Nkt A/S

CSE:NKT

Earnings Call Transcript 2022-Q3

[Operator]

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

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

[Alexander Kara, executive]

Yes, good morning, everybody. Thanks for joining the call where we present our Q3 results. I have here with me in the room my CFO, Line Andrea Fandrup. And let's go to the key message of our Q3 results.

Overall, I would consider the results as satisfactory. And we gave some qualitative indication about our Q3 results at our Capital Market Day, which we hosted on the 22nd of September, as such, maybe not too many surprises in the Q3 results, but we may come back to that.

So overall, we had an organic growth of 8%, and the growth has also driven operational EBITDA. Based on the first 9 months and outlook, we update our financial outlook, and Line will come a little bit later to the details.

Our high-voltage order backlog is still very high at EUR 4.5 billion and we have some orders on onshore -- AC onshore and variation orders on the existing projects.

We issued a green hybrid bond of EUR 150 million to strengthen our financial position for further opportunities and to grow.

We hosted a Capital Market Day on 26th of September, where we also announced our updated strategy, what we call ReNew Boost, where we gave an upgrade of our midterm guidance and outlined the way how we want what our plans to go forward.

We had the opportunity last week to be in Sharm El Sheikh and to participate at the COP27 and several meetings like caring for climate. And it's clear that NKT and our cable solutions can contribute to the green transition, enabling and transporting power from offshore wind to shore for interconnectors and so on. Not only that we contribute as NKT to Scope 1 and Scope 2, but also to Scope 3 reduction, and I come later back to that. It was a quite interesting event participation. And I think, as I said, that NKT and also the entire cable industry can contribute to the decarbonization of the society, which is an important goal.

In NKT Photonics, we continue with the process of divestment and we are processing here as planned, and this should be concluded latest by Q1 next year.

If you come to the Q3 performance. We grow in solution and with this underlying operational EBITDA. Last year we had -- the same quarter, we had a onetime impact of EUR 20.7 million of insurance claim which we settled, which, of course, we have not this year, and this has an impact on the numbers but overall we improved.

The applications result, I would consider as unsatisfactory. Even though we could increase [indiscernible] but this was purely by price increases in [ volume ] produced and cable we [indiscernible] used. And the reason for that was the higher input costs, and we may come back later in the presentation.

In Service & Accessories, I'm satisfied with the revenues and operational EBITDA. Service had a good quarter, but also accessories, on the high-voltage side, we improved.

So you see the number on the right and we have growth already communicated that.

If you come to Solutions, on the third quarter, we executed several projects, and with this we generated revenues. And then the growth of 10% and improved EBITDA of EUR 24 million.

The Victoria [indiscernible] several jobs Shetland and Troll and others and there was good utilization. We have continued with the extension of our factory in Karlskrona and Cologne, and we inaugurated our extrusion tower in Karlskrona on the 27th of October and we plan now in November to produce the cables with the investment what we have done.

We also produced the first low carbon copper cable, where we reduced the CO2 emission by 23,000 tonnes for Dogger Bank C, which is the largest offshore wind farm in the U.K. and the first DC. This is an important step to reduce Scope 3 and we need to continue here on this journey to reduce the Scope 3. As you may aware, the CO2 emission, 95% or more is from copper, aluminum and so on production. Only 25% or less is in Scope 1 and Scope 2 of NKT [ auto ] cable production.

So very important step where we work with the entire supply chain from the mine with [indiscernible] to make that happen. So a big step forward [ then ].

If you look at the high-voltage market, we have received various AC onshore and variation order, and we were selected a turnkey supplier for East Anglia THREE, which is not yet in the backlog and firm order. We were here for notice to proceed until the customer has final investment decision which is expected to be happen in Q1 next year.

We received in October the HVDC onshore power cable Hertel-New York, which is the Canadian part of the Champlain Hudson Express power project. It's with an overall value of EUR 90 million -- approximately EUR 90 million market price and then EUR 80 million standard metal price. This will become next -- this quarter, Q4, to the backlog.

Overall, the first -- if we look at the first 9 months, EUR 7 billion on orders have been awarded. Out of this, NKT had roughly EUR 2.1 billion or actually a little bit more than EUR 2.1 billion if we take Champlain Hudson Express with around EUR 1.4 billion due to Ostwind second system. [indiscernible]. And this is approximately also the market share which we had in the past and which we intend to maintain going forward.

