Nordex Se

Ladies and gentlemen, welcome to the Nordex SE Q1 Figures 2024 conference call. I'm Diti, the call-us-call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star, then zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ms. Anja Seeler, Head of Investor Relations. Please go ahead, Madam.

Thanks, Vicky, and also a very warm welcome from our side. Thank you for joining the Q1-24 Nordics Conference Call. My name is Anja Seeler. And I joined Nordic beginning of May as head of investor relations, as some of you may already know. I do look forward to connecting with you over the next weeks. With me in the room are our CEO, Jose Luis Blanco, our CFO, Ilya Hartman, and our CSO, Pachi Landa, who will lead you through the presentation. Afterwards, we will open the floor for your questions. As always, we ask you to take notice of our safe harbor statements. Now I would like to hand over to our CEO, Jose Luis. Please go ahead.

Thank you very much for the introduction, Ania. I would like to welcome you as well on behalf of the entire board. As always, I would like to start with our executive summary for the respective quarters. We had a strong start of the year with a very strong order intake of around 2 gigawatts compared to around 1 gigawatt we booked year before. This came with a stable ASP and within our respected margin requirements. We also made some early progress. In U.S., we booked our first order, 148 megabytes, not in first quarter, but in April, after a long period of time, and this is a good sign. We hope to keep building on this and keep growing our U.S. order pipeline this year. In terms of our financial performance, we again had a better start to the year compared to last year. Our sales increased by around 30% to 1.6 billion based on a better project and product mix. Our gross margins remain steady at around 20%, 19 to 20%. As a result, our EBITDA margin came in at 3.3% compared to minus 9.4% last year. This very significant improvement in performance comes in mainly on the back of a better project mix, better execution, and as well, some cost elements on some projects improving better than expected. Also keep in mind that the first quarter of last year included some heavy costs on account of inflation, supply chain disruptions, and so on. But as we have seen last year, these effects are shocks, have slowly receded, and we see now a more stable environment this year. As a result, we now expect a much more stable margin profile this year within our guidance range. In terms of installations, We completed 1.1 gigawatts in the quarter compared to 1.3 gigawatts last year. This is slightly behind our internal planning, but we are confident on catching up during the year along with the delayed backlog of last year. On the liquidity side, we ended the quarter with a liquidity level of 741 million. This is mainly driven by seasonality of working capital. we expect the working capital ratio to normalize later during the year. Finally, we maintain our guidance and our mid-term outlook of 8% EBITDA margin, and our results in Q1 show first how our margin profile could improve as better quality orders starting to flow through our financials in an unstable and more normal environment. also provide an early proof that we are making good progress towards profitable growth and achieving our mid-term targets. Moving on to the next page, let me provide a quick update on markets and market share, although Pachi will elaborate further. As you have seen during our last call, we have become number three globally text China with a market share of 17% in terms of order intake. Since then, the full year installation data has also become available. Hence, to complete the picture, we thought that this would be useful to you to provide an update on that as well. As you can see, We have significantly improved our market share last year as our regulations recovered substantially. We are still fourth largest turbine player globally in China, but now with a very little gap with the second and the third player in the market. This is just another example to show that we have successfully scaled up to a 7 gigawatt company and will target to scale up further beyond 8 gigawatts in the coming years. And now I would like to hand over to Pachi for discussing markets and order intake. Thank you, José Luis.

As mentioned, order intake momentum continues to be strong. We doubled our orders with 2.1 GW of new turbine orders compared to 1 GW in Q1 2023. The majority of those orders came from Europe with 67%, with largest markets being Germany, Lithuania, and Turkey. South Africa accounted for 30% of the order intake, and the remaining 3% came from Argentina. The increase in the order intake was accompanied by stable prices. ASP was 0.85 million euro per megawatt, which is slightly better than our 2023 ASP. Generally speaking, we continue to see prices remaining stable in our pipeline. Moving to the next slide. Revenues in our service segment grew 9% to 166 million euro, with an EBIT margin of around 15%. As expected, service revenues keep growing in line with the re-installation cycle and high contract vulnerable rates. As we have mentioned before, margins are temporarily affected by inflation effects, turbine and regional mix. But we expect margins to recover in future once the share of outdoor turbine types and share of non-European service contracts go down in our order book. Average availability on the fleet was around 97%, with a total fleet of around 45 gigawatts on the service. Moving on to the next slide. Tournament order backlog grew by 14% to 7.3 billion at the end of first quarter. Service order book grew 11% to 3.8 billion euro, leading to a combined order backlog of 11 billion at the end of the first quarter. And now I'd like to hand over back to you.

