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

Good day, everybody. My name is Claes Westerlind, and I am pleased to welcome you to this webcast presentation, which we will focus on NKT growth opportunities and also the upcoming high-voltage investment program. I want to draw your attention before we go into the material on this slide -- and the fact that this -- both the material and the comments that we will add to them contains forward-looking statements. And presenting myself, Claes Westerlind, I'm since about 2 weeks the new Group CEO and President of NKT. And on the side of me, I also have Line Andrea Fandrup, the CFO of this company. And we will together take you through the material and presentation in today's meeting. So some reflections about the key messages in today's announcement, starting with the market. The market has grown significantly in recent years, and the outlook in the high-voltage market and in cables in general remains very positive, and we will get into this a little bit more as we go through the presentation. We have been fortunate to acquire significant order intake in the recent 2 years. And that, together with the fact that there is a strong market outlook, we are today confirming and in a more detailed way that we are to invest approximately EUR 1 billion in additional high-voltage production and also installation capabilities. With this new RoCE accretive investment program and also our improved high-voltage order backlog, we have also communicated in today's announcement about the upgraded and extended medium-term financial outlook. Further, we intend to raise around EUR 350 million through a rights issue. And this will also -- the aim is that this will provide us with the required capital structure to drive on the one side our continuous operations, but also on the other side, the high-voltage investment program. But if we take a step back a little bit and reflect about where we are coming from as a company and as a group, this slide shows a couple of things which we are proud of, also stating that we have managed well in recent years. Starting with the improvement of financial performance, which has been done as you can see, both from a revenue perspective and also our operational EBITDA with significant growth on both these dimensions, measuring from 2019 into 2022. We have been acting in a growing attractive high-voltage market that is very clearly visible also in our backlog, which at the end of 2019 stood at EUR 1.4 billion, and at the end of the quarter this year is up to EUR 7 billion. We have also under-take in the meantime, a number of efficiency measures related to asset utilization, our product portfolio and also optimizing our cost base, improved underline that this is not only in one of the business areas, but basically across all solutions, applications, accessories as well as service. We have strengthened our balance sheet, lowering the leverage significantly from 2019 into 2022. And last but not least, of course, during these years, we've had a very much focused work on our core power cable business and the execution of our ongoing projects. And this is, of course, one of the extremely important ingredients on our pathway to become a pure power cable player with also very strong execution capabilities. And the last part here is especially important, taking risk management capabilities into mind, both when it comes to executing on our projects, but also our experience in conducting investments, which has been done across the group, but more significantly in both Cologne and also Karlskrona. So having a look at this slide, I think we stand much stronger as a company today versus how we looked in 2019. And in doing that, also been taking pride in the fact that we've delivered on our targets, and we have strengthened the foundation upon which we are now continuing to build upon. I mentioned the market initially in the presentation, and this is a rough picture of how the global annual energy generation is expected to develop. And you can see here dating from 2010 to where we are roughly now in 2020 and up until 2050. And this is indeed a radical development where we see the green transition really is taking major steps forward basically starting now towards 2030, but also continuing up until 2050. There is a strong growth in renewable sector that benefits companies like us across our different business lines. It's viable in the generation side, transmission side and also distribution side areas, which NKT as a company, we're all active in. There is also a change in the supply-demand pattern as we move away from fossil fuel into offshore wind, as an example, that displaces the generations versus the demand and changes the need of our power grids, replicating into even further needs when it comes to, for example, power cables. And the personal reflection, if you look into the 2050 target and the 2040 targets, it's still so that 20% to 40% will be nonrenewable. So I think we, as a society and of course, we, as a company, ask ourselves, will this be enough to reach the climate targets that the world is striving for, or is there even an upside to what we see on this page. So again a little bit on where we are and what we can offer. We are acting -- we are based primarily in Europe with a global reach. And as you can see to the left on this picture, looking at the political ambitions when it comes to offshore wind expansions across Europe, you can say that if today you were to expand your capabilities in supporting the green transition, Europe, for sure, is not the wrong place to be. And that's why we also are very satisfied with us having the main operational base in Europe for the moment, and that this is also the place where we are now continuing to expand [ forward ]. If we look to the right and referring to what I said on the trends, in general, we are also able with our technical offerings, both as far as production goals and installation to support across the green expansion and the green transitions