NKT A/S

At this time, I would like to welcome everyone to NKT Cables Group Arrow Report 2024 Conference Call. Today's call is being recorded. If you have any objections, please disconnect at this time. All participants will be in a listen-only mode throughout the presentation, and afterwards, there will be a question-and-answer session. I would now like to introduce Claes Vesterlund, President and CEO, and Lina-Andrea Fandrup, CFO. Claes Westerlund, you may now begin.

Good morning, everyone. Welcome to this conference call following this morning's release of our annual report for 2024. I'm Claes Westerlund, the CEO, and I'm joined by our CFO, Lina Fandrup. As usual, I will cover the overall development and business lines, and Line will walk you through the financial performance for the fourth quarter and 2024. Please turn to slide number three. 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 year on slide four. 2024 was a pivotal year for NKT that we are proud of. We delivered significant growth, mainly driven by expanded capacity and capabilities in solutions. We progressed on our major expansions and we launched new investments across our business lines. Further, we continued to deliver value to our customers and maintained our diligent focus on sustainability. With the closing of the divestment of NKT Photonics during the second quarter, we completed the transition of NKT to a company with full focus on our core business of power cable solutions. To strengthen our positions, we in June acquired the Portuguese power cable manufacturer Solidal. During the second half of the year, the integration process progressed, confirming the business case behind the acquisition. Looking back at 2024, it was a busy year in a positive sense, and all in all, NKT is a better and stronger company compared to a year ago, supporting the energy transition and enabling the electrification of societies. With this, we are well positioned to take advantage of the opportunities that lie ahead of us. Throughout last year, we delivered double-digit organic growth and Q4 was the ninth consecutive quarter with double-digit growth in both revenue and EBITDA. We ended the year with 26% organic growth and operational EBITDA amounted to 344 million euros, record high for NKT and an increase from 255 million in 2023. This positive development was supported by all business lines, but primarily driven by solutions benefiting from increased capacity and capabilities, as I just said before. Further, we left 2024 generating a satisfying level of free cash flow at an amount of 400 million euros. And also worth mentioning is that our net earnings doubled to 236 million. We also made progress on our commitments on sustainability, which is an area that remains important also among our customers. We play a vital role in relation to climate change and decarbonization as our cable solutions are important enablers of the energy transition. We have full focus on achieving our sustainability ambitions and targets and our focus here is twofold. Maximizing our product handprint and at the same time minimizing our product footprint throughout the product lifetime. We acknowledge that there are several challenges that we need to address to achieve these targets. Let's turn to slide number six for a look at the financial performance in the fourth quarter and the full year. As mentioned, in Q4 we again delivered double-digit growth, both in revenue and operational EBITDA. Revenue and operational EBITDA increased across all three business lines, with solutions being the most significant contributor. Revenue for the quarter amounted to €963 million and €2.5 billion for the full year. This corresponded to organic growth of 23% and 26% respectively. Profitability also improved as operational EBITDA in Q4 increased by €27 million to €90 million and the margin improved to 13%. We thereby, with 344 million euros for the full year, ended the year at the very high end of our guided range. In solutions, activity level remained high in Q4 and we continued to execute on our high voltage order backlog with overall satisfactory product execution. The positive development from the previous quarters was maintained with continued solid growth in revenue and operational EBITDA, as the business line benefited from the recent year's investments to increase capacity. The higher revenue in applications was driven by the acquisition of Solidal. Compared to the same quarter last year, organic growth was slightly negative due to continued weakness in the construction exposed part of the low voltage segment. The medium voltage power distribution grid segment continued the positive development, but as we are running at high capacity utilization, it had a limited effect on growth for the quarter. In service and accessories, both segments contributed to the positive development in the quarter, The high service activity level was maintained both on and offshore and the increased demand for high voltage accessories had a positive effect. Operational EBITDA doubled and the margin for the business line was at the historical double digit level. Now I will dive deeper into each of the business lines starting with solutions and slide seven please. In the fourth quarter of 2024, revenue and solutions increased to €469 million, up from €350 million in the same quarter last year, equal in organic growth of 34%. The development reflected the previous year's investments in capacity and capabilities, as well as overall satisfactory product execution. Installation activity was also high in the quarter, partly driven by subcontracted scope. Throughout the quarter we made progress on several projects in the order backlog including Champlain, East Anglia 3, Horn C3, Sydostlink and also Sydlink. The high activity