Ladies and gentlemen, welcome to the NKT A/S Q2 Report 2016. Today, I am pleased to present Group Executive Director and CFO, Michael Hedegaard Lyng. For the first part of this call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Speakers, please begin.
Thank you, operator. Good morning, everybody, and welcome to NKT webcast covering the second quarter result for 2016 that we released this morning. My name is Michael Lyng, CEO in the NKT Cables business and Group Executive Director in NKT Holding. The format for today's meeting is unchanged compared to what we have been doing the last couple of times. Presenters unchanged, Jonas Persson, Nilfisk President and CEO, and then Basil Garabet, also President and CEO for the NKT Photonics.
Together we will do the presentation of the second quarter announcement, but let's look at the agenda on slide number four. First I will cover some highlight for second quarter 2016, then we move into the businesses, first with Jonas presenting Nilfisk. I will present NKT Cables, and then Basil will present Photonics before we jointly end with the Q&A session.
On slide five, some highlights for second quarter 2016. First of all, I think we can say and conclude that earnings are in line with expectations based on good performance in both Nilfisk, Cables, and Photonics. If we start with Nilfisk, then we are reporting 3% organic growth, which is an okay number, in particular, if we look at - 1% in first quarter. I think it's also important here to stress that it is supported by strong growth in EMEA of 7%, and Jonas will come back to that later in the presentation. Based on that, we also see an EBITDA improvement of 0.4%, and that is actually on the back of increased gross margin up to 41.2% from 40.9%, and also we start to see improved overhead cost ratio, which is coming slightly down to 32.2%.
Of course, we have looked into growth for a number of quarters here in Nilfisk. It's also fair to say that looking back, we have not been fully satisfied with the growth that we have realized. On the back of that, we are also now reporting that we will change the organizational structure going into second half 2016 and into 2017. We will also start up a cost reduction program with the aim of reducing cost base of DKK 35 million by 2019, and that should be seen as 2016 being the base. So a program very similar to what we did in NKT Cables under the umbrella DRIVE, and Jonas will talk much more about this under the Nilfisk part.
When it comes to NKT Cables, we see a negative growth. I have to say that this is fully as expected. It is - 13%, but if we somehow look into the composition of that, I am happy to announce that we see very strong organic growth in what we define as being the product segment, up 9%, and then project business is down 43%. Please bear in mind that this is as expected, and it does not indicate what is actually going on in Cologne, where we are seeing a production load up to the roof. I will come back to that later on in the presentation.
We also now have the group management structure complete. As you know, we are spending a lot of time here also on implementing a new target operating model beginning of 2017, and now the N- 1 structure is complete. I will come back to that later in the presentation. NKT Photonics see a very satisfactory financial performance, and Basil will later on present this in more detail.
With that, we are able to maintain guidance for 2016. Having said that, we do some adjustment on the underlying assumptions as illustrated here on the slide, but let me come back to that a few slides ahead of us. Also worth noticing here is that we continue to see a strong performance when it comes to the balance sheet. Working capital reduced further during the quarter, which is good. We actually also have a good cash flow from operation of EUR 28.7 million. Check marks on the balance sheet as well.
Let us look a little bit more into the financial figures on slide number six. Revenue here, you can see EUR 553.2 million, impacted of course by the lower revenue in NKT Cables. Totally we are reporting a minus 5% organic growth. Nilfisk up 3%, NKT Cables down 13%, and then NKT Photonics up 9%. Operational EBITDA 52.9, giving a 10.9% ratio, and that is also down. It should not be a surprise compared to the very, very strong second quarter we had in 2015.
If we look at the balance sheet here, working capital amounted to EUR 318.8 million. We are now trading at LTM of 15.4%, which is a notch down compared to in the first quarter where we ended at 15.8%. It is actually driven by good performance in both Nilfisk and Cables. Nilfisk down from 20.2% to 19.6%, and also in Cables we see a reduction from 11.6% to now 11%. Cash flow, as mentioned before, operating activities generate cash of EUR 28.7 million, significantly up compared to second quarter 2015. Then we have investment activities of EUR 17.5 million, also up from the EUR - 29.8 million second quarter last year. Last year was impacted by some acquisitions that we did in second quarter in Nilfisk. That generates a free cash flow of EUR 11.2 million, which is also an okay number.
