Good day, and thank you for standing by. Welcome to the NKT Q3 report 2021. 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 today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Alexander Kara. Please go ahead.
Thank you. Good morning, everybody, and welcome to the Q3 report, and thanks that you take the time to listen to our Q3 results. In the room I have here two more presenters, Line Andrea Fandrup, my CFO, and Basil Garabet, President and CEO of Photonics. Let me start here with the key messages for Q3. As you know, we have pre-announced our Q3 result on the nineteenth of October, and since then, our numbers and figures have not changed. As such, there may not be too much news. But if you look at Q3, NKT Cable, we overall grow 10% organically. This was supported by all three business lines and also the consequent impact on the operational EBITDA.
Our high voltage order backlog is EUR 2.9 billion market price end of Q3, which is at the very high level. I would like to mention here, in Q3, we, NKT Cable, received a higher sustainability rating from three independent rating agencies, which is a consequence of our actions taken in the area of sustainability. Coming to Photonics. Photonics had a record high Q3 in revenues and also an improved EBITDA. In addition, also our highest Q3 orders received of up to 25%. In Photonics, we are ongoing with the strategic review, and we have appointed our lead financial advisor, JP Morgan.
If you look at the cables performance in Q3 specifically, as mentioned, all three business lines have contributed to the revenue growth, and you see on the graph on the right side for Q3, 11%, and for the first nine months, 19%. On operational EBITDA, we have a change from 7.91% - 13.5%. This was mainly driven by Solutions which included an insurance one-time income of DKK 20.7 million. Also without this insurance, we have improved the Q3 2021 number compared to Q3 2022.
If you look at the nine months result, we increased the operational EBITDA from EUR 48 million - EUR 117 million or without insurance to EUR 96 million, meaning an increase in percentage from 5.8% to 12.1%, including insurance, or from 5.8% - 9.9% without insurance. We had some good development on the application side with the improvement, and I will come later back to that. In service and accessories, the increase on revenues was mainly driven by service and also we had a modest EBITDA growth. Coming to a solution, we worked on various projects and we finalized the Moray East projects, a 220 kV high voltage AC cable, which provides power for 40% of the Scottish households.
Further, we have launched an initiative, as already pre-announced in Q3, to improve the profitability on the solution business where we focus in Cologne on moving the lower part of the high voltage cable to Velke Mezirici and focus in Cologne on the higher voltage on AC and DC. This will impact has impact on the workforce in Cologne, so we will reduce the workforce then with more than 100 FTEs, which also resulted in an 14.5 Million one-off cost in Q3. The focus of moving the production of the lower end of the high voltage to Velke and to increase the focus on high voltage AC and DC in Cologne requires an investment of 25 million, which is split between this Cologne and Velke .
Overall, those together, the 14.5, 15 around and 25 is the DKK 40 million cost and investment initiative, as informed earlier. If we come to the high voltage market development, we have received orders in Q3, in and out orders and variation orders of existing orders. Further, we selected a preferred supplier for the Champlain Hudson Power Express transmission line, which is a project which brings power from Canada to New York. This is not yet a firm order and as such also not in our backlog. We're working on the contract negotiation as we speak. In the first nine months, around DKK 2.5 billion of projects have been awarded. In different regions around the globe.
We have seen mainly in 2020 and 2021 DC technology versus AC technology. Looking at the backlog. Our backlog has slightly been reduced from DKK 3.16 billion to DKK 2.297 billion in market price, or to DKK 2.52 billion in standard metal price. You can see on the graph in round numbers the distribution of the backlog, how it will be executed in 2022 and in 2023 onwards. Overall, we are working on different projects in execution offshore wind, interconnectors, and oil and gas. You see a list here on the slide on the right side. In application, we have made some good progress in driving our efficiency in the factories, factory output.
This has increased the operational EBITDA by 2.6% from 5% - 7.6%. Further, we work also on commercial initiatives, which includes also pricing. We see good momentum here in application. The business on the building wires, good output from Varsavice in Poland, but also on the medium voltage side, with medium voltage demand in Scandinavia. This is really a positive highlight of Q3. Coming to service and accessories. The revenue growth was mainly driven by service and the closeout of repair jobs from the first half of this year, and also consequently, EBITDA. What we also plan to do is what we have initiated is execution hub in Gdynia, Poland, to prepare for the coming growth in Poland on offshore, but also the high demand on onshore.