level, execution of multiple projects and management of the associated risks continues to put an elevated demand on the Solutions Organisation. Operational EBITDA increased to 67 million euros compared to 54 million euros in the same quarter in 2023. The margin for the quarter was 14.3%, a slight decline relative to last year. driven by a different product mix. Naturally, in a product business like NKT, quarterly profitability will vary depending on the facing of the products in execution. In addition, we are constantly investing in enhancing capabilities and the margin was negatively impacted by an increased cost level to support the construction and ramp up of the new high voltage factory in Karlskrona. The construction of the factory progressed as scheduled during the quarter, with the extrusion tower having reached its final height of 200 meters. We have started the construction inside the tower, and we are installing machinery in parallel with constructing other buildings. The construction of NKT's second cable-lay vessel, NKT Eleonora, progressed as expected, with a key-laying ceremony conducted in January this year. In Cologne, the investment program to expand production capacity and capabilities progressed according to plan and supplier selection for several major machine lines have been finalized. Timelines for both investments remain unchanged and they are expected to be operational from 2027. Please turn to the next slide for an update on the market development. Activity across our addressable market remained at a high level throughout 2024. We estimate that products awarded in this market exceeded 17 billion euros for the year and the development was mainly driven by DC technology where demand for production and installation capacity remained high. When looking at our awards in 2024, it should be seen in the light of the high order intake we secured in 2023 and our available capacity. If you combine the two years, our market share was around 25%, which is a very decent level. Between Christmas and New Year, we were awarded two turnkey projects under the existing framework agreement with Tenet. Those contracts are expected to be called off in 26 to 27 and have a combined value of approximately 1 billion euros. The projects will not be included in our reported high-voltage order backlog before call-off, just as the previous awards from 2023. In total, five projects have now been awarded to us under the framework work agreement with Tenet, which runs until 2028, with possible extension until 2031. Our view on the addressable market remains largely unchanged, and we continue to expect an average market of more than 10 billion euros in the period 2024 to 2030. For the past two years, this number has been exceeded, evidencing the strong demand and visibility in the market. There are currently several circumstances globally that could impact short-term energy policies and investments, including but not limited to the new US administration, conflicts, election in Germany, as well as the new EU Commission. But like we've said previously, we currently expect the supply-demand balance to remain healthy throughout this decade before appearing to move into more balanced territory. This said, we also remain humble that political decisions may impact primarily the demand side short term. But in this context, we also take comfort in the backlog and the booking commitments that we have. On the longer term, we remain confident about the importance of electricity as an avenue to sustain modern life, including electrification of societies and the energy transition. This should support long term grid investments and thereby demand for both HVAC and HVDC technology. The presidential election in the US has attracted a lot of attention, and it has also increased uncertainty in the US, including potential impact on electrification and installation of offshore wind. We are following the development closely and the US continues to be an interesting opportunistic market for us with future potential. Looking at our current exposure to the US, which is limited, it's primarily through the Champlain Hudson Power Express project, which we are executing on as we speak. This interconnector project is linking hydropower from Quebec, Canada to New York City, providing around 20% of the city's need for electricity. Please turn to the next slide and our order backlog. We ended the year with a high voltage order backlog of 10.6 billion euros, which is a slight decline compared to last year, as the order intake is only partly offsetting the product executing during the years. On top of this, we have more than 3.5 billion euros in booking commitments, which we expect to be called off during the next couple of years. The current level reflects a structural step change compared to previously, and a strong demand for high voltage production installation, mainly driven by the energy transition and general electrification of society. The composition of the backlog has only changed slightly. From a customer perspective, more than 85% of the backlog is with European TSOs, and with regards to use applications, around 55% of the backlog is interconnected projects and around 40% offshore wind. This backlog gives us good visibility for the coming years and thereby also in our medium term financial ambitions. Executing successfully on this backlog in the coming years is crucial to realize the inherent value. And as you know, product execution is at the core of NKT and managing any potential risks is a clear priority, not only for the solutions business line, but also for the whole group leadership team, including Lina and also myself. We remain highly active in ongoing tenders to further strengthen our position and to support earnings and value creation. We will