Good day and thank you for standing by. Welcome to the NKT Q1 Report 2022 conference call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Alexander Kara. Please go ahead.
Thank you. Good morning, everybody, and thank you that you take the time to listen to our Q1 results. Today we have here in the room our presenter. It's Line Andrea Fandrup, the CFO NKT, myself and Basil Garabet, the President and CEO of NKT Photonics. If you look at the key highlights from Q1 2022, from this quarter, the cable business has grown organically 7%.
Here, main contributor was application with a record high quarterly revenues, which contributed substantially. Operational EBITDA has increased from 10.2% to 12%, which is a 1.8 percentage point increase. On the development on upgrades on Karlskrona and Cologne, the high voltage factory is going according to plan, and the investment will be completed this year by end of the year at the latest.
Also in Q1, we had an acquisition, a family-owned business, Ventcroft Ltd. in U.K. and where we produce fire-resistant power cables which will help us to grow in this segment. Photonics has grown 7% organic and we divested the LIOS sensing business. Now going forward NKT Photonics will focus on the core business.
If you look at the business performance in the first quarter, the solution, despite that we have lower revenues of approximately DKK 10 million, we had a good execution and efficiency initiatives which contributed to the good result on operational EBITDA. Application had a strong quarter in terms of revenues and also on operational EBITDA driven by market which is in favor of all products what we have. We have grown in all countries with all products in all markets.
I mentioned already acquisition which help us to strengthen our position in the fire-resistant cable. Service and accessories revenues operational EBITDA was lower than last year the same quarter and last year we had a very high Q1 as you know.
The revenues went up from EUR 296 million to EUR 297 million and operational EBITDA from EUR 30 million to EUR 38 million . In round numbers 10.2%-12% percentage points. If you look at Solutions, we have a little bit lower revenues than the same quarter before, EUR 10 million. This was due to the mix of the production. However, the operational EBITDA increased from 12.1% to 1 6.4% percentage points.
We had a good execution on several projects and they are listed here on slide four, Wind Farm, Dogger Bank A, where we had the first campaign on laying Dogger Bank C, the Shetland project, but also the Ostwind 2. The Karlskrona upgrade in Cologne is progressing as planned. I would like you also to mention, even if not related to Q1, we have started the first production of the SuedLink in Karlskrona just recently.
The NKT Victoria had a satisfactory deployment and was involved in several projects. Overall a good quarter. A strong performance for solutions. If you look at the market, the market outlook is positive.
We had, if it comes to order variation orders of existing projects and onshore projects in Q1, the total market was at around awards of EUR 2 billion, mainly projects in Europe. As we said in the annual report, the market for 2022, 2023 and 2024 years to come is around EUR 7 billion-EUR 8 billion.
I would like here also to mention yesterday was announced in an offshore wind summit in Denmark with the presence of Ursula von der Leyen and Olaf Scholz, the German Chancellor, that the four countries, Germany, Belgium, Netherlands and Denmark, plan to increase the installation of offshore wind to 150 GW till 2050, which is tenfold in the North Sea.
That will also be a further accelerator and good for the cable industry. The European Commission also have outlined that they want to be less dependent on Russian gas, and that will also be positive for the cable market. You see here some projects of the recent orders which we have won.
If you look at the order backlog in NKT, it went slightly down from Q4, EUR 2.87 billion to EUR 2.75 billion, but still very strong. We work on several projects in offshore wind, in interconnectors and also oil and gas. You see here roughly the revenue distribution for the remaining part of the year, 20% onshore and 80% offshore. If we come to Applications. Applications had a very good quarter.
We increased sales in all the countries where we sell with all the products. We increased organic growth by 32%. This of course also needs to be seen in relation to a relatively weak Q1 last year. Nevertheless, 32% growth is a strong quarter. Also, operational EBITDA improved from 5.7% to 7.9% compared to last year.
Strong quarter, as I said, with all products in all countries from low voltage 1 kV to medium voltage, driven by the clean agenda with upgrade of power grids and also with an increased number of electric vehicles. If you look at service and accessories, the revenues were lower and also the earnings were lower compared to Q1. Q1 last year was very strong with several repairs.
