Siemens Gamesa Renewable Energy, S.A. (OTCPK:GCTAF) Q3 2022 Earnings Conference Call August 2, 2022 2:30 AM ET
Company Participants
Cristina Perea Sáenz de Buruaga – Head of Investor Relations
Jochen Eickholt – Chief Executive Officer
Beatriz Puente – Chief Financial Officer
Conference Call Participants
Vivek Midha – Citi
Mark Freshney – Credit Suisse
Supriya Subramanian – UBS
Sean McLoughlin – HSBC
Gael De-Bray – Deutsche Bank
Akash Gupta – JP Morgan
Deepa Venkateswaran – Bernstein
Lucas Ferhani – Jefferies
Ajay Patel – Goldman Sachs
Cristina Perea Sáenz de Buruaga
Good morning, ladies and gentlemen, and thank you for joining our Q3 22 Results Presentation. Before we start, I would like to draw your attention to our forward looking statement in Page 2. At the end of the presentation, we will have a Q&A session.
And with this, let me hand over to our CEO Jochen Eickholt. Jochen?
Jochen Eickholt
Thanks, Cristina, and thanks to all of you, a very good morning. In some parts of Europe, it’s very early in the morning. Thanks for joining us. This morning, I’m supposed to be joined by our CFO, Beatriz Puente. And we would like to take you through the results of the Q3 of this fiscal year. We’ll try to also give an update on the financial targeting for this fiscal year as well as presenting more details on part of our activities. And also, after our little presentation, we shall be happy to take your questions at the end of the call.
So now let’s look at the Q3 results. I’m happy to announce that we got a record order backlog which now totals up to €34 billion and that is led by the strong performance in Offshore. But it’s also seeing contributions from a recovery in Onshore certainly versus the last – in the previous quarter. Our Q3 revenue was in the range of €2.4 billion, that equals a 10% reduction year-on-year and the EBIT margin was at minus 14.1% – minus 14.1%. The performance was impacted by the continuing discussion around our 5.X platforms.
We also continue to see supply chain constraints. We of course do have higher cost of energy, materials, and logistics. We also saw difficulties in the availabilities of key turbine components. We had port congestions and further supply delays. And we also had, then, additional quality issues, specifically more from the legacy platforms, which hit us in the area of Service. So, Service’s EBIT margin is then also going to recover for the fourth quarter of this fiscal year but that was hit.
As for the debt profile, Siemens Gamesa has a net debt of €2.3 billion and continues to enjoy a good access to capital. The ongoing sales, the ongoing sale of the assets element of our business in Southern Europe, the wind farm development that is targeted to be concluded in Q4 of this fiscal year. And we expect an EBIT contribution out of this of €540 million. The targets for fiscal ‘22, those had to be revised to reflect the ongoing market challenges, those ones I just referred to. In fiscal ‘22, the revenue is projected to be at approximately minus 9% year-on-year in comparison to previous year. And the EBIT margin is expected to be at minus 5.5%.
Mistral, our company program Mistral is expected to help to stabilize short term performance for ‘22 and ‘23 and also beyond that and as a program is designed to help us to deliver on our long term vision and this includes various optimization activities. Now, sector forecasts are supported by the climate change and of course, the market as such, in our view continues to be promising mid-to-long term. Short term, we are facing difficulties also some of our competitors are facing.
On the next slide, we see the continued, in my view, excellence in performance in the area of ESG. We have received a top ranking result from all major agencies. And I’ll take or may take one of the examples here. The Standard & Poor’s ESG valuation gave us some 83% out of 100%, placing us at #2 in Spain and the #12, globally. So this in our view is illustrating our continuous efforts, and it will remain to be a focus for our activities going forward.
Now, with a view of the commercial activities in Q3, as I was indicating, we have a record order backlog in the range of €34 billion that reflects an increase of 4%. And the order intake of €3.5 billion for Q3 was boosted by the strong Offshore performance and, as I said, the recovery of the Onshore activity. In terms of backlog, we have around 80% of the backlog in markets, where we continue to see growth possibilities and trends. And that’s in my view, a very positive sign.
Next please? On the Onshore side, we saw a order intake recovery up to a level of 1.2 gigawatts. A selective – if you or if some in the audience remember the discussions we had in previous calls, we apply and continue to apply a selective commercial strategy, which means we really focus on the more attractive parts of the business. The order intake as such, however, is aligned with various stabilization and ramp up activities. And we did experience longer negotiation phases with the customers but also see an upward trend in pricing and that is here now shown on the graph.
We are combining price increases with cost mitigation measures, of course, in the end of the day, to help us to develop the business going forward. But if I recall the figures correctly, also this €0.89 million perhaps is a number which is slightly too positive, because as you can imagine, there are also things like variations orders in there, which kind of are different in nature to the kind of first-time booking of a number. But even if we would subtract those effects, the trend is clearly positive and takes us back to pricing levels of the year 2017 or 2016.
