NKT A/S

Good morning to everyone, and thank you for joining us on the call today. My name is Claes Westerlind. I'm the CEO, and I will have the privilege of presenting NKT's results for the second quarter of 2014 today. Next to myself, I also have our esteemed CFO, Lina Fandrup, who later on in the call will take an in-depth look at our financial performance in Q2 and also throughout the first six months of the year. Before we go into the presentation, I want to draw your attention to the regular disclaimer that both the presentation from myself and Line, together with this material, that it's containing forward-looking statements. And with that, turning now to our key messages for the quarter. Overall, we recognized strong operational and financial results in Q2, with continued double-digit growth in revenue and operational EBITDA for the seventh quarter consecutive quarter. Driven by positive contributions from all three business lines, we delivered organic revenue growth of 29% versus Q2 last year. Increased earnings from solutions and applications led to an operational EBITDA of 86 million euros in the second quarter, which is equivalent to a margin of 14.2%. Profitability in absolute terms and margins were both quarterly records for us. and we're 1.8 percentage points higher than the 12.4% that we delivered in Q2 last year. Supported by a number of relatively small orders, including variation orders to existing projects, our high voltage order backlog remained at a high level of 11.3 billion at the end of the second quarter. Free cash flow was 398 million euros in Q2 this year, which was driven by a higher earnings contribution as well as a favorable development in working capital and solutions. Excluding acquisitions and divestments, free cash flow in the second quarter was a very decent 542 million euros. On top of this strong financial performance, the second quarter was one of strategic progress for us as well. Photonics was successfully divested during the second quarter, marking the final step on our growth journey towards becoming a focused power cable solutions company. Furthermore, we also announced the acquisition of Solidal, which immediately enhances our ability to serve power transmission and distribution operators with end-to-end grid solutions. Both transactions have strengthened NKT's market-leading position across voltage levels and have the company well positioned for the future. Turning now to NKT's financial performance in the second quarter and the first half of this year. Double-digit growth, both in revenue and EBITDA, was primarily driven by expanded capacity in solutions and a record quarter in applications. Revenues increased to $605 million in Q2 and $1.1 billion throughout the first six months, corresponding to an organic growth of 29% and 28% respectively. This was in line with the trajectory that we have demonstrated over the preceding six quarters and that we continue to be on as a company. In solutions, execution of our commercial products was overall satisfactory, which led to 33% growth in revenue and 60% growth in operational EBITDA. The applications business line continued to benefit from positive sentiment in the power distribution grid segment. and various efficiency initiatives implemented in the recent years across our production sites. The result was an operational EBITDA of 21 million, a quarterly record for applications, and also equal to a margin of 11.8%. And last but not least, organic revenue growth in service and accessories was 90% due to an increased activity in the service business, partially offset by slightly lower revenue in accessories. Despite higher revenue, the operational EBITDA margin decreased to an unsatisfactory level of 7.1 in the second quarter. Profitability was impacted by an increased cost base reflecting higher employee headcount, as well as work related to one legacy service agreement, which was executed at an unusually low margin. Work related to this service agreement was successfully and physically completed during the second quarter, and as of today, no additional scope has been identified within the same agreement for the immediate future. Now, diving deeper into each business line, starting with the solutions business line. Revenue increased to 379 million in the second quarter from 285. in the same quarter last year, reflecting an overall satisfactory execution, as well as increased capacity and capabilities. Throughout the quarter, we continued to progress on several projects through various stages of execution, including Baltic Power, Borwin 5, Champlain, Dogebank, Draugen, East Anglia 3, Horn C3, Sydlink and Sydostlink. Overall, the loading situation in solutions remains high, which continues to place elevated demands on the organization. Execution remains a key priority for us, both in solution, but also for NKT as a whole going forward. Organic revenue growth was 33% for the business line and operational EBITDA of 67 million euros increased 60% compared to Q2 in 2023. This was equal to a margin of 17.7%, which clearly was a satisfactory. Margins will continue to fluctuate, as you're well aware, from quarter to quarter, depending on both our ability to execute, but also the underlying product mix that we have in both production and also in installation. In Kastrona, the approximately 1 billion euro investment program, which was launched in May last year, continued to progress throughout the second quarter. Foundation work advanced according to