Gamesa Corporacion Tecnologica's (GCTAF) CEO Ignacio Martin on Q1 2014 Results - Earnings Call Transcript

Jul.29.14 | About: Gamesa Corporacion (GCTAF)

Gamesa Corporacion Tecnologica SA (OTCPK:GCTAF) Q1 2014 Earnings Conference Call July 24, 2014 12:00 PM ET

Executives

Ignacio Martin - Chairman and CEO

Xabier Etxeberria - Executive Director

Ignacio Artazcoz - CFO

Analysts

Pinaki Das - Bank of America Merrill Lynch

Alok Katre - Societe Generale

Operator

Good afternoon and welcome to the presentation of results of the First Semester of 2014 of Gamesa. And before starting we would like to apologize for the slight delay. The presentation is going to be delivered by Ignacio Martin and by the Executive Director, Xabier Etxeberria; and the CFO Ignacio Artazcoz.

Now I am going to give the floor to Mr. Ignacio Martin.

Ignacio Martin

Good evening everybody and many thanks for listening to this conference. First of all I would like to establish a context for this results presentation. It had to be said that we are half way through the business plan of 2012-2015 that was presented in October of 2012 and what’s exactly 19 months of lapse. And at this point in time we think that it’s really the right moment to draw some conclusions as to where we stand and what we think about the future. And from the point of view where we stand, I would like to remind you that when the plan was submitted, the plan was complex, it was difficult to execute, and there was a certain amount of skepticism limitation to the possibility for Gamesa had of achieving the results that had been included in the plan.

But today we can say that half way through the plan that we are attaining our contexts and from the point of view of sales, we at this point in time, as we are going to be seeing during the presentation, we have a level of orders that allows us to guarantee that we have coverage for 100% of all of the intermediate range of the guidance we have given for this year 2014 of this 2,200 to 2,400 megawatts and that with the small orders that we expect to include that will generate activities in 2014 as well as you see during the presentation. And you will see that we will be able to reach the highest level of the guidance, in other words 2,400 megawatts.

But from the point of view of the results and if you compare to the year 2013 and not 2012 which would be an even better comparison, we can say that we are practically at the level we had given for 2015 and if you take it unbiased you will be able to see we are at 7.7% of EBIT in constant currency compared with the level we had in the year 2013. And from the point of view of our position in the future, from the point of view of commercial positioning it can be said that with the order of portfolio that we are going to be looking in this presentation, orders like beyond of activities of 2014 together with the agreement that we have signed to the offshore business that will generate more activities in the future, we can say that we are achieving lots of growth that are much greater than what we had established in the mid-term in 2013. This means that by maintaining the guidance of 2014 that were not going to change and by maintaining ways until now, right through the plan we will able to -- we can say that we are achieving our objectives and that we are optimistic as regards for future.

Gamesa has strengthened its growth prospects. It has improved its profitability, has a greater access to funding. Because we have generated 801 megawatts in new orders in Q2 this year, and as I said before this guarantees 100% coverage of the new guidance of 2014. And this is halfway through the guidance. But as regards our sales in this semester, constant currency, we’ve had an increase of 21% and bear in mind the currency that has been negative the average growth has been 13%, annual sales growth. And the EBIT margin as I said before that we are practically achieved the target we gave for 2015 while we’re very close to 8%. We are currently at 7.7% and that comes from the currency bearing in mind the exchange rate effect we have an EBIT margin of 6.5%.

Likewise we have continued with our efforts aimed at consolidating and strengthening our balance sheet through debt control that we will be talking about during the presentation, and also because we have signed a new syndicated loan that will allow us to have to guarantee funding for the business plan 2013, 2014 and 2015. And also in this semester we have being able to sign the agreement with Areva and that was on January the 20th, and which has been conducive to another agreement that has to do with certain conditions for the joint venture to become a reality. So with all of this, as I said before, we have strengthened our competitive position. We are in line with all the things we’ve pointed out in our 2013, 2014, and 2015 business plan and our prospects for the future are positive.

And now I would like to give the floor to our business CEO, Mr. Xabier Etxeberria who is going to be talking about the performance figures for this semester.

Xabier Etxeberria

Thank you very much and good afternoon. Well thanks to the solid commercial position, Gamesa has achieved 100% coverage in 2014 considering the range given ranging from 2,200 to 2,400. We’ve had an order intake certainly 801 megawatts which means that it’s been a 31% improvement compared to the previous year. And then we have the order book end of June which has reached 1,213 megawatts which represents an improvement of 24% relative to the same period of the previous year. Although since June 30 until this date today we have signed another 393 megawatts in additional orders. So that means that we have an order intake of 2,306 megawatts.

And finally the order book for this year accounts to 1,112 megawatts, in other words a 50% improvement compared to the previous year. And this improvement in megawatts also represents an improvement in our revenues, because in the first semester we’ve had an increase of 13% and this would be a 21% of increase in revenues at constant exchange rates and in particular we’ve reached €1,262 million in sales supported by the growth of wind turbines as well as by the growth of operation and maintenance services. And in winter once we’ve reached the business figures in this first semester of €1,051 million in other words 12% higher compared to the 2013 and sales or revenues in O&M have reached the figure of €212 million, which means that it’s an 18% increase relative to the same period of the previous year.

