Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2021-Q1

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Ladies and gentlemen, good morning, and welcome to the presentation of Kongsberg's First Quarter 2021 Results. The presentation today will be given by our President and Chief Executive Officer, Geir Haoy; as well as our Executive Vice President and Chief Financial Officer, Gyrid Ingero. I will ask press and journalists that are to set up interviews with us after the presentation to contact our Corporate Communications department. You will find their contact details on our webpage, www.kongsberg.com. And with that, I will leave the floor to our President and CEO, Geir Haoy.

[Geir Haoy, President & CEO]

Thank you, Jan Erik. And good morning, and welcome to everyone on the call. And thank you for joining us this morning for the presentation of our results for the first quarter of 2021. As I have been these last quarters, again, I'm very pleased with the consolidated figures. And even more pleased with the efforts and performance of my colleagues across the entire group. For those of you who have had the time to read the press release, you see that Kongsberg is off for a very good start of 2021. And I would say, especially due to the current circumstances. Here in Norway, the spring is upon us. And globally, the vaccination program are being rolled out. And society is gradually reopening as infection rates are slightly on the downturn, at least in some regions. So I think there is reason for cautious optimism, but we are prepared for the pandemic to continue to affect us also in the remainder of 2021. Our partners, customers and our own organization continue to exhibit impressive adaptability to the situation. And impressive, in fact, is a word I have used a lot the past year as my Kongsberg colleagues have stepped up again and again, to tackle the various challenges. So with that, let's look at the figures. Following a year with so many variables, I must say that it's a good experience to be standing here today, presenting you with the Kongsberg numbers as we have started 2021 well. We are continued to -- we are continuing a positive trend from previous quarters. We have delivered strong performance across the group. Our continued focus on efficiency initiatives and cost discipline is paying off, and we have a favorable project mix in the both Defence and the Maritime. The order intake ended at NOK 7.6 billion, which is up 12% compared to Q1 last year. This is due to both the number of contracts signed as well as the size of some of them. I will come back to do this on the next slide. When it comes to the book-to-bill, I'm also very satisfied that we managed to deliver a book-to-bill of 1.2 this quarter. And particularly with KM, which again delivers a book-to-bill over 1 in a very challenging market. For the EBITDA, we deliver solid results there, close to NOK 0.9 billion, with a margin of 13.9%. Gyrid will come back to details later. Another good thing is that we continue to realize the cross-sales from our expanded combined KM/CM portfolio, which was one of the rationale for acquiring the Rolls-Royce Commercial Marine. And this quarter, we have a cross-sell contribution of approximately NOK 200 million in revenue. Also this quarter, Norway and Germany entered into the strategic maritime cooperation on material, aimed at the acquisition of identical submarine and the Naval Strike Missiles. We expect that this agreement will generate major order intake for Kongsberg in the years to come, both related to the submarine, but also as well as the NSM missiles. The first submarine is about to be delivered in 2029. As you can see, Kongsberg continued to sign contract, and we have also, this quarter, signed several in all business areas. Kongsberg Maritime, we have secured several contracts where sustainable technology are very central to many of these deliveries. We have signed a comprehensive retrofit package for the training vessel, MS Gann. It's a lower emission solution, helping to both reduce the emission, vessels emission and also enhance the education offered on board. We are also to define and deliver very low-emissions service vessel. It's a live fish carrier to the shipping company of Sølvtrans. This is, in fact, 8 -- number 8 vessel to Sølvtrans, which is delivered or ordered with KM/CM scope. We have also signed a long-term service agreement with Sølvtrans for maintenance of their entire fleet. And then we are also going to supply to the Norway's Institute of Marine Research with 4 autonomous vessels, a full solution for ecosystem monitoring and management: 2 of them are unmanned surface vehicle and the other 2 is unmanned underwater vehicles. And then we also have signed a substantial integration technology package for a wind turbine installation vessel. The value is approximately USD 40 million. And this is with the U.S. energy company, Dominion Energy. This is a very important market for Kongsberg, where we are extremely well positioned for a significant part