Kitron ASA
OSE:KIT
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Kitron ASA
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Welcome to a review of Kitron's Fourth Quarter and Full year Results 2021. I'm Peter Nilsson, CEO of Kitron. And with me today, as usual, the CFO, Cathrin Nylander. I'd like to remind you that we will conclude with a Q&A session, and I encourage you to post questions during the presentation. Now let's take a look at an overview of the quarter. Slide 2. Demand continues to be very strong. Kitron's revenue for the fourth quarter was NOK 949 million. This brings 2021 Q4 revenue to 2020 year's level on comparative currencies. The order backlog ended at a record NOK 2.8 billion, an increase of 41% compared to last year. This is a record again, and it reflects the strong total demand situation. However, strong demand was overshadowed by a challenging supply situation, primarily from the semiconductor shortage. For the full year and quarter, sales was affected approximately 10% negatively by supply chain delays. Operating margin was affected about 1% reduction due to delays in efficiencies and rapid component price increases. Net working capital increases as demand continues to be strong. Next slide, please. Slide 3, strategic outlook. Let's talk a little bit about the strategic outlook and the outlooks for both '22 and '23. For the longer term, the outlook remains favorable with identified programs to support growth. In the near term, demand continues to be very strong for '22 and '23. Significant growth opportunities driven by market sectors, electrification and connectivity are being launched in 2022. For example, growth in our Poland site is forecasted at more than 100% per year in '22 and '23. Multiple electrification customers are being introduced with full electronic assemblies as well as high-level integration. Overall, we expect 10% growth within the Kitron companies, and the addition of BB Electronics should add well over NOK 1.5 billion to 2022. Limitations on availability on electronic components look to continue in '22 and '23 as global demand increases faster than new capacities introduced. We continue to monitor the situation carefully and take proactive measures to minimize the impact to sales. Many redesign efforts are ongoing with customers to increase flexibility and affect a more supply chain robust product design. Given last year's increase of inventory and working capital and the projected difficulties in '22, additional focus is required when executing demand into deliveries, improving our cash flow and protecting competitiveness and profitability. Next slide, please. Slide 4, the BB Electronics acquisition. Towards the end of last year, in late December, an acquisition was completed of BB Electronics, another Scandinavian EMS company. And as we see if you take a look at the chart, combined pro forma sales and operating margin for last year 2021 shows a significant contribution to the Kitron Group on a pro forma basis. Other possibilities that the acquisition provides, of course, is the additional sales of about NOK 1.5 billion to the group for this year, but also 3 new manufacturing sites, bringing the Kitron Group to 9 sites and close to 100,000 square meters of manufacturing footprint. Over 100 new customers will be added and strong revenues within sector connectivity with multiple customers focusing on sensor technology for smart homes driven by the strive for energy efficiency as well as green energy solutions. We also see opportunities to leverage material cost and opportunities to cross-sell to new markets and offer new solutions to our customers. With that introduction, I'll hand over to next slide, financials, please, with Cathrin Nylander. Go ahead, Cathrin.
