Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's NKT Q1 report 2019. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question- and- answer session. At which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, Thursday, May 16th, 2019. I would now like to hand the conference over to your speaker today, Mr. Roland Andersen. Please go ahead, sir.
Thank you very much, and welcome everyone to NKT's Q1 2019 report. Let's just jump to slide five. Today, I am here with CEO for Photonics, Basil Garabet, and then myself and Michael Nass Nielsen from investor relations. Highlights for Q1 2019, a revenue of EUR 205 million, down from EUR 254 million, primarily driven by the lower activity level in Solutions in our factory in Karlskrona. - 16% organic growth. Despite the positive growth in Applications, the drop in activity and capacity utilization in Karlskrona outpaces the growth in the Applications business.
Operationally, EBITDA ended at EUR -2.4 million, down from EUR 20.4 million last year, same period. Our high voltage order backlog stayed largely flat, EUR 1.1 billion, compared to Q4 in 2018. Other keys here, lower activity in Karlskrona, and as we mentioned, the profitability in Applications increased slightly compared to last quarter in 2018, but still at a level that is unsatisfactory for us. Service and Accessories came out of or initiated the year with a good pace.
We have now appointed a new CEO, Alexander Kara, that is expected to join us from August 1st, 2019. On the back of this Q1, we will maintain an unchanged financial outlook for 2019, of a revenue between EUR 0.9 billion and EUR 1.0 billion and an operational EBITDA of between EUR 10 million- EUR 30 million. If you jump to the next slide and look a little bit on our Solutions business. I think the Solutions business executed on the backlog in line with our expectations.
The result, EUR 0.4 million, was low, but maybe slightly better than we had anticipated, were expecting, and is primarily driven by the fact that the orders in the market since 2017 and 2018 have been postponed, primarily in the infrastructure projects. That means that our 2019 results in the Solutions business will be low and our Karlskrona plant is not fully loaded. NKT continued to produce on our Borssele Beta project, also Hornsea 2 and the NordLink project continued in execution. We handed over the Martin Linge oil field cable to the customer during this quarter as well.
NKT Victoria, our cable-laying ship was not fully deployed in Q1. Q1 is traditionally a seasonally low period. All in all, a quarter in Solutions that is in line with our expectations. Now if you jump to the next slide and look at the high voltage market. There was expected no significant project awards to us in Q1. The tender activity continues, though, and progress continues in line with what we communicated in February.
From our point of view, the market outlook is still attractive both in the coming years but also longer term. We estimate that the market in 2018, of awards in the high voltage market that are relevant to us, was about EUR 3 billion and we still expect that the 2019 level will be par with that. If you jump to the next slide. Flash on our high voltage order backlog, largely flat compared to previous quarter, Q4 in 2018. Allocation of that backlog is that 40% is expected to be produced in 2019 and 60% is expected to be produced or delivered in 2020 and onwards.
With that, I think we will leave the Solutions business and jump to the Applications business. Applications posted a 3% organic growth and we are quite content with that. However, the operational EBITDA is still unsatisfactory. EUR 0.1 million is way too low, though it's better than same quarter last year. We have appointed a new EVP and head of this business line. The business line is now one single P&L in NKT, where all factories, all markets, and the supply chain function is assembled under one P&L and one EVP. I think that will add to our ability to execute and stay focused on only what needs to be done.
The organic growth in the quarter was fueled primarily by our Eastern European markets. By the end of the quarter, we were still slightly down by the rollout of our new SAP platform, and this is primarily related to the Scandinavian countries, and a little bit of that is expected to continue into Q2. I think that was about it for the Applications business. Let's jump to the next slide, service and accessories. Our accessories business, or the combined business line, is down by 18%, and that's primarily driven by the service business that had no significant offshore repairs in this quarter.
They're doing quite well on the onshore side, though, and are expected to do better for the remaining of the year. Our accessories business is also doing quite good. We have strong growth in our accessories business from the Middle East and also from Central Europe. Also profitability in that business is picking up. That's however, of course, not necessarily moving the needle on group level. We have concluded the divestment of the railway business, and that was effectively out as from February 1st, 2019. With that, I'll give the word to Basil for review of NKT Photonics.
