Nkt A/S

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Earnings Call Analysis

Earnings Call Transcript 2024-Q3

[Operator]

Good day, and thank you for standing by. Welcome to the NKT Third Quarter Report 2024 Conference Call. [Operator Instruction] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to our speaker today, Claes Westerlind. Please go ahead.

[Claes Westerlind, executive]

Thank you, and good morning, everyone. Welcome to our Q3 2024 conference call. I'm Claes Westerlind the CEO, and I'm also joined by our CFO, Line Fandrup. As usual, I will cover the overall development and the business lines and then Line will walk through the financial performance for the quarter and also for the first 9 months of the year.

Before we begin, please note that this presentation may contain forward-looking statements and I therefore ask you to pay close attention to this disclaimer.

Now let's move on to our key messages for the quarter. The third quarter 2024 was another good quarter for NKT. We continued executing on the Renew Boost strategy achieving solid operational and financial results. In this quarter, we again delivered double-digit growth in both revenue and operational EBITDA, a development we have now seen for 8 consecutive quarters.

Organic growth was 25% compared to the same quarter last year, mainly driven by Solutions benefiting from increased capacity. Operational EBITDA reached EUR 93 million, the highest quarterly result in the history of NKT, despite the fact that we had non-reoccurring costs related to the integration of SolidAl. It underlined the positive development we have seen during the past few years and compared to the same quarter last year the improvement was primarily driven by Solutions.

This quarter also marked the first full contribution from the acquisition of SolidAl. During the quarter, we initiated the integration process and it progressed as expected. Our expectations and findings from the due diligence process have so far been confirmed with no negative surprises. SolidAl's competitive and competent organization is a great addition for us in the medium and high-voltage segment up to 225 kilovolts and as previously mentioned gives us stronger presence in southern Europe.

We have formed a dedicated integration organization headed by our COO, Will Hendrikx, and also Head of Applications, Carlos Fernandez to ensure continued progress and also a good overview of the process. We remain confident that through a successful integration we can realize the expected EBITDA synergies of EUR 7 million by the end of 2026.

It's a custom at NKT that all production sites are named after the cities where they're located and therefore going forward, we will refer to SolidAl as NKT [ in ] Esposende, but when referring to the acquisition itself it will still be SolidAl.

In the Applications business lines, we continue to see good commercial momentum stemming mainly from demand for medium voltage cables to upgrade distribution grids. During the quarter, we signed 2 frame agreements with local DSOs in the Netherlands and Denmark. These 2 frames have durations of 8 years and 5 years respectively which are longer than traditional ones and on top of this in November we extended 2 frame agreements with RTE and France to deliver high voltage cables to upgrade the French electricity grid. The delivery will be supported by our site in Portugal highlighting our improved position in southern Europe and also the planned investments at the Esposende site.

Now let's turn to the financial performance in the third quarter and the first 9 months of this year. As mentioned, we delivered double-digit growth both in revenue and operational EBITDA. This was mainly driven by the expanded capacity in Solutions. Revenue increased to EUR 657 million in the third quarter and EUR 1.8 billion for the first 9 months. This corresponds to 25% and 27% organic growth respectively, and thereby we continue the trajectory from the previous quarters.

In Solutions, activity remained at a high level as we continue to execute on our high-voltage order backlog and note that product execution was overall satisfactory. Translated into financial figures we delivered solid growth in both revenue and operational EBITDA and maintained the positive development from previous quarters.

Higher revenue in Applications was driven by integration of SolidAl. Organic growth was marginally negative compared to last year and operational EBITDA increased by EUR 1 million. Applications continue to benefit from positive developments in the power distribution grid segment and various efficiencies initiatives implemented across our production sites in recent years.

Revenue and profitability in Service & Accessories increased mainly due to higher activity level in the service business. The operational EBITDA margin increased to 12.8% in the quarter, a solid improvement from Q2 this year which was negatively impacted by work related to one legacy service agreement as we have also talked about in this forum before. This work was completed during the second quarter of this year and with satisfactory execution the margin therefore resumed to historical double-digit levels.

Next, I will dive deeper into each business line starting with Solutions. In the third quarter of this year, revenue and solutions increased to EUR 429 million up from EUR 301 million in the third quarter of 2023 reflecting increased capacity and capabilities, as well as overall satisfactory product execution.

Throughout the quarter, we made progress on several products that were in varying stages of execution including Baltic Power, Champlain Hudson Power Express, Dogger Bank C, Hornsea 3, East Anglia 3, SuedLink and SuedOstLink, as well as ramping up execution on Yggdrasil and Bay of Biscay.

The loading in Solutions remains high and with higher level of execution demands on our organization are elevated in a similar manner as they have been also during the second quarter.

We are constantly investing in enhancing capability across the business, which is also as earlier conveyed impacting our OpEx cost in Solutions and hence also margins. But I also want to add there that this is crucial for the growth that we are undertaking and also is expected to undertake in the coming quarters and years.

Organic revenue growth for Solutions was 42% with operational EBITDA increasing to EUR 66 million. This will equal to a margin of 15.5% slightly lower compared to the level in Q3 of last year and in product businesses like ours, margins fluctuate from quarter-to-quarter depending on the underlying product mix, but also the maturity of the risk in our various projects. In addition, the margin in the third quarter of this year was slightly negatively impacted by an increased risk provision related to a limited number of onshore projects that I will come back to later.