Thank you, Peter. I will now present the financial results. Slide 6, please. Continued mixed sector development. Revenue for the quarter is at NOK 950 million approximately, a reduction of 6% from last year. But as Peter said, at the same level,over last year if we calculate into last year's currency. For connectivity, we see strong growth from last year and also strong growth from last quarters, and it's actually both subsectors, communications and sensors, that have similar development, building up to the growth. Connectivity is one of the sectors where the revenue is more in line with the expectations coming into the quarter. For electrification, we have a substantial reduction compared to last year. Electrification currently is greatly affected by material delays and came in below our expectations in the quarter. On to Industry. Industry has a good growth, and together with connectivity or the sectors that are in line with our expectations. Subsector automations continues to be strong. Medical devices are down. The exceptional volumes we had in 2020 were more or less down to normal in Q4 last year, so they don't make up a change. For Material Devices, material delays -- for medical devices, material delays and the closedown in China effects. Defence/Aerospace has a minor reduction compared to last year, but a substantial increase in the quarter. Norway and Sweden revenue at last year's level, but as a bit behind. Defense is also affected by material delays. So looking at the countries, all of them are affected by the material delays, and the net effect differs in how much they're able to compensate and move volumes around basically. Norway ended up a minor growth due to the defense delays. There is a very good growth in Sweden, mainly from connectivity in the industry. CEE heavy electrification has a substantial reduction. And for the others, China was affected by the closedown in December and the U.S. is below by lower defense volumes. It's a bit depending on what we're able to deliver in the quarter that shows the revenue development and the country development. I have to say that the volumes that we have produced in the quarter have been really hard work and from many people to produce these volumes. Slide 7, please. A little bit on the currencies. We have a 6% negative effect on currency compared to last year. There are currency effects on local level on most sites as the invoice and other countries in addition to their local currencies. And for the fourth quarter, the spread between the currencies are similar to last month and where the U.S. dollar continues to be the largest, followed by the euro. Add to that also that we also buy mostly in U.S. dollar. The currency effect of the selling currencies are shown in the graphs showing the new bank average closing rates per quarter with a mixed catering has, this gives an average about 6%. For the full year, currency effect is around 3%. That said, we have mentioned a reduction compared to last year of 6%. So 3% is currency, and there's a 10% reduction due to the extraordinary volumes of medical devices in last year. And then we have around underlying growth, excluding the medical devices of 6% in the revenues for the full year. Slide 8, please. EBIT affected by material supply delays and close down in China. The fourth quarter profit was around NOK 52 million. This corresponds to a 5.5% EBIT margin. And if we adjust for about NOK 5.7 million of one-off advisory costs related to the acquisition of BB, the EBIT margin is about 6.1% for the quarter. So the quarter is affected by the material delays and inefficiencies regarding to that and the close down in China. Year-to-date profit margin ended at 6.5% and 6.6% if we adjust for the one-offs. If we look at the countries in the quarter, Norway had a minor revenue growth and a slight decline in margin, ending basically at the same profit level as last year. Year-to-date margins for Norway is at 7.1% and the same as last year, which I think is a good effort due to the difficulties in supply. Sweden had a strong growth and margins improvement from 7% around to almost 10%, an impressive ending. The margins are affected by some positive year-end effects and probably a percentage higher than what can be expected going forward. The year-to-date profit margin for Sweden was 7.6% compared to 6.6% last year. Central and Eastern Europe with a 2-digit revenue decline to have a subsequent margin decline, where material delays are causing it and inefficiencies at the ground scale there. Year-to-date, CEE is at 7.5% and about the same level as last year. For the others, margin in Q4 is affected by the shutdown in China and the U.S. defense volume as well as a reallocation of group costs. They ended at the same level of profits as last year's, but at higher margins. And of course, after the shutdown in China, we would have expected a higher result in Q4 here for others. And from a general level, China is performing very well outside of the shutdown period. And the U.S. still needs some improvement. And therefore, in December, we have made some adjustments to get the cost level down coming into 2022 in the U.S. The EBIT margin in others year-to-date is 5.2% compared to 11.2% last year. And the last year was greatly affected by the exceptional volumes in medical devices driving profits. Some short comments on the items below EBIT. We have some currency effects from revaluation in working capital in Q4. This is a profit of 0.6%. And last year, it was a loss of 0.1. We also have in finance