Kongsberg Gruppen ASA

OSE:KOG

Earnings Call Transcript 2022-Q3

[Jan Erik Hoff, executive]

Good morning and welcome to the presentation of Kongsberg's Third Quarter 2022 Results. Today's numbers will be presented by President and CEO, Geir Haoy; as well as Chief Financial Officer and EVP, Gyrid Skalleberg Ingero. Good morning also to those of you who are following this presentation through the webcast. You may also ask questions after the presentation and questions may be submitted through the webcast throughout the presentation and will be presented on stage after the presenters are done with their slides.

With that, I would like to leave the floor to President and CEO, Geir Haoy.

[Geir Haoy, executive]

Thank you, Jan Erik. Good morning, everyone, both to those listening in on the broadcast and also to all of you here in this room. It's good to see you. Welcome to our third quarter presentation for 2022. Before I go on with the presentation, let me start with some overall reflections on the global situation. The security situation in Europe has changed dramatically in the wake of the tragic war in Ukraine. I think it's to remind us that we can never take peace for granted. Several states are now allocating for strengthening their own preparedness as well as upgrading and investing in new security and defense capacity. At the same time, the world must handle challenges related to the energy supply and speeding up the energy, accelerating the transformation towards a more sustainable planet. So our mandate and purpose in Kongsberg are to help states and governments to solve their security challenge and at the same time to be a key accelerator in the energy transition.

Given the trend, I believe Kongsberg will be a key part of the solution going forward. And with this backdrop, I'm also pleased to present yet another solid quarter for Kongsberg highlighting strong performance across the entire company and also an all-time high EBITDA. Then you have seen the disclaimer. That brings me to some highlights of the third quarter. Kongsberg has grown its revenue by 25% and, as I mentioned, have delivered all-time high EBITDA of NOK 1.36 billion. This is a result of strong performance in all major parts of the company and also favorable project mix and good progress in major air defense programs. I'm also glad to mention that we have had a very strong order intake in Kongsberg Maritime this quarter. Although the number of newbuild are quite much lower than last year, we experienced good activity in our high-end markets. In general, we are experiencing increasingly high market activity in several segments, which I will come back to in more details later.

And then I would also like to mention that Lisa Edvardsen Haugan is appointed as the new President of Kongsberg Maritime taking over for Egil Haugsdal. And also appointed as a new President of Kongsberg Digital, I'm very pleased to see that Shane McArdle stepping up from the ranks and replacing Hege Skryseth. I'm confident that both Lisa and Shane are the right for the jobs and on the road to further strengthen our maritime and digital business globally. Egil Haugsdal, which many of you know, have accepted new responsibility and will be heading our new initiatives, the Kongsberg Renewables Technologies, which I will come back to a little bit later. And then finally, we have also successfully closed the acquisition of NanoAvionics in this quarter. All divisions. With a 36% increase in revenue ending at approximately NOK 4.7 billion and a book-to-bill of 1.2 in the third quarter, I think it's very satisfying to see that KM has continued its positive trend.

The strong order intake in Q3 is due to good activities especially within the offshore wind. Naval, LNG and also the aftermarket continue to be strong. Kongsberg Maritime continue to hold a large market share for the LNG carriers. So far this year, it has been contracted 130 LNG carriers at the yards and we also expect more vessels to come in the pipeline going forward. Regarding the aftermarket, we see that the regulatory requirements around emission creates increased demand for environmentally friendly power solution and we also expect that this trend is going to continue. We also see an increased interest and good activities within sensor and the robotic segment this quarter and I think this fortifies our position as the world leading technology provider in the sensor and autonomous underwater segment. And as you might know, our autonomous underwater vehicle and sensor have multiple use both for monitoring and surveillance of critical operation, which is high on the agenda these days.

So all in all, Kongsberg Maritime delivered a very strong quarter and I think also they have a very strong position going forward. Then to Kongsberg Defence & Aerospace. Kongsberg Defence & Aerospace continued to grow and increase its operating revenues by 24% this quarter while also the EBITDA ended at a very strong 21.5%. The growth was mainly driven by the high activity and good progress in large air defense projects. Unfortunately, we still have some delays on the remote weapon station deliveries and it's of course our highest priority to solve this case in close cooperation with our customer and partners. KDA continued to experience high interest and demand of the Naval Strike Missiles. The Naval Strike Missile is an antiship and land attack missile recognized as the most advanced precision strike missile in its class. In the third quarter, we have secured call-off for the delivery on of Naval Strike Missile worth NOK 328 million to the U.S. Navy.

