Kitron ASA
OSE:KIT
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Kitron ASA
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Welcome to this Kitron First Half Year and Q2 Results 2019. I am Cathrin Nylander, acting CEO and CFO. And with me today, I am very glad to say, is our COO on medical leave, Peter Nilsson, that will join me today.
Happy to be here. Happy to be here. I'm looking forward to coming back full-time here at -- in September.
That's great. So why don't you start, Peter?
Thanks. Well, the first half of the year has been really, really busy. Strong -- continued strong growth in the top line in both first and second quarter. In the second quarter, we had 29% growth and almost 27% growth year-to-date. So really well above the levels we're comfortable with when it comes to efficiency. And I know Cathrin will get into that a little bit later. Both the U.S. acquisition and Norway and Lithuania contributed heavily to the strong revenue growth. The EBIT margin in the second quarter was 6.6% with continued margin improvements in Norway and in Sweden. The order backlog has stabilized at a high level. Or at the end of the second quarter, I think just over -- close to NOK 1.5 billion, even.
Close to yes.
With a strong growth of 44% compared to last year. Contributions, again, mostly from Offshore/Maritime and the Defense and Aerospace sectors. The working capital has been a challenge for us the past 6 to 9 months, really. It all started with the constraints in the raw material and supply and some decisions made or taken to early on secure material with long lead times in components and such. But we feel that the increase in working capital year-on-year is mostly related to higher revenue and somewhat still on raw material constraint situation. Even though we see the raw material constraints have started to ease, and when we look isolated at the end of the quarter, we see that the working capital efficiency is getting closer to where we want to be and we expect improvements as we move forward.
Yes. Thank you. Then a bit on the financial highlights for the second quarter then. So revenue ended at NOK 860 million which is as Peter said, up 29%. Of that, organic growth is 19% and the acquisition is then about 10% of the growth. And we see strong growth within Defense/Aerospace, Offshore and Industry. EBIT, NOK 56.4 million, all-time high. And an EBIT margin of 6.6%, slightly down from 6.8% last year in the same period...
And it's the second consecutive quarter with all-time high on EBIT. Are you going to deliver that in Q3 as well?
No -- or maybe. And no I don't think so. Q3 is normally our slightly slower quarter due to vacations in Europe. The EPS is on the same level as last year, NOK 0.20, which is also the same basically that we had in the first quarter. It was quite strong last year. But also in this year, we have some noncash agio effects in Q2 which affects the EPS value, and also the increased financial cost based on the acquisition and also the increased working capital level. Order backlog, as Peter said, up 44% compared to last year. Same level as Q1 basically, which is a similar development we had last year, Q1 and Q2 are similar. Partly, that is a seasonal thing. We see that for some large customers that have the season -- or the production is high during Q4 and Q1 and the order backlog go down in Q2 and then start going up again in the Industry sector. Operating cash flow, NOK 53 million, up 25.3 for the quarter, which is good -- 25.3% from last year, which is good. We now see when the working capital stabilizes, the operating cash flow is also improving. The net working capital, about NOK 933 million, basically the same level as Q1. And we see a difference in the working capital. It's less inventory but same amount of trade receivables but trade payables are lower as well as we are buying less [ for the painting ]. So same level on net working capital. This development in the working capital is what we expect to say, to be able to reduce it going forward. And we're over at the half year. And we're at NOK 1.7 billion almost, growth of 27%. Of that organic, 19%, again. And with same sectors growing. For the year-to-date figures. EBIT margin year-to-date is 6.4% which is the similar figure it was last year actually. However, the numbers are substantially higher. And the operating cash flow now at NOK 79 million approximately for year-to-date which was slightly above NOK 20 million last year same time. And the EPS accumulative is NOK 0.41 compared to NOK 0.35 last year same time. And of course the agio effects comes in, in Q2 and is also apparent year-to-date. So a bit on the orders, Peter.
