NKT A/S (NKT) Earnings Call Transcript & Summary

Yes. Good morning, everybody. I just got introduced and I'm the CEO of NKT A/S. Thanks that you take the time to listen to our update on the rights issue. And I have here in the room with me our CFO, Line Andrea Fandrup; and also Michael Nielsen, Head of Investor Relations and Treasury. So just going to an overview on the road map of NKT and recent development over the last years. If we look back between 2016 and 2017, there were one key milestone where NKT acquired ABB High Voltage Cables, which -- and with this acquisition, they have acquired also the technology of the DC cables, which is today key for the growth in the renewable market. Further there were 2 acquisition on Photonics. Also in this year, 2017, we had the demerger of Nilfisk and so that the company could focus on power cables and Photonics. And there are some smaller divestments in certain areas. From 2017 to 2018, there were some challenging market conditions. Projects have been postponed and not awarded, and as a consequence, we have seen very low earnings in the year 2019. In '18 then second half, we were successful in cutting awards of around -- more than EUR 800 million on projects like Johan Sverdrup 2, Ostwind, Moray East and so on. And during that time, '17/'18, we had also a good growth on Photonics. 2019 and first year 2020, we could further increase the order intake of EUR 750 million in 2019. And then with the German corridor project, which we were very successful of more than EUR 1.5 billion in second quarter 2020. As a consequence of these large orders, we did a capital increase in May of EUR 93 million to strengthen our financial position as a first step. And today, we announced the second step. Also during this period, the management has changed. Line has joined but also in my management team with several new team members. Today, in the second half of 2020, we have further increased the order backlog to a record high number of EUR 3.1 billion. And -- which is highest ever. And in Photonics, unfortunately, due to the COVID-19 situation and the market situation, we resumed the strategic review. As a consequence of the high order intake and the need for capital -- for investing in factory expansion, we found prudent to strengthen our balance sheet. Going to the next slide. Here on the background, the key element really is the market is attractive. The outlook is good. The projects are becoming bigger. And with this also, to a certain extent, the cash flow is more volatile, lumpy. And also, of course, with the large projects, the risks are going up. So it's prudent to have a stronger balance sheet. So that was one main reason. Further, in order to execute the large projects, the corridor project, but also new orders which we expected, we need to invest in expansion in the factory in Karlskrona and Cologne. And that's what we will do with these proceeds hopefully we will get through this rights issue. And we have, of course, unfortunately, still uncertainty over the COVID-19 in the market with the second wave, which has a big impact to the entire society. Whereas I have to say, we at NKT has limited impact but Photonics has more severe impact due to COVID-19 as they deliver globally. Going to the next slide, overview of NKT. NKT consists of 2 parts: NKT Cables and NKT Photonics, so the focus today is on NKT Cables as the rights issue is for strengthening NKT. So NKT is -- we are really in the phase here of the green transformation. And with our product solutions, we will contribute to the CO2 reduction, which I consider as one of the key challenges of this century to limit the climate impact. So we see also on the bottom, our revenues over the last 12 months around EUR 1.1 billion, it's on our metal price; and around EUR 50 million operational EBITDA. And then on the right, you see Photonics who's active in the high-end fiber-based photonic components and organic growth and acquisition is the main key topic. Going to the next slide. The business in cable consists of 3 business line solutions where we have the high-voltage projects, offshore interconnectors, oil and gas is the majority of the revenues. Then we have the Application business with medium-voltage and low-voltage cable and building wires and telecom is around 37%. And Service & Accessories, with the smallest portion is around 12%. In our Photonics, we have 3 segments, Medical & Life Science; and Aerospace & Defense. Those are which are growing faster, but of the -- say, are the smallest; and then we have the Industrial segment of Photonics. Going to the next strategic initiatives. If you look at Solutions, key is obvious that we utilize the assets what we have in Karlskrona and Cologne and to the maximum extent to an optimum product mix, keep maintenance technology leadership and improve execution and production. So Solutions, we grow and we, going forward also, started to improve the margin. Application, it's all about efficiency, optimizing sales and operations for our portfolio, factory efficiency and several other initiatives to improve the margins, where I think this year, we were done on the first step to improve from last year. And Service & Accessories, it's -- we grow, we grow in new markets and we also have spent our portfolio and optimize our cost base. Photonics, the focus is on growth, which will come back. Actually, we turned back to organic growth of 3% in Q3, but we need to see that what will be the more normalized level after the COVID-19 is behind us. So growing is the goal and also here is the margin potential. If you look at the next slide, how NKT contributes to sustainability and the mega trends. We have here on one, the large project offshore wind is a mega-trend interconnector where we are very active. On the technology side, we have been successful with the Corridor project, the first 525 DC land interconnector, which is a milestone, a new area. And then we have on the other side here also the trend to more electrical cars and then you need to have the chargers. And obviously, you need to have cable to the charging station in order to charge the cars. And with growing volume on cables, power cables, also the demand for Service & Accessories will go up. And in Photonics, we have a fast growing -- we expect a fast-growing business in the fiberoptic laser technology. Organization. We have a new organization, I just mentioned, before Line has joined, but also in my management team, have some new colleagues there. And we are now committed to work further to deliver on our promises and to our sustainability targets. The good part is that all our company is supported by global initiatives from the European Commission. There will be huge investments in renewable energy to reduce the greenhouse emission by around 55% in 2030 and then 100% in 2050. This will trigger huge investments on offshore wind sites. And you can see on the slide here from 2022 of 25 gigawatts to 2030 228 gigawatts, that's 9x, and then again, 4.5x to around 1,000 gigawatts. That's massive expansion of offshore wind, which is in the pipeline. And then we have also investments in renovation of existing buildings, meaning also potentially putting solar panels on the roof, heat pumps to get a little of oil heating and electrical chargers. So there is also a trend and this needs to increase also from 1% to around 3% in order to meet the target -- the climate target goals of the European Commission. So good momentum here to support the business. If we go to the next slide, you see here how the backlog has developed. And as I mentioned earlier, we have increased the backlog to EUR 3.1 billion. Roughly, this is 4.9x the revenues of Solutions over 12 months, which is a massive increase, as you can see, compared to previous quarters. And you see also the quarterly revenues on Solutions, which is expected to go up going forward. Key orders received this year were Attica-Crete, the land cables and NI Technology. Shetland, the interconnector in Scotland from the main island to Shetland. BorWin5, the wind farm. And then SuedOstLink and SuedLink as a part of the German Corridor project, so some nice orders. Looking on the next slide. On the low-voltage, medium-voltage cables, there will be investment also in, again, the buildings, upgrade of buildings to improve the efficiency. There's a trend to the urbanization. More and more people live in urban areas. And all this needs to be -- get electrified using mainly cables, also from the acceptance point of view. And then the further the electricity grid, with all the changes in the renewable, needs to get update -- upgraded as it will be not changed only on the transmission level, but also on the sub-transmission and medium voltage level. And last but not least, also the equipment in the grid aged equipment needs to get replaced. And as example, we have just recently replaced the Öresund cable from 1973 by a new cable as it has reached the end of the lifetime. The other mega-trend is the electrical vehicles where it's more and more coming, and there's a lot of million charging points planned until 2025. And this also needs a lot of cabling in the cities in order to be able to charge the cars. So with this, I would like to hand over to the financial highlights to Line.

