Nkt A/S Unsp/Adr

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.

Thank you very much. And first of all, congrats on the strong development. Great to see that things are working out for you guys. I have a couple of questions. I'll just take them one by one so you don't have to write down too much. The first one goes to the, I would say, unallocated costs within EBITDA. You, of course, provide the EBITDAs for your three divisions, and then there's a, whether you call it unallocated or other group, which was minus 7 million euros here in the quarter. And to some extent, it kind of destroys a little bit the very strong margin development that you see on the divisional levels. Was there anything unusual in this minus 7 million euros? And could you sort of guide us a bit on what to expect going forward on this line?

Yes, thank you, Kasper, for the question, and well understood. So I think I'll draw a little bit back in history to also help understand this question. As you know, growing a lot in Sweden currently also means a higher exposure to the Swedish currency. And back in Q3 2023, we actually had some of the same questions around this, and it's the exact same explanation. So non-allocated cost is a reflection of two items. It's a non-allocated group cost we have, and then it's elimination of intercompany currency hedges. And especially this latter part, due to the Swedish entity having a functional Swedish crown as currency, we do intercompany hedges. And that doesn't change, let's say, the Swedish It limits the exposure for the Swedish entity's currency exposure, but on group level, since we are a Euro company, we need to eliminate this. When you reflect about the solution margins, you should think about the solution margins Disregarding this non-allocated cost, I think some of you are asking the question whether you need to think about these eliminations should be added, subtracted from a solution business line result, and you should not. It's a different dynamic due to the changes in functional currencies. I know it's a bit technical, and we're also happy to explain later, but these are the two overarching elements. So when you see a currency development between the euro and the Swedish crown, We will see reflections of this in our financial results.

Well understood. Thank you. Then my second question goes to Claes' comment about the high-voltage market, where, if I heard you correctly, you said that you expected more of a balanced market or a balance in supply and demand towards the end of the decade. Correct me if I'm wrong, but I think that's a little bit changed from what you've said in the past. As I recall it, you've talked about still seeing a higher demand than supply despite of capacity additions. So if you could just clarify if there is anything changed in the way you look at the market towards the end of the decade.

Thank you, Casper, for the question and also hope you had a good summer. To your question, it's a relevant one. I wouldn't say that something has dramatically changed. I think what we have done lately is also allowing ourselves to reflect well into the 2030s. Admittedly, this comes with a high uncertainty as well. You can look at projects, you can look at grid expansion plans, you can look at political ambitions and try to translate that down to To the demand that this is what we are doing at the same time. Also, we have. We, we have our established peers, and then we have aspirational candidates to get into this market that have announced plans in the past, but have also continued to announce plans. And of course, then it's about comparing and making the equation between these 2. And when we do that, then we tend to see, and again, with all the uncertainties that I just said now, we tend to see that there is a strong demand where demand outperforms supply in the coming years. But then towards the end of the decade, being also 2030 and maybe even beyond, that's when we see, depending on how many of the plans actually materialize on time, and to the extent that they are put out, then we are looking at the more balanced demand supply situation. So I think it's not anything to the contrary of maybe what we have seen before, but we have taken a longer perspective now. And that's why we are coming out with this or why I'm making this comment today.

Okay. Very relevant as this is an industry that's planning far ahead. Last question, probably to Lene on the net working capital. Obviously, strong development here in the quarter. If you could just elaborate on how to think about this for the reminder of the year, will you start using some of these prepayments so that there will be, to some degree, a reversing situation in the second half of the year?

Yeah, thank you for the question, Kasper. I understood also it's a very favorable level, and you asked us some of the same questions at the last quarter. What's really happening is, of course, the main impact from solution business and the customer payments here, and then it's also a matter of the uptake and speed on our investment program. And you can see comparing Q1 to Q2 on our investments that we are picking up speed, and we should also. And that will actually continue for the rest of the year also. So expect an acceleration on CAPEX here. On network and capital, what will happen the rest of the year is very much, let's say, dependent on, of course, payments from customers, but certainly also awards. So there can be some dependencies on that we don't fully predict, of course. And then I want to say for N24, I think you should reflect that this, I would say, this could be the level. You know, we don't guide on this number. And then it can, of course, be changed quite much by single or just a few individual payments from customers that would move across the year or something like that between 24 and 25. So have a little bit of cautiousness on that. And then I just want to emphasize one point to be really clear about is, of course, it's a normal part of this business model that we receive upfront payment for actually planning and producing the cables. So when we are now building a backlog also for the second factory in Karlskrona, but there's still years to come before we actually will go into full production, we will see some of this very favorable position. But in the moment we start producing those cables in a new factory, you again see NKTs, let's say, steady state position changing. And here we would expect that current, at least, that it comes to a more normalized level, not so favorable as you're seeing it currently. A little bit of a long explanation. Just want to help out here on the future also.

