Good day, and thank you for standing by. Welcome to the NKT third quarter report 2022 conference call. At this time, all participants are in listen only mode. After the speaker's presentation, there will be the question-and-answer session. To ask a question during the session, you will need to press star one one on your telephone keypad. You will then hear an automatic message advising your hand is raised. Please be advised that today's conference is being recorded. I would now like to hand the conference over to a speaker today, Alexander Kara. Please go ahead.
Yeah, good morning, everybody. Thanks for joining the call for where we present our Q3 result. I have here with me in the room my CFO, Line Andrea Fandrup. Let's go to the key message of our Q3 results. Overall, I would consider the result as satisfactory, and we gave some qualitative indication about our Q3 result at our capital market day, which will be hosted on the 22nd of September. As such, maybe not too many surprises in the Q3 result, but we may come back to that. Overall, we had an organic growth of 8%, and the growth has also driven operational EBITDA based on the first nine months.
In the outlook, we update our financial outlook, and Line will come a little bit later to the details. Our order backlog is still very high at EUR 4.5 billion, and we had some orders from onshore, AC onshore and variation orders on the six existing projects. We issued a green hybrid bond of EUR 150 million to strengthen our financial position for further opportunities and to grow. We hosted a Capital Market Day on the 26th of September, where we also announced our updated strategy, what we call ReNew BOOST, where we gave an upgrade of our midterm guidance and outlined the way how we want what our plans to go forward.
I had opportunity last week to be in Sharm El Sheikh and to participate at the COP27 and several meetings like Caring for Climate. It's clear that NKT and our cable solutions can contribute to the green transition, enabling and transporting power from offshore wind to shore, for interconnectors and so on. Not only that we contribute as NKT to Scope 1 and Scope 2, but also to Scope 3 reduction and I come later back to that. Was a quite interesting event, participation. I think, as I said, NKT and also the entire cable industry can contribute to the decarbonization of the society, which is an important goal.
In NKT Photonics, we continue with the process of divestment, and we are progressing as planned, and this should be concluded at the latest by Q1 next year. If you come to the Q3 performance, we grow in Solutions and with this the underlying operational EBITDA. Last year, in the same quarter, we had a one-time impact of EUR 20.7 million of an insurance claim, which we settled, which of course we have not this year. This has an impact on the numbers, but overall, we improved. The Applications result I would consider as unsatisfactory, even though we could increase, but this was purely by price increases in volume produced and cable we've used. The reason for that was the higher input cost, and we may come back later in the presentation.
In Service and Accessories, I'm satisfied with revenues and operational EBITDA. Service had a good quarter, but also in accessories on the high voltage side, we improved. You see the number on the right, and we have also already communicated that. If you come to solution on a quarter, we executed several projects, and with this we generated revenues and then a growth of 10% and an improved EBITDA of EUR 24 million. The NKT Victoria was busy with several jobs, Shetland, Troll, and others, and that was good utilization.
We have continued with expansion of our factory in Karlskrona and Cologne, and we inaugurated our extrusion tower on Karlskrona on the 27th of October, and we plan now in November to produce the first cables with the investment what we have done. We also produced the first low carbon copper cable, where we reduced the CO2 emission by 23,000 tons for the Dogger Bank C, which is the largest offshore wind farm in the U.K. and the first DC. This is an important step to reduce the Scope 3, and we need to continue here on this journey to reduce the Scope 3. As you may aware, the CO2 emission 95% or more is from copper, aluminum, and so on production. Only 25% or less is in Scope 1 and Scope 2 of NKT or of cable production.
Very important step where we work with the entire supply chain from the mine with the rod producer, Electrovaya, Boliden, with the customer SSEN, Equinor, and Aker, [Ledoulen, to make that happen. A big step forward here. If you look at the high voltage market, we have received various AC onshore and variation order, and we were selected as turnkey East Anglia THREE, which is not yet in the backlog and firm order. We wait here for notice to proceed, and until the customer has the final investment decision, which is expected to be happen in Q1 next year.
