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Gamesa Corporacion Tecnologica’s (GCTAF) CEO Xabier Etxeberria on Q4 2016 Results – Earnings Call Transcript

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Gamesa Corporacion Tecnologica SA (OTCPK:GCTAF) Q4 2016 Earnings Conference Call February 23, 2017 12:30 PM ET

Executives

Ignacio Martin – President

Xabier Etxeberria – CEO

Ignacio Artazcoz – CFO

Analysts

Operator

Welcome to the Results Conference of Gamesa and we have here with us the we have here with us the President of the Company Ignacio Martin and the Business CEO, Xabier Etxeberria and the CFO, Ignacio Artazcoz and I will give the floor to the President of the Company Mr. Ignacio Martin.

Ignacio Martin

Thank you very much Christina and good evening everybody. As Christina has just pointed out we’re going to be talking about the results of the year 2016 and we consider that it has been an extraordinary as regards to the outcomes obtained. We have been capable of pointing out the objectives that we’ve set for the 2015, 2017 period at the end of the year 2016 so believe that this year this year has been year that continues with our previous levels of performance that started in the year 2012 which is when we designed a business plan whose compliance took place earlier than expected but we’re also going to be talking about the year 2017 and we’re going to be talking a little bit about the future too. The year has been extraordinary not only because of the performance numbers and because of the achievements that have been made but also because this year as everybody knows we have laid down the foundations and we’ve also advertised we have announced rather the transition that is going to bring about the merger with Siemens Wind Power with Gamesa and that means an international leader is going to be born and this international worldwide leader has we would explain during the presentation will allow us to position themselves in such a manner that at the peaks or during the peak movements we will be able to have a quicker growth than what Gamesa could receive on its own and then in the trough moments it’s going to allow us to be able to resist and have much more capacity because we’re going to achieve a much more significant scale.

Without further to do then let’s move on now to the key elements of this period and I’m going to give the floor to our Business CEO Mr. Xabier Etxeberria.

Xabier Etxeberria

Thank you very much Ignacio. And as we’ve already pointed out Gamesa has has exceeded the objective that we established and we have managed to laid down the foundations for the long term strategy and that is because we have a record order intake and installations in 2016, order intakes a total 4.7 GW. In Q4 we obtained 1.4 GW and now installation also represent a record for a company and its 4.3 GW installed in 2016 so that meant that we achieved the number four position in the global ranking of the WTG Manufacturing sector and we also exceeded all of the guidelines given for 2016 with management focused on creation value and the ROCU of the company reaches 30% and this has been achieved by means of a profitable growth. Our revenues have reached a €4612 million which means that it’s been a 32% increase year-on-year and our EBIT margin has reached €477 million which means that there’s been an increase year on year of 48% and EBIT margin relative to revenues of 10.4% but our net profits on the other hand have gone up 77% year-on-year and in the year 2016 the figure that was attained was €301 million and all of this is connected to focused investment and we’ve been very careful about the management of working capital and CapEx because [indiscernible] working capital by the end of the year it reached a negative figure of €225 million or in other words it means that it’s minus 4.9% relative to revenues and on the other hand the CapEx has total €211 million. It’s a modular CapEx and it’s based on the fact that we’ve put our stakes on technology and new platforms and also on the growth of the company from an industrial point of view. And this CapEx is 4.6% relative to revenues and we also have a sound balance sheet because our net cash at the end of 2016 has reached €682 million which means that during the fiscal year it has generated a net cash of €423 million and all of this by laying down solid foundations for the company in the long term, on the medium term and this means that we have created value for the near future. And we’ve signed merger agreements with Siemens Wind Power and we’ve also received the Gamesa shareholders approval.

As regards our record order intake as mentioned previously it meant that in Q4 we have reached 1.4 GW as mentioned previously this means that it’s 33% more than what we reached last year and our order intake at 12 months has been 4.7 GW which compared to the 3.8 we reported one year ago. It represents a growth of 21% and our order book order backlog at the end of 2016 is 11% higher than the order backlog we had one year which now stands at 3552 MW and all of this means that we have a very significant visibility in terms of the growth that we predicted for the year 2017, our order backlog is 17% higher at the end of 2016 in relation to what we had one year ago and these are 3335 MW as you can see on the chart that our orders at the end of the year 2016 for the sales of 2017 mean that for the activities of 2017 close to 5000 MW what we’re going to be have hedging that is about 63% or in other words in Gamesa means that Gamesa has a visibility in terms of its future revenues that exceeds 2/3rds of the activities that we’re going to be projecting for this year but not only that but the record order intake in the first quarter means that we virtually achieved a book to bill ratio in other words the ratio between the order intake and the revenues of the year which is 1.1 which is the ratio we are currently projecting. So all of this has been achieved by means of a much better diversified regional mix and also because we have a very fast penetration of new products and you can see on the left hand chart you can see the geographical breakdown of order intakes of 4.7 GW and you can see that it’s much more balanced from the geographic point of view and this diversification allows us to provide us with access to practically all markets and this means that our order intake of the year 2016 has arrived from 21 countries where the United States and Asia Pacific followed by India and Europe are the main driving forces for the order intakes of 2016 and the diversification we have in Latin America also allowed us to compensate the macroenvironment in Brazil which is weak against the strength we have in Mexico and this is a good diversification of our regional mix is supported by our distribution, the distribution we have of our products as regards of new order intake and these 4.7 GW in terms of order intake 70% of them are based on new platforms or in other words in our 2.0 MW and 2.5 MW with our [indiscernible] 114 and the G126 platform on the whole they account for 67% of the orders of the year 2016 which is higher than 50% of what was is represented by these platforms in terms of order intakes in the previous year and I would also not underscore that in the 2016 fiscal year we obtained the first order for our turbine G132 with a power rating of 3.465 MW and it’s something like 200 megawatts in Mexico and this shows the competitiveness of our portfolio because here we have the expected product portfolio for the business plan ’15-’17 and it’s a very positive because we are leaders in the 2 MW segment with our G126 2.5 MW wind turbine generator which once again has allowed us to win the gold medal in this category and then our entry in the segment in excess of three megawatts with a new contract in Mexico of something like a 200 MW.

