Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2023-Q2

[Jan Erik, VP, IR]

Good morning and welcome to the presentation of Kongsberg's Second Quarter 2023 Results. This is a webcast-only presentation, but you are able to ask questions through the webcast. [Operator Instructions] Today's results will be presented by President and CEO, Geir Haoy together with CFO and Executive Vice President, Mette Toft Bjorgen. You will see two frames in your video window, one with the video and one with the slides. You can select which of these frames to focus by holding your mouse pointer over your screen and select your view.

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

[Geir Haoy, President & CEO]

Thank you, Jan Erik. Good day, and welcome everyone to this second quarter presentation of 2023. I want to start-off by thanking all good colleagues and partners around the world for their efforts they have put in so far this year. Kongsberg is growing and performing strongly. Thanks to our skilled people, technology leadership and dedication.

In terms of results, Kongsberg has continued a good trend and delivered growth, solid results and good order intake, both during the second quarter and the first half year of 2023. Order backlog is record high, more than NOK68 billion, giving us a good visibility and predictability going forward. All business areas are growing in Q2 with our revenue growth well above 20% compared to last year.

And I'm, of course, very pleased with what we have delivered and achieved. It is now approximately 17 months since Russia invaded Ukraine, an event that forever changed the world and history. Millions of Ukrainians were sent fleeing, there are cruel fates that unfold every single day in Ukraine. Thousands of lives has -- have been lost for no reason.

In this strategy, it is nevertheless good to see that our air defense system, NASAMS, every single day are helping to stop Russian missiles, drones and other threats from the air. We standby by Ukraine and are proud to support U.S., Norway's and other donations.

What we produce at Kongsberg saves lives. What we develop at our workplace here in Kongsberg matters, it makes a difference. What we do in Kongsberg is a job with purpose. The war in Ukraine has also led to an energy crisis and a food crisis, where energy and food have been used as weapons in a conflict. From before the world faces also a serious climate crisis. These grocers have accelerated an extensive global energy transition.

The large amount of renewable energy must be developed over the coming years. At Kongsberg, we are contributing to this change. Our ambition is to take leading position in the global energy transition, in the same way that we are currently have -- that we currently have leading position in the ocean space technology.

We have unique experience and industrial expertise from advanced marine operation which will be decisive in the development of offshore wind as an example. We are a front runner in green shipping and we have world-leading position in the ocean domain with smart sensors and autonomous underwater vehicle, which can monitor climate changes and secure critical infrastructure.

At Kongsberg, we go to work every day because we see that what we do makes a difference. What we create saves lives, reduce the climate crisis, accelerate the energy transition and secure the ocean. Our job with purpose innovating technology for a better tomorrow.

As many of you probably have noticed, we have recently unveiled a new global brand and recruitment platform called protecting people and planet. Protecting people and planet shall underline our uniqueness as a leading global technology pioneer, solving global challenges related to sustainability and security.

So before I continue on my Q2 presentation, I would like to share with you our new film. Please enjoy.

[Video Presentation]

So then I continue with business update of the business areas, starting with KM, Kongsberg Maritime delivered another solid quarter with strong revenue growth and NOK5.1 billion in order intake. The order backlog at the end of June was NOK19.6 billion, corresponding to an increase of 34% over the past year. We continue to see a strong order intake coming from the aftermarket, the portion of orders coming from new building in general builds backlog towards the tail.

The new build order intake on a year-to-date basis is focused in the pie chart to the right. As I noted in our Q1 presentation, the order intake is diversified and comes from several ship segments. This is still the case in Q2. Although, orders from the LNG carriers, as well as the Seaborne&Pax has been more dominating in the latter quarter. Overall, we see a slowdown in new build ordering in 2023 compared to the previous two years. At the end of May, contracted new building orders was just above 500 vessel in total, compared to more than 2,000 vessels totally in 2022.

Despite this slowdown, we find the mix of vessels being ordered favorable for us. The traditionally strong Kongsberg's segments still see relatively strong ordering, as for the aftermarket, we see a continued strong pace coming especially from sustainability upgrades and spares. This is a trend that I believe will remain as the ship owners across the world are forced by increased regulation to comply with new emission and ESG standards.

When we presented Q2 last year, 58% of the backlog was to be delivered 2023 or later. Now 65% or a much higher backlog is to be delivered 2024 or later. This means that long tail of our backlog has increased with more than NOK4 billion.