This year we had one repair in Q1, a complex compound, which is a cable connection between Denmark and Sweden. We had some temporary cost increase due to the transfer of high voltage accessories from Germany, Cologne to Alingsås in Sweden. We established a hub, a service hub in Gdynia, which will help us to serve the market in Poland but also in the Baltic with increased market outlook. Overall the sales in medium voltage and accessories went up, whereas we had some decrease in the high voltage part. With this, I will hand over to Basil on the Photonics side.
Good morning. Thank you, Alex. On the Photonics side, NKT Photonics again had another record quarter. That's seven in a row at the moment. The key developments in there is that we had a broad-based growth in three of our four markets. The revenues for Q1 increased by 10% organically over the same quarter in 2021.
2021 was actually a record quarter for us as well because that quarter increased by 26%. This is an additional 10% on top. Good movement. The business is moving in the right direction, and we're seeing some very positive pull from the market. Operational EBITDA was slightly down, mainly caused by some write-downs to obsolete and slow-moving material.
We also got affected with one-time costs for the strategic review that we are undergoing at the moment. On order intake, as I mentioned, it's been a very positive market. The trend has continued in the quarter, and we are up by 16% over the same quarter in 2021. In the same quarter, we also divested a non-core business. This is our LIOS Sensing business, and we've done that to fully focus on our core business, which is lasers. We move to the next slide in the business development side in Medical and Life Sciences.
This segment continues delivering very strong revenue and growth and order intake, especially on the ophthalmology side, where we are adding on a number of new projects and a number of new OEMs, and it's a very positive move for us. In the industrial segment, we have continued the growth, especially from a hard pull from our semiconductor customers. These are the large tool manufacturers in the industry, and that continues through the year with very positive results.
In Quantum and Nanotechnology, we had a slight decrease, but that doesn't really echo what's happening in the industry as the orders are coming in there much faster. It's really a timing issue and we'll continue that growth.
Finally in Aerospace and Defense, we had exceptionally high growth again in this segment, and we see the market due to various aspects of the geopolitical situation that we're in, increasing. We're seeing favorable growth there. With that, short presentation, I pass over to Line to go over the financials.
Thank you, Basil. From the NKT group highlights here on the income statement, summing up what Alex and Basil shared with you, that across the two companies, a 7% organic growth for the quarter, and improved operational EBITDA margin, compared to last year, same quarter, with a very strong performance in the applications business in the cables, where we almost doubled the operational EBITDA. Very sound financial performance here. Operational EBITDA also improving across the group here.
If you look at the one-off items, just to note that this is related to the acquisition of the Ventcroft business, and it's related to the divestment of the LIOS Sensing business. An EBITDA for the quarter of EUR 45 million and a net result summing up to EUR 15 million, compared against EUR 2 million same quarter last year.
If we turn to the next slide, looking into the balance sheet highlights. NKT Group will always come out of a very favorable working capital position in the at the end of the year, Q4 2021 as a comparison base. We build up inventories for the season.
In this year, the first quarter also reflects that the trade receivables was rising from increasing sales in the applications business. So you see here a development in working capital, where we end at EUR 66 million at the end of the quarter.
Looking at the ROIC, here you also see a continued improvement to the level underlying driven on the quarter very much from the cables business. But you're also seeing, if you look across the quarters going back in time, that we are developing positively on the ROIC here. Leverage is at 0.7x due to an increasing debt level due to the working capital development and also continued investments in the businesses.
The last bullet on this slide before we turn is that the EUR 150 million hybrid security issued in 2018 has the first call date in September this year. We intend to call the security no later than this date.
Going to the cash flow statement highlights. The expected increase in the working capital outweighed the positive EBITDA development of the quarter, therefore also leaving us at a lower level in cash flow from operating activities than compared to Q1 last year. Cash flow from investing activities. Here, if you look at the CapEx, we are at a higher level compared to last quarter or quarter last year.
We have a high level of activities relating to the expansion programs in both Karlskrona and Cologne, and this is the reason for this development. Overall net cash flow for the quarter at minus EUR 81 million, compared to EUR 60 million at the same quarter last year. We maintain the outlook for the year for both companies. NKT Cables at around EUR 1.35-EUR 1.45 billion on the revenue, and an operational EBITDA margin of EUR 130-EUR 155 million for the full year. For the Photonics, just a note here to restate the base comparison, excluding the LIOS for when you look at the organic growth.