of the deliveries. Our extensive portfolio is actually perfect fit with the scope for such a high-end vessel. Looking at Kongsberg Defence & Aerospace, we have won the contract for both -- we have won contract, both strategically important and also considerably size. We have signed the lots 15 to 17, which is the production for components to the F-35 Joint Strike Fighter program. This is then for more than 500 aircraft. Today, we are already on full rate production and have so far successfully delivered and finalized more than 800 fighter jets. In this quarter, we have also signed an upgrade contract for the Norwegian NASAMS, the Air Defense systems in Norway. This is -- has a value of NOK 266 million. So if you take a closer look at our business, in Maritime, we have, in this quarter, been quite busy. We have done several development projects. We have launched new project -- product and also done several green upgrades. And I'd like to mention a few of them here. The HUGIN Endurance, which is the next-generation of our advanced HUGIN AUV, boosting operational duration and enabling a substantial extended survey and inspection mission far from shore. And then another exciting project, the RECOTUG. This is the world's first fully operational and fully remotely controlled tugboat. And this is to be developed together with Svitzer and American Bureau of Shipping. Some more green upgrades. We have entered into a collaboration for low-emission solution to offshore drilling operations with COSL and National Oilwell Varco. This has resulted in an integrated solution, where we combine KM's energy management system with NOV's research into energy optimalization. And if we look at the figures here, they are quite impressive. We -- here, we will achieve an overall fuel and emission reduction of more than 25%. This includes both NOx and CO2. On top of the -- on top of this, KM synergy and efficiency improvement continued to supporting improved margins. We have now the full year effect of the integration of CM. And obviously, we also still have some COVID-19 effect. If you look at the Kongsberg Defence & Aerospace, together with the contract I have already mentioned, we have also been awarded what we call a call-off on our framework agreement with the U.S. Navy, which is their Over the Horizon program. Also Kongsberg Aviation Maintenance Service has secured a very strategical important contract. This is to maintain and make ready for sale 2 F-16 aircraft. These have to then be taken out of the service in the Norwegian Air Forces. The contract is signed with the Norwegian Defence Material Agency. And this award position comes for future opportunities. As a considerable percentage of the entire F-16 fleet may be potential to -- relevant for repair and making ready for sale. So it's exciting. This might generate considerable activity. In addition, there are also business opportunities related to the maintenance of these and other F-16 aircrafts with both existing users as well as new potential owners. KDI are continuing expanding and ramp up our capacity as planned, to deliver our substantial -- to deliver on our substantial order backlog. And as you have seen, this is continuing to grow. Our [NASAM] production is progressing at a very high rate. We are expanding our production sites, such as a new building at our production facilities, Arsenalet in Kongsberg City. And we just also decided to -- another new customer -- customized facility for our space activity, which is also at Arsenalet in Kongsberg City. Also, speaking of space, our space efforts is commencing successfully. In fact, we have now Kongsberg technology on Mars as NASA latest Mars rover, Perseverance landed smoothly and safely on the surface of the planet in February. For Kongsberg, it's great to contribute to such historical technology adventures in space. It really demonstrate our reach from the deepest ocean with HUGIN Endurance, and now with our technology at work on Mars. With our expertise, we have also contributed to expand the lifetime of a satellite 36,000 kilometers above the equator. If we look at the Kongsberg Digital, I've already talked about Digital progress. So I just add that we are continuing to ramp up also in this business area. We, in fact, hired about 100 new colleagues in 2020, and we will continue to expand our capacity also in 2021 as we are working diligently to deliver on our backlog. In March, we secured a contract to install Vessel Insight to the entire fleet of Dorian LPG. And the agreement is expected to commence operation in the upcoming months. We are also continuing to roll out our Dynamic Digital Twin KOGNITWIN under the Shell agreement. And the agreement is -- and we are also increasing the number of users in parallel. I'm also satisfied to see that there is interest from other customer, where we have additional pilot project ongoing. And I'm quite confident that we will see positive results going forward. And by that, I leave the floor for Gyrid to take us through some more details on the figures.

