Ladies and gentlemen, thank you all for standing by, and welcome today's annual report 2019. At this time, all participants will be on a listen-only mode. There will be a presentation, followed by a question and answer session. At which time, should you wish to ask a question, you will need to press star and the number one on your telephone keypad, and wait for your name to be announced. I must advise you all that this conference is being recorded today, Wednesday, February 26, 2020. Without any further delay, I would like to hand the conference over to first speaker of the day, Mr. Alexander Kara. Please go ahead.
Yeah. Good morning, everybody on the call. I would like to present today the NKT annual report 2019, and the Q4 results together with my colleagues. My name is Alexander Kara, CEO of NKT. Here with me in the room, I have Roland M. Andersen, CFO of NKT, and Basil Garabet, CEO of NKT Photonics. It will be a pleasure to present the results. First NKT and what Roland will present, and afterwards, Basil will present NKT Photonics results and the highlights, and Roland will cover the financial highlights of NKT A/S before we go to the question and answer sessions. Looking at 2019 and the fourth quarter, in my opinion, we have delivered as guided. In the fourth quarter, we have returned back to revenue growth, increased earnings, and we delivered in the fourth quarter, EUR 262 million on revenues.
Important in 2019 was for NKT that we have secured several orders. One of it was the Dogger Bank in U.K., but also several other orders. Our order backlog is all-time high at EUR 1.37 billion. This is very important as this gives us the basis for delivering a stronger 2020 and beyond. We have also strengthened further in 2019 our technology competence. We acquired the technology consultancy of ABB in Västerås, and with those we can further develop our cable, new generation of high-voltage cables. Also, we are successful and very proud of that we qualified the 525 kV for the corridor projects, as we have already delivered in 525 as first and igré announced the 525. Going to the individual business lines, looking at solutions. In the first quarter, as just mentioned, we have increased significant revenues and earnings, which is very positive.
Further, we have also now all our high-voltage factory are running on green electricity. This is an addition to the NKT Victoria, which is very fuel efficient and which is in the harbor. We have a power from shore also where we can feed with renewable energy. We have also mentioned for the qualified for the 525 kV German corridor project, which is an important part of the German Energiewende. Very important to bring this power, which is generated in the North Sea from the generation to the south to the load center to Bavaria and so on. That is critical for Germany and the further development. Looking now to one specific order in solutions where I'm extremely proud is the first HVDC offshore wind farm connection in U.K. which we got awarded last year.
This is a total 2.4 gigawatts, which is 40% out of the CfD auction. Once in service, the wind farm will be able to feed with green energy approximately three million households. This underlines our capability to deliver high-end DC XLPE cables. We have a strong back record on all projects what we have already delivered in the past. We will use also our state-of-the-art NKT Victoria to install these cables and make sure that this will be a success. Looking at the high-voltage market in 2019, we received more than EUR 700 million orders out of EUR 3 billion, which is roughly a quarter out of this, which is positive. If you look for 2020, we see a similar number of orders in the range of around EUR 3 billion.
On top of this, we will have the German corridor projects, which will significantly increase the tenders which will be awarded looking backwards to the last years. This is a positive outlook for the entire cable industry. Looking at the backlog, important is, if you look at slide number nine, with EUR 1.3 billion, that we execute these orders, what we have in hand, flawless, without any issues. We have projects in all segments, offshore interconnection, oil and gas, and we are also tendering projects in all these fields. We see a positive momentum on the market and execute as it is expected from our customers. This concludes the solution part, and now looking to application. Application performance in Q4 and for the full year is not satisfactory, and revenues, particularly in Scandinavia and France, were below what we expected.
It is clear we need here to improve our efficiency and the output of the factory. It is not where we want to be, and we will work on that, and I come a little bit later back to that. Last but not least, let me say some words to service and accessories. We delivered a satisfactory financial result in Q4. We had no offshore repair, which has an impact on the profitability in Q4, and we could very secure the first order where we gave a guaranteed vessel mobilization time of 10 days. We received this order from Equinor, and obviously it is very important to have the downtime of the cable minimized. With 10 days mobilization time, we can ensure that, which is important for our customers. We have also grown our accessories business on a medium voltage and offshore.