We received in October the HVDC onshore power cable Hartlepool to York, which is the Canadian portion of the Champlain Hudson Power Express project. This with an order value of EUR 19 million, approximately EUR 19 million market price and an EUR 80 million standard metal price, this will become next or this quarter, Q4 to the backlog. Overall, we look at the first nine months, EUR 7 billion on orders have been awarded. Out of this, NKT had roughly 2.1, or actually a little bit more than 2.1 billion if you take Champlain Hudson Power Express with around 1.4, SuedOstLink second system. So this is 700, 2.1. This is around 30%.
This is approximately also the market share which we had in the past and which we intend to maintain going forward. For the full year, we still see EUR 8 billion on project awards, and going forward also for next year and the year after, we see EUR 7 billion-EUR 8 billion strong market, which to be continued. We disclosed here at how we execute the backlog, 5% for the remaining part of the year for Q4, and 25% for 2023, and 70% for 2024 and onwards. These are round numbers, and again, this is the backlog. This does not include East Anglia THREE or Hartlepool and so on. Obviously, I have read already this morning the first reports from the analyst.
This is around 25%. A strong backlog with EUR 4.5 billion, a little bit down from Q2, EUR 100 million. Application. Application, I said, a very unsatisfactory quarter, weak quarter, driven by increased input costs. Even we could increase prices, but the volume in terms of cables has been reduced. We worked a lot to improve that further, and we have written also in our report that we see some improvement into Q4, but it's a dynamic market. Just to give you one example, we have received, for example, at the end of the quarter, a massive price increase from a supplier effective first of the next month.
You can imagine if you get such letters with three to four days notice, you have practically no chance to update your prices towards your customers. We're working on price increase towards customer and also see how we can improve the situation with our suppliers. We see a decline in the construction-related business, meaning building wire and 1 kV, mainly copper, which is due to the downturn on the European economy. We feel really the recession on this part of the business. If you look at the medium voltage, the demand is high, driven by the electrification of the society, the decarbonization, and all of these actions, so that is positive.
Looking at the Service and Accessories, we had a good quarter for service accessories. Both contributed on revenues and on the earnings. I'm also satisfied, particularly here, with the high voltage accessories that we could increase the revenues. A good development. What is new and what we have seen here, more and more concerns from customer is that they're concerned about the critical infrastructure or if you're talking about interconnectors and, but also offshore wind. We have all the following in the news, Nord Stream and the explosion.
In fact, one of the explosions Northeast of Bornholm in Denmark was less than 1 km away from an interconnector between Sweden and Poland, which was at that time under maintenance, and customer getting concerned about the critical infrastructure, and this is something that the cable industry and the customer need to take care. How can this be more secured in the future going forward? That's some new development in the market. Good development, and we continue with our activities to move accessories from Cologne to Alingsås, and we see, as I said, a good development. With this, I hand over to Line, and she will guide you a little bit more to the financials.
Yeah. Thank you very much, Alex. Alex covered well the quarter in terms of an organic growth of 8%. I can just say also for the year to date, it's corresponding to a 9% growth. We are tracking well here. All business line are supporting this growth, which is also good to see. On the operational EBITDA, important to note this is this insurance gain from 2021, which is adding up on the EUR 45 million from Q3. If you subtract that actually, we have a good underlying operational performance, and also an improvement on the margin here.
Having a look at EBITDA and also the net result of the quarter, you know the one-off, of course, from last year at the same time. Since we don't have the same here, we have a good level on the EBITDA and also the net result is quite up compared to last year. Overall, we are still continuing to ramp up on the FTEs. We are driving the footprint changes continuously, as we have announced, both for we are coming to the end of the, not fully there, but coming to the end of the footprint moves on the factories. From the Cologne to Czech we are also continuing that journey, meaning we ramp up FTEs to be ready in the receiving end, and eventually at a later point, we'll ramp down. I think that was it on the income statement.
If we then go to the balance sheet highlights, you will note that the working capital, if you disregard the hedges, we are having some deterioration compared to last quarter. This is primarily due to a buildup of inventories in the Applications, and in general also ensuring that we have our raw material in stock to be ready to produce. We also see some phasing of milestone payments in the Solutions business. I would say on the contrary, we're actually seeing some accounts receivable improvements due to collection efforts in the Applications business.
