Good day, and welcome to the NKT Interim Report for Q1 2018. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Michael Hedegaard Lyng. Please go ahead, sir.
Thank you, operator, and good morning. My name is Michael Lyng, President and CEO for NKT, and welcome to the webcast covering the first quarter results 2018 for NKT. With me today, I have Roland Andersen, CFO of NKT, and also Basil Garabet, President and CEO for NKT Photonics. Jointly we will go through the Q1 announcement that we released this morning. First, I will cover the highlights for NKT. Then Basil will take over and do the same for Photonics, and Roland will end with the financial highlights. Then we jointly will move into the Q&A session.
Turning to slide number five, key highlights for NKT in Q1. We increased the revenue and earnings over Q1 2017, and we realized an organic growth of 7%. With that, we are maintaining our financial outlook for 2018, and we will come back to that a little bit later.
I f we zoom into on the solutions business, we had a good execution on a number of high-voltage projects. Basically according to plan, which is good to notice. If we move into the applications business, we actually saw nice organic growth despite the fact that we saw a very challenging market in the Scandinavian region, in particular in Sweden, where we did not have the activity level as forecasted, mainly due to some tough weather conditions in Sweden. This is also fair to say that it's mainly a timing issue between Q1 and Q2, Q3. The service and accessory business had pretty strong performance, and thereby we demonstrate the future potential for that business segment. We did a number of cable repairs in the market and also saw an okay-ish development in the underlying accessory business.
Looking at the high-voltage order intake, we of course have booked smaller orders here and there, but we have not been able to close any significant orders that could give future visibility during Q1. That should not come as a surprise, because in case we were able to do that, we will of course announce it to the markets. The high-voltage order backlog decreased as a result of that, and end of Q1, it now accounts for EUR 0.6 billion.
We try to do whatever we can in order to compensate for the shortfall in the order intake. And thereby we have also concluded to initiate a cost program, to speed up some synergies related to the ABB acquisition and also speed up some result from the excellence journey. It all amounts to EUR 10 million that will have a positive impact on 2019 and a minimal impact for 2018. We are mainly here targeting a reduction of white-collar workers in Karlskrona and in Cologne, and of course, mainly targeting that in the back end of the value chain.
Then in the end, some key numbers. As you can see, revenue EUR 254.5 million, up with EUR 69.3 million. Operation EBITDA of EUR 20.4 million, which is slightly up over 2017. And then we had a significant working capital build-up in first quarter, and Roland will come back to that in his presentation.
If we turn to slide six, then looking at the operational EBITDA development, the numbers I already mentioned. Based on that, we are reporting operational EBITDA margin of 8% in Q1, over 9.6% same period 2017. And that is the reason why you see that the LTM curve is declining from 13.1% to 12.5%. And this is mainly as a result of lower performance in the applications business, which is mainly a timing issue.
If we then look at the first business line, and by the way, this is the first time that we now are reporting based on the new structure that we announced back in the annual report in March, where we look at the business in three business lines, one being solutions, where we do the sophisticated high-voltage AC/DC on offshore cables. The applications business, where we do the medium voltage and construction-related stuff, and then the new business line, service and accessories.
But looking at slide seven, we, as mentioned before, had expected performance in the underlying execution of projects. We did a lot on the first part of Hornsea One, where we delivered the cables and also installed them. Johan Sverdrup is another one that we have finalized, and the NKT Victoria vessel has been pretty busy in the quarter, despite being in the first quarter where weather conditions are pretty tough.
We continue to see a high voltage onshore market, which is the market below 220 kV. That continues to be pretty challenging. There are orders to get, but it's of course impacted by the overall supply-demand situation in that segment.
On the DC qualification side, we continue to work on Cologne. We also have taken the first step into investing into selected machines that are needed to qualify DC in Cologne, and thereby be able to supply DC cables to the corridor projects that we expect in the German market in the years to come.