And then Spain has also selected Naval Strike Missile for their existing fleet, but also for their coming future frigates. And as I mentioned, we have done the closing of NanoAvionics this quarter. And when it comes to further space activities, I would like to add that we have also entered into a new and very important infrastructure interesting collaboration with the European Space Agency on micro satellites infrastructure for ocean surveillance. So Kongsberg is in fact Scandinavia's largest supplier of space equipment to ESA and we are now furthering and strengthening our scope and competitiveness in this domain. The cooperation with ESA is of critical importance for Norwegian space industry as well as for Kongsberg's endeavors in this segment. Further, we are continuing to ramp up our defense business to meet further growth both when it comes to recruiting new skilled colleagues as well as investing in new facilities and also of course to capture new contracts.

And then to our digital business area. Kongsberg Digital is also showing good progress this quarter and also with growth in all areas. We are continuing to roll out our digital twin the Kognitwin and we have 2 new additional twins launched into operation this quarter. And as you can see on the graph to the right, the number of users are also increasing at an acceptable speed. We have now more than 4,500 active users on the Kognitwin adding to the growth in our recurring business revenue. At the end of the quarter, we have more than 60 shipowners that have signed contracts for 1,900 vessels on the Vessel Insight platform. In total these shipowners represent more than 3,000 vessels, which I think showcase some of the potential for KDI going forward. It's no secret that we have high expectation for KDI as the digitalization of the maritime market and heavy asset industry are a significant contributor to optimize customer insight into and also control of their operation.

Therefore, we see and we expect increased demand for the business area's solution going forward and overgrowth ambition for KDI remain. And then I said I will come back to Kongsberg Renewable Technologies. So before I leave the floor to Gyrid, just address these new initiatives. We have announced this in the press earlier, but I like to just recap some of the key points. So we are now establishing KRT to strengthen our technology concept and development solution and also the domain knowledge within the entire renewable energy value chain and also then to unlock new strategic opportunities for Kongsberg and for future growth. KRT will particularly focus on solution for production of renewable energy offshore, but also for energy management and also adjacent part of the value chain and then to enable significant scale up and also rollout of the renewable energy.

And I think this initiative will strengthen Kongsberg's existing investment in offshore energy solutions as well as add also new capabilities in the Kongsberg Group. But just to underline, this does not mean that we're going to consolidate all our sustainable technology efforts into Kongsberg Renewable Technology. And as you might have seen, our ambition for Kongsberg is to achieve a double-digit billion revenue from the offshore wind and renewable segment within 2030 and that is for the group as a whole.

And with that, I leave the floor for Gyrid to take us through the financials for third quarter.

[Gyrid Ingerø, executive]

Thank you, Geir, and Good morning to those attending here at KirkegArdsveien and also to you following us on the webcast. I really look forward to release those figures today. We have been through a quarter characterized by very high activity both on the delivery side, but also as Geir touched on, on the market activities. Activities that will generate continued growth and progress for the group and we are at an all-time high level both when it comes to maritime, defense as well as in digital. So first, let's start with giving you some highlights for the quarter. We delivered 25% year-on-year growth and have delivered our strongest quarterly EBITDA ever close to NOK 1.4 billion. To put the results in a perspective. Our EPS, earnings per share for the quarter was NOK 4.97 and it's higher than annual EPS used to be just a few years ago. Despite relatively low defense order intake, the remaining of the group has generated a strong order intake that gives us a backlog of NOK 54 billion to deliver over the coming years.

Despite a major part of the backlog are to be delivered out in time, we have NOK 8.4 billion in the backlog to be delivered in the fourth quarter and adding on extra revenues from the aftermarket, Q4 already seems to be another record quarter when it comes to revenue. Order intake in Q3 was NOK 7.5 billion, primarily driven by strong order intake in maritime and approximately half of the order intake we delivered in Q3 last year were signed in the NOK 8.2 billion order with Norway and Germany for delivery of compass system to submarines as well as NSM to nations Navies. Kongsberg Maritime also signed a EUR49 million order with Costco meaning when we adjust for the extraordinary large contracts last year, underlying order intake actually up some 10% to 15% giving us the NOK 54.1 billion in order backlog as I mentioned. All business areas delivered growth in the quarter and our rolling 12 months revenue are now at NOK 30.5 billion, which is above our 2022 full year target set out back in 2019.

