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 lead you through this meeting today. Please go ahead.

Thank you very much for the introduction. A warm welcome from our side. Good afternoon, ladies and gentlemen. I'd like to welcome you on behalf of Nordex to our analyst and investor call today. Our CEO, José Luis Blanco; our CFO, Dr. Ilya Hartmann; and our CSO, Patxi Landa, will share the latest information and developments and financial review. Afterwards, there will be a Q&A session. [Operator Instructions] And now I would like to hand over to our CEO, José Luis. Please go ahead, José Luis.

Thank you very much for the introduction, Felix. I would like to welcome you as well on behalf of the entire Board. As Felix mentioned, Patxi and Ilya are here with me today, guiding you through the presentation and answering your questions later. After having published our updated guidance on May 24, including all the [ upcoming ] information, we will follow the usual agenda today. In the first slide, executive summary. As always, let me start as usual with the summary for the first quarter 2022. We booked revenues of EUR 933 million, which is 25% below last year. Last year, we had a more stable revenue run rate throughout the year. As we mentioned to you before, we expect revenues to increase sequentially quarter-by-quarter due to our installation and production schedule. In addition, our installation were impacted by some weather-related delays in some parts of the world, including Germany. On the EBITDA level, we generated a loss of approximately EUR 89 million. This includes all the adverse impacts from a challenging market environment and one-off costs from reconfiguration of our production footprint. Without this one-off cost of around EUR 37 million, we show an operating EBITDA of minus EUR 52 million or an operating EBITDA margin of minus 5.6%. In this context, I would like to confirm our updated guidance for 2022 and our midterm strategic EBITDA margin of 8%. Our working capital was at minus 11.3% and well below our target. Ilya will provide you with deeper insights later. With an order intake for the first quarter of 1.2 gigawatts, we achieved the same level last year, which is promising especially in such a volatile environment. With a share of 91% of -- Delta4000 platform have again shown its competitiveness and a strong track record. Furthermore, we entered the 6-megawatt class successfully and have already installed the first 6.X turbines. As a quick update on the cyber incident, we have been making good progress in solving this incident and are restoring all systems so that we are almost back to normal already. And now I would like to hand over to Patxi for markets and order intake.

Thank you very much, José Luis. As mentioned, we closed 1.2 gigawatts of new turbine contracts in Q1, down 7% with respect to the same period last year. 89% of those orders came from Europe and 11% from Latin America. We received orders from 11 different countries, the largest markets being Finland, Germany, Croatia and Peru. 91% of the orders came with the Delta4000 turbine in its 4-, 5- and 6-megawatt configurations. ASP increased to EUR 0.78 million per megawatt in Q1 2022, up from EUR 0.73 million per megawatt in the same period last year. Service sales amounted to 12.4% of group sales in Q1 with EUR 116 million and an EBIT margin of 17.2%. Fleet under contract stands at 27 gigawatts with an average availability of 97%. Turbine order backlog grew 24% to EUR 6.3 billion at the end of Q1 2022. And service order backlog grew 7% to EUR 3 billion for a combined order backlog of EUR 9.3 billion at the end of Q1 2022. And with this, I hand over to Ilya to go through the financials.