In Karlskrona, the approximately EUR 1 billion investment program progressed as scheduled during the third quarter. This includes the ongoing construction of our second cable lay vessel NKT Eleonora. We also initiated the construction of the third extrusion tower at the end of July and by early November it reaches the final height of 200 meters, which I have to say personally is beyond impressive and it also constitutes an important product milestone. Not that it's a competition, but it's now the second highest building in the Nordics, but in my personal very biased opinion perhaps the most beautiful one.

We are in the middle of a heavy construction phase and during Q4, we expect to make some larger contractual commitments, therefore execution remains our highest priority in this project. This includes the constant monitoring and managing of the various risks and also opportunities to have and will continue to arise.

In Cologne, the EUR 100 million investment program to expand production capacity and capabilities has progressed as expected with planning of the initial construction phase underway.

Now I also want to add here that the profitability as I just said was slightly impacted by an increased risk provision related to a limited amount of legacy onshore projects. Cases like this are not unusual and for this specific case, we are not overly concerned, but it is a natural process which is developing over time with a technical assessment and the root cause analysis, but of course, also a client dialogue. And while we will not disclose the size in detail, I can say that it's not material on a group level. And it is relating to the same projects and that we were discussing at the Q4 results last year. So this is connected to the same process and development in those projects.

Now with those comments, I will now turn to look at the developments in the high-voltage market through the first 9 months of 2024. Across NKT's addressable high-voltage market, activity remained at a high level through the third quarter. We estimate that products awarded in this market exceeded EUR 15 billion in the first 9 months of the year. Demand for high-voltage production installation capacity continued to be driven by DC technology, and this segment was also the main driver behind the new orders in the market.

Our awards here in '24 should be seen in the context of the high order intake in last year and also our available capacity. And when we look at last year and this year combined, our market share is at a very decent level, somewhere hovering between 25% and 30%.

We continue to expect an average addressable market above EUR 10 billion per year until the end of the decade and with awards of more than EUR 15 billion this year, a robust short-term demand is evident, but it also deserves to be mentioned that portions of these awards actually stem from capacity allocations in 2023 and I think, we have mentioned that in the past.

Having said that, the supply demand balance is expected to remain favorable throughout this decade, before -- as we have said before, appearing to move into a more balanced territory during the course of next decade.

Our new factory in Karlskrona is expected to start production in 2027 and similar additions are also coming from our peers. And we remain of the opinion that the market can absorb this capacity and remain healthy with reference to what I just said before.

Constructing an HVDC factory and you've heard me say it before is a complicated task, but on top of that, it's another thing to have it up and running and consistently producing cables at the desired quality kilometer after kilometer. For this we require skilled and experienced operators and building the factory we are now building in Karlskrona next to our existing facility allows us during both construction but also later on operation to leverage our existing resources. At the same time, we are also investing in the additional resources obviously required to operate this factory efficiently in the future.

We believe, and I personally also believe, we are very well positioned to manage the risks of establishing a new factory and achieving the desired quality within the planned time frame. And despite our extensive local experience, the process will still take more than 3 years and we remain humble and focused. And I just want to underline, even with all that I said rest assured that we meet challenges every day on this journey.

All in all, we continue to see a robust near-term demand supported by the ongoing electrification of society and transition to renewable energy. Long-term, we have less visibility and to some extent the development will depend on political ambitions across key markets. From where we stand today, we see a more balanced market towards the end of the decade, but the timing and obviously several other factors remains uncertain when you are trying to look about 10 years into the future.

It's also without a doubt that the U.S. election has attracted a lot of attention. We will have to wait and see a little bit how President Trump will pursue a new energy policy that might slow down electrification of society and offshore wind projects or not.

With that being said, many states pursue their own ambitious climate targets and we expect many will continue this pursuit. Besides the current execution of the Champlain Hudson power project, we have, as it stands, a very limited exposure to the U.S. market, but we continue to follow the market development closely and we are also looking for potential opportunities.

Finally, let us look a little bit on the composition of the high-voltage order backlog. It ended the quarter at EUR 11 billion, which is slightly down from EUR 11.3 billion at the end of Q2. This is due to that the orders executed in the quarter, but also compensated by a number of smaller orders and variation orders to existing contracts. Compared to a few years ago, this level represents a structural step change. And it reflects the strong demand for high voltage cables, and I think, also NKT's ability to also secure orders and prove our competitiveness in the segment.

On top of the firm orders, we have the tenant framework agreement with 3 named projects and 2 projects with SSE which remain as booking commitments. Combined they have a value of more than EUR 2.5 billion, and we expect these projects to be called off and included into the backlog in late '25 or early '26. Over the summer, we are happy to have confirmed our partnership on the 2 products with SSE and agreed to proceed with the initial product work.

The composition of the backlog remains unchanged as you can see. Over 80% of it is comprised of European TSOs as customers. Interconnectors constitute around 55% of the backlog while roughly 40% is related to offshore wind projects.

The order backlog continues to provide good earnings visibility for the majority of the rest of the decade. Executing this backlog is crucial in the coming years to unlock the inherent value, but of course, also to steer clear of any portfolio risks and is why risk and execution management remains a key priority for our Solutions teams, for Line and also for myself.

