Kitron ASA

OSE:KIT

Earnings Call Transcript 2019-Q4

[Lars Peter Nilsson, CEO & President]

Good morning. Welcome to the Kitron 2019 Full Year and Fourth Quarter Webcast. I'm Peter Nilsson, the CEO. With me today, as usual, Cathrin Nylander, our CFO. So let me give you a brief summary over the fourth quarter and somewhat into full year last year. We had a strong revenue growth in the fourth quarter of about 20%, and 26% for the full year, particularly strong in the Defence and Aerospace sector as well as Offshore/Marine, just as we initially talked about very early in the year. Year-to-date the EBIT margin was 6.1%, strong improvements in both Norway and Sweden. Overall, we made just over NOK 200 million in profits. The order backlog ending very strong with a strong contribution from Defence/Aerospace and Marine sectors. Our working capital ratios are trending down after the large buildup earlier in 2019 and really starting in 2018. And talking about the coronavirus outbreak and the situation in China. Kitron started up on Monday this week at 30% capacity, and we're increasing day by day. I'll talk a little bit more about that later. And we'll also talk about later the Kitron U.S., the rebuild of the flooded factory from last year and what the status is now. Kitron Poland is up and running at projected margins. So breakeven in -- towards the end of last year, December breakeven month and actually, a pretty good result in January, even though we're not here to talk about January, but I can't help myself. The proposed dividend for last year is NOK 0.50 per share or NOK 0.50 per share. And we'll have a smaller capital markets presentation on March 18, the webcast and put out as a little movie. So the highlights for the fourth quarter. Revenue close to NOK 890 million. That's up 20%. The EBIT margin, NOK 54 million, up 28% from previous year. Order backlog, very strong, close to NOK 1.9 billion. And the interesting thing about the order backlog, it's not for the next 18 months. It's more dominated about -- for the first 9 months of 2020. So when we look at individual sites and we look at the order backlog for the first half of this year versus our forecast and budget, I think we're pretty much at 100% of our budget already and forecasting orders for the first half of the year. Now looking into the second half of the year, over 80% at least. So that's a different situation from what we're used to. It's very strong. Normally, we start out the year with less demand from our customers. So we feel pretty secure in our forecast for 2020. The operating cash flow, NOK 97.2 million in the quarter. So we had a lot of inflow in the fourth quarter. We're really seeing actions yielding results when it comes to reduction of net working capital, primarily driving down inventory numbers. And net working capital, though, for the full year is up 21%, ending at NOK 942 million. Of course, we've added operations, both the U.S. operation as an addition and the Polish operation also started up last year. So then looking into the full year for 2019. NOK 3.3 billion top line, it's up 26%. NOK 200 million, NOK 201 million profit for the year. Again, order backlog is the same as for the fourth quarter. But the operating cash flow is close to NOK 200 million for the year. Another big highlight, I think, is the EPS, where the earnings per share ended at NOK 0.74 per share versus NOK 0.63 the previous year. Yes. So a little bit about some of the major orders that came in, in the fourth quarter. 2 major orders from one of our larger customers, Kongsberg. One for communication equipment for K-TaCS and NASAMS Air Defence Systems. The value is approximately NOK 90 million, and delivery start this year and be completed into next year. Production will take place in our Arendal site in Norway. We're also awarded about NOK 80 million in orders for Remote Weapons Stations, RWS. Production there will take place in Norway also and it starts also this year. We were awarded an order for energy products, high-voltage direct current products to secure offshore wind power production. The delivery start here also in 2020. And again, it's our site in Arendal, Norway. So very strong order backlog for Arendal, Norway. And I think from a site perspective, we were close to NOK 1 billion in order backlog at the end of the year. So getting back to the coronavirus, a lot of interest right now from a lot of people and how that affects Kitron. Overall and based on the information we have right now, we don't see any material effects for Kitron. Our facility is located in the coastal City of Ningbo. It's about a 2-hour, 2.5-hour drive south of Shanghai and about 900 kilometers from Mainland City of Wuhan. We opened on Monday this week at about 30% capacity. We have employees that are traveling in from other places. They'll gradually be released from quarantine. Depending on where they're coming from, they're either facing 1 or 2 weeks guarantee right now. Of course, these -- that information and those decisions tend to change on a daily basis, so I'm describing the situation as of this morning on February 13. Suppliers and transport and customs is really where we're focusing. And we have about 44 suppliers in China delivering not only to our Chinese facility, but to many other Kitron facilities also. Most of those Tier 1 suppliers are now up and running. It's mainly PCBs and mechanics. And what we're doing in our other Kitron sites is rescheduling and resourcing to build other products to limit any effects. When it comes to Kitron China itself, it's about 10% of the group revenue. So again, these 2 weeks that the New Year and the shutdown, extended holiday has been for us, we're not expecting any material effects from it. Yes. So I'd like to talk about 2 of our new sites. We acquired Kitron Technologies. It's an acquisition we did from API. It's located in Windber, Pennsylvania. It was completed first quarter last year? Yes. And then in the second quarter, we had major flooding, all right? There was some very heavy rain and the site was completely flooded. We were up and running about 2 weeks later in the new facility, so a very, very strong comeback. We didn't miss any customer orders of significance. And today, the site is more or less renovating -- renovated. So the finishing touches are being put on, which is, I'd like to classify as a new facility, a new site. It's really beautiful, the way it's been renovated. So we've also had then business interruption in insurance that covered any extra costs that we've had during that period. All of those costs and losses and everything was booked in Q4. We plan to move into the renovated facility in the second quarter in this year.

