NRXXY - Nordex SE (NRDXF) Q3 2022 Earnings Call Transcript

Nordex SE (NRDXF)

Q3 2022 Earnings Conference Call

November 15, 2022, 08:00 AM ET

Company Participants

Felix Zander - Head, Investor Relations

Jose Luis Blanco - Chief Executive Officer

Patxi Landa - Chief Sales Officer

Ilya Hartmann - Chief Financial Officer

Conference Call Participants

Constantin Hesse - Jefferies

Sean McLoughlin - HSBC

Ben Heelan - Bank of America Merrill Lynch

William Mackie - Kepler Cheuvreux

Kulwinder Rajpal - AlphaValue

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the Q3 Figures 2022 Conference Call of Nordex. Today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions].

I would now like to turn the conference over to Felix Zander. Please go ahead.

Felix Zander

Thank you very much for the introduction. Good afternoon, ladies and gentlemen. Here, I would like to welcome you on behalf of Nordex to our investment analyst call today. Our CEO, Jose Luis Blanco eguez; our CFO, Dr. Ilya Hartmann; and our CSO, Patxi Landa, will guide you through the presentation today, sharing the latest information about developments and financials for the year. After the presentation, as you have heard, there will be a Q&A session. I would like to ask you to limit yourself to three questions, please.

And now I would like to hand over to you, Jose Luis. Please go ahead.

Jose Luis Blanco

Thank you for the introduction, Felix. I would like to welcome you as well on behalf of the entire board. As Felix mentioned, CSO, Patxi Landa; CFO, Ilya Hartmann, are here with me today, guiding you through the presentation and answering your questions later on. We have prepared our usual agenda for today. And as always, as usual, I would like to start with the executive summary for the first nine months of the year.

Our order intake continues to show a healthy development, and we see a good number of additional orders in our pipeline. Prices and margins are improving. We booked 1.4 gigawatts in the third quarter, which means a cumulative order intake of 4.4 gigawatts in the first three quarters, roughly the same as last year. As expected, our run rate of volumes and margins improved in the third quarter compared to the first half of 2022, partially on the back of improving installations.

To be specific, in Q3, we booked revenues of €1.7 billion with an EBITDA margin of negative minus 1.5%, which means our revenue on the first nine months of the year reached around €3.9 billion with an EBITDA margin of negative minus 5.2. However, the market continues to remain challenging on the supply chain side despite some easing in terms of freight and commodity prices.

As already discussed in our previous calls, Supply chain disruptions have continued causing shortages in components and even in specialized vessels, which has affected our projects and installation schedules, leading to higher costs and liquidated damages discussion with our customers in the near term. In the medium term, we hope that situation will improve. And we can get more benefits of a stabilization in the commodity prices and higher price orders for our turbine copper in the extra cost.

Our working capital was again solid at minus 9.8%, and is better than our target of minus 7% by the end of this year.

Regarding our installations, we have achieved almost our normal run rate again, but also leaves a higher number of installations to complete in Q4, which is always subject to weather risk in winter.

Finally, given the current still challenging market environment, we have tightened the EBITDA margin for 2022, the lower than -- to the lower end of the expected corridor at around minus 4%. At the same time, we strongly believe in the outlook for our industry, which remains promising and confirms our better target for our EBITDA margin of 8% under the requisites of a sustainable, stable macroenvironment.

With this, I would like to hand over to Patxi to discuss markets and order intake.

Patxi Landa

Thank you very much, Jose Luis. As mentioned, looking at the orders, we sold 4.4 gigawatts of new turbine contracts in the first nine months of the year, down 4% with respect to the same period last year. 69% of those orders came from Europe with the largest markets being Germany, Finland and Spain. 31% of the orders came from the Americas, with Brazil, Colombia and the U.S. being the largest markets.

ASP grew to €0.91 million per megawatt in Q3 2022, up from €0.69 million per megawatt in the same quarter last year, a 32% increase year-on-year. Service sales grew 20% to €398 million in the first nine months of the year with an EBIT margin of 16.1%. Average availability of the fleet was 97.1%.

Turbine order backlog grew 30% to €6.5 billion at the end of September, and service order backlog grew 8% and to €3.2 billion for a combined order backlog of €9.7 billion at the end of September 2022.

And with this, I hand over back to Ilya.

