Kitron ASA

OSE:KIT

Earnings Call Analysis

Kitron Reports Solid Growth and Outlook

Kitron ended 2023 on a high note with record Q4 sales of over EUR 199 million, a 14% year-over-year increase, and annual revenues exceeding EUR 775 million, up by 21%. EBITDA soared by 56% to almost EUR 71 million. Despite these gains, the order backlog dipped 15% to EUR 494 million. The proposed dividend increased to NOK 0.75 per share, and equity improved to 31.6%, reflecting a healthy 28% return on equity. For 2024, Kitron projects revenues between EUR 700 to EUR 800 million with an EBIT of EUR 60 to EUR 74 million. While defense and electrification remain robust, Kitron navigates industry softness and prepares for a stronger H2 as customer inventory levels normalize. The Malaysian plant operationalizes without significant impact yet, and overall, the electronics component outlook remains controlled and positive.

Kitron Group Ends 2023 With Record Sales and Strong Financial Performance

Kitron Group's fourth quarter earnings call revealed a strikingly successful end to 2023. Chief among the achievements is a notable sales growth of 14% in Q4, culminating in a record quarter of over EUR 199 million in revenue. This growth is a continuation of a trend, with the full year seeing a 21% increase in revenue, reaching over EUR 775 million. The company's EBIT (earnings before interest and taxes) for the quarter reached EUR 18 million, which represents a 13.5% increase from the previous year. Over the entire year, Kitron experienced a substantial growth, with EBITDA (earnings before interest, taxes, depreciation, and amortization) escalating by almost 56%, reaching close to EUR 71 million. Kitron's returns remained robust, with stable operating capital return, improved cash conversion cycle (from 100 days to 95 days), and significant debt reduction. Shareholders benefitted from a 40% increase in earnings per share.

Challenges in Order Backlog and Regional Slowdowns

Despite the impressive sales and profit figures, Kitron faced a 15% decline in order backlog, decreasing to EUR 496 million. This decline is reflected in regions such as Central and Eastern Europe, which are experiencing a slowdown attributed to less favorable market sentiment. However, Kitron's performance in the Nordics and U.S. remained strong, driven largely by the defense sector and grid infrastructure projects.

Optimism in Defense and Energy Sectors, with Caution Elsewhere

The energy and defense sectors continue to be sources of strength, with significant progress and optimistic future projections, especially in grids and high-voltage transmission. However, the company acknowledges a slowdown in growth in the industry and connectivity sectors, suggesting a cautious approach to macroeconomic uncertainties and customer destocking trends.

Strategic Investments and Efficiencies Paying Dividends

Kitron has strategically invested over EUR 16 million in site and manufacturing equipment upgrades, evidenced by the successful results in margins and growth figures. Furthermore, the net working capital decreased, and Kitron has placed a focus on reducing their interest-bearing debt, protecting net income. With these efforts, the company proposes a dividend of NOK 0.75 per share, which equates to 25.6% of net income.

2024 Outlook: Revenue and Profits Expected to Stay Strong

Looking ahead, the outlook for 2024 remains positive, with projected revenues in the range of EUR 700 to 800 million and an operating profit (EBIT) estimated to fall between EUR 60 million and EUR 74 million. Kitron expects solid demand in the first half of the year, with further enhancements anticipated later on.

Dynamic Market Sentiment and Capacity Planning

Kitron anticipates an improvement in the second half of the year based on expectations of inventory destocking by customers and an overall positive market trend in Europe. For the defense sector, the company guides a notable increase in revenue, implying broad distribution throughout the year. Additionally, investments in new markets such as the Malaysian plant are in progress, ensuring operational leverage without incurring undue costs.