Thanks, Pachi. So good afternoon also from my side. As always, I will guide you through our latest financial figures, starting with my first slide, as usual, the income statement. So in the first quarter, we delivered sales of around 1.6 billion euro, which is a growth of around 29%, compared to the previous year, which, among other things, is reflective of our improved order book, as mentioned earlier by José Luis. Gross margin sequentially improved each quarter last year and further increased in 19.6% at the end of Q1 compared to 8.9% in Q1 2023. Performance is mainly driven by the fact that last year was negatively impacted by extra costs coming from delays and other product issues. And now we have also a high proportion of profitable orders going through our financials as indicated in I'll fool your call as well. So as a result, we achieved an absolute EBITDA of 25 million euros in the first quarter compared to those minus 150 million in Q1 2023. This corresponds to an EBITDA margin of 3.3 for Q1 this year compared to minus 9.4% in the same period of the previous year. That improvement was helped Again, by two topics, a pretty clean execution in the quarter, and the lower portion of legacy projects delivered in Q1 compared to the quarters ahead of us. As the volatility of the last few years finally starts to subside, we now expect a more stable margin profile in the coming quarters, so a slowly but surely increase of those. And with this, I will move to the balance sheet. Overall structure remains in substance unchanged compared to the year end of 23. We closed the first quarter with a cash level of 661 million euros. In addition, we maintain that cash facility of around 80 million euros, so an overall liquidity level of 741 million for the end of Q1. Compared to the year end, our liquidity levels have decreased, but essentially because of the working capital ratio, You can see this in a bit more detail on the next slide. Because working capital ratio stood at minus 7% and absolute numbers minus 479 million euros at the end of Q1. This is a temporary effect caused by a typical dip of manufacturing levels between a higher Q4 and lower Q1 activities. So rather than the usual for the season, And so we expect the working capital ratio to revert back later in the year. And of course, we maintain our guidance of below minus 9% for this KPI. With that, let's jump to the cash flow side. As you can see on the screen, our cash flow from operating activities before net working capital reflects the better margin profile of our orders over the last quarters. And this is a result of the improved operational performance. However, the aforementioned working capital development resulted in a cash flow from operating activities of around minus 200 million euros. Cash flow from investing activities split around minus 50 million euros, slightly higher compared to the previous year level, however, in line with our planning. Nothing much to say about our cash flow from financing activities, which totaled around 8 million for the quarter. Jumping to the next slide, the investment totaled to around 34 million in the first quarter compared to 25 in Q1-23. In this past quarter, we executed our investment program largely as internally planned. We expect to see a catch-up in the CapEx run rate over the coming quarters to meet our CapEx guidance for the full year. And that brings me already to my final slide, the capital structure. So, yes, as a consequence, net cash levels decreased to around 360 million compared to year-end. The development was anticipated and is mainly driven by the higher working capital, as explained on some of the previous slides. Equity ratios stood at nearly 19% and remains basically unchanged from year-end level. And with that, I'm giving the back to Jose Luis who will guide us through more details of our operational performance in the first quarter.