Onshore, sorry, Offshore. Now Offshore, we continue to maintain our leading position in Offshore where we see a combined backlog and pipeline view of some 16 gigawatts. And this includes roughly 8 gigawatts of the orders for the SG 14 megawatts machine. In the third quarter, we saw a new preferred supply agreement in Poland, and also maintained a strong position in the UK. Some will remember the fourth round of the CfD auction and there we’ve been putting ourselves into in the end for a rather favorable position.
Next slide. Just over half of the company’s order backlog is allocated to the Service business units. And that Service business unit as such then continues to show strong growth. Service has now some 84 gigawatts of fleet under maintenance and we have a retention rate of the customers of 68%. So that in my view continues to be a strong pillar of our business.
The figures of Q3 were impacted by the development, which I indicated but perhaps on more commercial details, let me hand over to Beatriz now.
Beatriz Puente
Thank you, Jochen, and good morning, everyone and thank you for joining us today. So on Page 12, we have the summary of the group financial performance for the period. Revenue for the group declined roughly 10%, reaching €2.4 billion in Q3, and roughly 12% decline in the nine month period reaching €6.4 billion. Revenue performance is the result of the impact of the supply chain disruptions that we continue to see with lack of critical components and also late deliveries, also the lower than expected progress on the manufacturing of the ramp up of our 5.X platform, that also all in are impact in our project execution, installation and also commissioning.
At the EBIT level, the group ended the quarter with the losses of roughly €343 million, a negative margin of 14.1% of our revenues and losses of €957 million in the nine months of the fiscal year. The group EBIT reflect the challenges that we face in the 5.X platform including our manufacturing delays, inflation of material and transportation costs, and also the impact of supply chain disruptions on manufacturing and trade execution and delivery.
Considering the higher costs and also the updated assumptions on the market, because of cost market conditions, on valuing our ownership backlog, the total negative impact in the quarter has been €185 million, mainly of course are related to the cost, new assumptions in onerous contract. And last but not least also our EBIT is impacted as a result of lower revenues and of course, resulting in lower absorption of our overheads.
In addition, during Q3, the group also experienced as Jochen mentioned, additional cost coming from higher failures and also the cost of repair in several components of our legacy Onshore platforms in North America. And this impact has had been seen in the Service activity and explains also the low margin in the quarter, that we foresee to have, again in Q4 standard margins above 20%.
Below the EBIT line, we see an increase in integration of restructuring costs, which in total amount of €$62 million in the quarter and the increase is due to the ongoing actions on the optimization of our manufacturing capacity.
Regarding financial expenses, the group registered in quarter financial income of roughly €5 million and also totally in €16 million in the nine month period. And also as we explained on the Q3 results, this has a positive impact due to the higher interest rates. But of course, when we update the value of our provisions provide this positive impact of roughly €17.7 million in the quarter and roughly €46 million in the nine month period.
Tax expenses amounted in Q3 of a tax income of €5 million and in total nine months, a negative tax expense of €28 million. This is as a result of the group incurring in lawsuits in market with the company as of today is not capitalizing deferred tax assets and also, of course, we have profits in countries with high tax rates. As a result of operating performance and the reasons I explained before, net income of the group amounted in a period on Q3 to a loss of €446 million and a loss of €1.2 billion in the nine month period.
Moving to the balance sheet, the group has invested €183 million in CapEx in Q3 and roughly €503 million in the nine month period. This is in line with our expectations and very important, roughly 65% of the CapEx has been deployed in Offshore to maintain our key competitive advantage. Regarding the group net debt, I will cover that later on in the next pages.
So we move to Page 13, to give you more color from the revenue performance and as we really explain group revenues, I will focus on the segment. Double digit revenues decline was driven both in the Q3 and also in the nine month period by the lower manufacturing and project execution activity also has been impacted by the challenges that we have on the 5.X platform and also because of the supply chain disruptions with significant bottlenecks in critical WTE components and of course it’s causing us late deliveries for us.
Offshore manufacturing activity grew in the quarter roughly 15% year-on-year, but the installation activity was done – driven mainly also causing lower revenues on Offshore segment in the quarter. Service revenue of €1.5 billion in the first nine months was up 9% year-on-year, fully in line also with our group expectations.
So moving to Slide 14, we see the EBIT performance of the group in Q3 and the nine month period. And as I explained before, has been heavily impacted by cost inflation that are not only of course in raw materials, but as Jochen said, also in the cost of energy and transportation, also extra cost because of the supply chain disruptions and also the challenges that we’ll have on the ramp up volumes of the 5.X, despite the team is focusing all the effort in improving the difficult situation that we’ll have on the supply chain.
Also, as I mentioned before, the impact of lower revenues is also driven by external and internal challenges. And of course, we have idle capacity increasing our – or decreasing our absorption of the fixed costs. In addition, on Q3, the performance has been impacted by cost of higher than expected failures on components and of course, the cost of repairs in legacy Onshore platforms. Especially in North America, the total amount we have provided for you to have the impact roughly €113 million relate to this quality issues with significant impact on the Service Division.
