Good morning, and welcome to the NKT webcast covering the annual report 2017 that we released this morning. My name is Michael Hedegaard Lyng, President and CEO in NKT, and together with me here today, I have CFO Roland Andersen and Basil Garabet, CEO of NKT Photonics. Let's look at the agenda on page 4. First, I will start with a short presentation on the highlight 2017, including a perspective on NKT. Roland will follow me presenting the financial highlights for 2017. After this, we will move to NKT Photonics, where Basil will do the presentation before we then jointly end with the Q&A session. Slide 5, just to, for the last time, show that the Nilfisk demerger has been executed with success back in October 2017. In connection with that, we also changed the name from NKT Holding A/S to NKT.
I guess you are all very familiar with this, so I suggest we just move on. Here, a slide on some group highlights for 2017. For the NKT part, we increased the revenue and operational EBITDA, also supported by the ABB acquisition that we closed back in March 2017. We increased the revenue by EUR 307.6 million, up to EUR 1,058,000,000 . With that, we more or less met our guided top line of around EUR 1.1 billion. On the operational EBITDA side, we almost doubled that to EUR 138.3 million, and we increased the margin from 9.7%- 13.1%. Embedded in these numbers are a good fourth quarter, where we realized an EBITDA margin of 12% compared to 9.6% last year.
Later on, we will probably talk a lot about the visibility for 2018 and also the projects award in 2017, and it should not come as a surprise that we have not succeeded in filling up a backlog for 2018. However, that being said, we are pretty satisfied with the order intake we saw in the offshore wind segment with the Borssele Beta order award that we announced earlier the year, but also the preferred supplier awards on Moray East and Triton Knoll that will give good visibility in end 2018 going into 2019. In the product business, we saw a - 3% organic growth. This is primarily due to the fact that we had very high comparison numbers in Germany because of the photovoltaic year, and we talked about that earlier in 2017 also.
Then we saw some challenging markets in particular in Poland, that were tough in particular in the first half of 2017. However, that market improved slightly in the second half of 2017. Just touching briefly on NKT Photonics before Basil will go into the depth here. We actually crossed the milestone of reaching EUR 50 million in top line, yielding an organic growth of 7% and operational EBITDA of EUR 3.5 million. Here it should be noted that as also announced back in third quarter, we were negatively impacted by EUR 2.5 million related to some long-term incentive programs. We also, in this business, concluded the acquisition of Onefive, and Basil will explain more about that later on in presentation. We continue to strengthen the organization from being development oriented into a real industrial company.
We continue the journey of investing into the future in this business. If we move on to slide 7, just looking at the guidance that we have had throughout 2017. For the NKT part, we can conclude that we are in line with the targets for 2017. We realized operational EBITDA of EUR 138 million over EUR 140 million that we guided throughout the entire 2017 after announcing the conclusion of the ABB transaction. NKT Photonics had slightly lower numbers compared to what we communicated back in third quarter announcement in November. However, you should also remember that we are talking pretty small numbers, so a EUR 500,000 actually improved the margins or have a negative impact on margins quite dramatically. We are also here satisfied with the developments. If we move into the hot topic for today's call, the outlook for 2018.
We are guiding a top line for the NKT part of a revenue of between EUR 1 billion and EUR 1.1 billion standard metal prices, and that should yield operational EBITDA in the level of EUR 90 million- EUR 110 million. This is, of course, reflecting the fact that we do not have sufficient visibility into the factories in the second half of 2018, predominantly in the Karlskrona site, that are being half empty in the second half of 2018. For the NKT Photonics part, we are guiding a revenue of EUR 65 million- EUR 70 million, and with that, we should be able to do an EBITDA of around EUR 10 million. With that, we actually start to demonstrate strong potential for this business and also strong operational gearing, when we manage to increase the top line. If we move on to slide 9.
For the NKT part, we see 2018 as a transition year. We are fully aware of the fact that the guided operational EBITDA level is not what was expected, and it is also a number that we cannot be satisfied with. I think, however, it is also important to mention that we cannot change it a lot. We are in a business with a lot of fixed costs and a lot of capital employed, and there is a limit to what we can do to reduce costs. In particular, because we do look into 2019 and 2020, where we expect and continue to expect a significant pickup in activity levels. This is what we currently are seeing in the pretty intense tendering activity that we see.