In accessories, we had a good medium voltage deliverables from Nordenham, whereas we had some challenges on the high voltage side with the Cologne footprint moving to Alingsås with increased cost. Coming to our ESG rating, as mentioned in the beginning. We do a lot on the sustainability side. We have all factories running on green electricity. We work on reuse of cable scrap, for example, also our forklift either electrical or run on biofuel and so on. Scope one and scope two is less than 5% of the total, whereas 95% is scope three, meaning, for example, CO2 emission from raw material and so on. But also here, we have started actions with our suppliers to improve and reduce the scope three side.
On the diversity and inclusion, we have completed in Q3 an employee survey. Also here, we have improved, and we plan to have 30% of female leaders in 2024. You see the ratings here, quite a good improvement compared to previous years. With this, I would like to hand over to Basil so that he can talk about Photonics.
Thank you, Alex, and good morning. We start off this quarter by announcing that we are separating a different segment in our reporting. The segment is Quantum and Nanotechnology. Now, this segment has been part in the past of our industrial segment. For this reporting and going forward, we've decided to separate it out, essentially because we've seen some tremendous focus on the area from different governments and different industrial portions of the industry, but also because it's growing quite significantly for us. Quantum today covers about 16% of our revenue in the last three quarters and is growing.
As a segment, Quantum technology covers a range of very fast moving areas, especially in quantum computing and quantum sensing and in quantum communications. Nanotechnology also covers the applications within the development of advanced materials, mainly for the quantum different areas. Moving on to the performance in Q3. As Alex mentioned earlier, the revenue increased in the quarter, and is actually a record increase, so a record total for us, considering that Q3 last year was our first quarter of growth after the pandemic. It was a record quarter, but this quarter is 10% over the same quarter in 2020. EBITDA also rose significantly to DKK 3.2 million, again, driven mainly by the higher revenue and gross margin improvements.
A component with all of this is, we've had the highest ever Q3 order intake, again, a record at 25% over the same quarter of last year. Business is moving well in most of the areas, especially in industrial and quantum technology. We move to the next slide to outline the business development in Q3. In medical and life sciences, the trend did continue with regards to improvements, especially in ophthalmology and in microscopy, so quite strong quarters for us. In quantum, the area that contributed mostly has been in quantum computing and all the research associated with quantum computing. On the industrial segment, which is still our largest segment and is showing a significant growth, a lot of the growth has come from our segment in semiconductor industry and in remote sensing.
In aerospace and defense, the growth was relatively flat, but still positive, but affected by timing factors. We have existing projects and some interesting projects on the horizon that will move it forward. With that, I finish my segment and pass it on to Line. Thank you.
Thank you, Basil. Turning to the financial highlights of the group, for the third quarter, the revenue and operational EBITDA came out satisfactory. The 10% growth in both NKT Cables and NKT Photonics, it was a good contribution across both of the businesses. When you look at the earnings, also decent too, compared to last year, especially, take note on year-to-date performance up significantly compared to the year-to-date result of 2020. On the margin level, also improvements across both businesses and, with a one-off item related to the restructuring at Cologne, the total EBITDA of the combined companies ended DKK 34 million for the quarter.
On the net result, we are at 0 for the quarter and a year-to-date performance of DKK 13 million compared to -DKK 44 million last year. FTEs is increasing year-over-year for the cables part, particularly, which is due to the expansions in our solutions and the higher activity level in applications. On the balance sheet highlight, worth to notice that the working capital improvement was favorable compared to Q2. For the cables part, a DKK 106 million reduction in the working capital, mainly due to a milestone from solutions business. With the good improvements on earnings and working capital, the ROCE over the quarter also improved, and net interest-bearing debt decreased compared to Q2.
