Nordex SE (NDX1) Earnings Call Transcript & Summary

Good day, and welcome to the Nordex SE Q2 Report 2022 Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Felix Zander. Please go ahead.

Thank you very much for the introduction. Good afternoon, ladies and gentlemen. I would like to welcome you on behalf of Nordex to our analyst and investor call. Our Board members José Luis Blanco, our CEO; Dr. Ilya Hartmann, our CFO; and our Chief Sales Officer, Patxi Landa, will guide you through the presentation, sharing the latest developments and financial review. Afterwards, as you know, there will be a Q&A session. [Operator Instructions] And now I would like to hand over to José Luis. José Luis, please go ahead.

Thank you very much for the introduction, Felix. I would like as well to welcome you on behalf of the entire Board, together with Patxi and Ilya, we will guide you through the presentation and take your questions later. We have prepared for you as usual agenda today. And just going to the first slide. Usually, let me start with the executive summary of the first half of this year. My first message is that our development in the first half was in line with our previous expectations. We shared this with you in our Q1 call and as well during our roadshow meetings in July. In general, we expect that half -- first half of the year to be weaker in terms of volume and margins, and we expect margins and volumes to pick up in the second half of the year. Our order intake continues to be healthy, and we continue to see a good pipeline of orders. The pricing and margins are also improving. In the second quarter, we booked 1.8 gigawatts of orders, reaching 3 gigawatts in the first half, 90% of those orders are coming from Delta4000 platform. Revenue increased to EUR 1.2 billion in the second quarter compared to EUR 933 million in the first quarter, in line with increased installations. We expect this trend to continue in the second half of the year as well. On the EBITDA level, we generated a loss of approximately EUR 173 million, roughly negative 8%. As mentioned on earlier calls, this is mainly due to impact from supply chain disruption, resulting from multiple macro events like Ukraine war, lockdowns in China, cybersecurity incident, but as well due to volatility in commodity prices. Some commodities have been showing signs of improvement lately. Orders like electricity remain very high level. However, this is likely to reflect in our cost base with a certain lag. We also see continuous disruption in the supply chain, which hopefully will normalize as we go forward. In addition, we booked about EUR 30 million direct costs for our footprint reconfiguration. Excluding these one-off costs, our operating EBITDA stood at minus EUR 144 million, translating into an EBITDA margin of minus 6.8%. Our working capital was robust again at minus 10.8% and was better than our target of below 7%. We are also pleased to report good progress on the cybersecurity incident and recovery. There are still some large remaining consequential impact emanating from the incident that we still have to address like, commissioning machines in Germany and bringing full operational system, but most of our key systems and applications are now fully recovered and restored. Finally, we have been able to significantly reduce the risk of this company by implementing a solid financial package with support from our anchor shareholder as well as majority of remaining shareholders to strengthen our capital structure sustainably. And Ilya will talk about this in more detail later. Finally, I would like to confirm our guidance for 2022 and our midterm strategic EBITDA of 8%, all things being equal as they are today. And now I will like to hand over to Patxi to share with you evolution on markets, customers and orders.

Thank you very much, José Luis. Now with respect to the orders, we sold 3 gigawatts of new turbine contracts in the first half of the year, up 8% with respect to the same period last year. 70% of the orders came from Europe, 23% from South America and 7% from North America. Biggest contributors in the quarter were Germany, Poland and Spain and Europe and Brazil, Colombia and the U.S. and the Americas. ASP grew to EUR 0.79 million per megawatt in Q2, up from EUR 0.68 million per megawatt in the same period last year. Service revenues grew 4% to EUR 226 million, representing 11% of the total group sales in the first half of the year. EBIT margin was 17.3% in the period. Turbine order backlog grew to EUR 6.7 billion at the end of June, up 38% with respect to the same period last year. Service order backlog grew as well, 6% to EUR 3.1 billion, for a combined order backlog of EUR 9.7 billion at the end of June. And with this, I hand over back to Ilya to go through the financials.