Yes. Thank you very much, Alex. So the next 7 slides or so, it's a little bit of looking at the installed performance of NKT and different business lines, especially the Photonics. And then we look ahead into how our outlook looks for and how that ties into what Alex just touched upon with the nice developments and mega-trends around us. So if you look at the first financial Slide 16, the overall group performance, the combination of both Photonics and the cables you have here. So if you start looking at the revenue development there, it is obvious if you look at the small rings and the red and the blue above the text that from '17 and ahead, Photonics until this year has had a very nice growth actually. And that also panned out to some margin that were very nice in those years. And then unfortunately, as other companies, Photonics is impacted by the COVID this year and, therefore, we see the growth decline on the revenue side of things. And then when you look at the cables part, we had some nice growth coming into '17 on the revenue. In '18 and '19 that had a flat and a shortfall due to the lack of orders we simply won over this period of time. And that panned out also into the earnings at the lower end of the graph here, where you see the negative effect of the fewer projects and the lack of utilization in the factories. What we've seen now in 2020 and if you look at the last 12 months, it is an upward trend, especially on the cables. So you see the larger order intake and you see some of the -- you see the execution of the orders already on hand, which is giving a 19% growth for NKT Cables alone. And you also see the earnings here increasing with that utilization. If you flip to the next slide, going in a little bit on the segment that Alex also touched upon. So it is, as you know, a varying business in terms of contribution of revenue and associated operational EBITDA. For the Solutions business, which is the major part of the cables, there is a clear strong link between the revenue part and the contribution into the EBITDA. What you see on the Applications business here, the orange is the large top line and then the lower-margin business that corresponds to the lower end of our EBITDA levels. Both Service & Accessories and Photonics here has a good margin with the revenue generated. So that's kind of how the development on the niche flows. If you go to the next slide, the Photonics will be more of a deep dive into each of the business lines and Photonics in a bit on the history. Further to the left, you have the high-voltage order backlog in market prices. And here, you see the nice uptake that Alex touched upon. When you then go to the middle one, the revenue, that is in standard metal prices. And here, you see exactly the development of the revenue shortage in '18, and shortcoming in '19, but where you also see the pickup there very nicely with 35% due to the higher voltage orders that is supporting the green transformation across Europe. Going to the operational EBITDA, you then see the margins of the projects we had in '18 and the shortcoming in '19, of course, impacting the overall levels compared to 2017. But you also see that there is a pickup in 2020 related to the projects we won to better utilization and execution of these. And this is, as you'll see later in the outlook, also what we expect to continue ahead and we have a close attention to that. Going to the next one, a bit on Applications here. Applications of around EUR 400 million on revenue. Going into '18 and a shortfall in '19 and then you see the growth here in 2020, which I would say despite of COVID. Actually, our spring turned out favorable in terms of not a material impact from COVID. Now we are at the end of the year and more businesses are impacted by COVID. So we are, kind of, waiting in this second round to see that the -- what kind of market developments will come from this. If you then look at the operational EBITDA over the same time horizon, we were at 5.8% EBITDA margin in 2017. And then due to market circumstances, we fell very short. And I would also say in '19 and some of you were probably here at that point in time, complexities and -- around our organization and how we run our plans and combined with some external factors, they made us come to very low. What we're seeing now is a good improvement, a strong improvement of product mix and how we execute on the business here. And this is the uptake we're seeing and expecting to come out with also. If you turn to the Services & Accessories, which is the smaller business line within NKT, but which has a very nice growth story attached to it. And of course, the Accessories also ties in very strongly to the high-voltage order backlog, so we do expect a good growth momentum to continue here. And in the Services, it's very dependent on the different services that needs any repair jobs needed. But over the years, it has been a growth story. We expect to see the growth momentum continue. And when you then look at the operational EBITDA, it is a margin that is in the higher end of it within the business lines. Over the years here, you have -- you see a slight decline, I would say. Some of this relates to, of course, some fluctuations of how each of the quarters fall out. But right now, also some investment in warehouses and factories because we are planning for growth and preparing ourselves for that. We will continue to see good margins coming out of this business. If you turn to Slide 21, the Photonics. Here you see what we already touched upon, the good growth story, the good impact in 2020 and then associated with