Earnings Call Transcript 2023-Q4

[Lars Nilsson, executive]

Good morning, everyone, and welcome to Kitron's Fourth Quarter Report for 2023. I'm Peter Nilsson, CEO of the Kitron Group. And joining me, as usual, today 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, please. In the final quarter of 2023, we continued our streak of growth with the record sales in the quarter of over EUR 199 million, that's a robust 14% increase from the same period previous year. Our EBIT was EUR 18 million, a growth of 13.5% from last year. Cash flow has been strong this quarter with a cash flow of close to EUR 35 million. Return on operating capital is stable and just under 27%, with a cash cycle conversion improving from 100 days to 95 days. Furthermore, our net interest-bearing debt-to-EBITDA ratio has been reduced from 2.6 to 1.5, another strong improvement.

In Q4, we saw a decline in order backlog of almost 15% to EUR 496 million. Finally, our earnings per share for the quarter increased some 40% to NOK 0.73 compared to NOK 0.52 the previous year. Overall, in the fourth quarter, we hit our targets, and I'm proud of the hard work and dedication our team continues to show.

Next slide, Slide 3, please. So let's review the year-end full. Building on 3 strong quarters in '23. Q4 continues the momentum. Year-to-date, we've generated a revenue of over EUR 775 million, a 21% increase over previous year. Our EBITDA has grown substantially, reaching almost EUR 71 million, close to 56% up from previous year's EUR 45 million. We now have 5 consecutive quarters with strong operating margins exceeding 9%. The net income stands at over EUR 51 million.

In 2023, we've invested more than EUR 16 million in site and manufacturing equipment upgrades and capabilities. The metrics suggest that our initiatives are delivering results. But rest assured, we're focused on maintaining this momentum. Now let's look at some of the business trends. Next slide, please, Slide 4. Well, what trends do we see in the fourth quarter? Well, strength is evident within the electrification sector, particularly in energy grids and high-voltage transmission. The defense sector continues to witness solid progress and optimistic projections. In connectivity and industry sectors, there's a no bespoke slowdown or leveling off in growth.

As for regional developments, the Nordics and the U.S. are seeing ongoing strong growth driven by defense, critical grid infrastructure and segments benefiting from AI innovation. Despite a strong end to the quarter, Central and Eastern Europe is experiencing a slowdown as market sentiment in Europe takes a negative turn.

Next slide, please, Slide 5. So we had a strong sales in Q4 and future market sentiment reflect in the order backlog. Current order backlog stands close to EUR 494 million, marking a 15% decrease from previous year's EUR 580 million, on a quarter-over-quarter basis, the order backlog remains comparatively steady. Notable strengths continue in defense and parts of electrification sectors. Elsewhere, a shorter horizon for customer orders is evident, indicative of current market sentiment and persistent destocking by customers.

Next slide, Slide 6, please. Let's broaden our respective using the R6 and R12 indicators. These indicators shed light on customer anticipated demand for the next 6 and 12 months. The defense sector shows strength. There's a noticeable inclination among customers to fast track their orders. Furthermore, there's an escalating demand for energy solutions within energy transmission. The R6 provides evidence of stable demand expected in the initial half of the year. This stability is complemented by service sales and vendor managed inventory solutions for our customers.

We can see that the R12 must steadily improve in the back half of the year as the market sentiment in Europe turns around. I'll be back to discuss the outlook and some key takeaways in a bit. But for now, Cathrin will review the details behind the numbers. Cathrin, go ahead, please, on Slide 7, next slide.

[Cathrin Nylander, executive]

Thanks, Peter. Currency and growth. Now some comparables for clarification as we this year changed from NOK to Euro as presentation currency. The presentation currency in itself will not take out various -- will take out variations in translation differences in consolidation, not underlying currency risk as such in each of the sites. So the waterfalls show growth on top in NOK and below in Euro. For Q4, there was an underlying growth of just about 18% in both currencies and in euro and negative currency effect of 3% and NOK a positive effect of 10%, ending in a quarterly growth of 14% in euro and 28% in NOK.