With this, it sums up the performance in 2019. Now we will talk briefly about the key actions in 2020 and 2021, in order that we improve the profitability. That is the key for us in cables for 2021 to improve the profitability. If you look at slide number 12, we have a solution. It is important that we fill our factories. We have secured already some orders successful in 2019 with the right composition, means between DC, AC, a right mix to maximize the utilization of the assets. Further, we need to execute the project with the quality which is expected from our customer, and this will be one of the priorities. On application, we need to increase the output of the factories, make them more efficient, getting more out of the factories, and reducing, as an example here, also our maintenance cost in the factories.
In service, we have a nice service offerings. As I mentioned, the order with Equinor with the 10-day mobilization. We need to increase here our offerings and our service footprint, what we are doing in U.K. and in the Middle East, so that we have a larger coverage of the market. With that, I would like to conclude on the 2019 year. As mentioned, we delivered as guided, and it is clear that we worked hard to improve the near-term sustainable performance of the company. With this, I would like to hand over to Basil, and he can guide you through the Photonics highlights. Basil?
Thank you, Alex. Good morning. We are on slide 14 now, going through the key highlights for the fourth quarter in 2019. In the quarter, our revenue came in at EUR 25.5 million. That is up from EUR 22.5 million in the same quarter in 2018 and is the highest revenue quarter in the company's history. It comes with a growth of 15%. This growth is an improvement to the organic growth in previous quarters and is in line with the guidance and financial outlook that we gave. EBITDA came in at EUR 7.2 million. That is down from EUR 8 million of EBITDA in the same quarter in 2018, driven mainly because of the investments that we put into the company to enable growth in the year and growth in future years.
In the same quarter, our order intake increased by 50% compared to the same quarter in 2018, and it is driven by a number of large OEMs. The way that we've been moving forward is concentrating on more and more OEMs to enable the growth that we are forecasting. The performance in the quarter is in line with expectations, and as the same in previous quarters, previous years, Q4 is always our largest quarter, and that's because of the seasonality of our business. In October 2019, we opened our new manufacturing facility in Boston, Massachusetts in the U.S. It's very important for us. The Boston facility will service the market in the U.S., especially on our medical and our aerospace and defense markets.
We've also opened a new industrial application center in the U.K. to deliver customer-focused services, looking at our ultra-fast lasers and laser micro-machining applications, helping our customers and ensuring that we get more business through that center. As I said earlier, we are preparing for future growth, and in the quarter, we hired more than 20 employees, bringing the total at the end of the year to just over 400 people. We move to the next slide 15. One thing that we are doing, especially moving forward and especially for 2020, we are updating the market segmentation that we are servicing. So we're moving from a product-focused market segmentation to a market-focused segmentation, and that really shows the growth in the company, especially the maturity in the company. So previously, we had reported on segments which were imaging and metrology, sensing and energy, and material processing.
The new market segments, actually, they are not new, they are more prominent in what we do, is medical and life sciences as one segment, industrial as another segment, and aerospace and defense as the third segment. We will continue reporting on that throughout 2020. These market segments are generally in line with the reporting in the global photonics industry and allow people to compare like with like and compare us to our peers going forward. Also, to look at the size of the market and look at the performance of NKT Photonics within those clearly defined markets. This will provide a very good overview of our commercial focus on the years ahead. These three markets are basically moved forward by a number of mega trends.
The first one is a mega trend where there is a growing and aging population and additional need for more health screening, additional need for sensing and monitoring, the additional need for less expensive medical instrumentation for mass screening, less expensive medical instrumentation for diagnostics, et cetera. That helps our medical market segment. For our technology market, the mega trend is mainly in newer technology. As technology becomes more complex, the material processing part of that is becoming more and more important, especially for newer technologies, and that is where we play, especially with our ultra-fast business. Finally, on the mega trend within our aerospace and defense segment is with a big focus on security. Where we play is mainly in directed energy, in areas such as drone detection and protection, et cetera, focusing on security both on the aerospace and civil side. We move to page 17.
The growth in 2019 came mainly from aerospace and defense. That is a market segment that grew tremendously in the year for us, and we see that growing in 2020 as well. The other segments, actually the fastest growing rather than size, but the fastest-growing segment was our medical and life sciences. There we play in bio imaging, we are in medical devices, and very importantly, we are in ophthalmology, especially for cataract operation, we supply lasers for cataract operation, supply lasers going into and we are being designed into for other applications such as LASIK. The industrial side is the side that is our largest at the moment. It is moving forward as well, but not the same levels or speed as medical or aerospace. That is driven mainly in remote sensing and semiconductors.
Finally, again, on the aerospace side, where we play is in directed infrared countermeasures, DIRCM, in directed energy, and in remote sensing. With that, I end my segment of the report, and I pass on to Roland.
