NRXXY - Nordex SE (NRDXF) Q3 2023 Earnings Call Transcript
2023-11-14 12:08:03 ET
Nordex SE (NRDXF)
Q3 2023 Results Conference Call
November 14, 2023 08:00 AM ET
Company Participants
Felix Zander - Investor Relations
José Luis Blanco - Chief Executive Officer
Ilya Hartmann - Chief Financial Officer
Patxi Landa - Chief Sales Officer
Conference Call Participants
John Kim - Deutsche Bank
Vivek Midha - Citigroup
Ajay Patel - Goldman Sachs
Sean McLoughlin - HSBC
Sebastian Growe - BNP Paribas
Constantin Hesse - Jefferies
Anis Zgaya - ODDO BHF
Kulwinder Rajpal - Alphavalue
William Mackie - Kepler Cheuvreux
Presentation
Operator
Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the Q3 Figures 2023 Conference Call of Nordex. Throughout 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 to our analyst and investor call this afternoon. Our CEO, José Luis Blanco; our CFO, Ilya Hartmann; and our CSO, Patxi Landa, will guide you through our slide deck. [Operator Instructions]
And now I would like to hand over to our CEO, José Luis. Please go ahead.
José Luis Blanco
Thank you very much for the introduction, Felix. I would like as well to welcome you on behalf of the entire Board. Patxi Landa and Ilya Hartmann are here with me today guiding you through our presentation and answering your questions later. For today, we have prepared our usual presentation deck.
Going to the introduction, as usual, with the executive summary for the first quarter of 2023. Our project execution in the first quarter was sequentially better than the second quarter but still slightly behind our internal expectations. We expect to catch up and complete even higher activity levels in the last quarter of the year, which should also support the improvement in our underlying margins.
In the third quarter, we booked 2.3-gigawatts of new orders, which was an increase of 58% compared to the third quarter of the year before, largely on the back of a strong performance in Europe and despite facing delays in non-European markets.
The pricing and margins of these orders continue to be stable. In the first nine-months, our order intake increased to 4.9-gigawatts, exceeding the 4.5-gigawatts of last year, with generally stable selling prices.
Our order pipeline in Europe remains strong. However, let me also note that we continue to face delays in our international order pipeline, which could likely make our installation schedule next year more back-end loaded like this year, which increases our general risk profile, as you can imagine.
In addition, we are also happy to report that the German market is developing well, although we see a lot of early-stage delays in not only project permitting but also transportation permits. Going forward, this could impact project execution, but we hope that this will be addressed in time by relevant authorities and stakeholders.
Our revenues rose from €3.9 billion by 15% to €4.5 billion by the end of September. At the same time, our gross margin also increased to 18.3% in the third quarter, leading to an improved gross margin for the first three quarters of 13.6%.
We generally expect further positive developments of the gross margin with a higher share of revenues coming from better quality orders. Although let me also point out that financial stability of some key suppliers in supply chain could also increase the overall cost, which is impacting margins and could also impact our margins in the future.
Our EBITDA level improved, as indicated in the last quarter, further in the third quarter to €48 million, representing an EBITDA margin of nearly 3%. Compared to our EBITDA margin of 9.4% in the first quarter and 0% in the second quarter, this is a step ahead. This was mainly possible due to higher volume and better underlying margins in the orders in the third quarter.
Consequently, we now show an EBITDA margin of minus 1.5% in the first three quarters of the year and expect this continued improvement in our underlying margins going forward. Our working capital was stable at minus 10.2%.
Our installations increased in the third quarter to 2.4-gigawatts, reaching 5.5-gigawatts in the first three quarters of the year. And finally, I would like to confirm our guidance for 2023 and our midterm strategic EBITDA margin of 8%.
And with this, I would like to hand over to Patxi for markets and order intake.
Patxi Landa
Thank you very much, José Luis. As mentioned, looking at the orders, we closed 2.3-gigawatts of new turbine contracts in 2023 for a total of 4.9-gigawatts of new contracts in the first nine-months of the year, up 11% with respect to the same period in 2022. 83% of the orders came from Europe and 17% from the Americas. The largest orders in the quarter came from Turkiye, Chile, Germany, Canada and Spain.
ASP increased to €0.85 million per megawatt in the first nine-months of the year, up from €0.82 million per megawatt in the same period last year. Service sales amounted to 8% of group sales in the first nine-months with €483 million, 21% with respect to last year and an EBIT margin of 13.9%.
The fee income on contracts 33-gigawatts with an average availability of 97%. Turbine order backlog grew 2% to €6.7 billion at the end of September, and service order backlog grew 14% to €3.6 billion for a combined amount of €10.2 billion at the end of Q3.
And with this, I give it back to you, Ilya.
Ilya Hartmann
Thanks, Patxi. Good afternoon also from my side, and I would now like to guide us through the latest financial figures, starting with the income statement. As mentioned before, we had a soft start into the year. However, in line with our previous calls, our sales performance has been consistently improving every quarter since.
