Siemens Gamesa Renewable Energy S.A. (OTCPK:GCTAF) Q1 2022 Earnings Conference Call February 3, 2022 2:30 AM ET
Company Participants
Andreas Nauen – CEO
Beatriz Puente – CFO
Miguel Angel López – Chairman
Jochen Eickholt – CEO
Conference Call Participants
Vivek Midha – Citi
Gael de-Bray – Deutsche Bank
Akash Gupta – JPMorgan
Deepa Venkateswaran – Bernstein
Sean McLoughlin – HSBC
Katie Self – Morgan Stanley
Rajesh Singla – Societe Generale
William Mackie – Kepler Cheuvreux
Operator
Unidentified Company Representative
Good morning, ladies and gentlemen. This is Javier [indiscernible] from Siemens Gamesa IR team. Welcome to our First Quarter Fiscal Year 2022 Presentation. Before we start, let me to draw your attention to our disclaimer in page two. The earnings release presentation will be conducted by the Chairman of our Board of Directors, Miguel Angel López, who will talk about the leadership change; and our CFO [ph], Andreas Nauen; and CFO, Beatriz Puente, who will discuss Q1 results.
Our newly appointed CEO, Jochen Eickholt, is also on the line and he will make some brief remarks. But as he is not in the office yet, he will not take questions today. We will finish with a Q&A session, for which we will take your question over the phone.
With this, let me, therefore, turn the meeting over to Miguel Angel López, Chairman of the Board of Directors. Miguel Angel?
Miguel Angel López
Thank you, Javier. Good morning ladies and gentlemen and thank you for joining our call. As you are aware, a couple of weeks ago, Siemens Gamesa announced preliminary results for Q1 fiscal year 2022, which showed significant deviation from market expectations, and we adjusted our guidance for the full fiscal year.
As a result of these deviations, the Board of Directors has analyzed and discussed the performance of the company and our options for taking action to improve performance and put the company on the path to sustainable profitability.
Ultimately, we came to the conclusion that Siemens Gamesa required a reset and a change in its leadership. And as a result, yesterday announced that Jochen Eickholt, who is currently a Board member of Siemens Gamesa and a Senior Executive at Siemens Energy, would replace Andreas Nauen from March 1st.
Andreas will remain in post until then to ensure a smooth handover. We believe that Jochen Eickholt has the right blend of skills and experience to lead Siemens Gamesa through what is a highly challenging period.
The wind energy industry, in common with other industries, is facing severe supply chain disruption, which we expect to continue through the fiscal year. Siemens Gamesa faced its own internal challenges with the ramp-up of the Siemens Gamesa 5.X platform and needs to stabilize its onshore business unit.
Jochen Eickholt has proven experience both of turning around companies in such circumstances as well as managing industrial and engineering businesses with highly complex operational challenges. He will take on the leadership of a company that has two businesses that are operating very well, offshore and service, in large part, thanks to the influence of Andreas.
We are confident that Jochen and the Siemens Gamesa team will be able to accelerate the turnaround of onshore and put the company back on the path to sustainable profitability in an industry that has a bright future despite the current challenges.
Jochen is with us right now. Hello, Jochen. Good morning.
Jochen Eickholt
Hi, Miguel. Good morning. Yes. So, as a person, I’m very happy. I’m humbled, I’m really feeling privileged to be able to take over the position you just mentioned and I’m really looking forward to working in this new Siemens Gamesa environment from March 1st onwards.
Miguel Angel López
Thank you very much, Jochen. Looking forward for our working together. Finally, let me pay tribute to Andreas for his dedication and commitment to a company with which he has a long and distinguished history. Andreas has played an instrumental role in building our market-leading offshore business. He will leave the company with our thanks for our — for his major contribution to its development.
And with that, let me hand over to Andreas.
Andreas Nauen
Thank you, Miguel. Good morning to everyone and welcome to this surely a little unusual earnings release call. Before we get to the numbers and the slides, I would like to say a few personal words.
I was informed yesterday about the decision of the Board. And the rationale is, of course, obvious. The financial situation of Siemens Gamesa is not what we all want it to be. The results are bad. Too often, we have surprises that are hard to understand and hard to explain for me, and in the end, the trust is highly questioned, if not completely gone.
And so I fully understand that the Board had to decide and I understand that decision. Not that I like it, but I fully understand it. I continue to believe that we started many good things, but the perfect storm that we also had, and we talked some of them in these calls about supply chain, raw materials, and all of that, that maybe it’s also impossible to fix that, combined with our internal issues that are never hided in just 18 months.
But anyway, it’s not about me or me as a person, it’s about Siemens Gamesa and what is best for the company. And therefore, the restart with Jochen, who has done similar turnarounds in other business, is probably also in — the best way forward.
I continue, as Miguel said, until end of February, and will also help — that is a good transition — that we have a good transition and Jochen has a flying start. I continue to believe that this is a great company. And 17 years ago, I had the chance to start it. We were just a €300 million small business unit in Siemens. We are now €10 billion, and I think there’s the serious chance that this can easily grow by 50%, if not double over the next decade.
And for me personally, it has been a dream job. I never expected when I left university as a German engineer and started in Siemens nearly 31 years ago, and I continue also to believe that’s a great industry. We have a major role to play in the fight against climate change, and I can only hope — I think we all hope that we can turn this company, this industry around, and I wish already now Jochen the best of success.
