Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2022-Q1

[Jan Erik Hoff, executive]

Good morning and welcome to the presentation of Kongsberg's First Quarter Results 2022. The presentation today is a webcast only and questions may be submitted through the webcast by following the link on your screen. The results today will be presented by our CEO and President, Geir Haoy; as well as Executive Vice President and Chief Financial Officer, Gyrid Skalleberg Ingero.

And with that, I'll leave the floor to Geir Haoy.

[Geir Haoy, executive]

Thank you, Jan Erik. And good morning, everyone, and welcome to the first quarter presentation. I'm pleased to announce that Kongsberg has performed well in the first quarter of this year. The positive trend from 2021 continued across all business areas. I will share some key figures with you a little bit later. There are, however, some dark clouds gathering that will again test our ability to adapt to rapidly changing conditions. The tragic and meaningless war of Ukraine following the invasion of Ukraine will inevitably impact us and as a consequence spread through commerce, security and other areas and I will come back to this a little bit later. So let me start with some of the key highlights in the first quarter this year. As we can see, the order intake was NOK 7.5 billion, the revenues were NOK 7 billion and the EBITDA was just above NOK 800 million. Overall, the operating revenues for the group are up 11% compared to Q1 2021.

We have had revenue growth across the group and our order backlog is growing. Kongsberg Maritime's aftermarket performance was particularly good. We have delivered a solid operational performance in a time of adversity. We are coping with logistics challenges and shortage of some components that affect all business areas and this has already impacted our Q1 results. Whilst we are taking appropriate actions, we are prepared for that this situation will continue at least for 2022. Just let me -- just like to underline. Kongsberg supports and comply with the sanctions against Russia even though we have lost business as a result and have needed to terminate several deliveries. Also Kongsberg Maritime is affected by the sanctions against Russia, but we have prepared for that with a loss provision, which Gyrid will come back to somewhat later. As I mentioned, all our business areas are performing well and we have secured new contracts in the first quarter.

Some of the important contracts are shown in this slide. And starting with Kongsberg Aviation Maintenance Services, which have entered into a contract with Leonardo for the maintenance service for the Norwegian fleet of the AW101 Search & Rescue helicopters in the period of 2022 to 2026. Kongsberg Maritime will deliver innovative propulsion technology to Vard to the 2 new Norwind Offshore commissioning service and operational vessels. Kongsberg Defense and Aerospace have signed an agreement to supply more air-to-air pylons for the F-35 program. I think this latest order confirms our capability as a key supplier and adds another 3 years of the production duration. Kongsberg Maritime will also provide propulsion and control system to Scandlines new 0 emission Ro-Ro vessel. This is meant to be the world's largest all-electric double-ended freight ferry. This is currently under construction at the Cembra shipyard in Turkey.

Kongsberg Digital has secured some important contracts too, notably a fleet agreement with a large tanker operator to provide the Vessel Insight to more than 100 vessels. And as some of you know, Vessel Insight is a SaaS-based solution that provides vessel to cloud data infrastructure capturing and aggregating quality data in a cost effective and secure way. I'm also pleased that Kongsberg Maritime have recently signed an engineering and procurement and construction agreement with a global offshore production contractor Yinson. This is for the supply of an integrated suite of electrical and control equipment for a floating production storage and offloading vessel and this is also currently under conversion. I think these awards underline the broad technology scope we're offering and the strength that lies in our diversity.

So turning to the business update for each of the business areas. This slide gives you an update as regards to Kongsberg Maritime. We continue to attract orders basically for all vessel types for both newbuild and also in the aftermarket. The orders for tugs have been particularly strong making the Seaborn & Pax segment the dominant segment, but also featuring in the Naval segment. Component shortage is an issue here and in other business areas as well. We are addressing this problem, which is not unique to Kongsberg. And I would also like to mention that we now have once more expanded the HUGIN family of our autonomous underwater vehicles with the new HUGIN Edge. As for the Kongsberg Defense & Aerospace. KAMS is the second supplier certified outside the U.S. to take on repair and maintenance and overhauls for the engine of the F135. KAMS KDA is also working with Navantia under an MOU to support and modernize the Norwegian frigates.

