Kitron ASA

OSE:KIT

Earnings Call Transcript 2018-Q2

[Lars Peter Nilsson, CEO & President]

Welcome to Kitron's 2018 First Half and Second Quarter Result Presentation. I'm Peter Nilsson, CEO of Kitron. With me today is Cathrin Nylander, CFO.The second quarter highlights are we had the highest revenue ever in the second quarter. The underlying growth, however, only 2.6%. Our EBIT margin came in at 6.8%, slight reduction from last year. However, the EPS, the earnings per share, came in at NOK 0.20 per share, up from NOK 0.18 last year. The order backlog had a comparable growth of more than 12%.Looking at the first half of the year then. The first half of the year, again, shows the highest revenue ever. Underlying growth is close to 7%. The EBIT margin in line where our expectations are for the year, 6.4%. The EPS, earnings per share, for the first half of the year, I think, is a record high so far in Kitron, with NOK 0.34 per share. Again, order backlog just over 12%.So some of the additional highlights in the quarter. The first half of the year, I think, really increases our confidence in the 2018 full year outlook and our strategic ambitions for NOK 3 billion and 7% earnings by 2020. We're especially happy with the performance of our supply chain in the face of very challenging component allocations we see in the marketplace. We have a strong cooperation with our customers and all of our strategic partners, working diligently to solve issues and try to stay ahead of the game.Another very gratifying indicator is when we look at future prospects, what's in our pipeline and what have we delivered RFQs on and what our expectations when we look to the future? So our pipeline growth is 60% compared to last year, really, really strong improvement. On top of that, the oil and gas market sector shows some strong signs of recovery, and we expect significant improvements from 2019.So a little bit about this component allocation and shortage situation. It has its root cause in very strong growth in Internet of Things, in automotive industry. It has its root cause in consolidation on the suppliers' side, with reduction in manufacturing capacity on the component side, along with some hesitancy in investing in new capacity. So we started working on this early last year. We work very closely with our customers. We work very closely with our preferred partners and been able to, so far, stay ahead of the problems. However, we have seen some increase to our working capital, primarily bringing in inventory a little bit early, bringing in inventory in order to secure the second half of the year and possibly even the first half of next year.Cathrin?

[Cathrin Nylander, Chief Financial Officer]

Thanks, Peter. Over to the financial statements for the first half year and Q2 2018.First, I'd like to comment again on the new accounting standard that we implemented as of 1/1/2018, where we go for over time revenue recognition instead of point-in-time, meaning that we convert our work in process and our finished goods into income. And the effect for the Q2 is very, very small. It's NOK 2.4 million, a reduction in revenue of NOK 2.4 million compared to this IFRS adjustment and barely visible on the result. See Note 5 in the report for a complete overview.The revenue for Q2 was a sector growth in line with expectations. We have very strong growth in the industry, as you can see, but we only grew 2.8% compared to the same quarter last year, we're only up NOK 18 million. But we have a NOK 70 million growth in the industry, whereas the expected decline in the Defence/Aerospace in '18 has a reduction of NOK 74 million, taking out the full growth of the industry growth. So if you look on the growth between the years and the quarters, we have a growth of approximately 20%, excluding the Defence/Aerospace downturn, which we know is only temporary.If we do a comparable match for the first half year, we see a stronger growth. We have almost a 7% growth between the years. Again, industry shows very strong growth, NOK 33 million -- 33% and NOK 150 million. A reduction of 30% for the Defence/Aerospace, with NOK 109 million down. Again, looking at the other sectors, cumulative, excluding Defence/Aerospace, they have a growth of over 20%. So we are quite happy with that, and we are in line with our expectations and are guiding for the year with a 7% growth for the half year.

[Lars Peter Nilsson, CEO & President]

I think even on Medical devices, we are ahead of our expectations.

[Cathrin Nylander, Chief Financial Officer]

Yes, we are. That's right, Peter, thank you. When we look on the countries, we see consequences on the Defence downturn because it's basically something in Norway and in Sweden, and we see Norway has gone down 16% and Sweden 11%, NOK 34 million down and NOK 21 million down, respectively. Whereas in Lithuania and China, we see very strong growth. Lithuania is up 20% and the others up 24.3%. Others are China and the U.S., so China is growing more than 24%.

[Lars Peter Nilsson, CEO & President]

Right. China had an impressive growth of more than 50% in the second quarter.

[Cathrin Nylander, Chief Financial Officer]

Yes. It's very, very strong. And we see the same picture for the first half year, slightly less reduction though for the first half. So Norway down 15%, Sweden down 7%, Lithuania grown 23%, approximately, and the others around 16%. Again, Norway is down NOK 60 million between the years and Sweden NOK 26 million between the years. And Lithuania is up, actually, almost NOK 100 million compared to first half year last year and then the others show a growth of NOK 30 million.When we convert that into profits then, we had a profit of NOK 45 million. We had slightly higher last year in the same quarter, a very, very strong quarter last year, with 7% margin. We now reached 6.8%, again, in line with our own expectations and the strategic target for the year and for the full year.

