Kitron ASA

OSE:KIT

Earnings Call Transcript 2019-Q3

[Lars Peter Nilsson, CEO & President]

Good morning, and welcome to Kitron's first 3 quarters and Q3 results for 2019. I'm Peter Nilsson, CEO; and with me today Cathrin Nylander, CFO. We're coming to you live today from Kaunas, Lithuania, where we spent this week reviewing the Kaunas site and attending the Kitron Board meeting, which was held in Kaunas this week. So looking into the third quarter and what's happened so far this year. We've had a strong revenue growth all year this year and really hitting the high point of 31% in the third quarter, just under 30% year-to-date, with strong growth in our Defence and Aerospace business as well as Offshore/Marine. The EBIT margin is at 5.4% for the quarter, with strong margin improvements in Norway and Sweden. Strong order backlog, with most of the contribution really coming from Defence/Aerospace and Marine/Offshore. Our working capital has stabilized and we're seeing some improvements. This is one of our main focus areas for the next 6 months really to get this down and really releasing cash back to us. The component availability is better than expected and we see that, that continues on into the next foreseeable future. Earlier this year, I think it was in beginning or end of June, right, we had a flooding in our U.S. facility, where the -- really the facility became inoperable, and we moved production within a 2- to 3-week time frame into a new facility and we were up and running at that new facility, and I'll get back to that a little bit later. In Grudziadz, Poland, our new facility has come online. That increases our capacity with about 8,000 square meters. Production has started and will ramp-up now in the fourth quarter. So the overall picture then. Growth around the 30% mark. Organically, just over 20%. Revenue came in at close to NOK 740 million and close to NOK 40 million EBIT for the quarter. Order backlog very strong, just over NOK 1.5 billion. Cash flow is favorable at NOK 19 million, but our net working capital has continued up as we've launched major programs this year and continued to battle the allocation with components earlier in the year, but we've seen a turn on that and we are targeting some reduction going forward. So for the full year, 28% growth and NOK 2.4 billion. We have seen that long ago, we were at NOK 2.4 billion for the full year.

[Cathrin Nylander, Chief Financial Officer]

Just a few years ago.

[Lars Peter Nilsson, CEO & President]

Yes, yes. And the EBIT of NOK 147 million so far this year, with a 6.1% EBIT. I think that's the missing key number here, but it's right there, I see it, yes.

[Cathrin Nylander, Chief Financial Officer]

Okay. To the flooding, beginning of July it was.

[Lars Peter Nilsson, CEO & President]

Beginning of July, yes. So [ I wrote it ] exactly, yes. So we moved the production to a temporary site. We had some inefficiencies, but we were pretty quickly up and running with everything with really minor effects on customers. And by now, I think we are almost, if not completely caught up, on all deliveries. So there's really no significant financial impact expected from this. We expect to move back into our renovated facility, which is to the level of almost being a new facility early next year. We're hoping to get in by Christmas, but it looks like it will take a few weeks longer.

[Cathrin Nylander, Chief Financial Officer]

So we have no significant impacts because we -- because of the business interruption, insurance where we already have received the coverage for the period where we actually were standing still. Therefore, no financial impact of any kind basically in Q3, which is good.

[Lars Peter Nilsson, CEO & President]

So on Poland, the 8,000 square meter facility was completed earlier this year with all of the equipment required for this year and probably, possibly, into the first quarter already installed. We are ramping the products. We have approval from one of the major customers and we're just, in the next week or so, waiting approval from the second major customer. About 80 employees so far, 50 of them being direct employees. So we are well prepared to start delivering from our Polish facility. And actually, we're looking at positive earnings, positive contribution in the first quarter from Poland.

[Cathrin Nylander, Chief Financial Officer]

It was on their first invoice, yesterday.

[Lars Peter Nilsson, CEO & President]

Yes, that's right. That's right.

[Cathrin Nylander, Chief Financial Officer]

That's a good milestone.

[Lars Peter Nilsson, CEO & President]

Should publish that on the social media.