For the full year, we still see EUR 8 billion on project award. And going forward also for next year and the year after, we see EUR 7 billion to EUR 8 billion strong market which to be continued.

We disclosed here how we execute the backlog, 5% for the remaining part of the year for Q4 and 25% for '23 and 74% '24 and onwards. These are round numbers. And again, this is the backlog. This does not include East Anglia THREE or Hertel and so on. And obviously, I have read already this morning the first report from the [indiscernible].

So this is a round number, 25%. Strong backlog with EUR 4.5 billion. A little bit down from Q2, EUR 100 million.

Applications. Application, I said already, unsatisfactory quarter, weak quarter driven by increased input costs. Even we could increase prices, but the volume in tonnes of cables have been reduced. We have a lot to improve that further, and we have written also in our report that we see some improvement into Q4, but it's a dynamic market.

And just to give you one example. We have received, for example, at the end of the quarter, a massive price increase from supplier effective the first of the next month. So then you can imagine, if you get them such lessors with 3, 4 days' notice, you have practically no chance to update your prices towards your customers. So we work on -- anyway, we're working on price increase towards customer and also see how we can improve the situation with our suppliers.

So we see a decline in the construction-related business, meaning building via and 1KV mainly copper which is due to the downturn on the European economy. So we feel really the recession on this part of the business.

If we look at the medium-voltage, the demand is high, driven by the electrification of the society, the decarbonization and all of these actions, so that is positive.

Looking at Service & Accessories. We had a good quarter for Service & Accessories, both contributed on revenues and on earnings. And I'm also satisfied in particular here with the high-voltage accessories that we could increase the revenues. So a good development.

What is new and what we have seen more and more concerns from customers is that they are concerned about the critical infrastructure or if you are talking about interconnector and -- but also offshore wind. And we have all following the news [indiscernible] explosion. And in fact, one of the explosion northeast of Bornholm in Denmark was less than 1 kilometer away from an interconnector between Sweden and Poland, which was at that time under maintenance. And customer getting concerned about the critical infrastructure; and this is something what the cable industry and the company to take care, how can this more be secured in the future going forward. That's a new development in the market.

So good development. And we continue with our activities to move accessories from Cologne to Alingsas. And we see, as I said, good development.

With this, I hand over to Line, and she will guide you a little bit more on the financials.

[Line Andrea Fandrup, executive]

Yes. Thank you very much, Alex. So Alex covered well the quarter in terms of an organic growth of 8%. And I can just say also for the year-to-date, it is corresponding to a 9% growth. So we are tracking well here. All business lines are supporting this growth, which is also good to see.

On the operational EBITDA, important to note this insurance gain from '21 which is adding up on the EUR 45 million from the Q3. If you subtract that actually, we have a good underlying operational performance and also an improvement on the margin.

Having a look at EBITDA and also the net result of the quarter, note the one-off, of course, from last year at the same time. So since we don't have same here, we have a good level of -- on the EBITDA. And also the net result is quite up compared to last year.

Overall, we're still continuing to ramp up on the FTEs. We are driving footprint changes continuously. We have announced both for -- we are coming to the end of the -- not truly there, but coming to the end of the Applications footprint moves on the factories. And then from the Cologne to the Czech, we are also continuing that journey, meaning we ramp up FTEs to be ready in the receiving end and eventually at a later point will [ rent ] down.

So I think that was on the income statement. If we then go to the balance sheet highlights. You will note that the working capital, if you disregard the hedges, we are having some deterioration compared to last quarter. And this is primarily due to a buildup on inventories in the Applications and, in general, securing that we have our raw material stock to be ready to produce. We also see some phasing of milestone payments in the Solutions business. And then I would say on the contrary, what you're seeing some accounts receivable improvements due to collection efforts in the Applications business.

If we go to the RoCE, you see across quarters that we are more or less stable around the 3% to 4%, and it's not 2 months ago, we have the Capital Markets Day and then we also shared with you that the ambition here is to move and beyond the double-digit or into the double-digit space. So you will see this gradually improving over the years. But it's of course very important that actually our expansions, our investments come online and they start contributing with earnings expected.

