Nordex SE NRDXF CEO Jose Luis on Q4 2019 Results

Dear ladies and gentlemen, welcome to the annual report 2019 of Nordex AG. As our customers request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by 0 for telephone operator assistance. May I now hand you over to Miss Thunder who will lead you through the meeting today. She's going ahead, sir.

Thank you very much for the introduction. Good afternoon ladies and gentlemen, Phoenix is speaking. I would like to welcome you on behalf of Nordex to our analyst and investor call for the full year 2019 figures. Our co-host José Blanco, CFO Christophe Borgia, and our CSO Kalender will give a presentation showing the latest developments about strategy, markets, products, guidance, financials, and not to forget COVID-19. After the presentation, we will open the floor for Q&A. Please limit yourself to up to three questions. And now I would like to hand over to our CEO, also José, please go ahead.

Thank you very much, José. Good afternoon. Looking at the market today, we see good demand for 2020 orders across the different markets, and this is supported by a number of factors, notably the acceleration of private offtake agreements. Demand in Europe continues to be strong, with exception of Germany, but not only strong in the Nordics and in the East as well. In the US, we continue to see a high level of activity for 2020 orders, and they announced an expansion of the 60% PTC value to the end of 2020, supporting midterm demand in that market. In Latin America, we also see good activity levels, notably in Brazil and Colombia. As a consequence of this, we have a good visibility on the potential order pipeline for 2020, even better than the one we have seen last year. However, with the outbreak of COVID-19, we still need to evaluate the potential short-term effect on demand. Next slide, please.

As José mentioned, in 2019 we had a record year with 6.2 gigawatts of new turbine orders, up 31 percent compared to the previous year. The row of orders in queue for 2019 were 1.5 gigawatts. ASP for the year remained stable at 0.71 million euros per megawatt. All markets performed really well, but notably Europe with close to 50 percent year-on-year increase, and the US with more than double the orders over the previous year. Importantly as well, Delta 4000 relative share of orders continued to increase quarter after quarter during 2019, representing already 67 percent of the new orders in Q4 2019, and contributing to increase the average profitability of the backlog. Next slide, please. Service sales grew 15% versus the previous year and represented over 12% of the total group sales in 2019. Segment profitability continued its good and positive evolution and increased to 17.7% EBITDA margin for the year. Next slide, please. Turning to the backlog, a brief reminder of the criteria we give ourselves for order recognition. We continue to apply the same discipline, and we only recognize an order when it meets all and each and every one of the following criteria: needs to have signed contract, all permits have to be in place including grid connection, financing for the project has to be in place as well, and the down payment already received. So the existing backlog that we will see now is formed by projects that meet all these criteria. Next slide, please. Turbine order backlog at year-end stood at 5.5 billion euros, increasing 43% from December 2018. Service order backlog at 2.5 billion euros, for a combined order backlog of 8.1 billion euros. Next slide, please. Looking at the backlog composition, the Delta 4000 already constitutes the largest turbine type as you can see within the backlog, and in normal circumstances it should grow to become the majority of the backlog during this year already. As I mentioned before, the average profitability continues to be very well balanced geographically, and very importantly as well, three-quarters of it is with large regional and global utilities and IPPs, confirming the very significant transformation in the customer base achieved by the company over the last few years. With this, I hand over to Christophe who will lead you through the financials.

Thank you very much, Patxi. Good afternoon ladies and gentlemen, welcome also from my side. I would like to guide you now through our full year 2019 financials. The financial year 2019 went according to plan without any major surprise, with the anticipated challenging back-end loaded pattern. Despite those challenges, we were able to fulfill our guidance and to reach all financial targets. And with respect to our order intake as just explained by Patxi, and also working capital performance, we were able to exceed the targets we set ourselves for the second year in a row. Now starting with the sales number of 3.285 billion euros in 2019, this is an increase of 825 million euros and 34% respectively compared to 2018, which clearly shows that Nordex as a global player is back on the growth track and has entirely overcome the negative effect of the declining German market. Cost margin stood at 23.6% at year-end 2019, and we generated 124 million euros EBITDA, representing 3.8% EBITDA margin. The profitability level is still reflecting the challenging price levels of the projects signed during the peak of the price competition, but improved by 35 million euros compared to financial year 2018, while increased financing costs due to a higher business activity were burdening the net result. For the sake of completeness, we have added the income statement for Q4 2018 which I'm showing now, which is not showing any unexpected deviation but reflecting the significant back-end loaded volume increase as communicated previously. Now if we move to the balance sheet...