We continue to remain highly active in ongoing tenders that would further strengthen our backlog. However, also given the current situation with our backlog, we are able to adopt a selective and disciplined approach towards optimizing capacity utilization in both production and installation, supporting earnings generation, but also having the adequate focus on the risk reward balance.

Now let's take a closer look at Applications. Revenues for this business line increased to EUR 183 million with SolidAl contributing EUR 28 million. Organic growth was marginally negative at minus 1% compared to the Q3 of last year, which was a high comparison period due to the price adjustments made to offset inflationary pressure.

Demand and volume in the power distribution segment remained at a satisfactory and robust level, while demand in the construction exposed segment remained subdued and revenues were actually a little bit lower compared to the same quarter last year and also the preceding quarter.

Operational EBITDA amounted to EUR 14 million. The marginal increase from last year was mainly driven by positive effects from specialization of production sites and also various efficiency initiatives implemented in recent years. The integration of SolidAl led to a reevaluation of inventories in the acquired businesses, having a negative impact on operational EBITDA of approximately EUR 4 million in the third quarter. The margin for the quarter ended at 7.6%, compared to 8.4% in the same quarter last year.

From a market perspective, demand for medium voltage cables remained robust, particularly in the Northern and Western Europe, primarily driven by the continued solid demand in the power distribution segment. As a company, we are well positioned in this market. And during the third quarter, we secured 2 new framework agreements in Denmark and the Netherlands, as a testament to this, with durations of 5 years and 8 years respectively, reflecting the positive market development. And also last week, as I mentioned earlier, we extended the framework agreements with RTE to deliver 90 kV, 225 kV, and 400 kV onshore power cables and accessories and installation from '26 to '28 to upgrade the French grid.

Last, we turn to the Service & Accessories business line, which again this quarter delivered solid organic growth of 25%, mainly driven by higher activity levels and satisfactory execution in the service business. Accessories in isolation delivered slightly higher revenue.

Operational EBITDA increased to EUR 8 million up from EUR 5 million last year due to improved profitability in the service business. The margin for the quarter was 12.8% and when comparing this to the 7.1% more than in Q2, please note that last quarter we executed a large offshore repair work related to one legacy service agreement that had an unusual low profitability.

Despite the higher revenue in Accessories driven by high-voltage accessories, operational EBITDA was slightly lower compared to last year, as we continue to ramp up production and capabilities meaning excessive OpEx costs.

With this, I've concluded my part of the presentation and I will now hand over to Line for a look at the financials.

[Line Andrea Fandrup, executive]

Thank you, Claes, and good morning to everybody from me as well. I'll now walk you through NKT's financial highlights and we'll start on the income statement.

Starting with revenue, as Claes mentioned, organic growth was 25% in Q3. This was primarily driven by 42% organic growth in Solutions as a result of our investment in both capacity and capabilities. Additionally, the acquisition of SolidAl contributed EUR 28 million equal to 6% growth to the top-line of this quarter.

The higher revenue translated into a record high quarterly operational EBITDA of EUR 93 million, mainly driven by Solutions, but all business line increased EBITDA compared to the same quarter last year.

The margin of the quarter was 14.2%, a decrease compared to Q3 2023, which had the highest quarterly margin last year. Compared against Q2, the margin was unchanged.

Depreciation and amortization were slightly higher than last year, mainly due to SolidAl. That brings us to EBIT, which amounted to EUR 66 million an improvement of EUR 2 million compared to the same quarter last year. The EBIT margin was 10.1% for the quarter.

Financial item was an income of EUR 5 million in Q3 driven by interest income derived from our cash position. This positive effect was partly offset by losses related to exchange rate fluctuations and other financial items. Compared to last year, financial items improved as Q3 2023 was negatively impacted by exchange rate fluctuations primarily related to unrealized hedges.

Taxes for the quarter amounted to EUR 14 million reflecting higher earnings level and a tax rate of 20%. For the first 9 months of the year, the tax rate was 14%. This leaves us with a net result of EUR 57 million and as NKT Photonics was divested during Q2, there was no effect from discontinued operations. The net result more than doubled compared to last year.

Our full-time employee continues to increase reflecting our growth journey and investment in capabilities. The inclusion of SolidAl added around 430 employees to NKT.

Now let's turn to the next slide and look for the cash flow. So the free cash flow in the third quarter was negative standing at EUR 134 million as EBITDA was more than offset by cash outflows from changes in working capital and investments. Free cash flow for the first 3 quarters of the year amounted to EUR 248 million.

The development in net working capital was a result of normal fluctuations in Solutions related to the phasing between milestone payments and project execution.

Investments reflecting the initiated investment programs, mainly in Solutions and Applications, continued to ramp up in the quarter amounting to EUR 115 million. This is nearly double the EUR 60 million in the same quarter last year and also an increase compared to Q2.

Cash flow from financing activities was basically flat for the quarter compared to an inflow of EUR 357 million in Q3 2023 when we concluded the write issue. Overall, this led to a negative free cash flow of EUR 134 million for the quarter, but a positive EUR 248 million year-to-date. Including proceeds from the divestment of NKT Photonics, net cash flow for the first 9 months of 2024 was EUR 471 million.