Yes, yes. So in the second quarter, Kitron signed a major new contract with the Efore Group which is -- they -- it's primarily within power products. We'll be the -- one of -- the main manufacturing partner for the EMS production. The value approximately starting out as NOK 25 million in the first year of full production. And the production will take place in Kitron's plants in Lithuania. We had some Kongsberg orders in April. We received orders worth more than NOK 50 million under long-term manufacturing agreement with Kongsberg Defense & Aerospace. We expect the deliveries to start in the second half of 2019 and proceed into 2020. And the production will take place in Kitron's plant in Norway in Kilsund. Harris, also one of the partners in the F-35 program, awarded the next big block buy contract to Kitron. Fully Integrated Backplane Assembly for the F-35. The contract covers production through lots 12 through 14, which I'm not sure exactly how long that takes us in the timeline. But it's over next...
2 years.
2 years at least. Yes. But then the potential value in this contract is $18 million, so pretty significant for us. The Integrated Backplane Assembly is a very advanced and complex high-level assembly. We've built this product for some years now. And under these new higher volumes, the deliveries start in this year and continue, yes, through 2021.
Yes. So...
Yes, so it's been -- in summary, Cathrin, it's been a pretty darn busy first half of the year.
I have to say so. I mean, organic growth of almost 20%. That is above actually the ideal growth rate when it comes to efficiency considering the product mix and of customers that we have. And more rapid growth that we've had, that affects our margins in the short term as you know.
So what about the status on the new capacity we're bringing online?
Well, China, they have taken over the new facility where they've actually doubled the footprint and they have reorganized and started production into the new structure, which is...
I've seen the photos from that facility. Really, really nice inside.
It's really, really nice. And the construction of the facility in Poland is progressing according to plan. And where we will start then production in Q4 and we'll take over it late -- in Q3 as planned. It's...
And in the pictures, it looks pretty much done.
It does. But there is always some things to be done at the end which takes time. So -- but also in the U.S., there are actually changes. As of next week, we are moving to -- moving the activities at Windber, our newly acquired site, to a temporary site where the production will take place for the next month. And the fact what we're doing that time to refurbish, and that is a consequence of water damage from flooding, actually.
But as I understand, a lot of products have been built. And really, effects to deliveries and customers will be minimal.
Yes. I mean, we are quite quick at moving. We have done it several times before. But we expect to have some inefficiencies due to this move. But revenue targets for Windber and that site are withheld for Q2. But there is a change for sure.
I am happy to say though, when I look at the customer base and the prospects and the RFQs when it comes to the U.S. operations, primarily with Windber now sort of being the locomotive pulling along, there's a lot of interesting things going on, on new revenue also.
Definitely. Yes. And a lot of competent people within the site, I have to add. So they're working hard now to do the relocation as quickly as possible into a site very near the old one. And then a bit more on the financial statements for the first quarter and Q1 for 2019. So we talked about the strong revenue growth. So ended up NOK 860 million, it's up NOK 193 million. Of that again, organic growth, 19%. And we see on the value-wise, we see growth in Defense/Aerospace of NOK 63 million, about 53.5%. Offshore/Marine is growing NOK 67 million and a number of hundreds percent for that. And also Industry is strong on NOK 45 million. Medical and Energy/Telecoms below 10%. But still a very good growth in general for the quarter, I have to say. Equally strong, we might add, is the year-to-date. NOK 438 million increase compared to last year and now ended at NOK 1.7 billion almost. And the strongest grower there is Offshore/Marine that have grown NOK 100 million compared to last year and over 500%. And also Defense/Aerospace is up 30% and NOK 75 million. Industry up NOK 86 million and 15%. And then Medical devices at 13%. And Energy/Telecoms at 29%, 30%. So all in all first half year, very strong in many sectors, actually, and double-digit growth for all.
I think my expectations -- I got a question from one of the investors, I think last year some time, on Offshore/Marine. And speculating, what do you think the volumes are going to be for this year? And I think I said, "Somewhere between NOK 150 million and NOK 180 million." And NOK 100 million now in the first half of the year is pretty spot-on then.
Yes. It is. Good. So...
And I'm happy because you never know when you're starting up something like that either.