Ilya Hartmann

Thank you, Patxi, and good afternoon also from my side. I would now like to guide you through the financials. On the first slide income statement, we delivered sales of around €3.9 billion at the end of the first nine months, similar to the previous year period. Our sales, as we expected, increased in a step-up mode over the first three quarters as our installations gathered pace. Let me point out that our sales improved by over 46% to over €1.7 billion in the third quarter when compared to the previous quarter this year.

Gross margin, as we see, stood at around 11% at the end of the first nine months. And we should remember that our gross margin during the year had been influenced by inflationary pressures, supply chain disruptions and in some cases, project delays. We expect an improvement sequentially once the external environment has stabilized again. Our higher margin projects will start gradually kicking in.

So as a result, our EBITDA reached around minus €200 million at the end of the first nine months with an EBITDA margin of minus 5.2%. As Jose Luis, mentioned earlier, our margin in Q3 improved to negative 1.5% when compared to the minus 7.1 achieved in Q2.

And with that, we would jump to the balance sheet. Looking at it, the overall structure, our balance sheet remains essentially unchanged with a solid liquidity level at the end of the third quarter. We closed that quarter with a cash level of around €670 million. And in addition, we have a cash facility of around €90 million, which brings the total liquidity level to around €760 million at the end of this reporting period today.

We have a net cash position of just north of €200 million, and the equity ratio is at 21% at the end of Q3, excuse me, of course, also a result of the rights issue that we completed in that month.

That already gets us to the working capital. Working capital ratio continues to be quite tight at minus 9.8%, similar to our earlier quarters. And the absolute number you will see of minus €525 million. So overall, the working capital ratio remained below the guided number of, we call below minus 7% for this year. And that's how we maintain the guidance, bringing us to the cash flow slide.

So here, we see cash flow from operating activities, minus €360 million roughly, very much reflecting the operating -- the negative operating results in the first nine months that we already mentioned. The cash flow from investing activities, we'll see that in a second is largely at the level of the previous year and goes according to plan of the investment program. And then finally, our cash flow from financing activities, around €340 million, of course, largely reflecting the cash proceeds from the rights issue in July.

That, as I mentioned a second ago, is bringing us to the investment slide. Total investments of around €125 million in the period. Basically, as I said, according to plan and in line with our CapEx guidance, which we maintain around €180 million for the current year. Focus also on those investments remained largely the same, as mentioned in previous occasions, main investment targets were, again, the blade production facilities in India and Spain and tooling and equipment for our higher installation levels.

And that already brings me to my last slide of the deck. So as we have negative EBITDA guidance for the current year, we think it's better to track the net debt or net cash, if you will. As you can see, we continue to have a net cash level, also helped by that right issue that I mentioned already twice. And to repeat, there is very little external senior debt left once we will have repaid the high-yield bond early next year with the shareholder loan. And of course, that will reinforce the capital structure of the company. Again, and one more time to repeat equity ratio went up to 21% as a result of the transaction.

And now before I give it back to Jose Luis, three key takeaways. Operating performance in Q3 improved, in line with our early expectation. Second, nonetheless, inflationary pressures and the back ended installations and supply chain reliability issues continue to be risk in Q3 was and in Q4 is to be monitored. And third, for the CFO, obviously, priorities for us in the office remain the same. Adequate risk management, strong working capital management and maximum cash flow preservation in the months ahead.

And with that, I'll give it back to Jose Luis.

Jose Luis Blanco

Thank you, Ilya. Let me now explain our operational performance in the first nine months of the year. As you can see in the chart on this slide, our installation run rate was way slower in Q1 and Q2, severely impacted and due to the unfortunate cybersecurity incident as well as the consequential effects of the Ukraine war as well as lockdowns in China.

We hope to cover the shortfalls in Q3 and Q4. Thankfully, our run rate in Q3 has been almost back to normal as you can see, but it does not cover to days on the first half. This gives a bigger installation profile for Q4, which also creates a risk of its own that we have to monitor from now to the end of the year.

In total, we have erected 800 turbines in 17 countries with around 3.6 gigawatts. Again, majority 74% in Europe, 14% LatAm, 12% North America. Cell production, we are catching up and almost back to normal. We assemble about 1,000 similar to last year. But because of the higher nameplate, we see that 4.9 gigawatts the previous year with -- that was 4.8. So as you can see, quite an unbalance between what we are able to produce with some delays to availability of components and what we were able to install due to the delay in the availability of components.