both for offshore cables, either that may AC or DC cable solutions, onshore AC and DC and also taking this into our turnkey concept in delivering turnkey-ready transmission systems to our customers. We have been, we are and we will continue to be active in both the Interconnector segments, the Offshore Wind segments, power from shore as well as underground. And as we can see and as you just saw on the previous page, the ambitions in Europe are massive when it comes to offshore wind going forward. For the ones of you who were part of the -- our broadcast a couple of weeks back in conjunction with the Q1 release, this is a slide that is easy to recognize. It starts a little bit with us looking backwards on where we have been now in 2020 and '22 and the products we are executing for the moment. You can see a list of the products we are currently in execution of. And what I wanted to note here is the fact that there is a broadness in what we are doing. We have products across all the different segments that I mentioned in the previous page. We have products across both HVDC and also HVAC, these segments. And we also can note that we are expanding our geography when it comes to executing large power products, for example, towards the Med region in 2020, Attica-Crete and also across the North Atlantic in 2022 with the award of both Champlain Hudson Power Express, and also the Hertel projects. And I'm also very satisfied to see that we have a number of returning customers coming back to us again and again, which in itself is a good testament, not only to our ability to win the project, but also executed in a good manner so that the customer returns. Reflecting on the market and going forward and where we have been increasing from the years of 2016 to '19 from around EUR 2 billion and upwards, we stand now at around -- with projections around EUR 8 billion. And this we can see could go even higher, both from '22 to '24, but especially also in the future. So it's a positive outlook following the trends on the preceding slides. And last but not least, on the historic market share where we have been around 25% a couple of years ago when we had steadily increased that sales as well, which shows our ability to actually win orders on the market and that both the preceding years are a testament of, but not also the least the first quarter of this year. And that in itself, of course, shows in our backlog, where as we also discussed earlier in the presentation, from 2019, there has been a rapid increase in the backlog. We have multiplied our backlog with basically 5x to how we closed Q1, 2023 compared to 2019, which is the important foundation for us now taking a prudent position to expand even further upon. It's not built on speculation or anticipation. It's built on us actually acquiring major orders to an extent that is now a necessity for us to expand further in order to serve both our existing backlog, but also our future backlog to [ come ] and customers. There were some key order wins post the Q1 results being announced and those included the Bay of Biscay interconnector and also the TenneT frame agreement. Those 2 in itself is further an evidence to what I just said. Bay of Biscay is another entrance for us or a recognition in the Med region with the customers of REE and also RTE and the TenneT framework is a returning customer and basically a paradigm shift in how cable volumes are awarded into the market. Rather than as individual projects, now customers take the approach of awarding a bunch of projects with the ability to secure even further volumes. So this good story -- and I think it is really a good growth story or even a sunshine story -- is then bringing us into the EUR 1 billion investment program, which is aiming at further -- even further strengthening and can [ be ] leading position and our ability to support our customers. So looking into the next page to be a little bit more articulate around where we are and where we are now heading. We have 2 factories for the moment for high-voltage cable production that is in Karlskrona and also Cologne, as everybody is well aware. We also have a cable-lay vessel, our NKT Victoria. Both these sites have been developed, and I will come back to -- Karlskrona nurtured and partly also invested in across the last couple of years to be state-of-the-art sites, each with their own focus. Cologne it's an leading center for onshore production with the capability to also do offshore cables and the Karlskrona plant, which is a world-leading site for offshore cable production, AC and DC also capable to produce land cables. And after the investment that we are now deciding on, we will have then 3 factories, which will be 1 in Cologne and then 2 factories in Karlskrona, what we call the Karlskrona North factory and also Karlskrona South factory. And this new factory will be built and also operated in the immediate vicinity of the existing factory. We are also announcing today that we are building and investing in a second cable-lay vessel, a vessel which you will see a picture of later, with record high both capability and capacity if you compare to existing vessels which are on the market today. This is a large investment program which is starting now and already has started and the target is that these new assets will come into operation in 2027. It's both a prerequisite for delivering upon the orders we have to-date, but even further so will allow NKT to continue to grow with a growing market as well. Reflecting on the site of Karlskrona and our operations there, which I know a fair bit about having been there since 2014, this is an operation just like the rest of NKT with a wealth of experience and knowledge. The history is more than 100 years, not on this very geographic location, but taking Stockholm on the Karlskrona site into combination. For example, it was on this site that HVDC, MIK was -- were first invented and deployed in the 1950s. And it was also in this site by this organization that HVDC XLPE cables