Earnings Call: Q3 2021

Apr 21, 2021

Earnings release

Welcome to a review of Ketron's First Quarter twenty twenty one. I'm Peter Nelson, CEO of Ketron, and with me today as usual is CFO, Katharine Elanda. I'd like to remind you that we conclude with a Q and A session and I encourage you to post questions during the presentation. Let's look at an overview of the quarter. Next slide please. So customer demand was strong in the first quarter and although component supply has been challenging, Ketan has yet again delivered its strongest first quarter. During the first quarter, the market sectors electrification and industry drives growth. Industry products supporting automation and increased industrial capacity have been particularly strong. Our EBIT profit improves by close to 12% generating an EPS of NOK 0.25 in the first quarter. As usual, when there is a strengthening of our consolidation currency, in Ketan's case not versus USD and euro, growth looks weaker than it really is. We primarily see this in our order backlog, which seems to be flat compared to last year, but grows 8% in underlying currencies. The first quarter has been executed according to our sales plan for 2021. Demand for the quarter has been slightly stronger, but challenges in the supply chain has pushed fulfillment into the second and third quarter. Current demand outlook for 2021 confirms our earlier outlook of the strongest year yet for Ketron and puts us in the midpoint for our 2021 guiding. Demand is particularly strong in our CEE group, Lithuania and Poland. Next slide, please. So, let's take a look at some keytone operation status. Despite some additional waves now of COVID-nineteen, there's been little effect on keytone operations. We have continued with the precautions set in place last year. The challenges with material supply with shortages and semiconductor supply have now extended to other component categories. This results in extended lead times, delays in deliveries, de commitments from suppliers and price increases. And although we see that these challenges will increase over the next two quarters, the early work done in Q3 and Q4 last year identifying and addressing critical components for our customers has paid off in the first quarter and we expect it will continue supporting us in the forthcoming quarters. Our strategic partner program, together with the strong dedication and hard work by the Key Tron team, has been crucial to meet these challenges with great success. Our continuous improvement program delivers year on year value for our customers and ourselves. This is a good way to partially mitigate the impact of material price increases. Next slide please. So a brief summary on what we talked about on our Capital Markets Day for all of you new viewers out there. Starting this year, Ketan has updated its five market sectors. Two old classifications are retired, so gone are energy telecom and offshore marine. This move will help us market Ketron's capabilities more clearly as we focus our teams to further grow business. In addition, each of the five market sectors are built for and allow for multilevel drill down to truly identify business growth and quickly adjust strategies. Let's start with market sector connectivity. Within this sector, we find machine to machine Internet of Things, sensors, wireless communication, networking products, optical transmission products and more. Next up, electrification. Within this sector, we find battery management systems, power grid transmission systems, power and electric drive management, charging and fuel cell technology. On to market sector industry. Within this sector, we find equipment for automation, robotics, recycling and equipment for infrastructure and construction. Finally, two of our traditional areas of growth, defense aerospace and medical devices. Both sectors have extremely high requirements, entry barriers to do business and long product life cycles. In general, Keytrum's diversification shows resilience to variations in the general business cycle. Next slide please. So some of the important orders in the first quarter. In January, we received the first order for the F-thirty five radar system under the $20.16 $500,000,000 NOC long term agreement. This initial order has a value of 10,000,000 NOK and production will take place in Norway. In February, we were awarded production of battery management systems. This initial award covers three years and is valued at $150,000,000 Production will take place in Poland. In March, we entered an agreement with Corvus Energy covering production of battery management control systems as well as other services. The initial award covers two years and is valued at $100,000,000 Production will take place in Norway. In general, we're carefully targeting customers within the defined sectors with good success, actually above average hit rate. Moreover, we see the market in an upwards trend. The number of new potential customers we're engaging with is higher than ever. Next slide please. So now here is CFO, Katrin Lander, to walk us through the financial results. Katrin? Thank you, Peter. I will now talk about the financial results. Next slide, please. Electrification and the industry drives growth. Growth for the quarter is 7%. And growth adjusted for foreign exchange effects in consolidation is 9%. Let's go from left to right and start with connectivity. Connectivity has a growth of twenty three percent and sixteen million compared to last year and it has two subsectors, subsector communication where M2M IoT is being the largest application in area and the subsector sensors, which is mostly different types of metering. Both subsectors also with a growth rate of around 23%. Connectivity has had a fairly stable revenue in the last four quarters. The sites which are strong within connectivity are Sweden, Lithuania and China. Onto electrification. Electrification