As for year-to-date numbers, underlying growth, 26% in both currencies, negative 5% in euro and a positive 11% in NOK, ending with a year-on-year growth of 21% in euro and 37% in NOK. And to the left, you can see the average rates we have used in consolidation for this year.

So next slide, please, Slide 8. Business sectors. Strong growth also in Q4 for CEE and Nordics and the volume reduction in China continues as markets show from China show less demand. That said, all sites are profitable and had strong margins also in Q4. We have cleared out some group costs in Q4 and year-to-date margins for the regions, therefore, gives more value to evaluate trends. For the full year 2023, the Nordics and being Norway, Sweden and Denmark have a revenue growth of 23% and a growth in profit of 46%. EBIT margin is right around 9%.

CEE, Lithuania, Poland, Czech, revenue growth of 58% and a profit growth of 78%, EBIT margin at 9.6%. The rest of the world, mainly our 2 facilities in China and the U.S. and the one in the U.S. has a revenue decline of 14%, but a profit improvement of 21%. U.S. is no longer loss-making and has shown improved stable results all year. So EBIT for this part of Kitron is 11.2%. And in total, for the group, again, growth of 21% and a profit improvement of 57% of EBIT and a margin of 9% -- 9.1% for the quarter and for the year.

As for the number of employees, we're now currently at 3,001. It's a growth of 5.4% from last year, yet there is a reduction of 69 FTEs from last quarter. So on next slide, Slide 9. Cash flow and working capital. So operating cash flow ended at a very strong EUR 33.4 million in the quarter compared to EUR 7.3 million same quarter last year. Year-to-date ended at EUR 59 million compared to EUR 18.2 million last year. Compared to EBITDA, our operating cash flow was 67% of EBITDA for the year total.

The [indiscernible] severance will see that we're missing a line or change in factoring debt in the operating cash flow. It has now been reclassified to financing. If presented the same way as before, the operating cash flow would have been EUR 6.7 million lower in Q4 and EUR 9 million lower for the full year, still a very strong cash flow for us.

Net working capital has decreased with some EUR 6 million in the quarter and basically all capital items that are reduced apart from contract assets, but we have a growth from 5.6% from last year, and we are continuing our work to reduce the inventory. Next slide, please, Slide 10. Ratios. Net working capital as a percentage of sales, 24.4%, it's down from plus 26% last year and last quarter. Our target is to be below 20%, so we have some way to go still. ROC at 26.7% at last year's level of 27%, and it's above our strategic level of 20% to 25%.

Please see at 95% and below last year's level of 100. Receivables and inventories are down 24 days and payables down 19 days, giving a net of reduction of 5 days very similar development from Q3. Net interest-bearing debt over EBITDA, slightly down to EUR 1.5 million from last quarter's EUR 1.7 million. The net debt ended at EUR 129.6 million, which is a reduction of 16% from last year and EUR 12 million lower than last quarter. It is explained by some more cash, but mainly lower factoring debt at the end of the year. Finance debt ended at EUR 6 million. It's down from EUR 6.6 million last year. We have some positive EUR 3 million of argue reducing the finance net this year compared to EUR 0.3 million last year.

Our interest rate is at 6% also in Q4. The interest cost in the quarter is around EUR 2.4 million, which gives an annualized interest rate of EUR 10 million a year, which is around 20% above the actual cost for 2023. It is a priority to us to reduce our interest-bearing debt to protect our net income. And as a result of that focus, a dividend is proposed of NOK 0.75 per share, which corresponds to 25.6% of net income, 25.6%. And the dividend last year was at NOK 0.50. The dividend policy is to pay out 20% to 60% of net income. And finally, equity as a percentage was 31.6%, which is an increase of -- from 28.6% last quarter, giving a return on equity of 28%. And the earnings per share in euro then EUR 0.062 in the quarter and EUR 0.258 for the year and an increase of 24% and 78%, respectively. Tax rate for the year ended at 21%. Some true-up on tax calculations gave a higher tax rate in Q4 of 26%. And with that, I leave the word back to you, Peter.