With that, I would like to go to the presentation, and then I will hand over, as usual, to Beatriz. She will take a longer road today and explain the second part completely. But nevertheless, I’ll start with the key points and also about some of the orders that we got.
So, let me look at the key points for the first quarter. We had a strong commercial activity with an order intake of nearly €2.5 billion and the backlog now rose to €33.6 billion. The revenue is — was €1.8 billion, an okay start to the year, I would say, with the first quarter. But of course, the EBIT margin was nearly minus 17%, highly impacted by the higher costs driven by the supply chain challenges and, of course, by our ramp-up difficulties that we have at the 5.X platform.
When — as Miguel also said, we have a continued strong service performance, an increase of 8% in revenue. EBIT margin, again, where it should be, well in the 20s. And in addition to the LEAP program, we have also started further actions in the coming quarters, including new mitigation plans against the supply chain challenges and the missing parts that, at the moment, slow down our production. Also here, we needed additional initiatives to get this under control.
And we also continue, we discussed that many times, to pass through cost inflation and material risk and logistics risk into the new contracts. So, I’m very confident that this will help us in the future. The profitability — or diminishing profitability, the early production in some areas and investment phase, especially in Offshore, have impacted our cash flow. But we have an ongoing plan that includes cash flow mitigation initiatives and, as we talked about, the disposal of our wind farm pipeline in Southern Europe, which is going really well.
And we enhance liquidity tenure to avoid liquidity constraints. The total liquidity now, and Beatriz will cover that later anyway in more detail, is now €4.5 billion. As commented before, we have changed our outlook for the fiscal year 2022 due to the supply chain constraints and the ramp-up delays, especially in onshore. And our new guidance for the fiscal year is now — the revenues are expected to decline between minus 9% and minus 2%, while the EBIT margin will be between minus 4% and 1%.
However, we keep our long-term vision and with an EBIT margin between 8% to 10% in later years to be achieved. And this is supported by the onshore market and the turnaround in onshore and the sustained profitable growth in offshore and service.
I would suggest we then have a look at the commercial activity in the first quarter, where we can see that our backlog continues to grow, reached now more than €33 billion, almost 12% higher than a year ago. The order intake with €2.5 billion supported that strongly. It’s driven by growth in service and offshore and favored by orders initially expected in coming quarters, and it reflects the company’s commercial strategy of focusing on controlling risk and prioritizing profits in the onshore projects.
As a consequence of our growing order backlog, we now have reached more than 93% coverage of the fiscal year 2022. That’s, of course, always a remaining service and revenue that is normally not covered at this time of year, but we are confident that this will come as it has always come. More than 80% of the order backlog is also related to markets where execution is strong and with growth prospects that are above average.
As you can see in the chart on the right, the EMEA region is again the main driver of the order backlog, with over €22 billion, €4 billion more than a year ago. In case of the order intake, both service and offshore benefited from shift of orders expected later in the year, and onshore performed as a consequence of prioritizing profits over volume.
If we then have a further look at the commercial activity in onshore, with a focus on profit over volume, it’s behind the low — and that logic is behind the lower order intake volume. Also here, EMEA is the main driver for the onshore commercial activity, with Finland a large contributor, Sweden and Spain. Outside EMEA, we have India with 15% of the total order intake and then Canada with 13%.
Again, as expected, turbines of four megawatts or greater account for more than three quarters of all orders in this quarter and with 50% coming from the 5.X platform, which has accumulated around nearly four gigawatts of orders since its launch.
We also saw now that the Siemens Gamesa 5.X was a success in Spain, where we signed the first order, which was unfortunately a little delayed due to the famous royal decree.
We continue to incorporate cost inflation into our contracts. The trend in the average selling price clearly shows a positive effect, something that we always expected, and it shows that prices in onshore are increasing. The positive effect is also due to the geographic mix as EMEA’s contribution increased. And if you would take out the India effect — or the element that India has at the moment, the ASP in onshore would even be higher.
We then have a look at the offshore commercial activity. We maintain our leadership with 7.6 gigawatts in order backlog, another 6. — gigawatts in pipeline, which — with projects all across the world. What’s important for me is especially the order intake and pipeline for the 14-megawatt 222 turbine, where the prototype is already up and running here in Denmark.
And as you can see in the chart on the left, offshore order intake for the last 12 months increased by more than 30% in the first quarter. Here, I would like to highlight the conversion of Gode Wind, an order from Ørsted in Germany, from the pipeline into a firm order.
Service, next page. Service order backlog reached €17.3 billion. That is more than half of the group’s backlog and 13.4% higher than a year ago with the — all the three regions contributing to that growth.
The company has now 82 gigawatts under maintenance, an increase of 9% from the previous year, out of which 69 are onshore and 13 are offshore. We also keep a good retention rate of nearly 70%, in line with previous quarters. Commercial performance was strong and significant order intake growth.
With that, I would like to hand over to you, Beatriz.
Beatriz Puente
Thank you, Andreas. Good morning everyone and thank you for joining us today. I will cover our Q1 financial performance and the outlook for the year. Starting with the key financial metrics. There are no changes versus our preliminary Q1 numbers.
Q1 2022 revenues and EBIT performance has been impacted by the following factors that we also shared with you in our preliminary numbers, supply chain-related disruptions, which now are expected to last longer than previously anticipated and also further affected by the continued impact of the COVID-19 pandemic.