So as a result, we recorded total sales of around €4.5 billion compared to €3.9 billion at Q3 2022. Year-on-year, this is an increase of about 16%. Key drivers were the substantially higher installation levels. They were up 54% in the first nine-months when compared to same period last year.
So as also indicated in our H1 call, our gross margins improved again, and now in the third quarter as well, gross margin stood at 18.3% for the quarter compared to 10.7% at the end of H1 as the extra cost of delays from last year receded. The improvement is also down to the fact that we have better price orders now starting to flow through our financials.
So as a result of this, we generated a positive EBITDA of €48 million in Q3 after reaching breakeven EBITDA in Q2. And going forward, we continue to expect improvement in the underlying margins.
So with this, let’s move to the balance sheet. The overall structure of our balance sheet remains essentially unchanged to the liquidity level of €732 million at the end of last quarter. In a breakdown, cash stood at €642 million.
And if we add to this our cash facility of around €90 million, that gets you to the total liquidity amount I mentioned. And at the end of Q3, our net cash revision stood at €344 million and the equity ratio is roughly 19%.
Now to the working capital. Working capital ratio continues to be relatively tight at minus 10.2% at the end of Q3. In absolute numbers, that was minus 639. Working capital was driven by an increase in payables, reflecting of a high operational activities during the quarter.
With this, the working capital ratio remains below our guided number, which is below 9% - below minus 9%, apologies, for the current year. So we continue to expect a tighter working capital also for the last quarter.
That ties into the cash flow slide. As we see on the slide cash flow from operating activities still reflect the softer margin levels we have seen in the first nine-months. However, we can also see a substantial improvement compared to last year. This is driven by continuously improving margins, as mentioned, and again an even tighter working capital management.
Cash flow from investing activities stood at around minus €95 million. This is largely at the previous year level, and it reflects the execution of our investment program as we have planned for.
Worthy to mention probably we nearly reached breakeven free cash flow, roughly minus €2 million, in the quarter, again resulting from the same operational performance improvements that were mentioned at the beginning of the call by José Luis.
And then finally, the cash flow from financing activities, roughly €300 million, are basically on the same level as we reported in our last call, a key source of inflows from our green convertible bond in April this year.
And that gets me to the investment slide. I mentioned a few moments ago, total investments are around €83 million in the first nine-months of the year. That is below the nine-month period of last year where we stood at around €125 million.
However, the lower level we have spended the first nine-months is in line with our internal planning for such a backlog this year. So we expect to catch up in the CapEx rate in the last weeks of this year.
And closing on this one, I get to my last slide, that is the capital structure. As also mentioned earlier, net cash level at the end of Q3 at around €344 million. And then again, the equity ratio, around 90%.
This is probably an appropriate moment to remind us that both the debt-to-equity swap as well as the convertible bond were good and timely instruments to further strengthen our financial position in an environment that remains uncertain for another while. This, impacted by significant improvement on the EBITDA level over the past quarters, gives us confidence that we are financially well equipped for the challenges that lie ahead of us.
And with this, I give it back to José Luis.
José Luis Blanco
Thank you, Ilya. So let’s discuss our operational performance in the first 3 quarters of the year. As explained in our calls, our installation suffered last year due to several reasons so that our target was and still is to catch up. As you can see, we have been making consistent progress every quarter, and this quarter is no different.
Our installation increased to 2.4-gigawatts in the third quarter, a 40% improvement. And this means we managed to install around 5.5-gigawatts in the first nine-months of the year. an improvement of roughly 54%.
This is still lower than what we have planned internally, but we expect to catch up and complete even higher level of installations in Q4, which naturally increases our cost and our risk profile higher than usual for the last quarter.
We have elected 1,090 turbines in 24 countries in all compared with 791 turbines in 17 countries last year, with the biggest share of 60% in Europe, followed by 25% in Latin America, 8% in North America and the remaining 7% in the region Rest of the World.
On nacelle production, we assembled 979 turbines compared to 1,003 in the same period last year due to the higher nameplate capacity. We reached 5-gigawatts demonstrating on a slight increase of 3%. Further increase in activity is expected in the current quarter in Q4.
Overall, the number of blades produced was 3,358, exactly on the same level last year thereof. We produced 802 turbines compared to 879 last year. This level of higher outsourcing of blades is likely to continue in the future. and we want to keep our flexibility but also to keep in-house knowledge.
So now I would like to show our guidance for the year, which we confirm. Our overall performance has been, so far, in line with our expectations. In particular, we were able to increase our revenue by 15% in the first nine-months.
After having reached our EBITDA breakeven in the second quarter, we could increase a bit further in the third quarter, which led to almost breakeven free cash flow in the third quarter. The working capital ratio remains in the targeted corridor. CapEx spending is likely to increase significantly in the fourth quarter but should still stay under our guided figure.
And finally, as I mentioned earlier, the operating environment has clearly improved but is not yet fully stable. Some of the uncertainties that I highlighted earlier include inflationary pressures within Europe, supply chain reliability, order intake in the international markets, and finally, in debottlenecking of the permitting process in Germany, both for projects, but as well for transportation permits.