Thank you, William. So let me provide you with a quick overview of our operational performance in the first quarter of 2024. As mentioned before, we completed the installations of 1.1 gigabit during the first quarter, although this is 16% lower than last year. is slightly behind our internal planning. We expect higher activity levels in the coming quarters as last year, which should take care of the spillover delays of the quarter and of the last year. Summary, we erected 227 turbines in 13 countries, again with a majority in Europe. Production, we assemble 200 turbines, slightly more than last year. In terms of megabytes, that means around 9% growth year over year. And similarly, we produce 1,039 blades, a bit less than last year. Around 30% were produced in-house, which is slightly more than in the last year. And with this, we are approaching the end and going on to the guidance. After reporting Q1 financials, the key message here is that we can confirm and maintain our guidance for the full year 2024. In summary, we can say that Q1 results provide a great start of the year. Sales and margins are in line with our expectations. And in contrast to previous years, where there was a lot of volatility throughout the year, we now expect more stable results as external environment starts becoming normal again. Working capital was slightly below our guidance in Q1, driven, as mentioned, by the sectionality of our sector, but it should revert back to normal later this year. I'm now handing over back to Anja to open for Q&A.

Yeah, thanks, gentlemen, for leading us through the presentation. Let's open the Q&A session, so Vicky, please go ahead.

Thank you. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star then 2. Anyone who has a question may press star and 1 at this time. Participants are kindly requested to use only handsets while asking a question. Thank you. The first question is from . Please go ahead.

Hi. Good afternoon, everybody. I'd be interested to hear an updated view on how you see legacy backlog or low margin backlog filtering through the numbers in the next call two years.

Can you please repeat your order backlog question and then maybe be closer to the telephone?

Sure. Is that any better?

Yes. Okay.

Sorry about that. Can we speak about the cadence on backlog delivery? as it relates to legacy backlog. So from memory, there's about one and a half gigawatts to deliver through call it middle of 2025. Is that still the right way to think about it and write quantums? And how does the loading work front end versus back end loading? Thank you.

Okay, I think we don't have the granularity of how this backlog of, let's say, sub-average quality will flow through the P&L, but you are right, it's approximately 1.5, and the assumption is that we will get rid of that during the year, not in the first half, but during this year. John, you're still with us?

Perfect. Thank you. Could we just talk about underlying price dynamics, holding project scopes constant? Is the pricing dynamic or environment stable now? Are you still able to put price increases through? How should we think about that?

Generally speaking, and across the markets, we don't see variations. We continue to see stable prices, not only in the orders that we close, but also in the orders that we see through the pipeline that we will be closing in the next quarters.

Okay, great. Thanks so much.

The next question is from Ben Hillen, Bank of America. Please go ahead.

Yes, thank you guys. Good afternoon. The first question I had was around these comments in the presentation on the margin profile, small step ups expected each quarter. So it sounds based off the 3.3% EBITDA you did in Q1, you expect to be at the top end of the guidance for this year. So from a margin perspective, so I'm wondering why you haven't raised the guide today to close that to the top end. Secondly, if you look at that guide, the second half of 24 versus the second half of 23 wouldn't imply that material amount of improvement in the margin profile. I'm just wondering, is there something specific that's driving that, or is that just a conservative take? How should we think about that margin step up in the second half of the year versus the second half of last year? Thank you. Thank you.

No, thank you for the question. I think that, you know, we are not going to, you know, shy that the Q1 results, we are happy with those. With that being said, it's too early. I mean, the majority of the activity is still to be processed in production, in installation, and so on. It's true that in Q1, we saw slightly more opportunities than Greece. We see stabilization, and our internal planning is slightly improving in the next quarters to come. Is this going to lead to ending into the top end of the guidance? It's possible. but we still see a lot of risks. So it's too early to form a different view on our guidance at this point, although we are positive, we are optimistic. And that's very much what we can comment regarding that. And regarding the second question, I think our situation is more stable now, We should not plan for the substantial step change we saw in the second half of the last year. Although we see improvements obviously with more activity and more stability, we should do small improvements quarter on quarter.

Okay, great. Very clear. Thank you.

The next question from Sebastian Groh, BNP Paribas. Please go ahead.

Good afternoon, everybody. Thanks for taking my questions. Just three overall. The first one would be around the U.S. reentry. So you sounded quite optimistic with regard to making a successful comeback in the U.S. market. And I would be interested in three points here. So the first one is why do you stand in the question of demothballing the Iowa plant? Second question is, what is the launch date that you have online for US specific turbine? And thirdly, where would you see target volumes over time in that market for yourself?