These supply chain tensions have resulted in higher-than-expected cost inflation, mainly affecting the WTG segment. Volatile market conditions have impacted also some of our customers’ investment decisions and therefore, also resulted in delays to some of the projects and a loss of volume for us throughout the year.
Additionally, the ramp-up challenges of the 5.X platform, including some design changes that are needed, have affected the production and product execution as scheduled. This negative impact of these delays and also changes in production plans have been compounded by the existing bottlenecks in the supply chain.
In this challenging environment, Q1 group revenues have declined 20% in the period to €1.8 billion, with service revenues performance continue to be very strong. Q1 EBIT pre-PPA and integration and restructuring costs amounted to a negative amount of €309 million.
The group EBIT has been negatively impacted in Q1 by the valuation of the profitability of our onshore order backlog and the new market and production conditions that I have explained.
The negative impact amounted to €289 million and relates mainly to the cost deviation in our onshore projects due to market conditions and the delays of — due to the ramp-up of the 5.X. It’s worth highlighting that services activities continue to perform very strong despite current market conditions, and also that our offshore operations provide a positive contribution in the quarter despite the very low activity in this period.
Integration and restructuring costs, not very significant in the period, amounted to €11 million. And also, I want to highlight that net interest expense of €five million in the period, a significant reduction versus last year despite higher leverage. So, I think it’s a good example how we have optimized the debt and cash management of the company that we started last year.
Tax expense on the period of negative €22 million as a consequence of losses in markets where the company cannot capitalize the deferred tax assets together with profits in other high tax rate countries. As a result, reported net income amounted to €403 million loss in Q1.
Now let me give you more color about the revenues in the quarter. Group revenues of €1.8 billion, a decline of 20% quarter-on-quarter driven by a 26% decline in our WTG segment partially compensated by a very sound service revenue performance, up 8% on the period.
Q1 2022 revenues have been positively impacted by currency, roughly the amount has been €65 million, half of that coming by the appreciation of the British pound and also the Taiwanese dollar.
The WTG segment revenue performance, 26% decline, has been driven by the impact of material shortage and also company delivery delays in our manufacturing facilities, both for the onshore and also offshore businesses.
As a consequence, manufacturing volumes have come down roughly 42% in the period to 1.4 gigawatts, 32% down in onshore and 66% down in offshore. The decline in manufacturing activity has been partially compensated by strong installation activity in the quarter. It’s important to highlight that we expect WTG segment manufacturing activity to recover in the coming quarters, in line with our revenue guidance range for the year.
Also, service revenues reached €429 million, fully in line with expectations of a high single-digit growth throughout the year. As we have already covered in depth the EBIT performance of the group, let me focus on the balance sheet of the company. I want to highlight that cash generation and also balance sheet strength remains a priority for the group.
Therefore, financial discipline, maintaining investment grade as well as alignment of leverage and investment phase are our top priority. A good example of that is the confirmation of the additional levers that we put in place last year are well on track, as Andreas has mentioned. The additional cash measures and also the asset disposal process of the Wind Farm Solutions are well on track.
Additionally, we have strengthened the liquidity of the company with the extension of the maturity of our €two billion credit line one year longer towards 2027. Before, it was 2026.
Net debt financial of the group stands at €1.1 billion at the end of December 2021 driven by the operational performance with a negative gross operating cash flow of €116 million, increase of working capital of roughly €600 million driven by early production and also levels of safety stocks to mitigate the impact that supply chain disruptions are having in our activity.
And last but not least, CapEx of €129 million, with more than 60% of that CapEx invested in offshore to be able to tap demand growth and maintain our market leadership.
Now on page 15 of the presentation, you see that despite the increase in net debt, the group retains a very solid funding position with no significant maturities in the short term. The company has drawn €1.6 billion and considering the cash in the balance sheet of roughly €1.3 billion, the group has €4.5 billion in available liquidity. And as I mentioned before, we have extended the maturity of our credit lines.
So, all-in-all, a strong funding position, no covenants as related to the funding lines and no short-term liquidity constraints. And now let me cover within the outlook of the company, the market growth prospects that support what Andreas said this is a great industry and also why our long-term growth and margin ambitions have not changed.
We continue to see higher renewable targets across the globe. And as we could see now with COP26, also with new support schemes in Europe. The important growth expected for offshore in the coming years, reflected in the next slide, is also supported with more than 16 gigawatts of auctions awarded in 2021 and the over 89-gigawatt auctions already announced for 2022 and beyond. And even considering these very high targets, it’s still not enough to achieve net-zero emissions by 2050.
To achieve that goal, targets need to be increased, requiring current wind installations to be multiplied by more than four times by 2030. As indicated earlier, we have adjusted our outlook for fiscal year 2022, but we maintain our long-term vision.
In our new guidance for fiscal year 2022, revenues are expected to decline between 9% and 2% on a comparable basis, and EBIT margin will be between minus 4% and positive 1%. This new outlook is based on the supply chain disruptions and the challenges of the 5.X ramp-up. This has led to a decrease in revenues, higher cost and the delay in certain projects in Q1.
Additionally, as I mentioned before, some customers have delayed their investment decisions. The further range of the guidance also builds in further pressure for lower activity levels and also leading to lower fixed cost absorption due to idling capacity as well as the higher cost environment, especially on the lower end of our guidance.