[Gyrid Skalleberg Ingero]

Thank you, Geir. Good morning to all of you again. Once again, Kongsberg is moving in the right direction -- let's find the -- new records and healthy development beating Q1 last year with -- even with COVID restrictions. Strong financial performance in Q1 with EBITDA growth from a combination of higher gross margin and lower OpEx spend in all business areas brings the EBITDA up from Q1 last year. Maritime with lower year-to-date revenue year-on-year, while Defence continues to grow according to plan. Return on capital employed of 24.1%, up from 10.2% last year driven by the combination of increased EBIT and reduction in capital employed. Number of employees increase with 81 FTEs this quarter. Increase is shared between Defence and Digital to be able to deliver on growth. Kongsberg had an order intake of NOK 7.6 billion for the 3 first months of 2021. As Geir mentioned, Defence with 1 large contract on F-35, while Maritime finally saw some large contracts again and a positive tendency in global customer support at the end of this quarter. Despite COVID, 53% of the new orders came from our Maritime business area. Our order backlog continues to grow and has now increased to NOK 37 billion. I will comment on the split later. On Digital, we have focused on the recurring revenue, which is not part of the order backlog, as you can see. A decline in revenue of 4.7% from the company, driven by a decrease in Maritime on 16% and while Defence grow by 21%. Digital grow on recurring revenue, while the division Maritime simulation has been heavily affected by COVID over the last year and are still waiting for the academies to open again. Out of order backlog today, almost 60% will be delivered already this year. Even with the decline that we see in Maritime this quarter, we still believe that we will deliver growth for the group also in 2021. We delivered an EBITDA of NOK 883 million with a margin of 13.9% this quarter, up from NOK 643 million last year and up from NOK 381 million the year before. Improved profitability in Maritime and Defense, together with COVID OpEx savings brings EBITDA ahead of last year. The significant uplift from 2019 is due to cost synergies and cross-sales after the acquisition of Commercial Marine in combination with the scale in Defense. In terms of EBIT, which I normally comment on, I want to bring to your attention that Kongsberg will have a very steady depreciation and amortization going forward by approximately NOK 300 million per quarter, given today's business setup. Cash flow. We entered last year -- we ended last year with a cash at bank at NOK 7.2 billion. During the COVID, the focus on develop -- has been on development in the working capital. It has actually been extraordinary in the whole company. And as you can see here, we still have control of the development in the working capital. The investments this quarter has been low with NOK 140 million. Main projects are digital twin, [indiscernible] in Defence and IT. For time being, we have been running 2 different share programs. Share purchase under the buyback program of NOK 80 million and the employee share buyback program of NOK 59 million. In our cash position as March -- at the end of March 2021, you should also be aware that we have almost NOK 2 billion in prepaid from our customers. After approval for the general assembly next week, we will pay out NOK 8 per share in dividend. Together with the share buyback program, a total of NOK 1.8 billion will then be returned to our shareholders. Through the last 12 months, we then have been returning approximately NOK 4 billion to all our shareholders. And then a new credit rating has been performed. We have a solid liquidity and are comfortable with the remaining debt maturities in June and December. Whether we will manage those from existing cash or refinance is something we will decide closer to the maturity. The credit rating agency, Nordic Credit Rating, assigned a "A-" long-term issuer credit rating on Kongsberg Gruppen ASA with a stable outlook on the 7th of April this month. The stand-alone credit assessment was set to BBB+, and there is a 1-notch uplift from the state ownership. The management's credit rating evaluation process started already early last year in 2020, and the investment case was concluded during full last year. Following the issuance of the public rating, Kongsberg has received material interest from debt investors. It is too early to conclude on any pricing effect. But it seems for us that longer-dated funding, 7 to 10 years, now will be more easily available for the company. The whole credit rating analysis, you can find on kongsberg.com. And on to Maritime. Kongsberg Maritime received NOK 4.1 billion in new orders this quarter and are increasing the order backlog for the first time since COVID. Cancellations of NOK 24 million this quarter compared to an order backlog of NOK 11.5 billion is