Nordex SE (OTCPK:NRDXF) Q4 2021 Earnings Conference Call March 29, 2022 8:00 AM ET
Company Participants
Felix Zander – Head, Investor Relations
José Luis Blanco – Chief Executive Officer
Patxi Landa – Chief Sales Officer
Ilya Hartmann – Chief Financial Officer
Conference Call Participants
Vivek Midha – Citi
Ajay Patel – Goldman Sachs
Constantin Hesse – Jefferies
William Mackie – Kepler Cheuvreux
Sean McLoughlin – HSBC
Anis Zgaya – ODDO BHF
Felix Zander
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 today. Our CEO José Luis Blanco; our CFO, Dr. Ilya Hartmann; and our CSO, Patxi Landa will guide you through the presentation, sharing information about 2021 and our expectations for 2022 with you. Afterwards, as you have heard, we will open the floor for Q&A. I would like to ask you to limit yourself up to three questions.
And now, I would like to hand over to our CEO, José Luis. Please go ahead.
José Luis Blanco
Thank you, Felix. Good afternoon, everyone. As usual, let me start with the key highlights of our last financial year 2021. Our final results are in line with the preliminary results that we have published on March 9. We look at sales of approximately €5.4 billion which was about 4% higher than the top end of our revenue guidance.
We were able to close the year with an EBITDA margin of 1% in line with our revised items and despite all macroeconomic headwinds impacting our sector and the wider market. Our working capital was negative 10%, again, much better than our guidance. Ilya will talk about this later in the presentation.
We look at the 32% higher order intake in 2021, with almost 8 gigawatts of orders on the back of a very successful Delta4000 platform. Vast majority of our new orders are consistently for the Delta platform, which also helps with our margin profile and to profitability.
Our installations continue to raise, intending with our sales and order book growth, with an annual growth of 20%. Last year our latest turbine 163/5.X was awarded with a gold medal by Windpower Monthly, which is one more proof of our industry-leading onshore product portfolio and our strong capabilities in research and development.
Finally, let me reiterate recent events in the Ukraine have been extremely sad. We have a team of 20 people there. We are doing our best to help them in any possible way. Unfortunately, the conflict has really shaken the world and will have direct and indirect effects on everyone and many industries including wind and us. But let me cover that later in the presentation when we discuss the strategy and outlook for 2022.
If we move to the next slide, as you can see, Nordex has been consistently growing for the last three years, with market share growing from around 7% to around 14% now, based on the Russian Wood Mackenzie report for installations between January and November 2021.
We are placed number two in Europe region, which is very important, because it’s our main region on top of — is the region with the best improved outlook due to the recent events and geopolitical situation around Ukraine and number four in Americas. Our strong momentum in order intake should ensure that we will continue to grow in 2022 and keep improving our market positioning.
If we move to the next slide, in operations, let me provide you with a quick overview of our operational performance in 2021. We installed more than 1600 turbines in the year, which is 6% higher than the previous year. And as we move towards larger turbines every year, this translates to 20% more installations in terms of megawatts.
This year, again, majority of our installations with 58% were in Europe with North America accounting for 23% and the LATAM region accounting for 10% of the total installations. Rest of the World with 9%. During the year our nacelle production improved by 16% of which more than half produced in Germany with Spain being a close second. Nacelle production in India is also ramping up nicely and should increase further this year. Last our in-house blade production improved by 9% with two-third of blades been produced in Germany and in Spain. This might change going forward as part of our footprint reconfiguration plans.
With that let me hand over to Patxi.
Patxi Landa
Thank you very much, José Luis. We closed 7.9 gigawatts of new turbine contracts in 2021, up 32% with respect to 2020. 58% of those orders came from Europe, 31% from North and South America and 12% from Asia Pacific. We received orders from 22 different countries and the largest markets were Brazil, Germany, Finland, Australia and the USA. 83% of the orders came with a Delta4000 turbines. It needs 4- 5- and 6-megawatt configurations. And ASP increased to €0.72 million per megawatt in full-year 2021 and to €74 million per megawatt in Q4, up from €0.70 million per megawatt in the same period last year.
Service sales amounted to 8.6% of group sales during 2021 with €468 million and an EBIT margin of 16.6%. Fleet under contract stands at 27 gigawatts with an average availability of 91.1%. The turbine order backlog grew 20% to €6.2 billion at the end of 2021 and service order backlog grew 8% to €3 billion for a combined order backlog of € 9.2 billion at the end of 2021.
And with this, I hand over to Ilya to go through the financials.
Ilya Hartmann
Thank you, Patxi and welcome also from my side. So now let me take us through the 2021 financials, and I start with the income statement. So our sales grew by 17% to €5.4 billion basically on the back of a high level of execution as mentioned by José Luis, and in a very tough environment, who also said that this is slightly better than the upper range of our sales guidance that we gave originally for 2021 and later.
Our gross margin stood at around 15% compared to 12% last year. Please keep in mind, that our gross margins in 2020 include many COVID-related costs while our gross margins in 2021 include the impact of the extreme cost inflation and increased logistic costs especially in the fourth quarter.