The solid structure of our balance sheet remains in substance unchanged compared to year-end 2018. The significant increase of the balance sheet versus 2018 is of course driven by the increased activity level compared to previous year. Also equity increased in absolute amounts compared to 2018 due to the mentioned capital increase in October 2019, but the equity ratio went slightly down due to the overall balance sheet prolongation. With 510 million cash, we have again achieved a strong position at year-end 2019. Net debt in 2019 went slightly up compared to 2018 to 83 million. With this, I would now like to comment on our working capital development. The working capital ratio developed with -9.1% of sales very positively at the end of 2019 and clearly exceeded our expectations. This performance was mainly achieved for the following reasons: firstly, the remarkable increase of our execution activities towards the end led to a corresponding decrease of our inventories, which contributed to a reduction of 162 million in working capital in Q4. Secondly, the positive development was further supported by reduced receivables due to increased cash collections and higher account payables in line with volume growth in Q4. Overall, the result is a reflection of the cross-functional awareness of the importance of stringent working capital management within our organization globally. We have been talking about it for, I think now more than 2 years, and this is certainly also now a result of that. With this, moving to the cash flow statement. The cash flow from operating activities was mainly impacted by the positive working capital development, being partially offset by the net loss and the phasing effect of VAT following the ramp up and globalization of our supply chain. We have been talking about that already during previous quarters, particular in Q3, and we have all measures in place to reverse that effect. All of these, the cash flow from financing activities is mainly impacted by the capital increase in October 2019 and the repayment of the Schuldschein tranche in April last year. With this, going through the investments. Our total investment spend at the end of 2019 stood at 172 million, and this shows a jump of slightly more than 50% compared to 2018 as outlined on the slide. The investments undertaken in 2019, amongst others, to support our global production ramp up, specifically Mexico and Spain, steep increase in installation activities supported of course by all kinds of tools that we need and cranes, transformation of our global supply chain capacities even more towards our Delta 4000 platform, responding to the even faster and higher than assumed customer demand. And last but not least, of course also comprises further product development. With that, I want to move to the capital structure.

You do see the leverage curve in Q4 falling again steeply to 0.7, well below our long-term target level of 1.5, as indicated during our Q3 call. At that time, of course we were looking at 2.2, and I think many of you were wondering how will it pan out, what's the end? And actually we again managed to get to the level which is our ambition level. We have already touched upon the equity ratio, and here you can see again the impact of the capital increase as per October 2019. Now I would like to sum up the full year 2019 financial results of the Nordex group with the following three takeaways: firstly, Nordex delivered in a challenging environment in 2019 as per the guidance and without any negative surprise. Secondly, Nordex managed successfully an extremely back-end loaded year with all challenges related to this pattern and is fully back on the growth track after the temporary volume dip in 2018. And this of course is confirmed by our guidance which we will talk about in a minute. Certainly, with this being said, Nordex group feels well prepared for a very intense 2020, showing further significant sales growth driven by our record high order backlog and constant new order intake generated by our successful Delta 4000 platform. But of course that picture needs also to include a view on COVID-19, but we will do that in a minute. Thank you. Thank you.

Thank you, ladies and gentlemen. We will now begin our question-and-answer session. If you have a question for our speakers, please signal by pressing star 1 on your telephone keypad now to enter the queue. Once your name has been announced, you can ask the question. If you find your question has already been answered, you may press star 2 to cancel your question. If you are using speaker equipment today, please lift the handset before making a selection. As a courtesy to other participants, may I finally request that you limit the number of questions you ask to three? Thank you. And one moment please for the first question. The first question is from Sean Lachlan from HSBC. Your line is now open, so please go ahead.

Good afternoon and thank you for taking my questions. Just on COVID-19 first, just understanding this stress test that you're implementing right now. I mean, just on working capital, your guidance pre-COVID implies a potential unwind of up to 300 million if the working capital balance comes back to zero. I'm just wondering, what are you looking at in a potential stress testing scenario, and ultimately what measures do you have to protect cash in that scenario? That's my first question.

