Good morning, and welcome to Kitron's Q1 report for 2024. I'm Peter Nilsson, CEO of the Kitron Group, and joining me, as usual, is Cathrin Nylander, CFO. Following today's brief presentation, we'll have a Q&A, so please post any questions you may have in the Q&A section of the webcast. Thanks. Next slide, please. Slide two. Let's start by reviewing the current market sentiment. The Nordic and US operations show positive momentum, mainly driven by increased demand in defense and aerospace sectors, along with some strong demand from sub-sectors of electrification and industry. We expect some 20% growth for Norway, Sweden, and the US. However, the broader market environment is challenging, leading us to revise our full year outlook down some 12%. We project slower than anticipated market recovery, along with extended destocking activities by our customers.
After a remarkable growth in 2023, CEE, Central Eastern Europe, shows some declines of some 13% in Q1. Our current projection is that CEE operations are facing 30% decrease for 2024, widely affected by lower demand in green tech. In China, after tremendous growth last year, demand has decreased 50%, impacted by weaker industrial demand in China and increased regionalization. The trend with localization and regionalization persists. We're seeing increased customer requirements for regional or local manufacturing and supply chains. Technological sovereignty and security of supply are driving local manufacturing for defense, aerospace, security, and other products. China and India are establishing tough rules to sell products in local markets, driving supply chains to adapt. Security and supply and sustainability are reshaping the supply chains in Europe, pushing regional manufacturing to Central Eastern Europe for Europe.
In the U.S., products affected by the Inflation Reduction Act are creating trade barriers and enabling opportunities for U.S. manufacturing. Trade tariffs are pushing production out of China to non-China solutions for North America. Our view may vary compared to other reports, but we've had extensive discussions with customers regarding forecast, indicating a recovery in the second half of 2024. Few customers are currently prepared to back up forecasts and projections with firm orders, committing to a second half growth. Customers that are showing growth in the Q1 continue to build on that in later quarters. This leads us to take a conservative stance in our outlook for the back half of the year, allowing us to focus on efficiency improvements and synergies of full integration of the 2022 acquisition of BB Electronics.
Based on this new view of 2024, let's look at how we meet this challenge. Next slide, slide 3, please. So how will we maintain profitability in a dynamic market? Well, after the growth in 2022 and 2023, with significant investments in people, plants, and equipment, and the current softer outlook for 2024, we're strategically aligning our capacity with the prevailing demand to bolster future efficiency and competitiveness. These initiatives include substantial steps toward creating a unified One Kitron through adopting a common business platform for ERP, MES, and QMS. Streamlining organizational structures with a stronger focus on local and regional performance. Aligning our capacity with demand to conform to regional best practice. Overall, these actions will lead to a workforce reduction of more than 20% from last year's peak, reducing our annual costs some EUR 12 million versus previous estimates.
The Q1 saw nearly EUR 5 million in restructuring charges. We expect the full impact of these changes to materialize from mid-Q2 onwards. Of course, we remain agile and fully prepared to seize on any opportunities should the market conditions improve sooner than expected. While our commitment to strategic targets remains steadfast, we recognize that short-term fluctuations around our 9% margin target may occur as we adapt our strategies based on these evolving market conditions. Next slide, slide four, please. So let's review some of the market sector trends for the Q1. Connectivity, decrease of 18%, really reflecting a market saturation and economic downturns affecting spending on new technologies. There is growth on products supporting infrastructure investments, and we expect to see strength returning to this sector in early 2025. Electrification, the sector shows a decline of 11%.
Within this sector, there is strong growth on network grid infrastructure, a growth of 160% compared to a strong last year on those products. Other parts of the sector, including many green tech products, suffer from reduced customer spending on big-ticket items. We project very slow, low sales on many of these products. Last year showed a growth of 62%, driven to an extent by supply chain concerns. Industry revenue is down some 15%, indicating a cooling off of industrial activity with reduced capital expenditures. A combination of economic slowdown, weak customer demand, overstock in supply chains, lead to an extended recovery time. There are a few strong points. For example, infrastructure emulators supporting advanced chip design, growing close to 100%, this year, or the Q1, but also this year. Medical devices show a decline of 21%.