close to 0. Out of the order backlog of NOK 11.5 billion, 61% are for deliveries in 2021. That is NOK 7 billion. In the first quarter, Maritime delivered a revenue of NOK 3.8 billion, that secured a revenue of NOK 10.8 billion before aftermarket. Aftermarket is normally at least NOK 7 billion for a full year, where the majority is not in the order backlog. We see some small optimistic trends also in the aftermarket right now. It will be hard, but we believe in a flattish top line in Maritime for 2021, even if it don't seems like that after, or not that optimistic after Q1. If I should bring point out 1 challenge here, it will be further COVID challenges, triggering delays or added cost. But if I should also bring your attention to an upside, it must be some increase of order intake from new buildings or increased activity on the existing fleet. Both could lead to increased orders and revenue towards the end of this year. Maritime came in with a strong quarter after a somewhat slow start in 2021 March and then on a positive note, especially for global customer support. Both Sensor & Robotics and Integrated Solution contributed with positive development this quarter. Strong cost discipline, combined with focus on new internal cost program and sourcing initiatives, offset the reduction in revenue of 16% this quarter. The divisions are still waiting for the large contract that has been delayed over the last year. Maritime delivers NOK 430 million in EBITDA this quarter, with a margin of 11.2%. That is the highest margin that the combined Kongsberg Maritime and Commercial Marine together has delivered. Maritime do not have any integration cost anymore, but benefit from full year effect for -- from the integration program. I also want to comment on Deck Machinery this quarter. That now delivers margin in line with the rest of the business and DM for the first time. That has been one of the main turnaround areas from the acquisition and has been diluting the margins in Maritime for the last 2 years. With higher order intake, the contribution from this area suddenly looks more promising. Kongsberg Defence & Aerospace. Defence with an order intake first quarter of NOK 3.3 billion, increasing the order backlog to NOK 24.5 billion. Geir has already mentioned the main contributors here. 29% of the order backlog will be delivered this year, so almost NOK 7 billion on top of the NOK 2.4 billion in revenue for the first 3 months. That gives a run rate today for almost NOK 10 billion at the moment compared to NOK 8.5 billion last year. If we avoid surprises in our supply chain, the growth for Defence this year is quite firm. Since last quarter, we have also built more solidity, both for the order backlog in 2022 and onwards. KDA's revenue or Defense revenue in the first quarter are NOK 408 million higher year-on-year, 21% growth, largely driven by the significant increase in CROWS and NASAMS Qatar. While we had some delays in CROWS delivery, supplier issue that have affected deliveries and the CROWS was resolved in March and deliveries is now back on track. Despite supplier issues, CROWS is the largest project in Q1 and accounts for NOK 401 million or 17% of the revenue. Top 15 projects in Defence accounts for 68% of the revenue year-to-date. That show the robustness that we now see in the project portfolio of the running projects that we have today. Defence EBITDA increased from NOK 231 million last year to NOK 469 million this quarter, an increase of more than 100%. And EBITDA margin of 20% is up 8.1% from first quarter last year. A positive effect from Air Defence with cost reassessment of NOK 40 million, effects of scale for the whole portfolio, limited travel cost and COVID-19 effect keep the OpEx at a lower level today. With 20% EBITDA margin in Q1 and 19.5% EBITDA margin for 2020, I can agree that a long-term guiding on 16% in 2022 is low. But to deliver 14% for the whole group, we also need to keep up the increasing trend in Maritime.Kongsberg Digital. Digital keep getting traction in the market and have order backlog of NOK 1 billion. In terms of COVID, the typical orders connected to Maritime simulation are postponed. Energy with Digital Twin are ramping up, both in terms of employees and investments. In addition, we see high order intake, both in K-Spice and in Ledaflow. Digital delivered revenues this quarter of NOK 192 million, out of which recurring revenue is 40%, up from 35% last quarter. Our Digital Twin project connect more and more active users. The price model here is to invoice user and asset subscriptions in a SaaS model. Digital is current, delivering quite well. And at the current state, makes it natural to access both future partner models and other models in order to fully realize potential Kongsberg see in Kongsberg Digital today. Going forward, this could also include a stock exchange listing. So with that, I hand over to our outlook from our CEO, again.