were invented and first commercially deployed in the end of the 90s. So I think that in itself tells that we have a wealth of a long-standing experience in addressing both investments, but also the delivery of projects. There has been a gradual expansion, as I mentioned, of this site, as you can see on the pictures here in different phases, also in different sizes. There was a major expansion project back in 2010 to 2015, some modest or more modest expansions between 2015 and '17 and then another major expansion just conducted from 2020 to '23. And these gradual expansions and also main expansions at times not only have been planned and talked about, but we have proven that we are able as a company to do them. And we are able to do that while also delivering on our promises to our customers. So this is investments and at the same time, flying the plane. And doing investments and also running operations, of course, that comes into several different topics, technology, production, installations, risk management and project management. They go hand-in-hand, and they're all very important for both executing our products to our customers, but also to be able to do our investments in a prudent, timely and in a cost careful manner. And thirdly, it's important to say that another thing has been proving on this journey, and that's our ability to attract competence. This site when it was established in Karlskrona, there were 118 people moving down from [ Stockholm ] into the Karlskrona plant. That has grown since immensely. And in the last years with the -- last 3 years with 300 people alone, manifesting our ability to actually attract and get the competence we need both to expand, but also to deliver on our promises. So this leads into the big boom. And here, you can see a geographic illustration by far not capturing all of this investment, but at least the most visual aspect of it, which is the third tower. You can see the Karlskrona plant as she looks today with the 2 towers and a significant factory area. Now I'm unable to use the cursor in this picture. But I talked about the Karlskrona North factory and the Karlskrona South factory. What you see here, if you disregard the new tower it's the Karlskrona North factory. This picture is taken from the North in Karlskrona. And the southern factory will basically be starting with the tower and then proceeding south towards the [ border ]. So it will be a new end-to-end factory, starting with material handling, logistics, conductor stranding, going into extrusion, heat treatment, lead extrusion, armoring and file storage. And this entire value chain will be covered by this investment, obviously, drawing on the upsides and the fact that we are in the absolute vicinity of one of the oldest sea cable production sites for the moment. Also drawing up on the fact that we have material laboratories, we have testing laboratories for electrical high-voltage testing, et cetera, which gives us a benefit when investing and also will grant us a benefit as we take this asset into operation. I also want to comment on the size of the investment. The EUR 1 billion covers both the factory and also the vessel. And it is a sizable investment, but it is also sizable when you look at the profitability that this will generate as we take these assets into operation, and Line will come back to that. And we will not invest with the mind of the current existing market. This is an investment that also aims to be able to capture the developments to come with respect to long-length. Products are getting larger and larger. And of course, our customers are expecting us to be more and more competitive also in the competition with our fellow cable producers. So therefore long-length concepts -- aspects like large conductors is absolutely fundamental. And this factory will be invested and built exactly with those sharpened capabilities in mind. It will generate more than 500 new jobs in [ solutions ] and in Karlskrona, out of which a large part of that is obviously blue colors and the rest is white colors. Again, I want to refer back to what I just said on the previous page with our proven ability to attract 300 people in the last 3 years. So, we feel confident that we are able to also deal with the forthcoming topic on attracting further competence. If we go to next page, you don't build an onshore factory without an offshore factory. So here is also illustration of the vessel in this investment and in the renewable strategy that NKT has laid out and is following suit on, we are keeping the turnkey concept in very high regard. And this investment here also stays true to not only that strategy, but also this very concept. And by that, with us gradually having expanded, we have now grown out of the capacity that Victoria is able to provide us with. So this is now also a decision where we will design and build and operate yet another vessel. This vessel will be more capable and grant us further capacity than any other existing vessel on the market. And to my comments on the factory and about the future proofing of the factory referring to long-length, large conductor, et cetera, the same goes for the vessel. This vessel is built for whatever is there today and what we expect to come on the market in the next coming years. [ She ] will complement Victoria in a very good manner as she will be a more sizable vessel. And as such, grant us also a good flexibility in serving our customers and serving the factories of both Cologne and Karlskrona. And last but not the least, staying true to the turnkey concept, both for our customers, but also internally for us as a risk management perspective to be in control, to be part of the signing of the vessel and also being in full control of the vessel as we execute our projects. We have many years back learned the hard way that, that is the absolute right way to conduct the cable business. And with those words, ladies and gentlemen, I wish to hand over with warm hand to Line for some deep dive on the financials.

