NKT A/S

Good morning, everyone. Welcome to our Q3 2024 conference call. I'm Klaus Westerlin, 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 nine 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 of 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 eight consecutive quarters. Organic growth was 25% compared to the same quarter last year, mainly driven by solutions benefiting from increased capacity. Operational EBITDA reached 93 million euros, the highest quarterly result in the history of NKT, despite the fact that we had non-reoccurring costs related to the integration of SolidAlp. 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. Solidals 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 Hendricks 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 7 million euros 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 and 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 two frame agreements with local DSOs in the Netherlands and Denmark. These two frames have durations of eight and five years respectively, which are longer than traditional ones. And on top of this, in November, we extended two 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 nine 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 657 million euros in the third quarter and 1.8 billion for the first nine 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 project 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 1 million euros. Applications continue to benefit from positive developments in the power distribution grid segment and various efficiency initiatives implemented across our production sites in recent years. Revenue and profitability in service and 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 429 million euros, up from 301 million euros 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 projects that were in varying stages of execution, including Baltic Power, Champlain Hudson Power Express, Dogebank C, Horn C3, East Anglia 3, Sydlink and Sydostlink, as well as ramping up execution on Yggdrasil and Bay of Biscay. The loading and 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 costs 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 66 million euros. 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 1 billion euro 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 its final height of 200 meters. which I have to say personally is beyond impressive, and it also constitutes an important project 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 have and will continue to arise. In Cologne, the 100 million euro 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 a 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 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 nine 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 15 billion euros in the first nine months of the year and Demand for high voltage production and 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 10 billion euros per year until the end of the decade. And with awards of more than 15 billion euros 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 Kastrona 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 timeframe. And despite our extensive local experience, the process will still take more than three 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 US 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 the 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 US 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 11 billion euros, which is slightly down from 11.3 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. 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 three named projects and two projects with SSE, which remain as booking commitments. Combined, they have a value of more than 2.5 billion euros, and we expect these projects to be called off and included into the backlog in late 2025 or early 2026. Over the summer, we are happy to have confirmed our partnership on the two projects with SSE and agreed to proceed with the initial project 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 older 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 Lina 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 183 million euros, with Solidal contributing 28 million euros. Organic growth was marginally negative at minus 1% compared to the third quarter 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 14 million euros. 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 re-evaluation of inventories in the acquired businesses, having a negative impact on operational EBITDA of approximately 4 million euros 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 two new framework agreements in Denmark and the Netherlands as a testament to this, with durations of five and eight 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 and accessories business line which again this quarter delivered solid organic growth of 25 percent mainly driven by higher activity levels and satisfactory execution in the service business. Accessories in isolation delivered slightly higher revenue. Operational EBITDA increased to 8 million euros up from 5 million euros last year due to improved profitability in the service business. The margin for the quarter was 12.8 percent 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 Lina for a look at the financials.

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 Claire mentioned, organic growth was 25% in Q3. This was primarily driven by 42% organic growth in solution as a result of our investment in both capacity and capabilities. Additionally, the acquisition of Solidial contributed 28 million euros equal to 6% growth to the top line of this quarter. The higher revenue translated into a record high quarterly operational EBITDA of 93 million euros, mainly driven by solution, 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 23, 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 solidado. That brings us to EBIT, which amounted to 66 million euros, an improvement of 12 million euros compared to the same quarter last year. The EBIT margin was 10.1% for the quarter. Financial item was an income of 5 million euros 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 14 million euros, reflecting higher earnings level and a tax rate of 20%. For the first nine months of the year, the tax rate was 14%. This leaves us with a net result of 57 million euros, 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 €134 million, as EBITDA was more than offset by cash outflows from changes in working capital and investments. Free cash flow for the first three quarters of the year amounted to €248 million. The development in network and capital was a result of normal fluctuations in solutions related to the facing 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 115 million euros. This is nearly double the 60 million euros in the same quarter last year and also a increase compared to Q2. Cash flow from financing activities was basically flat for the quarter, compared to an inflow of €357 million in Q3 2023, when we concluded the right issue. Overall, this led to a negative free cash flow of €134 million for the quarter, but a positive €248 million year-to-date, including proceeds from the divestment of NKC Photonics, Net cash flow for the first nine months of 2024 was 471 million euros. This leads me on to the balance sheet highlights at the end of September. Working capital increased by 83 million euros compared to the end of June 2, 2024, due to the natural facing effects and solutions mentioned on the previous slide. when capital stood at negative 1.1 billion euros at the end of the quarter. Rosy 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 182 million euros to 734 million compared to NQ2. 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 ROCI. ROCI will continue to vary depending on the project mix in production, timing of payment from customers, and a higher capital base from ongoing investments. During this year, we've seen a gradual increase in KBICs. This development is expected to continue into Q4, and as the investment progresses, we also expect another step up in 2025. The net cash position is likely reduced to 1.1 billion euros, 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 2.5 billion euros at the end of Q3, up from 2.3 billion at the end of Q2. Let me turn to the financial outlook for 2024. We maintain 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 2.33 to 2.43 billion euros and the operational EBITDA interval is 310 to 345 million. The outlook reflects our financial performance to the first three quarters of the year and expectations for the remainder of the year. As usual, please pay close attention to the assumptions behind Outlook. These assumptions include satisfactory execution of high-voltage projects, stable market conditions in the application 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 solution 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 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 93 million euros, the highest quarterly result in NKT's history, underlying the positive development we've seen in recent years. We have initiated the integration process of SolidARL, which progressed as expected during the third quarter. Our expectations and findings from the due diligence process have been confirmed, and SolidARL is a great addition to NKT that will enable us to meet the demand in the medium and high voltage segment up to 225 kV. Finally, we continue to see good commercial momentum in applications. During the third quarter, we secured two 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.

Thank you, dear participants. As a reminder, if you wish to ask a question, please press star 11 on your telephone keyboard and wait for a name to be announced. To withdraw a question, please press star 11 again. Please 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.