And going forward, we hope that these effects are mitigated and our gross margins will return to normalized levels in the next couple of years. We managed to achieve an EBITDA margin of around 1% in line with our revised guidance. However, as we have mentioned just a few moments ago, this was significantly impacted by the ongoing inflationary pressures and the supply chain disruptions. And for comparison let me point out that our EBITDA in the previous year included the profit on sale of our European product development pipeline to RWE, which is reflected in the other operating expense line item in 2020.
So jumping to the next slide the Q4 numbers. During that quarter, we recorded almost € 1.5 billion [ph] sales similar to the performance in Q4 2020. However, our gross margins decreased in comparison, as we account for the extra costs partly coming from provisions for the collapsed turbine in Germany and partly due to some cost inflation topics as mentioned and also LDs booked as a result of some delays.
That brings me already to the balance sheet. We ended the year with a — I would say a healthy cash level of €780 million. So we now have a net cash position of just around €420 million and an equity ratio of almost 26% thanks of course to the capital increase carried out in the middle of last year. As a result of this, our balance sheet is much stronger and in a much healthier state, especially when now tackling those ongoing volatilities in the sector and beyond.
During the last year just to remind us, we reduced our current liabilities by more than €600 million. We’re paying the Schuldscheindarlehen and canceling the state backed RCF facility. Our immediate next payment is the high-yield bond of €275 million, which is due in the first quarter next year.
So and as I’ve mentioned before in other occasions we keep exploring our options, refinancing or repaying subject to market conditions that can optimize our capital structure. That brings me to the working capital slide. Ratio continues to be quite tight as José Luis mentioned minus 10.2, compared to minus 6.3 at end of 2020. That improvement was mainly driven by reducing our inventories because of those higher installations and better order intake compared to the previous year.
So overall, we have stayed clearly below our guided numbers for the current year and we continue to expect a tighter working capital level in line with the past few years but want to be on the side of caution.
That working capital slide brings us right into the free cash flow calculation on the next slide. Those from operating activities stood at around €130 million at the end of 2021, much higher than the previous year and mainly driven as you can see by the further tightening of the working capital.
Cash flow from investing activities we see that later was largely in line with our supply chain optimization program. And so as a result of better working capital management and the growing operations, we ended the year with only a slightly negative free cash flow of give or take €25 million compared to a negative €120 million in the previous year.
So finally, our cash flow from financing activities stood at around €60 million and that reflects again the aforementioned cash proceeds from the capital increase offset by repayment of the RCF and the Schuldscheindarlehen/swap to equity of the shareholder loan.
CapEx next slide, total investments around €170 million in 2021, which was similar to the spending in the last year’s 2020 years period. So the focus of our investments also remained pretty much the same on mostly blade production facilities in India, tooling equipment covering our ongoing high installation activities.
That brings me to our capital structure slide. Of course, net debt ratio EBITDA in a net cash company is not all that purposeful but the equity ratio is. So both of them significant improvement also again because of the capital increase and that is basically the token of the fortified balance sheet now an equity ratio of 26%.
So when summarizing from a finance perspective, three messages. We finished the year largely in line with the revised guidance and that was challenging enough. Second, we will continue to focus on risk management margins, tighter working capital management, and preservation of cash during this year.
And then last but not least, we’ll see this in a moment in a bit more detail recent unfortunate events in Ukraine have created another set of direct and indirect challenges. So we’ve set up a task force to identify and contain those risks, but the exact impact and especially the indirect impacts will be hard to ascertain today. So it is another challenging year still ahead of us and we can also expect to have a soft start into this year and a soft Q1.
So much for the financials and then there’s two slides on sustainability, which plays an important role for us. It’s anchored in our DNA as a wind turbine manufacturer. And, of course, our whole business model is based on that. So we have adopted a new sustainability strategy 2025 based on a comprehensive materiality analysis and stakeholder engagement process. So, the core idea here is to have a topic more — even more transparent, set high sustainability targets and of course pursue them.
And then, one more slide on this, related to the EU taxonomy which is also and has been a key topic for us. So we are basically showing here the compliance with the new obligations under the EU taxonomy regulation. And that is basically from my side and I will give it back to you José Luis.
José Luis Blanco
Thank you, Ilya. We move on to the next part strategy and outlook. As mentioned during the last quarter, the macro environment and the resultant political focus is providing the perfect background for a massive growth, the renewable sector over the medium term.
We expect the long-term demand for wind to shore [ph] in the medium-term, if governments across the world are serious about the main two topics. First, is ambition to achieve net-zero status by 2050, for this to happen the current wind market needs to be at least three or four times larger than today. And second, energy security concerns.
The recent and unfortunately ongoing war in the Ukraine puts the energy security topic right in the front and center of the European agenda. The recent paper published by EU called REPowerEU set ambitious targets for wind, 480 gigawatts by 2030 will mean at least 48 gigawatts every year from the current 20 gigawatt size market today.
Of course this cannot be achieved without easing the permitting process and supporting and strengthening the local supply chain for true energy independence. However, it’s a step — great step in the right direction.