This leads me on to the balance sheet highlights at the end of September. Working capital increased by EUR 83 million compared to the end of Q2 2024, due to the natural phasing effects in Solutions mentioned on the previous slide, when capital stood at negative EUR 1.1 billion at the end of the quarter.

ROCE improved further to 31% for the quarter, up from 15% last year and driven by increased EBIT, which more than offset the higher level of capital employed. Capital employed increased by EUR 182 million to EUR 734 million compared to in Q2. This was due to a combination of investments and working capital development.

Looking at the development in this quarter, it is encouraging to see that the earnings improvement is filtering through to the ROCE. ROCE will continue to vary depending on the project mix and production, timing of payment from customers and a higher capital base from ongoing investments.

During this year, we've seen a gradual increase in CapEx. This development is expected to continue into Q4 and as the investment progress, we also expect another step up in 2025.

The net cash position slightly reduced to EUR 1.1 billion and our financial position remains robust as is required to fund ongoing investments across the business continuously. This strong financial foundation allows NKT to continue progressing on its growth journey in the coming years.

The value of NKT issued guarantees increased to EUR 2.5 billion at the end of Q3, up from EUR 2.3 billion at the end of Q2.

Let me turn to the financial outlook for 2024. We maintained the outlook for 2024, but we now expect that NKT will end the year in the upper end of the intervals. The expected interval for revenue is EUR 2.33 billion to EUR 2.43 billion and the operational EBITDA interval is EUR 310 million to EUR 345 million.

The outlook reflects our financial performance through the first 3 quarters of the year and expectations for the remainder of the year. As usual, please pay close attention to the assumptions behind the outlook. These assumptions include satisfactory execution of high-voltage projects, stable market conditions in the Applications segment and stable supply chains with limited disruptions along with access to required labor, materials and services.

NKT is a project company and we are increasingly exposed to production and installation risk in our Solutions business. In the projects we are constantly monitoring the risks that could have an adverse effect on our financials. This, of course, remains key also in the last months of the year.

So before we open up for Q&A, I'd like to reiterate the key messages for Q3 that Claes highlighted at the beginning of the call. Q3 was another good quarter for NKT. We delivered impressive organic growth of 25% and for the eighth consecutive quarter, both revenue and operational EBITDA grew by double digits. This growth resulted in an operational EBITDA of EUR 93 million, the highest quarterly result in NKT's history, underlying the positive development we've seen in recent years.

We've initiated the integration process of SolidAl, which progressed as expected during the third quarter. Our expectations and findings from due diligence process have been confirmed and SolidAl is a great addition to NKT that will enable us to meet the demand in the medium and high-voltage segment up to 225 kilovoltage.

Finally, we continue to see good commercial momentum in Applications. During the third quarter, we secured 2 longer duration framework agreements with local DSOs in the Netherlands and Denmark. And here in November, we extended framework agreements with RTE in France.

This brings me to the end of the presentation. We're now ready to take your questions.

[Operator]

[Operator Instructions] And now we're going to take our first question. And this comes from the line of Casper Blom from Danske Bank.

[Casper Blom, analyst]

I have a couple of questions and I'll try to take them one by one, so you don't have to write down too much. First of all, on the subject of the provision in Solutions here in the quarter, I understand that there is client confidentiality and so forth, but I think it would be very helpful if you can say anything that can sort of support the thesis that we will not see additional provisions and also, that this is an isolated issue that is not sort of related to any structural challenges within the division. That's the first one, please.

[Claes Westerlind, executive]

Thank you, Casper. Yes, it's a good question and I understand that you ask it. If we just take a step back first, more indications in general and how they are dealt with just to leave you with that question and common understanding together with us. Either we or a customer find something that doesn't operate as planned. Therefore, there, after, of course, we would do then a detailed technical root cause analysis that will be followed by commercial and also execution considerations, what to do about it and what the remedies and actions are. And ultimately, of course, there is a customer side to it as well where a bilateral agreement needs to be struck depending on what the conclusions are and what the insights are from the 2 parties. So that's the -- just we have a feeling for the process as such.

Now the provision taken, I mentioned it's not material from a group perspective. It also represents for the moment, the more likely the outcome -- the financial outcome for NKT. It is related to the same amount of provisions that were taken during Q4 last year, so the same part of these AC onshore legacy products as we called them at the time, I believe, which was connected to a specific technology. So AC technology, onshore cables and also specific production time back a couple of years in time. I think hopefully that will help to give you some comfort.

Now as far as can nothing else come, we are not in the process that I just mentioned, we are not at the end of that process. But what I can say, since it is related to a confined area of the history and a specific amount of projects and also technology, we are not overly concerned about this topic.

[Casper Blom, analyst]

All righty. Fingers crossed. Then a second question going to Applications. You mentioned that there is this roughly EUR 4 million impact from the revaluation of inventory from SolidAl. If I adjust for that, you end up with an underlying EBITDA margin of just around 10% for Applications. Is that a sort of good expression of the going rate in Applications today with the mix that you currently see between high and low-voltage and with the inclusion of SolidAl?

[Claes Westerlind, executive]

Thanks, Casper. Yes, I think it is -- I think, when we reflect on the performance of Applications, I think we mentioned it before as well. The power distribution segment, so which is the majority of the business line roughly around 60% enjoys a good momentum for the moment. So there is a robust demand and also the price levels are sustainable. From a construction perspective, which is connected to 1 kV copper and also building wire, there we see a continued subdued and actually slightly even more depressed situation than what we experienced the same quarter last year and also in Q2 this year. So I think that's the underlying status of the business line.

