Nordex SE
XETRA:NDX1
Earnings Call Analysis
Q4-2023 Analysis
Nordex SE
Demonstrating a commendable balance between aggressive growth strategies and prudent financial management, the company has made significant strides in strengthening its balance sheet. Notably, it accomplished this through a series of targeted actions over the past year, including repaying higher bonds and converting shareholder loans into equity. What stands out is the company's working capital management, which showcased a robust ratio of -11.5% in the last quarter, outperforming the guided threshold of below -9% consistently throughout 2023.
The improvement in operating cash flow to EUR 161 million, a turnaround from a previous deficit of EUR 350 million, underscores operational efficiency and improving margins. The drive toward better working capital management has borne fruit, resulting in a positive free cash flow of EUR 20 million, contrasting sharply with the previous year's EUR 514 million deficit. Financing activities further stabilized with an influx of EUR 300 million, primarily from green convertible bonds issued in April 2023.
Deliberately backloading its capital expenditures (CapEx), the company increased its spending rate in Q4 but maintained full-year expenditures below typical levels due to several rollovers. These strategic moves allow for flexibility in execution and ensure continued investments in critical areas like blade production facilities and new molds, essential for maintaining competitive advantage in product offerings.
The operational side of the business also tells a compelling narrative of growth and efficiency. The company has successfully increased its installation run rate every quarter relative to 2022, albeit with a shortfall of about 100 turbines in Q4. With the installation of 1,429 turbines across 24 countries and an assembly of 1,520 turbines, the company achieved a 7% year-over-year growth. Keeping a keen eye on cost optimization, the management has affirmed its 2023 guidance released earlier through a press release. Margin improvements attest to this disciplined approach, as margins have risen each quarter thanks to higher turbine prices and a stabilizing cost environment. Looking ahead to 2024 and beyond, management expects further margin recovery supported by three key levers, indicating strategic progress within the company.
The positive outlook is cemented by the management's 2024 guidance, projecting the order revenue to range between EUR 7 billion and EUR 7.7 billion. This revenue forecast is anchored on a robust order book and anticipated order intake. Additionally, the EBITDA margin is expected to hit the 2% to 4% mark, illustrating confidence in the company's ability to enhance profitability and deliver value to stakeholders.
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Ladies and gentlemen, welcome to the Nordex Annual Figures 2023 Conference Call. I'm Vickie, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Felix Zander. Please go ahead, sir.
Thank you very much for the introduction. Good afternoon, ladies and gentlemen. A warm welcome on behalf of Nordex to our investor and analyst call for the full year '23. Our CEO, José Luis Blanco; our CFO, Ilya Hartmann; and our CSO, Patxi Landa, will guide you through our slide deck, sharing all the relevant topics with you. After the presentation, our Q&A session takes place. [Operator Instructions] And now, I would like to hand over to our CEO, José Luis. Please go ahead, sir.
Thank you very much for the introduction, Felix. I would like as well to welcome you on behalf of the entire Board, Patxi Landa, CSO; Ilya Hartmann, CFO, here with me today guiding you through our presentation and taking your questions as usual.
Moving to the executive summary. As usual, I would like to start our presentation with the executive summary of the last year 2023. As in '22, we continue with our strong order intake momentum in 2023, especially in EMEA, a market with yearly approximately 16 gigawatts installation. We have ranked #1 consistently for 2 years in a row in terms of order intake. We will get 2.5 gigawatts in the fourth quarter compared to 1.9 gigawatts last year. And our full year order intake increased from 6.3 gigawatts last year to 7.4 gigawatts this year. The prices and margins in our order book are improving as well as you can see.
Regarding our financial performance. Last year, developed overall as expected with a soft start in the first quarter and then gradually improving throughout the year as more and more better quality orders started to flow through our financials. Our full year sales increased by 14% to EUR 6.5 billion, which exceeded the upper end of our guidance of EUR 6.1 billion comfortably. Our EBITDA margin improved as well from minus 9.4% in the first quarter to 3.4% in the last quarter, reaching breakeven on a full-year basis as we had expected and indicated since our Q2 call.
We also had a good year in terms of installations with full year installations growing by almost 40% compared to 2022. As a reminder, we had started the year with backlog of installations from 2022. And as you will remember, we had some further disruptions during the year coming from earthquake in Turkey, which caused delays resulting from partially destroyed port facilities. All those means we were required to install roughly 450 turbines in the last quarter against which we could install only roughly 340.
On the liquidity side, we ended the year with a positive free cash flow of EUR 20 million on the back of a strong working capital of minus 11.5% and an EBITDA breakeven. During the first half of the year, we replaced high-yield bonds with lower interest-bearing convertible bond and also converted shareholder loans into equity. All these initiatives helped us to end the year on a strong net cash position of EUR 631 million.
Finally, our guidance for 2024 shows a further revenue increase and a margin recovery. The pace of the recovery depends on how far we are impacted by near-term challenges, particularly disruptions in the currency, recovering our installations delays from 2023 and further building our momentum outside Europe.
Having said this, I believe that we have been gradually making a solid progress to reach our midterm 8% profitability EBITDA target that we still confirm and maintain.
