Nkt A/S

CSE:NKT

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to the NKT Annual Report 2020. [Operator Instructions] I must advise that this conference is being recorded today on Wednesday, the 24th of February 2021. And now I would like to hand the conference over to your first speaker today, Alexander Kara. Please go ahead.

[Alexander Kara, President & CEO]

Yes. Thank you. Good morning, everybody. And thank you for your time to participate in our call, annual report and Q4 data information. So we are happy to present today first NKT Cables result. And then later, Basil, the CEO of Photonics, will present the Photonics data. So we have here in the room to present, Line, my CFO; Basil; and myself, so then I will start with the presentation. If we look at 2020, I think 2020, I would consider for NKT a successful year, a transition year. So if we look at orders received, we have EUR 2.3 billion orders received, 5 major orders in Europe, supporting to the green transformation and we expect that this trend on the green transformation in Europe but also beyond Europe will continue in North America and also in Asia. Our operational EBITDA in Cables tripled from EUR 15 million to EUR 57 million. So this is at the upper end of the guidance, also what we communicated to market earlier what we expect. And we delivered as per our expectation. NKT Photonics had some challenges in the first half of the year. But later in Q3 and Q4, we have seen some positive signs and some organic growth also in Q4, and Basil will come back to this in more detail. We were able to reduce our debt level and we closed the year 2020 with minus 0.4x, positive free cash flow development, and we have some 2 successful capital increases with around EUR 260 million on net proceeds. So all in all, I consider 2020 as a successful but a consistent year. If we look at Q4, we improved our earnings in Cable and all the 3 business lines contributed to the results. We have been also selected us for one more offshore wind farm as the third supplier with the value of more than EUR 250 million, and this is not yet in the backlog. We have delivered on solution on the backlog and executed as planned. We have seen some negative impact in application due to COVID-19 on demand side, not on the supply side, but earnings despite lower revenues have improved compared to the same quarter in 2019. In Service & Accessories, we improved also. Organic growth in Q4 was 1%. But overall, for the full year, as you can see on the diagram, we improved revenues by 15%. And in absolute terms from EUR 15 million to EUR 57 million, as indicated earlier, and in the quarter from EUR 1 million to EUR 9 million. Looking now on the individual business line. Solutions, as mentioned before, we executed on the backlog and having organic growth of 6% and our vessel Victoria was busy with various activities like more ease and so on. Overall, execution in Solution was as expected. Looking at the high-voltage market. 2020, I would consider it was a good year for the entire cable industry, but also particular for NKT Cables with 5 large orders, EUR 2.3 billion, supporting the green transformation and the total order award in 2020 was around EUR 6 billion, where we got a major share of it. Most of the projects which have been awarded, we have with DC technology, and all the 5 projects, what you see on the right side, where were with DC technology, 4 with XLPE technology and 1 with MI, the Attica-Crete project. For this year, we expect that we are busy with tender work, and we expect volume to be awarded, more than EUR 3 billion, less than last year of EUR 6 billion, but EUR 6 billion last year was heavily impacted by the German corridor projects. And we are busy in all these areas. If you look at the order backlog, we have a record-high order backlog of a little bit above EUR 3 billion, relative to EUR 1.4 billion in 2019. And we are active in execution on offshore wind, interconnectors and oil and gas in the various countries as listed here on the right side. Looking at the next, Applications. Application, we have some headwinds on the demand side, where COVID-19 was impacted us. And you can see the revenues have decreased compared to 2019 from EUR 92 million to EUR 84 million. But despite of the decrease of the revenues, we could still improve the earnings from previous quarter in '19 from minus EUR 2.6 million to EUR 0.4 million. So the negative growth here we could compensate through to better mix, cost efficiency and production efficiency. So the weaker market was mainly Sweden and Denmark, and again, it was the demand side. We have successfully rolled out an ERP system in Eastern Europe, and this will help us also further in the future on transparency and driving efficiency. In Service & Accessories, we have grown 11% and revenue, EUR 39 million, a good quarter in Service. So we have also completed repair jobs, Skagerrak 1 and 2, which interconnect between Denmark and Norway, and we have signed a new service agreement, one with Elia in Belgium and one with Litgrid for the NordBalt interconnector. Overall, we have improved the business in the growth in Accessories, mainly driven by Middle East and also in Scandinavia.So we are very active since years on our climate program, and we have now our first cable supplier in Europe signed up for the science-based target. And we will continue this journey in reducing our CO2 footprint, emission, all our power cables are running on green energy, and we are looking now how we can further improve our consumption by, for example, switching to biofuel and working continuous to drive our C02 emission down and we committed to 5% decrease year-on-year. So we're working on scope 1 and 2. Scope 1 is our own emission and scope 2 is from the supplier, what we are buying, for example, on electricity, but we work also with our suppliers on scope 3, how we can cooperate with them and reduce this, as this is a major part of the value chain if it comes to CO2 emission. So with this, I would like to conclude the Cables part. Overall, good. And now I would give it to -- hand over to Basil, and he can give you some insights on the Photonic side.