[Lars Nilsson, executive]

Thanks, Cathrin. Let's review the outlook for the full year 2024. We uphold the 2024 outlook shared during the Capital Markets presentation in December '23. Our present projection is that Kitron anticipates its revenues to be in the range of EUR 700 million to EUR 800 million, with operating profit EBIT estimated at fall between EUR 60 million and EUR 74 million for the year.

Next slide, please, Slide 13. So these are the key takeaways from the fourth quarter and the full year. The fourth quarter capped off a year of double-digit growth with robust results, unprecedented achievements in revenue, EBIT, margins, earnings and cash flow were recorded. Growth persisted in the Nordics and the U.S. propelled by defense and particular electrification product lines. A discernible slowdown in growth has been observed in the industry and connectivity sectors. This is attributed to macroeconomic hurdles, inventory reduction, the advantage of shortened lead times and thereby reducing the exposure to risk. Solid demand is anticipated for the first half of '24 with expectations of further enhancement in the latter half.

Next slide, please. So we're off to the Q&A part of the presentation.

[Lars Nilsson, executive]

Again, I'd like to remind you to post any questions you may have in the Q&A section of the webcast. Cathrin, let's take a look at some of the questions that have already come in. Let me grab the screen here and take a look. [indiscernible] from Artic is saying you expect an improvement in second half of '24, what's this based on? You are in -- you were impacted by customer destocking. Do you have any color on when you expect this to ease?

Well, we see customers saying that they have somewhere around 2 to 4 months to burn off some of the extra inventory. We also see, in general, a lower second half meaning for every month, we move into the second half of the year, the volume drops, which is normal also when you look at forecast horizon. So particularly December will be much lower than June or July even. So we know that more orders will come in there. And then there's an expectation that this inventory will burn off. And also that market in Europe, primarily what's happening in Germany, well, at some point this year start turning around and becoming more favorable.

Second question from Henriette. You guide 50% down -- growth -- down 50% growth in defense for '24, which implies a revenue of EUR 168 million versus EUR 112 million in '23. Do you expect this to be broadly evenly distributed throughout the year?

Pretty much, yes, because this is affecting primarily 2 of our sites, Sweden and Norway. Norway being the biggest 1 and then Sweden following and then a portion of it also in the U.S. U.S. will see some transfers of products that need to be built in the U.S. over the years. So that work is going on in getting that site qualified for those products. We're running pretty much at the maximum capacity in the first quarter, right? So we see a possibility of taking in some demand that today is -- in '25, customers, I spoke about customers fast tracking orders, but we need to prepare that capacity for the site. And this is the whole equation now of shuffling and moving products around group. So taking industrial products out of Norway, taking some electrification products out of Norway, ramping those products up in Denmark, getting a second source into 1 of our biggest electrification customers ramping that production up in Poland, all to prepare for more capacity and more load in Norway.

So that's part of the grand plan when we look at the EUR 700 million to EUR 800 million range to do those things. And that's why I say we expect defense to be evenly distributed. Right now, there's a front-end load of it in Q1, Q2 because that's just the way that orders are placed. Most of the customers there have already secured material for the next 2 to 3 years and prepaid that material and it's sitting in our warehouses. So when they release orders, it's pretty quick to start moving. And again, for the first half of the year, we have full order coverage.

And following up with EUR 95 million in Q1 and a larger increase from EUR 36 million. EUR 95 million in R6 in defense implies EUR 48 million in Q1, Q2, a large increase, yes. Any comment on how this would be appreciated? I think I just spoke about that. We're ramping up both in Sweden for the Swedish defense customers in Norway for the U.S. and the Norwegian defense customers. So it will just be more of the same.

Let's move on to the next question, which AW asked instead of cash dividend, would it be possible for a stock dividend? Interesting question, and I'll be sure to relay the question to the Board and see it will be discussed anywhere in the and the general assembly meeting or not. It's not something that we can respond to at this meeting right now. But interesting question.