Thank you, Roland. The key highlights for NKT Photonics in Q1 are that our revenue came in at EUR 14.5 million. Q1 is usually a relatively small quarter for NKT Photonics. However, even so, Q1 came in at 17% above Q1 same quarter last year, 17% organic growth. The momentum that we had seen in 2018 continues for us in Q1. EBITDA came in at EUR -0.4 million, which is an increase of about EUR 1.1 million compared to the same quarter in 2018. This is buoyed also by a 7% increase quarter versus 2018 in our order intake.
We, in the quarter, continued to increase our footprint in the United States. We have established a manufacturing facility in Boston, Massachusetts. The facility will be complete in late summer, and we expect first product to be shipped out of the facility by the end of the year. A key priority to support our growth is to strengthen and professionalize our sales force. That has continued, and we continue hiring key people in various locations. The number of our full-time employees has increased by 20% compared to the same quarter in 2018.
The outlook for the year will continue with the same guidance. Our organic growth is between 15% and 20%, and EBITDA margin is between 15% and 20% too. The business development in the first quarter of the year. Imaging and metrology continues being our largest sector, which is 38% of revenue, which was also one of the main growth drivers in the quarter. The super continuum, white light sources for bioimaging and life sciences delivered very strong growth. That's a sector that continues growing for us, and we have a very specific concentration in that area.
In sensing and energy, which is 30% of our revenue, that was relatively flat. Again, there are seasonal issues in that. We expect that to grow further in Q2 onwards. Material processing, which is 32% of our revenue, the market increased quite satisfactory for us. Again, the growth in material processing is driven mainly by industrial and scientific ultrafast fiber lasers. Finally, when we look at the strategic direction, which we have been working on for a number of years, there is no change in 2019.
We continue concentrating on moving up in the value chain. We're focusing primarily at the moment on accelerated organic growth. With our operations in Boston and other operations, we are concentrating on lean manufacturing and lean operations. Naturally, being in the high-tech industry, we continue a focus on fast introduction of new products. With that, it ends my section. I go back to Roland.
Thank you, Basil. If we jump to slide 16, just a fast revenue bridge, where we show our metal price adjustments and also the currency impact for the quarter, EUR 5.9 million, and the impact from the divestment of the railway business and also the growth divided into negative growth in NKT and positive growth from NKT Photonics. If we go to slide 17, not so much new. Maybe highlighting here that the implementation on IFRS 16 impact positively operational EBITDA by EUR 1.6 million, of which EUR 1.1 million is from NKT and EUR 0.5 million is from Photonics.
Secondly, the divestment of railway led to an accounting gain under one-off items of EUR 6.4 million, where the EUR 3.4 million negative were related to implementation of strategic initiatives and also our ongoing employee reductions as we reflect in last quarter. If we jump to slide 18, the EBITDA graph, operational EBITDA margin down LTM, 1.7 points from Q4- Q1. Also just highlighting that profitability improvement we see from 2015 through to 2017 is primarily driven by the acquisition of ABB HV Cables activities in 2017 and also the divestment of our Chinese operations. If we jump to slide 19, working capital increased during the quarter.
The increase in NKT was primarily driven by the development in our high voltage order backlog in Solutions, but also slightly in NKT Photonics, where timing of payments from customers slowed down a little bit. Capital employed here is primarily driven by IFRS 16, but obviously also by a change in working capital and divestment of our railway business. If we jump to slide 20, which is the development in working capital, and the development in working capital was positive by EUR 41 million, from end of 2018 until end of Q1 2019.
This is as expected, driven by Solutions. Working capital develops in line with timing of milestone payments and also other payments in the high voltage order backlog. Obviously, no significant prepayments from project awards. Applications for building up the working capital slightly ahead of the seasonally high quarters, Q2 and Q3 also, that is relatively usual. Also, we can say that the working capital level in total for NKT is not expected to be higher by end of the year. If we move to slide 21, cash flow from operating activities is negatively primarily driven by the working capital development we just discussed.
Cash flow from investing activities slightly higher than in Q1 2018. The divestment of railway cable activities in NKT impact cash flows positively. Then let's move to slide 22, where we show development in net interest bearing debt. Our net interest bearing debt, understood as borrowings, increased from EUR 248 million at the end of 2018 to EUR 303 million, excluding IFRS 16 impact at the end of Q1 2019, mainly driven by the working capital development. Accounting-wise, the implementation of IFRS now means that we are adding EUR 36 million to this net interest bearing figure in the balance sheet.