[Basil Garabet, Chief Executive Officer and President]

Thank you, Alex. Good morning, everyone. Glad to come after a good presentation from Alex on the improved results and Cable doing fantastically. Hopefully, we will follow on that as we go along. So NKT Photonics. We continued the positive growth, organic growth in Q4 that we had seen the beginnings of in Q3, which shows a reversal in the fortunes of NKT Photonics. It comes really after a very challenging first half of the year. First 2 quarters were not good. We got hit pretty hard by COVID. But this trend has reversed. We see that reversal going into 2021 into the positive areas that we had been experiencing before and hopefully move forward in the same levels that we were prepandemic. We had a very good positive development in our Medical & Life Sciences despite the pandemic. That has been moving quite nicely forward. It's also a nice business that the global trends in is moving in the right direction. In our Industrial market, which comprises a number of different industries, we see the challenges in Q4. We have done better, but there are still challenges, and there's still challenges that going into '21, again, mainly driven by COVID-19. And I'll go through it a little bit further in the next slide or so. The development in our Aerospace & Defense business was pretty much flat. And again, a little bit disappointing to be flat, but that's, again, because of many projects that moved basically being presented as being hit by COVID so they were delayed. We hope and see those projects happening in '21. The EBITDA in Q4, even at 16.4%, which is pretty good, was much lower than it was in the same period in 2019, which was about 28%. So we see that again hit by a number of different issues, mainly the cost base that we had. We have built the company on higher growth. There had been somewhat of a less favorable customer mix, and we've had temporary yield inefficiencies, which we have overcome at the moment, but they hit us hard in Q4. Okay. So if we move to the next slide in business development. We're on Slide 15 for everyone at the moment. You can see that the part of the Medical & Life Sciences, that's a part that has been growing the best in our business at the moment. We've had solid growth. The solid growth continues with a number of different areas. Main applications is in ophthalmology. In medical devices, we're doing very well. Ophthalmology and things like cataract and various other procedures is moving really well. And so as our bio-imaging and microscopy. Again, despite the COVID-19 pandemic, all those areas have done remarkably well. The Industrial segment, as I said, has been the main pain that we've basically experienced. And going forward, we see that easing up as we had seen in Q4 and as we see now going into '21. And finally, the Aerospace & Defense market have been relatively flat, as we've said. However, with our very large customers, we see improvement going into '21. And with that, I will pass over to Line, our CFO. Thank you very much.

[Line Andrea Fandrup, Executive VP & CFO]

