Welcome to the twenty twenty First Half and Second Quarter Report from Keytron. I'm Peter Nelson, President and CEO. Joining me today is, as usual, Ms. Katharine Nelander, CFO. During the presentation portion of this webcast, I encourage you to post your questions online for the Q and A session that starts immediately after the presentation.
Let's kick things off by taking a look at some of the highlights. So we're moving on to Slide two, please. Q2 twenty twenty is a record revenue quarter for Keytron with well over NOK 1,000,000,000 sales. The 2020 is over NOK 1,900,000,000.0. Profits improved in second quarter with EBIT at EUR 88,000,000 and the first half twenty twenty EBIT ending at over EUR 146,000,000.
We booked an impressive 45% growth on the order backlog, generating a backlog in excess of EUR 2,100,000,000.0. Cash flow suffered during the quarter as a higher degree of sales were generated in the back half of the quarter. However, year to date cash flow is still favorable. And although net working capital increased slightly in the quarter, overall capital efficiency improved and we expect further efficiency improvements in the 2020 as defense, aerospace and energy sector projects with long lead times are set to be shipped. And on that note, let's move on to Slide three, important events in the quarter.
As I said, revenue grew in the quarter and it was driven by defense aerospace, medical and industry sectors. Within the industry sector, we're seeing strength in warehouse automation and IoT. Strong performance in all Keytron sites contributed to the profitability of 8.5%. Our third and fourth quarter outlook leaves us confident in reaching our upgraded full year 2020 targets. Our third quarter is expected to be particularly strong and the fourth quarter should settle on a more normalized level.
With a 45% growth, our order backlog continues to develop strongly. Growth is prevalent among existing customers. In addition, new programs have been won in the quarter and quote activity is solid with a strong focus on our new operations in Poland. Earnings developed significantly during the 2020 with an EPS of EUR 0.59 versus last year's EUR 0.41. Our China site upgrade is now completed.
Currently, all installed capacity is being utilized. Renovations and upgrades to our U. S. Facility after last year's flooding were completed in the quarter and the plant is now relocated to the updated facility. Ramp up in our new Poland plant continues with existing customers and new wins.
And talking about new wins in the quarter, let's move on to Slide four. Our success as a supplier within the F-thirty five program continues. We secured our position as the supplier for serial volumes for the next three blocks. The award is valued at $18,000,000 Our Norwegian plant continues to perform above expectations in both customer service and securing new business. Focus on operational performance, smart automation solutions and strict compliance to advanced regulations and requirements have resulted in a competitive solution, profitability and a defensible market.
For our Polish site, we've won the next generation program within the energy sector. The business is valued at between 3,500,000.0 and EUR 5,000,000 annually. We're particularly pleased with this win as it is well suited for our Polish operations. That concludes the introduction. Now, Cathrine will share some details on our financials.
So Slide five, please.
Thank you, Peter. Slide six, please. Very strong revenue growth in defense aerospace industry and medical devices sectors. The quarter ended at NOK1041 million and an increase of one hundred and eighty one million and 21% compared to last year. The underlying growth is 11%, up from two percent first quarter this year.
Whereas the Q1 revenue had a sector development as expected before the corona pandemic, there are large variations in Q2. I think all sides has had rather large changes in demand in the quarter between both sectors and customers. For the sectors, Offshore Marine and Energy Telecom, we see substantial reductions. For Offshore Marine, the effects are project timing related and caused by the oil price development. For Energy Telecom, it's mainly related to the disengaged customer that we did last year, but also related to weaker telecom in Q2.
Medical Devices revenue is driven primarily by increased demand for ventilators. We continue to have strong growth in defense aerospace with a large amount of projects and high activity. For industry, demand is driven by warehouse automation and IoT, but there are significant variations in demand within the sector. Looking at the sites. Norway showed good growth at 7% and ending at around NOK235 billion, which is in line with Q1.