Several products are due for a generational shift, leading to lower demand in 2024 and growth in 2025. For defense aerospace, the sector shows 30-31% growth in Q1. Of course, this increase is connected to the heightened defense spending amidst the global security concerns, regional conflicts, increased government investment in defense and aerospace capabilities. Our top three customers grew 36%, and the largest growing 58%. Next slide, slide five, please. Let's take a look at some of the future outlook on the demand side, our R6 and R12 outlook. This is what customers are telling us by forecasting in the 6-month window or the 12-month window. It sheds some light on customer anticipated demand for the next 6 to 12 months, but we need to remember that we've cleared out what we suspect is over-forecasting.
The R6 indicates a more uncertain outlook for the Q3, and the R12 reflects shorter demand horizons from customers, and thus, poor data for Q4 and Q1. I expect, I'll be back to discuss the outlook and some key takeaways in a little bit, but for now, Cathrin will review some details behind the numbers, starting with the Q1 performance highlights. Next slide, slide six, please.
Thanks, Peter, and on to some of the highlights for Q1 2024. In the Q1 of 2024, we saw our streak of growth break with the reduction in sales of 8.8% compared to 2023 Q1, coming in at close to EUR 174 million. Our EBIT was EUR 10.6 million, down from EUR 17.3 million last year. However, adjusted for the restructuring charge of close to EUR 5 million, our EBIT was EUR 15.4 million, and the EBIT margin 8.9%. ROC, EPS, and other indicators are also affected by the charge and capital efficiency ratios in general by the reduced volume. Leverage is improved, while the overall demand outlook remains weak, despite hotspots in Nordics and the U.S. That said, let's move on to the order backlog. Next slide, please, slide 7.
The current order backlog stands at EUR 445 million, which is a 24% decrease from previous years, EUR 586 million. On a quarter-over-quarter basis, the order backlog is reduced by 10%. Strength is in the defense and aerospace sector, connected to the heightened defense spending. However, we expect defense order backlog to be a bit lumpy, as larger orders come in periodically. Other sectors, we see shorter customer horizon on order placement, reflecting current market sentiment, reduction in lead times, and continued destocking of customer inventory. Next slide, please, slide 8. The business sectors. So we see a slowdown in CEE and Asia, and continued growth in Nordics and North America. The restructuring charge is presented in group and Elim ROE.
Compared to last year, the Nordics and North America show growth of 15%, profits increased with 10%, and profit margins at 8.8%. CE volumes are reduced with 12% and profits reduced with 26, profit margin at 8.6%. Asia volumes and profits are halved with last year, profit margins at 8.5 in the quarter. In total, for the group, a revenue reduction of about 8.8% and a profit reduction of 12%, excluding with restructuring charges. EBIT margin at 6.1% for the quarter, and adjusted for the charges, it's 8.8%.
As for the employees, in total, we're now at 2,771, which is a reduction of 13% compared to last year, and down from 3,001 at the end of the year or last quarter. Of the 418 compared to last year, we have a reduction in Nordic or an increase in Nordics and North America of 11%. CE has a reduction of 13%, and Asia has so far a reduction of 40%, approximately. Not all workforce reduction are implemented in full at the end of the quarter, and the further reduction of up to 200 employees is expected before the end of Q2. However, all the charges are taken already in Q1. Next slide, please, slide 9, cash flow, net working capital.
Operating cash flow ended at EUR 8.5 million, versus EUR 10.5 million last year. Cash flow ended at 56% of EBITDA. Just a technical comment, the factoring debt now is now reclassified to financing, and all comparative numbers have changed. Net working capital increased with some EUR 3 million in the quarter, and thirteen million euros compared to last year.... The asset side of the net working capital is decreased with 5% compared to last quarter, but the payables are down with 11%, creating the increase of the net working capital in net. So our debt to suppliers are increasing or decreasing quicker than what the assets are. Next slide, please. Slide ten.
So, net working capital as a percentage of sales is then up 28%, which is up from 24% last year and the last quarter. Net working capital increases is as explained, in addition to the volume decline, causes this increase in the net working capital as a percentage of sales. ROC is at 15.4%, or adjusted with a charge, 22.8, which is still down from last year and last quarter. CCC is at 113, which is up from 90 last year at the same time, and this is caused by a combination of increased inventory and reduction of payables. Net indebtedness is at 1.5, and at the same level at last year's 1.5, or last quarter's 1.5.