Net cash flow of EUR -13.4 million, reason being that we continue our share buyback program, impacting with EUR 20.1 million, and then we have also paid out the dividends approved on the last AGM of EUR 13 million. All in all, on the balance sheet we will now come back to that later in the presentation in order to keep it short and sharp, but in the appendix to this, you will see the normal trend curve that you have seen in the past.
If we look at the overall outlook for 2016, then we are maintaining what we originally set in the annual report for 2015. We expect a flattish organic growth unchanged, and we still expect an operational EBITDA on par with 2015, where we realized 9.4%. Then we are changing our planning assumptions slightly. Organic growth Nilfisk is now expected to be in the range 1%-3%, compared to 0%-5% before. As a consequence, we are also narrowing the span on operation EBITDA before 10%-11%, and now 10%-10.5%.
In NKT Cables, we maintain what we said on the organic growth, so still expected to be negative with around 5%. Based on a pretty good performance in the project business in second quarter, and also good growth, we are able to narrow the band here from before 8%-9%, to now the level around 9%. So very similar to what we achieved in the good year of 2015. Photonics unchanged growth of 10% and operational EBITDA between 12% and 14%.
But let's look at the next slide here, slide eight, where we can actually see where we are trading. Just as said, 9.4%, we expect similar to 2015, and that is actually currently where we are trading, so it should not be a big surprise.
If we turn to slide nine, composition of revenue in the box number one, upper right corner, where we see the revenue decrease of 47.2%. As you can see, impacted by various factors. We see significantly lower metal prices, and that is diluting top line with EUR 38 million. Also negative impact from FX, but then offset partly by positive impact in the acquisitions that we've been doing in Nilfisk but also in Photonics, 20.9%, before we are then down to the reported -5% organic growth for the quarter.
Composition of operational EBITDA, decrease of 6.6%. Nilfisk is actually improving compared to second quarter, as said in the beginning. So we see margins up in the quarter, but also LTM, as a consequence up from 11.4% to now 11.8%. Then we see Cables being down from 14% to 10.8%. That should of course be seen on the back of a very strong second quarter last year.
With that, I think actually we should move into the business lines. Jonas, why don't you take over from here?
Thank you very much, Michael. Then let's jump into the details of Nilfisk. Starting up then with the quarter, we ended up with 3% growth in the quarter, and that gives us 1% year- to- date. In EMEA, ended up with 7% growth in the quarter, so a very strong quarter despite the political challenges we have in the Middle East. So a great quarter. Service up, very strong growth, but also the mid-markets, a very strong growth in the quarter. Americas, on the other hand, we had another disappointing quarter, -4%, and it's mainly U.S. Floor Care that is still we struggle when it comes to growth. That is still a challenge for us.
We do growth in Latin America, and we also have growth in the pressure companies in Americas. So very much a challenge continuously in U.S. Floor Care. APAC ended up with 0% in the quarter, which is actually quite good. We had very strong growth in Southeast Asia, very nice growth also when it comes to consumer in Pacific. China, of course, maintain a challenging market for us, and that is mainly the challenge to municipalities and the government.
Turning then into the next page, improving margins in the quarter, and also year- to- date, and also when it comes to the overhead. The activities we have when it comes to pricing initiatives, but also procurements start to pay off. We also have started up the overhead reduction, which is also give us an effect in the quarter.
Let us turn into the next page. We have not achieved what we want when it comes to growth. We have achieved a lot. We launched Accelerate strategy here in March last year, and then we also started up with the mid-market. We have seen a very good growth in the mid-market. We have seen very good growth in the service, and we have also seen good improvements when it comes to supply chain, but we have not really seen the growth we want to. That is why we also come into this organization change that we like to do.
We like to get closer to the customer and also empower organization, but be more customer-oriented, changed organization in the front end in order to be closer to the customer, but also create more accountability to the countries. We also like to simplify the organization and to take out complexity in order to increase speed.
The new organization we like to push to is actually to achieve two things. It is to achieve the growth we have not fully seen. We are still lacking what we wanted to with the strategy, and this is of course, in order to be able to get that and enable us to get the growth we want. The other thing is we also see a possibility to improve the margins by doing this organization change.
First, we will unify our sales company and organize them in a premium value and service in order to have the same way of organizing our front end, but also be able to support the sales organization from the back end. In order also to simplify the span of control for the sales company, we also would like to take out the specialty and the consumer. This is a handful of companies that is not really the full core. In order to have them stand alone, we will not only be able to focus more on consumer and specialty, but we will also be able to focus more on the main business in our sales company. These two divisions will be completely stand alone, end to end.