So, Sebastian, the last question was very silent.

Target volumes. Okay. I got it. Hi, Sebastian. I think the when, so regarding the US, As we shared with you in the previous call, we needed to do some homework in the product, which we are working around the clock. to launch like our competitors, a high capacity factor machine, specifically 42S. We expect the plan was, and it still is, hopefully before next quarterly call, we should be able to say something, otherwise we'll be beginning of Q3. Second, I think we have reasonable products for non-high capacity sites in US that we are targeting now, customers, US and in Canada, and we expect to run certain orders. Regarding reopening, Iowa is not an if, it's a when. We are selecting the right time to be in line with the requirements of the demand. But reopening the Iowa plant is not the bottleneck. We have created internal plants to be able to ramp up that factory and having available components that meet local requirements, training programs, and so on. within the normal schedules that the customers are requesting to us. But that should not be the bottleneck. And the last question regarding market share, we don't guide market share, but if in the past we were able to do from 10 to 15, this is as far as we can go. I mean, we should not pretend and that we'll be too optimistic to have a market share like in Europe, 40%, that's not realistic. But why not the market share that we previously had in that market? In the past, we were able to deliver 15 market share. Another time we were a weaker company, smaller company than we are today. We are a better brand. that there's leadership worldwide and I don't see why we should not have our small share in that market.

That sounds reasonable. And if we talk volumes, then this is so far we have seen a strong tilt in order intake towards the EMEA region 2023 and also in quarter 124. So can you update us on your pipeline in EMEA? Do you see that stable at around six to seven gigawatts per annum? And what is your expectation really for the Latin American markets and Australia alike?

We see a good momentum in Europe. So we continue to see that we will deliver volumes at the level, if not better, in that geography. With respect to North America and the US, you can expect 2024 being a re-entry year. So don't rule out to see more orders, but don't count on them as well. And I do see 2025 to be back structurally from an open intake perspective in the market. So in combination, and I'm not guiding orders, but we started very strongly the year. We do see Q2 probably being at a lesser level, at a lower level, but then picking up again in second half. And we have very good visibility on the volumes that we may be doing for the future.

To my last question, I think we had previously also another call, discussions around where could you take the business if everything falls in place with the capacity around the cells, etc. If I take your words now for the output in Europe, add to this what could be then 1.5 gigs plus minus in North America, let's see what comes out of Latin America, let's see what comes out of Australia, so then it would take me to a very high single digit, if not 10 gigawatts numbers. And maybe you can comment on that one, if there's any sort of errors simply and that kind of framework. And the other question I still had is, you labeled the point that 20% was across profit margin in the first quarter. I do recall that you also said that in 24, you would have at least some liquidated damages headwinds. not as material as in 23 for sure, and that you would still sit on some legacy contract. So long story short, where is really a clean and underlying gross profit margin should be closer to 22, 23% for my liking. So maybe you can also comment on this and then I'll let you go.

Let's first take the volume pattern and without guiding anything, nor for the year, nor in the strategic plan, your reasoning, we buy. I mean, if we maintain our market share in Europe and we grow with the market in Europe, and if we recover the market share that we used to have in US, and if Latin America doesn't fall apart, and if we do business in South Africa as we are doing, and leveraging on our Australian presence from deals in Australia that we are working on. yes, we will be heading into that direction, but it will take time, because the orders that Pachi was mentioning in 25, more than likely might be delivered in 25, but more than likely in 26. So that long term is a possibility, yes, and we are preparing for that. And regarding the composition of the margin and the headwinds?

I would say, together doing this, I think Q1, when you mentioned in your intro, was rather good executed, little hiccups, and less legacy projects that we can expect in another quarter. So the distribution of the legacy projects in 24 is a bit more random. It's not necessarily at the beginning. So this one was rather on the lower end of portion of legacy projects. So I wouldn't extrapolate from that upwards, but stand behind our statement is that this steady but slow step up in absolute margin is what we want to convey as a message.

Okay. Very much appreciate it. Thank you. You're welcome.

Next question from Ajay Patel, Goldman Sachs. Please go ahead.