And as I said before, we – I strongly believe, we count on Service to deliver the standard margin on quarter four which we consider that they will be above, significantly above 20%. Also, as a result of all this, we have to update also the backlog of mainly Onshore profitability with this higher cost and new market conditions. And that’s the reason of the impact of a €185 million mainly related to cost deviations in onerous contract.
If we move to Page 15, I want to cover the cash situation of the group and also the leverage. As we also mentioned on Q2, we foresee that Q3 will be the quarter with a pick of the leverage and it has been the case, roughly €2.3 billion. The main reason for that is the increase of working capital of roughly €765 million. This mainly reflects the early production and also of course, the delays that we are having on installation and to a lower extent also the safety stocks both also being impacted by the supply chain conditions that we have.
Also, of course, our cash flow is deteriorated by the operational performance. And also because the investments that I mentioned before, CapEx of roughly €503 million. It’s important to say, as Jochen mentioned, we are very well on track on the disposal of wind farm business. And for us, we proceed to close the transaction early September with a net cash contribution of roughly €550 million and also of course significant contribution on EBIT as well of roughly €540 million.
Last but not least, I will mention that we have roughly €4.5 billion in credit lines and loans in Q1 we extended maturity of our €2 billion credit line to ‘27. And in Q3, I want to highlight also we refinanced all the short term maturities, roughly €675 million but now are due by the end of ‘23, beginning of 24 as we shared with you the pro forma new maturities, and very important, with no change on the conditions.
Also, during the period, we have drawn roughly €2.7 billion. We have a cash position of €1.2 billion therefore roughly €3 billion in liquidity. And last, I will highlight that all the debt that we have on the credit lines have no covenants associated to our funding lines. And as you see here, after the refinancing, we have no short term liquidity constraints.
And now, let me hand over to Jochen to cover the market outlook, our target for ‘22 and the initiatives of Mistral. Thank you.
Jochen Eickholt
Thanks Beatriz. So now perhaps as indicated, it’s the time to give an update on the outlook for the sector and the company as such. As you see on this chart, the overall demand situation continues to be very strong. We see that there are ever increasing, if you wish, outlooks for the size of the market in the different parts of the world. We see that, for instance, the European Parliament continues to backup 45% of the energy target or continues to back that 45% energy target in line with the REPower or REPowerEU plan. The German parliament approves the Easter Package, but there’s the further packages yet to come.
Please remember that in Germany, there is a policy to have most of the legislative work being completed by the end of this year. And another prominent example is the latest CfD round in the UK, leading to the overall confirmation, if you wish, of another 10 gigawatts, in demand out of which 7 gigawatts are in the field of Offshore. I think it’s relevant to mention that the mid-to-long term perspective really is such that we see in Offshore, a major growth. We continue to see that growth. And the pure growth rate figures as such, are really tremendous. So in many cases, we believe we even have to answer the question of how one possibly can provide the related capacities. And that’s right now also ongoing discussions between us and our customers.
On the Onshore side, it’s a little bit different, but there also the market continues to be strong. Of course, challenges remain and we have to see that despite all the positive outlooks, our industry, perhaps I can’t even say that, but certainly I can speak for us, we are in a difficult situation. And if you now look at some of the numbers which are shown here on this chart, we may perhaps make it slightly understandable that under the given circumstances, the August target, we would like to announce now, on the EBIT pre-margin is reduced down to minus 5.5% coming from the previous communication of minus 5.0%.
Q3 was impacted by the numbers shown specifically and on top of other effects by additional effects coming from the legacy platforms hitting us in the Service business that was discussed. But of course, we continue to see difficulties in the ramp up. And we of course continue to also see effects from other influence factors like the COVID development or for instance, also geopolitical tensions. The revenue guidance remains where it was. So we expect that to be that range of minus 9.0% to be more precise, and margins continued or continue to be squeezed by all the different effects, we were referring to also in the course of this presentation.
Our Onshore business and that is what needs to be remembered, is still suffering from onerous contracts in many cases and also idle capacity in the [indiscernible] driven by lower than anticipated volumes. We will carry out further assessment on the Onshore legacy platforms to improve our commercial position. And of course, still a risk of delays to customer’s investment decisions is something we have to consider. We have actions in place to reach the long term target of the plus or greater than 8% as indicated here on this chart. And the main lever or the main program or the main framework to achieving that is our Mistral progress.
Mistral program as such, is looking at activities in, if you wish, three horizon levels. So first of all, we have to mitigate the ongoing headwinds. Rightfully so, they were specified in the past, mostly by the ongoing 5.X Onshore platform ramp up and the supply chain disruptions. Mid-term, we will work on further optimizing the margins and address various further levers to improve on profitability and cash flow. And we categorize that in the areas of the top line growth and the top line development. The competitive product as such must obviously also meet gross margin targets.