In order to get out the cost, but also to create excellence, we also push with both finance, HR, and marketing, and consolidate these functions in order to be able to push out costs from this. This transition will start here. We will actually go out internal as well, this today, with the communication, and we will go partly live with this organization already here 1st of September. Then we will have a transition period, fairly short, until end of December, and we will go full live here, January 1st.
What is then the impact financially? It will be of cost to get the savings. We will have a cost of roughly EUR 30 million, but we will also save based on the base of 2016 and the 2019 impact. We will have an overhead restructure. We will also work harder on the sourcing, savings, production footprint, continuously to do that, but also reduce the complexity in our organization. The cost for this, as mentioned, is EUR 35 million, but on top of that, we have EUR 5 million also to reorganize the front end.
To sum up, okay growth quarter three. Very good growth in America, still below expectations. Margins improving with activities we have. Thank you very much.
Thank you, Jonas, for taking us through the performance in Nilfisk. Let's now move on with the cable business. As indicated here, we actually have something to celebrate, NKT Cables turns 125 years later in this month. So many, many years behind us. A lot of experience, a lot of passion, and that is actually what we try to build on, executing on EXCELLENCE 2020, bringing us even one step further ahead.
But if we look at slide 19, then we can use this as a talking sheet describing performance in the different markets. First of all, the -13%, -19% for first six months. That also means that in order to achieve the around -5% for full year, we will see a positive growth in the second half.
Let's start with the project business. The negative numbers is behind us. Month after month, we will start to see positive growth in this business as we are moving on, getting closer to the end of executing the projects that we currently have in our backlog. On the market side, we look at an offshore market still being pretty attractive. We see a lot of projects out of the Holland coastline, Dutch coastline. We see, despite the fact of Brexit, we still see a lot of activities in the U.K. markets, some related to projects already being awarded, but also recently awards of new projects. So we could maintain our positive view on the offshore segment.
We have full visibility in this segment up till end of 2017, so it is more back to executing properly on those projects, and that should drive better profitability in second half, but also going into 2017 in this business line.
Looking at the onshore, where we see a flattish development compared to last quarter, maintain or continue to be a tough segment. It is probably the toughest segment in the cable industry these days, where we do not see a lot of volume, and that is, of course, having a negative impact on prices. Not worse than we have seen before, but we have also, on the other hand, not seen any improvements yet.
In the product business, we are very satisfied with growing that business 9%. We start to see a full benefit of pricing excellence that we introduced a year back. We have also developed a new product range that complies with the new CPR regulation that are very soon impacting some of the markets that we are serving. If you are not familiar with the CPR regulation, Construction Products Regulation, then I suggest that you visit our homepage and watch the video that have been prepared as an information vehicle to customers and installers, because also for them, it is driving a lot of changes. I think we are in the front row here when it comes to communicating to the market and also developing the new product range. We should, of course, benefit from that, driving growth in the quarters and years ahead of us .
If we look at the composition of this, then the Nordic market is flattish, and that is actually covering over a very strong performance in the Swedish market, where we continue to see a good performance. We also saw that last quarter. Whereas the Danish market, that also a big market for us, is somehow a little bit more challenged and more flattish. Central Europe, a very strong performance, also impacted positively by the so-called Förderjahr in Germany, and specialties, which is accessories and railway business, is flattish. In the specialty segments, we have now finalized our restructuring of the cabinet business that we have had for many years. It has now been closed down and partly divested. It was loss-making, so ahead of us is a much better and more solid performance in the specialties business when it comes to the medium voltage accessories that we are serving.
China continues to be tough, as you can see, - 26%, also representing our very low appetite to gain orders, so to say, because they are more or less loss-making, and in particular, if you look at it from a cash flow perspective and return perspective, we lose money. So ahead of us in APAC, we need to fix this issue. I cannot foresee in a situation where we will also talk a lot about APAC going into 2017.
Let's look a little bit on the composition of the revenue in the project business, because I do admit that the negative growth numbers are somehow pretty high, and that does not reflect the fact that we are looking at a production unit in Cologne that are producing up to the roof. This is somehow the bridge where you can see that there are some accounting issues where we changed the method last year. It should not have any impact going forward and moving forward. Our composition of backlog this year contains less civil work in the projects compared to last year. That is normally a pass on, so it should not impact margins, underlying margins, a lot.
