NKT A/S : Transcript Q3 2022

Q3 Earnings Call

Wednesday, 16th November 2022

NKT A/S Q3 Earnings Call

Wednesday, 16th November 2022

Business Overview

Alexander Kara

CEO, NKT A/S

Key messages Q3 2022

Yes, good morning everybody, thanks for joining the call where we present our Q3 result. I have here with me in the room my CFO, Line Andrea Fandarup, 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 Markets Day, which we hosted on 22nd September. As such, maybe not too many surprises in the Q3 result. 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 nine months and the 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 €4.5 billion and we've had some orders from onshore, AC onshore and variation orders on the fixed existing projects. We issued a green hybrid bond of €150 million to strengthen our financial position for further opportunities and to grow. We also held[?] our Capital Markets Day on 26th September where we also announced our updated strategy, what we call ReNew Boost, where we gave an upgrade of our mid-term guidance and outlined the way, how we want our plans to go forward.

I had 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 transporting power from offshore wind to shore for interconnectors and for [inaudible]. Not only that we contribute as NKT to Scope 1 and Scope 2 but also to Scope 3 reduction. I will come later back to this. It was a quite interesting event, the participation, and I think as I said, NKT and the cable industry can contribute to the decarbonisation of society, which is an important goal.

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

Performance in Q3 2022

If we come to the Q3 performance, we grow in Solutions and with this, the underlying operational EBITDA. Last year we had - in the same quarter, we had a one-time impact of €20.7 million of insurance claim, which we settled, which of course we have not this year. And this had an impact on the numbers, but overall we improved.

The Application results I would consider as unsatisfactory. Even so we could increase this, but this was purely by price increases, in volume [inaudible] produced and cable [inaudible] were reduced. And the reason for that was the higher input costs, and we may come back later in the presentation.

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

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NKT A/S Q3 Earnings Call

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

Solutions - Q3 2022

If we come to Solutions, in the quarter we executed several projects and with this, we generated revenues and the growth of 10% and an improved EBITDA of €24 million. The Victoria was busy with several jobs, Shetland, Troll and Doggers[?], and there was good utilisation.

We have continued with expansion of our factory in Karlskrona and Cologne and we inaugurated our extrusion tower in Karlskrona on 27th October, and we plan now in November to produce the first cables with 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 UK and the first on 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 be aware, CO2 emissions, 95% or more is from copper, aluminium and so on production. Only 5% or less is in Scope 1 or Scope 2 of NKT or of cable production. So very important step where we work with the entire supply chain from the mine with the rock[?] producer, Electrovaya [inaudible] with the customer, SSE, [inaudible] and any [inaudible] to make that happen. It's a big step for the team[?].

High-Voltage Market Development

If we look at high-voltage market, we have received various AC onshore and variation orders and we were selected as turnkey supplier for East Anglia Three, which is not yet in the backlog a firm order. We wait here for notice to proceed and until the customer's 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, with an order value of approximately €90 million market price and then €80 million standard[?] metal price. This will come this quarter, Q4, to the backlog.

Overall, we look at the first nine months, €7 billion on orders have been awarded. Out of this, NKT had roughly €2.1 billion, or actually a little bit more than €2.1 billion if you take Champlain Hudson Express with around €1.4 billion, SuedOstLink 2nd System, so this [inaudible] €700[?] million, €2.1 billion. This is around 30% 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 €8 billion on project awards and going forward also for next year and the year after, we see €7-8 billion, a strong market to be continued.

High-Voltage Order Backlog

We disclosed here how we execute the backlog 5% for the remaining part of the year, for Q4, and 25% for 2023, and 70% for 2024 and onwards. These are round numbers and again this is a backlog, this does not include East Anglia Three or Hertel and so on. And obviously I have read[?] this morning the first reports from the analysts[?].

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

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NKT A/S Q3 Earnings Call

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Applications - Q3 2022

Applications, I said already a very unsatisfactory quarter, weak quarter, driven by increased input cost. Even we could increase prices but the volume in [inaudible] cables has been reduced. We worked 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.

Just to give you one example, we have received, for example, at the end of the quarter a massive price increase from a supplier, effective the 1st of the next month. So then we can imagine, if you get such letters with three, four 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 customers and also see how we can improve the situation with our suppliers.

So, we see a decline in construction-related business, meaning building wire 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 you look at the medium voltage, the demand is high, driven by the electrification of the society, the decarbonisation and all of these actions, so that is positive.

Service & Accessories - Q3 2022

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

What is new and what we have seen here are more and more concerns from customer, is that they're concerned about their critical infrastructure, or if you're talking about interconnectors and - but also offshore wind. We have all been following the news of Nord Stream explosion and in fact, one of the explosions north-east of Bornholm in Denmark was less than one kilometre away from an interconnector between Sweden and Poland, which was at the time under maintenance. And customers are getting concerned about the critical infrastructure and this is something what the cable industry and the customer needs to take care, how can this more be secured in the future, going forward. That's some new development in the market.

So, good development and we continue with our activities to move Accessories from Cologne to Alingsås and we see here, as we said, good development.

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

Financial Highlights

Line Andrea Fandarup

CFO, NKT A/S

Income Statement: Improved Revenue Driven By All Three Business Lines

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's corresponding to 9% growth, so we are tracking well here. All business lines are supporting this still, which is also good to see.

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And operational EBITDA, important to note, this is the insurance claim from 2021, which is adding up on the €45 million from Q3. If you subtract that actually, you will have a good underlying operational performance and also an improvement on the margin here.

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

We are still continuing to ramp up on the FTEs. We are driving the footprint changes continuously as we have announced, both for - we are coming to the end of the - not fully there but coming to the end of the application footprint moves[?] on the factories. And then from Cologne to Czech, we are also continuing that journey, meaning we ramp up at least to be ready at the receiving end and eventually at a later point, we ramp down.

Balance Sheet: Leverage Ratio Remained Below Targeted Level

So I think that was it on the income statement. If we then go to the balance sheet highlights, you will note that working capital, if you disregard the hedges, we are having some iteration compared to last quarter, and this is primarily due to a build-up on inventories in the Applications and in general, also securing that we have our raw material stocks, we're ready to produce. We also some phasing of milestone payments in the Solutions business.

And then on the contrary, we are seeing some accounts receivable improvements due to collection of debts in the Applications business.

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

Cash flow was at a lower level, very much from the investments also. So we see our net interest-bearing debt increasing with a leverage of 0.6 times EBITDA. As Alex also mentioned, we issued the green hybrid securities, €150 million, more or less replacing the hybrid we had in place.

Cash Flow: Negative Free Cash Flow as Investment Programme Continued

So next to the cash flow statement highlights. The cash flow from operating activities was slightly negative as the earnings contribution was outweighed by the changes in working capital and the continued investment flow, which you see here in the year-to-date number, 144, compared to 123 rest of year. So we are closing out on the investment and the expansion in Cologne, we are continuing in Karlskrona, as you remember from Q2, with the new tower, the green [inaudible], now with the second extruder coming there. And you'll see more of the investments in that throughout 2023 also.

Financial Outlook with Continued Growth Expectations

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

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