Nordex SE's (NRDXF) CEO Jose Luis Blanco on Q1 2019 Results - Earnings Call Transcript

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About: Nordex SE (NRDXF)
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Earning Call Audio

Nordex SE (OTCPK:NRDXF) Q1 2019 Results Earnings Conference Call May 14, 2019 8:00 AM ET

Company Participants

Felix Zander - Head, IR

Jose Luis Blanco - CEO

Patxi Landa - Chief Sales Officer

Christoph Burkhard - CFO

Conference Call Participants

Sebastian Growe - Commerzbank

Sean McLoughlin - HSBC

Ji Cheong - Citigroup

Wolfgang Felix - Sarria Asset Management

Alok Katre - Societe Generale

Operator

Dear ladies and gentlemen, welcome to the Q1 2019 Report of Nordex SE. At our customers' request this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions]

May I now hand you over to Felix Zander, who will lead you through this conference. Please go ahead sir.

Felix Zander

Thank you very much for the introduction. Good afternoon, ladies and gentlemen. This is Felix speaking and I would like to welcome you on behalf of Nordex to our call for the results of the first quarter 2019.

Here with me is our whole management team and our CEO, José Luis Blanco; our CFO, Christoph Burkhard; and our CSO, Patxi Landa who will give a presentation sharing the latest information with you including our latest order intake coming from the U.S. After the presentation, we will open the floor for questions and answers. Please limit yourself up to two questions.

And now I would like to hand over to our CEO, José Luis. Please go ahead.

Jose Luis Blanco

Thank you, Felix. Thank you, good afternoon, and thank you for participating in our Q1 analyst call. As always here with me Christoph, CFO and Patxi, CSO. We have prepared for you a standard agenda. I will share with you an executive summary of the evolution of the quarter. Patxi will share with you the situation in markets and orders. We will review with Christoph the financial performance of the company as well as on important relevant information. We will then spend some time talking about the current operational performance as well as the plans for the rest of the year, sharing with you as well some recent announcements in new product evolutions to conclude with a guidance for the year, opening up the floor for Q&A.

So let's move on. As executive summary, we will summarize that we are executing 2019 as planned. Q1 results, we have delivered sales volume of €398 million, EBITDA margin of 0.8% and working capital of -1.5%. Remarkable order intake in the first quarter more than 1 GW and worth to mention as well this is the sixth quarter in a row delivering more than 1 GW per quarter.

Profitability in Q1 as expected is affected by low sales volume resulting in lower absorption of overheads. Remarkable and important for the future is we have started as planned the serial production of Delta4000 platform the 149/4.0-4.5 MW machine in this case in Rostock. Remarkable as well is that we landed the first international orders for this product, Q4 last year we landed big bonus in Europe and in Sweden among other countries. This quarter remarkable performance of this turbine coming from Argentina and Australia and not in the quarter, but today it will show us where remarkable order coming from the U.S. selling partner 350 MW.

Worth to mention as well, during the annual [indiscernible] presentation was mentioned and was shared with our customers at WindEurope - last WindEurope in Bilbao we entered in the 5 plus MW class turbine, is the first evolution of the platform derivative with very positive customer feedback. Operationally, the DF [ph] the key structural patterns for the year that were discussed with your. The [indiscernible] remain valid as presented. Last but not least, with all the information we have at hand, the guidance for 2019 is confirmed.

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

Patxi Landa

Thank you, very much Jose Luis. Good afternoon. We see increasing commercial activity in the market generally speaking, supported by EU goals in Europe with good activity levels in a number of markets like Spain, the Nordics, and France. We see as well now Poland coming back and the new markets like the Ukraine developing as well. On the other hand, Germany continues to be at low activity levels and we expect it to start picking up the next year. We see significant activity in the U.S. as expected as well as in the rest of the world with some key markets coming back like Brazil, South Africa and India.