Back in February, we're reporting this setback that we saw because of the quality issues that we had from one key supplier. I am happy to announce that we have now our arms fully around this issue. It is not an issue that will impact second half at all, but it has impacted second quarter because of need of reproduction of cables. If you remember, we also had a similar impact in first quarter, and we expect to be fully compensated from that sub-supplier, and that is currently under negotiation.
Then we have the other EUR 15 million negative, bringing us down to the EUR 51 million, and that is actually very simple, very much related to pricing. So lower profitability level on current backlog compared to backlog executed in 2015, and that should also not be a big surprise. So that brings us to EBITDA margins down to 8.2% in the quarter, despite the fact that we are okay satisfied with the performance in the quarter. Having that in mind, we should also notice that we are now guiding a level of around 9% EBITDA margin, and that means that we should see a stronger second half this year compared to what we saw in 2015.
On slide 22, you can actually see what is happening. We have used this slide before, and if we look at the product business, we quarter- after- quarter see a better performance. It relates to full impact of DRIVE kicking in. It relates to pricing excellence, commercial excellence, as discussed before. That is very much in line with what we actually expected for the year.
Looking at the orange curve here, we see that is the project business where, as communicated before, we will have significantly lower profitability from that business in 2016 because of order backlog over 2015. But we are actually doing better execution than expected, and that is illustrated here by the gap between the dotted line and the fixed solid line. The dotted line reflects the budget behind the forecasting of the range eight to nine, and we do better, and that is also why we are able to take up guidance, indicating that we will be around 9%, similar to what we did last year, looking at operational EBITDA.
To sum up on slide 23, a good quarter despite the negative growth. We see a good execution, we see a good growth. When it comes to the new group management team, then I am also here happy to announce that it is completed. Frida Norrbom Sams joined us beginning of June. She is having a lot of experience by driving growth, driving commercial excellence, turnaround of front ends. So I strongly believe that she will contribute positively to that development. We have our new COO on board, Dietmar Müller, representing a lot of years of driving production excellence, optimizing manufacturing footprint, et cetera, and he will join us beginning of October. With that, the N-1 layer is fixed and then also the N-2 is very close to be ready to be announced, and then we are ready to work under this new term, beginning of 2017.
It is a long journey, but we work under the frame, go slow to go fast. We need to have proper planning, and with that being done now, we are ready to kick it off beginning of 2017. That is part of the EXCELLENCE 2020 strategy that we announced last year at this time. And one important element, also under the different other Must-Win Battles and segments initiative under the EXCELLENCE 2020 strategy, we are progressing as planned.
With that, I would like to hand it over to Basil to take us through NKT Photonics.
Thank you, Michael. I'm Basil Garabet. I'm going to give you a quick overview of the NKT Photonics sector and how we've done in the quarter.
We had a good organic growth of 9%, driven mainly by our improvements in the sensing and energy sector. If you look at the slide, it shows the three strategic sectors that we operate in. On the largest one, which is imaging and metrology, it's about 45% of our business. We had a good growth on our existing segment in the quarter. We're also working on capturing a number of significant OEMs. In the quarter, we signed an 18-month frame contract with a large semiconductor customer. That has been the fruits of many quarters of work with our customer base.
In the sensing and energy sector, again, very strong growth. Part of the synergies that we had with the integration are bearing fruit. We have not only improved in the sectors that we are traditionally in, for instance, in structural monitoring, and we had a nice announcement that we supplied the equipment for fire monitoring in the Gotthard Tunnel, but we're also improving in other segments, for instance, in monitors for gasifiers and chemical storage. That sector is moving in the right direction and very strong.
Finally, the smallest sector that we are in at the moment, which is material processing, which is about 13% of our business. Again, very strong organic growth for the half year. We had a small decline in the quarter, but overall, we're over double-digit performance for the half year. We had significant orders in the end of last year and in last quarter in which we are delivering to our customers now.
If you move to the next slide. The integration of both Fianium and LIOS are going as planned. We have fully integrated the sales and marketing and engineering sectors in all companies at the moment, and that's bearing fruit. On the Fianium side, our backlog and our pipeline is at very high level, in fact, the highest we've ever had in our history, and we're quite pleased with that, and we will continue filling that up. On the LIOS side, as I mentioned earlier, that's going really well and it's better than expected. Again, it's due to an energized team that is doing very well. They're out there getting a number of significant OEMs in. So we're very pleased with that sector.