Thank you, Basil. Yes. Taking us through the financials of the quarter and the year. Here on our income statement, the main element to pick up here is the revenue growth and if we start by looking at the full year for Cables, you see a very nice revenue growth, up by 15% for the full year, so good recovery. And staying with the recovery, leaving -- noting here that the Photonics, as Basil alluded to, is coming through Q4, getting into a growth mode again. So with the stabilization of in Q3 and Q4, we're now into a better mode. Going into the operational EBITDA. Of course, it's a good place to be to see that we're improving our operations EBITDA to the degree we do of a doubling compared to last year. This constitutes of both Cables and Photonics contributing positively in the quarter of Q4. And then looking into the -- further down the line, so I think stopping at the EBITDA for the year, the EUR 49 million. And if you go further down, you'll see that we are getting to a net result of EUR 75 million for the full group of negative EUR 75 million. And the main contributing factor this, I would say, note also that our taxes is different compared to last year. Very much related to the revenue recognition differences between IFRS and local tax accounting but also the -- that's the capitalization of deferred tax assets. So an improved operational performance, definitely. And a revenue growth that is a very nice for another year. If you turn to the next slide, going into a few of the highlights on the balance sheet. And on the working capital, I should say here that it's an unusually low year for 2020. We came in very low already in the '19, and now it's improving further. The next slide a little bit more on that. But then down to the return on capital employed, which is improving also for the year, contributing from the improved earnings on the NKT. On the leverage level, we are at a very different place now compared to where we were earlier. And so the issuance of new shares and the development in the working capital takes us at a very good level. So the debt right now is the leverage ratio at the minus 0.4x EBITDA. So flipping to the slide on working capital and just to give you a few insights to this. It's very much related to the big backlog after the wins in 2020 that we saw and the prepayments. So I would also not expect this level to continue. As you've seen before, there's a seasonality pattern to this also, right? So in that sense, Q4 came out very nice for NKT. And then flipping to the cash flow statement, where I would start at the bottom of the table here for Q4. So the net cash flow of EUR 232 million is very much, of course, impacted by the issuance of new shares last year. And then going up further, you see improved earnings also turning into a positive cash flow for operations this year. And then you also should note here that now we are -- we have ramped up the activities around our investments. So our CapEx is increasing, and we will see even more of that in 2021. If we then go to the next slide is our leverage ratio. And here, you, of course, see the investment of -- sorry, not the investment, the impact of the issuance of the new shares and right now, to say, we had total available liquidity reserves of EUR 536 million in this year -- in 2020, and that consisted of cash of EUR 239 million and ongoing credit facilities of EUR 297 million. And just to note that, of course, 2021 is a year of big investments within the Cables business. So this will, of course, change our cash position with the market. If you turn to the next slide, here, we have the financial outlook for the year. We are reconfirming our guidance for the year on the Cables NKT. And of the EUR 1.1 billion to EUR 1.2 billion revenues and operational EBITDA margin of EUR 80 million to EUR 110 million. So we expect to continue to grow and also certainly improve our operational performance. And when we look at Photonics, just to remind you that the -- of course, 2020 has been the year of fluctuating performance. We still go in with some uncertainty for 2021, not knowing exactly how COVID will impact us. But despite we see a stabilization in 2020 and of course, in our guidance for the year, bringing that revenue growth of 0% to 10% and looking at the EBITDA margin at 3% to 7%. And noting on this that we have included a restructuring cost of around EUR 1.5 million related to FTEs reductions in the business. So therefore, you see this level. But this will, of course, pan out into an improved performance going beyond 2021 as per our expectations. So if -- to close this presentation and over to the questions on the key messages of 2020. It's a record-high order intake. And NKT is very well positioned within the global trend of the green transformation. So that's a very positive note on events of 2020. We are improving our operational EBITDA, more than tripling NKT performance with contributions, strong contributions from all business lines. We are landing in the upper end of our guidance on EBITDA. And looking to Photonics, a challenging 2020 but good to see the recovery in Q3 and Q4. And finally also that we changed our whole capital structure, and we are now have a stronger balance sheet and a much lower debt level with positive free cash flow contribution. So by that, we will leave it over to questions and answers.

[Michael Nass Nielsen, Head of Investor Relations]

Operator, we are ready to take question and answers, please.

[Operator]

[Operator Instructions] Your first comes from the line of Artem Tokarenko of Credit Suisse.

[Artem Tokarenko, Research Analyst]

My first question is around Solutions margin in Q4. Can you maybe elaborate a little bit about the drivers of the weak margin and maybe confirm whether you've seen any cost overruns on projects or maybe project delivery delays? And also, if the margin weakness is driven by just delivery of -- the marginalization of weaker-margin projects from the backlog, how much of a headwind or for how long that headwind could continue in 2021?

[Alexander Kara, President & CEO]

I mean we executed the backlog and the revenue of the recognition is, of course, depends on the project which we execute just in this quarter. So we expect that the margin obviously will improve going forward in -- to 2020 because otherwise, we could therefore, we guided also on the values of EUR 80 million to EUR 110 million for next year. So it's a little bit weaker, if you want to say so, the quarter, but -- in Q4 but overall, better than the year before. So there, we have no -- I mean, no major delays in projects. In some, we have but not substantial. So -- yes.

[Artem Tokarenko, Research Analyst]

Okay. And just to confirm, you haven't had any cost overruns in Q4?

[Alexander Kara, President & CEO]

No, we have -- I mean, we have -- we don't comment on specific projects. Obviously, you have some projects where you improve the results and some where you may have some challenges, but no overruns or no major issues to report.