The effect of the two factors are already visible in a variety of forms, maturing PPA markets repowering support from green hydrogen, EU green deal et cetera. Even if this ambition targets are half achieved, we could witness significant demand growth for the wind sector.
If we move to the next slide, while the long-term outlook is great, we continue as mentioned face multiple shorter challenges. First was COVID. COVID disrupted the world supply chain in 2020, this was followed by high inflation and shipping challenges in 2021 partially as the supply chain across the world struggling to ramp up post-COVID demand slump.
Unfortunately then, when things were about to be stable, on a high cost level and price level but stable, Russia invaded Ukraine last month which has destabilized specific commodities and political agendas, especially within the European Union.
As the war is still ongoing, it is difficult for us to estimate its full effect on our operations today. Nevertheless, we will try to provide you some color for your benefit. I think it might be useful to divide the impact on Nordex into two main blocks, direct impacts and indirect impacts.
Let’s talk first about the direct impacts. Let me note, that our direct exposure to Ukraine is small. We have planned for roughly 280 megawatts of projects for revenue recognition in 2022 in Ukraine.
This might not happen now. And we might lose the related margins if we are not able to replace with any other project in the region. There is a very little service revenue in Ukraine, so minimum risk for our service revenue. The impact on working capital and cash balances is also small, but any write-off could affect our margins in the year.
Let’s talk about Russia. Russia on the other hand, we have no direct sales working capital or cash exposure. However, we might experience some disruption in the shipping sector as some of the Russian ships or Russian chartering agencies become unavailable and this could add cost to replace. We also have a few steel suppliers in Ukraine, which we will need to replace. This is manageable but can lead to higher costs.
Now let us talk about the indirect impacts. What we are more concerned is in the other indirect impacts that might not be clear today. For example, general slowdown in order intake as we are facing in Q1. Further supply chain disruption if any of our suppliers is impacted by the war directly or indirectly and this subsequently is going to impact us.
Possible delays or canceled lease are hard to estimate today and very important high volatility in some commodities again. But let me park this and explain this in more detail in a minute. In the end, we can only control our response to this situation. We have immediately set up a crisis team to monitor and identify the risk and plan mitigation actions wherever possible. We are also constantly evaluating the full impact on our internal budgets and look for ways to offset these challenges. But as mentioned, it’s too early to comment beyond that today.
With that, let me move to the next slide. Let me first note that the market has been less volatile since we reported our Q3 results. However, the situation changed since the war started. Some commodities are now showing a massive increase in pricing again. For example, steel and bunker fuel are up 20% to 30% in a matter of weeks. It certainly affects everyone in the industry and we hope that this is temporary. Keeping this in mind, we need to wait and see where these prices settle eventually in the long term.
In the meantime, we continue to reduce our risk wherever possible the escalation clauses leaner scope back-to-back passing on extra costs. But let me stress again as such a fast change are difficult to hedge against in the short term.
Moving to the next slide and approaching the end, while we cannot control the external environment we operate in we certainly can control our internal environment. We are constantly evaluating our supply chain set up to ensure that there is competitive as part of this footprint [Technical Difficulty] we have decided to discontinue our production in a blade facility in Germany and nacelle facility in Spain. This will have some impact on our margins in this year, which will be offset with potential savings over the next two to three years.
With that let me move to the guidance slide. We expect to record sales of €5.4 billion to €6 billion with an EBITDA margin in the range of 1% to 3.5%. As mentioned on our last call, we expect a slightly better performance than 2021, despite the cost pressures. However, our performance will be more back-ended loaded compared to last year, particularly due to the back-ended loaded revenue profile and front-loaded inflationary costs and lower margin orders.
We improved our working capital target slightly to a negative 7% compared to our last year target of negative 6% and we maintain the same level of CapEx guidance of €180 million. However, as mentioned, this year our guidance is subject to two topics: first, our guidance does not include any costs related to footprint reconfiguration, which I have just mentioned, as we are in discussions with workers’ council and workers representatives at this moment, we cannot provide an exact estimate of the cost and time for that.
Second, our guidance does not include any impact from the ongoing war in Ukraine. While we do have a preliminary view on the direct impact on our sales, today we have limited view of its impact on our margins, especially any indirect impacts. But we will continue to report on it and provide you with more analysis on every quarter.
Moving to the last slide of the presentation, the mid-term strategic targets. Given our consistent growth in the last three years despite the challenges, we have been able to cross our targets of reaching and maintaining sales above €5 billion and capacity above 6 gigawatts. Unfortunately, our margins have been severely impacted due to a very difficult macro environment. The war in Ukraine adds risk to our margins in the short-term but also accelerates the requirements to shift to wind energy quickly in the medium-term as the solution to derisk energy supply and to reduce inflation. This has the potential to add additional momentum, the financial win over mid-term we believe that we can reach a normalized EBITDA margin of 8% once the macro environment has stabilized with good demand momentum and successful cost pass-through to the end customers.
And with this, I will hand over to Felix for Q&A.