And then to KDI, Kongsberg Defense & Aerospace had an order intake of NOK4.4 billion and our book-to-bill of 1.28 for the quarter, combined with strong revenue and order backlog growth year-on-year. We continue to experience strong demand for both our missiles the NSM and JSM, as well as the NASAM air defense system. The largest single order during the quarter was NOK1.3 billion NSM Missile contract from Raytheon to the U.S. Navy's over the horizon weapon system program.

In addition, we have signed three important orders with Norwegian Defense Material Agency during the quarter. First, strategic contract to develop combat net radio for the Norwegian armed forces. Secured communication through new technical radio is an important part of the modernization of combat related IT for their armed forces.

Kongsberg together with Norwegian Armed Forces, the Norwegian Defense Research Establishment and Norwegian Defense Material Agency have over decades developed very robust capacity in the field of communication, which master the demanding topographical and climatic conditions in Norway. Based on this, we are developing future solution that can meet the sector's need for tactical radio capacity.

The second contract was for upgrading the NASAMS Air Defense radars and the third was a contract signed by Kongsberg Aviation Maintenance Services to overall and make ready for sale a total of 32 F-16 combat aircraft. We have seen a strong backlog growth over the past year and our product portfolio are in a higher demand and more relevant than ever. Therefore, we are investing in capacity to meet this demand.

Currently, we are building a production facility in Kongsberg that will be -- that will substantially increase our missile production capacity. This is a NOK1.5 billion investment and the factory shall be in operation from mid-summer next year. In June this year, we also announced that we are establishing an F-35 depot at Rygge where we maintain airframes for Norwegian F-35 combat aircrafts. Here our investment will be approximately NOK500 million.

These investments highlights our confidence in future growth for KDI. As mentioned, we have a record high order backlog spanning several years into the future and we see considerably demand going forward. We are prepared to meet this by investing not only in facilities, but also in people and competence.

And then to Kongsberg Discovery. Kongsberg Discovery had an order intake of NOK800 million and a book-to-bill of 0.89 this quarter. The orders signed in the business area is typically a combination of solid number of smaller orders, combined with some large orders from time-to-time.

Comparing order intake with Q2 last year, solstice (ph), last year we signed several major orders for over HUGIN vehicles in Q2, bringing the total order intake up to NOK1.2 billion and a book-to-bill of 1.6. In Q2 this year, the level of smaller contracts is strong, but we did not sign any major orders. This is considered ordinary course of business and order intake will fluctuate due to this.

Kongsberg Discovery's unique positioning within energy, fishery, research, security and surveillance gives an exciting outlook for the years to come and we see increasing demand and interest for the solution we are offering. The need for Sustainable Ocean Management is an important driver for the business area going forward and this entails seabed mapping, surveillance of various deep-sea installation, biomass management and monitoring of water quality and other environmental parameters in the ocean space.

We also experienced growing demand for a solution that can provide increased effectiveness and security in the marine -- in marine operations. We are seeing numerous prospects both for our HUGIN family, as well as for the remaining portfolio going forward. So the outlook remains positive.

So to KDI, in Q2, we welcomed two new investors, Shell Venture and Idekapital and also acquired majority share in FutureOn, both considered important steps for Kongsberg Digital. The investment from Shell and Idekapital amounted to $90 million and comes on the back of our previously stated intent to explore different strategic alternatives to fully realize the potential that lies in KDI. The funding and new investors will support and accelerate the future growth and development of Kongsberg Digital.

FutureOn is a front runner in developing technology towards the early phase of an asset lifecycle, making its technology a perfect fit for the digital industrial surface. Building on an already close partnership, Kongsberg Digital and FutureOn will continue to develop and incorporate new technology to enable a true end-to-end delivery throughout the lifetime of an asset. The business area is growing rapidly and has delivered impressive revenue growth compared to Q2 last year. Kongsberg has ambitious plans for KDI and together with our two new co-owners we will continue to aim for even more success.

So with that, I will leave the floor to Mette to take us through the financial highlights.

[Mette Bjorgen, EVP & CFO]

Thank you, Geir. Good morning and thank you for attending our Q2 2023 presentation. Now Geir has shown you that we delivered another solid quarter. Due to reporting the quarterly figures quite early, we as usual, closed the books earlier in Q2, meaning the quarter is approximately one week shorter than the remaining quarters.