[Cathrin Nylander, Chief Financial Officer]

Yes. Maybe I should say a few words on the effects on the accounts, basically. So everything up to Q4 is booked in the income statement, and it affects the top line of about NOK 30 million, and that is insurance income, but the business interruption that we get is at margin value. So if you turn it back into top line, so it's a sort of a one-to-one replacement of top line for us. And there are some extra costs, basically, about NOK 19 million in the year of other expense, which is related to the flooding and booked into other OpEx. And then we have a write-down of equipment that was damaged and the installations in the facility of about NOK 6 million. And the EBIT effect for the full year is, I would say, on a group level, not visible. It's about NOK 1.8 million. And in the quarter, it's nothing. So it evens out quite well even though it affects certain items.

[Lars Peter Nilsson, CEO & President]

As it should.

[Cathrin Nylander, Chief Financial Officer]

Yes. Of course, it should.

[Lars Peter Nilsson, CEO & President]

So jumping on to Kitron Poland. Our new facility is in Grudziadz, Poland. It's about 1 hour south of Gdansk. Production started in the fourth quarter. We had some preliminary qualifications in September and really running fully in December. So December was a breakeven month for us. We now have 2 fully automated production lines running basically 3 shifts at this point. And I think, a pretty decent result in January. So it's at -- currently at planned capacity and margins.

[Cathrin Nylander, Chief Financial Officer]

