Categories
Uncategorized

Siemens Gamesa Renewable Energy S.A. (GCTAF) CEO Jochen Eickholt on Q2 2022 Results – Earnings Call Transcript

Article Republished By Javier Troconis

Siemens Gamesa Renewable Energy S.A. (OTCPK:GCTAF) Q2 2022 Results Conference Call May 5, 2022 2:30 PM ET

Company Participants

Javier Jódar – IR

Jochen Eickholt – CEO

Beatriz Puente – CFO

Conference Call Participants

Vivek Midha – Citi

Akash Gupta – JP Morgan

Deepa Venkateswaran – Bernstein

Mark Freshney – Credit Suisse

Sean McLoughlin – HSBC

Katie Self – Morgan Stanley

Lucas Ferhani – Jefferies

Mike Clements – Downing Fund Management

William Mackie – Kepler Cheuvreux

Javier Jódar

Good morning, everyone. This is Javier Jódar from Siemens Gamesa Investor Relations. Welcome to our second quarter fiscal year 2022 earnings release presentation. Please let me draw your attention to our disclaimer in Page 2.

Our CEO, Jochen Eickholt; and our CFO, Beatriz Puente, will drive this presentation.

Please, Jochen, the floor is yours.

Jochen Eickholt

Thank you very much. Good morning to everyone. A very warm welcome from my side as well. We now have the pleasure of getting in touch the second time in very few weeks. Still going forward, we would appreciate to have good discussions around our situations. As usual, we’ve prepared a, in my view, very good and comprehensive little deck to explain our situation.

Let me go on to the key points, Page #4. The Q2 ’22 order intake was €1.2 billion. Our order backlog in that sense ended up at €32.8 billion. We had impacts from a, in our view, standard volatility in Offshore, in the Offshore business, and we also had an increasing selectivity and longer commercial negotiations in Onshore, leading to these situations.

The ongoing inflation pass-through that is reflected in the ASP trend, which we’d come back to a little later. But of course, we also did, and that is what I referred to last time already, we introduced new risk mitigation measures into the negotiations, which then also had an impact. Perhaps quite remarkable certainly for us, we had a successful offshore market entry in Poland on the Baltic programs, and this is something we put really a lot of hope into.

The Q2 revenue of €2.2 billion and the EBIT margin of minus 14% were impacted by the ramp-up challenges of the 5.X platform and a couple of questions around that and the ongoing and continued supply chain disruptions. Already last time, we dived into that a little.

The performance improvement program, which we started with, that is focusing on the short-term priorities. Those were immediately launched after my arrival a couple of weeks ago, and we later on will also go into the new company plan, which we want to be the response to the situation we’re in.

It is remarkable, in my view, that we have had a strong Service performance, with the revenue going up 19%. And of course, the EBIT margin also, in my view, is satisfactory.

On the net debt side, we are facing a situation of minus €1.7 billion, coming along with a working capital of minus €1.8 billion. The working capital increase has been driven by additional investments also in inventories. The inventory situation, of course, is determined a little bit by the delayed difficulties we have, specifically in the Onshore business.

We continue to have very good access to liquidity, the €3.5 billion, including €1.1 billion of cash in the balance sheet that remains to be solid. We’ve had a successful signing of the asset disposal, as it’s mentioned here. The signing as such happened recently. We published that as well. The closing is expected to happen in our — this fiscal year, which means we expect a cash collection of around €580 million during quarter 4 of this fiscal year, end of September.

The fiscal ’22 guidance was placed under review and no longer valid. That was also published and communicated on last time. We continue to assess the already aggravated supply chain environment, and the Onshore ramp-up delays also continued to have an impact. The group targets for the meantime, and that was in line with also what was said last time, as far as revenue is concerned is between a decline of minus 9% and minus 2%. The EBIT margin target will be in the minus 4% area. Both figures include the effects of the asset disposal.

On the market side, the European programs, together with various additional national initiatives, leads to an increase of the demand prospects certainly in this decade and supporting also the mid- to long-term outlook. However, we have to say that oftentimes, permitting periods are really inhibiting the quick movement ahead. And that needs to be changed as well. We are in various discussions also with European and national politicians on these issues. We need to continue to drive also with the help of the associations for a speed up of that activity set, a speed up of that market development.

Also, very importantly for us, we want to remain the leader in ESG performance in our business space. In this context, it is good to see that the various elements of policy we put into place have been continuing to be acknowledged by various indices, by various media. And we were also typically in a very top rank on various types of scoring and rating agencies. We typically find ourselves in the top percentile for the ESG rating, and we typically are a member, if not the member, listed at the top space of what is being looked at in these areas. We have to underline, in my view, that sustainability remains to be at the core of us, of our business policy, and it will help us to reach also the business objectives. So we don’t see that as an additional burden. We see that as an integral element of our policy to go forward.

Coming to the slightly more detailed overview on the commercial activities. The order backlog is a little short of €33 billion. That year-over-year is down 2.7%, so not perhaps too remarkably. The order intake in the quarter 2 was €1.2 billion. You see the comparison versus the last year’s quarters. And perhaps if you compare these numbers, in my view, they look perhaps slightly worse optically than they truly are because the last year’s quarter really was a record quarter if you compare those numbers. That was an outstanding quarter, and we have to see that a comparison against that always is difficult.