We grew revenues by 27% from Q2 last year to NOK9.6 billion, which is the highest revenue we have ever delivered within one single quarter. As you see from the right-hand charts, all our business areas delivered strong growth. In nominal figures, the growth is driven by two largest business areas; Kongsberg Maritime and Kongsberg Defense & Aerospace, which grew 24% and 29% respectively, corresponding to an absolute NOK1.7 billion out of our NOK2 billion increased revenue.

In Kongsberg Maritime, the growth comes after strong order intake the past years in the new building segment, as well as high activity in the aftermarket. In Kongsberg Defense & Aerospace, we see high growth related to our missile deliveries, as well as continued high air defense volumes.

Kongsberg Discovery grew by 25% year-on-year, while Kongsberg Digital grew by an impressing 55% where a good portion of the growth came from recurring revenues. Discovery signed a large portion of orders for the autonomous underwater vehicle, HUGIN, in 2022. The production and delivery of these units are ongoing and represent the major driver for the growth in the business area.

When it comes to Kongsberg Digital, I am pleased to see recurring revenues growth both as a result of more assets in operation and more users on the systems. In addition, we see an increasing level of recurring revenues related to the already first half last year.

If we look at our operating results, operating results for the group came in at NOK1.38 billion for the quarter, which also is a solid improvement from last year. The operating results are as in Q2 last year impacted by NOK80 million in costs related to our employee share program, which had a record high attendance this year with some 5,200 employees signing up for shares. In addition, we have recognized NOK135 million in profits related to property sale, that impacts the other segments in Q2.

The absolute EBIT level is also driven by our two largest business areas. Kongsberg Maritime came in at NOK392 million corresponding to an EBIT margin of 7.9%. The improvement comes as a result of increasing volumes and we also see efficiency improvements in the business area. That said, in maritime as well as in the other business areas, margins reported in individual quarters are impacted by project mix and can fluctuate.

Operating results in Kongsberg Defense & Aerospace came in at NOK514 million corresponding to a margin of 14.8%. The margins benefit from a favorable project mix and strong project execution. We have been entering a period where the project mix is about to change as the business is growing.

We have started to see lower margins in the project mix, but at the same time, we are able to take out scale benefits from the growth. We will continue to deliver strong margins from defense going forward and we expect the margins to normalize towards our previously announced targets.

Kongsberg Discovery delivers NOK141 million in operating results corresponding to a 15.1% EBIT margin. Kongsberg Digital continues to scale the business, both with regards to sale as well as general capacity. This will continue to affect EBIT during the year as well, which is according to our plan for the business area.

Total operating results in first half came in at NOK2.57 billion corresponding to a 11% EBIT margin. Earnings per share for the quarter came in at NOK4.38, which is a solid improvement from NOK2.98 in Q2 last year and we delivered net earnings of NOK777 million for the quarter. For the first half of 2023, earnings per share was NOK8.6 and total net earnings came in at NOK1.547 billion in first half of 2023.

Kongsberg is growing in all our four business areas. The growth has come in a period where supply chain has been a challenge for many companies. Working capital has high attention in the business areas, but as we've said several times, it will fluctuate between quarters. The main driver for fluctuations is the delivery and payment profile for the large programs in our defense business areas.

This quarter has seen increased working capital in both the Maritime and Defense segments. Good progress in project portfolio contributes to the increase and there are also somewhat higher inventories to secure deliveries in our order backlog. We also see increases in current trade receivables due to high level of invoicing towards the end of the quarter.

The working capital in the quarter is also negatively affected by currency rollover effects, which is a temporary effect from rolling previous hedges forward. The cash flow in the quarter is driven by some large elements. We deliver a solid EBITDA of NOK1.4 billion, which is partly offset by increased working capital, which was commented on the previous slide. We also paid NOK208 million in taxes during the quarter.

In Q2, we have continued our investments in production facilities. The building of the new missile production facility is going according to plan and we will see this finalize during 2024. The capital raised from Shell Venture and Idekapital in Kongsberg Digital came in with NOK936 million and gave a net positive cash inflow from investment activities in the quarter.

