Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2022-Q2

[Jan Erik Hoff, executive]

Good morning, everyone, and welcome to Kongsberg's presentation of our second quarter 2022 results. The results today will be presented by President and CEO, Geir Haoy, as well as Executive Vice President and CFO, Gyrid Skalleberg Ingero. You may submit questions throughout the broadcast by using the question function on your webcast, and please also spell out your name when asking a question. And with that, I'll leave the floor to Geir Haoy.

[Geir Haoy, executive]

Thank you, Jan Erik. So good morning, everyone, and welcome to our first half year and second quarter results for 2022. I must say it was really good to see many of you when we last met in person during our Capital Market Day last month. I hope that you all gained good insights during the day, including updates on our growth ambition and financial targets.

As a global company, we are affected by changes in international trade, access to components and global politics. This situation challenge us, but I want to assure you that my team and I are spending every waking hour on how to cope with these challenges and turn them into opportunities for Kongsberg.

So standing here today, and thanks to my hardworking colleagues, I'm pleased to report that Kongsberg has had another solid quarter and that we are well on track to reach our financial targets for 2022.

So let me start with updating you on some of the key highlights from last quarter. We have, as usual, secured a high number of new contracts in all the business areas, and this has resulted in an order intake of almost NOK 11 billion with an all-time high order intake in Kongsberg Maritime. The book-to-bill ratio is at 1.45, which is very satisfying. The revenue ended at NOK 7.6 billion in the quarter, which is significantly up compared to same quarter last year. The EBITDA ended at approximately NOK 1 billion for the quarter.

Among many highlights this quarter, I want to mention that we have recently acquired NanoAvionics, a leading global space operator from Lithuania. This acquisition expands our space offerings to also include technology solutions for the growing commercial small satellite market.

Kongsberg is already a leading space company in Northern Europe. And with this new acquisition, we will further strengthen our position in Europe and also globally. So if you have some spare time during the summer month, I want to get some more insights of our new family member. Please visit NanoAvionics on their YouTube channel. You will then see impressing technology and videos from space. I will come back to more information about this acquisition somewhat later in the presentation.

So to the business update of Kongsberg Maritime. Just to repeat what I said on the last slide, Kongsberg Maritime has a very strong order intake this quarter, actually all-time high. What's more to say? As you can see on the pie to the right, the order intake has a good and diversified mix, meaning that we are not singularly dependent on any cyclic segment. Our Maritime business is now probably the most competent and complete supplier of the maritime solutions in the world, and we are well positioned to shape the maritime future with our latest screen technologies.

Kongsberg Maritime had a lot of achievements worth mentioning this last quarter. The sales in sensor and robotics have been very strong. We have signed several and strategic important autonomous vehicle contract this quarter. And this, of course, further strengthen our position as the world-leading technology provider in the autonomous and the water segment. The aftermarket continue also to be strong. We see more orders coming in on larger upgrade projects as customers are adapting to new regulation and retrofitting towards a greener portfolio.

Another market in which we have won several major contracts is the offshore wind, a growing market where Kongsberg has advanced technology the market demands. And despite we see some decrease in new contracting in general, we see also positive development and new orders coming in, in certain segments, such as naval offshore wind and also LNG. In fact, only the last 6 months, it has been contracted more than 100 LNG carriers. So I will say, all in all, Kongsberg Maritime delivers and the company has a very strong position going forward.

So to the Kongsberg Defence & Aerospace, they continue to perform strong and secure several important contracts in the quarter. And here, I would like to mention that we have further strengthened our F-35 position with new deliveries to the fighter aircraft.

So far, we have delivered parts to more than 1,000 aircrafts and passed more than NOK 10 billion in the order intake on the program. We have also secured more Naval Strike Missiles related to the U.S. Navy's Over The Horizon program. And we have also signed an initial contract, NSM contract to Australia to replace the harpoon and to ship missile on the Royal Australian Navy's frigates and destroyers. This is an important breakthrough and very important for us.

We have also, in the quarter, signed an upgrade on the combat system to the Royal Norwegian Navy's Skjold-class. And we have also reached the first milestone towards enabling the installation of Kongsberg remote tower system in U.S., where we have signed a partnership agreement with the airport of City of Concord in North Carolina. And customer aviation maintenance service has extended its existing contract with the Norwegian Defence Materiel Agency to overhaul and make ready for sale an additional batch of the F-16 aircraft.