It is a tough situation to be in, where a big part of the organization are extremely busy servicing the customers with what they expect from us. Doing a lot of detailed tendering work on a lot of numbers of projects and also very complicated projects. Then, in the other area of the business, we have a half empty factory. But that is just a reality, and we cannot change that. Now we start with this guided interval here. We will, of course, do whatever is possible to be in the upper end of that range. If we manage to get in business that can have a meaningful impact in 2018, and also later on in the year, look into opportunities for maybe moving production from 2019 into 2018.
We will, of course, try to do that in order to maintain the number, or also have it slightly better. But that's too early to be more precise, and that's why we have started with this range. I think also, before we move on, it should be noted that we still do not yet have full flexibility between the site in Cologne and the site in Karlskrona. So the Cologne site is actually fully utilized and expected to be fully utilized in 2018. Also, with the visibility that we have on new orders that we have received in the offshore wind segment, we will continue to see a very high capacity utilization. But unfortunately, we cannot yet move that order backlog to be produced in Karlskrona.
If we move into slide 11, looking at the different segments, we can conclude that we realized a 7% organic growth for 2017. If we look at the project area, and if I should try to put a little bit more flavor on that, we are satisfied with the execution of the offshore projects and segments that we saw in fourth quarter and throughout 2017, actually. In the legacy ABB business, we also have seen a very high activity level on the NKT Victoria vessel and also a high utilization of the factory in Karlskrona. So taking into account that we only have 10 months of ABB into the numbers, we are actually pretty satisfied with the EUR 138 million that we achieved in 2017. There's a small element of postponement of revenue in the end of 2017 into 2018. But that's how it is in project business.
We, from time to time, see delays either caused by us or caused by our customers. In the product business, we actually had an okay-ish year in some markets, but that being offset by other markets being more challenging. In particular, Sweden, U.K., Scandinavia, we saw good traction in the market. As we also have explained a little bit, throughout 2017, we actually have been in situations where we could not supply sufficient volume to the market, which is something we try to compensate for by optimizing our manufacturing footprints. But that good traction was then offset by the Polish market being very difficult, in particular in the first half of 2017, and then also from the fact that the German medium voltage market were very strong in 2016, and we saw a decline of up to 10%-15% into 2017. And that, of course, impacted the numbers.
If we look into what is it that we try to work on and also try to tie it in a little bit to the EXCELLENCE 2020 journey that we launched a couple of years back, then we continue the work to drive excellence in whatever function we have in the organization. We did a lot of organizational changes in 2017, and since October 2017, we have been operating in a completely new structure. The aim of that is, of course, to drive excellence into what we do. One example on that is that we now have all our factories reporting to a COO. The COO's responsibility is really to get more capacity out of our factories and also to optimize capacity planning across the sites.
That should yield more capacity. Looking into 2018, in particular in the product area, it is also a capacity that we expect to be able to sell to the market. We continue that journey. We, of course, also look into how to accelerate growth, and here the ABB acquisition that we finalized in March last year is, of course, key. We have a completely unchanged view on the attractiveness of that business, and we are very confident that we will see a significant pickup in the market in the years to come. Early on, and also on the Capital Market Day, we communicated on expected orders awarded to the industry in 2018 and 2019, the two times five that you clearly remember.
Difficult to be precise on the numbers, but we actually have an unchanged view on the potential and the potential awards to the industry in the years to come. There can probably be elements of slight disappointments or areas where we see small delays in project awards. There have also been awards in the U.S. market that did not really develop the way we expected six months back. It doesn't change our view that we are looking into 2019 and 2020 with a significantly higher utilization. That's also tying into the next slide here on slide 13 that you have seen before. We still have a lot of the business in the segment develop and grow. That goes for the DC high-v oltage onshore, but also the AC and DC offshore segments that we just talked about.
We also continue to see a pretty good traction in the accessory business as well as in the service and installation business. The building wires segment, medium voltage, we don't do anything in order to improve it. We will see declining margins over time, and that's why it is very important, and it's a must-win battle for us to continue to improve the business in order to offset the price pressure that are very typical for commoditized segments. The last column here, the turnaround. The railway business, we have not talked a lot about that in the last year, but we have now reached the conclusion that we will look into a potential divestment of that business, and bear in mind that it's not really a significant volume for us.