grew 26% and NOK 60,000,000 compared to last year. As for the growth in the largest subsectors, power transmission doubled since last year. Power management had 13% growth and battery technology grew 25. China and Lithuania are strong within battery technology, Lithuania and Poland within battery management and Norway within power transmission. Onto industry, a familiar name but with different content. Industry grew twenty five percent and forty three million compared to last year. Subsector automation, which is the largest one, grew 36%. Oil and gas grew 24%. Recycling was up 37%. And for transportation and infrastructure, there was a slight decline. Medical devices are at the same level as last year, which is actually above our expectation. With the extraordinary revenues for life support last year, mainly in Q2 and Q3, we are expecting an even more significant rebound in the first quarter. Life support and hospital care grew 15% whereas we have reductions in diagnostics and home care. Defense aerospace, a reduction of 24 and 60,000,000. We see lower demand in The U. S. And in Norway. And in general from The U. S. Customers, we see a COVID-nineteen related delays from the U. S. Government this year. If you look on the countries on the right hand side, we see growth between 8% to 12% except for The U. S. Where there is a decline in this quarter. That said, let's talk some more on growth and currency. Asset revenue was 7% and the underlying growth 9%. Underlying the term adjusted for exchange differences in consolidation. What that means is that we calculate the reported values with last year's exchange rates. However, there are also currency effects in local levels in most sites as well as invoice and other currencies in addition to the local currencies or for some only in other currencies. To give an indication of what the invoice currency are. U. S. Dollar, we invoice about 35% to 40% of the revenue. For euro, 30 5 percent of the revenue approximately. Second NOK, ten percent to 15% each and C and I about 5% or below. So, that's the total value. This, of course, varies over time and depends on what site that has the largest volume. But taking the invoicing currencies into consideration at the sites, the currency effect of growth is actually a negative 5% compared to the negative 2% in consolidation. So another 3%, I. E, if you adjust for all currency effects, the growth was 12%. Next slide, please. EBIT development. Profits are returning to strategic levels. First quarter profit was at SEK65.4 million compared to SEK58.4 million last year. This corresponds to 7% EBIT margin which is up from SEK6.7 million last year and profitability is in line with the year end outlook of 6.8% to 7.2%. We talked about currency effects on revenue and dependent on the currency sites to business in, there are in fact some local effects on EBIT on the low level too due to the working capital. In Q1, this has a minor effect. It's actually 0% and last year, it was a negative 0.4%. And below EBIT, we have a noncash negative ARGUR6 million in the finance net compared to positive ARGUR2.4 million last year. This is mainly revaluation of group internal loads and specifically euro loans in Poland and some USD items elsewhere. Tax rate is quite low at 15%, which is lower than last year's 22%. This is due to the income mix and the higher share profit in lower tax countries, specifically CEE. In addition, there is a taxable loss in The U. S. That reduces the group tax percentage in the quarter. The tax percent will vary between the quarters and are expected to end between 18% to 20% for the year. Next slide, please. EBIT by country. Norway and Sweden continues at strong margins. Norway at 7% but down from 7.3% last year and Sweden at 7.1% up from 6.3% Both show solid numbers with a revenue growth of 8% to 10%. Central Eastern Europe consisting of Lithuania and Poland improved EBIT margins from 6.6% last year to 9.9%. Keeping the level from Q4 in total NOK 15,000,000 increase in EBIT and main contributor for the profit increase in the quarter. The others consisting of U. S. And China show a low profitability in Q1. China is performing at the same levels as last year or even more. But unfortunately, U. S. Had a very weak quarter. This is due to the demand for a quarter which is lower than expected in last year's level and the fact that we're working out some more below profitability as well. The expectation is better progress going forward. But in all, solid from all sides, but U. S. Brings it down in the quarter. Next slide, please. Capital stabilized. Working capital ended at SEK1035 million, an increase of 2% compared to last year. Adjusting for foreign exchange effects and consolidation, it's around 11% increase on last year's level. So the SEK22 million increase from last year, which is a net effect last year's consolidation currency, it's about SEK101 million increase and the currency negative effect of SEK89 million. Net drivers in Norway and the contracts they have. There is large activity from the defense industry that has long lead items to procure for the future which does affect the numbers in Norway. Trade payable are increasing as a result of high activity and higher share of preferred vendors with larger payment terms or longer payment terms. Trade receivables are in line with revenue same level as last year's. Overall, it was around 4% down in value and percent from last year where it was 5.4% and mainly clear by now. DSO was 66 up from 62 last year. In total, R3 net working capital percentage of sales is 28%, same level as last year. Cash conversion cycles reduced one hundred and three days from $105,000,000 R3 ROK $16,600,000 up from $15,300,000 last year. As a positive cash flow, SEK 78,000,000 in the quarter, slightly below last year's SEK 102,000,000. It's driven by profitability and reduction in working capital. Net interest bearing debt, EBITDA, is