Nordex SE (NDX1) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to the conference call of Nordex SE. At our customer's request, this conference will be recorded. [Operator Instructions]. May I now hand you over to Felix Zander, who will start the meeting today? Please go ahead.

Thank you very much for the introduction. Good morning, ladies and gentlemen. I would like to welcome you on behalf of Nordex to our analyst and investor call this morning related to the news of yesterday evening. Our CEO, Jose Luis Blanco and our CFO, Dr. Ilya Hartmann, will share additional information with you. After the presentation, we will open the floor as you referred for Q&A. Please limit yourself up to 2 questions. And now I would like to hand over to you, Jose Luis. Please go ahead, sir.

Thank you very much, Felix. Thank you, everyone, for participating in the call. The idea of this call was twofold. First, to give you an update on the cybersecurity incident; and second, to update our guidance for this year based on the visibility that we have today on the emerging extra costs from the macro headwinds. But please keep in mind always that is based on our best estimate in current environment. Let me first start by giving you an update on the cybersecurity incident that we encountered in late March 2022. Thankfully, our IT team detected the intrusion in an early stage and shut down all the systems immediately as a precautionary measure. Since then, they have been working around the clock to clean the system and will start its full functionality. This also have an impact on our accounting and controlling systems where availability of data was limited. But since, as communicated earlier, we had to delay the issuance of our Q1 call. We expect to report our results by mid of June now. If we move to the next slide, Slide #3, talk more about macro trends before going into impact in our business. I would say that in order to remind everyone that the impact we see in our business are also increasing like never before the importance for energy security. And I would like to remind everyone that government policy and push for renewables is only getting stronger in light of securing energy security and energy independency in the markets where we operate. I'm sure you are mostly aware of the latest government ambitions, but let me make 2 points here. First one, onshore demand in Europe needs to improve markedly to hit those targets. And second, specifically in German market -- German onshore market could double in the next year if government delivers on the ambition levels and on the target. Of course, this is all subject to permitting issues and other challenges, but government is pushing to set the stage for a solid recovery in late '23 or '24. Okay. So if we move to next slide, as communicated earlier, we expect 2 cost impacts this year. The first impact from Ukraine, and second, cost of reconfiguring our production footprint. On top of that, unfortunately, there were 2 more unforeseen events that will impact our margins this year. First, the continued lockdown in the Shanghai port, Shanghai City by Chinese government and potential costs associated with our cybersecurity attack incident. And let me provide you some more color on each of the topics. First, Ukraine, as mentioned before, the direct impact is relatively small and straightforward. We could lose revenue of around EUR 200 million or so and the associated related margins in addition to potential or possible write-downs of working capital in the country. All in all, that could have an impact of up to 1% this year. On the other hand, the indirect effects are more difficult to predict. Our initial analysis suggests that the overall impact could be in the range between 2% to 2.5% for the year, and this is mainly driven by 3 topics. First one, longer transportation times and unexpected delays, coupled with higher shipping costs. Second, availability of steel in Europe and its effects on components especially towers. And third, risk for smaller suppliers who are trying to reopen the fixed price contracts and try to survive rising and increasing prices. We will have to digest lot of those costs in the short term for orders already booked. But as you can imagine, we are adjusting our cost base and reflecting that in our current and future order discussions with our customers without losing traction in the marketplace. Second, talking about footprint reconfiguration, let me note that we have already closed the nacelle plant in Spain, and we are well advanced in closing the blade plant in Germany. Unfortunately, this is likely to affect around 700 colleagues -- 700 jobs unlikely to cost in the range of EUR 70 million in 2022. But as commented before, we expect this one-off costs to be covered by savings within the next 2 to 3 years. Last or third, further headwinds. China imposed an strict lockdown in the Shanghai following its zero-COVID policy. Unfortunately, this impact -- the global supply chain again. Some of our sub suppliers could also be at risk to hold the production due to delays in getting components out of China. One of our factories in Germany and in Europe have already seen some effects due to this, meaning delays in getting components, increased shipping price, losing capacity and so forth. In addition, we were exposed as commented to our cybersecurity incident, and had to shut down our IT infrastructure. We are restoring our systems right now, and confident of getting back to normal within this month. But it does create an extra cost in IT and also indirect cost of delays and potential LDEs and working capital spikes. Altogether, we believe the total impact of those topics would be limited to under 1% this year. So in summary, we expect up to 3% to 4% margin hit in the operations and another 1% to 1.5% due to our internal footprint reconfiguration initiatives. And with that, let me move to our updated guidance, Slide #5. We expect -- we now expect our sales within the range of EUR 5.2 billion to EUR 5.7 billion after adjusting for lost sales in Ukraine. We update our EBITDA range to minus 4%, which is now all inclusive and reflects the impact from the macro headwinds and also the impact of the footprint reconfiguration. Keep in mind, this is based on our best estimate today. And last, working capital ratio and CapEx guidance stays the same. And with that, I will hand over to you, Felix, again to open the floor for Q&A.