Overall, the number of plates produced increased from 3,120 last year to 3,357 this year. Thereof, we produced roughly 26% in-house compared to 40% last year. This trend of higher outsourcing of place is likely to remain in the future as we continue to reduce and to better manage the risk in the operations.

Moving to the next slide. And before we go to the usual guidance slide, I would like to briefly summarize the current policy and market developments and as well issues we are facing in the near term. We have seen some important positive policy momentum in Germany and U.S. in the last quarter, The Inflation Act, as well in Europe last week about tackling the real bottleneck of the industry in Europe, which is permitting.

The recent announcements are quite meaningful for the demand in the medium term, where Nordex plays an important role. This could eventually compare to actual orders and a bigger market size in the next two to three years, benefiting key players like us in the marketplace.

At the same time, we have to address some challenges in the short term that impact on our margins and profitability. As mentioned before, just to name a few, while commodity prices seems to be stabilizing, we continue to see price increases coming through in our supply chain for strong components. In addition, some of smaller suppliers are struggling even more in this environment, which leads to higher price discussion and supply chain reliability and rescue issues.

Finally, we have also seen supply chain reliability in some components dropping sharply in the last few quarters compared to earlier times. This has affected our ability to deliver, has affected our project schedule, has affected the project cost, has affected liquidated damages discussion with our customers in some cases.

Moreover, as I mentioned earlier, we have a high installation target for Q4. And hence, there is always a risk of installations spilling into 2023. Always challenging to catch up in winter times. In the medium term, we are working to put these challenges behind us and further will -- on the quality of our order intake profile to help us to get to the 8% EBITDA margin.

Okay. If we move to the guidance slide. Having said that and considering the current market environment, we have tightened our guidance of the all inclusive EBITDA margin at the lower end of the range at around minus 4% to reflect some of these risks better. All other KPIs remain unchanged. Let me also reiterate that our EBITDA margin includes all recurring and non-recurring costs, including reconfiguration costs, costs from cybersecurity incident, asset sales disruption from Ukraine war and COVID lockdowns in China.

Finally, we confirm our strategic midterm EBITDA margin of 8% as well once macroeconomic environment has stabilized. Assumptions are, as always, stable order intake as we currently see stable margin of the order intake as we currently see stable cost base as we are starting to see unreasonable disruptions in supply chain that we are working on to overcome.

And with this, I will hand over back to you, Felix, for Q&A.

Felix Zander

Thank you very much, gentlemen, for the presentation. And now I would like to hand over to you, operator, and please open the session for Q&A. Thank you.

Question-and-Answer Session

Operator

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. [Operator Instructions] The first question is from the line of Constantin Hesse with Jefferies. Please go ahead.

Constantin Hesse

Hi, there. Can you hear me okay?

Jose Luis Blanco

Yes.

Constantin Hesse

Great. Thank you very much for taking my questions. So my first one is on margin. I just want to talk a little bit about the magnitude of the margin improvement that we can expect from here on now in relation to supply chain improvements. What are some of the key improvements that are still coming with regards to backlog, how much of your bad backlog, have you already delivered? When should we start seeing some of these more significant price increases coming through?

And then on margins in Q4, what is holding that back? Is that liquidation damages mainly? Thanks. That's the first one.

Jose Luis Blanco

Regarding about margins in the backlog, there is always a lead time of approximately 18 months of the orders to flow through the P&L. Our order intake in the last quarter was landed at a sustainable margin. So targeting the sustainable margin of 8% or above 8% EBITDA. And this implies also that the cost base of the company or that the unhedged cost base of the company will remain stable.

We start to see that stability in the cost base, but still, there are some topics that are volatile, like energy prices in Europe, unlike some components that are affected by energy prices. But generally speaking, we see a stability in the cost base.

It is required as well on top of stability on cost base, we get back slowly or not or as fast as possible to reliability in the supply chain in the industry in general. And we are making progress. We are about to get there. But unfortunately, we are not yet there.

Regarding the Q4, maybe Patxi, you can take it?

Patxi Landa

Yes. From a margin perspective, from a new order margin perspective, we continue to increase. Margins are sold on a sole basis compared to the previous quarters and especially compared to the previous year. And this is on the basis of sustainable price increase of the turbines. And as a consequence of this, the new orders that we are booking are all targeting above mid-term profitability level of 8% EBITDA for the company.