Turning to slide number eight, looking at the high voltage order backlog. This is more or less a copycat from the presentation we had a couple of months back after the full year 2017 result. The order backlog had been reduced slightly because of execution in first quarter. And you can see the different projects that we currently have in our pipeline and we currently have under execution. We still have the Moray East and Triton Knoll projects as preferred supplier agreements. We don't foresee any kind of risk on those, and we expect them to move into the firm order backlog pretty soon.
If we then look at the development in the high-voltage market, it's probably fair to conclude that it has been impacted by some delays in projects, but we still see the long-term potential to be attractive in this business. It's a segment where visibility to you guys and the market in general is pretty high. Everybody is aware of the fact that the Viking Link project, which is the DC interconnect between Denmark and U.K., unfortunately got delayed up to nine months, that was communicated approximately a month back. I have to admit that came as a surprise to NKT and probably also to our competitors.
Other projects that we currently have is within the offshore wind market, that remains more stable and is still a very attractive market. We expect here that the Hornsea 2 project will be awarded within the next couple of months. We also expect to maintain our overall market share in that segment.
Important to mention here is that our long-term perspective of the market in general remains attractive, and that is also still backed by a large number of ongoing tenders in the market. Of course, the timing is not within our control, and we're exposed to that.
If we then move into the applications business, we are reporting a EUR 92 million top line with 4% organic growth. Unfortunately, we are not able to do a lot of EBITDA on that. Looking at the comparison from first quarter 2017, we should note that still included the automotive business that we divested. We should also note that the Q1 is seasonally a low quarter. The good thing here is that we have had an underlying very strong execution in the back end of the business within production, where we have seen a significant better output. Volumes are up with 16%-20% year-over-year. We can conclude that we start to see the positive impact from the excellence journey, and the result of having all the different production sites now being operated under one COO.
Of course, that is nice. It also requires that we can then sell it to the market with good and decent margins. We have the timing impact that I mentioned before in Sweden. That is not a cancellation of orders. In the Swedish market, we have two to three very large frame contracts, and they are in the segment where you have above-average margins. Those frame contracts and the call off from those frame contracts have been delayed from first quarter into second quarter and third quarter. We can now see in the months of April and May and June that we have a pickup in demands, because the underlying need remains the same, and the contractors that are doing the work is now starting to call off the cables. So we are fully in line where we need to be in the Swedish market.
Last year, we had a very challenging Polish market, and we can now report that we see improvements there, which is positive. We have also been able to start executing on the large medium-voltage frame contract that we saw with EDF in France. We gained that last year. That is also now started up in the last months of first quarter in March, but also expected to positive impact the second and third quarter.
If we move on to the service and accessory business, we are reporting a top line of EUR 30 million, over EUR 14 million last year, an underlying organic growth of 26%, and then EBITDA of almost EUR 6 million, which is significant up over last year. Bear in mind that this business line here is a business line that used to, in the past, be included in both applications and solutions, the service part in solutions and the accessory parts in application, but that is more detailed explained in the Q1 report.
The reason for why we have carved out this business line is really to demonstrate the potential and to make sure that we, from an internal management perspective, have sufficient focus on this. It is a high-margin business when you are able to do these repairs. It is a market that are in development currently, where you start to see different kind of service contract offerings to customers. In particular, customer being offshore exposed to reliable cable systems.
We will continue to develop this business. Of course, we will from quarter to quarter be exposed to the number of realized repairs. So the organic growth will, in this business line, at least in the beginning, be pretty volatile. We also have the railway business as part of this business line. As we have discussed during earlier calls, we are in a process of evaluating different strategic options for that business, including potential divestment.
Turning to slide 12, the cost reduction program, we have launched that internally a few days back. We aim to take out white-collar workers in the back end of the value chain, in particular in Karlskrona and Cologne. That will have a positive contribution of EUR 10 million full year impact from 2019. There is an attach one-off expense to this of EUR 5 million, and the impact in 2018 will be positive but limited. We are currently in negotiation with the works councils in Cologne and in Germany and Sweden. Over the coming months or so, we will have a better idea on the precise timing.