maintain a selective and disciplined approach, which allows us to optimize asset utilization across our production and installation assets. Please turn to slide number 10 for a look at the applications business line. Revenue in applications increased to 178 million euros in the fourth quarter, driven by the acquisition of Solidal, which contributed 32 million euros. Organic growth for the business line was negative, minus 4%, as the weakness in the construction-exposed low-voltage segment continued, which was mainly related to residential construction activity. Demand and volumes in the power distribution grid remained at a satisfactory level, but when looking at growth rates compared to last year, it has to be kept in mind that our current medium voltage capacity limited our growth in the quarter. Operational EBITDA increased to 13 million euros from 10 million euros in the fourth quarter 2023, driven by the acquisition of Solidal, while the EBITDA for the existing business was slightly down. Operational EBITDA margin improved 70 basis points to 7.8% in the quarter. Excluding the positive effect from Solidal, the margins were slightly lower due to the lower volumes in the low voltage segment. From a market perspective, demand for medium voltage cables remained robust, driven by upgrades and strengthening of European power distribution grids. NKT is well positioned to benefit from this development, and during 2024, we have secured extensions of several framework contracts with local DSOs. We expect this positive development to continue in 2025, where we will also benefit from additional capacity at our sites in Falun in Sweden and also Velke in the Czech Republic, which we announced in April last year. The construction at our site in Asnes here in Denmark is progressing as planned, and we expect the additional capacity to be operational by 2026. Please go to the next slide. Lastly, turning to the service and accessories business line, which here in Q4 delivered a solid quarter with 7% organic growth, driven by growth in both the service and accessories business. In service, we saw a high activity level coming from smaller onshore repair works, offshore installation work and maintenance of existing cable systems. Combined with satisfactory execution both on and offshore, it generated higher revenue. The accessories business also reported positive organic growth, driven by increased demand for high voltage accessories. Operational EBITDA doubled to 6 million euros in the fourth quarter, up from 3 million euros last year, driven by improved profitability in both segments. For the quarter, the margin was 11.1 compared to 6.6 in the same quarter last year. To meet the increased demand for accessories driven by solutions products in our backlog, we are ramping up production and capabilities. During the first half of 2025, we expect the new test hall in Sweden for high-voltage accessories to be completed. Please turn to slide 12 and sustainability. Sustainability is a key priority for us, and our biggest impact is on climate change and decarbonisation through the cable solutions we manufacture and install for our customers. We play a critical role in the transition to clean energy as electrification and grid modernisations are prerequisites for a net zero and a modern society. We are committed to actively contributing to the same by maximising our product handprint. which refers to the positive environmental or social impacts a product has, and minimizing our product footprint through the product lifetime. A clear example of a product having a positive impact is the Shetland HVDC Link project, which we finalized last year. The 320 kV interconnector now transmits clean wind energy into the UK, covering electricity need for approximately 500,000 homes. We made progress during the year on our commitments and targets and by the end of 2024 we have reduced our Scope 1 and Scope 2 emissions by 68% from the baseline in 2019. We are thereby progressing on the target of 90% reduction in 2030. One of the main contributors to these emissions is from our installation vessels. We have taken several actions to reduce emissions and we also made investments enabling both NKT Victoria and the new vessel NKT Eleonora to run on sustainable fuel. The adoption of these fuels are however still limited and we are working closely with all stakeholders in the industry to overcome the switching challenge. As you can see, our Scope 3 emissions have increased compared to 2019 baseline. While helping countries reduce carbon emissions, NKT accounts for the emissions caused by power losses from the cables installed in the power grid. Upgrading the power grid is essential for countries to achieve net zero emissions. Therefore, we will continue prioritizing these projects, even though the impact will challenge the fulfillment of the near-term Scope 3 target approved by SPTI. Importantly, and to confirm our direction, NKT's long-term target to reach net zero greenhouse gas emissions across the value chain was verified and approved by the Science-Based Target Initiative in the fourth quarter in 2024. We also made progress on our social commitments during 2024. Our performance with safety improved significantly compared to the year before and while we are positive with this improvement we are not at an acceptable level yet. In 2024 we introduced several additional safety measures to drive this metric down and NKT will continue this focus going forward. Furthermore, the female representation in senior leadership team positions has increased from 21 to 21 from 13% since 21 and in 24, 25% of our new hires were females. This, ladies and gentlemen, concludes my part of the presentation and I will now hand over the word to Lina to go through the financials. Slide 13, please.