Thank you, Patxi. Also good afternoon from my side. As Patxi mentioned, I will now guide us through our Q1 financials, and I will start with the income statement. So as mentioned, that was basically delivered sales of roughly EUR 930 million compared to EUR 1.2 billion in the previous year same period. From a budgeting perspective, there was no surprise because the lower sales was mainly due to lower installations as per the plan. Now we did have some additional delays from weather-related incidents during Q1 in some part of the world, for example, in Germany, and there was an additional delay in installations coming from that. We expect our revenues to increase in a step-up mode now each quarter as our installations gather pace. Our gross margin stood at around 13% at the end of the Q compared to 17% last year same period. This was mainly due to the impact of the cost inflation and increased logistic costs in our cost of materials, and to a degree, to reclassification of some project management costs from OpEx to cost of materials. We expect, in line with what was said, our gross margins to improve again once new orders start flowing through the financials and the external environment stabilizes again. As we had mentioned on our last call, this year, we're taking steps to reshape our production footprint, which would result in some immediate costs of up to EUR 75 million this year. Those will be offset in the next 2 to 3 years by savings in our production costs. So as a result, our underlying adjusted EBITDA before those one-off costs stood at around minus EUR 50 million, while the EBITDA reflecting all the impacts just described stood at roughly minus EUR 90 million for the quarter compared to the EUR 10 million positive Q1 in 2021. With that, I would move on to the balance sheet. The quarter ended with a healthy liquidity level. Cash level was at around EUR 680 million in comparison to the roughly EUR 780 million at the end of the year. To this, in both cases, we had a cash facility of roughly EUR 90 million. So the liquidity level end of Q1 would be of around EUR 770 million. We now have a cash position of EUR 315 million and an equity ratio of around 20.5%, 21%. Those levels [ lowered ] compared to year-end are consequence of the impact on profitability by the factors already explained earlier on the call. Now on the corporate bond, this is now classified as current liabilities, which is the main reason of the increase in current liabilities in the balance sheet at the end of the quarter. With that, I will go to the working capital. Working capital ratio was at minus 11%, 11.3%. In absolute numbers, EUR 580 million. And that was a further improvement to the year-end level of minus 10.2%. So the further positive development in the working capital was largely driven by reaching, as we can see, strong milestone payments compensating the increase in inventories. Overall, the working capital ratio remains clearly below our guided number for the current year of below minus 7% which we confirmed in our last call. Now the cash flow slide, please. We see that this quarter, the cash flow from operating activities very much reflects the negative net results. But within that number, you have a positive compensating effect on the further tightening of the working capital, as just explained. Cash flow from investing activities is largely at the level of the previous year quarter and reflects the planned execution of our ongoing investment program. Cash flow from financing activities in that context was rather unsubstantial, which brings me back to the investments, and to the next slide. Again, total investments just shy of EUR 50 million compared to around EUR 40 million in the same quarter last year. As I said, program and CapEx investment have been executed as planned. So we still, as we did last call, maintain the full year guidance of EUR 180 million in CapEx, but of course under constant review given the environment. And then the targets of the investments, basically the same as compared to the previous quarter or the previous quarters. Again, the blade production facilities in India and tooling equipment for higher installation level, again, this year. That brings me to my last slide, which is the capital structure. For this quarter, calculation of the leverage ratio is not really applicable as we're talking about net cash levels and a negative EBITDA, so not a very sensible calculation. Equity ratio, we discussed before, coming down to 20.5%. The reason is, of course again, the impact from the negative results. Now before going back to José Luis, as you will, maybe 3 key messages from my side. The first quarter developed more or less as we expected. The first half of the year would be weaker altogether compared to the second half mainly due to the revenue step-up and due to some price adjustments that will start reflecting in the results. Margins, one more time, have been impacted by multiple external [ headwinds ], like for everyone else. But also in this quarter, we've seen some one-off costs, or in this year, that should not come back next year. Second, focuses on cash flow management with a strong working capital management. And adequate risk management is one of our key priorities. Obviously, and another key priority, and that's my last. Obviously, key takeaways is strengthening the balance sheet is a top priority for us, as mentioned on the last call. So we continue to review all available funding options to refinance our bond which is due in beginning of '23. And increase liquidity in the best interest of all our stakeholders. So needless to say, that implementation of any such capital measure depends on market environment as well as other developments. But with that, I will go back to you, José Luis. Thank you.