Then Australia has committed to equip its destroyers and frigates with the Naval Strike Missiles. And in connection with -- conjunction with the Norwegian Defense Research Establishment, we are now developing new capability to conduct satellite-based maritime surveillance where Kongsberg will invest in 3 small satellites in the next couple of years for the surveillance of the high north. Our KDA business area is also affected by the component shortage especially in the Remote Weapon Station area. When it concerns Kongsberg Digital, I'm very pleased to confirm that KDI has secured new strategic offshore wind partnership agreements to develop a digital twin for floating wind parks and the digital twin continue also to be rolled out and also expanded. And as I mentioned, the Vessel Insights agreement has been made with multiple operators and we also expect to announce further ship owners in the near future.

KDI has also secured a strategic contract for digital twins with an additional oil major last month with additional 4 assets. And as you may know, our President, Hege Skryseth, has accepted an offer from Equinor and she will start as the EVP for Technology, Digitalization and Innovation. And of course I expect that we will receive a lot of orders from Equinor going forward. Just to let you know that the process of finding her successor has already started.

By that, I will leave the floor to Gyrid. She will take us through the financial status.

[Gyrid Ingerø, executive]

Thank you, Geir. Good morning, and thanks for listening into our Q1 presentation today. It's only 3 weeks before the Capital Markets Day, 2nd of June. So I really look forward to see you all at the Grand Hotel in Oslo at that time. Just to summarize some headlines from this quarter. We continue to deliver double-digit revenue growth with 11% for the first quarter this year. Strong development in order intake from newbuilds on top of continued high activity on aftermarket. The challenging situation around components shortage and logistics are, however, forcing to make priorities when it comes to deliveries. This means that some customers are experiencing longer lead time with us compared to what they traditionally have been used to. All 3 key areas in Digital delivers ahead of plan with 15% revenue growth and 33% growth in recurring revenue. 2 new assets for digital twin in operation in Q1 and we have now 10 digital twins in operation with a total of 4 different customers.

In addition, we have several proof of concepts. Quarterly cash conversion is affected this quarter by an increase in working capital due to increased activity in maritime and no significant payments from customers during this quarter in defense. Still we delivered a return on average capital employed of 32.6%. In February, the Board decided to propose a record high dividend to the AGM. The proposed is NOK 15.3 per share totaling NOK 2.7 billion in addition to another share buyback program up to NOK 500 million. This gives a total remuneration of some NOK 18.1 per share. The last day of trading including dividends is tomorrow the 11th of May and as you can see, the ex-date is the 12th of May. So some highlights on Kongsberg in total. Order intake in Q1 is in line with Q1 last year and a book-to-bill of 1.06. Looking into our business areas, there are large differences between them.

The main driver for the order intake this quarter has been Kongsberg Maritime. Maritime grew in order intake by 46% compared to Q1 last year and had strong growth in all the regions both new sales and in aftermarket. Defense are NOK 2 billion below last year mainly due to NOK 1.75 billion contract with Lockheed Martin in Q1 last year. No major orders were signed in Q1 this year on defense. In digital, SaaS revenue continues to grow, but are not part of our backlog. Digital wealth continue also with its solid performance. Driven by strong order intake in maritime, we increased the backlog to NOK 50 billion, out of this NOK 17 billion are to be delivered during the remaining of 2022. All business areas delivered growth, 11% revenue growth both year-on-year as well as rolling 12 months. Maritime drove the growth with 14% increased revenue growth year-on-year with NOK 28.1 billion in revenue over the last 12 months and a positive trend we steer towards the 2022 revenue target of NOK 30 billion.

The EBITDA ended NOK 54 million below Q1 last year. This includes NOK 113 million in extraordinary employee appreciation and NOK 69 million in provisions related to sanction against Russia. Adjusting for these 2 effects, the EBITDA is adding up to NOK 1.011 billion with a margin of 14.3% compared to 13.9% first quarter last year. OpEx in Q1 increased year-on-year as our operations are normalizing after COVID. Looking into the main drivers. The OpEx increase are higher personnel cost due to increased number of OpEx FTs especially R&D resources in maritime and digital. Professional services such as IT and R&D consultants are also increasing. Travel cost has increased somewhat, but we can clearly see that lessons learned during COVID makes us able to travel less. So let's look a bit into the investments. Kongsberg CapEx have traditionally been relatively limited as an extensive part of the R&D investments are funded by our customers.