Felix Zander
Thank you very much, and thank you very much José Luis. And operator, please be so kind and open the call for the Q&A.
Question-and-Answer Session
Operator
We have a first question. It’s from Vivek Midha of Citi. The line is now open for you.
Vivek Midha
Thanks very much, everyone. Good afternoon. I had a couple of questions just understanding the path of margins over the course of the year. So your Q4 EBITDA margin is negative, and you mentioned the provisions from turbine collapse among other things. So could you give us as much color as you can on one-off costs in Q4 and this year, such as the burden from the turbine collapse and also liquidated damages?
And then secondly, in order to understand the back-end loading that you mentioned, could you maybe quantify how burden the EBITDA margins are likely to be in the first half? So, are you likely to be breaking even on EBITDA? Thank you very much.
Ilya Hartmann
Yes. So, I’ll probably take both of those. So, first on the Q4 EBITDA margins, and it’s true — Vivek thanks for the question — that the German incident on the turbine is one of the driver one out of three. It is that the LDs you mentioned. And of course, in Q4 one of the hits substantial one was the costs and the cost inflation that we had mentioned in our call in the fall. So that was one of the key drivers for the Q4 numbers too.
In terms of specific numbers around the turbine incident, we would prefer not to be very specific here on the call, because we’re in ongoing negotiations with basically three ends, customers, supplier and insurance companies in that environment. So, I would say to give an idea between the cost impact, so the cost increase impact on one side in the LD and the incident provisions, if you distribute this like 50-50, I think you get a good idea how Q4 was impacted.
Then, to the other questions. The other question on the profile of the year to come or this year, yes, as José Luis mentioned, it’s back-end loaded. We don’t guide quarters. But I think for understanding how that guidance came about, it is fair to say that Q1 and Q2 are basically, let me call it, the family or in the same box as Q4, not that much, because we don’t have the one-off effect and we have a tick up. But basically to digest in the P&L of 2020 those orders that came into our books last Q3 or before they were run based mainly through the P&L in the first quarter of this year.
And then, we should see an uptick, because of those two effects. One being that then again Q4, as José Luis talked about the price increases, healthier orders will go through the P&L. And secondly, on absolute terms, we’ll also take — unlike 2021 this year sees a more stacking up approach also on the top line. So last year the quarters were relatively even. This year the expectation is a bit different. So that also will pull up — should pull up EBITDA in the second half of the year. But again the start will be softer.
Vivek Midha
Understood. Thank you very much. I’ll get back in the queue.
Operator
The next question is by Ajay Patel of Goldman Sachs. The line is now open for you.
Ajay Patel
Good afternoon and thank you for the presentation and taking my questions. I’ve got — my first question is around assumptions. So, we have a guidance for this year. It’s still a little bit unclear to me given how much volatility we’re seeing in things, what are you assuming in terms of raw material costs within that guidance?
Would it be where the situation was prior to the escalation of geopolitical risks or is it somewhere in between? Just give us a bit of color there. And what are you expecting in regards to transport and logistic costs and then the supply disruptions we’re having and some normalization in the second half of the year or the current conditions staying exactly the same for the whole year? Just trying to get a sense of where we are relative to where the world is at the moment?
And then on the second part if you could give us a little bit of clarity, I noticed that when you set your objectives and targets and then you took your medium term targets, you used a revenue number of around €5 billion. And I was just wondering with the comments you made about security supply, the scope of additional orders that could come in from Europe, why would you have a decline in revenue or a decline in deliveries over the medium term? Just if you could put that context for us.
And then just to slightly understand maybe I missed the answer to this but I know that you couldn’t be specific to the incident cost for Q4. But just what was the one-off in its entirety for Q4 2021 so that we can get a better — so I can think about the Q1 and Q2 picture which you referenced quite nicely in the answer to the last question. Thank you.
José Luis Blanco
Okay. So, regarding — thank you for the questions José Luis speaking. I will take the first two questions and then Ilya, the third one. Regarding the first question, yes, you are right. So, somehow generally speaking we have cost of the company block let’s say for the next three quarters. We always have a risk that some suppliers might not be capable to carry on and you need to rescue and we are exposed to the volatility in order to secure capacity for Q4, which might or might not have an impact depending if situation is going to normalize to pre-war levels, which is the assumption of the costing of the company for Q4.
Regarding this volatility and how to deal with that in project execution, of course, is challenging although we are entertaining discussions with customers for order intake as well. We are discussing there are different pricing margin in order to deal with the risk, limiting scope, giving open certain cost items, and working on cost-plus basis until we see more stability on the costing side.
Regarding the strategic targets, I mean you are right, I mean we have exceeded two out of the three strategic targets and we expect the volume in Europe, especially in Germany to increase substantially versus the previous targets. The company enjoys a healthy top two position in Europe with competitive products, very good things, capillarity in the marketplace. So, if the market grows in Europe, we should grow with the market.