It’s important to reinforce the message and also that we — it is our priority. We continue implementing measures throughout the value chain to mitigate the risk that we see and also mainly related to increase in logistics and supply chain cost adding to the existence of 5.X program, additional measures and continue with LEAP.
We are working on other initiatives, as I mentioned before, such as the sale of the wind farm pipeline in South Europe and also a very important additional cash measures. Our CapEx-to-revenue ratio will be around 8% because, of course, we want to maintain the Offshore investment phase, always aligned with the financial discipline that I mentioned before. Our long-term vision is supported by different initiatives that are already in place.
The LEAP program and also the restructuring program, the strengthened mechanism to protect profitability for the new contracts from procurement cost volatility, including inflation pass-through in new contracts and enhanced the procurement strategy.
Additional measures also announced: staff cost control measures, cost-out programs and new technical features in our portfolio to support LCOE competitiveness and also combined with the announced investment plan. Due to those initiatives and despite the complex market environment in the near-term, we maintain our long-term vision of an EBIT margin of between 8% and 10%, expected to be achieved between fiscal year 2024 and 2025.
The basis for that is onshore turnaround, the maintenance of leadership in offshore, the steady high-margin service business and, very important, all supported by the long-term market potential. And also for us, with a very favorable mix effect with offshore and service volumes expected to grow faster at onshore.
So, now let me open the session for Q&A, and thank you. For now, please go ahead with the questions.
Question-and-Answer Session
Operator
Thank you. Good morning ladies and gentlemen, the Q&A session starts now. [Operator Instructions]
The first question comes from Vivek Midha from Citi. Please go ahead.
Vivek Midha
Thank you very much everyone. Good morning. I have two questions, please. Firstly, could you give us an indication of the latest expectations for free cash flow for this fiscal year? So, you’ve talked about some of the drivers within that. So obviously, we have onerous contract provisions, CapEx and margin outlook. Excluding any impact from the pipeline disposal, what sort of ballpark figure should we be thinking of for the full year?
And secondly, could you give us a bit more color within the ASP print for the quarter, roughly what was the underlying change in pricing, particularly taking out that geographical mix effect that you highlighted? Thank you.
Miguel Angel López
Thank you much for the questions. May I ask Beatriz for answering the first question around free cash flow, please?
Beatriz Puente
Thank you for your question. Yes. We will provide — let me be very — I will provide even more color on Q2 with the visibility on the disposal of the Wind Farm Solutions and also the implementation of the cash measures. But what we can tell you is that, of course, all the plans were put in place one year ago.
And as I mentioned, we are working on additional cash measures to mitigate the negative free cash flow of the period. So, you should see a performance on the second half of the year with significant improvement on the cash flow.
And as I mentioned before, of course, financial discipline continues to be a priority for the group. So, we will always align the investment phase of the company to the leverage of the company as well without hurting the future of the company.
Miguel Angel López
Thank you, Beatriz. Andreas, would you please take the ASP question, please?
Beatriz Puente
I think there might be a problem with the connection. So, let me take the question. Regarding the average selling price, price increases range between, I would say, low single to low double-digit, and the average is not meaningful. I think when you take into account that on a quarterly basis, sometimes it’s heavily impacted by the regional distribution of the sales, so I think it’s not very comparable.
But of course, we continue for us to be a priority to pass on that cost inflation to our clients through price increases, and you will see that in the future because it’s important for us to protect the backlog.
Andreas Nauen
And maybe finally, I — it helps if you unmute yourself, and so, Vivek, thanks for the question. As always expected, we raised prices already in the previous quarters in all our quotes and the tenders that we made. That also delayed some of the signings and it was always clear that sooner or later that will show up in the ASP.
As I mentioned also at the beginning in my speech, if you take India out, we would nearly be at €800 per — or at €0.8 million. That is still not where the market is in general, so it also shows there’s still some potential. And how exactly the mix is, as Beatriz said, it’s very difficult to compare that all the time.
Vivek Midha
Thank you very much Andreas and Beatriz.
Unidentified Company Representative
Next question please.
Operator
Thank you. Your next question comes from Gael de-Bray from Deutsche Bank. Please go ahead.
Gael de-Bray
Thanks very much. Good morning everybody. Look, it’s obviously pretty clear that you need to take actions foreseeable and implement new mitigation plans to address the current challenges. My question is do you think that the current setup and relationship with Siemens Energy are fully efficient from an operational perspective. Basically, do you think that it allows you to generate all benefits that would be possible in terms of leverage of R&D or procurement, for example?
Andreas Nauen
Do you want me to answer that, Miguel?
Miguel Angel López
Andreas, please go ahead.
Andreas Nauen
Yes, thanks for the question. I think we obviously need to differentiate within governance and you — but your question is targeted at operational efficiencies. And you mentioned, for example, procurement. We already have an extremely close relationship with the Siemens Energy on the procurement side. So, my procurement director and the Siemens Energy procurement director are working extremely closely together and bundling, and especially in the current situation, where we have shortages of components, we are really trying, jointly, to mitigate the damage that we have.
Also, in that case, I can already now say that Jochen, in his role, supports that and is also driving this via connections that he has. So, clearly, on the operational side and the supply chain, we have a very close connection. And there’s, of course, another element of whatever is wind-specific. That has to do with R&D that we do there.