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

Service segment grew 11% quarter-on- quarter with EBIT margin of 16.5% in the period consolidating as well a solid performance. Service backlog increased to €2.2 billion. As a consequence of the good sales performance over the last quarters' turbine order backlog increased by 63% to €4.4 billion and the combined order backlog increased to €6.6 billion at the end of the first quarter.

And with this, I hand over to Christoph who will go over the financials.

Christoph Burkhard

Thank you, Patxi. Good afternoon ladies and gentlemen, welcome also from my side. I would like to guide you now through our first quarter 2019 financials. Our first quarter 2019 went according to plan on an anticipated low level without any surprise and starting with income statement, sales of approximately €400 million do show the backend loaded structure of this financial year and in contrast to Q1 2018, total revenues of €583 million already exceeding sales by €185 million which is an indicator for higher activity level reflecting increased inventories in order to be prepared for sharply rising inflations in Q3.

As a consequence the overall volume in combination with revenues significantly exceeding sales plus favorable product mix is leading to the exceptionally high gross profit margin of 35% in Q1. However, in line with the overall structural pattern of this financial year, gross profit margin will normalized hand-in-hand with increasing sales volume and will come done accordingly. Eventually also the EBITDA number of €3.3 million representing an EBITDA margin of 0.8 is a consistent quarterly result stemming from the low sales volume and the consequential high proportion of fixed costs and also that of course will change in the accordance with increasing volume over the next quarters to come.

If we now go to the balance sheet the solid structure of our balance sheet remains unchanged compared to year in 2018 and if you look at the equity ratio there you see a deviation compared to year in 2018 and this is due to a prolongation of the balance sheet mainly driven by two effects.

Firstly, in preparation of the steep ramp up during the second half of the year, inventory levels went already up significantly. Secondly, we had the first time application of the further new accounting standard IFRS16 which stipulates to display all leading contracts on the balance sheet and total balance sheet prolongation effects of the IFRS16 implementation amounts to €76 million. And last but not least, we are looking at net debt of €110 million at the end of Q1.

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

And this brings me to the cash flow statement. If you look at the cash flow numbers, I mean they are really 1 to 1 translation very straightforward of what I have just mentioned. Looking at the working capital free cash flow stood at the end of Q1 at €-76 million and that again largely due to the outflows for increased working capital and obviously the investing activities.

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

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

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

And with this back to Jose Luis.

Jose Luis Blanco

Thank you, Christoph. Operations in Q1 very much follow the schedule and demand as per the request of projects and customers on how reflection, a physical reflection of what was mentioned by Christoph and what we saw in the P&L line and balance sheet. If we talk about installations 261 MW installed, 84 turbines, 8 countries, very low level of installations, consequence reflecting in sales.

The project execution will significantly increase in the second half of the year in order to secure the revenue of 2019. Everything is operationally planned for that. We are planning for slightly more than 4 GW of installation coming from 2.4 GW last year and I will say that the main challenges are eventually customer delays in the civil works of some of the projects, other than that, the operational site machine of the companies prepare for dealing with this increased demand. The effect of this eventually [indiscernible] might be shifting showing units year-on-year.

If we talk about production, you will see in production the reflexion of the working capital and inventory. We see substantial increase in the turbines assembly and place produce in-house and the effect of battery supplies. If we talk about turbines 214 units were assembled in Q1, 81 in Germany, 93 in Spain, 18 Brazil, 32 in India and this as mentioned before is, I will say slightly more than 15% of the volume that we planned for the year up as mentioned, everything is as planned. In-house blade production increased as well to 300 units, 84 in Spain, 84 in Germany, 215 in Spain, plus all blades through contractor in the Chinese plants, ramp up in India, Turkish plants, Brazilian as well as a ramp up in Mexico.

So you can see we are ramping up production to support the high pace of project demand and installation in the second half of the year. Special to mention here is a ramp up in India, you saw that in our sales. The ramp up is on track in sales as well as in blades produced with effect practically in India. Special to mention as well, as we speak we are producing our first blade in the New Mexican plant and the ramp up of that plant goes as planned. Other than the ramp ups or say other than the strong ramp ups in India or our new plant in Mexico, the rest of the plants overall combined we are going to be producing record volume, but individually plant by plant we are running most of the plants below maximum capacity.

