Kitron ASA
OSE:KIT
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Kitron ASA
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Good afternoon, everyone. Welcome to Kitron's Second Quarter and First Half Year Report 2023. I'm Peter Nilsson, CEO of the Kitron Group. And joining me as usual is Ms. Cathrin Nylander, CFO.
Following today's brief presentation, we will have a Q&A. So please post any questions you may have in the Q&A section of the webcast. Thank you.
Next slide, please, Slide 2, and we'll start by taking a look at some of the highlights. So I'm really excited to present our achievements for the second quarter of 2023. We've had an excellent quarter with significant growth in many areas of the business. Our revenue for the quarter was over EUR 206 million, an increase of 31% from the same period last year, when it was EUR 157 million. Our EBIT was EUR 19.2 million, an impressive increase of 93% from EUR 9.9 million last year. This is our third quarter with more than 9% EBIT margin.
And for the second quarter in a row, our net margin is above 7%, ending at 7.6%, up from the 4.2% last year. Finally, our earnings per share for the quarter came in at EUR 0.079 versus EUR 0.034 Q2 last year. For those who crave the not comparables, the growth and improvements are even stronger with revenue up 52%, EBIT 123% and EPS 171%. Once again, we've experienced an exceptional second quarter, and I'm proud of the results our team has delivered.
Let's review some of the half year numbers. Next slide, please, Slide 3. Building on a strong first quarter, Q2 completed the first half of the year, hitting the mid-year target in our outlook. Revenue was EUR 397 million, EBIT EUR 36.5 million, delivering 9.2% margin. Cash flow is EUR 19.4 million, and return on operating capital is slowly inching towards 30%, coming in at 28.2%.
Furthermore, our net interest-bearing debt-to-EBITDA ratio has been reduced from 3.6 to 1.8, another strong improvement. Our order backlog has increased to EUR 535 million, representing a growth of 13.5% compared to last year, when it was EUR 471 million. EPS year-to-date is EUR 0.15 versus the EUR 0.06 we had last year.
Now let's take a look at some of the business trends. So next slide, please, Slide 4. Demand has been particularly strong in sectors Electrification and Defense, Aerospace and continues to remain robust in automation and industrial communication. We're working on several large opportunities within energy efficiency, energy grids and energy storage and expect many new opportunities later in 2023 and throughout 2024.
Very strong growth is expected over the next several years for the Defense sector. Visibility on this growth is expected in the first half of 2024. For industrial communication and machine-to-machine IoT, we see that products that incorporate automation, mobility and Connectivity and some levels of autonomy are still positioned for further growth, although the trajectory here is not as aggressive as earlier projected.
In the regional trends, we see how the Nordics continue to be strong, with growth in Electrification, Defense and Automation. The Central Eastern European sites are preparing for further growth in 2024, with growth in the sectors of Electrification and Automation. All European sites are actively recruiting for the second half of '23 and the outlook for '24. We see a comparatively modest growth in China, as regionalization drives to other geographies in China for China business increases to replace exports.
Next slide, please, Slide 5. So taking a look at the order backlog, as I said, it increased from EUR 471 million to EUR 535 million between last year this quarter and this year. The growth in the order backlog is largely driven by Electrification, where Electrification is up 16% to EUR 193 million, and Defense is up 47% to EUR 122 million.
Connectivity and Industry remained flattish, whilst our smallest sector Medical devices declined 26%. Usually, we see lots of ups and downs in the Medical sector. So this is not alarming by any means. We know about one customer that is having some difficulties on the market, not related to any recession. We also see the order horizon shrinking as component lead times are decreasing, and we catch up on back orders.
So next slide, Slide 6, please. Connecting to the backlog, let's take a look at the rolling 12-month demand, and it affirms the trends we see in the order backlog, with more than 60% growth in market sectors, Electrification and Defense, also with some automation products within the Industry sector. While market sectors, Connectivity and Medical devices are up to 10% softer as lead times, stock levels and back orders are reduced.
The R12 outlook is EUR 812 million, up from the EUR 677 million last year, supporting our current top line outlook. We will also continue to focus on securing capacity to meet our customers' demands and grow our position in the industry. So we're confident about its strong progress, and growth will continue throughout 2023 and beyond.
Next slide, please. Now let's take a look at some operations and from that point of view, capacity. Before 2023, capacity investments in existing facilities are nearing completion. Overall, we're investing more than EUR 20 million in equipment and facilities this year. This includes a new production facility in Czech, which is currently being built, to increase capacity and the offering from the current adjacent Czech facility. Phase 1 includes 4,000 square meters of production and storage with focus on box build.
