Good day, and welcome to the NKT annual report 2016 conference call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Lyng, Group Executive Director. Please go ahead, sir.
Thank you, Operator. Good morning, and welcome to the NKT webcast covering the full year 2016 results that we released this morning in the form of an annual report for NKT Holding, but also this time, an annual report for Nilfisk. If you look at the slide with today's presenters, my name is Michael Lyng, CEO in NKT Cables, but also Group Executive Director in NKT Holding. Today's presenters are changed slightly compared to last time. So with me today, I have Karina Deacon, CFO, Nilfisk, and as last time, also Basil Garabet, CEO of NKT Photonics. I will start this presentation with the news around the appointment of Hans Henrik Lund as new President and CEO for Nilfisk that we announced this morning, and also the direct consequences it has on timing for the already decided split of NKT Holding.
After this, we will continue with a very fast Q&A session covering these topics, before Karina, Basil, and myself will then continue with the normal presentation of the group's performance during 2016. Next, please. The Board of Directors have, this morning, appointed Hans Henrik Lund to new CEO and President for Nilfisk, starting no later than early August 2017. Meanwhile, Lars Gjødsbøl, Executive Vice President and Head of Operations, will be acting as CEO as of today. Lars joined Nilfisk back in 2003, and thereby, he represents many years of experience from different parts of Nilfisk, having had operation responsibility the last many years. Lars will, in close cooperation with the chairmanship, cover the period until Hans Henrik joins early August latest. Hans Henrik Lund, 50 years old, many years of international experience from different leadership positions in global companies, as illustrated on this slide.
Currently being the CEO of the lighting company Helvar, located in Finland. But before that, having had many different leadership positions in companies such as Microsoft Mobile, Nokia, and GN Netcom. He holds a master in mechanical engineering, a PhD in material science, and also an MBA in organization and business development. It is the Board of Directors' view that Hans Henrik Lund has the right competencies to develop and grow Nilfisk and to execute the already well-defined strategy Accelerate+, and thereby to further consolidate Nilfisk's position as a world leader in the professional cleaning equipment industry. It also means that Jonas will leave Nilfisk as of today. Jonas has been leading the process of positioning Nilfisk for growth in the last three years, and during those three years, he has also established a strong management team.
On behalf of the board of directors, I wish to thank Jonas for his contribution to Nilfisk and wish him all the best in the future. Next, please. If we look at the intention to split NKT Holding into two separate listed entities, the intention to do that is unchanged, and we are still awaiting the close of the ABB transaction to happen here in first quarter. After that, we will continue to do preparation for the splits. The Board of Directors will seek the mandate to proceed the process at the AGM to be held on the 21st of April this year. Then we plan to complete the split in the second half of 2017, as soon as possible after Hans Henrik Lund has joined Nilfisk.
If we look at that from a timing perspective on the next slide, then you can see that Hans Henrik Lund will join Nilfisk latest, beginning of August, and then we plan to do the split in the second half, most likely between the Q2 and the Q3 announcements. It is important to stress that the intention to split NKT Holding remains unchanged. That finalized the first part of the presentation, and I would like to hand over to the operator for a fast Q&A session on these topics before we move on. Operator, anybody with a question?
Thank you. Ladies and gentlemen, if you wish to ask a question at this time, please press the star followed by the digit one on your telephone keypad. Again, it is star one if you wish to ask a question. Yes, we do have one question. It comes from Kristian Johansen from Danske Bank. Please go ahead, sir. Your line is open.
Yes, thank you, and good morning. First of all, in terms of the CEO change, can you confirm that this will not lead to a strategy change, that this is merely a matter of getting a different profile on board?
It is very much a matter of getting a different profile on board with the right competencies in leading a stock-listed company. I think the strategy plan, the Accelerate+ plan, is so well-defined and well-anchored. It is not the intention to change that.
Okay. In terms of the actual split up, can you comment on the different scenarios you work on? Is it still an opportunity to make a separate IPO of Nilfisk?
It is the so-called de-merger, where we will spin off the Nilfisk business to a separate listed entity. That means in reality that if you are a shareholder in NKT Holding before the split, you will then have two shares after the split: one in Nilfisk and one in NKT. That is the procedure that we intend to follow.
Okay. Then in terms of the ABB acquisition, if for some reason the competition authorities does not approve, what is plan B?
As also indicated several places here in the communication, we strongly expect to have it approved here in first quarter. If it is not approved in first quarter, it will move into a phase two, and then we expect to get the approval later on in the year. Then we, of course, need to consider whether we need to adjust the timing of the split, but that is not a scenario that we foresee.
Okay. Then just my last question for this round. You previously expected a capital markets day in the middle of March. I guess that's not relevant still. What kind of information should we expect once the ABB deal is completed?
As we also are communicating in the annual report, we expect to close ABB in first quarter, and as soon as possible after that, we will revise our guidance for 2017 for the new NKT Cables, with a consolidated view of NKT Cables and the new ABB business. So the guidance for this year are with the NKT Cables are a little bit temporary, because we plan to adjust them very soon.
Excellent. That was all for me. Thank you so much.
Good.
We will now take our next question. It comes from Claus Almer from Nordea. Please go ahead. The line is open.
Thank you. I have a question regarding the change of the CEO. Which competencies will Hans Henrik contribute with in Nilfisk compared to Jonas? Is he mainly strong in the front end, in the back end? That will be the question.