Good. And now back a bit on the financial statement. Thanks, Peter. So we had a growth of 8% organically in the quarter and actually, 20% for the full group, including the acquisition of API. In general, when we look on the growth on the sectors, it seem -- you see that industry, still the largest sector in the quarter. It's NOK 320 million in total, has a slight reduction. We saw a bit of hesitancy for some of the customers breaking up a bit and wondering about what's going to happen in 2020. We don't see the same hesitation in -- or in the order backlog going forward. So that is primarily the result of the reduction in Q4. Very strong Defence, NOK 255 million and up 116%, and NOK 135 million increase compared to last year, so very significant. Medical devices up also 20%, very good results of that. And Energy/Telecoms, a slight reduction. We have disengaged a customer where we had a medium to high volumes but relatively low margin. And that, you can see the effect in Energy/Telecoms in the quarter specifically in this, and you also see them on one of the slides later. Offshore/Marine, also there, good growth, NOK 53 million in total and a growth of 34% for the quarter compared to last year. So I will say in all, pretty strong growth and according to what we expected. When we look on the sectors for the full year, so we had a growth compared to 2018 of about NOK 680 million, and it's a 26% growth in total and 16% of that is organic. So Kitron Tech acquisition contributed in about NOK 250 million in total for the total top line. Industry. We had 6.3% growth in total, affected slightly by the growth in the fourth quarter. And Defence/Aerospace, 65% growth, ending at NOK 743 million. I have to say also industry is about NOK 1.3 billion of top line currently. Medical devices, also there, 15% growth for the year, very good. And Energy/Telecoms, in total, also 15% growth. And Offshore/Marine, of course, 340% growth, so ending at NOK 240 million compared to NOK 50 million the year before. So I will say a pretty good year. Kitron Tech then contributed about NOK 250 million, so around 10% of the growth in total. But organically, 16%, which I think is good and according to anticipation. When we look at the sites, then how did we do? Of course, Norway, as you have seen, they have most of the large orders. They are strengthening their Defence business quite significantly, and they grew in the quarter NOK 57 million compared to last year and 30%. Sweden being affected by this engaged customer, which explains for the reduction on '19, basically between these years. Lithuania, there's a slight reduction, as you can see, and most of that top line is, you can see in the right most column of Others. It's been transferred to Poland, and they are transferring some of the volumes continually, and that was the plan all along. So we can fill up Lithuania with new volumes going forward. The U.S., of course, the major part of that growth of NOK 103 million from NOK 11 million to NOK 134 million is of course, technologies, about NOK 91 million, but also [ Inc. ] did a significant growth by itself. And then the others consisting then on Poland and China grew some 36% in total. For the full year then, so how did we change? Norway, up 30% and NOK 185 million. It's a significant change from the NOK 670 million there last year and now up at NOK 851 million. Sweden, about the same, not so much change but stable income, which you will see also coming into next year, stable to a slight decline. Lithuania, growth of NOK 100 million in '19. Then U.S., we grew to NOK 293 million. And how many percent? Over 800%. But the NOK 250 million of those, again, is the acquisition. And then in others, we have a growth of NOK 80 million coming up to NOK 481 million, of which then the -- we have moved some revenue then from Lithuania into Poland. It's the same amount, of course, for the full year for Poland as in the fourth quarter. So all in all, I think it's a rather drastic change in the mix between the countries compared to last year. Profits. So we ended up at NOK 54.2 million in the quarter and 6.1% according to expectations and up 28% compared to last year. EBIT margin, again, 6.1% compared to 5.7%. And we did have the startup in the Polish facility in the fourth quarter, where we have taken a loss of about NOK 10 million. And we have to say that during the year as well, our legacy site in the U.S. has been running at a loss as well, which we will see it will have a profit next year. So we see good expectations for improved profitability next year. So we decided on showing this, the year-end figures for the EBIT development. And as you can see, Norway improved their margins from 4.2% to 5.7% (sic) [ 5.2% ] and a significant increase in the EBIT level as such. Also, Sweden improved their margins from 5.5% to 6.3% in spite of actually having an equal volume. So they've really improved their profitability. Lithuania is suffering slightly from the ramp-up effects. But also now that we're transferring some volume, we see a temporary, slightly lower margin compared to the 8% they've been to before. And then the U.S. coming up. So it's actually more positive on the acquired side in Kitron Tech. We have at expected margins and good margins, better than you see in the list here because it's been slightly reduced by the legacy operations that we have in Kitron U.S. driving the margin down for us. As for the others, China is performing well, and the Polish startup costs are included in Others. Next year, we will present Poland by itself and I think possibly also China. So going over to working capital. Last year, net working capital in percent of top line was 23%, and it's been -- and it's now 26.3% on a rolling 3 average. It's been decidedly higher during the year, so we see that it's improving during the year. The cash conversion cycle is higher than last year, and it's 102 compared to 84, where the -- actually, the DIO and the DSO is basically the same as last year. However, we have a lower DPO as we are buying less. And we will see this normalize a bit more going forward. ROOC, 14.8% at the end of the year. Also, that one was 17.5% last year. If we exclude the IFRS 16 adjustments that we do, in the ROOC, we include fixed assets. And of course, we have NOK 135 million approximately of fixed assets according to IFRS 16, which drags the percentage down about 1.5% from that comparably. The net operating working capital has increased compared to last year of about 160 -- or I think it's NOK 163 million, and NOK 100 million of those are from the acquisition in the U.S. in Poland to have some sort of explanation. For those that are studying the balance sheet, there are some large movements in certain items. I'd like to comment on a few of them. So for fixed assets, it's actually increasing to NOK 230 million in the year compared to last year then sort of to NOK 523 million. So the acquisition increases by NOK 43 million, which is a split of assets and IFRS adjustments. And then also, the startup in Poland increases with NOK 138 million. Also there, a mix. And the rest is basically IFRS movements. For the other sites, the investments and the depreciations end up at sort of a 0 change. So we increased our working capital from NOK 779 million to NOK 942 million. And it's been around NOK 930 million, NOK 940 million in spite of us growing organically about 16% and 26% in total, including then Windber. And cash flow again, we had a positive cash flow of NOK 97.2 million in the quarter. We're happy about that, ending in total right below NOK 200 million in cash flow. So we see good effects of that, and we anticipate a positive or rather strong cash flow going forward into 2020. Net interest-bearing debt, 2.8 compared to 1.9 last year, and that's affected mainly by the acquisitions that we made, but also according to the IFRS adjustments on net interest-bearing debt, which should have been 2.4 comparably to last year. And there was also a change that has -- you can see it in the balance sheet, it's quite clear, whereas we previously had booked some -- booked the IPC or the cash pool sort of net. We had to gross it up and that means that we have to increase our net interest-bearing debt with NOK 125 million on the debt side, and we are increasing our cash with NOK 125 million on the asset side. So it's blowing up the balance sheet slightly in the quarter, and that is the explanation for that, and is IFRS. And back to you, Peter. Market.