improved from SEK 2,500,000.0 last year to SEK 1,600,000.0 this year. If we adjust for IFRS 16 of around SEK 115,000,000, it is SEK 1,400,000.0. Net debt is SEK670 million and reduced from SEK757 million last year. A comment of the right of use assets which we specify in the balance sheet. We're mentioning the development in the report split into machinery and buildings and cars. So the machinery is related to leased equipment according to previous standards and buildings and cars are related to IFRS 16 and the value is about SEK 112. As for 2021, dividend of SEK 70 per share is proposed, which is a total SEK 125,000,000, 1 tranche to be paid in May and the other tranche to be paid in October. The general meeting is later today, so the minutes will be presented also later today. So even though we are less satisfied with the capital efficiency for the quarter, the capital situation in Keytron is satisfactory. Next slide, please. And now back to you, Peter. Thank you, Kathleen. Let's start with our order backlog. So next slide, please. We have strong confidence in our order backlog that it will support our 2021 targets. The current demand outlook confirms that 2021 should be the strongest year yet for Keystone. Demand is driven by connectivity, electrification and industry. All operations benefit from this demand growth. The trend with increased investment in industrial capacity and infrastructure drives strong growth in our CE group with Lithuania and Poland. Market sector medical devices is down after an extraordinary 2020 with a strong corona driven demand. Levels for 2021 and onward are now back on a normalized level. The order backlog for defense has weakened and the full year outlook is expected to be down slightly. The primary reason is delays in new program start up due to corona related travel restrictions. Next slide, please. So, let's move on to our guidance. Next slide, please. For 2021, we reiterate, Ketan expects revenue between NOK 3,900,000,000.0 and NOK 4,200,000,000.0. EBIT margin is expected between 6.87.4%. Current demand outlook supports the midpoint in this guiding. Growth is driven by connectivity, electrification and industry sectors. These sectors show an average growth of close to 30%. Next slide please. So what are the key takeaways? Well, Q1 twenty twenty one is our strongest first quarter yet despite unfavorable currencies and challenges in the supply chain. Our order backlog is and full year demand outlook supports continued growth. For 2021, our previous guidance and outlook is reconfirmed and maintained. Now this concludes the presentation portion and we are ready to move on to Q and A. So far, we see only one question. So go ahead and get them in there if there's anything you're wondering about. First question, Katharine, is from Aurel where he says where he asks, do we have any plans on stock on share buybacks? We have discussed the issue. We have discussed the issue and not concluded on the matter. So there is no plan yet. Right now, currently, we proceed with the dividend payouts and that strategy. And if there's any change, it'll come through the board later this year. That is it so far. Yes, Peter, looking at the guiding and the revenue we had in the first quarter, we're quite back ended this year, right? We are, yes. And one of the things, yes, we could have delivered a little bit more in the first quarter. Some of that has been replanned and reshuffled out as lead times on constrained component supply has stretched out. But I think overall, when we looked at this year and we planned this year, we're pretty much on plan for the first quarter. You're always unhappy when you know you could have done a little bit more. But that's the name of the game. And we've won some new business in the first quarter also where there is a lot of undelivered demand. But unfortunately, when we bring it aboard, we've got a big setup to do and we've got to chase down all of those parts. So there's had we won it three months earlier, it would have been higher. We have some more questions here from Could you give some more color on the backlog conversion for Defense Aerospace sector this quarter? It seems that it's lower than historically. And yes, right, we've had some we had a $60,000,000 reduction, as you mentioned, in the first quarter alone. And we have about the same when we look at the rest of the year. We see a backlog down about $115,000,000 all in all, driven solely, I would say, by delays in the U. S. Government in approving products and in allowing travel for certification of product startups in Norway and also in The U. S. So that reflects on the order backlog. Also, the order backlog is very heavy in U. S. Dollars. The U. S. Dollar impact of basically, you know, compared to last year, we have about a 1 NOK reduction on NOK versus U. S. Dollar. That has a big effect also on the backlog. We're not concerned really about it because we continue to win new business and have strong growth in parts of it. But this is the way it is, right? That sometimes you have a very strong order backlog on defense, sometimes it goes down a little bit. Yeah. You didn't see the whole question. It says also that is it driven by delays of certain programs due to COVID-nineteen? And the answer is yes in that sense. That's right. Yes. And then has another question. He follows up here. Even though you've coped well with the ongoing component shortage, do you see any risk for delayed orders from your customers as they might face challenges in accessing other necessary components? Not so far. Not so far. And usually, if we have an order, we deliver on our orders anyway. There could be an issue, you know, theoretically there could be an issue where we have forecast from our customers and they never convert it to orders. But at this point, I think most of our customers are well, have a very good understanding of what the supply