If we go to the ROCE, you see across quarters that we are more or less stable around 3%-4%. It's not two months ago, we had the capital markets day, then we also shared with you that the ambition here is to move up and beyond the double digit or into the double-digit space. You will see this gradually improving over the years, but it's of course very important that actually our expansions, our investments come online, and they start contributing with the earnings expected. Cash flow was at a lower level, very much from the investments also. You see our net interest-bearing debt increasing with a leverage of 0.6x EBITDA.
As Alex also mentioned, we issued the green hybrid securities of EUR 150 million, more or less replacing the hybrid we had in place. Turning to the cash flow statement highlights. The cash flow from operating activities was slightly negative as the earnings contribution was outweighed by the changes in working capital. The continued investment flows you see here on year-to-date number EUR 144 compared to EUR 123 rest of year. We are closing out on the investment on the expansion in Cologne. We are continuing in Karlskrona, as you remember from the Q2, with the new hall that we inaugurated lately, now with the second extruder coming there, and you'll see more of the investments in that throughout 2023 also. If we go to the next slide, a recap on what we announced this morning and an update to our financial outlook for the year.
On the revenue side, EUR 1.4 billion-EUR 1.45 billion. On the operational EBITDA, we are removing the lower end and saying we expect to be within EUR 140 million-EUR 155 million from here. Of course, unforeseen things, as we have seen all throughout the last three years at least, can happen. This is very much with the underlying assumptions of the current business that we see, that we expect to enter. Repeating the key messages, and organic growth continues, and expected rest of year. We have a good order backlog, and we also have a good market share of the awards of this year.
Now we have more transparency by the sharing of how much we expect to execute on the backlog in 2023 from the report. The issuance of the green hybrid security and the launch of the updated strategy ReNew BOOST, including medium-term ambitions, and let me just repeat them here. We expect to grow above 12% on average over the time horizon out to 2025. We expect to be on operational EBITDA of 12%-16%, and we expect to come into an above 12% ROCE at the end of the period. Very much grabbing the opportunity of the green transition. With that, turning into the Q&A session.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad and wait for your name to be announced. Please stand by while we compile a Q&A roster. This will take a few moments. Now we're going to take the first question. The first question comes from line of Massimiliano Severi from Credit Suisse. Your line is open. Please ask your question.
Yeah. Hi. Hi, good morning. Thank you for taking my question. I have two, one per division. The first one would be the margins on solutions this quarter were quite low despite full Victoria utilization. I was wondering, is it just purely project phasing? Are you seeing margins deteriorating also because of inflation and issues in passing higher inflation to customers in projects?
Yeah, if it comes to the margin in Solutions at 12.8% or 12.9% is lower than the previous quarter. It's phasing of the projects. We still have some projects with lower margin in the backlog, which we need to execute. For example, Attica-Crete, we are in the installation phase. Of course, most of the costs in Solutions we can hedge, but then we cannot cover all the costs. For example, steel cost on the Solutions, which also the steel price has increased. It's mainly phasing and then some other effects.
Okay, thank you. My second question would be on the inflation and the price cost issues. More or less, when can we expect a normalization in terms of time, given that you are raising prices? If you think that the 7%-9% margin range that we talked about in the past can still stand once price cost issues normalize in the division?
Yeah. Regarding the cost, as I said, and as we wrote in our report, we see improvements. Obviously, we see the October numbers already. This gives us some confidence. We see also still extremely dynamic development of input costs. I mentioned just before, we have received a letter from one supplier, a few days before end of the month, with a massive price increase at first of month, the next month. If we get such an increase, which has a not insignificant impact on the cost, within five days effective or four days, very short time, you have practically no chance to raise the price towards your customer.
This is one example, and what we have behind us, I would say or manage so far is the first wave of price increases. It's not excluded that we will see a second wave of input price increases triggered by energy prices, transportation, premium on metals, premium cost increase on plastic due to high energy prices and so on. We see improvements in for Q4. Is that stable? It's hard to say. Difficult to say. It's very dynamic. I would not lean out at this stage and say we are out of the woods.
Saying that 7%-9%, I think, that the market input price needs to stabilize and then on that basis, you can see where you end up. But it's a very dynamic situation, unfortunately.
Clear. Thank you.
Thank you. Now we're going to take our next question. Please stand by. The next question comes from the line of Nancy Ni from Goldman Sachs. Your line is open. Please ask your question.