[Geir Haoy, President & CEO]

Thank you, Gyrid. So then to the outlook. Let me start with the group as a whole. As we've seen, our balance sheet is sound. We have a substantial order backlog at nearly NOK 37 billion. Our position provides stability as well as confidence and solid expectation for the future. Despite persistent restriction, there is a proven ability to adapt throughout the entire group. We have managed to capitalize on identified opportunities in our markets, both regards to larger contracts within Defence. But also within growing Maritime segments such as the offshore wind segment and also within the digital transformation in sectors such as the energy. The transition to more sustainable solutions and energy sources will affect investments level in our segments. This equals opportunities both market where Kongsberg is already having a solid foothold, but also in new markets where our technology will make a difference. In Maritime, the situation remained part challenging, with a still low vessel contracting. However, there are some positive signals in certain areas, for example, the container vessels, where we have seen a strong contracting end of last year and which have also continued into Q1. Just to remind you that there is a time lag between the shipyard, ship owner contracting with the shipyard and until Kongsberg will receive an order from the shipyard. KM is also a player in segments, which is not affected by the new build market, such as the Sensor & Robotics as well as also the aftermarket. And we are, as you know, supporting more than 30,000 vessels. In my view, I think we have never been better positioned for an upturn in the maritime market. In Defense, I expect us to continue growing our business, driving the overall growth for the group. The business area is increasing capacity according to plan and to deliver on its significant backlog. And then, of course, also to continue to secure new orders. In Digital, the last year has, in many ways, confirmed and reinforced the need for digital and remotely controlled solutions, where Kongsberg through KDI has invested considerably in new digital solutions and services. I expect us to continue to strengthen and expand our positions in the market for Dynamic Digital Twin as well as within the digitalization of the vessel market. And as Gyrid have already mentioned, it's also natural for us now to assess how to best proceed to fully unlock the KDI potential going forward. So in general, our current position and future potential, combined with the experience and working methods obtained through 2020 as well as our continued focus on efficiency improvements and cost discipline, I think this equips Kongsberg well to reach the ambitious goals that we have set for ourself. By that, thank you for the attention. And then I think we are ready for a Q&A session.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Okay. We have received some questions from our viewers. The first questions are from Haakon Amundsen, ABG. Revenues in Kongsberg Digital fell by 7% in -- versus Q1 2020. Do you expect fiscal year revenues in Kongsberg Digital to decline versus 2020, the full year revenues?

[Gyrid Skalleberg Ingero]

It will depend on the COVID because 50% of the revenues in Kongsberg Digital is from Maritime Simulation. And they have been hit quite heavily by the COVID with all the academies being closed. It will depend on that. But we don't believe in decrease in the top line, even with -- if we include the Maritime Simulation.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Okay. And then a couple of questions on Kongsberg Defence & Aerospace from the same viewer. Kongsberg Defence & Aerospace delivered yet another strong EBITDA margin in Q1. Was there anything particular causing this performance?

[Gyrid Skalleberg Ingero]

Well, as I addressed also, I think the margin are developing quite healthy. And when we -- from the Capital Markets Day last year, guided on 16%. that -- we are beating that definitely, but it's a whole picture. And in terms of that, I addressed NOK 40 million in extraordinary reassessment from their Defence area. Otherwise, it's actually developing quite healthy. The project developing healthy. The margins are developing healthy and their very effective project execution in that area right now. And also a very beneficial portfolio with a lot of international contracts.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

And then last question from the same viewer with regards to contracts. It's actually 3 questions. First, do you have any updates on the Qatar contract?