Thank you, Basil. Let's just jump to slide 19 and have a look at the group's revenue development since the same quarter in 2018. If we adjust for metal price impact, the SP revenues in 2018 was EUR 254.6. We had small currency impacts, primarily from Sweden, and we also had a divestment of our rail business that has impacted the Q. If we adjust for that, then NKT has posted organic growth of EUR 36.7 million, and Photonics has posted organic growth of EUR 3.2, so the revenue pick up here primarily driven by organic growth in both companies. If we jump to slide 20 and have a glance at the group's consolidated income statements. Operationally, EBITDA for Q4 2019 was up, primarily driven by NKT. Improved earnings in solutions drove that pickup, and admittedly compared to an unsatisfactory Q4 from 2018.
Photonics has continued to invest in initiatives to drive further growth going forward. In these numbers, implementation of IFRS 16 increased operational EBITDA by EUR 1.7 million, of which EUR 1.2 million stems from NKT and EUR 0.5 million stems from NKT Photonics. We have posted one-off items of EUR 6.2 million in Q4 2019, and that's only related to NKT. It's primarily finalization of our strategic initiatives and reducing headcount on the program we announced at the beginning of 2019, and also a few strategic initiatives we have on improving our production efficiency. As expected, our FTE number is lower now coming out of 2019 as we have been driving our cost program almost to an end, and also because of the divestment of our railway activities back in February 2019. If we jump to slide 21, our operational EBITDA has been declining, as we know, over 2019.
However, the LCM margin is picking up a little bit in Q4 2019. Operationally, EBITDA margin, LCM was 0.8 points lower in Q4 2019 compared to Q3 2019. The pickup in profitability from 2015 to 2017 was primarily driven by the acquisition of the ABB HV cables activities, but also the divestment of the Chinese operations in NKT back in 2016. If we jump to 22 and have a quick glance on the balance sheet, clearly our working capital improved in Q4 2019. It improved exceptionally and is up to, most likely, a new normal. We come back to that on the next slide. Whereas NKT Photonics was largely flat at the end of Q4. The improved working capital also drove down the capital employed, yet we still have negative ROCE from the NKT business.
On this balance sheet, the IFRS impact have added lease liabilities of EUR 38 million, of which EUR 28 million is from NKT and EUR 10 million is from NKT Photonics. If we move to slide 23 and have a bit look on the working capital, it is clear that the reduction in working capital was very positive for Q4. It was driven by development in phasing of milestone payments from the solutions business primarily. However, also the application have worked increasingly with trimming the inventories and also improved the steerings of their receivables, and has contributed with a meaningful amount. In this respect, the service and accessories was more stable compared to the end of Q3 2019. Now, working capital is expected to normalize at a higher level during 2020.
And we all recall that working capital will primarily depend on timing of payments and solutions, which will cause quarterly fluctuations. If we jump to slide 24, obviously the working capital improvement led to a positive free cash flow for Q4, primarily driven by NKT. CapEx was mainly driven by NKT investing in the upgrade of equipment and solutions, but also an increased investment level in NKT Photonics. NKT in Q4 strengthened our R&D capabilities with the acquisition of a technology consulting unit of vasteras in Sweden from ABB, effectively adding further competencies to especially our high-voltage DC development efforts. If we jump to slide 25, our net debt was reduced to EUR 205 million by end of the year, excluding IFRS 16, and that is down from a comparable level of EUR 248 million by the end of 2018.
With the implementation of IFRS 16, however, we all recall that we are adding EUR 38 million to that level. The debt level of net interest-bearing debt consists of EUR 166 million from mortgage debt and EUR 46 million drawn on our revolving credit facility, under which we have availability up to EUR 300 million, and cash in bank and in hand was about EUR 7 million by the end of the year. Only the revolving credit facility is subject to financial covenants. These include agreed revenues in the form of security over NKT Photonics and the rest with NKT Victoria. NKT A/S has sufficient financial headroom to manage the level of activity expected in 2020. If we move to slide 26, NKT's financial outlook for 2020 now includes a revenue guidance of between EUR 1.0 billion and EUR 1.1 billion in standard metal prices, and we expect an operational EBITDA of between EUR 40 million to EUR 60 million.