Moving to the next slide. We are also pleased to note that our market share in terms of order intake improved to 17% in 2023 outside China, which makes Nordex third largest turbine player globally, ex-China and right behind the second place. This is just one example showing that we have successfully scaled up the company to 70-gigawatt plus company on the back of our high efficient and competitive product portfolio.
In EMEA, we again maintained our first position with a strong contribution from Germany, where we increased our market share to approximately 30% and we also slightly improved our market share outside Europe.
In summary, this is quite an interesting time for us, the Nordex family, as we have successfully repositioned the Nordex brand over the last few years, and now we have a strong solid platform for further growth.
With this, I would like to hand over to Patxi to guide you through markets and order intake.
Thank you, José Luis. As just mentioned, our order intake momentum continued to be strong in 2023. We grew our new turbine orders by 16% to 7.4 gigawatts compared to 6.3 gigawatts in 2022. The majority of the offers came from Europe with 86% with largest markets being Germany, Sweden, Spain, France and Turkey. 8% of the orders came from Latin America and 4% came from North America. The growth of the order intake came with stable prices as the full year ASP and also ASP in Q4 stood at EUR 0.84 million per megawatt at the same level as in 2022.
Moving on. The revenues in our service segment grew from EUR 574 million by 18% to EUR 679 million with an EBIT margin close to 15% for the full year. Service margins have gradually improved during the quarter since Q1 '23. And as we have mentioned before, our margins are temporarily affected by inflation effects, turbine mix and regional mix. We expect our margins to recover in future, once the share of older turbine types and share of non-European service contracts were down in our order book. The average availability of the fleet was around 97% with a total fleet of 35 gigawatts under service.
Moving on. The turbine order backlog grew by 6% to EUR 6.9 billion in '23. The service order backlog grew by 11% to EUR 3.6 billion, leading to a combined order backlog of EUR 10.5 billion at the end of the year.
And now, I would like to hand over to Ilya to go through the financials.
Thank you, Patxi, and good afternoon also from my side. As always, I will guide us through the latest financial figures and starting as usual with the income statement. In this case, for the full year '23. As we can see, last year, Nordex achieved EUR 6.5 billion in sales, which is a growth of around 14% compared to the previous year, and it's also around 5% above the upper end of our sales guidance range for 2023. Key were our continued good order intake momentum in Europe, as mentioned earlier by José Luis, and our higher installation levels compared to 2022.
Gross margin improved as well, 15.2% compared to 8.5% at the end of the previous year. The improvement basically comes from better priced orders on stable costs flowing through our financials more and more. With all of the breakeven on EBITDA level, to be precise, EBITDA of plus EUR 2 million, that is in line with our guidance and the indications we have made on our previous calls.
With that, we will have a look at the income statement for Q4 standalone. As mentioned before, our sales have been steadily improving each quarter with Q3 -- Q4 reaching around EUR 2 billion, the strongest quarter we have seen in the last year. This is around 11% higher compared to Q4 2022. Gross margin stood at 18.6% for the quarter, coming back to more normal levels. That's a strong performance, arguably, particularly when compared to the gross margin of 2.6% in the same period of 2022. Of course, that quarter 2022 had to account for extra costs coming from installation delays and other project issues, which are far less this time around.
As a result, our EBITDA margin in Q4 reached 3.4% versus minus 2.4% in Q4 '22, which is an increase of almost 6 percentage points. However, let me note that our margins also took some hit in the last quarter because of some extra costs coming from technical installation delays, which José Luis mentioned in his comments already. This is also likely to impact somewhat our 2024 margins. We will cover that topic later. But the performance in Q4 gives us confidence to keep building on this momentum as we make good progress towards our midterm targets of 80% in the EBITDA margin.
With that, we move on to the balance sheet. Overall structure looks very robust. We ended the year with a record liquidity level of above EUR 1 billion. That includes the cash of EUR 926 million and our cash facility of around EUR 19 million. The strong cash position was mainly driven by a very good operating performance in the last quarter and to tight working capital management, which I will comment in a few moments on the next slide.
But in addition to those financials I mentioned in the last year, to remind us, we repaid the higher bonds. We converted the shareholder loans into equity and we issued green convertible bonds at the beginning Q4 -- Q2 of 2023. So those measures have helped us. We mentioned it in the past, strengthened the balance sheet in a timely manner and while also reducing our burden in cash interest.
As announced, the working capital slide is next, the ratio stood in the last quarter at minus 11.5%. In absolute numbers, minus EUR 746 million. That is even stronger than at the end of Q3. The working capital was predominantly driven by order booking and product collections during that last quarter. Or in other words, working capital ratio did remain constantly stronger than our guided number of below minus 9% in all quarters of 2023.
That brings me to the cash flow slide. Cash flow from operating activities was EUR 161 million compared to minus EUR 350 million at the end of 2022. This development was predominantly driven by continuously improving margins over the last quarters and an even tighter working capital management towards year-end. Cash flow from investing activities stood at around minus EUR 141 million, lower than we had originally planned, and I will come back to this in a minute when we look at our CapEx slide. So for the result, we ended the year with a positive free cash flow of EUR 20 million when compared to minus EUR 514 million in 2022.