Thank you. Thank you very much, Ilya. A few words on the operational performance of the company in the first quarter. As I said in the beginning, our installations are down, partially as planned because of the change in our production of blades; and partially due to the unfortunate weather conditions, especially in Europe. In totality, we have erected 197 turbines in 12 countries, around 870 megawatts, with the majority of 82% in Europe, 10% in North America and 8% in Latin America. In our nacelle cell production, we assembled 304 turbines, exactly the same number as last year, but overall with a 15% higher nameplate capacity of extra of 1.5 gigawatts. Due to a change of molds to produce new blades in our blade production in Spain, we have produced 270 blades in-house compared to 380 last year. In addition, we have ordered 702 blades from third parties compared to 570 in Q1 2021. So that we are, in summary, on the same level as last year. If we move to the next slide about the guidance for the year. We summarize here our guidance for 2022, and I would like to confirm our recently updated guidance. In 2022, we expect to reach group sales of EUR 5.4 billion (sic) [ EUR 5.2 billion ] to EUR 5.7 billion and an EBITDA margin of minus 4% to 0%. Let me also stress here that all impacts are now included into this guidance, such as the ongoing reconfiguration of production footprint, the cyber incident, direct impacts from the war in the Ukraine, supply chain disruptions due to indirect impact from Ukraine war and due to COVID-related lockdowns in China. Also important to note that costs from our internal footprint reconfiguration measures, either incident and direct impact from Ukraine, are exceptional in nature and should not repeat in 2023, as Ilya mentioned. Adjusting for these effects, our underlying EBITDA margin could be close to 0% in 2022. Furthermore, there is no change to our working capital and CapEx guidance. Moving to next slide. What -- we wanted to provide our view on the latest order discussion in the current market environment. Let me make 2 points. We have seen electricity prices increasing significantly over the last year, as shown in the picture on the left-hand side of this chart. This is a result of higher gas, oil and coal prices. We believe that a relative small double-digit increase in the wind energy prices could very easily be absorbed in the current market environment. Second, we have been constantly updating our cost structure and increasing our turbine prices. We did that last year and we are already doing this successfully right now. The new pricing ensures that we can revert to our normal margin trajectory, considering the latest cost increases in the midterm. We're also happy to report that we continue to see good order intake momentum despite the price increases. In parallel, we are also making progress to adapt our contracts to mitigate the risk of cost increases better in the future, as we have mentioned earlier. And with that, let me move to the next slide, which is the last slide before the Q&A. Currently, as mentioned, we are facing macro headwinds which are impacting our margins in 2022. However, we see a couple of positive underlying trends that we want to highlight. First, the order intake momentum continues to be strong. And second, so far, we have been able to increase prices and pass on the increases to the new orders. In the midterm, I think everyone will agree that wind will play a massive role to achieve net zero targets and is one of the cheapest sources of energy. If market stays stable and the industry maintains pricing discipline, we believe to achieve the midterm profitability target. And with that, handing over back to Felix for opening the Q&A session.

Thank you very much, José Luis, gentlemen, for the presentation. And now, as said, I would like to open the Q&A. And I would like to ask our operator to start with. Thank you.

[Operator Instructions] We have a first question. It's from Vivek Midha of Citi.

I had 2 questions, please, I'll go one at a time. The first is just a question on timing, on clarity on the balance sheet. So Ilya, you mentioned exploring various options around the bond maturity. I appreciate the difficulty announcing in advance, but when do you expect to have -- be able to announce to the market some picture of which options you'll be taking to deal with the issue?

Okay. Thanks for the question. I guess, a pretty obvious one. As you also said, because I am on a public call, maybe 2 things for that to be crisp clear. The options could be evaluated are all the ones we mentioned last time between -- the ones we now got the authorization for, equity, equity [ link the approved ]. Also as last time we spoke about, still looking into the marketplaces, doing a refinance of the bond with an equal instrument. So when it comes to timing, these things are difficult to predict. I can assure you that myself and the team are working intensely on those. But I guess now this call being a bit late between here and the next call when we see each other again in August, we should have an at least clear picture for everyone which [ regards on the timing ].