I shall answer this. Christophe? Yeah, let me first start with the delta of 300 million that you are getting. I would like to put that in the context of how we have set our guidance over the previous years. You have been seeing a constant downward trend, which certainly carries an element of conservatism, but also I think it was appropriate because there was uncertainty. So we moved down from 7 to 5 to 2, and now we say clearly we want to be negative constantly. That is the background to the guidance. With respect to stress test measures, I would like to point you to the cross-functional COVID-19 team that we are having. It is very important that we are reacting fast once we do see new developments coming in, in order to prevent that we are building up too much working capital, and that across the entire supply chain or the entire value chain obviously. Therefore, we do monitor very closely project developments in order to countersteer on the outflow side and order to counter.

Question on component supply. Are there any specific components where you think supplies are more constrained? The way you see pinch points across the supply chain or for the wind industry this year?

Understood. The final question on the higher profitability. You can say enough sometimes the Delta 4000 is more profitable, and the proportion of the order book now of Delta 4000 continues to grow. Can you explain, and in a year pre corporate guidance, you know you're seeing huge expansion. What is holding back the underlying margin growth of the business?

Clear, thank you. And the next question receives from the Bastion Goal of collapsing KG airline is now open... We might have a little bit of technical issue. One moment. So before we take the question of Mr. Gros, we take the question of Martin Wilkie from Citigroup. Your line is now open. Please go ahead.

Yeah, hi, thank you. It's Martin Wilkie from City. It's a couple of questions. I mean, you mentioned about the supply chain and some comments that you had components and so forth. You do mention in your slide you have some third-party sites in China for blades, which is specifically on China, which was obviously the sort of starting point for the COVID-19 crisis. Was that a problem that's now being alleviated in terms of sourcing parts in China, or was that never a problem given this specific sourcing you got from China? Just, I've done a little bit about where that caused any issues for us all over the last time?

Thank you, that's very helpful. And just a second question. You mentioned about good demand for orders, suggesting the tendering activity still remains high. But I'm guessing that any tendering you're doing today is for delivery in 2021. Are your customers taking the view that they can still talk to you and go ahead with you on the view that any sort of bottlenecks that may happen in the short run with labor movement will be alleviated, and therefore you still expect that tender process is unchanged, if you like, from the current crisis?

I can take this one. So far, what we see, the facts of having the table in, I can share this with you today. As we are approaching Q2, the orders in the current quarter will have already surpassed those in the first quarter of last year, and I believe they will enter at around 20% with respect to last year. In progression, because January was a relatively poor start, February was better, and March was having the best amount of the orders. So this shows the activity that we see. Again, the view that we have on the year, which as you rightly say is for orders that will materialize in installations and activity in 2021, is very strong. As a consequence of that, at this point in time, that is what we see. Needless to say, there will be some customers that may take a view more wait-and-see from an investment perspective, and we are starting to see a few of them having that view. But all in all, as of today, what we see is that the view is that midterm life goes on.

Okay, that's encouraging. If I get my final question, you mentioned at the beginning the PTC extension. We've heard from different sources as to how important that 60% PTC extension could be. But it sounds like you potentially do see additional demand because of that extension? Just interested to hear some more color on that.

Ok, thank you. That's very helpful. Thanks.

And now we take the questions of Sebastian Groff on AG. Your line is now open. Please go ahead.

Yes, good afternoon. I just have a check so you can hear me right now? Yes. So let's go. The first one is a follow-up to what questions around the guidance. When looking at the incremental sales and profitability, it seems that the contribution margin is sort of very much on par with what we saw in 2019, surrounded by pipes? I've been hearing you clearly on launch customers and still obviously a majority of the backlog for 2020 being based on the old product. Could you nonetheless give us a sense of how much of ramp-up costs, high logistic costs feed into that guidance for 2020? And then I have the other two in a nanosecond.

OK, sound encouraging for 2021. And same questions around the operations and the capacity. Obviously, as Patxi just mentioned, the order backlog and pipeline is still calling for strong business activity in 2021. And you also mentioned before that the multiple plant in the US is one of the biggest missile plans for the company. Can you help me understand what related capacity leeway is from this mothballed plant in the US? And I think you mentioned on one of the previous calls that you have the ambition at least to take the overall run rate towards six gigawatts. So, the key cornerstone in here?

I think this year the plan is to ramp up the company to more than 6 GW, I will say in the range of 6.5 gigawatts without taking into account the US plant. So there is even potential for the current nacelle plants to grow further than the 6.5 gigawatts. With the US, of course, it is much more. The bottleneck is not nacelle assembly, it's components. It takes two years to develop gearboxes for the 5 megawatt platform. The bottleneck is also blades. But if we successfully execute the ramp-up in blades this year, we will have the possibility to sell more if customers are willing to buy more.

