Kitron ASA
OSE:KIT
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Kitron ASA
Earnings Call Analysis
Summary
Q1-2024
Kitron's first quarter of 2024 saw an 8.8% reduction in sales compared to the previous year, totaling close to EUR 174 million. The firm's EBIT dropped to EUR 10.6 million from EUR 17.3 million, affected by a EUR 5 million restructuring charge. Order backlog decreased by 24% year-over-year to EUR 445 million. The company revised its 2024 guidance with anticipated revenues between EUR 660 million to EUR 710 million and EBIT between EUR 53 million to EUR 60 million. Despite challenges, defense and aerospace sectors show growth, while restructuring efforts aim to save EUR 12 million annually and preserve profitability.
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Good morning, and welcome to Kitron's First Quarter Report for 2024. I'm Peter Nilsson, CEO of the Kitron Group. And joining me, as usual, is Ms. Cathrin Nylander, the CFO. Following today's brief presentation, we'll have a Q&A. [Operator Instructions] Thanks. Next slide, please, Slide 2.
Let's review the current start by reviewing the current market sentiment. The Nordic and U.S. operations showed positive momentum, mainly driven by increased demand in defense and aerospace sectors, along with some strong demand from subsectors of electrification and industry. We expect some 20% growth for Norway, Sweden and the U.S. However, the broader market environment is challenging, leading us to revise our full year outlook down some 12%.
We project slower-than-anticipated market recovery along with extended destocking activities by our customers. After a remarkable growth in 2023, CEE, Central Eastern Europe, shows declines of some 13% in Q1. Our current projection is that CEE operations are facing 30% decrease for 2024, widely affected by lower demand in greentech.
In China, after tremendous growth last year, demand has decreased 50%, impacted by weaker industrial demand in China and increased regionalization. The trend with localization and regionalization persists. We're seeing increased customer requirements for regional or local manufacturing and supply chains.
Technological sovereignty and security and supply are driving local manufacturing for defense, aerospace, security and other products. China and India are establishing tough rules to sell products in local markets, driving supply chains to adapt.
Security and supply and sustainability are reshaping the supply chains in Europe, pushing regional manufacturing to Central Eastern Europe for Europe. In the U.S., products affected by the Inflation Reduction Act are creating trade barriers and enabling opportunities for U.S. manufacturing.
Trade tariffs are pushing production out of China to non-China solutions for North America. Our view may vary compared to other reports, but we've had extensive discussions with customers regarding forecast indicating a recovery in the second half of 2024. Few customers are currently prepared to back up forecasts and projections with firm orders, committing to a second half growth.
Customers that are showing growth in the first quarter continued to build on that in later quarters. This leads us to take a conservative stance in our outlook for the back half of the year, allowing us to focus on efficiency improvements and synergies of full integration of the 2022 acquisition of BB Electronics.
Based on this new view of 2024, let's look at how we meet this challenge. Next slide, Slide 3, please. So how will we maintain profitability in a dynamic market? Well, after the growth in '22 and '23 with significant investments in people, plants and equipment and the current softer outlook for '24, we're strategically aligning our capacity with the prevailing demand to bolster future efficiency and competitiveness.
These initiatives include substantial steps towards creating a unified One Kitron through adopting a common business platform for ERP, MES and QMS; streamlining organizational structures with a stronger focus on local and regional performance; aligning our capacity with demand to conform to the regional best practice.
Overall, these actions will lead to a workforce reduction of more than 20% from last year's peak, reducing our annual costs some EUR 12 million versus previous estimates. The first quarter saw nearly EUR 5 million in restructuring charges. We expect the full impact of these changes to materialize from mid-second quarter onwards.
Of course, we remain agile and fully prepared to seize on the new opportunities should the market conditions improve sooner than expected. While our commitment to strategic targets remain steadfast, we recognize that short-term fluctuations around our 9% margin target may occur as we adapt our strategies based on these evolving market conditions.
Next slide, Slide 4, please. So let's review some of the market sector trends for the first quarter. Connectivity, a decrease of 18%, really reflecting a market saturation and economic downturns affecting spending on new technologies. There is growth on products supporting infrastructure investments, and we expect to see strength returning to this sector in early 2025.
Electrification. The sector shows a decline of 11%. Within this sector, there is strong growth on network grid infrastructure, a growth of 160% compared to a strong last year on those products. Other parts of the sector, including many greentech products, suffer from reduced customer spending on big ticket items. We project very low sales on many of these products. Last year showed a growth of 62%, driven to an extent by supply chain concerns.