The order intake so far was impacted by Onshore, as we said, Onshore selectivity and protracted commercial negotiations. Please remember that specifically in Onshore, also order intake typically happens to a majority at the end of the quarter, so in this case, in March. And in March, exactly the timeframe was when we — when I actually joined Siemens Gamesa, and we looked at various ongoing negotiations and sometimes had to introduce new different Ts and Cs, clauses, and we also looked at the pricing and became much more selective. So there is an impact here. We don’t expect that impact to be ongoing and extending to a longer period, but of course, we have to see that, that has an impact.

The Offshore business had a volatility — I mean, looking at the size of the projects, typically, such volatility is nothing unusual, in our view. The record quarter 2 in ’21, I referred to. The overall backlog, in our view, is really convincing, it’s really good. It’s strong, it’s stable. We have to see that the order backlog as such really can be seen to be linked with markets where we have strong execution power and also certainly some growth prospects.

Going forward, please, next. The perhaps also remarkable thing here is that the ASP, which sometimes is looked at, is something which clearly showed a positive trend. And we have had a, I think, result in the end of the day, which perhaps is even a little bit over the real picture because of the smaller order intake as such. Statistically speaking, you could say that perhaps we have here a slight overemphasis of the higher ASP projects, which we got to sign in the last quarter. A more realistic picture with a higher order intake would probably lead to a slightly lower order intake figure in the ASP. Still, the trend is overall positive. We would be in a range of probably 0.8% when it comes to the euro per megawatt — or the €1 million per megawatt price. That is still in line with our, actually, positive expectation on this development.

It is — if you compare it to some of our competitors, it is in that range, which we would expect. So there are competitors which typically are lower, there are competitors which typically are slightly higher. They have a different regional mix, they have a different product mix. All that is taken into consideration there. But for us, this development is clearly positive and showing that also on the sales side, we are able to react to the disruptions on the supply chain side. Next, please.

On the Offshore side, we continue to be the leading player, in our view. We have had, as I was speaking about, not really the order intake in quarter 2. However, the order backlog and the pipeline remain to be convincing. And again, the entry to the Polish market for us is a big achievement, which we are very happy about. Next, please.

53% of the group backlog come from Service, and this is really the positive message. If you look at the overall profitability structure of our business on the Service side, you will probably find that this is something extremely positive. And we continue to believe that we are one of the leading players really in the service field also when it comes to the discussion of foreign fleet. We have right now 83 gigawatts under maintenance, and we have a high retention rate for the existing contracts. We have a sound commercial performance. All the parameters look positive, and this is what makes us also very positive going towards the future.

With that, perhaps, Beatriz, we’ll come to some more financial numbers.

Beatriz Puente

Thank you, Jochen. Good morning, everyone, and thank you for joining us today. I will cover the key financial performance of the quarter, also the first half, but no changes versus the announced preliminary results.

As we explained, those has been severely impacted by 3 main reasons. The first one and with the largest impact has been on the additional ramp-up challenges in our 5.X platform, challenges that we explained has been more complex than we originally anticipated. Second are the higher-than-expected cost inflation, not only raw materials but also significant increases on the key direct material cost for us and also transport and electricity. And third, the ongoing, and I will say aggravated as well, supply chain disruption with bottlenecks in key components for our [terrains] and also causing further delays on the projects and also extra costs.

This has been compounded by, of course, the situation that we are facing with the geopolitical tensions and also the persistence of the pandemic and a new lockdown in China at the end of the quarter. As a result of all that, our WTG manufacturing activity and product execution has been impacted, leading to a lower revenue in that segment and additional cost. Despite this challenging environment, our Service performance has been and remain strong.

The consequence of all this and reflected in our P&L is a 7% decline in group revenues in the quarter to roughly €2.2 billion and a 13% decline during the first half of the year to roughly €4 billion, and EBIT losses amounted to negative €304 million in Q2 and minus €614 million in the first half. We’ll get — you have a detailed — more detailed information in the presentation.

Other key KPIs for us in the P&L, integration and restructuring costs amounted to negative minus €24 million in the quarter, mainly related to IT and digitization activities that are core for us. And we expect that integration and restructuring costs will increase during the second half of the year. The positive financial income of circa €50 million is mainly due to higher interest rates that are affecting the present value of the provisions that we have on the balance sheet.

Tax expense in the quarter continues to be impacted by the losses that we have registered in the period. Those losses are accrued in the countries where we consider that the company shouldn’t capitalize at this stage the deferred tax assets, therefore, the impact. As a result of all this, reported net income in the period amounted to a negative €377 million and for the half year, minus €780 million.

If we move to Page 13 and give you more color on kind of the revenue performance. I will focus on the WTG segment, decline of 13% in the quarter to €1.7 billion and 19% down during the first half of the year. The decline on the WTG onshore manufacturer activity has been partially compensated by the positive contribution from project and scope and also a bit of impact on the currency, leading to revenues of €931 million in Q2, down 19%, and to a revenue of €1.9 billion in the first 6 months, down 15% on the period.

In the case of WTG offshore activity, the decline has been compensated by product mix with the increasing contribution of our platform, SG 11.0-200, to the revenue line. And also, of course, that means higher price and, of course, because of higher size of the plates and the cells, and also has been also positively impacted by the execution of the last phases of some important projects for us.