First, I believe the synergies would be much smaller because many of the R&D activities, the testing, the prototypes are of a very different nature than what Energy does. So, to my understanding and interpretation, we are already exploiting the operational advantages to a large extent. Can there always be more? That is, of course, also true.
Gael de-Bray
Okay. Thanks very much for this. The second question is on the offshore business, for which there was obviously a very significant decline in revenues this quarter, but apparently with the margin still being positive. Going forward, what gives you confidence that there will be indeed a catch-up on the revenue side in the next few quarters? And do you still expect the offshore margin to be within this historical range of around 8% to 10% for the full year?
Andreas Nauen
Beatriz, do you want to take that? Or should I, if you like?
Beatriz Puente
Yes. No, no, no, I will take it. Thank you for your question. Regarding kind of the low profit — I mean low contribution on revenues on Q1 in the case of offshore are mainly due to two reasons. One, the disruption of the supply chain has not only affected onshore but also significantly impacted offshore because the lack of some key components has delayed the production on — and also we have some customers that also were impacted and there were some delays on those projects that are also impacted the revenues on offshore.
Coming back to your question. If — do we foresee to have, on the offshore, that margin, no. I mean we also stated that in the past. 2022 is a challenging year. Saying that, offshore growth at those margins, we strongly believe that, that’s feasible because of the growth of the market, our strong leadership with more than 50% of the market share.
And also, as we announced in our previous results, the significant investments that we are going to do to maintain that leadership. So, I mean the only thing that we need to remain is that offshore is not immune to current market challenges, but the mitigation plans are well in place and also a significant safety stocks also to mitigate that supply chain disruptions.
Gael de-Bray
Okay. Thanks very much.
Unidentified Company Representative
Next question please.
Operator
Thank you. Your next question comes from Akash Gupta from JPMorgan. Please go ahead.
Akash Gupta
Yes, hi. Good morning everybody and thanks for your time. My first question is for Chairman Miguel, and that is on importance of onshore business for the long-term success of the company. I mean you have been losing a lot of money in that business and there is no light at the end of the tunnel. And if you look at the market outlook, it looks that onshore is going to be pretty challenging.
And on the other hand, you continue to make strong progress in offshore, where we have a positive, far superior growth outlook. So, my question for you is that how much you are committed for onshore in the longer term. And if that — if the turnaround doesn’t go through, would you consider even more radical action like consolidating this business with competitors or even selling it or maybe closing down? Thank you.
Miguel Angel López
Good morning Akash. Obviously, the importance is both in offshore and onshore. Offshore, because of our distinct market position and the market leadership that we will defend. And onshore, it’s extremely important as well. That’s the reason why we need to turn around onshore now and secure that onshore remains a basis — a strong basis for our overall business, but also taking into account that the high-margin business of service is very much supported by, on one hand, the offshore business, but on the other hand, also by the onshore business. So, yes, it is very important to us, and there is a very clear direction. We need and will turn around the onshore business.
Akash Gupta
Thank you.
Unidentified Company Representative
Next question please.
Operator
Thank you. The next question comes from Deepa Venkateswaran from Bernstein. Please go ahead.
Deepa Venkateswaran
Thank you. Beatriz, I wanted to go back into the balance sheet and the net debt. So, given the €600 million of outflow that — you’ve done that in order to basically mitigate the supply chain disruptions and stocked up. So, I was just wondering what are the counter liquidity measures that you were mentioning that will see an improvement in the net debt in the second half. Like what kind of measures are these?
And are these not things that you’ve already pulled? And could you give us an idea of the scale of the Southern European development pipeline in megawatts? Just to have a scale of how big or small this inflow might be.
Beatriz Puente
Yes. Let me give you more color on that. The working capital and the inventory levels of Q1, because of two reasons. One, the one you mentioned, the safety stocks to mitigate supply chain disruptions; and the other one is because offshore is on a preproduction — I mean early production and also onshore as well. And so that explain also the high levels of the inventories in Q1.
So, what type of measures we are putting in place is a combination of many measures, but let me give you some color on that. Working with our suppliers on extending payment terms. It has been feasible in the past and continue to be. So, we are working on supply chain initiatives, and we are well on track with those. And that’s the reason you will see those on the second half of the year, so mainly Q3 and Q4. The disposal, of course, of the Wind Farm Solutions business, well on track.
Let me say so, we would prefer not to provide further information because, of course, the confidential basis of this process and — but we can confirm that we foresee the sale this year. And also other measures that we are putting in place is working with our clients on also prepayment of clients. We have done it in the past. They’re also interested in doing so to help us to face kind of the challenges and also the investment phase.
And last but not least, we foresee that at some point, the disruption of the supply chains will be lower. Therefore, we would also be able to lower the inventory levels as well by the end of the year. So, the combination of that will help us on the second half.
Deepa Venkateswaran
Okay. Thank you.
Unidentified Company Representative
Next question please.
Operator
Thank you. Your next question comes from Sean McLoughlin from HSBC. Please go ahead.
Sean McLoughlin
Good morning. Thank you for taking my questions. Firstly, just around price negotiations. I mean you said that pricing’s still not at market potential. So, it suggests that you’re trying to push through further price increases. Just any commentary around how negotiations are faring. It’s clear that also some of your competitors are looking at price selectivity as a strategy. How are customers — how much are customers pushing back? How much might we see further delays in contracts as you try to get those further price hikes through?
Miguel Angel López
Andreas?
