Nordex SE (OTCPK:NRDXF) Q2 2023 Earnings Conference Call July 27, 2023 8:00 AM ET
Company Participants
Felix Zander – Investor Relations
Jose Luis Blanco – Chief Executive Officer
Patxi Landa – Chief Scientific Officer
Ilya Hartmann – Chief Financial Officer
Conference Call Participants
Vivek Midha – Citi
John Kim – Deutsche Bank
Constantin Hesse – Jefferies
Sean McLoughlin – HSBC
Benjamin Heelan – Bank of America
William Mackie – Kepler Cheuvreux
Operator
Felix Zander
Good afternoon, ladies and gentlemen. And welcome on behalf of Nordex to our Analyst and Investor Call today. Our Board, our CEO, Jose Luis Blanco; our CFO, Dr. Ilya Hartmann; and our CSO, Patxi Landa, are here with us guiding to you through our slide deck which we have prepared for you today. They will share information about the latest developments, financials and markets. And as you’ve heard, the presentation is followed by a Q&A, I would like to ask you to limit yourself up to three questions, please.
And now, I would like to hand over to our CEO, Jose Luis. Please go ahead.
Jose Luis Blanco
Thank you very much for the introduction, Felix. I would like to welcome you as well on behalf of the entire Board. As mentioned, Patxi Landa and Ilya Hartmann are with me today in the call, guiding you through our presentation and taking your questions later.
For today, we have prepared our usual agenda. As usual, let me start with the executive summary of the first half of 2023. Our performance in the second quarter was in line with our expectations, as indicated in our Q1 call in May and we expected continued improvement in our performance in the second half of the year as volumes should pick up further, with better prices of the orders started to flow through our financials. Our order intake continues to remain stable, despite generally sluggish markets. The pricing margins are stable at a good level. In the second quarter, we booked 1.6 gigawatts of orders, reaching 2.6 gigawatts in the first half, with generally stable selling prices.
Our revenue increased to €2.8 billion in the first half of 2023 compared to €2.1 billion last year, recording growth of 30%. At the same time, our gross margin also improved sequentially in the second quarter to 12.1%. We expect this to improve further in the second half as the extra cost of delays and other project issues are slowly starting to recede, with a higher share of revenue coming as well from better quality orders.
With that, we managed to breakeven at the EBITDA level in Q2, as indicated in our call. This is a huge improvement compared to our EBITDA margin of minus 9% in the first quarter and this was mainly possible due to higher volumes and significantly less project issues in the second quarter. As a result, now we have an EBITDA margin of minus 4.2% in the first half of this year and we expect continued improvements in our margins in the second half of the year.
Our working capital was stable at minus 9.6%. Our installation increased in the second quarter to 1.8 gigawatts, reaching 3.1 gigawatts in the first half of the year. And furthermore, with the latest financial measures, we have strengthened the financial structure further with an improved equity ratio and net cash levels while also saving €45 million per year in financial interest costs.
Finally, I would like to confirm our guidance for 2023 and our midterm strategic EBITDA margin of 8%.
And now, I would like to hand over to Patxi for discussions about markets, order intake and customers. Patxi, please?
Patxi Landa
Thank you very much, Jose Luis. Looking at the orders, we sold 2.6 gigawatts of new turbine contracts in the first half of 2023, down 12% compared to the same period last year. All orders came from Europe, with largest markets being Germany, Lithuania, Greece and Estonia.
ASP stood at €0.89 million per megawatt in Q2, in line with the previous quarter and growing from €0.79 million per megawatt in the first half of 2022. Services grew 35% to €305 million, representing 11% of group sales in H1 2023, with an EBIT margin of 13.2%. Margin of the first half was lower compared to the same period last year due to inflationary pressures on costs as well as negative FX impact.
Turbine order backlog stood at €6.4 billion at the end of the quarter and Service order backlog stood at €3.4 billion for a total combined order backlog of €9.8 billion at the end of June.
And with this, I give it back to Ilya.
Ilya Hartmann
Thanks, Patxi. And also, welcome from my side. Like always, let me guide you through the financials of the first half of the year. And we’re starting, as usual, with the income statement.
So after a soft Q1, the performance in the second quarter improved largely as expected and in line with our indications in the Q1 call in May. As a result, we booked a total sales of around €2.8 billion compared to €2.1 billion in Q1 of last year. Year-on-year, it’s roughly a 30% increase. Key driver that was mentioned was the substantially high installation level in the first half year compared to the same period last year. Although our gross margins are still impacted by extra costs and some of these have further improved on a quarterly basis as expected, basically 12.1% at the end of second quarter compared to 8.9% at the end of Q1. The result is and of course, we’ve mentioned the breakeven at EBITDA level in Q1, to be precise, just shy of €1 million EBITDA.