the growth from '17 to '19, a very nice margin pickup. This year is very different. And you do see the decline in revenue and even also the cost structure that Photonics taking us to a low. We are, through Photonics, investing for the expected growth to come on the flip side of COVID-19, but of course, also to balance this over the short-term horizon. Turning to the next slide. It's looking into the -- how our capital structures at the end of September looked, when you look at our Q3 announcement. And how the 2 big activities here actually impact the balance. So if you look at the debt to gross debt level, what you see here is the revolving credit facility that in September closed at EUR 125 million. Due to the interest-bearing receivable, which was a full link into a cash collateral that we were guaranteeing towards just the financing partners we have. We had EUR 126 million there. After the balance sheet date, this was removed and therefore now is a part of our RCF, revolving credit facility, goes into 0 on the adjusted September announcement. If you -- the other thing that, of course, impacts here is the rights issue of our expected gross -- of the gross proceeds of EUR 175 million expected, which will impact, of course, our cash position and our equity. So by an adjusted 30 September 2020, you will see these flows. If you look at the gross debt maturity profile at the orange text are the adjusted 30th of September numbers that duly corresponds to both the rights issue and the cash collateral effects. So if you look at the longer-term debt, it is the mortgage loans coming in here. So after the fact here, we'll have unused facilities of the full revolving credit facility, which stands at EUR 300 million and EUR 177 million in cash. Yes. Through the next slide of the presentation, which is the financial outlook, we also touched upon to a large degree on our Q3 announcements. So just recapping here what it is we see and expect. We specified the 2020 guidance to the upper end of our guidance on the revenue and operational EBITDA. On the 2021, we are really guiding, I would say, a higher revenue than this year so a growth coming into 2021 and also a good improvement in performance on operational EBITDA to EUR 80 million to EUR 110 million. The underlying assumptions of 2021 when you guide in the early stages for us that we assume that we don't -- won't have a material impact from COVID-19 in our businesses. We will have satisfactory execution across all businesses. We will have additional awards impacting our 2020 financial and the high voltage. And our Applications business will continue to improve profitability and the satisfactory portfolio repairs in our Services business line. On the medium-term ambitions, the 10% compounded average growth rate over the period and associated operational EBITDA margin of approximately 10% to 14%. This -- the underlying assumption of this is also the COVID, no material impact. It is an optimal utilization of our factories and installation assets as well as continued successful awards of high-voltage orders. Project execution that is good and strong and an application that continues to improve profitability as well as Service & Accessories, which is keeping the growth momentum. That will take us into the medium-term ambition level. If you flip to the next slide, similar to Photonics, keeping their outlook from October as stated and not, at this point, guiding on '21 or medium term. For this business, we would like to see coming out of the COVID in a more stable business markets to -- and then we expect to see that the revenue will pick up again in terms of growth rates and associate profitability. On the -- this next slide, the capital structure target. Just to recap what we came out with also on the Q3 announcement, a change in our expected leverage ratio target, which the rights issue, of course, is a large contribution, too. It's going to a 1x leverage ratio target where we before was 1.5x. We do, as Alex also said, aim for this level, certainly to have a more, kind of, a stronger balance sheet to support also the transformation of the company into a larger project, doing business with a portfolio of projects that has a significant size and also a certain complexity to it in a span of time that is longer than we have seen historically. If you turn to the next one, the next 2 slides are more on the excess rights issue, what is the offering structure and there's, of course, much more to find on that also on our website. So what we expect from the rights issue to be seen is, of course, approximately EUR 176 million in gross proceeds, a rights issue in the subscription ratio of 1:3, which means that for all the different shareholders, they will receive one subscription rights per share. 3 subscription rights can be converted into 1 share in this rights issue. On our investors side, we can say that some of our largest existing Nordic and international shareholders have expressed their support directly to us on the rights issue and taking their share of this. Coming back again to the use of proceeds, strengthening the financial foundation, security comes into this new level of more scale, more different project portfolio and having a sustainable capital structure this period in time. The last slide before the question -- the Q&A is a little bit on the timing here. So today, publication of the prospectus. And from Monday, the rights trading period commences. It will close at 4th of December. And at the 10th of December, we will know the outcome of the offering. With that, I will turn over to the operator for Q&A.