Felix says, how is the electronic market outlook for '24 and '25? And how does the dividend look in '24? I think we've already responded to the dividend, NOK 0.75 for the dividend. The electronic market, I'm assuming you're asking about the component situation. And at most, Kitron had some, what, 7,000 Cathrin components under declared allocation and another 20,000 or so that were undeclared basically. And today, we're down to under 2,000 components that have declared allocation. So basically, it's not the problem for us. There are some components, particularly of either very new design or older generations where there can be some difficulty. However, when I follow this closely in the media and the sort of channels that we look at on this. There is a possibility of some increase on allocations later in the year. I think, though, that, that will more affect mobile and PC than the type of products that we're looking at as those markets are expected to recover more strongly towards the end of the year.

Thomas [indiscernible] asks what's the status of the Malaysian plant? How much more profitable D&A orders versus the target of 9%? How much more profitable they are the defense and aerospace orders versus the targeted 9% margin on the company level?

First of all, I'm not going to comment on profitability and prices and margins on particular segments, other than to say our margins are calculated to pay for the return on operating capital target we have at 25%. So the more capital you use, the higher margin you pay, the less capital you use, the less margin you pay. And that varies in general, somewhere between 6% and 12% on various products. Independent of market sector really. So more related to volume and resources.

The first question though was what's the status of the Malaysian plant. The Malaysian plant is open and ready for business. We've built some qualifying products. There's still -- we're still utilizing most of the manufacturing resources and engineering resources out of our facilities in China, as was the plan, right? The same thing that we did when we ramped the Polish facility. We had -- we use the Polish facility as a satellite facility for a Lithuanian site, all to make sure that we get the operational leverage and not start taking on cost before we have to. But as of now, there's -- as of January, there's no real big impact from Malaysia in our books.

Cathrin, why don't you take the next couple of questions from Emily Eling in here. She asks R6 is representative for the outlook for the first half of '24, this would imply negative growth in H1?

[Cathrin Nylander, executive]

We are guiding at a lower level for next year, the mid-guiding. And so at least stable or maybe slightly negative because we have EUR 775 million and we have a mid-guiding of EUR 750 million. So yes. The question about the correction between defense and the other one. I need to come back to that, Emily, actually. We did make a correction between the demand is the same as the current -- as the customer has been rolled around. And margin is down in all the regions in the quarter. We did -- we had -- normally, we have group cost, and we have grown quite significantly during the year and also the support services have grown and to be able to manage our sites properly we've given them, we call it things not changing too much to them about the cost level. So we keep the extended costs in ASA until the end of the year and then we clear out the group costs. So that means that they will have lower margin in Q4. But if you look on the average margin for the year, you will see that, that will be the correct 1 going forward basically because you see that the group margin has not changed that much.

[Lars Nilsson, executive]

I'll just jump back to Emily's first question about if the R6 is representative for the outlook for the first half of 2024, this would imply a negative growth in H1? I think the -- what we were saying the EUR 370 million, I don't really recall now. But at EUR 386 million is the rolling 6-month outlook. Now we like to target around EUR 200 million per quarter. On top of the actual booked product demand that R6 represents, there is also service sales, which is part of our R&D activities test development activities, other types of logistical activities that we sell to customers, and that also comes in at an additional few million here and there. And not included in this is where we have vendor-managed inventory where we're sitting on finished goods and the customers just call off and maybe they don't even have a forecast it.

So there could be some additional business there that backfills that up. But you're right, Cathrin, we're guiding on a lower midpoint guiding for this year. And I'm not saying that we're going to beat Q2 next year, but that's -- we're striving to at least. Let's see what else we have. You picked up, Harold was there, I think, that's a right or do we have something below that I'm not seeing now. So I think that wraps up today's presentation. And I hope to see you guys soon. And we're working hard on this year and this quarter also. Thank you, everybody.