Nordex SE
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Nordex SE
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Thank you very much for the introduction. Good afternoon, ladies and gentlemen. On behalf of Nordex, I would like to welcome you to the conference call for the full year 2018.We have participants here in the room, and we have also participants on the line. And with me, we have our members of the board, our CEO, José Luis Blanco; our CFO, Christoph Burkhard; and our CSO, Patxi Landa. They will give a presentation to you and they will inform you about the latest developments of our company, the strategy, different markets and the financials. Afterwards, we will open the floor for the questions. We will start with our audience here in the room and then switch over to the participants on the line. [Operator Instructions]And now I would like to hand over to our CEO, José Luis Blanco. Please go ahead.
Thank you, Felix. Good afternoon, good morning, ladies and gentlemen. Welcome again to the Nordex Full Year 2018 Analyst Conference. As Felix mentioned, I'm here with my management board colleagues: CFO, Christoph Burkhard; and CSO, Patxi Landa. Let me guide you through the agenda that we have prepared today. It's the standard format, so you are used to that. I will start with an introduction, hand over to Patxi to give our view on markets and orders. Christoph will explain the development of the company in financial as well as main KPIs. I will take it from there to guide you around operations and technology developments. We will share with you our strategy going forward as well as guidance for 2019, coming back to key structural patterns in our company, in our business, open the floor for Q&A and key takeaways of today's presentation.So with this, we move on to the first slide of the presentation. I will say the summary here, the main takeaway is that full year 2018 was in line with overall market expectations, and we delivered as we promised, sales in the span of EUR 2.46 billion; EBITDA margin, 4.1%; working capital, very good performance, minus 3.8%; and CapEx approximately -- not approximately but EUR 112.9 million.Very remarkable was the full year 2018 order intake. It increased 73% to 4.75 gigawatts compared to the previous year. And remarkable, the contribution of the most -- newest and most updated product to support a record-high fourth quarter 2018. So strong quarters in -- strong Q4 2018 order intake, record-ever volume, 1.7 gigawatts compared to 1.6 previous record 1-year report. As a result of the very good order intake, book-to-bill ratio increased to 1.71 from 0.8 the previous year. And this is, of course, signaling future growth for the company.Remarkable, and we -- Patxi will talk about that later. We see price stabilization. We started to saw (sic) [ see ] in the second half of last year, and we see more evidence now. Average selling price level was EUR 0.77 million per megawatt in the full year '18.Remarkable as well that 40% out of the 1.7 gigawatts order intake in Q4 comes from the new Delta4000 4-, 4.5-megawatt turbines. We landed as well the largest-ever turnkey order intake with this very new and fantastic turbine, Delta4000, in Sweden, 475 megawatts. Remarkable as well, landing in India 300 megawatts with a new product as well, AW140/3000. And last but not least, we were recognized by Windpower Monthly as the turbine of the year with the launch of this new platform.So with this, I will hand over to Patxi.
Thank you very much, José Luis. Good afternoon, ladies and gentlemen. Last year, we surpassed 25 gigawatts of accumulated installations globally in more than 40 countries. In dark blue, we show the markets where we installed turbines last year. And as we can see, we have a very strong position in all relevant markets, both volume and growth. And as a consequence of that positioning, more than 2/3 of the new 2018 orders came from large global operating customers.Looking to order intake. We closed the year just above 4.75 gigawatts of new turbine orders. That represents a 73-point increase year-on-year, and this corresponds to EUR 3.6 billion volume, with an average selling price of EUR 0.77 million per megawatt, which have seen stabilization during the last year and over the last 4 quarters. Importantly, such performance was achieved with a very balanced geographical footprint, reducing our exposure to individual markets in, for example, Germany, which is traditionally one of the main markets for the company, that we see the temporary low level of activity. And despite that, we were able to land this record order intake in other markets.Our new Delta4000 product was very well received by customers. And we saw initial strong demand, as José Luis was pointing out before, in the last quarter of 2018. And importantly, we see that, that trend is consolidating at the beginning of 2019.Service segment continues to grow at a healthy rate of 9% year-on-year. We see this margin increasing as well to 16% for 2018. Continues to be a solid and predictable part of our business, with solid new order inflows and a very high contract renewal rate of 85% as an indicator of customer satisfaction.From an order backlog perspective, turbine order backlog grew 132% year-on-year to over EUR 3.8 billion, providing a very high visibility on revenues for the full year 2019. In combination with order -- service order backlog, total combined order backlog for the company stood at over EUR 6 billion at 21st of December 2018 (sic) [ 31st of December 2018 ].And with this, I give way to Christoph that will continue with the financials.