plan. which enabled the successful start of the tower construction at the end of July earlier this year in the summer. And as a matter of curiosity, I can tell you that as of yesterday morning, we are up to about 20 meters in height of the tower, so that's good to see. We also announced the technical specification of our second cable-lay vessel, NKT Eleonora, which will be equipped with three turntables equivalent to 23,000 tons of cable-laying capacity, and is set for delivery in 27. Executing on the investment program continues to have the highest priority both for myself, for Lina, but also the organization as a whole, which includes managing risks and opportunities that have occurred and materialized but also will continue to arise. The 100 million euro investment program in Cologne also continues continued progress throughout the second quarter with procurement activities currently ongoing. Lastly, I would like to highlight that we successfully utilized our new jet plow on NKT Victoria in the second quarter, enabling reliable simultaneous cable lay and burial operations during the execution of 4WIN5. This was an important milestone for us, and it's also another testament to our ability to successfully execute investments in the field of offshore installation, which is a vital part of our turnkey solutions business. Turning now to the high voltage market through the first six months of this year. Activity across our addressable market continued at a high level throughout the second quarter. We estimate that the value of the projects awarded in our addressable high voltage market exceeded 13 billion euros through the first half of the year. This primarily has consisted of products that were converted into firm orders after being previously allocated as long-term booking commitments in 2023, as well as new orders where the majority has been based on DC technology. We continue to see an average addressable market about 10 billion euros per year, and this reaches from the period of 24 up until 2030, with this year already now exceeding the anticipated average. In the near term, we continue to see a robust demand and limited supply additions that could threaten the favorable high-voltage market landscape. As new capacity is gradually introduced in the years to come by both us but also our peers, we see a more balanced market emerging towards the end of the decade. With that being said, we also have enormous respect for especially the HVDC technology and the difficulty associated with expanding production capacity. Erecting a new tower, interacting with subsoil conditions or Mother Earth, constructing new factories around the tower, training and staffing the factory with skilled labor, and establishing a consistent manufacturing process that adheres to the highest standards for quality are just some of the challenges faced both by us when we are expanding, but also expectedly by our peers. And as a personal reflection from having a little bit more than 15 years in the business, I can also highlight cost overruns, delays on timing, quality issues, and the difficulty of attracting training and retaining critical human capital as potential obstacles that the industry as a whole faces in the year to come. But I also at the same time want to underline the importance of the fact that NKT has in the last couple of years since 2020 and the expansions which we have conducted prove that we are able to deal with most of these challenges. From a market perspective, we do see that additional capacity will no doubt enter the market, which we believe is also confirmation of the robust long-term demand for the HPDC technology. However, the timing of when a structurally larger supply chain materializes remains highly uncertain at this stage. We will have to wait and see how announced capacity additions materialize in the years to come. And this is with reference to what I just said before. In the meantime, we continue to see robust demand, supported by the ongoing electrification of society and transition to renewable energy. Over the longer term, we have less visibility, admittedly, which to some extent will depend on the political ambitions also across key markets. From where we stand today, we see a more balanced market towards the end of the decade. However, the timing remains uncertain, and of course, we remain vigilant and also in close observation of how the situation develops. Looking now how the order intake during the second quarter has impacted our backlog composition. We continue to benefit from the structural shift in the demand that has occurred in the recent years. From 2020 until June or the end of the second quarter this year, we have delivered a strong backlog growth, as is known to you all, exiting the second quarter with 11.3 billion in firmly booked orders. And on top of this, I remind you that we have the tenant frame with three main projects and two projects with SSE that continue to be presented as booking commitments, which have a combined value of more than 2.5 billion euros. We currently expect these projects to be called off and included in the backlog in late 2025 or potentially early 2026. The high-voltage order backlog broken down by customer continues to be tilted toward European TSOs, which now constitutes more than 80% of the backlog, with other types of customers being less than 20. From an application perspective, interconnectors continue to be roughly 55% of the backlog, with offshore wind making up approximately 40%, and