Furthermore, after a very intense third quarter, we are facing another very high activity level in the fourth quarter, which comes with our own execution challenges in the winter period. But we believe that the overall trends are going in the right direction, setting the stage for achieving our strategic midterm EBITDA margin of 8% in an unstable macroeconomic environment.
And with this hand over to Felix to open Q&A.
Felix Zander
Thank you very much for guiding us through the presentation. And now I would give it back to you, operator, to open the Q&A. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from the line of Kim John with Deutsche Bank.
John Kim
It is John from Deutsche. First question, can you help us unpack the evolution in the sales of ASP? I know it is a term you don’t like to use. But if you look at the euro - sorry, Q3 revenue in euro millions versus megawatts delivered, can you help us unpack mix effects or any sort of adjustments we should be thinking about?
Also, with this in mind, should we have the same sort of considerations for the Q4 numbers? The reason I ask is you are looking for higher activity levels in Q4. But if you could rev guide, you are probably from the midpoint of the range to the high end, looking for about €1.4 billion to €1.8 billion in revenue. I’m just trying to square the circle on this.
José Luis Blanco
Okay. So Patxi Landa, you go first and then we will complement.
Patxi Landa
Yes. With respect to ASP, we continue to be very good when booking orders. So main thing is that the margins with which we are booking those orders, the underlying margins, for the midterm profitability part of the company.
It is true that ASP in the quarter has been affected by some effects, so reduced scope deals as well as particular product mix configuration and market mix configuration that have made that the number is around €0.8 million per megawatt. But the important thing, as I said, is that the underlying margins which we are booking the orders continue to support the midterm profitability.
Ilya Hartmann
And to maybe support that point from Patxi, I think, John, it is getting not only at the order intake ASP, so to speak. We also have the performance when it comes to execution and that ratio coming down. I think we always have to bear in mind when we come to Q4 is that with 2 types of projects. One is what we do as a cost-to-cost recognition.
So largely, we recognize the revenues and the margin when we do the manufacturing. So production plays neutral and how that is driven. And of course, we have also the milestone projects, as we call them, when essentially we book revenues and margin with installation or other milestones physically in the field.
And the mix between the two can be very different quarter-on-quarter, especially if you compare 1 year’s quarter to another year’s quarter. So the ratio just - unfortunately, just between the installations and the sales - the top line number is not really perfect to be reconciled.
And as was maybe together with you, but to calibrate, John, here on the others, I think now with a bit of less performance in the Q3 than we thought, some of that slips into Q4. And so it will depend on whether we can deliver on those installations and manufacturing.
John Kim
Okay. Just a quick follow-up on that. The revenue mix on your Q4 deliveries, is it similar to Q3? Or is it different?
Ilya Hartmann
Very similar. If you compare basically the mix between the cost of cost and the milestones between these two quarters, there will be differences, but they will be way more similar than this year’s quarter to last year’s quarter. .
Operator
The next question comes from the line of Midha Vivek with Citi.
Vivek Midha
I was wondering if you might be able to elaborate on your midterm margin and the order intake. So it seems like you have got a strong order intake for this year, possibly 7-gigawatts might be feasible. And you have commented in the past that 7-gigawatts plus order intake would be a requirement for reaching your midterm margins. So how has your confidence in reaching the 8% margin level in 2025 changed over the last three to six-months?
José Luis Blanco
I think, as Patxi commented, we are not making compromises that our order intake in international markets is not to the expectations, which triggers underutilization cost on the activity we have there.
Order intake in Europe is good but delayed, so which means the activity of the company in the first quarter and the second quarter of next year is going to be low, similar profile than this year. We are still planning to execute close to 1.5-gigawatts of below average profitability during next year.
So all these effects are going to impact a little bit - delaying a little bit achieving the midterm profitability target. But the target is still there. We are still seeing that the boundary conditions are there to achieve and we don’t change our view.
I think our view is selling in this range, 7-gigawatts to 8-gigawatts at the margins that we are selling, selling those on time which, so far, is not 100% the case, selling those balances in the geographies we have the operations, which is not the case. And this may trigger strong adjustment in the cost base of the company. The order intake hasn’t come. But long history short, we are still in the company towards that mid-term asset.
Vivek Midha
That is helpful. And then my second question is a follow-up on that. You highlighted the delays in the international market. Is that just the U.S. comments? Could you maybe elaborate on where you are seeing those delays .
José Luis Blanco
I think it is U.S. definitely, and reasons, Patxi can elaborate. And it is especially LatAm and Brazil where we are executing a substantial volume this year as we speak, which unfortunately the market is temporarily very low.
So we are not losing market share. It is that the market is not contracting much which trigger underutilization costs temporarily in the next year. So we hope that the market will recover. There is no structural reasons for the market not recovering. And regarding U.S., Patxi, I think a temporary effect.
Patxi Landa
The broad pipelines [indiscernible] - I agree that is the effect of - long-term visibility in the market is making the market, for the most part, in a wait-and-see mode. The activity that we are seeing is mainly on the repowering of rates. So we will see the stronger activity towards a year for a normal period in 2025. That is our expectation.