So there are a number of different reasons to do this. One reason is really to adjust the cost base to current activity level and future activity level, in particular in the project execution part. It is also a question about accelerating the synergy potential in the business case we announced when we acquired ABB a year back, and also a result of the journey that we are on driving excellence into the different functions.
We do this in order to adjust. We have also early on communicated that we don't believe that a tough cost reduction program is needed, because we, as I mentioned before, still see an attractive market in the years to come. If that were not the case, we would, of course, do it differently.
On the operational excellence journey, which is also part of the strategy program, you are well aware of the fact that it's now driven by one COO, who joined a little bit more than a year back. We are in the process of implementing a uniform operating system across the different production factories we have, and that should secure that we have a better potential of optimizing capacity across production sites. We can better manage quality and, in the end, get more out of our installed capacity.
This is a journey that we will be on in the coming year or so, and we will also report progress on this to you guys. We are mentioning also in the report that there are actually smaller one-off costs that are also part of the application business related to this journey in the first quarter.
Another initiative that we work on is to focus on moving all back-end functions into a shared service center. That is now up running in Lithuania. We will start up with moving all the different activities that we will take over from the former ABB organization, so bookkeeping, salary payouts, et cetera, and move that from Sweden to the shared service center. Then gradually, we will then move other functions from the existing NKT organization into this office. So very positive development within this area the last three months.
Integration of the ABB business is on track, and we are realizing the potential synergies of around EUR 10 million that relates to procurement, optimization of back-end services, et cetera. Unfortunately, we are not able really to move forward with the approximately EUR 20 million potential that relates to more volume-related activities. There, we are depending on getting in more orders before we can move on executing on the remaining EUR 20 million. But the potential of realizing in total EUR 30 million remains unchanged.
With that, I finalized the NKT part, and I would like to hand it over to Basil to take us through NKT Photonics, please.
Thank you, Michael. Good morning. For NKT Photonics, we had a good and positive start to the year. In the first quarter, compared to Q1 of 2017, our revenue increased by EUR 4.9 million, which is a 65% year-on-year increase to EUR 12.4 million. In that, the organic growth was 18%. The other growth was from our acquisition of the Onefive facility in Zurich. The performance was broad-based, and it was right across all our business sectors. The business conditions in the photonics industry remain positive, and the outlooks look very good for the rest of the year.
With regards to our EBITDA. The EBITDA increased by EUR 0.6 million versus the same quarter in 2017. The actual underlying improvement was better than that because we had EUR 0.7 million of provisions for the long-term incentive program, and we had additional EUR 0.8 million provisions for one-time effects. The continued allocation of costs in getting the growth potential is also very good. We are getting more employees online, and we are rolling out a new ERP system, which should be finished with the end of this year in Q4.
The quarter also saw improved conditions with regards to order intake, and the order intake is 45% above the same quarter in 2017. The order intake continues being active, and we see that as a good indicator for the rest of the year. Finally, on that page, the integration of our acquisition in Switzerland continues doing very well, and that division is improving steadily and according to plan.
We move to the next page outlining the business areas that we are in. In imaging and metrology, which is our largest business sectors, is 56% of our revenue. The growth came mainly from semiconductors and the life sciences market. Our large customers continue placing orders with us, and the shipments for the quarter and the rest of the year look really good in those sectors.
In sensing and energy, the growth there has been driven by our fire detection equipment and in power cable monitoring. We also, in the quarter, won a prestigious 2018 Prism Award. It is a bit like the Oscars in our industry for our LIOS EN.SURE Power Cable Monitoring System. It is a great prestigious award that will help us with sales and revenue.
Material processing, which is the smallest part of our revenue, which is 13% at this stage, also has the largest potential. We have seen significant growth there, especially on our ultrafast lasers in medical applications and components for micromachining things like cell phones and tablets, et cetera.
We move to the final page, which is really the strategic priorities for NKT Photonics in 2018. These things that we have been keeping to quite religiously for the last two, three years. The main one is moving up a value chain. We are doing that. That was one of the strategic reasons for acquiring the Onefive facility in Zurich, which is doing well. The focus on organic growth, which is what we have at the moment, having acquired a couple of companies in the last two years, is very acute with us. We are building a base, and we are reaping the rewards of that organic growth, and that should continue throughout the year.