We somehow have concluded that there are better owners for that business that can do the necessary investments in order to improve the business. Also, we have concluded that it's not really core business for NKT. It's probably the last area that we will divest following the automotive divestment and the China divestment that we did in 2017 and 2016. If we manage to do this, we will be a pure-play business focusing on energy cables and service and accessories. The high-v oltage onshore business continues to be tough. This is the segment below 220 kV onshore, a segment that are also being more and more commoditized, and also a segment that are impacted by the relatively low order intake in the upper end of the segment that we saw in 2017, not only for NKT, but also for the industry in general.
The next, slide 14, is probably not new for you. This is just touching on the ABB acquisition we finalized back in 2017. The integration of that business is progressing according to plan. We will do some initiatives in 2018 in order to speed it up, because we have time to speed it up and become even stronger when we then move into 2019. The synergy potential of around EUR 30 million that we communicated back in March, our view on that is unchanged. But as you also know, the majority of that, or two-thirds of that, somehow relates to having more volume to execute and produce in our factories. So it will be impossible to realize that synergy potential if we do not see a significant pickup in the markets. And that is also what we expect to see.
Then on slide 15, we have a few more words on the market development in the high-voltage power cable segment. I think we can conclude that for 2017, we saw very few DC projects award. And unfortunately, the two we saw did not go our way. But it's not only NKT that somehow are in a situation where we could do more. That also goes for some of our key competitors. Having said that, we do see a lot of positive traction in markets. We earlier on talked about the offshore wind market, where we also have been awarded significant orders, and we are still working on more orders to be hopefully realized in the coming quarters.
We can also look at the European Commission that also have looked into this and have declared more than 100 projects of being projects of common interest, where some of these projects were provided funding in the beginning of this year. So we continue to see a very intense tendering activity. But having said that, I share your view that we also very soon would like to see that being crystallized in actual order intake. But as said before, we expect to see that during 2018. So with that, I have finalized my part of the presentation, and I would like to hand it over to Roland to take us through the financial parts.
Thank you, Michael. My name is Roland Andersen, and I'm CFO in NKT. On slide 17, we have an overview of our backlog and the projects including in that by end of the year. Our high-voltage order backlog at the end of 2017 was EUR 760 million in market prices and EUR 690 million in standard prices. And compared to the end of Q3, this was slightly lower. And that reflects obviously the part that we have produced during that quarter, and then the addition of the offshore wind order for Borssele Beta in the Netherlands.
The two preferred supplier agreements in the U.K. are not part of the backlog, as the customers have not reached final investments decisions yet. We, however, expect that to happen. The options for booking more tenders or more projects with an impact to our P&L in 2018 is still present. The available projects are relatively limited.
We are working on a few tenders, but obviously also tenders that can start filling our backlog for 2019 and onwards. If we flick to slide 18. This picture, many of you know, that shows our improving EBITDA level and also EBITDA margin over the past three to four years. During the course of 2017, our operational EBITDA development is obviously driven by the acquired activities from ABB. Q4 this year also was characterized by seasonality in products as well as phasing and a little bit of delays in projects in the High Voltage business. If you look at slide 19, the development in working capital is also continuing the positive trends. The development in 2017 has been strong, and it has been a continuation of the progress we have seen the previous three years.
The driver, especially in 2017, is driven by the acquired business, also the working capital initiatives that we continue to work on, and of course, the composition of our project portfolio as it looks today. I think the data point by the end of the year is probably not a sustainable level, but an extraordinary good level for us. If we move to slide 20, this summarizes the numbers and the highlights for 2017. Revenue increase in Q4, driven by the acquired business.
Also operational EBITDA and correspondingly significant good performance in the acquired businesses is driving the EBITDA up. With the acquisition of ABB, we also added around EUR 390 million in goodwill. That means that even though we have also picked up earnings, our ROCE is lower by the end of 2017 compared to previous year. Our investment level for 2017 has gone to EUR 62.9 million.
It reflects, of course, the added business, but it also indicates that we are still investing in IT infrastructure, platform upgrade for our applications business. Investment into DC capabilities in Cologne. If you move to slide 21, this is not so different from the other slide, but this is NKT A/S, and basically had now included the NKT Photonics numbers in the P&L. For the full year, Nilfisk is considered discontinued operations, and that means not included in the P&L number.
