Vestas Wind Systems A/S

SIX:VWS

Earnings Call Transcript 2022-Q3

[Henrik Andersen, executive]

Good morning, and welcome to this Vestas' presentation of our Third Quarter 2022. Another quarter with a number and many variables in the external environment. So I'll also take here upfront the opportunity to thank our many external stakeholders, customers and, not least, our 28,000-plus employees upfront for battling through this quarter.

So with that, I would like to go to the key highlights. So when we look at the key highlights for Q3, the average selling price continues the upward trend. Increased prices secure continued high order backlog of a bit more than EUR 18 billion despite lower order intake of 1.9 gigawatt. We see offshore momentum building, so the preferred supplier agreements of 3.8 gigawatt announced over the last quarter.

We released a revenue of EUR 3.9 billion. That's a revenue decrease by 29% year-on-year, mainly driven by some project delays in the quarter.

And then when we look at the profitability, the profitability negative but improving. EBIT margin of 3.2% negative, driven mainly by the negative supply chain disruptions and also cost inflation as well as some project delays.

We had a very strong quarter in Service. So strong performance in Service. Revenue increased with 32%, with a 24.5% EBIT margin.

And then as we are now at the time in the year, we have adjusted our outlook for '22, both in terms of revenue and EBIT margin, negatively impacted by some of the project delays while Service momentum has accelerated.

So with that, let's now go and see some more details from the business. You have seen this now throughout the last couple of years and throughout the last many quarters, and therefore, I'm also happy to say our priorities have not changed. We still look after the health and safety of our top priority to our colleagues in the field. And we also put an enormous effort to have maintaining business continuity, which is more important than ever considering the circumstances on the -- both the energy and electricity market, not least in Europe.

We also see the challenging global business environment and supply chain disruption. They are expected to last throughout 2022, and third quarter was an evidence of that. We see the energy crisis that underlines the wind power's criticality to meet both the electricity demand, ensure energy supply, but also contribute to lower the CO2 emissions for society. We also see governments dealing with different level of success to this.

Cost inflation, supply chain disruption and COVID-related lockdowns continue to impact timeliness and also the increased cost, and it seems to be a remaining theme throughout this year.

The geopolitical uncertainty continues to impact global business environments. And I will just say, here, we are concerned with that but also taking action, and notable, not least from what has happened in Russia and Ukraine earlier in the year, and we don't see any changes to that in the short term.

Let me then go to Power Solutions. We've seen slow permitting processes, and we've also seen regulatory offtake uncertainty especially being raised within the EU, where you also have a question mark to taxes, either on individual companies or specific asset types in EU which definitely hasn't accelerated but slowed down.

When we see there is a decreased order intake in all regions impacted by delayed orders from customers trying to balance the cost inflation but also, to a very large extent, the offtake uncertainty, not least the volatility in the PPA offtake contracts.

When we see then positively growing pipeline of orders due to the delays and the increased focus on energy independence, that's of course, accelerating ambitious for renewable transition across many countries. I will just say, here, of course, we have to mention IRA in the U.S. and how also that will be seen in the quarters to come.

When we then see the pricing, it continues to increase. It's to mitigate the cost inflation and also secure future profitability of Vestas.

We've seen the highest onshore ASP in the last decade. And as you can also see Q-on-Q from '21, we have an increase just close to 31%.

We see a strong momentum with the new offshore V236 turbine with now more than 8 gigawatt of total preferred supplier agreements in the discussions with customers.

And then you will see the breakdown of orders to your right, and you will also see the development in ASP in the chart to the right.

With that, I'll go to the Service business, a stellar quarter, but also a quarter which has extremely both things to do and also how to support customers. So it is a very, very high activity quarter for service.

So we've seen increased activity level and, as a result of that, also higher transactional sales across many, many core markets we operating in. We also see inflation levers on the service contracts, protects profitability of the backlog, but you will also appreciate the comment of, this is not just a straightforward job to run right now, so we owe a lot to our colleagues in the Service business.

When we look at the effects of the business, we, today, have a backlog of EUR 32.8 billion. We look after 141 gigawatts on the contract, and we have an average backlog in excess of 10 years. And below, you can see, very pleasingly for us, that all regions are growing in terms of their backlog and the portfolio of service contracts.

When we look at the sustainability, a couple of highlights here. The Lifetime CO2 (sic) [ CO2e ] avoided by produced and shipped capacity in the quarter decreased by 10% from Q3 2021, and that is, alone, a reflection of the lower activity and volume compared to Q-on-Q. So that's a nutshell.

When we look at carbon emission from our own operations, it increased with 4% due to the higher service activity described in the previous slide, partly offset by lower activity in Power Solutions, and we will continue to work with that.

We also developed and installed a battery system in the quarter that synchronizes the charging with real-time renewable electricity generation. And I will just encourage everyone that has either the time or the opportunity to stick by our HQ in August, where they can see that system working. And it is some of the same principle that was also applied as part of the concert with Lukas Graham during the autumn in Q3.

Just wanted to highlight here on the chart to the right that when we look at carbon emission, which is our Scope 1 and 2, measured in million tonnes, and therefore, you will see that our own emission in Q3 2022 still sits at 24,000 tonnes and, of course, something we can work with and will work within Scope 1 and 2, especially from our factories predominantly.