We're now at EUR 97 million for the quarter and 0.7x EBITDA compared to the 1.7 for the last quarter. Also, in this quarter, we have refined our revolving credit facility and for now have engaged with the five banks for a three-year facility of EUR 200 million. A little bit more specific on the working capital, where we can say we are back to a more normalized level compared to our Q2 with the milestones payment in the Solutions business. Also, our orders, our accounts receivable balance in the Applications business decreased.
Over time, we will see this fluctuation coming in with, especially the project and solutions business, award and milestone payments, whereas the application business is more running a business related to the inventory and accounts receivable. On the cash flow statement, it's satisfactory to note that our cash flow from operating activities is EUR 146 million. This is, of course, due to improved earnings and also the positive impact on the working capital of the quarter. We continue our expansion program, and by that also increased our cash flow from investment activities. But this is more than offset by our cash flow from operating activities, wherefore our free cash flow for the quarter is EUR 99 million.
On the outlook for the year, as the 19th of October press release stated that we are now expecting the NKT Cables to come in at around EUR 1.2 billion on the revenue for the full year and an operational EBITDA between EUR 125 million-EUR 135 million. NKT Photonics outlook is unchanged compared to the outlook after the second half, an organic growth on revenue of 8%-15% for the full year and an EBITDA margin of 6%-8%. The key messages of Q3 is noting the growth of revenue of 10% organically across all business lines. A still high voltage order backlog of EUR 2.97 billion in Q3.
We continue to add a number of projects, book to build, quarter by quarter. The record high EUR 18.5 million revenues for Photonics is understating that there's a solid recovery from the COVID impact of the last years. The continued review of the strategic alternative for Photonics, where we now engaged JP Morgan as lead financial advisor. With that, we will turn over to questions and answers.
Thank you. We will now begin the question and answer session. To ask a question, you will need to press star one on your telephone and wait for your name to be announced. Should you wish to cancel the request, please press the pound or the hash key. That's star and one should you wish to ask a question. Your first question comes from Kristian Johansen of SEB. Please ask your question.
Yeah, thank you. I have three questions. First one is on the German corridor projects, and if you can update us on the expected production start for these two projects you have, considering the customer dialogue I understand you have been having.
On the German corridor projects, we have discussed in the last quarter with the customer, and we will produce next year for SuedOstLink and SuedLink cables , and it will have a quite big impact on our revenues next year.
Okay. That's fairly clear. Will you produce according to the original plan or, I mean, will you produce a bit less than originally thought, but still a meaningful amount? Is that what you're saying?
It's a meaningful amount, not exactly as originally planned, but a meaningful amount.
All right. That's very clear then. My second question is on the backlog mix. I think you wrote it yourself that you've primarily been taking in DC orders. Again, focusing on 2022, what is the outlook and possibility to actually take in orders on the AC cables which can have a revenue impact next year?
Yeah, of course, we work on various tenders for AC and AC three core cables, but also for MI cables. There can be cable projects awarded, but the likelihood they must be won very soon in order that we have a meaningful contribution in 2022. We focus on the backlog what we have, meaning we have Troll West in the backlog AC. We have a lot of DC offshore project in the backlog. We build now the German corridor projects.
Just to clarify, so do you see tenders being awarded within the next three months then on AC cables, which could make a difference?
It will be difficult. It really to come fast because you have also a time till you start production.
Mm-hmm.
For next year, it will be difficult that we get the revenues, and if at all, then it might be not substantial.
I understand. That's clear. My last question is just on the strategic review of NKT Photonics. In the light of the fact that you've now hired an advisor here, can you sort of maybe elaborate a bit on what your conclusions has been so far and what potential outcomes are you now looking at in the light of this development?
Hi, Christian. Yeah. We obviously have, as announced, hired JP Morgan, and there are no conclusions as yet, and really any questions should be directed at JP Morgan.
Can you say whether a sort of industrial sale, IPO, and so on, is that still in play?
Again, you know, everything is on the table, and that's the reason we have hired JP Morgan. I would suggest communicating directly with JP Morgan on this issue. Every-
Understood. All right. Fair enough. That was all for me. Thank you.
Thank you.
