Nkt A/S

CSE:NKT

Earnings Call Transcript 2022-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the NKT Q1 Report 2022 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Alexander Kara. Please go ahead, sir.

[Alexander Kara, executive]

Thank you. Good morning, everybody, and thank you that you take the time to listen to our Q1 results. So today, we have here in the room or present it's Line Andrea Fandrup, CFO and [indiscernible]; myself; and Basil Garabet, the President and CEO of NKT Photonics.

If we look at the key highlights from Q1 2022 from this quarter, the cable business has grown organically 7%. And the main contributor of application there is a record high quarterly revenues which contributed substantially. The operational EBITDA has increased from 10.2% to 12%, which is 1.8 percentage point increase. On the development on upgrades on Karlskrona and Cologne, high voltage factories, we are going according to plan and the investments will be completed this year by end of the year at the latest. Also in Q1, we have an acquisition, a family-owned business Ventcroft OTT in U.K. and with where we produce fire-resistant power cables which will help us to grow in this segment.

Photonics has grown 7% organic, and we divested the LIOS sensing business and now going forward and Photonics will focus on the core business. If you look at the business performance in the first quarter, the solution, despite that we have lower revenues of approximately EUR 10 million, we had a good execution and efficiency initiatives, which contributed to the good result on operational EBITDA. Application had a strong quarter in terms of revenues and also on operational EBITDA, driven by market, which is in favor of all products what we have, and we have grown in all countries with all products in all markets. I mentioned already acquisition which helped us to strengthen our position in the fire-resistant cable.

Service and Accessories revenues operational EBITDA was lower than last year, the same quarter. And last year, we had a very high Q1, as you know. So the revenues went up from EUR 296 million to EUR 319 million, 7% and operational EBITDA from EUR 30 million to EUR 38 million in numbers, 10.2% to 12 percentage point. If you look at solution, we have a little bit lower revenues than the same quarter before, EUR 10 million. This was due to the mix of the production.

However, the operational EBITDA increased from 12.1% to 16.4 percentage point. We had a good execution on several projects, and they're listed here on Slide 4 with 5 Dogger Bank A where we have the first campaign on laying Dogger Bank 3, the Shetland project, but also the Ostwind 2.

The Karlskrona upgrade and Cologne is progressing as planned. And I would like here also to mention, even if not related to Q1, we have started the first production of the [indiscernible] in Karlskrona just recently. The NKT Victoria has a satisfactory deployment of and was involved in several projects. Overall, a good quarter, a strong performance for Solutions.

If you look at the market, the market outlook is positive. We had -- if it comes to order variation orders of existing projects and onshore projects in Q1, the total market was around awards of EUR 2 billion, mainly projects in Europe. And as we said in the annual report, the market for '22, '23 and '24 years to come is around EUR 7 billion to EUR 8 billion.

I would like here also to mention yesterday was announced in an offshore wind summit in Denmark with the presence of Ursula von der Leyen and Olaf Scholz, the German Chancellor, that the 4 countries, Germany, Belgium, Netherlands and Denmark plans to increase the installation of offshore wind to 150 gigawatts till 2050, which is tenfold in the North Sea. So that is [indiscernible] will be a further accelerator and good for the cable industry.

So the Europe Commission also has outlined, let's say, want to be less dependent of the gas, the Russian gas, and that will also be positive for the cable market. You see here some projects on the recent orders which we have won. If you look at the order backlog, in NKT, it went slightly down from Q4 from EUR 2.87 billion to EUR 2.75 billion, but still very strong. And we work on several projects in offshore wind, in connector and also oil and gas. And you see here roughly the revenue distribution for the remaining part of the year, 20% and 80% onwards.

If we come to application, application had a very good quarter. We increased sales in all the countries where we sell with all the products, and we increased organic growth by 32%. This is of course, here also needs to be seen to a weak, relative weak Q1 last year. Nevertheless, 32% growth is a strong quarter. And also operational EBITDA improved from 5.7% to 10.9% compared to last year, strong quarter, as I said, with all products in all countries from low voltage, 1 KV to medium voltage driven by the clean agenda with upgrade of power grids and also with an increased number of electrical vehicles.