Revenue was up by DKK 96 million in standard metal prices. This was mainly due to the acquisitions, but also the divestment of our automotive is reflected, as we can see in the table on the right-hand side as divestments. So revenue increased by DKK 111 million from acquisitions, divestments of DKK 11 million. Then there is metal prices and a few other things, basically leaving a flat organic growth on group level.
Our one-off cost in Q4 totaled DKK 17.7 million. We counted DKK 6.1 million as ABB integration cost. We also had costs related to the demerger of Nilfisk of DKK 4.4 million, and then we had EXCELLENCE 2020 cost and other strategic initiatives of DKK 7.2 million, including here under broken deal costs associated with our engagement in the General Cable process. If we move to slide 22, this shows the development for NKT A/S in the leverage ratio moving down by the end of 2017. A few data point, if we pro forma calculate the leverage point by end of Q3, excluding Nilfisk, leverage ratio was 2.2. By the end of this year, NIBD was DKK 293 million, and the leverage ratio was 1.9. This leverage ratio is obviously positively impacted by the extraordinary good level of working capital.
And with that was the financial highlights for NKT and the group. I will give it over to you, Basil.
Thank you, Roland. If we move on to page 24. We have, as per usual, divided our business into the three segments, the three market segments. The first one, which is imaging and metrology, which this year actually went up to 56% of our revenue. That is because we saw significant organic growth in that particular segment. We have also released new products into the segment, primarily the SuperK EVO, which is a supercontinuum white laser product platform. We are seeing first OEM projects already running in that segment. In the sensing and energy segment of the market that we are in, that accounted to just over 30%, 31% of our revenue. We had solid demand for our Koheras fiber lasers in the year, up significantly on the year before.
However, we did see a couple of steps backwards due to delays in a lot of the infrastructure projects that we had in the LEOS segment. That has started to reverse into Q4, and we are seeing a lot of the contracts that got pushed out are now primarily in 2018. Finally, in the material processing segment, which is one of our new growth areas where we are concentrating on, we acquired Onefive in Switzerland. Onefive is a leading ultra-fast laser manufacturer. The acquisition was completed on 1 September 2017, and that has given us a significant strengthened foothold in the industrial market and the medical market. In that segment, our fiber and gain modules actually went up on the year before. That segment was only 13% of our revenue, but going into 2018, we expect that percentage to be much higher. We move to page 25.
We go through the financial summary for 2017. Q4 came in at EUR 21 million, compared to EUR 16.2 million in the fourth quarter of 2016. As mentioned, we saw an organic growth of 13% in the quarter, and EBITDA numbers of EUR 5.7 million. For the year, as mentioned earlier, we broke through the EUR 50 million mark and came in at EUR 51 million. Our organic growth came in at 7%, and our operational EBITDA is, as also as mentioned before, lower than the year before. That really is impacted by a provision of EUR 2.5 million for LTI, long-term incentive program for senior management. Excluding these, the EBITDA numbers would have been slightly down compared to 2016. The year came in at 18% over the year before, and obviously a portion of that, as we mentioned, was the organic growth.
The other portion was the acquisition of Onefive, in which we had four months of revenue. We are preparing for future growth. We have implemented a new ERP system, and we have added a number of new employees in engineering and manufacturing. The capital employed for the year, including goodwill, was up by DKK 19.7 million. That is mainly due to the acquisition of Onefive.
Finally, if we move to page 26. These are the strategic priorities for us in 2018. The first one is to move up the food chain, expand from being primarily a supplier of components to complete optical systems. We have undertaken that in all three market segments that we are in, and that is moving satisfactory. We are also focusing on organic growth in 2018. We are looking at the consolidation of the companies we have acquired and increasing our revenue with our OEMs.
We also are implementing, throughout our operations, lean manufacturing and scalable manufacturing, and we are putting through a program of commercial excellence that we will see the benefits of it for in this quarter, actually in Q1, going forward. Finally, as all high-tech companies that are successful, fast introduction of new products is a key action item for us, and we will continue doing that into the year. With that, I will hand over to Michael.
