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Kitron ASA
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Good morning, and welcome to Kitron's Third Quarter Report 2024. 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'll have a Q&A. So please post any questions you may have in the Q&A section of the webcast.
Thank you. Next slide, Slide 2. Ladies and gentlemen, as we navigate global markets, it's important to see both the opportunities and the challenges ahead. Our strength in the Nordic and U.S. markets continue with close to double-digit growth, highlighting our solid market presence and focused strategy. Conversely, we're seeing a slowdown in the European economy which has softened demand, particularly impacting customers supplying into residential energy solutions, industrial vehicles, battery management and e-mobility systems.
We're closely monitoring the situation and supporting our partners to adjust as needed. Despite these challenges, our resilient sectors remain strong. Larger global customers are performing robustly, driven by energy infrastructure expansion, some 60% growth this year and doubling its share of the market sector. Additionally, the defense and aerospace sectors continue to exhibit steady demand, providing stability in a fluctuating economic environment. Looking ahead, we're pursuing regional opportunities that align with the global shift toward localized production. This opens up new markets in Central and Eastern Europe and across Asia, beyond China. We're also focusing on new partnerships, intensifying our efforts to attract new clients in 2025, building on the successes of 2024.
In today's volatile market, agility is essential. We're proactively managing forecasts to swiftly adjust strategies, mitigating risks associated with market fluctuations. These proactive actions affect our order backlog in [ R6 ] demand as we tend to bring a conservative view to the outlook to optimize global capacity utilization, we're continuing to execute targeted capacity adjustments and program transfers by maintaining a competitive cost structure throughout our streamlined processes, we're able to offer better pricing and services to our clients while maintaining attractive margins.
In summary, while we faced some dynamic market conditions, our strategic initiatives positions us for continued success by leveraging our strengths, expanding into new regions, building partnerships and managing customers proactively, optimizing operations, we're well prepared for the future. We're encouraged by our progress so far and maintain a long-term perspective, focusing on strong growth opportunities through new markets and customers as well as increased targeted M&A activities in key markets. Next slide, please. Let's look at some third quarter trends. Starting with connectivity, where we see a decrease in demand compared -- decrease in output in revenue compared to last year. Industrial IoT, network gateways and 5G are declining further in the quarter. However, satellite communication, sensor and tracking equipment are showing an accelerated growth of 76%, with a year-on-year growth projected at 73%. The share of these products are now more than 40% of the total connectivity sector. We expect a broader strength returning to the sector beyond mid-2025.
When it comes to electrification, the sector shows a year-on-year decline. Parts of the sector, including products that rely on housing, construction and the EV market are showing continued weakness but within this sector, there's strong growth on energy infrastructure expansion, up some 60% over last year. This encompasses about a dozen customers. Broader growth is expected to return to electrification as the housing market strengthens and energy costs drive upgrades in residential energy solutions. Industry, while the outlook indicates a cooling off in industrial activity with reduced capital expenditure and that continues. We do see an increase in China-driven demand by -- for investments in China for localization of production. Medical Devices, the demand is stabilizing and the sector shows growth for the quarter. Defense and Aerospace continues to grow, driven by continued and accelerated investment in defense and security capabilities.
Let's take a look at the order backlog on Slide 4, please, Slide 4. The order backlog comes in close at EUR 458 million. That's a quarter-on-quarter book-to-bill ratio of 1.03. Sequentially, the order backlog has increased with EUR 3 million compared to previous quarter. The connectivity sector continues to demonstrate quarter-on-quarter improvement. Other sectors exhibit shorter customer order horizons, reflecting the current market sentiment. Next slide, Slide 5, please. And over to you, Cathrin for some third quarter highlights.
Thanks, Peter. And on to some highlights for Q3 2024. The revenue for the quarter ended at EUR 145.1 million and also this quarter a reduction of around 19% compared to last year. There is seasonality in the quarter, which is stronger than last year due to last year's very high volumes. Our EBIT ended at EUR 10.7 million, down from EUR 16.2 million last year, and the EBIT margin is at 7.3% and lower than previous quarters. ROOC and other capital efficiency ratios are lower than previous quarters, mainly because of the lower revenue in the quarter. The net working capital is reduced to 3% down to EUR 183.1 million compared to last quarter. The financial situation continued to be stable with a net interest product over EBITDA of 1.6.