That's helpful. And the second question was just on the quarterly EBITDA number and just going between that and the full year guidance. So could you just help us with this untangling the different effects in Q1 and then looking back to the effects discussed in the last call. So this quarter, there's the effect from the supply chain. There's a negative volume effect from lower installation activity. There's a positive one-off from Poland wind farm sale. Can you just give us a recap of which effects have been seen in Q1, which are likely to see in Q2? And how we go from there to the midpoint of the range?

So I think I'll start with that one. Effectively, you said now, the -- if you compare the quarter ex one-offs, from the footprint reconfiguration, is you're coming to minus EUR 50 million, as we said. Though not guiding quarterly, I would say to everyone, I'd say Q2 is also going, as I said, a weaker quarter. The order of magnitude, maybe a bit more. And then in the second half of the year, it, according to what we see, should turn. So we said, if one believes this to be still a bit of a more conservative range than usual, then I think what you've been saying about things -- right on the midpoint. But basically, if you take those 2 quarters together, with some residual one-off on the reconfiguration, but really minor, then the next 2 quarters, 3 and 4, Q3 and 4, we should see really a positive phase, [ between ] the step-up in revenues and the better margins.

The next question is by Ajay Patel of Goldman Sachs.

I only have one question because part of my question was already answered in the previous. It's just on the guidance. Is there any assumptions for liquidated damages in these numbers?

Yes. We have certain provisions in the forecast. Of course, this year is slightly more challenging because we were operating under, let's say, exceptional force majeure claim situation from customers, from suppliers, due to lockdowns in China, due to the war in Ukraine and due to the cyber incident. Those LDs are under discussions. And we are guiding to the best of our knowledge with the best view of where we can land those discussions with our customers.

Okay. And then the second question I had is on, I think, Slide 16. You highlighted effectively greater risk-sharing in the contracts that you set up. And is there any indication of what percentage of the order backlog has these types of arrangements now in place? And what proportion does not?

I would say this is a sequential -- it was a sequential, let's say, situation. We started, as soon as we saw volatility, to try to go to reduce the scope. And then we don't see -- today in the order backlog, and there is almost no EPC. Most of the backlog is clean selling. Part of the backlog, substantial part of the backlog, is wind turbine only. We try as well to start implementing, when possible, where possible, back-to-back contracts for certain logistic activities. And we are starting to include inflation in PSAs in regions like Europe, which was not the norm before. Inflation was very normal, indexation in Brazil, in high inflationary countries. Was not the case in Europe -- was the case in Europe for MSA or service agreement, was not the case for PSA. And we are starting to implement those as we speak. So I cannot be more precise than that. So the degree of new contractual provisions in the backlog is going to have a sequential effect. So the later we landed the order intake, theoretically, the more we are covered for the future.

[Operator Instructions] The next question is by Lucas Glemser of Jefferies.

Just a few questions from my side about the low installation rate. What was it exactly that held you back in Q1? And have you already seen signs of improvement in Q2? Yes, can we start with that, please?

Yes. Definitely. I think installation is going to increase speed in Q2 and especially in Q3, which, as planned, is going to be in the record-level quarter in the company history. That's the plan.

And in terms of -- on margins. What just needs to happen for you to reach the upper and lower ends of your guidance by the end of the year? How do you think about that?

I think -- I mean, at this -- we are mid-June, order intake is booked. So from the order intakes, we don't see a risk. So very much, if we execute as per the plan and there is no disruptions on availability of components; we produce as per the plan, we deliver as per the plan; there is no further cost increases driven by force majeure, basically because the cost is very much covered by contracts, so if we don't face force majeure from our suppliers in the cost side, we deliver to the plan, that's very much going to be more towards the upper side. And if there are deteriorations in the cost or deteriorations in the availability of components, which will trigger deterioration in the PoC, then we will go to the lower side. So it's pure operationally driven.

The next question is by William Mackie of Kepler Cheuvreux.

