Kitron ASA
OSE:KIT
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Kitron ASA
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Welcome to a review of Kitron's First Quarter 2021. I'm Peter Nilsson, CEO of Kitron. And with me today, as usual, is CFO, Cathrin Nylander. I'd like to remind you that we 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 quarter. Next slide, please. Kitron has had a strong second quarter. However, many of the second quarter numbers have been impacted by stronger NOK currency and more normalized sales compared to last year's exceptional COVID-driven demand. This quarter has been a fight to deliver as much as possible in regards to the challenges from component shortages and delayed supplier deliveries. We continue to see strong customer demand, driven by industrial IOT, electrification and automation and manufacturing. Next slide, please. We are growing in line with our long-term targets despite negative currency effects of about 10% this quarter and supply chain constraints impacting us with another 10%. Profits in the quarter are at the top end of our guidance. Cash flow is strong despite an inventory buildup. Our order backlog shows a solid growth. And although the component situation is challenging, we expect to see some relief during the fourth quarter and further improvements into the first half of 2022. The second dividend from Kitron this year will be paid out in October. Next slide, please. Now here is CFO, Cathrin Nylander, to walk us through the financial results. Catherin?
Thank you, Peter. I will now present the financial results. Next slide, please. Electrification and Industry continued to drive growth. The quarter ended at NOK 994 million. The reported growth is a negative 5%, but the currency adjusted growth is a strong 5%. So the currency is about negative 10%, I'll come back to that. Again, let's go from left to right and start with the connectivity. Connectivity has a growth of 21% and NOK 18.6 million compared to last year. A distinct increase from the fairly stable volumes it has shown during the previous quarters. Percentage wise, very good growth, but not in value as high as Electrification and Industry. Connectivity has 2 subsectors: communication, where M2M-IOT is being the largest application area and the subsector sensors which is mostly different types of metering. This quarter, sensors are strong and driving the growth within connectivity. And again, the sites that are strong within connectivity are Sweden, Lithuania and China. On to Electrification. Electrification grew 26% and NOK 57 million compared to last year. As for the growth in the larger subsector, power transmission commit to be the strong growth compared to last year and drives the growth within the Electrification sector this quarter. Power management, which has seasonality effects had 9% growth and battery technology in line with last year. China, Lithuania are strong within battery technology, Lithuania and Poland within battery management and Norway within power transmission. On to Industry. Industry grew 30% and NOK 59 million almost compared to last year. Subsector automation, which is the largest grow 24%. Oil and gas actually doubled and recycling is up 27%. And for transportation and infrastructure, they're in line with last year. Medical devices is down NOK 133 million to negative 45% and is around the level of previous 2 quarters. Last year, there were exceptional volumes within the life support sector in Q2 and Q3, and we were expecting this year to be on 2019's level. We are currently running about 10% above that. Defence/Aerospace, a reduction of 19% and NOK 48 million. We continue to have lower demand in the U.S. and Norway and in general, from the U.S. customers, we see COVID-19-related delays from the U.S. government. Sweden is, however, performing above last layers level in the sector. And as for the countries in the overview to the right, Norway showed growth of 22% compared to last year despite the lower defense volumes. And the growth is driven by transmission within the allocation sector in oil and gas within the industry. Sweden show around 10% growth in spite of a 45% reduction in the medical devices sector. However, they show strong positive growth in all other sectors. See, immediately, this seems a bit weak with only 3% growth. However, adjusting for currency development, you could add another 10% to that figure, which is about 13%, a growth they show in the reported currency. The revenue is also affected by some volume push-outs due to material supply difficulties. Others being China and U.S., a reduction of 45% compared to last year. For China, it's primarily the exceptional medical device volumes last year and for U.S. to reduce defense volumes. That said, let's talk some more about growth and currency. Next slide, please. As said, the revenue growth is negative 5% and an underlying growth of a positive 5%. Previously, underlying growth has been presented as exchange differences in consolidation. So that means that we recalculated the reported values for last year's exchange rates. However, there are also currency effects on the local level at most sites invoicing other currencies in addition to the local currencies. The invoice currencies are for Q2, USD stands for 32%, EUR 27%, SEK 