Our product portfolio means that in particular these new platforms will be exceeding the energy production of a previous platforms between 20% and 25% more. So all of this means that Gamesa is now in the full position in terms of the total market but Gamesa has increased its installations by nearly 900 MW year-on-year which is nearly 27%. So it’s moving one position up in the global ranking and we now stand at number four and we’re gaining market share and in particular Gamesa now is occupying position number four with 7% of the market share which is a very significant improvement relative to previous years and this growth also happens in the market with the exception of China where they’ve reduced their installations there by 1 GW year on year so we are on the right path. So this order intake and the regional diversification and what we’ve already seen about the penetration of the new product this means that in the year 2016 and particular as regards revenues we reached €4612 million in terms of revenues which means that it’s a 32% increase year-on-year than it was only in Q4 where we achieved sales of €1273 million which was 31% more year on year. So these are the sales of the group that are fundamentally supported by the sale of wind turbines and particular as regards to turbines our sales totaled €4141 million which means that there’s been a 37% improvement year on year and the wind turbine generator activity is growing and now has reached a 4332 in other words there’s been an improvement as 36% year on year and these sales in 2016 have grown 28% vis-à-vis 32% in real terms and this reflects that the exchange rate influence is negative by six percentage points.

And that we have the control of structured expenses because we have said that the operating threshold has been maintained as one of the key elements for our management. We’ve grown in terms of revenues up to 4612 million for the strict control which gives us a ratio of 7% for structural expenses vis-à-vis revenues and in the year 2016 one year before we expected we have achieved the business plan objectives of the 2015-2017 business plan because we said that these expenses had to be with 8% and in the case of this particular ratio we have exceeded this threshold we now stand at 7% and one year before the business plan has been achieved but we can never forget about the future because we are very strict about controlling our structural expenses but this structure is sufficiently solid and it’s growing enough too so that we can invest whatever has to be invested so that we can achieve our growth levels in 2017. We have obtained a significant improvement as regards operating the net profit margins because the EBIT of the company in 2016 reached €477 million which is 10.4% relative to revenues and this figure has improved by 48% if you compare with what we achieved one year ago and it was in Q4 when we reached an EBIT of €137 million which was 10.8% and an improvement of 57% year-on-year but we also have a significant amount of growth in terms of the net profit because the net profit of Gamesa now stands at €301 million which means that there’s been a significant improvement competitive to the €170 million we reported one year ago and in particular we are multiplying this figure by 1.8 times and that is of the profits that were achieved last year and in this regard we have established a completely new record for the company. And then we also have another record as regards the generation of a net free cash flow as I said before the cash flow generation of 2015 reached €423 million or another words there was an improvement of 2.3 times the cash flow generation of 2015 and this is something we achieved thanks to profitable growth because the net free cash flow reached €469 million which is much greater than the €300 million that were generated in one year ago and there’s been a very strict control of the working capital which reaches negative figures of €225 million compared to the €12 million positive we had in December of 2015. So this means that the cash generation now stands are €237 million rows with much of a CapEx as I mentioned previously of 2015 and once again we have put our stakes on achieving the technological improvement and we also want to go for new platforms and we want to invest in capacity to provide support to growth in other words factory capacity so that we can give support to the growth of the company and this is how we achieved free cash flow generation of €423 million compared to the €182 million that we achieved one year ago and the position of net free cash on the balance sheet on December 31, 2016 has reached €682 million and then we have the proceed [ph] as we pointed out in the initial summary. It has now reached 30% and it’s a very important thing because we’ve had and it percentage point improvement of the ROCE we have last year because it was 19% in the year 2015 and it went up to 30% in the year 2016 and this means that it’s 3.6 times of the WSC [ph] [indiscernible] this is something repeat many times a profitable growth we want to grow and in the profit of matter and with a strong balance sheet and we this has to be permanently monitored and we want to have cash flow generation both in peaks and troughs and we want to transform the net profits into cash. Ratios have also improved in something that is very, very important for this company which has to do with the safety of all of our workers because the indices of safety at work as regards of frequency and severity have achieved very good levels compared to the benchmark of these sector and in particular the accident frequency index has established a record of 0.85 and the severity index repeats the figure of 0.023 which is an extraordinary ratio that was a really achieved in the year 2016.

So all of this means that the performance levels for 2016 has been mentioned until now and Ignacio will be pointing out in the next few minutes. All of this means that we have exceeded or we have fulfilled all of our commitments and that everything was adjusted upwards during the fiscal year on two occasions but you can see in these columns how this progression has taken place in terms of the guidance for the year 2016 to reach the final column on the right hand side where you can see that our volume has to do with 4300 MW, we have an EBIT of €477 we have an EBIT margin of 10.4%. We have a working capital relative to sales and negative by minus 4.9% and a CapEx relative to sales of 4.6% and our OCE as I mentioned previously is 30%. So this is something that we did in 2015 a very important year and we’ve also laid the foundations for the future once we advance with the long term strategy and this has to do with the merger agreement that were or signed with Siemens Wind Power and this moves forward in-line with our tentative calendar. So we started off with the Siemens Wind Power carve out and then we have the Gamesa shareholders meeting when the merger was approved in October 2016 and then in Q4 last year we received permission by the Stock Exchange Commission so some very important developments have been taking place over these recent months and we expect to get all the agreements up and running for the upcoming merger over the next few weeks and I would like to finish my part of the presentation with a very quick summary which I think signifies or explains what we think about the objectives for the 2015-2017 business plan. Gamesa has focused on the long, medium and long term we’re not a short company we are a company that wants to obtain good results in the short term but we’re already thinking about the medium and the long term too and in these first two years in 2015-2016 of the BP, the business plan we have focused and we will focus on making use of as many [indiscernible] as possibly. We want to find the right structure and want to improve our variable expenses. We have to maintain a sound balance sheet too and about all we have to boost the competitiveness of the product and service portfolios and the last year of the 2015-2017 business plan will be the year when we get Gamesa ready to deal with it beyond 2017 with the Siemens Wind Power agreement, we think that it’s a wonderful way to finish the 2015-2017 business plan and prepares the company to address the future perfectly well.