Thank you, Claus, and welcome back on the team. We have missed you.
Thank you. Likewise.
Claus, I think it is up to the Board of Directors always to look at the competencies for the different management team. And with appointing Hans Henrik Lund, they strongly feel that they have found a candidate that with his many years of management experience from well-known international companies, can contribute a lot to the Nilfisk management team. It is clear from the positions that he has had in the past that he has been very much around different kind of development work, with a lot of innovative solutions in a fast-changing industry. And I think capabilities and experience from that is something that Nilfisk definitely will benefit from. These are, among others, some of the capabilities that Hans Henrik Lund will bring to the team.
Okay, thanks.
We will now take our next question from Casper Blom from ABG. Please go ahead. The line is open.
Thanks. Claus and Kristian has already asked the question I wanted to, so nothing from me at this point in time. Thank you.
Mr. Lyng, in that case, we have no further question for the moment.
Good. Thank you, Operator. That finalizes the first part of the presentation, and we are now ready to move on with the so-called normal parts, where I will take us through the highlights for 2016, including some numbers for the consolidated NKT Holding, before I move on with the presentation of NKT Cables. Karina will then take us through Nilfisk, before Basil will do the same for NKT Photonics. In the end, we will end with a joint Q&A session. Let us just briefly look at the agenda on slide eight. Before we move on, I would like, on a slightly more technical note, to mention the reporting structure that we have used for 2016, caused by the upcoming split of NKT Holding. Nilfisk is treated as a so-called discontinued operations in the NKT Holding annual report, which then focus purely on NKT Cables and NKT Photonics.
Then we have prepared a separate full-fledged annual report for Nilfisk. All this is well described in detail on page two of the NKT Holding annual report. I hope you are able to understand it. Let us go through the highlights for 2016. 2016 was indeed a historical and very busy year in NKT, centered around the acquisition of ABB High Voltage Cables business and the announcement of the intention to split NKT Holding into two separate listed companies. In NKT Cables, we continued to improve margins and continued with the company transformation that we started up some years back. Despite an expected negative top-line growth of 10%, we were able to increase EBITDA margins to 9.7% from 9% in 2015. We also ended 2016 with a historical all-time high backlog of more than EUR 300 million.
We continue to expect to get merger approval, and to close the ABB deal during first quarter this year, so very soon. With the divestment of China, Automotive, and also the Cabinet business, we have also focused the business, and we are ready to continue the EXCELLENCE 2020 journey we started on a little bit more than a year ago. NKT Photonics continued through a commercialization journey with a meaningful EBITDA of EUR 6.3 million, on the base of 7% organic growth, plus the growth coming from the Fianium acquisition finalized in the spring of last year. Basil will elaborate more on this later on in the presentation. In Nilfisk, we again saw a very strong quarter with a significant performance improvement. Organic growth came in at 8% in Q4, again fueled by strong performance in the U.S. but also in Europe.
With that, operational EBITDA margin was very strong with 11% in the quarter, up from 9.5% in fourth quarter 2015. Nilfisk continued to execute on the Accelerate+ strategy, including execution of the EUR 35 million cost-saving program that Karina will elaborate more on later in the presentation. Let's look at the performance compared to guidance on the next page. It has become more a tradition now to show a slide like this, where we are comparing the realized numbers with the guidance that we have been given during the year. If we look at the consolidated picture, we came in with a negative growth of 2%, very much in line with the updated guidance after third quarter. We realized an EBITDA margin of 10.4%, slightly up compared to the level of around 9.6% that we guided end of third quarter.
If you then look into the composition of the different companies, we came in with a negative growth of 10% in Cables, within the guided range. We were able to realize margins of 9.7% up from the indicated range of 9%-9.3%, and also significant up from the original guided range of 8%-9% when we came out with guidance approximately a year back. For the NKT Photonics business, we ended at 7%, and the operational EBITDA came in slightly below of 15%. As said before, good performance in Nilfisk, where they had a strong end of 2016, realizing 3% for the full year, in the upper range of the guidance level after Q2. On the operational EBITDA margin, they ended at 11%, slightly up compared to the indicated range.
So all in all, we are satisfied with the financial performance that we had in 2016. If you look into the next slide and look at the guidance for 2017, the outlook, I have to say that it does not really make a lot of sense to give guidance for NKT Cables. Simply because we very soon expect to be a different company after the closure of the ABB transaction. The outlook mentioned on this slide are best guess for 2017, if we were to be an as is business in NKT Cables. However, we would like to give updated outlook, including ABB, very soon after the close. This guidance will then also include the one-off costs related to the transaction and one-off costs related to the integration plan that we have discussed at earlier occasions.
For NKT Cables, we expect organic growth between 0%-5%, and with that, we expect an operational EBITDA around 9.5%. For NKT Photonics, we expect organic growth around 10% and an unchanged level for operational EBITDA around 15%. Last but not least, for Nilfisk, we continue to expect to grow the top line, here indicated with a range between 2%-4%. We also expect to improve operational EBITDA as a consequence, and have here indicated a range between 11% and 11.5%. On the next slide, just one slide indicating where we are trading at if we look at the last 12 months' operational EBITDA, and this is for the consolidated business, so it includes the EBITDA from Nilfisk. As indicated here, we ended at 10.4%, up 1 percentage point from last year's level of 9.4%.