[Artem Tokarenko, Research Analyst]

Okay. And my second question is also on Solutions margin. Could you maybe give us some color on how much better are margins in the backlog for 2021? And also thinking about your key outlook for Cables of EUR 80 million to EUR 110 million, could you maybe confirm whether, with current backlog, you have the lower end of that guidance already secured?

[Alexander Kara, President & CEO]

I mean with the orders which we are taking in and with a better demand and supply base, the margin situation improves also. And -- but we have still some project with a weaker margin in the backlog, which we are phasing out. So we expect that this improves now in 2021.

[Artem Tokarenko, Research Analyst]

Okay. But I guess in terms of the group outlook -- EUR 80 million to -- the Cables outlook, could you confirm that the lower end of that outlook is already secured in your backlog?

[Alexander Kara, President & CEO]

Yes. I mean, as we said, we were quite successful last year with EUR 2.3 billion. This year, we expect the market of more than EUR 3 billion. And we are active in all segments, interconnectors, offshore wind and oil and gas, and we expect to win our share of the orders which are out. So the timing of this large project can, of course, vary, but we expect to win some orders, and we also can take some orders, particular to improve the mix in the factory on the three-core AC cable side.

[Artem Tokarenko, Research Analyst]

Fine. Okay. But I guess just to elaborate a bit more on your EBITDA outlook for 2021, what are the major sort of swing factors determining whether you will end up in the lower or the high end of your outlook?

[Alexander Kara, President & CEO]

Yes, on the higher end, we need to execute the orders which we have in the backlog flawless, without any execution issues. And so we -- what we need also to secure one or the other order, as just mentioned, particular on the three-core AC side to have a better mix in the factory. This will contribute towards the higher end. And then on Application side, we have improved from '19 to '20 from around EUR 0 million EBITDA to EUR 14.5 million. We plan to continue this journey to further improve the results on the Applications side. This higher factory output, more efficiency, cost consciousness and be more selective on orders. So this we need to continue. And then on the Service & Accessories side, well we need to get some offshore repairs in 2021 and continue also our performance on the Accessories side. So if that all ends up, then we will move towards the higher end and if not materialized, then it will be rather on the lower-end side.

[Artem Tokarenko, Research Analyst]

Okay. Understood. And my last question is about your outlook for the market of EUR 3 billion in high-voltage segment. I guess could you maybe talk a little bit about the phasing of those projects? Are there any bigger projects for you to win in Q1 or Q2 or the phasing will be more H2-weighted this year? And also secondly, what are your underlying assumptions for interconnectors within that EUR 3 billion market estimate? And maybe you could name any particular projects you include in that estimate?

[Alexander Kara, President & CEO]

I mean if you look at this year, there is -- in U.K., we see a divide with -- we're talking 9 to 12 gigawatts. So this will happen towards the end of the year. Potentially, it could be even flipping to next year. That is a big event. Then we have several interconnector, 3 interconnectors and here, it's difficult to predict really from the timing point of view, how they materialize because there are so many aspects which are relevant. And those projects are well-known. I can also mention and it's NeuConnect, SuedLink and NorthConnect. These are the 3. So that's exactly what is the timing and will one or the other even potentially move into the next year is difficult to say.

[Operator]

Your next question today comes from the line of Claus Almer of Nordea.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

I will also have a few questions. The first will also go to the Cable division. What about the pipeline outside Europe? Should we expect 1 or 2 or maybe even more projects outside Europe to be announced? That will be the first question.

[Alexander Kara, President & CEO]

I mean there's projects outside of Europe, in North America, offshore wind and interconnectors. And we also tender on those projects. And there's also projects in Asia, which we are also active. So again, the same applies like for Europe, the timing can vary on when they will exactly happen on all these projects.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

And do you need to make more performance bonds or those securities when you are active outside Europe? Or is that just a normal project for NKT?

[Alexander Kara, President & CEO]

That's normal projects where you have your performance bond, your different bonds. There's nothing specific where you have a higher bonding requirements in projects outside of Europe.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Okay. And then as to pricing, in past calls, Alexander, you have mentioned a, let's just call it, a positive pricing trend. Is that still the case? Or maybe you can put some more color to how the pricing environment is at the moment?

[Alexander Kara, President & CEO]

Yes. I can say, overall, the utilization has increased in the cable industry, which is very positive for the whole industry. And we were have a good success rate last year, so we can be more selective. And I guess also industry, the higher utilization logically will result in more discipline on the pricing side. So I would confirm it, yes.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

That sounds good. And then a question regarding Photonics. Basil, in giving the guidance for 2021, even looking at the high end of the range on the EBITDA level, it is not that much higher in actual terms, at least, than what we achieved in Q4 2020. So maybe you could put some more color to why you are not more optimistic about, yes, the 2021, even in the high end of the guidance.