Now as far as projecting the business lines into the future, you asked the question in a different way now. But also taking seasonality into account, what we have said historically is 7% to 9%. We have seen this business line over performing lately in relation to those historic expectations. But both me and Line have also been careful in establishing a new level of operational expectations on the EBITDA margin, saying that we want to see the business line proving itself and us proving ourselves for a couple of quarters before we are to determine whether there is a new corridor.

But going back to your question, I think your adjustment of the profitability for the quarter alone, I think is not incorrect, if I put it like that.

[Casper Blom, analyst]

Then the last one from my side, maybe one for Line here. But on the CapEx projects that you're currently running, the big ones, so the Karlskrona factory, the new vessel, the expansion of Cologne and the medium Baltic expansions that you're doing in 3 places. Could you sort of update us on how much of that CapEx is left when we end '25 -- '24? So out of the EUR 1 billion and out of the 2x EUR 100 million, how much is then sort of left? And how much have you taken out of that?

[Line Andrea Fandrup, executive]

Yes. Thank you, Casper. I think not being specific, let's say, about percentages, it's fair to say that we have a majority of the investments ahead of us still. So you see a pick up in the quarter, and we promise you that this will continue the rest of the year, but you will see a further elevated level for sure in 2025 and 2026 related to these programs.

[Casper Blom, analyst]

So in overall term, one should expect that the CapEx number in '25 is higher than in '24...

[Line Andrea Fandrup, executive]

Absolutely.

[Casper Blom, analyst]

That -- yes. And then also higher in '26 than in '25?

[Line Andrea Fandrup, executive]

I would say that '25 looks at current to be the highest, but we also need to still, let's say, close out some of our contractual agreements around when exactly the cash we passed on to the supplier for the equipment and all that. So we do see some tips on this. So not being too specific, '25 looks to be the highest yield currently, but it could change.

[Operator]

And the question comes from the line of Lars Topholm from Carnegie.

[Lars Topholm, analyst]

Yes. A couple of questions from me also. One goes to what we call the legacy business of Applications, so ex SolidAl. Q3 is obviously seasonally a low quarter. Can you put some comments on what the incremental margin is, for example, if you related to the gross margin just to get an understanding for how that margin is affected by the quarter being seasonally low? And maybe can you put some words also on the EUR 28 millin revenue in SolidAl? What kind of growth is that? And given SolidAl has a 14% margin, is there any sort of learnings from SolidAl you can transfer to the rest of applications to bump margins there?

And then a second question, which probably doesn't surprise you, but your long-term ambitions are, I think, long overdue for revision since assumption have been significantly changed. What is the proper timing for you to come out with new or revised long-term ambitions? And what internal exercises do you need to make before we get to that point? Is it a Q4 thing, for example?

[Line Andrea Fandrup, executive]

Lars, Line here. Thanks for the questions. I think Claes and I will share them a bit. So if I just I just want to jump on your first question and make sure I heard you right. You were asking about the seasonality of the Application business and how to reflect about the earnings level of the quarter compared to that...

[Lars Topholm, analyst]

Exactly.

[Line Andrea Fandrup, executive]

Yes. I would say so if you're clean for what we shared around the revaluation of the inventory. And then Q2 is always, let's say, a very strong quarter coming. July is a low month and you have Q2 and then you have Q3, Q4 can be a low quarter also due to the sample sales, but it very much depends. Now our portfolio is changing also with the medium voltage in there, which has a different kind of offtake compared to the construction sector. I think we are seeing different dynamics. So I'm not specific on margin here, and I and I know that because I don't want you to lean against any mathematical form when we're actually trying to predict this. But if you look historically, you can see some seasonality. But looking ahead, I would also see, say, it really depends. That was not, let's say, on the data point here, but more in general.

[Claes Westerlind, executive]

Yes, I think...

[Lars Topholm, analyst]

Can you -- no, sorry, Claes, go ahead.

[Claes Westerlind, executive]

Yes, sorry. No, I just wanted to add your reflection there on learnings from SolidAl going to their margins, et cetera. And I of course, we expect synergies. And synergies, we derive partly from the fact that we will be able to inject capabilities of NKT into SolidAl, but also the other way around.

And -- but I think, of course, reflecting also on their margins compared to our own perimeters, one has to keep in mind that it is a different cost base in Portugal, but they're also serving a different product mix than what we are doing from the existing perimeter. And not only different product mix, but also into different market segments. So they are difficult to compare like-for-like, but I agree with you. And I think this is also, of course, in our plans that we are both trying to interject NKT's abilities into SolidAl, but indeed also the opposite.

I think on the long-term ambitions, Line, I don't know if you want to say anything there, but if I start at least, Lars, I think you've heard us say it before in these forums that we, in essence, agree that this is something which is to that we want to reflect upon together with yourselves.

And the timeline for that, I think we have also said that sooner is better than later, but we also want to make a good process internally, which means it's not a matter of estimating or guessing for me and Line. This is a bottom-up process in NKT, where we want to have a look at this from ground up. And when we are through that process and when we are ready to announce it, then we will do so. And I'm not prepared to exclude that this may happen in Q4.