Operational excellence is a thing we focus on a daily basis on and lean structures and deficient capital are also leading to various additional measures. On top of that, we of course, continue to look at structure of – further structural levers to address the full potential of our company mid-to-long term. So, for instance, when it comes to the deployed technology in our turbine systems or the setup of the supply chain and also the operating models.
Now, if I may, take the last one here is a very good example. We intend to introduce a new operating model to our company by January the 1st next year. It is designed around a simplified and leaner company structure. We will have in the future a harmonization of the different technology developments. So we will have one technology development team across Onshore, Offshore, and Service. And there wants to be the role of a CTO of our company introduced.
When it comes to the Chief Operating Officer that will – that function will include also the manufacturing and also the quality management activities. So there also a further harmonization is attempted. And on the business side, the businesses as they were so – as they are the business units, they will focus on the sales, the project execution, the customer project execution, I have to say, and also the product roadmaps. And they will of course then in this context maintain full P&L responsibility.
I did observe that in the past, we had established different structures across the regional setup of the businesses. So in the future that will be harmonized, we will have one regional standardized setup for all the businesses. We, of course continue to discuss capacity optimization when it comes to footprint and structure. And that happens across Siemens Gamesa globally. We transmit – we transition many of these supply contracts rather to long term or lifecycle contracts, specifically, when it comes to direct materials. We have seen that too much of, in this sense, short term procurement, if you wish, it just seem to be too risky and too difficult to handle for us.
And of course I – and even myself, will focus a lot on the stabilization of the product development process, and the product quality. And we’ll do this by dedicated programs. Now, this as such, indicates already that there is a some substantial amount of complexity behind this. And this is why it’s even if the entire organization is focusing on this still takes its time to become successful.
Going forward, which is the next chart – going forward, we’d like to have the details of the new operating model finalized by October 1st. We will certainly use the existing very good contacts, also our social partners to have all the internationally related and important and needed negotiations in place. And the intention is to go live in January 1st.
So with that, allow me to summarize a little bit once more where we stand. And we said we are going to kind of continue business in a way the discussion we had in the very beginning on the key points. We continue to observe a strong order intake. We have a record or a backlog. The results in Q3 were not as satisfactory as we were hoping to see them. But in the end of the day, the minus 14.1% are something we have to recognize and to acknowledge. We saw a continued good access to liquidity. We saw a very strong progress on our so called asset sale. We have to adopt our fiscal year 22 targets. The most prominent example is the development of the minus 5.5% on the EBIT pre-margin in relation to previous communication, and perhaps sometimes underestimated in its effects. The Mistral program is now rolled out and will continue to substantially contribute to the development of our company. This happens under the overall good market outlook we observe and continue to observe.
Thank you very much for this now. Cristina?
Cristina Perea Sáenz de Buruaga
Thank you, Jochen. With that, we are going to open the session to questions. If you could say your name and question, please try to ask no more than two questions.
Question-and-Answer Session
Operator
Good morning, ladies and gentlemen. The Q&A session starts now. [Operator Instructions] Thank you. The first question comes from Vivek Midha from Citi. Please go ahead.
Vivek Midha
Hi, everyone. Good morning, thanks very much for taking my questions. If I think to one question, could I maybe ask on the 2023 commentary? You’ve given us helpful color on 2023 EBIT margins, would it be possible for you to give us any color on free cash flow next year and items like the onerous contract provisions, CapEx, and so on? Thank you.
Beatriz Puente
Thank you, Vivek. Good morning and thank you for the question. Regarding ‘23 kind of our new target guidance, we’ll provide more color as standard process with year-end numbers. So we’ll provide of course, revenue, EBIT, and of course, as I said, leverage or the cash flow generation of the company. So, we – I will provide a data set after the year-end results.
Vivek Midha
Okay, understood, thank you. In that case, I would it be possible to –
Beatriz Puente
Thank you.
Vivek Midha
Would it be possible to just quickly ask on the assumptions around input cost within the 2023 commentary? And so what are the assumptions around freight costs evolution? And yeah, is there any benefit at all in ‘23 or in ‘24 you see, for example, over steel costs? Thank you.
Jochen Eickholt
Well, we continue to observe the effects of the overall situation, which means that in some commodities, we continue to see the high price levels for ‘23. In some commodities, we see an improvement on those in total. And as the picture is showing for us, in total, the pure material cost will continue to go up. And that is in – even in spite of the effects that we right now, for instance, in some commodities see decreasing prices. We still also have to bear in mind that the overall systems and the – how shall I say, the trading of the commodities, so the different stages of value-add that that has a timeline or a time lag and a time delay effect, which then totals that up. On the freight cost side, I think we see a relaxation of the situation.
Vivek Midha
That’s helpful. Thank you very much.