When it comes to safety, given the high level of activities, especially in the Service, pleased to see that we remain around the same level, means that we look after each other. But of course, as well, we will constantly try to drive the KPI of total recordable injuries lower, and it currently sits at 3.5 per million working hours.

With that, I would like to hand over to Hans for financials.

[Hans Smith, executive]

Thank you, Henrik. Let's have a look at the income statement first, where we can clearly see how delayed revenue and cost inflation is impacting our profitability. So revenue decreased 29% year-on-year, down to EUR 3.9 billion, driven by lower offshore installations, by lower activity levels in the U.S. and by general delays across the business. We also impacted negatively again by, well, no deliveries in Russia and Ukraine.

And all-in-all, that leads us to a gross margin decrease of 6.7%, down to 4.1%, driven by the cost inflation that I mentioned and the, say, supply disruptions -- supply chain disruptions that I've also mentioned in past quarters.

EBIT margin decreased by 8.9 percentage points year-on-year, down to 3.2% minus, again, driven by the low gross margin as well as gearing effects from the lower revenue that we are having in the quarter.

We then had a few ups and downs on the special items, which all-in-all leads to a positive there of EUR 13 million. So clearly, it's something we are constantly working with as well as we have mentioned also in prior quarters.

The Power Solutions segment came in with a decrease of 37% year-on-year, driven by lower activities in the EMEA region and the U.S. EMEA, as mentioned already, in particular impacted by Russia and Ukraine, but also by delay on an offshore project. And in the U.S., we are seeing how the lower order intake is also meaning that we are seeing less to do on the installation side.

EBIT margins before special items stood at negative 8.1%, which is a 13.4 percentage point decrease year-on-year, driven, as I mentioned on the previous slide, by the cost inflation and the supply chain disruptions we've seen. And as also mentioned, the gearing effect obviously comes through also on the EBIT margin in the Power Solutions segment.

I think it's important to mention here also though that we are seeing sequential EBIT margin improvements during the year as some of the price lifts we have seen are beginning to kick in.

In the Service business, you mentioned already, Henrik, good performance there. High activity levels drives an EBIT level that is actually the highest that we have had of EUR 200 million, corresponding to a margin of 24.5%.

The revenue also increased significantly year-on-year by 32%, which is driven by higher activity levels overall by higher transactional sales. We are seeing a high demand for the services that we are providing in today's environment, but also by the inflation of levers we have in our contracts, and there's also a bit of FX effect in the numbers as well.

The SG&A costs remain under control. They amount to 8.5%, which is an increase of 1.9 percentage points compared to last year. However, this is primarily related to negative gearing effects from the lower revenue. There's also something coming from the offshore impairment and a bit also from transportation equipment. But as I said, we believe that our SG&A is quite well under control.

On the net working capital, we have clearly seen an impact from the delayed revenue and also from, say, the order intake that is smaller than what it was a year ago. The net working capital increased to EUR 93 million in Q3. The usual inventory unwind that we are seeing is delayed due to the back-end loaded profile of the year that we are having due to the delayed revenue that we're also seeing.

And we're also seeing as well that the order intake is driving lower levels of prepayments from customers. And as mentioned, the general delays we're seeing also means that the milestone payments we're getting on the projects are not coming in exactly on the same timing as what we'd typically would be seeing. And as said, that brings us to a net working capital of EUR 93 million.

The cash flow statement then sits with a negative cash flow from operating activities of EUR 614 million, driven by the lower profitability that we have had. I mentioned already the effects coming from the net working capital which obviously doesn't help either on how the cash flow is developing. And all-in-all, that means we're sitting with a free cash flow then of EUR 752 million negative in the quarter.

I would like to mention also though that we had a positive inflow coming from financing activities driven by the EIB loan that we took out earlier in the year.

Investments sat at EUR 138 million in Q3. The decrease compared to a year ago is driven by lower PP&E combined with proceeds from the disposal of our facilities in Lauchhammer in Germany.

As it relates to provisions and the LPF, we continue to see that being at elevated levels. LPF continues at a high level as a consequence of the extraordinary repairs and upgrades that we are carrying out. And warranty provisions made now correspond to 4.5% of revenue. The increase we are seeing is driven by general cost inflation. It's driven by logistics challenges for the repair solutions we are carrying out. And then we're also seeing a bit of increased upgrades needed for the existing cases we have. And all-in-all, that is leading to the numbers you can see here, the EUR 177 million of provisions made as well as the EUR 158 million of provisions consumed.

Finally then turning to the capital structure. Our net debt-to-EBITDA has increased, in particular due to the challenged profitability that we are experiencing. It now sits at 2.6, the multiple of 2.6 in Q3. I'd like to stress that our strong focus on cash and our focus on our capital structure targets remains, but we are also expected to be above this level for some quarters due to all of the challenges that we are experiencing in the industry currently. But we do see it as a temporary phenomenon. The key for this to get fixed is to restore profitability in the Power Solutions segment so as to get us back to a level that is more palatable in terms of what we would like to achieve.

With that, we go to the guidance, Henrik.