Thank you very much Jose Luis for the presentation. I think a lot of the valued information for our audience. And now, I'd like to hand over to our operator to start the Q&A. Please go ahead.

[Operator Instructions] And the first question comes from Vivek Midha, Citi.

I had 2 questions, please. The first is on the -- on free cash flow and net debt. So EBITDA margin is negative this year, typically would imply negative free cash flow. So could you give us any indication on where you expect your net cash position to be at year-end? Secondly, could you give us your latest indication on pricing and backlog margins? Do you see any improvement in industry price discipline?

Okay. So let's start with the first question. So Ilya?

Yes. Let me take the first one on the free cash flow. As always, not over guiding, but I think with the new building blocks, you can have quite a view depending on what you pick, because maybe for calibrating this a bit, let's just say that now with an adjustment and call this the all-in guidance, we would quantify that a rather conservative range given the uncertainties from the macro events and that the range is a bit broader than usual. So you can pick your building blocks. But then when it comes to the cash position, let's kind of go back and remind that we started the cash position in the beginning of the year, ending of last year to short of EUR 800 million. The RCF that was not long came on top of that. We don't report Q1 numbers, unfortunately today, but also anticipating those results, which are now planned for June 20 to be more precise than in the intro. That was just shy of say, EUR 700 million, again, plus the RCF. So while we never predict or guide on free cash flow, I think that gives a good idea of where we are and what the building blocks are for the cash.

Okay. So I'm talking the second question. You remember in our annual presentation, we were very happy of a very successful order intake in Q4 last year that was landed on a very high cost base, and at sustainability margin level, so the strategic target margin level. Unfortunately, the direct and indirect impact of Ukraine, this is going to hit in around 3%, as we commented, which means that the backlog is going to be deteriorated as a consequence the path to the strategic profitability will be delayed. This cost increase is now, as we speak, translated to new orders. And there is always the consumer if the market going to accept that are we going to lose traction in the marketplace. And the answer to that is, no. I think, of course, these are difficulties to renegotiate ongoing contracts in execution, but we have a very good understanding and very good reception from customers for accepting higher price associated with higher costs for new orders. So we are selling. We don't guide order intake, as you know, but we are optimistic about order intake for the rest of the year, and we are optimistic about landing the order intake at sustainable margins with the cost base that we have today, which means a 3% hit on the backlog. So customers are very much accepting those cost increases, and we don't see order intake suffering for that.

And the next question comes from Sean McLoughlin, HSBC.

2 questions. Firstly, on your comment around your expectation that some of these effects could accompany you into 2023. Could you talk a little bit more about that? What visibility do you have? What does that mean? Yes, anything you can tell us, I suppose, on that would be helpful. And then I just wanted to dig a little bit more into the pricing. I mean, should we expect to see ASP rising in Q1 on your order intake?