Good afternoon and thank you for the presentation. So I wanted to just take a step back and just think about the drivers. So we have the guidance for this year. We have the 8% target for the sort of more medium term. We know that the vast quantity of legacy projects expire or work through this year. Can you just walk me through the building blocks to an 8% margin target, as in is it that if you have very strong volumes this year, we could be on our way towards that in the nearer term, or is it really predicated on working through a last legacy project next year? I just want to understand the building blocks again to ensure that I know the picture.

That's a very good question, and we confirm. The building block that we presented, I think it was in the last call. We have a specific slide, maybe in the future we share again. So the building blocks was close to in the range of 1% will be profitability improvement by not having legacy orders. So the legacy orders are flowing to the P&L this year. we should not expect so our internal planning is that we should not expect legacy orders in the pnl in the in the future then we mentioned in the previous questions and as well that we are planning to grow with the market in europe and we are planning to recover market share in us so there is a potential of extra volume for the company within the existing capabilities of the company to do business. And this high volume potential could leave the profitability by better absorption and by better margin generation in roughly speaking, you know, let's say one to 2%. Then service margin, this is a more medium term. We talk about temporary impacts due to inflation, composition of certain less profitable projects that over time might improve the underlying margin of the whole company in half a percentage point. And we discussed as well in previous calls that executing projects in Germany currently is deteriorating a little bit profitability by permits and by road transportation and so on. We expect this to be solved in the future, and this should improve the underlying profitability as well in the range of 1%. So those are the four bridges or building blocks. to transition to that mid-term profitability target. So legacy orders, more volume, normalized service margins, getting rid of the extra cost of executing projects in Germany driven by mainly logistics.

Can I just add a little clarification there? Yes, please. All of those volume pieces added together, is the kind of run rate that's consistent with an 8% margin target Eight and a half, nine gigawatts? Is that kind of the rate?

I think it's, without being so specific, yes. So we need that volume for that run rate to lift this profitability in that range, yes. Perfect. Thank you very much. I think we think that is possible.

Thank you very much. Thank you very much.

The next question from Sean McLaughlin, HSBC. Please go ahead.

Thank you. Good afternoon. Firstly, on cash flow, given that you're guiding us towards the top end of your range, shouldn't we expect the year to be closer to or above or certainly it's kind of positive cash flow regime and what are the risks and drives around free cash flow generation in the second half. Second question, just I think probing a little bit more into the 8 gigawatts. You talked about scaling up to 8 gigawatts. Is that included within your 2024 capex, i.e. you'll be at 8 gigawatts of delivery capacity by or within 2024? Thank you.

Second question is, is easy? Yes, it's within the Carthex guidance is for the roundabout 8 gigawatts. The first, maybe you take it in there?

Yeah, I think, yeah, to be a caveat is that we're not guiding for those kind of things like free cash flow, but rather give you those building blocks. I think we make three statements. First, I don't think we're indicating the upper end of the guidance yet. I think we're showing a trend because we've made clear those risks. So that's there. And then second, as I said in the full year call, if we're getting on those building blocks and each of those to be higher range, then somewhere slightly negative neutral free cash flow is absolutely possible. I think that's as we continue to see the very same way as we did in the full year call.

But with one quarter less of uncertainty, so we are happy with the Q1 results. Let's put it that way.

Thank you. Thank you.

The next question from Constantine Hesse. Please go ahead.

Thank you very much for taking my questions as well. A couple of questions on my side. One of them is, Pachi, over to you very quickly, just on the order side. So as far as I understand, order momentum continues to be pretty good in Q2 as well. Can you maybe just comment a little bit on momentum relative to Q1? Because obviously you had a very strong Q1. So just curious to see what you see there. Number two is, have you by any chance ever looked or done what we probably have, but done an analysis on this potential 8% return of the Dow market guidance, including the future subsidies that you will probably be benefiting from in the U.S.? I think in the U.S., we're talking about $0.05 per watt on Nassau and $0.02 per watt on Blades. I mean, that is obviously a pretty significant figure given where your EBITDA is today, assuming that you're able to deliver volumes closer to one gigawatt or at least half a gigawatt even would have a substantial impact. So anything that you can comment on here would be greatly appreciated. Just to understand, Iowa is a nacelle plant, right? And the blades you would import from Mexico?