Operator
The next question from the line of Ajay Patel with Goldman Sachs.
Ajay Patel
I have two questions, please. Firstly, just on the guidance. You reiterated guidance today. You are already through nine-months of the year. And if you take the midpoint, it almost implies a 7% margin on EBITDA for Q4. I’m just wondering, why leave the guidance that wide? Why would the uncertainties be that big? And does that midpoint very much sort of where you are expecting to be? And if that is the case, how should we think about that margin going into next year? I believe consensus is at 4.5%. So just get a little bit of an understanding there.
And then secondly, on legacy projects, I just wanted to understand. I think you confirmed that 1.5-gigawatts would be below average profitability next year. Is that all of the legacy projects finished, i.e., there isn’t anything going into 2025 onwards or is there still an element that, that will weigh on results?
And then on just the backlog, last question. You have flat order backlog in billion terms at the nine-month stage. You are calling for a sizable or similar revenue to Q3. Is it possible that we end up with relatively flat order backlog at the year-end going into next year, which would imply revenues being flattish going into next rather than having substantial growth? Any sort of qualitative comments around that would really be helpful.
José Luis Blanco
So let’s start with your second and third question because that is - maybe perhaps Ilya to take the first one. Regarding the backlog, 1.5-gigawatts that were contracted in earlier times. This is what we are planning to process next year.
These are with lower profitability than the average profitability we are selling, you are right. And that is very much a majority of it. Maybe there is a small tail of 200-megawatts still for 2025. But I don’t think the figure is bigger than that.
Regarding the backlog, your assumption is very much our assumption. Although we don’t guide order intake, we expect a high level of activity in Q4. Your assumption stands, let’s put it that way. Yes, we plan a reasonable level of to support the activity for next year. And regarding the guidance.
Ilya Hartmann
There is one question open from Ajay, is about how we dilute the so-called legacy projects beyond 2024. And I think related to that, there might be lingering some of them.
But basically once getting through to 2024, that mix of the newer projects margin-wise, and the other ones should be almost completed. Again, outliers of long lead time projects might be there, but that should be the exception when you look into 2024.
And then the question on the guidance. It is in that together is - and then the next question, I mean, that is a fair question on the guidance. I think what the message from us is that we are - that we want to confirm our views from the previous call and the call before, which José Luis said as much is that we don’t see things change altogether since the last time we spoke when we are calibrating everyone around the midpoint of the guidance.
However, José Luis, I think what we are doing is that the risk to reaching that midpoint have not decreased because by that good Q3, but not as good as we have expected. The burden on Q4 especially in the field is higher than before.
So there is a call it, slightly or increased risk to that midpoint calibration. And I think what we are talking about next year is a bit earlier, I mean, probably it is very fair to say before the budget is landed at least, it will be better than this year. But I’m not sure you want to add something on -.
José Luis Blanco
No, we are just the process of planning and biding next year, it is early to say. We will see effects of underutilization of certain capacity. We will see the effects of this 1.5-gigawatts. We will see effects of the timing of the order intake, of the delay order intake that we had this year.
As you remember, the order intake this year was very backloaded and this has impact in this year’s profitability but as well in the year after profitability. But too early to guide the year. Our view today is that it is a step ahead to the midterm target that we are still into.
Ajay Patel
May I just make sure that I got this clear in my mind. So effectively, what you are saying is that clearly challenges for the Q4 but consistent with midpoint of your targets. 2024 will have 1.5-gigawatts of legacy projects to work through. Activity levels in some areas are a little bit weaker, so maybe profile of revenue into next year could be more flattish in nature. And then when we look beyond 2024, there isn’t really anything that holds you back from your midterm targets in regards to as long as the international projects start to pick up, there isn’t any legacy that would be a drag on performance. Are all of those comments correct? I just want to make sure I understood what you said.
José Luis Blanco
Very much. I think a little bit Ilya mentioned regarding Q4, you remember in the previous call, we said we were expecting high level of activity in Q3, high level of production. The high level of activity in installation in Q3 was true but was not yet there. I gave a number, 500 and 400.
We didn’t do 500, we did 450. So catching up 50 units in Q4, it cost you money and maybe some extra costs. Nothing substantially different, but that is the reality. And production as well is slightly behind, that we need to catch up.
So that is regarding this year. Regarding the next year, your view is spot on. I think maybe I will add a little bit some difficulties in some suppliers that might cost some money temporary until you adjust. And regarding 2025, we have the same view.
Operator
The next question is from Sean McLoughlin from HSBC.
Sean McLoughlin
I just wanted to build on the previous questions to understand a little bit more about the increased risks that you are seeing. If I’ve understood correctly, the increased risks are a result of production shortages rather than delivery shortages. Is that correct?
José Luis Blanco
With instability in the supply chain, logistics issues in transportation, especially in Germany. And this is affecting the revenue profile and the margin profile, and consequently, the installation. So installation is deviating housing.