Industry. Revenue is down some 15%, indicating a cooling off of industrial activity with reduced capital expenditures. A combination of economic slowdown, weak customer demand, overstock and supply chains lead to an extended recovery time. There are a few strong points, for example, infrastructure emulators supporting advanced chip design growing close to 100% this year -- for the first quarter, but also this year.
Medical devices show a decline of 21%. Several products are due for a generational shift leading to a lower demand in 2024 and growth in '25.
For defense/aerospace, the sector shows a 31% growth in Q1. Of course, this increase is connected to the heightened defense spending amidst the global security concerns, regional conflicts, increased government investment in defense and aerospace capabilities. Our top 3 customers grew 36% and the largest growing at 58%.
Next slide, Slide 5, please. And let's take a look at some of the future outlook on the demand side. Our R06 and our R12 outlook. This is what customers are telling us by forecasting in the 6-month window or the 12-month window. It sheds some light on customer anticipated demand for the next 6 to 12 months. But we need to remember that we've cleared out what we suspect is over forecasting.
The R06 indicates a more uncertain outlook for the third quarter and the R12 reflects shorter demand horizons from customers and thus poor data for Q4 and Q1. I expect -- I'll be back to discuss the outlook and some key takeaways in a little bit. But for now, Cathrin will review some details behind the numbers, starting with the Q1 performance highlights. So next slide, Slide 6, please.
Thanks, Peter. And on to some of the highlights for Q1 2024. In the first quarter of 2024, we saw our streak of growth break with a reduction in sales of 8.8% compared to 2023 Q1 coming in at close to EUR 174 million.
Our EBIT was EUR 10.6 million, down from EUR 17.3 million last year. However, adjusted for the restructuring charge of close to EUR 5 million, our EBIT was EUR 15.4 million and the EBIT margin 8.9%.
ROOC, EPS and other indicators are also affected by the charge and capital efficiency ratios in general by the reduced volume. Our leverage is improved whilst the overall demand outlook remains weak despite hotspots in Nordics and the U.S.
That said, let's move on to the order backlog. Next slide, please, Slide 7. The current order backlog stands at EUR 445 million, which is a 24% decrease from previous year's EUR 586 million. On a quarter-over-quarter basis, the order backlog is reduced by 10%. Strength is in the defense and aerospace sector connected to the heightened defense spending. However, we expect the defense order backlog to be a bit lumpy as larger orders come in periodically.
Other sectors, we see shorter customer horizon on order placement, reflecting current market sentiment, reduction in lead times and continued destocking of customer inventory.
Next slide, please, Slide 8. The business sectors. So we see a slowdown in CEE and Asia and continued growth in Nordics and North America. The restructuring charge is presented in group and elim row. Compared to last year, the Nordics and North America showed growth of 15%, profits increased with 10% and profit margins at 8.8%.
CEE volumes are reduced with 12% and profits reduced with 26%, profit margin at 8.6% (sic) [ 8.5% ]. Asia volumes and profits are halved with last year profit margins at 8.5% (sic) [ 8.6% ] in the quarter. And in total, for the group, a revenue reduction of about 8.8% and a profit reduction of 12%, excluding restructuring charges. EBIT margin at 6.1% for the quarter and adjusted for the charges is 8.8%.
As for the employees in total, we are now at 2,771, which is a reduction of 13% compared to last year and down from 3,001 at the end of the year or last quarter. Of the 418 compared to last year, we have a reduction in Nordic -- or an increase in Nordics and North America of 11%. CEE has a reduction of 13% and Asia so far a reduction of 40% approximately. Not all workforce reduction are implemented in full at the end of the quarter and a further reduction of up to 200 employees is expected before the end of Q2. However, all the charges are taken already in Q1.
Next slide, please, Slide 9. Cash flow, net working capital. Operating cash flow ended at EUR 8.5 million versus EUR 10.5 million (sic) [ EUR 10.6 million ] last year. And cash flow ended at 56% of EBITDA. And just a technical comment, the factoring debt is now reclassified to financing and all comparative numbers have changed.
Net working capital increased with some EUR 3 million in the quarter and EUR 13 million compared to last year. The asset side of the net working capital has decreased with 5% compared to last quarter, but the payables are down with 11% creating the increase of the net working capital in net. So our debt to suppliers are increasing -- or decreasing quicker than what the assets are.
Next slide, please, Slide 10. So net working capital as a percentage of sales was then up 28%, which is up from 24% last year and -- last quarter, net working capital increases is, as explained, in addition to the volume decline causes this increase in the net working capital as a percentage of sales.