17% and NOK 19% and CNY is normally about 5% and below. The split, of course, varies over time based on the site and their customer development. So the NOK weakened quite a lot during the first half year last year and has thereafter, strengthened again, which gives some substantial changes in the currency schedule operating. The graphs show the Norwegian bank average and closing rates per quarter. So Euro and RMBs (sic) [ NOK ] are down 8%, dollar 17%, SEK 4%. So it's quite a substantial change. And with the mix Kitron has that gives an average effect of around 10%. And thus, the underline growth for 5%. Next slide, please. EBIT at strategic growth path. The first quarter -- second quarter profit was NOK 73.1 million compared to NOK 88 million last year. This corresponds to a 7.4% EBIT margin with just as expected, down from 8.5% last year, due to the economies of scale and exceptional utilization of overhead we had last year. Year-to-date profit margin is 7.2% and in line with the year outlook of between 6.8% to 7.4%, whereas the quarter profit margin was 7.4%. The supply chain situation is demanding in this year, and we will see that also going forward, I guess, there are inefficiencies, et cetera, but not at a significant level currently when it comes to the profitability. And we have talked about currency effects on revenue and dependent on the currencies the sites of the business in gross some local effects due to revaluation of net working capital. In Q2, this is a minor effect. It's about 0%, and it was 0.6% last year. And below EBIT, we have a noncash negative agio of NOK 2.2 million in the finance net compared to the positive agio of NOK 1.7 million last year. This is mainly a revaluation of group internal loans and specifically Euro loans in Poland. Tax rate is 23%, which is higher than last year's 21% and is due to the income mix we have. The tax percentage will vary between the quarters, but expected to end around 18% to 20% for the year. Next slide, please. EBIT by country. Norway and Sweden continued strong margins. Norway at 7.4%, up from 6.9% last year and Sweden at 7.4% as well, up from 6.8%, both show solid numbers and good revenue growth. Central and Eastern Europe, consisting of Lithuania and Poland, improved EBIT margins from last 7.2% last year to 7.9%. It is lower margins compared to Q1 and due to volume pushouts and material shortages in the region for the end of Q2. The others, consisting of U.S. and China, show low profitability in Q1. And China is improving into Q2, but obviously not at the same level as last year. And the U.S. is also improving compared to Q1. EBIT margin of 5.7% compared to 1.7% in the first quarter is a lot better. In all, a solid quarter of 7.4% EBIT margin. Next slide, please. Working capital ended up at NOK 1,034 million, a reduction of 2% compared to last year. Adjusting for foreign exchange effects and consolidation, it's around 2% increase on last year's level, i.e. the currency has a 4% on the currency translation for the balance sheet. Inventory and contract assets are increasing around 7%. Inventories affected by the material supply situation, but mainly because of short-term delays. We're keeping a considerable amount of stocking consigned out of our balance sheet for our customers. Trade payables are increasing as a result of the high buying activity and the off balance sheet purchases, and the higher share of preferred vendors with longer payment terms. Trade receivables in line with revenue and reduced compared to last year, overdue is around 4%, the same level it has been in the last quarters, but the content changes. DSO is 63 days and up from 60 last year. In total, R3 net working capital in percentage of sales is 25.7%, slightly higher than last year's 24.5%, and conversion cycle is up to 96 days from 93 days last year, improved from last quarter's 103. R3, ROOC, return on operating capital is 19.1%, down from 22.1% last year, but up from last quarter 16.6%. And within ROOC, we aim to be 20% and 25%. So we're just below that number. There's a positive cash flow of NOK 109 million in the quarter compared to positive NOK 5.5 million last year, so quite a significant improvement. It's driven by profitability and reduction of stable working capital. Net interest-bearing debt over EBITDA improved from NOK 2.3 million last year to NOK 1.7 million this year, and exclusive IFRS 16 of about NOK 115 million, it's 1.5. Net debt is at NOK 670 million and this reduced with -- from around NOK 767 million last year, very much the same as Q1. A comment on the right of use asset -- right of use assets we are commenting on the development in the report. Machinery is related to leased equipment according to the previous standard, and buildings and cars are related to IFRS 16, and those values about NOK 111 million that are IFRS 16 related. And at the end, there is still one tranche of dividends to be paid out this year in October, it's NOK 0.35 per share, and we have, therefore, booked a dividend debt of around NOK 63 million incorporated in the balance sheet. And in total, at the end on the capital efficiency, I would say, considering the material supply situation, we're very satisfied with the cash flow and capital efficiency in this quarter. Next slide, please. And now back to you, Peter.