And with that, we would move to the balance sheet. Overall structure further improved since Q1, essentially on the back of the debt-to-equity swap completed in May. We ended the second quarter with a cash level of around €650 million. In addition, we had a cash facility of €80 million to €90 million which brings our overall liquidity to around €730 million, €740 million at the end of second quarter. And the swap I just mentioned resulted in a net cash position of €360 million and an equity ratio of just shy of 21%. And with this, we would jump to the working capital slide. The working capital ratio at the end of Q2 stood at minus 9.6%, in absolute numbers, at minus €605 million end of H1 Q2. Overall, the working capital level remained below our target of minus 9% which is our guided target for the full year ’23.
And that brings us to the cash flow slide. As we can see, the cash flow from operating activities very much reflect the softer margin levels we have seen in the first half, especially Q1. The negative operating results and cash outflow from interest and tax payments could partially be compensated. We see it here by a positive impact coming from the working capital management. The cash flow from investing activities stood at minus €63 million, that is comparable to the previous-year level and reflects the execution of our investment program in line with the expectations of the teams. Finally, cash flow from financing activities stood at roughly €310 million. Basically, these are the inflows from the green convertible bond issued in April.
That brings us to the investment slide. And CapEx, €50 million, so that’s the first half of the year, below the level of the same period last year but again, in line with the planning of the teams and reflecting the backloaded operations Jose was alluding to and explained a bit more in detail in the second half of the call. So therefore, we are expecting a catch-up in the CapEx run rate in the second half because we still stick to our guided number of €200 million CapEx for the full year.
That brings me to my last slide which is the capital structure. So on the slide we see net cash level, as mentioned, increased to €360 million after the shareholder loan was converted. Likewise, the equity ratio climbed up to 20.7% at the end of the second quarter. And this would be it for the financials. But before going back to Jose Luis, maybe a bit of summary. Margins from operating business have started to improve as cost environment has stabilized and some extra costs on past issues have receded.
But let me also note that the operational risks remain for us and in the industry which could impact our margin development, if not managed properly. And that I mentioned it before, the financial structure has substantially improved after the repayment of the high-yield bond and the conversion of the shareholder loans. However, now our focus must be and is on improving our operating cash flows.
And with that, I will give it back to you, Jose Luis.
Jose Luis Blanco
Thank you, Ilya. So moving to the operational performance of the company in the first half, let me share with you and as we commented in previous calls, our installations suffered last year due to several reasons like the consequences of the Ukrainian war, the consequences of the cybersecurity incident.
And our target was and still is to catch up. While we reached a run rate of 1.3 gigawatts in the first quarter this year, we could increase the installation in the second quarter further to 1.8 gigawatts, achieving 3.1 gigawatts in the first half of the year. This is a substantial increase compared to the previous year but still not the level that we expected and that we want.
In total, we have erected 632 turbines in 22 countries with approximately 3.1 gigawatts, again with a majority of 60% in Europe, followed by 25% Latin America, 8% North America, remaining 7% rest of the world. In terms of production, our nacelle production, we assembled 557 turbines compared to 604 [ph] in the same period of the year earlier — before. But due to higher nameplate, we reached 2.9 gigawatts, being more or less on the same level, with substantial growth expected in the second half.
Overall, the number of blades produced increased slightly to 2,224 compared to 2,162 as the year before. Therefore, we produce 506 in half compared to 573 in the previous year. This level of high outsourcing of blades is likely to remain in the future as we want to keep our flexibility. But as well, we want to keep know-how in-house.
With this, moving to the next slide, I would like to come to 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 30% in the first half. We achieved EBITDA breakeven in the second quarter after an expected weak first quarter. The working capital ratio remains in the target corridor. CapEx spending is likely to catch up in the second half.
At the same time, let me also highlight that the operating environment is not yet fully stable. Furthermore, we are facing very high activity level in the second half of the year and we expect another back end-loaded year with the prospective risk. Finally, we confirm our strategic midterm EBITDA margin of 8%, in line with a stable macroeconomic environment.
And with this, I hand it over to Felix to open the Q&A.
Felix Zander
Thank you very much for guiding us through the presentation. Operator, the floor is yours. Please open for Q&A. Thank you.