Constantin Hesse

Thanks. Sorry, I actually meant in Q4, what is holding back profitability? Because if I look at the new guidance, now you expect to mine was better with even higher installations and still negative EBITDA. What is holding at there?

Jose Luis Blanco

So sorry, Constantin. I think the challenge we have in Q4 is catching up in winter. I think we were substantially delay in our project installation. As you saw in the presentation, there is a huge imbalance between number of nacelles produced a number of turbines installed. The nacelles we are slowly trying to recover, but this has a substantial timing effect. So this is impacting installations.

And as a consequence, project costs, project liquidated damages and weather risk. I mean, it's not the same to install 500 turbines in summer than 500 turbines in winter, and this is the big risk we have in front of us, plus availability of some steel electronic part components that are affecting our ability to connect turbines to the grid.

We are working to overcome this issue eventually by year-end or beginning of next year. And those are the two big topics that are affecting margin. Plus, the proper planning that the projects that we are executing now were all sold 18 months ago. And those projects were somehow deteriorated by all sorts of waves of cost increases.

Constantin Hesse

Okay. That's great. Thanks, Luis. And then the second question would be on free cash flow. I'm trying to get some comfort on if you can get a grip now into Q4 going into Q1. I mean you're now at €292 million net cash. Free cash flow has been pretty bad over the last few quarters. What gives you comfort that you can start seeing some positive flows in free cash flow? And what gives you the comfort that adds €292 million net cash, that's a level that you probably wouldn't necessarily have to see you having to go to the market again, either by a debt or via another capital raise? Thanks.

Ilya Hartmann

I think, I'll take this one, Jose Luis. Yeah, fair question, Constantin. This is Ilya. No, I think we're confident in that regard. I think for a number of reasons, not only because we did the package in the past summer, but also when we now look at what we presented today, coming out of Q3 at a liquidity level of around €750 million a little north of that. And basically, also seeing that we typically -- and I've said this in previous calls, are doing recurrently better than the -- what we officially guide numbers of working capital.

So again, for reasons of course, we keep the guidance today at minus 7% or below. But what we see that there is -- as in the past, the track record going our way. So I would be more optimistic there.

And then, of course, we're not talking about '23 today, that is for the March conversation. But understanding, I think that's a common understanding for everyone on the call that '23 though being a transition year again for the industry and for Nordex. We'll clearly be better than 2022. So I think when we talk about liquidity and how we feel about that. I repeat myself, we're confident on that.

Constantin Hesse

Okay. Thanks. And then lastly, just on the regulatory environment. I mean, obviously Luis you made some comments on that already. But are there any specific dates coming up or any potential catalysts that you guys are expecting that will be announced relatively soon, mainly in Europe because in the U.S., I think it is relatively clear. Thanks.

Jose Luis Blanco

I think the biggest impact for our industry is the European package about tackling permit. This is the market is paying very high electricity prices. Everybody is eager to invest to somehow help society to address the energy shortages and the energy prices. Renewables is the key tool and especially in Europe is win. So there is no lack of capital. There is no lack of technology to address the challenges. The main issue is permit that are somehow lagging behind governmental targets to meet European and country targets.

I think the commission is together with member states are tackling the issue and all this legislation package that will be later on translated into state members legislation set to put climate change at the same level as any other environmental impact, setting times for improving permits are setting areas for fast tracking permits as fostering repowering all sort of measures that are included in this package that eventually should take effect, not short term, but medium term for sure.

Constantin Hesse

Yeah. But are you seeing any estimated deadlines? Or are you hearing anything when you have your conversations?

Jose Luis Blanco

Our assumption is the market, as you saw is low this year. The aggregated volume that was contracted was substantially reduced compared to last year. We start to see slightly improvements in next year and definitely, where we see kicking this office is in two years in ''24 order intake, driven by a bigger flow of permits in Europe and given by the Inflation Act policy in the U.S. So in '23 we don't see a substantial increase. We should see some increase or this is our assumption, but not materially. But we do see that in '24, yes.

Constantin Hesse

Okay. Thank you.

Operator

The next question is from the line of San McLoughlin with HSBC. Please go ahead.