And this increase in revenues, this growth in revenues means that there has been a significant improvement in our profitability levels by 1.9 percentage points. And the margin at constant currency has reached to something like 8%. And then we have evolution of EBITDA in the first semester shows that we have reached a figure of 83 million in EBIT in other words it’s 26% an improvement relative to 2013. And percentage wise we stand at 6.5% in this semester, which means that there has been an improvement of 0.7 percentage points relative to the previous year. Although it has to be said that at constant exchange rates EBIT turns about €104 million, which is 7.7% or 1.9 percentage points in improvement compared to the previous year.

But this improvement of the profitability ratio is supported by the volume effects that I mentioned before and also because there has been an optimization of variable costs and because there is a sale mix that -- not have a positive influence and that profit of the first semester of 2014 has grown 88%. And the net profit per share totaled €0.17 in this first half of the year that’s first semester. And this growing net profit is based on rising revenues and because there has been a significant improvement in profitability and because there has been proper capital management. And in the first half of this year we’ve reached a net profit level of €42 million which is 88% in terms of improvement relative to the €22 million reported for the previous year.

And we also have some good news our regards our health and safety indicators, we have the evolution of the frequency indices, in the severity indices which is in line with our objectives. And the frequency index has reached for the first time ever ranges below 1.7, and we’re talking about 1.68 that we have these severity indices but have reached ranges of 0.049 or both indices show that the company has put its specs on providing all of its employees with a safe and healthy workplace.

And now I would like to give the floor to Ignacio Artazcoz, who is the CFO.

Ignacio Artazcoz

Hello. Good afternoon and good evening my name is Ignacio Artazcoz and I am the CFO. So many thanks for listening to us on this conference call. Please allow me to look into the details of our net financial debt. And if we were to take a look at the NFD and we were to compare it with the activity of the first half of 2012 with the first half of 2014. You can see that as far as activities go, we are very similar record rates about 1,140 megawatts in ’12 and 1,187 megawatts in 2014 although, we have managed to reduce this figures down to 950 megawatts roughly, and it came down to 549 in this year. So it’s been 400 million in reduction of our net financial debt to the same activity.

So this has allowed us to improve our indicative ratios, because in 2012 this part of the year we had a ratio that was three times the net EBITDA figure. And in the first semester in 2012 we had 2.2 times, but in the first half of 2014, we have managed to reduce this ratio to 1.8 times the NFD, so all of this is due to the fact that’s due to the objectives that we set to achieve within the 13-15 business plan because we wanted to strengthen the balance sheet. And this is an objective that is supported by improving profitability. And as you can see we are improving our profitability quarter-by-quarter.

We have a very straight controlled working capital that I would like to talk about in greater depth, which includes the new model for wind farms, the new promotional models and we’re using the Gamesa energy model as a sales channel for our wind turbine and we did not want to have on our balance sheet all of the promotion activities as we had in formal times. We have a very clear cut focus on investments and we have a very strict control over CapEx which is necessary to add value to our business. And then we have divestiture of assets, which as you know throughout the year in the first half we have had a divestiture of €85 million of assets in the United States and over the next few months and the next few years we have the intention of continuing with these divestiture with these assets that are not key assets for the company.

Third, from the point of view of funding, as you know the first half of 2014, we have signed a new syndicated loan totaling €350 million and this will allow us to have a financial, a funding structure that is fully in line with the need of our 2013, 15 business plan, because we have access to €1.8 billion in funding that has been structured with long term funding, structural system with the syndicated loans and with the funding we already for the bank.

And we’re talking about a maturity half way through 2016 that’s about 500 million and then the rest will have to do with the years at 2018 and 19. So this I think it gives us a very solid financial position. And so the terms have been improve, thanks to this new syndicated loan but I think it is a very interesting option and also with the signing of the syndicated loan we have manage to optimize our financial cost.

But if we’ll now to move onto Page 13 of the presentation where we will talk about different financial magnitudes, and I am not going to go through each and every one of the figures, but it indicates we can see that our figures for the first half of 2014 have reached the figure to €1262 million, which means a 13% increase in relation to the previous and which the constant exchange rate, constant currency this would be growth of 21% compare to the previous year. As regard our activity and equivalent megawatts is 1,187 megawatts with growth rate of 25% compare to the first half of 2013.

Our operation, a maintenance revenues totaled €212 million in other words it has been a growth of nearly 18% whether that’s for the first half of the previous our EBIT now stands at a figure of €83 million that is a growth of 26% compared to last year and then the EBIT margin is 6.5 % and which in constant currency of the EBIT margin as we pointed out before is 7.7%. The EBIT margin for operations and maintenance is 12.3% and our net profits have total €42 million in other word a growth of nearly 88% compare to last year.

And net earnings per share of 0.17 per share and working capital figure of €480 million which mean that it has been 15% reduction for the attempt to the working capital we have in the first half of the year 2012 and which will represents working capital same ratio of 70% which is 5 percentage points less than last year.