Yes. Thank you, Patxi, and good afternoon also from my side, ladies and gentlemen. Before now going through the financials of H1, as José mentioned, let me briefly go over again the latest financing packages that we see now on the screen. So as you know and probably know, during the last 2 months, we implemented a comprehensive financing package with the support, Luis mentioned it, of our biggest, our anchor shareholder, Acciona, to strengthen the capital structure and derisk -- especially derisk our business and improve the liquidity to weather all those external shocks and further improve our positioning with customers and other stakeholders. So in a brief summary of what we've done, we raised just shy of EUR 140 million via a 10% direct placement capital increase in the end of June. It was done at market price. So no discount on the face value and was picked up by the market shareholder and thereby, maximizing the proceeds available to the company and, of course, in return, increasing the shareholding of Acciona in the Nordex Group. And second, we closed a shareholder loan facility, nominal value here of EUR 286 million. There's some decider in that. But it is not only essentially, but its purpose is to repay the high yield bond of EUR 275 million, which matures at the end of January next year. And then in the third lag under the capital increase done by rights issue, that was done in July, EUR 210 million to EUR 212 million, fully underwritten by a club of banks participated again pro rata by Acciona and was completed in -- at the end of July with a take-up rate of shareholders north of 96%. So that is a reason to be thankful to our shareholders and to other stakeholders involved in the transaction. We also believe strongly it's a token of confidence that people are putting into the market of wind OEM and into the company Nordex. And then on the bottom, we can see the result. The pro forma equity ratio at the end of Q2 will increase to just shy of 23% compared to the roughly 18% in Q1. And similarly, our pro forma equity position as of Q2 will be just north of EUR 950 million, so basically strengthening all the 3 items I mentioned at the beginning. But now with that, let's move to the income statement of H1. We said it earlier, the performance in the first half was generally soft to weak as we expected and indicated in our earlier calls. So what was true for Q1 is true for Q2. In numbers, our sales stood at around EUR 2.1 billion at the end of the semester compared to EUR 2.7 billion in the previous year period. However, let me point out that our sales improved by about 28% to EUR 1.2 billion in the second quarter compared to the first quarter as the pace of installations already picked up and we continue to expect those increases in our sales throughout the rest of the year. And basically, the reason for that is a significant step-up in installations now every quarter, until year-end. Gross margin stood at around 12% at the end of H1, mainly impacted by the cost inflation and increase of logistic costs, first and second wave. Our gross margins in Q2 were at around 10% to 11%, 2% to 3% lower than Q1 as we had to reflect those higher costs, resulting from the volatile macro environment explained by José Luis, especially Ukraine lockdowns and the ramifications, but we expect our gross margins to improve in the second half of the year once overall environment will have stabilized and higher-margin projects gradually start kicking in. Our total direct costs from our internal initiative to reconfigure our production footprint are around EUR 30 million at the end of H1. But in addition, we expect to book some indirect costs from this exercise into the P&L throughout the year. And this would include costs for scrapping obsolete machineries, costs to dismantle the factories, payback of subsidies, et cetera. So roughly a EUR 25 million to EUR 30 million ticket in total for the whole year. So as a result, and mentioned earlier, the adjusted EBITDA before those one-off was at minus EUR 144 million, while our reported EBITDA for the same time stood at minus EUR 173 million. And with that, I will already move to the balance sheet. So if you're looking at it, overall structure remained in substance unchanged. We did end H1 with a solid cash level of above EUR 650 million. In addition, we have a cash facility of EUR 90 million. This taking the overall liquidity to, I would say, a solid north of EUR 740 million at the end of the quarter. However, please note that the proceeds of EUR 212 million from the rights issue mentioned earlier are not yet reflected here in those numbers as this transaction was completed in July. And so we now have a net cash position of EUR 270 million and an equity of almost 18%. But again, when we show Q3 numbers, those KPIs are likely to improve once the rights issue proceeds are then factored in. So with that, I'd go to working capital, remaining at a solid level with a ratio of minus 10.8%, again, similar to the last 2 quarters, driven by reaching milestone payments, largely compensating the increase in inventories. From a guidance perspective, the working capital ratio from our perspective will remain further below minus 7% for the current year. That brings me to cash flow. Cash flow from operating activities of minus just around EUR 220 million, EUR 218 million, mainly due to the negative operating results discussed earlier in the first half of the year. Cash flow from investing activities was in line with last year and also in line with our ongoing investment program, which we will see in a second. And then finally, cash flow from financing activities stood at around EUR 145 million which basically and largely reflects the cash portion from our direct placement completed end of June. And with that, we would go to the investments as said. Very briefly, very substantial to report, but we did invest around EUR 90 million in the first half year 2022 and are so above the EUR 75 million same period last year. But the focus of the investments remain the same. So main investments were again in the blade production facility in India as well as tooling and equipment for our higher installation level in the course of the year, especially second half. So all in all, also here in line with the guidance figure of approximately EUR 180 million for the full year. And that brings me already to my last slide, and capital structure. So again, as we have a negative EBITDA guidance for the current year, it would not be possible to show a leverage or reasonably show a leverage ratio. But let me point out that we will have a very little external senior debt once the high-yield bonds are repaid -- is repaid by the shareholder loan as discussed. And this effectively making the balance sheet structure pretty safe, irrespective of the leverage ratio. Equity ratio, I mentioned it, decreased to 18% due to the weak operating performance and that we indicated earlier. However, again, it will improve with the transaction numbers factored in when Q3 numbers come out. So much for the financials. And before going back to José Luis, maybe 3 quick comments -- final comments from my side. The financing package, I think we've seen, has now strengthened, of course, the balance sheet again, given liquidity headroom, but also -- and we discussed this in our last analyst call, now taken out the uncertainty and has addressed around the high-yield bond and has addressed that topic for good. Second, to repeat that we expect the second half of the year, obviously, from our guidance to be better than the first one on the account of higher revenues and installations increasing quarter-by-quarter and the better margin mix. And third, needless to say that we will continue to closely manage cash irrespective of those transactions and have a strong focus on the working capital management. And with those 3 comments, I would go back to José Luis.