Sean McLoughlin

Thank you. Good afternoon. My first question is around pricing. There's been a real step-up in the order intake ASP this quarter over previous quarters. And it sounds like we have to wait probably till well, maybe end of '23 or even early '24 before we see that delivered. Should we assume that the orders that you booked in the first half of the year were not meeting that 8% EBITDA margin level? And at which point did you, let's say, change strategy to focus on that higher pricing? That's the first question.

Jose Luis Blanco

I think we were always selling since a couple of quarters ago, even Q4 last year at sustainable margins. Unfortunately, the cost base of the company was severely deteriorated by growing consequential impact by the lockdowns in China to a certain extent, effects of the cyberattack. But the main deterioration of the backlog on the cost side was coming from the consequential effects of Ukraine.

We started to see a stabilization in the cost base of the company in the last month, I will say. So last month, or even I would say, last quarter, we saw that the orders were coming above the sustainable margin. But the cost base of the company at this time doesn't deteriorate. Contrary with what happened in the last -- in the previous three quarters, where the cost base or the non-hedged cost base of the company was deteriorating. And this is very, and you are right. Those orders are going to flow through the P&L 12-18 months. So if the situation in the cost base stays stable, once those orders flow through the P&L, we should be landing those margins.

Sean McLoughlin

Yeah. I suppose then a follow-on is just thinking about your cost position in 2023, I mean, we've seen some of your competitors restructuring. I mean, is there a case to be made for you lowering your costs, your breakeven cost base in '23 as you look at flat at best deliveries and yeah, on a higher cost base.

Jose Luis Blanco

Okay. I think it's true that we are, in terms of activity, we are selling less megawatts. And we are planning for next year slightly less activity compared to this year. With that being said, we went already who are restructuring. So we closed two plants this year. And at this stage, it's true that we might run with a slight underutilization, but as we have ground expectations for the market to recover in 2024. We don't think it's going to be very appropriate to cut now this underutilization and growing the year after.

So we have very much a reasonable capacity, which allow us to deal with flexibility and which allow us to be prepared for future volume growth.

Sean McLoughlin

Thank you. And my final question just around that is on the U.S. I think there's a view that U.S. order intake should pick up at some point into next year. I mean, how are you positioned there to capture that growth and just thinking about some of your -- maybe your capacity requirements in the U.S. over the next two to three years?

Jose Luis Blanco

I mean, we are in the study, in the analysis phase. Definitely, the market is going to be a substantial market, and we want to be part of that. But it's slightly too early to say in what form. Just for you to know regarding additional investments shouldn't be that big because we have a [indiscernible] facility in West Branch, Iowa, where we are analyzing to produce nacelles to meet the inflation reduction at requirements.

We have blade factory in Mexico that we are assessing if that could qualify or not, too early to say. We are analyzing the possibility to bring local concrete towers to Mexico. So long history short, we have a plan to participate in that market too early to be more specific in how. And regarding order intake, we don't see yet the order intake coming as the legislation gives such a long horizon, customers are not in a rush. But the rush will come, and we want to participate on that. And I don't think we'll take extraordinary or substantial extraordinary investments for us to participate in that.

Sean McLoughlin

That's very helpful. Thank you.

Operator

The next question comes from the line of Ben Heelan with Bank of America. Please go ahead.

Ben Heelan

Yeah. Good morning. Thank you for the question. And the first question I had was on the loss in the corporate HQ line in Q3. Obviously, it looked like it started to increase in Q2, but it was just a massive number in Q3. So could you help us understand exactly what is in that loss and how we should think about that going forward?

And then secondly, services was very, very pointer particularly from a revenue growth perspective. Can you talk about the drivers of that? How much was inflation? How much was underlying volume growth? And how we should think about that moving forward? Thank you.

Jose Luis Blanco

Let me take the services and then you take the first one.

Ilya Hartmann

The first one.

Jose Luis Blanco

So regarding services, we were always signaling that provided the order intake keeps developing as it is developing in the service business will grow double digit. Of course, there is an inflation but mostly expected for next year, not that much for what -- some as well for this year, but the majority will come for next year.

So the result is very much a huge amount of Delta4000 that we are connecting to the grid and starting services activities on those machines. So usually, the timing is year one to grow the supply chain, year two, to grow the installation, year three, you will start to grow the services activity.