Thank you very much. Much appreciated, both of you. Thank you.

Thank you. Now we're going to take our next question. And the next question comes from Daniel Acosta from Goldman Sachs. Your line is open. Please ask a question. Hi, good morning. Thank you.

I have two questions. One is actually just a clarification of what you, Lina, just mentioned, going back on the free cash flow. Can you comment on exactly sort of was it just one big contract, and was it a down payment or a milestone? Because when we look at, like, contract liabilities, they're going up substantially, but the contract assets are not, just to understand that. And then I'll ask the second one.

Yes, thank you for the question, Daniela. We don't comment exactly on, let's say, the type of customer, which customer, which contract. So at all, I can say this is not a single thing. It's more elements within the solution business. But I would add to that that we can have, depending on the milestone payment, can have a very different size to a prepayment. So there are some... very big single payments in our working capital from single customers that can move the picture, but not being specifically on Q2 what that was.

And actually, following up on that, just also from the prior question before my final one. Historically, the seasonality had always been very favorable towards Q4. That seemed to have been the path of the industry, not just and KT. So given what we had this year and the CAPEX plan, should we still expect that or now the volatility will be much more unpredictable going forward?

If you're talking about the free cash flow for the year, then you should expect an uptake in CAPEX rest of year. And really the pattern or the facing of this combined with the facing of Possibly awards or larger milestone payments will determine to a large extent how the free cash flow will end when we close the books of 2024. So there's some uncertainty that I cannot fully explain or divide for you here now.

Got it. And one question regarding, I think Klaas mentioned before on solutions that the margin will vary depending on the spacing of the contracts. If we look at the rest of 24 and 25, are we sort of materially more skewed towards installation or production, anything that we should keep in mind when we do that modeling?

I can maybe start, Daniela, and then Lina can complement if she wishes. But I think it's difficult to say. I think starting with the seasonality topic of solutions, It is true that, of course, more installation is conducted during the summer period. So that means that in the period from April to October, the weather is better than the rest of the year, simply. And that is also reflected in, I think, the operational plans. But of course, that's only one side of it. The other side of it is also the project mix and the revenue generation, both in the factory and installation. It is difficult from the outside, of course, obviously, to expect which products will go into production and when. We can have a quarter where five products of higher margin are the primary drivers of our revenue, and we can have another quarter where two of them are actually replaced with lower margin products. And this can vary from quarter to quarter, and therefore it is devious. And as I said before, it's difficult to use a single quarter as a proxy for the next one.

Got it. Thank you very much. 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 now we're going to take our next question. And the question comes from the line of Akash Gupta from JPMorgan. Your line is open. Please ask a question.

Yes. Hi. Good morning, everybody, and thanks for your time. I got a few as well, and I'll ask one at a time. My first one is on solutions. So, Klaas, when I read your commentary on supply-demand, I wanted to ask, how should we think about NKT adding further capacity on top of what has already been communicated? When we look at your comments on more balanced supply-demand, do you see that the likelihood of you coming up with any new growth plan is low, or will it be a function of your commercial win in the pipeline. So maybe if you can talk about how should we think about new capacity announcement on top of what has already been communicated.

Thank you, Akash, and good morning. Just first with the caveat that notwithstanding just the resource situation or our own financial position in terms of further expansions, if we just put that to the side, because I think, for example, the human capital situation, we have said before, is also something that drives us to really focus at what we have on the table now. But putting that aside and to reflect on your question more broadly, what I believe we have been fairly vocal about also previously is that we will continue to be disciplined when it comes to reflecting about adding capacity or investing. And disciplined meaning that we have to have some level of certainty about the demand-supply balance and especially the demand coming into whatever capacity we are adding for a number of years before we would trigger such an expansion decision. And I think with what I also shared with you here today with a more balanced supply-demand situation in towards the next decade, I think that comment is as relevant as ever. So we will not, it's very unlikely that we would add capacity based on speculations or hopes and dreams, but rather we will maintain the discipline that we have had in the past and just continue to reinforce the same. That makes sense. That's an answer, Akash.