net, net noncash positive ag of NOK 4.4 million this quarter compared to negative agio of 8.8% last year. It's mainly revaluation of internal loans. Year-to-date negative agio was NOK 9.8 million and compared to NOK 8.7 million last year. Slide 9, please. Continued capital buildup due to material supply and delays. Working capital ended at NOK 1,230 million, approximately, an increase of 15% last year. The change in the quarter is around NOK 68 million. The main driver is inventory and contract assets with only minor changes to trade receivables and trade payables. The major reason for the buildup is the delays in material and also partly that we have an increase in volumes going forward. But in this quarter, the increase to a larger extent, being compensated by customer deposits and consigned material by customer. And as mentioned before, in addition to the inventory carrying our books, out of our books, we're carrying a couple of hundred million of inventory for our customers.As for the ratios, both for net working capital in percent of sales and CCE, although ratios are deteriorating compared to last year, they are not changed compared to last month. I said last quarter that we expected a stabilization of net working capital, what we got was the stabilization of the ratios, however, not the values. Slide 10, please. The operating cash flow in the quarter ended at NOK 7 million positive compared to NOK 132 million last year. In Q4 last year, we had a reduction of net working capital of NOK 70 million, and we have an increase of NOK 70 million in this quarter. That said, in Q3, our net working capital increase some NOK 123 million and now ending Q4, the increase is NOK 70 million. So we have been able to reduce the speed of the negative development, resulting in the almost 0 cash flow, slightly positive. We continue to monitor the situation and take proactive measures like asking for firm models and delivery alignments working on customer is consigned and customer deposit and just to continue to work and align with the best we can in this current situation. Net interest bearing debt over EBITDA decreased from 1.8 to 1.7 this year. The net debt ended at NOK 571 million, positively affected by the net proceeds from the share issue that we did to part finance the acquisition of BB. Adjusted for the share issue, the net interest-bearing debt over EBITDA is 2.7. Other acquisitions, transactions related to BB Electronics are booked in 2022. So this year, it's advisory cost and mainly the share issue that you see in our accounts. Slide 11, please. Updated dividend policy and dividend proposal. The Kitron Board yesterday decided to update the dividend policy. This is a consequence of the investment in BB Electronics and the future capital needs of the company. The Board decided to change the dividend policy into that whereas the last one said at least 50% of net profit, the new policy says to pay out between 20% and 60% of the company's consolidated net profit. The rest of text that you can see in the square is basically unchanged. The Board also resolved to propose an ordinary dividend of NOK 25 per share, which corresponds to 32% of net profit and a total of NOK 49.3 million in payouts. And last year, we had a dividend of NOK 70 per [indiscernible] very shortly. And next slide, please, Slide 12, and then back to you, Peter.
Thank you, Cathrin. Let's start with the order backlog. So next slide, please, Slide 13. The order backlog -- the record order backlog continues. The order backlog ended at NOK 2.8 billion, as I said before. It's an increase of 41% compared to 2020. To repeat slightly, it's a record. It reflects a really strong total demand situation, but it also includes about 10% of rescheduled orders due to these extended component lead times or supply chain constraints and delays. In absolute numbers, we grew most within Electrification. Percentage-wise, we grew very, very strong within Connectivity. So this reaffirms Kitron's strategy launched in '21 to make Electrification and Connectivity the focus of new sales development. Next slide, please. The outlook. Let's move on to the outlook. So next slide, Slide 15, please. The total demand is very strong and the order backlog at a record level. However, in the short term, supply shortages are affecting Kitron's ability to turn demand into revenues. For this year, 2022, we expect revenues to be between NOK 5.2 billion and NOK 5.8 billion, including BB Electronics. The operating profit EBIT is expected to be between NOK 330 million and NOK 430 million. Again, repeating where the growth is coming from, it's coming from Electrification, Connectivity and Industry Market sectors. I realize that the outlook may seem conservative, especially given the very strong demand we see. The limitations in material supply bring uncertainty to the outlook, and we would have to see confirmed improvements in supply to revise it. Next slide, please. So some of the key takeaways. Growth in 2022 is supercharged, propelled by the acquisition of BB Electronics. The order backlog and demand outlook for '22 and '23 supports strong continued growth. In addition, we see well identified key program acquisitions to sufficiently follow our strategic trajectory. Kitron will hold the Capital Markets presentation on March 15 at 10 a.m. Central European Time, where we will further elaborate on our updated targets, timelines, M&A effects and whatever else may come into the picture. This concludes the presentation portion and getting ready to move on to the Q&A.