Our net interest bearing debt here, i.e., the two borrowings, consist of EUR 170 million of mortgage debt and EUR 133 net drawn on our bank RCF, under which we have available EUR 300 million. Only the RCF here is subject to financial covenants. This development is exactly as we have expected it, and NKT has sufficient financial headroom to manage the low level of activity as it is expected in 2019. If we jump to slide 23, NKT is maintaining the financial outlook, both for NKT and for NKT Photonics, and that means that NKT guides a revenue of between EUR 0.9 billion and EUR 1 billion, and an operational EBITDA of EUR 10 million- EUR 30 million.
We still expect earnings in NKT to be higher in the second half than in first half of 2019. In NKT Photonics, organic growth is expected to be unchanged at 15%-20%, with an EBITDA margin that is also unchanged at 15%-20%. Main part of earnings in Photonics, as usual, expected to be generated in Q4. With that, I think I will give the word over to Q&A.
Thank you. Ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. You can cancel your request by pressing the hash key. Your first question's coming from the line of Artem Tokarenko from Credit Suisse. Please go ahead.
Good morning, and thank you very much for taking my questions. I have a few. The first one is around your market outlook for 2019, and what level of market share do you expect to win, especially in the context of your comments around the timing of future projects awards remaining uncertain in Interconnectors? I think despite broader market expectations for Viking Link to be awarded in May.
Yeah. That was the first question?
Yeah.
Thank you. As we say, we expect the market to be around EUR 3 billion ± for the year. We expect to take our fair share of that. Now, when and how that will happen is of course uncertain, right? But technically speaking, an award before summer holiday can happen, but otherwise it will happen during second half of this year. So one to two awards before summer, otherwise in second half. That's how we see it.
Okay, thank you. Maybe you can give a bit more color, where the bigger opportunities are there outside of Viking this year?
I'm not going to give too much color on that, right? There's a number of projects in tender in Europe. Interconnect, DC, AC, and also of course, a lot of offshore wind. There are projects in U.S. ongoing, and a few also in Asia that is of interest. Not all of them that I'm talking about here will be awarded in 2019. They'll most likely only be awarded into 2020 and onwards.
Okay. Thank you very much. My second question is around the net debt. I guess the broader question is where do you expect net debt to end at the year-end? I just wanted to ask about the working capital. Out of the EUR 40 million working capital outflow in Q1, how much of that relates to Solutions and how much is just a seasonal step up in Applications business?
Yeah, so the working outflow in Q1 is mainly from the Solutions business, but also Applications is building up with EUR 25 million or so, if memory serves me right. I think what's important here to note is that we're stating that we don't expect that the group's working capital by end of the year will be worse than it is by end of Q1. That will give you a little bit of a hint on where to or how to have a look on NIBD.
Okay. Thank you very much. I also wanted to ask about the European Union litigation where you booked a EUR 4 million charge. My understanding is that there is a risk of further claims from customers. Could you maybe give us a little bit of color how big that provision could be, and whether you would expect to provision for it in advance, or you will be waiting for customers to come back to you first?
No, on that case, we have no comments to that. We think we have provided sufficient to what can come on legal costs, and that's about it.
Okay, thank you. Maybe my last quick question on profitability and Solutions. Clearly, Q1 played out a bit better than you expected. What were the main drivers of Solutions being break-even rather than loss-making in Q1? Also, as part of that question, were there any provision releases or a step up in R&D capitalization versus Q4?
I think that in Solutions, we actually hauled in a few smaller orders that are not normally being notified to the stock exchange. So orders below EUR 50 million. Some of this were for immediate execution, and some of this is for later this year. So, in that sense, that was supporting Q1 performance. There was no extraordinary releases or anything in-- during the quarter.
Okay. Thank you very much.
Welcome.
Thank you. Your next question's coming from the line of Akash Gupta from JP Morgan. Please go ahead.
Yeah. Hi, good morning, Roland. I have a couple of questions as well. My first question is on small, medium-size projects. Maybe if you can talk about pipeline of these orders, and to be more specific, I am referring to projects that are either in single digit or double digit million euros. How the pipeline looking and could you be able to maintain Solutions backlog by end of the year by just winning good share in these projects? Or would you need to win any big projects in order to maintain your backlog that you have at the end of Q1? So that is question number one.