On the contrary, our Service revenue performance has remained, as we have explained, quite strong with revenues of €515 million in the quarter, an increase of 19%, and for the 6 months period, roughly €944 million, an increase of 14% growth. And also very important, both in line to achieve roughly what we foresee high single-digit growth for the year.

Moving to Slide 14 and explaining the performance on the EBIT and providing you the impact on the backlog as we also said on the preliminary results. EBIT margin pre PPA and integration and restructuring cost of negative minus 14% in Q2, which means for the 6 months, minus 15%. And as I explained before, this has been really impacted, severely impacted by the additional cost on the 5.X, the cost inflation pressure and also the additional cost generated by the impact of the aggravated situation that we are seeing on the supply chain. Also, that also for us has impacted the revenues and also because we are having lower volumes. We are having higher cost because of the EBIT capacity that we are suffering in some of the manufacturing activities.

Regarding the EBIT performance, also includes a negative impact coming from the evaluation of the backlog, mainly Onshore. That is because of the higher cost that I have explained. And this impact has been roughly €248 million for the second quarter, which means that for the whole 6 months, our revenue — our EBIT has been impacted by €537 million because — mainly related to these deviations in the onerous contracts.

This impact — these numbers, of course, this revaluation of the backlog has heavily impacted the profitability of the WTG division with a negative margin in the period of 25% and for the 6 months period, minus 27%.

Coming back to the strong performance in the Service segment. This is seen and, of course, a very strong margin in the period, EBIT margin pre PPA and integration cost close to 21%.

Moving to Page 15 and giving you more color on the situation on the balance sheet. As Jochen has said, of course, for us, cash generation continues to be a priority. Financial discipline as well and, of course, strengthening of the balance sheet. Net debt position stood at minus €1.7 billion as of the end of March, an increase of €1.5 billion. That’s mainly related to increase on working capital of €735 million. That is impacting our cash flow in the period. The increase in working capital, as you see in the chart, is heavily impacted by inventories. And for us, it’s mainly related to the early production on the factories, the delays, employee execution, but of course, we are sitting on that inventory, and to a lesser extent, safety stocks.

Operational performance, of course, has a significant impact on our operating cash flow of roughly €334 million. And we continue to invest in the future of the company. The CapEx of roughly €321 million will mainly focus on Offshore, as we explained, on developing additional features on our key platforms, with roughly €65 million of that CapEx deployed in Offshore.

As already announced, we completed the signing of the disposal of our Southern European development assets during April. We expect to reach financial closing of the transaction during Q4 of this year. The asset disposal will have a positive impact in our accounts of, as we disclosed, roughly foreseen revenues contribution of €580 million and with less — a bit less contribution on EBIT and cash for the period.

Regarding liquidity, the company has extended the maturity of the €2 billion credit line, that we’ll have 1 more year. Now it’s due ’27. And we have used in the period roughly €1.9 billion. At the end of March, we have available liquidity of €3.5 billion, part of which cash represent €1.1 million.

And now with this, let me pass on to Jochen to give a brief overview on the outlook and conclusion to the presentation, and then, of course, happy to answer any questions that you may have. Thank you.

Jochen Eickholt

Thanks, Beatriz. Yes, in the past, the primary driver for growth in Renewables was decarbonization in the end of the day. During the last weeks and months, actually, we saw that also the view on energy security, the security of energy supply, becomes an equally important driver for this development. The need to develop a secure energy supply free from geopolitical tensions is resulting into increased commitments to renewables in the key markets.

The REPowerEU plan for more affordable, secure and sustainable energy goes in this direction. It demands a set of annual installations of around 33 gigawatts, leading to 480 gigawatts by 2030. The EU has also acknowledged that such a target requires a simpler permitting process and improved connection infrastructure. And in my view, it also does require that we implement the instruments to fight inflation because oftentimes, also on our customer side, it’s not so easy to cope with inflation due to then the related contracts around PPAs.

We have also seen national governments reexamining their commitments. Two good examples here are certainly the U.K. and also Germany. We have to see that also here, the permitting process as such so far is not really up to speed, if you wish, in accordance with the needs of what the political direction sort of indicates.

As we see, the annual installations will grow by 54% in the second half of this decade, reaching then 33 gigawatts by 2030. Offshore is expected to more than double in this period. And the IEA’s net zero line by 2050 anticipates an even higher growth. It would require current wind installations to be multiplied by more than a factor of 4 by 2030 to achieve that net zero emission level by 2050. So you’ll see that really the demands which we foresee for the future are really substantially increasing.

As indicated earlier, the first half performance and the second half uncertainty have left our guidance invalid for this fiscal year ’22. These uncertainties are many and there’s a variety of them. They include the ramp-up of the 5.X platform. They include the tensions, of course. They include supply chain disruptions and also inflation. All this could further impact the evaluation of the order backlog.

We right now are rather strict, rather clear on our path and our policy to reassess the targets and forecast for the fiscal ’22. At present, we would like to confirm what we said also the last time. We expect the targets to be met, which means the revenue decrease between minus 9% and minus 2%, and an EBIT margin of minus 4%, including both the positive impacts of the asset disposals agreed in April. We expect to close in Q4 ’22.

If we now look at what led to the situation. The root causes we detected so far are around the delays in the 5.X program, as we spoke about also in the past, for instance, around not fully adhering to the milestone concepts we’ve put in place, and that sometimes or more than sometimes, actually, results into delayed product availability, quality problems and also then, as a consequence, unplanned costs.