In addition, I'm thrilled to announce that a new Kitron facility will come online in Malaysia to satisfy growth opportunities in Asia outside of China. The plant is currently being refurbished to Kitron standard. The equipment will be installed in the third quarter, and production will start in the fourth quarter. In Phase 1, the capacity is planned for up to EUR 50 million depending on product mix.
So 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. So next slide, please, and Cathrin, please take over.
Sorry. Thank you, Peter. Currency and growth. As we this year change from NOK to Euro as presentation currency, we present some comparative numbers for clarification. The reason for the change of presentation currency is to eliminate variations in NOK in the revenue and give greater transparency of the underlying growth. So again, on the method, the site still reporting the local currencies, numbers are first consolidated into NOK and then changed into euro.
And the presentation currency change will not take out variations in translation differences in consolidation, not under -- will take out variations in translation differences, not the underlying currency risks as such in each of the sites. So what about the underlying growth? In the waterfalls to the right, you see development in Europe to the left quarter and to the right year-to-date. And on the bottom, the same in million NOK. So as you can see, underlying growth in the quarter is the same, 38% in both currencies. In euro, negative effect of 7% in NOK, a positive effect of 15%.
As for year-to-date to the far right, the underlying growth is 37% in both currencies, negative 5% in euros and a positive 13% in NOK. So we're taking out some noise and making the numbers more transparent first of all and for the users of the accounts. And of course, as we said before, you can find historical numbers by quarter on kitron.com.
So next slide, please, Slide 9. The business sectors. So large growth in volumes overall creates economies of scale in general and more efficient use of resources. All sites are profitable and at good margins. So for the Nordics, Norway, Sweden and Denmark, revenue growth of 25% compared to last year and the growth in profit of 73%, and the EBIT margin is over 9%. For the CEE, Lithuania, Czech and Poland, the revenue growth of 77% and a profit growth of 143% in the quarter and EBIT margin over 10.5%.
So the rest of the world, mainly our 2 facilities in China and 1 in the U.S., revenue decline of 9%, but profit improvement of 63%. U.S. is no longer loss-making and has shown improved, stable results for the first half of the year. In total, EBIT margin of 9.3% improved from 9.1% last quarter, then a strong improvement from last year's 6.2%, where material allocation were holding us back in specifically the first half.
As for the employees, in total now 3,189, growth in 17% from last year and 33% -- [ 3% ] from the last quarter. We're staffing up due to the increased volumes in the Nordics and CEE and reductions in China due to the lower or stable volumes.
So next slide, please, Slide 10. So cash flow and net working capital. So operating cash flow ended at a positive EUR 9 million compared to EUR 10.4 million last quarter and EUR 4 million same quarter last year. The net working capital in the quarter increased with some EUR 5.7 million. Although as you'll see on the next slide, our capital efficiency ratios are improved in the quarter. So we are growing more than the increase in the net working capital. Other items bring the cash flow down, but still positive EUR 9 million due to the profits.
Next slide, please, Slide 11. So positive trend in key ratios continue. The net working capital as a percentage of sales is now at 22.3%, further down from 23.7% last quarter, and continue trending down towards our target level at 20%. Return on operating capital, a strong 28.2%, as Peter said, closing in to 30% and above the strategic levels of 20%, 25% that we have communicated previously.
The strong ROOC continued to be driven by the strong profitability in the quarter as operating capital is merely stabilized compared to the years before. CCC is up 84, down from 90 last quarter and 108 in the same quarter last year. Net interest-bearing debt-to-EBITDA decreased to 1.8 from last quarter 2, and the net debt is now at EUR 142.5 million, about the same level as last quarter. So that improvement is a result of both improved profitability and reduced debt. Excluding IFRS, we're at 1.7.
So on that note, on the net debt, we are currently funded at 5.5% interest rates and the tax rates are stable at 18%. Equity as a percentage is at 27%. That's an increase from 25.6% last quarter, giving a return on equity 40.7% and then doubling from 20.3% last year. So earnings per share, as Peter said, it's EUR [ 0.08 ] and about 170% increase from last year. We have a neutral finance cost in the quarter due to a positive argue, which outweighs the [ interest ] expense. This, in turn, positively impacts the net income and EPS in addition to the higher volume.
Next slide, please, Slide 12.