[Operator Instructions] Our first for today is from Artem Tokarenko from Crédit Suisse.

I have 3, please. Firstly, could you talk a little bit about why you decided to increase the size of the equity raise from initial plan 20% to 33% now? And does it imply any incremental investment needs?

Yes. Let's say, in May, when we did the first ABB of 90 -- a little bit more than EUR 90 million, we had one project awarded that was SuedOstLink. Afterwards, we were successful in the SuedLink with more than EUR 1 billion, followed by Shetland and BorWin5. So we were extremely successful. And so that has resulted in -- that investment has, to a certain extent, increased compared to the original plan, what we had.

Okay. But just to double check on this, this comment basically relates to the EUR 150 million of expansionary CapEx, which you already disclosed this summer?

Yes, this we disclosed in -- when we had the press release about the SuedLink, was we had approximately EUR 150 million. And afterwards, we got Shetland and BorWin. And so this is approximately number and so we were not so specific here.

Okay. My second question is around your debt. Could you maybe give some comments on whether you expect any early redemptions of debt on the back of this? And also, what's your plan with the hybrid bonds, which is up for their first call in 2022?

So thank you for the question here on the debt. So, so far, what we're going out with now is an assumption base that we're lowering our debt with this rights issue to get to the -- also the targeted leverage ratio. The hybrid is up in 2022, as you say, and we will, at that point, consider whether to continue or refinance in a different manner. NKT has come through a large transformation now and over the 2021. So we will also allow ourselves the time to decide on that.

Okay. And my last question is around the project pipeline. At the Q3 conference call, you mentioned that there are a couple of projects for you to win later this year. We've obviously seen Prysmian announcing one of the big projects in the markets. Does this change your outlook for this year in any way? And also as a follow-up to this question. I think the submarine cables market has been around EUR 3 billion to EUR 4 billion this year. Considering all the projects you track, how do you see the market in terms of the size for the next year?

I mean it doesn't change our outlook. And I mean, we were very successful and we can also not be into everything. So there are still other projects out where we have chances and we follow. We cannot close this project and follow up on those. For next year, there's a lot of projects in the market and question will that the timing remains as planned. And so there's, yes, a whole list of offshore winds, but potentially also interconnectors if they materialize on time and on DC technology but also somewhat require AC. So the market outlook looks good also for next year.

[Operator Instructions] The next is from Kristian Johansen from Danske Bank.