Kitron ASA

OSE:KIT

Earnings Call Transcript 2022-Q4

[Lars Nilsson, executive]

Welcome to Kitron's Fourth Quarter and Full Year Report 2022. I'm Peter Nilsson, CEO of the Kitron Group. And joining me, as usual, is Ms. Cathrin Nylander, CFO. [Operator Instructions].

So let's kick off the review and we'll move to the next slide, please. Today, I'm pleased to announce that our fourth quarter performance was nothing short of outstanding. We achieved a sales growth of 91% compared to the same quarter last year, with a revenue of over NOK 1.8 billion. The full year growth was 75% with a revenue close to NOK 6.5 billion. Our EBIT for the fourth quarter was NOK 165 million and NOK 460 million for the full year, a significant improvement compared to 2021.

Our high volumes have generated solid profits, resulting in improvements in our cash flow and key financial metrics, including return on capital at 27%, up from 12.3%, cash cycle conversion at 100 days, down from 126. I'm also proud to say that our cash flow was NOK 63 million in the fourth quarter and NOK 117 million for the full year despite the strong growth. This demonstrates our financial strength and stability and positions us well for continued growth in the future.

Next slide, please, Slide 3, order backlog. Let's talk about demand and growth. And as you all know, our company has been on a journey of rapid growth and expansion. This growth has been fueled by strong demand for the products we build and the services we delever. In the fourth quarter of 2022, we reached new all-time high levels of demand with an order backlog of NOK 6.1 billion, a significant increase from the NOK 2.8 billion previous year. Our book-to-bill ratio was 1.7 for the quarter and 1.3 for the year.

Let's deep dive into some of this and go to the next slide, Slide 4, please. The previous chart for order backlog measures firm order and a short forecast horizon. The R12 demand on this chart measures all the demand for the coming 12 months, i.e., all forecast on orders. The R12 raises the outlook further with the customer demand of NOK 8.95 billion versus NOK 6.2 billion last year. What is driving this demand? Well, the answer is simple. The global megatrends of Electrification, Sustainable Energy, Connectivity and Defense. These trends are not only shaping the world around us, but also driving rapid growth for our company with projections of up to 50% growth per year over the next several years for many product applications.

Let me give you a few examples on how we capitalize on these trends and what some of the drivers for the growth are. Electrification, Automation and AI enables development of autonomous products that are able to move. Autonomy, Electrification and Movement drives demand for high-voltage motor controls and server drives for motion sensors. This hardware, among other things, is found in all new products within defense, med tech, vehicle automation, robotics, trucks, buses, agricultural, forestry and material handling equipment. New propulsion systems require charging solutions and energy management and storage. Energy efficiency requires energy savings products like heat pumps. All of these products require advanced chips, and to that end, we build and deliver advanced tools for silicon chip design verification and application testing. A strong growth area for us, of course, is the defense industry, where increased security concerns are driving a rapid increase in spending, providing us with opportunities for growth.

Now with such a strong demand, you're probably wondering how do we cope with the added stress on the supply chain. Well, it is true that the strong growth brings a certain level of uncertainty to the outlook. I'm pleased to say that material availability is much better than compared to a year ago. Our team is working hard to ensure that we can continue to meet high standards of quality and delivery that our customers have come to expect from us.

In conclusion, I am confident that our strong progress and growth, coupled with the opportunities presented by the global megatrends, will continue to drive growth in 2023 and beyond.

So with that, let's go to the next slide, Slide 5, and let Cathrin talk a little bit about the market sectors.

[Cathrin Nylander, executive]

Thank you, Peter. And now on to the revenue in Q4 and for the year. Overall growth in all sectors compared to last year, organically about 35% and in total, 91%. With the sector growth bearing from 12% to 241% compared to last year. I choose to comment on the development in the sectors compared to last quarter.