We still maintain the outlook on the revenue for 12%-17% and an operational EBITDA margin of 11%-14% for the full year. The key messages of the quarter is that it was a good quarter with 7% organic growth, a very strong performance from applications, and an earning level that EBITDA margin increased to 12%. We are well on track with our Cologne and Karlskrona factory expansions, and we complete these later this year.
Acquiring the Ventcroft business has strengthened the NKT Cables position within fire-resistant power cable technology. The team has entered well into the NKT Cables, and it is fully integrated. On Photonics, 7% organic growth, you have to remember always that Q1 is a different development and a very strong Q4. That's the seasonality of the business. The divestment of the LIOS Sensing business now enabling Photonics to focus on its core business.
On the last slide of this presentation before we go to the Q&A, we are very happy to invite institutional investors and financial analysts to Copenhagen on our Capital Markets Day on the twenty-second of September this year. We will be delighted to tell you more about the business status and the expectations for the future of the Cables division. More details to come on that. With that, I will turn over to the operator for handling our question and answer session.
Thank you. We will now begin the question and answer session. As a reminder, if you wish to ask a question, please press star one on your telephone keypad. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. The first question comes from the line of Casper Blom from Danske Bank. Please go ahead.
Thank you very much. Congrats with the good start to the year. I have a couple of questions regarding the applications business. First of all, the strong growth that you see here in the quarter, do you see any risk of this slowing down on the back of low voltage cables being delivered into the building segment? I mean, one could probably build some sort of case that the higher interest rates and very high cost on building materials could cause a slowdown in that segment. That would be my first question.
Yeah, I mean, the current situation is, as I mentioned, we see a strong market in all the countries, in all the segments, product segments. Of course, we see increased inflation rate is a risk. I mean, applications business, low voltage is a short cycle business of two, three months. That could, of course, change. That is difficult to predict how it will develop. As of now, we see a strong market and, at the moment, we don't see any sign that the market would turn in a negative direction. That can happen.
Okay. Have you made any specific assumptions in your guidance regarding this?
No specific assumption. I mean, Q1 was extraordinary high with 32%. Do not expect that this will continue on that high. That is, will be definitely not the case. We expect for the time being that the market remains strong unless the market tells us something else.
Okay. Fair enough. It's absolutely fair enough to expect the 30% growth going forward. What about the 7.9% EBITDA margin? Is that sort of a new stable level for the applications business?
No. I mean, I said in one of the last calls that the 7%-9% is in reach. We are now at 7.9% in this quarter. We continue to work on optimization in the factory on various initiative, efficiency initiative, but also footprint. In addition, we work also on the commercial side to increase prices. Whenever we can increase prices, we'll do that, and we'll continue to do that. We do expect to be in the 7%-9% and, yeah, we plan not to go down. Let's say it like this.
Good to hear. Just a question regarding solutions. The very strong margin here in the quarter, I understand that it's partly affected by some sort of release of risk and contingency provisions on projects that have been well executed. Can you put any more sort of specific number on the positive tailwind from that side?
I think the performance here you see on the solutions business for the quarter is driven by good execution. You are not being specific on specific projects also that provision we have taken last year in Q3 related to some project. We have released some of that. Underlying good performance on operations and then a release of this part of this provision.
Okay. It's more the sort of, how could you say, day-to-day operations that are doing well than it's just a one-off release of provisions.
It is an operationally driven performance to the largest degree.
Okay. Great. That's all for me. Thank you.
Mm-hmm.
Thank you. Next question comes from the line of Claus Almer from Nordea. Please go ahead.
Thank you. Yeah. Also a few questions on my side. First of all, like Chester said, congratulations with a strong Q1. The first question would be about the Champlain project. When do you expect an update on this possible order? That would be the first question.
Yeah. I mean, as you know, we are preferred supplier, and as we speak, we are in the negotiation of the contract, and we expect an update in second half of the year.
Second half, first, I mean, you have had 10 years, I guess, to get all the contracts details in place. Is there any, you know, major issues you have to solve, or it's just things will take time?