To enable that, we have worked hard on enabling our lean operations. We, as you all know, hired a new COO at the end of last year. He is moving quite well within the different divisions that we have. He is building an organization that can meet the demands, especially on delivery and capacity. At the moment, we are set up for the rest of the year to do that.
The final thing, with fast introduction of new products, we continue doing that in our industry. That is our lifeblood. We need new products all the time, and we have released a number of new products for the year, which should ease, again, the revenue and the bottom line. With that, I pass on to Roland.
Thank you, Basil.
Let's just have a quick glance at the company's income statement, as already reviewed here, organic growth and top line of 7% and 18% respectively in the two companies. Also the NKT standalone had positive organic growth in all three business lines. Important to note here that the automotive business was included with about EUR 11 million in the same period last year.
In NKT, the EBITDA was driven by, first of all, additional two months of revenue from the acquired activities and also a good performance in the service business. The EBITDA margin decrease is driven by our applications business for Q1. We had a few one-offs here related to integration of the former ABB HV Cables and also to implementing of the operating system in NKT. The reduction in FTEs on group level here is primarily the sale of our automotive business last year.
If we move to the next slide, condensed balance sheet, what's moving the needle here is the increase in working capital from the end of December 2017 to end of Q1 2018. We'll look at that on the next slide, and that's pushing up capital employed. Also our net interest-bearing debt increases to EUR 433 million from EUR 293 million by the end of last year.
Next slide, if we look a little bit on the working capital. Working capital increased EUR 135 million from end of 2017 to the end of 2018. First of all, the level by end of 2017 was extraordinarily low, as we also described in the annual reports. If we have a little bit of look on our segment reporting now in the Q1 report, we can now see the development in working capital by business line. Out of the EUR 135 million, about EUR 100 million is coming from the solutions business and EUR 25 million from the applications business.
The volatility in the solutions business is driven by a number of things, but first of all, new projects coming in, which is normally negative for working capital, but positive force driving a negative level. Project execution is normally reducing our working capital level or increasing it in numerical terms as we deliver or push deliverable on the projects, and also a little bit timing of the milestone payments. All this combined gave the fluctuation of EUR 100 million in Q1.
If we look at the level in solutions alone, it's about EUR -30 million by end of Q1, and it was about EUR -130 million by end of Q4. And I think what we also said about the solutions business before, normally the solutions business will have negative working capital, but it can fluctuate a lot between zero and down to - 50, - 60. Obviously, the less projects we have, the more it will convert up towards zero.
The applications business is a little bit more straightforward. We had a low sales quarter in Q1, hence building up inventory like we also do seasonally. So that combination meant that we were building up some EUR 25 million extra in inventory that we expect to run off in Q2 and Q3.
So let's go to the next slide. That is the cash flow that is also driven by the increase in working capital. For Q1, we had a relatively low level of CapEx, no particular reason for that. And net cash flow is thereby EUR -14.8 million for Q1.
If you go to slide 22 and look a little bit on our net interest-bearing debt, that ended at EUR 433 million by end of Q1 versus EUR 293 million by end of 2017. This is also driven by the increase in working capital. We will end the quarter with a leverage ratio of 3.0 versus 1.9 by end of 2017. And one will recall that when we split from Nilfisk, we had a pro forma debt of EUR 340 million and a leverage ratio of about 2.2x. So volatility around that number is continuously expected.
As stated in the annual report 2017, the process of refinancing part of our bank debt is in process, and our medium-term target on leverage remains of about 1.5x as we move forward.
So if we jump to the next slide, as Michael already mentioned, we are reiterating our guidance for 2018. And a few new orders in solution needs to come in for us to deliver that, and also NKT Photonics reiterating their guidance.
And with that, I think I will give it over to the operator for questions and answers.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions.
We can now move to our first question. It comes from Claus Almer of Nordea. Your line is open. Please go ahead.