However, to be able to deliver on our extensive order backlog whilst preparing for upcoming opportunities, in particular the defense area, it's crucial to continue the investments in production facilities combined with modernizing our IT systems. In 2020 a new production facility for Air Defense System was up and running. Last year we started constructing new facilities for the space activities in Kongsberg. The space facility will be finished this summer and later this year, we will also start construction of a new facility for missiles production to be ready for the expected increasing volumes going forward. In addition, we are planning an expansion of our current location at [indiscernible]. This quarter we have invested NOK 152 million in property, plant and equipment, of which 1/3 is for the previous mentioned space facility. On intangible assets, the investments this quarter has been NOK 71 million, out of which the majority is development in digital.

On our Capital Markets Day, 2nd of June, we will present our new targets going forward. As opposed to previous targets, we will now focus on the EBIT level. So let's look at Kongsberg Maritime. Kongsberg Maritime had an all-time high order intake this quarter. All divisions had strong order intake and the business area's backlog increased by some NOK 1.5 billion mainly on the back of a growing order intake from new sales. NOK 5.9 billion order intake in Q1 and 30% increase last 12 months is a clear sign of our ability to monetize on a stronger market. All the divisions, both new sales and aftermarket, increased their order intake. The aftermarket order intake has increased more than 50% since the bottom of the cycle in Q3 2020 just after COVID and is currently at an all-time high level. Out of Kongsberg Maritimes NOK 14.5 billion backlog, NOK 8.2 billion is for delivery in the remaining of 2022, approximately NOK 1.2 billion more than we had for remaining of 2021 a year-ago.

In addition, the aftermarket is as mentioned stronger than ever and most aftermarket orders are not reflected in the backlog. This means we have a solid foundation for continued growth also in Maritime. That said, the current world is challenging. Raw material prices are hitting both directly for example with regards to production of propellers as well as indirectly through our suppliers. This also increased the total cost for the vessel and could reduce overall demand for new vessels. There have been no clear signs of this so far, but it is something to keep in mind. We also see longer lead time as you can see on the chart here. We increased the long backlog beyond 2022. Look for example at 2024. This is partly explained by the component situation where we have to plan for longer lead time for some deliveries. 14% year-on-year growth in Q1 and NOK 17 billion in revenue last 12 months confirms the solid trend we saw from the orders on the previous slide.

The revenue increase comes mainly from aftermarket where maritime has increased with 35% over the last year. The growth comes despite a challenging situation both with regards to logistics and to component shortage in certain areas. As mentioned on the previous slide, the situation forces us to prioritize. But that said, we turn every stone to deliver every day. Reported EBITDA is on par with EBITDA in Q1 last year. Adjusting for the employee appreciation as well as the provisions we took with regards to the sanction against Russia, we see a solid operational performance and an EBITDA margin close to 2 percentage points higher than Q1 last year for maritime. Even though maritime's direct exposure to raw materials are limited, we see the increased prices especially on steel in certain areas for example when it comes to production of propellers that I already have mentioned. This has and could also going forward put pressure on the margin.

The situation around components and logistics could also impact profits. That said, with the current trend maritime has both when it comes to growth as well as operational efficiency so at the moment, I'm still very positive going forward. We are monitoring the situation very close and we are taking lots of precautions to offset the challenges. So let's look into the defense area. The defense market consists of relatively few but typically when they come large orders. We have seen several examples of this over the past years especially in Q3 and Q4 last year when we signed the submarine contract with Norway and Germany as well as several missile contracts. In Q1 this year order intake has been more moderate with a few smaller contracts such as the one for pylon to F-35 program that Geir mentioned. Major fluctuations in order intake are normal in the defense market so a low book-to-bill in Q1 is no worry.

Looking at our backlog, the prospects for growth both this year as well as going forward are strong. We would currently have some NOK 1.6 billion worth of orders more to deliver in the remaining of 2022 compared to what we had the same period last year for 2021. The large orders signed in 2021 have also increased our long-term visibility. On our Capital Markets Day in June, we will show you that the future prospects are stronger than ever. In Q1 we saw challenging with regards to the component shortage. That delayed our remote weapon station deliveries. However, keep in mind that this is not orders that disappears from the backlog, but delayed deliveries. So if you now look at the revenue despite the delayed revenues from the Remote Weapon Stations, defense managed to grow their revenues by 5.2% compared to Q1 last year. This really shows that the defense business is stronger than ever.