If we talk about plants, we'd like to talk a little bit products. It was mentioned that we were one of the few companies as well running in the 4 to 5MW machine, now we are again one of the first OEMs to jump into the 5 MW class machines. Today is a great day because also we saw the announcement this morning we landed a big 350 MW deal in the U.S. with a 4.X machine and it's an important milestone because it is not just Europe, it is not just Japan LATAM, it is not just Australia selling this machine in U.S. and financing this machine in the U.S. is of relevant importance for Nordex. That is not only 4.X, we are evolving this platform to 5.X machine.

This was announced in WindEurope. The turbine is fully designed with cost of energy in mind to deliver the lowest cost of energy in its class. We decided to go with a staggered approach philosophy and [indiscernible] existing platform based on proven technology and is I will say the only 5 MW machine with this philosophy of enhancing existing platforms is the class machine dimensions in order to optimize logistic and installation aspects and change. The difference here customize lifetime for the turbine from 20 to 25 and even more gears. We keep the same rotor as the 4 MW machine for manufacturing synergies and global production. We keep the same tower portfolio as the 4 MW machine and as an example we kind of run these machines in several modes as an example here we have got one for decibels we can run the machine up 5.5 MW.

More important is that the fresh contracts have already been signed for delivering of this machine in 20-21. And that is important that this contract is that the machine is very well accepted by customers supporting Nordex as of the OEMs in the 5 MW class.

With this, and approaching to the end of the presentation for today we'd like to confirm the guidance for 2019 and as you remember, sales are going to be in the range between 3.2 and 3.5 billion, EBITDA margin in the range of 3 to 5 with working capital below 2 and CapEx approximately €120. And as was mentioned by Christoph and mainly related to the CapEx we do see increasing demand for more competitive and profitable products, the 4.X and the 5.X as discussed today.

Examples are there, the U.S. 350 MW deal as well as we show in the last slide the first units of the 5.X MW machine. So with this increase in demand we are closely monitoring and studying the possibility and the feasibility to accelerate the capacity development to a faster place doing a faster supply chain transformation to the 4 and 5 MW machine accelerating mainly investment in blade modes to hardware and this opportunity.

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

Felix Zander

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question we received is from Sebastian Growe from Commerzbank. Your line is now open sir.

Sebastian Growe

Yes, good afternoon gentlemen and the first one is on order intake and working capital is the side question. Would it be fair to assume that the ASP that we have seen in the quarter of 0.78 which is now the fourth quarter in a row with an improving trend here, is this not only functional score but also reflects your ability to command higher prices on some projects as I think you mentioned and also in the closing remarks as not least the Delta4000 has superior features for now compared to competition?

And related to that and come back to the working capital aspect, can you also comment on the most recent developments around payment terms which very much seemed to have moved into your favor if I look at quarter one in isolation? And then I would have one other question on the volume ramp up, but maybe we can start with this.

Jose Luis Blanco

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

Christoph Burkhard

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

Jose Luis Blanco

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

Sebastian Growe

Yes, and if I may pick up that last comment and start with, is it possible to also review some of the projects in the order backlog and eventually change the corresponding turbine or would it go away to fine order to just makes out for you on anything in terms of production but also clearly on the gross margin potential related to those turbine sales?

Jose Luis Blanco

No technically the contracts they have their own life and usually it is very costly to changing permits. I mean it is usually a year to year process, it is too late. I mean usually when suppliers and customers agreed they started the civil work so it is very difficult.

Sebastian Growe

Okay, understood.

Jose Luis Blanco

But even in this theoretical scenario, it does not improvement substantially because if we can accelerate the transformation in the supply change eventually there are customers that buy this additional capacity. So we don’t see a bottleneck currently in the availability of customers.