[Henrik Andersen, executive]

Thank you so much, Hans. And as we are now at the time of Q3, that's also the time where, first of all, we will review and also narrow to some extent some of the guidance ranges that we have been operating with throughout this year.

So when it comes to revenue, our outlook now is EUR 14.5 billion to EUR 15.5 billion. We expect to see Service grow with minimum 20%, reflecting on the 3 quarters we have seen.

When it comes to EBIT margin before special items, we now say it will be approximately minus 5%. And the Service margin is expected to be approximately 22%.

The total investments, as you've also seen a reflection of the previous quarters, is now revised to say approximately EUR 850 million. So it's also a lower investment level in the current environment.

I will also say with what we are experiencing now, and also have experienced throughout the previous quarters, it is important to note that we use the basic assumptions behind this guidance, of course adds and are still more uncertain than normal. And of course, the 2022 outlook is based on the current foreign exchange rates which you have seen by end of this quarter.

So with that, I would like to hand back to the operator, and we can start the Q&A. Thank you.

[Operator]

[Operator Instructions] Our first question is Claus Almer from Nordea.

[Claus Almer, analyst]

I have a few questions. The first goes to the ASP. From the outside, it's very difficult to compare the ASP increase with the cost inflation. The message during the past conference call has been that the level in those quarters has supported the medium-term 10% margin target. Now we saw that ASP in Q3 was up 10% versus Q2. Is this a pure reflection of cost inflation? Or is there actually margin enhancement? That will be the first question.

[Henrik Andersen, executive]

Okay. If I should take them one by one, then Claus, so the first question here is the ASP. Exactly the same as we have discussed in the previous quarter, we price and we run that discipline as we have done. A reflection of that is, of course, that when we see costs and updates coming in, and you can say, to a lesser extent, the cost inflation comes necessarily from components and raw materials, but more also on the underlying inflation will, of course, will hit us when it comes to energy levels and inflation pressure. So generally, the ASP in this quarter reflects exactly what we have been doing in the previous quarters, an uplift in ASP and pricing, which is still targeting our medium-term EBIT levels.

[Claus Almer, analyst]

Okay. Then my second question, which may go to Hans Martin, I think. At the CMD last year, the guidance was positive free cash flow every year. And given the 9-month performance, it looks a little bit challenging for this year. So are you still expecting positive free cash flow in 2022 or it's more for the coming years?

[Hans Smith, executive]

I think, again, Claus, if you look at where we are, I think it is fair to say it is, I mean, quite difficult to calculate the free cash flow that is positive for this year as it has turned out to be a very, very difficult year in a lot of ways. So I think you would be right in your modeling to assume that it's not going to be positive this year. I think that's quite clear.

[Claus Almer, analyst]

Okay. And then you mentioned this net debt-to-EBITDA target. And with the negative Q4, how long can you really stay above 1x ratio before doing something with your balance sheet?

[Hans Smith, executive]

I think it's fair to say that the 1x limit or ratio, or whatever you want to call it, that we have this, like a self-inflicted number that we have. So it is more something that we see ourselves wanting to achieve. It's also evident, given the circumstances that the industry is finding itself in right now, it is challenging. We see it as temporary, and this is obviously what we're working hard to fix. I think it's important to stress also that we see this as something that in particular has to be fixed through our earnings, through the EBITDA, because, first of all, that's obviously going to bring cash flow, but that's also going to impact this metric, of course.

And you can argue when you sit with a debt of roughly EUR 1 billion in a company our size, then that doesn't speak necessarily to there being say, liquidity issues, if that's what you are, say, referring to. For us, this is an earnings fix that needs to come through to work with that metric in particular.

[Claus Almer, analyst]

So the balance sheet is no issue once the offshore deliveries start to pick up?

[Hans Smith, executive]

Claus, we are comfortable with our balance sheet.

[Claus Almer, analyst]

Good. No more questions from my side.

[Operator]

And our next question comes from the line of Kristian Johansen of SEB.

[Kristian Tornøe Johansen, analyst]

Yes. Two questions from me as well. Firstly, on order ASP as well, so you made it clear that it is to secure profitability on the order intake you take in, but can you elaborate on how we should think of probability of the backlog then? So this significant step change in order ASP quarter-over-quarter, does that mean that the margin of the remaining backlog is continuing to deteriorate?

[Henrik Andersen, executive]

I don't think you can necessarily make that statement because, of course, we are also, as we always say, Kristian, we are also doing something when orders go firm. So there's part of the backlog with, of course, we will hedge and we will also secure as we have projects coming in. So you can't say that. But in the current environment, the ASP reflects what is a bare costing of this quarter on average, and they are more or less comparable because there isn't big changes in scope and others. So that you can.

But of course, you can for sure say that continuing now this trend for 8 quarters, then you can say there is still some challenges in part of the backlog when you have these rapid changes. On 4 quarters, you have a 31% increase in ASP. That's a statement in itself.

[Kristian Tornøe Johansen, analyst]

Sure. But maybe asking in a different way. Are you more comfortable with your ability to hedge cost considering where you are seeing cost volatility?