[Lars Peter Nilsson, CEO & President]

I mean, it's an impressive result, considering the reduction in the defense and aerospace sector and how that affects 2 of our sites.

[Cathrin Nylander, Chief Financial Officer]

Yes.

[Lars Peter Nilsson, CEO & President]

And those 2 sites have been able to almost retain their margin on a margin percentage point of view. But obviously, it does affect the profit level.

[Cathrin Nylander, Chief Financial Officer]

It does. So then looking at the profits. As you can see, Lithuania and China are improving in profits, Sweden and Norway, going down. So Norway has a reduction in top line of NOK 34 million, and they're managing to keep profit margin over 5%, which we're happy about. And the same thing with Sweden, they're keeping about the same level as last year, although they're down about NOK 21 million in top line for the quarter compared to last year. And Lithuania is improving and so is, actually, China. However, U.S. is bringing the figure down for the quarter in total.So there's been a lot of work, both in Sweden and in Norway, to keep up with the revenue downturn compared to last year and to keep the margins higher.For the first half year then, where are we at? Norway currently now at NOK 16.7 million (sic) [ NOK 15.7 million ] compared to NOK 20 million last year, 4.7% in total. And last year, they were 5.1%, so slight reduction in the margins. So we are hoping them to cross the 5% accumulative shortly. And then Sweden, an improvement compared to last year, 4.5% profit margin compared to 3.6% and an improvement in the results as well in spite of reduction in revenue of NOK 26 million compared to last year. And Lithuania at healthy 9.5% accumulatively and NOK 49 million in profits. So they're clearly driving the profits in Kitron, in total Lithuania does, and it does also affect the tax percentage that we have since Lithuania is so strong, our tax percentage is quite low. It's below 20% in the quarter -- or in first half year too. And then the others, even though we have a very high growth in China, unfortunately, the U.S. situation because of a defense downturn is slightly reducing those figures.So we see seasonal effects, where -- which is a point here on the cash flow and the working capital. We have -- normally, we have a positive cash flow in Q2, which we have also this year, however, not as strong as last year. And basically, it has to do with an increase in inventory and increase in working capital on total level to cater for the material allocation situation in Kitron. We are choosing now to prioritize the deliveries to our customers and to secure more inventory than we normally would in this situation. So it's actually the first time when we're not improving our capital efficiency targets for a while, but it's a deliberate decision which we stand by.Financial gearing is at 1.3 compared to the same figure last year, also 1.3. We were at 0.3, I think, at the end of the year, but the rather high dividend that we yielded as well as the increase in capital binding gets the gearing to 1.3, a figure we are -- plan to have at this point in time. So net working capital, again, they're quite -- we want to be below 20% of revenue, but we're actually slightly above now at 21.6% compared to 20.6% last year. The cash conversion cycle is also slightly higher than last year as well as the ROOC is slightly lower, still on a healthy over 20%, on 21.3%. So the capital efficiency is temporary. It is -- by effect of our own choices, we want to keep more capital because -- to secure deliveries to our customers going forward due to the material allocation. So Peter?

[Lars Peter Nilsson, CEO & President]

Yes, so a little bit about the market development. I think in face of all of these, a component that challenges in allocations and shortages and the strong performance we've had with our current customer base has given us a strong reputation when it comes to winning new business. We see a lot of movement on the marketplace and more business heading our way. I think that's part of what we see in our very strong prospect list and RFQ base. But looking at the actual orders then placed with Kitron, the order backlog on a comparable level with last year was NOK 1,141 million, up from NOK 1,018 million, that's the growth of 12%. I think a little bit more stabilized on the defense side, so basically the same order backlog as we had last year. Slight increase in Medical of 6% to NOK 171 million. The growth in Industry continues around the 40% level. Energy and Telecom is down a bit, about 10% down, primarily driven by the Telecoms business. The Energy business is growing in this market sector, and we have -- it's one of the pillars in growth when we look at the manufacturing operations in Norway for the coming year. Offshore, well, up 142%. But again, the number is not [ tied ] here. The order backlog is NOK 29 million. We -- our expectations is that this continues into next year. We have one significant new win with an existing customer for a completely new product generation, a subsea product. We have another new customer coming online, August, September, I believe, and both of those will be up and running and generate, I think, a healthy market sector revenue for next year.So we stand by our outlook for 2018. We've said all along we expect to be between NOK 2.5 billion and NOK 2.7 billion. The EBIT margin is expected to be between 6.1% and 6.5%. Growth is primarily driven by the industry sector. We know we have a down year in Defence/Aerospace, and probably we've now passed the low point in that, right? We see increases coming into Q3 and Q4, coming some increases. The profitability is driven by cost-reduction activities and improved efficiency. We have a lot of good improvements, especially on the financial side and, I think, the EPS is a testament to the activities on the financial side.Very good. I wish you a happy summer, and welcome to join us in our Q3 reporting.