Thank you, Patxi. Good afternoon, ladies and gentlemen. Welcome also from my side. And I would like to guide you now through our full year 2018 financials.As a starting comment and José Luis mentioned it already, the financial year 2018 went according to plan on an anticipated lower level compared to 2017 without any negative surprise. We have fulfilled our guidance and reached all financial targets. And with respect to order intake and working capital performance, we were able to exceed the targets that we set ourselves.Starting with the P&L and with the sales number of EUR 2.45 billion in 2018, the delta of EUR 619 million compared to 2017, this was previously explained, almost entirely attributable to the decline of the German market. Gross margin stood at 26.6% at year-end 2018. And despite the volume reduction in the challenging year 2018, we were able to generate EUR 101 million EBITDA, representing 4.1%.Driven by our 45-by-18 cost reduction program initiated in 2017, personnel costs as well as operating expenses were significantly reduced throughout 2018. The overall PPA depreciation amounted to EUR 62.6 million, which, by the way, will be reduced further to approximately EUR 30 million to EUR 35 million in 2019. And for the sake of completeness, we have added the income statement for Q4 2018 not showing any unexpected deviation.Now looking at the balance sheet. The solid structure of our balance sheet remains unchanged compared to year-end 2017. Certainly, the equity ratio is showing a significant deviation compared to year-end 2017, but the main reason behind is the technical effect triggered by the change to the IFRS 15 accounting standard in 2018, which was explained in detail in the previous quarters. The exact impact of this technical effect is illustrated on Page 15 of the presentation. Then with EUR 610 million, we have again achieved a strong cash position at year-end 2018. And we were able to reduce net debt in 2018 compared to 2017 to EUR 32.5 million.And now I would like to comment on our working capital development shown on the next slide. Working capital ratio developed was minus 3.8% of sales, very positively at year-end 2018. This good performance was mainly achieved for the following reasons. Firstly, our very stable inflow of new orders over the quarter, supported by a focused working capital management, enabled us to even out bigger seasonal working capital peaks. You remember we saw those peaks in 2017, and we were able basically to even them out. Secondly, we were able, particularly in Q4, to further improve on all working capital-relevant levers. And here again, strong order intake and stringent accounts receivable management contributed strongly to the substantial working capital reduction.This brings me to the cash flow statement. Despite the fact that we went through a challenging year, we were able to generate EUR 44 million positive free cash flow in 2018, following a negative free cash flow of EUR 54 million in 2017. This result is attributable to the working capital improvement, as explained before, and has been broadly supported by the overall cash consciousness of our team across all functions.Our total investment spend at year-end 2018 stood at EUR 112.9 million, almost exactly hitting our guidance of approximately EUR 110 million. And as outlined on the slide, the investments undertaken in 2018, amongst others, do support our global production ramp-up, specifically India and Mexico; the steep increase of installation activities, obviously with many, many tools and supporting devices; and of course, further product development.Last but not least, looking at our capital structure, we do see the leverage curve falling again well below our long-term target level of 1.5, as already indicated at the Q3 call. We have already touched upon the equity ratio, and here, you can see again the impact of the technical effect related to the IFRS 15 accounting standard change.Now let me sum up the full year 2018 financial result of the Nordex Group with the following 3 takeaways. Firstly, Nordex Group delivered in a challenging environment in 2018 as per we guided and without any negative surprise. Secondly, Nordex was able to further maintain its financial solidity and to significantly improve its working capital performance and free cash flow generation. And thirdly, with this being said, Nordex Group, we, the management board, we are also financially well prepared for 2019.And with this, back to José Luis.