[Henrik Andersen, executive]

I think we have discussed it before in so much saying we are comfortable in our model. We are comfortable in running this. But it is not only a price hedge, it is also a physical delivery and a physical get on sites and into the factories on time. And that is not as easy as you are saying. That is the one thing I can't hedge with anyone, is actually timely delivery or delays or, for that matter, waiting time.

So therefore, we are working through it. And I think our wording in here says it quite directly that we work through it and we work through it frequently, and we see the changes and the improvements coming through as probably we would expect.

[Kristian Tornøe Johansen, analyst]

Understood. Then my second question, so obviously you highlighted the current continued challenges in Q3. Looking at macroeconomic indicators, container freight, so what have you, it would suggest that things are probably easing a bit out there. Are you seeing any signs of improvement in the supply chain disruption, the transportation channel, these things, when you look at your current operations?

[Henrik Andersen, executive]

I think in our term in the way it works, I think we probably are some quarters away from seeing what happens into that. We just don't expect, because we have things running through our -- both our factories and our deliveries and back to site, again, there are some quarters until we see that.

We also welcome if people are now start working with more positive ways of keeping harbors and other things open. So of course, if we have a limitation of the logistic and bottlenecks question, we will benefit from it, so we welcome that. But it's too early.

I mean the third quarter, don't forget, we were still operating with how we were addressing our projects and other stuff that, for instance, were supposed to happen in both Ukraine and Russia. So there is still, for us, have been in Q3, a lot of these challenges being addressed.

[Kristian Tornøe Johansen, analyst]

But considering what's going on in the world, are you a little bit more comfortable then that we should start to see easing within sort of the foreseeable future? Is that what you're implying?

[Henrik Andersen, executive]

You're talking to somebody that has a few scars on the hands of trying to predict 2 or 3 quarters ahead. I think it's fair saying, when we look into it, it looks slightly better now, when we look quarters ahead, but it is too early to declare.

Every time we have seen positives in the tonality, it hasn't been too positive when we got 1 or 2 months longer down the line. And that's just what we are highlighting, Kristian. There's still a lot of uncertainties also on the geopolitical scene.

[Operator]

Our next question comes from the line of Dan Togo at Carnegie.

[Dan Jensen, analyst]

My first question is on the project delays that you are referring to. Are there any penalties attached to this that has an impact in Q3? And considering one-off is there a risk that we could see penalties impacting Q4 and it is embedded, so to say, in the guidance? So that would be the first question.

[Hans Smith, executive]

I guess it's fair to say, Claus, that when you have -- sorry, Dan, when you have, say, delays in our business, then of course there's risk of penalties and delays of the delay penalties. So of course, this is something we have tried to factor in. That is what we have also calculated. We have made our best estimate as to what that also means for Q4. And that is what leads to then the updated outlook that you saw there.

So it's very natural, I guess, that to say, that when we see these kinds of delays, depending on the type of contract you have, that there will be these types of delay at least in various shapes and forms.

[Dan Jensen, analyst]

Is this a major factor of the downgrade? Just to be -- can you elaborate on that?

[Hans Smith, executive]

I wouldn't say so. I think in the bigger scheme of things, what really matters is, say, the cost inflation, the structural challenges we're seeing on the cost level. Of course, they're meaningful for the customers to also, if you're comfortable that we will do what we can right. But if you look at what it is, that we have been, say, adjusting here, then there are other things that impacts more.

[Dan Jensen, analyst]

It sounds good. Then on the market as such, Henrik, you have in previous quarters given some comments also on how you -- investors has been positioned in terms of lost market share, et cetera, where the conclusions, at least until Q2, was that you didn't lose market share. What is your statement here when you compare your order intake to your peers? Is that still the conclusion that Vestas is not losing market share? Or could you give some words on that, please?

[Henrik Andersen, executive]

As I said, first of all, we haven't seen all of Q3. And in reality, you will definitely appreciate for me to say the following. We took a hard strategic decision many quarters ago that market share and volume was secondary to compare to value profit and pricing and that we are executing on. And you don't get us to deviate from that at all, whether the market share goes down and others. And of course, we track what we see, and we can only have our own way of interpretating how the industry behaves in the current cycle. But that's for Vestas, we won't change.

[Operator]

Our next question comes from the line of Casper Blom at Danske Bank.

[Casper Blom, analyst]

Also two questions from me, and I'll start with one revolving around ASP also. I understand that when you introduce price increases to the magnitude that you've done, then the discussions drag out with your customers. But it would be interesting to hear if there are other factors that are also impacting the order intake. Are you hearing anything from your customers regarding higher interest rates making it more difficult to find financing, volatile electricity prices making it difficult to sign PPAs? So basically, if you could talk a bit about what is it that is holding back the customer? Is it just your ASP increases or are there other elements in it also?

[Henrik Andersen, executive]

Thanks, Casper. I think you can hear almost I'm having a smile, so you can't see, but -- come on, I mean if we take third quarter and look at the volatility, to some extent, government has also imposed in the markets on PPA offtake. You have seen energy electricity prices deviate anything from basically EUR 700, EUR 800 per megawatt hour down to something lower. And I think -- so the PPA volatility is one thing. So you have a customer that has to both absorb, find investment and capital for the project. But I can tell you one thing, when you look into the energy markets, no one have been willing to exchange the price increase of the turbine with the access to the energy and electricity offtake price because that is many fold higher. So I think there is a volatility. That means that you, as a customer, have to go back either to your internal processes or your external financing partner and update that several times, which, of course, complicate your process.