[Cathrin Nylander, Chief Financial Officer]

Have it put it on the wall. No. So excellent start, a very quick ramp-up and we have had some -- we have machinery in there and we'll have some more machinery coming in at the end of the quarter. So the balance sheet is affected by the investment in Poland, so it's starting to grow a bit, but it's mainly machinery and equipment and some building investments so far. And at the end, we might mention, again, that we also expanded in China this year.

[Lars Peter Nilsson, CEO & President]

That's right. That's right. Earlier this year -- end of last year, we signed -- we acquired a lease to the building identical to ours, which is right next door. That building has been completely renovated to become a modern electronics manufacturing site. We moved in earlier this year and we've moved the high-level assembly and all of the final packing and shipping areas into that new site -- new facility, freeing up space to continue build on electronics manufacturing where we currently are. So really happy about that. I think it's about 3,000 square meters we've added to the Chinese facilities.

[Cathrin Nylander, Chief Financial Officer]

I think with that and the Polish factory now running, we might say that we are prepared for the next 5 years, which will serve plan all along.

[Lars Peter Nilsson, CEO & President]

This is there. We are prepared for next year.

[Cathrin Nylander, Chief Financial Officer]

Yes, that's true, too. But it's good to have finalized those. So the financial statements for the first 3 quarters and Q3 for 2019 then. As we said, we had a strong revenue growth. We grew from NOK 563 million to NOK 738 million compared to last year, which is a growth of 31%, and as Peter said, 21% organically. It is a growth of NOK 175 million. So the sector that grew the most is, of course, the Defence/Aerospace. It grew with NOK 82 million and 96%. Part of that growth is, of course, due to the acquisition we had, but it's also very much good growth in Norway. So the Industry sector grew 12% and NOK 30 million this quarter, a little lower than it has been, but still a good growth because of the size, I would say. Medical devices were rather stable, has been and will continue to be, grew NOK 6 million and 4.8%. Energy/Telecoms, up NOK 23 million and 25% this quarter, also good, I think. And then Offshore/Marine starting to show good figures as well, grew from 32 -- grew NOK 32 million compared to last year and 300%. We have to add though that when it comes to Offshore/Marine, it is -- there is a foundation of stable revenues, but there is also some project revenues on top. So we will see that revenue varying from quarter-to-quarter going forward. So all in all, NOK 175 million of growth. It's good. So where are we standing right now after three quarters in 2019? So at NOK 2.4 million (sic) [ NOK 2.4 billion ], we grew about NOK 530 million compared to last year, and 28%, of which 20% is organic. The reason why we don't have the same growth on total as we seemingly have a very steady organic growth is, of course, that we only bring in revenue from the acquired site as of 15th of February. So we're missing 1.5 months and that's more or less making up for the difference in the growth on total level. When we look on the figures, of course, we have had a very strong growth in Offshore/Marine, which grew NOK 130 million compared to last year, a totally different scenario than what we had before.

[Lars Peter Nilsson, CEO & President]

We're getting close to where we thought we'd be. I think I said in one meeting, NOK 150 million to NOK 180 million in Offshore/Marine for the full year and looks like we're going to be somewhere in that area.

[Cathrin Nylander, Chief Financial Officer]

True. You're right about that. We have grown NOK 158 million on the Defence/Aerospace and 50% approximately. Again, being aided by the acquisition, but also underlying growth, which is good. Energy/Telecoms grew NOK 86 million and 28%; medical Devices, NOK 38 million and 10%; and then Industry, around 14% and NOK 116 million. So what we see now is that when we look at the full year, we see we have growth above 10% on all sectors, which is good. So coming into the different regions, and Norway continue to grow good, 25% so far and growth of NOK 36 million in the quarter compared to last year. Sweden is rather stable, about the same top line and slight reduction in percent here. And Lithuania grew 20% compared to last year, up NOK 43 million. The U.S., of course, a strong growth where the acquisition in the U.S. stands for about NOK 60 million out of the NOK 83 million in growth there. And then we have a good growth in Others, but mainly China, which grew NOK 17 million and 25% compared to last year in the quarter. So a good spread as well on where the top line comes from. And after first 3 quarters, we see something here that is rather exciting and that is, in Norway, now that's grown 27%. But in NOKs, they've actually grown the most of all of the sites compared to last year, so they grew NOK 128 million accumulative this year compared to last year. And Lithuania has grown NOK 126 million, so they just barely beat Lithuania to it. So impressive.Sweden, rather stable. I think we'll see that coming into next year, too. And Lithuania 17.5% growth and NOK 126 million; U.S., grew NOK 190 million and most of that, again, is the acquisition; and the Others grew NOK 66 million and 36%. So China is having a good year too, I would say.