Yeah. So I think that in order for maintaining or even building our backlog, we need a few bigger project wins, and we also expect to have that. I think the name of the game in this business is also to work with your existing projects, variation orders, small add-on projects and so on, will develop the business as we move forward. So there will be some of that, and there is probably a little more in Q1 than there normally will be.
Okay. Thank you. My second question is on balance sheet. Maybe if you can talk about in your conversation with customers and particularly for these big projects, has there been any change in terms of customers focusing on your balance sheet and that may put in a relative disadvantage against some large competitors?
No, not at all. We have not had that issue. Also, our balance sheet situation has been stable now for three, four quarters wide. We had a lot of orders in second half of last year and so on. So I think the customers are satisfied with that.
My final one is on Karlskrona factory. Can you use some of these small mid-size projects? Again, these are either single digit or double-digit million euro projects to fill the factory or do you need only large projects or large orders to improve utilization there?
Most of the small orders we've had in Q1 will go to Karlskrona, because our Cologne factory is largely full. All of those that has offshore nature, they will go to Karlskrona. On our onshore side, it's more a Cologne thing.
Thank you.
Yes, it's adding to our throughput in Karlskrona.
Thank you. I will go back in queue now. Thank you.
Thank you. Your next question is coming from Claus Almer from Nordea. Please go ahead.
Thank you. Yeah, also a few questions from my side. The first question goes to the Applications business. When do you think that all the issues have been solved, and you should return to a more normalized level of profitability? That will be the first question.
Yeah. There is a few structural issues that we need to handle. I think it will be some quarters yet to come, before we can see a more stable new normal.
What you mean stable is at a higher profitability level?
Exactly. That's what I mean by that.
Okay. Just so by end of 2019, you will be on the right level of profit. That's the expectation.
I can't say that precisely. We need to do a few structural changes, and they need to work, and they need to give impact on our financial performance. And whether that is two, three, four or five quarters is hard for me to say. I think it's important from now on, we expect to see some traction in the right direction, and then it's a process to get there.
Okay. Maybe, Roland, if you could also update on the medium voltage, the business both tenders one, the level of profitability and the likes.
So on the mid voltage, we are doing better. As you recall, we had a poor 2018, and that is doing considerably better now in our Scandinavian countries. That looks well. We will do a pickup also in U.K. Then I think it looks like that the grid expansion in Germany may not be happening as fast as we had hoped for. I think we see the first midst of contraction in Germany. It may not impact the grid expansion, but so far it has not been growing at the same pace as other countries. And some of this is also very country specific. So I think it looks slightly better than we had anticipated.
This grid expansion in Germany being delayed, has that any link to the SuedLink project at all?
No.
Not least.
No, nothing to do with that.
Okay, good. Then just a final question. Looking at 2020 visibility, and sometime in the past at least, you have included both unconditional and conditional orders, very likely conditional orders. If we look at 2020, how does 2020 look compared to 2019 for the future?
Yeah. What we said three months ago was that we expect 2020 to be better than 2019. That still applies. Now, to what extent it will be better than 2019 is very dependent on the pace and also the type of potential order wins that we hopefully will announce over the next quarters. It needs to be orders that are relevant for our capacity, but it also needs orders that are relevant for 2020 production.
Okay. I can of course read your order backlog. I was also thinking about those who have not yet turned final and firm for you. If you have any of those projects, how does 2020 look like?
That I'm not going to be too specific on, Claus. But obviously if we very soon close one or two orders with 2020 production, we will see some form of peak up in 2020. If we don't see that form of order wins, the peak up in 2020 will be considerably less.
Okay. Do you expect to be able to sign any projects soon to have a meaningful 2020 impact?
Yeah. We expect to win orders during the remainder of 2019 with 2020 impact.
Okay. Thanks.
Thank you. Your next question is coming from the line of Casper Blom from ABG. Please go ahead.
Thanks a lot. Just two small things here. First of all, Roland, you mentioned that NKT Victoria has not been that busy here in Q1. How is her schedule looking for the remainder of 2019? Both maybe if you can comment on what you have her doing for yourself and third-party work. Thank you.