And if I can then give maybe just a little bit of a push to our governments in and around Europe, it isn't helpful in a quarter like this when you also then start imposing taxation on either individual companies or individual asset classes. Because, of course, that raises question mark to how the offtake can be done when you have to get external financing. To a lesser degree, we have seen the interest rates affecting it because the capital for renewable projects and the return on renewable project in the current energy crisis is substantial.

[Casper Blom, analyst]

Okay. That's comforting to hear at least. Sticking to the area of orders and order intake, do you have an opinion on when we could start seeing a larger flow of orders from the U.S. after the IRA? It's my understanding that there's still a bit of interpretation to be done on the whole document. But when would you sort of start to see a meaningful improvement in the U.S. order intake?

[Henrik Andersen, executive]

I definitely have an opinion. I will just say it's the coming quarters. Because, Casper, in reality here, for any customer that are sitting with the upside of the exclusion of the IRA, then you have to make sure your project gets an approval in there. There is such substantial differences. So therefore, you want to run over that project several times to be sure that it gets the coverage on the IRA.

And there are still interpretation, and there are still, as usual, legislation drop down into departments. You also need to know how it's treated from the department. It's in the coming quarters, and I will say it will start accelerating in the coming quarters, and you will see main of that being a discussion point for '23.

[Operator]

Thank you. Our next question comes from the line of Gael de-Bray at Deutsche Bank.

[Gael de-Bray, analyst]

My first question relates to the new guidance, which implies much higher volumes in Q4 than in Q3, but still continued heavy operating losses in Power Solutions, nearly on par with those of Q3 really. So how do you explain the lack of operating leverage on a sequential basis? So that's question number one.

Question number two is on pricing in offshore. You've been selected as a preferred supplier for several offshore contracts in the past few months now. And I was wondering if you could comment on your pricing discipline in offshore versus onshore.

[Hans Smith, executive]

All right. Do I take the first one, Henrik?

[Henrik Andersen, executive]

Yes, take it.

[Hans Smith, executive]

So the operating leverage, I think that was the main question in Q4, given the amounts of volumes that implicitly is expected to come through. I guess it's fair to say that we will be structuring also in Q4 with a lot of the challenges that we've mentioned already. So we are seeing elevated logistics costs, cost inflation on the components that we're shipping through, which sits with impact from the inflation that has been observed throughout the last many quarters. So you're absolutely right, there is a lot of stuff that needs to go through in the fourth quarter. We are heavily, heavily back-end loaded. But due to the delays and what we have observed, then I guess there's no point getting around the fact that mathematically, obviously, we would have liked to see better operating leverage, we would have liked to see higher margins, but unfortunately, given all the things we have now been talking about for basically the entire year, we sit with lower margins than what we would like to see. And that is also the reason why we are making the adjustment that we are to the outlook that we are having.

So it's a fair observation. And there's a very logical answer to that point. It's really just those things coming through, as one could have feared, so to say.

[Henrik Andersen, executive]

And then on the preferred supply agreements in offshore, you would appreciate this, for now the last few quarters we have been asked of if we are confident with the progress we are making. And I think these comes when time is right, and we are progressing with the global customers and discussing that across both regions and areas. It has come through in both Europe and the U.S. in the previous quarters, and it is exactly the same people are proving it and it's exactly the same process that runs in and around that. So it comes through the same approval processes. So the short answer to that, Gael, is same principle applies.

[Operator]

Next question comes from the line of Ajay Patel, Goldman Sachs.

[Ajay Patel, analyst]

So mine's more focusing on the leverage. You start obviously in the quarter in Q3 2.6x net debt-to-EBITDA. You say that you may stay above 1x for a little while, and it's a self-inflicted target. And much of that improvement to getting below 1x will depend up on earnings. I'm trying to understand is how much of that journey is already in the order backlog? And how much is actually dependent on getting a decent order intake in Q4?

And then the second question is that I think you said that these 1x was a self-inflicted target. What are the real ones and then what are your most constrained debt metrics? How do we sort of follow you on your journey, just to understand what the needs of capital will be as we go through this journey and recovering the business back to the longer-term margins and the improved outlook that we see that energy policy presents?

[Henrik Andersen, executive]

Ajay. I think on the capital, let me also put it a bit in perspective. I've been around first in the Board and as a Chief Exec for quite some time. And for quarter in and quarter out, we were sitting and discussing why we're actually having a target of 1x because we were never above it, we always had a cash position.

So we came into this part of the cycle with a very prudent balance sheet. And now everyone can also see, for those of us who have been around Vestas for a decade, we need that from time to time. And therefore, we are addressing that, as I said to a few people this morning, when we look through it.

Sometimes it's easier when most of your business works really well but you sit with a Power Solutions and especially the onshore business that is posing your negative EBIT, then it is fixing that. You can go back and see we are trying to address that quarter and quarter-on-quarter. And of course, that will unfold.