On the other side, compared to the targets, we were counting on big volume in the US that might come, but today there is no policy in place for that. So regarding strategic targets, we are, I would say, more cautious about the profitability. And when we will get there, I think once the market stabilizes, following what the competitors are doing there is no reason we should not be there, if the competitors improve similar to their mid-term targets.
On the revenue and on the capacity, I think we are very much sure that we will exceed those figures. Profitability, we will go with the market very much. I don’t think it’s the reason why market should not accept higher prices and margins.
I mean, it’s somehow difficult to understand that a sector where from the supply side you see shipping companies, steel companies record high profits. On the customer side, better outlook in the energy prices and we in the middle as a sector in losses.
That’s not healthy, not sustainable. Even from a political environment, this is — it should be a matter of concern. If we want to decarbonize the economy and get to net-zero society needs healthy companies to — for that mission. So, Ilya?
Ilya Hartmann
Yeah. On the follow-up to the turbine incident, let me try to be helpful without needing to be too specific here, in a public call different form differently. So I think three comments there [Indiscernible].
I think the RCA of the incident is continues to progress. And I would think that, we have — if we do a comparison I’m more optimistic than maybe we had — we were at the beginning of the incident, how the solutions might work.
Then secondly, to steer a bit more is, we believe that with those provisions and against that first comment I made that with the provisions we have looked altogether for this incident, we feel as today and as we sit here, quite comfortable.
So, we wouldn’t today expect way more surprises that we have to take into the P&L this year. That’s today’s status. And then, to give you at least a range on that question, let’s say, if you’re between the LDs and that incident think about a low mid-to — low to mid-double-digit number as a package, I think that gives you an orientation.
Ajay Patel
Okay. That is really helpful. And the last comment. Just let me make sure, I understood what one comment has made is that, within the guidance for this year, we are assuming, a normalization at least to pre-war levels. And what’s driving that guidance?
And then, if the world is different to that, we have to adjust, but that is at least the standing point that the guidance is based off. Does that — did I get that, right?
José Luis Blanco
Let me — yeah, high-level, let’s say, I mean, without being very precise. But high-level, let’s say, that we have secured the cost base of the company for three quarters. And the last quarter is exposed to steel prices and to shipment cost.
If steel prices and shipment costs at the moment that we need to secure those contracts to deliver in the last quarter are the pre-war levels then the guidance will not be affected. If we have a certain hit, we might put a little bit pressure towards the lower end.
Ajay Patel
Okay, very, very clear. Thank you very much for that.
Operator
The next question is by Constantin Hesse of Jefferies. The line is now open for you.
Constantin Hesse
Good afternoon, everyone. Thank you very much for taking my questions as well. So, my first one, would be on, pricing. Can you maybe just elaborate a little bit on, the price increases that you’ve taken?
I mean, comparing that to your competition, I know that there is also a mix impact there. But if I look at Vestas for example year-on-year there was an almost 20% increase 11% for Gamesa and you was only — was only about 6% and that is of course including the Australia projects. So maybe if you could elaborate on that a little bit.
Have you taken pricing that was actually similar to competition or below? And is the pricing that you’ve taken still enough to reach the 8% EBITDA margin, assuming no change to the cost base? That would be the first question. Thanks.
José Luis Blanco
Okay. So, I will elaborate on the second part and then I will hand over to Patxi for the first part. The pricing level for the 8% that is always the target, that was the case in the order intake of the last quarter of last year, was landed a very high cost level and with the associated price level to deliver the midterm profitability target. This might or might not be a reality now depending the war impact and when and how things settle in, this might or might not impact the cost. And regarding the pricing, maybe Patxi you can elaborate more in detail please.
Patxi Landa
Yes, I can. It’s very difficult to compare ESPs from competitor to even on a relative basis. And I come back to what we always say that the metric implies, so many different variables that in absolute terms and even in relative terms, it’s very difficult to extract any substance of it. You mentioned the large Australian deal, that deal which in substance is a very significant part. It’s almost about 10% of the total order intake of the year, so has a relative — significant relative weight in the mix.
This goes with a reduced scope. So, the deal we landed with the customers is that they will be taking a significant part of the scope on the construction side. So automatically the ASP of the deal gets reduced. So automatically given also the size — the relative size, it brings down the overall ASP of the year. So relatively speaking with the previous year, you cannot extract many consequences. What I can say and the important part of this is that, the gross margin of the deals we sell was improving throughout 2021 and especially in Q4, 2021.
So, we had gross margin of the deals that we took, improving because we continue to be very, very disciplined with the pricing. So, the pricing increases are similar to competitors. We are by no means taking lower increases and as a consequence the profitability of the deals that we book is also very disciplined in that respect.
Constantin Hesse
That is helpful. Thank you very much. And then my second question is on the margins and basically on the guidance that you’ve given. You say that this is before any costs related to the footprint reconfiguration. I mean, obviously geopolitical events who knows what might happen there, but you obviously already have kind of an idea that the footprint reconfiguration will have an impact there. So, I mean if you can’t share the number, at least an estimate, can you at least give us some visibility in terms of when you might expect to have a figure?