In general, component availability is continuing to ease and demand is strong. Connectivity, Electrification and Industry are now the 3 distinct and largest sectors. Very strong growth in Electrification of 38% in the quarter, and Connectivity and Industry on the same high level as last quarter. Very strong quarter and demand also for Defense, with an increase compared to last quarter of 43%. Medical Devices, quite stable volumes also this quarter. We will continue to see sector deviations between the quarters as component supply is still a bit uneven.

To the bottom right, the development for the full 3 years, growing with 75% in total and organically about 17%. Interestingly, all of Kitron, if we can call it that, is back on a 10% accumulative growth path starting in 2019.

Currency and consolidation has had very little effect on the revenue in the quarter, but also for the year as a whole. Again, a strong quarter for the -- and for the year for revenue.

Next slide, please, Slide 6. BB, our recent acquisition has continued on the path from previous quarters where they had delivered revenue, profits and profit margins higher than planned. On the growth from last year, they stand for 55% and Kitron for 36% of the 91% revenue growth. That said, the very strong growth we've had in the quarters come from all the business sectors, and with the strong growth comes increased profitability. The Nordics show a total growth of 40%, where 12% is organic. CEE even stronger with 96% total growth and 65% organic. The rest of the world at 161% total growth and 59% organic, so very strong all over, I would say.

EBIT margin increased to 9.1% in the quarter from 5.5% last year and 7% last quarter. You can see also that EBIT margin is strong overall in the business sectors going from 9.1% to 10.6% in the quarter.

Profit in the quarter is affected by a positive revaluation of working capital, weighing up for similar negative ones in the last quarter. But as always, there is always a bit of cleaning out in Q4, so there are other items that go the other way too. In addition, we have finalized the purchase price allocation for BB in the quarter, moving volumes from customer contracts to goodwill. This is also slightly reducing the depreciation of customer contracts in the quarter.

For the tax, we can also mention that we have made a noncash adjustment on deferred tax assets related to the U.S. of NOK 8 million approximately driving up the tax percentage. And finally, as for the employees, we're now at 2,848 up from 286 last quarter, so almost 2,850 people.

Next slide, please, Slide 7. Operating cash flow for the year ended at a positive NOK 117 million compared to NOK 126 million last year. Net working capital has increased in the quarter, mainly due to higher invoicing and slight reduction of payables. Inventory is stable for the quarter. So although an increase in net working capital, the profit in the quarter brings to positive cash flow. Furthermore just news of our cash flow statement, there is a presentation change between net financing and total net cash flow. The total net cash flow now only shows the variance in net cash now. Information has been restated.

Cash flow and net interest-bearing debt continued to be on our attention list to garner interest expense, and hence, the net income and earnings per share. I have to also remind ourselves that the acquisition of BB was finalized early in January, hence the NOK 900 million acquisition year-to-date in the cash flow.

Next slide, please, Slide 8. The positive trends in the key ratios continue. Net working capital as a percentage of sales is at 26.1%, trending down towards a target level of 20%. ROOC at 27% is above the strategic level, we say about 25% where we want to be. The strong ROOC is driven by the strong profitability in the quarter. Operating capital have stabilized around NOK 2.5 billion. CCC is at 100 million, down from 126 and trends downward throughout the year as well. Consistent higher output are improving the ratios, but not as much as we would like to. We are growing. Some progress are ramping up, making the trend downwards on the rates just a bit slower than we would like.

Net interest-bearing debt decreased from 3.1 last quarter to 2.6 this quarter. The net debt ended at NOK 1,626 million, which is down NOK 26 million from NOK 1,653 last quarter. The improvement in net interest-bearing debt over EBITDA is a result of both improved profitability and reduced debt. Excluding IFRS, we are at 2.56 NIBD over EBITDA.

The exclusive IFRS of 2.56 is important. Firstly, because we are closing down on our short-term target of 2.5, but also because our interest expenses are stacked and being below 2.5 is favorable on those. Equity as a percentage is 25.6%, increased from 24.7% last quarter. And on that development, we have to remind ourselves that we had a share capital issue in Q4 last year of NOK 340 million increase in the equity and the acquisition of BB in Q1, increasing the balance sheet. Return on equity is 27.6%.