Big majority of the cases is customer delay, but regardless this customer delay, affects our P&L. Because we have a certain percentage of POC that we don’t execute. And that is very much - it is always both. It is production, it is customer, it is logistics.
Sean McLoughlin
If I can just dig also a little bit into Germany. There is been a clear uptick in permitting volumes. And so I think there is greater visibility on market growth. But you are suggesting that there is a transportation permit issue and a lot potential bottlenecks. I mean, what in your view actually needs to happen for this not to become an issue for market growth in Germany?
José Luis Blanco
Yes. I think that is a very good question. I think, from the market perspective, we are very happy to see that the auction volume increased from 4.6 to 7.7 expected, subject to the last quarter, but in the last 12-months, substantial increase.
We are happy with our 30% on the permit share in Germany. We are happy with the pricing of the German market. And we are slightly concerned about the execution, which is driven by several factors.
One is a country factor that we are working together with the association, with customer, politician, suppliers to debottle the permitting issue because this is affecting us today, but it is affecting the ability of the country to deliver to the targets in the future.
I think that if the government, together with key stakeholder, was able to accelerate substantially the permitting because this is critical to nationally security, to energy supply, I mean, the country cannot afford that permits and roads are going to be the bottleneck. So we are working collaboratively with the government. And hopefully, this is a temporary impact. .
Operator
The next question comes from the line of Sebastian Growe with BNP Paribas.
Sebastian Growe
First one would be on the margins. You made the comment around the quarter three development being behind your internal planning. So would be interested in getting the sort of magnitude what you would have thought would be possible. So if we could start there and also then the likelihood to catch up with that one in quarter four. I think you said it in your prepared remarks, but if you could put a number behind it that would be much appreciated.
Ilya Hartmann
Yes, I mean, starting with your point, you said it. For the expectations [indiscernible].
José Luis Blanco
Yes. Number of production is - currently, it is less production. So our internal planning was better, better revenue and better margin on a better revenue. We were not planning certain margin deterioration we have with the issues mentioned before with certain suppliers, with certain temporary permitting issues. So maybe you can be slightly more precise.
Ilya Hartmann
But I think based on the traffic backlog activity, those, let’s roughly say, 450 versus 500, and look, we are not one really too much into do a public call. I think that gives you an order of magnitude.
I think that is the last thing after, I guess, is was that a stock deviation or just I take Slide 4. And my answer to that would be, as you said in the last call, Q3, we needed to deliver a pitch perfect quarter to make the numbers. And that didn’t happen. Shall we qualify that somewhere in 10% - 10%, 15% delta to the plan? I think that calibrates, at least longest leading use of. .
Sebastian Growe
Okay. That is helpful. And then move on to the pipeline, it is more a follow-on question. So you mentioned in a side comment that the U.S. is definitely behind that thought for the international order pipeline. So one thinks of what happens in the U.S. so far, then it is mostly repowering business. And installed base, obviously, that is not so much in your hands, but rather in other OEM hands. So I think it is [indiscernible] why you have sort of been missing out so far in the U.S.. But if you just look ahead, and Patxi, would be interesting to pick your brain on this one. What are you seeing really in the pipeline? When is the market really moving from repowering to sort of new builds? And what’s simply your sort of positioning there? And against that, clearly, also, how do you think currently about the Iowa plant?
Patxi Landa
I mentioned that before. So we presently, as I mentioned, that is powering is actually bulkhead that we have seen in the market. We are not positioning ourselves as a company in that segment. And the normal activity will be picking up throughout next year, also in the context of a very long term delivery for the first time in many years in the U.S.
The pipeline operators need to get rebates. So it has been a significant amount of [indiscernible] that has to be resisted back to wheel. So it is taking some time. And those delays we are seeing in the normal that market that we are addressing. So it is my earlier statement, we will see also 2024 a transition from respect to orders in the U.S. and we see a much more normal year 2025 for our sales for our company. .
Sebastian Growe
So in other words, rather flattish development from today’s point of view, really, in the U.S., in particular, with no pickup - real pickup before 2025. That is basically the thinking and the sort of plan currently?
Patxi Landa
That would be - guiding in the U.S., yes. We see a transition year into 2024 and much more normalized year in 2025. .
Sebastian Growe
Okay. And the last one, sorry, for leaving the point again. Obviously not so early to make sense of, on the one side, you are showing that obviously, the delivery capabilities are to the tune of 9-gigawatt annualized, if I look at the 2.4 that was printed in the third quarter.
Against that, obviously, you have the order intake run rate, as a case for that, 7-gigawatts. And then also your comment, José Luis, that you might contemplate eventually some capacity cuts. So how should we think about the sequence of events? If there is no sort of order pickup within the next two quarters, then you would have to sort of idle more capacity or what is sort of the kind of thinking here at this point, if I may ask that?
José Luis Blanco
That is a very good point. I think at this point, it is definitely our Brazilian factory is suffering because of lack of load. So I think we need to address that, Knowing that, that was the dynamic of the market in the past and knowing that Brazil this year is one of the best contributors for the company. So we should not take long-term decisions based on short-term signals. So we need to be a little bit more patient there. The same happens in all regions.