Yeah, no, fair enough. Thank you. The second one I have is on your full year guidance. So when I look at your first half performance, 161 million EBITDA, And if we annualize it, given you may see recovery in margins in service and accessories, which might offset some of the lower half in applications, we get to 232. And then if we add 10 million from solidality acquisition, we get to around top end of your new guidance. So maybe you can talk about what would happen for you to get to the bottom end. Because when I look at your guidance, it somehow lacks ambition and more like protecting your downside. So maybe if you can comment on that between first half and second half and how do you come up with lower end and top end of the range?

Okay, Akash, I'll go first and maybe Clate wants to comment. Let's start by saying that we don't feel that the guidance of DS is unambitious. We're actually on a growth journey and we have a very large project portfolio we're executing on. And I think you've also heard Clay say earlier on that you need to be very risk agile working with DS. So, of course, built in our outlook for the year is It's about executing satisfactory on the projects. And that's not a small undertaking. But we have done well in the first half and we certainly plan to continue that. I think another part we've also spoken about, and you still see to some degree here, is that application is a fast business, a very dynamic business in that sense that We have a pretty good visibility on the months ahead of us, and then the longer you get out, the less we can be certain about customer buying patterns and these things. It is changing a bit due to medium voltage uptake, which has some different dimensions into the contracts, but there is in the guided range some space for actually having different dynamics in the second half. Then, for the first half year here, you saw us having a large repair job in our service business. How that eventually will pan out for the second half is also still to be seen. And then, of course, the assumptions on, let's say, more the general economic environment and access to resources embedded there. We can certainly see NKT be in the spread of this range, depending on how everything pans out.

And I would not add much to that, maybe just only that, of course, we do internally, we do our budgets and our expectations, and this is what we are basing the external guidance on together with recent performance. And in that, we also, of course, have...

more transparency over the product mix which lies as the base for the build-up of the of the revenues and EBITDA quarter per quarter so that also needs to be taken into account in addition to what Lina said thank you and my final one is a housekeeping question on tax rate you have been utilizing this tax losses carry forward can you give us a timeline on by when we should expect tax rate to return back to normal thank you

I wouldn't actually give you a time line on that, Akash, and simply out of the fact that the multiple, let's say, decisions and things into that. But I can say for the rest of the year, we do expect to continue to capitalize these tax losses and estimate for the year, and things can still change, would be an effective tax rate about around 15%. So that should help you here for 2024.

Thank you.

Thank you. Now we will take our next question. And the question comes from the line of Lars Topholm from Carnegie. Your line is open. Please ask your question.

Thank you. First, congrats with what I thought was a very solid quarter with nice margins in your two biggest divisions. I have a couple of questions. One is probably very boring, but you have a 2028 financial ambition which was made before you decided to invest in expanding the factory in Cologne, before you decided to invest in expanding capacity in medium voltage and before you acquired Solidel. And now, of course, I understand you didn't update this ambition today, but I wonder what are your thoughts about this? When is it? an appropriate time to revisit those ambitions since the assumptions behind, of course, have changed dramatically.

Thank you for the question, Lars. And since this has been a returning question for the last couple of calls, we understand. And as also said earlier, we definitely both understand and are working on this. There are some building blocks in it, of course, we want to really deep dive into as a company to make sure kind of how they So once further, the current stance, but you're right, applications investment of 100 million euros, Rozier Creative, the same on Cologne, the solid dial, and then of course also the awards of 23 that came after we announced the medium-term ambitions are some of these building blocks. So we're working on this. I know we've said that before, but we are and we'll come back as soon as we're ready to communicate to you.

Thanks. Then a second question to service and accessories. You mentioned cost inflation because you're staffing up. So I wonder if you can give some color on the increase in headcount and how we should translate that into when the business might take off. Are you, for example, going to... maintain the same revenue relative to headcount or how should I think about that?

I think I can start here with some of the building blocks and then maybe Claes wants to add. So reflecting overarching about the hires we're doing now to secure the growth of the future. That is, if you're looking at our EBITDA margin we would say in 2024 one percentage point we could have had a higher EBITDA margin if we didn't do that ramp up. And this includes the services and accessories business. What you're seeing in those two businesses, and it's different dynamics, one thing is accessory growth. Due to secure, we can actually make sure we have all the joints for the full backlog and execution of that. There's people in that. And there's also business development activities in other markets. Then if you go to services, what we've been working on for the last year is, of course, also to secure we have enough jointers to actually do the joints on the cables, and that is, again, closely connected to the backlog. But it's also a geographical change in terms of some business development activity in other regions. So this is kind of the mix, but I would say on a single business line like services and accessories, it's a smaller part.