Now CapEx was 56 or has been €56 million and we have ended this period we have NFD of €549 million and NFD EBITDA ratio which 1.8 times. So this is something that applies to, wind turbines and operations, the maintenance and in the case of wind turbines as I pointed out in the first half we achieved an activity of 1187 megawatts which represent nearly 25% improvement whether it is to megawatt but it were made one year ago. And which reached figure of 950 megawatts but you can see, in the chart you can see how this progress of the descending trend that Gamesa had starting in the second half of 2012 that has changed radically, a radical change in trend and now we have reached significant number of activity in this first half of the 2014.

And this wind turbine activity has a significant commercial diversification with the predominance in the emergent markets because Europe and the rest of the world will increase and their contribution to all sales in the second half of 2014, Gamesa has commercial pleasance in a team and has reached figure of 30,000 megawatts installed in 45 countries. It also has extensive relation with customers we have over 200 customers of all sort utilities, IPPs and financial investors. But I would like to say that in this geographic mix of the significant presence of Gamesa in emerging markets like India this accounts for 30% of the revenues in equivalent megawatts of Gamesa in this first half. And Latin American has consolidated itself at about 36% of the total revenues of Gamesa.

But also I would like to say that there has been a very significant recovery of our commercial base in the United States where a year ago we had 4% of our sales in that region and now it’s nearly 20%. And I wouldn’t want to forget about China of course where although in the first half of the year we stand at 1% of our total revenues, but the forecast for the end of the year is optimistic because our competitiveness is on the rise in the most difficult markets and China it could account for between 5% and 6% of the total sales of Gamesa.

And then we have the breakdown of megawatts sold by customer type, has also given us a very good outcome where 64% of our sales are focused on IBTs on 30%, have to do with the utilities. And then operation and maintenance activities in this first half of the year, well this has also been a positive thing. The revenues in operation and maintenance as I said before, have reached the fold of €212 million, which means that is an 18% improvement. And then we have a bit profitability, that’s also grown and now stands at €26 million. In other words this has been a 12% increase compared to the previous year. And the profitability of operations and maintenance is stable and now stands above 12%.

We will now look into profitability as every time if you want to compare with the profitability we had in the first half of the year 2013, with the first half of 2014 what we can see is that the main positive effects that have taken place during the year, on the one hand of the volume effect, because the volume effect allows us to improve our EBIT margin by 2.1 percentage point from 6.2% that we had in the first half of 2013. There has been an increase in 2.1, and then as a positive outcome we also have the optimization programs for variable cost in which our main program for continuous improvement that we have underway which is program 915 and which is composed most of our production.

And at this program, since we launched it back in December of 2012, we’ve achieved an improvement in variable of 0.6%. Likewise, continuing with the continuous improvement of fixed costs and although this is not as high as it was last year, which is when we achieved a very significant improvement and in spite a bit off, in the year 2014, we have managed to improve our fixed cost by 0.2%. On the other hand we have some negative effect within the contribution margin. We have a negative effect, perhaps to do with the project mix and as you will recall in the first half of 2013 we had a project mix that was a very favorable which meant that the contribution margin was higher than what it was during the rest of the year. And this exercise in 2014 we had a project mix that was quite bit low compared to the first half of 2013 which means that we have lost a percentage of the contribution margin and therefore the EBIT margin that has to do with this effect.

So with all of these effect in mind, we reached the EBIT as I mentioned before, at a constant exchange rate is 7.7%, it was 6.2 in that 7.7%. Then after this we have the impact of the exchange rate which has enough of negative impact that reduces this EBIT margin of 7.7% to 6.5%. As you know working capital is one of the most outstanding elements we have at our disposal throughout the year, and something that we have been doing in the last quarters of the previous year too. As you can see from the activity perspective, we have increased our activity. And our activity estimate is from 1900 megawatt that we had in 2013 as complete year and now it is 2400 approximately in megawatts, estimated megawatts for the year 2014.

So with this increase in activity in excess of 20% we have managed to reduce our working capital from 494 to 418 within years, which means that is a 15% reduction. Likewise we have managed to reduce or percentage of working capital of our revenues by six percentage points. But if you take a look at the chart on the right-hand side, you can see working capital relative to sales, of each one of the quarters since 2012, we can see that the trend is clearly as downward one and you can observe that this is not only a downward trend but there has also been a lots of work done to reduce working capital. But you can see that there’s a certain amount of seasonality in our working capital in the first three quarters where it is slightly higher than what we have at the end of the year. So what we can see is that the options we’ve considered for our working capital below 10% by the end of the year, where you can see that we’re on the way there and we’re confirm risk objective of attaining working capital under 10%. That’s where we want to -- the outlook of the company and as we mentioned before we are very optimistic about the future. And we think that there is going to be profitable growth in the short, medium and long-term fundamentally supported by three pillars that are very significant for us.

The first pillar has to do with order book which we always hope is open, we’re going to look into this in much greater depth, it’s a very important order book. And then we have our competitive position in the different markets where we’re currently operating in the third element without a doubt it is extremely important it has to do with the signing of the agreement with the French company called Areva to serve the joint venture that gives us the visibility in the offshore business.