ROOC is at 15.4% were adjusted with a charge, 22.8%, which is still down from last year and last quarter. CCC is at 113, which is up from 90 last year at the same time. And this is caused by a combination of increased inventory and reduction in payables.
Net interest-bearing debt is at 1.5 and at the same level as last year's 1.5 -- or last quarter's 1.5. The net debt ended at EUR 123 million, a reduction of 13% from last year and about EUR 6 million lower than last quarter. The debt level, however, is about the same over 3 periods, but it's the cash that makes up the difference.
Finance net cost is about EUR 1.9 million, which is an increase from EUR 1 million same time last year. Net interest cost is at EUR 2.3 million, which is an increase of EUR 0.6 million from last year. Positive argue at 0.7 at the same level as last year.
So our interest rate continued to be around 6%, and our estimated annualized interest cost for 2024 is EUR 10 million which is about 20% about the actual cost for '23.
And the dividend proposed is NOK 0.75 compared to NOK 0.50 last year. The dividend policy is to pay out between 20% and 60% of net income. And the 2024 General meeting is later today.
Earnings per share, EUR 0.3, halving last year's outcome in the same quarter. Adjusting for the restructuring charge, the EPS is EUR 0.051 and a reduction of 24%. Tax rates for the quarter ended at 24%, and I expect that to go down 1 percentage point or 2 going forward.
And with that, I say next slide, please. And over to you, Peter.
Thank you, Cathrin. Well, in the face of a challenging market, Kitron is preserving its profitability with an underlying profitability of close to our strategic target. Our outlook for 2024 has been revised with an expected decline of about 12% from previous year, attributed to the ongoing reductions in customer orders forecast cancellations, supply chain destocking and a weaker-than-expected business cycle.
Our revised outlook for the full year, we anticipate revenues to be between EUR 660 million and EUR 710 million with an operating profit or EBIT of between EUR 53 million and EUR 60 million. This includes EUR 5 million in restructuring costs incurred in the first quarter.
Let's move on to some key takeaways. So next slide, Slide 12, please. Looking at Q1 revenue and the market sector development, we see continued growth and strength in defense and a few products in electrification and industry. Our outlook for 2024 has been revised with the expected decline of 12% compared to previous year.
Our sites in Sweden, Norway and the U.S. show a solid growth of 20% for 2024. The CEE region is expecting a decrease of 30% and China is expecting a decrease of 50%. Activities are ongoing amounting to EUR 12 million of savings to preserve profitability and competitiveness.
The first quarter results include EUR 5 million in restructuring charges directly related to reductions in force. Full impact of these changes to materialize from mid-second quarter and onwards. Our focus is now on executing all activities identified to promote synergies. In addition, there are several important projects for onboarding new customers during the second half of 2024.
We also know that in these weaker business cycles, many customers are looking for deeper engagement to save cost and capital, and we will pursue these opportunities if they make sense. We also stand ready to quickly ramp up volumes when market conditions improve. Our commitment to our strategic target is in line with operating margins of 9% and that remains.
So finally, next slide, moving on to our Q&A.
[Operator Instructions] Thanks. So Cathrin, let's take a look here at some of the questions that have come in. First question is from [ Emily ]. Can you say something about which segments are driving the decline in R06 and R12 as well as the weakness in order intake? Any comment there, Cathrin?
Well, I'd say the decline in what we have seen since last quarter is basically we have not seen much movement in the R06 and R12 in total. It's basically what's -- which is about the same decline as we had last year. What we can see when we look at the order backlog, for instance, compared to last quarter, is that we have basically a strengthening in connectivity.
We have a reduction in order backlog because they have not placed many new orders, they come very lumpy as we try to say. So there is actually a strengthening in the connectivity sector, and then we have a reduction in all the other sectors in the order backlog compared to last quarter, basically, and it's down 10%. So it varies between 9% to 15% within the sectors in the quarter, basically.
And I think it's -- basically, this is what we see. And the main reason, again, Peter, why we have adjusted the outlook is that we were foreseeing and expecting an increase of the orders for the late -- latter part of the year, which we so far have not seen, right?
Yes. I'm just looking at the charts, and I see that both the R06 and R12 are very stable on defense/aerospace, so nothing really happening there. In other words, the R06, R12 reflects what we talked about in the sector outlook.
[ Emily ], again. From implied numbers, it seems like the weakness in order intake in the quarter is driven by a decline in electrification and defense/aerospace. And now we're talking about the order backlog.