Ignacio Artazcoz

Thank you very much Xabier. I would not like to move on to the second part of the presentation of the results from — these are key figures. So as regards consolidated group and as we’ve already see the groups sales reached €4612 million which is 32% growth relative to the previous year and then the equivalent megawatts its €4332 million equivalent megawatts in other words it is 36% in terms of growth and we have operation and maintenance sales that have been €471 million which is just the slight growth of 0.1% which is stable and that we have EBIT, EBIT now stands at €477 million with the growth of nearly 50% compared to the previous year and then we have an EBIT margin relative to sales of 10.4% and then we have the operations and maintenance EBIT margin that has really climbed to 15%, its 14.9% and then we come to the final line which is the net profit that has reached €301 million which is a 70% increase in net profits compared to the previous year. Working Capital we’ve already seen this €225 million negative minus 4.9% relative to sales which leave net catch situation you can see at the end of the fiscal year of 2016. So moving on now to each one of the divisions we have the wind turbine generator sector that has undergone some very significant growth 36% in terms of growth and this growth in activity has been very diversified in all regions but it has been driven basically by India.

There’s been a slight decrease in Asia Pacific basically because of a contraction of the Chinese market and also because of the figure for last year was very demanding in 2015 I mean but if we were into the average share price per megawatt what we will see is that we — is because of the impact on ASP we’re fully inline with expectations we set throughout the fiscal year because if you remember we had a first part of the fiscal year where the ASP was very affected or very influenced by the assembly ratio and installation so in other words what we call the activity reach and in the first semester it was a negative but in the second half of the year it has recovered as we said previously and it’s been 1.43% and we have an average ratio which is close to one which was the estimate we had established throughout the fiscal year so that means that in the end this ratio has had no influence on ASP, there has been a negative effect in relation to the exchange rate minus 5% in 12 months and there’s been a positive effect to that has to do with introduction of new products mainly the G114 that has grown in terms of volume and it also has [indiscernible].

But if we now move on to wind turbine generator activity by geographic areas. What we can say is that geographic diversification and cloud diversification is something that still characterizes our activities but from a geographic point of view here we can see the pie divided by megawatts sold but if we also think in terms of euros you can see that the pie is very similar but perhaps it’s a little bit more balanced as regards the euro because in euros and in terms of sales India is 30% and North American sales are another 30% and then in Europe and the rest of the world its 24%, its 12% of the sales in the United States and China would have only 5% and then we have the breakdown of megawatts sold by customer type what you can say that we have customer portfolio that is very diversified with the IPPs that account for 54% of our sales 35% of the utilities and that we have other kinds of customers with a 11%. As regards the wind turbine division we have improved our profitability that was in the significant manner and also in the fiscal year 2016 because EBIT has gone up by nearly 80% relative to the previous year and it now stands at €407 million which means that it’s been nearly 10% of EBIT margin relative to revenues and WTG division and it’s a 2.2 percentage point improvement relative to the previous year, relative to last year and this improvement is based on the body of activities because we’ve also limited fixed expenses and because we’ve had continuous improvement of variable costs because as you know for us one of the key elements in order to counteract the pressure from the competition also in terms of pricing has to do with continuous improvement in variable costs with three significant variables and we have for instance design improvements and then we also have designs in terms of production process which means that we can improve the competitiveness of these processes and then we also have improvements in the supply chain with our collaboration with our supplies which means that we can optimize the unitary costs of the purchases we make and all this is based on our quality programs, Gamesa quality leader is one of the fundamental pillars for our continuous cost improvement and as I say it’s a fundamental talk so that we can maintain the competitive position of Gamesa and as usual as we pointed out many times we’ve focused a lot too on the breakeven in the profitability plan, we have limited fixed costs which have grown in the fiscal year as we’ve seen that they have grown much less than activities and this has allowed us to get ready to deal with growth with more growth next year.

Moving on now to the operational and maintenance division, this division has well it’s in line with the business plan ’15 – ’17 and in terms of revenues we have repeated the figure we reported last year but we have improved our profitability in this division by 30% and it nearly stands at 15% EBIT margin relative to revenues in the entire year and once again our focus in terms of improving costs and our operations and maintenance management program is based on reducing cost, its also based on introducing added value products in particular in mature markets where we have much more pricing pressure to put up with which is something that we have already pointed out in presentations of previous years and the introduction of added value products and to contract these effects and then we have contracts that are longer lasting in the emerging markets where we have more activities in recent years and this allows us to be very optimistic as regards our growth in the future. So this is something we can also see a little bit further down when we analyze our trends in terms of our fleet and order book and this allows us to guarantee that we will have revenue growth by the year 2017 and this will be inline with the objectives of the business plan ’15 – ’17 and we have a recovery of the fleet on the maintenance and we’re going to have improved renewal rates too and in the year 2016 the figure is 67%. Now the order book has grown by 11% as regards to operations and maintenance but if we move on now to the conservative group EBIT since 2015 until the year 2016 what we can say is that based on the EBIT we have for the year 2015 of 9.2% well the first thing is we eliminate, we eliminate non-underlying effect that is related to the capital gains because of the equation of that win which took place in the year 2015 and which totaled €29 million which is a 0.8 percentage points relative to revenues of last year.

So this brings us to the underlying REBIT margin and EBIT margin of last year of [indiscernible] which was 1.4% or 8.4% rather, it’s gone up two percentage points and now stands at 10.4% in the 2016 fiscal year. So these improvements have resulted from the positive impact in the increase in bottom and also because we’ve optimized variable costs including the effect of raw materials which in the year 2016 is something that happened and we also have a favorable composition of the scope and mix of the project and only we have had a lower contribution of the operations and maintenance division. So mathematically this has a negative effect on margins and then after that there has been increase in fixed expenses which as I said before this is necessary so that you can address growth and this is inline with the increase in the investments and here under high fixed expenses we’ve had more amortizations throughout the year 2016 related to the CapEx that we implemented in previous years. As from the point of view of the working capital our working capital has reached a figure of €225 billion minus 4.9% with a reduction of €237 million and here we are implementing the working capital management policies and what we are doing is putting manufacturing and deliveries and corrections inline and this is the activity where we have possibly improved most throughout the fiscal year in 2016 and we’ve continued with an active management of accounts payable and accounts receivable and finally we’ve had a positive impact related to SH contracts signed in the United States at the end of the 2016 fiscal year that probably had an effect between €100 million and €120 million as a net effect as regards to improving working capital which is 2.4 or 2.5 percentage points of the working capital that arises from this net effect between what we got through Safe Harbor and what we had already spent at that point in time in terms of safe harbor so the net effect as I say is what I just pointed out.