Cash flow was at a lower level very much from the investments also. So you see our net interest-bearing debt increased with a leverage of 0.6x EBITDA.

As Alex also mentioned, we issued green hybrid securities of EUR 150 million, more or less replacing the hybrid we have in place.

Turning to the cash flow statement highlights. The cash flow operating activities was slightly negative as the earnings contribution was outweighed by the changes in working capital. And the continued investment flows you see here on the year-to-date number of EUR 144 million compared to EUR 123 million [indiscernible]. So we are closing out on the investment -- on the expansion in Cologne. We are continuing in Karlskrona, as you remember from the Q2, the new child that we inaugurated lately now second [indiscernible] coming there, and you'll see more of the investments in that throughout '23 also.

And if we go to the next slide, a recap on what we announced this morning and an update to our financial outlook for the year. On the revenue side, EUR 1.4 billion to EUR 1.45 billion. And on the operational EBITDA, we are removing the lower end and saying we expect to be within EUR 140 million to EUR 155 million for the year.

Of course, unforeseen things, as we have seen over throughout the last 3 years, at least, it can happen. But this is very much with the underlying assumptions of the current business that we see, that we expect [indiscernible].

Repeating the key messages, organic growth continues so and expected rest of the year. We have a good order backlog, and we have also a good market share of the awards of this year. So we now have more transparency sharing of how much we expect to execute on the backlog in '23 from the recall. The issuance of the green hybrid security and the launch of the updated strategy ReNew Boost including medium-term ambitions. And let me just repeat them here. We expect to grow above 12% on average over the time horizon of '25. We expect to be on operational EBITDA of 12% to 16%. And we expect to come into and above 12% RoCE at the end of the period. So very much grabbing the opportunity of the green transition.

So with that, turning into the Q&A session.

[Operator]

[Operator Instructions] Now we're going to take the first question. And the first question comes from the line of Massimiliano Severi from Credit Suisse.

[Massimiliano Severi, analyst]

I have two divisions. The first one would be the margins on Solutions this quarter were quite low despite full Victoria utilization. I was wondering is it just purely project phasing? Or are you seeing margins deteriorating also because of inflation and issues impacting higher inflation to customers in projects?

[Alexander Kara, executive]

Yes. If it comes to the margin in Solutions, 12.8%, 12.9% is lower than the previous quarter. It's phasing of the projects. We still have some projects with lower margin in the backlog, which we need to execute for example [indiscernible] we are in an installation phase.

And of course, most of the costs in Solutions we can hedge, but we cannot cover all the cost, for example, steel cost on the Solutions, which also the steel price has increased, but it's mainly phasing and then some other effects.

[Massimiliano Severi, analyst]

Okay. And my second question would be on the Applications and the price cost issues. More or less, when can we expect normalization in terms of time, given that you are trading prices. And if you think that the 7% to 9% margin range that we talked about in the past can still stand once price cost issues normalize in the division.

[Alexander Kara, executive]

Yes. Regarding the cost, as I said, as we wrote in the report, we see improvements and obvious we see the October numbers already. This gives us some confidence. But we see also still extremely dynamic development of input cost. As I mentioned just before, we have received a letter from one supplier a few days before end of the month with a massive price increase, at first of month, the next month. So if you get such an increase which has not insignificant impact on the cost within 5 days effective or 4 days very short time. You have practically no chance to raise the price towards your customer. This is one example.

And what we have behind us, I would say, or managed so far is the first phase of price increases. But it's not excluded that we will see a second wave of input price increases triggered by energy prices, transportation premium on metals, premium cost increase on plastic due to higher energy prices and so on.

So we see improvements in -- for Q4. Is that stable? It's hard to say -- difficult to say. There's very dynamic I would not lean out at this stage and say we are out of the woods.

And saying that the 7% to 9%, I think that the market, the input price needs to stabilize. And then on that basis, you can see where you end up, but it's a very dynamic situation, unfortunately.

[Operator]

And the next question comes from the line of Nancy Ni from Goldman Sachs.

[Nancy Ni, analyst]

I just wanted to follow on, on Applications. You flagged sort of weakening European construction and the macro in general. So I just kind of wanted to hear your thoughts on maybe going into 2023 if we see continued macro weakening where you think Applications is headed.