Sweden is back at last year's level. Sweden's numbers are affected by the customer that we disengaged, but those volumes are now replaced with other customers' volumes, many of them new and also increased volumes within the medical devices and regarding ventilators. Central And Eastern Europe, Poland and Lithuania in total, a bit slower growth than we hoped for starting this year, but nevertheless a 10% growth. And this is based on weaker demand in part of the industry and telecom sectors. In the Others, U.
S. And China, very strong growth. For China, strong demand in industry and medical devices sector specifically. For China, the numbers also include group internal sales, which are the higher degree than they were last year. Apart from Norway, there are translation differences in consolidation in the presented numbers.
Slide seven, please. For Q2, another record EBIT for Keytron, above our long term strategic targets of 7% over a business cycle. It's driven by the growth in revenue, overall profitability improvements and high utilization. I'll talk more on the site results later, but in short, a strong quarter overall. For the group results, the world situation has affected the NOK and since consolidation is in NOK, it has an effect on the accounts.
Revenue has an underlying growth of 10.5% or 11% and EBIT has an underlying growth of around 40%. Although the NOK has a favorable development in consolidation, it does not in general affect the local accounts, but dependent on the currencies the site of business in, there are some local effects on revaluation of net working capital specifically. Therefore, Q2, we have around a 0.5% positive effect in other gains and losses, which were below 0.1% negative last year. Worthwhile commenting is also that we, below EBIT, have a net noncash positive argue of €1,700,000 in the finance net compared to a loss of €3,300,000 last year. Tax rate is around 21,300,000.0 which is slightly lower than last year, mainly because of the income mix.
But a very good quarter, I have to say, at the end, up from 6.6 last year to 8.5% this year. Slide eight, please. Q2 EBIT by country improved profits and profitability. Both Norway and Sweden are now at strategic targets levels of 7%. Norway expands IT margin from 6% to 6.9%, a significant improvement.
The growth in revenue adds to increasing profits from €13,200,000 to €16,300,000 Norway also broke the 8% profitability mark within the quarter. Sweden continued to stay on a profitability around 6.6% to 6.8%, now with revenues in line with last year. Central And Eastern Europe, consisting of Lithuania and Poland, improved their EBIT margins from 6.6% in Q1 to 7.2% in Q2. Poland showed a gratifying 6.4% and Lithuania's 7.3%. Although Central And Eastern Europe in total is lower than last year's 7.8%, we are satisfied with the result as these are profits from two sites now, not one as it was last year, as we established the main cost base of the site in Q3 last year.
And we only have had 10% growth in revenue. The others, consisting of U. S. And China, show exceptionally strong performance, mainly due to growth within in the medical devices and industry and where we have a high utilization and efficiency driving profits. We should also comment that part of the indirect cost to drive the demand is carried out elsewhere in the group.
Slide nine, please. Working capital efficiency improved. Working capital ended at CHF 10,059 million, an increase of 14% compared to last year. However, adjusting for foreign exchange effects in consolidation, it's around a 5% increase on last year's level. Many increase in net working capital in local currencies are due to demand growth in defense, aerospace and medical devices sectors.
We are carrying more inventory. The increase mostly in whip and finished goods represented as contract assets in the balance sheet. The increase here is due to the previously mentioned demand growth in defense, aerospace and medical device sectors. That said, part of that increase is covered by advances from customers. We also see reduction in inventory levels in local currencies for several of the other sites not involved in the medical devices and the defense aerospace sectors.
Trade payables, they are increasing as a result of the higher activity and that we are buying more from preferred vendors with longer payment terms. Trade receivables are in line with revenue. Overdues are halved compared to last quarter and the lowest it has been in over a year. And actually, those that were overdue at quarter end have cleared a few days after. Receivables in percent of revenue is approximately 21%, which is in line with last year.
So in total, net working capital in percentage of sales is reduced from 27.4% to 24.5%. Cash conversion cycle is also reduced with nine days to ninety three days. Our ROCE substantially improved to 22.1% driven by the profitability in the quarter. There is a positive cash flow of EUR 5,500,000.0 in the quarter compared to positive EUR 53,500,000.0 last year. Total cash flow is over 100% positive for the year so far.