Thank you, Christoph. If we move to next slide, operational performance of the company. First, in installation, we just follow the demand, and the demand is a consequence of basically the order intake 2018 that, as you will remember, was a weak year of order intake. Nevertheless, we installed 828 turbines in 17 countries: 44%, Europe; 17%, Latin America; 34%, North America; and 5% rest of the world.In production, as Christoph mentioned, 45-by-18 was one of the strategic initiatives of this management board when we took over and started the turnaround of the company, combining investment in new products and combining investment in supply chain transformation. In the 45-by-18, on top of adjusting the structural costs of the company, we needed to downsize the production capacity of the company to adapt to a lower level of demand but without endangering the ability of the company to substantially grow in the future. As a consequence, we assembled 202.2 gigawatts of nacelles, and we produced in-house 800 set of blades, almost 37 in Germany -- or 360 in Germany; 300, Spain; 37, Brazil; 18, India. We will see a completely, I would say, substantial growth in this year, especially in India and in Spain. And we did in-house production of 807 units in blades in Germany and in Spain.So the key takeaway of this slide is that the company is prepared to substantial volume increase that support the revenue guidance of 2019. We expect a back-ended operational year, but we are prepared. Our factories are prepared all over the world, and we feel well equipped to meet the customers' -- the increased customer demand for our products.If we move on, one of the key factors for our successful turnaround was working capital management, cash management and COE competitive products. So the consequence upon a steady reduction of cost of energy was and is key and remain key as one of our core strategic initiatives. As we mentioned in several times, we have more than 300 people around the clock, cross-transactional teams focusing to improve the cost of energy in order to have a more competitive company in the marketplace and enhancing our product portfolio and our service portfolio. Our previous performance of high single digit year-on-year was slightly exceeded. Our future targets remain high single digit year-on-year for the next three years based on mainly new products, like the one that you saw this morning, which have from 6% to 15% more yield, this product, with more factories in best competitive countries close to the markets where we sell: Mexico for the U.S. and for the Mexican markets; India for the areas for India and the areas around India. So new products, more competitive supply chain will trigger cost of energy -- further cost of energy reduction in the future. If prices remain stable, as we see today and was mentioned by Patxi, and we keep reducing COE, we should expect company -- improving performance of the company in the future.With this, let's use some time to share with you some important development for the company. It was -- the launch of Delta4000 1 year ago was a plan that we shared with you. And again, in this plan, we delivered towards -- to your expectations and to our customers' expectations. We developed -- we were one of the first companies to develop, let's say, 150-meter rotor plus 4 megawatts plus-rated machine with hub heights up to 164. That fully harvests the synergies of the previous merger of 2 companies together, so the best of Europe and the best of demand in low-COE markets, as the U.S. and many others. So this company was -- or this product was thought and designed in the beginning to tackle the high-demanding siting restrictions of Germany and Europe as well as the COE challenges of low-cost markets as the U.S. and many others.We delivered the prototype in -- absolutely in time. We installed and commissioned it in September 2018 around WindEurope in Hamburg. The performance of the product, 4.5 megawatts maximum rating, as expected and was the first prototype of its class in the marketplace.Series production of this product have started, in fact, last week in our plant in Rostock. And we have more planned, 200 of these turbines already in the permits in Germany for the time being. So very successful order intake in the last quarter of the year; very successful order intake of orders that we are working on in the first quarter of the year, expanding the competitive of this product with the recently launched 5 megawatt plus; and again, strong interest in Germany, Northern Europe, Australia, South and North America. It's a really, really global product with high market demand for this product. And as mentioned before, certification obtained in time and awarded wind turbine in the 3 megawatt-plus class.Good. So with this, I will take the opportunity to share -- or we will take the opportunity to share with you our strategy road map going forward, which is very much focusing in what we were focusing the last 2 years. So the good news is that there is no change in strategies. We keep doing the same. So far, it's successful, so we expect that this is going to remain us in the right track going forward.I think we accomplished something that was very important. You remember 2 years ago when we shared with you our plan, we had the ambition to become the top 4 global player of choice. I think being sizable and being global is a license to play to be perceived as a sustainable supplier in the customer community. I think we achieved that. In order intake, clearly, we are today the top 4 global player of the industry with a couple of shares from the rest of the participants in the market. And if that is in the order intake, very soon, we will see that positioning in the ranking of installations. We are a company that lives and breathes COE, and we are COE- and customer-centric. And I think we achieved being perceived by stakeholders, analysts, banks, customers, shareholders as a sustainable, long-lasting player of the industry.What are our focus? As mentioned, speed, we need to be faster than our competitors in time to market. We need to be COE- and customer-centric. We need to be