The underlying performance is NKT Cables increased to 9.7%, up from 9%. We also saw a 1% increase in Nilfisk from 10% to 11%, and also a nice improvement in Photonics from 9.6% last year to now 14.7%. Then a slide with a lot of numbers, and here we just have tried to illustrate the continuing operation, where Nilfisk is treated on one line, indicated here with profit from the year from discontinued operations. That means that it has been deducted in revenue and all the other lines. The two columns in the right side of the illustration here is including discontinued operation. So that is very much comparable to the business as is.
If we look at the revenue decrease of EUR 119 million and adjust for the Nilfisk discontinued, where we actually have seen a plus of EUR 87 million, then we see a revenue decrease of EUR 206 million. Approximately half of that relates to metal prices. There is also an impact from effects and the divestments that we have been doing in Cables, before we then come down to the organic growth, with a number of EUR -84 million, and that all relates to NKT Cables.
On the operating EBITDA increase of EUR 16.5 million, we can start by adding EUR 18.9 million from Nilfisk, and that means that the remaining continuing operation see a decline of EUR 2.4 million, and that relates to NKT Cables, where margins are up from 9% to 9.7%, but it is on the base of a lower top line, the 10% negative growth, and thereby, it has a diluting effect of around EUR 5 million. Then Photonics came in with a positive contribution here of EUR 2.6 million as a result of nice growth and increased margins. It is also a year where we have had significant one-offs, illustrated here in the blue box number three, and the majority of that relates to the divestment of the China business in NKT Cables and also to the acquisition and the EXCELLENCE 2020 journey in NKT Cables.
As you also are familiar with, we also have introduced the cost-saving program in Nilfisk and the Accelerate+ strategy, and there are also some costs related to that. Cash flow is, of course, impacted by one-off, but also positively impacted by the capital increase. If we start by looking at cash flow from operating activities, they are more or less on par with last year's level, and it is still good to see that we have been able to reduce working capital, and we see a positive contribution from that of around EUR 58 million. Cash flow from investing activities are negative with EUR 132 million, and that is compared to last year as a result of higher acquisition cost of businesses. They are up from EUR 29 million to EUR 53 million.
If we then add those two together, we have a free cash flow of EUR 22 million compared to EUR 85 million last year. Then as mentioned, we have executed the capital increase, and that has contributed with EUR 140 million. So all in all, we have a net cash flow of EUR 100.8 million, up from EUR 4.3 million last year. As a result of that, we also see a negative interest-bearing debt, meaning that we have a positive cash. As you can see here, we have been trading around one times debt to EBITDA during the year. But after the capital increase executed in October, and also a strong cash flow that we normally see in the business in fourth quarter, we now ended the year with a positive cash of EUR 68 million.
This picture will, of course, change very soon when we are able to close the ABB transaction and need to pay the costs for that. That finalized the NKT Holding part of this presentation, and we can now move into the NKT Cables part, and I will also cover that. If we look at the next slide, please. Then you are used to see this slide, and I think a starting remark from my side would be that 2016 definitely has been a landmark year in the transformation of NKT Cables, not only with the ABB transaction, but also with the divestment of the automotive business that will close end of first quarter this year, the divestment of China that already closed fourth quarter last year, and the divestment of the cabinet business early 2016. With that, we have been able to focus the business.
If we look at the project business, then we saw an okay growth of 8% in the fourth quarter, fully in line with the expectations. Overall, we have seen a better execution in the offshore segment than we expected during the year. But part of that has also been offset by a weak high-voltage onshore segment, not weaker than before, but at the same low level. We are trying to fix the high-voltage onshore business, and we have implemented a significant restructuring initiative, partly being implemented, but also partly being in process, in order to adjust our cost base and adjust our go-to-market strategy in that segment. In the offshore segment, we have seen a very good, strong order inflow, and I will come back to that on the next slide.
We have, during the year, talked a lot about the supplier issues that we announced about in the first months of last year. I am happy here to announce that we have solved it completely. A settlement has been negotiated with the supplier, and we do not see any significant impact in the profit in 2016. But as you know, a negative impact on the top line. But hopefully, it is all behind us. If you look at the product business, we had a tough fourth quarter. Overall, year-over-year, we see positive growth of 1% in the Nordic and the Central European regions. But that is offset by negative growth in the specialty segment, where in particular, the railway segment is facing tough times, not because of tough competition, but simply because of a lack of orders.
A strong first half was somehow offset by a weaker second half. That is also tying into the challenges and the focus areas that we have for 2017, where the most important issue in the product business is really to keep it stable for 2017 to come. On the innovation side, we continue to be a leading player in the Nordic region and also Central European region. As an example of that, we were the first one to introduce halogen-free flame-retardant building wires, which is a new norm for building wires according to the so-called CPR, the Construction Products Regulation directive that the E.U. decided on earlier on. In the annual report, we are also describing on some nice frame contract wins during the year. Among others, the Ellevio contract in Sweden. That is a three-year, plus two years option, frame contract for the Swedish markets.
The accessory business is doing fine. We have also here implemented and introduced new products to the market, and we are moving into the offshore market for medium-voltage accessories. One example on that is the development of a new 72 kV connector that facilitates transmission of power from offshore to onshore. Then maybe just a comment on APAC. I am happy to announce that that is behind us, and as mentioned before, we closed that deal in the fourth quarter. On the next slide, just a brief view on the strong backlog, more than EUR 300 million. That creates full visibility for the market until end 2018. In the right side of the slide here, you can see how this is tying up production capacity during the year.