The high revenue late in the quarter and the inventory buildup for Q3 affects the cash flow in the quarter as well as some finalizing payments in The U. S. Regarding the renovated facility, which has been prepaid us over time from the insurance company, but now it's cleared out. Net interest bearing debt, EBITDA is improved from 2.9 last year to 2.3. And if we adjust for IFRS 16 of around 135,000,000, it's two point zero.
So in all, the capital situation in Keytron is satisfactory coming into the summer. So with that, I leave over to you again, Peter. Slide 10.
Thank you, Kathrin. In general, we're seeing a lot of activity and many opportunities in the market. In total, our pipeline amounted to close to EUR 3,000,000,000 at quarter end. Now these represent annual values of quotes to customers waiting for a decision. The pipeline represents opportunities not in our order backlog.
Mostly, we focus on medical devices, advanced communication solutions for power mobility and infrastructure. These are opportunities we target to become part of our order backlog over the next six to eighteen months. Looking at our top three sectors in our pipeline, the industry sector represents 38% of value, defense 25 and medical 23%. That being said, let's take a closer look at our second quarter backlog. Slide 11, please.
Now it's important to remember our definition of order backlog. It does not include all future demand. Our definition is all firm orders and the first four months of customer forecast. Forecast exists beyond four months, but we do not include it in the backlog. Our strong our record strong order backlog ended at just over $2,100,000,000 compared to $1,500,000,000 last year.
Just over $1,600,000,000 of the backlog represents demand in 2020. The remainder is firm orders for 2021. The order backlog increase was very strong in the sector energy, telecoms, medical devices. Industry and defense aerospace continues to show solid growth. The increased order backlog in medical devices is primarily related
So let's talk about the rest of the outlook for the rest of 2020. So let's move on to Slide 12, please. As we said in our Q1 report, demand outlook has changed compared to expectations coming into this year. This year, the key driver has been the corona pandemic and its effect on different regions. Growth is strong within medical devices where the focus is on devices used in detection, prevention, or treatment of the disease.
Stay at home, shelter in place, and social distancing directives have increased demands for goods and services related to e commerce and home and gardening products. A quick recovery in the Chinese automotive has showed strength compared to European counterparts. Major defense and infrastructure projects, however, they continue without much interruption. For key change is a constant, we continue to perform on the basis of our diversified portfolio. I'd like to take this opportunity to thank all employees, customers and suppliers for the joint effort in our combined success.
Now let's move on to Slide thirteen, twenty twenty outlook. Demand has developed stronger than expected. Market sectors, defense, aerospace, medical and industry sectors are performing strongly. Our third quarter is expected to be particularly strong with higher demand than normal for medical devices. The fourth quarter should settle on a more normalized level for medical devices, but we expect the energy sector to pick back up.
Overall, we raise our outlook. Revenue is expected at between NOK 3,500,000,000.0 and NOK 3,800,000,000.0. Profitability is expected to increase to an EBIT margin of between 6.77.5%. Finally, let me summarize some of the key takeaways this quarter. Slide 14, please.
As the second quarter goes, this one is a record in many ways. The four points you should make note of are strong growth in order backlog, up 45%, record second quarter revenue and half year revenue, increased margins and update outlook updated and raised. Now this concludes the presentation portion of this webcast. Before we move on to the Q and A session, Catherine.
Peter, while we yeah. While we're waiting for some more questions, why don't you talk about what actions Keytron has taken to safeguard capacity and our personnel during the corona pandemic?
Okay. Yes, I can do that. So in the meantime, I encourage you to post your questions on the Q and A session. Well, since late February, Keytron has procedures in place to minimize risk to our employees, customers, suppliers, and capacity. For example, all our white collar staff not directly involved in manufacturing have been working from home when possible.