But as for how working capital has [indiscernible] we have seen that on recent years we’ve worked hard to especially reduce and I would highlight an improvement in the average consumption of the working capital as you can see what average working capital of revenues has got to 2%, we’ve reduced volatility of working capital over the most recent years and we’ve done that specially in 2015, 2016 and finally net debt or cash in our case we have a sound balance sheet, we will be growing that this year and in the coming year and we’re exiting €1800 million in funding lines at the end of the exercise we would €682 million, we’ve got 423 million free cash and dividend payments as well and with maturities of this funding which we’ve managed to extend the main one of €650 which we’ve extended and still 2020 and with some maturities that will be coming up next year on the next three years which will come from the loan that we’ve taken that with European Investment Bank and with that I’m going to hand the floor over to Ignacio Martin.

Ignacio Martin

Thank you very much and let’s now look at the future and the outlook for the future. Growth is still within being maintained within the sector sustained mainly by two factors, the need to fight against climate change which we have no skepticism regarding. We know that it’s out there and also because of the need all the reality of the competitive nature of wind power will give some information about that straightaway. But we’ve seen truly that in comparison to conventional fuel sources and other renewables wind power is very competitive and there are places that are depending on wind power and in fact there in these places this energy source can compete with any kind of energy. As for market data and based upon the market data published at the end of the last year we can see that this is a growing market with accumulated growth in the next four years of a 3.8% which if we include the market without China without the effect of China then growth is actually at only 6%. This is even more important this growth in emerging nations where we’ve seen it’s 8.4% in comparison to the mature markets where the growth is only 4.7% as for the order book that we have a backlog of orders that makes us very visible and that’s why this year we’ve got great expectations for this year 2017. I would imagine afterwards people ask me about the future we are in a complex, it’s a very complicated situation a worlds in which the macroeconomic situation and the general political situation is by no means stable but based upon the competitive nature of wind power and the need to fight against climate change we feel that the growth that we’re expecting is going to become a reality. In emerging nations of course there is always a question mark surrounding some of these emerging nations and there can always be specific difficult situations. I imagine people will ask me about Brazil and of course the Brazilian market is going through tough times at the moment. Recently news show that — auction had been cancelled and it may well be that 2018 isn’t going to look as good as 2017. But however in Mexico and other Latin American markets as a result of other auctions that have been held and we’re actually at the end now of those signing many contracts, the free market is showing us the growth that we will have over this year and different emerging markets is going to be important. I don’t want of course forget the Asia Pacific region, a region where we’ve got many eggs in that basket it’s also going to be a source of growth in the near future.

As for the values that we now have we can see that we’re going to have a figure of 5000 MW, if we look back now to 2012 when with a great difficulty we managed to get 2000 MW and 2013 was a similar figure but if we managed to multiply that which is what we’ve done by 2.4 then that’s a tremendous achievement not just because of the guidance that we received but also because we’ve managed to turn this volume into profitability. We all will know that in the industrial sector that if you’ve got a great deal of volume but you still got good margins even though some of these margins may be started its not an easy task to get this level of profitability. As Xabier Etxeberria has already explained we’ve done that by being very careful to stick to our principles. We are a wind power company, we’re a technological company and an industrial company. What’s does that mean? It means that a company that’s looking towards the medium and long term, the breakeven point, fixed costs, capital consumption and we’re talking here just about fixed capital CapEx investment and also of course working capital both are important and given the guidance that we have ahead of us at the moment we’ve always said that we considered this sector would have between 8% and 10% EBIT margin it may well be so we’re going to get a little bit more this year, the guidance for 2017 is between 10% and 11% for EBIT margin and in the past we’ve been less than 8% but we are an industrial company we want to be sound.

We want to say where we see the road heading and where we want to head within the market. In addition to the day to day running and the orders that we have on our industrial activity and everything that we’ve been doing this conversion of volume into results in addition to that the announcement that we made in June about our merger with Siemens Wind Power of course has been very important for us because it’s being a tremendous effort for us and a lot of resources being invested in it, a great deal of a complex work was involved for a demanding and all those people that have played a role in that have actually done it perfectly. In particular this merger is going to allow us to upscale and this is very important for us in a macroeconomic situation and a political situation that’s uncertain, that’s very important it’s very important to be large in scale, really is vital because it’s going to allow as I said at my introduction during times of growth to get greater growth than if we were smaller and it’s also going to allow us to diversify more rapidly, to do other things, get involved in other areas, to launch a portfolio of products and services at a higher pace than we could have done if we were smaller and also in the trough periods which of course will come up in the future we can’t overlook that, it will allow us to be more resilient because it’s this attention to breakeven to fixed costs is something that’s part of Gamesa’s DNA and this is something that the company needs to follow in the future and this including a strong balance sheet where we’re going to bring together cash flow from Gamesa and Siemens of course that in addition to Edwin [ph] which in the future once the transaction is done what will be a reality by next year but if we take into account all these effects is going to allow us to be born on with a strong balance sheet which as I said previously will make us more resilient when there are difficult trough periods and will also allow us to grow in the good periods. This means that we’ll be able to create more value for our shareholders. We’re concentrating of course on that we’ve got an order backlog which is very important of almost €21 billion, it’s also a very diversified portfolio. We’ve got different segments which includes services on-shore and offshore. This provides us with stability and gives us the possibility of facing the future, a far more stable, sound reasonable situation that we had before the merger.

So let’s move on now to conclusions. The future is promising and I’d like to repeat that in an clear, uncertain situation this company is doing its homework and we have a large platform which is meaning that we’re looking towards the future hopefully once again I should like to thank all those people in my team. I think we’ve got a world class team, a truly world class team and that’s these are the people that have put us where we are today and for me I have to say that it’s been a pleasure to lead this team over the last few years and I mean this is a team that needs to be highlighted because without them it would have been impossible. When I talk about the team I’m talking about all those people who work for Gamesa, all Gamesa’s staff, those people that work in the Board, our Business CEO, our CFO, people in charge of corporate business and the person that’s headed up this transition and merger process with Siemens Wind Power.

So that’s as far as the presentation goes. I’d like to say we’ve had an extraordinary year, an exceptional year where the fact that there’s been good daily performance combined with a great deal of hard work has given us a bright looking future. Thanks to the transaction that’s ahead of us now. Thank you very much.