Let's see, Cathrin, if anything is coming in. So this is from Peter, SB1 Markets. Backlog? Is it possible to say something on the effect of the longer lead times on the backlog? And I think it's about 10% to the backlog. So around -- if the backlog is NOK 2.8 billion, in the vicinity of that number, 10% of that is the growth of the order backlog, meaning that the underlying growth would be from 2 in 2020 to 2.5 the remaining. So that's the underlying growth of the order backlog. And we said about 10% of the top line for the year is being rescheduled out. So it's about NOK 300 million. It's all sort of connected to what we've seen since mid last year when we really started to see this being pushed. And we had a very, very strong first half of last year and really the difficulties accelerated in the second half of the year. Let me see if there was any follow-on there. Yes, BB Electronics. Can you say anything else scarce capacity in its facilities? Well, how would you know about that, Peter? And when do you expect the need to increase the facilities? Actually, we've taken one decision on the Czech facility was taken last year before Kitron came into the picture. And that facility has added several thousand square meters that are being planned to be filled up this year. Beyond this year, we're now looking at what else do we need to do for '23 and '24 in regards to the Czech Republic. But for this year, they're okay. We're seeing rapid growth in the Suzhou facility for BB, and we went ahead and increased 5,000 square meters just this week to expand now into the first quarter for the Suzhou facility. And that would take them to well over 13,500 square meters, I think, making it the actually, from a footprint point of view, the largest facility within Kitron. And if we look at the target volumes for next year in Suzhou, it would also be the largest facility from a revenue point of view within Kitron. So we have prepared at least those 2 facilities. Denmark in BB is -- I don't think is a problem, and there are -- there is space nearby if we ever were to need it. And for the rest of the Kitron facilities, it's all going to depend on -- will we up the outlook for this year? Or are we staying where we are now? If we're staying where we are now, then we should be fine because basically, then that this year's Kitron target is the same as it was last year when we started last year for '21. But the upside is tremendous. And -- but given where we are, right, it's difficult to say anything about if and when and the certainty of that. Now a couple more dividend. Is the working capital build up a part of change dividend policy? Or is it solely related to M&A and BB? You want to go ahead and take a stab at that, Cathrin.
The capital buildup in net working capital is due to the material delays. But the change in the dividend policy is due to the capital situation in general that we are in now currently after the acquisition and the future growth we expect for Kitron going forward.
And then a final question, the guidance, a wide range, especially on the EBIT. What are the swing factors? Well, the swing factors are -- is only the constraints on the material supply situation, right? We are pretty good at being very proactive on price changes and components. There may be a slight delay of a month or a few months when it comes to other sort of cost increase on passing that on to our sales price. But it is constraints on the supply chain. You will have lower efficiency if suppliers' promise delivery dates are not kept because that means we're sitting with capacity. If we know something is not going to happen, well, then we adjust capacity. And usually, it's not a very big problem. So we -- everything more than 5.2 delivered will have a corresponding effect, higher effect on the EBIT number. And really, when we're looking at -- the low range is pretty much where the finishing number for this year, for 2021 has been. Usually, that's where we start our guidance anyway. But this year, it seems even more relevant that to be able to continue on that level. And so far, I think we're tracking after only 1 month this year, at least that's where we're tracking. January is always very, very soft anyway. So it's difficult to find these sort of conclusions. Okay.
So far, I mean, the effects we have had is volatile top line and lower top line, which hasn't really had that long or strong deviation on the contribution margin. A slight reduction, but not much. So mostly the fact that we have a lower top line effect net profit. But of course, if things end up being lower at the end of the year, we had some cost build-up during the year and so.