Three questions. The first one relates to the order outlook for the rest of the year. With respect to your preliminary thinking, are you looking at a book-to-bill above 1? And can you give some scale of what sort of positive pricing effect you might be able to expect, at least in the short run, alongside any contract gains you win into Q3 -- Q2 and Q3? So that would be the first area, order intake, pricing and volume. Second relates to revenue. I think you just said that you expect Q3 to be a record year in the company's history for installations. If I look at the next 9 months against the bottom end of your guidance, you're looking for growth in the next 9 months compared to last year, Q2 through Q4. Can you just give us a flavor of where you think the installation rates will be in Q2? What's in the target for that? If Q3 is going to be a record, is Q2 up on last year? Or is there still some impact from the challenges of the ramp-up and the transfer on the blade manufacturing? And lastly, on the profit pickup in the fourth quarter -- sorry, in the second half. Can you give us any sense of how that profit pickup is driven by mix, i.e., the full swing to Delta4000? And how much might be driven by price? So the price increases you achieved were in the second half of last year. So how much of the book -- the revenue in H2 '22 could we expect coming from the better pricing of H2 '21? That's the 3 areas.

Okay. So maybe Patxi take the first one and we take the other, or together the others.

I'll do To that. So we don't provide exactly inter-quarter guidance. We just do the full year guidance with respect to orders, as always. But what I can share with you is that we have a good visibility in the pipeline. So we are selling, in Q1, 1.2 gigawatts, as we reported. We have good numbers as well in Q2 that we will report month August. And the visibility also for the later quarters in the year is there. So that without being too precise on our book-to-bill ratio, what I can tell you and share with you is that we have good visibility on orders. On top of this with respect to pricing, we are also able to increase the price for us to pass through the increase in cost with contribution margins that support the midterm EBITDA profitability that we've shared before. So good visibility in orders, and pricing that supports the midterm strategic profitability for the company.

Okay. Second question, regarding activity in the second quarter. Yes, definitely, it's going to be higher. As of today, as quarter-to-date, it's already higher than previous quarter. But not to the level that we are planning to do in Q3 because you need to take into account the change in molds, the ramp-up in India. So the availability of components is going to be higher now, which will trigger higher installation pace in Q3 and project demand. Nonetheless, it was mentioned at the beginning, this was very much the plan for the year. Of course, the cyber attack and the war in Ukraine brings volatility and delays and moves the activity towards Q3 and Q4. But that activity level was planned previously a quarter earlier.

And to the third question on the control of [ profit ], just maybe some more numbers there. In terms of that, I would say, a, Delta4000, more mix; versus, b, price. It is clearly the latter. Of course, an ever-increasing mix of Delta4000 helps, but it's already that high across the full year, so that this improvement would rather come from the pricing than from a different mix.

Can I ask one follow-up? On financing, can you just provide an indication of the level of the use of outstanding bonding financing? And what the level of interest cost was within the quarter charged against net financial expense?

So I think the total one is between the bond line and the corporate bond is to the tune of EUR 20 million plus. And come again with the first part of the question, please?

The question, how much of the interest charge relates to contract bonding?

Overall, the interest, let's say, I'm not giving you, but I think I give you a good idea with 50-50. So 50-50 on the project side and the rest on other interests.

The next question is by Rajesh Singla of Societe Generale.

So this is regarding your balance sheet. So how comfortable are you with the balance sheet currently you have? Are you still confident of winning projects in the U.S. with -- after such a deterioration in your balance sheet strength due to the issues, what we have faced so far, and we might face in the coming months or quarter? So do you think that you might require a further raising of capital in the next 6 to 12 months?

I think regarding the first question, one of the reasons we did the balance sheet reinforcement last year was precisely U.S. I think that proved to be a good decision. We landed orders there. Unfortunately, the balance sheet deteriorate with the execution. [ Such as ] U.S. market is in a slowdown case, but then looks promising. And regarding what to do with the balance sheet, maybe better Ilya, but I think all options are on the table.