Thank you Claes and good morning from me as well. So let me take you through NKT's financial highlights and we will start with the income statement on slide 14. So starting out at the top with revenue. As mentioned by Claes, we generated 23% organic growth in Q4 and it took us to 26% for the full year 2024. This was mainly driven by 34% organic growth in solution, as we executed on our high voltage order backlog would benefit from our investments in both capacity and capabilities. Additionally, the acquisition of Solidial contributed €32 million, equal to 6% growth to the top line in the quarter. Operational EBITDA amounted to €90 million, an increase of €27 million or 43% compared to the same quarter last year. Again, Solution was the main contributor with an improvement of €13 million, but our business line increased EBITDA. Full year EBITDA at 344 million euro, it's a 35% increase from last year. It's leading to a margin for the full year of 13.8%. Depreciations and amortization were slightly higher than last year, primarily due to the inclusion of solidar. That brings us to an EBIT of 60 million euros, a 20 million increase in the fourth quarter compared to last year at the same time, where the EBIT margin was 8.6% and now 24 closing out at 9.6%. That's an improvement of around one percentage point compared to last year. Financial items net was an income of 6 million euros in the quarter. It was driven by the interest income from our cash position, and this was in line with the development we have seen throughout the year. And for the year, financial items was an income of 34 million euros. Tax for the quarter amounted to 9 million euros, reflecting the higher earnings level. Tax rate for both Q4 and the full year was 14%. This leaves a net result of 57 million euros, 23 million higher compared to the net result from continuing operations of 34 million euros in Q4 2023. This was mainly driven by the improved EBITDA and income from financial items. Net result for the full year benefited from the gain related to the investment of NKT Photonics in Q2 and net result thereby landed at 337 million euros. Our employee headcount continued to increase, reflecting our growth journey and our investments to support this development. During 2024, we have added more than 1,000 new employees to MKT, with around 430 located at our site in Esposente, Portugal. So let's turn to the next slide to look at the cash flow development. Free cash flow for the fourth quarter amounted to 152 million euros, driven by EBITDA and a favourable effect from changes in working capital, more than offsetting investments conducted during the quarter. For the full year, 2024 free cash flow was 400 million euros. We had a strong ending to the year on working capital, benefiting from timing effects, and we had a positive effect of almost €300 million in Q4. This was a result of normal quarterly fluctuations in solutions related to the phasing between milestone payments and project execution. The positive timing effect from Q4 will most likely have an adverse effect at the beginning of 2025. As expected, investments increased and amounted to €216 million in the quarter as we are ramping up our investment program mainly in solutions, but also in applications. This was nearly a doubling compared to the level in Q4 2023. Including proceeds from divestments of NKT Photonics in Q2, net cash flow for 2024 was €621 million. Let's turn to the next slide and the balance sheet. Due to the positive development within working capital as mentioned on the previous slide, the working capital position improved. It stood at a negative 1.4 billion euros at the end of the year. Rosy improved further to 35% for the quarter, up from 20% last year, due to a combination of higher EBIT and lower capital employed from the working capital position. For 2024, ROSI was 31% compared to 15% in 2023. ROSI will continue to vary between quarters and over the coming years. This development is depending on earnings from operations, timing of payments from customers, and not least a higher asset base from ongoing investments. During 2024, we have ramped up our investment programs and CAPEX has gradually increased. As communicated in connection with the update of our medium-term financial ambitions in December, we expect this development to continue into the coming years. The net cash position increased to 1.3 billion euros at the end of the year and thereby we maintained our robust financial position. This is needed to fund our ongoing investments across the business and in addition the financial foundation allows us to continue progressing on the growth journey that lies ahead of us in the coming years. The value of NKT's issued guarantees increased to 2.7 billion euros at the end of the year, up from 2.5 billion at the end of Q3 and 2.1 billion at the end of 2023. Please go to the next slide, where we will go through the outlook for 2025. For 2025, we expect revenue in standard metal prices in the range of 2.37 to 2.52 billion euros and operational EBITDA between 330 and 380 million euros. The outlook for 2025 reflects limited growth in solutions. As we have discussed before, production and installation capacity available in 2025 will be the same as in 2024. In combination with a lower level of subcontracted revenue, revenue solutions could be slightly lower in 2025, with organic growth in the range between 0 to mid-single digit percentage negative. This is as you always should expect, depending on execution and timing of specific operations in different projects. We will in 2025 continue to execute on our backlog, mainly on projects awarded in 2020. 