You can't then say in an individual quarter, will it all suddenly happens from where we are today and into the high single positive EBIT on the Power Solution. So that will gradually come. And that is also why we are comfortable of doing that, that what we have seen of consumption of cash is materially the worst of what we have been going through and that we will try to address from here.

We are not uncomfortable with our balance sheet at all, and we run that as prudent as we still would do.

[Ajay Patel, analyst]

The sort of most constrained debt metrics or to maybe make an understanding of what is a limiting factor for your balance sheet?

[Hans Smith, executive]

Just to be clear, we're obviously not going to sit here and discuss our various, let's say, parts of our financing setup is structured. We have nothing unusual, nothing special in the way we are set up.

But as Henrik is also saying, we're comfortable with our position. But it doesn't make any sense to sit down and talk about that kind of stuff. It's -- as said, there's nothing unusual about what we have in our setup.

[Ajay Patel, analyst]

Maybe then just because that question may be a different one, is then, you're obviously very close with your customers and dialogues are taking a little bit longer and order intake has been a bit slow these 9 months relative to last year. Are you -- and it seems like if you look further out, there's a huge opportunity in energy policy from REPower EU to the Inflation Reduction Act. And it seems like there's a lag between the current environment we are now and then maybe the uptick that could come from those policy changes. Do you have any sense, with the sort of interactions you're having with your customers, how long that could be? 6 months? 12 months? 3 months? Or is it more of an unknown as you see it right now? Just to maybe understand any perspective you may have.

[Henrik Andersen, executive]

If it's Europe or U.S., I think U.S. IRA is something, as I just say, getting that, that will happen over the coming quarters. I think for everyone in the U.S. right now, everyone can see the positive upside in getting the projects permitted and also having do a transmission acceptance in there. And when all of that has happened, they still want to absolutely be sure that they get the right treatment under IRA which is positive. So that will be accelerating over the coming quarters. . And we will start seeing the first projects coming through in that nature. And we also subscribe to the way it has patterned out, then there will be probably soon, over the coming quarters, there will also soon be a discussion around what is actually the two North American capacity to be allocated.

When it comes to Europe, I think I expressed slightly my disappointment and concern over that, that why we haven't seen a more active actionable pipeline of approvals from European countries. But we will keep raising our voice around that one rather than -- I think it's actually, excuse the language, it's maybe a little of nonsense to sit in and adjust ambitious target in 2030 and 2040 because that doesn't address the current energy crisis in Europe.

[Operator]

Thank you. And our next question comes from the line of Sean McLoughlin at HSBC.

[Sean McLoughlin, analyst]

Do you think your current manufacturing footprint is well sized with respect to the order intake volumes that you're seeing right now?

[Henrik Andersen, executive]

Yes. Currently, yes. Otherwise, we would also have made announcement on it, Sean. And you can say we adjusted in -- we have definitely adjusted in China and India early in the year. And for obvious reasons, we also adjusted capacity in Russia to 0 and exited that. And then as you would have seen in the quarter here, European, Brazilian, LatAm orders, and we will start seeing also a U.S. order growing. Do you know what, that fits well in terms of the current footprint. We look forward to that we can start having some proper full time and shifts back in the U.S. factories.

[Sean McLoughlin, analyst]

And just on the project delays. I just wanted to understand a little bit more, what specifically is causing this? Is this still just about component shortages? Or what are the kind of pinch points that you're seeing across the value chain? And again, how quickly can that delay unwind?

[Henrik Andersen, executive]

I mean, Sean, it's sort of -- it's dangerous to say there are delays with a generic reason to it. And I think previous question sort of that causes LDs and investors' is basket not necessarily because it might not be us to blame for. So as the world has and is unfolding, there can be individual projects where there is a delay, and some part of that, you then have to find a way to mitigate. And when there is a delay right now, we just have to say it's anything you do on site is costly because it puts strains on assets that should be somewhere else. That could be cranes, it could be people, it could be construction. So therefore, it's just costly to be delayed. And when there is then a liability on it, a liability is a bit toxic right now, because the electricity prices, I'm sure you can see on your meter back home, is just incredibly high. So the paradox is the working environment is tense. I wouldn't call it toxic, but tense, because everyone wants to have commissioning right on time. So delays cause tensions.

[Operator]

And our next question comes from the line of Deepa Venkateswaran of Bernstein.

[Deepa Venkateswaran, analyst]

I have two questions. One is on the net debt and the inventory buildup. So obviously, you've had a huge buildup of inventory over the year, and you're also expecting a pretty large Q4. So should we assume that you would see some of this inventory buildup unwind in Q4? Or is this kind of structural and stay for longer? Because presumably that will make a pretty big difference to your net debt metrics given that year-to-date it's a EUR 1.4 billion buildup on inventory. So that's the first one.

And secondly, on the -- just coming back to the previous questions on delays. I mean how should we think of these delays? Is this shifting profits or revenues for next year? Or is this just a consequence of the delays this year, which means higher cost and liquidated damages, which means they eat into the margins permanently? I mean, how should we think of these delays? And therefore, is this trend, then therefore, likely to also spill into next year?