It is not necessarily the picture that you will look at when you look at the project, including installation and the final delivery. But the factory in Cologne is fully occupied with producing the Hornsea project that we started up recently. During the year, we will also start up Kriegers Flak before we then, beginning of 2018, will move into the Borssele Alpha project. So a very nice picture for the business year. Looking at the next slide, LTM operation, EBITDA margins, they ended the year at 9.7% compared to the 9% level we ended at in 2015. If we look at the earning level in the quarter, we realized 9.6% compared to 7.2% in the fourth quarter last year. So also here, a nice development fully in line with the guidance.
Although the margins are slightly higher, you should bear in mind that it is on the base of a slightly lower top line. Working capital continued to improve. It has a lot of focus, and it also needs a lot of focus. But it is also important to say that we are at a level around 10%, which is an all-time low level for the cable business. It requires a lot of focus, and we actually think we can improve it even more. So we will work on that in 2017 and the years to come. Then a slide on the ABB transaction, and this is a copycat from previous presentations. In reality, there is not a lot to comment on it. We still expect to close the transaction in Q1, so that is very soon.
The last many months since September, we have worked heavily on preparing ourselves on this. We have had a lot of dedicated people working on post-merger integration plans that we are ready to roll out. That includes a new organizational design, where we merge the two businesses. It also includes focus on how to go to markets day one. It also includes areas where we need to secure some cost saving potential that are part of the synergy plan that we have talked about earlier, as fast as possible. So a throughout plan that we are ready to roll out as soon as we are allowed to close the deal. If we then move one slide. Next, please. Next, please. Then just one slide on the strategic priorities for 2017, and they are also described well in the annual report.
If we just shortly take them one by one, it is very clear that with the ABB expected closing, we need to focus on developing and grow the AC and DC high voltage offshore segment. As you know, it do result in a lot of opportunities when we are merging the two businesses, not only within AC, but definitely also within DC. So a lot of positive growth opportunities for those two segments. Also, the accessory business starts to perform very well after the restructuring initiatives that we implemented beginning of last year, or we finalized the beginning of last year. We will also take over a lot of accessory business from ABB that we have settled around the last quarters, a factory up in Alingsås around Gothenburg will be part of the deal.
We will be able also to integrate our current accessory business with the ABB accessory business. So a lot of growth opportunities there as well. If we then look at the segments in the middle, we need to continue to focus on profitability and maintain the level that we are at today. We do see a satisfactory level within building wires and low voltage and also medium voltage. But we also see some changes in the market, among others, the so-called photovoltaic year in Germany that came to an end mid of last year that has resulted in a more weak medium voltage market currently. But we somehow try to work to compensate that negative impact by entering new markets. It is also very important for us to maintain a stable price level.
If we then look into the turnaround initiatives, the most important battle here is to turn around the high voltage onshore business coming out of Cologne, mainly. That is today a loss-making business, and we need to fix that. Part of that fix will need to be internally driven. But we also here expect the markets to improve. Here it is important to bear in mind that there is a correlation between that AC high voltage onshore market and the discussions we have around the onshore interconnect DC markets, because the market drivers are going hand in hand. If you start to invest into DC, it will have a positive spillover impact also on the AC high voltage onshore market. Railway has moved from development growth to turnaround, and that is illustrating what I said before, that the market is extremely weak.
Not that we are losing market share, we have a very high market share in Europe in this small segment. The customers are holding back with new investments, and that is impacting the market negatively. We need to adjust to that, and that is what we also have on the agenda for 2017. To sum up, a busy year, but also a landmark year when it comes to continuing the transformation of the cables business. We have talked about top line, we have talked about operation EBITDA. It is also worth to mention here that we have increased the return capital employed from before 8.2% to now 9.3%. It is one step forward towards the aim of reaching 15% in year 2020. With that, I would like to finalize the cables presentation and welcome Karina and [Stasia], first time, to take us through the Nilfisk performance. Please.
Thank you, Michael. I will take you through the highlights from Nilfisk for 2016. As Michael said, we have for the first time prepared a full IFRS annual report, which hopefully you will all have the chance to have a look at. If we look at the first slide, we have a revenue top line increase of 8% in total for 2016, which brought us past the EUR 1 billion mark in terms of revenue, which of course for Nilfisk was a big step. We had some help from acquisitions done in 2015 and early in 2016, accounting for 6%. What was really encouraging was the 3% organic growth, and that came on the back of a strong second quarter, not least the fourth quarter.
As you know, we started out relatively weak, particularly in the U.S., and we were discussing a lot also with you guys why that was. In Q3, we saw sort of a breakthrough, not least in our national accounts within the U.S., where the work that we have been doing basically since Q4 2015 started to pay off. That good result in Q3 continued in Q4, and we saw again a good growth in our, what we call U.S. Floor Care business, where we saw a very strong growth. We also saw good growth in Latin America, despite some countries, as an example, Brazil, being a little bit difficult from a macro perspective. Then we saw some very strong growth, for instance, in Mexico, which meant that we ended the year with 10% organic growth in that region.