Good. Thank you, Basil, and thank you, Roland. With that, we have concluded the presentation, and we are ready to move into the Q&A session. Operator, anybody with a question?
Yes, certainly, sir. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. We will now take our first question from David Vos from Barclays. Please go ahead. Your line is open.
Good morning, gentlemen. Thank you very much for taking my questions. I have three, if I may. First of all, could you shed some light on understanding the earnings bridge into 2018? It occurs to me that on revenue that is virtually flat year-on-year, this is quite a big drop, which is coming, of course, from the project business as you've indicated. Could you just say how much each of volume pricing and if you will, synergies, perhaps negative, as the vessel utilization, for example, is a lot lower impact on that earnings bridge? A rough back of envelope calculation suggests that you may see as much as 50% of the earnings disappear. It would be very helpful if you could shed some light on that. That would be the first question. I will take the other two afterwards, please.
Good. Roland, do you want to answer that?
Yeah. Thank you, David. First of all, if you look at our order backlog, it is clear that we are missing orders for production next year of DKK 150 million or more. That is one thing. The second thing is, of course, when you do that, we also have 12 months of the factory in Karlskrona. So that is another one you need to consider. Then, as we have discussed before, 2017 was actually quite a strong year. If you look at our production portfolio for 2017, we have had MI, mass-impregnated paper production in Karlskrona. We have had basically full load on our extrusion lines. The ship hit the water in beginning of May and was deployed less than 10 days after, and has been so for most of the time since then.
In Cologne, apart from our challenges in the onshore market, also the offshore line there has been fully utilized. So we are coming out of a relatively good 2017 into a 2018, with less utilization on the different lines, both in the factory but also installation-wise. So that is what is causing that decline in EBITDA.
Okay. That is clear. Is each of that effect one-third of that overall decline then? Is that fair to assume?
No, that is not granular enough. It has to do with the composition of the MI line and the time it took to produce that in Karlskrona and so on. It is a mix
Okay
of these elements.
You did not mention pricing. Is it fair to assume that pricing will turn a little bit worse versus what you have seen in the past as presumably, you will now need to take some actions to get the factory back and fully loaded or more fully loaded perhaps?
I guess you refer only here to the project business.
Yes
We do not see a significant lower price level in the orders that we are tendering, all the orders that we were awarded throughout 2017 compared to prior years. Having said that, we of course have a strong aim of filling up our capacity, but we always want to balance that with what is expected from a market development. For 2018, we don't see a significant pricing impact in the numbers.
Okay. My second question would then be on the cash flow in 2018. There's no guidance on that in your presentation. Could you perhaps shed a bit of light on what you're expecting there? Also, in relation to maybe your ending net debt position by fiscal 2018.
Yeah. We're not guiding specifically on this, David, right? If you assume EBITDA is cash equivalent, that would be a fair assumption. Then I think the investment level you have seen in 2017 is probably at par in 2018, because we'll continue to finalize what we're doing on the platform side, and especially on the DC capability side in Cologne. So that's also a data point for you. Then, on the working capital side, I think we ended the year quite extraordinarily good, actually. So most likely that will have a negative impact to the cash flow during next year. If you add that up, I think it may end up breakeven-ish or slightly negative.
Yes, that's my sense as well. By my calculation, which differs perhaps slightly from yours, 2017 was already a modestly negative outflow in free cash flow. It would be fair to assume, I presume, that if we only look at the drop in EBITDA year on year, that that would be the sort of the magnitude of deterioration in cash flow. Is that fair?
That is a fair assumption, but you need to bear in mind that the number of projects is also impacting working capital, right? The way you construct-
Yes
your projects. Exactly. So, actually an inflow of project would most likely benefit your working capital, whereas if projects are running off, it will be-
Yeah
negative for your working capital.
Understood.
If I can just add on the CapEx side, as you all know, we are constantly looking into when and how to potentially add more capacity in either Karlskrona or Cologne in order to be able to supply more DC capacity to the market if that is required. That is of course a little bit difficult to put into a budget because we do not want to hit that bottom or start push before we actually also see the requirement for more capacity in the market. So we expect that that will happen in 2018. But it is difficult to say, and we of course also have some opportunities for timing that into 2018 or potentially into 2019. So that is also a factor.