Thank you. I have a couple of questions. The first question goes to the tendering activity within the submarine segment. In past reports, a wording like intense tendering activity have been included. As I can see, that has not been repeated in this report. Should we put anything into that? That would be the first question.
No, you should not put anything into that. The tendering activity level, the amount of tenders and the work that we put into that remains intense, Claus. On top of that, a number of also very large new projects are soon to enter the tendering phase, in particular in the offshore wind segment, but also in the onshore interconnect market.
I think, Michael, previously you said that during the summer month, we should probably expect two or three awards to be announced, excluding the Viking Link. Is that still the case?
I don't think it was excluding the Viking Link. Viking Link was one of the projects that we expected to be able, not we, but that we expected to be awarded to either us or competitors or a mix, during most likely second quarter. But you are still right that there's still a number of other projects where we expect award in second quarter or third quarter over the summer, as you mentioned. That remains the same.
Okay. I just excluded Viking Link, as we know that has been postponed. Okay. A second question. Working capital, as Roland also went through, there has been a major movement in the first quarter. How should we think about working capital on a full year perspective?
I think that if you look a little bit on the trends as you can see them in our new segment reporting. Thinking about applications tying up between 5% and 10% of revenue in working capital is about the volatility levels to think about, and currently they are in the high end and plan to run off over the next Qs. The solutions business also, as new orders come in, it will generate a negative working capital, i.e., positive for the company, and the solutions business will remain in the level between zero and down to, I do not know, EUR -50 million, minus EUR -60 million in working capital. So those are also about the trend levels that you can deduct from the business lines.
Okay. Something like EUR 110 million plus or minus should we expect to reverse in the coming quarters. Is that a fair assumption?
It will be between zero and EUR -60 million, and then applications business of EUR +20 million- EUR +30 million. Yeah.
Okay.
Volatile around those levels.
Sure. Okay. Just a link to this, your refinancing of debt. Obviously, the stock market didn't like very much the Q1 report, that could be linked to this fear of a covenant on your debt. Maybe it would be interesting, or it will be very interesting, if you could update us on where are you when it comes to covenants and the current 3x net debt to EBITDA ratio?
Yeah, we're not disclosing the covenants levels. We are in the process of refinancing part of our debt with the bank group, that's moving forward and in process. I think that's what there is to say about that. We are not in covenant breach, if that's the question.
Yeah. But would it be fair to assume, like we've seen in the past, that the amount of covenants on your debt, as we have seen in the past, is zero or very limited?
I think it would be fair to assume that certain covenants will apply to the new financing once we get that in place. That's an expectation, I guess.
Right. Okay. Maybe, I'm not trying to ask in another way, but I know you have these 3x EBITDA. Hopefully, debt will go down during the year. But if you do the math on the current debt and the full-year guidance, so to speak, then you are something between 3.5x or 4x EBITDA. Would that still be in line with your agreements with the banks?
Yeah, we don't expect to be in covenant breach.
Okay. Thank you so much.
Thank you. We can now move along to our next question. It comes from Dennis Dinkelmeyer of Goldman Sachs. Your line is open. Please go ahead.
Good morning. I'd like to ask a question about your full year guidance for the NKT cables business. You are guiding for just over EUR 1 billion in sales and standard prices this year, and your backlog now stands at roughly EUR 600 million, and you are expecting half of this to be delivered this year. Implicitly, that means that you are guiding for EUR 700 million in sales from new orders this year, i.e., in four out orders this year. Given the delay of Viking Link, we were wondering if you could provide some clarity and reassurance in where you expect these orders to come, from which projects you expect to execute and gain EUR 700 million in cash flow in sales this year.
Yeah. Thank you for that question. The assumption or the underlying assumption for the guidance is that we will bring in another two to three projects during this year with 2018 impact.
Could you provide some details on which projects this may be?
No, that we are not doing.
Of course not. We cannot comment on what we expect to win.
Okay. It is just difficult to get confidence on this guidance for this year and the associated profitability guidance as well. I understand the business position.