Operator
Thank you. The next question comes from Mark Freshney from Credit Suisse. Please go ahead.
Mark Freshney
Hello, thank you for taking my questions. Firstly, on the UK CfD round, where 7 gigawatts of Offshore cleared and some capacity was not in there. So I think it’s fair to say we’ve probably got 8 gigawatts. Is it fair to say that with the exception of perhaps one project Siemens Gamesa is preferred supplier to pretty much most of it, 7 gig of the eight. And just secondly, on the actual contracting, I think you spoke about this a bit. But one thing is the price. The other thing is indexation cost plus. Can you talk about how rigorously you’re imposing those terms and whether you’re enforcing them? Thank you.
Jochen Eickholt
Well, thanks. Thanks Mark. Yes, indeed, we feel in the end of the day in a rather good position for the UK and it’s confirming the strategy we had. And we feel that this will clearly help us specifically to maintain our market position in Offshore. On the material indexation or perhaps in a broader context, the inflation compensation, we are very rigorous, very rigorous with new projects. And there is a bundle of measures typically, which is going to be applied and I was referring to that also in the most recent – in the other calls. Of course, depending a little bit on the situation, also our customer, we have to make sure that the risks of inflation are covered. And there is by now, the application of various levers to make sure that this is happening. We did adopt the risk contingencies in our projects. We have a material specific discussion sometimes with our suppliers. We use the element of indexation on the commodity side. And there are further elements to that, but believe me, we are very rigorous on applying these levers.
Mark Freshney
Thank you very much.
Operator
Thank you. Your next question comes from Supriya Subramanian from UBS. Please go ahead.
Supriya Subramanian
Hello. Hi, good morning and thank you for taking my question. Just a follow-on on the indexation clause. I just wanted to get your thoughts on how sticky do you think these price increases are that you have taken, in a world of, let’s say, declining raw material prices? I understand that the impact may not come immediately in 2023. But do you think that ASPs get adjusted down more quickly? Or do you think given that, the price hike came with quite a bit of lag versus raw material prices, you will be able to command higher prices for a slightly longer period of time? And my second sort of quick question is just the €113 million charges that we took in the Service business, is that a one-time? Are we done with those, the breakdowns and costs related to that? Or do you forecast some more cost coming in the next few quarters? Thank you.
Beatriz Puente
I will start with your second question. And then first one, we’ll cover it by Jochen. Regarding the €113 million, yes, we consider that is not recurring. For us, it’s more a one-off that embodies the split between Onshore and Service, in the Q3. And for us, we are taking a very proactive, let’s say, measures on improving the quality of our platform. So if we said, it’s mainly focus on legacy Onshore platforms, but we would proactively address those quality issues with a strong campaign in the coming quarter.
Supriya Subramanian
And could you, sorry, just quickly, any ballpark indication of between the Onshore equipment and Service, what’s the breakdown between the €113 million?
Beatriz Puente
No, I mean, we’d say that’s very sensitive information, we prefer not to split but as I said, it heavily impacted Onshore and Service performance on what we can give you color is that we foresee to have a Service in our fourth quarter quiet strong, very, very strong.
Supriya Subramanian
Sure.
Beatriz Puente
And going back to a levels above 20% margin.
Supriya Subramanian
All right, got that, thank you very much.
Jochen Eickholt
Perhaps on the other part of the question, now, what we did apply and continue to apply is a rather rigorous monitoring of the so called attractiveness of a project, which covers and obviously, the whole set of Ts and Cs, and also the pricing in relation to this. And in this discussion, we try to apply a concept of what we call selectivity. So, projects have to be above certain thresholds under various aspects in order to be approved pass. And that is a process which we newly introduced with my arrival here in this company, and that continues to be a core element of our business activity when it comes to the overall improvements of the projects.
So, we have to observe all the various aspects of price increases and inflation, which we discussed and that we continue to expect also for the upcoming periods. We feel that the measures – the protective measures, if you wish, we have put in there increasing or including the price increases, that that takes us onto a positive path. But of course, we are not the ones who can speculate about the future. And if I just watch out the press articles and the press communication, then we have to see that we probably are well advised to remain careful here. Clearly, however, when it comes to the pricing specifically, Onshore will see a positive trend.
Supriya Subramanian
Thank you very much.
Operator
Thank you. The next question comes from Sean McLoughlin from HSBC. Please go ahead. Mr. Sean, please go ahead.
Sean McLoughlin
Sorry, I was on mute. A question on components failures, just building on from previous question, what were these? Why were they so unexpected and expensive? What is the risk that we see further similar failures on other legacy machines?