Sebastian Growe

Yes, okay. And on the comment you made on about 4 GW of total installation volume in the year 2019 and you also referred to the ramp up in production which is now at more than 200 turbines in the first quarter, is it fair to assume that you can take your overall production outputs in terms of number of machines to about 1200 or so? And if I also then may refer to another comment you made that you are not expecting production plants to be utilized in the year 2019 where do you see after the ramp up of India, after the ramp up of Mexico the total numeric capacity in terms of machines produced once will fully ramp up?

Jose Luis Blanco

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

If we talk about blades, the picture is different, because there is a product transformation that requires new blades and new blade molds and new factories, so it is very much product driven. I would say that the bottleneck for transforming the followed portfolio to the 4 to 5 MW machine is ability of the company to ramp up and more blade suppliers, more blade plants and to harvest their demand.

So in the sales full industrial capacity I would say from suppliers development we are well on track and the ramp up in India is well on track, glass blades of the AWP platform running at high volume. I would say the only slightly out of normal scenes is the ramp up in India and one ramp up of one supplier in China.

We are ramping as we speak in Mexico, but we are going to produce in Mexico only 5% of the glass blades for the year, so even facing some ramp up delays in Mexico the impact is very limited and in the new carbon blades for the realtor for housing it would plan to ramp up in Mexico in the second half, but with no impact for installation this year. So long story short, in our sales we are confident. We have the industrial capacity to row more I would say substantially more without big investments, blades no, blades we need to invest. If we see opportunities in Delta4000 with good margins and good cash flow and if physically possible we will accelerate the investment in more blade molds in the second half.

Sebastian Growe

And if I may, and this will be the final question, yes I promise that, when are you going to have the decision made in terms of are you going in for an expansion of capacity in the blade molds et cetera, is it just a function really of your intake in the quarter two or what's really the make or break?

Jose Luis Blanco

I think there are two factors, one is the order intake that we are very optimistic and the second factor is management. I mean physically we need to focusing ramping up Mexico. After ramping up Mexico we need to transfer one of the Spanish plants to produce the 4 to 5 MW machines and once this is secure, we will start the next project. So it is more at this point physical limitation of trying to do things properly. I am not sure in that we don’t make mistakes in those ramp ups, than availability of customers.

Sebastian Growe

Okay, sounds good, thank you.

Operator

The next question we received is from Sean McLoughlin from HSBC. Your line is now open sir.

Sean McLoughlin

Good afternoon, thank you for taking my questions. Can I just come back to Mexico and the independent blade suppler in the market has had a lot of problems and I just wondered given that you're building in exactly the same location Matamoros, I understand what are you seeing first of all in terms of ability to hire staff and let's say your relations with the local unions and how that may impact your ramp for the second half, the year?

Secondly, just wanted to dig into costs, I mean SG&A costs are coming up higher staff numbers, finance costs are also coming up. Can we extrapolate the Q1 numbers into a full year trend? Thank you.

Jose Luis Blanco

Okay, thank you very much for the questions. I will take the first one Jose Luis and Christoph will take the second one. Regarding Mexico, what I shared with you is that the ramping up is moving as planned. We saw some instability in the region due to political reasons, that things looks like are settling and in our case no effect. We are secure out of dealings with the union. We have before, we have the plant ready. The molds arrived to the plant. The training program is ongoing. They are producing the first blade.

We are of course cautious, but at the same time optimistic about our ability to ramp up this plant as expected. So far, no impact at all for us. Worth to mention as well that as we are ramping up the plant, we are producing limited amount of numbers this year, only 5% of the glass blades are going to produce in that plant. So we are not aware of magnitude if the rotor [indiscernible] so the impact in the glass blades is very limited and the impact in the carbon blades we are planning to produce I would say 20 rotors but those rotors this year are not going to be installed. So the impact for the revenue of the company in 2019 is limited. But for me the important thing is not the impact on revenue is that our project there so far has not been impacted and things are running as a normal ramp up, looks like the situation around Matamoros is settling.