Andreas Nauen
Yes, that’s absolutely a question for me. First, maybe I would like to split my answer into two. First, the conditions or the contract conditions and who takes which risks. That is clearly something we are changing. And of course, I can only speak for Siemens Gamesa. I don’t know what our competitors do in that respect. For example, with the logistics cost explosion that we currently see, we now also start offering logistics on a cost-plus basis, something we never did in the past because that — our customers expected us to take care of.
We now, especially when we have large overseas transport and sea transport, which is, at the moment, very unpredictable how it will be in one or two years, we now say we gladly take care of that, but only cost plus a certain margin. That should also reduce the risk again and follows our logic of let’s control the risk and not take on risk that we can’t control, and that is, for me, a good example.
If I then look at the price development, taking the contractual conditions aside, we are clearly — and I can see that also that our competitors do that, pushing prices — are passing on all the material cost increases. And it always depends on which situation the client is. We have, for example, project in Egypt with a firm government-controlled tariff and the price increases that we had to pass on now postponed the projects considerably, maybe even the project will never be realized because of the technology doesn’t allow to ever fulfill that tariff. So, this is clear.
In some cases, there’s no maneuvering room for our clients. But in other cases, we’ve seen them. And you saw that we signed a large Onshore contract in Finland, and this is one of the examples where the client was still flexible, was not completely done with this PPA and then it’s easier.
And at the moment, because the whole industry is moving in that direction, clients understand also why we have to do that. Do they like it? No. But it all depends on their business case and then their flexibility with regards to tariffs, options or PPAs.
Sean McLoughlin
Thank you, Andreas. And I suppose just — if we think about some of the cost — of the unexpected cost increases, I mean is there — just trying to understand, it’s clearly not a simple business to run. I mean how does one — is this going back to fundamentally rethinking how you take on risks, how you price those risks in? And is this something that kind of needs to be effectively reset from the start today?
So, if I look at what is being delivered over the next 12 to 24 months, can we be confident that those — that risk mitigation is already in place? Or does risk mitigation really have sort of kicked off in the last three to six months?
Andreas Nauen
And here, I would like to follow-up from what I said. I think since the very first — from the first quarter last year, we will still have, in our order backlog, a number of contracts that don’t have all these conditions that we now would like to have in place simply because we signed them before the raw material spike — the logistics price increase and we have to work through that backlog.
So, it’s not that now automatically, everything is nice and easy. We — as I said also in previous quarters, we introduced these new conditions, these reduced risk conditions in April this year also with a much better linkage between our procurement activities and our sales activity. So unfortunately, we will still see that mix of, let’s call them, legacy bad and future at least better contracts, and that will go back and reduce over time.
I still believe there’s also a fundamental change that needs to be driven in this industry. Who takes on which risks? And also because it has been successful for many years, the OEMs and also Siemens Gamesa, we took on a lot of risk with regards to cost inflation, transport risk and many other things. And I don’t think that this can continue. But step-by-step, I believe we also can and need to change that so that everyone has a fair chance in the value chain to be profitable.
On the other hand, I also would like to say, because I don’t think we should blame it all on external effects, on COVID, we also have our own issues that we need to solve. The 5.X ramp-up is clearly a mix of both where we should have done a better job in engineering and within super-optimistic time schedule.
So that is also something we have to repair for the future, that we are not so optimistic with regards to product introductions into the market. But we do it, as we always did it, in offshore. We test and time, have the bill of material ready, produce a zero series and then only go into full zero production. And I think in that combination, things will get better.
Sean McLoughlin
Thank you, Andreas. Wish you all the best.
Unidentified Company Representative
Thank you very much. The next question please.
Operator
Thank you. Your next question comes from Stacey Strauss from Morgan Stanley. Please go ahead.
Katie Self
Hi, I think that’s maybe me. It’s Katie Self from Morgan Stanley. A couple of questions from me. The first one, Beatriz, you mentioned the prepayments. Could you just give an indication of the level of prepayment on the balance sheet at the moment and how you’d expect those to trend through the course of the year? Obviously, big movements from offshore can have a big impact then on working capital.
And then my second question would be particularly around the credit ratings for Siemens Gamesa. Can you help us to understand, particularly, the S&P rating? Because as we understand it, S&P downgraded the individual credit rating for Siemens Gamesa to below investment grade in December, but maintains the positive outlook as tied — or a stable outlook as tied with the energy rating. Can you just help me to understand what you think of those separately?
Beatriz Puente
Thank you for the questions. Regarding the first one regarding level of — I would say that it has been the case that, in the past, that has been feasible. So, we don’t foresee that because of the size of the contracts in offshore. It is quite common, in our case, to work with the clients that way. So, no significant — that can’t have a significant impact on the working capital levels of this company and also take into account the growth of offshore. So, we have done that in the past, we continue to do so.
Regarding Standard & Poor’s rating, I would say — I mean, the numbers of Siemens Gamesa on 2022, we have been hit by really one-offs, and we will consider that nonrecurring for the coming years because at some point, raw material prices, supply chain constraints will be sorted out.
And as Andreas said, the design issues on the ramp-up of the 5.X as well is our priority, the turnaround of Onshore. So, coming back to your question. The stand-alone basis ratio of Siemens Gamesa, yes, it was downgraded. And the tie-in company methodology of Standard & Poor’s that not only apply to us, but all the companies that are part of a — with a significant shareholder, and they follow the tie-in company methodology. So that’s the reason we got the notch uplift based on the sound investment grade of Siemens Energy.