[Basil Garabet, Chief Executive Officer and President]

Okay. Yes. Thanks, Claus. The -- I think if you look at '20 -- if you look at Q4, Q4 is always our largest quarter. A lot of what we ship goes out in Q4. Actually, a lot of what we ship goes out in December of Q4. And hence, you saw the 16.4% EBITDA number. That is really, if you look at our past performance at the top end of every year, so Q4 is always a good year. So you can't really compare Q4 with the full year going forward. '21 for us is a year that we are readjusting the company. We are looking at our core business. There are some one-offs that Line mentioned in her talk that will affect us in '21. What we're doing really is building the company for the type of growth and the type of EBITDA levels that we had before. So going into '22, that's what we're building the top company for in '21. So you should see, again, the sort of double-digit growth in top line and organic growth, and you should see EBITDA levels starting to hit the 20-plus percent that we've always been forecasting in the past. You should see COVID has basically hit us and knocked us sideways. And we're going back on the path by essentially concentrating on our core business and readjusting the company to do so.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

Right. So the reason why I mentioned Q4 is -- I know you're always doing a great job in Q4. Hopefully, you will do the same in Q4 2021, but it seems like the first 3 quarters of the year will not show a lot of profitability, if any. Is that the way we should think about 2021?

[Basil Garabet, Chief Executive Officer and President]

No. I think what we're saying is we should be cautiously optimistic. So the business looks much better. And we are doing better, and we're doing better in Q1. In fact, we're doing better in Q1 than we have in any other Q1 before. We still have COVID, and that's the wild card. That's the joker in the deck. I'll be a very brave man, Claus, if I would still be highly optimistic considering that we should have 2 more quarters at least or maybe 3 more quarters of COVID. So I think that's the cautious optimism you see, but there's also conservatism there to move forward. I don't like to overshoot on this one.

[Claus Almer Nielsen, Senior Analyst of Capital Goods and IT]

That's a fair point. About the order intake, I think it was in the report that the growth in the order intake between Q3 and Q4 has been quite substantial. Can you put some numbers or more color to how the backlog looks going into 2021? That will be my last question.

[Basil Garabet, Chief Executive Officer and President]

We don't report on that in exact numbers because it varies so much, and we are in so many different industries. And what gets pushed out, gets pulled in. And it will be just a mixed bag. And you'll have some quarters very high and some quarters very low. So it's almost nonsensical to report on a quarterly level. All I can say is getting into the year, the business looks good. Our backlog looks good. It looks much better than the start of many years, but we're being cautiously optimistic.

[Operator]

Your next question today comes from the line of Kristian Johansen of Danske Bank.

[Kristian Tornøe Johansen, Senior Analyst]

So 2 questions for me. First one is on Application and whether you can elaborate a bit on this minus 8% organic growth in Q4 and how it does relate to the pandemic and also how it differentiates between low voltage and medium voltage.

[Alexander Kara, President & CEO]

Thanks, again, for the question. Kristian, first of all, on COVID-19 side, we are fine on the manufacturing side and also on the supply chain. But we have seen really that some countries have a weaker demand, like Sweden, U.K., also building wires to a certain extent. So it's difficult to predict how this will continue here or not continue in Q1. We -- despite the lower revenues and the negative organic growth, we still could improve our earnings. So with our actions to improve the profitability, we are on track. And so considering that if the demands come back, we assume that we will continue on the improvements. So we are not concerned on that side. But this is a part which is difficult to influence. Of course, we try to compensate with these other companies, with other customers, but that was limited possible in Q4.

[Kristian Tornøe Johansen, Senior Analyst]

I understand. So just to clarify, so it's primarily the low-voltage segment and the construction demand which is creating the headwind in Q4? Is that how we should understand it?

[Alexander Kara, President & CEO]

Yes, you can say. So it's building wires is one of the area. And then we see also little bit the impact here that is not connected with COVID-19 on the utility side in Sweden with -- that's more a regulatory thing, that's a lower demand. So -- and that is -- we will see how that will continue or will not continue. It's too early to say. We are now just in February, mid-February. And I can also not comment on Q1.