Finally, just to sum up the final slide. As you see from the bar graph, we continue the upward advancement of our EBITDA. Again, with our organic growth this year compared for instance quarter-to-quarter to last year, we are at 9% this year compared to a -14% last year. More significantly, we are up for the half year to about 11% compared to -9% for the same period of last year. So all in all, things are moving in the right direction, the ship is steady, and we are quite pleased with our performance. That concludes my part of it.
Thank you, Basil. With that, we have finalized our part of the presentation here, and we are ready to move into the Q&A session. So, operator, I will hand it over to you.
Thank you. Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. Please hold until we have the first question. Our first question comes from the line of Casper Blom from ABG Sundal Collier. Please go ahead. Your line is open.
Thank you very much. A couple of questions from my side. First to Jonas. Jonas, in Nilfisk and U.S., you mentioned that the U.S. Floor Care is sort of a challenge for you. Are you doing anything sort of particularly to cater for that challenge? Or will that also be fixed by the sort of new organizational setup that you are presenting today? Also, on the whole organization changes that you are doing, have you done anything to sort of really asset test how these changes will be sort of taken by the organization, sort of to avoid that you do not get into any, let us call it, implementation problems with this and that people are on board from the start?
Then finally, Michael, on cables, two things there. First of all, if you could sort of give an update on pricing, it looks as if it's stabilizing a bit in the products business. Finally, on your second half growth, could you give any guidance on how to sort of look at growth in Q3 and Q4? Will it be roughly on level or will one of the quarters be significantly different from the other? Thank you very much.
So if I then start, Casper. When it comes to the U.S. Floor Care, there is numerous activities when it comes to how do we go to market. We have been able to improve already margins and overhead there, but the growth is still a challenge, as I said. But we have also decided to let go of our CEO in the Americas by immediately effect, and we will have a new person on board here the 7th of September.
When it comes to the implementation, of course we have involved also management here, and we have so far and also some big market countries, and we have seen a very positive feedback so far. So we feel very much that this is the right thing to do.
Then, on your question about, c an you just repeat what you asked about-
Yeah.
the growth? I understand the-
Yeah. Merely, as you also said, Michael , you are expecting to see growth in NKT Cables in the second half after a decline in the first half. How should we sort of look upon Q3 and Q4 here? Will growth in the two quarters be much different, or will it sort of be on level growth in those two quarters? If you could give a bit of guidance on that. My second question was just if you could give an update on pricing.
Yeah. I think on the growth side first, I think as you know, we are reporting -5%, so we will be down year-over-year, and that should not be a surprise and very much related to the project business and the price level in the order composition. Looking at what we expect for third and fourth quarter, it is always a little bit tricky because the project business can easily move from one quarter to the other. But if we look at the comparison numbers, we had -12% growth in third quarter last year and then 2% in fourth quarter. With that, I actually expect that we will do a very nice third quarter, but probably with an even stronger fourth quarter than realizing the -5%.
Then on pricing. Pricing is important to discuss both in the product business but also in the project business. In the project business, we do see an okay price environment when it comes to the offshore market, and that is also what we have said before, that looking into 2017, we will have a better order composition to execute on. The onshore market continues to be tough. We do not see any worsening on pricing power, and also we do not want to take orders with low margin. Then we would rather try to optimize in different ways. Whereas in the product business, we implemented a pricing project beginning of last year, and that is not about only increasing prices, it is also about putting more intelligence into doing price setting in the market, and we actually benefit from that. So underlying the 9% is a fairly even mix between volume and price.
Good to hear. Thanks a lot, guys.
Our next question comes from the line of Kristian Johansen from Danske Bank. Please go ahead. Your line is open.
Thank you. First question regarding the strategy for Nilfisk. This might be looking at things a bit simply, but if we go back to your original strategy, it was to increase the amount of sales and service people, which should then result in an increase of organic growth. Obviously that has not happened to the degree you expected. Now you are taking out sales and service people, and then that should also increase growth. I understand that it will increase margins, but can you just help me understand the logic in terms of why this should improve growth?
No, I think, Kristian, you have slightly misunderstood this. We were taking out costs by doing several things here. Consolidation of the marketing, consolidation of marketing people, consolidation of finance, and consolidation of P&P, but there is also back-end in the sales company. We are still continuing to drive foot on the ground for the salespeople to also service people. That is also a contradiction.