OK, interesting. And actually put a number behind the US plant just for the sake of completion. It is easily, I mean we shared before in the presentation the number of production in Germany, 500 turbines. 500 turbines are very easy to produce in the US. But don't take that as a number, it's a possibility.

No, no, that's helpful. And then the other last question is just on fine. Christopher can just remind us of your financing headroom that you have in place. We have seen this gross cash of around 500 million now at the end of 2019. I guess you also have ample credit lines. The question is simply how much of that is or has been drawn down. And what should we know eventually about potential prolongation?

If you talk about our credit line, then you are I guess you are talking about the guarantee line I suppose. Our guarantee line is at the moment 1.21 billion, utilized around a billion, a little bit short of a billion. So there is not too much headroom left. On the other hand, I think we have reached a pretty steady state rhythm now. You have been seeing our order intake has been on a constantly higher level, already anticipating the growth that you see in sales. So we would not see, I mean I don't know how successful it would be in the future, but you know already very successful. So what I want to say is we do not calculate with big jumps upward even more for the time being with order intake. So we feel comfortable with that headroom that we have left. We have also been quite successful internally to incentivize sales orders to put maximum focus on parent company guarantees in order to get the balance between bank guarantees and bank bonds.

OK, sounds great. And then sorry for the very last quick question on VAT. It has been obviously quite a headache for all. Can you just give us a sense what the burden was on the cash flow statement in 2019 and what you expect to revert in 2020?

Yeah, I'm going to be very open with VAT. I was too open already in Q3 and I continue to be. I was in January in India with our head of taxes to look personally after that topic because it is I have to admit it is really complex and tricky topic in certain countries. We have a burden of 93 million in pricing effect, 93 in 2019, which is a lot admittedly, and we have to reverse that. Again, there are countries like Brazil, like Mexico, like India in our landscape that are really much more complex compared to Europe. I will also be open, we underestimated it back in 2017, '18. You need first to have the real life experience. But we are massively working on it, massively working on processes. You need to do much more documentation, you need to be much more on the trigger compared to Europe. And I think that's all in a good way, but it's a complex topic. Yes, Kapil, thank you.

Before we take the next question, just a reminder, if you would like to ask your question, please press 0 1 on the telephone keypad now. And the next question is from Frank Arya. Your line is now open. Sir, please go ahead. Mr. Arya, your line is open right now. Are you on mute? Sorry, I'm not sure. Can you hear me now? Yes, yeah, yeah, okay, sorry, my headset seems to be the trouble. Yeah, sorry.

Three quick questions. One about the prospects for the German market. You mention it's nothing much happening in 2020, but what are your thoughts on the timing of a possible recovery in that market? And secondly, a broader question regarding oil price collapse and any implications for demand in your sector. And thirdly, some comments on the pricing of the four to five megawatt turbines. I guess they are on the path of gliding prices. Where do you stand in terms of your outlook for the general price reductions in the market as a whole? How do these Delta 4000 fit into that picture? How far do they take you in terms of following the downward slide in pricing in the industry as a whole, please? And thank you.

I will address the German market first. The German market represented during 2019 around 3% of our total orders. So that puts the conversation in context. We don't count on the German market unfortunately given the situation. When is the timing with respect to recovery? We are slightly pessimistic to be honest, because the word movements have needed to happen did not, and as a consequence I believe that we are not counting on a full recovery of the market in the year 2021. That is built into the business plan. So consequently, Germany for us is an upside, so it is negligible at this point in time. When it comes back, which I have no doubt it will come back, it will be enough. With respect to oil price collapse, it remains to be seen. As you know, oil is not determining pricing in power markets; gas naturally does, natural gas does. But we need to see whether this is structural or a story to judge at this point in time. The reaction is going to happen to global electricity demand specifically in specific markets. I believe players need to form a view in that respect. To my earlier comment, the players that are having the same information as we do, speaking in March 2020, are taking investment decisions that we collect as orders. As I said, the order evolution is here at a greater level than last year. We will have to wait and see a little more on the impact of this into future demand, whether it is really short term or long term impact. With respect to pricing, the industry has seen over the days where pricing was on a big decline. Pricing is a relatively complex topic, and we all rightly discuss about the ASP as an indicator which considers a number of factors, and consequently it is not showing too much overall value to assess and understand pricing evolution. But what I can share with you is that pricing stabilization is in the market, and I see that competitors and ourselves are very disciplined right now in that respect. The scenario is very different to the one we were suffering a year and a half ago. And I assume that the Delta 4000 in terms of price per megawatt fits into the pattern of generally declining over the years pricing environment. That's right. From a pure capex perspective, mathematically the greater the generator, the lesser the ASP. But what you need to factor in is the numerous comments that we have done during the call with respect to the profitability of the Delta 4000 compared to the legacy product, which is increasing. All right, thank you very much.