Christoph Burkhard

And Sean, Christoph here. If I may now complement the statement which was your second question which I will respond here around SG&A, OpEx and current expansions, as you know we do not have due to the total costs method not a split of the classical SG&A as you would see it if in case we would do cost of goods sold method. Why am I saying that because you see the increases in OpEx as well as impex very much also related to the ramp up of blue collar workers which in the concept of cost of goods sold of course would not sit in the SG&A.

So the related increases that you see are very much volume driven and they are a combination of on boarding of blue collar service people, plus blue collar factory people and related OpEx in that context. So again this is very much to be seen in the preparation for the ramp up and I don’t want to give you now a very specific OpEx guidance for 2019. However, I think if you look at our EBITDA guidance then you can almost one to one derive the proportion of OpEx and pex from that. The main message is this is not the classical SG&A ramp up. We are very disciplined on that side. This is related to volume driven factors mainly around blue collar workers.

Sean McLoughlin

That's clear. And the OpEx finance costs?

Jose Luis Blanco

It is up 15 million a quarter. I can't see any exceptional topics here to be honest and Sean if you allow me we can get back to you afterwards and then give us a very specific answer on that at least there is nothing unusual in our financing costs.

Sean McLoughlin

Thank you.

Jose Luis Blanco

Thanks.

Operator

The next question we received is from [indiscernible] from Citi. Your line is now open sir.

Ji Cheong

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

Jose Luis Blanco

Okay, so the tariff impacts we have as I said and no impact for us out 2019 numbers and guidance. For 2020 we see – have planned to shift the supply change strategy more from India to the U.S., more from Mexico to the U.S. and more from Europe to the U.S., less from China to the U.S. So in our case, even the impact for 2020 with the current time that we have effect is going to be very limited.

Ji Cheong

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

Jose Luis Blanco

This is difficult to predict. I mean you need to keep in mind that inventory is paid by the customers because these are contractual obligations that we need to deliver and produce as per the agreed milestone of the contract, but the customers have always the right to delay if they face some balance of plan delay in their project. So it is going to be very much customer driven if the projects and if the balance of plan of the projects is secured properly we will in the inventory quickly if not we will need to start the inventory of our customers. I mean you see it in our balance sheet but it is mainly our customer's inventory until they are ready to set the inventory in their wind farms.

So difficult to predict, eventually some slight increase might be expected because we are going to produce, we are going to increase substantially the pivot [ph] in installation plant for second quarter and quarters to go as well as the production. The production we cannot slow down because it is a contractual obligation. The installation we might need to slowdown because it is a customer requirement.

Ji Cheong

Got it, thank you very much.

Operator

The next question is from Wolfgang Felix from Sarria. Your line is now open sir.

Wolfgang Felix

Yes, hello. Thank you very much and congratulations on the U.S. order. Can I first ask, what is the likely timeframe of the delivery of these machines? Is this as usual aimed at year-end or are you having more time?

Jose Luis Blanco

It was mentioned in the press release. This contract needs to be commissioned before the end of 2020. So that's the plan, those machines are going to be installed in 2020, most of them produced in 2020 so then starting to be produced around Q4 this year. So that no revenue impact for this year, the quarter revenue and most of the cost is going to be a 2020 year.

Wolfgang Felix

Okay, the other question I have, I'm somewhat concerned about I suppose where the balance sheet is going with the ramp up and that truly, what is your consolidated net leverage covenant? Is the next testing date December 19th and is it around 4.6 times or how do we really think about that?

Christoph Burkhard

Right, and firstly, we do not disclose our leverage covenants and I have always been saying that we have sufficient headroom and this is still the case. The second thing is our covenant calculation is still based on [indiscernible] 11 and not IFRS15 and therefore yes that's the picture is pretty different, but there is no concern whatsoever.

Wolfgang Felix

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

Jose Luis Blanco

We expect them to stay pretty stable.

Wolfgang Felix

Okay, all right, thank you.

Jose Luis Blanco

Welcome.

Operator

[Operator Instructions] We received a question from [indiscernible]. Your line is open sir.

