Kitron ASA

OSE:KIT

Earnings Call Transcript 2023-Q1

[Lars Nilsson, executive]

Good morning, everyone. Welcome to Kitron's First Quarter Report 2023. I'm Peter Nilsson, CEO of the Kitron Group. And as usual, with me today is CFO, Ms. Cathrin Nylander. Following today's brief presentation, we will have a Q&A. So please post any questions you may have to the Q&A section of the webcast. Thank you.

In our previous quarterly presentation, I was asked whether Q1 would be as strong as Q4. My answer then was Q1 will be strong or stronger. And I'm happy to report that the revenues in Q1 exceeded the previous quarter by close to 10%. So let's kick off of the review.

Next slide, please, Slide 2. I'm delighted to present our achievements for the first quarter of 2023. We had an excellent quarter with significant growth in many areas of the business. Our revenue for the quarter was close to EUR 191 million, an increase of 32.3% compared to the same period last year when that was EUR 144 million. Our EBIT was EUR 17.3 million, which represents an impressive increase of 119% from the EUR 7.9 million of last year. We've also seen an increase in our net margin, which has grown to 7% from 3.1% last year. Our cash flow has been strong this quarter with a cash flow of EUR 10.4 million, a significant improvement compared to the negative cash flow of EUR 10.9 million last year. Our return on operating capital has also increased to 26%, up from 11.5% last year. Our cash cycle conversion has also improved, reduced from 108 days to 90 days.

Furthermore, our net interest debt-to-EBITDA ratio has been reduced from 3.6 to 2.0 another strong improvement. Our order backlog increased from EUR 586 million, representing a growth of 34% -- increased to EUR 586 million, representing a growth of close to 35% compared to last year when it was EUR 435 million. Finally, our earnings per share for the quarter more than been tripled to NOK 0.74 compared to the NOK 0.22 in the first quarter last year. Overall, we've had an exceptional first quarter, and I'm proud of the hard work and the dedication our team has shown. We're committed to delivering value to our customers, and we'll continue to work hard to maintain our growth trajectory.

Speaking of growth, let's take a look at some trends. So Slide 3, please. Demand has been particularly strong in the Defense and Aerospace and Electrification sectors. It continues to remained robust in industrials. Supply chain constraints are improving but not yet back to normal with primarily large node semiconductors and custom parts continuing to be challenging. And even though revenue has been all-time high in the quarter, undelivered backlog remains at approximately EUR 50 million and improving some 16% the previous quarter. They say this equates to about 3 to 4 weeks of full production.

Broadly looking at the sector trends, product that supports energy efficiency, energy grids, EV charging will continue to grow over the next several quarters, driven by global security trends and concerns, the defense sector is continuing to strengthen. We see the products that incorporate automation, mobility, connectivity and some levels of automation are also positioned for further [good] demand increases. On a regional level, the Central European sites lead the way with a growth of over 60%. The Polish facility alone has delivered more than 160% of sales compared to last year and last quarter last year -- previous quarter -- the same quarter last year.

The Nordic sites follow with a growth of 30%, comparatively modest growth just under 10% in others as regionalization drives business back to Europe from China and local business has yet to recover fully.

Next slide, please. And it's the order backlog. The order backlog for our company has increased significantly compared to last year, rising from EUR 435 million to EUR 586 million this quarter. This is the positive development and a testament to the strength of our customers and our business. The growth in our order backlog has also been driven by our performance across different market sectors. Connectivity grew from EUR 75 million to EUR 81 million, while electrification grew from EUR 135 million to EUR 210 million. The industry sector also grew rising from EUR 115 million to EUR 135 million. Medical sector devices -- medical devices sector remains flat with orders remaining around EUR 31 million.

On the other hand, Defense & Aerospace grew from EUR 78 million to EUR 130 million, representing an impressive 66% increase. We've observed that component lead times are decreasing, particularly on connectivity products or product components where they are in the connectivity products. This is resulting in shorter order horizon from our customers. In contrast, electrification orders have continued to increase driven by products and technologies that target energy savings such as heat pumps, electrification of gas-powered tools and equipment and EV charging load balancing for local or long haul grids.

These products tend to have a higher degree of high-level assembly with many custom parts. Additionally, the industry sector continues to thrive on automation-related products and advanced tools for silicon ship design, verification and application testing. While the medical sector has remained flat, we'll continue to monitor this sector for any growth opportunities. Finally, we see strong defense and Defense and Aerospace, driven by to increase security concerns in Europe and the U.S. Overall, we're encouraged by the growth in our order backlog, and we're committed to maintaining our positive momentum in all market sectors.