Then it's back to me. Thank you, Cathrin. Well, let's talk about the outlook for full year 2023. Overall, we're pleased with the strong customer demand and are now recharged to grow it further as back quarters are filled and more capacity becomes available. Actually, we've had a pretty tough situation, especially in our Central European plants with capacity and struggling to meet all of the different customer demand. And it's to the point where we actually have not brought to board any more new customers this year. So we're ready to open the floodgates and start adding new customers also into Q4 and Q1 next year.
We expect the current trajectory in revenue and margins to continue into the back half of the year. And the beginning of Q3 could be a little bit challenging as European operations tend to slow down a little bit because of summer vacations. But then we should charge full speed ahead in August and September. Against this backdrop, we update our outlook for the full year of 2023. We now expect to reach the higher end of previous outlook. And for 2023, Kitron now expects revenues between EUR 750 million and EUR 800 million. Operating profit is expected to land between EUR 65 million and EUR 75 million.
So finally, some key takeaways. Next slide, please, Slide 13. Now as a CEO of Kitron, I'm thrilled to see the growth in the last quarter. The quarter-on-quarter improvements continue and the outlook remains positive. Our strong results in Q2 are a result of growing demand from our customers, especially Electrification, Defense and the Industry.
The positive trend from the first and second quarters is expected to continue into the back half of this year. The full year outlook is now updated with narrowing targets to the upper interval. And we're committed to delivering value to our customers and are excited about the future of Kitron.
So next slide, please. Moving on to the Q&A. So again, I'd like to remind you to -- we'll shortly be starting the Q&A. So please post any questions you may have in the Q&A section of the webcast.
So while we wait for some questions to come in, Cathrin, what's the deal with the order backlog, the R12 and varying demand and decline? And how should we interpret all of these different numbers? Again, you have to unmute.
Yes. Thanks, I was not -- I'm not in the [ muting ] mode today. We have to remember that we've had a quite significantly large order backlog than we normally have due to the fact that we had material allocation. We asked our customers to place longer orders, so we're able to supply their demand. And what we see now is sort of a normalizing and going back to the levels of order backlog, which we normally have, which is about 5 to 6 months of order backlog in and about half a year of revenue normally in the order backlog, very close to that.
So if you do some adjustments and look into our current order backlog, what it relates to '24 and '23 and add on the forecast for the 2 months, that's not there. I think we're basically on what we're saying. So it's more a normalization. And I think also we've been working off some of the, as you say, back orders, things that have been delayed for the customers.
So let's move on to some questions and starting with the question from [indiscernible]. The order backlog, here we go, is down a bit from Q1. Are we concerned? Are you concerned about this?
And it's always unpleasant when the numbers go down a bit. But when I look at it, objectively, I'm not too concerned about it. I still see that in the -- in the short term, for up through Q1 next year, we have very strong quarterly numbers. And really where the demand starts to drop off is somewhere there in May, June next year, the numbers are low. So a strong horizon up until that point, which is normal. And it's a normal situation where not a lot of customers are forecasting that far ahead, only a few and specifically on the Defense side, they tend to have longer forecast. So back to normalization and working on understanding and putting more meat on the numbers.
[indiscernible] continues with -- can you say something about the growth opportunities and challenges in 2024?
I think the growth opportunities are there as some of our competitors struggle. Customers would like a safe haven, and Kitron is a safe haven. We also have a bit of an exodus out of China. So new opportunities are coming online where customers either want to have manufacturing closer to their home base, which would be Europe for us. But some are also interested in staying in Asia because they have a market in the Asia Pacific region. So that opens up opportunities for us with our Malaysia facility.
In the meantime, before having anything out there, we're now actually taking on transfers from China into our European facilities that really shouldn't be there and probably will be transferring into Malaysia later on into next year. Other growth opportunities, as I mentioned, within Electrification, so specifically energy storage, energy grids. One of our big customers announced a massive investment in employees in Sweden, so starting, I think, now and moving into the next few years where they're increasing about 3,500 employees in their facility.
So that reflects directly back on us where those products today are built in Norway, and we're looking at maybe expanding that footprint into other parts of Europe to support that customer. So many, many things like that. Defense customers, some of them has said on this program, the business is increasing eightfold. Others will say 4x increase or a doubling of the current order backlog. So those are some of the things that are happening.
Let's move on to [indiscernible] Spetalen from Arctic. And he has very long questions here. A couple of questions. He'd like to better understand supply and demand. I think some of the investors might be worried that revenue does not reflect the underlying demand, but rather includes some older orders and better component availability makes you able to deliver on today. Is there anything in this statement that I find true?