Yes. Let's start with ASP, our colleague Patxi always comment, I mean, it's an indicator, it doesn't reflect there are scope, there are geographies. But yes, we definitely see in a like-for-like, of course, we see cost increase, and we see price increases for that. And I expect to see ASP increases as well. The positive message is that after the cost spike and provided that the cost doesn't deteriorate further. So the oil, the steel and so on stays at this level. At this stage, we are selling at sustainable margins at very high cost level. We don't know if costs are going to keep increasing, which should be a further deterioration if cost increase could be a potential improvement. Regarding 2023, it's going to be a compound of backlog deterioration and new orders sold at sustainable margin levels. As you can imagine, a big portion of 2023 is coming from the backlog. The backlog was historically built with profitability improvement profile, driven by more [indiscernible] better prices and margins over time. So all-in-all, we should see better '23, because the backlog improved has a hit. Of course, this 3% is going to affect the backlog for 2022, as well as, the backlog for 2023, but the quality of the backlog to be delivered in 2023 is better than the quality of the backlog to be delivered in 2022. On top, we are still selling for 2023, and we are doing so at sustainable margin levels. I hope that this gives you color. And honestly, we don't have more information because we will start after the summer the planning process for the budget. And by that time, we will have more information. But conceptually, this is the picture.

And the next question comes from Mr. Patel, Goldman Sachs.

My question is just around liquidated damages. What is assumed in this guidance? And also, in regards to the lockdown in China and the supply disruptions and these numbers, how fast are you expecting these issues to subside? Just to get a sense of what we're comparing with as events unfold, we can get a better understanding of the direction your number are going?

I think there is liquidated damages, we are in the middle of discussions with customers. We think that majority of those we have ground to call for force majeure to try to avoid penalties for that, product because those are unforeseen events, and most of them are world-related, growth-related qualify as force majeure. So we are optimistic to keep that under control. Customers understand and have set that, and we have constructive discussions. So I'm optimistic that this is not going to be a big issue for us. Nonetheless, we will have limited impact. Talking about China, we have forecasted what we know today. Situation in Shanghai is improving. Shanghai is opening, we'll start to see shipments out of Shanghai, so suppliers, subcomponents that we do there. But we are starting to see issues in Tianjin. This is very much out of our control. We hope -- I mean, we haven't forecasted any Tianjin lockdown like the Shanghai one. We have forecasted what we know from Shanghai. And Shanghai is very much reopening and our activity back to -- close to normality related to Shanghai. We have limited exposure to Tianjin, but some of our suppliers do have activities there. They are in cooperation with us talking to the government to have a short lockdown, so allowing them to ship the Tianjin components to our Shanghai super assembly facilities. So we are, I mean, with all the caveats and with all the precautions, we are moderately optimistic that we can be better with Tianjin lockdown as with the Shanghai lockdown, but it's out of our control.

And then may I just follow up with the second question, which is on balance sheet again. It's not too much of a stretch to take the EBITDA guidance that you have today, which is now negative and to take a minus 7% working capital ratio that you highlighted in that guidance versus I think it was minus 10% last year, and end up with a situation where your net debt is positive, i.e., no longer net cash. Do you need more equity in this business either to strengthen credit ratios so that you can access the U.S. market properly as you were highlighting previously or to kind of mitigate against potential additional rises that may come from a tougher market, either through a recession or ongoing issues from China -- China and COVID or the supply disruptions persisting for longer?

Let me first elaborate and then I will hand over to my colleague. Our exact capability to go to detail numbers is limited, because we are reopening the IT system, and this is the reason why we delayed Q1 results. Nonetheless, we are fulfilling our goodies to share with you impact that we know we are going to see within the year. With that being said, the revised guidance, less qualified as slightly conservative. So our visibility is limited -- we decided to go for a slight conservative guidance. And with this, I will hand over to Ilya to go more in detail about what does it mean for the questions that was...