[Lars Topholm, analyst]

So Q4 is sooner. That's what you're indicating.

[Claes Westerlind, executive]

No. I said I don't exclude that it can happen in Q4.

[Operator]

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

[Claus Almer, analyst]

Yes, also a few questions from my side. I will do them one by one. So the first is for you, Claes, about the pipeline. How do you see the pipeline progressing? And maybe also a wording about 2025? It seems to be another strong year when it comes to awards. That will be the first one.

[Claes Westerlind, executive]

Yes. Thank you, Claus. Pipeline in general, I would say that we have had good activities for the last couple of quarters, if you look into the tender organization. But I think if anything, I think it has intensified a little bit lately in terms of tender and work, also including negotiations. So I think that bodes well.

And of course, it's also evidenced by the EUR 15 billion awards so far down this year to be compared with the modesty of our earlier statements, more than EUR 10 billion of average market between '24 and 2030. So clearly, I think the market has manifested itself this year. But also connected to the comments I made during the presentation earlier that some of this also stems from capacity award bookings from last year.

Now looking forward, we will remain, when we look at the quantified statements with our statement about average market sizes to be awarded, also looking into 2025. But I would say with the activities that we see for the moment we have no reason to be concerned about 2025.

[Claus Almer, analyst]

Doesn't that look to be an above average year as it looks today?

[Claes Westerlind, executive]

I would refrain from saying either yes or no. I think we will do some reflections potentially about this as we come into the announcement for the year, Claus. And I also -- I think it's even more difficult to project now year-by-year lately, I have to say, because of the fact that the products are getting bigger and bigger as well. So by a single product shifting, a year can really change or a framework agreement can really change the magnitude of the year. And that's why we try to shy away from annualizing the market sizes and more looking to average over a certain period. We believe that's a more adequate reflection. Otherwise, we risk to trick ourselves and also perhaps even to mislead you yourselves, if we try to be too articulate on annualized market sizes.

[Claus Almer, analyst]

That's fair enough. Okay. My second question goes to the guidance and not least the change wording around your guidance. So now you expect to end in the upper end of the ranges. When I try to say full year minus 9 months, Q4 looks to be another very strong quarter. Will this be supported by all 3 divisions? Or is -- I know it will be difficult to have this performance without Solutions having a good Q4, but maybe you could put some more color, given the Q3 performance, as to what we should expect for these 3 divisions?

[Line Andrea Fandrup, executive]

Yes. I understand the question. And then I'm just reflecting about which kind of color can we give without being very specific on 3 months of business line result that we don't guide on. I think you -- installation activities, you can always reflect about in Solutions that is a lower level usually throughout the wintertime. And as just mentioned, also usually lower activity in at least December of the application construction sector.

Then we have a mixed portfolio in Solutions and then we also talked about it last quarter, but I guess in general, we mentioned it that it very much depends on the mix of what we're executing on in the Solutions that eventually turns out to be the profitability.

And then for services, I would say, we see good traction on the medium voltage, and we, of course, we expect and hope to see this also continue into the last quarter of the year. This is probably [ indiscernible ]

[Claus Almer, analyst]

So okay. Not that I'm more understanding how Q4 may be. So maybe to ask the question in a different way, is there any of the 3 divisions where we should be including a seasonal slowdown versus Q4 last year? It's a different pattern versus in the fourth quarter last year, that's probably the way to put it.

[Claes Westerlind, executive]

No, I don't think we can expect just from a seasonality expectation, I think unless the winter is more or less cold, et cetera. I think what we can say is what I maybe initially also said about Applications is that the construction market is, in relative terms, a little bit weaker now than what it has been historically as well. So I think that's maybe something that deserves to be mentioned. I can also, in the same sentence, as I say that, also point out that it's also a very modest part of the NKT business in total. But I think it deserves to be mentioned. But other than that, it is of course important to underline what Line said about the project mix. So depending on what we install or what we don't install, that can, of course, make a difference compared to Q4 last year. But other than that, I don't think there is no material differences that the survey pointed out.

[Line Andrea Fandrup, executive]

No.

[Operator]

[Operator Instructions] And now we're going to take our next question. And it comes from the line of Akash Gupta from JPMorgan.

[Akash Gupta, analyst]

Yes. I have a few questions as well. The first one I have is on these legacy onshore high-voltage projects. So as you said -- I mean, by the way, how you describe it, it appears to me that these projects has been finished, but maybe they are not working as the same as the way they should work, which is why you still need to go and fix some of these. Is that the correct interpretation?

[Claes Westerlind, executive]

Yes. I think we try not to be too specific, Akash, but I cannot say that you're wrong in that description. So these are produced back in time. They are not in production for the moment. So yes. I wouldn't correct your statement.

[Akash Gupta, analyst]

That's very clear. And then I have a question. I mean, in Q4 conference call earlier this year, you made a remark saying that this year you have some solution revenues coming from third party production in the U.S., and that is something that is going to drop off in 2025. I mean, we are right now in almost middle of November, so I assume you may have a more visibility on how this change is going to be between '24, '25. So I'm wondering if you can provide any comment on how should we think about this impact and how would we expect underlying growth going into next year?