Ilya Hartmann
Yes of course Constantin, valid question. And you’re — you also anticipate that there’s a limit to the answer, but let me try to shine as much color as I can on this, all right? So it is about the announced closure that José Luis, mentioned of two factories some medium-sized nacelle factory in the Southeast of Spain and a fairly large blade factory in the north of Germany in our Rostock Hub. So, in the first case, we’re talking about 120 employees more or less and in the second direct labor of 600 to 650 people. So that, I think gives us an order of magnitude because we won’t be able today to share specific numbers. And of course, we have a plan for them because it’s a planned event.
But the number of employees involved, I think gives it a bit of an understanding how much that can be, that we have to incur here in 2022 because both of them, we plan to execute the closure in this year. And then — and it is — there’s always a question of perspective, but that is substantial money.
Now if you ask me for a time and when we can be sharing this? Well, we don’t want to put anybody under pressure, but it’s going to take a few more weeks, maybe a few months. But as soon as, those concluded we’re more than happy to share the actual numbers. So don’t put me on the gun for that response. But let’s say, if we talk about two to three months having those final numbers, I think that’s a good guess.
Constantin Hesse
That is very helpful. Thank you very much. And then maybe one question on obviously the Russia-Ukraine war has led conversations around the acceleration of the energy transition. And I mean let’s just assume that, if we assume that bureaucratic hurdles such as permitting for example gets sorted, how likely is it that we could see an acceleration in installations in the short-term, given current supply chain disruptions?
José Luis Blanco
I would say the sector in our assessment is running with overcapacity and thus in our assessment one of the reasons for the low profitability of the sector. So I assume that capacity is not going to be a bottleneck, not an issue. It’s going to be more permitting. And if permitting gets accelerated, we as a sector, in my humble opinion, we need to be very careful to not rush in creating capacity before the demand is there because the end result is always the same, low profits. So let’s see the demand. Let’s deal with the demand with the capacity available we have. And let’s see, if there is a good visibility to increase capacity without destroying the prices and the margins. That’s our view.
Constantin Hesse
And José Luis, you think there are enough components out there to increase capacity to increase production if we see an acceleration?
José Luis Blanco
I think so.
Constantin Hesse
Okay.
José Luis Blanco
No. No I think so. I think I mean two things, which we are advocating, for we call it supply chain independence to support energy independence. So European supply chain is relying heavily on Asia. Components are available, but supply chain is exposed to geopolitical events. Let’s see, if there is a European policy to value the Made in Europe in order to derisk the supply chain. Of course, if you want to do the volume with full European supply chain, no. European supply chain is not ready because that was somehow moved to Asia during the last 15 years.
In a global environment, yes there is capacity. I don’t see capacity as a risk. Although, if all things materialize it might be the case because I mean you have the very ambitious plans of China, you have the very ambitious plans of Europe. On top you have the green hydrogen expected boom in demand. But all in, I don’t think that we should rush in creating capacity too early in advance of the demand. Let’s see, the demand and let’s see the prices and the margins and then let’s see how to pick up capacity.
Constantin Hesse
Very helpful. Thank you very much.
Operator
The next question is by William Mackie of Kepler Cheuvreux. The line is now open for you.
William Mackie
Good afternoon, gentlemen, everyone. Two questions, please. The first relates to the cost inflation you’re seeing across the bill of materials. Can you just scope out within the project business, what proportion of your costs you see high confidence of pass-through with escalation and incorporated risk sharing in the Ts and Cs? And what proportion of the cost structure you’re exposed to in terms of the price inflation? So that’s the first question.
And the second, perhaps a little more theoretical. But relating to the market conditions and the willingness of different customer groups to accept prices and changes in contract scope, to what extent would you need to theoretically raise prices to achieve your target gross margins based on what you can see as input costs across the various key elements, either the raw materials or the towers and blades?
José Luis Blanco
Now, two very good questions. The first one, I will take second Patxi, you help me there or we do together. So regarding cost inflation in the bill of materials for the project business I mean, you have – I would say three factors. That subject to discussions are always manageable, which is general inflation, especially in some traditional inflationary markets like Brazil, that’s part of the contract – of the contractual arrangements that may or may not be part of the contractual arrangements in Western world depending how outlook for inflation might be in the future and the lead times for delivering the projects.
Second is bunker oil for logistics is indexable clearly indexable. Steel price more tricky, but I could even accept that could be indexable, but very tricky, because the cost structure cannot be fully replicated with the index, because your cost structure depends from the price of the steel place on a given mill, and the price of processing the steel plate on a given tower processor.
And those assumptions may or may not be available at the moment that you need to contract. But there are several cost factors, which are very difficult to index. So the way to deal with those is open discussions, and adjust the margin expectations to the risk that the sector is carrying. I mean the price of a container very difficult to index, but substantial cost impact and profitability deterioration for our industry.
Ammonia now impacted due to the Ukraine might not impact us directly, but might impact amines and other components that we need to produce resins. The competitors or let’s say suppliers facing difficulties and threatening the resistant that may impact our ability to deliver and we maybe need to rescue them difficult to index. So this is regarding your first question.