And we have an order pipeline of 2,800 megawatts, which means that as regards the current position of the company we are experiencing certain amount of growth. But this growth has been accelerated by the fact that offshore growth is much more significant than onshore growth. And of course those emerging countries in which they operate are growing at a higher speed, much quicker than the markets of developed countries. And all of this is a fundamentally based on continuous improvement of our cost activities for our products by launching products, and this was something that we announced in the 2013 and 2015 business plan which we are fulfilling and which obviously strengthens our position.

And then we also have this in the organizational change in the way we were working at this company. We had a cultural change which we are currently carrying out. And we are now becoming very functional organization instead of being an organization that manages its activities based on business processes, without a doubt we have also being assisted by the fact that in certain key markets there is more regulatory visibility, because what happens is that certain countries where there were uncertainties because they were setting up their regulations, things have been clarified and this regulation is underway as we’ll see later on in much greater details as this effects the countries like India, Germany, the United Kingdom et cetera.

With those regards of the order intake between 2011 and 2014 you can see that our order book and this is on the chart of Page 21, we have had some positive trends. And you can see that the order book allows us to guarantee that we have 100% coverage of guidance for this year 2014. And with what we hope we will arrive to or what we expect will arrive over the next few weeks and we hope to be in the highest levels of the guidance. In other words 2,400 megawatt, like wise it’s important to underscore that the evolution in this order intake we’ve had in this month that we have announced and which is 393 megawatt, added on to the 1,913 we had something like 2,300 megawatts.

And we have underscored here that about 1,194 megawatts for activities of 2014 but rather activities as from the year 2014, in other words ’15 and ’16 fundamentally. So this means we are now starting to become much more visible relative to what we are able to do not only this year but also in future years, because this pipeline for the future is 49% higher compared to what we had a year ago for these years. And this gives, makes us feel very confident.

And then our competitive positioning which the company has as mentioned previously or also because of the countries where we’re operating on the customers with whom we’re working and because of our products and activities generally speaking along the entire value chain they give full support to this growth we expect would occur in the short, medium and long-term. But in particular as regards the ’13 and ’15 business plan, we were talking about briefly a product strategy we were talking also about the 2 megawatt platform which is very competitive and we are also talking about having rotors of larger size, so that we can have lower power density.

And this is something that we are already doing. These are the machines that are being very well received by the markets. And we expect to have a portfolio for our rotors that are going to be very significant for the G114 and we have also looked into our machine of 2.5 megawatts as an extension of the 2.0 machine in this mainstream segment, and we can confirm that we’re launching it and it’s been very well accepted by the different markets in which we already working and this also gives us the stability whether to the future. And then we have the multi-megawatt machine of 5-megawatts, as I said before it’s been very well received in those places where it’s of use.

Our operations and maintenance activities are very significant because we have something, we have 20 gigawatts right now under maintenance and everything is fully in mind with what we have said until now and we have the availability of all the installed fleet in access of 98% unless we have set in the business plan sometime ago, we have activities along the entire value chain in which we are operating, because we have promotional activities which in certain markets are fundamental activities to be successful because it will be the case of India or should be the case of Mexico, where in the case of Mexico we’ve also find as was announced sometime ago.

We have signed an agreement with the Banco Santander and that would allow us to stick to our strategies, so that we can work as technology and have partners that are essential people that provide the funding. And then in certain markets it’s very important to have APC capabilities and Gamesa has a very significant amount of experience and which has been very well received by our customers that find it appreciated. And this means that our positioning is very outstanding position.

And I wouldn’t want to finish this section without saying that Gamesa has undergone very clear cut decent organization process, because this is a company that was born in Spain and most of its business was in focus on screen, but it has extended its range of business and now more than 90% of our activity volume is taking place outside the country. So this means that we have to carry out a decent organization process that also that it has to be set, that Gamesa has the necessary local teams, splendid teams that allow us to have very good local management for this plan to become a vanity.

And likewise and within the manufacturing strategy that we design with the manufacturing hubs are basically in Spain and China or the local manufacturing in India and in certain assembly in number of countries, this gives us the necessary local contents so that we can operate in those markets in which we are emphasizing and as I said before the third element that gives us growth too in the offshore business.

And I would like to give four again to Xabier, so that he can give us some more detail relation to the sector.

Xabier Etxeberria

Thank you very much. As you can see on Page 23, the offshore segment is going to provide Gamesa with wonderful opportunity for the complementary growth in the long term. And the forecast is that the offshore facilities will triple their contribution towards global installations in the next five years.

And in Europe however they will account for one third of the total wind demand of all the wind facilities in Europe, but if you take a look at the chart on the left that refer to worldwide wind installation in 2013 to 2018 you can see that the rate of growth of this facilities in the natural business is 6.4%

However, if you take a look at the offshore growth rate all the figure is multiplied by 6, nearly 6 and stands at 38.2% in the 13-15 or 13-18 period, whereas in the year 2018 and as regard to global wind power installation 16% of the megawatt installed will be in the offshore spectrum but on the right hand chart we want to explain the same thing although this has to do with wind facilities, wind installations in Europe from 2013 to 18 and that it is onshore growth or the growth rate is suppose to be on the level of 3.4%, whereas the offshore growth rate multiplies this figure by 7 and reaches a total of something like 24.1%.