Finally, the cash flow from financing activities totaled roughly EUR 300 million, and that was essentially at the same level as we have already communicated in our Q3 call. The main driver were the inflows from our green convertible bonds in the April of 2023.
So with that, to the investment slide. We can see that our CapEx rate went up in Q4 due to our backloaded activities in line with our expectations. However, our full CapEx spending was lower than the usual level. Basic driver here is some CapEx rollover, especially in execution, equipment, tooling and the catch-up that will happen this year. But the focus of our investments in '23 by content largely remained the same. This we mainly invested in blade production facilities and new moulds as well as in transport tooling equipment covering our installation levels.
Now that brings me to my last financial slide on the capital structure. So as you can see on the slide, our net cash level sharply increased to EUR 631 million, coming from EUR 244 million at the end of the previous year. And again, this positive development was mainly due to the shareholder loan conversion into equity and the repayment of a higher bond last year.
And with that, I would switch my sustainability section. In 2023, we have made good progress in implementing our so-called Sustainability Strategy 2025. So let me just highlight a few targets. We have submitted science-based targets reducing greenhouse gas emissions. They're currently still under validation, but we will publish them once that process is completed. As of the previous year, we have managed to achieve our goal of continuously reducing lost time injury frequency, that ratio LTIF of 1.2 for 2023.
And regarding the supply chain, we've taken measures to ensure full compliance with the German Supply Chain Act, and have established a Human Rights Officer in our company. On the other topics, activities are ongoing as shown on the slide, and we will initiate further actions throughout this year again.
That brings me to my second sustainability and total last slide. So we can see here our business activities show a high degree of eligibility and alignment with the EU Taxonomy contributing to the environmental objective climate change mitigation. We also managed to keep up our good scores in several renowned ESG ratings, to name one, Ecovadis, we have achieved the gold medal now for the third year in a row.
And with that, I hand it back to José Luis.
Thank you. Thank you very much, Ilya. So now, let's move to the operational performance in full year '23. As you can see on this slide, we managed to increase our installation run rate in every single quarter compared to 2022. However, we were still short by around 100 turbines in Q4, as I mentioned earlier. The additional installation during the winter quarter and subsequent delays have impacted our margins in Q4 and we have some impact on our margins in '24 as well.
In summary, we erected 1,429 turbines, so 300 more in 24 countries with around 7.3 gigawatts, again the majority in Europe. We assembled 1,520 turbines, slightly more than last year, not in terms of megawatts, that means around 7% growth year-over-year. Similarly, we produced roughly 4,600 blades, a bit less than the previous year. Around 25% were produced in-house, nearly the same level than last year.
Finally, let me also note that we keep working on optimization of our production and supply chain in order to optimize our cost structure, which brings me to the guidance. And as I mentioned earlier, and we have confirmed our guidance for 2023 via our press release with the preliminary figures released on February 12. Outperformance was overall in line with the expectations and with the guidance.
Now I would like to share with you where we are on our path to the strategic margin target level of 8%, which I herewith would like to confirm. In early 2022, we have provided our plan towards the midterm profitability target. And as expected, after managing the very volatile years of 2021 and 2022 with the war in Ukraine, supply chain disruptions, extreme price increases and logistic challenges, we are now in the middle of the stabilization period.
In 2023, our margin improved each quarter on the back of increasing turbine prices and stabilizing the cost environment. And in 2024 and beyond, we expect further margin recovery to materialize.
In the next few years, we believe 3 key levers will continue to support this margin recovery, assuming a stable supply chain and assuming that the recent disruptions in the Red Sea and the geopolitical events are contained. First lever is volume growth based on continued growth in our key markets, Europe. Second lever, improving order book quality. And third lever, a growing service business with improving margins.
In summary, we feel we are on track of the road map that we shared in early 2022. And let me give you some more details in the next slides.
Market. So you know the onshore wind market size, ex-China, is likely to grow by around 14% for the next 5 years, and growth in Europe will be a substantial part of it. Europe aims for 500 gigawatts of wind capacity by 2030, of that around 389 gigawatt needs to come from onshore wind. Despite this growth outlook, Europe is likely to fall short of this target by a decent margin. We believe that ongoing political support, policy changing, especially easing of permitting processes across Europe could further fuel this growth outlook in the midterm. And with our leading market position and product portfolio, we could really benefit from it.
The development in the European market is also benefiting from the recovery in our home market, Germany. Again, like Europe, Germany is likely to fall materially short of its targets despite a very solid growth outlook of close to 15%. As you're aware, we have a strong position in Germany with around 30% market share. In 2023, we increased our order intake by 36% and our market share in the completed auctions in 2023.
Beyond Europe, the U.S. is an important market for us. While we have decent traction in Canada and Latin America in 2023, we did not really make much progress in the U.S. However, we intend to change this in the future given our success in Europe.
Let's move to the next slide, and let's talk about the next 2 levers, which are internal levers and that are on track. As we have stated before, we have been successful increasing turbine prices to lift margins in our order book. As you can see, our margins have increased by around 4% to 5% in the last couple of years on the back of a robust order intake in Europe. We still have some old legacy orders left in our order book, which will impact our margins in 2024. However, we expect to complete those orders largely within this year.