Ilya Hartmann

And then I think the other one, which I think for the corporate, we also unallocated. So basically, without going into too much detail here a segment reporting, which we typically don't do on the call, but on one-on-ones. But basically, what we're seeing here is those costs that we cannot directly assign a specific project or customer in terms of service in both projects.

We have things like more overheads, some OpEx increasement and general corporate expenses as well. Also, there is -- you would see some of those LDs there that we're not allocating to a specific customer project when we, for example, do a field repair campaign during the year. So all these things would go into that.

Ben Heelan

Can I just follow up quickly on that? I'm not sure I understand why costs couldn't be allocated to a particular project or a particular customer, if you're dealing with liquidated damages just as 1 example. Why can't you allocate that?

Ilya Hartmann

Well, of course, you could always in a consequence, but sometimes an issue, let's say, is overarching goes across several customers comes from one root cause, let's say, and a specific Luis would be the technical guy there. But basically if you have something that goes back to making up the example of generator, and that basically can always allocate that to specific contract because they all executed in specific contracts. We're also viewing them as topics that we clustered by the reason, by the rationale why it is cost. So that's more of a fair question, but this is how we classify this internally.

Ben Heelan

Okay. So I shouldn't think of [indiscernible]. This is just a function of the challenging environment that you're facing and you just aren't allocating some of these costs?

Jose Luis Blanco

Very much so.

Ben Heelan

Okay, very clear. Thank you.

Operator

The next question comes from the line of William Mackie with Kepler Cheuvreux. Please go ahead.

William Mackie

Good afternoon. Thanks. First of all, I wanted to pick up on the comments you mentioned, Patxi, about having a good orders in the pipeline. Can we just color in the prospects for order intake between Europe, North America and LatAm? I mean when we think about Europe, you've got a very high base of comparison whereas in North America, things seem to be at least on hold.

So how do you -- how should we expect the pipeline to materialize into orders booked in Q4.

Patxi Landa

So what we can say is that we will continue with a good trend from a volume perspective. As mentioned before, by Jose Luis, we don't see a recovery in the North American market in the short term. So we continue to see a relatively flattish market in 2023. And what we are seeing and what we are pursuing actively is to get very disciplined on the pricing and on the margins with which we sell the new the new order.

So from a volume perspective, and this is by no means a guidance towards the end of the year, but we will continue with a good momentum, probably not as good as Q4 last year, but still good in terms of volume and the focus on increasing prices and margins of the new orders we take.

And then regionally speaking, as I said before, for America, we don't see picking up. We don't see regulatory changes, providing tailwinds short enough to see a meaningful volume increases in the market in Europe in 2023. So from that perspective, a relatively flattish expectation of the market also for next year.

William Mackie

And with following up from that, in your release, you used the term you're working to reformulate contracts. I mean we all seem to be focused on price, which is a rather simple measure. But what other additional actions can you take. I mean, to pass the risk through to your customers? To what extent are you able to incorporate indexation or other measures that enable a pass through of risk to your customer base to avoid a 2022 again in the future?

Patxi Landa

And that is precisely the point terms and conditions of the contract are equally important as pricing to minimize the risk exposure of the company. And we have, through the painful learnings that we have seen over the last quarters. What we are doing is to try to rebalance the risk we take with both suppliers and customers and try to derisk as much as we can the backlog for the company.

And for that matter, what we do is to entertain discussions with customers in that regard successfully, I would say, partially successfully. And the discussion is not just with customers. It's a political level as well with governments, with society. The situation that the sector was as a result of the previous mindset of the World 2010-2020 goes down a stability. So everybody was asking for a fixed CapEx, deploy fixed capital. The banks wanted the fixed CapEx and the sector was pushing too much risk into our chain of the supply chain.

This -- in our case, we don't see it going forward. We cannot commit with fixed CapEx for delivering in three years. And the customers of our customers need to understand that. Governments need to understand that, that we are seeking for more balanced risk reward among the different participants in the supply chain.

William Mackie

Thank you. My final question would relate to the growing imbalance between your total production measured in megawatts and your total installations at this point in the year, you've produced about 40% more than you have installed? I understand the delays and the creation of delays in Q1 and Q2. But do you not see or should we expect that you need to now drop your production rates, well, at least significantly below your installation rates for a couple of quarters to adjust that imbalance and to recorrect the networking capital levels?

