us on what kind of impact you're expecting from the recent wave of tariffs and on the timing of the tariffs if possible, and if you have any planned measures to offset? I'll get to the second question later.

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [24]

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Okay. So the tariff impact has -- we have assessed it, and no impact for our 2019 numbers and guidance. For 2020, we still have time to shift the supply chain strategy more from India to the U.S., more from Mexico to the U.S., more from Europe to the U.S., less from China to the U.S. So in our case, even the impact for 2020 with the current time that we have ahead is going to be very limited.

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

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Got it. The second one is on the inventory. So are you expecting further inventory increase given the high level of activity you're expecting in the second half in Q2? Or is the inventory increase that we've seen in Q1 pretty sufficient for preparations into the -- for the second half?

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

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It's difficult to predict. I mean you need to keep in mind that inventory is paid by the customer because it's a contractual obligation that we need to deliver and produce as per the agreed milestone of the contract. But the customers have always the right to delay if they face some balance of plan delay in their project, so it's going to be very much customer-driven. If the projects and if the balance of plan of the projects execute properly, we will eat the inventory quickly. If not, we will need to store the inventory of our customers. I mean you see it in our balance sheet, but it's mainly our customers' inventory until they are ready to accept the inventory in their warehouse. So difficult to predict. Eventually, it's only a slight increase might be expected because we are going to produce -- we are going to increase substantially the activity in installation plan for second quarter and quarters to go as well as the production. The production we cannot slow down because it's a contractual obligation. The installation we might need to slow down because it's a customer requirement.

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Operator [27]

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The next question is from [Oscar Felix] (inaudible).

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Unidentified Analyst, [28]

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Congratulations on the U.S. order. Can I first ask, what is the likely time frame of the delivery of these machines? Is this as usual aimed at year-end or are you having more time?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [29]

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It was mentioned in the press release. This contract needs to be commissioned before the end of 2020. So that's the plan. Those machines are going to be installed in 2020. Most of them produce in 2020, some of them starting to be produced around Q4 this year. But no revenue impact for this year or revenue. And most of the cost is going to be a 2020 year.

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Unidentified Analyst, [30]

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Okay. The other question I had is -- I'm somewhat concerned about, I suppose, where the balance sheet is going with the ramp-up naturally. What is your consolidated net leverage covenant? Is the next testing date December '19 and is it around 4.6x? Or how do we think about that?

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [31]

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Right. Firstly, we do not disclose our leverage covenants. I've always been saying that we have sufficient headroom and this is still the case. The second thing is, our covenant calculation is still based on IAS 11 and not IFRS 15. And therefore, the picture is pretty different, but clearly there is no concern whatsoever.

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Unidentified Analyst, [32]

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Right. And the current relationship, I suppose, between prepayments that you've already received on your balance sheet and the inventory you're having, is it going to stay as high? Or do you think the prepayments over the year are -- I think as we've sort of seen generally over the last periods would drop off somewhat during the year? How should we think about -- what's your -- what do you anticipate there?

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [33]

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We expect them to stay pretty stable.

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Operator [34]

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(Operator Instructions) We received a question from Glenn Zahn of Commerzbank AG.

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Glenn Zahn, Commerzbank AG, Research Division - Analyst [35]

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I'm just wondering if you could talk a little bit about how the auctions are going in Germany. Had there been year-to-date any auctions? And how is the participation and the pricing?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [36]

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Yes. Actually, we have seen today the results of the last auction and they were again undersubscribed -- significantly undersubscribed with awards below 200 megawatts. Average price is at just above EUR 0.06, so the dynamic of the German market continues as we explained in the previous call with bottleneck into permitting that is driving undersubscription, and as a consequence high PPAs. We see this dynamic continuing during this year, and we expect that the market will start to readjust during 2020, thus activity levels recovering in that year.

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Glenn Zahn, Commerzbank AG, Research Division - Analyst [37]

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Now has the German government done anything? The regulators done anything to kind of accelerate or basically to improve the conditions as far -- the pricing or the participation? I mean are they requiring, for example, permits in the bidding process, et cetera?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [38]

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Yes. That is -- permits are required right now to participate into the auctions. At a federal level, there was -- as you know, there was a bipartisan agreement by the government and by the parliament to enhance the volumes to be awarded into the auctions. The bottlenecks remains at local and state level that are the authorities that are granting permits and is a very diverse country as you know and there are -- the bottleneck is right now there. We expect that little by little the bottleneck will be resolving. And as a consequence of that, the market reach an equilibrium.