[Alexander Kara, executive]

Yes. I mean, we see a clear drop I mean on the impact on building buyers and 1KV copper. So the demand is weakening, is substantial. So we see impact on revenues, but also in output and consequently on tons of cable produced and building wire in 1KV.

So it's -- I do not expect that this will be soon over a little recession. And I assume this will continue into '23. But I'm also not an economist to predict the future. But I doubt that it will be or that we will soon see a recovery. I think we need to live with this situation on lower demand for buildings. Yes.

[Operator]

Now we're going to take the next question. And the next question comes from the line of Claus Almer from Nordea.

[Claus Almer, analyst]

Also a few questions from my side. The first goes to this order intake you had in the quarter from onshore wind and also variation orders. How should we think about the margins on these orders? That will be the first question.

[Alexander Kara, executive]

I mean the margins, typically, if you talk of offshore, normally, the valuations are being equal or better margins than the original margin of the project. And onshore, we see a trend towards better margins for projects which are coming in but those are partly getting executed, let's say, a little bit far out. We have a quite good backlog in AC onshore. So what we see, increased improvement also in AC onshore and also driven by higher demand.

[Claus Almer, analyst]

Okay. And Alex, do you see in general more of these variation orders? So you get the order in the backlog and then as long as the project you see may be progressing, you see more variation orders being added?

[Alexander Kara, executive]

No, I would not say it's more -- I mean variation orders are in offshore are driven mainly from installation to changes on the installation spread. That can vary sometimes from year-to-year, but it's not that it's going substantially up or down.

It depends also how much offshore installation work you have. I mean if you have more offshore installation work, then also the likelihood that your variation order is going up. On onshore, you have typically less variation order on the existing project during installation. So it varies a little bit, it depends how much installation you have, Claus.

[Claus Almer, analyst]

Sure. Okay. And then my next question goes to the whole production quality and efficiency within the Solutions division. Maybe you can give an update on how do you see this progressing both from the existing lines, but also the ramp-up of capacity?

[Alexander Kara, executive]

Yes. I mean, ramp-up capacity, as I said, we have a relative moderate growth on the revenues, as you can see in the numbers. And we integrated just now on the 27th of October the tower in Karlskrona [indiscernible]. Before it was not ready, and we are starting now in November to produce the first cable in Karlskrona. And we are a little bit earlier in Cologne. So we have seen a rather slow start and then slightly delay also, to be honest. And -- but these extrusion lines are also even the supplier deliver -- produced several of those. It's not the machines, you press the button and then boom the cable comes out. So a lot of adjustment.

So the ramp-up will happen now gradually, and we should see it in full in 2023. from the expansion. Meaning the expansion, what we did with EUR 150 million investment, the EUR 90 million will come the year after.

And efficiency improvement, we work, of course, on efficiency improvement and we have moved one extruder from Cologne to Velke Mezirici. And obviously, during this move, you cannot produce a cable so you missed that volume from this extruder. This has now been completed, the installation of this extruder in Velke. And we are starting now to producing the first cable. Then we need to make [ tight ] test. Once the [ tight ] tests are completed, we can start the production in Velke Mezirici. That will happen in Q1 next year.

Then we have the shifts again from AC to DC. In Cologne, that's also ongoing. So it's a little bit a dynamic process where we should see improvement next year mainly not too much [indiscernible].

[Claus Almer, analyst]

Sure. But so given this new capacity being added, I know it's still early days, but are you, let's say, satisfied by what you see so far?

[Alexander Kara, executive]

Yes, I'm satisfied and -- I'm satisfied. But I mean if you install new equipment, there's always some, let's say, hiccups, but it's normal. I mean, I have [indiscernible] in the past and we work through this with the supplier. Also at the end, we need to ensure that we deliver the right quality of cable, meaning the roundness, the waviness, it's preciseness in that case it's valid for 2 different extruders with the difference -- where we have different suppliers. So it's a lot of fine adjustment to ensure that the quality is at the level what you want to achieve, particularly if it comes to DC, it's very sensitive and you need to be in the limits of what you have, especially over this design to have the performance.

[Claus Almer, analyst]

Okay. So it sounds like you are ready for 2023.

[Alexander Kara, executive]

Yes, we are ready for '23.