Thank you very much, Claes. So with a very strong market and this choice of investment in the future, we also make a step change in our financial ambitions going forward. So quickly highlighting here and then dwell into the detail on the coming slides. But NKT will continue to grow beyond '25 above 12%. We will increase the operational EBITDA on -- for '25. We are now communicating above EUR 300 million and for 2028 above EUR 550 million, and we will improve the returns on the company in '25, now expected above 15% and in '28 expected above 28%. So for the comparison base and a little bit more dwelling going to the next slide, the latest ambitions we introduced to you in September '22 when we hosted our Capital Markets Day. And as you can see from the period since then, many things has changed. Margins are definitely favorable. They're strong in terms of demand and also enabling therefore a very sound pricing. So we will continue to grow and in 3 years behind us now of 15% growth. And now we see a trajectory of 5 years ahead of us where we are on average would grow 12%, of course, depending on let's say, investments coming online during the duration of that time horizon. On the operational EBITDA, we communicated back in September last year that we expected an EBITDA margin up till 16%. We are now changing our [ main ] communication to be above EUR 300 million. This corresponds to more or less the upper half of the earlier communicated range of -- meaning of 14% to 16% ratio. In 2028, we will be above EUR 550 million and basically, the increase between the years is driven out of the investment here in the first factory and a second [indiscernible]. Moving into the RoCE of the year, we expect to deliver above the previously communicated 2025 RoCE ambition. And we have looked into different definitions of RoCE also, based on good dialogue with our shareholders and analysts, and we will stay with the current RoCE definition of operational EBIT for continuing operations as a percentage of average of the last 5 quarters of capital employed for continuing operations. And this is more like comparable to how the industry is also measuring RoCE, but this doesn't change the fact that we have of course had oversight on the different return metrics in general. And we have evaluated and looked into most of those, and we can communicate that this investment is expected to be fully accretive once in operation from 2027 to a large degree and also all the different share metrics you can think about. When we go to the next slide then, of course, communicating over longer horizons, demands and assumptions, the most critical we list here, it is that the market demand is continuing to be favorable in terms of the supply/demand balance as we see it today, that we will ensure further high-voltage project awards to enable high utilization of our production, our assets in general, that we would see a stable development of the global economy and that we will continue to have satisfactory execution of our high-voltage investment with the program ahead of us and also on our projects to deliver on the expected profitability margins. We have the assumption also of a stable supply chain with limited disruption and access to the required labor, materials and services. And also, we are adding here the assumption of a stable development in metal prices, which is an assumption behind the RoCE number. If we go into the next slide to talk more into the capital structure of NKT, and also later coming back to the capital raise that we will do. Going just some months back, we communicated that it was important for NKT to secure that we could be part of tendering on these frame agreements where the TenneT frame agreement was the first one. And that demand that we could secure and commit to our customers that we would be able to expand our factors to deliver the cable, but also that we could secure, we have a robust capital structure for the company we are becoming. So this is very much about being ready for the future in a larger project business that will continue to grow and where the project business is considered also one where we have to mitigate and act on risk. So the stronger balance sheet will very much -- we will look into the leverage level. And here, we are having a stronger ambition of securing a leverage ratio below 0, which is compared to the earlier communicated up to 1. And we will secure -- this will secure a low debt level. And in general, we will, of course, be very aware of cash generation and management of net working capital, where we do see large swings in our current operations. Further, we need to secure that we can at all times secure the needed project guarantees for winning the project and when we execute. And also, we need to have a liquidity to cater for any kind of collaterals related to hedging of commodities and currency exposures. Turning to the next slide to say more about the planned capital raise. So again, we asked for the authorization of up to 50% rights issue at the annual general meeting. And this was to secure, we could tender on the projects ahead of us or the necessity. What has happened then -- since then is that we have gone into a strong collaboration with the Swedish government, but also securing the site and the location in Sweden. This has further enabling a, collaboration with the Swedish export accreditations team, which are coming and supporting NKT with a significant amount of guarantee capacity. What we are also seeing in our negotiations with customers is that since the demand supply curve is strong and stable of the cable supply, this, of course, enables also discussions about cash flow size of the projects while being executed. And here we are also, to a large extent, enabling the investment program over the coming years. So there are different elements into this item we communicate today of the EUR 350 million, which you note is not at least with the current share price close to 50% capital [ increase ]. It is much low, and of course, eventually, the [ sense of ] pricing will be subject to market conditions, but it's out of a very strong position that's prudent. This will give us flexibility to act on growth opportunities, which are very good ahead of us. It will enable us to fund the value-enhancing investment solutions, and it will secure we have the right balance sheet and capital structure for NKT's future and taking on the growth. Turning to the next slide, not so much of an update on Photonics, as we could probably all wish for. More or less, this is the same statement that we shared in Q1 -- after the Q1 results. So far, we are awaiting the purchasers' further actions in response to the decision of the Danish authority, and we are evaluating our options considering this position's segments [indiscernible]. We are well protected against this situation. What we just want to underline again is that the Board of Directors still intends to divest NKT Photonics. And we will have to come to that process on the other side of the Purchasers' actions and decision ahead of us. As we have spoken with some about, let's say, the change around NKT Photonics, that current doesn't change anything for the investment in the cable's division, neither does it change anything on the funding or the capital ratio we're doing here. On the short-term, we have sufficient funds to actually initiate and execute on the investment program. And over the medium, long-term, when the investment steps up, we expect to have more [indiscernible]. Going to the next slide and repeating the key message is that NKT started out with -- high-voltage power cable market has grown significantly in recent years. It's a structural change and the outlook remains very positive, driven by the transition to the renewable energy and the general electrification of societies. So to deliver on the significant order intake we already have, we will invest approximately EUR 1 billion in additional high-voltage production installation capabilities and capacity. We will -- we have communicated a new set of medium-term financial ambitions and they are reconfirming the strong outlook on continued growth in NKT, improved earnings level and a higher RoCE level for the company and also [indiscernible] policy. We intend to raise around EUR 350 million to a rights issue in due course. With that, we will turn over to questions and answers.