Thank you, Cathrin. Let's start with the order backlog. Next slide, please. .We have a strong order backlog, and we have confidence that the order backlog supports our 2021 targets. Actually, the current demand outlook confirms that 2021 should be the strongest year yet for Kitron, even without currency effects. Demand is driven by Connectivity, Electrification and Industry and all operations benefit from this demand growth. The trend with increased investment in industrial capacity and infrastructure drive strong growth in our CEE group, Lithuania and Poland. Medical devices is down after the extraordinary 2020 with the strong corona-driven demand and we're now back on a more normalized level, even though we actually are a little bit surprised that demand is a little bit stronger than we were expecting on medical.The order backlog for defense weakens for the full year, and sales outlook is also expected to be down around 10%. Next slide, please.So for the outlook, we continue to be very confident in our ability to follow the strategic path we outlined in our cap [ markets ] presentation in March. For 2021, Kitron expects revenues to be between NOK 3.9 billion and NOK 4.2 billion. EBIT margin is expected to be between 6.8% and 7.4%. The current demand outlook supports the midpoint of this guiding. Again, the growth is driven by connectivity at about 30% to 40% growth. Electrification and Industry sectors at between 20% and 30%. And although we expect a reduction of about 10% to 15% on defense due to late government approvals, our overall expectations stand. Medical devices expected to be normalized as we've said, in line with previous years, but there is a stronger demand than we initially anticipated. So next slide, please. So what are the key takeaways? Well, the second quarter is a very strong quarter for us. despite unfavorable currencies and challenges in the supply chain. Our order backlog and full year demand outlook supports our continued growth. And for 2021, our previous guidance and outlook is reconfirmed and maintained. This concludes the presentation portion, and we're ready to move on to some Q&A.
We do not have any questions as of yet. I see we have a lot of viewers, but maybe they are on vacation, we're getting ready to go.We'll take a bit of a pause, Catherin and talk about the supply chain, right? I mean, I've followed some of our other competitors and what they're saying. Some of them see puts the same thing we're talking about, some very strong growth compared to last year. And also big challenges on material supply, component and transportation. Some of them are talking about some significant inefficiencies in manufacturing. I know we've been challenged with it, but we're sort of prepared with holding off on some recruitments even though we saw demand was strong. There is a lot of overtime pay. Our competitors are saying about the same thing. So I think we're seeing similar things. There may be a little bit of an extra effect on Kitron because we have a lot of Electronics. And if you're more into electromechanical assembly, obviously, a little bit of an easier and easier time. So there's a question here from [indiscernible], do you expect Defense/Aerospace to regain growth momentum in 2022? What do we know about the outlook for 2022. We know that some of the programs delayed for this year will start up in Q1 next year. Primarily on F-35, we've had some problems in getting government approvals and sort of certified production. And it has to be certified in place in Norway. So I know those should be up and running. I'm not certain exactly how much that will contribute to next year. Do you have any numbers for us on that?
Not yet, not at that type of numbers that we can give here. But it will regain in 2022. The question is how large basically, it's a bit early yet. -- to see that we only see first half year with some credibility, and that looks strong.
I know that our customers have worked very hard with us to secure material. So a lot of material we bought that's been put in consigned and paid for it and that. So we're prepared if and when the product is ready, if and ready, the market is ready, if and when government approvals are ready, we should be good go. Somebody else asks regarding the semiconductor deficit, how do you allocate resources between different plants? Will some plants or sectors be -- see -- will be struck harder than others? Well, we have a corporate team with our strategic buyers and that work hard across the board, with both escalations and negotiations and meetings with suppliers. In those meetings, usually, our customers participate also. So we sort of -- we allocate resources to where they're needed. Some sectors might be struck harder because like the defense sector has been preparing for this for almost a year. So there's a lot of inventory already bought, and I don't see much of any real impact on the defense programs we've had this year. Programs that are being affected is a lot of it is in the industry, industrial infrastructure, automation, where there's rapid growth in demand. And look at China, for example, China came in, they had a forecast, which was about 102% over their plan for June. They delivered 108%. So they delivered more than their plan. But they still left about half a month of output undelivered because all of that came in, in June. So in June, an extra half month of demand landed impossible, obviously, to ship out. So those rapidly growing sectors tend to be affected harder. And you sort of really have to listen to us when we have our monthly webcasts on supply chain and give updates on what the customers should be working with us on.
