Kitron ASA

OSE:KIT

Earnings Call Transcript 2018-Q4

[Cathrin Nylander, CFO, Acting President & Acting CEO]

Good morning. Welcome to the Kitron Fourth Quarter and Full Year Results Presentation for 2018. I am Cathrin Nylander, CFO and acting CEO of Kitron.Organic growth was strong in the quarter. We ended at NOK 740 million for the quarter and a growth of 10.6% compared to last year. Growth excluding the Defence/Aerospace sector was actually 24% in the quarter.Also strong was the order intake. The order intake was about NOK 920 million, in line with the level of last year and builds up to a record-high order backlog of slightly over NOK 1.5 billion at the end of the quarter. It is actually 16.2% growth compared to last year.The EBIT margin ended at 5.7%, compared to 6.5% compared to last year.Earlier in the quarter, we announced the acquisition of the EMS division from API Technologies in the U.S. That transaction has caused some expenses for legal and financial advice, about NOK 6.7 million in the quarter. Adjusting for those one-offs, the EBIT margin for the quarter was 6.6%.EPS due to those one-offs were about at the similar level as last year, NOK 0.16 compared to NOK 0.17 last year.We have continued to build up inventory in the quarter to secure deliveries and future growth. So the cash flow was also in the fourth quarter negative with about NOK 27 million, slightly better cash flow, though, than Q3 this year. So net working capital ended at NOK 780 million, up a whopping 60% compared to last year.If we look on the full year, we have a strong order growth, including oil and gas, in total. The year ended at slightly over NOK 2.6 billion, in line with expectations for the year. The growth was 7.5%. And again, if excluding the Defence and Aerospace, the growth was 22%.EBIT margin at 6%, up 0.1% compared to last year, if we exclude the one-offs at 6.2%. So just slightly below our mid guiding compared to the -- earlier this year.EPS, 0.63% -- NOK 0.63 compared to NOK 0.57.So we see early signs of increasing activities in the customers in the oil and gas industry, which has led to a substantial backlog increase in the Marine/Offshore sector. With that backlog that we're having, I think we're firmly positioned for 2019.Some important agreements in the fourth quarter. We received a 3-year contract with a scope of NOK 150 million from a complex rehab technology customer in the medical sector. It is modules for electric wheelchairs, and the production will take place in Kitron's plant in Sweden and the U.S. And I would say we have just started the production at the very, very end of Q4.Also in the fourth quarter, we're proud to announce that we were selected as main supplier as -- for electronics to CROWS for Kongsberg Defense & Aerospace, and it's a contract over -- that can be NOK 300 million over 5 years. And the production will take place in the U.S. and in Norway, and it will start in '19.Important, Kitron, we are to acquire the EMS division of API Technologies Corp. We entered into an agreement end of November, and the acquisition marks a substantial strengthening of our position in the U.S. market.The business is highly complementary to our existing operations, with a focus on defense/aerospace, medical and industry. It's located in Windber, Pennsylvania, which is very close to our current facility in Johnstown. They have approximately 100 employees and 10,000 square meters of facility. The revenue in '17 amounted to about USD 30 million. And the purchase price, $15.9 million in cash equal to net asset value. The closing is expected to take place in Q1 this year. There has been a shut down, but so far it has not affected our plans.Capital Markets Day. Happy to announce that we will host a Capital Markets Day in Oslo, March 21 this year. You are welcome to register on our kitron.com for this event. And we would like to invite you and happy to see you.Financial statements then for full year and Q4 '18. So we grew about 10.6% in the quarter, it's up compared to last year. It's up NOK 71 million. And as I said, it's 24% growth excluding Defence/Aerospace.Industry continued to be the strongest grower and grew about 39% and up NOK 100 million compared to last year. Defence/Aerospace is down actually NOK 50 million and 30% compared to the same quarter. Medical devices, basically the same. Offshore/Marine, high percentage, but only NOK 8 million. Energy/Telecoms, up NOK 13 million.And for the full year, we ended up at NOK 2.620 billion, up NOK 180 million. And here, we see large shifts for the full year. We grew then 22% excluding the Defence/Aerospace.So the industry is up NOK 300 million. Defence/Aerospace is actually down NOK 200 million. We grew about NOK 60 million in Medical and NOK 10 million in Telecoms and NOK 17 million in Offshore/Marine. The percentage is quite strong for the Offshore/Marine, but the value is quite low, but we see a strengthening, which is very good.Revenue by country. Continued strong growth in Lithuania and China. So in the fourth quarter, Lithuania grew 30%, and China actually grew 15%. Norway and Sweden, as expected, basically on the same line as last year. And the U.S. had a slight decline. So the strongest growth in Lithuania and China for the quarter, in line with the development for the full year.I'm happy to announce now that Lithuania has broken the EUR 100 million level as well as the NOK 1 billion level of revenue for a year. In total, they grew 23%, and China actually grew 28% for the year. Both Sweden and Norway had a decline of 6% and 10%, respectively, which was expected. The Norway, Sweden and U.S. revenues are affected by the decline