And then the other question, you name it is, yes, we are running a structural overcapacity. That has a cost associated with that that deteriorates the profitability target. But as well, there is always a tradeoff between working capital and capacity because you cannot refer the company for 1-megawatt capacity and sell 1-gigawatt capacity because the orders are not coming in that sequence. The needs are not coming in that sequence.
And to produce a stable volume with stable and variable demand drives massive working capital investments that we cannot afford in the current balance sheet capabilities and free cash flow of the company. But we take care of those - of your points daily in our strategic discussions, so for what volume prepare the contract.
Sebastian Growe
Okay. Understood. And the very last one, if I may. Just on that point of potential capacity cut in Brazil. Can you give us a sort of magnitude if and when something was happening. So what is the kind of affected staff number? Are we talking a couple of hundreds? Real difficulties to get a better sense simply of what that could mean on the financially then.
José Luis Blanco
There is not much we can share at this point. I think we need to wait to the next call or to the guidance of next year to give you more color about how we plan how we plan this. Next year, at that time, we will have a better visibility as well.
Operator
The next question is from Constantin Hesse with Jefferies.
Constantin Hesse
Unfortunately, all of them have actually been asked. But I’ll quickly a couple in there. Patxi, very quickly on the U.S. market. Historically, you have always done deals with European companies there.
So just wondering if there are conversations ongoing with local utilities, local developers, so if we are building a relationship for a potential future order intake there or is that still very much going to be geared towards European developers?
And then second of all, if you could maybe share your view on the wind power package that was announced a few weeks ago. And could we expect any kind of tangible implementation in the coming weeks?
Patxi Landa
So the first one, it is true that the profile of customers from the last five to six years has been geared towards large European utilities with activities in the U.S., but not only. And we have had also local customers, and we are [indiscernible] so we are addressing a whole market, to your point. So that is the organization that we have, a position that we will in the next years as well. .
José Luis Blanco
Regarding the repower CapEx, I think this is somehow encouraging currently. I mean, considering win of superior public cases. It is encouraging in that the Commission and the member states are addressing the market reform. They are addressing the acceleration of permits. They finally view the value of a resilient supply chain European based, which they want to prefer and protect.
So I see very positive signals from many different [indiscernible]. Of course, the new power package needs to be translated to national legislation in the different countries where we operate to make this a reality. But definitely, the North Star sets the right direction of the political priorities.
Operator
We have a follow-up question from Kim John with Deutsche Bank. .
Q - John Kim
Can we spend a little bit of time talking about CapEx build-out and capacity? So would be helpful for us to get us on where the €180 million is going this year. Is there a regional focus? Is there a particular aspect of your production capability or footprint that you are looking to augment?
And a clarification question, please. We spoke about units earlier, originally talking about 500 units in Q3, 450 delivered. Are you speaking about completed turbines? Are we talking nacelle, blades? What are we speaking to here?
José Luis Blanco
Installed units. We were planning previously to install more or less 500 in Q3, 400 in Q4. Unfortunately, we couldn’t do that. So it was a good step up, but 450, below 500, which is a substantial deviation that we plan to catch up. But catching up in winter costs money and increase the risk.
Regarding the CapEx, is apart from the engineering capitalization of new variants and developments, majority of the CapEx goes for transportation and installation equipment because we are doing substantial more activity.
And this requires more vessels, more trucks, more everything that uses transportation and installation fixtures, more [indiscernible] and is as well related to blade moats to set up a new blade lines to support the current volume and expected volume for next year. Those are the biggest CapEx items.
So it is onward capitalized, transportation and installation tools for higher level of activity. New moats for the pipeline projects and for the supply chain strategy that we are implementing.
Operator
[Operator Instructions] The next question is from Anis Zgaya with ODDO.
Anis Zgaya
I have two questions. So first one is on the European Wind Act. In your view, what is the measure that could protect European manufacturers from Chinese competitions? And my second question is on Lat Am. And we see two big orders in Q3 coming from Brazil and Chile. So why - and you are indicating that those markets are in a standby mode. And you succeed to record two big orders in Q3. So could we have - why are you so cautious on those markets while you are succeeding to book orders?
José Luis Blanco
Regarding your first question, there are several points. I think the principle, in my view, is the prequalification criteria to participate in the auctions eventually to install wind turbines in Europe. Cyber security, data residence and control of those turbines is another factor.
So I think that is perceived as European public interest to somehow be in control, be in control of that. And I think those factors can play a role. Regarding LatAm, yes, in Q3, the order intake in there was good. but that was the first quarter.
So we were expecting not in Q3 this year, but to sell in Q4 last year. So we waited 3 quarters without almost selling anything in that geography. So it is substantially less than one-year revenue and it is substantially less than initial expectations.
And it is fair to say as well that those orders came with certain margin compromises that were offset by above than average margin in certain European orders. And this is why our view is temporarily not too optimistic. It is not that we are losing market share, it is that the market is not contracting because economies are not growing.