Unidentified Analyst

Yes, good afternoon. I am just wondering if you could just talk a little bit about how the auctions are going in Germany, have there been year-to-date any auctions and how was the participation and the pricing?

Jose Luis Blanco

Yes, actually they were having today the results of the last auction and they would again under subscribe, significantly under subscribe with the works below 100 MW average price is at just above 6 cents. So the dynamic of the German market continues as we explained in the previous call with bottleneck into permitting that is driving under subscription and not a consequence high PPAs. We see this dynamic continuing during this year and we expect that the market will start to readjust during 2020 thus activity levels recovering in that year.

Unidentified Analyst

Now has the German Government done anything, the regulars done anything to kind of accelerate or basically to improve the conditions as far as the pricing or the participation, I mean are they requiring sample permits in the bidding process, et cetera?

Jose Luis Blanco

Yes, that is – permits are required right now to participate into the auctions at a federal level as you know there was a bipartition agreement by the government and by the Parliament to enhance the volumes to be awarded into the auctions. The bottlenecks remain at local and state level that are about granting permits and these are very diverse. The country as you know, and there are the bottleneck is right now there and we expect that little by little the bottleneck will be resolving and as a consequence of that the market reaching equilibrium.

Unidentified Analyst

But what is actually driving the under subscription in these auctions?

Jose Luis Blanco

The lack of available permits, available projects we are fulfilling all the necessary requirements to participate into the auctions, so and as a consequence of that, the under subscription and the high PPA prices into the auctions to say that German Government they seeing us and most of the countries in Europe have a clear target towards European Union, so behind the target, so how something might be expected and the second important thing is the power of economies. I mean if the auction is at 60 eventually we will that speeding up more investment in companies doing more permitted projects to tackle future demand, but this…

Unidentified Analyst

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

Jose Luis Blanco

Not at all, that continues, the timing continues to be the same and as we explained before is the lack of permits that is creating that temporary bottlenecks. We see that the market will recover and we expect it to begin to recover in 2020 and beyond.

Unidentified Analyst

Okay, thank you, fair enough.

Operator

We received a followup question from Sebastian Growe. Your line is now open sir.

Sebastian Growe

Yes, thanks for taking my followup. So from Services and the related margin development in that particular segment, so can you just give us a sense why the margin has been lower than in prior year despite the growth on the top line, if there is anything in the mix composition and if so if there are also eventually simply greater delta eventually between what the Nordex Service contracts are based on what they would give you in terms of margin profile compared to that AWP and how would you expect that to play out going forward? Thank you.

Patxi Landa

Moving forward we don’t have sufficient information or evidences to process so our assumption is ability. This slight difference is of course when you – every 100 MW in Germany for the same gross margin has a better synergy and as a consequence bottom line profitability. And most of the volumes that we added was in big projects in international markets, slightly more challenging pricing environment. These megawatts were landed the same that we are executing here in the toughest times of the price war. So landed this volume in the toughest time of the price war plus less contribution in small projects in Germany where we have well attended service networks is what is explains that.

Sebastian Growe

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

Patxi Landa

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

Sebastian Growe

Okay, thank you.

Operator

The next question we received is from Alok Katre from Societe Generale. Your line is now open sir.

Alok Katre

Hi, thanks for taking questions, Alok Katre from Societe Generale. I have a couple of follow ups and then one question. Just on the German comments, clearly the permitting issues still continue to sort of curtail sort of demand in that sense because from the also propping up prices, just wondered on the dual front in terms of how you think these, the current sort of situation in terms of the permits the under subscription of auctions, et cetera, how does it affect your installation pipeline for 2020 and the couple of years beyond that, because I'm, you know appreciate the better, let's say contracting environment I just wondered how long does it take to translate that into sales and therefore how does it affect your market recovery from an installation perspective? So that's question number one and then I have a followup.