What this organization change will do, will also empower this organization when it comes to the sales organization to take the right decision closer to the market, and make the organization more simple, with clearer responsibilities.
But does that mean you are not changing the absolute amount of sales and service people?
No, we are not changing. Of course, we constantly work with taking out non-performers, but we are not changing that, no.
Okay. That's very clear. Then on the cables business, can you just remind us your exposure to especially the British pound and how you are hedging this, considering the recent decrease and your backlog with a couple of U.K. projects in projects?
We are not exposed to British pound to a very large degree. By far the largest amount of orders we get in the U.K. market is nominated in euro, underlying euro. So we don't have any significant exposure.
Okay. That's quite clear. Then just lastly, in terms of your Chinese business and cables, should we interpret what you're saying here as that you will have exited this in one way or the other by the beginning of next year?
I don't think you can conclude that we would have exited it. But I think you can read between the lines that we would have reached a conclusion what to do. And then, an exit of a market can, from time to time, take a longer time because of various reasons.
Okay. But does this also mean that you're not having a positive cash flow in this business? Because obviously it's not that long ago where you did a strategic review and chose to focus more on cash flow.
No, we do actually have an underlying positive cash flow, because of collecting our accounts receivables. But the operational part of the cash flow is severe negative. It's not a big issue in 2016, and it was also not a big issue in 2015. But due to the fact that we have had some order backlog to execute on in 2016 also, we have been able to limit our loss, so to say. That will not be the situation going into 2017, because we don't want to increase our backlog with loss-making orders. So somehow we need to fix that operational part of the journey now, and then, of course, find a solution under which we can still collect our receivables in China.
Okay, very clear. That was all for me. Thank you.
Our next question comes from the line of Claus Almer from Carnegie. Please go ahead. Your line is open.
Thank you. First of all, congratulations with the report. I have some questions for Nilfisk and one for you, Michael, in the cables business. I take them one by one. Jonas, maybe you could give a few words to the new head of the U.S. operation. That will be the first one.
Yes, I am happy to. He is coming from a Scandinavian company, actually. He is American, of course, and he has very much international background, and also worked very much with commercial excellence, and that is actually the part where we have found him. So we have extensive experience when it comes to the front-end activities and sales activities and turnaround for sales company. So I think this is a very strong candidate for this position.
You said he will start in September, right?
September 7, so three weeks from now.
Yeah. Okay, perfect. With the new cost-saving initiatives, how will you roll out these initiatives, and do you see any specific or significant execution risk and also any possible upside potential?
There is always risk when I do the transformation, but I believe that we have worked through with the risks and have activities around that. But of course, it takes time, of course, to consolidate the finance, for example. We are doing this over a period, and we will have a roughly estimation of one off already this 2016 of EUR 20 million. But of course, there will always be risk, but we believe that we have worked us through this. The second question was? Sorry.
Potential upside. Normally you do not come out with your most aggressive target.
No. I think, of course, that could be upsides as well, and we might find also during this process more potential things, but that will also maybe then lead to more costs. But right now, this is where we believe where we will end.
But you know, Claus, if I can just add, we have a positive trend of surprising when it comes to cost reduction programs, and we would, of course, like to keep that trend.
I know. So that is why I am trying to figure out where there could potentially be some upside potential.
Yeah. But that we leave up to your intelligence.
Okay. Thank you. Jonas, did you mention you expect a EUR 20 million positive impact this year?
No.
From the-
I expect that we will be closer to one off this year. There will be little or almost nothing improvements when it comes to margins this year, because most of these activities will happen very late in the year.
Okay. Thank you for that clarification. Michael, with the cable business, you mentioned you saw a lot of activity in the offshore areas, especially in Holland. When do you expect projects being awarded? Maybe you will win, maybe you don't, but when will these projects move forward?
They are moving forward. It is always extremely dangerous to promise when we see the awards, whether it is to us or competitors, because we have just learned the last many years that it is shifting from quarter- to- quarter, or even half year to half year. To be honest, I do not want to give you a firm indication here. You should not expect a lot to happen this year, so we probably need it to go into 2017.
Okay.
It also relates to the fact, Claus, that the cable part of such projects are normally something that you do in the end of the planning process.
Sure. Any update on your work with the DC technology and possible expansion of your capacity in Cologne?