I think you responded to it well. And maybe just to add, and I think we've had this discussion also in the past, Lars, that we want to underline the importance with us taking these decisions, hiring ahead of time. And it does become on group level meaningful. It is also, of course, meaningful on a business line level. And it's also connected, for example, jointers, hiring them ahead of time. It takes time to train people. and it is connected sometimes to also uncertainties which are outside of NKT's controls like permit etc when installation can actually take effect which doesn't harm NKT's let's say the lifetime financial status of a product but can indeed affect also a revenue within the single quarter moving from one quarter to the next so there are a number of moving parts here but hiring of people for the growth is something which is present, especially in solutions in the Kastrona perimeter, in accessories and also in the service perimeter.

That's very clear. Then a final question, if I may, on the competitive landscape. And I just wonder if you can comment on to what extent you are meeting Asian in general and Chinese in particular competitors when you do tenders and maybe if you can differ the answer so you comment both tenders from TSOs and tenders from non-TSOs if there is a difference.

That's a good question, Lars, and they're also highly relevant also considering the discussions in media in the last couple of days in adjacent areas. I would say, you know, to try to answer it in a simple way, we have met Asian players in tenders, both in AC and DC, for a couple of years, actually. And, you know, sometimes they've also been successful. Sumitomo is one example in the NEMO product, which was awarded a couple of years ago and has been fully executed. We have seen Chinese vendors being awarded on AC, lower voltages, also on C cables, a couple of years ago. But when you move into the higher segments, and I think to your point there, especially on the TSO side, it is uncommon that we are meeting credible Chinese players in those tenders. And what I say is that they may be a part of the qualification and tender process, but I think there is... Quality matters too much and evaluation is not only based on price when it comes to TSOs that are using sophisticated procurement process that most of them are actually doing these days. For developers, it's a little bit more different depending on which developer it is. So there are some which are more actively looking into Asian vendors. But in general, we have not seen any massive presence, especially in SA2DC of Chinese. So it is swaying, but not to a very major extent, if I answer on the Chinese part.

That's very clear, Claes. Thanks, Claes. And again, congrats with the numbers.

Thank you. Thank you. Thank you. Now we're going to take our next question. And the question comes from the line of Xing Wang from Barclays. Your line is open. Please ask your question.

Hi. Thank you for the opportunity to ask a question. So my first one is on solutions. Could you maybe give some color on the subcontract revenue contribution in the quarter? How much of the year-on-year increase in BIDDA was driven by higher subcontract work? Thanks.

I think we thank you for the question, and we do understand it. We're not sharing the detail at that level. I think what you have heard us say for the full year that it's a larger part of our revenue contribution in 2024 is subcontracted revenue, and it's higher than normal level, and this will normalize, you can say, in 2025. Therefore, we try to help on kind of how to reflect about that. So not sharing the quarterly details and exact numbers here.

Okay, no worries. And also on the upgrade on NKT Victoria, can you maybe let us know how much you spent on that? How should we think about the insulation capacity extension out of this upgrade? I think you previously said your manufacturing and insulation capacity are roughly balanced. Is this upgrade ending effective capacity with no new manufacturing capacity being ended? Thank you.

Thank you for your question. I was thinking to myself how to answer it. I think if we start maybe with the easy question, then how much money did we spend on that? I think on Victoria specifically, this was about minor redesigns and especially reclassification of her in terms of cable lay capacity. So in that regard, you should think about, I don't know, saying insignificant capex is maybe the wrong word, but it's very, very low spending on this. When it comes to the wider updates we have done in the recent years of the installation, like the NKT JetCloud that I also talked about earlier in the presentation that has proven successful also in the field during the second quarter, in the context of factory expansion, it's also minor in terms of CapEx. Now, to your question around the balance between cable lay and factory we stand by our earlier comment and the re-rating of Victoria's cable a capacity is positive I would argue for you know projects where we can hopefully do longer simultaneous lay without having to go back but it doesn't change anything from a major perspective. We are not gaining 150 days per year or so with this one, but there can be local upside in some projects with the fact that you can carry more cables and conduct longer lane runs. But the significant addition, of course, comes with the NKT Eleonora.

Okay, understood. Thanks very much. Last question on applications. In the assumptions you made for current year financial outlook number two, you have stable market conditions and implications, which has not changed from Q1. Do you think this is overly conservative, given you have made 100 million CapEx decision in April and then another 50 million on Solidaire? What would be the justification for these CapEx decisions if your market outlook remains stable?