The net debt ended at EUR 123 million, a reduction of about 13% from last year, and about EUR 6 million lower than last quarter. The debt level, however, is about the same in all three periods, but it's the cash that makes up the difference. Finance net cost is about EUR 1.9 million, which is an increase from EUR 1 million same time last year. Net interest cost is at EUR 2.3 million, which is an increase of EUR 0.6 million from last year. Positive ARGU at EUR 0.7 million, at the same level as last year. So our interest rate continued to be around 6%, and our estimated annualized interest cost is, for 2024, is EUR 10 million, which is about 20% above the actual cost for 2023.
And the dividend proposed is EUR 75, compared to EUR 50 last year. The dividend policy is to pay out between 20% and 60% of net income, and the 2024 general meeting is later today. Earnings per share 0.3, halving last year's outcome in the same quarter. Adjusting for the restructuring charge, the EPS is 0.051 and a reduction of 24%. Tax rates for the quarter ended at 24%, and I expect that to go down a percentage point or two going forward. And with that, I say next slide, please, and over to you, Peter.
Thank you, Cathrin. Well, in the face of a challenging market, Kitron is preserving its profitability with an underlying profitability of close to our strategic target. Our outlook for 2024 has been revised with an expected decline of about 12% from previous year, attributed to the ongoing reductions in customer orders, forecast cancellations, supply chain destocking, and a weaker-than-expected business cycle. Our revised outlook for the full year, we anticipate revenues to be between EUR 660 million and EUR 710 million, with an operating profit, or EBIT, of between EUR 53 million and EUR 60 million. This includes five million euros in restructuring costs incurred in the Q1. Let's move on to some key takeaways, so next slide, Slide 12, please.
Looking at Q1 revenue and the market sector development, we see continued growth and strength in defense and a few products in electrification and industry. Our outlook for 2024 has been revised, with the expected decline of 12% compared to previous year. Our sites in Sweden, Norway, and the U.S. show a solid growth of 20% for 2024. The CEE region is expecting a decrease of 30%, and China is expecting a decrease of 50%. Activities are ongoing, amounting to EUR 12 million of savings to preserve profitability and competitiveness. The Q1 results include EUR 5 million in restructuring charges, directly related to reductions in force. Full impact of these changes to materialize from mid-Q2 and onwards. Our focus is now on executing all activities identified to promote synergies.
In addition, there are several important projects for onboarding new customers during the second half of 2024. We also know that in these weaker business cycles, many customers are looking for deeper engagement to save cost and capital, and we will pursue these opportunities if they make sense. We also stand ready to quickly ramp up volumes when market conditions improve. Our commitment to our strategic target is in line with operating margins of 9%, and that remains. Finally, next slide. Moving on to our Q&A. Again, I'd like to remind you that please post any questions you may have in the Q&A section of the webcast. Thanks. So, Cathrin, let's take a look here at some of the questions that have come in. First question's from Emily.
Can you say something about which segments are driving the decline in R6 and R12, as well as the weakness in order intake?" Any comment there, Cathrin?
Well, I'd say the decline, and what we have seen since last quarter, is basically we have not seen much movement in the R6 and the R12 in total. That's basically what's going on, which is about the same decline as we had last year. What we can see, when we look at the order backlog, for instance, compared to last quarter, is that we have basically a strengthening in connectivity. We have a reduction in order backlog because they have not placed many new orders. They come very lumpy, as we try to say. So there is actually a strengthening in the connectivity sector, and then we have a reduction in all the other sectors in the order backlog compared to last quarter, basically, and it's down 10%, so.
So it varies between 9%-15% within the sectors in the quarter, basically. I think it's basically this is what we see, and the main reason, again, Peter, why we have adjusted the outlook is that we were foreseeing and expecting an increase of the orders for the latter part of the year, which we so far have not seen, right?
Mm. Yeah. I'm just looking at the charts, and I see that both the R6 and the R12 are very stable on defense aerospace, so-
Yeah
... nothing really happening there.
Mm.
Otherwise, we see the R6, R12 reflects what we talked about in the sector outlook.
Mm.
Yeah. Emily, again, from implied numbers, it seems like the weakness in order intake in the quarter is driven by a decline in electrification and defense aerospace, and now we're talking about the order backlog.
Yeah, so the order backlog, yes, is reduced. It's not necessarily a decline. We've just used it up for a month or two. We expect it to be refilled, but it will take a month or two before that happens.
Yeah, especially on the defense, as you said-
Yeah
... we see a lot of lumpiness. We know orders are on their way in for some, for some, really strong refill of the order backlog on defense.
Mm.