flexible in times that the market environment changes. There are duties, trade war, no trade war, so we need to adapt fastly and rapidly to new changes in the marketplace.What have we delivered, and what we are planning to deliver in the future? Global market presence, hopefully, ambition to keep this good momentum, so 73% increase, 4.7 gigawatts across all the regions. So our ambition is to grow with the market or slightly more than the market. And the prospectives for the market are positive because society demands decarbonizing economy, and there are not many other alternatives other than wind and solar.Second, we wanted to deliver optimized product portfolio and, as a program part, strong demand for the product that we launched recently globally.Third pillar was the supply chain transformation from the company. As we speak, we are ramping up our biggest blade plant in Mexico as well as in India for local demand and global demand. So improving every single day the competitiveness of our supply chain, doing more in best competitive countries close to the markets where we operate, so Europe for Europe; India, Mexico and other best competitive countries for non-European market supply.We are going to keep our cost and cash focus. So positive free cash flow, working capital ratio substantially improved and this is -- remain very high in our agenda. And as was mentioned by Patxi, strong renewal rate and strong service growth, close to 10% year-on-year, thanks to the good renewal rate and the order intake.So as a summary, we are in the right track to be a leading global onshore wind turbine supplier. I think we are that, and we need to enhance that position.With this, approaching the end of the presentation, I would like to share with you our guidance for 2019. As a consequence of the good order intake last year and as a consequence of a very good coverage of orders, we expect to land sales in between EUR 3.2 billion and EUR 3.5 billion; EBITDA margin in the range of 3, 3.5 (sic) [ 3.0 to 5.0 ] mainly driven by activity; working capital, high focus, below 2% in this growing activity period; and we plan to deliver a CapEx approaching EUR 120 million. And this is -- very much is going to depend off the demand from the new products and the ability of the company to speed up investment in molds for the new products. So if we see opportunities that we see and we have possibilities to accelerate investment for margin recovery in the future, we will do so, always taking into account the working capital and the free cash flow. With this, we want to share with you as well some key structural patterns that we see in 2019. First, we see very back-ended installation, and this is driven by the profile of the contracts. It's usually a normal pattern, is not new, it's similar to the last year. We will see low revenues in first half of the year and very strong revenues in the U.S. Several reasons: U.S.-driven, usually, installations in the U.S. are mainly performed in the second half of the year as well as some other customers and countries. So we will see record-high execution level in Q3 and Q4 as well as ramping up manufacturing capabilities in the second half of the year. I mean, the plan, in the case of nacelles, is to -- is on availability of components, but we don't see a major risk in terms of industrial capacity. I will say some ramp-up needed in place, but we have good plans to deliver this substantial increase in activity. And this, of course, as was mentioned by Christoph, is going to demand even, I would say, a more close look to working capital. But as we are finished to do that, we will keep doing that. And so with this, I will hand over to Felix for the Q&A.
Thanks a lot. Now the floor is open in our audience, and happy to take the first question. Yes, Guido, yes, please.
Yes. Guido Hoymann from Metzler. So I've got 4 questions. So starting with the order intake in Q1, you usually prerelease bigger orders, and I think if I add that up, what you prereleased come up at around 400 gigawatts or something like that. I think last year's level has been around 1 gigawatt in the first quarter. So maybe you can give an indication where we stand, if there's more to come in the next few days or if there's a shift into the following quarters or something like that. Second question would be on the selling prices you reported. They rose slightly in Q4 compared to Q3. So is that a result from a different product mix or regional mix? Or is it maybe indeed -- or does it indeed mark the trend figures? So what's your opinion on that? And then you actually gave a quite wide range for sales and margin. So if I apply the lower end of the sales range and the lower end of the margin range, I get some EUR 90 million EBITDA, and if you use the upper end of both, then you end up at EUR 180 million EBITDA. So maybe you could elaborate on the 2 scenarios, which mark the both extreme cases. What has to happen for the lower end to come out? And what has to happen for the upper end to be the actual outcome? And last but not least, you -- in the recent quarters, you provided some guidance on 2020. Today, you didn't. Does that tell that these kind of targets are no longer valid? Or unless something changed, or is that still unchanged?
Okay. You take...
1 or 2?
Yes.
Thank you, Guido. With respect to the first question, we wouldn't -- there is much to come in Q1 from what has been already published. And we would be in a normal basis in the first half of the year as we were last year, if not slightly improved. So we keep a good momentum of orders, and we will see that in the next couple of quarters coming. With respect to your second question, ASPs, there is an effect of scope given the fact that in Q4 last year, we sold an extraordinary share of EPCs with respect to a normal quarter, and the effect of higher scope has an effect as well in the year. And that is the main driver for that increase.
Nevertheless, if I may complement Patxi, too, that with the new product, we see better margins. So the more we sell the new product, more we ramp up the supply chain for the new product, the better margins we will see in the future.