All in all, we could report 3% full-year growth in Americas, and for the quarter, 8%. At the moment, it is still a little bit too early to say that we now have Americas back on track with EMEA, but nevertheless, in the quarter, they did very well. Moving on to EMEA, that was also a good story, where they achieved 10% organic growth in the quarter. What was encouraging was that the growth came from several countries, also several of our large countries such as France, Iberia. In particular, we had strong growth in our private label business. Our private label business accounts for only about 5% of our total business at group level, but they had a very strong growth, particularly in the fourth quarter.
That meant that we were able to report 10% organic growth in the region in Q4, and therefore also leading up to the 8% at a consolidated level. In APAC, we have talked about earlier that we had a challenging situation in China that continued in Q4. Not quite as bad as the quarters we have seen before because we had a comparison in Q4 2015, which was not as heavily impacted with this big outdoor project that we had in 2015. Nevertheless, we saw -9% organic growth in Q4, and thus we saw -7% for the full year. Many of our countries in APAC are doing very well, not least in Southeast Asia, but the negative growth in China has such a significant impact, so it basically wipes out the positive stories.
If I exclude the China business, we are slightly below zero in organic growth, and one of the reasons is that a country like Korea, there are some challenges from a macroeconomic perspective as well, which also feeds into our business. All in all, looking at organic growth, we saw a strong Q4, and we are very satisfied with that. Turning to the earnings. That was also a strong finish of the year, and this proves really what we talk about when we talk about the operational leverage in our business, that when we see the growth on top line, it also feeds down to the bottom line. Here we could report 11% EBITDA margin for the quarter and also for the year, which was a significant improvement over 2015. It came from both the gross margin and also a slight reduction in the overhead cost ratio compared to 2015.
When we look at the improvement in gross margin, it comes from both the back end and also in the front end. The optimization in the back end includes procurement initiatives and also efficiency measures within the production. But when I look at the front end, we also saw significant improvements in the gross margin, not least in Americas, where they improved by more than one percentage point, but also in EMEA. That is the result of dedicated work towards improvement, for instance, in the U.S. business, but also in certain areas or countries in EMEA. Overheads, as I said, in terms of the ratio, it decreased slightly from 2015. Our overheads are under control, and you know the Accelerate+ cost-saving program is also beginning to kick in. Actually kicking in a little bit better or higher than I thought after Q3.
We were now helped by EUR 2.3 million savings from our Accelerate+ initiatives. I will come back to that in a little while. If we turn the page to look at working capital. Personally, I like the look of this graph very much. It has certainly the right direction. This is something that we are working with on a structural note, and that is the result we see of that. I will say, however, that when we look at the end of the year, we are at a level which I will not perceive as sustainable. We had some special events that made us go particularly low in working capital. It is not so evident on this graph here because it measures 12 months rolling.
If you look at just the 31st of December point and also look at the balance sheet, you will see that we were very low on working capital. There are three main reasons for that. One of them is to do with the high activity level we had in Q4. So we had to run with a very low safety stock level, also lower that we would actually like to see. So that brought our level of inventory down. Another point that brought it down is simply from a calendar point of view. Easter is relatively late in 2017, so we are not building up the consumer inventory in the same way as we do normally. The third point also relates to consumer, and that is when we look at our forecasting and we look at what products within consumer we need to stock up.
We saw a slight change in the mix, and that mix was towards products which are manufactured by third-party suppliers to us. So that means that at the end of the year, they are not on our inventory, but they are on the way to end in our inventory. So they will only come in January and February. At the moment, as I said, we have a not sustainable level of working capital. If you ask me to put a number on, I would say it is probably slightly more than EUR 20 million, which are what I would call a one-off nature. But that does not change the fact that we are still working on bringing down working capital, and we should just look at structural changes to do it in a sustainable way, and that is what we are working with.
Then into the next page, a few words on our Accelerate+ cost-saving program. We talked about this now both after Q2 and Q3, and we are continuing to work with the levers included in this program, and we have a very good overview of what is going to bring us to the EUR 35 million cost savings, which will be executed by the end of 2019. If you look at the run rate of what we have done by the end of 2016, we have now executed levers that accounts for EUR 11 million in run rate impact in the P&L. That is quite a big change from the EUR 5 million we reported in Q3.
It also implies, though, that the speed that this was done with in the first months was higher than what we can continue to do, because clearly, I will not say that there were any low-hanging fruits, not at all. But anyway, some of the levers we could pull could be done relatively quick. We talk about delayering, we talk about taking people out. That thing has a very quick impact. Now what we are looking at is more long-term, really structural changes, which we also knew when we put this program into play, that we need to do some structural things. Those levers, they have a longer inflow, and that is why that we also say that you will only see the potential in 2019.
But this is just a slight warning that the speed where we saw the EUR 11 million, that will not come with the next EUR 11 million. But we see them coming, and we know exactly what to do. So I am not worried that we will not reach the EUR 35 million. As I said, we had an impact already in 2016. It was EUR 2.3 million. So from the 11% EBITDA, we had about 0.2 percentage points helped by these cost savings. As announced previously, we have some implementation costs relating to the Accelerate+ program, not only towards the cost savings but also to the implementation of the organizational structure. As you can see here, we have now spent EUR 15 million of the announced EUR 40 million, and the remaining EUR 25 million will come over the coming three years.
We have also announced that we expect that there will be certain CapEx investments which relates to systems development. It relates to, for instance, tools and equipment in our production. Those investments will come within 2017, but we have not had any in 2016. Looking at the summary page on slide 30, we have touched upon many of the things that we have here. I think one comment to mention is on capital employed, that we reduced that. We increased our earnings, we lowered our working capital, and therefore we could also report an increase in our return on capital employed, which where we are now at the end of 2016 is at 14.6%. One last comment to mention is about our development programs. We continue to focus on that, and we are very happy to present our Horizon Program earlier in the year.