If you look at Service and Accessories, the revenues were lower and also the earnings were lower compared to Q1. Q1 last year was very strong with several repairs. This year, we had one repair in Q1, a complex [indiscernible]. This is a cable connection between Denmark and Sweden. And we had some temporary cost increase due to the transfer of high-voltage accessories from Germany, Cologne to Alingsas in Sweden. We established a hub, the service hub in Gdynia, which will help us to serve the market in Poland, but also in the Baltic with increased market outlook. So overall, the sales in medium-voltage accessories went up, whereas we had some decrease in the high-voltage part.

With this, I will hand over to Basil on the Photonics side.

[Basil Garabet, executive]

Good morning. Thank you, Alex. On the Photonics side, NKT Photonics, again, had another record quarter. It's 7 in a row at the moment. And the key developments in there is that we had a broad-based growth in 3 of our 4 markets. And the revenues for Q1 increased by 10% organically over the same quarter in '21. '21 was actually a record quarter for us as well because that quarter increased by 26%. So this is an additional 10% over that. So a good movement. The business is moving in the right direction, and we're seeing some very positive pull from the market.

Operational EBITDA was slightly down, mainly caused by some write-downs to obsolete and slow-moving material. We also got affected with onetime costs for the strategic review that we are undergoing at the moment. On order intake, as I mentioned, it's been a very positive market. The trend has continued in the quarter, and we are up by 16% over the same quarter in '21. In the same quarter, we also divested a noncore business. This is our LIOS sensing business, and we've done that to fully focus on our core business, which is [indiscernible].

If we move to the next slide, in the business development side. In Medical and Life Sciences, this segment continues delivering very strong revenue and growth and order intake, especially on the ophthalmology side, where we are adding on a number of new projects and a number of new OEMs and it's a very positive move for us. In the Industrial segment, we have continued the growth, especially from [indiscernible] from our semiconductor customers. These are the large tool manufacturers in the industry, and that continues through the year with very positive results.

In quantum and nanotechnology, we had a slight decrease, but that doesn't really echo what's happening in the industry as the orders are coming in that much faster, so it'd be a timing issue, and we'll continue that growth. And finally, in aerospace and defense, we had exceptionally high growth again in this segment, and we see the market due to various aspects of the geopolitical situation that we are increasing. So we're seeing favorable growth there.

And with that, a short presentation, I pass over to Line to go over the financials.

[Line Andrea Fandrup, executive]

Thank you, Basil. So on the NKT group highlights on the income statement, summing up what Alex and Basil shared with you that across the 2 companies, the 7% organic growth for the quarter and improved operational EBITDA margin compared to last year same quarter with a very strong performance in the applications business in the cables, where we almost doubled the operational EBITDA, so very sound financial performance.

Operational EBITDA also improving across the group here. And if you look at the one-off items just to note that this is related to the acquisition of the Ventcroft business, and it's related to the divestment of the LIOS sensing business. So an EBITDA for the quarter of EUR 45 million and a net result summing up to EUR 15 million compared against the EUR 2 million same quarter last year.

If we turn to the next slide, looking into the balance sheet highlights. NKT group will always come out of a very favorable working capital position at the end of the year, Q4 2021 as a comparison base. And then we build up inventories for the season. And in this year, the first quarter also reflects that the trade receivables was rising from increasing sales in the applications business. So you see here a development in working capital, where we end at EUR 66 million at the end of the quarter.

Looking at the ROCE. Here, you also see a continued improvement to the level underlying driven in the quarter very much from the cables business. But you're also seeing, if we look across the quarters, going back in time that we are developing positively on the ROCE here. Leverage is at 0.7x due to an increasing debt level due to the working capital development and also continued investments in the businesses.

The last bullet on this slide before we return is that the EUR 150 million hybrid security issued in '18 has the first call date in September this year. We intend to call the security no later than this date.

Going to the cash flow statement highlights. The expected increase in the working capital outweighed the positive EBITDA development of the quarter, therefore, also leaving us at a lower level in cash flow from operating activities than compared to Q1 last year. Cash flow from investing activities, here, if you look at the CapEx, we are at a higher level compared to last quarter, last year. We have a high level of activities relating to the expansion programs in both Karlskrona and Cologne, and this is the reason for this development. So overall, net cash flow for the quarter at minus EUR 81 million compared to EUR 60 million at the same quarter last year.

We maintained the outlook for the year for both companies, NKT Cables at around EUR 1.35 billion to EUR 1.45 billion on the revenue and an operational EBITDA margin of EUR 130 million to EUR 155 million for the full year. For the Photonics, just a note here to restate the base comparison, excluding the LIOS when you look at the organic growth, but we still maintain the outlook on the revenue for 12% to 17% and an operational EBITDA margin of 11% to 14% for the full year.