Question-and-Answer Session
Operator
[Operator Instructions] The first question comes from Vivek Midha from Citi.
Vivek Midha
So my first question is relating to the TPI Composites announcement yesterday. What’s the latest information regarding this and any link for yourselves? They highlight a single warranty campaign, for example. Is that relating to your turbines?
Jose Luis Blanco
Thank you for the question. We usually do not comment on others market communication. To us, came a little bit of a surprise. We have regular issues with suppliers, including TPI. But to the best of our knowledge, the issues we have with them are included into the figures that we are guiding. We will try to gather more information because to us, it was a little bit of a surprise.
Vivek Midha
That’s helpful. And my second question is on the Service margins which have been down year-on-year. Do you have any comment on when this is likely to improve? And how does cost pass-through typically work within your Service contracts?
Ilya Hartmann
Let me take the first part of the question and basically saying in which point in time, so when we will see the full-year numbers, Q3 but especially the full-year numbers, we are expecting that those numbers will have clearly improved again.
Jose Luis Blanco
Yes. And this is, I would say, temporary adjustments because the way the contracts were structured and protected against inflation, there is timing effect of when the revenue kicks in and when the cost kicks in. There are as well adjustments in the cost base because there are certain cost factors that were more affected by inflation. So it will take time to adjust to the new contracts. But structurally and long term, we expect in the future normalized margin levels in the Service activity.
Operator
The next question comes from Kim John from Deutsche Bank.
Kim John
It’s actually John. Two questions on the order intake. Can you talk us through what you’re seeing right now, H2 versus H1 levels? In particular, I’d love to hear a little bit of color or context on your positioning in the U.S. The reason I ask is you’ve seen a number of larger OEMs announce builds or capacity expansion in the U.S. and Asia Pac in support of offshore. How does that color temporarily your view towards those markets?
Jose Luis Blanco
Yes. Patxi, you can elaborate and I can complement.
Patxi Landa
Yes. H2, we are not guiding on, as always, order intake. But I can comment that we have a strong pipeline ahead of us and we expect that the activity in the second half of the year will be stronger than in the first half. So we see solid order pipeline towards the end of the year. And then with respect to the U.S., with the whole situation of higher rate, we have had a number of quarters, Nordex seaking, specifically speaking to Nordex, relatively sluggish in the U.S. market but we are picking up activity, commercial activity. And with the cycles that generally we have for the orders to close, we expect a normalization on the U.S. order activity coming back also for us towards the end of the year, beginning of next year.
Jose Luis Blanco
We have — we plan to restart the [indiscernible]. We are waiting for more visibility from customers and orders before creating capacity and putting pressure on — overcapacity and then putting pressure on price. But it’s true that our competitors are announcing orders. We don’t see that our pipeline or the pipeline of our customers are as mature to shorter — being in a position to decide to restart the facility. But definitely, our plan is to restart the facility as soon as we get a little bit more visibility in the pipeline.
Operator
The next question comes from comes from Constantin Hesse from Jefferies.
Constantin Hesse
My two questions are going to be based on margins and then free cash flow. And on margins, as every time you guys were talking about improving trends, you were emphasizing operational risks are still very much there. I know that you’re confirming the 8% EBITDA margin but I’m really trying to get a feeling because it seems like your tone might have changed a bit compared to the last call, it might have gotten a bit more negative, in terms of the improvement trend that we’re going to see now in the second half and towards 2024. If you could maybe discuss a little bit, I mean, obviously, we’re not going to see a 900 basis point [ph] swing again in between quarters. But if we could at least have some kind of directional guidance — or not guidance but directional view, that would be great.
And talking about your current order backlog and the profitability profile there because it seems now you have €2.4 billion on — of projects basically with at least 8% margin in there which already supports 70% of the consensus numbers next year. So if you could provide a bit more color as well as to this TPI issue on margins directionally, that would be great.
Jose Luis Blanco
Yes. I will try to do my best, Constantin. Just high level, I mean order intake in Europe is strong but order intake in non-European markets is substantially delayed. And even in Europe, we have some delays which triggers pressure on the revenue recognition and on the activity. We still need to sell close to 1 gigawatt for PoC within this year. I think we are in the last mile and we see this absolutely achievable but we need to do so in the next 2 months. As a consequence of the delayed order intake, we are backloading the year and we are planning a record Q3 in installation as well as substantial activity in installation in Q4. This delay in order intake triggers as well very high activity level in nacelle production with PoC percentage of completion within the year.