So, Konstantin, I think the questions on the order intake and the questions on the U.S. we understood, but unfortunately your line was really low or interrupted, so your second question would be great if you repeated it.

Apologies. Can you hear me now?

It's just more interference. There's not the volume so much. We'll try. Come again, Konstantin, and we'll try.

Okay. I'll go really slow. It's about the U.S. IRA subsidies. the five cents per watt nacelle and the two cents on blades. If you have looked at this and done an analysis on the potential margin impact that this could have for you once you ramp up production in the U.S.

Okay, so this is, yes, we have done. And we concluded that for us, the best approach is local nacelles. from Iowa and imported blades from other locations and local towers. More than likely steel, but we are analyzing as well in-house concrete towers to deliver the IRR requirements. I think this is the best This is the best margin profile for our business there. We don't have blade operating facilities like some of our competitors. So for us, a new investment in a U.S. blade factory, we don't see the good investment. Let's put it that way.

Let me clarify. With this, we get 100% of the value under the IRA.

Only in its first stages, but also in the last requirements, which I think is around 55%. So with that setup, we will also benefit from even the last stage of requirements in the IRA. We've done that enough.

So that basically also means that your future margin is probably going to lay way above the 8% just driven by this subsidy alone.

No, I think that's included into the, we expect with this configuration of supply chain to sell to the American customers at average profitability. So if we expect to sell at all included, what the U.S. is going to bring is potentially and eventually this extra volume exceeding the 8 gigawatts to lift the profitability as the building block we mentioned before. But our assumption today in the budget and in the business plan is that U.S., should bring volume at average profitability of the group.

Okay, because I'm just curious, because you first introduced the 8% margin, so before the IRA was announced.

So I would have assumed that... Yeah, yeah, but the IRA we needed for the volume, because to get to the 8%, we need volume. And where is the volume going to come from? Before was more volume expected from Latin America. Now the Latin America is slowing down. The planning was always more volume coming from Europe, which we are delivering while protecting prices and margins. And the compensation from the decline in North America plus the additional volume to the 8 gigawatts needs to come from North America.

Okay, and that will clearly be a very profitable volume given these future subsidies.

We expect so. We expect that we'll be as profitable as the European volume.

Okay, even including those subsidies.

Even including those subsidies. I mean, of course, this is a supply and demand. We are not market leaders, as a consequence we are not price makers, we are price takers, so the two other players will decide the price and the margin of the sector. In Europe we have more responsibility as we are market leaders on prices and margins, but I hope that the US follows the pricing strategy that Europe has followed.

Okay, great. And then just quickly on the order intake momentum touching Q2.

Q2, we will see this is project business. Q2, you can expect a lower volume that we have in Q1, but for the rest of the year, picking up in the second half of the year. So I see good pipeline for the full year, but you can expect a relatively weaker Q2.

Thank you very much.

Thank you.

As a reminder, if you wish to register for questions, please press star and one on your telephone.

Okay, so thank you everyone. We have now closed the Q&A. I would like to hand over to Patsy for your final remarks.

Thank you. Thank you very much, Ania. Thank you very much for the questions and for the participation. Moving to the key takeaways. First, I will say the macro environment is stabilizing. We still see some inflation pressure, but not massive shocks like last year. At the same time, our order intake and pipeline continue to be healthy, and we expect to make more progress in U.S. and North America this year. Q1 results represent a clear set of results with minor external exceptional impacts, which provides a very solid start for the rest of this year. As a result of normalizing environment, we expect a more stable margin profile this year, despite some temporary challenges in the form of geopolitical risk, installation delays, and higher project costs in Germany. And last but not least, we see a clear path for achieving our mid-term target on the back of volume growth, as discussed, margin improvement, as discussed, and growing service business as discussed. Thank you very much for your participation in the call and wish you a nice afternoon. Goodbye.

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