Yes. I think that's basically what we said earlier on the call. And one of the aspects will be, as we mentioned last year, that especially in a market like the U.S., that plays maybe even a different role, but that's also just part of addressing, you should -- altogether.

[Operator Instructions] The next question is by [ Sami Cheikha of Engaging Partners ].

Three questions, actually. So the first one is, when do you expect the new European contracts to start phasing into the P&L, to the point where your cost base is significantly de-risked? Second is your exposure on pass-through contracts with suppliers versus the pass-through contracts with clients. Are you exposed more to the suppliers on the short term versus the clients, longer term? And the third one is vis-a-vis your guidance, which in the previous call, you mentioned was a bit conservative. Do you still regard it as conservative?

Okay. So the first question, the typical execution time in -- for projects in Europe, 12 to 24 months, depending -- it's project by project. But say averaging in the middle, so 18 months. Regarding customers and suppliers, we always mentioned that it's impossible to hedge all cost functions. And it's true, that with customers, by nature, we are long. And with the suppliers, by nature, in several cost factors, we are short. So there is an exposure there that it seems to stay at the current level. This is factored into the guidance and into the midterm strategic targets. If things deteriorate, it's going to put risk. If things substantially improve, it's going to be an upside from the costing side of the company. From the revenue side, the contracts are the contracts. And the only thing that can change in the future is if we keep selling at what margin and how stable is going to be the cost going forward. And the last question was around...

If we still qualify the guidance range as conservative as we did on the guidance adjustment call.

I think we haven't changed our view in the last month. I mean, we haven't changed our view about the guidance. We haven't changed our view about the uncertainties. And the uncertainty of the environment where we operate, I mean, environment is volatile and there are many variables that we see every day. Oil price and electricity prices are -- somehow is good for the business long term, but there's massive cost pressure in the short term. I don't know if this has answered your question.

So you still see it as conservative? There's no...

Yes, we haven't changed. We haven't changed our thinking there, our view.

The next question is by Richard Alderman of BTIG.

I wonder if you could just tell me what your current cost of debt is and how you see that transitioning into 2023. And then one further follow-up question. I think you answered to Ajay's question about liquidated damages, that there are some discussions and outstanding claims. Can you give us some idea of what your worst-case scenario is on how long it will take to resolve those? And what the total quantum would come to?

Can I take the first one?

Yes.

So final charge of interest runway for the full year is, give or take, around EUR 80 million. Between the bond line, the corporate bond, the shareholder loan and some minor stuff. So EUR 80 million, give or take.

And regarding the LDs, I think we haven't planned such a worst case because I think our case is strong. I mean, the lockdown and the war and the cyber-targeted -- cyber incident, we're seeing strong cases to protect, of late delivery of certain projects. Unfortunately, as we mentioned, we don't have cost increase relief, but we should have time relief, which is what we are planned. So we haven't planned for a worst case.

Okay. This is Felix speaking. All questions are answered so far [indiscernible] making in our call. [ This finishes our analyst and investor call ] today. And before leaving, I would like to hand over to José Luis. Please, José Luis, provide us with your final remarks for today.

Yes. Again, thank you. Thank you very much. Thank you very much for your time, for the questions. And as a last remark, a little bit summary of our call. Demand for Delta4000 remains strong, especially the new variants. Margins, as discussed, short-term, are severely affected by the Ukraine conflict and the recent macroeconomic events, like many other industries. However, as it was mentioned in the call, turbine prices already improving in new orders, paving the way for margin recovery from '23 onwards as the 2021 order book runs out. We discussed as well that, including electricity prices, is a short-term cost issue for us, but it's a midterm opportunity, coupled with potential demand growth, offers opportunity for cost increases and cost pass-through, and hence, helping to reach midterm, strategic, 8% EBITDA once macroeconomic environment has stabilized. And last one, to conclude. The guidance for 2022 includes impacts from macroeconomic headwinds and footprint reconfiguration concern. And with this, again, thank you for your time and attention, and wish you a wonderful rest of the day.

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