[Lars Peter Nilsson, CEO & President]

Despite the trades and tariffs and all that.

[Cathrin Nylander, Chief Financial Officer]

Despite the trades and tariffs. So we'd like to show this to show the development that we have. So the profit is around NOK 40 million this year and we have a profit margin of 5.4%. Last year, we had NOK 30 million and 5.3% and the year before in Q3, we had NOK 30 million. So a substantial change in the actual value of the EBITDA we have earned in the quarter. There is a seasonality, of course, because many of our customers are Nordic and they prefer not to have deliveries in July. So that's affecting the profit and the top line in the quarter and will continue to do so.We see then -- we would have hoping in general to have a higher percentage, but we are at the startup of the Polish facility in the figures for the quarter. And we also have some customers where we are -- have growth and ramping up that's also affecting total there.

[Lars Peter Nilsson, CEO & President]

I think we'll see that. We were looking -- we'll be looking at site or the country slide next, I think, on profitability.

[Cathrin Nylander, Chief Financial Officer]

Yes, you can see it here. So I'm very happy to see that when we start, we have continued profitability and improvements in Norway and Sweden for most. So they're going from 3.7% last year in this quarter to 4.6% and profit in 5.2% to 8.1% in Norway. So Sweden also improving from 5.6% to 6%.

[Lars Peter Nilsson, CEO & President]

And even with a reduction of top line. So good job. Good job.

[Cathrin Nylander, Chief Financial Officer]

Yes. It's good. It's good. Yes, it's around slightly above NOK 8 million. Lithuania is also improving compared to last year 1 percentage point from 5.1% to 6.1% and now at NOK 14.8 million in Q3. And the U.S. is profitable and the profits are coming from tech basically in this quarter. And when we look at the Others, we have China. China is performing well and -- but in the figures for Others, we also have the start-up cost for Poland, which affects the totality of it.But in general, it will say a strong quarter for Kitron in Q3, taking into consideration we are opening a factory and we've had a flooding. So -- and the first 3 quarters, in general, we see continued profitability improvement. So again, Norway, above 5%, 5.1% compared to 4.4% last year and now at NOK 30 million in profit. Sweden over 6%, 6.3% and 4.8%. I can say both Norway and Sweden actually show amounts with 7% also in this quarter, so good.

[Lars Peter Nilsson, CEO & President]

I think every site was over 7% in September.

[Cathrin Nylander, Chief Financial Officer]

This time, yes. Lithuania at 7.5% slightly down from last year and that's where we have the ramp-up effects from the larger customers that we have.

[Lars Peter Nilsson, CEO & President]

I think there is a difference between growing 17%, 20% on stable customers, and actually introducing completely new customers and ramping 2x to 3x faster than you're expected to. And that's what's cost us on efficiency. It drove revenue up, way up, and it did not give us the contribution we were looking for because of having to really put a lot of resources into ramping very, very quickly. Positive and short-term negative.

[Cathrin Nylander, Chief Financial Officer]