No, we had 12 years time, to be more precise. We don't-
Sorry
We don't, Claus, negotiate twelve years the contract details. No, this is a big project. Besides, cables, there are also other parties involved where contract needs to get finalized. Other preferred supplier like Hitachi Energy and this kind of contract negotiation need sometimes time. This is how it is.
You have assumed in the guidance that you will start up production this year, right?
You can also start activities even if you have not signed the contract. If you make an early works agreement with the customer, that's possible.
Okay.
You need not sign contract. You can make intermediate agreement.
That part is not at risk as it seems today.
No.
Good. My second question goes to the guidance. You know, given the very strong, you know, start of 2022, the guidance for the cable activities at least now looks a bit on the cautious side. Is there any specific reason why you did not hike your guidance or at least, you know, increase the low end of the guidance range?
No, there is no reason. There is, of course, uncertainty with Ukraine, the whole situation with Ukraine, with material, with input cost, with inflation. There's a lot of parameters which could change. It's just that we are cautious, and we want to see now how Q2 develops, and then we will see what we have communicated. There's nothing specific except to be cautious because of these parameters which I just mentioned.
Mm-hmm. Sure. There's none of these parameters that is actually turning against you so far. That, that's correctly understood, right?
No, nothing, which turned against us, no.
Okay. The third question goes to Photonics and you, Basil. There was not a lot of words about the strategic review in the report. Should we read anything into this?
Hi, Claus. No, not at all. I mean, the strategic review is ongoing. You saw that it we have some one-time costs there, so you can deduce from that, but it's at least in going in the right direction. We also divested LIOS, which was part of the strategic review. It's in full-fledged.
Okay. Are you starting to prepare slides for the CMD, the 22nd of September, or do you expect not to be part of that?
That's a great question, Claus. I'll answer it closer to September.
Fair enough. Okay. That was all for me. Thanks.
Thank you.
Thank you. As a reminder, if you wish to ask a question, please press star one. Next question comes from the line of Max Yates from Credit Suisse. Please go ahead.
Thank you. Just my first question is around solutions. I mean, one of your competitors, Prysmian, had I think a much more difficult quarter of execution and profitability in their projects business and talked about it largely being down to costs that were difficult to pass on to customers, so things like stainless steel for armoring, ship fuel for installation. You look to have been kind of largely immune from that.
I was just wondering how do you manage those costs? Are you having and have you had negotiations with customers to try and sort of price up your contracts versus original prices? How do you see that evolving over the next few quarters? Do you envisage that'll be a problem for your solutions division? Maybe a bit of color around that would be helpful.
Yeah, I mean, I do not communicate, of course, here on competitors. There can of course be that a quarter can or quarters in isolation can differ. Like in Q4, we had a weak quarter, and this quarter we have a strong quarter. If it comes to a cost increase, certain materials we can hedge, others we cannot hedge. Here of course, we need to see how we deal with cost increase from steel and for projects which you have in the backlog, which are contractually binding. The only thing you can do is discuss with the customer and hope for their goodwill that they are flexible, that they share a little bit the pain.
That is not the conventional way. We are doing this, but we talk to customers on that side. Then overall, it depends also on which quarter you are and whether you buy just metals, and then you could have a little bit more or less impact there. So far, we could manage the exposure on steel, which you cannot hedge it relatively well.
Okay. I mean, is there any, I mean, would you be willing to sort of talk about how you've thought about your solutions margin for the full year within the context of the overall guidance? I mean, I presume kind of you used to have a 15%-17% margin target for this division. We obviously were at 16.4% in Q1. I mean, you would need to fall kind of quite substantially below this. I mean, is it fair to say that this will be the kind of best quarter of the year and it will be very difficult to replicate?
I'm just struggling to square the comments of you've done a good job underlying this is kind of just the business performing and then kind of how to think about margins for the rest of the year.
I mean, it's a good quarter to be 16.4%, and we cannot necessarily expect that we will have the same margin quarter- on- quarter. There can be variances.