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Glenn Zahn, Commerzbank AG, Research Division - Analyst [39]

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What is actually driving the undersubscription in these auctions?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [40]

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The lack of available permits -- available projects with fulfilling all the necessary requirements to participate into the auctions. So -- and as a consequence of that, the undersubscription and the high PPA prices into the auctions.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [41]

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It's fair to say that German government, they are seeing us in -- most of the countries in Europe have clear targets towards European Union. So we are behind the target, somehow something might be expected. And the second important thing is the power of economics. And if the auction is [at 60], eventually we will attract speeding up more investment in companies doing more permitted projects to tackle future demand, but we've said this takes time.

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Glenn Zahn, Commerzbank AG, Research Division - Analyst [42]

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But have you seen any decline in the delays? I mean I think we were talking originally it was like 12 months or so and then with the PPAs involved, they got expanded out to 24-plus months. I mean has that shrunk at all? Or do you still -- are we still at that wideband -- wide range?

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [43]

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Not at all. That continues -- the timing continues to be the same. And as we explained before, it's the lack of permits that is creating that temporary bottleneck that you see, that the market will recover, and we expect it to begin to recover in 2020 and beyond.

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Operator [44]

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We received a follow-up question from Sebastian Growe.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [45]

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Just on services and the related margin development in that particular segment, so can you just give us a sense why the margin has been a little lower than prior year despite growth on the top line? Is there anything in the mix composition? And if so, is there also eventually simply greater delta eventually between what the legacy Nordex service contracts are based on? Or what they would give you in terms of margin profile compared to that AWP? And how would you expect that to play out going forward?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [46]

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Going forward, we don't have sufficient information or evidences to process, so our assumption is ability. This slight difference is of course when you -- every added megawatt in Germany for the same gross margin has a better synergy and as a consequence bottom line profitability. Most of the volume that we added was in big projects, in international markets, slightly more challenging pricing environment. These megawatts were landed -- the same ones that we are executing this year in the toughest times of the price war. So landed this volume in the toughest times of the price war plus less contribution in small projects in Germany, where we have well-extended service networks is what explains that.

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Sebastian Growe, Commerzbank AG, Research Division - Analyst [47]

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Okay. And any positive outcome in the most recent developments eventually from the fact that some competitors are struggling quite significantly that you can just take share eventually and customers are proactively approaching you?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [48]

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I will say that for us, the positive momentum coming from the sector and the price war in the last quarter. So this is the most positive effect going forward. In this situation, some of the competitors might affect our business, I would say not radically. I mean maybe slightly, but not even worth to mention. But the big impact for us is the price stability and new contracts with new products and better condition. So we will see slowly the translation into the company performance, not in the next quarter because the next quarter is still volume from the price war, but slowly as we transform the product to the new product platform. And as we have more share of better deals, we will see this improvement.

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Operator [49]

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The next question we received is from Alok Katre from Societe Generale.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [50]

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Alok Katre from SocGen. I have a couple of follow-ups and then 1 question. Just on the German comments, clearly, the permitting issue still continue to self-curtail demand in that sense. It's probably also propping up prices. Just wondered on the deal front in terms of how you think these -- the current sort of situation in terms of the permits, the undersubscription of auctions, et cetera, how does it affect your installation pipeline for 2020 and a couple of years beyond that? Because I appreciate the better, let's say, contracting environment. But just wondered how long does it take to translate that into sales? And therefore, does it affect your German market recovery from an installation perspective? So that's question number one, and then a follow-up.

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [51]

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It doesn't. 2019 German installations had a very insignificant part of the composition of the P&L. Then order intake translates generally in 12 months’ time into P&L effect in the German market given the time line of the projects. And therefore, any positive move that we might see between now and the end of the year might have a positive impact in 2020. And this is the view that we have today that little by little the market will recover and little by little, we will see German relative performance with respect to our markets improving, but that will only happen in 2020. 2019 will be very, very little activity in Germany.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [52]

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And if I can complement Patxi, I think the timing for us is how much is because we are ramping up. Germany requires big machines, requires the 5.X, so big machines. We are ramping up the capacity for big machines. As we mentioned before, bottleneck is new blades and investment in blades. And we saw, as Patxi mentioned, a substantial peak in demand in the U.S. for these projects. So having demand in Germany doesn't change our company because we don't have more blades to deliver, and those blades have customers in the U.S. in '19 and '20. So I'm not saying that this is positive. It's not. But the material effect for our company is neglectable because we have more demand for these products than capacity at this time.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [53]

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Good. Do you think from U.S. perspective, touching on the tariff side that's quite helpful. Just wondered from pricing dynamics perspective, how has that changed and looking at -- from a competitive perspective as well in the U.S., but also in terms of passing on any tariff to the customers? I was just thinking if the tariff net expands a bit more beyond China, does that -- how does that affect the overall, let's say, negotiating position with customers? Because this was clearly an issue, I think, across the industry and some aggressive pricing, et cetera. So just wondered if that has changed.