Thank you. Your next question comes from the line of Akash Gupta of JP Morgan. Please ask your question.
Yes. Hi, good morning, everybody. I have three as well, and I'll ask one at a time. The first one is on 2022 solution revenues bridge. I think now you say that a quarter of your backlog will be for 2022, and that gives me a number where consensus is roughly DKK 200 million above that. Basically, you need to get DKK 200 million more in orders to hit 2022 revenues. If we do the same sort of work for last year, like if you look at your last year backlog and how much at this point in time was due for 2021, I think the info out after Q3 was around DKK 100 million.
The question I have is that, do you think that this consensus expectation for solution business, which has roughly DKK 200 million more in revenues than the backlog you have at this point in time, do you think it's realistic, or could there be any upside or downside risk from new orders?
Yeah, Akash, thank you for the question. I mean, we gave some indication about the revenues with the 25% what you see. The 25% of the DKK 2.52 billion is roughly DKK 600 million.
DKK 60 million. This is a round number. A percentage up or down is a DKK 25 million impact. That's number one. There's Champlain, for example, is not in the backlog yet, and would have a positive impact in 2022, provided it becomes an order. We can also have further impact here, positive impact from projects not yet in the backlog.
Okay, you think consensus for next year could still be doable?
I mean, we will guide on the next year in February.
Yeah.
I gave you some hints with the 25% of the $2.5 billion, and the 1% is $25 million. 2% more, then you're already at $50+ million projects which are not yet in the backlog, for example, in Champlain, can have a meaningful impact.
Thank you. My second one is on cash flow. I mean, Q3 was pretty strong, and you said working capital is now more normalized after a step up in Q2. Can you say anything on Q4, what your expectations are on both progress collection as well as on CapEx, and what sort of trajectory we should expect for Q4 cash flow?
Hi, Kash, this is Line talking here. I think our investment programs we have earlier touched upon, and they are a significant impact also to our cash flow for the full year. If you look at a proxy for working capital, I think history will help you most. Usually we will continuously in the solution business have milestone payments, which is a major swing. Then if you do a proxy on the applications, I think you can do percentage to revenue or something like that. Not to be exact, but I think those hints will give you at least some proxy for the working capital and cash flow up to fourth quarter.
Thank you. My final one is on COVID headwinds. I think in the last couple of quarters, or maybe since the start of the year, you are highlighting that uncertainty from COVID, and also from raw materials. The question I have is that if you look at your this year's guidance, how much of COVID headwind have you seen or have you factored in that guidance? If we haven't had these headwinds, what could be the upside this year in EBITDA? Thank you.
No, I mean, for cables, we have managed during the whole COVID-19 period that very well with our actions to protect our employees, and we had a minor impact in the past. We also do not expect to have an impact until end of the year. No plus and no minus.
I think what we don't do is narrow this down to a single absolute number that would be the net impact of COVID. Our business, as others' businesses, can be impacted by several activities. When we give an outlook, of course, we
The COVID-19, it could be execution. It's a lot of different items. That's what we cannot account for when we do an outlook.
Thank you.
Thank you. Your next question comes from the line of Claus Almer of Nordea. Please ask your question.
Thank you. Yeah, I will also have a number of questions and take them one by one. The first goes to Photonics and you, Basil. Could you please provide a bit more color to this Quantum & Nano Technology division? What are the actual applications or technologies that are, you know, within this segment? That would be the first one.
Hi, Claus. In the Photonics segment, which is very fast-growing for us, the main driver there at the moment. By the way, we've been in this segment. This is not new for us. We've been supplying into the segment for the last 20 years. It just hotted up in the last year quite significantly. But the main pull on that is in quantum computing, and it's an area where our lasers make a significant difference. We're seeing a lot of push and a lot of pull from customers on that, and a lot of market movement. If you look at the investment by governments and companies worldwide, it's quite a few billion EUR being spent in China, in Europe, and especially in the U.S.
That's the segment that we're pulling out because it's exciting for us, and it's an area where we make a big difference.