If I can just add, you also need to look at the underlying applications business, where the first quarter is always a very low quarter due to seasonality, and there is a significant pickup in volume there in second and third quarter. So that you also need to add into your numbers to get the numbers right.
Yeah, this is the question regarding your guidance in the solutions business. The NKT cables business as such has a guidance of EUR 1 billion- EUR 1.1 billion. I understand that the Viking Link has delayed, but you have issued this guidance before the announcement of the delay of the Viking Link. I am not sure if your previous assumption had in place that you were executing some of Viking Link, but potentially this delay should cause a revisiting of the guidance. Maybe there is-
I think currently we are assuming to win two to three projects over the next months that will have 2018 impact in order to meet the guidance. That's true, but it's hard for us to name them. We can't really do that.
Okay. No problem. Then maybe moving to a different topic. You've previously discussed, and obviously in the long term, that you might sell the Photonics business, and clearly the business is performing very well here, and I wondered if you had seen a pickup in the M&A demand for this particular business.
I think it's probably a question that I'm more to the board here. But it's not currently in the making to divest Photonics. We strongly believe that that business will develop very positively in the years to come, and then we take it from there.
Okay, and then the final question, as discussed previously regarding your refinancing of your debt. In your annual report, it says that roughly EUR 590 million of your liabilities have maturity with one year, so this year. And you've discussed your net debt levels at around EUR 430 million. I was wondering if you could provide any details on the refinancing. How much are you planning to refinance this year, and how much of the debt maturity are you trying to meet with the cash flow from the underlying business?
I think that is a misunderstanding. We do not have EUR 600 million expiring this year, at all, actually. But the intention is to. Sorry.
In the annual report on page 108, there is the maturity of your group liabilities, and it says EUR 588 million with the liability of this year, and it is comprising of financial liabilities of EUR 560 million.
But these are the provisions and liabilities, and the accruals, cost accruals included. So this is not only bank debt.
Okay.
That is more a liability note. So that is something else. Anyway, let me just add some flavor to the question. What we are trying to do, ideally, we would like a full new debt structure as we move forward, but it is only a smaller part of our debt that falls due and needs to be refinanced. That is what we are working on.
Okay.
That has been put in good progress.
Okay. Thanks very much.
You are welcome.
Thank you. We can now move along to our next question. It comes from Kristian Johansen of Danske Bank. Your line is open, sir. Please go ahead.
Thank you. Just going back to the tender pipeline. You mentioned you expect to win two to three projects within the next couple of months. I understand you cannot name specific projects, but can you just quantify how many tenders, high voltage projects, do you expect to be awarded in Q2 and Q3?
That, Kristian, it's extremely difficult, because w hat you are looking for is the large projects that we typically announce to the market. There we historically have used a threshold of EUR 50 million. So above EUR 50 million, we announce them, and below, we do not. There, hopefully, a large number of smaller orders from EUR 10 million- EUR 20 million- EUR 30 million that will also be awarded. Those projects will also help us in the second half to meet the guidance.
We also expect some significant larger projects to be awarded. For example, in the offshore wind business, that will also have a positive contribution in 2018, but of course, a more meaningful impact in 2019. So, you need to be aware of that, from announcement of a project until it hits production, there is a time slack of typically three to four months, right? Here we are, to a larger degree, depending on getting smaller projects, but of course a big one where we can start production fast, can also do it. The sum of projects that we look at in our tendering pipeline, whether that is small or large projects, gives us comfort with today's knowledge that we can meet our guidance.
Okay. But then just getting back to Roland's comment on the two to three projects, that includes smaller projects, i.e., below EUR 50 million?
Yes, it does.
Then if you only look at projects above EUR 50 million, can you quantify how many of those you expect awarded this year?
Yeah. You asked me to guess, right? Because I strongly believe that-
Yeah, I know there's uncertainty, but as everything, what would be your view?
Yeah, but with the knowledge we have today, probably a handful of projects will be awarded this year. But I cannot guarantee you that some will not slip into next, right? It's out of my control.
No, I completely understand.