In May, we paid out approximately NOK2.1 billion worth of dividends to our shareholders. We have also finalized the share buyback program as authorized at the General Assembly in 2022. After purchasing back a total of 1.4 million shares split between purchasing from the market and our largest shareholder, the number of outstanding shares in Kongsberg is now at 175.9 million. Included in the financing activities is also the funds received for the bond issue in May. We raised NOK1 billion in a seven-year bond with a fixed interest rate of 4.85%.

Our two largest associated companies are Patria and Kongsberg Satellite Services. Patria delivered 16% growth compared to the previous year with about EUR168 million in revenues for the second quarter of 2023. When we report quarterly figures from Patria, we are one month late, meaning Q2 consist of March, April and May. We report a catch-up in Q4 by inclusion of four months.

Kongsberg Satellite Services continues the positive path from previous years and reports a revenue growth of 19% in the quarter and 22% year-to-date and a steady growth in EBIT as well. KSAT has had a strong quarter with regards to order intake and the order backlog has increased with more than NOK1 billion in the first two quarters, which gives a sound base for continued growth.

We expect KSAT to deliver growth in both revenues and EBIT for the year. The backlog from our associated companies is not recognized in Kongsberg's reported backlog and the contribution to Kongsberg from associated companies is recognized as income from associates in the P&L.

With that, I leave the floor for Geir to give you some more information on our current outlook.

[Geir Haoy, President & CEO]

Thank you, Mette. I think we already have touched on the most important outlooks for the business during the presentation. So I will not go into details here. However, in total, we do see a strong growth prospects in all our business areas in the short to medium-term. Growth in 2023 is already more or less secured if we deliver what's in our backlog and we have also secured solid portion of deliveries for the next few years.

In general, we see a strong demand throughout our portfolio, meaning I believe we should grow our backlog even further. In the Defense, we have a strong backlog and increasing number of prospects. In Maritime, we experience a positive sentiment in our high value segments and aftermarket continues at a high pace.

With regards to Kongsberg Digital, we are continuously increasing the scale of the business and we have also added two partners to our owners list during Q2, adding both competence and financing of continued efforts. Kongsberg Discovery is established on a basis of a very strong position in several areas and is positioning to continue the growth. We see strong demand in all segments the business area is operating and our prospect list is higher than ever.

So to sum it up, all in all, I'm confident that we will continue our sustainable growth path also in 2023.

Then, I would like to open up for questions from our viewers.

[Jan Erik, VP, IR]

We have received quite a few questions from the viewers today. The first one comes from [indiscernible] Capital. In Q1, you said that a stock exchange listing is being considered in long-term for KDI. I note that you no longer make that reference to the stock exchange listing after the Shell investment -- Shell Ventures investment and Idekapital. Could you elaborate if this investment and lack of reference to a stock exchange listing means that listings is off the table for time being?

[Geir Haoy, President & CEO]

I think we have several times during the presentation mentioned that we have now just received two new co-investors in Kongsberg Digital and I think that is very exciting. I think we should focus now on that for time being. And then, as we have said many times, a listing of KDI would also be an option depending on the situation and the market out there. So not mentioning, it doesn't mean that it will never happen, but I think now we will focus on developing KDI together with our two new co-investors.

[Jan Erik, VP, IR]

Thank you. And then a few questions from [indiscernible] Bloomberg. Considering Kongsberg's broad technology portfolio, what strategic steps is the company taking to ensure it stays at the forefront of innovation, while also managing challenges that come with technological disruption. Could you elaborate on the mechanics in place to stimulate continuous innovation, adaptability and successful roll out of new products?

[Geir Haoy, President & CEO]

That's a very good question, I think. I try to be short, but I think it's important for Kongsberg, we have a very diversified portfolio. And of course, for us, it's important to continue to make sure that our portfolio -- current portfolio is at the top, that means that we are continuously developing our both product and systems and services continuously. And then of course, it's also important for us to, let's say, be involved in research programs, pilots, taking the new innovative solutions to the first stage.

I think Kongsberg is extremely active in several of these programs, both nationally programs, but also European programs. So I think that is one of the strength of Kongsberg that we are able to continue develop existing, but also taking the next step for the new innovative solutions. So I think we are pretty active on that side.

[Jan Erik, VP, IR]

Thank you. Kongsberg has ambitious plans for growth, including the construction of a new missile production facility and significant investments in digital solutions. How does the company plan to balance these expansion efforts with maintaining financial stability, particularly given the prediction of a negative operating result and cash flow from Kongsberg Digital in 2023?

