Kitron ASA

OSE:KIT

Earnings Call Transcript 2022-Q1

[Lars Nilsson, executive]

Welcome to a review of Kitron's First Quarter of 2021. I'm Peter Nilsson, CEO of Kitron. And with me today, as usual, the CFO, Cathrin Nylander.

I'd like to remind you that we have -- we will conclude with a Q&A session, and I encourage you to post questions during the presentation. Now let's take a look at an overview of the first quarter.

Next slide please, Slide 2. So some of the highlights of the quarter. Revenue in the quarter was at a record high, reaching over NOK 1.4 billion with a growth of over 50% compared to previous years. Order levels are very strong. Demand measured as rolling 12 forward-looking grew to NOK 6.6 billion from NOK 3.3 billion the year before. The EBIT, however, was under pressure from rapid cost increases as well as an uneven incoming flow of raw material and spot buys of semiconductors. Margins were just over 1% lower than expected.

Next slide please, Slide 3. Let's talk about market and operations. As I said, demand continues to be very high, reaching all-time high levels. The top 10 customers R12 demand is NOK 3 billion with a growth rate of 50% year-on-year. Actually, when we look at the top 30 customers, which is NOK 5.2 billion, the growth rate there is also 50%. The highest growth is driven by demand for industrial communication, sensor technology, sustainable energy, heating, ventilation solutions for residential and professional markets. New product introduction and ramp-ups on business won in 2020 through 2023 will generate over NOK 500 million in sales in the next 12 months. Next year, a few of these customers will even be on the top 10 list. These products are primarily within EV charging, advanced battery management systems or sustainable energy, heating and ventilation solutions.

Availability of material is key to higher growth. This year has not become any easier compared to the last 6 months. Shortages continue on semiconductors and other critical parts, with demand surpassing capacity. COVID lockdown in China is affecting supply chains and transportation. And the war in Ukraine may have some longer-term effects. As a solution, customers are encouraged to redesign products in line with material availability.

The strong customer demand for 2022 and 2023, combined with the constraints in material availability, have increased inventories. Delivery plans are now adjusted and in line with expected component availability. Inventory management will remain our key focus area for 2022. To ensure profitability, price target profitability, price reviews are being implemented to adjust for increase the prices on material, transportation, energy and other inflation-driving factors.

Next slide please, Slide 5 -- Slide 4, sorry, revenues. So I've spoken about the strong demand and a very positive outlook. Let's take a look at the first quarter revenues and where we've been able to deliver regarding supply chain constraints. We have a strong underlying growth within Connectivity as new customers have been ramped, 55% growth. This market sector is known for shorter life cycles of products and one or more new design releases per year, hence, delivering a higher capability and higher availability from the supply chain. All other sectors are stable and show little variance compared to 2021. This is not due to a lack of demand but a lack of available material. Our indications are that approximately NOK 350 million or 25% of customer [ account ] is unfulfilled.

Now let's move on to the next slide, please, and that is demand and order backlog, Slide 5. To give a more complete outlook over the next 12 months, we've decided to share with you not only our order backlog containing all order in the first 4 months of forecast but also what we call the R12 demand, containing all planned demand with regards to component supply and customer requests for the next 12 months. As lead times are extended in the market, it's more relevant to look at the R12 to understand the trends for the immediate future. And as you can see, the R12 is NOK 6.6 billion with a like-for-like growth of 50%.

So let's move on to our -- now let's move on to Cathrin, thank you, with the next slide, please, which is Slide #6 -- 5, 6.

[Cathrin Nylander, executive]

Six. Thanks, Peter.

[Lars Nilsson, executive]

You're asking me to do too much.

[Cathrin Nylander, executive]

Okay. Thank you, Peter. I will now present the results. Business entities. As we now have included BB, it was relevant to adapt the business entities. Nordics include Kitron Norway and Sweden and Denmark from BB. CEE includes Kitron Lithuania and Poland and Czech from BB. Rest of the world are Kitron China in Ningbo and BB in Suzhou, and Kitron U.S., including some smaller entities that we also have.

In all, we ended up at NOK 87.1 million and a 5.5 percentage margin.

The EBIT margin in the quarter is mainly affected by revenue delays and inefficiencies caused by component situation. But energy costs are also having a negative effect. Having said that, I have to comment that BB, our recent acquisition, has delivered revenue higher and profit slightly higher than planned. The EBIT margin, however, is slightly lower due to spot buy invoicing in the revenue. BB in total grew 87% in revenue and increased EBIT margin with 1.7 percentage points from the same period last year.

As for the Nordics, we see a growth of 35% including BB and an 8% growth for Kitron. Sweden has had growth and profitability according to our plans. Norway had a difficult material delivery situation and ended up with revenue and profitability slightly below last year's level due to less favorable mix, inefficiencies and increased energy costs.

For CEE, we see a growth of 20%, including BB and a 4% decline for Kitron. In Lithuania and Poland, we have a very high degree of electronics and are therefore more vulnerable to material delays. Lithuania came in with revenue according to plan and Poland slightly below.