We continue to have a very high business complexity. In my view, we have a too broad portfolio with too much variance in there. There is too limited standardization and modularization. We continue to have high production costs, partially also driven by low utilization of then existing capacities. Low utilization also sometimes coming from delays in our portfolio, for instance, around the 5.X. So there is a little bit of a vicious circle here as well.

The effects of the global supply chain disruptions continue to be there. We are right now in the phase of negotiations for the material pricing for the ’23 period. And we see that pricing is not going down. It’s going slightly up instead.

Of course, we have then also on our side additional complexities around IT systems and tools and their transformation. We, for instance, did change CAD systems or the development environments. And that, of course, then led to additional delays.

However, I’m very positive, and I’m positive because we saw solid foundations. I saw solid foundations, which are available. As indicated before, we have extremely strong market prospects, and I believe that is a general trend which will not cease. We so far have seen that price increases and risk-sharing with customers in a very partnership approach is possible and is perceived in a not too negative way. So therefore, the trend for ongoing activities in this direction is there, clearly visible on our side, and probably it will also perhaps even reach our business in general because many of our competitors also, I mean, in my view, do not report too positive situations.

We have a competitive product portfolio in both Onshore and Offshore. And 5.X, whilst it’s sometimes referred to as our difficulty right now, I believe is probably going to be the most successful product in Onshore we’ve ever had.

And first and foremost, we’ve got highly talented people. We’ve got a committed organization. We’ve got extremely qualified engineers. We’ve got people who are part of the founding circles of the industry in total, if you wish, and that makes me extremely positive that we can also master these challenges.

We’ve set up a couple of short-term activities to tackle the issues, mostly around the 5.X activities and procurement. We’ve set a cross-functional task force implementation up by actually making sure that we have really our best people in those task forces and it’s really cross-functional under all circumstances.

Commercially, we have to see, and we spoke about that in the part on the order intake, we’re applying much more discipline here. We apply much more the concept of selectivity. So not each and every project is too attractive. A project has to have a certain attractivity profile, if you wish. There are clear hurdles implemented under which we see a project as being attractive for us.

We have reinforced, as a consequence also, the project approval process. And we’ve, under all circumstances, implemented an extremely close alignment between procurement and sales when it comes to the effects of the supply chain.

Of course, going forward, we would like to make sure that this focus and dedication is further implemented across the organization. We’d look at further optimization measures. We will, however, be slightly more rigorous when it comes to the already defined company processes because, as we said, higher on this chart, if you wish, that not everything was adhered to. And we want to have really a priority-driven organization because otherwise, the situation is too complex to handle. Next.

If we look at the overall situation, we are also looking at an intensified partnership across the value chain. So that includes customers, that includes suppliers. On the supplier side, we would like to achieve and go for rather long-term supply agreements. We have implemented the financial hedging of key commodities. We will intensify the collaboration in product development. We will intensify our efforts to product standardization. And in this, we also wanted to include the supplier early. And of course, in some cases, we also have agreements with Siemens Energy to join forces.

On the customer side, we also strive for strategic agreements around that. We wanted to make sure that raw material price developments have to be seen as something which is indexed on either side of the value chain. And it has to be seen also on the side of the customer that this is something without, it is difficult for us to have a sustainable business approach. And oftentimes, we do have back-to-back commercial agreements.

The overall approach is to make sure that the profit pool is going to be enlarged. Right now, this is a little bit of a difficulty, and we’ll continue to drive that. And so far, we’ve also found open ears for these discussions, for instance, at the side of our customers.

Of course, more midterm oriented, we want to make a structured approach towards improvement of our business. In the past, and as it was communicated, we ran the so-called LEAP program. We’ve had significant progress on productivity measures and some key actions also were implemented, a little bit more relating to the challenges from the past.

Going forward, we wanted to have something windy instead. We are going for the program Mistral. We wanted to have a program which allows us to answer the most recent industry challenges. Of course, we will continue to focus on the short-term challenges, but then also key levers are identified for the margin improvement midterm. And we will also here look at further transformational measures, which we want to explore like the review of our portfolio or like the technology harmonization, for instance, around blades, drivetrain, electrical systems.

So that means we — these days also, internally, we’ll launch the Mistral program. We will put people and health and safety into the top of our priorities. But then again, we will focus on the solid top line development, typically measured in volume and market share, if you wish. I want to have a very clear view on competitive and high-quality products. We want to have operational excellence being driven across the value chain. We will also look at optimization of our structure costs. And of course, under the circumstances also mentioned by Beatriz, cash flow is one of the top priorities. And going forward then, we will have a much more modularized and much more harmonized technology offering across the entirety of the portfolio. And I want to make sure that this modular approach also covers the so far sometimes different approaches between Onshore and Offshore in a joint manner. So we will strive for harmonizing those approaches as well.

With that, we’re through with the presentation, but of course, happy to answer the upcoming questions. Thank you very much.

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Vivek Midha from Citi.

Vivek Midha

So could I just ask on the transformational measures that you mentioned as the Mistral program? So could you give us some color on what some of the ones which are under consideration, some of the areas which might be considered noncore? And just to be crystal clear, since it’s been asked on these calls before, does this include anything around the whole Onshore business?

Jochen Eickholt

Thank you very much for the question. If I understand it correctly, then the answer on our side is that Onshore remains to be part of our core business. Please remember that the majority of the Service revenue is generated by the installed fleet coming from Onshore. So we would see a substantially different picture without Onshore.