And as regard the volume of megawatts installed in wind power in the year 2018 nearly 30% as we mentioned before and that was nearly 1/3 of the wind facilities will be based on offshore production. Let me, as we said before has taken the step forward and we have entered this world to become leaders, the joint venture signed with Areva offers us this opportunity and this also limit risk, because Areva has provided it’s model M5000 and with a very significant order of pipeline, which reaches 2.8 gigawatts and it’s the second best of pipeline orders in the market.

And then the Gamesa contributions are very clear and they obviously supplement what Areva has to offer because we have a 5-megawatt platform that has already been certified and it is ready to be marketed. We have lots of experience in cost optimization and in operation in maintenance activities and we have changed the supply for components, but is not based on practically 13,000 megawatts installed all over the floor.

And the total massive that are going to be put onto the joint venture in the case of Gamesa it’s going to be €195 million and in the case Areva it’s going to be €218 million in assets. But I would like to underscore that these 218 million are a net-net of the total value of assets which depends on the working capital that Areva was provided on the operation as far and which is very important without any additional monetary contributions as to be made by partners. On the right-hand side, you can see how the market and this is an estimate from January 2014, edited by Maec and this is what they think about the new strategic repositioning in the offshore business where the joint venture is going to occupy a position of leadership of Gamesa and Areva. The merger will allow us to occupy an important leadership position with a very extensive amount of experience in technology and R&D and with very significant financial capability. I think it’s very clear.

This is a strategic rationale and as we’ve mentioned before there is a combination of competitive advantages that have produced the synergies from the very beginning, and there is an outstanding position to benefit from the potential offered by the offshore market, and as we said before, in Europe in 2018 this will account for one third of the wind facilities and it’s a business that is underway without any threat, which means that’s there are no big funding requirements. So this means that from the very beginning we are going to maximize the value of the investment at Gamesa in these two multi-megawatt platforms with positive contribution in terms of the net profit for the company.

But moving on to something completely different and on page 26 I would like to underscore that our prospects as it was pointed out by our CEO are very good. And they are based on increasing regulatory visibility because in India where Gamesa has a position of leadership, there is a very significant amount of additional support for renewables within the budget of that country for 2015. And this is based on four important points. Like, repositioning accelerated amortizations or extending fiscal holidays, and then there is tax allowance of 15% for investments and reduction of import duties or import taxes. All of these measures that has been publicized in recent days, mean that the Indian wind market, that’s right now, stands at 2500 megawatts, could grow in a very significant manner and could create 3500 megawatts in a short term, though we are in a growth market, and we are in a position of leadership in India.

And then we have Mexico. Mexico, well they are going to change their energy market there. They are going to reform it because this rule open up a support system for renewables and Gamesa is also in Mexico as in leadership positions. So this makes us feel optimistic as because our business prospective and business outlook. And finally, Europe, Europe is currently about to approve the recognition of the energy markets, that is it going to reduce the regulatory uncertainty. And in the United States, more and more support is being given to fight against climate change, which makes us feel moderately optimistic because before the end of the year there will be renovation amongst the expected the renovation of the PTC.

Well, what we have then at the end of the day is that the results we are attaining are all full in mind with the commitment we’ve already started with 2014, in other words the guidance that we have established or that the evolution of the year has been positive and from the volume perspective, as I mentioned initially we have 2300 guaranteed and over the next few years we have the good day which we will reach in 2400 megawatts. From the point of view of the EBIT margin at constant currency, in this half we expanded 7.7% as we said before, practically this is what we set some time ago, what we established for the year 2015 at a constant exchange or constant currency the EBIT margin is 6.5%. In other words it’s over 6. And then working capital have reduced at 17% , last year it was 22% and this will amount to feel confident that we will achieve our guidance of being below 10% spending CapEx.

And investment has been 56. Last year it was 51 and I am sure that they are going to be below 110. And in Africa, the NFD relative to the EBITDA and in spite of the seasonality of our business, we stand at 1.8 times right now which also allows us to feel confident because we assure that we’ve already reaching 1.5. And then we have net free cash flow. We also believe that we can achieve this because last year we were at a 124 million in consumption and we ended up at 75 positive. And this year we stand at 129 million and we trust and hope that we will have a positive net free cash flow. As regards the ROCE we are currently at levels of 7.5. In other words more than 2% points above what we have for the last year which ended at 7.3%. In other words we hope that we will reach something like 8.5 to 10 and possibly very close to the highest range we’ve set for ourselves as a target some time ago.

Well finally as regards to conclusions, I think that there were some technical problems at the beginning and with the English a bit so I would like to repeat things again, and to a nice extent to what I said at the very beginning of my introduction and I am sorry for those of you that find it repetitive but it’s very important to underscore that the time has come to draw our own conclusions because we’re halfway through the 2013-’15 business plan that we presented to the market. And these 18 months that have gone by of these 36 have allowed us to draw several conclusions which I think are very important because that time in October of 2012, the plan was taken to be a very aggressive plan, a plan that was very difficult to carry out but was tremendously aggressive and which in a way the feedback we received after this presentation, well that’s difficult to get it done. We have to show results and you shouldn’t really explain things of things have to be done. But now the time has come to do so.

And we are fully in line and relative to what we want to do. And from the sales perspective throughout the presentation we have spoken about our commercial position we have also said at this point in time, we are already thinking about this year to be in the high level of the guidance, in other words 2,400 megawatts, which means that we are fulfilling what we promised for 2015.