[Kristian Tornøe Johansen, Senior Analyst]

Okay. Understood. Then second question is on NKT Photonics and the cost ramp-up and the cost adjustment. So in Q4, you say that you are increasing costs to prepare for future growth. And now you're also talking about some redundancy costs. So specifically, can you maybe just elaborate a bit on how you balance this current challenge on your profitability versus what sounds like a firm expectation that once the world normalizes, the growth potential is there and you still need to ramp up?

[Basil Garabet, Chief Executive Officer and President]

Okay. We did not increase costs in Q4. The cost had been there in the complete year. So we did not adjust the cost increasing in Q4. That we -- being a growth company in high tech, we have looked forward and increased our cost base with the expectation -- this is prior to the pandemic, that we will have higher growth. And hence, when the pandemic hit, it knocked us sideways or slightly backwards but we had already built in the cost that we had. And so that affected us in the year. And obviously, to adjust and to adjust to the change in business and to the new realities out there and the different parts that our markets take, remember, we're in a number of different markets. So each one is going at a different pace. To adjust to that and to adjust to the new reality and to keep the increase, we have to sort of reorganize the company, and that is being done in Q1 going forward. And we see -- we should see -- obviously, there are one-off costs that will hit us, and we should see, again, going back to positive growth, both on EBITDA and top line going forward. I mean that's our, like I said, our cautious optimism looking forward.

[Kristian Tornøe Johansen, Senior Analyst]

And where exactly is it that you are taking costs out? Can you be a bit more specific on that?

[Basil Garabet, Chief Executive Officer and President]

It's everything. We are looking at working capital. We're looking at headcount costs. We're looking at readjustment and the reorganization, looking at the priorities that change. So it's not one -- there's many, many levers in here. As I said before, we operate in completely different markets. So some markets are not moving at all, some are moving backwards. And some are actually doing exceedingly well. So we are concentrating and reconcentrating our efforts, both commercial, engineering, manufacturing, on the core business and on where we're doing well. So it's not -- there wasn't one lever. There are many, many levers in there that we're using.

[Operator]

[Operator Instructions] Your next question comes from the line of Akash Gupta of JPMorgan.

[Akash Gupta, Research Analyst]

I have a few questions as well, and I'll ask one at a time. My first question is about Solutions business. So if you look at 2020 performance, then, I would say that quarterly performance has been a bit volatile. And the question I have for you is that when we look at 2021, can you comment on phasing of your backlog that how you expect H1 versus H2 on both revenues and margin?

[Alexander Kara, President & CEO]

So 2021, I mean, the quarter is, I would say, we have, in particular in the first half, there are still MI projects, Attica-Crete and Viking in it. So that should positively impact the quarter. And overall, it really depends on which project we have in the backlog and which we executed and what we will see. But we don't guide here now on Q1. So it's clear that Solutions needs to pick up in order that we deliver in the guidance which we gave EUR 80 million to EUR 110 million.

[Akash Gupta, Research Analyst]

And my second question is on this offshore wind growth. So if you look at the forecast from third party, a significant growth will be coming outside of Europe, and we see some of your competitors are either working on or contemplating plan to have a manufacturing footprint outside of Europe. So maybe on a 5-year view, do you have any such project lined up? And then the question is also like how much of this growth outside of Europe can you address with your footprint -- existing footprint in Europe?

[Alexander Kara, President & CEO]

So at the moment, we are on the implementation phase of the expansion of the Karlskrona and Cologne factory. And with this, we are good cover, and we can also serve out of Europe, North American market. And also, we can also deliver towards Asia. So at the moment, we implement investment which is ongoing.

[Akash Gupta, Research Analyst]

And next question is on portfolio. I mean if I look at Applications business and size of that business compared to some of your other competitors and listed ones where, basically, they use Application-equivalent business to generate cash flow and use that cash flow to fund growth in projects and clearly, compared to these players, your Application business is quite subscale and you have a very big project business. So if you look at current portfolio, and yes, what's your thought on Application business like how core is that business? And let's say, if you get a good price, then could we see you might exit that business and become a more of a pure-play into Solutions?

[Alexander Kara, President & CEO]

No, we are not considering to exit the Application business. We are working here on improvements also on the cash side, to generate positive cash flow from Applications. We have some good improvement from '19 to '20 from EUR 0 million to EUR 14.5 million EBITDA. So -- and we plan to continue this in 2021. So there's no plan to divest here anything.