situation is and how important it is to execute when you can execute and not delay. Because if we were to delay component supply, ask for it later or cancel and try to put a place a new purchase order, that demand allocation is gone. Then you're in the back of the queue for mid next year on the supply. So not too concerned about that. Haven't seen any of it yet. Also, if it says, how bad was the result in The U. S. In the first quarter and when will you breakeven? Well, we will definitely breakeven in the second half of the year. We hope that it'll take a turn now in the second quarter. The whole first part of the year, we are stuck with delivering out a significant program, which is pretty much half of the revenue at this point, where the profitability is nonexistent. That doesn't help. On top of that, you have delays with the medical customer rollout that we won last year and continued prototyping, continued design changes. I think those are pretty much complete by now and we should start to see that rollout in the second quarter and really gain volume into the third quarter. I don't know if you want to comment on the result specifically, Katerina, in the first quarter. No, it was a negative, but it was substantially. It was below USD 1,000,000, but in that area. It was close to USD 1,000,000 for the quarter. Yonas says, how would you describe the M and A field in general? Have the valuations increased during the last year? How the quality of the companies how the quality How is the quality of the looking for a new owner? I would say the answer to the first question is valuations are very high, even for unlisted companies. And really specifically for unlisted companies because most of the transaction proposals or projects that we look at are unlisted companies. And valuations, I would say, are high. And even, you know, even though so getting to some of the performance and the quality, historically, some of these companies are not doing well, but the outlook is always, you know, roses and sunshine. So looking at that and looking at the evaluations, we're not really seeing anything that has piqued our interest in general on the market now. There have been a couple of companies we've talked to and approached but really nothing that's solid and that we're working on. And he also follows on, Jonas, with a question, has the structure reorder backlog changed in any way? For example, share of fixed orders versus customer forecast. Yes, it has changed. The share of fixed orders has increased a lot. I would say we have never seen as if you extend the definition of order backlog, because ours is pretty strict. It's fixed orders and only forecasted demand inside a four month window. If you look at the full year, we've had I don't think we've ever had as a strong demand outlook as we've had this year, starting in January, increasing in February, increasing in March, and to a level now where we're, you know, we have a demand outlook which is within the window of our current forecast outlook. And we know that not all demand is in there because we know some of the products come later. We know some of the products don't have prices. So demand is in there, but there's no price and no value on some of the demand. So I think that's changed and that's changed because we've held these monthly or bimonthly webcasts for the general community on the supply situation and then specifically followed up with every month a dozen or so one on one meetings with large customers, bringing them up to speed, bringing their management teams up to speed of what's going on and what they need to be doing. So that drives, I think, demand. Sophie says, do you expect to win more business within connectivity next quarter? Yes, I do. I'm not going to tell you what it is. But we have at least one large quote I'm thinking about. But again, you know, unless there's a confirmed supply on that, it could take a little while before a ramp up takes place. But I would say we expect connectivity to grow more the next few quarters than it has I mean, connectivity growth in Q1, I think, was 45%. We haven't talked about it specifically because it's not the biggest market sector of industry electrification and connectivity. Connectivity is the smallest, but it actually grew in a percentage measurement the most. And we expect a higher revenue on connectivity going forward than we had in the first quarter. Yes. Jonas follows up again here with I think that's the one he just asked. So from orders. And Hendrik says, referring to your contract with Corbus Energy, can shareholders expect similar agreements with other energy suppliers in this sector? Which geographical market is of most interest to Quito? I hope you can expect more. We are working on more agreements very actively in this sector which market is the most important, we're working a lot with the market in Sweden. We're working with the market in the DAX region, so German speaking part of Europe, Germany, Switzerland, Austria and so forth, even The Netherlands. Specifically when we look at charging technology because that as everyone knows is set to grow dramatically when large parts of the European auto industry converts also to electrical. So, there's a lot of business opportunities out there and many, many, many companies that have that are big today. So, some of those we're in active discussions with also. That's it from a question point of view. We're at exactly 09:00, so thirty minutes. It's our longest webcast so far. Good. Just a few seconds only and see if there's since there's a little delay and see if something else comes in. It seems to have, quieted down. So okay, let's stop. Okay. I'll be meeting some of you later today in one on one meetings. I'm looking forward to that. And if not, well then, hopefully, we can get together at the end of Q2 and or in the beginning of Q3 to look at the second quarter results. Thank you so much.