What we hope that we can demonstrate is that with announcements in the coming months, can indicate that the market shares we have in the different segments, among others, the offshore wind, will maintain where they are today.
Okay, roughly five larger projects where obviously I assume Hornsea 2 is one of these five projects. Is that how to see it?
That is also my assumption.
Good. Then along this line, obviously we saw Taiwan offshore wind a fairly substantial allocation for projects. Some of these projects already need to be installed in two years by 2020. Can you just update us on the development on the cable side here and when you expect tenders to come in, and then potentially whether you are already in dialogue on conditional order agreements for any of these projects?
I fully subscribe to the fact that what you are somehow hinting to, that the Taiwan market looks very promising in the years to come. It will not fix tomorrow or fix 2019, right? It is probably impacting 2020 and the years beyond that. The way we look at the market is that currently we do not have any permanent establishment in Taiwan. We will most likely get that pretty soon. The reason for why we do not have it there today is because we do not deem it to be strong and necessary in order to get orders.
The first offshore wind projects that we expect that will be executed out there will be with existing well-known customers, either out of Denmark or Germany, with whom we of course have very close dialogue on these projects. The understanding we have, we as an industry, is that the critical elements of these projects, among others, the export cables, will be sourced from Europe. That is why it is of course a very important and relevant market for us to address. We do whatever is necessary to assist our customers and sit close to customers on that market.
Okay, but then just for my understanding, if you are building a wind project, offshore wind projects in Taiwan, which is going to be completed in 2021, when will you need to start production if you get the order?
Without having a detailed calculation behind that, and depending on when in 2021, then we would probably need to have the order within the next 12- 18 months or something like that.
12 months, probably.
Good. That is very clear. Then just my last question. Looking into 2019, and the capacity utilization, despite this delay in the Viking Link project, do you still feel that there are enough order potentials so that you can reach a stage of close to full utilization of both Karlskrona and Cologne in 2019?
The Cologne is not the biggest issue here because, as you know, we have pretty good visibility also for 2019 in Cologne with the current order backlog. The issue is more related to Karlskrona. As we all know, there we are working every day hard to secure orders. I think it's important here to mention that it's not because of losing orders. We have not lost anything, any significant orders in the last many quarters. It's simply because of a pretty dried up market currently. We work on getting visibility on 2019.
What you need to bear in mind, and what we also are somehow highlighting in our communication today, is that this is not only about capacity utilization in Karlskrona. We basically are realizing revenue and thereby earnings from a number of different streams. One is the throughput in the factories with the production and capacity utilization in the factory. Another one, which is also important, is the installation parts, and the third one is when we do installation with NKT Victoria. And of course, if we do not have a lot to do in the second half of 2018 or beginning of 2019 or whatever it is in Karlskrona, then first step is to get visibility and capacity utilization in Karlskrona. And we do feel comfortable that we are moving in that direction.
But that, of course, there's still a time slack from them being able to install something. And hopefully, also do it with NKT Victoria. And you need to understand that totality of the picture and put into your model, and that is what we somehow are highlighting in the report today. It all starts with getting in more orders, which is what we are working heavily on.
Very clear. Thank you very much.
You are welcome.
Thank you. We can now move along to our next question. It comes from Casper Blom of ABG. Your line is open. Please go ahead.
Thank you very much for taking my questions also. I would like to start by just following up a little bit on where Kristian left off. I understand there is a lot of uncertainty, and things may change, but when looking into 2019 now, maybe if you could give some sort of perspective of where we may end up. As I recall it, you have talked about 2017 previously as being quite a good year with high utilization across the board pretty much. Is there a chance that 2019 could be better than 2017, or is that being too optimistic as things look right now? That is my first.
Yeah, but that is what we just talked about. With the knowledge we have today, we will not be able to beat 2017 in 2019. Simply because we do not play on the entire engine. Hopefully, we are where we need to be on the capacity utilization in Karlskrona. But the next step of the value chain, doing installation either with or without Victoria, will then be the challenging part. And we need to produce stock before we can install it. But of course-
Sorry, I just wanted to clarify.