Yes, right. If we look back to the beginning -- middle of Q3, around week 37 or so, that's when we peaked on back orders. And back order is where customer has requested a delivery date, and we have responded with a different delivery date, which is further out in the future because there were no parts available probably, right? So that number was EUR 61 million back in week 37, it's down to EUR 31 million now. So from mid-Q4 through Q1 and through Q2, that -- those back orders have been taken down to about 50% and about EUR 30 million still remain as we move forward.
A bit confusing on outlook statements. So on one hand, we guide EUR 750 million, EUR 800 million, but then I say that we expect the current trajectory to continue. Can I clarify on this?
Well, I mean the expectation is for it to continue. The downside there, the EUR 750 million. We target EUR 800 million, right? That's our target. And EUR 750 million, if bad things happen, that's where we're looking at EUR 750 million. So we're not really expecting to be in the midpoint. We're targeting to be in the higher range of that. So that's how you should interpret that.
Guidance, flat revenue for second half, implies a significant slowdown compared to recent quarters. If you can increase revenue, why are you adding capacity?
Because we're full, right? We cannot grow anymore. So that's why we are adding capacity. And that also reflects on the growth for the second part of this year. We've not added much new business, other than what was won in the beginning of last year into the first half of this year. So the first half also includes much more eating up or taking out of the back orders, and those are less going forward.
There's some seasonality for Q3 in the numbers, right? There's a -- which is the next question he has here. There's some seasonality as we work with some of the big customers in automation or autonomous products that the big season for that is mid Q1 through Q2. And in Q3, it really starts back up in September. So there's other products that backfill Q3 to still be able to deliver strong numbers in Q3.
Medical and Connectivity both of them are forecast-based businesses, normally, right, where it's a high-level assembly. We deliver the complete high-level system products to customers or directly to the end market and is supported by forecast. In the component constraint scenario, those customers were forced to place firm orders on those products also. Now they're returning to a forecast situation and playing it defensively on the Medical side, trying to not risk anything that may turn up on a sort of recession on their side.
So I see that the numbers are going up and down from these customers. One moment, they'll pull them down; 2 weeks later, they'll increase them again. So it's difficult to say exactly what's happening. One customer has some problems with being sort of out of sync with the technology on the market, which has nothing to do with any recession or things like that.
Connectivity, again, that's purely going back to the forecast based and then call off on a short lead time, maybe 2- to 4-week lead time on orders. Again, then doing that because now they see an opportunity not to buy too much in case demand goes down.
Can we comment on continued hirings in Europe, right, and flat group revenue?
We have had significant temporary employees in most sites. Also I think, to the limit on overtime in all of our European sites and then preparing for growth into 2024. So there is some hiring going on. It's not massive hiring, but -- and it's mostly on the direct side. It's very few indirect employees. We don't expect a lower margin in the second half of the year, right, which is in almost the final question.
And the final question is, when do we expect the facility in Malaysia to ramp up into full production?
My expectations isn't -- we're installing the equipment in the third quarter. We're going to have qualifications with customers and qualifications built in the fourth quarter and then start ramping up in Q1 next year. It's difficult to say how quickly this is going to go. The facility, we started greenfield in Poland, exceeded in every expectation we had. But I suspect the EUR 50 million target we have will be over the next several years. And yes, that's to fill it up and move into Phase 2, which is beyond the EUR 50 million.
I think we'll know more when we start to look into next year and do the outlook for 2024, which we'll do.
We have one last question, actually, unless someone else is quick on the trigger here to get in. And I'll just throw this one over to you, Cathrin.
[indiscernible] question, how much is Kitron dependent on the FX for the Krona?
Not so much actually now that we're in Europe. What we see is that Norway's revenue that there's only one site that sells in NOK for any sense or purposes, which is Norway. And of the total volumes we have, it might be around 15%, possibly that's in NOK. I think they have a higher share of the order backlog. So when the sort of the NOK is weakening, then the order backlog is drawn down by that. But it's basically there. I would say we're not so dependent on it, I would say, going forward. So whatever happens with it, if it's strengthening, that will only increase our volumes going forward, I would say.
But looking at our comparables, as we had in the first couple of slides, the growth is just tremendous when you look at the NOK numbers. We wouldn't have dreamed of it a few years ago, but it's all currency and...
Yes. So I'm happy not to have it in the main numbers.
No, no...
Because evidently, it will strengthen, and that will -- if you do the volumes in NOK, that will reduce the growth going forward when it strengthened. So it's euro numbers will be more correct going forward.
Yes, not more questions?
Hey guys, I think that's it. We're at 30 minutes in. So thanks so much for listening to us, and we'll see you again in the Q3 report. Have a great summer.