In addition, we expect some temporary pressures on our margins due to the current geopolitical disruptions, installation delays in -- from 2023 and a slightly higher execution costs in Germany due to a slow transportation permits.
And the last lever to our profitability comes from our consistently growing service business. In addition to the operating leverage from growing sales, we expect the margins in service to revert to our normal levels over the medium term as the other turbine contracts run out and the share of more profitable Delta4,000 current contracts are starting to flow and to grow.
And this brings me to the one of the last slides, which against this background, I would like you -- to guide you through the guidance for 2024. We see 2024 as a year in which we made further progress in our profitability. We assume generally a similar pattern as in the last year, starting slowly and then building up gradually each quarter on activity and profitability.
We expect our order revenue to be between EUR 7 billion and EUR 7.7 billion, driven by our order book and expected order intake. We expect our EBITDA margin in the range of 2% to 4%. We keep our working capital guidance on the same level, below minus 9% despite a good performance in 2023. And we expect our CapEx around our usual level of EUR 175 million. However, also please note that this doesn't include any material growth CapEx in the U.S., which is going to depend on the order intake visibility.
Moving to the last slide before the Q&A. I would like to give you an update of where we are in our new initiatives in the green hydrogen sector. Remember, we started 2 joint ventures in the project development business and the electrolyzers manufacturing. Let me reiterate that we see a huge potential in the demand of green hydrogen and our strategy allows us to benefit from this growth while keeping our capital commitment risk very low.
On the project development side, I'm happy to confirm that the new JV company has been formed with Acciona and the new entity has a pipeline of over 50 gigawatts across U.S., Latin America and North Africa.
On the electrolyzer side, a new JV company was as well formed with Sodena. 50-kilowatt prototype is already in testing and good, promising results. And the development of the final 500-gigawatt stack prototype is on track in the next months.
In summary, I will say that we are on track, but it will take some time until we see results impacting our P&L.
And with this, I would like to hand over to Felix to open Q&A.
Thank you very much for the detailed presentation. And now, I will open the floor for the Q&A, and I'd like to ask the operator to open the floor.
[Operator Instructions] The first question is from John Kim, Deutsche Bank.
Three unrelated questions. On Brazil, can you help characterize for us this year and possibly next, what you think the market outlook -- how the market outlook will change from '23 levels? If you could speak to what you're seeing on weather patterns and competition from Chinese OEMs, that would be helpful.
Second question. On the U.S., you mentioned this as a priority market in '24. What initiatives or what sort of activity levels lead indicators can we look at to see if or when Nordex will start to win orders in that space or in that market?
And then last question on cost structure. Can you speak to us a bit about your outlook for wage inflation and logistics costs given what's happened with global supply chain and shipping costs?
Let's go with the first question. Let me take the first one. With Brazil, the situation is the market continues to be low from a contracting perspective, combination of low electricity prices, high interest cost, high CapEx is making that the market is low and is continuing. However, pipelines of projects, they developed. There is a substantial amount of customers lined up and measuring when the conditions in the market are going to be changing, reaching the required returns and the required PPA prices that will enable the projects to fly. We don't see that happening in the next few quarters. I would say -- cautiously, I would say, 2 to 3 quarters, but it's going in the right direction. It's moving in the right direction, and we can expect the Brazilian market to come back.
Unknown at this point in time when this will happen, but we do see the usual players lined up with mature projects waiting for the conditions of the market to be back at that high levels. So with this, I would say that expectations for the year are low and eventually, the expectations for next year remains to be seen, but are going in the right direction.
Regarding U.S., is a key market for us. It's the biggest market worldwide, ex-China. We used to have a market share there from 10% to 15%. And we had a plan to develop this market and to be part of that market. Our competitors launched a specific high net capacity factor products for mainstream U.S. We thought we had a business for proposal, but reality, we need to reassess and react and develop a similar product.
On the contrary, our product portfolio is very successful in land-constrained markets and as a proof of that is the market share in Europe. We are going to take that competitiveness into account in order to reach in Canada and in land-constrained parts of the markets in U.S. in the interim. So with both combined, we still plan to sell sizable volume in North America. At the same time, we are reacting to our competitors' products and basically, long story short, developing high net capacity factor machines, similar to our competitors to target U.S. market is a minor modification. It's basically a bigger blade for certain turbulent intercity class that you put in existing platform. And we are doing that as we speak. So once the product is back in competition for this very specific site conditions in U.S., we will expect to get our share on the marketplace. And for the time being, focusing in parts of the American market that demands high nameplate capacity factor machines. And regarding inflation?
Let's do this together.
But very much the wages inflation is true. We see that in Europe. We see that in North America. It's part of our guidance. It's part of our cost structure. So far, we have been able to pass through these inflations to customers.
That is true that in certain areas of the business, it has a temporary effect like in services. Because the inflation hits you today in the cost and you recover the revenue in the future. So there is a timing effect on the margin profitability in services, not long-term, but temporary. And other than that, I would say part of the guidance. Ilya?