in the Defence revenue.Looking at the profitability and where we ended up. This is a time line. So we have adjusted back the one-offs for Q4 '18, so landing at about NOK 49 million and 6.6%. You see it's the highest profit that we've had, I think, ever.And we see a clear distinction between Q1, Q2 and Q4, which are starting to be more equal, whereas Q3 will always be the slightly lower quarter. So it's a strong quarter, although the component allocations has created less flexibility and we are not able to push around demand as we would like to and it creates inefficiencies. And that said, I'm really happy about what we have delivered in Q4. It's been a lot of hard work from many people to manage this figure.And also, again, a comment on the one-offs related to the acquisition. So it's legal and accounting advice related to the negotiations and due diligence process.So profitability by site. So Lithuania is back to the normal profitability level. They had a short-term demand pushout in Q3, which pulled profitability level down, now they're back at about 9% to 10% where they're normally at, and growth in nominal value.We see strong profitability environment in Sweden. So they have a 5% reduction in top line for the quarter. But in spite of that, they have doubled their profitability from 3.6 to 7.4, basically.Norway had some inefficiencies related to material allocation. It is, I would say, affecting Norway most. And they also had some ramp-ups that took slightly longer than expected, so profitability is slightly lower in the quarter than we've had so far. And U.S. is affected by the defense projects timing. They -- it will be improving in beginning of 2019 for the U.S.Looking at the full year then, where we ended up, where Lithuania and China show EBIT improvements in percent, for sure. So Sweden and Norway, in spite of their revenue reductions of 6% and 10%, respectively, they have stabilized or improved their profitability levels, which is good since they are affected by the U.S. timing.Then inventory buildup to secure deliveries and future growth. So the cash flow was minus NOK 27 million, so it's improvement from Q4. We had a positive NOK 90 million last year, so it's quite a substantial change or deviation. And there are threefold explanations to this. So we have bought allocated material, put it into inventory. We also have had some postponements on deliveries, so we're keeping it in inventory and the deliveries will happen in '19, mainly. We have built up for growth in Q1 and Q2. And we've also produced for later deliveries, which is affecting it.I have to comment on that and that we will see a reduction in the net working capital in '19. And the reason for this is that we see that the material allocation situation is stabilizing. It is improving slowly, and we see shorter lead times, so we expect to start to bleed off the extra material that we have starting, actually, in January, February this year.The gearing is affected by this higher working capital, so it's at 1.9 compared to 0.9 last year. And thus, slightly worsened working capital efficiency figures. So net working capital as percent of revenue is up to 23%, compared to 17.5% last year. We should be around 20%, that's our goal, so we need to bring that down.Cash conversion cycle, also still high, 84 compared to 61 at the end of last year.The ROOC ended at 17.5% compared to 23.2%. If we adjusted the ROOC for the one-offs, it was actually around 20% and not 17%.So short on the market development and on the strong backlog that we have in the quarter. I will say offshore strengthened. So the offshore order backlog is now at NOK 100 million, it's increased with NOK 80 million compared to last year and NOK 60 million compared to last quarter, and it is due to deliveries early in '19, basically.Defence, as we've said, is down also this year, down also this -- to NOK 472 million and 6% down from last year. Actually, it increased in the quarter with NOK 50 million.Medical, now up 11% compared to last year. Industry, up 20%. And Energy/Telecoms, up 11%. So we are firmly positioned for the start of '19.A few summary comments then for the quarter as a whole. We had a strong order intake and we delivered a growth in the order backlog of about 16%. The revenue was record high at NOK 740 million, ended up at NOK 2.6 billion in top line for the full year, an increase of 7.5%. Adjusted for one-offs, EBIT was 6.6%, up from 6.5% and 6.2% for the full year from 6.1%.Industry sector continues to be strong. Marine/Offshore is picking up. And Defence is temporarily weak, we will see Defence growing again at the end of '19.We have made the acquisition of the EMS division and which will strengthen us in the position in the U.S., and we expect to close that during Q1.The component availability then has continued to be an issue, but we see that the situation now seems to have stabilized, and we see shorter lead times coming on now.Also, the board proposes a dividend of NOK 0.40 per share for 2018. And the outlook for '19 shows further improvements and increases our confidence in our strategic ambitions.Then finally at the outlook. So for 2019, Kitron expects revenue to grow, to be between NOK 2.9 billion and NOK 3.2 billion. EBIT margin is expected to be between 6.2% and 6.6%. So the growth is primarily driven by the acquisition of the EMS division, but also, substantially, growth for customers in the Industry and the Offshore/Marine sectors. And the profitability is driven by cost reduction activities and improved efficiencies.So that was all for this time. Thank you all for tuning in and listening, and talk to you soon again. Thanks.