Next slide, please. As a supplement to order backlog, we also consider the R12 demand, which is a 12-month forward-looking demand based on customer forecasts. I'm pleased to report that the R12 demand has risen to EUR 837 million from the EUR 647 million last year and EUR 802 million last quarter, reflecting a strong trend of growth for our business.

The R12 demand affirms the trends we're seeing in the order backlog with strong growth in market sectors such as electrification, defense and industry. All market sectors like connectivity and medical devices are somewhat softer as lead times and stock levels are adjusted. While the order backlog has a modest growth quarter-on-quarter of the 1.03 book-to-bill ratio. The R12 demand shows a book-to-bill ratio of 1.2.

So in summary, we're confident that our strong progress and growth will continue into 2023 and beyond. We'll continue to focus on securing capacity and materials to meet our customers' demands and grow our position in the industry. I'll be back to discuss the outlook and key takeaways in a little bit.

But for now, Cathrin will review some hardcore details behind the numbers. Next slide, Slide 6, please.

[Cathrin Nylander, executive]

Thank you, Peter. Euro as a presentation currency. The idea to change presentation currency at the euro is not a new one. It does come up as a topic with investors over the years and -- but also in our own discussions, especially after the acquisition we made last year, even further driving down the NOK part of the revenue of transactions. It is to eliminate the variations in the NOK specifically and to give greater transparency on the underlying growth. A few dates. So data is treated as a change in accounting policy according to the IAS 8.

And also, the indirect method shortly explained is that the sites still report in the local currencies, numbers are first consolidated into NOK and then changed into euro. With a direct method, we would have skipped the stock with the NOK. The result in consolidation would have been the same, but there were some valuations aspects on the assets that are different. So the presentation currency change will take out variations in translation differences in consolidation but not underlying currency risk as such, which is important to have in mind.

Since this is an accounting change numbers comparative numbers for the opening balance in 2022 and onwards are audited and currencies used in the table are shown below and the methods are for your information here so that you can look into it. And if you want to look at restated numbers, you will find them by quarter on kitron.com. And for your information is that we have recalculated the month by month and to get the correct numbers that we get, you have to do the consolidation on a month-by-month basis.

So next slide, please, Slide 7. On this slide, we're just briefly showing the comparative development between NOK and euro as presentation currencies over time. The top left table shows the revenue per year in NOK and in euro and the percentage growth for the same period. First, CAGR is slightly higher in NOK than in Europe, reflecting the NOK development over the time we've had in this period or over time. And looking at the growth in euro and NOK, it is evident that the NOK numbers are varying much more and that the variation is, of course, linked to the NOK development.

So the difference in growth is up to 10%, but it's also a possible difference in decline of 10%. Also exemplified to the right is a table showing translation differences, the consolidation for the first quarter. And it's very clear. You can see that the underlying growth is 36%, but presented in NOK, it's 47% and in EUR, it's 32% and the 32% is much closer to our underlying of 36%. So we are taking out some noise and making the numbers more transparent for us and for all the other users of the accounts, the main reason for the change.

So next slide, Slide 8, please. Revenues, on the revenues in the quarter. Peter made some comments on it. So overall growth in the sectors compared to last quarter is 39% and 32% compared to the same quarter last year. And we have a sector growth compared to last year, [bearing] between 8% to 63%, which is quite high. So I choose to comment on our developments compared to last quarter for this time. So in general, component availability is continuing to ease and the demand is strong. So Connectivity continued with a growth with between 5% to 10% and now the third largest sector.

Electrification industry, now the 2 distinctly largest sectors and continue to grow with 13% and 10%, respectively, from last quarter. Medical device is up 11% from last quarter and Defense and Aerospace grew 5% in this quarter. We will continue to see sector deviations between the quarters as component supply is still a bit uneven, but there is a clear growth compared to last year. So again, in summary, total growth of 32%.

Next slide, please, Slide 9. Business sectors. The revenues are discussed by Peter in depth, so I'll just follow shortly with some of the numbers. So the large growth in volumes creates large economy of scale in general and more efficient utilization of resources. It shows us how efficient we can be on higher utilization. And also, all the sites are profitable and at good margins, but I think there is still some room for improvement. So the Nordics, Norway, Sweden and Denmark, revenue grew 30% and the profit grew 92%.