[Operator]

[Operator Instructions] And the next question comes from the line of Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

My first question is on offshore wind project awards. And here, the question is more about decision-making -- speed of decision-making in light of these windfall taxes prospect that we see both in the U.K. as well as in Europe. I mean, I think here in the U.K., we will have a provision [indiscernible] whether we will see windfall taxes and what would be a level of windfall taxes threshold. I'm just wondering like are you having a dialogue with your customers in terms of could there be any potential delays in closing down orders or awarding firm orders based on what kind of surprises might come out in this announcement in coming weeks, which may change from time to time given the situation in both Europe and U.K.

[Alexander Kara, executive]

No. I mean we don't see here any delays. I mean we have East Anglia THREE announced. And we work also on other opportunities where we don't see any delays. But I mentioned in the beginning that it was at the COP27 and one of the topics that was the permitting and the delays of the -- or the duration of the project from start [indiscernible] until completed. I was on a session about Dogger Bank, and it took 10 years from start then it was finally coming into service. This is too long, and that several participated in the COP27 mentioned that the duration is too long.

And also from the financing, certain parts are pretty complex in this project. In particular, more than 30 banks were involved. So the whole permitting needs to speed up in order to manage the large growth which the companies are committed to manage that.

But to answer your question, we do not see any delay in our project we have on hand for which we expect to become an order.

[Akash Gupta, analyst]

And my second one is on the capacity situation for next year in Solutions business. So thanks for providing this chart on phasing of backlog. And I think here you say that roughly 1/4 of backlog or around EUR 1 billion in standard metal has already been secured for 2023. I'm just wondering how much more flexibility do you have in order to take orders for next year capacity or next year production and installation given it looks like you are already in very good shape from backlog standpoint at this point in the year?

[Alexander Kara, executive]

Yes. Thanks for the question. We, let's say, 25%, EUR 1 billion that's on the backlog, what is not included is obvious East Anglia THREE [ Hertel order ] in and out order which contribute and then we can also take some more orders questions, will this -- is there's something coming, generate revenues for next year. But we have still capacity to take some more orders, in particular on the AC offshore cable part. But you have a good coverage so far.

[Akash Gupta, analyst]

And my final one is on cash flow. I mean if we look at first 3 quarters, I mean cash flow has been negative, but I guess there is no major surprise. But looking for the rest of the year and especially in terms of milestone or down payment in projects, what sort of net debt level should we target for end of the year? Any ballpark range if you can give, that would be great.

[Line Andrea Fandrup, executive]

I think the best way to help you is to have you look at the Q4. Historically, right, and usually see an improved performance, and that definitely also, let's say, how we work with the cash collection milestones, everything and even more intensive towards the end of the year. So I think that's the way to go about the cash.

[Operator]

And the next question comes from the line of Massimiliano Severi from Credit Suisse.

[Massimiliano Severi, analyst]

Just a more general one. How -- what do you see and when will you see potentially the first 525 kV [ submarine ] extruded orders coming up also in the context of TenneT launching the [indiscernible] for this technology?

[Alexander Kara, executive]

Yes, as you say, and actually, TenneT has turned out for 5 offshore wind project in the Netherlands. So most probably this will be the first -- one of those will be the first offshore wind, what we will see. There is ongoing [ tender ] process. And yes, we need to see when it will be awarded. There are some questions about environmental impact in the Netherlands, which is some concern if that has an impact on the delay of these orders, but that we need to see that came just recently but that's too early to say.

[Massimiliano Severi, analyst]

And do you generally see also interest on the interconnection side? Or for now it's mostly TenneT with its 5 offshore wind projects for the 525KV technology?

[Alexander Kara, executive]

No, there is also interconnectors in U.K., several under discussions, we're tendering to be more precise 525KV Western [ aisles ] which was originally 300KV DC has changed to 525KV on East Coast and U.K. several project under discussion, 525KV DC. So this will come -- so this will come also soon -- I mean soon as an award, not necessarily as the production and execution.

[Operator]

[Operator Instructions] Dear speakers, there are no further questions. I would now like to hand the conference over to your main speaker today, Alexander Kara, for closing remarks.

[Alexander Kara, executive]

Yes. Okay. Thank you very much for your good questions, and wish everybody a good day. And talk to you soon. Bye-bye.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.