Finally, earnings per share increased compared to last year, both for the quarter and an increase of 160% compared to Q4 last year and a cumulative increase of 72% ending at NOK 1.46 year-to-date compared to NOK 0.85 last year. Proposed dividend is NOK 0.50 which amounts to 35% -- 34% of net income, which is in line with last year's percentage. The dividend policy states that it should be between 20% to 60%.

And with that, I will leave over to you, Peter. Slide 6, please.

[Lars Nilsson, executive]

Thank you, Cathrin. So on to the outlook. On December 13 last year, we had a capital markets presentation and gave an outlook. For 2023, we said Kitron expects revenues between NOK 6.7 billion and NOK 7.3 billion, with an EBIT profit about -- between NOK 450 million and NOK 550 million. Revenue and EBIT are now expected to be in the higher end of those ranges. With continued strong demand, we expect margins and capital efficiency to improve further.

Next slide, Slide 10, please. So some of the key takeaways from the report. Positive quarter-over-quarter growth in 2022. Easing of supply constraints have enabled increased production and is increasing operational efficiency. The demand is robust across diverse market sectors, including the defense sector. And there's a high level of activity among customers driving growth and expansion. And we expect the trend from the last 6 months of 2022 to continue into 2023.

So with that, we'll get ready for some Q&A at the next slide, please, and get ready for some questions on that. So Cathrin, what do you think about this 8.95 billion R12 demand outlook? You are on mute.

[Cathrin Nylander, executive]

Oh, I was. I mean, it's impressive, Peter. I have to say, it's very, very strong. I think the challenge that we will have is whether or not we will be able to source all that material on time. Even though we see a clear ease of the material supply, this is a lot of material and a rapid increase, I would say.

[Lars Nilsson, executive]

I think also it reflects, let's call it a wish list for many of the customers, they see an enormous growth potential in the markets they're active in. Some of these products are new, we have to remember. They are not ready for release maybe at this point, and with more of a sort of a target that they should be ready and be ramping up towards the second half of the year. So there's an uncertainty in the timeline when actually that can happen. And of course, there is this still a big uncertainty on what the material situation is going to be like. Now we say that it's easing, but that also reflects what a good job the organization is doing on actually getting the parts and it's not business as usual, and the supply chain is not normalized for the industrial and defense and medical and power-type products that we build for sustainable energy and power products. So there's still a lag on that. And probably the normalization is going to be towards the end of this year if it comes that early.

So let's see if we can answer some of the questions we have. The first 2 are from Tomas Skeivys, and really, you have commented on them all already, Cathrin. The first one is can you elaborate on the tax rate in the quarter? And the next one from Tomas also. Can you also comment on the very high gains losses figures in the quarter?

[Cathrin Nylander, executive]

So partly, we have been -- we have written down financially some deferred tax assets in the U.S. due to the fact that we have not have a very strong profitability for the last few years, and IFRS requires you to write down sooner or later, and we're at that point now. So it's about NOK 8 million. Also, there has been some tax adjustments on the other sites for the tax rate in the quarter, I would say. So cumulatively, if you take away the 8, it should be more in line with what you can expect for the future.

As for the higher gains and losses, I mentioned that we had a higher revaluation of working capital in the quarter, which has a positive effect, which was negative in Q3. Added together, those revaluation over the year is almost 0. That said, in the quarter, we also had some other items going the other way, which is in material costs. We have increased so lessens provisions. We have other items that go negatively basically. So but they are the ones affecting the gains and losses.

Peter, the next one.

[Lars Nilsson, executive]

Yes. You have previously said, this is from also [indiscernible]. You have previously said that the R12 is the best estimate for revenues in the next 12 months. A year ago, it was NOK 6.3 billion, and we delivered revenues of about NOK 6.5 billion. Today, it's NOK 8.95 billion. What is the upside, downside risk for this being the best revenue estimate for 2023?