Operator

The next question comes from Akash Gupta from JP Morgan.

Akash Gupta

My question is on 5.X product development as well as production ramp-up. So originally, this product was launched in 2019, and you were supposed to ramp up production in ’21. But then we had design issue and then supply chain issues. And because of that, we had these delays. And every time you have delay, you need to add more project into so-called onerous projects. Maybe if you can update us on where do we stand now in the development as well as production ramp-up phase. And do you see that there could be additional downside risk in terms of further delays that could add to — on risk provisions that you have already made?

Jochen Eickholt

So first of all, I’m very happy to be able to say that we are making progress. The majority of the focus right now is around the ramp-up of manufacturing. The ramp-up of manufacturing is, for the most part, happening in Spain and in Portugal. So it’s in Ágreda and Vagos. In both places, we are making progress in ramping up manufacturing more from a serial manufacturing perspective. So that is rather positive and going in the right direction.

However, it continues to be difficult because of the delays you mentioned. These delays you mentioned sometimes come from what we call engineering change notices. So something like a late change to, for instance, a bill of material is introduced, then leading to a different new approval process for that very component, then leading to a new ordering process, and that’s then hitting the supply chain in its current status.

So these things continue to be complicated and difficult. We are making progress. I hope to be out of the woods in that sense really by the end of this year. It continues to be difficult, though, because of so many details to be considered, and most of them happen in conjunction. So not any one of these difficulties as such is too complex, but it’s the overall number, the sheer number of the difficulties which make us — which hit our organization really.

When it comes to onerous projects, it is, in our view, so that we have had so far considered buffers really for the majority of the risks. And additional effects, I would rather see to be insignificant versus what we have seen so far. The full exclusion of any further risk is not really possible at this point in time.

Operator

The next question comes from Deepa Venkateswaran from Bernstein.

Deepa Venkateswaran

My question is on offshore wind. So one of your large customers recently reported that the U.K. project, Hornsea 2, was facing slight delays and ramp-up, and one of the issues identified was some issue with some inverter modules. I just wanted to check is on the Offshore side, is everything okay? Are there any provisions or anything we need to be looking out for, whether that’s in the U.K. or the ramp-up in Taiwan?

Jochen Eickholt

Thank you very much for the question. With Hornsea, our view is that there are kind of standard situations. Of course, every now and then, there are discussions with the customer. We are in full alignment and try to rectify everything. From our perspective, there is no further extraordinary discussion going on and needed either.

Operator

The next question comes from Mark Freshney from Credit Suisse.

Mark Freshney

Just firstly, on the pass-through provisions, I mean, to try and drill down into those, as I understand it, you can index contracts, but the indexation can’t deal with all costs. There are then pass-through — other pass-through provisions such as cost plus. Can you — and I understand that those are more critical. Can you talk about use of those kinds of latter provisions?

And secondly, just on the balance sheet, clearly, we’ve seen the sale of the Southern European onshore pipeline. But can you talk about potential other measures to reduce the level of net debt and what you can do to extract cash from the business?

Jochen Eickholt

First of all, on the pass-through, there’s a bundle of measures we actually do try to apply in each and every contract. We look at the indexation wherever that is possible. Rightfully so, you say that also on some of the commodities, this is, for various reasons, not fully possible. There, we typically have cost adds, if you wish, to be considered on our side, and those are then also in full alignment and full transparency with the customer.

There are other mechanisms where we then would like to have further elements of risk-sharing, and these measures include, for instance, a different flow of the cash, a different cash flow profile in the project, in the course of a project, and educations. And at times, we also agree on extension of time and extension of cost under those circumstances. So there’s a whole bundle of things we typically do apply as a standard in each and every project. However, the result of that, obviously, is in the result of the negotiation. So net, everything is standardized with each and every contract.

We are very rigorous in applying this. And from our perspective there, we don’t want to become the masters of speculation on the commodity pricing, but we feel that we are really on the safe side going forward.

For the balance sheet question, Beatriz.

Beatriz Puente

Yes. Thank you, Mark, for your question. What can we do? Of course, first priority for the company, and that’s the purpose of the plan, this enhanced profitability. And that’s our top priority for many things, for, of course, making this business sustainable in the future and also for reducing the leverage of the company and generating cash.

Of course, analyzing the future CapEx investment of the company, not only this year but the years to come, what we can afford, what we should invest in the growing business. Also, discussions with the clients are undergoing. As Jochen said, we want to really make a partnership with our clients. And of course, we want to invest in the future. So our clients need to also help us on that front.

And we’ll have — foresee also to have a smaller contribution from our asset disposal, not, of course, of the magnitude of the one that we have announced. And last but not least, of course, anything, all the alternatives will be analyzed in due course because our priority continues to be to strengthen the balance sheet [indiscernible] in that front.

Operator

The next question comes from Sean McLoughlin from HSBC.

Sean McLoughlin

You mentioned an ASP of €0.8 per watt as a realistic figure. Is this covering your higher material costs? Or do you need to continue raising prices? That’s my first question.

Jochen Eickholt

Well, that’s a good question. Thank you very much for that one. So if you look at the overall profitability, and perhaps I could even say the profitability in our sector, so including our competitors, then probably there’s a further relevant of price increase helpful and perhaps even necessary. So of course, we will continue to work on all fronts, yes. We will try to work on all fronts in order to make us in the future a really sustainable business. And I would assume that, yes, further price increases have to be seen, looking at also the situation of general inflation across the globe. Thank you.