Pretty much you've given the rationale already [indiscernible] question, because some building blocks need to come together. But then let's remind us that we're focusing, as we said in earlier calls, now on to -- which is the best option to [indiscernible] high yield. And whether or not any other things are necessarily required we'll see once we have a clear picture. You mentioned the working capital. Of course, that Q2 was hampered by that cybersecurity taking away that we had. So we've explained some instruction even in the factories. So there is plans to recover this in the year. So, I guess, the larger picture will only become clearer during the year. But for now, that's repeat with what we decide together is coming from a healthy cash level at the beginning, and still not having the full picture for the Q1. So being a bit more conservative, I think it's too early to talk about these things.

The next question comes from Constantin Hesse, Jefferies.

I've got a couple. One of them, can I just push a little bit further on the balance sheet Ilya, because, I mean, assuming you deliver the midpoint of this guidance at EBITDA level, I mean, the free cash flow could potentially be minus EUR 400 million outflow, which is quite a significant amount. I mean, last time you guys did cap raise was obviously with a much higher debt position, but you had, I think, around EUR 500 million cash in the first half of '21. So do you see the risk of having to take on additional financing in any form? And then the second question would be, what needs to happen or what needs to happen basically for the lower end of that guidance to be achieved and potentially even when you turned out our downgrade because from what I understand, the visibility is still relatively low in terms of the LDEs, as well as, interestingly, I didn't know about Tianjin. Now you just mentioned that. So any color on that would be great.

Maybe we will tackle second question first, together Jose and myself. I think, let's not overestimate that lack of visibility. So this is why we're coming out with the guidance. So as we said in the first call, Q1 that we will confirm when the numbers come out, we told that we want to expect the sub to start into the year. Now the shape of the year should be clearly different once we go into H2. So that is already -- the systems were down. There's quite visibility within that supply chain for H2.

Yes. I would say, I mean, to make our numbers this year, very much we have almost no order intake risk or the majority of the orders are either book or allowed to be booked well above 90% coverage on the order intake, which is a remarkable position. Second, our factories have a production plan to be delivered the rest of the year to deliver the full system, the customer farmers -- and Shanghai is very much open to deliver parts to our factories for making the numbers, because cash flow positive. So the activity is what drives very much everything. And this, I'm not concerned about that, because our case is very strong. I mean, of course, it will trigger discussions, but we have a very clear case for that. So the biggest challenge we have is to fulfill our production planning the rest of the year. Orders we have parts, we are now opening Shanghai, which is the biggest source of parts for the wind onshore industry. So to the best of our knowledge, we are in the steering window path.

And then back to the first part, I'd like repeating ourselves saying that a focusing on an instrument for the high yield that comes due in February of next year. And then also kind of looking at the track record of Nordex working capital. So whilst we maintain our guidance here and depending on how the recovery from those 2 disruptions will be. I think in the past Nordex had a track record of doing better than what we guide in terms of working capital, too. So all-in-all those building blocks that would change that number that you just mentioned at beginning of the call.

Okay. This is Felix speaking. And so we do not have any more questions on the line. And so, I would like to thank you for participating, sharing all your questions with us. And I want to say goodbye. But before doing that, I would like to hand over to you, Jose Luis, for your final remarks. Thank you.

Thank you very much, Felix. Thank you for your participation, your questions. As a summary of this call, I will say that work-related impacts oil prices, steel prices, shipment costs, shipment availability, commodity prices, electricity prices are impacting our short-term cost base and profitability. But at the same time, are boosting like never before, the macro trends for our industry. Energy independence, energy security and energy cost reduction are higher than never before in the political agenda, and Nordex as a top 3 global onshore player with a top 2 position in Europe, which is the region more affected by -- that should be well positioned to harvest that opportunity. So thank you very much for your time. Wish you a wonderful day.

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