Profitability in CEE is lower than last year. This is a result of ramp-up of the organization to manage large new product introductions as well as more unfavorable product mix both by invoicing and higher energy cost effects in general. For the rest of the world, we see growth of [ 173% ], including BB and a 23% growth for Kitron.

Profits are also up substantially from last year. U.S. delivered revenue in line with last year but with considerably better profitability. China has improved both profitability and revenue.

As for the employees, BB now has a little over 993 employees. Increase of employees over the last year mainly due to strong revenue growth and ramp-ups, particularly in China. Kitron basically at last year's level, but up from last -- up from year-end. FTEs are continuously adjusted according to our factory load. So this -- that they vary over the quarters is quite normal.

Slide 7, please. Cash flow and working capital. Firstly, the acquisition of BB was finalized very early in January. Net payment was NOK 878 million, partially financed by the share issue that we made in late December 2021 of NOK 340 million. And the remainder loans of which NOK 500 million is a term loan in euro of 5 years. Operating cash flow is a negative NOK 107 million compared to positive NOK 78 million last year. The increased capital binding in the quarter has come from both the Kitron and BB. So a decrease in factoring that negatively affects the operating cash flow in the quarter.

For the operational cash flow, the challenges in material availability continues to affect. A number of actions are continuously undrawn, such as balancing demand with material availabilities, customer prepayments and consigned inventory. Actions to stabilize working capital should have positive effect in the operating cash flow going forward.

So at the bottom of the slide, our working capital ended at NOK 1,709 million, an increase of 63% from last year. BB stands for NOK 445 million of the increase in the quarter just in total, but they came in with NOK 320 million in the opening balance. The buildup of working capital are due to delays in the material, but have now, to a larger extent, been compensated for both customer deposits and consigned material by customers and will continue to be so.

And as mentioned, in addition to the inventory carrying in our books, out of our books, we're carrying a couple of hundred million that we cannot see here. And we also have customer deposits for material.

Slide 8 please, ratios. The 3 main capital efficiency ratios: net working capital as a percentage of sales, return on operating capital and cash conversion cycle, all continued to show a decline compared to last year. However, we do see improvement from last quarter in both net working capital as a percentage of sales and CCC. BB as such has no material effect to these capital ratios.

Net interest-bearing debt or EBITDA increased to 3.5 from 1.7 in the second quarter last year and 1.8 last quarter. The net debt ended up NOK 1.6 billion, up from [ NOK 570 million ] last quarter. The development in the quarter is affected by the closing of the acquisition of BB and the negative operational cash flow.

Equity as a percentage varies due to share capital issue in the last quarter and increasing the acquisition of BB in this quarter, increasing the balance sheet. The percentage as such was also affected by the high working capital that we currently carry. And here it follows the same logic.

After that, I would like to say that covenants in Kitron are now based on loan-to-value and net interest bearing debt over EBITDA. Both are met in the current situation.

Finally, earnings per share declined compared to last year. But however, Kitron stand-alone adjusted for any BB-related transactions comparable to last year is actually lower. So they've had a positive effect on the earnings per share in the quarter.

And Slide 9, please. And now back to you, Peter.

[Lars Nilsson, executive]

Thank you, Cathrin. So let's talk about the outlook and move on to the next page, please, the outlook, Slide 10.

We're again reiterating, total demand is very strong. Order backlog at a record level. However, in the short term, supply shortages are affecting our ability to turn demand into revenues.

For 2022, we reiterate earlier outlook, and we expect revenues between NOK 5.2 billion and NOK 5.8 billion, including BB Electronics. The operating profit EBIT is expected to come in between NOK 330 million and NOK 430 million.

Growth for 2022 is driven by Connectivity and industry market sectors. Again, the constraints in material supply and the COVID lockdowns in China and the development of Russia's war in the Ukraine bring uncertainty to the outlook.

Let's look at some of the key takeaways. Next slide, please, Slide 11. Growth for 2022 is propelled by the acquisition of BB Electronics. The order backlog and 2022 demand outlook for '22 and '23 support strong continued growth. And in addition, new programs are being introduced that will sufficiently allow us to follow our strategic trajectory.

This concludes the presentation portion, and we're ready to move on to the Q&A. Next slide please, Slide 12. I've got to say, Cathrin, if you're with me, and I see that you are obviously. The crew, the teams and the sites have done a fantastic job this quarter. Some very, very difficult circumstances, balancing the constraints in the supply chain, uneven flow. You have one foot on the gas pedal and the other on the brake constantly and chasing, chasing, chasing a lot of very tired people out there. And I just want to give them a shout-out that I appreciate everything they do.

[Cathrin Nylander, executive]

Yes. [indiscernible]

[Lars Nilsson, executive]

So it doesn't look like we have any questions today. I think we'll maybe have to bring it up in the later meetings then.

[Cathrin Nylander, executive]

Let's see. Let's wait and see if something comes up due to the delay. But there's nothing currently.

[Lars Nilsson, executive]

Okay. I think we'll wrap it up, and we'll get back to everyone as we go into one-on-ones over the next few days.

[Cathrin Nylander, executive]

Very good.

[Lars Nilsson, executive]

Thanks, and see you in the next quarterly review in beginning of July.

[Cathrin Nylander, executive]

Thank you.