Spain - Gamesa regains operating profitability and reduces debt

Gamesa regains operating profitability (€12MM at the recurring EBIT level¹) and reduces debt ahead of schedule (€100MM) in 2Q12. The outlook for the second half of 2012 has prompted a review of guidance for wind turbine growth and profitability in 2012. The new Business Plan and the development of new lines of action to 2013-2015 will enable the company to operate profitably in an environment of moderate demand while retaining flexibility

Net Financial Debt (NFD) of €938MM (3.2x EBITDA), almost €100MM less than at the March close with over 50% related to wind farms sold for delivery in 2012. Recourse leverage² is already at 2.5x EBITDA (€729MM)

The outlook for demand and the delays in the inflow of orders from Asia, as well as the strategy of matching manufacturing to the order intake have prompted the company to adjust its guidance for sales and margins in the wind turbine business in 2012: sales of 2,000 MW and break-even at the recurring margin EBIT³ (margin: > 0%). Gamesa reiterates the rest of its guidance for the year: positive free cash flow and leverage of close to 2.5x (debt/EBITDA)

Main consolidated figures for 1H12:
- Revenue: €1.65bn (+27.1%)
- EBIT: €3MM (-94.5%); recurring1 EBIT: €12MM (-79.9%)
- Net profit: -€33MM; recurring net profit1: -€24MM

Business units:
- Wind turbines: 1,140 MW (-12%) sold in Latam and Southern Cone (40%), the US (25%), Europe and the rest of the world (17%) and Asia (India & China, 19%). Negligible exposure to the Spanish market. Firm order intake of 548 MW in 2Q to put the first-half balance at 1,235 MW (+44%)
- Service division: 18,204 MW under maintenance (+1,904 MW in the last six months) and revenue of €152MM
- Wind farm development and sale business: revenue growth of 3.5x (€641MM), deliveries of 164 MW in 2Q12 and sale agreements totalling 554 MW with deliveries scheduled for 2012-2013 (3x 1H11 sales)

The persistence of adverse economic and sector conditions continue to erode Gamesa’s results which, nevertheless, in 1H12 recovers operating profitability and initiates its deleveraging process ahead of schedule in 1H12 (initially slated for the second half), generating a net cash inflow of €100MM in 2Q12:
- EBIT of €3MM (EBIT margin: 0.2%), this rises to €12MM (EBIT margin: 0.8%) stripping out restructuring costs (1H12: €9MM)
- As of June, the company’s recourse1 debt stood at €729MM (2.5x EBITDA), while more than half of consolidated debt (€938MM, 3.2x EBITDA) is associated with the development of wind farms already sold and scheduled for delivery in 2H12. The ongoing adjustment of manufacturing activity to match the delivery schedule, coupled with monetisation of the wind farm portfolio, will bring overall leverage at close to 2.5x EBITDA over the course of the second half, in line with guidance for 2012.

Geographic diversification: Latam and the Southern Cone, key drivers:
In the first half of 2012, Gamesa generated consolidated revenue of €1.65bn (+27.1%), thanks to its diversified sales mix and higher assembly and business volumes in the wind farm development and sale business.

These growth drivers offset the decline in sales of wind turbines which, in capacity terms, totalled 1,140 MW (-12%), shaped by the strategy of gradually bringing production in line with deliveries and a slowdown in China (project delays) and India (increased volatility).

Gamesa’s sales mix remains well-diversified by market: Latam and the Southern Cone cemented their role as the main business driver, contributing 40% of sales volumes (in MW). The US accounted for 25%. Europe and the rest of the world contributed 17%, while India accounted for 14% and China, 5%. Gamesa’s exposure to the Spanish market is minimal.

This strategy allowed the company to offset the drop in order intake from Asia (70% in 2Q12 vs. 2Q11): firm order intake of 548 MW (a scant 3% down on 1H11) for delivery in 2012-2013 to put the first-half balance at 1,235 MW (+44%). In 2012, Gamesa won contracts in six new markets and penetrated 20 new customers.

Wind farm development and sales: sales of 3.5x 1H11:
Business volumes in the wind farm development and sale business were buoyant in the first half and were geared to meet 2H12 delivery commitments, mainly in the US.

The division generated revenue of €641mn in 1H12, 3.5 times the 1H11 performance. The company sold wind farms with capacity of 164 MW in Germany, France, Poland, the US and Mexico in 2Q12. It also signed agreements during the first half covering the sale of a further 554 MW (almost 3x 1H11 sales volumes) in the US, Mexico, France and Germany for delivery between this year and next. The company has 868 MW of capacity in the final construction and commissioning stages, of which 575 MW are subject to firm third-party sale agreements.

Revised growth and profit guidance for 2012 and 2013-2015 Business Plan:
- Despite meeting guidance in the first half – break-even at the EBIT level and reduction in debt – the outlook for demand and the drop in orders from Asia, a trend that is not expected to revert in 3Q12, coupled with the adjustment of output in line with order intake, has prompted Gamesa to revise its guidance for wind turbine sales and profits in 2012: the new guidance is for sales of 2,000 MW and break-even at the recurring EBIT level3 (margin: > 0%), despite lower volumes and driven by cost streamlining efforts.

- The company reiterates the rest of its guidance for the group for the full year: positive free cash flow and leverage of 2.5x (consolidated debt/EBITDA).

Gamesa is in the process of reviewing its medium term strategic initiatives with a view to bolstering profitability and reducing debt. These efforts will materialise in a new 2013-2015 Business Plan to be presented to the market in October designed to enable it to operate profitably in an environment of moderate demand (optimising resource utilisation), while maintaining the flexibility needed to react quickly when demand recovers and new growth opportunities arise.

Comments:
¹Excluding restructuring costs (1H12: €9mn)

²Excluding €209mn related to wind farms sold and under construction whose delivery is binding in 2H12

³Wind Turbine EBIT excluding restructuring costs and including consolidation adjustments relating to the profitability of the wind turbine division