Kitron ASA

OSE:KIT

Earnings Call Transcript 2018-Q1

[Lars Peter Nilsson, CEO & President]

Good morning. Welcome to Kitron's 2018 First Quarter Results. I'm Peter Nilsson, CEO. With me today as usual...

[Cathrin Nylander, Chief Financial Officer]

Cathrin Nylander.

[Lars Peter Nilsson, CEO & President]

CFO. Good morning. The first quarter, Kitron had a fairly strong growth, just over 11%. Our top line revenue came in to -- at just over NOK 650 million, in line with our expectations. The EBIT margin was 6%, up from 5.3% last year. So a clear improvement in profitability, with almost NOK 39 million in EBIT. Our order backlog grew about 10%, also in line where we wanted to be. Seasonal cash flow affects the cash flow overall. So cash flow is negative NOK 19.5 million. However, working capital continues to be efficient with 19.8% return on operating capital and a cash cycle conversion of 67 days. So even with an 11% top line growth, we reduced our working capital with 5%. So in the quarter, we received 1 significant order, new order, new product. There was an industry order about EUR 17 million overall, estimated to start up later this year and run over a 4-year period. Production will take place in our site in Kaunas in Lithuania. Overall, we see a demand increase in all our regions we're in and really, in most market sectors. In the first quarter, we won more than 30 new programs, worth more than NOK 230 million on an annualized basis. This is compared to NOK 75 million in the first quarter last year. 70% of these programs come from existing customers, well in line with our strategy, and 30% came from new customers. Our service sales were just very close to 9% of revenue in the quarter, but as you know, our strategic target is to be above 10%. The solid growth and improved profitability in the first quarter indicate that we are on track for our 2018 outlook and our strategic ambitions. Growth was particularly strong within the industry market sector. We've spoken earlier during -- at the first -- during the annual -- the Q4 reporting, and also, commented upon it in our annual report, the availability of components of the strong demand in the market for electronic components. So 2017 was a challenging year for many companies in this EMS business, and the challenges are expected to continue into 2018 and last throughout this year, possibly even into next year. However, Kitron's timely and systematic approach combined with our preferred partner program has prevented serious supply disruptions. And in spite of these challenges, Kitron aims to reduce material cost in the same manner as achieved over the past 3 years.

[Cathrin Nylander, Chief Financial Officer]

Okay. And over to the financial statements for Q1 2018. I'd like to start out first with a comment on that we have implemented a new accounting standard, IFRS 15 as of January 1, 2018. The change is that we're going from over time revenue recognition from point in time, a technical financial term. It will have marginal effects in the P&L, as you can see in the P&L below here. It will have a reclassification effect within the net working capital in the balance sheet, and it has an order backlog adjustment. And to put it simply, what we are doing is that each quarter-end, we are recalculating all our WIP and finished goods into revenue or corresponding revenue, and we are taking a difference between those balance sheet values into income. So the effects that you can see here in -- on IFRS is basically then the change in the balance sheet effects. We expect it to be in this area, besides it could be slightly smaller, slightly bigger, maybe negative, even if we build on our inventory. See Note 5 for a complete overview in our quarterly report on the effects on the balance sheet and also, the order backlog. We will comment on this every quarter in 2018.Sector growth. In line with our expectations, we have to say -- Peter commented that the industry growth was particularly strong and it is, yes. We grew from NOK 585 million to NOK 651 million, NOK 60 million -- NOK 66 million up in the quarter, and it's very much due to Industry. Defense/Aerospace is down as we expected it to be compared to last year. Medical devices and Energy/Telecoms grew, but slightly below -- or slightly above 10%. And Offshore/Marine, very gladly up 31% or 32% almost; that is very small still. A comment also is that we have reclassified some customers from Industry into Energy/Telecoms as of first quarter '18, but we also restated historical figures to show the correct growth.When we look on the countries how they contributed on the growth, we see Lithuania continue to have a growth between 20% and 30% in total and very strong now. And clearly, the largest sites going forward. Also, China is growing. China is part of the other sector. They are growing well. What we see on the revenue side is both Norway, Sweden and the U.S. are affected on the top line on the changes in -- or the development in the Defense revenue, and -- or as we expected them to be. I think we'll say as expected many times during this presentation.Like to show this development how we are continuing to increase our margins. So 6% at the end of Q1 '18, we're at 5.3% and NOK 30.8 million, at the end of '16 -- or Q1 '16 and then NOK 20.5 million and 4.1% in '16. So we are growing well and stabilizing at the higher level, I would say. Another comment is, it is due to improvements in efficiency, of course, but also, that the component allocations have not had any significant impact on our results in Q1 this year, even though it requires substantial work to make it -- make that effect not happen.So profits. Lithuania continued to show a strong profit improvement, both in value and in margin. Sweden improved from last year from 1% to 3.3%, below our ambition, but in line with our expectations. And the U.S. and Norway are -- they're more affected by the Defense volume reduction in the quarter. A comment here, I will do on the tax. As you can see, Lithuania is very strong on profit in this quarter, which means that the tax percent is quite low, since they have 15% tax in Lithuania, which explains that one.Cash flow. It's very clear that Kitron has a seasonal balance sheet, at least for the first quarters compared to Q4, which affects the cash flow. So as mentioned, we are down compared to last year. Albeit, our cash flow is negative due to the fact that -- or very low net working capital at the end of Q4 normally, and we're building up to Q2. So as you can see, the cash flow is basically the same as last year, but we have positive cash flows the other quarter normally. Our low financial gearing continues. We are now at 0.8 compared to 1.3 in the same period last time. And here, I'll reiterate the working capital figures. I think net working capital stayed below 20%, which is our strategic target. So we continue to be under that 2 years before the strategic period ends. And the cash conversion cycle at 67 and roughly below -- slightly below 20 or around 20, I would say.So Peter?

[Lars Peter Nilsson, CEO & President]

So finally, in summarizing what we see for the future. The order backlog NOK 1,161 million versus NOK 1,059 million last year. That's a total growth of about 20 -- 10%. We see the reduction as expected, and as we spoke about earlier this year for Defense. Medical, also, slightly down in this outlook, in this order backlog. Very strong growth in industry, still even with taking out some of the volumes from industry and adding them into Energy/Telecom. The growth in Energy/Telecom driven a lot by the Energy sector. And then, as we said when we looked at the actual revenue for Q1 and Offshore growth, we see a continued growth in the order backlog also for Offshore. There is an IFRS adjustment here where the incoming and outgoing balances of WIP are reduced from order backlog. So the IFRS 15 backlog is NOK 1,025 million.So summarizing this into the outlook for the full year. We expect to be between NOK 2.5 billion and NOK 2.7 billion. Our margin is expected to be between 6.1% and 6.5%. Again, the growth is primarily driven by the industry sector and the energy sector for top line growth. Profitability continues to improve efficiency in the sites, in our different factories, and our different cost initiatives continue to provide increased profitability.That's all.

[Cathrin Nylander, Chief Financial Officer]

Yes.

[Lars Peter Nilsson, CEO & President]

Thank you. We'll see you next quarter.

[Cathrin Nylander, Chief Financial Officer]

Thank you.