Exact proportions difficult to assess, I cannot even give you a high level could be 50-50. But I don’t have – we can run an analysis and get back to you either directly or on our next call. Regarding market conditions, I mean before handing over to Patxi, the pricing of the sector is a function of a competitive dynamic amount for market participants. There are price makers and price takers. In my view, the size of the market doesn’t – is not impacted by the price of the turbines. I mean, the further prices for electricity post-Ukraine and pre-Ukraine 10-year forward is a substantial increase. So there is substantial profitability there to pay the extra cost and to pay sustainable margins. But, if we are going to get there and when, it’s a function of the commercial behavior for global players. But Patxi you can give more color there.
Patxi Landa
That is a very good summary, because that is precisely the point that energy prices allow for increased CapEx in terms of higher turbine pricing without too much effect in demand. It’s pretty inelastic in our view. What we are doing is – and with this volatility in the input costs, what we are doing is a pricing strategy that takes us to the midterm profitability. And this is a moving picture as also the cost in base is a moving picture, and also a factor of competitors’ behavior. What we are doing on our side is what we believe is doing the right thing, and keeping a very strict discipline in the pricing policy with the pass-through of the volatile costs, with the margins on the deals that we need to get to the midterm profitability.
William Mackie
I guess, there’s a follow-up, I guess, the question would be really, yes of course in the open markets in the merchant markets, selling electricity at this price with a classic levelized cost of energy is extremely profitable. And even if we look at PPA markets, the forward prices on three-year are up double.
So customers like that can use their balance sheet integrated utilities are able to take that opportunity and pay a higher capital cost and accept a higher levelized cost of energy. I guess my question is, which customers are really pushing back? Is it really independent project financiers or smaller projects in riskier markets? Why is there a delay in order intake? Why is the customer base deferring their order decisions? Is it purely a time delay on recalculation of internalized unlevered costs of returns, or is it something else such as hope that they will get a better price in the future?
Patxi Landa
On the contrary for the most part is that is precisely a timing effect. And I say on the contrary, because we even say — we even see some sophisticated players out there that are not foreseeing a drop in pricing in the coming quarters that and this is not — this is the exception. It’s not the rule that are actually anticipating their investment decisions. So we see different behaviors there. For the most part it’s a delay in the orders as we explained before. And due to that timing effect of recalibrating the market.
William Mackie
Thank you.
Operator
The next question is by Sean McLoughlin of HSBC. The line is now open for you.
Sean McLoughlin
Thank you. Good afternoon. A couple of questions from me. Looking at India, your production levels still quite low in 2021. I see ramping up. What are your production expectations in 2022? I mean what, kind of, proportion of your deliveries will be produced in India? And what impact will that have on your cost base as you go through 2022? That’s my first question.
Ilya Hartmann
India, last year was a ramp-up year and this year is very much close to nominal speed in India. I will say out of Delta4000, we have a production lines in there out of let’s say around about 20. So that’s a substantial contribution in competitive rates. The plans are progressing well. I mean, there are 50% of the malls are at nominal speed as we speak.
The other four are approaching nominal speed surely and the cost advantage of delivering those to Europe were scrutinized again and again and even after the logistic cost increases and show advantages. Of course, not the massive advantages we saw before, but substantial advantages and those are factors in the guidance for this year.
In terms of nacelles, we are as well ramping up but the Indian proportion is in the global proportion is lower. The cost benefits are as well important when delivering to the US and to non-European markets. Delivering to Europe there are as well some minor cost advantages, of course, not as before because of the currencies and because of the logistic increase. But, nonetheless, important contribution in our reach to the sustainable profitability.
So the two messages is that the cost improvements of India and the capacity ramp-up has already factored in the guidance. The numbers are checked every month, every quarter to — in our allocation capacity to factories is an ongoing projects. We see a good contribution for blades globally and good contribution for nacelles to U.S. and non-European markets and some contribution as well for nacelle into European markets.
Sean McLoughlin
Thank you. And so I’m assuming that that capacity ramp is complete or certainly it’s included within 2022.
Ilya Hartmann
Yes. Thanks.
José Luis Blanco
Yes. And even after the decision to close one of the European nacelle assembly plants, I mean, we plan to do in Europe more than 50% of the volume very much the majority of the European demand is going to be served with European capacity in nacelles. In blades, its a different story, because producing blades in Europe in the current political environment is very challenging.
Sean McLoughlin
Can I ask a follow-on as well. Thinking about your production footprint the two adjustments that you’re making one in Germany and one in Spain, does that effectively set you up now for reaching your mid-term target?
José Luis Blanco
Yes. I think with the remaining capacity after that, I will say that we still have spare capacity. So, I mean, the remaining capacity, we’re producing more than seven gigawatts last year. We keep — we plan to keep similar levels this year without the contribution of those plants during half a year. So in a full year, the company has still capacity to — for the seven gigawatt — for this seven gigawatt targets.
Sean McLoughlin
Thank you.
Operator
[Operator Instructions]. Our next question is by Anis Zgaya of ODDO BHF. The line is now open for you.