Guido, if I can elaborate on the [ language particularly for ] EBITDA and revenues, of course, we anticipated your very elaborate question here. What would have to happen? Let me start with the lower end of the guidance. We have described what -- in terms of pattern for 2019 as well as operationally what we expect in 2019. And for us, in terms of describing generic risks, and specifically, I'm talking here generically, yes, there is no reason to already assume something we have guided. But it's our obligation to think about generic risks in a year with increasing volume. It is very much about the installation peaks that we have seen in the second half of the year, and that has 2 dimensions. The first dimension is the one that is really affecting our own internal teams. And our teams have to cope with a very, very heavy number of installation towards year-end. And if they would not be able to live up to our plan, that, of course, could trigger -- that could really trigger negative effects on our financials with respect to [ LDEs ], with respect to delayed installations. And that could affect both the revenue part as well as the margin part because as you know, IFRS 15, everything that is not mechanically completed by year-end doesn't show up anymore in the revenues. So this would be simply a logical consequence, and that could be substantial. And therefore, we decided to go for a wider bandwidth. The second dimension of the same topic is it could also be triggered by external -- by the external root cause. We, of course -- particularly this year, we were heavily -- although it depends on the performance of our key supplier. And I mean, it's absolutely -- I mean, it always happens in this industry that even very experienced suppliers experience also shortages, problems, whatever performance topics, and that basically would be -- would trigger the same result. But just basically, the root cause would lie with the external suppliers. So that's the reason for the lower end of the bandwidth, yes? The higher end of the bandwidth is a combination, of course, of being -- showing super high performance on the revenue side. I mean, could happen, yes? And that, together with stellar performance, no whatsoever issues that have a negative material impact and, of course, the company always operating with a risk but not only with a risk but also with a chance at least, yes, and we have a few chances, also opportunities penciled in. And if everything falls in the right place, then we could also end up in the high end of the guidance. And with respect to your question around 2020, there is no change of view. Otherwise, we would have communicated. But we have talked in autumn about it, and we did not want now to blur the focus of the year-end 2018, and an introduction of the 2019 with already with a comment on 2020 and have already a 2020 discussion, yes.
But the patterns of the outlook unchanged
It is unchanged.
Unchanged, yes. And one factor in the previous question, customers. For the revenue, I mean, doing everything perfect, a customer might face a permitting delay or might face a delay in the balance of plant. It doesn't mean that the project falls apart. It means that the project is delayed to the next year. But due to the accounting rules, you cannot account the profit and the margin. So this is a combination of factors for the growth guidance.
Okay, thank you. Do we have other questions here? Okay, not for the time being. Operator, then please open the floor for the participants on the line. We're happy to take their questions.
[Operator Instructions] The first question is from Michael Berman (sic) [ Michael Boam ], Sona Asset Management.
I have a few questions. Firstly, with respect to cash flow items, you've talked about CapEx of EUR 120 million. Taxes last year were around EUR 25 million, interest around EUR 35 million. What will there be in restructuring this year? And do you expect to be able to be free cash flow positive? The reason I ask is because with such strong growth in revenue, it's unlikely that your -- I mean, working capital should naturally grow.
Yes. So to comment on restructuring, no, there's nothing planned this year. With respect to expectations around positive free cash flow, as usual, I would not like to speculate that early in the year around whether we make it or not. What I can say is that certainly, the starting baseline is much more ambitious compared to previous year. And yes, we have come down to minus 3.8%. At the same time, as explained, the pattern of our ramp-up certainly could have effects on working capital with respect to temporary increase of inventory. It's not what we planned, but it could. And eventually, one big factor will again be -- and therefore, it's simply too early to be more precise here. You saw how -- you know how big the effect was in Q4 2018 with respect to the order intake performance and the order intake dynamics. And this will also add or contribute a lot or even -- or not contribute a lot. So this is for us also a big uncertainty. Therefore, we cannot be more precise at this point in time.
Okay. But the cash items that I mentioned, if you agree with the numbers, equate to a cash burn of around EUR 191 million. That's assuming nothing for working capital. The high end of your guidance is for EBITDA of EUR 175 million. You'd still be cash flow negative on that basis.
Yes, that's correct.
The next question is from Manuel Losa, Goldman Sachs.
It's Manuel Losa from Goldman Sachs. I have 2 questions if I may. The first one, you announced today the development of the new 5-megawatt machine, which will start into production in 2021. And I was wondering whether you think that your current CapEx is sustainable to go with that or you will be expecting an increase in terms of CapEx when you start developing this new machine. Second question, I think I understood you correctly, José Luis, but I just wanted to confirm it. Am I right to assume that with the new turbines that you're expecting to deliver in 2020, we should see an improvement in terms of profitability, meaning an improvement in terms of gross margin if prices remain as they are right now in terms of stable?
Thank you, Manuel. Starting with the second question is, yes, I mean, we have a certain quota of the new products in our order backlog. We are increasing the supply chain capabilities for the new products, and the order intake for the projects with new products yield better margins. Usually, the lead time for delivery is not less than 12 months. So the orders coming in Q1 '19 will yield revenue and margin improvement in Q1 2020. So it's a timing effect of when those projects hit the P&L and is a portfolio effect of the share of the new products versus the total share -- the total value of the comp. Regarding your first question, does the company have the CapEx or the company can develop the 5-megawatt turbine to deliver in 2021 with a EUR 120 million CapEx? And the clear answer is yes. I mean, the main driver for eventual CapEx deviation is going to be the acceleration of the product transformation. So more molds, more blade factories to tackle the demand that we see today for these new products that eventually will gain better profitability but not very much related to the development of this new machine. The development of this new machine is an evolution of the current platform. So from an engineering point of view, everything is planned and is within the range. And again, as mentioned, the main key driver for the CapEx is blade facilities in best-cost countries to tackle the very good market momentum. And it's going to be mainly driven by cash flow restriction because we don't want to risk the balance sheet as well as by management capability to do as many plants as we want to do at the same time.