It's also based very much on what type of components they are using and what supplier they are preferring basically or actually manufactured, right?
So again, from [ Andreas ] as a follow-up question here, I'm going to go ahead and take that right away. Can you give a quick update on how the U.S. plant is doing? The U.S. has been a struggle a little bit this year. It's so heavily defense -- defense-oriented on volume. And those volumes, I think, I'm not exaggerating if I say it's up towards a 50% reduction on many of those customers. I think any time you have a change in government and there tends to be a delay before a new administration gets things going before Congress decides how to appropriate money. So the U.S. is so heavily dependent on not just defense programs but other type of security programs. The MedAvail production for medical is up and running in June. Our target is to build one unit per day. We're building one unit today, and that should bode well for in for Q3. Into Q4 also, we have some more -- we're expecting some more orders on oil and gas that should alleviate the result there. We've hired two new business development people in the U.S., one on the East Coast, one on the West Coast, they started on June 1, both of them. We're in the process of hiring a new plant manager for the facility. And in the meantime, we're rotating 2-man teams out of our Swedish, Norwegian and Lithuanian facilities to support the site in place up until the end of the year. Okay. Benjamin says outlook for M&A also, when are you ready to enter organically into a new country. Cahterin, do you want to take that?
Yes, I mean we have said already that we think we need to be starting a new country in 2023 or early 2024, to be able to cater for the growth that we see in 2025 end. So that's basically the plan and still is the plan. And when it comes to M&A, so obviously, the situation has been rather difficult to do those things in the current situation. because you can't visit plants, and we are dependent on that, especially when the EBITs outside of the countries we're in. But we're always looking, we have to say
How much does material supply challenges impact you in the terms of lost revenue and potentially inefficient operations? While we shipped NOK 994 million. We had the demand of NOK 1.1 billion. And that's not taking any currency into effect. So it's about 10% effect on not shipped revenue. Now yes, there's -- I mean, we are careful when it comes to inefficiency. But for some sites, there has been a greater impact than others. Poland has had a strong result so far this year, I think, but if you look isolated at, for example, the month of June, the result was not strong in Poland. It's not negative in any way. But usually, they're a much stronger result. And just sort of a slight pushout or impact really affected them, more overtime pay than normal. Because we've hesitated or really, we took a strategic decision based on hiring people towards the volumes we saw and what we could expect on material supply. So we were sort of conservative on that. And of course, that's a decision we took to pay more overtime instead.
And what we also do, which is more than normal is we're moving things around. We're replanning and replanning and pushing in and pushing up, but to be able to reduce the inefficiency. So the numbers are not really, if you give a number, it will not be exactly correct. But we did give sort of an indication in that revenue waterfall that we are showing on Slide 3 in the presentation. Where we say that we had a demand increase in the quarter of about NOK 161 million, but we had a push out of NOK 107 million. So you might say that the NOK 60 million disappeared out that we could have definitely have delivered. So over NOK 60 million an increase for that. But there is -- it's always difficult to estimate exactly how much because where is it going? It's probably going into the next quarter of the demand.