With regards to our medium-term guidance, NKT anticipates an increasing demand for power cable solutions and services in the years ahead, and as a technology-leading provider, NKT expects to be significant beneficiary of this development. The growth of the high-voltage market is, however, subject to various factors, including the timing of political decision-making, which makes the rollout of specific projects challenging to predict. Back in 2017, NKT provided medium-term financial targets, which targeted operational EBITDA of approximately EUR 200 million to EUR 225 million, and a return on capital employed to more than 13%. However, due to the aforementioned timing uncertainty, in particular future awards of high-voltage projects, NKT has decided to only provide financial outlook within the current financial year.
If we move on to slide 27, the outlook for 2020 for NKT Photonics is an organic growth of between 5%-15% and an EBITDA margin of 15%-18%. Medium-term targets for Photonics is an annual organic growth of about 10%, an EBITDA margin of about 25%, and a corresponding return on capital employed of about 20%. With those words, I will give it over to the operator for questions and answers.
Thank you, sir. Ladies and gentlemen, once again, should you wish to ask a question, you will need to press star and the number one on your telephone keypad and wait for it to be announced. Should you wish to cancel it, you may press the pound or hash key. Once again, to ask a question, please press star and one. Our first question comes from the line of Akash Gupta. Your line is now open. Please ask the question.
Yeah. Hi, good morning, everybody. I have three questions, please. My first question is on working capital, where you say you expect it to normalize at a higher level. Can you quantify what you mean by that? Do you still expect it to remain negative, or can it go positive? That is question number one. The second question I have is on Photonics business, where you are in process of strategic exploring all the options. Can you talk us through where we are in the process and by when we should expect to hear some update? Also, I am surprised that despite having 50% order growth in Q4, you are targeting 5%-15% organic sales growth for 2020. So maybe if you can elaborate how the order growth was for the full year in that business. My final one is on applications.
The performance of business was a disaster in 2019. Can you talk about how much improvement you can expect and then steps you are targeting there? Also, in that business, there has been some deterioration in performance in Q4. Was it only driven by top line, or was there anything else that we should be aware of? Thank you.
Thank you, Akash. Maybe I should start also on net working capital. As you know, I think we have improved the level in applications substantially. So I think on applications, there is probably a more permanent improvement compared to the average we have seen over the past four to six quarters. On solutions, it is more volatile. It really depends on which orders we get in, how fast we get them in, and also the timing of milestone payments over the period of execution of the project. So we are not going to quantify that so much more than that. With regards to the strategic review on NKT Photonics, I think we are happy that NKT Photonics delivered on their guidance from November. The strategic review is moving on as per planned. For now, we do not have further information on that process than that.
Basil, I think there was a question maybe on the growth rates.
Yes. As I said earlier, the fourth quarter is our largest quarter. We have a seasonality in the business that, in this particular case, gave us a 15% growth. The actual growth we calculated for the full 2019 is 10%. We are guiding 5% to 15%, so we are not really changing the growth process and the trajectory that we are on. It is very similar to 2019. As reported earlier, there are headwinds in our industry. Other companies in our field have been reporting double-digit down organic growth. We have a little bit more of a balanced portfolio, so we are seeing a little bit more of a growth than they are. I think that is a healthy growth, and it is also conservative looking at 5% to 15%.
Yes. Maybe to your questions with the application, what you call a disaster. I would go not that far, but it is definitely not where we want to be. We went down in revenue in the fourth quarter from EUR 97 million to EUR 92 million, which has, of course, an impact on the profitability and considering also the contribution. So what we need to do is to increase the output of the factory, increase the productivity, make sure that we optimize changeover times and so on. So the output must be increased. With this output, we also increase the revenues. Further, we need to look at the maintenance costs where we can come down. So we will improve that in 2020, but it will be not a step function. So gradually we will go up, but we do not guide on the individual application line.
Yes. Maybe a follow-up on applications. So how long do you think it will take to normalize margins in that business to, let us say, mid-single digit level?
We will work hard on 2020 and work on the actions which we have defined to improve the output on the factories, on all the factories in the Nordic, in Czech, and in Denmark, and then we will give you an update at a later stage when we move towards end of the year.
Thank you.
Thank you. The next question comes from the line of Claus Almer. The line is now open.
Thank you. Yeah, also a few questions from my side. The first question goes to the solution division. You are labeling the tender activity as continued tender activity, which seems a bit less positive than your market outlook that including SuedLink could more than double compared to both 2018 and 2019. Is there a message you want to share by this way of characterizing the tender activity? That would be the first question.
Yeah. Tender activities, we are active in all segments of interconnector offshore wind and oil and gas. As I mentioned before, we believe it will be around EUR 3 billion. Then we have the corridor projects where we will be expected to be awarded in Q4, and this will significantly increase on the volume in the market. On that, we believe we get our share.