Question-and-Answer Session

A – Unidentified Company Representative

Lets now move on to the Q&A session and as we’ve done throughout the previous year. We’re going to read to the questions that you have sent us via the e-mail and via our website. The first question is for one of our speakers but anybody can reply to it and the question is perhaps a one that’s in all analysts thoughts today which is price pressure. I mean is there a specific market in which price pressure is greater than other markets?

Xabier Etxeberria

As Gamesa already said several months back now price pressure exists. It’s continuous, ongoing and has been for several years now–for several months now. The fact that there are now auctions and also in other countries for certain reasons both Gamesa and the rest of our sector is undergoing tremendous demand or moderate price pressure but it’s being well managed by our team, it’s a price pressure which under no circumstances is going to reduce our margins, our margins are still healthy, sound and growing in as far as we are able to manage all those projects and there are many of them. They’re very far down the line and we need to also manage well quality we’ve got the Gamesa quality leader project, the MICE projects and other projects that are going to be started between now and 2020 and I’m sure we’re going to be able to manage, minimize and even do away with this price pressure which yes it does exist in the market but that is not going to as I’d like to reiterate that is not going to affect the company’s margins.

Unidentified Company Representative

Let’s now move on to a second question. The previous question came from Societe Generale and the next question is for Ignacio Martin its, about guidance for margins. To-date we were spoken about 8% to 10% of margin, we’ve now increased it to 11% how come? What’s that down to is that due to an price improvement or greater volume and that’s a question that comes from Bank of America.

Ignacio Martin

As I was expecting this question, yes in my presentation I said that we think there are sectors between 8% and 10%. In good years we can see slightly better than 10% and we think 2017 is going to be a good year and that’s why we’ve said between 10% and 11%. We also feel that in difficult years and ties when either the market acts unexpectedly or there is a mix problem or an implementation problem then maybe we’ll see lower than 8% margins, so this year we are seeing a slightly higher EBIT and although these people they are saying well maybe the margin is very small for the increase in volume they’ve got, what I would like to say in response to that I would say we put out our guidance to meet that guidance so that’s the policy that we’ve always followed when publishing guidance figures and then when we calculate our maths and our margins and what they contribute I want to say that we’ve got almost 700 additional megawatts from turbines in equipment activity but they’ve got different margins to the service margins that means that there’s a mixed effect, there in the sense that we’re talking here about or referring here to different business segment. As for price pressure this has already been replied to by Xabier, of course yes there is price pressure out there. This comes from two things one systems are being changed we’re having to go to auctions, and also there are this price pressure from our competitors but the good news and this is something that we have announced from Gamesa is that we’ve been prepared for this for a long time now. When I said there we’re an industry and technological company what that means we are cost managers. We spoke about fixed cost containment and how that has improved our break in and out the fact that we’re managing well our variable cost, this is linked to technology and this has led not just only to an improvement in process but an improvement to products and once again different margins and different prices which are allowing us to keep these margins to maintain this and so I think the quality was — not that I think this the quality of our portfolio is similar to the one that we could have had a year ago. This doesn’t mean that there’s been a slight drop in price but this has being offset by the fixed price contention that I mentioned previously.

Unidentified Company Representative

Let’s have another question from Societe Generale. Once again for Xabier about the Indian market and how we perceive the market change with the auction that’s upcoming in March that’s been announced for March. Should we be concerned about that auction where once again now in a very competitive environment in India it would seem.

Xabier Etxeberria

In India we feel that this is a country that’s got economic growth as a result of that it’s going to need more energy, energy demand will go up and also looking at the government’s objectives they are very much concentrating on renewable energies and that means wind power and solar power and as far as wind power is that’s what we’re interested in. In India we are going to be able to maintain our market share. Our market share which is going to be between 33% and 37% this gives us a series of major strengths. When we’re going to have to face the challenges that India will have in the coming years which could be based on greater price pressure resulting from these auctions but also with cost improvement programs that are actually going to make us moderately optimistic regarding the company’s management in India. I should like to highlight here that it’s very important for the wind market to have a pipeline projects and we’ve got several gigs of our own projects and own development in areas where there’s a great deal of wind. It’s more than that actually in fact almost 80% of our purchases come from Indian suppliers. So it’s an important market for us and we’ve got the cornerstones to carry on doing well in India.

Unidentified Company Representative

Let’s now take a question for Ignacio Artazcoz, our CFO and in this case from another [ph] equities and it’s about working capital this question, what’s changed so that working capital has gone down so much is north percent of sales a sustainable figure?

Ignacio Artazcoz

Well working capital as we have mentioned throughout this presentation has gone down to 225 million negative figure and we’ve said that as the part of that improvement in the working capital that comes from the safe harbor effect in the U.S. This is a figure of around €100 million and €120 million which is almost the half of the negative figure for working capital if it wasn’t for this figure we would be around about minus 2% over revenues. Our working capital is fairly volatile as you know and it’s not very easy to get the exact figure and to project precisely that exact figure so we’re talking about plus or minus 2% to 2.5% so this 0% that we set aside as our long term target and we think is sustainable in the long term well also of course to be volatile, it’ll fluctuate between plus minus 2% to 2.5% that’s the approach that we’re going to be taking.

Unidentified Company Representative

Let’s now take a question from for the CFO in this case from Bank of America again and about how the payment of the special dividend for Siemens, how that’s going to affect the balance sheet of the new company.

Ignacio Artazcoz

No microfinance I’m sorry, as you know the special dividend paid from Siemens, what Siemens did will do rather is when it mergers, it provides a cash flow of €147 million which is around three years per share and that’ll be in the cash flow of the merged company with Gamesa. Twelve days after merger Gamesa will pay a special dividend which will amount to €1400 million which means that there will be €43 million remaining in the company of those €43 million this is the dividend that the Gamesa paid in July, the ordinary dividend for the results of 2015 which was paid in July. So the Gamesa shareholders excluding Siemens will receive a dividend which will be €3.59 per share and which will be paid 12 days afterwards. We feel that when we think about the net cash flow of the new company this dividend isn’t being taken in account because it’s a cash flow that comes in and then leaves again in a 12 day period, when we always think about pro forma we don’t talk about this extraordinary dividend because is already paid and we’ll just have the remaining in the company these €43 million as I said were paid out in July last year.

Unidentified Company Representative

Let’s now move on to another question. We have a question for Mr. Martin from the BBA regarding the merger process and the news that has appeared on whether it would be a need to make a disinvestment of certain assets and could you please say something about the current situation of the merger process right now.