[Claes Westerlind, executive]

Yes. I think we will be careful Akash into providing an outlook for next year at this time. There will become a point in time where we will give you a more high-resolution picture on what we expect for '25. But I can only reiterate and I think you summarized quite well yourself that the Champlain product enjoys external revenues to a bigger extent than perhaps what is normal.

And also, that impacts the Solutions business line in total, driven by 2 factors. One is external cable production and the second one is external installation scope to a larger extent than normally in our products. For example, Victoria is not being used in that project, but also driven by the fact that installing cables in the U.S. is more expensive than installing cables in Europe.

We have also said that this will be excessive, I don't know if excessive revenue generation is the right word, but it will be generating revenues to a bigger extent this year and next year, but it's fading off as well. And I think we will remain with those statements until we can give a better resolution on next year for you.

[Akash Gupta, analyst]

And maybe putting it another way, you don't see any need to change consensus numbers because, I guess, you compile consensus so you know what market is expecting. And given the fact you didn't mention this in Q3 conference call, we should assume that consensus is not wrong in their growth into numbers.

[Claes Westerlind, executive]

I think it's a super good question, Akash. I think I would step on thin ice if I start to reflect about whether consensus is right or wrong. What I can say is that there was a good reason and there is a good reason for us spending quite a bit of our time when we went into this year to reflect about this impact that these external revenues will have on our revenues, especially in '25 and '26. So I think that's -- the merits of that still stands. So I think I will leave it at that rather than to point to whether consensus is right or wrong.

[Akash Gupta, analyst]

And then my next question was on your installation and capabilities because currently you have 1 vessel and then in future you will have 2. If you look at 1your current level of installation activity, can you give us a rough indication like, how much of installation you are able to do on your own and how much you are utilizing for third party? Because I would assume if you have more of your own installation, then margins in that quarter may be better than, let's say, if you have to use third party vessels to install cables. So any high level view that you can give us that would be great?

[Claes Westerlind, executive]

Yes, super relevant and super good question. I would have to think through a little bit how I answer it. But what I can say in general, how we think about our capacity, if you take the biggest perspective that you can on it, cable production and installation capacity. And with installation capacity now, I mean, cable laying capacity. We do not want to be or to have a situation where the limiting factor is the installation capacity. So we will set the limitation according to the cable production capacity.

So in essence, we plan with the 2 vessels that we have that we will be able to lay the cables that we produce. Now having said that, this is then the most general statement. And of course, as you are well aware, there will always be cases in nearshore operations. There can even be products like Champlain where you simply cannot do it for one or the other reason.

So I think the base intention from our side is to lay the cables by means of our own resources. And only when we can optimize the final cost for the customer and this is the right thing to do for NKT will we reside or resort to external installation cable lay resources.

[Akash Gupta, analyst]

And my last question is for Line on working capital. And if you look at your Q3 working capital and if you have to think about year-end working capital, is there anything that we should be aware of in terms of any milestones, whether it's down payments or advances or maybe any ramp up that you that might bring some headwinds on working capital side?

[Line Andrea Fandrup, executive]

Thanks, Akash. Good questions and also something we talked about last quarter, so understood. If you look at our Solution business, I know I'm repeating myself a bit, but it's equally important still also reflecting about potential awards or no awards rest of the quarter or rest of the year, that will, of course, eventually impact our working capital position. So you should reflect that there can be, I would say, rather large swings in the net working capital very much related to solution. A EUR 100 million to EUR 150 million would not be out of proportion of something we see.

And then combined with the fact that Q4 usually is a quarter where the net working capital position for some of the other business line is improving, I would say if you look at now and look at year end, you will -- you could see fluctuations in the range I just mentioned, but still a very solid negative level of net working capital we should expect for year end.

[Operator]

[Operator Instructions] And now we're going to take our next question. And it comes from the line of Lucas Ferhani from Jefferies.

[Lucas Ferhani, analyst]

So I'll have a few. I'll take them one by one as well. And firstly, just on Solution. If you look at sequentially, the revenues are quite higher versus Q2. Obviously, the margin has dipped. What's your kind of view on maybe the number one impact on sequentially what has driven the margin? Is it mainly mix from kind of installation? Is there a change in maybe the subcontracting scope? Or maybe it's simply the provisions? So how do you look at the sequential change?

And also in Solution, if we can get an update on the ramp up cost, I think you mentioned that was a headwind in Q2. Have you still seen the headwind in Q3? Is it similar to what you saw before? I think you talked about 100 bps last quarter.

[Claes Westerlind, executive]

Thank you. Thank you, Lucas. Also, relevant question, obviously. First and foremost, Solutions profitability was impacted by the provision that we also discussed earlier on this call. So I just want to underline that again. It was not material on the group level, but of course it did impact the Solutions profitability percentage.

Now apart from that, there are different things that impacts the profitability of Solutions. And one of them is the portfolio or product mix, as Line was referring to. And this can change quarter-over-quarter. And being a simple engineer, I've also previously on these calls reflected on that it is difficult to just judge the Solutions profitability on a quarter-by-quarter. Things can be the same this quarter as last quarter, only that the mix of products that are in execution is slightly different and therefore the ultimate profitability can be quite different, even though all things equal.

Another aspect that also can have considerable bearing on the profitability is the risk and contingency maturity dates. So in our products, we are working of course with managing a lot of risks. To these risks, there are buckets of risk money connected When we are not managing to mitigate the risk, so that we don't use the money, then we -- so that we have to use the money, then of course this is absorbed as cost. But when we manage to successfully mitigate the risk, then the risk money can be released to profit, which can also have an impact on the profitability in the given quarter.