The next question is from...

Sorry, sorry, I was very hard to understand. We said we hear you very far away. Is this better? Thank you very much. I'm sorry. I was talking about the prepayments that you receive. Could you give some color as to how they're different geographically? Which geographies give you better or worse prepayment?

I remember the US were pretty good at it. They follow the split that we have been showing for ordering pace of 52% Europe, 28% North America, 18% Latin America, and then the rest of the world. Quarter on quarter, the dynamics of different markets may alter those percentages. The US in the current state of business, Q2 generally has a greater share of US deals. But other than that, they would follow relatively well the full year pattern.

And if I may add something to what Patxi said, maybe more generally to answer your question, I think we have been observing quite a harmony of payment terms if I may say so over the globe basically. If I compare that to 2-3 years ago, where it was much more dependent on whether you would deal with a country where you would have smaller customer structure with smaller developers, etc. So if I look at projects being presented for approval, whether in Latin America or the US, the payment terms are fairly similar meanwhile.

OK, thank you. And with respect to your audibility going obviously oils dropped away? The world's a brave place these days. This question is also probably as already answered: is there any danger to any of your order book falling apart effectively? Customers pulling orders, perhaps even asking to repay some of the prepayments on the order book? I did listen to a presentation with five criteria. So generally, those are projects that are fully permitted, so no risk on permitting side; fully financed, so no risk on financing side; with binding contracts legally firm and binding; and up payments already received. In that context, with finance in place, permitting in place, projects go ahead. After the biggest share of the backlog is Europe, US, Chile, South Africa, Australia. So in relative terms, we have increased our European/North American weight into the backlog. Yes.

Ladies and gentlemen, again as a reminder, if you would like to ask a question, please press 0 1 on the telephone keypad now. And the next question we received is from Marco Smith of Otto BHF. Your line is now open. So please go ahead.

Yeah, thank you. It's a question I have, just one actually, and it's related to the guarantee facility. I saw on the annual report that you extended the facility with your banks to April 2021, so it's not a new five-year maturity. Could you please explain what is driving this? What did the discussion with the banks end? And if the intermediate prolongation will be made on the same terms as the most recent facility?

Yes, we are coming to an end with our process here. What I can tell you, we have been seeing some kind of extension of the timeline due to COVID-19 and very strict travel. We have many people now working from home offices that certainly slowed down some of the approval committees. But I am optimistic that we will be able very soon to communicate the respective prolongation of the facilities.

OK, so that could happen and that's realistic?

Absolutely. The intermediate prolongation has taken place on the same terms as the previous. Absolutely, yes, yes, yes. Any that you see now on our annual report actually yes, it is already approved and implemented.

OK, great. That's for me. Very much welcome.

And the last question for today is from Guido also from Otto BHF. Your line is now open. Please go ahead.

Good evening. So most of my questions have been asked. Maybe one question: the new products share in sales is expected to increase in the next years, but today your product business is a bit negative. When should we expect it to be profitable again? And what is your medium-term target for this business? Thank you.

Maybe I can complement that. If you see the backlog composition at the end of last year, 40% is composed by Delta 4000, the balance non-Delta 4000. When you see that three quarters of it have a maturity of 12 months or less, you can deduce that a significant amount of the non-Delta 4000 backlog will go through the P&L during 2020. Moreover, the new orders share is going to be a majority Delta 4000. You can figure out what the potential composition of the backlog at the end of 2020 will be, and I expect the majority will be Delta 4000 already, with the profitability impact that José was mentioning.

OK, that's clear. Thank you very much.

Ladies and gentlemen, thank you for your questions. And now hand back to Mr. Tonga for some closing remarks.

Thank you very much for your participation in the call. If you have questions, my team and I are happy to take them. And now I would like to head over to our co-host Luis for our final remarks.

All right, ladies and gentlemen, thank you for your attendance. The session is concluded. You may disconnect.