So the key messages of the quarter is that it was a good quarter with 7% organic growth, a very strong performance from applications and earning level at EBITDA margin that increased to 12%. We are well on track with our Cologne customer factory expansions, and we complete this later this year. Acquiring the Ventcroft business has strengthened and NKT Cable's position within fire resistant power cable technology, and the team has entered well into the NKT Cables and is fully integrated. On Photonics, a 7% organic growth. So you have to remember always that Q1 is a different development and a very strong Q4. That's the seasonality of the business. And then the divestment of the LIOS sensing business now enabling Photonics to focus on its core business.

And then on the last slide of this presentation before we go to the Q&A, we are very happy to invite institutional investors and financial analysts to come here on our Capital Markets Day on the 22nd of September this year. We will be delighted to tell you more about the business status and the expectations for the future of the cable division. So more details to come on that.

With that, I will turn over to the operator for handling our Question-and-Answer Session.

[Operator]

[Operator Instructions] And the first question comes from the line of Casper Blom from Danske Bank.

[Casper Blom, analyst]

Congrats with the good start to the year. I have a couple of questions regarding the applications business. First of all, the strong growth that you see here in the quarter, do you see any risk of this slowing down on the back of low voltage cables being delivered into the building segment. I mean one could probably build some sort of case that the higher interest rates and very high cost on building materials could cause a slowdown in that segment? That would be my first question.

[Alexander Kara, executive]

Yes. I mean, the current situation is, as I mentioned, we see a strong market in all the countries, in all the segments, product segments. Of course, with increased inflation rate, there is a risk. I mean application business, low voltage is a short cycle business of 2, 3 months. And that could, of course, change, but that is difficult to predict how it will develop. As of now we see a strong market. And at the moment, we don't see any sign of that the market would turn in a negative direction, but that can happen.

[Casper Blom, analyst]

Okay. Have you made any specific assumptions in your guidance regarding this?

[Alexander Kara, executive]

No specific assumption. I mean Q1 was extraordinary high with 32% do not expect that this will continue on a -- that will be definitely not the case. But we expect for the time being that the market remains strong onto the market are on some sales.

[Casper Blom, analyst]

Okay. Fair enough. It's absolutely fair not to expect the 30% growth going forward. But what about the 7.9% EBITDA margin? Is that sort of a new stable level for the Applications business?

[Alexander Kara, executive]

No. I mean I said in one of the last calls that the 7% to 9% is in reach. We are now at 7.9% in this quarter. We continue to work on our optimization in the factory on various initiatives, efficiency initiative, but also footprint. And in addition, we work also on the commercial side to increase prices. So whenever we can increase prices, we'll do that, and we'll continue to do that. So we do expect to be in the 7% to 9%. And yes, we plan not to go down, let's say that.

[Casper Blom, analyst]

Good to hear. Then just a question regarding Solutions. The very strong margin here in the quarter. I understand that it's partly affected by some sort of release of risk and contingency provisions on projects that have been well executed. Can you put any more sort of specific number on the positive tailwind from that side?

[Line Andrea Fandrup, executive]

I think what we did the performance here, you see on the solutions business for the quarter is driven by good execution. And then you might not be specific on projects also that the vision, we have seen us take last year in Q3 related to some project. We have released some of that. But underlying good performance on operations and then a release of this part of this division.

[Casper Blom, analyst]

Okay. So it's more the sort of how could you say, day-to-day operations that are doing well, then it's just a one-off release of provisions.

[Line Andrea Fandrup, executive]

It is an operational-driven performance to the last.

[Operator]

Next question comes from the line of Claus Almer from Nordea.

[Claus Almer, analyst]

Also a few questions from my side. And first of all, like I care to say congratulation with a strong Q1. The first question would be about the Champlain project. When do you expect an update on this possible order? That would be the first question.

[Alexander Kara, executive]

Yes. I mean, as you know, we are a preferred supplier. And as we speak, we are in the negotiation of the contract and we expect an update in the second half of the year.

[Claus Almer, analyst]

Second half first, I mean, you have had 10 years, I guess, to get all the contract details in place. So is there any major issues you have to solve? Or it's just things will take time?