The next question is from Sean McLoughlin, HSBC.
A couple of questions from my side. Could I just -- I'm not sure I understood it correctly, your comment about the first half order intake. Was I correct in understanding that you're expecting better order intake in the first half 2019 versus the first half 2018?
I would say similar pattern that you saw last year, if not slightly better, but in similar terms to what you saw in the first half of 2018.
Great. And just to understand the volume ramp as well, which is significant in 2018, I see that there's -- if I look at the production figures, there's clearly been no preproduction ahead of this very significant ramp here. I mean, can you just help us understand in a little bit more detail how you've prepared for, let's say, this very high utilization of the asset in terms of your procurement through the first 3 to 6 months of the year and how we should expect to see that developing through the first and the second quarters?
Good. I mean, if you compare to 2018, of course, you see a very steep increase. If you compare to record-high production levels in the different plants, although the default is not that big of a difference other than the ramp-up in India. I mean, Germany is going to be producing similar number of units as we produced in 2016 and '17. Spain, very similar units as the record-high production in previous year. And the only difference in nacelle production is India that we are ramping from -- I think it was 18 nacelles last year to, I would say, more than 200 this year. Everything is prepared. The plant is prepared. The teams are there. I mean, we have been operating in India for 3 years. So we are well equipped. And even 200 out of the total volume, the risk of not meeting the expected growth in the total volume is digestible. First, we have plans to deliver. Second, the impact of not being able to ramp up India at the speed that we want in the total volume is digestible. In terms of blades, similar pattern. I mean, we are ramping a blade factory in Mexico as we speak. And other than the blade factory, the rest is somehow business as usual. So the blade factory in Mexico, of course, is a new plant, is one of the biggest factories that we have all over the world. And we have all management attention to deliver -- to support the ramp-up of this plant. So from a supply chain point of view, the main challenge is ramp up nacelles in India; ramp up blades in Mexico; the rest, sort of business as usual in the past.
And one last question if I may, just on the 5-megawatt turbine. Is this targeting specifically the German market or which other markets?
I would say that the machine targets -- well, Germany is definitely one target market for this machine, especially because in Germany, depending the site condition, this machine could deliver from 7% to 15% more energy. So in countries where permitting is a big restriction, you need to extract the maximum amount of energy out of a permitted position. So -- and that's the case of Germany, but not only Germany, I think this is a global product. In fact, the first orders for this product are not going to come from Germany but are going to come from the Nordics. So it's Germany. It's the Nordics. Eventually, we will see business from this machine from Lat Am as Delta4000, not only a European product but a global product. And we are producing blades for this product in Mexico because we see demand for this product in the neighboring -- in Mexico and neighboring countries like U.S.
The next question is from Alok Katre, Societe Generale.
This is Alok Katre from SocGen. Three questions really from my side. First, I'm just trying to understand a bit more your margin guidance because obviously, you look pretty comfortable from the sales perspective. We've seen pricing stabilize in new orders for the past 3 quarters, and I guess these make a bulk of your deliveries in 2019. Yet we're talking margins broadly sort of flat Y-o-Y at the midpoint. And I guess that includes roughly EUR 15 million to EUR 20 million or 50 basis points of tailwind from the lease accounting. So just trying to understand what are the moving parts really that are getting -- I mean, and why are you not seeing the benefit of stable pricing yet feeding through even partially in 2019? So that's my first question, and then I will follow up with the other 2.
Alok, this is Christoph here. Alok, the pattern that you see or let's say the expectations -- our expectations that you see in the guidance, at least from our point of view, to exactly reflect what we have been stating in our strategic outlook. I mean, we always knew that in 2019, we would still suffer from significant price pressure within all the legacy products. And at the same time, we're talking about the range of price pressure, and I think we talked also in Q3 about it. And at the same time, we said we will be able to compensate by the operating leverage and through the higher volume. And I think that's what exactly is sitting in the guidance bandwidth. So we still do look in 2019 at a structure where the new product has only a sort of a minority share.
Minority, yes.
And at the same time, we are still suffering from what we've been saying, from the price pressure dating back to '17, '18 that is materializing now.