[Geir Haoy, President & CEO]

Yes. What I can say is that the dialogue is now back on track, meaning after the COVID, let's say, lockdown. We have people on the ground down there. And it's picking up. The dialogue is picking up, and we look forward to continue the dialogue with the governments and end users in Qatar.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Second, with regards to NSM to Germany, what can we expect here?

[Geir Haoy, President & CEO]

Yes. We -- as I mentioned in my presentation, the agreement is signed between Norway and Germany. And we expect that we will conclude the submarine contracts sometime this year. And then also, of course, Germany has then committed to by NSM for their frigates programs. So we expect quite a lot to be honest, on the missile side, both for NSM, but also for next-generation besides, together with Germany and Norway.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

And then the a question from Kenneth Sivertsen, Pareto. With regards to Kongsberg Maritime aftersales, could you indicate the level that is running at in Q1? And how you expect it to perform going forward?

[Gyrid Skalleberg Ingero]

I think that we see some positive signs at the end of the first quarter, actually in March. It doesn't seem that optimistic in January and February. But out of the whole, it's approximately the same portion of revenue to global customer support. So we are following, monitoring it quite tightly. But again, we saw some more positive trends, but it has been a hard year for those as well.

[Geir Haoy, President & CEO]

If I may, may I add some comments? This is still quite -- let's say, we have to handle this aftermarket due to the restrictions in a different way than we would normally do. But I would say that, in my view, there is positive signals now in the aftermarket, both when it comes to upgrades. As I mentioned in my speech, we see more owners wanted to do green upgrades. And then, of course, as the restriction are lifted, I'm quite positive for the development in the aftermarket, hopefully, going forward.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Okay. A question from Sveinung Alvestad, Artic Asset Management. Were there any items of one-off nature in the EBITDA in Q1 apart from lower cost due to COVID?

[Gyrid Skalleberg Ingero]

Only the NOK 40 million that I mentioned from the Defence area.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

And then we have 2 questions around KDI from Haakon Amundsen, ABG as well as [ Martin Brammon ]. I will read both questions. Is there a time line for the potential listing -- for a potential listing of KDI? And with respect to your comments around KDI, can you give some more color on a potential process towards a listing? For example, will we look for industrial partners first? And what is your time line?

[Geir Haoy, President & CEO]

I think as we have said, we are considering and assessing different alternatives. One of the alternatives is to find a partner to KDA. Another alternative is to list KDI. The timing here is not decided and will be considered as we go along. I think there's several factors to consider if we're going to do either or when it comes to this.

[Gyrid Skalleberg Ingero]

And I think not a secret that this has been a massive interest for KDI, both from industrial partners, from financial partners and also to do a listing of the company. And in terms of timing, it's all about timing when it comes to listing. So we will have that option in the toolbox as well. Having just said this, we are Kongsberg Group and it's Kongsberg DNA. We want to do things the proper way, and we feel that over the last year, the company has developed healthy, and the KPIs are moving in the right direction. So it's now that we feel that we can have all those assets in the toolbox for us.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Okay. The final question from the webcast from [ Karl Mathisen ]. Do you expect -- how do you expect revenue synergies between Commercial Marine and Kongsberg Maritime to develop going forward? Is the NOK 200 million per quarter that you had in Q1 a, in a way, normalized level?

[Geir Haoy, President & CEO]

No, I think this will actually increase, but I think I have mentioned the harmonization program between CM and KM. That is ongoing. It's a 3-year program. We are at plan or ahead of the plan. And I think as this harmonization program is completed, we will also see increased cross-sales, further increase cross-sales. I'm very pleased with the level that we have today, to be honest, because it's not that long time since we have been fully integrated. But I expect that to continue to grow and also to, let's say, get positions in other segments than we have today.

[Jan Erik Julseth Hoff, Group Vice President of Investor Relations]

Thank you. That was the final question from the webcast.

[Geir Haoy, President & CEO]

Okay. Then I, once again, thank you very much for joining us this morning, and have a pleasant Friday and good weekend when that times come. Thank you.