Yes. So maybe you want to give more to some of us on the Red Sea and on the Suez thing, but before that, I probably used the occasion but I think we have not seen the supply chain and the operations as stable as last year for years. So of course, it's a project business, and it remains a fragile element, but the stability we are experiencing -- I think also the industry, not only Nordex, is very good. And that's also true for the costs.
There is always a new piece for us. I think this one we think is a handleable one. But the Red Sea, do you want to say 2 or 3 words on...
Well, very much. Red Sea impacts are impacting our profitability because you need more time. More time means more cost. I mean not delay this because I think we are good on that. But if the project lasts longer, you have more running costs and less profitability on the projects. So we expect this to ease and is part of the guidance.
We expect this to ease in the second half. If that is not the case, we might go a little bit upper or lower the medium range of the guidance. For 2025, we are not very concerned because we are already selling with two options, with and without, and majority of the customers are accepting that.
The next question from Vivek Midha, Citi.
I have a couple of questions. I'll go one at a time. On cash flow, firstly, so CapEx came in below your guidance for 2023. And while you're guiding for CapEx to be up in 2024, it's still below the original 2023 guidance. So why are we not seeing a stronger catch-up effect in 2024?
I think this is, well, first is cash flow management and rigorous management of the CapEx investment to the absolute required in order to protect free cash flow. I think this is the utmost priority for the management of the company.
Second is a timing effect, a temporary timing effect. And you don't see that recovery in 2024. Because I mentioned before in the call, this is all dependent on the CapEx needed for the U.S., the ramping up of the Iowa facility. I think we can do within a normalized CapEx, but the new blades that need to be signed and produced by kicking in '24 or in '25 and that's very much the explanation.
Understood. And my second question was just a follow-up on the margins. You commented that there's likely to be a slow start to the year. Is it possible at all to quantify how slow the start to the year is, presumably Q1 last year was particularly weak, but should we consider the first half is likely to be loss-making?
I mean, we don't guide quarters, but that's not our assumption. Our assumption is improving quarter-on-quarter, but starting from positive.
The next question is from Sebastian Growe, BNP Paribas. We will take then the next question from Sean McLoughlin, HSBC.
Can you hear me?
Yes.
Super. Can we just look at the competitive environment on order intake? Just to understand in a little bit more detail how the exit of one of the competitors has changed the competitive dynamics. I understand it's clearly -- well, both of you investors have had a strong order intake. I mean is -- how meaningful has that already become in Q4? And what kind of support, if you like, can it give to higher order intake through 2024 on a year-on-year basis?
Yes, not to underestimate the effect of having one large player in the market having not 0 because they have continued to sell. But of course, they have not been selling at the levels. It's speculative to say because they have clearly publicly announced that we will be impacting the market. So I would not dare to speculate when or how this will happen. What I can confirm is that for a short period of time, we are benefiting from a competitive intensity, especially in Europe, where we are market leaders where those other competitors are having a strong position. But we can clearly see that having 1 player less is improving the intensity of the competition.
These are different dynamics in other markets where Chinese players have a position, especially in Latin America and also South Africa and other markets and a totally different dynamic also in the U.S. and Canada. Specifically, to your comment, I would say that we are very recent in this, in the European markets, where essentially other competitors are at this point in time, taking the most part in the market.
Which helps the pricing and the margin.
Understood. And just with regards to the Slide 27 where you show that improving order book margin. I mean, what is the scope? In fact, given the current environment and the fact you benefit -- I mean, could -- do you expect this to be a margin positive environment compared to your current backlog?
27, you mentioned?
Yes, that's where we show the order improvement for the legacy -- and the other ones go on.
So that is -- yes, that is from I think 27, what's the competitive environment, as I said before, speculative on when and how competitors are going to be back in the market. And again, they have probably stated [indiscernible]. So with the current information that we have is how we have built the scenarios. And of course, we'll have to revisit those if the situation materially changes.
Yes. But we expect, I mean, basically, the market should grow and should absorb even the new competitor coming to the market when that comes, if that comes, when that comes.
Very clear. And another question on free cash flow. Positive free cash flow for 2023. The balance sheet issues have been fixed with good net cash position coming out of '23. Clearly, margins improving on high volume. Is there any reason for us to assume that you shouldn't be free cash flow positive going forward?
Yes. I'll take that one. For the current year we're in, and maybe José Luis between you and me for the following words. And I think the short answer is no. If you take the building blocks of the guidance we've been providing and you go through -- take midpoint then, of course, from an operational perspective, working capital being equal, you will probably come to, for this year, a neutral, slightly negative cash flow. If we do even better on working capital, then that reverts.
I guess, not guiding, not -- a real -- well, we're about -- for '25, again, we believe José Luis is going to be stronger again than '24. So if this is a neutral minimally negative or positive free cash flow that is only to improve. So I repeat the short answer, no, there's no reason that you should see that.
No, I think the short-term message is stability and is a step by step improving. And then a quarter more, a quarter less, I think it's not that relevant in the journey. The important is the journey that we are in, that we expect the same trend to continue in '24, '25, '26. '26, of course, is long term, but '25, we start to see some visibility about that.
The next question from Constantin Hesse, Jefferies.