Understood. Understood. My final question, Michael, would be in relation to your sale of NKT shares at the end of 2017. Could you just help us understand a little bit why you sold such a substantial amount of shares and also perhaps contextualize that in relation to your holdings in Nilfisk as a result of the split that was effectuated in October last year? Thank you.
No, I actually do not think I want to entertain you more on this topic. I know you have been discussing this with Michael heavily, and I also know that you even have tried to get out information that are not publicly available, which is not really the way we want to do business here. What you can see is that I still have a lot of holding in NKT, and you can also see from the notes that I am about to execute new options that I can do now, which means that I still have around 1% vested of the total business. So I am pretty exposed to NKT and also committed to the long-term development. More than that, I do not want to comment.
Fair enough. Thank you for taking my questions.
We will now take our next question from Claus Almer from Nordea. Please go ahead. Your line is open.
Thank you. I have a few questions also. The first question goes to this probability weighted order intake potential. Michael, you touched upon this during your presentation, but maybe you could give a little bit more flavor into the more, let's say, absolute numbers. I guess it's fair to assume that DKK 5 billion order intake in 2018 is probably downgraded. Should we expect kind of DKK 4 billion, and then should we add this less DKK 1 billion to the 2019 number? That would be the first question.
I think, Claus, when we gave you these numbers, it was in order to somehow demonstrate the potential of the market development in the years to come, and we gave you the numbers back in September last year. What is very important for us to stress is that that view is actually unchanged. Of course, it can be very difficult to then be precise on whether the five is four or three or whatever. Whether that missing one or two is then moved into 2019 or some of it moved into 2020. You know exactly how we have calculated the potential, by looking into concrete tenders and expected tenders in the market. We have added a probability factor to that in order somehow to demonstrate what do we foresee being orders being awarded to the industry as such.
Then I would also like to say that we had hoped for a better result of the RFP in the U.S., because there were some significant orders there. That does not mean that we do not continue to work on them. It just means that they were not part of what was being awarded recently, but the potential have been unchanged. We are also working together with our competitors on significant order awards, hopefully to be visible here in 2018, on a number of interconnect projects, for example, the Viking Link projects, the SuedLink projects, are moving forward as expected. We have significant offshore wind projects also being awarded to the industry as such in the coming quarters. So for us, the overall picture is unchanged. But I probably also agree with you that the five is maybe lower than five for 2018, but it's not canceled.
It's postponed into 2019 and potentially into 2020.
Okay, thanks. The second question goes to the Q4. It seems like Q4 has been more on the low side. I know you explained part of these trends, but maybe you could add more into the exact numbers. Are we on an underlying lower level, or is more a timing Q4 2018 that caused this lower profitability? Thanks.
I think we have stressed a number of times that you should not expect much more than EUR 140 million. You also know that when you have these pretty complicated and large projects, there's always management assumptions on how much risk provisions do you want to release, et cetera. We have not released a lot of risk provisions in 2017 in order to reach the EUR 138 million target. For us, fourth quarter is not any weaker than expected. You should also remember that there is a negative seasonality impact from the product business in fourth quarter. Of course, the NKT Victoria is not as busy as it is in the second and third quarter, in fourth quarter.
We also want to make sure that for the guidance in 2018, we have as good a starting point as possible to deliver, hopefully, the upper end of that range as indicated. Much more than that is difficult to add, Claus.
Okay, then just a follow-up on that one. In the new guidance or the guidance for cables in 2018, do you include some risk release provisions or how should we think about that?
No, there won't be any big chunks laying for release as you've seen in the past, because we have, in all modesty, our risk management and our project management has been a bit more sophisticated in the sense that we will release risk more often related to different gates or milestones reached in the project. So it will come more as a successive release as and when we complete stages in the projects. More than that, no.
Okay, thanks.
As a reminder, ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. We will now take our next question from Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Thank you. First question is on the guidance. You are guiding for a spread of EUR 100 million on revenue. In 2017, you had a gross margin of 48%. Theoretically, that should imply an almost EUR 50 million earnings spread, but you are only guiding EUR 20 million. Can you just help me understand the dynamics going from the spread in revenue to earnings?