Cash flow is at last year's level with EUR 2.3 million. Net income at EUR 6.1 million, which corresponds to 4.2% of revenues, whereas the same percentage last year was 5.4%. It's a deviation of EUR 1.2 million and where the improved finance net show less than last year, which compensates 0.5 points from the EBIT margin difference. Deviation in EPS, the primarily half from revenue and half from lower profitability. Next slide, please, Slide 6 and some numbers on where we are year-to-date. Revenue rate ended up EUR 486.6 million, which is 16% below last year. EBIT at EUR 36.3 million, affected by the EUR 4.8 million one-off in Q1 and set an EBIT margin of 7.5%. Adjusted for the one-off EBIT margin is at 8.4% accumulative. Cash flow of EUR 29.4 million is improved with last year and it's now at around 70% of EBITDA, which is below our 80% target. And next slide, please, Slide the business units. Nordics and North America show 9.3% growth. Profits are at 6.8% EBIT margin, which is lower than last month's 9.3%. In addition to the seasonality, there are some inefficiencies in the quarter as we were not able to utilize the full volume potential in the quarter for the Nordics, which drives the margin slightly down.
For CEE and Asia, quite dramatic reductions in revenue growth of CEE with minus 41% and Asia, minus 34% compared to last year. Profit margins, however, this quarter at 8.7% and 10.9%, respectively. There is a substantial reduction of employees compared to last year following the volume reduction and the number of employees are further reduced in the quarter with 73 FTEs. Next slide, please, Slide 8. So cash flow ended at EUR 2.2 million -- EUR 2.3 million in the quarter and it's about the same level as last year positively affected by the reduction in net working capital in the quarter, but negatively from reducing other short-term liabilities and local fees such as tax payments, et cetera, with EUR 15 million. Investments are substantially lower than this year than last year's. We did increase machine capacity substantially last year on several sites, and now we're moving capacity around between sites to optimize and I expect the investments will be around 1% to 1.5% of revenue in 2024.
Next slide, please, Slide 9. Net working capital as a percentage of sales is at 31% and up from 28% last quarter even though the net working capital is reduced to 3%. The CEE and Asian sites are closing in on the strategic target and ROOC 20% of net working capital as a percentage of sales and the Nordics and North American sites carry more working capital in general and are more affected by the Q3 seasonality in addition. CCC has a similar effect and is up 11 days from last quarter. ROOC at 16.8% is down from last quarter's 22.3%. ROOC is quite sensitive to changes in profits, and I expect most capital efficiency metrics in Q4 to bounce back to the level it was in Q2 or an improvement on those. Again, net interest bearing debt to EBITDA of 1.6 and last quarter's level. And the net debt ended at EUR 118.4 million, which is down 3.4% from last month.
Finance net EUR 2.3 million and in this quarter, we only have a minor [indiscernible] of 0.2% compared to last year, whether it's [indiscernible] was [ 1.4. ] Our interest rate continues to be around 6%, and we are now running at an annual interest rate cost of around 8.5% to EUR 9 million, which is below the EUR 10 million we indicated before. Tax rate for the quarter is ended at 27%, which is higher from last quarters and-- it's some higher tax units and some dividend effects, which creates tax, but I expect it to stabilize somewhere around 21% to 22%, where it is now year-to-date. And next slide, please take in. And over to you, Peter.
Thank you, Cathrin. Let's talk about the outlook for 2024, the full year outlook. We expect growth to continue to be strong in the Nordic and U.S. sites -- we reset our capacity and CEE and focus on new customers and new ramp-ups. Asia facilities are now streamlined for competitiveness, as they've shown this quarter, performing extremely well and on target to continue winning new business. For the full year, we anticipate revenues to come in between EUR 635 million and EUR 660 million with an operating profit or EBIT between EUR 44 million and EUR 50 million including close to EUR 5 million in restructuring costs incurred in the first quarter Let's move on to some key takeaways. Next slide, Slide 11, please. But we see strength continuing in the Nordic and the U.S. markets. We also see that the European slowdown affects demand in electrification and industry sectors, particularly affecting sites in CEE. Resiliency in energy infrastructure expansion and advanced chip development drives growth with global customers. We have strong sustained demand in defense aerospace providing stability during this economic volatility.
The demand for regional production opens up new markets in Central Eastern Europe for us and Asia beyond China, aligning with those -- with the expansion plans we have. They're intensifying efforts on growth opportunities through new markets and new customers, creating new partnerships. We also have increased targeted activity in M&A, looking at key markets as valuations continue to become more attractive. Next slide, which is the Q&A. And I'd like to remind you that we'll shortly start the Q&A. So please post any questions you may have in the Q&A section of the webcast. Thank you.