EBIT margin is over 9.8%. CEE, Lithuania, Czech and Poland grew 60%, and profit grew 157%. EBIT margin is over 10% in this area. And the rest of the world, mainly our 2 facilities in China and the 1 in U.S., revenue grew slightly lower on 7.4% and profit improve up 84%. U.S. no longer loss-making and has shown improved stable results for all 3 months in the first quarter. So EBIT margin at 9.1% and the same as last quarter and a strong improvement from last year's 5.5% when material allocation was still holding us back. So profit at EUR 17.4 million compared to last quarter's EUR 15.9 million followed by the revenue increase of 9%. As for the employees now approximately 3,200, strong growth on direct workers and CEE due to the volume ramp-up and up from the [22,800] last quarter.

Next slide, please, Slide 10. Cash flow and working capital. The cash flow ended at a positive EUR 10.4 million compared to a negative EUR 10.9 million in the same period last year. And the net working capital is stable or exactly the same basically from Q4 in spite of the continued growth of 9%, and we're happy that we're trying -- we can stop the moment on that one. But other items brings the cash flow down a bit, but still positive due to the profits in the quarter. So a positive EUR 10 million in cash flow. Cash flow, net interest-bearing debt continued to be our attention to garner interest expenses and hence, net income and earnings per share.

Next slide, please, Slide 11. The positive trend in the key ratios continue. So net working capital was 23.7%, trending downwards and as previously said, our target is to be below 20%. And now we finally made sort of a big step down towards that. ROOC at 26% is above the strategic levels of 20% to 25% and where we want to be or higher. And the strong ROOC is, of course, driven by the profitability in the quarter since operating capital is stabilized. CCC at 90, down from 100 last quarter and 108 same quarter last year. So we're finally seeing some traction here, too, and consistently a higher output or improving the ratios, but we are still some distance away from our targets, I have to say. Net interest bearing debt over EBITDA decreased from EUR 2.5 million last quarter to 2% this quarter.

And net debt ended at EUR 140.7 million, down from EUR 154.8 million last quarter. So it's a result of both improved profitability and reduced debt. Excluding IFRS, we're at [ 1.9 ] and which is good. Equity as a percentage, 25.6% same level as last quarter and earnings per share in EUR 0.07 compared to EUR 0.02 last quarter. So we will present the earnings per share in euros and in NOK going forward to make sure that we have a direct connection between the share price and our earnings. And finally, proposed dividend of NOK 0.50 per share. Today [indiscernible] and if decided it will be paid out in or about 18th of May.

And that was all I had to say. So next slide, and over to you, Peter.

[Lars Nilsson, executive]

Thank you, Cathrin. Thank you. Overall, we are very happy and challenged by the strong customer demand. We do expect further improvements in EBIT and capital efficiency. And as a result of this, we update our outlook for 2023, further reflecting the strengthening of the underlying business as well as the change of presentation currency from NOK to euro. For 2023, Kitron now expects revenues between EUR 700 million and EUR 800 million and an operating profit or EBIT between EUR 60 million and EUR 75 million.

Let's move on to the key takeaways. So next slide, please, Slide 13. As the CEO of Kitron, I'm thrilled to see the growth in the last quarter. We've worked hard to improve our supply chain, and we're seeing the results of our efforts. Our strong margins in Q1 were the result of growing demand from our customers in sectors such as electrification, industry and defense. The positive trend to continue from -- is expected to continue from the first quarter into the second quarter. And we're committed to delivering value to our customers and excited about this year and the future of Kitron. Finally, we're pleased to propose a dividend of NOK 0.50 to our shareholders.

And with those words, next slide, please. I'll remind you that the Q&A will start shortly. So please post any questions you may have in the Q&A section of the webcast. Thanks.

[Lars Nilsson, executive]

Cathrin, back on right? While we wait for the questions to come in, let's discuss this switch and presentation currency. Why now? And what's driving this? You're on mute.

[Cathrin Nylander, executive]

Thank you. It's been clear now the last year. We started to internally just switch to euros to get a better idea on capacity increases needed, especially when we are talking about the growth of the group as such, not for site specifically, but when we say that we have customers growing and that they will be growing out of the capacity of a certain site over time. And then it was always a discussion. Is this sort of -- is it NOK driven? Or is it actually the underlying growth? So for us, it makes a lot of sense to do this internally. And I think it's the same externally. It will give us a greater transparency. In some ways, it's a little bit of less up and down, I would say, on the growth back and forth over the years.