Patxi Landa

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

Jose Luis Blanco

And if I can compliment, Patxi. I think the timing for us is so how much is the cost we are ramping up Germany requires big machines or requires the 5.X so big machines. We are ramping up the capacity for big machines as we have mentioned before. A bottleneck is new blades and investment in blades and we saw as Patxi mentioned substantial peak in demand in the U.S. for this project. So having demand in Germany does not change our company because we don’t have more blades to deliver and those blades have customers in the U.S. in 2019 and 2020. So I'm not saying that is positive, it is not, but the material effect for our company is neglectable because we have more demand for these products than capacity at this time.

Alok Katre

Okay, the other thing from a U.S. perspective touching on the tariffs side that's I've just wondered from pricing dynamics perspective, how has that changed and looking at from a competitive perspective as well in the U.S but also in terms of passing on any tariff to the customers and I was just thinking if the tariffs expands a bit more beyond China how does that affect the overall let's say negotiating position with customers because this is clearly an issue I think across the industry and you have some aggressive pricing, et cetera, so just wondered if that has changed…?

Christoph Burkhard

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

Alok Katre

Okay, okay perfect. And then last question really is just wondering how should we think about the pricing in the backlog the €4.4 billion backlog of orders that you have relative to if I calculate what you need to get through to consensus expectations through the rest of 2019's gets to around 5%. Just wondering how should we think about the pricing and margins in the backlog relative to that 5% that you need to make consensus this year?

Jose Luis Blanco

The last six quarters was on one week about, we officially announced that we saw light at the end of the tunnel in the last quarter, so you can take your math, the quality of backlog so we start to see that that margins seems last quarter and especially with new products. So a combination of the new products and from the timing of two quarters this will give you how long it is going to take to transition from price war margins to I would say future margins.

Christoph Burkhard

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

Alok Katre

So should we then expect much better, is that effectively you are then saying is we expect much better performance purely on the pricing and everything how that's been moving over the last six quarters it should start to show up already in the later part of 2019, is that how we should sort of read your comment then?

Christoph Burkhard

Too early. I mean we don’t guide too early to either next year, what we are telling you is actually that the volume that we landed in the last quarter has better quality and especially with the new products as you need to put what the share of the new products over there, so and when this volume is going to be installed, it's going to be in 2020 is going to be in 2020 and 2021. I mean the planning process for evaluation stock [indiscernible] and we follow the normal budgeting and guidance.

Jose Luis Blanco

But I think as I understood Alok, you are little bit fishing for towards end of 2019 upside if I understand you correctly? And I have to say…

Alok Katre

No, I'm just trying to look, yes I was just trying to understand when because that's the kind of indication sort of your peers have said that it's probably the back half of 2019 when you start to see, not necessarily get the full effect which is appreciable?

Christoph Burkhard

You know I think we had, the good news was, you know we have very high visibility into 2019 earlier than usual, but that you know is a conclusion also enabled us of course to get more visibility maybe into the guidance. So I think that's a little bit too limit now to prices to what's the later end of 2019, I think that's what we see as the midterm development will entirely this year by product mix transition, but that's a midterm story.0

Jose Luis Blanco

And if you take this that we announced today substantial deal zero impact P&L 2019 is everything is going to go to 2020 P&L.

Alok Katre

Yes, okay great, thank you. Thanks for the comprehensive answers.

Operator

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

Felix Zander

Okay, thank you very much. Yes, thank you very much for your interest in our company for participation and to fruitful discussions and I would say good bye to you and like to hand over to Jose Luis for his final remarks.

Jose Luis Blanco

Okay, thank you. Thank you very much all of you. Thank you, Felix. I think the main messages and take away that we want to share with you is that [indiscernible] is as expected. We have clear view on 2019 backend loaded with high level of activity in the second half. It was mentioned but relevant to mention again that it is not only Delta4000 and 4 MW machine that not versus as well in the 5 MW segment kicking in with good customer acceptance and landing deals with new enhancement product that the proven technology of Delta4000 is now serving and demand in Europe but as well as LATAM, Australia, and globally and that we still see strong performance in order intake for existing and especially for new technology in the current and upcoming months. So with this, thank you very much for your participation and have a wonderful day.

Operator

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