And we are reaching our targets in 2014, and that’s a very important thing, because this has been supported by the product strategy, by the cost reduction and by competitiveness in Medicaid, all of these things that we’ve been pointing out during this presentation.

Likewise we’ve also explained that we start to have more visibility, because we are now seeing that we have order pipeline of getting 1,200 megawatts or 2,000 megawatts. So for our subsequent activities in 2015 and 2016. So this allows us today that we are achieving this vision of 2015 in advance. So it means that we can think that we have growth rates that are in excess of our vision of that estimate we gave for 2015 in the mid-term. That's a very other important thing.

And secondly from the point of view of results, when we launched our planned 8% to 10% of EBIT as a vision for 2015, although truth is that we had our doubts. We didn’t think that this sector would be able to do these things. But we’ve seen during the presentation that practically at a constant currency in this first half of 2014 we’re very close. We stand at 7.7%. We are practically there. So this I think is very positive for the activities that we announced and for the way we’re doing things. But obviously financial, so let it be the financials, that we have with the new syndicated loans and with access to $2.8 billion in funding for this plan of ’13, ’15 that we launched some time ago. These are I think sufficient lines. We have consolidated our balance sheet. We have strengthened it. We have reduced our debt which means that we are achieving what we said that we were going to achieve.

So all of this with another issue which is offshore sector, the offshore business, which in the mid-term is going to add volume and is going to increase our activities and it's going to give us more profitability as a company.

So this is what we wanted to present to you tonight, in other words we are achieving what we promised and things are going well and we’re well positioned as regards to the future. I understand that as from this moment then we’re supposed to be moving on to the Q&A session, if I'm not wrong.

Question-And-Answer Session

Operator

Good afternoon ladies and gentlemen, the Q&A session starts now. (Operator Instructions). The first question comes from Pinaki Das from Bank of America Merrill Lynch. Please go ahead sir.

Pinaki Das - Bank of America Merrill Lynch

I had three questions. The first one is on volumes and revenue growth. Volume growth is about 25% whereas the revenue growth is about 13%. Can you explain, is the gap mostly because of FX or is there some sort of pricing impact as well in there?

My second question is around your guidance on volumes to 2.4 gigawatts, you want to be closer to the upper end. Does that have any impact or should it have any impact on the margins as well, because ultimately higher volumes should mean some operational leverage for your company. Or is it being offset by FX or something else?

And the last question that I have is on offshore. Obviously this a medium term platform that you have. Did you give us any indication about what sort of net income can we expect and by when? Because that’s one of the things that you have highlighted in you slides that positive net is one of the targets there. My question is over.

Ignacio Artazcoz

My name is Ignacio Artazcoz. With regards to your initial question that is volumes, the volume activity in equivalent megawatts has grown 25% and the volume of revenues has grown 13%. And the main reason for this difference has to do with the impact of the exchange rate, because in our revenues at a constant currency rate they would have grown 21%. And we therefore be talking about volume of 25% in activity of growth and volume -- revenues of 21% in growth in terms of monetary units and the rest of the difference is what it is a mixed effect of the different regions, which as you can see, this isn’t affected, is no longer that material or that tangible.

And the second question had to do, I think with the increase in volume, with this increase margins. What we have repeated several times during this presentation is that we have maintained the guidance we have given for the year 2014. In other words the constant currency is more than 6% -- the current currency is more than 6%, a constant currency in 2013 is more than 7% and this is something that we have maintained, but of course the volume affect has a positive outcome and this means this guidance is going to be much easy to achieve. And with regard to the third question, I understand that you were referring to the volume activity that can be expected in the offshore business in the next few years. And the impact this will have a net profits. So we haven’t made any disclosure whether it’s to our activities in the offshore business, but we will do so and due to course and we will provide you with information on the activities looking at the current and the future. The only thing we have said about the future is that order pipeline is 2874 megawatts, I think.

Operator

The next question comes from Sean McLoughlin from HSBC. Please go ahead, sir.

Sean McLoughlin – HSBC

Good afternoon. I have two questions. Firstly on the seasonality, is there anything we should be thinking about in terms of H2 profitability over H1? If I think back to last year, Q2 was the seasonal peak of profitability, your booking that was I believe in part to do with the mix as well as certain high margin components you booked in the first half and not in the second half, what should we expect for the second half of this year in terms of seasonality? That's the first question. Second, on provisions, I notice they've come down significantly on that they looked to be somewhere around 2 percentage of sales; is this something that you can continue in the second half of the year? Should be think about provisions coming down towards a lower figure? Thank you.

Ignacio Martin

Well, as regard to the first question, that has to do with seasonality, the seasonality of our margin. As you’ve probably remember, in the first and second quarters of 2013, we had a very positive impact in our margins that had to do with the certain projects that we manufactured and sold especially in Mexico. And then in the second half of the year, we had margins that were slight lower and then we ended with our final EBIT margin of last year of 5.5%. But this year we -- what we have had situation at margins that in the EBIT figures you can see that the margins are somewhat lower as regards to the product, the product mix compare to the previous year. And the second half of the year well, what we can confirm is that we will be finishing let see guidance we mentioned with the debit margin in access of 6% at the constant currency and EBIT margin in excess of 7% at the constant currency.