Hi. Good morning, and thanks for taking my question. I just wanted to follow on applications. You know, you flag sort of weakening European construction and the macro in general. I just kind of wanted to hear your thoughts on maybe going into 2023, if we see continued macro weakening, where you think applications is headed.
Yeah. I mean, we see a clear drop. I mean an impact on building wires and 1 kV copper. So the demand is weakening substantially. So we will see an impact on revenues but also on output and consequently on tons of cable produced, building wire and 1 kV. So I do not expect that this will soon be over, the recession, and I assume this will continue into 2023. But I'm also not an economist to predict the future. But I doubt that it will be or that we will soon see a recovery. I think we need to live with this situation of lower demand for building wires. Yeah.
Got it. Thank you.
Thank you. Now we're going to take our next question. Please stand by. The next question comes from the line of Claus Almer from Nordea. Your line is open. Please ask your question.
Thank you. Yeah, also a few questions from my side. The first goes to this order intake you had in the quarter from onshore wind and also variation orders. How should we think about the margins on these orders? That would be the first question.
I mean, the margins typically if you talk of offshore, normally, variations are having equal or better margins than the original margin of the project. Onshore, we see a trend towards better margins. For projects which are coming in, but those are partly getting executed, let's say, a little bit far out. We have a quite good backlog in AC onshore. What we see increased improvement also in AC onshore and also driven by higher demand.
Okay. Do you see in general more of these variation orders where you get the order in the backlog, and then as long as the project is maybe progressing, you see more variation orders being added?
No, I would not say it's more. I mean, variation orders are in offshore are driven mainly from installation through changes on the installation spread. That can vary sometimes from year to year, but it's not that it's going substantial up or down. It depends also how much offshore installation work you have. I mean, if you have more offshore installation work, then also the likelihood that your variation order is going up. On onshore, you have typically less variation orders on existing project during installation. It varies a little bit. It depends how much installation you have, Claus.
Sure. Okay. My next question goes to the whole production quality and efficiency within the solutions division. Maybe you could give an update on how do you see this progressing both from the existing lines but also the ramp up of capacity.
Yeah. I mean, ramp up capacity, as said, we have a relatively moderate growth on the revenues, as you can see in the numbers. We integrated just now on the 27th of October the tower in Karlskrona. Obviously before it was not ready, and we are starting now in November to produce the first cable in Karlskrona. We are a little bit earlier in Cologne. So we have seen a rather slow start here and a slight delay also, to be honest. But these extrusion lines are also even the suppliers believe are produced several of those. It's not a machine to press a button and then boom, the cable comes out.
There's a lot of adjustment. The ramp up will happen now gradually, and we should see it then in full in 2023 from the expansion. Meaning the expansion, what we did, with the EUR 150 million investment, the EUR 90 million will come the year after. Efficiency improvement, we work of course on efficiency improvement, and we have moved one extruder from Cologne to Velké Meziříčí . Obviously during this move you cannot produce a cable, so you miss that volume from this extruder. This has now been completed, the installation of this extruder in Velké Meziříčí . We are starting now to produce using the first cable. We need to make type tests.
Once the type tests are completed, we can start the production in Velké Meziříčí . That will happen in Q1 next year. We have the shifts again from AC to DC. In Cologne that's also ongoing. It's a little bit of a dynamic process where we should see improvement next year, mainly. Not too much this.
Sure. Given this new capacity being added, I know it's still early days, but are you, let's say, satisfied with what you see so far?
Yeah, I'm satisfied, but I mean, if you install new equipment, there's always some, let's say, hiccups. It's normal, huh? I mean, I have done also
Sure.
Communicate in the past and we work through this with the supplier. Also, at the end, we need to ensure that we deliver the right quality of cable, meaning the roundness, the waviness, precision. In that case, it’s valid for the two different extruders with the different where we have different suppliers. It’s a lot of fine adjustment to ensure that the quality is at the level what you want to achieve, particularly if it comes to DC. It’s very sensitive and you need to be in the limits of what you have, especially what is designed to have the performance.
Okay. It sounds like you are ready for 2023. Thanks, Alex. That was all for me.
Yes, we are ready for 2023, yeah.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Now we're going to take our next question. The next question comes from the line of Akash Gupta from JP Morgan. Your line is open. Please ask your question.