Basil, just trying to figure out the potential. Quantum computing is still, you know, low in volumes, terms. I guess, as you said, it's government, this might be, you know, more, it's not in big commercial volumes yet. If things are progressing as hoped for, could this, you know, be a significant increase in the volumes if you look two, three, four years ahead, or how's the outlook?
No, absolutely. If you look at all the investment in quantum, whether it's in computing or communication or cryptography, it's been driven by big data, it's been driven by banking, it's been driven by security, it's been driven by medical and life sciences. There's a lot of pull on that. The quantum computing industry as such, which is still in its infancy, is getting a lot of boost to basically take it where in four, five, six, and probably a little bit more years than the amount of product that needs to be out there is significantly high. That's the exciting part. Now obviously, what we sell is very high value, very high technology, very sort of involved parts that make up that.
In quantum computing, it's basically they use lasers, you know, these are atom computing where you trap and cool and spin and get all kinds of quantum effects from the atoms to be able to make the computer work.
Okay.
We are at the heart of it.
Sounds good. With this strong performance so far this year, both in your order intake and in your revenue. In nine months you have had a 20% organic revenue growth, I think, and you're guiding for 8%-15% full year. What's actually going to go against you in Q4? That means a quite depressing Q4.
Well, if you look at Q4 of last year, it was a record for us. Again, you know, we are performing well, but there are some issues that do affect our shipments for instance. The business is still very buoyant. The orders are coming in, business is very good, the outlook is very good. What's working against us is, you know, the possibility of a COVID affecting us. There's a spike in Denmark at the moment, especially in the Copenhagen area.
Because most of our shipments are backloaded into the second half of the quarter, what happens is if we miss them a week or two, I mean, we're not that many people, so if it takes out three, four, five, six people from a production line, it shuts us down for a week or so. That affects revenue. The other thing that we are seeing is that even though we have everything in place with regards to supply chain, we are seeing that things can change with one day notice. We would have one day notice of a supply of a key item coming in change. That's why we have this range at the moment, which is the 8%-15%. We're being prudent on that.
If everything was fine, we would be at, you know, we would be doing better, but we can't sort of guarantee that with the current situation that we are in.
Oh, that's fair enough. Of course, Q4 last year was the best quarter ever because you are a growth company, but it was not like, you know, you had enormous growth in Q4 last year. Just to be sure, the way you are guiding is, who knows what happens tomorrow or next month, therefore, if things happens, then you will probably be able to absorb that in your guidance. If things do not go wrong, then it could be more rosy than your guidance is reflecting. Is that the way to read it?
Yes.
Got you. Okay. Moving to the cable division, Champlain, maybe an update on the milestones. There is a public hearing going on in Q4. Is everything going well there? Also should we expect that hopefully signing of the contract will happen in Q1 next year? An update there will be helpful.
On Champlain, I mean, we are in the negotiation with the customer and TDI got the green light from NYSERDA. There's one permit missing public hearing, which should happen in Q1. We expect that this should be not too difficult, but you never know. You need to wait until you have it. Again, we are in the negotiations, so we said we expect that it will be in order in 2022.
Okay. Going to your investments in Poland, I guess that must be due to, you know, strong hopes to get your fair share of the offshore wind CapEx projects. Can you give an update on the timing and possible discussions with developers?
Now what we are doing in Poland, we are creating an execution hub. We start here with hiring jointers, and they will be located in Gdynia, and we will expand that as we capture hopefully some orders in Poland. Then we will expand on that.
Again, normally you don't do these investments in, you know, ahead of, you know, some specific regional or local investment ahead of getting orders. Why is Poland different than other European offshore wind markets?
Now, Poland, there is a growth expected. With Poland, with adding a local workforce, which you can also utilize in for service activities outside of Poland, you should have an advantage on the cost base.
It's not only necessary we use the execution hub for Poland itself.
Okay. It's not like you have a, you know, number of Polish projects, you know, on more conditional status. Once, you know, these projects hopefully win in auctions, it will be NKT projects. More, how certain are you about your markets here in Poland?