Staff working in production have been instructed to stay at home if they or a family member do not feel well or if they've been in an exposed situation. Plants have eliminated shift overlap and implemented shift separation up to thirty minutes. Production in common areas have been cleaned and disinfected more frequently and between shifts. All external visits to ketone sites have been prohibited. Besides a brief shutdown of China in February, there's been little effect on Keytron's capacity.
Although sick leave has been higher than normal due to rigorous compliance to rules put in place, capacity and costs have been managed efficiently. On the supply chain front, there's been challenges. However, we've managed to avoid any major disruptions to our plants. Many components have been impacted with constraints due to mandatory shutdowns in different countries. However, medical customers are prioritized by manufacturers and other industries that are deemed critical to security have a special priority or waivers towards mandatory shutdowns.
Now we're in the process of reducing restrictions. Shift separation is being scaled back. Visits to sites by customers and critical support staff are being allowed. However, restrictions do apply. Central Eastern Europe is allowing 50 of support staff back to the sites from home office on a weekly rotation schedule from July 1.
And The Nordics and other sites are expected to follow in August or September. So thank you to all employees for effectively dealing with the challenges this has brought, both from staggered shifts in production to actually having to work from home up to five months for many employees. So that concludes. Let's take a look at the, Katina, at the q and a here and see what if any questions we have not already answered.
I think you can just start from the top, I guess. What are your thoughts about three d printing, Peter?
Well, I think the specific question around three d printing of advanced circuit boards, And, let's see what it says here. I think this is a yeah. The three d printing of advanced circuit boards is progressing. Results seem to be good, but I still think this is stretch away before it becomes any sort of part of serial manufacturing. And so I would say it's an opportunity for Keytron in prototyping and quick turn of testing.
It's not a threat. You know, since we're on top of technology and continuing investing in technology, it's probably something that we either are looking at already or about to invest in. The next question is when it comes to ESG and especially the e, how do you see your sector is going, and will the focus to reduce material resources and carbon footprint be focused going forward? Katrina, why don't you help me address this?
First of all, I have to say that the EMS business as such are quite light on the carbon footprint in general because we have products that we make are small and lightweight normally, and so we have transportation in general is rather small. But what we're doing is that we're working together with our customers because they're basically deciding how their products should be produced and trying to find solutions that are more environmentally friendly going forward. And ESG is definitely on the top of our mind, and but we cannot do it ourselves. So it's a sort of a full supply chain driver for us. And nobody can, you know, avoid working with this.
It's important.
The next question is regarding analyst coverage for the company. Do we plan to invite a wider group of analysts to cover company performance and share price?
Of course, we would like as many as possible to to cover us, but it's also a a matter of how much money they can earn on covering us, I think. Currently, we're having three, and we would like more definitely.
The next question is regarding medical in the 2021. Will we be back to normal levels in Q4? Or how sustainable is the increased demand we saw in Q1? Well, we know that we will continue very strongly with that demand in Q3. For Q4, the situation is more fluid.
So right now, forecast is that we go back to previous levels. However, our capacity is there, our supply chain is there. And if there's a requirement, we will just continue on. But at this point, it's difficult to really say where is the whole pandemic situation heading and what the market requirement will be. And there's a follow on question to that.
How much of the improved margin relates to medical? I'm I'm throwing that one at you, Cathie.
Mhmm. I thought you would. Of course, higher revenue gives higher profits, and you can see that The US and China have higher profits in the quarter. So it is driving it. I will not comment exactly how much, but it is a good contribution to our margin.
And that really answers the next question is why we're not breaking out U. S. This quarter. And the reason is for competitive reasons. We we were not showing the details of of the group other.
And here's a question we, pretty much thought knew that was gonna come. Are you we now considering to pay out the dividend for 2019?
We have a message from the board, which is the board is continuously and carefully following the development of the corona situation and will decide when it is appropriate to pay out the dividend. That's their comment.
And then we have a question on the revenue potential for Poland. So what's the utilization right now compared to the potential? Well, we said the potential is, you know, a €100,000,000 is easy. We are far from that now. And with all of the currencies, we need to translate in our head to No.