And if I may add, in the P&L 2019, you see the order intake of Q4 '17; Q1, Q2 '18, tough price war -- in the middle of the tough price war. And you see as well, as Christoph mentioned, let's say, roundabout 20% of the new product, but the 20% of the new product was launching projects, launching customers for the new product. So the margin recovery is, while you have more share of the new product, not at launching prices but at the market prices, you will see the recovery in profitability.
Okay. Fair enough, fair enough. Then the related question to that is, do you feel confident in then getting back up to the 7% to 8% sort of EBITDA margin in, let's say, 2020 and beyond with all these new products coming in? Obviously, the Delta4000, the 5-megawatt bandwidth sort of comes online as well, and obviously, Germany particularly, I guess, recovering in that time frame. So do you feel confident you can get back to the 7% to 8% that's close to, I guess, where consensus expectations are for 2020?
It's too early. I think we will stick to the -- we will stick to our financial calendar and information calendar. We see positive signs, but there are many moving pieces as well as how many molds can we install, what is going to be the share of the new product is going to be a [ reiteration ] of noting the profitability of the more, I will say, legacy product in the next year. Too early, too early to comment on that. Good perspectives, but we don't have the full picture to make out -- to guide you right or left.
But the building blocks, you would say, are in place? Is that how we should think about it at least?
It will say that we see a building block in place, which is new products with better margins. But it doesn't mean that the old products might drop the margins. We don't know. I mean, it might be as well the case. So depending the share of new product versus existing products, we can compensate or we can upsize a little bit. I think good signs, but too early. Give us some more time.
Okay, fair enough. And my last question is, just looking at the balance sheet side of things, I guess the equity ratio has dipped a little in 2018 and, I guess going by your guidance 2019, from a net income perspective, probably remains a little tough as well. And then on the free cash flow, if I heard you right, you're obviously probably still indicating negative free cash flow next year with all the moving parts and so on. Therefore, how comfortable are you with your balance sheet sort of position both from a net debt and -- net debt perspective and also the equity ratio perspective? Do you think you're a bit thinly capitalized at this point in that sense?
Alok, it's Christoph here again. No, we don't think that we are thinly capitalized at that point in time. Again, I follow your analysis, and I think that was all right, what you mentioned. Just we would not conclude that we are thinly capitalized, number one. The equity ratio, in terms of practical importance, really, it is very much in -- with respect to our banks. And all our covenant levels do have ample headroom, and banks are not concerned at all. They are calculating also still to IAS 11. We do an IAS 11 shadow calculation of all the covenants. And we do -- in terms of capitalization, we have -- we said we do not have any issues or restrictions on the cash side. And with respect to the pure balance sheet ratios, we do not see an issue and also -- or base effect that we don't want to go now too deep into 2020 and 2021. Of course, we do see ourselves now getting on a positive trend, and therefore, we believe that the current ratios will be fine.
The next question is from Wolfgang Felix, Sarria.
I've got 3 questions. The first one, if I could go back to your working capital and maybe particularly the movements throughout the year, and I think last year, you would have expected to be working capital negative at this point. It's obviously great to be. How long do you think you're going to take to work through these prepayments that you've received? And how should I think about maybe your inventory position in that -- sort of from Q2 to Q3-type phase or perhaps running up to Q3? When do you think it's the -- it's potentially at least the biggest pressure on your management of your working capital?
You're now expecting kind of a quarterly working capital guidance already now.
Yes.
That's a tough one. I would say -- okay, I'll do my best. I would see Q1, Q2, according with the ramp-up pattern that we have been describing, I would not expect too much pressure here. Q3, Q4, the uncertainty will become higher because we have then the very steep ramp-up. We have the production utilization going up sharply. So here, we could see some pressure in the inventory, if you want me to give you some guidance around timing across the year.
But you wouldn't, at this stage, start producing ahead of time basically and, well, presumably produce inventory obviously to ensure that by the end of the year, you'll have sold everything you could have possibly sold?
Basically, the way we work, we work with a pull system. So we activate the supply chain once the customer activates us with the down payment and with the milestone to start delivery. So if we need to deliver that turbine, usually, our long lead time in '19 is 5 months. So if the contractual obligation is to deliver in June, we will start ordering components in February. We don't start in January because we want to optimize our inventory.
But if you're hitting 100% of capacity in the second half, wouldn't it be wise to pull some of that forward?
Not really. We are used to do that, and this is a healthy practice for the company. We don't want to build inventory.
Okay, okay. Second question, are your lead times in all your markets broadly the same? I suppose the answer is no.
No.
But could you give us some more [ relief ] around maybe some of the lead times, particularly in the emerging markets that are maybe a bit newer to some of us?