Just to give you one point of info, we are planning to assemble in the last quarter the same megawatts that in the first half and this is somehow the risks we see because we are planning a very high level of activity for the company in the second half which we are prepared. And we have everything in place to do so but the activity level is expected to be very high. And this is what is supporting the profitability expected in the second half. It’s a high level of activity, with better margin quality projects going through that activity.
Regarding the midterm strategic targets, the preconditions are still the same. I mean, certain volume, let’s say, around 7-plus gigawatts, certain volume in time because if the volume doesn’t come in time, then you have empty slots and the empty slots cost you money and doesn’t bring you revenue and margin. So timing of this order intake is critical. If we keep suffering delays in U.S. or in LatAm, this puts pressure on the midterm targets because it means that you have an organization without activity.
Luckily, we see very strong demand from Europe but additional strong demand from Europe means additional risk as well to execute that demand. And overall, this might deteriorate the margin mine. So preconditions is volume. Margin on the order intake are stable. I mean we are — if we keep selling at the margins that we are selling, this is the 8% EBITDA margin. The volume, 7 gigawatt-plus, we are not yet there, let’s see. The timing of this volume is always a risk. And the last is not deteriorating margin in the execution which we are improving but we are still deteriorating margin in execution.
So I hope this gives you a flavor of how margin is expected to evolve which I expect positive improvements in the quarters ahead.
Constantin Hesse
It does, absolutely, Jose Luis. I’m just wondering, if just as a follow-up very quickly, I mean these execution risks here, I mean supply chain obviously is fixed, it seems to be fixed anyways. But can you maybe elaborate a little bit on execution? Where exactly are you failing here? What are the key issues in execution that you seem to be seeing maybe often in project execution? Then Ilya, the second question goes to you on free cash flow generation in the second half.
Jose Luis Blanco
Yes. No, execution today, the nacelle factories are running quite well. We don’t see risk on availability of materials. We don’t see risk on the price of the components. Blades is as well catching up from normal issues in blade production. Where we see the issues, as we speak, is the [indiscernible] cost in Turkey, where we have a huge activity of blade production, tower production to deliver to the Turkish market but especially to deliver to Europe. And we are facing the [indiscernible] in the ports because the ports offer big time [ph] after the earthquake which means you need to pay vessels waiting to be loaded and you deliver — lay those components to the projects and you pay LDs on the projects. And Europe, Germany and Nordics are bringing back the execution back to normal but it’s not 100% there.
So I would say [indiscernible] that triggers extra course and LDs on projects because the components are late, we have a plan to turn around this situation. That’s not going to be permanent but it’s going to take still some time. And Nordics and Central are improving month-on-month in the execution. We are not still to the point that we are able to deliver the project as we expected when we sold those projects.
Constantin Hesse
That’s great. Ilya, just over to you quickly on free cash flow generation. Second half, what can we expect here?
Ilya Hartmann
Yes. I’ll take this one. Thanks, Constantin. So the intro is the typical one. We’re not guiding for free cash flow and we’re not guiding for margins or EBITDA on quarters. But to hopefully help us calibrate here a bit, Constantin, so we clearly see — or we see a clearly improved free cash flow profile for the second half. Main building blocks: A, we were discussing with the CEO now the continued — that the sequential margin improvement Q-on-Q 3 and 4 will help that. Second, there is quite some one-offs for the first half that we don’t see to repeat in the second one, for example, the unwinding of the shareholder loans and some extra financial costs from there. And so putting that together with the starting block of liquidity on the free cash flow, summarizing clearly a better profile than in the first half.
Operator
The next question comes from Sean McLoughlin from HSBC.
Sean McLoughlin
A couple of questions. Firstly, on the demand environment, you talked about kind of non-U.S. orders. Can you just maybe talk through the pricing environment and how kind of Europe versus non-Europe pans out?
Jose Luis Blanco
I can elaborate there. So usually, in Europe, there is the high need to reduce the energy dependence from Russia and from the gas. So this triggers demand. Electricity prices are high, although have decreased lately. And this drives better PPAs and more allowable cost and price for the equipment. So [indiscernible] margins in Europe are slightly better on a higher cost base because demand strong in towers and more expensive equipment [ph]. Demand in Latin America is temporarily very low for everybody and that’s driven by high rainy season with low electricity prices in the market and a demand that temporary is not picking up. We are moderately optimistic that this is a temporary situation but low demand means — low demand and low electricity prices and higher capital cost, it means that temporary many projects are on hold.