Yeah, so we have some work to do for her internally, more East, and then we have a few other tenders out where I expect her to be deployed. So I expect deployment of Victoria to be quite good for the year.
Okay. Secondly, just on the guidance for the cable business here for 2019, the EUR 10 million- EUR 30 million. I think when you originally provided that guidance back in, was it November 2017, you said that to get to the high end, you would need to see some additional orders. When is the cutoff date on when orders received in 2019 can actually also have an impact on the 2019 earnings?
Yeah, but that depends on what orders it is and when it comes in, right? You can see that the orders that we have received in Q1 is technically speaking, adding to this. That is a positive sign, but we need one or two more orders in order to get to the high end.
But you can still sort of get something that can give you a meaningful helping hand in 2019.
Yeah, we think so, yeah.
Okay. Thanks a lot, Roland.
Thank you. Your next question is coming from the line of Benjamin Szekeres from Goldman Sachs. Please go ahead.
Good morning. Thank you for taking my question. I have a question about the IFRS 16 impact for the full year. I do not know whether you have guided on this, but could you provide what you expect to be the impact for full year 2019, and whether this is already incorporated in your guidance?
Yeah, I think on IFRS for the full year, it is about EUR 4 million for the Cables business and EUR 2 million for NKT Photonics.
Your guidance of EUR 10 million- EUR 30 million, would this be inclusive of the EUR 4 million?
Yeah. Yes.
Thank you. Just to follow up on a previous comment, on Viking, did I hear correctly that you said that an award is possible before the summer holidays, but potentially it might be in the second half of the year?
No, I said that we expect to get more orders this year--
Yeah.
--and one or two can happen before summer holiday, and if they do not happen before summer holiday, it will be in second half.
Makes sense. Thank you. Can you comment anything on the Viking tendering process, or is that something you are not commenting on right now?
Today we won't talk about the Viking project.
Makes sense. Thank you.
Thank you. Ladies and gentlemen, once again, it's a star and one on your telephone if you wish to ask a question. Your next question's coming from Kristian Johansen from Danske Bank. Please go ahead.
Thank you. Just two questions from me. One, can you update us on the process of qualifying the Cologne factory for DC cables? Secondly, the status on the tender process for the SuedLink project. Thank you.
Yeah. So qualification of the Cologne factory is ongoing and we will be up and running during second half this year for full DC production in Cologne. I think secondly, on the SuedLink projects, I think there is not so much new. We get indications that one or two of the corridors may be delayed into 2020, but this is not something we know for a fact yet.
So you are still optimistic we will see the first award sort of end this year, beginning next year?
Yeah. Yes.
Okay, that is clear. That is all from me. Thank you.
Thank you. Your next question is coming from Artem Tokarenko from Credit Suisse. Please go ahead.
Thank you very much for taking my follow-up questions. First, I just wanted to confirm that comment around this year's guidance. So you see there are potential orders in the market which can leave you above this year's guidance for cables business?
That is speculation. What I said was that we need more orders in order to get into our high end of our guidance.
Okay. Thank you. In terms of your financial headroom and net debt in 2020, I appreciate you have enough headroom for 2019, but in a negative scenario, shall that recovery be postponed if you don't manage to secure required orders? Do you reckon you still have enough financial headroom for 2020 given where your order book sits now?
Given the plans we have today, we have sufficient headroom that we need.
Okay, great. Thank you. Last two quick questions on Applications. I saw you're rolling out. You just started the rollout of new IT platform. How long do you expect this to take?
I think we'll be up and running within one to two months. It's a SAP upgrade, right? That is a challenge for most, but we are doing quite well. I'd say we started in the Northern Europe, right? That'll be done in a month or two months, then we'll move on to roll in our entire Central Europe business.
Okay. Would you expect the level of investments in the business in H2 to go down year-over-year?
After the rollout, or what is the question?
Would you expect the overall level of investments to go down in Applications business in H2 compared to last year?
It will be about the same. Slightly lower.
Okay. Thank you very much. Thank you.
Thank you. We seem to have no further questions at this time. Please continue.
Okay. If there's no more questions, thank you everyone for participating in this Q1 presentation. Thank you.
That does conclude our conference for today. Thank you for participating. You may all disconnect.