No, but it's been really strong, and a strong ramp up, too. And talking of each, when we look into where is the growth for the different countries? And you see Norway has grown to NOK 215 million and 25%. And now turning around from years where there actually have been a negative growth, we now see very strong growth. Also Sweden, close to 10% growth now ending at NOK 180 million. Lithuania, 22% growth, up to NOK 288 million. And then the U.S. sites, both of them added up, at NOK 80 million. And then China, which is basically the others when it comes to revenue, at NOK 97 million and a growth of approximately 18%. So really strong growth from most sites actually. So the growth is spread. And similar picture when we look at the first half year. Again, Norway growing 30% up to NOK 422 million. And Sweden then, too, with about 8% to NOK 354 million. Lithuania, slightly lower than some other years at 18.2% for the half year. And still the largest site at NOK 578 million now. I think it's hunted down by Norway soon. And the U.S., again, growth due to the acquisition as well but now at NOK 129 million. And then China at NOK 190 million for the half year. So very strong half year for many of the sites on the top line. And very stressful, I have to add. It's been a lot of hard work. And an interesting part of this is when we go to the another quarter with improved profits. So we have an all-time high. Last one was last quarter at NOK 51.2 million, now we're at NOK 56.4 million. So it's very strong in monetary and it's a relatively strong percentage as well of 6.6% when we're aiming for a 7% strategically. And it's an increase on the EBIT with 25% per year and the 6.6% versus the 6.8% that we had last year. So we see that the margins, due to the ramp ups that we are mentioning, they are slightly lower than we would normally have with the slower growth rate, I have to say. And when -- then we look at the percentages. Somehow, the different sites are developing in profitability. And we see a good change in the profitability in Norway, from 5.2% last year to 6% EBIT margin now from NOK 9.3 million to NOK 13.2 million. Happy about that, to be on the 6%. Then we have to add that for the first time ever in Norway, we reached 7% for -- in 1 month in the quarter. So congratulations, Norway. They're working on their targets. Sweden at 6.6%, up 1% from 5.6% in EBIT margin last year, also good improvement. Lithuania is quite stable and it has to do with large ramp ups on the revenue -- stable on the EBIT in value and slightly lower margin. But revenue is growing. It has to do with large ramp ups, so customers where we don't get the efficiency out immediately so the margins are slightly lower than we would have wanted them to be. U.S., where actually the Windber facility is showing good profits. However, we at [ inc ] are struggling slightly with the profitability.
Our older existing one [ mentioned ].
Yes, the older one. The volumes levels are slight -- too low to get a good profit currently, so we're working at that. And then good profitability change in China, from 10% to 12.5% EBIT margin and ending at NOK 14.6 million. So I think we are seeing good promise on many of the sites. Oops. And then for the first half year. So for the first half year, we still see profitability improvements in Norway and Sweden compared to last year. Norway ended at 5.3% compared to 4.7% in EBIT margin last year and growing. And Sweden at 6.5% compared to 4.5% same period last year. Again, Lithuania having a, value-wise, same type of profits as last year but the margins are lower. And U.S., the same comment for the full year as for Q2 basically. And then the others at around 11.2%, so it's quite good actually for China. Another part here then, the cash flow. For the working capital. So the cash flow from the operations, as I said, it's NOK 53.5 million and NOK 42.7 million in the quarter last year. And we see this is -- the improvement in the cash flow is a result of the stabilized working capital.
So where we are going to end up for the full year?
On cash flow?
That's what I want to know.
Yes, I'm not going to tell you. But we expect to see this positive development continue out through the year. Year-to-date cash flow at almost NOK 80 million compared to NOK 20 million last year. We see the financial gearing, it's at 2.9 currently. We still are quite heavy on the net interest-bearing debt due to working capital. And -- but it's also affected by the implementation of the IFRS 16 of the lease standard when we actually activate loans for financial -- or for lease agreements. And that's about NOK 90 million. So if you deduct that from the net interest-bearing debt, the net interest over EBITDA is 2.6, so slightly lower. Working capital, the ratios are actually worsening in the quarter compared to last quarter, and it has to do with the trade payables going down significantly. As a result, we are buying less raw materials. So the inventories are going down and the trade receivables are about the same level. So this is an effect that we have now and I think we are playing basically at the level on trade payables we should be. So any further reductions in our inventories will reduce the working capital. However, the ratios are not very happy, I might say so.