[Akash Gupta, Research Analyst]

And my final question is on medium-term EBITDA margin target of 10% to 14%. And can you tell us a rough estimate of depreciation and amortization that would be in the medium term so we can back out operating margin implied by this EBITDA margin target?

[Line Andrea Fandrup, Executive VP & CFO]

I think how you can look at this, Akash, would be that we say that before we started the big expansion, we were at an investment of around EUR 50 million to EUR 60 million. And now we are expanding in this coming year, and then we will come back to normal level being a bigger company also. And then I think you probably have some metrics to get that into a depreciation for the medium term that you can use.

[Operator]

Your next question today comes from the line of Casper Blom of ABG.

[Casper Blom, Lead Analyst]

My first question goes to the working capital. You mentioned, Line, that right now, it's probably at an unusually low level. Could you give any kind of flavor to how you expect it to develop during 2021? Obviously, depending on order inflow and prepayments, but still if you could give any kind of help to what the setback we might see on the working capital side in 2021. Second question, following up a little bit on the previous one regarding CapEx. If you could just confirm that things are going as expected with the capacity expansions within the Cable business. And also, if you could give any guidance to us, the EUR 150 million of expenses, how much have been consumed. How much do you expect to use more in '21? And if any, how much in 2022? And then my third question to Basil. There was a deal in your space here earlier this year with Lumentum acquiring Coherent. Obviously, Coherent being a somewhat larger company than Photonics, but are there any readthrough that you sort of find relevant for Photonics in such a deal? Also when it comes to valuation here? Or is it something else than what you're involved in?

[Line Andrea Fandrup, Executive VP & CFO]

Okay. So 3 good questions there. Thank you. So starting off with the capital position. I think you should take a note of, of course, that we say this is unusually low. And it is due to a lot of wins. And the wins also in 2021 will be the major thing making the working capital development right. So I think you know by now that we are preferred supplier for 1 project. But besides that, everything depends. We are engaged in many centers across. And this eventually the wins and the terms or conditions of those projects will define that. So I think not being -- not giving any numbers, so you should look at a bit of the pattern of our history rise and then expectations to the wins. I think that's the closest I get to that for the Solutions business, which is the major part. Then on the CapEx part, you're fully right, and we are expanding now the 2 factories in Cologne and in Sweden. And it's a big project ongoing. We saw by in Q1 here that our CapEx level went up. And I think we really communicated to do that the major part of the investment is in 2021. So definitely, here, you will see a high level. And some of it also will pan into 2022 before we finish the Swedish factory. We're doing well on the expansions. Absolutely. And I think that's actually how you should think about the investment level of 2021 and 2022, we finalize. Yes. I think then over to Basil on the last question.

[Basil Garabet, Chief Executive Officer and President]

Okay. I think it was somewhat of an open question. So Lumentum hasn't bought Coherent. Lumentum put an offer in Coherent, which then got -- then Coherent got a better offer from MKS and then they got a third even-better offer from II-VI. So what that tells you really is that the market is pretty hot in M&A in our industry. The multiples are very high. The companies that have announced results similar to what we have, have seen a return to favorable growth, especially in the second half of the year. And we see a positive growth in the industry in general in '21. I would say a lot of them are saying the same as we did, that there's cautious optimism going forward. Obviously, there -- from the multiples that you see from those photonics companies, there is a lot of excitement in the market and there is a lot of movement in M&A. And I think you'll see much more going forward. I'm not sure what you were trying to get as an answer from me on parts of the deal.

[Casper Blom, Lead Analyst]

No. Well, I was basically looking to hear your view if you think that there is anything fundamentally different from Coherent to your business that would suggest another type of multiple or if you would basically find that, that would also be a relevant multiple to look at if Photonics were to be taken over by someone else.

[Basil Garabet, Chief Executive Officer and President]

Okay. Yes, now I understand. Well, we're very similar, what we do, to Coherent. It's -- even though it's a much, much larger company than us and has been going since 1966. So it's quite long in the tooth, I'd say. But we're very similar to Coherent. We're very similar to the photonics side of MKS. We're very similar to what II-VI do and probably more similar to companies like nLIGHT. So if you follow, nLIGHT's sort of results and multiples, we are in that type of league. So I don't see us any different. As for multiples, we have not looked at that. This is -- it's -- we're part of NKT. So it's -- we don't look at the separate multiples for Photonics as such.

[Casper Blom, Lead Analyst]

That's absolutely fair. Can you give any update to how things are progressing with your previous comments about potentially divesting a noncore part of the business?