Many customers decided to put the projects on hold to invest and that has put more pressure on prices and on margins which we try as much as we can not to compromise.
Sean McLoughlin
And if I can just throw a little bit into the guidance range, I mean it’s still a pretty wide range midway through the year. Have you said you’re comfortable with the midpoint? I mean what is — what can get us comfortable about the upper end of this range? What risks are around the lower end of the range? And should we think of the kind of 5%-ish embedded margin in the second half as a kind of runway into next year? Or can we also see, let’s say, sequential H2 ’24 on — H1 ’24 and H2 ’23 improvement in margin?
Jose Luis Blanco
Yes. The map to the midpoint points into the direction that you mentioned. I think the high end is definitely very challenging because the order intake is late but theoretically possible but challenging. The rest is about the risk of high activity level in the second half, very high activity level. And in discussion [indiscernible] activity level without margin deterioration. So those are the two key factors that I see.
Sean McLoughlin
And maybe just, if I may, just to build on that a little bit and latch back to a previous question, I mean the risk around high activity levels, I mean, so logistics don’t seem to be a problem anymore. So where are the key kind of pinch points around or the risks related to activity?
Jose Luis Blanco
Yes. I mean we mentioned the port freeze. We mentioned that in the last quarter, we need to assemble close to 3 gigawatts of nacelles, so it’s a huge number of industrial activity. We are planning to install in the third quarter close to 2 gigawatts in that range; so very high activity. We are installing 200 megawatts a week as we speak. So it’s a massive level of activity in 30 projects simultaneously that something can go wrong somewhere, a machinery breakdown, health and safety issue, there are — a crane breaks. So the typical activity risk that we have, with very little buffer to deal with that because we are backloading the year because of the delayed order intake.
Operator
The next question comes from Ben Heelan from Bank of America.
Benjamin Heelan
First one, your peers have obviously discovered quite material issues in the design of their turbines and I was wondering if you had done any analysis to check whether this is something that you may see in your own turbines or whether you were quite comfortable that this was not an issue for you. Secondly, looking at that chart you’ve got in the deck on the in-house versus outsourced production of blades, it looks as though there’s been a bit of a shift towards outsourced blades. I just wondered if you could comment on that and if that’s something that is strategic, just a bit of mix. And how we should think about that, going forward?
And then final one on pricing. I know you kind of touched on the demand environment a little bit in one of the last questions but pricing is obviously at a fairly healthy level, raw materials, all those sorts of costs are rolling over a little bit. How sustainable do you think this level of pricing is?
Jose Luis Blanco
Okay. So let’s take one by one. So regarding the PS material issue, I think we don’t know because we know that the public information, of course, when you see this from the market. You automatically gather your team to analyze what could go wrong and what could go wrong in our Delta4000 platform. Our Delta4000 platform is in the market now for 5 years. So we did a deep review into the platform. And to the best of our knowledge, the issues that we are facing are normal course of business, nothing extraordinary to be worried about, at least that was our assessment of our current running product that, as I said, has been successfully selling for the last 5 years, with operational experience of — as well 4 to 5 years. So, we are — quality is a big focus and derisking is a big focus for the industry. The same for us is a high priority. But after the analysis, we think that we don’t have any structural systemic issue in the Delta4000 platform which is the product that we sell today. The majority of the sales are of that product.
Regarding the in-house versus outsourced, I mean, our strategy is very much to keep that — to keep certain volume in-house. It could be more or less depend on availability of good-placed suppliers in different markets and depending as well about how competitive we are in different markets producing the blades in-house. We don’t expect structural changes. I think we are happy with our in-house production in blades that eventually will slightly grow a little bit year-on-year next year but with the same number of factories. So the strategy for us is to keep the know-how in-house to better understand the quality, to better understand the processes, to better put in place plans to deal with the critical-to-quality topics in-house and with the suppliers. So that part is strategic for us. And the rest is 60-40 or 70-30, is going to be opportunistic, depending on every market in every location.
Regarding pricing, we see stability. I think the deals that we approved in the last quarter and the deals that we are discussing as we speak and the portfolio of the order intake delivers the midterm profitability guidance.
Operator
The next question comes from Sebastian [ph] from BNP Paribas.