Thank you very much, Ilya. And I'm moving to the operational performance of the first half, what we see is that our installations have been lower compared to last year, partially due to ongoing challenges on the logistics side of the company, driven by indirect effects of Ukraine war and lockdowns in some of the Chinese ports, unavailability of key systems due to the Sybil cyber incident, and some weather-related challenges at the end of Q1, which also led to a shift of some projects in the second half. However, we should be able to catch up on the lost time in the second half of the year. In summary, we have projected 416 turbines in 16 countries, approximately 1.9 gigawatts, again with majority, 75% in Europe, follow close to 20% in Latin America, 6% North America. Nacelle cell production, which was as well affected by availability of components and logistics and so on. We assembled 604 turbines compared to 685 in the same period of last year, but due to different product mix, we reached 2.9 gigawatts, which is nearly on the same level. Overall, the number of blades produced increased to 2,152 compared to 2,028 last year. And we produced 573 in-house compared to 819 last year. This trend is expected to continue or to same at that level in the future. So in summary, less installation, driven by -- not by availability of projects, but by the availability of product, which is very much driven either by availability of vessels or availability of components. And this situation, we are now fighting to catch up in the second half. Moving to the next slide. No changes to our guidance, which now includes all recurring and nonrecurring costs that we know, ongoing reconfiguration of production footprint, cybersecurity incident, direct impact from the war in Ukraine, supply chain disruptions due to indirect impact from Ukraine war and due to COVID-related lockdowns in China. And finally, we confirm as well our strategic midterm EBITDA margin of 8% once macroeconomic environment is stabilized and provided that we keep selling expected volumes with expected margins as we did in last quarter and the cost side of the company stays stable. And with this, I will hand over to Felix to open the Q&A.

Thank you very much for the presentation. And now I'd like to turn it over to our operator, please start the Q&A.

[Operator Instructions] We'll take our first question from Constantin Hesse from Jefferies.

The first one would be around pricing versus peers. I'm just trying to get a little bit more comfortable with the dynamics between pricing and your order intake. Because your order intake is up, whereas your peers are down. Your price and your ASP, even though I know it is directly, it isn't directly comparable. However, the level of 79 is -- I think it's the lowest -- the biggest discount compared to your peers of the last 5 years. So I'm just wondering, what do you think is driving this? Is there a very big mix impact here? Or are your prices simply lower compared to the competition? Just any color you could give here and your comfort around the pricing that you're currently achieving and basically the ability to deliver the 8% EBITDA margin on these prices or potentially even raise prices even further to drive even higher margins potentially? Just any color there would be great. That's the first question.

Thank you very much for the question. This is Patxi Landa speaking. The orders that we are taking the underlying gross margins of the orders continue to support the midterm strategy profitability target. The margins are growing. And from a pricing perspective, if you do the analysis and truly comparing ASP to ASP is not possible given the nature of the turbine type, scope, geography that affects into the KPI. But nevertheless, if you take the market leader and you compare Q2 '21 up until now, you will see that the evolution, the growth in the ASP is pretty similar. I can also share with you that ASP in the month of July this year was north of 0.86. So continues to grow very significantly with respect to Q2 '22, that was 0.79. And this is a month in July, where volumes were significant, hence, the KPI is significant and volumes in Brazil were significant. Brazil being a country whose ASP is generally lower than average. What I want to say with this is that from an ASP perspective, relatively comparing to peers, the evolution over the last 4 quarters is pretty similar. Nordex, comparing with ourselves, we are significantly growing ASP. And the more important message of all is that, we continue to apply a very strong pricing discipline at the underlying margins of the orders that we are booking as we speak continue to grow, considering the cost base that is actually in the market. So from that perspective, we are not true that we are winning market share. But we are not seeking to grow the company, and we will not, in the future, grow significantly in the company. We believe that we have reached to a level and remains to be seen the level of orders towards the end of the year, but I don't anticipate that we will be making a repeat year, probably will be a healthy order intake, but at a lower level that we achieved last year from a volume perspective, but from a margin perspective, significantly improved. I hope that answers your question.