As regards of the second question that has to do with provisions well, yes. In fact in the first half of the year we had a level of provisions over approximately 2.2%, which is lower than our level of provisions that we had before which was 3.5%. And this is due to the fact that in certain projects or in certain regions our provisions book -- we include them in their accounts when we deliver the product because that is when they appear in our accounts, but there have been certain projects and we have not yet to debit them to the customer. So that means that our level of provisions is slightly below the 3.5% which is the figure we’ve had traditionally that are estimated by the end of the year we will be finishing with a level of provisions that will be in mind with what we've had in the past, something about 3.5%.

Operator

The next question comes from Alok Katre from Societe Generale. Please go ahead.

Alok Katre - Societe Generale

Alok Katre from Societe Generale. Couple of questions and one follow-up to what Sean has asked a couple of minutes ago. Firstly, I mean just want to understand a bit more on the offshore segment. One of the things that we have seen is the likes of Siemens, which has used its financial services division to win orders by offering some sort of financing arrangements in the offshore. Is this something that Gamesa and Areva's JV can offer or is this something that you're looking at what else. That was question number one.

Question number two was on pricing, particularly in Brazil where there seems to be a lot of competition coming up and also in India, where some of the auto flow is picking up quite nicely. So if you could just comment on pricing in those two regions particularly. And then the third question that I had was a follow-up to Sean’s question. Just trying to understand on my number, the underlying margins in Q2, excluding effects were kind of closed to 9%. So I just wanted to get a sense of what should change between let’s say Q2 and the full year to get us back to just above the 7%, and you know why not significantly above 7%.

Ignacio Martin

Well, the truth this that the sound we’ve received was very bad and I'm afraid that we didn’t understand practically anything of your questions. So let’s start with the offshore question which I think that we understood. Could you please send your questions to my email address and we'll read them and then try to answer them. Thank you very much.

Operator

There are no more questions in English. We will now proceed to the questions in Spanish. Thank you.

Ignacio Martin

I will try to answer the offshore question because I didn’t really understand it very clearly because of the sound problems. And somebody here has clarified it for me. But I understand that your question has to do with the fact that Siemens’ actual project is providing equity as it providing the funding for the project and which is what we expect to do with offshore projects within the joint-venture. We -- our funding transfer, the offshore sector is a plan that is fully in line with what we already have in the on-shore business and we do not expect to provide any equity for offshore projects. And in the order book we have the 2.8 gigawatts. We have no commitments with regards providing equity for projects.

Operator

And the first question in Spanish comes from [indiscernible] from Exxon [ph]. Please go ahead with your question.

Unidentified Analyst

I have three questions for you. The first one is a clarification of the strategic vision of the group for 2015. I would like to know if the increase in guidance that you've announced that for 2015; does it only refer to the sales volumes or does it also refer to the range of EBIT margins of 8% to 10%? And considering this level of demand we’re seeing it is much better than your tablet figures. Do you think that Gamesa [indiscernible] increased its operating margins in the excess of 8% to 10%; that’s my first question? And my second question refers to the position of Gamesa in New Mexico and Brazil and I need to know what kind of manufacturing capacity do you have in these three markets and how much capacity do you have right now and how much would be available in 2015 and 2016? And could you say anything more about what you think apart from your impact that could be associated to the regulatory changes in India. And the third question is just the clarification on what appears on Page 21 of the presentation. Certainly the order pipeline for deliveries in 2016 is 1.2 Gigas. Could you give me the figures for 2015 and 2016? And I also have in relation to that page. Could you talk about a 93 million -- 93 megawatts signed in June? Is this in addition to 1.2, and or is there anything talking about the pipeline of 1.6. Or was it 1.2?

Ignacio Martin

I will answer the first question and then I will hand the floor over to Xabier. Fundamentally he can talk about orders. We have never given guidance for the year 2015. What we've given is a vision for 2015. And what we are saying at this point in time is that this year, in 2014, we are already in the high range of the guidance that we’ve set for this year, which is 2400 megawatts. So we’ve achieved the objective that we have established for 2015. So we cannot quantify something that we have not given and what we are saying however is that as we are at 2400 megawatt, what we do see is that in the future there will be growth. And when are we going to give the guidance for 2015? Will, when the time comes at doing so, at the end of the year or perhaps in February of next year. And that is when we will provide the pertinent guidance.

So I've said before, the volume will support margins without any doubt whatsoever because it did have a positive impact from the margin point of view. In 2015 we say that we want to fulfill the guidance and to put more than 6% or more than 7% depending on whether we do or do not include the currency impact and then volume obviously has a certain effect as regards to the future, this volume that we are seeing, that will be positive, will also help us. With regard to the order pipeline, and the markets of India and other places, I'm going to give the floor to Xabier.

Xabier Etxeberria

Yes. Regarding your question on our manufacturing capability in key markets, what I would like to point out is that right now with the investments like Gamesa is making in Brazil, our minimum manufacturing capability stands at about 600 megawatt with significant amount of room to move and to extend this capacity, or this capability as a function of new demands. And in India, our manufacturing capability stands at 700 to 800 megawatts. With ease -- easily and with a very low investment we could reach a level of 1000 megawatts. And the manufacturing capacity we have in Mexico is something like 500 to 600 megawatts. And this fundamentally comes from our manufacturing capability in Europe.