We have now for the full year introduced more than 40 new products, and we continue to invest in our development. We had, in 2016, 3.6% of revenue invested in our development area, and we expect definitely to continue with that. So all in all, this summarizes what I was going to say. A good year for Nilfisk, and we are ready for 2017. With those words, I will hand over to Basil.
Good morning, and thank you, Karina. We had a good fourth quarter and end of year. We ended 2016 with Q4 revenue of EUR 16.2 million, and annual revenue just over EUR 43 million at EUR 43.1 million. We also in the year achieved better than forecast EBITDA of 14.7%. Our organic growth of 7% was led by the sensing and energy sector in the three sectors that we show below. If we move to below the slide where we go through the sectors, imaging and metrology came in about 50% of our total revenue. The segment was relatively flat against a very strong 2015. But we picked up in Q4, and it looks like the sector is improving, and the trend is improving into 2017. Our order intake and backlog was at a very satisfactory level. In fact, it is setting new records for us at NKT Photonics.
We also signed several new OEM contracts, and those will fuel our growth into 2017. The next sector, which is sensing and energy, accounted for 38% of our revenue. This sector was remarkably strong for us in 2016, and it was strong right across all the sub-segments of the sector. In the quarter, we awarded a distributed temperature system, DTS system, for an offshore wind farm in the North Sea. Our final sector, which is material processing, which is a new growth area for us, that accounted for 12% of our revenue. Again, very strong interest from a number of OEMs and very satisfactory growth, albeit from a low base. If we move to the summary slide on page 33, you can see where our revenue in Q4 at EUR 16.2 million compares to the EUR 12.7 million in 2015.
It also shows a 10% organic growth compared to 2015. The annual revenue of EUR 43.1 million compares to EUR 40.6 million. Most importantly, is a EUR 6.3 million EBITDA compared to a EUR 3.7 million EBITDA in 2015. You can see the progression with the very nice graph below, where we are improving our operations and our EBITDA, where it is running the last 12 months today at 14.7%. In summary, revenue of EUR 43 million, organic growth of 7%, led by sensing energy with a slightly flat sector in imaging.
But that is improving as we move along. The operational EBITDA at EUR 6.3 million at 14.7%, which is up from 9.6%. We have significant OEM development contracts signed within the year. We also acquired Fianium in April of last year. Finally, the outlook for 2017, we will achieve organic growth of 10% and EBITDA at 15%. Thank you very much.
Good. Thank you, Basil and Karina. That finalized our presentation, and we are now ready to jointly move into the Q&A session. Operator, anybody with a question?
Certainly. Again, ladies and gentlemen, as a reminder, it is star one on your telephone keypad if you wish to ask a question. We do have a follow-up question that comes from Mr. Kristian Johansen from Danske Bank. Please go ahead, sir. Your line is open.
Yes, thank you. First question regarding NKT Cables and the guidance. You are guiding for 9.5% EBITDA margin, which is actually a slight decrease to 2016. You repeatedly throughout 2016 made reference to the Race Bank project and indicated it was at a lower price point than what you expect going forward. On top of that, you have divested your APAC business, which I assume is margin dilutive as well. Can you just help me understand how you can reach at a conclusion with unchanged or actually lower margin for 2017?
Yeah, I think you should also bear in mind that we started the guiding 8%-9% for the year, right? What I also mentioned during my presentation was that we have seen a significantly better project execution for these complicated projects, among others, the Race Bank. We are looking into 2017 where we always are a little bit cautious about project execution issues, and you also are familiar with that. Then you are correct that we divested China, but in that you also missed that we divested automotive, and I have previously told you that they are one to one. That is basically a wash from 2016 to 2017. That is something you also need to take into account.
Okay. I noticed you haven't included the profitability graph for projects and products, which you used to have, but can you maybe just verbally explain how that would look like? What—
Yeah.
—in absolute terms, what would profitability for these two segments look like in 2017?
Yeah, there's no particular reason why we have not included that. It was just to also reduce some time. But if you were looking at that graph, you would see the product business to flatten out in fourth quarter, as also previously announced. You would also see the project business continue to close the gap to a performance we saw some years back. So that is somehow the split that you would see.
The forecast for this graph would be fairly flat, I assume then?
They would be fairly flat and of course for the project business, exposed to our ability to do a proper project execution.
Okay. That is quite clear then. I would like to jump to Nilfisk and first, I have a question regarding the U.S. and these national accounts. In connection with Q3 results, you stated you won new contracts within national accounts. I am just curious whether you have won new contracts again in Q4 or whether it is a spillover from Q3 we are seeing in Q4.
Well, there were also a couple of new contracts in Q4, not as substantial as in Q3, but a couple of new contracts, yes.
Those are new contracts with new clients?
Yes.
Okay. That is quite clear. Just going forward, is this a trend we should expect to continue, that you should pick up on new clients in 2017 as well?
We certainly hope so. The result of good structured, dedicated work with these national accounts has built up a good pipeline that we are working with. With these big accounts, the timing and the magnitude is difficult to predict. Of course, we hope that the way we work with this group of customers right now will lead to more contract wins. I think one thing to bear in mind is that these are not the portfolio wins as such.