[Hans Smith, executive]

All right. I'll take the first one. On the inventories, you're absolutely right that they are, of course, going up and they are at fairly elevated levels. When we have these delays, of course, that also has an impact. And I'd also like to remind that part of our, say, revenue recognition means that you have delays impacting inventories because we then, when you have transfer of risk, flush things out of the inventory. So structurally, that also means that if you have a back-end loaded year, then you will see that also impact how the inventories develops.

So the short answer is that we are expecting to see that the inventories will be impacted by the high activity levels we are having in the fourth quarter. There should be some flushing coming through as well. So that's how we are expecting for it to work out in the fourth quarter. But we are, of course, challenged by the very heavy back-end loading that we have had.

[Henrik Andersen, executive]

Yes. And in terms of delay, Deepa, I would say you can't, because there will be some delays that runs from quarter-to-quarter, and you can't exactly say that. And as you can also see on our -- on our adjustment on ranges for the top line, yes, there will be some that potentially runs into beginning of next year, but that's more the risk of having something that is similar to what we previously have in the years where -- when you have a year-end in Q4, you will have a risk of some projects running in.

And as I said, as everyone trying to quantify LDs, I still encourage people to say, LDs is only one proportion of it. And right now, the LDs is not the material part of our cost overruns with that.

[Operator]

And our next question comes from the line of Supriya Subramanian of UBS.

[Supriya Subramanian, analyst]

Actually most of them have been answered. Just maybe one question is into 2023, and I appreciate, of course, that we get the official guidance the next quarter. But just wanted to get your thoughts on what we need to keep in mind on the various moving parts, both related to your top line as well as margins, like the lower order intake, maybe a slightly improving environment, the price is going up. And how do you see things trended at least subjectively into 2023?

[Henrik Andersen, executive]

I say that '23, you'll hear more about on the 8th of February. I think we have all hands on deck right now in executing the remaining part of the year. And I will say I won't give you any surprise in saying, a good advice will be to track both order intake and ASP in Q4 also for looking into '23.

But as you can see now, that there will be a lower gigawatt to be expected delivered in '23. But at the same time, we are not finished with the year and the order intake.

[Supriya Subramanian, analyst]

All right. Fair enough. Maybe one quick question. Do we still sort of believe that we can reach the 10% margin target by 2025? Is that still a goal that the company maintains?

[Henrik Andersen, executive]

There's nothing in what we are doing today that works away from that goal. So that, we are still adamant.

[Operator]

Our next question comes from the line of Martin Wilkie at Citi.

[Martin Wilkie, analyst]

It's Martin from Citi. Just a question, first coming back to the demand environment. And in Europe, you've talked about the permitting delays. I saw on your website you've put out, I somewhere heard bureaucrats can save the world heading into COP27 and how there's 4x as much wind stuck in permitting in Europe as there is actually under construction. Two parts of the question. Firstly, are there any countries that we can be more hopeful about? It seems on paper that Germany is perhaps a little bit more advanced in permitting change than other countries? I'd be interested to hear your views on that.

And then secondly, just ahead of COP27, obviously, you are going to be focusing on how permitting can change. But is that the sort of silver bullet? Or do all these other issues around PPAs and so forth means that actually the number of complexities we have in Europe means that this sort of delay, if you like, in ordering could actually continue for quite some time?

[Henrik Andersen, executive]

I think I share your optimism, Martin, that certain governments are more to the point of what needs to be done. And that means, instead of talking about doubling your renewable targets in 2040, you actually get some permitting done. And I think I will welcome the German progress.

Yes, you can also focus on there something that was unsubscribed for in the last auction. But still compared to where we came from in '19, '20, we see '21 and '22 picking up the momentum. And I think that serves as a good example for many countries surrounding Germany. And we generally see some of those initiatives. And not surprising, what you will expect, we do get a fair bit of discussion point with energy ministers and governments on exactly that point. And we encourage everyone to try to address it. Because as we can offer both the capacity and the turbines, if the permitting in there, basically solutions within the coming 3 to 4 quarters fully commissioned and helping the consumer in Europe. So that we will continue to do.

In terms of the COP27, I will say, you know how it went in Glasgow. And I think there's probably be some surround is exactly the same magic for COP27 now, which is that they will do some mathematically exercise in calculation and then we will find something. But that doesn't help the coming 4 quarters. So I encourage people to spend a bit less time in do the calculations for 2040 and actually ask the departments to get the permitting going.

[Operator]

Our next question comes from the line of Henry Tarr at Berenberg.

[Henry Tarr, analyst]

I think most of them have probably been asked, but if I could just come back on to the delays and so on. What is it that you are watching or wanting to see to get comfort that things are getting better? Is it shipping reliability? Is it issues in ports in specific geographies? Is it China reopening? Any kind of indication there would be great.

[Henrik Andersen, executive]

Henry, we know each other well enough. I could say you answered it yourself because you said China opening and so with the treatment in China harbors, access to our own factories and from factories out to site. And unfortunately, there are still some equities that are long away from where world works well again.

So I think those are the queues and the delays, and we accord in that randomly. We work with the best in the world, but still we sit with some of those delays. And I don't think that it isn't a short -- we've always said it isn't a short-term fix, because just the backlog takes months and months to clear from what is in there. And that goes not only for ports, it also goes on rail and other things. So that's one.