No. We need to see that we're tracking the full quarter this quarter, and we're heading into the second quarter at a much higher rate, then we can feel confident that, hey, something good is going on here. But if we're tracking at the sort of level we were last year, well, every month, we get closer to the end of the year as last month to run up the -- to deliver more. Anyway, Tomas Skeivys gave us a couple of questions. Situation in the Chinese plant back in operation? Yes, they were back in operation on...
26.
The 26th. I was about to say the 25th. But the 26th of December, we took a decision in early December to increase the capacity from a machine point of view with another -- just over 30%. That line was already installed when they actually went back to work. So very quick ramp-up. It's being utilized fully. The output from China -- from Ningbo facility now we're talking about. Ningbo facility was about RMB 50 million in January, which is normal output is around [ RMB 30 million ]. So we can immediately see an effect. And the actual output from Ningbo in January was very favorable and a really nice result there. Of course, now in February, China loses about a week from the Chinese New Year. Even though we have contracted with about 1/3 of the workforce to work through that holiday, it's passed now. I mean it was a first week of February, so. But next question there start to appear some news about easing supply chain issues globally. Do you see the improvement? Or is it more of an expectation? Right. I'm done with hoping. I've heard this before. In Q4, I went out and told you guys also that it looks like Q1 is better, right? We're getting much stronger confirmations from suppliers. And what was the -- what became the truth of that. Well, the confirmed deliveries in beginning of January, nothing came, no communication even. So about 3 weeks later, the suppliers come back and say, hey, we've taken your orders and we've moved them to April. So that gives me an indication as we are nowhere near the certainty. Now we're seeing a lot of really good confirmations for Q2. Are they going to happen or not? Well, nobody knows. And I'm seeing conflicting messages from other leaders in the industry. I think the leader for Volvo went out yesterday on saying that we see it easing into this year, things are becoming better. Well, I mean it depends on what you believe. In reality, the lead times on their cars, I'm not going to comment too much there. But in general, in the automotive industry, lead times on cars are very, very long, 10 to 12 months maybe. If you -- and many, many cars are delivered without the electronics, in stripped-down versions, where you're taking away guidance systems and all of these things that they've had. So we're still not through this. And I say -- and also when I'm reading from within the industry is that demand is growing faster than new capacities being added. So we need to be smart and we need to work with customers to redesign products, to create these flexible robust production designs, which means we can switch between different component alternatives. And really, if you look at of the design companies and the Nordics now, 50% of their work or so, between 30% and 50% is going solely to redesign existing products to make them producible for alternative components. BB synergies, how quickly do you expect these to be realized? I think on the component part, I think that's where we have the biggest identified synergies, but it's going to take at least the first half of this year to roll those volumes into new prices. There's a lot of this half -- first half of the year has already been placed on order. And so -- but this year, this year, on other synergies as upselling and cross-selling, where we're actively working quite a few programs where we see customer demand for the U.S. from BB and possibilities for us to either win back or keep existing volumes within BB that were scheduled to move out but they can maybe be kept if the products are transferred to the U.S. So again, it's going to take this year. Our focus right now is also very much on actually just delivering the schedule and top line we have. So that will be priority #1. And from the sourcing organization, the priority #1 is working with suppliers on a daily basis, getting parts. [ Vincent Normant ] says -- asks material situation. How did it improve in the beginning of Q1 compared to Q3 and Q4? Well, it didn't. It looked like it was going to, but it didn't. That's the only comment to be said here. It means that we're working even harder. I spoke about adding some resources, and we're looking at adding more people, more resources to chase more that have a bigger push and drive and also alleviate the situation from our current people working with this, where they've been working day and night, now pretty much for 9 months trying to just save the situation. What is baked in the lower end of the guidance for the sales and EBIT? And I think you commented the lower end of the sales matches the original guidance for '21. And