Yeah, maybe we can both comment me and Lina. I think that our intention with that statement is that it remains stable on a very good level that we are seeing. So this is a healthy level when we look at the market conditions for applications for the moment, especially in the power distribution grid segment, which covers medium voltage and also part of our 1kV portfolio. And our intention is there that that doesn't significantly deteriorate or change, which, and I think such an assumption is, I wouldn't say is conservative.

No, and I would just add that when we took the investment decision on application, it was actually early in 2024. So there you can reflect that the business case where we assessed is this, what is the value contribution to application and can see as a whole and our communication that this is accretive to our ambition of erosion above 20%. That was based on those markets. I do think you also recognize the numbers, but we've had a very good one here in the first half. So just to shed some light on what's the underlying assumptions of those choices.

Thanks very much. Thank you. Now we're going to take our next question, and it comes from the line of Lucas Fernhany from Jefferies. So the line is open. Please ask your question.

Good morning. Thank you for the question. I have two, but I'll do them one by one. Firstly, on solutions, I think you're starting to hit tougher comps. Can you remind us on the timing of the capacity increase that has driven the growth? My point is to have an idea of what kind of organic growth we can expect in H2, and also on growth and solution, you're not providing necessarily subcontracted revenues, but can you give us an update on Champlain Hudson, how that project is going? Where is it in terms of completion, and should that be done kind of this year, next year? When do you see that ending? Because obviously that will lead to some of those subcontracting revenues coming down. Thank you.

Thank you for the question. Starting on the investments, it's a good question. I'm happy to remind you we did an investment announcement in 2020 and also 22 respectively for both Cologne and Karlskrona. And these investments are, as of second half of last year, completed from a machine perspective. And this is also the organic growth that we are seeing being reflected in recent quarters. So also under Q2. And so I think what you can expect going forward now is more modest organic growth, as we have also said previously, that as the investments are being completed end of last year, then we will see an uptake this year. But then in 25 and 26 in solution space, it's going to be more modest, driven by that no new machines or the machine hours stay constant over these two years. apart from that you also have the impact as was asked earlier and also now by you on the subcontracted revenues which of course goes up and down but they are at an unusually high level now due to the Champlain project and without going in and commenting on specifics in Champlain the project as we announced when we were awarded is due to be completed in 2026 but I think we have also made comments earlier that This year is a high year for subcontracting, and then it's going to fade down towards the provisional acceptance, which is going to take place in 2026. It all goes well, of course.

Perfect. Thank you. Just a quick follow-up on that. When you look at 2025, then you have, I think, a better view on the projects, the mix you're going to have, and some of those subcontracted revenues. Do you still see, when you take all of that into consideration, some modest organic growth achievable, the solutions level in 2025?

I understand the question, and I think I will leave it, I think, with the earlier comments we have given. Also, at the beginning of this year, we tried to give a little bit of transparency, but we have yet to give out the actual revenue guidance and also EBITDA guidance for next year.

Perfect. Thank you. And the second one was on margin. With the comments that you made also on installation activity during the summer and quite high utilization of the vessel, should we take that maybe H2, which is some normalization, or maybe slightly lower margin sequentially with that seasonality. And similarly on the services margin, is that legacy contract kind of now done and should we expect a slight kind of increase, a jump in the margin closer to what that business kind of was able to deliver previously? Thank you.

Thank you. I will intend to start there. If I take the easy question first on service, what we have said previously is that the profitability is and has been suffering from this legacy repair. So, of course, logically to that, when the repair falls away from a P&L impact perspective, then the relative margins will improve. If I go to the solutions one, it is a difficult question, and we are not guiding on business lines or individual quarters exactly what will happen with the profitability, and the profitability will be a mix of several things, as I said earlier. Product mix, asset utilization, of course, impacted by installation, amount of subcontracted scope, also quarter by quarter, and these things will vary. But all other things equal, of course, and if installation is lowering activity during a certain period, then yes, this would have an impact, of course, or could have an impact both on revenue and profitability. But it's more complex than that. So I wouldn't use just our seasonality comments as a proxy to try to project that profitability has to go down. That would potentially be too simple.

Yeah, great. Thank you.

Thank you. Dear speakers, there are no further questions for today. I would now like to hand the conference over to Klaus Westerlin for any closing remarks.

Yeah, thank you. And we appreciate everybody that's called in. And I hope you can hear the tone of our voice. We are, of course, proud of what NKT has achieved in the second quarter. And the credit goes to the people who have worked so hard to make this possible. But we also stay humble and vigilant going forward. It is the public business and we have to, we cannot let our guard down. So with those words, we look forward to hopefully meet many of you in the upcoming roadshows, and we wish you a good weekend when it comes.