Okay. I would have thought you would have talked about the tender activity to be busy. Did you mention that the project in Germany will be awarded in Q4 2020? Was that
In Q2. Sorry, in Q2.
Oh, okay.
Maybe a misunderstanding. This is what we hear from the TSO, that the award will take place in Q2. We are busy with all projects in all the tenders, interconnected land and sea, oil and gas, and offshore wind farms.
Right. Okay. Then coming back to the working capital. If the market will play out, including the SuedLink, will you still be having a higher net working capital by the end of the year? Or what's the assumption behind normalizing net working capital?
We're not quantifying that, Claus, especially with regards to SuedLink. It's close now, so we won't be too quantifiable on that. But what we're saying is that as and when we get orders in, and we got orders in 2018 and also in 2019, then we will maintain negative working capital in that business line, and that is expected to continue. So you can expect negative working capital to be even more negative when we get awarded projects compared to if we are not awarded projects. By the end of Q4 2019, it was a little bit of, in a good way, the perfect storm. That's why we're saying, that is not the new normal. It will bounce back to Q1, Q2.
Okay. That makes sense. Then, given the projects that have been awarded in the market, and the outlook for awards in 2020, how do you see utilization among the main cable manufacturers? Are you starting to see people-
The utilization
Sorry?
Yeah, go ahead, please. Go ahead. Yeah.
No, I just want Are you starting to see a more tight supply-demand balance?
Yeah. If you look at 2019 on awards, we received more than EUR 750 million and also EUR 3 billion, but all other cable manufacturer got also their share. The utilization is growing in this industry, which is good for the entire cable industry, and we are looking towards a more balanced demand-supply situation.
Okay, and then just a final question. Regarding your midterm targets, I understand you didn't give some new midterm targets for the cable division, but if you remove this uncertainty about timing, do you still think it is possible to achieve the EUR 200 million to EUR 225 million EBITDA for the cable division?
Yes. So Claus, thanks for the question. I'll answer it in this way. Compared to when we issued this guidance in 2017, there's basically no change in our view on the market and the market potential, and there's no view or no change in our view on our own capabilities, our own technological edge or capabilities. What has changed is that we have learned that especially in the large end, the interconnectors, the large projects that are driven by political decisions, allocations on the government's spending budgets, legal permission rights to land and so on, there's a lot of uncertainty with regards to timing. That has changed, and that's why we are articulating in this way instead of what we did in 2017.
Okay. That makes sense. Thank you so much.
Thank you. The next question comes from the line of Andreas Granath. The line is now open. Please ask your question.
Good morning, everybody. Thanks for taking my question. One is on the net debt. Could you please comment on how you see your financial average going into 2020, considering also your comments on the working capital evolution?
I was a little What is it on? What is the question on?
It is on your net debt and financial leverage in 2020.
Yeah.
How do you think of it going forward, given also the working capital evolution?
Yeah, I think there's a close correlation, right, to a net working capital and to our guidance on EBITDA and thereby our net interest-bearing debt. Assuming, as we say, that that net working capital to a certain extent will bounce back, our net debt will also somewhat bounce back up.
Thank you. My second one is on the high-voltage market. Given the positive outlook in 2020, how do you see pricing trends over the years?
I mean, as I said, the utilization of cable manufacture is increasing. That should lead to a better supply-demand, let's say, outlook. Based on economy, that should have its impact economically rules.
Okay. Got it. Thank you.
Thank you. Akash Gupta would like to ask a question again.
Yeah. Hi, good morning. Thanks for follow-up. My first follow-up is on progression on EBITDA in 2020. How should we expect first half versus second half, and if there is anything unusual in terms of phasing of backlog that we should be aware of? Second, is there anything latest on SuedLink award? Maybe if you can talk about when do you expect this project to be awarded. Thank you.
Thank you, Akash. With regards to our guidance, I think you should think of it as being back-end loaded. Second half will be better than first half. That's one thing. Then regards to the SuedLink, I think as Alex said, we expect, in line with the customer's communication, that there will be awards before summer.
Thank you. No further question at this time. Please continue.
Okay. I think if there's no further question, then I would like to thank you that you took the time to call in and for your good questions. I wish everybody a good day and talk to you soon. Bye-bye.
Thank you. That conclude our conference for today. Thank you all for participating. You may all disconnect. Speakers, please stand by.