the balance representing power from shore contracts. Overall, an order backlog of 11.3 billion euros provides a strong earnings visibility for the remainder of the decade. which also is a good situation for us because it allows us to focus our efforts firmly on execution in the years to come. But we also continue to be highly active in ongoing tenders and we are focused on building backlog further with selected projects adhering to a couple of principles, including but not limited to optimizing our asset utilization, that we don't compromise on the risk and reward balance, And last but not least, also that the pros generate a fair margin that reflects the value that we bring to the customer. As an example, technological or just from a turnkey perspective. Switching gears now and turning our attention to applications, which delivered a record quarter in terms of revenue, operational EBITDA and margins in the second quarter. Revenue of 175 million euros represented organic growth of 3% compared to the same quarter last year, which was a high comparison period also due to price adjustments that were implemented at that time to offset inflationary pressure. This was primarily the result of continued positive developments in the power distribution segments, where volumes increased compared to the same quarter last year and prices remained stable. In the construction exposed segment, which is building wires and also part of the 1kV cables, revenues and volumes were maintained at a stable level compared to the same comparison period last year. However, we continue to see that the demand is subdued. Driven by higher revenue as well as continued positive effects from the specialization of production sites in recent years, operational EBITDA was 21 million, equivalent to, in my eyes, an impressive margin of 11.8%. Going forward, the financial performance of our newly acquired asset in Portugal, Solidal, will positively impact the applications business line. Due to the timing of the acquisition, which was completed on June 21st, Solidal did not have a material impact on the revenue in EBITDA in the second quarter. We have commenced integration of the Solidal organization, and as I've done before, I just want to repeat myself and extend a warm welcome to the more than 430 very skilled employees that have joined our family as of June. Coming now to the service and accessories business line, which continued on a similar trajectory in Q2 from Q1, Revenue growth was again significant at 90% and was due to increased offshore repair activity within the service business, partly offset by lower revenues in the accessories business. Despite high revenues, operational EBITDA decreased to 5 million euros in the second quarter versus almost 6 million euros in Q2 last year. This was equal to an unsatisfactory EBITDA margin of 7.1%. Throughout the second quarter, a high level of offshore care activity continued to be driven by work related to one legacy service agreement, which we have discussed before, and that was also executed at an unusually low profit margin. Work related to this service agreement was concluded physically in Q2, and no additional scope has been since identified. Profitability was also negatively impacted by an increased cost base which is a reflection of the fact that we are growing both in service and also accessories, where we need a significant number of jointers and a larger volume of accessories to execute on our projects in our backlog. And with those words, ladies and gentlemen, I would like to hand the word over to Line.

Thank you, Claes. I'll now walk you through NKT's financial highlights, starting with the income statement. So if you turn the page, Starting with the top line, organic revenue growth, as Claire previously mentioned, it was 29% in the second quarter and 28% through the first six months of 2024. This was driven by contributions from all three business lines with satisfactory execution and expanded capacity and solutions driving the majority of the growth. Higher revenue was converted into operational EBITDA of 86 million euros for the quarter equal to an EBITDA margin of 14.2%. This was a 1.8 percentage point increase compared to Q2 2023 and brought operational EBITDA of €161 million through the first six months of the year. During the second quarter, NKT recorded one of items of €1 million, which reflect transaction costs associated with the acquisition of Solidar that was successfully completed in June. Subtracting these and depreciation and amortization, which was at a similar level compared to Q2 2023, EBIT was 61 million euros in Q2 2012. This was an improvement of 25 million euros compared to Q2 2022. In financial items, we had an income of 16 million euros in Q2. This was mainly due to our cash position that generated interest income. We also had positive contribution due to fluctuations in exchange rates in the financial items. Now I'll turn to the tax line. Our effective tax was 3% in Q2, 2024. This low level was mainly due to legislation in Germany, which was enacted in Q1, 2024, that allows us to capitalize a higher amount of tax laws carried forward. This brought our net results from continuing operations to €75 million in Q2 2024, which was an improvement of €40 million compared to last year. This quarter, we also successfully closed the divestment of NKT Photonics, which led to a net result in discontinued operations of €104 million. Looking to the numbers of full-time employees, we see a growth of 