We have started up working on DC, as you know. We have also succeeded in producing the first system being a cable plus accessories, but a system that we mainly will use in testing of developing this further. It is in the lower end of the voltage range. That is one thing we do, and we also have other initiatives planned. We see the expected development there. When it comes to expansion of Cologne, DC is too early to take into account there. That should more be driven by offshore, if we do it soon. Also here, do not expect a lot to happen the rest of 2016. Also here, we probably look into 2017.
Okay. Thank you so much.
Our next question comes from the line of Patrik Setterberg from Nordea. Please go ahead. Your line is open.
Hello, gentlemen. A couple of questions from my side as well. Just following up on the previous discussion about when this cost saving is going to kick in. Could you give some kind of guidance when these EUR 35 million will start to be visible in the numbers? Will it be back-end loaded, or will we already see a significant amount of cost savings kicking in already by 2017? That is my first question.
There will be, of course, more and more over the years up to 2019, and we will see the full effect 2019. I am happy to come back a little bit more to detail that in the quarter three announcement.
Okay. My second question related to this Accelerate program in Nilfisk. These one, of course, you are flagging four. Are they all having a cash flow effect?
Yes, they will all have a cash flow effect. Majority.
Is it all or is it a majority?
Sorry?
Is it all of the cost or just a majority?
It's majority.
Yes.
Okay. A last question regarding the performance in Nilfisk. The gross margin is taking a small step, or taking a step down compared to the reported numbers in the first quarter. Could you explain, or help me out, have you not been able to defend the price increases you were able to secure in the first quarter, or is it just a normal seasonality which are impacting the gross margin here in the second quarter compared to the first quarter?
It's typically what's happening first and second, where we have much more DIY sales in the second quarter, so it's a product mix effect. But we are improving the gross margin compared with last year in the same period, as you see.
Yes. Okay. My last question is regarding this framework agreement you assigned within NKT Photonics. What kind of volumes and revenue impact are we talking about from such a framework contract?
The framework contract is mainly a development contract at this stage for the first 18 months, followed then by a number of deliveries that we cannot disclose at the moment, but they will be significant. Within the 18 months, the numbers should be in the EUR 1 million- EUR 2 million range.
Okay, thank you for that. Also from my side.
Our next question comes from the line of Jon Hyltner from Handelsbanken. Please go ahead. Your line is open.
Thank you. My line was disconnected a bit, so sorry if I ask a question that has already been answered. My question is on Nilfisk, and it is obvious that you are not happy with how the Accelerate program has developed. I just wonder on the sales strategy that you launched in this new Accelerate program, could you maybe give us some examples of what has gone wrong to better understand what did not really work out here.
I have to say, partly not satisfied because there is, of course, marks that we have a very good performance. But the difference when we do this is that we take down the span of control. We have a huge complexity for the sales company to cover a lot of customers, and the focus, of course, will be less then. So in order to drive up more focus and be more customer-oriented and also in how we organize ourselves, we will be able to execute in a better way with the sales. And that is the main thing here. And we have, of course, seen in some countries where we already have organized like this, that we have a much better performance also when it comes to commercial excellence.
Sure. But something is not developing as you want, as you are implementing a new organization now. So, kind of wondering what that was.
The reason why we do these organizations is actually to organize our sales company in a segment way, so we get closer to the customer's need and also be able to focus on the specific customer segment's needs. And that is the big change we do when it comes to the front end and also to be able to execute the growth. And then, of course, on top of that, there is a several part when it comes to improve the margins in the back end as well.
Okay. So this is not really an overhaul of the old strategies, it is just a way of really implementing that strategy fully, that you implement this new organizational change. Is that correctly understood?
The Accelerate strategy remains very much. It is very much what we will continue to drive. These organizations are just to make sure that we enable the organization actually to achieve what we believe we will be able to.
Okay. Could you maybe mention a bit if you have lost a lot of senior salespeople and if there is a lot of new salespeople in the organization right now?
No, we have, of course, spots in countries where we see this, but overall that is minimal now. We have stabilized the sales force in the organization today.
You have a lot of new salespeople that typically are new on the job, that have maybe one, two years before they become fully efficient, more than normal in the sales force.
I said we have in some countries that, but when it comes to the big markets, we have now stabilized it, so they have the experience they should have.
Okay. Thank you for those answers. That's all for me.
There are no further questions at this time. Please go ahead, speakers.
Thank you. Then we can finalize the session for today. As indicated here on the financial calendar, we will be back November 11 with reporting third quarter performance. So thank you for listening in, all participants here. Goodbye.