Yeah. But of course, we also work on different aspects because NKT Victoria can also do installation of cables produced from competitors. Such projects are also in the market right now. So we try to optimize 2019 as much as we can, but you need to take this into account when you do your numbers.
Understood. Very clear, Michael. Then just a follow-up on the whole balance sheet issue. When you tender with customers, how much focus do they have on your balance sheet? Is it in any way a restriction for you in terms of securing new orders that you have a fairly high debt at the moment? Would you potentially consider doing, for example, a right issue to fix that in a quick way?
That I can say no to. We do not plan to do that to fix the issue you just mentioned. We don't see any issues with getting orders because of our balance sheet. The reason for that is, of course, that we are using different instruments to give the customers necessary comfort. Among others, of course, bank guarantees. With today's picture, that is definitely sufficient for the customers to place orders. Then I would just like to repeat what I mentioned also before, that we are not losing orders or market share in the segments that we play in. It's a result of a pretty dried up market, and we as an industry need more orders to be placed in order to improve.
Yeah. Understood. I was thinking maybe that you have to give sort of an additional discount or something like that to make customers feel comfortable. Talking about that, what-
That is not the situation.
Okay. Very clear. Thanks a lot.
Thank you.
Yes.
As a reminder at this time, it's star one if you'd like to ask a question today. We can now move along to our next question. It comes from Akash Gupta of JP Morgan. Your line is open. Please go ahead.
Yeah. Hi, good morning. Thanks for your time. I have three questions, please. My first question is on submarine business and try to understand how quickly can you start recognizing revenues from new potential orders. Basically, if you can talk about delay in lead times between orders and deliveries, or how quickly can you start recognizing revenues, whether the gap would be one quarter or two quarters, or it would be more. That's the question number one.
When you have a typical submarine order, and I would like to use the offshore wind as an example, because that's probably where you have the shortest lead time. Then you are looking at a process that typically have been ongoing for a number of quarters, if not year. Where you have discussed a lot of issues with customers, technical specification, et cetera. There are examples in the market also currently being tendered, where the lead time from getting an order to start off production or engineering production is relatively short. We are talking maybe a month or two months. If that answer your question.
When you are in the interconnect market, it's a little bit different. You talk about a slightly longer lead time. Of course, you can start off your engineering work very fast, that will create a small revenue. But typically there you also have different kind of qualification test that you need to do before you can start real production.
Yeah. That is very clear. My second question is on applications business. For this business, last year you were guiding for 7%-9% margin, and in Q1 we had roughly breakeven. Maybe if you can tell us what margin you have baked in in your full year guidance for this segment, because you are saying that you are expecting to reverse some of the losses into second quarter or maybe in Q3.
Yeah. I think-
If you can comment on that.
Yeah. The applications business is the one that are being currently significantly impacted by the number of structural initiatives that we do, in particular in the back end of the business where we really try to change the way we operate. That is not a straight line, a positive development. There are small ups and downs. The first quarter result, we are not satisfied with that, but it is not representing the full-year guidance, and you will see a significant pickup in the coming quarters. I will not give you a precise number for what is the underlying earnings assumption. But it is significantly better than what we did in first quarter. That is clear.
Can we say you can grow margins in this business this year, or that is unlikely after the Q1 performance?
Year- over- year? We should be able-
Yes, for the full year.
to grow margins. Yes, we should be able to grow margins year- over- year.
My final question is on SuedLink, if you can provide any update on what is the latest from Germany on that?
My understanding is, from talking with the four different customers with whom I have frequent contact, of course, is that the projects are developing as planned. It is also my understanding that we should see the first probably two tenders out of four. There are four projects. We expect that two of them, in a tender format, will hit the market pretty soon.
Thank you.
Thank you. We have no further questions. So at this point, I would like to hand the call back to the speakers for any additional or concluding remarks. Thank you.
Good. We can end this call, and with the last slide, the financial calendar conclude that we will be back in this format discussing the Q2 report, and hopefully also some order intake when we meet here the 15th of August. Thank you for dialing in.
That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.