718 compared to the same time last year. This is including the more than 430 Solidale employees that Claes just mentioned, as well as additional people to support the continued growth. Now let's turn to the next slide on the cash flow. In the second quarter, NKT recorded strong cash flow from operating activities of 642 million euros compared to 321 million in Q2 2023. This was driven by a 585 million euro change in working capital that was primarily due to the timing of customer payments and solutions, as well as the 27 million euro increase in EBITDA. This part was partly offset by working capital increase in applications applications associated with the acquisition of Solidale. Investments in solutions and applications continue to step up in the quarter. A spend of €100 million CAPEX in Q2, which was an increase compared to last year, as well as the first quarter of this year. During the quarter, we also recorded a net cash outflow of €144 million related to the acquisition of Solidale. In total, this led to positive free cash flow from continuing operations of €398 million in the second quarter and €382 million through the first six months of 2024. Excluding acquisitions and divestments, free cash flow was €542 million in Q2 2024. As Claes previously mentioned, we successfully completed the divestment of NKT Photonics in June for a final enterprise value of €254 million. This led to €248 million in cash flow from discontinued operation, which increased net cash flow to €641 million during the second quarter. Let's now turn to the balance sheet highlights of end of June. Wergen Capital saw another significant decrease compared to the end of Q1 2024, ending the quarter at a negative 1.15 billion euro. As mentioned before, the facing of customer payments and solutions were the main reasons for this decrease. Roche improved further and ended the quarter at 30%, compared to 11% at the same time last year. This was driven by a decrease in capital employed where positive free cash flow and the proceeds from NKT Photonics resulted in a large decrease in net interest-bearing debt. Continued growth in EBIT also contributed to the further step of the motion. With net interest-bearing debt at minus 1.3 billion euros, we have strengthened our financial position further in Q2. A robust financial position is required to fund the ongoing investments across the business as well as being the foundation for our continued growth in the journey ahead. Last but not least, the value of NKT's issued guarantees increased to 2.3 billion euros at the end of Q2 from 1.9 billion euros at the end of Q1. Now turning to the financial outlook from 2024. On July 11th, we released an updated guidance to reflect a strong financial performance to the first half of the year. This guidance is maintained. Revenue is expected to be between 2.33 and 2.43 billion euros versus the previous range of 2.21 to 2.36 billion euros. And operationally BIDAR is expected to be between 310 and 345 million euros compared to the earlier communicated range of 285 to 335 million euros. The new ranges also reflect the expected contribution from SolidAR on revenue and EBITDA for the remainder of the year. I'll just go through the key assumptions related to this range, or these ranges, as you see on the slide. Point one is the satisfactory execution and development of high-voltage investments and projects without major disruptions. Point two is stable market conditions and applications. The third point is satisfactory offshore power cable repair work activity. Point four is the stable development of the global economy. Point five is the stable supply chain with limited disruptions and access to required labor, materials, and services. And the last point is a stable development in foreign currency and metal prices. Before turning to the question and answer session, I would like to reiterate the key messages for Q2 that Claes highlighted at the beginning of the call. So turning to this slide. NKT delivered another quarter with strong organic growth of 29%, a result that we are satisfied with and reflects overall satisfactory execution on our order backlog in solutions. Higher revenue was converted into record-high operational EBITDA of €86 million, equal to a margin of 14.2%. Free cash flow was €398 million in the quarter, a result of higher earning contribution as well as favorable development in working capital in solutions. Our financial position has been strengthened further in June, too, and MUST is a conservative capital structure has to be maintained in order to execute on the investments ongoing across the business. Lastly, within the investment of photonics and the acquisition of Solidal, NKT recognized a quarter of strong strategic progress. A focused power cable company is what NKT has become, and we were well positioned to continue to capitalize on robust demand across voltage levels, that continues to be driven by the ongoing electrification of society and the transition to renewable energy. So with that, we are ready to take your questions.

Thank you. Dear participants, as a reminder, if you wish to ask a question over the phone, please press star 11 on your telephone keypad and wait for your name to be announced. To withdraw a question, please press star 11 again. Please stand by. We'll compile the Q&A roster. This will take a few moments. And now we're going to take our first question. And it comes from Casper Blom from Danske Bank. Your line is open. Please ask your question.