My first one will be a follow-up from Vivek, which is basically the margin ladder here, but instead of starting off, I'd like to have a discussion on potentially where it ends this year. I mean given the current legacy backlog, you have about 1.5 gigawatts and you're obviously delivering a logical, most of it this year. What kind of let me -- we obviously had a big swing this year from minus 900 basis points to plus 300. So could we be ending up this year towards the mid-single digits of 5%, 6%? And then is there a reason to believe why you shouldn't be at 8% already in potentially Q1 or Q2 next year? That would be my first question.
No, thank you for the question. I mean, we don't disagree with you, conceptually, because we have legacy orders, 1.5 gigawatts. This is draining profitability. We expect extra volume in the future with Europe growing. U.S., we need to succeed. Eventually, Lat Am will recover. So this extra value -- volume for next year should give, as well, a profitability jump substantially.
Then we mentioned that our 2023 is impacted by temporary topics like the 100 turbines delay from 2023 to 2024, like the temporary impacts of the Suez Canal, higher cost to executing in Germany. Hopefully, those issues will not repeat next year. And this is another profitability.
And the fourth lift is the normalization of the service margins that, not sure if '25 or middle '25 or we expect medium term, this will contribute as well to lift the profitability towards the middle -- midterm 8% target. So those are the 4 building blocks.
Is that going to be Q1 '25? I don't think so because Q1 '25, we are going to have always a dip in volume and high end utilization. But we expect '25 another substantial jump in average profitability versus 2024 in the full year.
That's understood. So maybe just a little bit of color on the volume side of things. And Patxi, maybe over to you on the order intake momentum you're seeing in Q1 as well as the pricing discipline. Are we seeing a better momentum this year compared to the start of last year? And if you could comment on the pricing discipline, that would be great as well?
Yes, we expect we are, of course, in the 2/3 of the quarter already. So still -- and this is a great business. But how I see the quarter, the quarter's going to end well and certainly above last year's result as well. The good order momentum continues. So the first half of the year, we see also the momentum continuing.
And from a pricing perspective, as you mentioned, we see also competitors behaving well in that sense, being disciplined, same as we are, trying to maximize both prices and margins of the orders that we take. So good momentum continues.
Understood. Okay. And then lastly, third question would be on warranties and provisions. I mean, just to get any color that you can give this En G announcement. I understand that all of that is already included in your guidance. Is there any downside risk here? And any color on the more material warranty provisions that you booked this year on the EUR 109 million?
Let's do together with Ilya in the En G announcement. It's a little bit a surprise to us because this -- we are under nondisclosed agreement. What we can comment there is that it's a very important and valuable customer for many years and that we are -- we did several projects in Europe and U.S., and we are currently working with them in other projects in Europe.
All the effects are already included into the 2023 figures and into the 2024 guidance. We don't expect further deterioration coming from this discussion. And it's very -- I would like to reemphasize that this is not affecting current products. It's not affecting Delta4000. It's a discrepancy in all products despite technology of a special turbine type of only a few smaller numbers have been sold. And unfortunately, we are negotiating the outcome, but we don't expect this to impact our 2024 guided figures.
Sorry, do you mean then José Luis that we could see a '25 figure -- a negative impact in '25 from this still?
No, no, no. All the forecasted impacts, we have already in our balance sheet.
The next question from Ben Heelan, Bank of America.
Yes. I just wanted, first, to ask a clarification. I just wanted to understand, in terms of the poorly performing contracts, so will they be largely completed by the time you get through the end of '24? That's the first one.
And secondly, we've heard from some peers that the environment in Germany has gotten a lot better in terms of the auction process and the outlook there. Could you maybe comment on that a little bit? And then into 2024, the revenue growth that you've guided for was definitely stronger than what I was anticipating. Can you talk a little bit about the breakdown there between the services and the installations of turbines, et cetera?
Okay. The first one is very simple. It's -- yes, that is the assumption. We expect that 90-plus percent of the low profitability orders will go through the P&L within this year, and that's part of considering the guidance. And regarding Germany.
Yes, in Germany, I would agree with the statement. We also see that the conditions are improving from a permitting perspective, north of 7 gigawatts of permits were awarded last year. We expect north of 10, easily north of 10 gigawatts of PPAs auction this year. So in combination available volumes and available orders to be awarded are going to be significantly increasing. And as a market-leading position, we expect to harvest that growth and hence improve also our results versus previous years. So yes, situation in Germany is improving.
And regarding projects and service, I mean, generally speaking, the service business should grow around low-double digits, high-single digits on a year-on-year basis. I don't really have here the total breakdown of the revenue growth in projects and services.
No, but I think, Ben is asking the calibration between project and services. Do you plug in a service number for '24 and use of some EUR 750 million and you have the rest then you got to get picture. That's how the distribution is.
The next question from Ajay Patel, Goldman Sachs.
I wanted to ask how much of -- is there any LDs with the capacity that rolls over into 2024? And is there any sense of the downward impact that legacy project has had for '24?
And then lastly, do we have any sense of what percentage of the backlog is legacy versus ones that are consistent with 8% margin target?
Yes. I think this, we still have some in our guidance and forecast. Nothing compared to last year. But it was heavily impacted by delays. This year, we still have some. But I don't know. I don't have the full detail with me here, but in the range of less than 1% of revenue, I think, in that -- a little bit even less than that. And regarding the backlog of low profitability, it's 1.5 gigawatts that we plan to execute this year.