[Basil Garabet, Chief Executive Officer and President]

Yes, that's a small noncore part of our business, and we are still looking at the opportunity of divesting that.

[Casper Blom, Lead Analyst]

But is there also appetite in the current market environment?

[Basil Garabet, Chief Executive Officer and President]

Is there appetite on that noncore business?

[Casper Blom, Lead Analyst]

Yes, from bidders.

[Basil Garabet, Chief Executive Officer and President]

Yes, absolutely. Absolutely, yes. Yes. Yes. It's not exactly in totally in the photonics market as such. It's a side market. And as I said, one of the things that we do concentrate on going forward is our core business. And our core business is the business that, if you have to sort of look at it from a different point of view, is the most successful. It's also the part that is the -- basically elicits the most excitement from the market. This is really noncore to what we're doing at the moment.

[Operator]

We do have one more question on the line. This comes from the line of Artem Tokarenko of Credit Suisse again.

[Artem Tokarenko, Research Analyst]

My first one is around the low-margin projects and solutions. You mentioned that execution of those will continue in 2021. Could you maybe let us know when you expect to finalize all those projects?

[Alexander Kara, President & CEO]

So I'm not sure when I talked about low margin. I said we had some, in the past projects, which are below average, and we are phasing them out. And as we get more projects in with higher margin, this has a positive impact. So I'm afraid I will not be more specific.

[Artem Tokarenko, Research Analyst]

My second question is around NKT Victoria. I think your competitors have just recently delivered new ships. I guess a question to you, how do you see the competitive position of NKT Victoria in the current market? And what's the likelihood that you'll need to make new investments into maybe your boats in the space over the next 2 to 3 years?

[Alexander Kara, President & CEO]

No. NKT Victoria is still a very new vessel and a state-of-the-art vessel with a lot of features and which is absolutely suitable to deliver current projects. And so we are not planning any further investments on the vessel side. Also, you need to consider that if you would need more capacity, there's also third-party efforts on the market, which we could take in as -- on a subcontract basis for specific jobs. So there's several installers which have cable-laying vessels, and we could reach out to them in case the Victoria would be occupied with certain jobs. So there's no need for, with the current size and even with the size on the expansion, to go beyond and invest in a new vessel.

[Artem Tokarenko, Research Analyst]

Right. Understood. And my last question is about industrial markets in Photonics. Could you maybe talk a little bit about which specific areas of industrial markets are causing the weakness at the moment? And also considering that, as you mentioned, some of your peers have already started seeing relatively sharp recovery in Q4. What's your typical lag to maybe industrial production and those peers?

[Basil Garabet, Chief Executive Officer and President]

Yes. So our industrial market is a basket of a number of different markets. The part of our industrial market that is associated with the semiconductor industry is, for instance, doing very well for us. And it's also doing very well with our competitors and peers. So that market is advancing. The -- anything to do with quantum, whether it's quantum communications, quantum computing, cryptography, banking, et cetera, is doing very well. There's a lot of investment from different governments, especially China and the U.S. and now, to a lesser extent, in Europe in quantum technology. So anything to do with that is doing very well. The parts that are a little bit lagging behind is our R&D business, our research and development with a number of different areas, mainly because of COVID, mainly because most institutions are still closed. Most universities are closed. Most research establishments are still closed or working at a very reduced capacity. So a lot of market, which is also highly profitable for us, is slow and will continue being slow in Q1 and Q2 of this year because of COVID. So that's the lag. And I think if you sit and analyze our peers and competitors, you see that market there doing a little bit worse. The industrial manufacturing market, it really depends on geography. So our market in China was doing, for instance, really badly at the beginning of 2020. It's recovered nicely in the second half of 2020, and it looks like it's recovering really well into '21. So China is going back to more positive growth. It's always been positive, but even more positive growth going forward. However, the industrial markets, anything to do with manufacturing or automotive manufacturing, different kinds of manufacturing in Europe and in the U.S. are lagging behind. And that again is very much pandemic-driven. It's very much driven by the economy and what will happen after the pandemic. So there is not one single market that we're in industrial that is just pointing in one way. It's a basket.

[Operator]

Thank you. It appears there are no further questions at this time. Please continue.

[Alexander Kara, President & CEO]

So if there is no further question, then I would like to thank you once more for participating in the call and for your good questions. I always appreciate that. Wish you all a good day, and talk to you soon.

[Operator]

That does conclude our conference for today. Thank you all for participating. You may now disconnect.