It's about it's €20,000,000, I will say.
Okay. So we're about 20% utilization. Yeah. But, you know, still with decent margins. So we have we have control of our cost in that site.
Can you provide some color on the changes in the market view regarding impact of postponed dividend?
Not sure exactly. Comes to our owners, the major shareholders, they have responded positively for the postponement. Apart from that, I don't have any comment.
No. And even before it was announced, there were several of the large owners that gave input before the announcement even, that they would not be against it if we were to decide to do it. What are our current thoughts on dividends for 2019? Well, again, we answered that question. Our initial remarks said that q three would be strong.
Is that on group level or only for medical devices? It's on group level. So we're looking at for the first time since I joined the company in 2014, and I doubt that any time before that all either. All sites are running throughout the summer with the exception for our Polish facility that has a three week shutdown. And that's the first time Norway or Sweden has not closed for anywhere between, three to four weeks.
So that tells you a story because Norway is not building any any particular, COVID nineteen medical products, but are focused on a lot of other a lot of other defense demand. There's a large defense demand in Sweden. Even though Sweden is involved in medical, it's not really the driver to have the whole factory open, maybe a production line. But at this point, the whole plant is running over the summer also in Sweden, driven very heavily by defense demand. China, of course, is usually runs and is continuing to do that and so is Lithuania.
So I think that answered that question. It's on a group level and it's not medical devices. Has your view in normalized margins changed? I don't think so, right? We say 7% over a business cycle, which means in some really bad times, margin should drop down a bit.
But in in when there's a lot of demand, we see the economy of scale generate some some some very good margins for us. Let's keep you on expanding more in count I mean, more countries in the future. Are we focusing on growing within the countries we're already in? We're obviously focusing on on on on both, but from a capacity and a footprint footprint point of view, it'll be in countries that we're not in. We have now very nice size sites in Norway, Sweden, Poland, Lithuania, China and The U.
S. Now The U. S. Is not one country really to me, it's a really very big place. That means that there could be additional sites in The U.
S. Down the road. But we're looking at other places either within Europe or Southeast Asia as look at what opportunities are out there. We're getting close to the end. Impressive numbers, especially considering these difficult times we're going through given these numbers.
Do we have any updates on 2019 dividend? I think we've answered that. And thank you, though. And then there's another one on dividend in in Norwegian. Since the question was in Norwegian.
Target for year end 2020 and long term regarding net working capital, net interest bearing debt through EBITDA, excluding IFRS 16. Catherine? Now, Yes. Obviously, we our strategic target is 20% of top line, not more not more than than that in in net working capital. I think our our our net interest bank debt EBITDA target is also well known.
The question is how far can we reach by year end?
I think in total, when it comes to net operating working capital in percent of revenue, etcetera, as we're saying that the fourth quarter will normalize slightly, but we're building down. So we see a slight improvement, so between 22% to 24% on net operating working capital in percent of top line,
like I'm going have to light the blowtorch and chase some people.
Yep. I think so too. Net interest bearing debt to EBITDA is gonna be around where it is now, I think.
And then second to last quarter is what turnover and profit margins can Keytron reach in the medium term two to three years. Interesting. Well, we've set our five year plan at 5,000,000,000, excluding any acquisition. So difficult to speculate. Right?
We're growth oriented. We've also said that we we target to grow 10% organically per per year. So, you know, you look 10% next year in '21 and 10% beyond that every year. Yes, I can't comment any further really. And the final question is how large portion of total sales is coming from China?
And I think we've answered that we do not want to answer that for competitive reasons.
Yes?
That's it on the Q and A side. Thank you so much Again, for joining thanks to all of our employees. Thank you for our from our to our investors for supporting us and believing in us, and thanks for all the nice congratulations that we've received so far. And hopefully, can come back and surprise you in the third quarter. You never know.
Anyway, everybody have a great summer. Thank you so much.