There is a very high visibility here, a lot of water in the reservoirs and the electricity price is depressed. CapEx increased 40% year-on-year, capital cost, 300 points. And our customer in these currency circumstances, they postpone.
They postponed the investment decisions, waiting for the right PPA. We start to see some light at the end of the tunnel, but it is very, very, very early to change our cautious view that the region is going to be temporarily in a sort of downturn.
Operator
The next question comes from the line of Christian Bruns with Montega. The next question is from Kulwinder Rajpal with Alphavalue.
Kulwinder Rajpal
So two questions for me, please. First, if we zoom in a little bit on the wind action plan that was announced last month. It mentions considerable overhaul to the grid infrastructure in Europe. So do you think those measures are adequate? Because, let’s say, even if the wind orders start coming through, we need a lot of capacity - we need a lot of investments on grids for this capacity to reach to the consumers. So what are your thoughts on that?
And secondly, just a quick question on service margins. So service margins seem to be back above 15% in Q3, if my math is correct. So how should we expect them to trend in the subsequent quarters, mostly going into 2024 and 2025?
José Luis Blanco
Starting with the second question. Thank you for the questions. I think with the second question, I think we mentioned in the previous call that the service recovery in margins is going to be a two to three-year journey because we suffer some FX, temporary inflationary effects as well geographical footprint effect, nothing concerning, but temporarily is going to impact.
Although long term, we are quite confident that we can come back to the previous reported margins. And it is going to be a step-on-step in the quarters ahead. Regarding grid, indeed, I mean, grid is a critical factor.
I mean, for the substantial growth expected. I mean, if the European economy is going to work carbon-free. So the first thing we need to do is electrify even more the economy and then decarbonize the part of the economy that can be electrified.
And for that, you need grid as a key enabler for this mid- to long-term strategy to be approached. I agree with you, it is a key enabler. I don’t think it is a massive challenge short term. But indeed, if the grid doesn’t deploy at the speed of the volume, yes, this might become a bottleneck.
Kulwinder Rajpal
Okay. And just to clarify on further. So the margins that we saw before, so 17%, you will not see them again for two, three years. That is what you said, right?
José Luis Blanco
Yes, I would say, yes, towards 2025..
Operator
The next question is from Mackie William with Kepler Cheuvreux.
William Mackie
Some questions. Firstly, on the supply side, given the growing importance of cost to cost and looking over the last three-years, I mean, can you give us a sense of what you expect in terms of the operational side or the build rate production side of the business, how you see it running in Q4? I mean, should you be at your normal sort of level of nacelles of around 1,500 for the full year?
And then just with respect to your supply chain. Could you put a bit of color on perhaps the changing pattern of your sourcing and production around nacelles. There seems to be somewhat of a shift towards China. And also with regard to blades, a number of your key outsourced suppliers are in perhaps weak financial positions. And how do you see that affecting your ability to source?
José Luis Blanco
Thank you for the question. Your first comment, wow, spot on. The 1,500 is very much what we plan for the year in nacelle production. So let’s see because it is a substantial risk because we did so far 1,000. So it means that we need to do 500 in a quarter, which is not a minor thing.
Regarding supply chain, it is - very much our strategy is not - is risk management. So we want to keep certain capacity with the associated overcapacity cost in Europe. At the same time, we are ramping up China and India.
So we want to have a diversified supply chain and see how policy plays out to accelerate going to the right or going to the left. This might impact as well as temporary profitability, but we don’t want to take any, let’s say, irreversible measure at this point in time without sufficient clarity in the policy front. So we need to be cautious. Let’s see. And then we have all cash open to go far left or right and on a different speed.
Regarding blades, I think we don’t comment much on other companies. I think we mentioned that suppliers, in general, the suppliers’ profitability is something that is concerning to us because we are suffering a lot in many locations due to this situation.
Regarding blades, we are taking the - our strategy is unchanged, and we are diversifying our supply chain. And hopefully, this situation will be turned around with more volume for our suppliers.
But at this point, it is something that, of course, we are on top of that but we don’t think this is going to be that critical for our company. I think, yes, it might cost us some money here and there, temporarily until things stabilize. But I don’t think it is - I wouldn’t expect any of the blade suppliers, let’s put it that way, not to stay in business, which could be an issue for us. We don’t expect that
William Mackie
And just two follow-ups. Thinking about the produced capacity in terms of megawatts, I mean, should we factor in a continued increase in your average nacelle sizes? I mean, you are now running nearly at 6-megawatts per nacelle in terms of production. Is that sort of where you see the operations now? The output is boosted by the average size of the nacelle increasing as well? That is the first follow-up.
And the second relates to your underperforming business or the contracts from a previous era. I mean, you talked about the 1.5-gigawatt of business to be processed or installed in 2024. But just to give a kind of reference or a baseline, what volume would you describe of the installed installations this year that would have been associated with low margin or contracts from a previous era?
José Luis Blanco
The average nacelle, yes, the market - for us. the average megawatt is increasing and we see higher shares on the 6-megawatt platform. it is one of the reasons of the ASP because the bigger is the machine, the lower ASP at a stable margin. So we still sell at a stable sustainability margin a bigger machine with lower euro per megawatt. And this is the trend for us because majority of the European market require bigger machines.