Unidentified Analyst
The first question that I have is on the statement that you made now several times about 7 gigawatts plus. Is this really what you see in terms of the achievable order intake for the total of fiscal ’23 if everything falls in place? And you obviously made some comments around exogenous factors like rain seasons, like energy prices, et cetera. So if you just could provide us with some more color what it would take to really get to the 7, that would be much appreciated.
Jose Luis Blanco
Yes. I think, as Patxi mentioned, we don’t guide order intake. But what Patxi mentioned is H2 is expected to be better than H1. So let’s see. Something I forgot to mention before about the risk in operation, we mentioned ports, we mentioned project execution, especially in Germany and Nordics. We have an issue with high inflation in Europe and many suppliers going out of business which usually creates pain and create issues. Hopefully, this will stabilize. But we are optimistic about, I would say, global supply chain for components and products. And China and India are stable and open for business and very reliable. A little bit more concern in several suppliers in Europe that are struggling and service suppliers as well in Europe that might create some temporary pain. But to your question of the 7 gigawatts, I would say, it’s challenging but let’s see.
Unidentified Analyst
Okay, sounds encouraging. And if I may then continue, what that really, really means? Obviously, you pointed to 2 gigawatts-plus volume, obviously, for the fourth quarter that you have planned for compared to the 3 that you managed and performed and executed in the first half of the year, we should have — think see a similar level like 1.5 or so run rate also in Q3. So this is basically then also the way forward to look at then the year ’23 in execution. So if that is all the case and then we have better tailwinds from better pricing sitting in the order backlog, what is kind of holding you back and turning more positive on the revenue side of things? Is it purely these kind of unknowns and that is it in a way? But if things go well, then we could see materially better sales than the 6.1, is that the right reflection?
Jose Luis Blanco
It could be, could be. I think, in the revenue side, if things go well, yes. The margin, of course, is going to depend on the top line and it’s going to depend on the quality of the backlog that we are executing because we are still executing, I would say, sub-quality margin projects in the pipeline and depends about the experience [ph] and deterioration in the margin. But from an activity level, we are — with the risk that I mentioned, we have plans for being moderately optimistic about the activity level.
Unidentified Analyst
Okay. And then the last one for me. Just touching on the operations, more to the execution part when it comes to regional assessment, so you mentioned obviously that the H1 order intake was solely coming from Europe. To what extent does this really affect then also your execution in respect to what you have in India compared to then the European hubs, with Germany and Spain, for instance? So does this create some friction? So how should one think about that?
Jose Luis Blanco
I would say that exposure to Asia was a challenge during COVID, indeed, a huge challenge. Now we are very comfortable and the bigger supply chain issues we have is that we need to debottleneck Turkey. So the port capacity in Turkey needs to be debottlenecked and this is going to take time and it’s going to cost us money and LDs and so on; that is a temporary issue. We still have a lot of activity in Germany and Spain, more than 50% of the sales are still producing in Europe. And we have a blade factory as well in Spain. It’s not that we are fully dependent on Asia. But India for global and moving to India capacity and to China has proven to be good for us currently.
Unidentified Analyst
And will then the greater push for local content, yes, trigger any changes to the operational setup? Or what’s your view on the matter?
Jose Luis Blanco
I think we are in discussions with policymakers about the new energy policy for Europe. We are strongly advocating for supply chain resilient — for a resilient supply chain in Europe and we are ready to do so. We have decided not to sell assets that we unfortunately needed to close in the hope that policy support might support us, let’s see. We are advocating for that, for a resilient European supply chain. But resilient European supply chain needs a levelized playing field to protect the cost because we cannot — we might not be able to compete in a levelized playing base with sectors that might have other state aid or kind of tailwinds in the way they conduct their businesses.
Unidentified Analyst
And sorry, very, very last one, I promise. And on the timeline when it comes to these very discussions to have a level playing field in Europe because we can see that elsewhere in the renewable space, obviously. And I recently just picked up that, that was pinpointed at quarter 4 eventually that we might find a solution. Do you have any best estimate for us?
Jose Luis Blanco
Difficult, Sebastian. I wish I could be more specific but this legislation is in the making, is quite — there are — policymakers are working in different views of the different countries. If this could be absolutely no protectionist whatsoever or if we should put certain public money at work in order to protect a strategic sector for keeping supply chain in Europe to support the energy independence because energy independence with supply chain single source is not that really that independent and that’s what we are advocating. But I cannot be more specific than that, that I wish to see a European policy similar to the U.S. policy to protect the local content.
Unidentified Analyst
Couldn’t agree more.
Operator
The next question comes from Christian Brun [ph] from Montega.