With regards to some other comments during the quarter, we still see some delays related to the Remote Weapon Stations component. This is a situation we are obviously following up closely and in very good dialogue with our customers. We have also been informed that the Norwegian Ministry of Defence has terminated its contract for the NH90 helicopters. In the short term, this will have none or minor financial impact for Kongsberg. And in the longer term, Kongsberg focuses on securing MRO competence and activity related to helicopter maintenance, and then especially for our setup in Bardufoss.

So let's go back to space or maybe up in space. I have briefly mentioned the acquisition of NanoAvionics already, and I want to give you some more insights on this. The acquisition represents a game changer for Kongsberg's space ambition as we are stepping up to take important shares in the growing small satellite market.

Kongsberg is the Nordic region largest industrial space company and a global leader in maritime surveillance. We have a clear ambition to grow further. And with this acquisition of NanoAvionics, we are taking further steps in line with our ambition.

Kongsberg will acquire in total 77% of the company, giving us a solid majority control of the company. The rationale behind the acquisition, our 2 companies have complementary technology and position in the space value chain. NanoAvionics is a leading mission integrator and the best manufacturer in the small side segment with customers in more than 40 countries across Asia, Europe and the Americas.

Kongsberg is already well-established space provider and through Kongsberg Satellite Service, the world-leading supplier of satellite ground stations for downloading and processing satellite data. Then NanoAvionics is complementing Kongsberg's global position in both the traditional space segment and also in the new space segment. So this acquisition is in line with Kongsberg's strategic priorities to grow and take advantage of the opportunity pipeline in the space technology sector.

So to Kongsberg Digital, which also is showing good progress. This year, KDI has secured several new strategic partnerships. One example is the agreement to develop digital twins for floating wind parks, a market where Kongsberg is already well positioned. Our digital twins are really unique, and I'm glad to report that KDI continues to add new users to their Software-as-a-Service recurring business model. And one important highlight this quarter is the signing with MSC, one of the world's largest shipping container lines.

MSC is playing a key role in facilitating trade all over the globe, but also in setting the standard in making the industry more sustainable to digitalization. With Vessel Insight, MSC can contextualize data created by a fleet of approximately 500 vessels through our vessel-to-cloud infrastructure and use this data to optimize their fleet performance and by that, reduce emission.

Another important highlight is KDI's acquisition of the software developer company, Interconsult Bulgaria or ICB. This acquisition will further strengthen KDI's capacity in a growing digital market. Kongsberg Digital are increasing both in number of installed digital twins and Vessel Insight systems, and we expect increased demand and more news for the business areas solutions going forward.

And by that, then I leave the floor to our CFO, Gyrid Skalleberg Ingero, to give you the financial status of the second quarter and first half year.

[Gyrid Ingerø, executive]

Thank you, Geir, and good morning for listening into our Q2 presentation. And what is better than to use or spend the morning coffee by looking into those fantastic results that we have. We have been through some exciting weeks since our Capital Markets Day, signing some solid orders, and we have also made 2 acquisitions after that. I will start by summarizing the quarter.

We have had a major order intake in Q2, a book-to-bill of 1.45 and 97% higher order intake than Q2 last year. The strong order intake has led to yet another quarter reporting win backlog -- with backlog growth. And we have now secured orders to be delivered over the coming years of close to NOK 54 billion.

Our revenue also continues to grow, and we report a 12% quarter-on-quarter growth corresponding to 11% the first half year. Our return on capital employed continues at a solid level. And at the end of the quarter, we have a return on capital employed of 31.2%. We also closed the acquisition of ICB, as Geir mentioned, and announced the exciting acquisition of NanoAvionics that I will provide you with the financials after closing in Q3.

Order intake in Q2 was, as I mentioned, 97% higher than Q2 last year. The larger orders that Geir already has mentioned was the NOK 1.4 billion order with Northrop for supply to the F-35 Joint Strike Fighter program. It's also pleasing to see order intake in sensor and robotics in Kongsberg Maritime picking up. This is an area in Maritime that supplies to a broad range of markets, among them, research, navies and fisheries, to mention a few.