Yes. So the backlog, yes, is reduced. It's not necessarily a decline. We just used it up for a month or 2. We expect it to be refilled, but it will take a month or 2 before that happens.
Yes, especially on the defense, as you said, we see a lot of lumpiness. We know orders are on their way and for some really strong refill of the order backlog in defense. That is all that has come in so far.
Yes, let's wait a little bit, if there is coming more. But in general, Peter, you mentioned that there was a decline in electrification in NOKs, but it's also, compared to last year, a strong decline in industry as well, both of them have but same value in monies, which you've also talked about.
So amidst all of this change, there are customers that are sort of flattish, some of are bigger Swedish industrial customers and you see that when you look at their quarterly reports also, they are basically low single-digit drop or low single-digit growth and we see that also with them. So we're not really commenting on that. We're commenting on the big things that are driving either growth or driving decline.
That said then, it's been important for us now when we see this outlook for the end of the year to make sure that we can deliver on the profitability margins that we have in our strategy. So -- and hence, the restructuring program that you were talking about, Peter, which is mainly sort of implemented, but not everything yet.
In every sort of market scenario, you do your best if you take the opportunity to implement change, and that's what we're doing here. We're not relying on unsecured customer forecast that it will have -- somehow magically the second half of the year is going to turn around. We're taking the opportunity we see now to do some change within the company. And that will bring us strength as we move forward. And that's much more important than trying to hold on to an outlook which is high risk.
But we have -- that said then, as you also mentioned, is if the orders should come a little bit quicker than you anticipate in your...
Yes, we have the factories, we have we have the equipment and machines. We're also using some of this extra capacity that we have now in Central Eastern Europe, primarily in Poland to move a lot of product around. So there are transfers going on out of Norway. Even though we've hired another 100 people in Norway and we still don't have enough capacity free to take on all of the defense orders immediately. So that's also being pursued now during the first half of the year.
There's a new question coming in here from [ Gregorsh ], right? What is the main problem with backlog reduction?
I think after a pretty strong growth after 2020 and onwards for 3 years and then followed by the component crisis, right, driving many customers to -- and the whole supply chains to buy a lot of inventory and put a lot of stock, expecting sales to continue with business as usual.
Now we saw the slowdown coming even in the third, fourth quarter of last year. Remember, we grew 30% in first half of last year and only 20% for the full year, indicating a much slower growth in Q4 compared to the growth we had in Q1, Q2 and that was driven by the business cycle.
Interest rates, the economy, people spending, all of that driving -- showing a weaker business cycle, and that continues now compounded by a lot of stock in the supply chain drives down the order backlog very much more rapidly than it should. The finished goods need to be depleted throughout the distribution chains and with customers.
And -- but it's being depleted at a lower rate because of the weaker business cycle than expected 6 months ago. And it's not -- and on top of that, lead times have reduced in the market, components are more readily available. So customers are unwilling to commit to a longer outlook because they already have stock. They have to consume what they have as they should before ordering more product. So it's the economy.
[ Emily ] says, you previously said that R12 is a good representation of 9 to 10 months of sales, but now it seems higher compared to your guidance. The R12 is EUR 654 million. Yes, so if you say that that's only 9 or 10 months then...
But our guidance is in the realm of EUR 660 million to EUR 710 million, so there is some room to play there.
And we see customers putting orders into our -- into first quarter in '25.
I think the significant reductions we've seen in the past 3 months really. We thought it was done when we exited Q4. We thought the reductions for this year were done, but it was like an avalanche that came throughout the quarter that really made us determined towards the end of the quarter, towards the mid of the quarter, let's -- we need to take this opportunity and redo some things in the company and get that done. And of course, if there's -- we see this growing again, we'll very quickly jump on that.
Well, it seems like we have a slowdown in incoming questions, and I think we'll wrap things up from our end.
Overall, I think the team is fired up. The team is working really hard on implementing the activities we need to do. And I'm really optimistic about the opportunities we see in the market for both new business and growing the business we have. So, I mean, this is a short-term adjustment, let's say, which gives us breathing room that we didn't have for 2 years on actually looking at improving our efficiency. The past 2 years has just been deliver, deliver, deliver, catching up with the pent-up demand. So -- and we need that breathing room in business to do some changes now and again, and that's a good thing for us.
Thank you all for listening, and we'll be back in the second quarter with some updated information. And until then, I'll see several of you in other meetings over the next couple of weeks. Thanks.