Okay. Just the final question on the German corridors. Could you talk a little bit about kind of when you expect to be producing these, whether kind of we feel like these are coming into the business at a similar margin to the kind of say 15% margins, which is where we hope this division solutions will get to in the next few years. Could you talk a little bit about the timeline of producing them, the phasing of revenues, whether it will be even, and kind of if there's any color you can help us with on kind of whether these should be sort of broadly in line, dilutive or accretive to the overall division? That would be helpful. Thank you.
I mean, we have announced that we start production of the first cables for SuedLink in Karlskrona. We will continue in the second half, and we also plan to start with SuedOstLink towards end of Q2 in Cologne. There will be a revenue contribution in 2022. This revenue contribution in 2022 is reflected in overall guidance.
Okay. Anything on sort of profitability versus the rest of your division? Is it meaningfully different to what you're or to say-
Yeah. I mean, we said that we are satisfactory with the margin, and when we book this project at old margin, and since then the status has not changed.
Okay.
We are still.
That's great. Thank you.
We are still at early stage and on the POC we are really on a low level at the moment then. We start also just now production.
Understood. Thank you very much.
Thank you. Next question comes from the line of Akash Gupta from J.P. Morgan. Please go ahead.
Yes. Hi, good morning, everybody. I joined this call a bit later, so apologies if this has been already addressed. My question was more in general the tendering activities and the negotiation that are taking place with your customers before you sign the firm orders. I mean, we have seen inflation, and one of your competitor was saying that the bids you placed last year or I mean they placed last year is costing 30% more this year because of inflation. Obviously that is delaying some of the customers' negotiations.
The question I have for you is that we have a robust pipeline, but do you see any risk that the growth might take longer to materialize because of the inflation that might impact customer decisions, especially in the Solutions segment? Thank you.
No, I mean, we see of course this inflation in various element in salaries in electricity prices and so on. In a project which are not awarded, we include that in our cost calculation. So far we have not seen that this will limit the growth or that orders get postponed because of this inflation. I mean, more substantial is the increases in raw material, copper, aluminum, if you compare it to or steel, if you compare it to the year ago. This is simply how it is. To answer your question, simply, no, we don't see any delays or impact.
Thank you.
Thank you. Next question comes from the line of Kristian Johansen from SEB. Please go ahead.
Yes, thank you. I have two questions. First on applications, again, and just diving one step further down on low and medium voltage. It would be my sort of understanding that the low voltage cables are more cyclically driven to a large extent by the construction activity industry. While medium voltage that's more structural driven by the electrification upgrades.
Firstly, do you agree to that? Secondly, can you help us putting a bit of color on the growth you are seeing in Q1, how much is driven by low voltage and medium voltage? Do you see the same explosive growth in both segments?
Yeah. We share your view with the construction business which influence the low voltage business and more the electrical structural and the medium voltage, 1 kV and higher voltage. We see a high demand in low voltage in building wires, in 1 kV in medium voltage. Across all countries with all products. Strong, and I think we mentioned it also in the Q1, for example, with the Wars zowice in Poland with strong performance. As of now, we don't see a sign that this will change. Of course, it's cyclical and the short cycle business. Building wires, it could change rather quick.
I mean, we are talking here from the backlog to execution, 2-3 months, and then we need to refill the pipeline quite fast. That is of course hard to predict. So far we see a super strong market in the markets where we operate.
I understand. The DKK 10 million EBITDA you make in applications in Q1, can you split that between low voltage and medium voltage?
No. We don't split it, but I can say that we have a high utilization output in all the factories.
Internally, we of course split it.
Internally we split it. Yes, yes.
All right. Fair enough. My second question. I just wanted to understand, you write that you are booking EUR 1.1 million in one-off costs related to the NKT Photonics review, but you book that in the cable business. Can you just help me with the reasoning for that cost ending up in the cable business?
As such, you can say it's the group, and here the holding company that actually is facilitating the strategic review of photonics. Therefore, it's booked like that. Nothing more to that.
Fair enough. Great. Thank you. That was all for me.
Thank you.
Thank you. There are no more questions at this time. Please continue.
Okay. If there's no further questions, then thank you very much for your time, your good questions, and hope to talk to you soon. Have a good day. Bye-bye for now.
That does conclude our conference for today. Thank you for participating. You may all disconnect.