Jose Luis Blanco

No, it's the other way around because we have contractual commitments where we have export milestones to fulfill. What we need is to catch up with installations, which is a substantial challenge because we need to install substantially more than the previous plan to catch up the delays and we need to do that in winter times, and this is really challenging. This is one of the biggest risks we see in front of us. But not from a production point of view, we are going to see stability in the next quarters because we need to deliver our backlog as per our contractual agreements, and we have work availability of products as a contract milestone.

William Mackie

Understood. So how would you describe -- what proportion of your backlog would you say is still running on a very tight or late timeline and therefore, subject to LDs?

Jose Luis Blanco

Well that's difficult to quantify. But the -- if you very much do a quick math between debt and balance, you could very much figure out that, debt and balance could be having a risk of LDs.

William Mackie

Thanks very much.

Operator

The next question comes from the line of Kulwinder Rajpal with AlphaValue. Please go ahead. Mr. Kulwinder, can you hear us please? Thank you. Of course, sir. Please go ahead.

Kulwinder Rajpal

Hello. Good afternoon, gentlemen. Thank you for taking my questions. Could you please remind us how much of your cost base is freight costs? And given the recent softening in freight rates, how should we think about their impact on year-on-year and medium-term profitability? And then I have a follow-up.

Jose Luis Blanco

Regarding the freight costs. In previous calls, we mentioned that we were trying to implement fetching policies. And one of the hedging policies was back-to-back, try to contract the freight. At the same time, we contracted the TSA. So we said freight and installations, we will try to do back to back. Of course, we don't succeed in all the orders and that could potentially bring some potential upside.

Containers, we as well so a drop in the price of the containers that will potentially be some upside. But we have as well headwinds in the electricity in other commodities. So I think it's too early to celebrate in our -- from our point of view that the cost is going to bring potential upside in profitability.

Kulwinder Rajpal

Okay. Understood. Thank you. And second, just to gain some clarity on project slippage. How should we think about the risk going into 2023? And given some slippage, could you please give us your thoughts on the pace of installations that we see under a more normalized scenario versus under a scenario where there is slippage beyond Q4 that is in 2023.

Jose Luis Blanco

Risk of slippage to 2023 is not minor. One is operationally, we need to install those turbines. And there is availability of certain electronic components to connect those turbines to the grid, which we have a plan to overcome the backlog eventually in the next couple of weeks, but this might slip as well to next year.

Eventually, the situation should be normalized for sure in the next year. I mean before as long as normal weather is back, is always -- let me put it the other way around. It's always easier to catch up in spring or in summer than to catch up in winter. So the risk is catching up in winter.

Kulwinder Rajpal

Okay. Understood. Thank you.

Jose Luis Blanco

And less costly as well

Operator

[Operator Instructions] We have a follow-up question with Mr. Constantin Hesse with Jefferies. Please go ahead.

Constantin Hesse

I just want to go a little bit further on margins. So if I think looking into next year, are we looking at a rather linear improvement? Or is there rather going to be something like a hockey stick in your view? And could we be talking about 5% to 6% EBITDA margin in Q4 next year? Thank you.

Jose Luis Blanco

I mean, let's be cautious. Definitely, definitely, what we are saying is that what we are selling now, we expect to land above 8% EBITDA in 18 months. Should that be linear from where we are to that maybe -- that's an assumption? I don't see a huge hockey stick. I mean every quarter, every year has always quarterly effects because usually, winter is less activity. Then summer, summer, you have better profitability than winter in a stabilized environment because of the activity itself. But other than the seasonal effects, yes, the quality of the backlog improved linearly.

Constantin Hesse

Okay. And by the end of '23, so we would be looking at the orders you took in Q2 and Q3 this year. So it could be a fair assumption that you could be, I mean, still below the 8%, but relatively closer. That let's say about

Jose Luis Blanco

I would say more towards Q4 because as I mentioned before, the cost base of the company is stable, just for a few weeks, until few weeks, the cost base of the company was deteriorating. It's true that the last one or two months, the cost base of the company is stable. And if we take in consideration that the lead time to process orders is 18 months, 18 months is more towards the end of next year.

Constantin Hesse

Fine. Thanks. And then the second question would be on competition. I mean initially, the conversations were always that the Chinese would not be able to catch up with the Western players because they would have to build the supply chain locally and the Western players had already built a very efficient supply chain. Therefore, it will be tougher to build a base there. But it seems like some of these players are making quite some good movements into the west here. So just in terms of competition, what are you seeing from Chinese players?