Our year-to-date growth is now at 16%; maritime has 18% growth year-to-date, defense 13% and digital 14% growth year-to-date. The EBITDA ended at NOK 1.360 billion with a margin of 17.6% and our best-ever quarterly EBITDA. The main driver for the EBITDA is the high activity with air defense, sensor and robotics and the maritime aftermarket as the 3 main drivers. Working capital in maritime increased by NOK 200 million during Q3 to NOK 2.3 billion or 12% of rolling 12 months revenue. The increase in the quarter is mainly growth driven and related to the increase in short-term trade receivables. We are always targeting a more efficient working capital, but with the continued expectations of growth in the fourth quarter, this implies year-end net working capital to sales around the same range. Looking at the working capital in Kongsberg Defense. As mentioned several times, working capital in defense can have large fluctuations that are typically a result of payments schedules in the large defense projects.

During the quarter, the explanation is different. Close to half of the working capital increase is related to our missile division where we recently initiated the project of setting up a new missile production facility. This will increase our capacity and ability to meet the increasing backlog as well as the future demand. Due to this, we have decided to increase our inventory with regards to components to missiles to secure future deliveries. In addition, the component shortage in land systems still delays deliveries of remote weapon stations. Customers would typically pay on delivery and when we still, due to shortage on some components, are lagging on deliveries, working capital continues to increase. Looking at the development this year. The main explanations are a combination of delivery in land system, inventory buildup in missiles division and few milestone payments from the large projects compared to 2021 when the prepayment level was very high.

Looking at the cash flow. I touched upon the working capital development in maritime and defense on the past 2 slides. In the chart, you can see the cash flow effect on the working capital change. With regards to the other major cash flow effects in the quarter, these are related to the acquisition of 77% of NanoAvionics with NOK 526 million and the share buyback program with NOK 298 million. Approximately NOK 200 million of those are related to the portion of shares bought back from our largest owner related to previous program where we deleted 1.5 million shares the 1st of July this year. The remaining are in relation to the ongoing buyback program decided on this year's AGM. At the end of the quarter, we had NOK 2.2 billion worth of cash in our balance sheet and a net debt of NOK 225 million.

A bit more details around Kongsberg Maritime. Maritime continues to deliver strong order intake and the NOK 5.6 billion in Q3 corresponds to a book-to-bill of 1.2. Kongsberg Maritime has a very, very strong year actually both this quarter and also year-to-date. We have seen good order intake both from the newbuilding market, the sensor and robotics market as well as the aftermarket. We have signed additional huge orders in sensor and robotics during the quarter and the solid contracting from the vessel newbuilding market continues. The strongest contributor in Q3 was once again the aftermarket with a little more than half of the order intake this quarter. Year-to-date Maritime accounts for 70% of Kongsberg's total order intake. When presenting Q2, I mentioned that we have experienced a shift in the aftermarket from need to have, like to have we have experienced during COVID to nice to have and would like to have. This has continued.

New solutions mainly related to greener shipping are to a larger extent becoming more and more a pull from our customers. We see that we have several competitive advantage in the aftermarket. First of all, our 24/7 network makes us trusted by our customers. We have also seen that our engineering approach taking the full operation into account is highly appreciated and preferred by our customers who do not necessarily have those roles internally. The speed in the market as well as the strong position we have built over years make it very positive, but also when it comes to the order intake over the next quarter for KM. I really believe that this will continue. As you see from the right-hand chart here, we continue to build order backlog on the tail of today's deliveries. This is mainly due to pressured yard capacity in the short to medium term.