Unidentified Analyst
Christian from Montega. The — I think most of my questions have already been answered. But I would like to know when there will be a decision on reopening your U.S. facility. Can you tell us something on this? And the second question is, given that your pipeline is now just — not the whole pipeline but the order intake was just 100% Europe, what is the maximum capacity you could install in Europe in 2025, given that here, the environment is very comfortable for you? Is there any capacity restriction here?
Jose Luis Blanco
Yes. So the first question, U.S., we were internally discussing when is the right timing to do that announcement and we ended to the conclusion that we could start right away. We have everything prepared but we decided not to do so and better wait for more visibility on the pipeline which we don’t have yet. We are in discussions with customers. But the level of maturity of these discussions are not robust enough. So we need to wait. And at the moment that we see orders, then we will then — not just 1 order but a pipeline of orders because reopening a factory for 1 or 2 orders and then not having activity, something that we don’t like to do. So we want to see a good visibility on the pipeline and then push the button and everything is ready for that.
Regarding the capacity in Europe, I will say from a product point of view, we don’t have a limited capacity because the, yes, the plans are global. The challenge is the local execution which we are planning to increase the capabilities. We are as well working with governments. I mean Germany is a core market for us, really, really core market, where we are quite optimistic that we can grow year-on-year and that’s our plan. And we are working as well with the German government and the association to try to derisk the execution because the activity level that is expected in the few years, you mentioned 2025, 2026 is a substantial increase and this is going to require more police permits, more permitting, different ways to assess the highways, we are analyzing waterways and this is a very constructive dialogue with the industry and with the government. But we are doing the homework to be in the position to do bigger volumes in Europe and especially in Germany.
Operator
The next question comes from William Mackie from Kepler Cheuvreux.
William Mackie
Yes. A few questions, please, to follow up. First one is coming back to installation rates and really just to make sure I understand what you’re saying or clarity, you’ve thrown out a couple of numbers but could you at least reiterate what your expected installation rate is in megawatts in Q3 as you work through the planned catch-up and then in Q4 because, well, the numbers you’re talking about put you into a record territory?
Jose Luis Blanco
Yes. You need to take this with grain of salt because we don’t guide installations, we guide revenue. But we want to give you information of the activity, so you can better understand the business. The current planning, as we speak, I have it in front of mind for Q3, is 500-plus units which is a substantial increase versus Q1 or Q2. In Q2, we did 359 or something like that. So we have a substantial increase to 500-plus in Q3. And Q4 is 400-plus. That’s the level of activity in installation. And yes, it’s a record level for quarter.
William Mackie
And to what extent are you confident you have sufficient on-the-ground logistics to execute at such high levels because most of it is Europe, right?
Jose Luis Blanco
Most of it is Europe yes, you are correct. And yes, we have the cranes. We have the people. We have the plans to have the components. So if there is — if everything works as per the plan, the plan helps that installation and we are working towards that plan.
William Mackie
And then with regard to what you reported, if I just look at the number, the Q1 and the Q2 numbers, it appears as though you had a negative installation rate in Q2 in Latin America. Was there a reallocation of the work that you did between the quarters?
Jose Luis Blanco
Shouldn’t be. That’s a mistake, we will clarify and get back to you in a one-to-one but I don’t think so. So some — so — or yes, yes. Could be, yes, yes, yes. You were spot on. I mean 1 project in 1 Latin American country was relocated because of some customer issue without P&L impact for Nordex.
William Mackie
Okay, super. Now in Q1, you mentioned that there was about a 400 basis point drag on the profitability related to a high allocation of LDs and high installation costs in the Nordics. Can you give some sense of how that was running in Q2? To what extent was there still a substantial LD drag? And would you quantify it?
Jose Luis Blanco
Unfortunately, I don’t have that level of detail. Conceptually, it’s lower, it’s substantially lower, so things are getting back on track in Nordics. And in Germany, the level of deterioration in execution has improved substantially. In the beginning of the year, we were paying a substantial amount of liquidated damages for late installation and late connection. And majority of the projects were in liquidated damages. At the end of the quarter, just a handful of projects that you can with a hand were in the LD territory. So — but if we reduced from 4 to 2 or 4 to 1, I cannot be that specific.
William Mackie
Building on that question, just when we think about the target level of gross margins within the turbine business, I mean it’s been down close to zero in some quarters on the figures that you report and it’s historically been up as high as almost 20. But when we think about the contracts which yourself and Patxi are signing off, what is the sort of level of target gross margin we should be thinking about within turbines, midterm?