Ignacio Martin

Yes, the merger process had several conditions and all of them have been fulfilled and by now we’re only waiting for the authorization to be given by the competition authorities in Europe. So we filed the application couple of weeks ago and we trust that the proceed will be carried out and as we have pointed out throughout the presentation we expect that by the beginning of Q2 this will come to a close. It will finish and as a regard to possible sales of asses well we have no comments to make because what we expect is that we will receive this authorization and that we will be able to finish the operation without any kind of problem.

Unidentified Company Representative

We have another question now from — this is a question for Xabier and it has to do with order intakes in the United States. Could you please say something about this because it’s gone up quite a lot in the United States and how many of these orders how many PTC contracts have been guaranteed?

Xabier Etxeberria

Yes you’re right, order intake figures for the United States have been important. Fundamentally because of very good behavior in the market of our new wind turbines as we already mentioned in the presentation. Our 2.6 turbines with the 126 rotem [ph] this is a very well accepted turbine in the North American market and this is where we have the differential factor and it was very important in 2016 to attract more orders as regards safe harbor but it has to be said that the signing of contracts for safe harbor and for other aspects that are related to style of construction which is another variables that you can opt for the PTC volumes until 2020. What I’m about to say is that the megawatt signed those equivalent so that you can opt for something like 2.3 gigawatts of potential projects between 2018 and 2020.

Unidentified Company Representative

We have several questions now and this has to do with how wind power costs will devolve from the BBBA from Daniel Ortega [ph]. What do you think about solar power and its trends and could this be a threat or not? And there’s another question here from [indiscernible] and these questions are for Xabier.

Xabier Etxeberria

Well the truth is that the trends in wind power costs, the trends are very good. We are still very competitive and from a technological perspective we are still achieving technological developments that only two or three years ago people couldn’t even think about and I’m not talking about 10 years ago. We’re now talking about wind turbines ranging between 3.5 MW and 4 MW, we’re talking about rotors, the sector is now talking about 140x meters and tower heights of 150 or 160 meters that are now becoming very commonplace in this sector and then technological speed, technological progression and how the sector is overcoming barriers all of this has been very useful and has an [indiscernible] feel optimistic as regards the competitiveness of wind power because it’s based on reducing energy costs and it’s also based on a high generation capacity that is growing and growing more in the wind power business with wind farms with very good capacity factors and with a very significant resources but how does solar power affect all of us? Well I think that right now there’s a role to be played by both of them because solar power has its own competitive factors. It also has its own business niches and its outstanding countries too but wind power also has its own resources and it has a much more mature industry. It has a much more advanced technology and in a way it’s a technology that could be considered to be supplementary in relation to solar power because we mustn’t forget that solar power achieves much higher levels of performance in the day and wind power in the night and well apart from being competitive the sector is still growing because what Bloomberg has being giving us or what make or other experts in this sector have been giving us say that the industry is going to grow in moderate manner in on-shore business but in a very significant manner in the off-shore sector. So I’d even dare say that wind power is going to be competitive in the future for sure.

Unidentified Company Representative

There’s another question here for Ignacio Artazcoz from [indiscernible] and this is a clarification on the dividend. If Siemens only pays out €1047 million for payment of dividend or if they were to pay the dividend and the equivalent of cash related to its stakes in the company.

Ignacio Artazcoz

Well let’s say Siemens on the one hand it pay cash for the dividend which is what we use for that is the mechanism that I explained during the presentation but apart from that cash Siemens also according to the merger agreement it also provides cash that is calculated with a mechanism that is a little bit more complex and which is related to the bridge to equity formula and what that does is take into the Gamesa cash and it takes into account reference working capital of Gamesa and does exactly the same exercise but it applies it to Siemens and it takes into account it’s reference working capital. So Siemens will also provide its own cash according to this equation, this swap or calculation method as a function of the Gamesa cash and of Gamesa reference working capital. As regards Gamesa cash well bearing in mind the working — the reference working capital if you multiply this by 1.44 to calculate how much Siemen has to pay but you also have to bear in mind the working capital and these details or these figures rather have been calculated on December 31, 2016 and these figures now are undergoing an audit and we will be able to confirm them over the next few weeks I suppose, but in any case the figures or what we have noticed is that the balance sheet position of the new combined company is going to be very solid balance sheet position that is our vision at least at this point in time.

Unidentified Company Representative

I have a question for all three speakers on the situation of the North American market and this is from the Bank of America. Gamesa does not have much internal manufacturing possibilities in the United States but any positive measures that could be adopted in the United States to change that on the domestic front?

Xabier Etxeberria

Well the potential changes that could be implemented well they’re not very clear especially as regards to the contents and how long it would take to apply them because Gamesa right now and you’re right, it doesn’t have a very big manufacturing capability in the United States although we did buy components in the local market and in the domestic market and we have done so in a significant manner and then with the merger with Siemens, Gamesa and Siemens will have manufacturing capability in the United States and have it very quickly and very significantly to deal with possible risks related to changing conditions in the United States. So we think that the future as a combined company we believe what we’re looking at the future with Gamesa and Siemens and we consider that as from the moment that the deal is signed we believe that the production capabilities available at Siemens will be sufficient or perhaps they will have to be expanded that’s what we hope if we get more business so that we can address 100% of the manufacturing capabilities in the United States.

Unidentified Company Representative

We have another question here that comes from Sean from HSBC and from Macquarie on the improvement we’ve had in the operations and maintenance margins of Q4 and I would also like to know if the 15% margin is this sustainable in the services, a division how can you explain the Q4 margin and can you sustain a 15% margin and this is a question for Xabier Etxeberria.

Xabier Etxeberria

Well Q4, Q4 was good without a doubt because we have managed to implement many actions aimed at cost improvements things that we have launched at the beginning of the year we have fought very hard and the operations and maintenance team at Gamesa have done excellent work some excellent work and about to congratulate you on your magnificent work to reach Q4 when the results were record results basically because of two things because we managed to implement all of the improvement in terms of variable costs that what launched at the beginning of the year and also because we implemented some projects that had to do with advanced products or products that were using new technologies in the field of operations and maintenance and as regards to the question regarding the 15%, can that margin be maintained? The answer is no. This can be improved upon and that is what we expect to do in 2017. We have to work on this. We have our own business plan and we are fully competent that the operations and maintenance team will exceed this figure of 15% in the year 2017.