2020 to 2022 and like in 2024, we'll have a higher cost base and solutions to support the ongoing investments, production ramp up and future value creation. This is all reflected in the current EBITDA outlook. Both applications and services and accessories are expected to contribute positively to the revenue and EBITDA development in 2025. The Solidaire acquisition will have a full year effect compared to six months in the last year, 2024, and the additional capacity in Sweden and Czech is expected to contribute with high single-digit growth to the business line. Services and accessories are expected to see positive effects from capacity ramp-up, and in general the business line is dependent on the activity level in the market. Currently, NKT is going through a heavy investment phase, with construction activities ongoing at multiple sites. In connection with the update of our medium-term financial ambitions in December, we shared our CAPEX expectations for the period up to 2028 of around 2 billion euros. We also gave indication that you should expect the CAPEX spend to be front-loaded, with 2025 being the year with the highest level. This indication still holds, and a step up in CAPEX is therefore expected compared to the 463 million spent in 2024. Also, it should be kept in mind that with the projects ongoing, some variables could shift during the year and specific items could move into 2026. As always, the outlook rests on several assumptions. First of all, satisfactory execution of our high voltage investments and projects along with satisfactory operational execution across business lines. Market conditions for applications and services and accessories are expected to be stable, including normalized offshore power cable repair work activity. We assume limited supply chain disruptions with access to the required labor, materials and services and a stable development in global economy, foreign currency and metal prices. Please turn to slide 18. Before we conclude the call, I would like to spend a few moments on our medium-term financial ambition for 2028, which we updated in December. We see a continued strong growth journey ahead of us. And for the period from 2021 to 2028, we expect an organic revenue curve of more than 14%. This is a reflection of current order backlog, including the pricing of the projects and the additional capacity coming online. Depending on how you calculate this, it means that we in this period will more than triple the company's revenue from 1.1 billion euros generated in 2020. On the basis of this, in 2028, we expect to generate an operational EBITDA of more than 700 million euro, which is more than doubling compared to the 344 million in 2024, driven by improved profitability across all business lines. And last but not least, to secure value creation, return on capital employed will exceed 20% in 2028 due to the improved earning level reflecting a solid return on our investments. Now let's turn to the next slide and last slide where I will repeat the highlights of 2024. 2024 was a pivotal year for NKT. We delivered organic growth of 26%, and in Q4, operational EBITDA grew by 35%. It was thereby the ninth consecutive quarter with double-digit growth for both revenue and operational EBITDA. We reached operational EBITDA of 344 million euros, the highest result in NKT's history and thereby underpinning the positive development. Reflecting on the 2024 result in the bigger picture and looking back to 2020, NKT has gone from revenue just above €1 billion to now €2.5 billion. At the same time, operational EBITDA has improved from €57 million to now €344 million. This is truly an impressive development. With the divestment of NKT Photonics in Q2, we concluded the strategic transformation of NKT into a pure-play cable solutions provider and with the acquisition of SolidL, we strengthened our market position. Finally, we advanced on our sustainability efforts where we maintain a strong and dedicated commitment. In relation to climate change and decarbonisation of societies, NKT plays a vital role. The journey is not without challenges which we need to address to meet our ambitious targets. This concludes the presentation and we are now ready to take your questions. Operator, please.