Yes. But if we have people and we're paying people and they don't have anything to do, which has happened not a lot, but a few occasions. And I see some sites that very -- the lowest impact has been in China with 0% impact. And then it varies between 0.3%, 0.5%, all the way up to 1.5% in June for Poland, for example, versus top line on extra direct labor pay. So that's the one way to look at it. It's not an exact science, but there is some impact. So seeing the overall result of 7.4% for -- still would be strong. .Okay. Let's move on here. We have [indiscernible] -- Can you comment on the strong order intake in the connectivity electrification? Is it due also to delays and shortages? Do you expect to recoup some of the sales in Q3. Right. So with the order backlog growth, is that because we pushed out demand into the next quarter. And we've talked about this a lot. And we look -- we're leaving and looking at the full year, what we see. I don't think it is, right? There's some of that going on. But there is a strong underlying growth, especially if you start looking at the currency also. Are you optimistic that you in the mid-term, 2 to 3 years, we'll be able to diversify U.S. operations away from defense to avoid lumpiness in margin? Yes, that's what we're working on. That's why we hired two new business development people. We're going to be a lot of focus on industrial products and medical devices as well as other market areas, a lot of electrification, for example, strong growth in the U.S., a lot of really nice interesting companies. So we're looking at that also as a target. Victor says, thank you for this very clear presentation. After a strong 7.4% EBIT margin, I understand you expect this margin to potentially decrease in Q3, Q4 given the full year guidance you provide
Yes, we normally have a lower margin in Q3 because of the vacations and those things that are going on in Q3. So yes, Q3 down and Q4 up, I guess. And then it depends on what we get to deliver in each of the quarters how we look. But we haven't changed the guiding for the year. So we're still confident, what we're going to deliver what we have said.
How much of the operating margin is affected by exchange rate fluctuations?Well, that's a discussion we've had. Go ahead and comment on it.
And the margin normally so much on the exchange rate. It should probably have been negative if you do it that way. But what we see normally is that the top line is affected but the margin very much less so basically. It's -- we have different types of revaluations that we do. We have different types of contracts with the customers and we are buying in different currencies, and we're selling in different currencies and they match each other. So we're trying to have a sort of a natural hedge. Meaning there are effects, but it's not so huge that we think it's a major thing to comment on the margin. It for sure doesn't have a positive effect, and slight negative, I would say.
In Q1, you said you breakeven in the U.S. during Q2. Are we there yet? Not quite.
Not entirely, not quite. But June was much better. So we're glad to see the progress.
What are the main challenges going forward? I think we have really nice progress on our Scandinavian sites. We have really good progress and growth and margins in China. Lithuania, Poland, Central Europe is growing strongly. However, we need to diversify more in Poland. So that's one of the important challenges: grow Poland diversify more, not to have more customers that have the small revenue, but get some more big customers in there. We're very dependent on a few big customers today. So the plan there is now that we -- Lithuania is very full. It's difficult to continue growing there. Our strategy with Poland is we have higher revenue, higher volume customers. So some customers from Lithuania will be transferring over to Poland during the rest of the year, allowing Lithuania to continue growing and to provide a broader base of business for Poland. And then we continue focusing Poland for high-volume customers' high-volume business -- high revenue business. Then we have quite a few that we're working with over the next 6 months. The other big challenge is getting the U.S. up and running, to where it needs to be to be that growth site for us. We have a target of $100 million for the U.S. and hopefully get there within the next 3 years. And then continue expanding in the North American market if that are [ BR beachhead ], [ BR base ] of operations, continue growing in North America, where appropriate at other sites even. What new legs are you standing on. With the new legs you're standing on connectivity, electrification. What EBIT margin is expecting in the future for those? I think the same type of EBIT margin we're working on, around 7%, 8% is we want to be landing. We're not -- we never quote much lower than that. We always try to be competitive, however, but be efficient enough to all the time, provide cost reductions for our customers but also margin improvements for ourselves. Will you gain any business from the large deal recently closed between Kongsberg Defense Aerospace and Norway, Germany, this is what for the submarine..
It's a submarine deal that just was announced, and we will get some of it, but the major part of it there large volumes on the [ summaries ] were we're not involved. So a small part when you consider the amounts that they have actually talked about here. But we are -- we will get business from it, too. .
It seems like we have come to the end. How is our production capacity changing through the year? Well, we've had a lot of more seasonality earlier years, where Lithuania has gone from 500 employees to 1,000 employees up and down over the year depending on season. Now we changed some of our production strategy to sort of balance that out. And we don't see that sort of fluctuation anymore. However, the period June through September tends to be a little bit lower on some products. However, then again, other industrial-type products usually start ramping up in September and into Q4. So there's been -- there was more fluctuation earlier years than there is now. But this is something that we manage continuously. .I think I've covered everything. If not, then I apologize because I've been jumping around a little bit. Okay. I think that's it, Catherin, right? I hope you'll join us in our third quarter review, and hopefully, we can continue to deliver strong results. Thank you so much.