[Mette Bjorgen, EVP & CFO]

I can answer that. When it comes to Kongsberg Digital, we reiterate our target for the business area, which is a positive EBITDA in 2024. So we are developing positively. We see recurring revenues growing 70% in a quarter, which is a good development, it now accounts for 55% of total revenue in Q2. So this business area is developing according to our plans and of course, we aim to have a profitable EBITDA in the next years.

When it comes to the production facility for missile division, we have an order backlog at KDA at NOK45 billion at the moment, NOK23 billion is from the Missile division. And of course, we have to expand to be able to deliver and we expect solid profits also going forward from this business area.

[Jan Erik, VP, IR]

Thank you. As Kongsberg positions itself towards a more sustainable world, could you elaborate on how the company's commitment to environmental, social and corporate governance principles is being integrated into the core business strategies and how does Kongsberg measure the impact of its ESG initiatives and what steps are being taken to ensure adherence to these initiatives across all business areas?

[Geir Haoy, President & CEO]

I think, of course, this has a high attention from the Board to the management in the corporate out in the business areas. We have committed our self to the scientific-based target initiatives, which we have submitted our plans and targets and we hope to achieve that improvement within this autumn. I think we are also -- I think it's two ways. We are, of course, looking at our own footprint, making sure that we take the right measure internally in our own operation.

And then, we have also committed our self that not only Kongsberg, but also our supplier, the supply chain, we should also bring them along into the scientific based target initiatives. I think we said that by 2027, two-third of our supply chain should be a part of that commitment.

And then, of course, the most important thing is our products, how we innovate on our technology side to take down the footprint and the new solutions for the greener within the maritime industry, within the ocean space area. So I think this is very much on the table every day when we talk about strategic development or strategic direction for Kongsberg, this is a part of our discussions, both in the group but also in the business areas.

[Jan Erik, VP, IR]

Thank you. And then a question regarding Kongsberg Defense & Aerospace's missile program tenders. KDA is reportedly tendering on multiple missile programs, which could presumably have significant impacts on future revenues and overall growth. Can you provide any additional details on these potential opportunities and how does these tenders align with KDA's overall strategic goals and financial expectations?

[Geir Haoy, President & CEO]

I think we said last quarter that we had -- I think the last two quarters, we have reported that we have high expectation to securing orders, especially in the missile side and also in the air defense side. And I think we have shown that we are doing that. I will not go into any details of the specific prospects. But what I could say is that the budget of the NUS, the presidential budget proposal, I think we said last year that if that will be approved, then only the NSM multi-year opportunity will mean NOK10 billion or more for Kongsberg in the NSM.

And then, of course, you have the JSM coming online. We have full operational capability in 2025, which means that I think we will see also some high activities in the JSM sector going forward. So we are planning for it, that's why we are investing also in the factory in the new production facilities in Kongsberg, which will increase our capacity substantially producing the NSM and the JSM.

[Jan Erik, VP, IR]

Thank you. And then a question from Marios Hydal (ph), it's related to Kongsberg Maritime. There are potentially some quite large assets coming up for sale in the maritime sector. What are your thoughts around acquisitions in this space?

[Geir Haoy, President & CEO]

I guess he ask for -- is it M&A opportunities or is it...

[Jan Erik, VP, IR]

Yes, it's regarding...

[Geir Haoy, President & CEO]

I was thinking about ships, we are not going to buy ships.

[Jan Erik, VP, IR]

No. Assets for sales within the Maritime sector?

[Geir Haoy, President & CEO]

Yeah. I think what I can say is that this is something that we obviously, continuously monitoring. We are looking at M&A opportunities continuously and then it's all about, I would say, what it is -- how does it fit into the DNA of Kongsberg? What is the timing? So obviously, we are also looking at these opportunities that he is talking about here. And -- but I will not comment on more in detail on M&A rather than that we are following that very closely, of course.

[Jan Erik, VP, IR]

Thank you. And I believe that concludes the questions from the viewers.

[Geir Haoy, President & CEO]

Okay. Then I would like to say thank you. Thank you for joining us this morning in July. Have a great summer everyone out there and we look forward to see you again in the third quarter at least, so have a good summer. Thank you so much.

[Mette Bjorgen, EVP & CFO]

Thank you.