Jochen Eickholt
Well we do see, we do observe the component failures in typically two or three broader categories. One is related to the blade technologies. So, sometimes we see the so called wrinkles or cracks, if you wish, after some period of time, not always to be predicted. We then see also difficulty in some parts of the electrical system, both the generator and the converter systems and those also has to be rectified. I think this is the last categories of what we’re looking at. What we have to establish is that sometimes these turbines already are a couple of years old. This is why also for us, it’s – in the sense of the responsible business unit rather a Service discussion. But of course, those problems are not originated in the Service business. And that sometimes makes it difficult to, first of all, also establish the problem as such on a technical level and then put corrective action in place. We continue to believe that the situation as such, obviously is covered by the numbers we indicated on but if we have questions where components fail in an unpredicted manner, obviously, please imagine what sort of sometimes even mid-to-long term evaluation is needed to establish root cause and the right level of corrective action.
Sean McLoughlin
Understood. So, if I – if some of these turbines are two years old, are these actually still under warranty?
Jochen Eickholt
Well we have different terms and conditions on the warranty side, warranty conditions go up to, I think, two years, sometimes up to five years even and then typically kick in, at least this will be our hope, service contracts. And those are in the framework to rectify those issues.
Sean McLoughlin
Understood. Then lastly, if I can just specify whether these were in Onshore Offshore turbines?
Jochen Eickholt
Well, the things we are discussing mostly when it comes to the current discussion are around Onshore turbines. Onshore older turbines, so Onshore not 5.X, if you wish.
Sean McLoughlin
Thank you.
Beatriz Puente
And it’s mainly on, we have to clarify, it’s mainly Onshore. I mean, the things that we are discussing on the platform is on especially, two years for Onshore and five years for Offshore, and of course, the service warranty goes up to 35 years, for you to have all the information.
Jochen Eickholt
With the service contract.
Beatriz Puente
Yeah.
Operator
Thank you. The next question comes from Gael De-Bray from Deutsche Bank. Please go ahead.
Gael De-Bray
Yes, good. Good morning, everybody. Thanks very much for the questions. Look, firstly, could you elaborate a bit more on the so-called decisive actions you’re taking to turn around the business, in particular regarding potential headcount reduction? I mean, generally speaking, do you think it would make sense to cut jobs to reduce losses, considering that the market will likely pick up again in a year or two? So that’s question number one. And then I’d like to do have a couple of clarifications, please? So firstly, on the revenue guidance at minus 9%, is this now fully updated for currencies or not? And then secondly, on the €113 million charge, I think I’m getting a little bit confused here. So it’s booked mainly in Services, but also in Onshore. So is this fully in addition to the €185 million provision, or is it included? Or is that a part of that included within the €185 million provision? Thank you.
Jochen Eickholt
Well, thanks, Gael. Let me start with the first part of the question. And then perhaps the FX effects and details numbers are going to be answered by Beatriz. So what you describe is indeed part of the difficulty. And so we – we definitely do feel that it doesn’t make sense to reduce, let’s say, headcount capacities when we foreseeably need them again. So this is part of the difficulty, still, we do believe that in some parts of our organization, there are capacities way beyond the actual need, and that needs to be rectified. Now, that is true for parts of the manufacturing portfolio, as well as part of the overhead or administration or structure of our organization. So this is what we mostly look at. We will continue to work on detailing that and get in touch with our social partners to have all the words and relevant and legally binding and legally necessary discussions. But what you described is really part of that difficulty we find ourselves in, and this is why it’s not so easy to come up at rather short notice with the idea of having to slash that on that capacity and off we go.
Beatriz Puente
And Gale, regarding your question, I think the one that you refer to the revenue, if – the new kind of target for the minus 9% is always, we provide that on a comparable basis. And of course, the reason for going to the lower end of our formal target is mainly to the issues that we have on year to-date Q3 results. As to your second question is like how much of the amount that would have on the €113 million are, of course, embed in minus €185 million. As we said before, we prefer not to provide, the breakdown of that within, On and Offshore, sorry, On and Service. But of course, a portion of the Onshore hit is fully impact in the €185 million. Because this is related to operate [indiscernible] are mainly, as we said, are impacting trades in North America, because of the reasons that Jochen said. So that portion has been, of course, in this €185 million update on the backlog, so a portion of that is hitting the onerous contract.
Gael De-Bray
Okay, thanks very much. Can I have a quick follow up on the headcount equation? So what is the share of the workforce today, which is in the structure, in the overhead, administration and the like?
Jochen Eickholt
I’m not, now, I mean, we try to communicate on that to try to make sure that we are not confusing, because our structures are slightly more complicated. What we discussed typically is that we would like to centralize some of those functions. And by that streamline, the, how shall I say, line of command, if you wish, in those functions, specifically, when it comes to CTO and COO. Now that has the potential that we can become more efficient, and also the potential that, for instance, the number of different technological solutions, for similar purposes, is going to be reduced. So this is part of the effects. Of course, that then in the end of the day, also needs to contribute to some cost saving, and that is what we’re targeting at, and this is what makes the approach we follow slightly more differentiated. So the centralization of the functions in many cases will lead to an optimization of processes of the needed capacities also of the true landscape.
Gael De-Bray
Okay, thank you very much.