As I said, this is not the first time that happens to Siemens Gamesa, and also in the past, also we have the same. For us, it continues to be a priority. We continue a very active dialogue with the rating agencies for them to see the growth prospects of the company and how this company can be, and I strongly believe so, in the very short-term, stand at investment-grade by a stand-alone merit.
So, for us, as I said, financial discipline continues to be a priority, deleverage of the group as well. And very important, don’t forget that this company has no liquidity constraints. So, we have no issues on facing any of the maturities that we have.
And for us, the enhancement of the profitability is very much linked to the turnaround of onshore, the very significant growth process of offshore and very high level of service margin that, as we have seen despite this volatile and, say, challenging environment continue to be the case.
Katie Self
Thanks very much. And then just as a quick follow-up on your other rating from Fitch. Could you just update us on the latest there? Do you have any concerns? Or are you in an active dialogue with Fitch? Anything would be helpful. Thanks.
Beatriz Puente
Yes. Coming back to that, a very active dialogue will Fitch that continues to be. Last year, this year as well. After our preliminary results, also very active dialogue. We are going to hold meetings with them this month and they also have the same. I refer to the note that Fitch also released after our Q1 results. And I think they clearly stated also how they will approach the rating of this company.
Katie Self
Great. Thank you.
Unidentified Company Representative
Next question please.
Operator
Thank you. Your next question comes from Rajesh Singla from Societe Generale. Please go ahead.
Rajesh Singla
Hi, thanks for taking my question and good morning everyone there. The question is regarding the hedging of your current order backlog. Like how much are we currently hedged with respect to the cost for the order backlog and also for the logistic cost currently for the backlog which we have?
Beatriz Puente
Let me take that question. When you mean hedge, you are referring to — I mean, I will guess, tower steel and copper. We can confirm that for 2022 volumes, we have already contracted on tower steel more than 90% of the volumes of 2022. In the case of copper, in this case, we hedged, and we have done also more than 90% of the volume of 2022.
As Andreas has referred and also we did so in our previous quarters, for us, it’s very important to protect the profitability of the new contracts. And that’s when we have, say, strengthened the indexation clauses for onshore and in the case of offshore was more standard.
So, for all the new contracts, we can confirm that they have either indexation clauses on tower steel or copper. Of course, we have included significant cost, others and contingencies to cover, as you said, so also supply chain disruptions or higher logistic costs.
Rajesh Singla
Okay. So, maybe a follow-up on that. So, if tomorrow, say, let’s assume the raw material prices moves up further, so will we see more provisioning on your own-risk contract? Like — or how it will go? And on the other hand, if we see a sharp decline in raw material prices, so will you benefit from a provision or — from the write-back of provisions?
Beatriz Puente
Yes. Let me explain quickly. Yes, those are onerous contracts. So then we’ll run, every single quarter, the profitability of our order backlog based on our best estimate. So, therefore, these projects, mainly onshore are related to Brazil and NEME. And those are projects that are running through 2022 and some of them, even 2023.
So, as you said so, of course, higher disruption on the supply chain, so higher cost, operating delays happen. Then we’ll run, again, our best estimates and therefore, there is a possibility, as you said. So, if we go to the low end of the guidance, of course, if we go to that case, you’ll see that through on the onerous contract.
At the same time, as you said, as this is a provision based on best estimates, if the situation is improved and also, of course, the project schedule changes and we are able to fix the challenges that we have before also on a positive side, that will run through the P&L.
Rajesh Singla
So, we’ll benefit from a write-back of provision if the raw material prices fall substantially in the next six months, right?
Beatriz Puente
Could you said — they are — sorry, could you repeat the question? If there are ramp-up challenges?
Rajesh Singla
No, no, if the raw material prices fall substantially in the next six months, will we benefit from a write-back of provisions which you have already made on your backlog, which you will execute in the next six to 18 months?
Beatriz Puente
Yes, any improvement on our cost estimates that can be related to project schedules, lower cost, better situation on the raw materials, it will hit us in a positive way in the P&L.
Rajesh Singla
Okay. Maybe last question on your Onshore business with price-over-volume strategy, which we are following. How are you planning to manage the lower absorption of fixed costs in the Onshore business? Or we would see more restructuring in the Onshore business, and maybe more restructuring strategies in the coming quarters?
Andreas Nauen
Do you want me to take that, Beatriz?
Beatriz Puente
Yes, please do so. Thank you.
Andreas Nauen
Thanks for the question. And yes, we are looking also at the footprint that we have in Onshore because we really need to drive utilization of our factories and we need to drive that up. And with the volume that we currently see, there’s clearly, again, the question of do we have the right footprint.
What we also do is we hibernate factories. One example for that is our U.S. factories that is also impacted by our legal fight with GE that made business, especially this coming year, quite difficult.
So, we hibernate the factories and run it at an extremely low level and — to save all the costs that we otherwise would have. And then we ramp up later when we see the U.S. market coming back again and this is how we currently deal with that.
Unidentified Company Representative
Next question please.
Operator
Thank you. Your next question comes from William Mackie from Kepler Cheuvreux. Please go ahead.
William Mackie
Hello. Good morning to you all and thank you for the time. I’d just like two questions. One, maybe I missed it earlier, but could you give us an update on the time line for the ramp-up of the 5.X and where you are in the resolution of the various design challenges that you’ve described? Just to get a sense of where we are on the curve for managing the risk to catch up there.