So I would say with that, and maybe the other side being the growth that you can see comes and stems mainly from the addition of capacity when you compare to the third quarter last year, because that was in the end of that quarter, where we started in a serious manner to utilize one of the extrusion lines that was added within the previous investment product. That drove up the volumes. But of course, what's speaking against us now is that we continue to face you mentioned it as headwinds, I would say, maybe I would use another word, but of course, we are facing ramp up costs on the OpEx side, which has been doing together with the [ CAS ] -- the new investment product ahead of time, building both white colors and blue colors and training them for the growth that is to come. And that's counterbalancing potentially the scale benefit that you would expect from higher revenues.

[Line Andrea Fandrup, executive]

So I could just add here, it's a little bit what Claes is already alluding to. But the 1% EBITDA margin, let's say, erosion of the rainbow is still what we see. And so into '25 a little bit, you should expect at least something like this as we continue to secure, let's say, the preparedness for the expansions.

[Lucas Ferhani, analyst]

That's super helpful. Secondly, on Applications, can you discuss a little bit the weaker market momentum? Obviously, construction has been weak in a kind of difficult spot for some time now. I think before we thought it was kind of on trough level. So seeing weakening from here seems a bit alarming. Do you think it's kind of a short-term kind of Q3 impact you're seeing? Do you still expect that from here we're probably seeing an improvement maybe over a longer time frame? How do you look at that end market now?

And also just in Applications, in terms of the inventory adjustment, are there also integration costs in SolidAl above that EUR 4 million inventory adjustment? Are there other kind of costs that are nonrecurring above that level? If you can give us that number.

[Claes Westerlind, executive]

Yes. If I start on the construction side and then maybe Line can complement on the integration costs. Construction wise, I wish I knew when the tide is turning. And if I were to have that in my hand, then I would be happy. But when I turn to at least places like Eurostat and looking at the expectations on the construction market, this is also what we have based our statements on when we reflected, I think, 3 quarters ago, we said that we will continue to expect the construction markets to be weak and in recession for the remainder of this year. And then at least what Eurostat is telling us is then that maybe they will turn to growth during the course of next year. But I think we remain super humble here and just reflecting and observing what is happening there. So I think the changes we saw now in Q3 versus Q3 last year and also in Q3 versus Q2, I would say were not alarming, but we're observing a little bit of a weaker volume and pricing situation versus preceding quarters. But with reference to the future, I go back to what I just said there, admitting it's not an easy one to predict.

[Line Andrea Fandrup, executive]

And then I can add here on the SolidAl integration cost. The one mentioned on the inventory revaluation is a very specific one of EUR 4 million. And this is a very normal also as a part of the integration cost and it hits Q3 very much in full because we reevaluate the inventory. And then we have the turnover of the inventory, of course, in relation to we're actually selling the products. And then you get the P&L impact. And here we got more or less the full impact in Q3 of this. We are unplanned with SolidAl integration-wise as expected. So there's not a bigger, let's say, impact foreseen that likewise this one.

[Lucas Ferhani, analyst]

Just to confirm on those integration costs, I think there was -- you talked about some costs to deliver the synergies. Were there some of those costs already in Q3 above that inventory adjustment or not necessarily?

[Line Andrea Fandrup, executive]

When you look at the Application as a total, and that's what we report on, right? Underlying in SolidAl is, of course, different activities related to integration that also has a cost bearing. But this is really insignificant beyond what we mentioned here. Therefore, we also don't spill it out, Lucas. But as long as the integration is ongoing, we will have an associated cost as in any kind of company integration.

[Lucas Ferhani, analyst]

No, perfect. That's helpful. So the last one, just for the provisions for risk in onshore, just to confirm. So there's an element of it being an ongoing process, and so it's not completely ruled out that there could be further, maybe one way to look at it would be when you look at the volumes of those maybe products that you sold and also the number of customers that have been concerned, do you feel like you've maybe dealt with a lot of the potential issues from it? And also, I guess, are they all concerned with that issue or it's only a small batch within all of those kinds of onshore products you've sold that are concerned with the issue?

[Claes Westerlind, executive]

Yes, I understand the will from your side to get even more details around it, and I sympathize with that. Like I said before, it is confined to a certain period of production, which has not been recent. It is a process, I can confirm that, and we are not at the end of that process. But you also heard me say that we are not overly concerned. So -- and I hope that you can grasp something from that part as well. Of course, I cannot rule out, as per the earlier question, that we would provide for something more. But if it would be really material from a group perspective, then I think you would not hear me express that I'm not overly concerned. But we also want to try to be as forthcoming as possible and be able to tell you when the process is fully finalized.

[Operator]

There are no further questions for today. I would now like to hand the conference over to your speaker, Claes Westerlind, for any closing remarks.

[Claes Westerlind, executive]

Yes, not much extra to say. I think we are very pleased with that you called in, you spent the time with us, and we are also proud of the NKT organization, which once again is able to show significant growth. And I think it doesn't become visible in calls like these how much effort and work that goes into by the organization to be able to enable this kind of growth. So we thank you for the interest, and we thank you for your attention.

[Operator]

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