Unidentified Company Representative

We have another question here and it comes from Citi and what kind of changes do we envisage in the Indian market because of the elimination of the GBI?

Xabier Etxeberria

Well the elimination or the addition of GBI we believe that this is something that could have a minor effect as regards the profitability of the project. Well GBI was helping us make profitable those projects that were not that profitable in the first place and not that many in India. So the elimination of GBI could have an impact with regards to the total volume of the market but not in a significant or no tariff [ph] manner. We cannot say that it’s not going to have an impact. It’s better to have a GBI than not to have it, total elimination of GBI is not something dramatic and it’s not something that we are focusing on as one of the negative drivers of the market. Nothing like that. It will have a minor impact and especially affect those projects that’s not profitable or at least those projects that have an average kind of profitability so what we believe in short is that the impact will be minor and as regards mid-term market prospects.

Unidentified Company Representative

So this is a question from several analysts, [indiscernible] and we also have from Bank of America and that is where do the volumes of 2015 come from? Which markets are going to grow and which markets are not going to grow? According to the guidance you’ve given already and this is for any of you, for all of you.

Ignacio Martin

For the 2017 I think that this is what the question focuses on 2016 and 2017 or perhaps one of the temptations would make us think about the Brazil that is on the downward to no because the volumes in Brazil in 2016 were covered by auctions of several years ago and as we pointed out some time ago we had chosen customers with financial solvency in other words these are projects that are going to be carried out. So it’s a market that people can be afraid about but we believe that it’s a reasonably stable relative to what we had last year but where do we see growth? In particular we see there is going to be a certain amount of growth in the American market and as I mentioned previously we think that this is also could happen in Asia Pacific and we also see some growth in India and this is where the increase in volume will arise from and as regards in Latin America excluding Brazil yes we do have a year with a slight slump in megawatts but it’s circumstantial because as I believe I pointed out during my presentation the last auction in Mexico they are now signing contracts and I believe that we can be very optimistic about these contracts and this slight drop of about 100 MW that could take place in this market will be recovered next year.

Unidentified Company Representative

There’s a question here for Artazcoz that has to do with the level of factoring that we have on the closing date of 2016.

Ignacio Artazcoz

A €197 million.

Unidentified Company Representative

And then there is another question for any of you from [indiscernible] Financial Analyst and that is what kind of potential do we believe can be assigned to repairing in the markets? Do you think that this could be lever for growth in the period of 2018-2020?

Xabier Etxeberria

Well we have two products in our service portfolio, one of them has to do with the lengthening of life and the other one is repairing or replacing old turbines and installing new generation turbines. So this really depends a lot on the situation of each market it depends on what the regulation is like and it also depends on locations etcetera, etcetera, but we do give a certain amount of importance to repairing and there are markets where we do believe that it could become a significant element. Germany is one of the examples that comes to mind and we also have the case of the United States which is also another possibility and we have always said that in Spain this industry that was a pioneer on an international scale, well there are wind farms now that are about to turn 17 or 18 or 20 years old with some very old machines in place and they could be replaced by new machines with a much better level of performance and we could instead of having lots of machines you only need one and this needs a regulation I’m talking about the Spanish case which is something that should be in place so that these wind farms can be improved significantly and things can be done at a reasonably quick pace and we obviously need to have the right conditions for this repairing to become a reality. So that the owners of the wind farms who could decide to let them die and get the money and leave the operation but they could do the opposite, and get update their wind farms. So the install base we have or generation in terms of megawatt per hour which we have in wind power is not going to go down because parks are going to become obsolete and that is not good, is not going to happen.

Unidentified Company Representative

We have another question here now starting off with Xabier and this is a question that comes from David from Barclays and it also comes from [indiscernible] on the Brazilian market and it’s a question that has to do with first of all what kind of expectations that we have for the Brazilian market in the short term and in the medium term, will we be surprised by the cancellation of the auction and what impact does this have in terms of our margins considering our capability as regards manufacturing upto to 600 MW in Brazil.

Xabier Etxeberria

Well yes we were surprised by the cancellation of the auction in Brazil because it’s happened only hours or days before it was supposed to take place. Gamesa was already working on this scenario. In other words, in the macroeconomic situation of the country the lack of economic growth means that power demand has not become stagnant but rather has been reduced significantly and the plans in the country for the generation of more energy demand is something that is good to see in the mid-term. But Gamesa has something about 600 MW in capacity but it has 600 MW capacity including the suppliers of blades who you know that we do not manufacture the blades and suppliers [indiscernible] but we do so through our company [indiscernible] and our real manufacturing capacity is located in the state with 600 MW to build it. So this is well it’s capacity that has a lots of flexibility to grow and to decrease in size but from the capacity point of view we have these possibility, we have the possibility of growing and of shrinking and we’re very flexible about that and then the prospects for the next few years we are considering a reduction in the market because there are no auctions in 2016 and I think that because of wind power not a single megawatt was awarded and we don’t think that there will be new auctions in 2017 but even so the year 2018 is not going to be a dramatic year because we already have megawatt signed something like 100 megawatts and we also have assembly operations and we have thousands of megawatts under operations and maintenance so that means that the business in Brazil in terms of wind turbines could grow but there’s going to be a significant increase in and we believe in the country and although the country is now facing severe economic difficulties when we go to a country we do not leave just like that. I think that we can actually state and perhaps I’m wrong but I’m going to say this I think that we are the only O&M that has never left a country. We’ve always stayed there. So Brazil is going to be no exception because we believe that it’s a country that has potential. We believe that it’s a country that meets all the necessary requirements as regards wind resources and as regards of future energy requirements so that we can go there to operate in a stable manner. So we’ll be there with the volumes and margins that will be more or less good for another one or two years’ tops but we’ll be there for when the market grows and we’ll be there — we will be in the country when things turn around in a significant manner.

Unidentified Company Representative

We’re going to we have several questions for Ignacio Artazcoz and the first one with Macquarie and that is what is that we think about stable cash flow generation in the future. What’s your view on that because there is more working capital reductions have played a significant role so what do you think is going to happen in the future?