[Operator Instructions] And your first question comes from the line of [ Mojo Adebayo ], Goldman Sachs.

I was just wondering if you could provide more color on the upgrade of the 2020 fibers given the state that new [ acts ] will only be fully ramped up by 2027? So despite being ahead on your organic growth target and in line with the margin target will be ahead on EBITDA absolute guidance? We can only sort of see a RoCE towards 12% in 2025. So wondering if you could sort of provide more color on that so we can understand the working capital assumptions and particularly advances considered inside the new targets?

Yes. So if I understand it's -- right here, it's a little bit more color on the '25 upgrade to the ambition on the RoCE business. And -- of course, when we came out in '22 in September with the ambition at that point, we still had a lot of uncertainties. And I can say that the last 9 months has proven also very strong in understanding the whole market demand. So what we see now is a strong demand for our cable solution, and that actually goes across our medium-voltage and high-voltage space. So, we will definitely see a good earning level. And also, meanwhile, executing on our investment program, we will a build a backlog for a latter NKT and full utilization of the new factory also. And when we have -- when we are awarded more orders for a bigger capacity, that also means more cash in from awards and prepayments and execution, and this is also contributing to [ improved development ].

[Operator Instructions] And your next question comes from the line of Kristian Johansen from SEB.

So I have 3 questions, I'll do it one-by-one. So you mentioned your authority to issue up to 50% new shares, but you also have an authority to issue 10% new shares without preemptive, right? So considering that your equity need is not larger than it is and how the share -- stock market is reacting to today's news, have you at all considered to instead just do the 10% without preemptive price?

I think many considerings has been underway. Of course, what we have sized the capital raise from is also in the investment -- the size of the investment and the strength of the capital structure that we see is necessity. So therefore, we have decided to go for a rights issue of this size [ appeared ] and also to secure we actually favor our existing shareholders in these issues.

Then my second question goes to the initial utilization of the new vessel. So from what I understand, you are going to be building the new vessel alongside the new factory, meaning that those investments will be done by 2026. So obviously, I mean, you need to produce a cable before you can install it with the vessels. So how do you secure the utilization of the vessels from day 1 in the first year? Because I would assume that it takes a while until your new factory is ramped up and you have a full load on the vessel?

Yes. I think that's a very good and relevant question, and one that also, of course, we are considering. We have not yet decided exactly when to take delivery of the new vessel. That, of course, will be done in conjunction with ensuring also the load for the same. But I can also say that NKT Victoria was taking delivery of -- in 2017 when we had 1 tower in Karlskrona and when we had the Cologne factory. Since then, we have built our tower. So the actual need of more cable and capacity has grown ahead of us now actually deciding to acquire a new vessel. So it's not a given one that the new vessel will only install cables from the newly built factory. I hope that is an answer enough to your question.

It definitely is. And then my last question just goes to expected level of depreciation. So how much depreciation and amortization do you expect that these new investments will add by 2027?

That was a detailed question. We just add to -- we expect around EUR 50 million of depreciation from that deal.

[Operator Instructions] There are currently no further -- We've just had one more question come in. One moment, please. And your question comes from the line of Akash Gupta from JPMorgan.