Sean McLoughlin

And I suppose related to that question, just thinking about the tension between selectivity and market share in Onshore, I mean, is there a level of market share that you’re willing to sacrifice to hold a higher price? How are you thinking about that?

Jochen Eickholt

We’ve already indicated with our behavior that we actually put action behind those words. So yes, we do at times also sacrifice market share in that sense. We are not going for each and every project any longer. We apply really rigorously our concept of selectivity with those defined hurdles.

Operator

The next question comes from Katie Self from Morgan Stanley.

Katie Self

I’ve got 2, if I could. The first one is around whether you could just help us think about the liquidity profile. It looks like you’ve drawn down around €1.9 billion of the available lines and are maintaining around €1 billion in cash. Is that the approach that we should expect to continue to see in the future, i.e., sort of keeping around that €1 billion of gross cash on hand but using up the lines to manage any further variations?

And then my second question is, again, I’d just like to push a little bit around these warranty provisions and impairments. As you laid out quite clearly, you’ve taken around €537 million at this stage. I noticed that quite interesting comment around 80% of the backlog being exposed to sort of healthy markets, strong and above-market growth markets. So that leaves about 20% elsewhere. That’s about €6.6 billion of the backlog. Is there an indication there that this €6.6 billion is at risk of further impairments? Or how much of that is covered by those impairments that you’ve taken already?

Beatriz Puente

Thank you, Katie. Regarding your question and also I will follow up on the question that you asked us also on the preliminary results. For us, of course, we foresee to withdraw further down the syndicated loan that we have, and that is reality because as we said, seasonality of the business and, of course, the challenges that we are facing in the short term. So answering your question, yes, we foresee to use that further down. And also we foresee to have a Q3 leverage higher than the one that we have, and also coming back to reduce the leverage with the contribution of the disposal of the Southern pipeline that we did coming on Q4.

Regarding the second question, and you’re doing the math on our backlog, I would suggest maybe doing that in a way because when we said that we have a very strong backlog for the years to come, that’s the reality. But we cannot ignore that as of today, and that’s the reason of this €537 million impact on the first half of the year, because all the reasons that we explained in the previous calls and the challenges that we have on the 5.X and the projects that we have from the past, we have very, very low contingencies that is impacting us significantly on cost. So what we can tell you is that we foresee, depending, of course, on the execution of the projects in the coming months, that we’ll have roughly €2 billion of onerous projects in execution by ’23. And that’s the exposure — open exposure that we have.

What also we can confirm is, as Jochen was explaining, for the new projects that has been approved, significant contingencies has been added to that, not only because we have reinforced, as we explained, what we can index to, mainly tower steel, of course, copper, a bit of transportation, and the rest also others, and as asked, about we have included cost others and we continue to work hand in hand commercial with procurement. So all those projects that are now in our backlog but, of course, will be in execution by ’24 onwards are more protected. And that’s the priority for this company: to enhance the health of our backlog.

Katie Self

That’s incredibly helpful color. On that €2 billion, that’s obviously quite a big number. Can you help us at all with understanding the phasing of how we may see that in the coming months or quarters? And how does that link to a cash-out?

Beatriz Puente

It will be highly dependent on — that’s the reason we put the outlook on the review on our kind of year-end numbers, what we foresee to have in the coming months to provide more color on that because, as we said, that will, of course, depend on how we will end up the year. Some of that additional cost might come through orders contract. That’s a reality. If we end up with higher cost estimates because of the reasons that we said, maybe higher disruption in the supply chain, higher cost, that estimate that is coming, so allow us to give you more color in the coming quarters with this.

Operator

The next question comes from Lucas Ferhani from Jefferies.

Lucas Ferhani

My question was on the 5.X ramp-up You said during the call that you expected to be out of the woods this year. Just wanted to understand better what you meant. Do you mean you can kind of execute the contracts by the end of this year or in terms of just extra costs, you just think we’re at the end? And can you provide just a timeline, when do you expect those, let’s say, problematic contracts to be executed if not by the end of this year?

Jochen Eickholt

Well, thank you very much. Out of the woods for me means that we really, in the sense of quality and quantity, meet our targets ex works. So that means that we come to the originally assumed capacity profiles we have foreseen for the manufacturing sites. So of course, then the execution of customer projects may extend also in the next year. And whatever the plan is, we continue to sell that turbine. So 5.X is going to be sold for quite some time. I was referring to really the desired profiles in capacity and quality ex works. And that is the thing we are working on right now.

Lucas Ferhani

Okay. Just another one on price, higher prices or indexation. Can you talk a bit about kind of within the backlog, the proportion, let’s say, of contracts that have indeed indexation or prices, is it the majority? Or is it still a small part? I’m talking just about the orders you’ve signed recently. Do you still sign some orders where you don’t have kind of necessarily prices or indexation in there? And is it kind of one of the other rather than kind of both?

Beatriz Puente

Thank you. As we explained, of course, for us, we started like mid-’21, of course, because of the challenges that we faced, internal and external, to reinforce, as we said, kind of the policies to make sure that we have indexation clauses on the topics the companies have said. We cannot index the rest. I mean what we are trying to do is, of course, with procurement, as we said, so analyze further indexation clauses that will provide our clients the comfort, but they also can finance their projects, make sure that we have also back-to-back with some of the key components that also we have indexation clauses within our procurement — I mean our contract because you can index on both ways, on the supply chain and, of course, with your clients.