I would say, of course, if the market is close to our manufacturing capabilities and to our suppliers, lead times are shorter. I mean, the -- I will say the minimum lead time we can do is 6 months. If the consumer point is 8 weeks shipment from our manufacturing, we need to add those 2 to 3 months in some cases. So we think from 6 to 10, 11 months is a normal lead time.
And this would be -- I'm asking also with respect to the turnkey projects versus purely delivering the nacelles or maybe just the equipment, is there a difference between the lead times?
No, no. I mean, usually, the difference is that turnkey projects are bigger. But from a lead time perspective, there is no critical road map in the balance of plant or EPC. It is always in the components, be it boxes and those kind of components of the turbine.
And what proportion of your business in, say, Brazil and Mexico and, yes, emerging markets would be turnkey versus...
I mean, you will see in the slide of the order intake, you can take a rough assumption. In Slide 6, you see we do 45% Europe -- or we reached order intake, 45% Europe; 15%, North America; 25%, Latin America; 15%, all over the world. You cannot take precise conclusions out of this because we deliver some projects from India, other projects from Europe. Brazil, we deliver from Brazil. Very hard to make a conclusion.
Okay. And last question if I may. Your larger turbines now, you said -- and then obviously, I think that's a great idea, that they've been built with both the European market and the mass market in mind at the same time. Now the mass market clearly seems to hover around 2-megawatt turbines. How are you going to place a state-of-the-art, relatively new 4.5-megawatt turbine in these markets?
I mean, that was our assumption 1 year ago. We were expecting that the 4.5-megawatt machine was only demanded in Europe. We are heavily surprised, and we were not precise that we start to see big demand for these products in traditionally 2-megawatt markets, example, U.S. So we see 2 patterns here. One, Europe, accelerating the transition from the 3-megawatt plus to the 5-megawatt plus, and we are prepared. We are a frontrunner, as some of our competitors. And second pattern we see is that we see demand for these machines not only Europe, but we see demand for these machines in Argentina, in Chile, in U.S., in Mexico. So it's really, really not marketing studies but real opportunities that we are landing and negotiating as we speak.
And what's changed? What has changed that makes these attractive now as opposed to...
I would say in -- it changed several things. I mean, one thing is land, land availability. You have a better use of land with bigger machines. Second important factor, your OpEx is lower. So customers take decisions based on long-term OpEx of their assets. These are better hedged to prevent profitability of the projects in low price market expectations, which are better hedged. Although your worst-case scenario, if you are an owner of a [Audio Gap]I would say demanding in the past. Those are easing in those -- in U.S. primarily and altogether is bringing this additional demand. Of course, there are countries, for instance, India, where we don't plan to sell this machine, and we are developing updated products as the 140 that we sold 300 megawatts last January. And India is mainly driven by logistic restrictions. So it's almost impossible with today's transportation means to deliver those big machines to the site. But other than India, I will see demand -- we will see demand for these products in most of the markets where we operate, namely Australia, South Africa, Brazil, Chile, Argentina, Mexico, U.S. and, of course, Spain and other European countries.
[Audio Gap]Mr. Berman (sic) [ Mr. Boam ], you can ask your question.
[Audio Gap] not 3.0 to 3.5.
No, 3.0 to 5.0.
At the moment, there are no further questions. [Operator Instructions] There are no further questions. I would like to hand back to you, gentlemen.
Okay. Thank you very much. And I will ask our audience here, are there any additional questions from your side? Okay, obviously not. So thank you very much. And now I would like to thank you for participating in our call and would like to hand you over to José Luis for the final remark and key takeaways. Thank you very much.
Thank you very much for your questions. Thank you very much for participating in our call. Key takeaways for today that I would like -- that we would like to share with you. First, the global footprint after merge phaseout, so strong performance of the order intake and strong performance on installation despite volatile market environment and especially despite a drop in our -- once in the past our core market. That eventually will come back, but thanks to that, we are able to deal with the situation. Second, very important, we are accelerating, as we speak, in the supply chain transformation to best competitive countries to deliver competitive products to our customers at better cost level and, as a consequence, improve the profitability long term. As we speak, we are ramping up India, we are ramping up Mexico. And we will see the result of this in 2020 onwards.Third, very important because this was a very strategic decision that we took in a very challenging time. The very successful introduction of the new technology has triggered already significant orders with key customers globally and more expected to come shortly.And fourth and last from our side today, strong working capital management and free cash flow generation. This was remarkable in '18 and is very high in the agenda for us as a management team for '19. So with this, thank you very much. See you soon in the first quarter's call. Thank you very much.