Yeah. Hi, good morning, everybody, and thanks for your time. My first question is on offshore wind project awards, and here the question is more about decision-making, speed of decision-making in light of these windfall taxes prospects that we see both in the U.K. as well as in Europe. I mean, I think, here in the U.K., we will have a provision Thursday whether we will see windfall taxes and what would be the level of windfall taxes threshold.
I'm just wondering, like, are you having a dialogue with your customers, in terms of, could there be any potential delays in closing down orders or awarding firm orders based on what kind of surprises might come out in these announcements in coming weeks which may change from time to time given the situation in both Europe and U.K.?
No, I mean, we don't see here any delays. I mean, we have East Anglia THREE announced, and we work also on other opportunities where we don't see any delays. I mentioned in the beginning that that was at the COP27, and one of the topics that was the permitting and the delays of the, or the duration of the project from start of the development until completed. I was there in a session about Dogger Bank, and it took 10 years from start, then it was finally coming into service. This is too long, and several participants in the COP27 mentioned that the duration is too long.
From the financing, certain parts are pretty complex in this particular project. More than 30 banks were involved. This, the whole permitting needs to speed up in order to manage the large growth which the countries are committed to manage that. To answer your question, we do not see any delay in our project we have on hand or which we expect to become an order.
Thank you.
Yeah, go ahead.
Yeah. My second one is on the capacity situation for next year in solutions business. Thanks for providing this chart on phasing of backlog. I think here you say that roughly a quarter of backlog or around EUR 1 billion in standard metal prices has already been secured for 2023. I'm just wondering how much more flexibility do you have in order to take orders for next year capacity or next year production and installation, given it looks like you're already in very good shape from backlog standpoint at this point in the year.
Yeah. Thanks for the question. Yeah, we said 25%, EUR 1 billion. That's from the backlog. What is not included is obvious, East Anglia THREE half or in and out orders, which contribute. Then we can also take some more orders. Questions will there will this if there's something coming generate revenues for next year. We have still capacity to take some more orders, in particular on the AC offshore cable part. We have a good coverage so far.
Thank you. My final one is on cash flow. I mean, if I look at first three quarters, I mean, cash flow has been negative, but I guess that is not major surprise. Looking for rest of the year, and especially, in terms of milestone or down payment for incoming projects, what sort of net debt level should we target for end of the year? Any ballpark range, if you can give, that would be great.
I think the best way to improve here is to have a look at the Q4 historically wide, and usually see an improved performance. That's definitely also, let's say, how we work with the cash collection milestones, everything, and even more intensely towards the end of the year. I think that's the way to go about with the cash.
Thank you.
Thank you. Now we're going to take our next question. Please stand by. The next question comes to line of Massimiliano Severi from Credit Suisse. Your line is open. Please ask your question.
Yeah. Hi. Thank you for taking the follow-up. Just a more general one. Where do you see and when do you see potentially the first 525 kV submarine extruded orders coming up also in the context of TenneT launching the tender in September for this technology?
As you say, actually, TenneT has tender out for five offshore wind projects in the Netherlands. Most probably this will be the first one of those will be the first offshore wind what we will see. There is ongoing tender process and. We need to see when it will be awarded. There is some questions about environmental impact in the Netherlands which is some concern that if that has an impact on the delay of these orders, but that we need to see. That came just recently, but that's too early to say.
Do you generally see also interest on the interconnection side, or for now it's mostly TenneT with this five offshore wind projects for the 525 kV technology?
No, there is also interconnectors in U.K., several under discussions, or in tendering, to be more precise, 525 kV. To Western Isles, which was originally 300 kV. DC has changed to 525, on the East Coast of U.K. Several projects under discussion, 525 DC. This will come. This will come also soon. I mean, soon as an award, not necessarily as a pre-production and execution.
Yeah. Clear. Thank you.
Thank you. Dear participants, as a reminder, if you wish to ask a question, please press star one one on your telephone keypad. Dear speakers, there are no further questions. I would now like to hand the conference over to our main speaker today, Alexander Kara, for closing remarks.
Yeah. Okay. Thank you very much for your good questions, and wish everybody a good day and talk to you soon. Bye-bye.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.