[Alexander Kara, executive]

No, we had 12 years' time to be more precise about that. [indiscernible] 12 years the contract details. No, but this is a big project. And besides cables, there are also other parties involved where contract needs to get finalized, others which are prefer supply like Hitachi Energy and this kind of contract negotiations sometimes time and this is how it is.

[Claus Almer, analyst]

But you have assumed the guidance that you will start up production this year, right?

[Alexander Kara, executive]

You can also start activities even if you have not signed the contract, if you make an early works agreement with the customer, that's what you need some contracts you can make intermediate agreements.

[Claus Almer, analyst]

Okay. So that part is not at risk as it seems today.

[Alexander Kara, executive]

No.

[Claus Almer, analyst]

Good. Then my second question goes to the guidance. Given the very strong start of 2022, then the guidance for the cable activities, at least now looks a bit on the cautious side. Is there any specific reason why you did not hike your guidance or at least increase the low end of the guidance range?

[Alexander Kara, executive]

No, there is no reason. There is, of course, uncertainty with Ukraine, the whole situation with Ukraine and with this material with input costs, with inflation. So there's a lot of parameters which could change, and it's just that we are cautious. And we want to see now how Q2 develops and then we will see what we are communicated. There's nothing specific, except to be cautious because of this parameter, which I just mentioned.

[Claus Almer, analyst]

And does none of these parameters is actually turning against you so far? That's correctly understood, right?

[Alexander Kara, executive]

No, nothing will turn against us, no.

[Claus Almer, analyst]

Okay. And then the third question goes to Photonics and you Basil. There was not a lot of words about the strategic review in the report. Should we read anything into this?

[Basil Garabet, executive]

Hi, Claus. No, no, not at all. I mean, the strategic review is ongoing. You saw that we had some onetime costs there. So you can deduce from that, but it's at least in going in the right direction. We also divested of LIOS, which was part of the strategic review. So it's in full fledge.

[Claus Almer, analyst]

Okay. And are you starting to prepare slides for the CMD this 22nd of September? Or do you expect not to be part of that?

[Basil Garabet, executive]

That's a great question, Claus. I'll answer it closer to September.

[Operator]

[Operator Instructions] Next question comes from the line of Max Yates from Credit Suisse.

[Max Yates, analyst]

Just my first question is around solutions. And I mean, one of your competitors, Prysmian had, I think, a much more difficult quarter of execution and profitability in the projects business and talked about it largely being down to costs that were difficult to pass on to customers, so things like stainless steel, armoring, ship fuel for installation. And then you look to have been kind of largely immune from that.

But I was just wondering, how do you manage those costs? Are you having -- and have you had negotiations with customers to try and sort of price up your contracts versus original prices? And how do you see that evolving over the next few quarters? Do you envisage that will be a problem for your Solutions division? Maybe a bit of color around that would be helpful.

[Alexander Kara, executive]

Yes. I mean I do not communicate, of course, here on competitive debts. But I mean, there can, of course, be that quarter can -- quarters in solution can differ like in Q4, we had a weak quarter, and this quarter, we have a strong quarter. If it comes to a cost increase on certain materials we can hedge, others we cannot hedge. And here, of course, we need to see how we deal with cost increase from steel and/or a project, which you have in the backlog, which are contractual behind it. Only what you can do is discuss with the customer.

And hope of their goodwill that they are flexible, that they share a little bit the pain team, but that is not a contraction right. So -- and this we are doing but we talk to customers on that side. And then overall, we think it depends also in which quarter you are and whether you buy just metals and then it could have a little bit more or less impact. But so far, we could manage the exposure on steel, which you cannot hedge relatively well.

[Max Yates, analyst]

Okay. So I mean, is there any -- I mean, would you be willing to sort of talk about how you've thought about your solutions margin for the full year within the context of the overall guidance? I mean I presume kind of you used to have a 15% to 17% margin target for this division. We obviously were at 16.4% in Q1. I mean you would need to fall kind of quite substantially below this. So I mean, is it fair to say that this will be the kind of best quarter of the year, and it will be very difficult to replicate. I'm just struggling to square the comments. You've done a good job underlying. This is kind of just the business performing and then kind of how to think about margins for the rest of the year.

[Alexander Kara, executive]

I mean it's a good quarter with 16.4%, and it could not necessarily expect that we will have the same margin quarter-on-quarter. So there can be a variance.