The next question from Sebastian Growe, BNP Paribas.
Hope now you can hear me. The first one would be on the order intake. I heard your comments around specific markets. I would just like to touch on the sort of bigger picture here, what you would see for '24? We had obviously a pretty strong '23 order intake. And the question simply is in the wake of the positive being, I think, especially the German market share that you singled out a couple of times now, there should be pretty material catch-up, I think, for you guys in this year '24. So would it be a fair assumption that order entry should be up from what you can currently see over '23? If you could start there.
I will essentially be guiding on -- as you know, we never do, but I can reiterate my comments that I see the good momentum continuing from Q1, Q2. And yes, and I think that will be enough for you to have a feel of how others may be better.
Okay. And that wouldn't be sort of underlined by the fact that we still have lower power prices, potential rich-burn of one competitor later this year that has temporarily ceased the selling of its 5-megawatt turbines. So that wouldn't sort of provoke any [indiscernible] that you enter.
We don't see -- I mean, power prices are delaying order intake in Latin America, that is true, and in Brazil. In Europe, it's true that our prices are decreasing but we don't see projects being postponed so far. And hopefully, this trend continues. But so far we see zero delays in project execution due to power price temporary decline.
Okay. And then quickly on region markets. So you made some comments around the U.S. and then Canada. You have not, I think, mentioned Australia at this juncture. So could you just comment on what you're seeing there and if there's a good likelihood to eventually score a project somewhere during '24?
Yes. Australia is a very attractive market with good volumes that will continue in the midterm and this is our view on the product from an OEM perspective, so hence, the competitive intensity, lower as well. With somebody's entry, essentially with great cold, with some cycles that from our selling is longer than average. So we are actively working in the Australian market.
We will see the results more towards the midterm rather than the short term. But yes, this is a capital market for us and we active in the -- and we can expect good results probably more towards the midterm rather than the short term.
I'd say a big, I would say, game changer for the perception of the brand in Australia was receiving the approval to interconnect McIntyre, which is a giga-scale wind farm and where Nordex performed amazingly well with the technical capabilities, and this has somehow brought high interest from many other customers that are very interested to cooperate with us to eventually replicate that success. And Canada, I would say Canada, there is very good momentum and our turbine fits perfect there. U.S., very good momentum as well, but we missed temporarily the two going forward. Mainstream high-capacity factor sites that we are trying to catch up rapidly and concentrating more on areas where land-constrained turbines are needed.
And there, we can expect very good outcomes also in the short term [indiscernible] we expect to sell significant volumes in the Canadian market.
Okay. Sounds good. And then the very last one for me is just on the margin guidance. I think you sounded very, very optimistic on earlier calls with regard to the 8% EBITDA margin target. Now the midpoint of the '24 guidance range is 500 bps short of that. Obviously, I think it was a very positive surprise around the revenues that you're having on mind now for '24. So the question that I simply have is what is sort of baked in the bridge when it comes to the legacy projects? You mentioned the 1.5 gigs, but maybe you could also give us a bit of an idea how 0 or negative they are.
And the second then around in the Red Sea issues that you have eventually factored into that guidance? Because I kind of just get the impression that, at least the midpoint would be very much an attempt to play it as safe as you possibly can at this juncture.
Let's start with the second. I think the assumption for Red Sea are included in the midpoint of the guidance, provided the situation improves in the second half. If the situation does improve, we will deteriorate a little bit in the second half. And I don't know, it's a double-digit number and not close to the three digits. The potential worst case deterioration that we see if situation doesn't improve in the second half. And in 2025, we don't expect an impact because we are already quoting with the option with Red Sea and around Africa. So 2025, it will not be impacted.
The legacy orders 1.5 gigawatts, I mean those orders are not at 0 marking, let's put it that way. Those are positive contribution margin, but not to the 18% -- or to the 8%. So are those at 0 positive contribution margin for sure. How much this is dragging profitability, cannot be very specific here, but substantial money. I mean, high-double digit would be, let's put it that way.
Extra volume is the biggest lever. I think we have substantial available capacity and if we manage to sell more and to use this capacity, this could substantially improve profitability. The extra cost in 2024 coming from the delays in '21 and the temporary issues in Germany, again, let's say, mid-double digit plus/minus and normalized service margin, you can do the math.
The next question from William Mackie, Kepler.
Yes, 3 questions. The first one, just to pick up on your comments about available capacity. You produced more turbines than you installed last year. Can you maybe describe what your central case thinking is for the volume of installations that you can achieve in '24 and the sort of impact that we will see as the mix shifts to Europe and away from Latin America?
And when we think about the capacity just you have capacity, but to what extent in Europe do you think there's available capacity in the logistics value chain downstream? Because not just you, but the whole industry is going to be chasing the movement, logistics and installation services of many of your suppliers.
Indeed, and this is why in Europe, we are facing inflation and certain temporary adaptations to move goods to the sites with -- Germany is a good example. I think we are working together with our competitors and the industry and the government to remove those roadblocks. The government, of course, is fully supportive. But temporary, transportation is not 100% flowing.