I think we have commented a little bit on it before. I think there's a lot more new products in this demand. And the material situation is still uncertain. So right now, we're comfortable saying that we're in the upper range of our outlook from Capital Markets Day, and we'll come back in the first quarter report, see where we are. I think this is -- NOK 8.95 billion is very challenging from the perspective that it's actually impossible to deliver it, not capacity-wise.

And to that end, the next question is where do we stand on in terms of current capacity, or are there any challenges we see in terms of capacity, to be able to meet strong demand and order intake. Well, we were running in Q4. I think the run rate in Q4 was up around over the NOK 7 billion mark in December -- or mid-November through mid-December in that time range we were looking at the output. So we know what we were capable at that level. To that end, we are investing heavily. We placed orders for 67 million -- NOK 60 million new equipment in December. We're placing orders now today this week for an additional -- I can't remember...

[Cathrin Nylander, executive]

NOK 40 million.

[Lars Nilsson, executive]

NOK 40 million, yes. So that's NOK 100 million in new equipment. The budget is NOK 240 million investment for this year, so we still have NOK 140 million to go in the later part of the year. We're ordering equipment a bit early now because we want to get ready earlier.

Part of this then goes to the next question again from [indiscernible], the payroll cost increased 40% year-over-year. Part of that is connected to the acquisition, right? It's not the percentages of direct versus sales or indirect versus sales is going up. It is the acquisition of BB Electronics and the massive growth of the top line. But we can look at that issue of payroll and FTE in the terms of what we're investing in, and we're investing in increased automation, we're investing in much, much faster machines. We're replacing some older equipment where the capability is maybe 50,000 placements, and now we're replacing it with equipment and lines that can do 300,000 placements an hour. So that really helps output. And those newer machines also require less operators to run them, which is then easier for us when we want to step up and run 24/7 on those lines. Normally, we try to plan for a 3-shift operation, so running 24/5, but using weekends then for whatever extra capacity we may need.

[indiscernible] asks us, how are we -- how do we -- how do you manage to meet future demand by organic growth or acquisitions. Right, well, both. Right now, it's all about the organic growth when we're looking at the output. We do have plans for acquisitions. We're constantly reviewing and working on different projects for this. There's nothing ongoing right now that we're serious about, nothing that has really caught our eye yet. And we're looking from the perspective of both really nice customers and really nice profitability and top line where it makes sense to be a part of Kitron, or where we see this as a possibility to add more capacity to us. We need -- we know we need to continue investing in additional footprint in Central Eastern Europe, and additional footprint in South Asia, Southeast Asia outside of China. So those are the areas we're looking at, either greenfield or acquisition for sort of capacity point of view.

Let's move on, and how do we -- again from [indiscernible], how do we prioritize amongst the received orders and the backlog. Any favorite customers? We try to meet all of our customers' demand and give everybody a fair treatment. And really, the prioritization will be what parts do we have available to run, and that's the priority. We cannot have lines sitting idle and waiting for parts to come in just because one customer feels that they need to have higher priority. So we still had some free capacity in Q4. There were times 2, 3 days that some parts of our operations were sitting idle, waiting for parts. So no, we don't prioritize between customers. And we still have a strong or a solid high backlog for request date from customers, right, so varying between sites and complexity. That is what I see, Cathrin. More question there? I think we covered them all.

[Cathrin Nylander, executive]

Nothing more coming either.

[Lars Nilsson, executive]

Okay, very well. Hey, I hope to meet some of you guys in meetings later on into the quarter here, and talk to you more personally and be able to get -- take your questions then.

Overall, this quarter, we're continuing to work really, really hard, and it is full speed ahead for us.

Yes, good, see you guys next quarter otherwise. Take care. Thanks. Bye.

[Cathrin Nylander, executive]

Thank you. Bye.