Let's take a look at some of the questions that have come in. First couple of questions are from Amelia Enean.
What is driving the weak EBIT margin in the Nordics, given the strong year-on-year sales. I told you this question would come. Are you prepared for it?
Yes. It's just -- we want -- or we are planning to grow even more in the Nordics and meaning that we are bringing up with more people and assets. And currently, we're striving a little bit to utilize that full potential on the top line side. Hence, we are having some inefficiencies in the quarter in addition to the seasonality.
And the next question was, any updates on the full year guidance given the stronger-than-expected EBIT in Q3? The midpoint of your guidance implies a lower EBIT margin than you reported in Q3, which is likely from a lower revenue base.
Currently not. Sticking to our guiding, I would say.
That's what we have so far. I know that we are on a slight delay on the Q&A part here. We do have 78 people with us today.
It's very good.
I'll give it another few minutes. Well, when do we expect to be in phase with or reaching the full potential?
I think there is a...
And what are we talking? I mean what is the full potential?
You can talk about that, but we're measuring that as a revenue per day that we produce basically, and we have some way to go there, I think, and we are hoping to close that gap before the year-end.
I think we're NOK 9 million or so per day out of our Norwegian facility. And our target is we need to get to EUR 1 million a day. So there's a substantial uplift. Now we're not geared for EUR 1 million per day, maybe right now, but we need to start getting to that level. And it's been a struggle ever since I'd say, mid-Q2 getting to that number. Obviously, the site, as we built it and renovated it and installed equipment the first time around back in 2016, was geared for a maximum of EUR 600 million a year. Now we're looking at about 4x that. So it is pretty crowded in there. And that doesn't help when it comes to streamlining processes and increasing output even more. But we will get there.
So Olav Rordevand has a couple of questions.
The order intake in the quarter is 148 and nothing else. So slightly higher than the revenue, 148. That will get you numbers in order, Olav, I think.
And then Peter, I didn't understand your explanation of better-than-guided Q3 margin.
We didn't give a -- we ended higher than we expected, actually, even though it's a little lower than it was last year for several reasons. So probably our anticipations when we set the numbers to be even lower than we actually did give better. So we are preparing to last year, and we did ended up somewhere -- and our anticipation when we sent out the outlook change was actually to have some more problems than we actually ended up in the end.
Another follow-on question from -- you've been in the process of moving some customers to sites to free up capacity of defense customer. Is this process finalized? When do you expect these customers to be up and running?
Well, we have 2 or 3 customers that we're moving to Denmark from Norway. It's at the very least two. Both of them have started to deliver and are performing. It's not completed yet on that. The largest move is on electrification with starting up Poland. Our ambition was to start up Poland as a second site for that product, really supplying product into Norway for a final test, but building the product in Poland, getting them up and running. And we wanted to do this in Q1 this year.
But after discussions with the customer and the product development plans from the customer, the plan is now to introduce the next-generation product in 2 sites, both Norway and Poland, pretty much at the same time and not transferring anything of the existing generation, which also means that, that project probably will be finalized sometime during next year and starting up sometime probably in the -- either beginning or towards the end of the second quarter. That's where the time line is right now.
So obviously, that does not help our situation where we want to be with the focus on continuing to ramping up defense, but we'll have to find other ways to deal with. And we know that we can increase utilization of the Norway facility pretty dramatically without the transfer also just by changing the way how we run the plant and how we plan the processes and production.
What is our current R&R within defense post the summer holiday? What are the expectations for growth defense growth in Q4 and next year?
We're not going to talk about next year during the Q3 reporting at all. We're leaving that for the CMD in December as we've not completed our analysis of the outlook for 2025, even though we haven't pretty good idea about defense, but the other sectors need a lot more work and understanding, and we need more time to see where things are heading for next year. I don't understand what this current R&R, what's that? You don't know either?
No. Not familiar with the term.
I will give it another few seconds here, see if anything pops up.
There's a possibility if either, if you're meeting with us during this week or next week, if you've scheduled meetings with us already, follow-ups on there. There's a possibility to meet us and the tech leaders in Paris on the 25th and 26th of November or on Paretos tech SaaS -- tech SaaS meeting in Stockholm on the 28th of November.
Okay. I think we'll close the shop today, and we'll see you all when we see you. And if not, then in the Q4 report. Thank you. Bye.