Good. Yes, we're building full picture in that sense. So again cumulatively, China is performing well and we have the startup costs in the Other there -- over there.Working capital, where we talk about that all along, the working capital is lower this quarter. It's NOK 887 million, I am starting at the end now, compared to NOK 933 million and NOK 927 million in the other quarters. Of course, in these figures, we took in about NOK 100 million of net working capital when we did the purchase, but we do have quite a substantial growth in spite of that. But we start to see now it's stabilizing in spite of growing and continue to grow, which is good. And we will see improvements going forward. All the net working capital ratios, of course, are not good. Part of it is that it is a bit big in the working capital, but it's also Q3 where we only have activity on full level for 2 months, which makes the rolling average look worse than they are actually. Cash flow. Positive cash flow in the quarter of NOK 20 million, an improvement of NOK 60 million compared to last year, where we had a negative NOK 41 million. And year-to-date cash flow was about NOK 100 million positive cash flow compared to negative NOK 20 million last year same time. Our gearing, which is important. We measure the gearing without the IFRS 16 effects, the effects from the leasing standard. So in our net interest-bearing debt, if you look into the balance sheet, we have NOK 115 million of interest-bearing debt related to IFRS 16. Adjusted for that, our gearing is 2.6, including the IFRS adjustments, it's about 3. So the net working capital, I told you the reach. I won't go through them, but they are rather high and we prefer not to stay at this level any longer I will say. And one of the reasons we are sure that this will end quite rapidly is that the supply lead time from the sub-suppliers, now we see it's closing up to what we've had before all along. You see the yellow line to the left there, that's the average that we had before the allocation situation and now we're basically only few days away from that. So that means we start to see very shorter lead times when we actually order and can see the effects of it now. The components and allocations substantially reduced and there is only a few sites that has to battle the allocations with our lead times on the products, and that has to do with those products that are oldest and largest.Raw materials, stabilized. What we see, which is not very clear on this picture, so we see that the material that's in raw material is very different to what it was before and there are certain reasons for the status right now and we have shifted a lot of the allocation material that was there from before. So all these 3 graphs show us that the situation in the working capital will improve going forward. So that was me, and now back to you, Peter.

[Lars Peter Nilsson, CEO & President]

Cool. Let's look -- let's summarize and look at the market development. We've spoken about the strong order backlog. You can see that the year-on-year growth compared to the third quarter last year, it's a growth of order backlog of just over 40%. Very, very strong growth in Defence. And looking back a year or so, we've always said that towards the end of 2019, we expect it to grow and we expect 2020 to be strong in the Defence area. But even nice growth in Medical with close to 36%. Energy/Telecom growth, Offshore, very strong growth going up to the levels we've spoken about. But also then, we're seeing sort of a softer growth to no growth on Industry, which is to be expected when countries and the economy in general is sort of expecting recession in certain areas. We'd expect to see it first in our larger industry sector and we're seeing some customers, they are not all, some customers having a softer forecast or a shorter lead time on their forecast horizon and that affects our order backlog if the horizon is shorter and lead times grow shorter. Overall, our organic growth is 27% in our order backlog.So then looking at our outlook, we expect between NOK 3.2 billion and NOK 3.4 billion for full year 2019. Earnings in value are above previous outlook, but our margins are expected to be between 5.9% and 6.3%. Really the effect of the ramp-ups of new customer programs with stronger growth than expected. We expected to have a nice stable ramp-up to learn the product, give us efficiency, that didn't happen. So that resulted in lower efficiencies and more costs for the ramp-up. We also have a slight effect of the start of the Polish factory. We expect the factory in Poland to contribute to profit in the first quarter. I don't expect it to be able to hit those levels in Q4. So -- but these margin challenges should be solved as we move into 2020. The ramp-ups are completed in Lithuania. We see that the margins are at the target levels or very close to the target levels as of the end of September. The growth for -- part of the growth this year -- the acquisition of the EMS division of API Technologies and that drives big contribution of growth in Defence/Aerospace, also somewhat in Industry and Medical for the API part. Offshore/Marine driven by customers in Norway.

[Cathrin Nylander, Chief Financial Officer]

So basically, maintaining -- it says earnings above the previous outlook and that was the outlook that we did in Q1. So this is the same outlook that we presented in Q2 basically.

[Lars Peter Nilsson, CEO & President]

Correct. Very good. I think that's it.

[Cathrin Nylander, Chief Financial Officer]

That's it. That's all.

[Lars Peter Nilsson, CEO & President]

So we're looking forward to fourth quarter and finishing off the year strong. Thanks for listening and watching.

[Cathrin Nylander, Chief Financial Officer]

Thank you.

[Lars Peter Nilsson, CEO & President]

And we'll talk to you at the end of -- or in the beginning of the first quarter.

[Cathrin Nylander, Chief Financial Officer]

Yes, February.

[Lars Peter Nilsson, CEO & President]

February, that's right.