Now as we move into more of a just-in-time status on materials, again, then payables will sort of stabilize at the normal level. And until that just-in-time is reached, payables will suffer.
Yes, that is true. So the cash conversion is quite high, 101 compared to 75 last year. We will see cash conversion ratios improving going forward. And then the ROOC, return on operating capital, 16.7% compared to 21.3% last year. So it's still rather low. However, the -- we have to also consider the IFRS 16 on the ROOC to have a comparable figure. So that deducted, it was 17.7%, still lower than it should be. But you can see here also the working capital has stabilized now and it should start to go down. Talking a bit about working capital and trying to explain why we think it's going to be better. So we try to show this in 3 graphs. And the graph to the left is showing procurement lead time, the how long in advance we need to procure the material before we get it. And as you can see, as it was at the worst, it was double the lead time compared to what it normally has been. That means that we are less agile and we have less maneuverability to change things. Now these component lead times are going down to historical level or approaching. They're not exactly there yet, but we will see them gradually being there maybe end of Q3 or beginning of Q4. And that will make it easier for us to steer our working capital and inventory going forward. Another part of this which is important is that the components on allocation they have. The number of components that are on allocation is about half to what it was before. And it is now more on the longer-term products only. So it has much less effect on, for instance, Industry and other types of sectors. So good development there, and you can see that the numbers are going down quite rapidly, I would say. So -- and the third graph is our raw materials that is booked as inventory. As you know, we convert we -- unfinished goods into contract assets. So the raw materials, now that had its peak in Q1 and are starting to go down, and we will see them continue to go down. So an illustration on why we are sure that we will be able to reduce our working capital going forward. Okay? So Peter, market.
Very good. Very good. So we spoke about the almost NOK 1.5 billion, that actually NOK 1.453 billion, I think, on the order backlog. With very, very strong growth on the Defense side, right? 87 -- almost 88% growth on Defense at NOK 675 million. Also strong growth on Medical, and it's been a while since we saw that type of growth on Medical with 24%. Industry is slightly lower growth, right? We've been used to seeing 30%, 40% growth on the order backlog on Industry. But still a strong and stable number. Slight decline on Energy/Telecom. I think we've delivered out some of the major contracts on power-related products, energy-related products. And now we're waiting sort of the evaluation of those deliveries and the next big order on it. Of course, Offshore/Marine, the Offshore side, we're very, very happy with both with what we've delivered so far but also looking at the order backlog here of NOK 110 million. That tells us something about the short-term future because this is not over the next 3 years, this NOK 110 million. I think majority of it is probably this year and maybe into early Q1 next year.
I think it's this year.
Yes, so...
So it's good. So good order backlog. So we have looked into the rest of the year and decided to change the outlook for Kitron. So we have increased the top line guiding. We are now saying that we expect the revenue to grow to between NOK 3.2 billion to NOK 3.4 billion, actually. And previously it was at NOK 2.9 billion to NOK 3.2 billion. So we're actually above the previous range in growth on top line. And we see that earnings in value will be above previous outlook. However, the EBIT margin is expected to between 5.9% and 6% -- 6.3%. And we have a stronger growth than expected due to ramp up of customers, temporarily drive inefficiency in existing facilities. And we also have the startup of the Polish facility in Q3/Q4 which also drives the margins slightly down. And we expect these margin challenges to be solved as we move into 2020. So the values in numbers are actually slightly higher than what we have guided on before, but we see a different margin in the second half and that's why we have decided to alter it. But we have growth and it's primarily driven as before, on the EMS division from API and for the Defense/Aerospace which we didn't comment on before all that much and Offshore/Marine sectors in addition to Industry. So we see a very strong year in top line and...
We -- sometimes, these are decisions you have to make, take a short-term, slightly depreciated margin. But long-term, we have the volumes. And ideally, we'd like to ramp up in 16 or 18 weeks. But sometimes, the customer requirements are different and you just have to just put more resources into it and get the job done.
For sure. And we're working our hardest to make sure that we are hoping to deliver on the top end of this range. But we need to be realistic as well. So I say thank you for listening into this webcast. And I say thank you to you, Peter. And I look forward to having you back end of September.
Thank you. Thanks so much. And have a great summer, everyone.