The second question is very hard to answer. The next year, we know it because we are precisely on the planning for the budget, and we know even the name of the projects and geographies and so on and so forth. But for this year, I don’t have that data. I’m sorry for that. We can look at it and maybe... .
Ilya Hartmann
Obviously, it is higher than this year. I mean, it is higher than those [indiscernible] because we have that receiving effect now. Such an important question, and I can’t mislead anybody on a public call.
And that really, with a lot of caveats before looking them up and always be careful, take from the execution, we see something to the tune of 30% or so. But then we have to deliver the exact numbers. I think that would not be misleading. But really, a lot of caveats just to calibrate it this year versus next year.
Operator
The last question is a follow-up from Sebastian Growe with BNP Paribas.
Sebastian Growe
Going back to your earlier comments that you made. So I’m a bit confused, to be perfectly honest. And I guess that is also what other people on the call will feel. And it is on the comments that you made with regard to next year, and I know how delicate and difficult is to talk about that openly. But obviously, there is different buckets obviously that would help us understand better where 2024 might settle. And that is volume. I think that is what you relatively clearly answered in this, and it is rather volume than up or down, so rather flat - sorry, the volume up and down.
I think you haven’t really commented much on price. Still, the order intake is year-on-year, 3% higher. It was obviously materially higher on the 2022 order intake. So if we could give us a bit of a handle and [indiscernible] in there. And then also on services, what sort of a growth rate from year might be going into 2024 or on a more structural trend.
And more important, that is adding to the confusion is really that on the one side, Patxi has been saying that the overall pricing for product, scope, whatever reasons might be trending down, but still the gross margin is stable-ish. At the same time, you, José Luis, said had some compromise in Brazil. You also then, on the contrary of the spectrum, you mentioned that Germany is going very well from a pricing perspective. So if you could give us a bit of a steering when it comes to the gross profit margin going into 2024 based on anything that you can see right now that would be much appreciated.
José Luis Blanco
No, thank you. And let’s be clear. The order intake and the order backlog that we landed year to date delivers the mid-target profitability. And of course, there are certain markets with slightly above average and certain markets with below average, and there are markets with more scope and markets with less scope.
But in all, we are delivering the midterm profitability. Regarding next year, we just wanted to give you some color. But you need to understand as well as, Sebastian, that we are in the planning process for the budget, and we cannot comment much on next year at this point in time. We need to wait to the regular calendar of the company.
We know, but there are certain effects that may affect like the backloaded year, like the 1.5-gigawatts of, let’s say, legacy backlog, like the overcapacity in certain factories, like the stress in certain areas of the supply chain, that might impact. But all in all, to the best of our knowledge today, next year, we see a better year than this year.
Do we see an 8% profitability target next year? No, we don’t. But if we keep selling the quantities that we are selling at the gross margin that we are selling, the supply chain stabilizes a little bit and we keep deteriorating margin there, if the permits in Germany are solved, if the margin in service improves as expected, we see up towards 2025. And this is what our view is with the limited information we have today and with a long period of looking ahead.
Sebastian Growe
Okay. That is helpful color. And then a very last one for me is just on the topic of the more recent weeks, I think, project guarantees. So if and when volumes were to increase, and let’s assume volumes were to shoot for 8-gigs, 9-gigs, whatever then the right figure might be over time, would you think that currently the support on the side of the banks, et cetera, would be definitely sufficient to get there or how should we think about that?
Ilya Hartmann
That is a very good question, Sebastian. And let me take this one for you. Look, more than the total volume, which is as described in the last year, this year, next year, without going too much into it. very comparable, it is more the mix of projects and the mix of countries and where you have more balance sheet, more project finance customers.
So these things play a role. It is not just the total volume that we sell but where, to which customer. But all that being said, as we are now very advanced already in refinancing the existing bond line, we see from that end, no concern.
Felix Zander
Okay. Thank you very much for all the questions. And I would like to close our Q&A session for today. And I would like to hand over for your final remarks, José Luis. Please go ahead.
José Luis Blanco
Okay. So as usual, I would like to close our presentation today with our key takeaways. The order intake momentum has improved throughout the year, now being at a very reasonable level. The order pipeline remains robust, providing good visibility for the future. As expected and communicated, EBITDA improved further in the third quarter benefiting from an increased share of better price orders being now reflected in the financials.
Our financial position is overall healthy, providing us with enough flexibility on the back of a strong working capital level, improving cash flow profile and the issuance of the compatible bond. Finally, we confirm our guidance and feel comfortable with our midterm strategic target. Moreover, we hope that the encouraging policy ambition and measures in our core markets will pay out soon.
Thank you very much for your participation in the call, and I wish you a nice afternoon. Thank you.
Operator
Ladies and gentlemen, the conference is now concluded, and you may now disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.
For further details see:
Nordex SE (NRDXF) Q3 2023 Earnings Call Transcript