Jose Luis Blanco
I mean that we sell at 8% target level, assuming, let’s say, a 7-gigawatt company. And that gives you a certain contribution margin that usually we don’t disclose and — but what I can tell is EBITDA level 8% with the assumption that the volume is approx 7 gigawatts.
William Mackie
Then…
Felix Zander
We are close to running out of time. So maybe last question because we have one other also asking questions, please the last one, okay?
William Mackie
Sure. So North America, just if you’d like to talk about, whether you have the right product for North America, some of your customers — some of your competitors are introducing new products for the U.S. market? Or would you need to go through another innovation cycle to prepare for a U.S. market ramp-up?
Jose Luis Blanco
We are planning to sell a slight modification of existing products, so using existing blades and existing components and that’s our main plan. If we are successful or not, future will tell. But in our current plan, it’s not a new innovation cycle but building on reliable components because innovation also always carries certain risks, especially during the ramp-up phase.
Operator
We have a follow-up question from Constantin Hesse from Jefferies.
Constantin Hesse
Just a very quick one. So in Q1, you said that the catch-up of the delays would be done by the end of the first half and you would have delivered most, if not all, of your the low-quality projects by the end of the year. Does that still stand? That’s the first question.
Jose Luis Blanco
Unfortunately, not. I mean we did a substantial catch-up and we improved a lot in the margin, the deterioration and in the LDs. But unfortunately, we were not able to debottleneck the situation with the ports in Turkey and this is still creating pain for us. And the second factor that is affecting us is that we were expecting earlier order intake with earlier production, with earlier installation. And this is now why the second half has high level of activity.
Constantin Hesse
Understood. And then just the last one because we couldn’t hear it. There was a question regarding sequential improvement in profitability if we take the current expected roughly 4%, 5% EBITDA margin in the second half and looking to 2024, it’s probably fair to assume a continued improvement in margins in 2024, right?
Jose Luis Blanco
Well, that should be the expectation. I mean we are — it’s too early because we are — after the summer break, we will start the planning for the budget and the business plan. But if the company sells, ’24, we still need to sell all the fish. I mean we have little volume in the backlog for PoC and activity in ’24. So, all the majority of the fish is going to be sold in the second half of the year but as well in Q1 and Q2 next year. So I would say, too early to say. But if the conditions you mentioned materialize, we should see better margin quarter-on-quarter because less deterioration and better quality on the order intake.
Operator
The last question for today comes from John Kim from Deutsche Bank.
John Kim
Just want to see if you’re seeing any progress on country-level legislation in Europe; we have [ph] these directives. And I’m wondering if you’re seeing new policy at the country level specific to debottlenecking, permitting or anything else you see as kind of a binding condition or restraint on your ability to grow the market for the next 3 years.
Jose Luis Blanco
Yes. I do see, yes. We do see substantial improvement in Germany which is our core market and which we are very, very happy. So Germany now, you see the volume of the auctions, the available number of projects in the auctions and this was always a matter of concern because Germany is a key market for us. We are leaders in the market. The market is expected to grow. And two prerequisites to grow: One is the availability of permitted projects and the other is the ability of the supply chain to execute. We don’t see that prices and high interest costs are going to harm the market because the country needs to decarbonize. And I’m very optimistic to see the progress in the legislation about permitting, about making more land available, about several legislation steps that the German government is taking that, hopefully, the European legislation will go into that direction. That’s the expectation and the rest of European countries will follow.
Felix Zander
Okay. Thank you very much for all the questions and the fruitful discussion. This closes our Q&A session. I’d like to say goodbye from my side. But before ending the call, I’d like to hand over to Jose Luis again for his final remarks. Jose Luis, all yours.
Jose Luis Blanco
Yes. Thank you very much for the time, for the interest and for the questions. And as usual, I would like to provide you our key takeaways. And first, given our slower start in terms of order intake for the first half of 2023, we expect a back-ended load profile for 2023. However, we assume a sequential improvement of margins in the second half of the year. We confirm our expectations for this year. As also indicated in the last call that the performance in the second half will be stronger than in the first half. With our latest financial measure, we have considerably strengthening our financial structure and even flexibility.
Finally, confirm our guidance and midterm targets and hope that good policy development and measurements in our core markets with labor assuming to higher volumes and margins. And with that, thank you for your participation and wish you a nice afternoon. Goodbye.
Operator
Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.