Even though it is not visible in our figures yet, the MCS contract KDI signed for deliveries of Vessel Insight will gradually help growing our sales revenues. All business areas delivered growth, 12% revenue growth year-on-year, and we are now at NOK 28.9 billion rolling 12 months. With some NOK 13.7 billion backlog as well as shorter-term order intake, especially from the Maritime aftermarket, we are on track to close out 2022 at more than NOK 30 billion revenues.

Both Maritime and Defence delivered double-digit growth this quarter compared to the corresponding quarter last year, and Digital has grown the recurring revenue by 35% during the same period. The EBITDA ended at NOK 1.12 billion, slightly above last year's NOK 993 million. It's worth mentioning that we have implemented a change in how we are reporting the approximately NOK 80 million cost that we have related to our employee share program. That attracted close to 4,400 of our employees this time to invest on average NOK 72,000 each in Kongsberg shares. Previously, the cost related to the discount in this program has been accrued with NOK 20 million each quarter. This year, the full NOK 80 million is accounted for in the second quarter, so it's part of the result.

Net working capital in Maritime increased by NOK 511 million in Q2 to 11.8% of the rolling 12 months revenue. The increase in the quarter is mainly driven by trade receivables due to high activity in this quarter. Net working capital in Defence increased with NOK 1.4 billion in the second quarter, where of NOK 668 million is related to the deliveries of the air defense system. The 2 ongoing large NASAMS projects, Qatar and Hungary, which as of Q2 have received payments for, on average, 2/3 of the contracted value. As both projects are ongoing, the net working capital will fluctuate as a result of deviation between milestone payments and project deliveries.

No large payments have been received on projects in Defence during the second quarter. High project activity is the main driver to the net working capital increase in Defence. In addition, delays on remote weapon station deliveries increased the working capital in land system as we are still waiting for components to close final deliveries and to do the last revenue recognition for some of the Remote Weapon Stations.

Then some comments on the cash flow. I touched on the working capital development on the past slide. As you see, the working capital has a major effect on the cash flow. I already comment on the increase in trade receivables due to high activity in Kongsberg Maritime with regards to the payment status of the 2 large air defense projects, you see the effect on the net projects here. There are projects where payment have been received previously. The increase in net projects here show the process in the project until the next milestone for final deliveries.

The other major cash flow effect in this quarter comes from the NOK 2.7 billion dividend we paid out in May. This means that at the end of the quarter, we have some NOK 3.5 billion in cash. Following a recent uptick in orders, Kongsberg Maritime Sensor & Robotics division have announced that it has secured over NOK 450 million in contracts for HUGIN AUVs in the second quarter.

The order income consists of a healthy mix of recurring business with existing customers and new customers that will utilize the HUGIN platform in their operation. Over time, the range of the HUGIN AUVs has enrolled to go deeper, longer and carry a larger payload of sensitive data collecting sensors, which has made HUGIN the most successful commercial off-the-shelf autonomous underwater vehicles ever made.

We see this as a growth area for Kongsberg. And in May, we therefore enter into a contract with Horten Industrial Park, who will colocate and set up new facilities for Sensor & Robotics in Norway. The new building is next to Norwegian Defence research establishment, who also is a contributor into the constant development of this product. Together with divisions in Kongsberg, we now account for approximately 1,100 employees in the City of Horten.

Kongsberg Maritime. Maritime had its all-time high order intake from last quarter with another record high order intake this quarter. Both integrated solutions that primarily deliver system and solutions to new vessels, sensor and robotics that among others delivers to HUGIN and our global customer support divisions increased their order intake with more than NOK 600 million each compared to the second quarter last year. With total order intake of NOK 22.2 billion over the past year, Maritime now has a record high NOK 17 billion order backlog to deliver.

Geir touched on the diversity in the order intake, and this is also reflected in the backlog. Despite it seems like the total number of vessels to be contracted this year will decline, high-value segments for Maritime, such as LNG, Naval and Offshore Wind, are looking very positive. We also experienced a shift in the aftermarket from need to have, like we have experienced during COVID to nice to have or would like to have. When we previously introduced our new solutions for the green shift, our clients often made other priorities. Now the customers are pulling us into concrete projects that goes way into their planning for how to meet and manage the green shift.