Ignacio Artazcoz

Well our trend or our prospects as regards generating cash flow we want to transform net profits into cash flow in our current [indiscernible] we’re working with that and this year our cash flow generation has been significantly higher compared to net profit perhaps this has been assisted by the improvements by the significant improvements in terms of working capital because we have a one off that is related to the safe harbor that we mentioned previously but our target is to maintain this generation of net profit in terms of cash flow but as regards working capital what we can say is that we are at the level of a zero or perhaps we are at a somewhat negative level but even so I think that what we could do is help more with that greater CapEx that we have to invest at times in group but in the long term we have to create a net profit.

Unidentified Company Representative

There is another question that also comes from [indiscernible] and this has to do with the changes as regards the equipment system in the first quarter of the year. In 2016 we do have a number of facts non-recurring effect as regards the profit and loss account and we have not detailed them because they compensate themselves and they end up being a net effect in terms of the net outcomes but as regards the evidence there are no-non-recurrent effects underlying effect but they are with EBIT. But basically in terms of equity accunt investments [indiscernible] they are under no effects and one of them is positive that we can see in the case of the equity accounted income and this has to do with the deterioration in one of the companies involved which is called [indiscernible] where we’ve made a investment of €50 million at this company and this is a provision we’ve established in the year 2010 because of the good business perspective we had to change that, we had two negative effects that have practically identical total figure of €40 million which on the one hand, one of them is financial expenses that we’ve had to include in the books and this is related to the back to back we have in the cross auctions because this has to do with the taking over advents, in other words we have a negative effect of €7 million that is explained in our accounts and this has been included under financial expenses which is a non-underlying effect and we have another non-underlying effect totaling another €7 billion which is deterioration in the wind farm that we have available for sale in the United States. So we have positive plus 15 for equity accounted investments, negative 14, 7 for financials and back to back and 7 of Pocahontas [ph] which is also negative.

Unidentified Company Representative

We have another question here for three speakers and that is what kind of expectations do we have as regards Edwin [ph] profits in the year 2016 because we know that there was a negative impact, what kind of expectations do we have and when there’s a breakeven point going to be attained?

Xabier Etxeberria

Well as you already know well the acquisition the takeover this is connected to being able to sign the merger agreement with Siemens because Edwin we had a right of exclusivity to develop the offshore business and this made it impossible for us to carry out the merger with Siemens because that would have meant that all of the offshore business of Siemens could end up being managed via Edwin so we’d have to share this with our partner so it wouldn’t make any sense. So that meant that we had to buy Edwin in the company and whatever we think about Edwin as you we think about Edwin as a company that is integrated within the resulting company in Gamesa and Siemens. We believe that this is good news because Siemens is clearly the world leader in terms of the offshore business and it is clearly a leader in terms of volume and also in terms of profitability and its clearly the company that has the best levels of performance in terms of offshore activities and this is good news because Edwin in the future we hope will be managed through our future colleagues at Siemens and this will make it possible to better manage the company through experts. So addressing the Edwin business plan right now I believe that we will have to define it at the given point in time once we define the business plan of the new combined company that is and once the integration process has been carried out with Siemens offshore.

Unidentified Company Representative

We have a question here from the [indiscernible] for all three speakers and do you think that any there will be any surprises in the renewable auctions that are going to take place in Spain. Can we expect any surprises in these auctions?

Ignacio Martin

Well the first thing is that we first have to see the terms and conditions of the auctions, many allegations have been submitted and the auction is now going to be postponed it was going to take place in March and it seems that it’s going to be held in June. So we have to wait and see what are the terms and conditions exactly like. I believe that Spain is very suitable country for wind power for solar power and we are completely confident, we believe that wind is extraordinarily competitive because they are wind farms with a very high competitiveness of factors compared to other kinds of power and in particular with solar power. So we only hope that this will become a reality, this auction will become reality and we trust and hope that Gamesa would also be able to obtain a significant chunk of the [indiscernible] awards.

Unidentified Company Representative

This is the final question. Thank you very much Ignacio and it has to do with the Mexican market and what do we think about the conversion of auctions into orders, what do you think about that, all the transformation into the orders with the Mexican market still has all the conditioning factors in place and it could eventually become a great market because it is a country with lots of power requirements and it has a significant amount of volume.

Xabier Etxeberria

So this means that the energy costs of turbines and the prices are going to be extremely competitive but in particular Gamesa still maintains its leadership position in a very outstanding manner because in the last auction that took place well that was a very important thing for Gamesa because we had a very good participation, we won lots of megawatts. We already have some binding contracts signed and for others we are very close to signing binding contracts in the course of the next few weeks and not more than that and apart from that Gamesa is so present in the country that we’re deeply involved in the free market but which together with a regulated market it means that this is a very outstanding market for us because we do have the right kind of technology for the wind blows in that country, we have also significant degree of implementation, we have thousands of megawatts already installed so that means that we know the company perfectly, know the country perfectly well as well as the suppliers and we have a very significant fleet and operation and maintenance. Mexico is and will be an important country for us where we are making a very big effort and where we are totally dedicated.

Unidentified Company Representative

Thank you very much so Xabier be it. And now to end this presentation I’m going to give the floor back to our chairman Mr. Ignacio Martin.

Ignacio Martin

Thank you very much Christina, I think that we have seen the performance of 2016 was extraordinary as we entitled the presentation based on delivery and also based on what’s going to happen after the year 2017 which is what we actually said in the strategic plan that we presented to the market’s in June 2015. So this delivery has been extraordinary and so is the transaction that we are about to finalize with Siemens. I’ve spoken about how important it is to be an industrial company to be a technological company, when the company I had even dare talk about company of renewables or renewable energy why because we told the market some time ago that we were already doing solar projects in India that are working reasonably well and where we expect them to grow even further. So I think that inspite of the macro economic and political uncertainty that we’re dealing within different markets the company is still on the right path and we believe that we are ready to go and I’m sorry I’m know that I’m repeating myself but we have EBIT between 9% to 10% but when abnormal circumstances arise situations change but the company is perfectly ready to deal with growth and it’s also ready to deal with exceptional market situations. So I would like to thank our shareholders very much because they’ve obviously have trusted us until now and that has made it possible for the share price to evolve positively over the last four years and once again many thanks to all of the people that form part of the Gamesa workforce and are particular to the team that I have the pleasure of leading. It’s been a great pleasure for me to be responsible for this team during this period of time. Thank you all very much and good night.

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