So all of the information that I am giving you now is only for our entity purposes because our minimum manufacturing capability and these levels, we are perfectly ready and above all we have a chain of supply that is perfectly organized, so that these suppliers couldn’t [indiscernible] in our growth, which is what we expect. And I think we have the regulatory changes in India. This represents a very big opportunity for us. And I would like to essentially refer to the most recent information we’ve obtained on the accelerated system that has been approved in India. It has been estimated that these new measures could increase in a very significant manner the capability of wind farms by 1,000 megawatts. In other words the current 2,500 megawatts they expect to install in 2015 could very easily, and it’s something like 18 months but eventually it becomes 3,500 megawatts, but obviously for Gamesa the growth for market in a market where we are already leaders and where have a market share that ranges between 25% and 30% which also already represents a very significant phase for growth for wind facilities in India.

The final question that has to do with the pipeline when we say in is 2015, ’16 -- but it is still little bit too early to give you details on the expectations for ’15 and ’16 but in any case what I can say is that this pipeline for this product line, the year 2015 is much more important than 2016. But as regard your other question that is if in these 2,194 megawatts, have we included the 393? Yes. I’ll confirm that. Yes, the 393 have been confirmed. Because you answer the question from a point [ph] that we couldn’t understand what he was asking us about the price in Brazil and India which is where we are very well positioned. And where orders as he said are growing but there is also much greater competition. That’s the first question that we couldn’t hear clearly enough here.

And the second question has to do with the expense margins and why is it that we’re maintaining the guidance in terms of margins? Well to answer your first question, well yes you are absolutely right because of Brazil and India are highly competitive markets where it is definitely easy to operate and it is already present. And Gamesa is in both of these countries. It occupies a very important leadership position. But in Brazil and India we really haven’t seen anything different in terms of pricing compared to what we already had in 2013, because we still believe that there is stability in prices in both countries which led to our improvement in competitiveness and also linked with more manufacturing capability in both countries and India I have already said, our manufacturing capability is very high and the same thing applies to Brazil. So this means that our margins are maintained or are being improved and these are the prospects we have relative to the future.

Or as regard to the maintenance of guidance, we have a way of managing our businesses and announcing the results in our forecast which is what we have been doing since 2012. And this is in guidance. We are sure that we’re going to be able to fulfill our guidance. And this is why we have reiterated it. And what we believe that from the point of view of margins, we are going to exceed 6% or even 7% at constant currency and this is where we think that we have to be in. And this is what we think we have to do to.

The next question will be asked by [indiscernible].

Unidentified Analyst

Two very quick questions. The first one has to do with pricing. What do you think about the markets? What are your expectations with regard to the pricing of turbines for the second half of the year 2015? And could you give us the competitive factoring which is what you provide at the end of June, I haven’t seen it.

Ignacio Martin

We as regards changes in pricing in the different markets, what I can think is that we are seeing that in each of the markets as the pricing is modest, flat. But what we have seen is that with the introduction of new products the introduction of new products allows us to increase the prices very moderately and we could also therefore increase margins.

With regards to the second question, the factoring we have at the end of this first half of the year. Well with regards to factoring, what we have seen is that the alignment between our manufacturing and our deliveries is allowing us to standardize our factoring levels and this quarter we’ve managed to reduce the factoring very significantly compared to what we had at the end of year and then what we’ve also done, we have managed to achieve a level of factoring relative to our activities that is very in line with the previous quarter.

Due to time constraints, we’re going to accept some of the questions that have reached us through the email. And then we’re going to finish after these questions or this question. And the question is, would it be possible to quantify the currency impacts by currencies? So what have the effects being like in the pace of the Brazilian real or the rupee in India?

So obviously as you know the currencies that affect us most in our profit and loss account, as well as in our results, currently what affects us most are the rupee and the Brazilian real, because those currencies in this first half have behaved similar to happened in the first half of 2013 with stock of about 15% in each one of them. And I don’t have the in depth figures of the level of impact, it has produced but I daresay that the impact produced by the Brazilian real is slightly higher than the impact that has been produced by the Indian rupee. We're going to accept one final question that we have online from Fernando [ph]. Please go ahead with the question.

Operator

[Indiscernible] Equities. Please go ahead, sir.

Unidentified Analyst

Thank you very much for accepting this last question. One very quick thing. The cap rate has been pretty high. What do you expect by the end of the year? And the second one is much more genetic because you mentioned that the product has had a negative impact on margins. Does this have to do with the market issue or because of different products in both? Could you please explain this negative impact? Thank you.

Unidentified Company Representative

Yes. As regards the tax rate, it is true that in this first half the year we’ve the tax rate of about 25% and this basically is related to two effects, because on hand we are present, we have a very significant…

Operator

Ladies and gentlemen we’re having some technical difficult, please now hang up.

…Ladies and gentlemen [indiscernible] with that we conclude the telephone conference. Gamesa’s first half 2014 results presentation is now over. You may disconnect your line. Thank you.

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