What we can tell you is that, as we said, from May onwards, all our kind of project that has been signed are more protected. You will never have a 100% coverage. The industry doesn’t allow you to do that. But for us, we are reinforcing that we make sure that we mitigate, reduce the exposure that we have on that open risk that the industry has. So that’s why it’s so important also, as we said, not only indexation, but price increases are needed.

Operator

The next question comes from Mike Clements from Downing Fund Management.

Mike Clements

I’d like to ask a question about your ESG efforts and just follow up on the slides in the presentation. And clearly, Siemens Gamesa doing a very good job in many areas, especially on the environmental side. However, we noticed that some of the main ESG rating agencies have flagged the company at risk or potentially violating one of the principles of the UN Global Compact due to your activities in the Western Sahara. And obviously, this is something that concerns us as investors and I’m sure many other investors. Can you please just talk about how you’re looking to address these concerns, perhaps in the context of your wider ESG program?

Jochen Eickholt

Well, as you perhaps know, Western Sahara is a very specific case. We are constantly monitoring all the efforts around that. We are recognizing and acknowledging all the, let’s say, UN-driven positions there as well. We so far are rather careful and we need to make sure that we are fully compliant and in line with all the requirements. And we will continue to monitor the situation to make sure that we are handling it in a most adequate way. It’s, of course, not so easy for us to distinguish between different conflict parties in that case. And therefore, we’d rather like to follow on the guidance of, for instance, institutions like the United Nations.

Operator

The next question comes from Vivek Midha from Citi.

Vivek Midha

Just to follow up on the comments around indexation and hedging, could you maybe give us a bit of color in Offshore around the risks that you’re seeing there? You highlighted permanent magnet inflation in the last call. So what sort of protections you have there? Is it particularly different to what you think about Onshore? And do you see cost inflation putting any projects at risk whether in Europe or the U.S.?

Jochen Eickholt

Well, thank you very much. So first of all, as I said, the material pricing as such, we see as something which continues to be a concern for us. That’s one. For the projects in execution also in Offshore, we continue to have discussions with our customers on how to solve these issues. Those discussions are not ended yet and will continue, and that is clearly one of our priorities. When it comes to the projects and acquisition, we clearly incorporate the more rigorous standards I was referring to also for Offshore. So on that side, my view is that we will be protected in the future.

The overall development of the supply chain. However, when it comes to permanent magnets, for instance, these things were extraordinary because there were massive, really massive price increases. Thereof, however, we have to see that we can really get these things, in the end of the day, incorporated into the overall set of agreements we want to apply. I do not see — in the end, I do not see a different situation for Onshore and for Offshore either. So we treat those business units, in our sense, equally. So in the end of the day, we would like to be protected, and we need to make sure that our business becomes sustainable.

Operator

The next question comes from Akash Gupta from JP Morgan.

Akash Gupta

I have 2 follow-ups, if I may. The first one is on medium-term margin guidance. I mean there is no mention of 8% to 10% margin targets. Is it fair to say that is under review as well?

And secondly, on the supply chain, you have exposure to both China and India, and as we saw with your Danish peer, who is now revisiting their sourcing and global footprint, do you see that you may also need to reduce your exposure to these 2 countries given the local demand is not going in your favor?

Jochen Eickholt

So first of all, the 8% to 10% for the time horizon which was mentioned before, like ’25, that is under review as well. From today’s perspective, I find it difficult to commit to such a figure if we look at the current difficulties we have right now.

Going forward, we, of course, need to apply our kind of risk assessment, if you wish, to all the different regions. And then we will come at that point in time when it will be relevant for us. In other words, when we have to do some decision-making around projects, then we will come to decisions. We are extremely careful in order to make sure that the business we take on board really is something which in the future is going to add to a good, profitable, sustainable backlog.

Beatriz Puente

Your question regarding China and India per se, we don’t have such a thing as exposure on China. Of course, it’s impacting us on different ways. One, of course, the lockdown of China has increased. We have some sourcing of India — sorry, of China coming to the U.S. So it’s impacting us, and that’s the reason of extra provisions on some of the projects there. And in the case of India, we reduced the exposure last year and we reduced the capacity. And of course, in our case, we have reassessed already the India footprint and activity for other reasons last year. So we don’t foresee impairments as such for that kind of operations.

Jochen Eickholt

Perhaps one little adder. For the long term, I do not see really a reason with those prospects we mentioned, I do not see really a reason why we should not be an 8% company.

Operator

The next question comes from Deepa Venkateswaran from Bernstein.

Deepa Venkateswaran

I just wanted to come back to your chart on Mistral and the 5.X. So I think in that, you’re saying a time line of FY ’22, ’23. So just wanted to see if — and you also said you expect to be out of the woods by the end of this year, perhaps in the volume and quality ramp-up. So what are the milestones we should look out for, apart from not having any additional onerous provisions, that this is on track? Will you communicate any KPIs to us? How can we gauge that this is going as per track?