Anis Zgaya
Yes. Thank you. Good afternoon. So I have many follow-up questions. And regarding guidance my first question if I understand correctly, the main risk factor on your current guidance is mainly Q4. So why is it so wide guidance if the main risk is only Q4? And why didn’t you secure Q4 right away?
And my second question is on factory closing in Spain and Germany. And could you please just repeat the number of employees and the expected impact, because I didn’t — sorry, I didn’t catch where were you’re plans are? And that’s all for me. Because my third question was already ask. Thank you.
José Luis Blanco
Maybe Ilya I’ll take the first one the guidance. I mean, the first part regarding the range I think, we are living in uncertain times. If we — if all the remaining order intake lands in time, and we produce in a schedule and in cost, we will deliver the upper part of the guidance.
If that’s not happening and we have pressure on volume or pressure on cost for the non-secured part or pressure on costs in the secure part, because the suppliers cold not deliver, then we will need to — this might affect the volume and the profitability.
Why we didn’t secure Q4? Because it was quite difficult. So the option was not in the marketplace for us, other than procure the steel. So the only way that we have to de-risk steel was buying the steel and storing the steel in the moment that the steel is needed.
And that’s had a working capital impact for us and had as well cost impact, because we needed to pay for the storage costs and so on. So we decided to wait to place the orders until the moment that the schedule of the projects require the orders to be put in place. That’s very much the main reason. And regarding the other question, Ilya, please.
Ilya Hartmann
I’ll take it. Maybe just an addition to the guidance range, that doesn’t matter much. But I think when we compare to similar setups, competitors, I think the range we’re giving is probably not wider to the contrary. So I think, the circumstances are also reflected in the ranges by the others, for the reasons that José Luis gave.
But on your factory closing question. So what I would say is that, today, unfortunately, we will not be able to give a specific number. That’s why I mentioned again the number of employees to give a sense for the order of magnitude, because we’re negotiating on both ends, in Spain and in Germany, as we speak, with the employees’ representatives, because unfortunately for these people that means that their jobs in those factories end and then there will be severance packages.
There are negotiations. So we’re more than happy to share the numbers once we’re done with that. And I was saying that, again, we are not trying to put pressure on our counterparties. I think an estimate to the next three months have that concluded, I think, is a fair guess and then, of course, we share the specifics.
Anis Zgaya
Okay. Thank you. And how many employees, just, if — and I think that you mentioned —
Ilya Hartmann
Yes. So let me repeat this, give or take, approximate numbers in the Spanish nacelle plant that José Luis has mentioned 120 colleagues unfortunately affected. And in Rostock we’re talking about direct labor colleagues of 600 to 650 people.
Anis Zgaya
Okay. Thank you very much.
Operator
The next question is by William Mackie of Kepler Cheuvreux. The line is now open for you.
William Mackie
Thank you. Two quick follow-ups. Firstly, I guess, my question is, to what extent do you think you will be able to enforce force majeure due to the Ukraine conflict to limit the impact of liquidated damages in 2022?
And the other follow-up relates to the US market. Can you just touch on how you see the US market order flow developing this year against the absence of governmental incentives?
José Luis Blanco
Thank you for the questions. Patxi, you take the market, I take the force majeure. The force majeure, I think we are notifying customers that we think in our view that this is a force majeure event impossible to predict. And somehow, we will further communicate with our customers the impact and entertain conversations regarding precisely that the Liquidated Damages, if we — this triggers late delivery or in some cases extra costs. Those discussions are ongoing, as we speak with customers. Regarding US, Patxi, please.
Patxi Landa
Yes, for the most part customers are in a wait-and-see mode. So the expectation of the regulation that the value it provides is making them sitting in the projects for the most part. So there are some activity and some deals that we are chasing and working and securing, but at a much more limited amount that we have seen in the previous years. And we expect as soon as the regulation passes, hopefully that this situation will change. But for the most part, today on a wait and see mode.
William Mackie
Thank you very much.
Operator
There are no further questions for the moment. And so, I hand back to you.
Felix Zander
Thank you very much for the questions and the discussion. And I would like to say goodbye. But before we close, I would like to hand over to José Luis for your last and final comments. And the floor is yours.
José Luis Blanco
Thank you very much. Thank you very much for your time, your interest, your questions. Before concluding the call, let me reiterate the key takeaways of this call. First, the ongoing war in Ukraine brings the energy security topic right at the top of the political agenda combined with one of the lowest cost of energy, demand for wind could experience significant tailwinds on top of the previous momentum. But the market environment in the short term continues to be challenging. And within this context, Nordex is making a steady progress as is visible from its growing market share and growing order intake momentum and as well ability of the company to execute in a very challenging environment. The immediate key task for us is to navigate this risk and reach this transition period. But over the medium term, the increased electricity prices and the potential demand improvement will help us with passing on the cost to customers and also help us to achieve our midterm target of 8% margin in the process. Thank you very much for your time. Wish you a wonderful rest of the day.
Ilya Hartmann
Thank you. Bye-bye.
Be the first to comment