Jose Luis Blanco

Let's do this together with Patxi. I will differentiate North America and Europe that for different reasons or Western Europe, that for different reasons, we don't see them. And Western Europe is our biggest volume in order intake in services. And why not Western Europe because the market is so capital. I mean we do 200 projects with 150 customers, small size, midsize projects, which the configuration of the market is not that interesting for the Chinese players.

The regulation is very complicated, very different regulations from country to country from -- even from region to region within the country. So a very complicated regulation that makes difficult the cost of doing business. So the cost of doing business in Europe is going to be the same for a Chinese or for our European and we have the proven track record. I think our customers are more focused on reliable partners to secure the ability to deliver than any other thing.

The U.S., the Inflation Reduction Act calls for local production and for the Americas and it is not a question of price. It's a question of national security and energy independence. So that's the main driver for the volume in America. So we don't see a threat in that market. And maybe in the other geographies where we operate, which are not as big as Europe, but maybe in those other geographies, we might see that.

Patxi Landa

And we do see them and specifically in Latin America and South Africa, where for the Chinese is not so complicated to the business. But we see them, let's qualify this from an order of magnitude. South Africa, we see them as one of the players. Latin America still, they are not mainstream. But however, we can expect that in the medium term, they may become a mainstream in those markets as well. That is affecting 20% of our market and exactly of the addressable market of us. And today, I would say that is affecting 10% of the 20%, so it's a 2% at this point in time impact.

Constantin Hesse

Got it. Thanks, Luis.

Operator

The next question comes from the line of [indiscernible]. Please go ahead.

Unidentified Analyst

Hi, guys. Can you hear me?

Jose Luis Blanco

Yes, Vikas [ph].

Unidentified Analyst

Perfect. Thanks for the presentation. And just a quick question on provisions. The additions for the nine months kind of €51 million. So as of the first half, they were, I think, around €93 million. So it was kind of actually negative in the quarter. I'd just like to know, firstly, what's the reason for this?

And then secondly, just kind of going forward, we've seen kind of across the page, the warranty provisions have been increasing. If we look at kind of obviously quarter-by-quarter for yourselves, like probably kind of between 3% and 6% this year, the sales. And yeah, how should we kind of think about them going forward, obviously, with this kind of negative addition in the quarter.

Patxi Landa

I think from the provision, for example, also in the segment reporting when we're seeing the decrease in the provision is now that we're turning some of those provisions into actual costs because we're executing those repairs. And that's where that change would come from.

I think the broader question is always for the industry, with all the issues already in taking into account fully. But for us, I would say this is now a recurrent executing of those things that we have been detecting as I earlier mentioned on these infield repair, so that would be the key reason for the change. I'm not sure, Jose Luis, if you want to add anything to that?

Jose Luis Blanco

No, that's fair, Patxi.

Unidentified Analyst

So does that mean going forward, we should kind of expect low provisions?

Jose Luis Blanco

No. Stable, stable provisions.

Ilya Hartmann

Yeah. So we're not foreseeing any substantial changes for now. I mean that always goes hand-in-hand with what we see in the field. But we're not foreseeing right now any substantial change there.

Unidentified Analyst

Okay. Thank you.

Felix Zander

Okay. Thank you. Felix again here. I think this was the last question for today. And I would like to thank you for your participation. And as you know, I always take the opportunity to hand over to Jose Luis for his final remarks. Please go ahead, Jose Luis. Thank you again.

Jose Luis Blanco

Thank you very much for all your questions. Thank you, Felix. Finally, as always, let us outline our key takeaways from this quarter. First is that policy momentum continues in the right direction, which will greatly support the growth of renewals. Second, our order intake remains solid with increasing prices and margins.

Our operational performance in the first three quarters has improved, but shorter challenges remain abundant. Higher installation profile and supply chain reliability remain near-term challenge as we go into the next quarter. And to reflect this risk, we have tightened our margin guidance to the lower end of the expected range, while we confirm our midterm EBITDA margin of 8%. Once again, macro environment further stabilized, which we start to see.

Thank you for your participation in the call, and wish you a nice afternoon.

Operator

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.

For further details see:

Nordex SE (NRDXF) Q3 2022 Earnings Call Transcript