Kitron ASA

OSE:KIT

Earnings Call Transcript 2019-Q1

[Cathrin Nylander, CFO, Acting President & Acting CEO]

Good morning. Welcome to this Kitron First Quarter Results Presentation 2019. I'm Cathrin Nylander, and I'm CFO and acting CEO of Kitron.For some comments. Revenue was strong in the first quarter. We have received about -- or reached 25% revenue increase compared to last year. The growth this quarter was particularly strong in NOK in the Industry sector, but in percentage-wise, both had a very strong growth in the Offshore/Marine sector.We improved our profitability to 6.3%, which is in line with expectations. The overall demand trends are positive with an all-time high order backlog, increasing 43% year-on-year. And all sectors, except Energy/Telecom, increased the order backlog significantly. We also had a continued increase in working capital related to the material allocations we have talked about before, but also due to the fact that we have growth and the acquisition of the EMS division from API. And the current material-constrained environment is expected to ease going forward.Also happening in the quarter is that we completed the acquisition of API Technologies' EMS division and they are being consolidated into our figures as of February 15, so we have half a quarter of consolidation with those.So coming back. Revenue, order backlog and operating profit at record levels. The strong growth in revenue, 25% year-on-year. Of that, 20% is organic growth, i.e., not related to the acquisition. So we reached NOK 813 million for the quarter. Operating margin received a record profit of NOK 51.2 million in the quarter and a profit margin was 6.3% compared to 6% last year. That is also an increase of the EBIT of 32.2%.Earnings per share increased 40% to NOK 0.21 from NOK 0.15 last year same time. And again, all-time high order backlog increasing 43% compared to last year. Of that, 28% is organic growth. We also had a positive cash flow in the quarter of approximately NOK 25 million compared to a negative one, about the same size last year. And then networking capital continued to increase. I will come back to that.So important agreements in the first quarter. We received the communication orders early January -- or late January for new product within industrial communication. It is industrial IoT. And the annual revenues are NOK 25 million for the last -- for at least 5 years. And the production will take place at Kitron's plants in Lithuania and China.So coming into the financial statements for the first quarter. So we grew from 655 -- NOK 651 million to NOK 813 million. It's an increase of NOK 162 million and then 25%. Strong growth in industry in NOK, about NOK 56 million, amounting to 18.4%. And a very strong growth in Offshore/Marine ending at NOK 42 million compared to about NOK 8 million last year and a NOK 33 million and over -- almost 400% growth. So a very strong growth. And again, of that, 20% is organic growth, meaning that about NOK 34 million on the growth comes from the acquisition of the API EMS business. About NOK 30 million of those are Defence/Aerospace-related volumes and the rest is divided into Industry and Energy/Telecoms.Very positive. We have revenue growth in all countries. We have decided as of this year to split USA out of the Others. So therefore, we're showing that separately. We're coming back to the situation. Norway very positively grew 32% up to NOK 210 million and a growth of NOK 51 million from last year. Specifically, Offshore is bringing the growth and also Energy/Telecoms for this quarter. Sweden show a good growth of 11.5% ending at NOK 174 million for the quarter. Lithuania, above 12% and still a very large site at almost NOK 300 million in this quarter. U.S. now split out show a total of NOK 50 million. That is half a quarter revenue from the EMS business from API and a full quarter from then our Johnstown facility. Both show good revenue for this quarter, I would say. And at the end, Other, which is primarily China now, grew 23% -- or NOK 23 million to NOK 110 million and a 27% growth in total. So good growth all over, I would say.Quarterly EBIT. As mentioned, this is record EBIT of NOK 51.2 million approximately. We've had NOK 51 million in 2008, so we finally broke that record. And also to be noted in this type of presentation is that we normally don't have such a strong first quarter that we've had this year. Normally, we have a very good fourth quarter and a slightly weaker first quarter. But this time, we're actually beating the fourth quarter results both percentage margin and in NOK. So ending at 6.3% compared to 6% EBIT margin last year.So strong margin improvement in Norway and Sweden. So we see good profitability improvement both in Norway and in Sweden. However, in Norway, we would like to see higher profit margin than we reached and that we had some inefficiencies related to ramp-ups, and some of that is also product mix. However, good margin in Sweden, 6.4%. Lithuania, slightly weaker but still strong at 9% and a profit of NOK 27 million. When it comes to the U.S. units, you see that there is a net slight negative figure. The Windber facility or the new EMS business that we acquired, they actually show a positive profit for the quarter. However, we are still struggling with some ramp-ups in our unit in Johnstown. And China is showing very good profit and good profit margins and improvement from last year, where they have current issues in the first quarter. So overall, we would say a good improvement from last -- the same quarter last year.And then now to the part that is maybe not so positive as the rest. We did show a positive cash flow for the first quarter. Normally, that is not so the case, NOK 25.4 million positive compared to about NOK 20 million negative last year. The financing gearing is at 2.9 compared to 0.8 last year, and it's due to the fact that we are increasing our balance sheet quite clearly. If we exclude the IFRS adjustment, Kitron implemented IFRS 16 during this year and that means that we are increasing our fixed assets but also our interest-bearing debt due to this. If we adjust for that, our financial gearing was at 2.6.So working capital ending at NOK 927 million for the quarter, and I think it's 73% or similar from last year. And it's partly due to growth, of course. It's partly due to the acquisition of API. But it's also partly due to the fact that we still have inventory based on the allocations. We are still learning to ease that off. We are working on it and it will ease off during the year. However, we see little effect of that in the first quarter. And our relative numbers show that as well. So the net operating working capital as a percentage of revenue, it is 25%. We really want that to be below 20%. And the cash conversion cycle is at 91 compared to 67 this year -- last year same time. And the ROOC is at 7.2% (sic) [ 17.2% ] compared to 19.8%. So we will expect to see all these ratios improve and the working capital to stabilize and ease going forward.So how about the market development? Record order backlog, as we said, ending up at NOK 1,466 million on a comparable basis to Q1 2018. All IFRS adjustments are included in all periods, so it is comparable. So we grew 43%. A part of that, 28%, is organic, i.e. not related to the acquisition. About NOK 156 million is added to the order backlog from the EMS business in the U.S. We see strong growth all over, I would say, apart from Energy/Telecoms, which is about stable in an area where it has been. Particularly strong Offshore at NOK 107 million and up almost 500% compared to last year. Industry continue to be strong. And Medical also show very good progress. Defence is affected by the API. Apart from that, there's a slight reduction compared to last year same time. We will see Defence order backlog increasing during the year.Coming back to the outlook. We are reiterating our outlook that, with Kitron, we expect the revenue growth to be between -- or to be -- to grow to between NOK 2.9 million and NOK 3.2 million (sic) [ NOK 2.9 billion and NOK 3.2 billion ]. And the EBIT margin is expected to be between 6.2% and 6.6%. And the growth is primarily driven by the acquisition and the growth from customers in the Industry and Offshore/Marine sectors. And the profitability is driven by cost reduction activities and improved efficiency.So with that, I would like to say thank you and -- for listening and talk to you in the next quarter.