Maritime delivered 26% revenue growth after 14% in the fourth quarter -- first quarter and 14% in the second quarter, year-on-year growth and now at NOK 18.6 billion in revenues the last 12 months. This confirms the solid trend we have seen from the orders on the previous slide. All divisions in Kongsberg Maritime managed to grow the revenue in Q3. But also with regards to the revenue, the main contributor is the aftermarket. There are still lots of uncertainties with regards to both components, logistic and inflation. However, we have solid comfort for the remaining of the year as well as into 2023. Kongsberg Maritime delivered a record high NOK 796 million EBITDA corresponding to 17% EBITDA margin compared to NOK 560 million and 15% margin last year. The improved EBITDA is primarily a result of growth and solid project execution. Currency fluctuation in general and the change rate between Norwegian krone and U.S. dollar is something that we follow closely.

The majority of maritime revenues come from customers outside Norway. However, it's important to notice that we typically hedge most delivery projects meaning that eventual currency effect is typically spread over the contract period. But a portion of the revenue are exposed to the spot market and for Q3, we have calculated a positive EBITDA effect of around NOK 50 million related to this mainly from sensor and robotics and the spot side of the aftermarket. The ongoing inflation of course also hits the whole maritime value chain. To a large extent, we have been able to offset cost by 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 the green shift, renewable needs and last, but not at least, KM's strong market position. So I'm still very positive to the development.

Some more details also around Kongsberg Defence & Aerospace. The order intake in Q3 was NOK 1.6 billion. We keep on reminding that order intake in defense fluctuates somewhat substantially between quarters, which is clearly highlighted when comparing order intake in Q3 this year. The largest order we signed in Q3 this year was the NOK 328 million for the NSM to Over-The-Horizon program. Another important achievement within NSM this quarter was the Spanish selection of NSM as a replacement of their current anti-ship portfolio. This selection add another flag to our list of NSM customers. We have great expectation for NSM going forward and expect to sign orders for at least NOK 15 billion over the next 18 months. We have in the last quarter said that the current backlog secures growth for the current year. From the chart to the right here, you can also see that we already have secured NOK 11.5 billion for delivery also next year, which is some NOK 0.5 billion higher than the last 12 months revenue.

I will now show you on the next slide meaning solid growth in 2023 is also within reach. As mentioned on the previous slide, rolling 12 months revenue in defense are now NOK 11 billion compared to NOK 10.4 million last quarter. The quarter -- the year-on-year growth for Q3 was 24% and this is despite us still having delays in deliveries of remote weapon stations. We also have extraordinary high progress in some of the large delivery projects. The positive contribution to the revenues is around NOK 300 million. Scalability on increased volume also improved EBITDA and we delivered another very strong defense quarter with 21.5% EBITDA margin. As I keep on reminding you, over time the margin will trend somewhat down due to change projects as well as geographical mix on our deliveries. We now see that defense also in Q4 will deliver strong margin meaning that 2022 should end up at about 20% EBITDA margin.

We have started to see a mix between mix change when it comes to orders both with the orders signed over the last 1.5 years as well as with regards to the increased market activity that Geir touched upon. This goes with both geography and as well as the products. The deliveries the last couple of years have been and still are boost with high margin international projects. These programs are and will still be an important part of our revenue going forward. But looking at the order intake as well as the future projects -- prospects, the project mix will change somewhat going forward. This is the main reason for the 17% outlook target margin in 2025 that we released on the Capital Markets Day in June. Just before we presented the Q2 presentation in July, we announced that we had entered into an agreement to acquire 77% of the Lithuanian small sat mission integrator and bus manufacturer NanoAvionics. The enterprise value on a 100% basis that we agreed upon was EUR65 million and the acquisition was closed on the September 6.

NanoAvionics and Kongsberg have complementary technology and positions in the space value chain. NanoAvionics is a leader in the small sat segment whilst Kongsberg is an established provider of spacecraft subsystem and through Kongsberg Satellite Service, the world-leading supplier of satellite ground station for downloading and processing satellite data. With this acquisition, we expand our portfolio to also have products and technology for designing and manufacturing small satellites and it confirms our position as the Nordic region's largest industrial space company. Looking at the pro forma figures. NanoAvionics would have added some 22% or NOK 150 million to our 2021 reported space revenue. In addition, Kongsberg owns 50% of Kongsberg Satellite Services that are reported as associated company and had some NOK 1.2 billion revenue last year meaning that we are now controlling more than NOK 2 billion related revenues in the space segment and so far this year we are at NOK 1.7 billion.