And the other thing, of course, is shortages of critical components, which we still have experience of in a number of areas.

And then, yes, I mean, from a delay point of view, if you look at our quarterly this time, there is a paradox in that we are losing more than 8% on a Power Solution and onshore in a quarter where the solutions we are commissioning have never been more valuable to our customers, and that one we have to change, we simply have to change.

[Henry Tarr, analyst]

And just quickly on CapEx, which has obviously come down a little bit this year. Can you just confirm sort of what's come out? And then is that -- what does that mean for next year? Is some cash being deferred? Or is this actually just sort of a net payment issue with divestments, et cetera?

[Hans Smith, executive]

I think what we are looking at is a multitude of different things. So it's, say, a combination -- you mentioned yourself, we had an asset sale that has, say, a smallest impact. And then we are seeing that some of the CapEx that we're experiencing in R&D is getting a bit delayed. We are seeing also some adjustments to some footprint things on the manufacturing side. . And all-in-all, it's really a bucket of different things which is impacting the CapEx. It's not possible to point to any specific thing here which is driving the adjustment you're looking at on the outlook. As I said, it's really a multitude of parameters coming from different areas. Some of it has moved out and some of it is taken down. But in the bigger scheme of things, no material numbers, I would argue.

[Operator]

Our next question is from the line of Ben Uglow at Morgan Stanley.

[Ben Uglow, analyst]

I had two. The first is just around the working capital movement. And I think somebody before was talking about inventory. If we look forward, if we look 2023, 2024 and beyond, can you move back down to what I would call a structural lower level of inventory? You're carrying about EUR 7 billion. 2, 3 years ago, it was EUR 4 billion to EUR 5 billion. Are we looking at an ongoing high level of inventory? Or is there something that can be done to get that number back down? So that was question number one. Question number two is coming back to the net debt-to-EBITDA at 2.6x. So I understand that you guys are comfortable with that. But what I wanted to know better is what is the basis for that comfort? Is it that you perceive an environment where new orders, customer advances and free cash flow gets better? Or are you referring more to the kind of current existing liquidity and you are kind of structure of the balance sheet?

[Hans Smith, executive]

So if we take the last question first on the 2.6x. If you look at the size of our debt, I think I mentioned already, we are roughly at EUR 1 billion. And I think for a business our size, say from a liquidity perspective, that is not a supply number to be at also, given, say, what kind of facilities we have available. Then the EUR 1 billion, I mean, it compares in a way where that gives us, I'd say, a good comfort around that. So I think as I said before, this is about, say, getting the -- EBITDA getting the profitability up.

Of course, we'll talk in a second also about working capital and inventories, that will obviously also help us. We see that the cash flow should hopefully start to improve. But it sits on the, say, the 2.6x levels of net debt-to-EBITDA, we see that as a temporary phenomenon. Whereas the earnings sequentially will go up, then it will revert back to levels that should be lower, just to make that clear.

Then on the inventory, and I guess on the working capital. So you're right, there's clearly something we are looking at in terms of addressing that. What I would say is due to some of the challenges that we have had over the course of the last year plus, I guess, they've seen for the pandemic -- to the COVID times, we do see that structurally it has made sense to run with levels that are somewhat different to what you might do in a super optimized world where everything is very, very stable. So clearly, if that was to get to, say, to be the case again, there would be certain things we can do.

I'd also say that it has been a very difficult sector and business to forecast and be and, of course, also what that means is that the delays we are experiencing means that you are seeing these fluctuations. We spoke about that also earlier on the call.

So I think clearly, we have the ambition level to take the inventories down, which in turn is also then going to have a meaningful impact on the working capital at some point. But it takes time. This is not something you just fix over the course of a month. Because a lot of what we do is basically locked for a very long time once you step into the orders and also when you work with your suppliers. But clearly, of course, this is something that's very high on the agenda for management.

[Henrik Andersen, executive]

And if we could now move to, operator, the last question.

[Operator]

Yes. Our final question comes from the line of Jacob Pedersen at Sydbank.

[Jacob Pedersen, analyst]

I have two. First of all, can you just take a few words on the order pipeline. What does it take to unlock the potential from all the political initiatives? And also, we see that your competitors, some of your competitors are scaling down. Where does that leave you in competition for the coming quarters?

[Henrik Andersen, executive]

I will say, first of all, on the order pipeline, Jacob, the predictability of trying to guide forward on order intake, we absolutely refrain from. It's probably fair saying the catalog of projects that are being carried over and not come to a firm order intake is getting larger, because that's just a natural reflection of that there are that many variables to it. So in that sense, we are positive.

But it also means though it's the same firmness in voice and tone of voice here is that we absolutely don't change our attitude towards order intake. And for that matter, we don't believe in using capacity through a negative order intake from a profitability. That doesn't make any sense.

If people are adjusting capacity sort of in a more big scale, it's probably because they haven't done it on an ongoing, I can only guess. But that's probably one of the challenges for the industry, that to become disciplined means that you're disciplined on a day-to-day basis, not just when you have new management arrival.

Okay. With that, thank you so much for your time. Thank you also for the interest and the support in the previous quarter, and we look forward to see many of you over the coming days. So with that, have a very good day, and thanks for both of us here.