[Max Yates, analyst]

Okay. And just the final question on the German corridors. So could you talk a little bit about kind of when you expect to be producing these whether kind of we feel like these are coming into the business at a similar margin to the kind of, say, 15% margins, which is where we hope this division solutions will get to in the next few years. Could you talk a little bit about the time line of producing them, the phasing of revenues, whether it will be even and kind of if there's any color you can help us with on kind of whether these should be sort of broadly in line, dilutive or accretive to the overall division? That would be helpful.

[Alexander Kara, executive]

Yes. I mean we have announced that we start production of the first cables for seeking in Karlskrona and we will continue in the second half, and we also plan to start with Ostwind towards end of Q2 in Cologne. And so there will be a revenue contribution in 2022. And this revenue contribution in 2022 is reflected in overall guidance.

[Max Yates, analyst]

Okay. And anything on sort of profitability versus the rest of your division? Is it meaningfully different to what you're to say?

[Alexander Kara, executive]

Yes. I mean, we said that we are satisfactory with the margin. And when we booked this project as sold margin and since then, the status has not changed. We are still at early stage on the POC, we are really on a low level at the moment, but we start also just now production.

[Operator]

Next question comes from the line of Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

I joined the call and this call a little bit later, and apologies if this has been already addressed. But my question was more in general, the tendering activities and the negotiations that are taking place with your customers before you sign the firm orders. I mean we have seen inflation and one of your competitors was saying that the bids you placed last year or, I mean, they placed last year is costing 30% more this year because of inflation.

And obviously, that is delaying some of the customers' negotiations. So the question I have for you is that we have a robust pipeline, but do you see any risk that the growth might take longer to materialize because of the inflation that might impact customer decision at -- especially in Solutions segment.

[Alexander Kara, executive]

No. I mean, we see, of course, this inflation in vast element in salaries, in electricity prices and so on and in a project which are not awarded. We include that in our cost calculation. And so far, we have not seen that this will -- is limiting the growth or get postponed because of this inflation. I mean, more substantial is the increases in raw material copper, aluminum, if you compare it to steel, if you compare it to a year ago, but this is simply how it is. And to answer your question, you know we don't see any delays or impact.

[Operator]

Next question comes from the line of Kristian Johansen from SEB.

[Kristian Tornøe Johansen, analyst]

I have 2 questions. So first on applications, again, and just diving one step further down on low and medium voltage, it would be my sort of understanding that the low voltage cable are more cyclically driven to a large extent, by the construction activity industry, while medium voltage as more structural driven by the electrification upgrades. So firstly, do you agree to that? And then secondly, can you help us putting a bit of color on the growth you're seeing in Q1? How much is driven by low or just medium or do you see the same explosive growth in both segments?

[Alexander Kara, executive]

Yes. I mean we share your view with the construction business to influence the low-voltage business and then more the electrical structure and the medium voltage 1KV and then higher voltage. We see a high demand in low holdings in building buyers in 1 KV and medium voltage across all countries, across with all products strong. And I think we mentioned it also in the Q1, for example, with Warszowice in Poland with strong performance.

And as of now we don't see a sign -- don't see a sign that this will change. But of course, it's cycle short-cycle business building by us, it could change rather quick. I mean, we are talking here from the backlog to execution 2, 3 months, and then you need to refill the pipeline quite fast. So that is, of course, hard to predict. But so far, we see a super strong market in the markets where we operate.

[Kristian Tornøe Johansen, analyst]

I understand. And the EUR 10 million EBITDA you make in applications in Q1, can you split that between lower to medium-voltage?

[Alexander Kara, executive]

No, we don't split it. But I can tell you that we have a high utilization output in all the factories.

[Line Andrea Fandrup, executive]

Internally, we, of course, split it, but we...

[Alexander Kara, executive]

Internally we split, yes.

[Kristian Tornøe Johansen, analyst]

All right. Fair enough. And then my second question, I just wanted to understand. You're right that you are booking EUR 1.1 million in one-off costs related to the NKT Photonics review, but you booked that in the cable business. Can you just help me with the reasoning for that cost ending up in the cable business?

[Line Andrea Fandrup, executive]

As such, you can say it's the group and here the rolling cable that actually is facilitating the strategic redo Photonics, Therefore, it's put like that. Nothing on to that.

[Operator]

There are no more questions at this time. Please continue.

[Alexander Kara, executive]

Okay. If there's no further questions, then thank you very much for your time. Good questions and hope to talk to you soon. Have a good day, and bye-bye for now.

[Operator]

That does conclude our conference for today. Thank you for participating. You may all disconnect.