Other than transportation in Germany, at this point, from a product availability perspective, I don't see shortages of capacity. For a growing market, our level of utilization of [indiscernible] plants is very low because unfortunately, we have low level of activity in the first half coming from a very backloaded end in order intake. So we'll start to ramp up rapidly in the second half, and you need to produce in the second half at a pace of, I don't know, 12 gigawatts a year.
So if we manage to sell more evenly within the year and to produce more evenly within the year, we have free capacity available. That is not just generate margin, but about utilization and utilization costs. Latin America, as you know, is in a slowdown mode. We expect this to recover, and we have available capacity there. But we have plenty of available capacity, let's put it that way.
Sorry, two things I didn't pick up. The first was the installation units that you might achieve compared to the 1,429 in '23. And also, I think you made a comment just then about second half production rates, implying -- I think you mentioned the equivalent of 12 gigawatt annualized capacity output. Was that correct? Sorry.
I would say installations, we didn't go into that detail. I think the profile will be similar than last year. And without guiding numbers, the numbers should be in the range, of course, with higher nameplate turbines, but we don't expect a big increase in numbers of installations.
When we talk about blade production, the blade production is quite stable over the year. Of course, it's driven by the mode. And when you talk about [indiscernible] production, it's driven by working capital management. So you try to produce in the last minute that is required for the project in order to optimize the working capital manage.
As the sequence of orders in the north part of the world. During winter, the activity is low, there are two effects during winter. The activities is very low compared to the spring/summer unfold. And if you analyze our order intake evolution over here, there is always a big jump in July before the summer break or around the summer break and another big jump before Christmas, which triggers that the activity to assemble those [indiscernible] is always substantially higher in the second half than in the first half.
As the activity is slow in the first half, you have low revenue, low margin, high underutilization cost. And in the second half, you have high volume, high margin and very good -- and no underutilization cost or very low underutilization cost. Those are very much the levers that move the P&L evolution quarter-on-quarter.
That's great. The second question relates to the U.S. or North America more generally on two points. Firstly, you've mentioned the need to prepare a new machine and then the Board will assess the reopening of the factory dependent on order flows. I mean what sort of level of investments are you starting to think about that you might need to make in nonrecurring development expense and nonrecurring capital expense and tools fixtures to be ready to go into the market?
And then more specifically on the blade side, what are you thinking about your relationship with TPI on the outsourced blades for the region from Mexico, which I think comes up for renewal later in the summer?
Yes. I would say, you are right. I think regarding our initial plan was to set U.S. market with existing products and reopening the Idaho facility. That CapEx was -- I think, we could deal with that within the 2% to 3% CapEx on revenue. If new moulds are required, this extra CapEx is going to be required, we haven't assessed that yet. Although what we expect to do is a similar thing that our competitors did, which is a minor enhancement of existing machines of all proven track record machines. So it's not developing any machine. It's developing a new blade for an existing machine.
Nonetheless, not to underestimate the CapEx in moulds, in transportation tools and so on and so forth. But at this point, we don't have the detailed analysis. It's something that we think the balance sheet of the company can deal with, but is -- we don't have the detailed announcement.
Regarding TPI, is a very good supplier. And the Mexican factory, to be decided what we are going to do with that, we don't have yet made a decision. What we have done is extended contracts with them in Turkey and in India. And we are very happy with those two TPI factories.
The very last question area relates again to the provisions. I mean, if I strip out the EUR 109 million that you took exceptional on legacy technology Q4, your underlying provision rate is still 3.8%. And on an annualized basis, against sales. On an annualized basis, it's still much lower than your peers. How should we think of -- development going into '24 and '25? And how are you providing against your Delta4000 and new related technologies or relatively new?
I think Ilya maybe goes into the details. On the concept, we are not happy with that nonquality cost and provision level. I think the industry needs to go back to the previous times and our quality program calls for reducing the nonquality costs over time in the next few years. So 3.6% is slightly less than from our other market participants. But for me, it's not good enough, long-term. I think if the sector keeps the mindset on focus in existing platforms, very important the quality, the quality programs, the reliability and so on, that should be possible. In the case that the sector goes to another [indiscernible] technology, that has always consequences because you're selling mature products. But we keep selling mature products, focusing in the quality enhancing programs, solving the legacy issues that we have here and there. This, in the long term, should be part of the profitability recovery of the company.
Okay. Thank you very much. Now this closes our Q&A session. And I'd like to say goodbye, but the last words is our CEO, José Luis, for the final comments. Please go ahead.
Thank you very much. Let me outline the takeaways from this year. The first one, very important, policy momentum remains strong across Europe, U.S. and our home market, Germany, which are supporting our expectations of continued sales growth. 2023 was performed as we expected with improving sales and margins. At the same time, we started the year with a healthy balance sheet and cash levels. Our margin outlook for 2024 improves as we did on 2023, in line with our road map 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 to our midterm target on the back of volume growth, margin improving, growing service business and as last mentioned, quality improvement long-term. So thank you very much for your participation in the call. Wish you a nice afternoon and see some of you, hopefully, at the WindEurope fair in Bilbao. Goodbye.
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