Jochen Eickholt

Of course, we have the obligation and the definite wish to communicate as openly and as clearly as possible. Looking at KPIs and more detailed information, I don’t know really how to answer this. Of course, you could take my position or you could take the position of our managers. We look at KPIs and indication there, but perhaps that’s what the — slightly over the top. We will continue to communicate clearly on the situation with the 5.X, but we hope that this is sufficiently indicative. Too many further KPIs and technical analysis and discussions and charts and discussions around why things now as a — in a sort of, how should I say, chain reaction then turn out to be difficult and others less difficult that perhaps would be slightly over the top.

Deepa Venkateswaran

Right. But I think as investors, we’ve not had any — it’s only the onerous provisions, that’s the indication of how bad things are. So there hasn’t been generally any communication on what were the original time lines, what’s going on. So we would really appreciate if there is some information you can give so we can also get a better sense for how things are going.

Beatriz Puente

Yes, we’ll do so. And of course, I think it’s important that we focus on the short-term plan that as we highlighted, those are the measures, that we’ll give you, of course, update on how those are ongoing. But in the end, as we said, it’s making sure that, of course, the ramp-up volumes are there, that, of course, we continue to mitigate the cost inflation. And that’s the reason as well of the onerous projects.

Per se, kind of that metric gives you a color. But as I said so, we are sitting on those €2 billion of onerous contract. What is important for us is that we enhance the health of the future projects. And of course, that we tackle the challenges that we have on the short term. So that’s the reason. As you said, we will keep providing kind of for you information for you to have the comfort that we are able to tackle those challenges. That’s the important thing for us and for the future growth of the company.

Jochen Eickholt

But we accept and appreciate your wish for further clarity here, and we will look into this.

Operator

The last question comes from William Mackie from Kepler Cheuvreux.

William Mackie

Just 2 quick follow-ups and then a question, if I might. The guidance, just on a quick follow-up, it’s under review, but then you referred to the minus 9% on revenue and the minus 4% on EBIT. Are you — what are you communicating? Are you actually saying that is a floor? And when will you come back with the guidance? When do you think the conditions are right to reset that? That’s follow-up one, sorry about that.

Follow-up two was — I don’t know if you’ll give any more detail regarding how you changed the project selection process or the criteria for project selection. And the real question comes down to a follow-on from project selection and your comment about willingness to forgo or give up market share. I guess the question is on — related to Onshore and it’s married between sort of thinking about forward loadings across your factories and actual capacity in the near term. So for how long will you give up market share before you have to curtail capacity?

But then on a broader issue, really, the big question is against the improving outlook, the doubling of volumes potentially between now and 2030 is where is the capacity utilization in your business or in the industry? And how much capacity investment would be required to reach those 2030 targets from the supply side? And how can you envisage the right financial signals, i.e., the investment returns you need to invest in that capacity if it is required? Very long.

Jochen Eickholt

Well, certainly, in my view, quite a number of very good questions. So first of all, on the guidance, we want to be coming up with our guidance again after the earnings release of Q3. That would be, as we foresee it, end of July, beginning of August.

We had quite a number of, as I said, additional criteria to be implemented for our project selection, and that means that we also have introduced stricter requirements regarding risk contingencies, regarding the risk coverage in general, which is not only commercial mitigation but also technical mitigation. And then we also had, let’s say, additional hurdle requirements, if you wish. So there is a limit under which we typically accept project. These things, however, cannot be really standardized. We need to look at the entirety of the picture. We need to have a holistic approach, and this is what we apply now. However, we are more strict than in the past.

The next question was giving up market share. As I said, right now, market share is not necessarily the prime target. The prime target is to make us a sustainable company because we have a — we’re starting off with a belief, and the belief is only as a sustainable player in our industry we can be also, mid- to long term, a strong partner for our customers as well as for the suppliers. Therefore, without sustainability also on, let’s say, the profitability side of our business, it will be very difficult in the future. So it is in the interest of many participants in this market to make sure that also players like us are in that situation.

Now going forward, indeed, there is this question around who would finance in such — or who would finance, who would invest in such a growth with all the needed elements if the business as such is not sustainable, and that’s a very valid question. And that is what we are currently working on. This is what we’re discussing with our partners. And this is where I — where we also have, for instance, started discussions with our customers, for instance, on different payment profiles, on different payment schemes, and where we then need to assess in detail with the related customers how to handle such situations. It is clear that we cannot continue to invest endlessly under the given circumstances.

Beatriz Puente

With this, we are going to conclude the call. Jochen, do you want to conclude?

Jochen Eickholt

Yes, thank you very much. So thank you very much for all of you for your attention, for the very good questions. We take all of them very seriously and where applicable come back to those points in the future.

We were trying to share the picture on our Q2, which ended end of March. We have shared the figures, we have shared the figures in detail. We’ve explained how we view the market, and we also have provided a little bit of an update, I shall say, on the view on how we see our guidance picture. We were, in my view, in the end also with the help of your questions, perhaps even more clear than in the past. Please understand that this is a difficult picture, and we come back to this after our Q3.

Going forward, we are actually very positive around the way of how we set up our company activities. It will be structured around the new company program. The company program is called Mistral. It will be different. It will be also a different approach internally versus LEAP. But Mistral also is going to be a program which we will communicate on a more or less regular basis.

With that, thank you very much for all of your attention. We hope to answer to your questions as good as possible, and we look forward to the future dialogue, which is going to come. Thank you very much.

Beatriz Puente

Thank you.

Leave a Reply

Your email address will not be published.