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Patxi Landa, Nordex SE - Chief Sales Officer & Member of Management Board [54]

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So far as we mentioned before, so the impact in 2019 is 0. 2020 will have potentially depending on the composition of the supply chain, some impact. 2020 is still relatively sellers market in the U.S.. And so far we are in a position to pass through the impact to customers.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [55]

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Okay. Okay. Perfect. And the last question really is, just wondering how should we think about the pricing in the backlog, the EUR 4.4 billion backlog of orders that you have relative to -- if I calculate what you need to get through to consensus expectations for the rest of 2019 gets to around 5%. Just wondering how should we think about the pricing and margins in the backlog relative to that 5% that you need to maybe consider for this year.

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

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I mean the last 6 quarters, more than 1 gigawatt. We officially announced that we saw light at the end of the tunnel in the last quarter, so you can take your math, the quality of the backlog. So we start to see that the margins since last quarter and especially with new products were a combination of the new products and from the timing of 2 quarters. And this will give you how long it's going to take to transition from price war margins to, I will say, future margins.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [57]

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But if I can complement what José Luis is saying, I think we have been discussing several times projects of our strategic outlook and the impact of price pressure that is still going back to projects that we took on in 2018, and I think that remains unchanged. I mean we -- of course, last year, we took some assumptions, but I think those assumptions are all becoming true. And therefore, actually no change of our view as far as 2019 is concerned. We have factored in obviously the backlog margin quality into our 3% to 5% margin guidance.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [58]

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Should we then expect much better -- is that effectively you're then saying is we expect much better performance purely on the pricing and everything? How that's been moving over the last 6 quarters that should start to show up already in the later part of 2019. Is that how we should sort of read your comment there?

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [59]

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Too early. I mean we don't guide. It's too early to guide next year. What we are telling you is factually that the volume that we land last quarter have better quality, especially with the new products. But we need to put what's the share of the new products over the total volume and when this volume is going to be installed is going to be in '20, is going to be in 2021. I mean the planning process for budgeting starts around August, and we follow the normal budgeting and guidance.

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

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But I think -- as I understood here, you're a little bit fishing for towards end of '19 upside if I understand you correctly.

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [61]

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No.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [62]

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And I have to say...

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Alok Katre, Societe Generale Cross Asset Research - Equity Analyst [63]

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No. I'm just trying to look -- yes. I'm just trying to understand when because that's the kind of indication some of your peers have said that it's probably the back half of '19 when you start to see, not necessarily get the full effect which is appreciable.

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Christoph Burkhard, Nordex SE - CFO & Member of Management Board [64]

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I think we had -- the good news was we had very high visibility into '19 earlier than usual, but that -- as a conclusion also enabled us, of course, to get more visibility maybe into the guidance. So I think that's a little bit to limit now to prices towards the later end of 2019. I think this was relative -- the midterm development will entirely be steered by product mix transition, but that's a midterm story.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [65]

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And if you take this -- that we announced today substantial deal, 0 impact P&L '19. Everything going to go to 2020 P&L.

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Operator [66]

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As far as there are no further questions, I hand back to Mr. Zander.

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Felix Zander, Nordex SE - Head of IR [67]

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Okay. Thank you very much. Yes. Thank you very much for your interest in our company, for participation and the fruitful discussion. And I would say goodbye to you.

And like to hand over to José Luis for his final remarks.

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Jose Luis Blanco Diéguez, Nordex SE - Chairman of Management Board & CEO [68]

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Thank you. Thank you very much, all of you. Thank you, Felix. I think the main messages and takeaway that we want to share with you is that start of the year is as expected. We have a clear view on '19 back-end loaded with high level of activity in the second half. It was mentioned but relevant to mention again that it's not only Delta4000 and 4-megawatt machine that Nordex is -- as well in the 5-megawatt segment kicking in with good customer acceptance and landing deals with new enhancement product. That the proven technology of Delta4000 is not just serving demand in Europe but as well as Lat Am, Australia and globally. And that we still see strong performance in order intake for existing and especially for new technology in the current and upcoming months. So with this, thank you very much for your participation and have a wonderful day.

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Operator [69]

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