And last, but not at least, Kongsberg Digital. The revenue in Kongsberg Digital continues and in this quarter KDI has 19% growth in revenue and 34% growth in recurring revenue. The growth in recurring revenue is driven by increased number of digital twin assets and impressing 30% increase in number of users. The increase in number of connected vessels on Vessel Insight also contribute to the growth in recurring revenue and I'm also very pleased to see that the other part of our digital business is now growing both with regards to maritime simulators and traditional simulators to the oil and gas customers. For 2022, the financial results are and will continue to be affected by cost related to investments in product development and scaling the organization to secure growth and maintaining our market position. So all in all, fantastic quarter and a very happy CFO.

So with that, Geir, some outlook.

[Geir Haoy, executive]

Thank you, Gyrid. I think maybe not need for any outlook, you have told a lot already. But anyway just a few comments on the backlog -- on the outlook. I think looking at what Gyrid have just presented, I think we can be quite sure that we will deliver on our financial targets for 2022, which we set some years back. I think we have still a very robust order backlog and I think also that we have a very solid and growing opportunity pipeline going forward. Looking at Kongsberg Defense, the current backlog secures growth and we experience and we also see very high market activity also going forward. Gyrid mentioned that we still probably will see some fluctuation in the revenue due to the component situation that we experience in the remote weapon station.

For Kongsberg Maritime, we expect positive sentiments especially in the high-end segment and of course with that, we also believe that the aftermarket will still be strong going forward. There is some yard capacity and also of course the macro outlook could also of course impact the maritime segment going forward. And as Gyrid ended with Kongsberg Digital, we continue to expect increased recurring revenue in that area and we continue to scale up and invest for further growth both organically as well as inorganic. Then of course we need and will continue to monitor the geopolitical situation very closely and we will remain vigilant with regards to that development. So just to conclude, let me say that Kongsberg is in a good shape and I strongly believe that our product and systems and services will continue to be a strong demand and a part of the solution towards a more secure and sustainable world.

So by that, thank you for listening in. And then Gyrid will be joining me on the stage again and we open up for questions.

[Jan Erik Hoff, executive]

Okay. It's free to ask questions from the audience as well. If there aren't any from the audience, I will start with some questions from the webcast. But please raise your hand if you have questions. First one from Hans-Erik Jacobsen, Nordea. Have you seen any pickup in demand from the oil and gas sector?

[Geir Haoy, executive]

Yes, we have seen more activities in the oil and gas sector and particularly in the aftermarket. I think we talked about it. There is a need for green transition and we see more and more activities especially in the hybrid solution. So I would say, yes. On the newbuild still naturally quite slow. But it's going to be exciting to see especially within the -- I think the anchor handler segment is going to be interesting to see in the years to come what's going to happen in that segment especially for offshore wind and floating offshore wind. So that is -- but I think this is some years ahead of us, but very high or improving activities in the offshore aftermarket.

[Jan Erik Hoff, executive]

And we have 2 questions from Kirsten Sternard. What is Kongsberg's reaction to the Norwegian government's new rules with the introduction of new strict limitations on management pay rise and how will you be able to compete to retain top management?

[Gyrid Ingerø, executive]

How long time do we have?

[Geir Haoy, executive]

I think this is announced by the government and I think we are now of course looking into what that means for Kongsberg. When it comes to salary or compensation to the management and myself, I think I will leave to the Board to look into that and make the decision there. But obviously we are looking into it.

[Jan Erik Hoff, executive]

One more question from Mr. Christian. With regards to KDI, when can we expect to see some development in the divestment of KDI?

[Gyrid Ingerø, executive]

We have -- we monitor that all the way of course and the intention was to do an IPO at an earlier stage. But with the situation right now in the markets, we are just sitting on the fence and monitoring the situation. So it's like it always has been over the last quarters that we are looking into options for KDI. I'm very happy with the development though that is even more actual.

[Jan Erik Hoff, executive]

Thank you. It seems like it's late Friday on the webcast so there are unfortunately no more questions. So if there aren't any -- are there any questions from the audience now?

[Geir Haoy, executive]

Crystal clear.

[Jan Erik Hoff, executive]

Then I think that was it.

[Geir Haoy, executive]

Yes. Thank you so much.

[Gyrid Ingerø, executive]

Thank you.