If you look at the chart here, you can see that out of the new orders this quarter, we are building order backlog at the tail of today's deliveries. This is mainly due to pressured yard capacity in the short to medium term. 14% year-on-year growth in Q2 and NOK 17.6 billion in revenues last 12 months confirmed the solid trend we saw from the orders on the previous slide. The revenue increase come from the same 3 divisions that grow the order intake growth. There are still a lot of uncertainties with regards to both components, logistic and inflation. However, today, we have comfort at the remaining of the year as well as into 2023.

EBITDA is up with 12% year-on-year to NOK 507 million in Q2. The main driver for the Maritime EBITDA is the aftermarket. But this quarter, Sensor & Robotics has also contributed with a solid margin improvement. The ongoing inflation, of course, also hits the whole Maritime value chain. But remember that this market has been through a long period where prices have actually decreased, so increased prices does not necessarily only have a negative impact for Kongsberg.

We are able to offset costs actually taking part of the price increase as well. The situation around components and logistics could, of course, still impact profitability. But that said, with the current trend, Maritime has both when it comes to growth as well as the operational efficiency. So at the moment, I'm positive going forward. We see this as an opportunity to further improve our operations.

Some comments on Defence. The order intake increased from NOK 1.1 billion Q2 last year to NOK 4.1 billion this quarter. This implies a book-to-bill in the quarter of 1.52, which also grows the already large order backlog even larger, so now on NOK 36 billion in total. The backlog secures growth this year. And looking into next year, Defence already has NOK 9.9 billion to deliver, NOK 2.1 billion higher than 1 year ago, which is a solid indication that the growth will continue in Defence.

The Northrop order for the F-35 program is yet another order for this program. We are delivering to this program through 3 suppliers: Northrop, Lockheed Martin and Marvin Engineering. Since we started the deliveries back in 2008, we have signed orders worth NOK 10 billion, and the program will continue. With regards to the 2 NSM contracts signed in the second quarter, both of them are parts of large programs, where we only have signed delivery contracts for a small portion of the planned scope.

Earlier this year, I pointed out Australia as a very interesting country for our future Defence sales. The Australian decision to sign NSM and the recent contract award is another proof that Australia will become a larger portion of our sales in the future. Defence delivered a solid 10% revenue growth despite still some challenges when it comes to Remote Weapon Stations. Also, the NOK 6.2 billion for delivery in the remaining of the year that you saw on the past slide shows that second half will come in even higher.

Without the delays in deliveries on the Remote Weapon Station, the growth would have been around 16% this quarter, although up from 10%. The EBITDA margin holds up at very high level. Over time, the margin will trend somewhat down due to changed projects as well as geographical mix on our deliveries.

I was asked about the margin on Defence this year when we released the fourth quarter in February and said that first half would be at the same level as the margin for 2021. First half of 2022, we have seen a margin of 19.9%. But as I have mentioned before, the mix in the backlog is changing, both geographically and product-wise.

The deliveries the last couple of years have been boost with high-margin international sales. These programs are areas will still be an important part of our revenue going forward. But looking at the order intake, especially last year with the large missile and submarine contracts, the mix will deliver and the deliveries will change somewhat. This is the main reason for the 17% target in 2025.

So last but not at least, Kongsberg Digital. Kongsberg Digital continues to take steps for -- towards its targets. The recurring revenue in this quarter was now actually more than 50% of the total revenue. This is driven by both the increased number of digital twins in operation, more Vessel Insight user as well as the SiteCom system from our digital Wealth Division. We are continuing to scale KDI, both organically as well as through M&As.

The ICB acquisition is an example of this. ICB offers highly innovative and skilled personnel complementary to KDI, with machine learning with the maritime and energy domain. ICB will serve as KDI's European development hub for software development to attract and develop key talents to deliver into existing projects. ICB has had a relationship with Kongsberg since 2004, so we know the company very well.

So with that, thank you for listening in. And then over to the outlook.

[Geir Haoy, executive]

Thank you, Gyrid. Yes. Then a short brief of the outlook. Kongsberg has had a very positive development in the recent year. And also through the pandemic, the company has implemented several restructuring measures and also changes. This has strengthened our market position and made the company even better to adapt to and cope with changes, as well as to take on new opportunities.

Despite the component shortage, logistics and inflation, we maintain a good control over our own operation. Kongsberg's order backlog is increasing and is, as Gyrid already mentioned, now at almost NOK 54 billion. After current order backlog, approximately NOK 40 billion will be delivered this year. And I think this gives us a visibility, a good visibility and predictability going forward. The solid order backlog, combined with a strong performance culture, means that we are on track to reach our ambition of turning NOK 30 billion in revenue in 2022.