That is all that has come in so far.
Yeah, let's wait a little bit.
Yeah.
If there is coming more. But in general, Peter, you mentioned that there is a decline in electrification in, you know, in Nordics, but it's also, compared to last year, a strong decline in industry as well. Both of them have that same value in monies, which you also talked about-
Mm
Earlier on. Mm.
So I mean, amidst all of this change, there are customers that are sort of flattish, some of our bigger Swedish industrial customers. And you see that when you look at their quarterly reports also. They are basically, you know, low single-digit drop or low single-digit growth. And we see that also with them, so we're not really comment on that. We're commenting on the big things that, that, that are driving either growth or driving decline.
That said, then, it's been important for us now, when we see this outlook for the end of the year, to make sure that we can deliver on the profitability margins that we have in our strategy. So and hence, the restructuring program that you were talking about, Peter, which is mainly, sort of implemented, but not everything yet.
You know, in every sort of market scenario, you do your best if you take the opportunity to implement change, and that's what we're doing here. We're not, you know, relying on insecure customer forecasts that it'll have, you know, somehow magically the second half of the year is going to turn around. We're taking the opportunity we see now to do some change within the company, and that'll bring us strength as we move forward, and that's much more important than trying to hold on to an outlook which is high risk.
But we have. That said, then, as you also mentioned, is if the order should come a little bit quicker than you anticipate in your...
You know, we have the factories. We have the equipment and machines. We're also using some of this extra capacity that we have now in Central Eastern Europe, primarily in Poland, to move a lot of product around.
Mm.
So there are transfers going on out of Norway, even though we've hired another 100 people in Norway, and we still don't have enough capacity free to take on all of the defense orders immediately. And so that's also being pursued now during the first half of the year. There's a new question coming in here from Gregors, right? What is the main problem with backlog reduction? I think, yeah, the after a pretty strong growth after 2020 and onwards for three years, and then followed by the component crisis, right, driving many customers to, and whole supply chains, to buy a lot of inventory and put a lot of stock, expecting sales to continue with as business as usual.
Now, we saw the slowdown coming, even in the third, Q4 of last year. Remember, we grew 30% in first half of last year, and only 20% for the full year, indicating a much slower growth in Q4 compared to the growth we had in Q1, Q2. And that was driven by the the business cycle. You know, interest rates, the economy, people spending, all of that driving, showing a weaker business cycle, and that continues now. Compounded by a lot of stock in the supply chain, drives down the order backlog very much more rapidly than it should.
The finished goods need to be depleted throughout the distribution chains and with customers, and but it's being depleted at a lower rate because of the weaker business cycle than, you know, expected six months ago. And on top of that, lead times have reduced in the market, components are more readily available, so customers are unwilling to commit to a longer, longer outlook because they already have stock. They have to consume what they have, as they should, before ordering more, more product. So that's, you know, it's, it's the economy.
Mm.
Emily says, "Yeah, previously said that R12 is a good representation of nine to ten months of sales, but now it seems higher compared to your guidance." The R12 is EUR 654, yeah.
Mm.
So if you say that that's only 9 or 10 months, then. But our guidance is in the realm of EUR 660-710, so there is some room to play there.
Mm. We see customers putting orders into our, you know, into Q1 in 2025.
I think, you know, the significant reductions we've seen in the past three months, really, you know, we thought it was done when we exited Q4. We thought the reductions for this year were done. But, you know, it was like an avalanche that came throughout the quarter, that really made us determined towards the end of the quarter, towards the mid of the quarter, you know, let's—we need to take this opportunity and redo some things in the company and get that done. And of course, if there's, if we see this growing again, you know, we'll very quickly jump on that.
Mm.
Well, it seems like we have a slowdown in incoming questions, and I think we'll wrap things up from our end. Hey, overall, I think the team is fired up. The team is working really hard on implementing the activities we need to do, and are really optimistic about the opportunities we see in the market for both new business and growing the business we have. So, I mean, this is a short-term adjustment, let's say, which gives us breathing room that we didn't have for two years on actually looking at improving our efficiency. You know, the past two years has just been deliver, deliver, deliver. You know, catching up with the pent-up demand, so.
And we need that breathing room in business to do some changes now and again, and, that's a good thing for us. Thank you all for listening, and, we'll be back in the Q2, with, with some updated information. And, until then, I'll see several of you in, in other meetings, over the next couple of weeks. Thanks!