It is clear that when we have a breakthrough with a big customer, then there is also a bigger presumption that they will buy more from us. It is not the repetitive orders that we can count on. That is why, yes, we are very, very happy with what we got in the second half of the year, and we are hoping that we will get similar good contracts next year. We don't know it, and it is not like we have them in our order portfolio at the moment.
Okay. That is quite clear. Then, in terms of your guidance, if we look at the lower end, you guide for 2% organic growth and an unchanged margin versus 2016. As I understand from your slide, you will get an incremental EUR 9 million in earnings impact, which is almost a percentage point on the margin. On top, you yourself mentioned the operating leverage impact, you should get 2% organic growth. I am just struggling seeing how that leads to an unchanged margin.
Yes, I can do exactly the same math as you have done, so I am not surprised about the question. It is simply because we say we will also make some investments in our company going forward. We have now had a little bit of a stop-go about our sales staff, but we definitely see that this is a good time and the right thing to do to keep investing. So we have anticipated that we will hire more salespeople in selected countries. Another thing is that also we, of course, are also focusing a lot on the whole world of digitization. We are investing money into building up a focused department addressing that and other things where we say we also simply want to increase our overheads to make sure that we can continue to grow in the future years. So that is the reason.
Can you quantify these investments? What is the total size of this?
No, I do not want to put a number on that.
Okay. All right. That was all for me. Thank you very much.
You are welcome, Kristian.
We do have another follow-up question from Casper Blom from ABG. Please go ahead, sir. The line is open.
Thank you very much. If I may start off where Kristian finished on the guidance for Nilfisk, and your organic growth guidance of 2%-4%. Can you talk a little bit about how you see that being faced in 2017? Looking at where you are coming from in Q3 and Q4, is it fair to assume that growth will be front-end loaded in Nilfisk? That is my first question.
Actually, we expect a rather stable development over the years. We have certain large contracts that we know either we stop or we win, and there are certain that stops here in the first quarter. Even though we had a weak quarter last year, we do not expect a huge quarter in 2017. Actually Q1 to three, more or less the same, and then a slight pickup in Q4 because of a known big order we will get at that point in time.
Okay. That is very helpful. Then also in Nilfisk, in connection with Q3, you talked about the robotics development and the Horizon Program. Could you give an update on that, and when do you expect to bring these new products to market? Maybe also if we can get any indication on pricing of that.
Yes. It is going as planned. We are still in very intense testing phase, and we have some customers testing for us on-site, and it is all going according to plan. We still anticipate that late Q2, we will be able to send these products to the market, which was also what we anticipated after Q3. In terms of pricing, we are not yet settled on a level yet.
Okay. Fair enough. Michael, in Cables, you did address the challenges that you have in high voltage onshore. Can you put a few more words on how you are actually targeting to do the turnaround of that area?
I can try to put a little bit more flavor on it. I think it is fair to say that we cannot turn that business around on our own. We also need to depend on a better market structure. But we can do a lot internally, and what we work a lot with right now is to secure that we have the right go-to market strategy in the different markets that we are addressing. We are also looking into the markets that we address, so the market scope. Of course, there are some markets where we, by nature, are stronger than other markets, and we need to make sure that we are also capturing growth in markets where we are not necessarily strong.
We look a lot into the front-end guys that we have in the markets to make sure that we have the right team, that we have sufficient feet on the street, so to say, to capture the growth that are in some markets. A lot of work in the front end. Then in the back end of the business, in the Cologne operation site, we also do a lot in order to improve our cost base to make sure that we are not overengineering projects that are becoming more and more commoditized, if I should put it that way.
Bear in mind that if we go three, four years back, the medium voltage market was significantly more advanced than it is today, but it has been commoditized, and somehow we see some kind of the same trend in the lower end of the high voltage, and we need to adjust to that, and that is also what we currently are working on.
Excellent. Thanks a lot.
Welcome.
Our next question comes from Mr. Claus Almer from Nordea. Please go ahead. The line is open.
Thank you. I have also some questions. First to you, Michael. The slide you showed with the backlog of EUR 189 million for 2017, how is that compared to 2016? That would be the first question.
The backlog or the order?
The EUR 189 million, how is that compared to what you recognized as revenue in 2016?
That is slightly higher.
Okay.
We use more offshore in 2017 than we did in 2016.
Okay. The Drive Two and Three, I know you do not quantify the expected effect, but could you maybe put some more flavor to what we should expect from these programs in timing, in what area, et cetera?
Well, I have never heard about Drive Two and Three, but what I know about is that we are having a plan for how to close the gap between current growth and the 15% target that we want to do in 2020. One very large element in that is the new organizational design that I also well described in the annual report, that we launched 1st of January this year. It is a structure where we move away from decentralized business lines into a more centralized functional organization. We do that in order to drive excellence in whatever we do, whether it is in the front end, the back end, or in the supply chain. That means that we will optimize much more across production sites in order to be more competitive and reduce cost as just being one example.
Then it also means that we will have a more lean and agile organization. We will also look into the layering a little bit like they do in Nilfisk. The span of control will increase, and that means that we will have a more cost-efficient organization. There is a lot of levers and initiatives in that program. It is not as easy as it was in the past with Drive, where we could, on a quarterly basis, communicate, because it is a transformation that will take slightly longer and are more difficult to work with. But we are looking into a cost-saving potential of at least EUR 20+ million . That is a big element in closing the gap up to the 15% goals.