Well, that's a good question. I mean, we work on tenders and so on, and we historically our market share is somewhere between 20% and 30%, and that can vary. Last year it was more. This we need to see. We just prepare that, and it's mainly manpower, and they join us, and we can then, if needed, scale it up. That's the plan.
Okay. That was all from my side. Thank you so much.
Thank you. Your next question comes from Jakob Magnussen of Danske Bank. Please ask your question.
Thank you very much. Two questions from my side. Can you talk a little bit about your plans for the upcoming hybrid that has its first call date next year? What are your thoughts around calling this bond and furthermore around refinancing it potentially? Will you be refinancing it or will you just be drawing on your credit facilities? And down those lines also, your cash position has improved, so what are you thinking about distributing some of that to shareholders in the maybe short to medium term? Yeah, let's start with that.
Thanks, Jakob. So on the hybrid and I guess in general what you are asking about, our cash position, I think, right now, satisfactory performance of course turning out in a better cash flow position. In NKT this is the midst of a significant change in the green transition. Our, let's say, readiness for where the markets are going and what will happen, we are pretty agile at the moment, and that means of course there's a lot of things going on. Of course, dividends to shareholders could be one thing, investment in the business could be another thing, and then, financing, changing our financing structure not to have the hybrid anymore could be another thing.
I think for now, we are working with different hypotheses and not to be concerned about that. But we will come into 2022 and be more firm on kind of direction of NKT in this regard.
Okay, thank you. Just a conceptual question or your thoughts around when or if you are awarded the Champlain U.S. cable, what are you thinking about setting up construction capacity in the U.S. versus producing the whole lot in Europe and then shipping it to the U.S.?
Provided we get an order, we can produce in Europe in our factories, but we have also possibilities to produce in the US.
Okay. Thank you very much.
Thank you. Your final question comes from the line of Daniela Costa of Goldman Sachs. Please ask your question.
Hi. Good morning. Yes, actually I have three questions. One is actually a follow-up on the prior question. Can you elaborate? You said you have possibilities to produce in the U.S. Exactly, what are you talking about? I thought you didn't have local capacity, so interesting to hear there. The second thing was wondering if you could give us some indication of what are the biggest tenders that are going on at the moment, and if you still think that the price of current tenders is increasing given the industry in general is more utilized. A follow-up on Photonics on the comments earlier.
I was just interested in hearing the motivation behind why you're now giving us the split of the business. Is that in any sense kind of mapping how you're addressing the process of optimization? Mainly it may be sort of like more of a piecemeal segment by segment versus the whole of Photonics or no, just what's the motivation there behind giving the disclosure of the details? Thank you.
Okay. Maybe for production, I mean, obviously we will not produce in a factory from Prysmian or Nexans, but there are also other companies which is not a direct competitor and where we could produce. Yeah, I'm not sure I need to be more specific. I think it's pretty obvious. Coming to the next question about ongoing tenders, so what we expect going forward of course is in a timeframe from April to July, expect that awards from UK CFD rounds. So there are several projects which could be awarded or in the area of 10 gigawatts. As in the U.S., projects are ongoing.
Some have been already awarded and some may come. We have in Europe several projects. In project in Poland, we have projects in Germany and Netherlands on offshore wind. We have also interconnector projects with MI technology and those are publicly known information. There's also projects which expect to come in the oil and gas field in Europe but also in the Middle East. There's a lot of activities on several tenders with different technology, different regions. We acted on several projects. Of course, we expand our capacity in Karlsruhe and Cologne, and we need to see what can we take on orders in order to fulfill commitments on the delivery time.
If we expand, we have also limited capacity. That is also to be understood.
Thank you.
The last.
Yeah, sorry. On the Photonics. You asking Daniela about the reason for splitting the Quantum segment. For now, we're having a strategic review. The Quantum segment is an important part of the Photonics business as such with a good growth so far and increased focus, and that's the main motivation of that.
Okay, thank you.
Thank you. There are no further questions coming through on the line.
Okay. If there's no further question, then, thank you very much for the good questions and your time. Wish you a good day and talk to you for the Q4 numbers. Thanks. Bye-bye.
Thank you. This concludes today's conference. Thank you for participating. You may now disconnect.