[Lars Peter Nilsson, CEO & President]

Yes. Thank you. So overall, a very strong year for Kitron. Nice increase in top line, NOK 200 million profit, NOK 200 million cash flow. So we're pretty darn happy. We're even happier when we look at the order backlog for going forward. NOK 1.9 billion as we exited last year, and it continues into this year, also continuing to grow and looking very strong. So overall, on the order backlog, we almost see a doubling of the Defence/Aerospace. So it's close to NOK 900 million on Defence/Aerospace now. Even though we had a disengagement from this low-margin customer, we still see a growth on Energy and Telecom, up 37%. So that's an increase with about NOK 60 million, and it's primarily driven by the high-voltage direct current products that we're supplying to wind farms in the North Sea. Industry, growth, 7.7%. It's about NOK 35 million up. It's stable around NOK 500 million, the order backlog for Industry. As of -- when you look at Industry in the full year, what the actual number is on invoice sales, it's about NOK 1.1 billion. That shows you how much order backlog coverage we have. Lead times tend to be shorter in the Industry sector. Medical devices, nice growth on medical. Overall for the order backlog, it's about NOK 200 million. Just over NOK 200 million and about just over NOK 100 million on Offshore/Marine also continuing to grow into this year. Yes.

[Cathrin Nylander, Chief Financial Officer]

Nicely done. So outlook.

[Lars Peter Nilsson, CEO & President]

So outlook for the full year 2020, we expect to be somewhere between NOK 3.3 billion and NOK 3.7 million (sic) [ NOK 3.7 billion]. We always sort of have our starting point at where we ended the previous year, and that's sort of tradition with us. We expect the EBIT margins to be between 6.4% and 7%. Growth is primarily driven by Aerospace and Defense and Industry, at least according to our plan. You know the plans are the first thing to change when you really hit the ground running. Profitability is mainly driven by operational improvements in Poland, where we had the NOK 10 million loss booked in the fourth quarter; and the U.S., where we also had a NOK 10 million loss in our legacy operation for the full year. So those -- just by breaking even in those 2, it's a significant improvement. And of course, both of them should generate normal profit levels in 2020. On top of that, continued growth, continued improvements in Norway, continued improvements in Sweden. Lithuania sort of back on track after transfers into Poland, so 2020 is looking pretty good for us. I think that's it. Thank you so much. We'll see you at the Q1, whenever that is. Thanks. Bye.

[Cathrin Nylander, Chief Financial Officer]

Thank you. Bye.