Our rolling 12 months revenue are now at NOK 10.2 billion and we have NOK 1.6 billion extra backlog to deliver this year compared to 2021. Adjusting for the previous mentioned employee appreciation, KDA or defense EBITDA margin is still at a very strong 20%. All the largest divisions in defense except from Land Systems are delivering EBITDA growth higher than or at the same growth level as revenue. This assures me that the current operations are very healthy and that defense will continue to deliver strong results though -- keep in mind though what I mentioned on the last slide, the current situation is challenging. At least not least -- but not at least -- last, but not least, the Kongsberg Digital. Kongsberg has high ambition for digital and digital's current business plan aims for revenue of NOK 2.8 billion in 2025 as you already know. The revenue growth this quarter is 15% with a 33% growth in recurring revenue.

Kognitwin and Vessel Insight with own and third-party applications will be the main driver for this growth. Significant investments are currently being made to roll out new solutions and applications with substantial scaling potential. In 2021 digital increased the number of employees by more than 25%. The scale-up is the key to success in both developing and rolling out the platforms and applications and are seen as necessary investments to achieve our ambitions. Therefore, digital also acquired Interconsult Bulgaria, a software delivery house, late April this year. The acquisition is strategically important to secure the people and capacity we need to grow digital according to plan. Digital will continue to deliver negative EBITDA also in 2022 as investments in products, application development and people are fundamental for growing our market position and rolling out our leading digital products and solutions.

The current most important KPI we follow in digital is the development in recurring revenue. The KPI has constantly improved throughout 2021 and last year the share of recurring revenue was 42%. In this quarter, recurring revenue increases even more with 33% compared to first quarter last year. In 2022, we aim to increase the share of recurring revenue to 50% whilst also growing total revenues.

With that, let's take a short look at the outlook before the Capital Markets Day in 3 weeks. So Geir.

[Geir Haoy, executive]

Thank you, Gyrid. Again the Q1 results just presented by Gyrid tells us that our performance is strong and that we have a solid financial situation, which I think is a very good starting point for the onwards journey for 2022. The positive trends from 2021 continues, but we expect more uncertainties related to logistics and components shortage. We are experiencing longer lead times and difficulties in getting hold of some components. This has for instance, as mentioned already, led to delays in deliveries for the remote weapon systems. We are monitoring the situation closely and continually implementing measures.

The higher raw material prices may also affect the demand for new vessels. The challenging raw material, logistics and component situation may result in some fluctuation in the revenue in the coming quarters. However, that said, we expect to continue a sustainable growth. More than NOK 17 billion of our order backlog of almost NOK 50 billion is for delivery in 2022 and this equals an order coverage that is actually NOK 2.7 billion higher than it was at the end of Q1 2021. So in total, we expect to continue growth in our operating revenues and are on the schedule to achieve our ambition for 2022 despite the turmoil related to the pandemic and Ukraine.

Then just a kind reminder that I really hope to see all of you in the Capital Market Day 2022. We will then give you some more insights and you will also hear from our business area leaders. By that, I say thank you for listening in and I will ask Gyrid to join me for the Q&A session.

[Jan Erik Hoff, executive]

We have received a few questions from the viewers. The first 2 questions comes from Kenneth Sivertsen, Pareto Securities. The cash flow from operation is negative and offsetted by net working capital. What was the main element in this?

[Gyrid Ingerø, executive]

We have very high activity in Kongsberg Maritime this quarter especially from customers. So that was the main increase and we also have very high suppliers at end of last year. We also have no large payments from projects and customers in defense this year. So if you look into this year, we can of course not [ analyze ] what we will have from the defense customers because that are milestone payments that comes when the projects are exceeding some milestones. But again we will continue to have negative working capital from defense and from the maritime, it has been around 10%. I think that will probably increase a bit if the activities continues on maritime.

[Jan Erik Hoff, executive]

And with regards to the working capital going forward given the component shortage that we experience, how do you see this impacting the net working capital?