You want to take it, or want us to, right? I think you cannot do it that way because the way we calculate gross margin is basically top line minus material cost. You do not have the variable production cost in that number. That is somehow below. Of course, the incremental margin on missing or more top line are significant in a project business like ours with a lot of high fixed costs. We are talking about an operational EBITDA margin of 25%-30% or even higher in some situations.
Your guidance only implied 20% then.
Roland?
No, it does not, Kristian. Well, maybe I misunderstood your question a little bit. Can you explain a little bit what you are looking at?
I assume your revenue in the higher end indicates you get more orders and more business, which will increase your top line by EUR 100 million. Given the high levels you just explained, I would have assumed your earnings to increase by more than EUR 20 million from the lower end to the higher end.
That depends on the composition of the product portfolios. You cannot reason like that. That is back to the question from David Vos, I think. You know exactly what is the composition and how much the revenues are derived from outside the factories, installations, civil works, and so on, and how much is inside the factories.
Okay, fair enough.
But-
Then just on the topic, can you just, on the applications business, and on the DC high-v oltage onshore, what are you assuming sort of 2018 versus 2017 on earnings?
No, we are not guiding that, but in the applications business, we are expecting some nice organic growth rates from pickup in markets, from the fact that we have realized a nice frame agreement with EDF in France on medium voltage, that partly actually will be produced in Cologne. We do see a nice organic growth journey for the applications business.
Is it fair to assume you are expecting higher earnings than for the applications in 2018 and 2017?
Yes, it would be fair to assume we expect improvements in that part of the business.
Okay. High-v oltage onshore, you have previously been fairly specific in stating that the loss, should we expect a similar level for 2018?
I think because of the new organization that we implemented, we will somehow take a different view on the high- voltage onshore. Historically, that were only being produced in Cologne, and we did not produce anything else in Cologne. Now, as we are having a more holistic view on our operating sites, we will try to optimize across and move away from the somehow silo thinking that we have had for a number of years. One example of that is that we are moving medium voltage to the Cologne facility that will improve the factory Cologne's results. It is not necessarily a fantastic business, but it will somehow dilute a lot of fixed costs. So we take a holistic view on how can we maximize our top line, looking at the installed capacity.
It doesn't change the fact that the high- voltage onshore, which is when we talk about it this way, is below 220 kV, so the more commoditized part of that is under significant pressure. But you should see the way that we somehow also are trying to offset part of that pressure by allocating the machines to producing, for example, in this case, a medium voltage. That should somehow improve the results. The market for high- voltage onshore, we don't expect any significant improvements there before we start to see improvements in the upper end of the segment, because that will automatically have a positive spillover impact on the capacity that are used for the lower end of high voltage.
Okay. That's quite clear. Thank you. Then my last question here is on the merger synergies. First of all, can you just specify how big a proportion of the DKK 30 million will be realized by 2018?
Yeah, but it's clear, Kristian, that by far, most of the synergies are related to our ability to run relatively high capacity utilization and be flexible across the two factories. As long as we are not there and not filling the factories, it won't be a very large amount in 2018. We still believe in the 30, but it will be delayed.
Then, if I can just add, the approximately one-third that do not relate to capacity, more capacity, more volume, the part that are more fixed cost related, white collar related, we have, of course, already since closing of the acquisition back last year, started to realize that. But we will also use 2018 somehow to accelerate that further in order to become even stronger when we then move into 2019.
Okay. If I can just follow up on Roland's comment on the delay. I guess you are working with one scenario where you can get close to full capacity utilization in 2019, if sufficient orders come in. In that scenario, would you then realize the full merger synergies?
Yeah, absolutely. Yeah.
Yes, I agree fully to that.
Yeah.
Okay, excellent. That was all for me. Thank you very much.
Thank you, Kristian.
We will now, I apologize. We will now take our next question from Akash Gupta from JP Morgan. Please go ahead. Your line is open.
Yeah. Hi, good morning, everyone. It is Akash from JP Morgan. I have three questions, please, and I will take one by one. My first one is on guidance, and there is no surprise that operating EBITDA guidance is materially below consensus. Given the lead times that you have in your business, you should have some idea in second half of last year about the shortfall versus market expectations. My first question is that, is there any order that got delayed or maybe you lost it to competitors that have resulted in this lower EBITDA, which could be something that you have not expected at the time of your capital markets day or perhaps Q3 results?