Operator
Thank you. The next question comes from Akash Gupta from JP Morgan. Please go ahead.
Akash Gupta
Yes, hi, good morning, everybody, and thanks for your time. My question is on Onshore wind business, and maybe, Jochen, as part of this new organization structure, are you looking to revisit your Onshore footprint and maybe becoming more selective, especially after your US competitor announced last week that they are stepping away from international opportunities and focusing more on North America? Like are you also considering similar set of action in your Onshore business to focus more on the regions which are more profitable than the others?
Jochen Eickholt
Yes, we clearly observe, we clearly monitor the regional developments. And it leads to already us refraining from specific opportunities where they are not sufficient or essentially profitable. And that may lead to further consequences. But that is not established yet. But Akash, the thinking of course is right. We indeed have set up a system for us where we focus on those markets on a, let’s say, a smaller number of core markets where we want to be successful on, so they are, so there is this effect.
Akash Gupta
And then maybe a follow up on Offshore business, I think you earlier said in your comment regarding capacity discussion with customers. So the question I have is that, if you a look at your market share in the UK especially after UK CfD auction, do you have enough capacity already to meet these requirements? Or do you need to expand further in your capacity to meet your quota commitments from the latest auction?
Jochen Eickholt
Well, so far, we see that our plans are kind of in line with our, how shall I say, success in those discussions. But going forward, I clearly see that to change. So I foresee capacity shortfalls in our industry.
Akash Gupta
Thank you.
Operator
Thank you. The next question comes from Deepa Venkateswaran from Bernstein. Please go ahead.
Deepa Venkateswaran
Hi, thank you for taking my question. So I was wondering whether you could give us an update about the takeover by Siemens Energy. And particularly I think around the time when they launched the offer, have the results of the UK CfD auctions, the recent Inflation Reduction Act from the US, so a few other events that have happened, which have – which would definitely work better for the medium term outlook. So just wondering, is there any process or to kind of take these into account in the minority buy out process, and maybe just a side impact? You – in your slide, you didn’t talk about the Inflation Reduction Act from the US. Any comments on how that impacts your operations would be helpful?
Jochen Eickholt
So first of all, the takeover process, please forgive us that we are not Siemens Energy. The offer was announced, the offer right now is in its approval process by CNMV, which is the Spanish finance market supervision authority. I would assume that this or shall I say, this approval process moves on. The next step then would be that approval, if it moves on, and then that offer would be out. Beyond this, it’s very difficult for us to comment on potential next steps, because we are not the party who actually is deciding here. So please forgive us that that perhaps is something which I may refer to or which I may redirect to our colleagues of Siemens Energy. Now, when it comes to the various elements, sorry?
Deepa Venkateswaran
No, no, sorry, please go on.
Jochen Eickholt
Now when it comes to the element of cost, or inflation compensation and cost compensation, that is an ongoing exercise. I was I think rather clear about our policy. Of course, that policy has regional flavors. We have to see under which circumstances what is thinkable. But I have to tell you that the most recent developments in the US, there’s this infrastructure bill discussion that in my view is something which is will have an extremely positive outlook onto the development of our whole industry. And since we are a player in the US as well, we also hope to benefit from that.
Deepa Venkateswaran
Okay. Thank you so much.
Operator
Thank you. The next question comes from Lucas Ferhani from Jefferies. Please go ahead.
Lucas Ferhani
Good morning. Thank you for the time. My question again would be on the Service division. You have also one of your key peers, which highlighted issues in kind of related to older legacy platforms. And I would just want to ask, if you see this kind of problem you’re having at the moment bring any change in your long term assumptions for Service? Could it be the case that potentially we need more maintenance for the turbines, especially at end of life? Does that bring any kind of changes in the way you’re seeing, the way you price the warranties? And also, just to comment again, on what you said, regarding Service in Q4, you said you expect to recover, but they’ll be impacted? Could you just detail a little bit what that means? Thank you.
Jochen Eickholt
Well, thank you. Well, right now not. I mean, what we see for – what we foresee for the future, when it comes to the new types of turbines, that the needed service work will become more sophisticated. So that in my view means that we typically find ourselves in a rather better position than in the past and actually take over the responsibility for those service activities. So this is rather a mid-term development. So the turbines become more complex, the service works will become more sophisticated. Regarding the quality deficits, I don’t see any major change regarding the models we operate according to and that so far is, in my view really foreseen in our business planning. So therefore, I would not see that as a trend.
Beatriz Puente
And regarding your second question, what we meant by the impact on Service profitability, of course, will have the hit on Q3, what we meant is that Q4 standalone basis, Service will have delivery margin above, quite above 20%. And, of course, on a year-to-date, or for a full fiscal year, of course, we cannot catch up with the impact of Q3. And what we mean is that, we see a very [stringent] performance continues to be on the Service business.