I think that's the run rate we're coming out of. So we were pretty confident in the run rate we're coming out with Q4 and into what we're seeing now is confirmed on-hand component deliveries for Q1. So given that run rate, that sort of sets the bar for the lower range. The higher side is pretty much half of our demand on the high end, right? So we don't -- I think it would be premature to set the guidance at the top end of the demand, given where we are. And of course, the EBIT, this is related to top line, about 15% or so of top line on a good day will fall right down to EBIT. What are the positive factors for margin you could trigger synergies from BB? I think it's going to take this year. It's limited in total. We said about maybe NOK 10 million to NOK 15 million on synergies on material pricing is what our estimate was in Q4. So we're sticking with that estimate. I don't have a timeline for when it will be happening. But prices are being negotiated on a quarterly basis. They were pretty much done for Q1 when it comes to Kitron, and now it comes into adding BB into those volumes with those suppliers. That takes some time. And then those prices, most we'll see how retroactive they are or not. I'm not going to comment on that. But hopefully, we can have some attractive pricing on orders already placed. How confident are you in BB delivering NOK 1.5 billion? Or NOK 1.5 billion is they had about a -- they had about DKK 1 billion, Cathrin, in sale for [ 2021 ], which was about close to NOK 1.4 billion. So 1.5 billion doesn't seem like a stretch when their budget is higher and their demand situation is closer to [ NOK 2 billion ]. So that gives you the sort of possible upside. It also gives us -- so that gives them that flexibility to be able to reach that really maintaining the level they were at in Q4, but being able to deliver some upside. And again, the budgets are higher for these guys. But of course, from a cost perspective, we never increased cost prior to actually having the volumes in hand. Okay. That was Vincent. Thank you, Vincent. [ Tomas Tang ]. I understand there's a 10% effect in order backlog from orders being pushed into '21 and '22. Of course, the order backlog positively effect. I think we've answered this [indiscernible]. Okay. Okay. How much was the order backlog effect on getting more orders into the future compared to pre-COVID levels?Yes. I don't know if I have any percentage number on it. We did an analysis in Q4 where we said looking into 2021 in September 2020, what was that, was that 30% of 2021 was on order or something like that? Or in the total demand backlog, right? And at the same point a year later, we had 120%. So the home market has changed. The home market has changed also from what we do downstream or upstream into the component supply. So it's not that -- but on top of that, you still see that within Electrification and Connectivity, these are demands and levels of demand that we've never had in the same time period. So when we look at Q1 or Q2 or Q3, usually, those orders are always been there. It's in the longer term. Right now, for Central Eastern Europe, basically everything is booked until summer next year. We still have some work to do when it comes to Sweden, Norway, but those Central Eastern Europe have been good at driving their customers even into 2023.
I have to say also when we talk about demand, then we don't differentiate between how we just saved demand for the period. In the order backlog, we only have the firm orders and the forecast for 4 months. So talk about demand, we talk about everything. So the major difference from the COVID point of view is that more forecast has been turned into firm orders that's lifting slightly the order backlog. But what we see is that, which doesn't really matter whether or not it's a firm order or forecast is that the total demand has increased significantly. And I would say that's, as what you said, we have 100% of the demand or more than that already come into the year, and you invest the year before that. We had 40% or 60% or something like that. So it's totally different.
And on the Defence/Aerospace side, our order backlog maybe may not reflect the truth either because several hundred million has been deposited by customers just to create flexibility and not have to commit to specific products or specific volumes, but to be able to very quickly ramp up and meet demand. So that means that we bought the material. We have it on hand. It's lying there and wait. And it's -- from a cash point of view, we've been compensated. That's very common on the defense side from both U.S. contractors and Scandinavian contractors. I think that was it, right? Vincent was the last one I see here. And now we were on Tomas. Yes, yes. That was it, 11.59. It's just over 9 o'clock. So I think we'll call it a day. Thank everybody listening, and we'll be back on the Capital Markets Day, hopefully, right, with some positive news on the supply situation. If not, we continue working hard to meet our targets. Thank you so much. See you.