Yeah, I think you are touching on something that have impacted 2018 negatively, and we had hoped to be able to get orders in, and there were also a number of a few orders in the market in the second half of last year that potentially could have solved 2018 completely for us. It's not that we did not win any of the orders mentioned, but for a number of reasons, the orders were somehow being either canceled or postponed.
Okay. My second question is, we have talked a lot about the cable or basically high voltage part of the business. If I look at the operating EBITDA guidance, what is embedded for the business outside of high voltage? I'm talking about this medium voltage and low voltage part of the business.
Yeah. Back to what Kristian talked about, the applications business, we expect to improve in 2018, whereas the onshore part is still a more subtle outlook on the market, but where we will, by ways of more active production planning between medium voltage factories and then our Cologne factories, try to mitigate and allocate part of the fixed cost to part of that business. The answer is, improvement in that part of the business and on the onshore, not market-wise, but structurally, we have a few handles we can pull.
And my third and final question is that, you mentioned the slide that performance of new vessel NKT Victoria was satisfactory, which does not sound, for some reason, that positive. So maybe if you can elaborate what has been which is not working and why the performance is just only satisfactory.
No, I think that may be our humbleness. I don't know. I think the performance of NKT Victoria has been absolutely satisfactory. There has been no fallouts. The customers have been very content with the work we've done for them with that vessel, both installation-wise and also in the service jobs that we have done. So if you have read that differently, that's a misunderstanding. There's no doubt that vessel is absolutely performing.
Thank you.
We will now take our next question from Casper Blom from ABG. Please go ahead. Your line is open.
Yeah, thanks a lot. A lot already said, just two things from me. First of all, if you can just give an update on your expected non-recurring cost or integration cost for 2018, maybe also 2019. Then secondly, Roland, you mentioned a little bit of cost related to broken deal from General Cable. The first time I sort of really heard you confirm that you were looking into that. Could you elaborate a little bit on the strategic rationale for you guys looking at General Cable? Or were you just, how can you say, having a look? Thanks.
Yes. For integration cost, we have guided that the integration cost of integrating the acquired ABB deal is DKK 35 million-DKK 40 million. That still stands. We are guiding about DKK 15 million in one-offs for 2018, and most of that will be integration costs. That was first part of the question.
The second part, yes, we can clearly confirm that we were a part of that auction process and also were pretty advanced and spending a lot of resources on it as well, with a strong strategic rationale around being a global cable provider with a full-fledged offering to the market. That was a very interesting opportunity.
Unfortunately, it did not really move our way, because we were not able to, and we would also not pay the price that in the end were offered by our dear Italian competitor, because we did not look into the same synergy potential. But yes, we can confirm that we were actively looking at it.
If I may just follow up, it seems as a slightly different approach than the ABB acquisition where it seems as if their focus is really to focus on complicated high voltage solutions. General Cable, to my knowledge, is somewhat more widespread. It seems as if you were sort of leaving behind the rationale behind ABB, or am I getting that wrong?
No, I think you are getting that wrong, but I suggest that since we did not end up doing it, right, because we were not the winner of this, I suggest that we take it offline, that discussion.
Fair enough, Michael. Thanks.
There are no further questions at this time. Ladies and gentlemen, if you would like to ask a question, please press dial one on your telephone keypad. We will now take our next question from David Vos from Barclays. Please go ahead. Your line is open.
Thank you for taking the follow-up. Just with respect to your financial debt and the covenants you might have on that, would you be able to help us understand the main covenants on the debt, please? Net debt to EBIT coverage, that kind of stuff. Thank you.
There are covenants on that debt that we also speak a little bit about in the annual report. It is up for refinancing, so we are currently refinancing part of that debt within the next two or three months, and think then it will be more relevant to look at the structure after that.
Okay. Are they public, the covenants there, or will they be post-financing?
No, they are not public. Not currently. We have an acquisition debt laying that we will roll over and then do a new structure. That will be in place within a few months, then it will be more clear.
Okay, understood. Thanks.
As a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. There are no further questions in the queue, sir.
Thanks to everybody for listening in and asking good questions. On the last slide here, you can see that we will have our AGM meeting on the 22nd of March, and then we will be back with the first quarter result 2018 on the 15th of May. Thank you.