[Gyrid Ingerø, executive]

At the moment, it hasn't been impacting at all, but it's on top of our wish list that actually we could increase this working capital in terms of components. But if we get any problems, we just say just buy them so we are sure that we can deliver. So hopefully, we will increase the working capital. But it's a lack of components all over the world right now.

[Jan Erik Hoff, executive]

And then a question from [ Erik Lovstad ]. In general, could you comment if you are able to forward the majority of the cost raise currently ongoing to the customers to protect profits and how this market position is differentiated in -- or different in the different business areas?

[Gyrid Ingerø, executive]

On the defense area, of course we have contracts that we are able to protect the margin. But again if you have some suppliers that have challenges, then you of course have to change supplier and that could impact. But in the large picture, this now worries around that one. For maritime on the aftermarket, we are following all the purchases out to the customers. But if you see on the steel prices, it's quite challenging at the moment in terms of the area for propulsion engine and also the areas for deck machinery or integrated solutions.

[Jan Erik Hoff, executive]

Okay. And then a question around the same subject from Hans-Erik Jacobsen, Nordea. With regard to the cost increase, I think increased raw material costs et cetera on contracts already in the backlog. Do you have any mechanisms to protect profits here?

[Gyrid Ingerø, executive]

Yes, we already have. And if you see a lot of the orders in the backlog on the defense side have already been secured. But then you have the Maritime where you probably have to have some delays on the deliveries and then you also have to maybe increase some margins on the things that you purchase.

[Geir Haoy, executive]

I think if I may add, I think this is always a negotiation also that we are doing with our suppliers. And right now we are trying to search for suppliers wherever we can and of course we are also addressing this with our suppliers. So -- and then of course what we can in addition do is to work on our delivery and you know to further do effective project supply. So we are always focusing on the margins not only for the components prices.

[Gyrid Ingerø, executive]

At the moment, we have not seen any large differences, but we see it comes.

[Jan Erik Hoff, executive]

And then a question from [ Luca Stahl ]. What is driving the strength of the aftermarket sales in KM? Any particular vessel segment or classes standing out here?

[Geir Haoy, executive]

No, I think it's general I would say. There is more activities out there. It's basically in all segments we see that there is more activities. I think we have been in a period now for 2 years in the pandemic. We have had some delays in upgrades, maintenance. So I think it's a general situation that we see a lift of the restrictions and the restrictions. So meaning that we are now able to do maintenance in a more normal way and also the upgrades. And then of course we see more on the offshore side coming online. So I will not point at any specific market, but in general it's a lot of activities out there, which has built up over the last 2 years for the pandemic.

[Jan Erik Hoff, executive]

And then we have actually 3 persons asking the same questions here and that is regards to the delays you have seen on Remote Weapon Stations. First of all, does this affect your margins? And secondly, do the delay deliveries or are there any penalties related to delaying deliveries there?

[Gyrid Ingerø, executive]

What we do is that we actually produce weapon stations as far as we can with the shortage of the components that we lack for. So we have delayed in the revenue recognition. But in terms of margin, there are no changes on that. So it will occur later on the top line. But at the moment, it's a bit delayed. So no.

[Geir Haoy, executive]

There is no penalties on this at this stage. We are working very closely with the customers to speed up the deliveries. And as Gyrid mentioned, we are working with alternative suppliers to get hold of the components that we need to finalize this. So I think it will not affect the margins. It will just affect the revenue stream coming from that.

[Gyrid Ingerø, executive]

And we are still able to finalize a lot of the weapon station, but not ready for deliveries because we lack the last components.

[Jan Erik Hoff, executive]

Okay. And then another question is around Defense from Lars-Daniel Westby from SpareBank. How has tendering activity within defense developed in 2022 with regards to the current situations that we see in the world? Has it increased?

[Geir Haoy, executive]

I think the activities has been high also in 2022 and a lot of these programs that we are working on is long-lasting, let's say, exercises for us to conclude on the projects. But I would say that the attention around defense area has, I would say, increased the last months. So I would say that the activities on the quotation side has picked up somewhat.

[Jan Erik Hoff, executive]

Thank you. That concludes the questions from the webcast.

[Geir Haoy, executive]

Okay. Thank you so much for listening in today. See you at the Capital Market Day. Have a good day.