Jochen Eickholt
But perhaps a slightly more generous comment, I can specifically speak for our company, and the mode our company is right now is not sustainable. So what is needed in the end of the day, some something which would typically referred to as inflation compensation but you could also make it even more simple and could say, we need to have a higher revenue for the megawatts or we need to have higher prices. And that continues to be a problem, in my view, even for the entirety of the industry, if you look at the results of our competitors, but certainly it is a problem for us. So we need to find solutions in order to get a better result, specifically, when you look at the overall situation, the whole wind sector, find itself in. So there are so far, obviously players who rather benefit from most of the – from many of the more recent developments, and others don’t. And that needs to be considered. Because in the end of the day, we continue to believe, I continue to believe that we need to play a strong role in whatever there is called the energy transition.
Lucas Ferhani
Great, thank you.
Operator
Thank you. The next question comes from Ajay Patel from Goldman Sachs. Please go ahead.
Ajay Patel
Good morning and thank you for the presentation. Apologies if maybe the questions already been answered. I cut out, so I had to re-dial in. So I’ve got two issues I wanted to discuss. Firstly, could you give us a bridge of how the underlying margin is moving from Q3 to Q4 to be consistent with the full year guidance? So even if you take off the disposal expected in Q4, there is a sizable improvement, so just a better understanding of the components would be really helpful? And then on the second side is more sort of understanding the debt. What are your expectations for the full-year in terms of the components that will move to improve the situation? So how much of a working capital reversal, for example, are you expecting, so that we can just get a better understanding of how you leave this year, going into next year, where you already indicate that margins would be negative? I’m just trying understand, you’re clearly in a company that is in recovery, what capital needs are you going to need for that journey?
Beatriz Puente
Thank you for your question. Regarding kind of bridge on Q3 to Q4, we’ll try to give you more insight on the Q4 performance with two things. As we said we update the target for our revenues on EBIT for the full year with the minus 9% on a comparable basis, EBIT target of minus 5.5% and we provide you, so in theory, you can build a bridge. We provide you the implied contribution of the disposal of the wind farm business with roughly a contribution on EBIT of €540 million.
So, that will explain how we will improve. Of course, Q4 will be on a year-to-date basis, our results of Q3 will be foreseen to be the lowest throughout the year because you will have the positive contribution of this transaction. It will contribute in everything, revenues, EBIT and cash and actually, the figure for cash is quite similar to the potential EBIT contribution, €550 million in cash.
So, again, for us, as we take in the previous Q2, Q3 will be the highest leverage for the company, because we foresee to have the €550 million cash in, as I said, the beginning of September. And also some improvement on, that will help us also on the working capital. We will provide guidance target for ‘23, as I said, with the year end results. And therefore, also any need, for instance, in the balance sheet, also, we will provide at that time, of course, based on the new outlook for ‘23 and on how we see the market on the coming year.
Operator
Thank you. The next question comes from Mark Freshney from Credit Suisse. Please go ahead.
Mark Freshney
Hello, thank you. I have a follow up question regarding the patent dispute issues. I know, it’s something that’s gone on for decades, particularly with one of your particularly litigious competitor who used as a commercial tool. But could you give us an overview of where we are on the patent disputes in any markets where it may be inhibiting your ability to win projects? Thank you.
Jochen Eickholt
Well, right now, thank you very much. Try – let me try to simplify that matter a little. Indeed, there are different players in our sector and some follow a policy to use a patent related litigation as a tool. We feel a little bit like being dragged into some of those discussions. And that’s not necessarily our intention but anyway, it is like it is. We have two cases or two principles structures, what’s being discussed, we have some rather software related activities where right now we continue to be in dispute in various markets. However, so far, my view is that we kind of manage the situation rather well. So should, so far, there is a rather mixed picture in recognizing the validity of the related patents. But we’ve already established turnarounds on our side should that in the end of the day be the ruling.
Then there’s a second family of discussions, which are more hardware related, and that is what the most recent ruling was about in the US. And that now clearly states that there is a hardware concept violation of a big North American competitor in the relation of our or in conjunction with our patents. The first indications were and the first rulings were that there should be some kind of licensing agreement in place and the rules or the North American judges even established a sort of level of where those licenses should sit. And, and this is now part of the discussions and ongoing discussions. We feel ourselves right now from this, how shall I say, patent-related disputes in a rather positive and rather good situation.
Mark Freshney
Thank you very much. Well done.
Cristina Perea Sáenz de Buruaga
Thank you, I think we’re going to conclude the call now. Jochen, I don’t know if you want to?
Jochen Eickholt
No, I think we tried to bring across some key messages. As always, we’re also open for further communication if that is sensible and helpful. We would like to thank you very much for all the good questions and also for the ongoing observation of the fate of our company. And like to continue that discussion at the planned and foreseen dates and possibilities. Thank you very much.
Cristina Perea Sáenz de Buruaga
Thank you, everyone, and have a good holiday break and happy to follow up with any questions you may have.
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