We have received some questions, Peter, already.

[Lars Nilsson, executive]

Yes. Yes, we can move on and start to take them on. First question is from Christopher Haugland. Did you onboard any new customers of significance in the first quarter. Or did the growth primarily come from existing customers?

Well, first of all, I think the top 20 customers in Kitron, they represent about 90% -- or not -- sorry, about 60% of our sales. Am I correct, Cathrin?

[Cathrin Nylander, executive]

Yes.

[Lars Nilsson, executive]

Yes. So of those top 20 customers, 19 showed growth or strong growth. So a lot of the business is driven by existing customers. The remaining customer who didn't show strong growth was basically flat. On top of that, actually, in the first quarter, we are ramping in Poland, significant new business within electrification. So there's been a big -- that's why we grow Poland grows 160% year-over-year. I don't want to comment exactly on who those are, but they are within electrification, either grid solutions or EV charging and others also. So that -- I thought the significant. There's many other smaller customers that add up also bit of significance, it's within electrification.

And also from Christopher then, how much of our upgraded guidance can be explained by expanding gross margins following improved supply chains? Going to hand that over to you, Cathrin.

[Cathrin Nylander, executive]

This is a difficult question to answer any one. It's several questions actually, one, I would say. So the profitability increase is a lot about economies of scale and taking out the inefficiency we have had in stocks, et cetera, and [ratings]. I will say it's split when it comes to those two whatever is basically improved efficiency and what its large economies of scale. And then the top line is -- that's probably we're asking. It's only the margins, right? Yes, I would say that. It's half and half, I guess.

[Lars Nilsson, executive]

Do you want to move on Benjamin Billiard. Can you please comment on the M&A pipeline, please? Now that you've deleveraged and on and are on the front foot operationally.

Yes, well, yes. Well, we are looking -- I think every week, we have a couple of prospects we review. Some are more interesting than others. Nothing that's coming in firm yet. But we are looking, we're doing calculations, we're seeing how it affects. We want to find business, of course, that's accretive to Kitron and to the bottom line. So actively searching and -- but if we're looking at pure capacity expansions, we're also looking at expanding those internally itself.

[indiscernible] outlook and visibility for revenues, EBIT and margins in 2024.

Well, the rolling 12, that includes the first quarter of next year. So that's in there. And we show for most of the different business units, we show growth in Q1 next year versus this year. The full 2024 is not -- we don't have numbers probably for the fourth quarter yet, except for some sites. So if we look at the order backlog and the full year next year, for example, for Norway, looks very strong because of defense and aerospace orders.

[Cathrin Nylander, executive]

Yes. But it is a bit early to comment on the 2024 I would say.

[Lars Nilsson, executive]

Yes. Yes. I mean we don't have full numbers. So there's only partials for certain market sectors.

[Cathrin Nylander, executive]

On in the first quarter or Q2 this year.

[Lars Nilsson, executive]

Yes. [indiscernible], are you seeing any signs of destocking of inventory amongst your customers? If so, which segments, why now does this influence you, if at all?

We've seen, I don't know, maybe we have about 200 customers. The top 50 are account for somewhat above 90% of our sales. And within then probably 2, 3 -- I think 3 customers that I know that are not increasing, right, not growing the way they projected they were going to grow, but stable in demand. So there's nobody that's really pulling back beyond levels of 2022. So, so far, we're positive and upbeat and we're struggling with capacity everywhere.

[Cathrin Nylander, executive]

And we did see some adjustment that was last year basically.

[Lars Nilsson, executive]

Yes, it -- I mean it started early, say, in the third, fourth quarter last year and some of the customers pulling back.

[Cathrin Nylander, executive]

And again, some other customers grew more than they pull back.

[Lars Nilsson, executive]

I'm having no customers calling me and saying, "I want to pull back." I'm having customers call me and say, "I want more. Why aren't you delivering more?" So that's the main focus.

Okay. We'll give it another few seconds here and see. I think maybe people were a little bit overwhelmed. Okay. We are in a little bit of a delay here, 30 seconds or so.

[Cathrin Nylander, executive]

[indiscernible].

[Lars Nilsson, executive]

I don't see anything more coming in. We'll be holding meetings the rest of the day. And hopefully, I'll meet you in person some of our investment community.

Okay, guys. Thanks for this quarter. We'll see you next quarter. And hopefully, we'll have even better results then. Have a good weekend. Thanks.

[Cathrin Nylander, executive]

Thank you.