That is very helpful, Patxi, especially the color that you threw into July ASP 0.86. That's definitely very helpful. Second question would be on the footprint reconfiguration cost or the restructuring costs here. Sorry, I'm sorry if I missed this. So far, you have about $30 million in there. Should we be expecting in the second half an additional booking into that particular line? Or are we going to see one-off costs being spread out across other cost lines?

Yes. Thanks, Constantin. This is Ilya. Let me take that one. The latter is the case. So with those direct costs, we were booking already in Q1, anticipating what especially the severance packages would be making a slight adjustment now in the Q2 from that direct by and large and I mean almost entirely, that would be it. So basically, the rest of the delta to those we estimate to be EUR 70 million, EUR 75 million of recon cost for the entire year, you would see spread out in other lines when we -- somewhere between OpEx, somewhere between cost of materials. So this -- we would call the indirect cost of the winding down of the factories.

It's helpful. And then my third question would be around your guidance. So I mean, since you've given the new guidance, how have things been developing here in terms of relative to your expectations? Any worse, any better? Any color here would be great.

Let's do this together, Ilya. I would say the biggest uncertainty we have from now to the end of the year, as you saw in the level of production and installation, is bringing progress to the projects. As a consequence of the Ukraine war, we are facing bottlenecks in vessels and availability of vessels and changing flux of the vessels from Russia to other countries and so on. So this is the biggest uncertainty that we have. We think that the consequential impact of the cyber-attack, we are finalizing, but we are still struggling with some delays in connecting wind farms to the grid in Germany mainly but as well in other countries and bringing products from Turkey to Central Europe. Situation in China is improving. So it's not expected -- is not expected, surprises there, but we still wonder we need to catch up in the second half of the year. So the biggest risk is stabilizing, which we are working on that. We think we have things under control, but it's a catch-up exercise that we are in. And this is going to drive very much where to land finally. And maybe, Ilya, if you can put more color there?

Yes. But I think, José Luis, happy to do so, but you hit the 2 big points, which is it is not that much from what we see today, the exposure to the supply chain because it's so largely locked in, given that we're in August of the year, and it comes down to the project execution, as described by José Luis. So I don't think we have a different view on -- really a different view on the guidance than we had when we last spoke together. The difference, of course, is, and I think someone mentioned it, a record Q3 in execution, a very intense Q4 ahead of us. Of course, the risk profile, the more you're into those quarters, the more intense it is. So that will now very soon become clear to which part of the book end of the guidance we will land, but it will be driven by exactly the factors José Luis just described.

[Operator Instructions] And we'll take our next question from William Mackie with Kepler.

Yes. I just wanted -- maybe we should touch on your impressions of the outlook for the U.S. market. You've maintained or mothballed capacity in the marketplace, and it seems the midterm prospects are now substantially improving. But any color you can give us on what you're thinking about when -- would the quantity of shovel-ready projects there are to go or when the order intake flows might begin to change in North America and where you see the U.S. potential ultimately emerging over a 1- to 3-year period?

Okay. Thank you very much for the question. Indeed, it's very good news. The PTC restored to a very healthy level, adjusted for inflation 10 years. So provides very good visibility in the market. The -- with respect to the short term which is your question on where we see the shovel ready, how customers are going to react over the next 1 to 3 years. I believe that the good long-term -- mid- to long-term view that this new legislation provides is at the same time and not providing short-term incentives for the market to react. And here, we are talking probably the most dynamic market across the globe used to remember 5, 6, 7 years ago, how the market was able to react from almost 0 to 100 in a matter of months. Remains to be seen, but yet in discussions with customers. They have been focused in different type of investments, in solar PV. They, of course, anticipating this situation have been back to permitting and re-permitting projects. However, we will see, in our view, that the effects over the next 12 months will not be very significant. So we see the market from an order perspective probably to continue to deliver similar levels to the ones that we have seen this year. And we expect, and this is -- and we will see 12 months from now, but we expect the market to fill different levels of activity in the year 2024. That's the view that we have in the market today.

Can you maybe just to build on that? Yes, the U.S. market, we've seen the historic data shows very high volatility. But are there -- maybe you can throw a bit more color on some of the reasons why you think the takeoff this time will be a bit slower? You mentioned perhaps a bias to its solar installations, but are there other factors which will delay the speed of takeoff?