And then the other area of questioning would be around the supply chain conditions. Lots of hope, but just can you give us a sort of real-time assessment of whether you see the conditions in Q1 and Q2 — calendar Q1 and Q2 improving or deteriorating relative to the conditions you’ve experienced in Q3 and Q4 last year? Thank you.
Andreas Nauen
I can take both. If not, it is fine. I would like to start with the second one, supply chain conditions and whether we see them changing. And here, unfortunately, I can only confirm they are stable. And stable means we have quite a shortage of components and that we are chasing every week. A certain level of that is always variable.
But at the moment, it’s pretty high. And it’s not easing up. And we have still components that are not coming at the time they were confirmed to us, and we have components where delivery times have been increased from five weeks to nearly 50 weeks. So that, that mix of very difficult supply chain situation continues.
As Beatriz also said earlier, also offshore is not completely immune. The good thing in offshore, we have a much more stable engineering situation and ramp-up, and also we are well ahead of delivery times for projects. So there, it doesn’t hit us that much. But overall, it’s stable and we are mitigating that, for example, by developing new suppliers wherever possible at short notice so that we then take alternative suppliers. So, that is, at least, my read of that.
And as far as I also hear from our competitors and what they say also on the calls that you participate, I think we are not unique in that. The second — or the first part of your question was about the 5.X ramp-up, and I would like to split that answer into technology. Technology, the prototypes are doing well. We are very pleased to confirming finally the power curve noise measurements are going on at the moment on the two prototypes that we have.
So on the technology confirmation side, testing side, things are going well. We are now, out of the total of 100, I think we have 90% of everything that has been tested. Then if you go to the industrialization, which is production. We are affected in the nacelle production in Spain and Tianjin by COVID and parts.
The engineering side of that has been progressing extremely well and the number of changes that we currently see in the nacelles has clearly gone down. So we are okay on the engineering input side, but now we start and have to ramp up the production higher volume, and we start to deliver these turbines already. We already installed them. Some in Sweden, some also in Brazil.
And then the last element of that is our blade production. We saw some quality problems in the blades. We now restarted the production of the blades. And that is also what I meant, at the beginning, when I said additional mitigation actions. We now increased also the capacity at LM because we can take on many projects.
We can take either our own blades or LM blades. We, at the moment, optimize the delivery schedule. So, here, I think that is still the biggest ramp-up we have to do, that we fully stabilize the delayed production. And then with that, then stabilize the project schedules.
William Mackie
Thank you. One quick follow-up. To what extent are you able to invoke force majeure clauses to allow — seek compensation for the — all of the disruption that’s being created at the time?
Andreas Nauen
There’s no flat rate answer for that, that everywhere we can apply. That’s a very individual answer per contract because depends when the contract was signed. Was it before COVID? Was it after COVID? Or also whether we can prove that, that’s really a force majeure impact from COVID on that project.
And we are, of course, pushing that through wherever we can. The customers, similar to the question that Sean asked me earlier, of course, not delighted and fight back, but we try wherever we can, and there is no general answer to that, because it’s always individual on project and supply chain.
William Mackie
Thank you very much for your answers.
Unidentified Company Representative
With this, we conclude the Q&A session. Please let me hand over to the Chairman of our Board of Directors, Mr. Miguel Angel López.
Miguel Angel López
Thank you very much for attending the session. And I would like to hand over to Andreas for some closing remarks. Andreas, go ahead.
Andreas Nauen
Yes. Thank you, Miguel. First, I would like to thank my team. A little bit more than one and a half years ago, I started to work very closely with Cristina, with Javier, and starting with the Capital Market Day that we had in Frankfurt at the time. It was always a pleasure to work with you. I find you do an extremely professional work. We have a good relationship to all the people that we have on the phone and many thanks for that.
My second thanks goes to Beatriz. You have always been an extremely loyal fighter together with me in the company and also a great companion in these calls. So many thanks, and I can only hope and cross fingers that you continue and stay on the path that you have set. I think you have done an excellent job for this company and will surely continue to do so.
And then it’s more on the — for the — to the people on the phone. In these one and a years, we never met in person. In some cases, I know your bedrooms and your home offices better than I know your offices, and in some cases, maybe you are just a voice for me, which is very, very strange. And — but one thing I have to say, I highly respect how you do your job. You, of course, have a different role than I have, and we all play our roles, but there was always one thing that I highly appreciate from the way you ask the questions, you wanted us to be successful, also for your own benefit, but also because you want us, as a company, to be successful. And you always wanted to believe.
And I’m, of course, extremely sad that so often I had to present disappointments here, that I said something that I couldn’t hold to because of our own shortfalls out of external circumstances and I can assure you — and I didn’t enjoy these calls and I also know that you didn’t enjoy them. You would have also liked to see something completely different.
And I can only hope that you continue to give this trust to Siemens Gamesa and the future, to Jochen and to Beatriz. And many thanks for the excellent cooperation that we have and hopefully one day in whatever situation, we have the chance to see each other again. And otherwise I, by the way, wish you all a healthy time. And I hope we come out of this crisis much stronger and then in different situation. So, many thanks for that.
Unidentified Company Representative
Thank you, Andreas. And with that, we close the call. Thank you very much. Bye, bye.