So by that, thank you. And then Gyrid will join me, and we will open up for a Q&A session.

[Jan Erik Hoff, executive]

Yes. We do have a few questions from Ben Heelan, Bank of America. With regards to the working capital that has been a significant drag in the quarter, can you help us understand why? And as well, will -- do you expect this to reverse by year-end?

[Gyrid Ingerø, executive]

Yes, I can comment on that. If you look at the Kongsberg Maritime, it's due to high activity. So the trade receivable has increased at the end of the second quarter. This, we expect to normalize. As I said at the Capital Markets Day, we aim for 10% working capital at -- in Kongsberg Maritime. Now it's up at 11.8%. So we think that will normalize at the end of the year.

In terms of Kongsberg Defence and Aerospace, it has to do that we had a lot of milestone payments last year on the 2 large air defense project that we run for NASAMS with Qatar and Hungary, and we're now delivering on those projects. And as I said at the Capital Markets Day, it's completely complicated to predict the working capital in Kongsberg Defence as the payments come while we have milestones deliveries.

[Jan Erik Hoff, executive]

Second question from Mr. Heelan. Can you talk about the component shortages in KDI? And how manageable are they? And can -- are you able to be concrete on what programs they are affecting?

[Geir Haoy, executive]

Yes. I think it's related to general Remote Weapon Stations. And we are, as I mentioned earlier, we are in close dialogue with our customers to find solutions for the component challenge. So we are working on it. And in fact, we are delivering now Remote Weapon Stations, but we need to fill up further with the components to be able to pick up on the speed for the deliveries for Remote Weapon Station.

[Gyrid Ingerø, executive]

We actually build them up to 85% finished, and then we are waiting for some components. So we constantly get components into the warehouse as well, and we are delivering Remote Weapon Stations, but in the speed that we wanted to is not high enough. So if we have more components, then we could speed it. So it's only a delay. It's not anything else than that.

[Jan Erik Hoff, executive]

There is also a follow-up question on that one from Hans-Erik Jacobsen, Nordea. Do you have -- are you able to predict when these orders are to be delivered, the delayed orders?

[Gyrid Ingerø, executive]

I think, as Geir said, we are delivering all the time. So just now the last week, we delivered around 50 weapon stations. So we are constantly delivering that, and we can build them up to 85% finished. So just waiting for the components to speed up.

[Geir Haoy, executive]

Yes, we are working every night and day to be able to source components to be able to deliver. So we are not sitting and waiting. We are actually working as hard as we can to get the speed up.

[Gyrid Ingerø, executive]

And there are components there. They are just not enough as we need.

[Jan Erik Hoff, executive]

And another question from Ben Heelan. With regards to the order intake that was very strong in both divisions, you touched also -- you touched on the drivers in KDI. But what should we think about the order intake for the second half of the year?

[Geir Haoy, executive]

I think the drivers -- I mean, in general, Kongsberg Defence & Aerospace had a very strong and big pipeline, and this is orders that we have been working on or projects that we have been working on for several months and several years. I think we are now seeing a, let's say, increase in, for example, in NATO. They are NATO countries. They are increasing their budgets. So in general, our products fits quite well with the geopolitics and the challenges we see in the market today. So we expect that we will have a solid order intake going forward as well.

[Jan Erik Hoff, executive]

Thank you. And a question from Lukas Daul, Artic. With regards to the margins in KDI, can you elaborate a little bit on how they will develop throughout from today and the remaining of the year as well as going forward towards your 2025 target?

[Gyrid Ingerø, executive]

I think Geir comment briefly on it. But as I said, for the first half year, we thought it would be approximately the same as last year as it was. But it will come down to 17%, but that's at the end of 2025. But as more as we are delivering on the submarine and then the semi-contract to Germany, and as long as we are delivering on the maintenance contracts that we have, there will be pressure on the margins, but that will be after 2022, I think.

[Jan Erik Hoff, executive]

Thank you. That concludes questions from the webcast.

[Geir Haoy, executive]

Okay. Then thank you so much for listening in during this summer month. I wish you all a good summer and look forward to see you again in the autumn. Thank you.