Will that be by 2018 or 2019 or—?
That will most likely be during 2018, beginning of 2019. Yes, that we will see the final result of that.
Okay.
Of course, now we will add more complexity with ABB coming in, where we are also looking into realizing a synergy potential.
Sure. Okay. Jumping to Nilfisk, the very strong performance we saw in EMEA in Q4, is that driven by the sales excellence program, or could you put some more flavor to that?
There's no doubt that the sales excellence and service excellence for that matter is really putting the foundation for the growth in our big countries. That being said, we also had significant growth in our private label business, and it does account for close to half of the growth in Q4. I will not put all the eggs in the basket of sales excellence. But clearly, we do see that it works, and we also acknowledge that it took longer time, but now we do see the results of it.
That also means that Germany is back on track?
Yes. They are performing better. We still like to see more in Germany, so it depends on when you say back on track. But yes, they are positive on the growth.
Okay. Thank you.
Thank you.
You are welcome, Claus.
Ladies and gentlemen, as a final reminder, it is star one if you wish to ask a question. Our next question comes from Mr. Faisal Ahmad from SEB. Please go ahead. Your line is open.
Hi, guys. This is Faisal from SEB. A couple of questions from my side. My first question really goes to Karina, and it relates to the Accelerate+ program. What kind of runway do you expect to achieve by the end of 2017?
I do not have the exact number, but as I said, it will not be a lot higher than the EUR 11 million. Of course, there will be some things, but it will not be significantly higher. That is because of its really structural changes we do. As an example, if you move people from high-cost to low-cost countries, that simply takes a longer time. We also look at the, when we talk about excellence centers, building up shared service, et cetera, it does have a longer fly in effect.
Okay. That is very clear, Karina. My second question relates to the growth which you achieved in Americas. If you exclude the national accounts, the wins there, and the big contracts, what kind of growth did you achieve in Americas excluding that?
It is a good question because it does help significantly. I do not have the exact number. It is also fair to say that we have talked about the industrial segment before, and we are not being helped by that still. So that is why I was also a little bit cautious about saying all in the U.S. is great now, because we do still see some challenges in that sector.
Okay. That is perfect. Then just two questions on the cable side. Michael, the full year helped you, I guess, primarily in the first half of the year. What kind of headwind should we expect from that on the organic growth in 2017?
Yeah. That is a good question. If we look at the German market, comparing it first half to second half, we are looking at a market that are significantly down. We are talking about 15%-20% within the medium voltage segment. That is what we somehow try to absorb in our business by addressing that capacity into other markets. There are other markets where we have been able to grow. We have seen contract wins in the U.K. in this segment. We have secured frame contracts in the Swedish markets in that segment. Somehow we are compensating that. By the way, we are also entering new markets to compensate and to maintain a flat price level. But it is a significant reduction that you see in the market that of course have a spillover impact in the entire industry.
Michael, just to clarify that, this 20% figure which you mentioned, the 20% figure, that is the second half 2016 compared to first half 2016? Or is that the first half 2017 compared to second half 2016?
No, it is more or less first half versus second half, and that will continue then into first half 2017. But it is not exactly six months versus six months. It is just to indicate the level of reduction that we see in the market. It has been a higher number in fourth quarter than in third quarter. But we don't expect it to increase further, so to say.
Okay. The second question relates to the railway business. What kind of headwind do you see in 2017 from that?
Well, it is basically that we do not see a lot of projects and we see a lot of customers that are postponing investments into the railway grid structure. That is what we are exposed to. In particular in fourth quarter, we saw a lot of customers that we expected to place orders that somehow moved them into 2017, for whatever reasons that they are basing the decision on. It is definitely not because we somehow are losing market share. Not at all. It is more a market situation that, in my view, sooner or later will change. That is just what we saw in fourth quarter.
How much do you expect your railway sales to be down in 2017 compared to 2016?
I do not want to give a number on that because then it becomes very detailed. It is double digits, if you look at a growth number.
That is perfect. One final question, Michael. The EUR 20+ million cost savings number, which you mentioned on Accelerate+, the split between headcount reductions and other things like consolidation of footprint and the continuous improvements, what would that be?
First of all, it is not the Accelerate+, that is Nilfisk. It is the EXCELLENCE 2020.
Yeah, exactly. Sorry. Go ahead.
I do not want to give you further detailed information right now. It is a little bit like the cost-saving program that Karina is working on. It is not necessarily FTE reductions that we are looking for. But we are more looking into also moving people into EXCELLENCE centers in low-cost countries. And thereby we are impacting a lot of FTEs, but not necessarily with the aim of reduction. There are also reductions in the target. But I would rather like to come back to that when we are communicating more about the result of adding ABB into NKT, because then we are looking into a completely new business.
That is perfect, Michael. Thank you.
You are welcome.
Mr. Lyng, we have no further questions at this point, so I would like to hand back to you for any additional or closing remarks. Thank you.
Well, thank you, Operator, for good steering of this meeting. With that, we can finalize the call, and we will be back on the AGM, 21st of April, and then we will release our Q1 announcement May 17th. So thank you, Karina and Basil, for supporting me here, and thank you, participants. Goodbye.
Thank you. Ladies and gentlemen, that will now conclude today's conference call. Thank you very much for your participation today. You may now disconnect.