Welcome to the 2020 first half and second quarter report from Kitron. I'm Peter Nilsson, President and CEO. Joining me today is, as usual, Ms. Cathrin Nylander, CFO. During the presentation portion of this webcast, I encourage you to post your questions online for the Q&A session that starts immediately after the presentation. Let's kick things off by taking a look at some of the highlights. We're moving on to slide two, please. Q2 2020 is a record revenue quarter for Kitron, with well over NOK 1 billion in sales. The first half of 2020 is over NOK 1.9 billion. Profits improved in the second quarter, with EBIT at NOK 88 million, and the first half 2020 EBIT ending at over NOK 146 million. We booked an impressive 45% growth on the order backlog, generating a backlog in excess of NOK 2.1 billion.
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. Although net working capital increased slightly in the quarter, overall capital efficiency improved, and we expect further efficiency improvements in the second half of 2020 as defense, aerospace, and energy sector projects with long lead times are set to be shipped. On that note, let's move on to slide three, important events in the quarter. As I said, revenue grew in the quarter, 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 Kitron 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 first half of 2020, with an EPS of NOK 0.59 versus last year's NOK 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. Talking about new wins in the quarter, let's move on to slide four.
Our success as a supplier within the F-35 Program continues. We secured our position as the supplier for serial volumes for the next three blocks. The award is valued at $18 million. 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 a next generation program within the energy sector. The business is valued at between EUR 3.5 million and EUR 5 million annually. We're particularly pleased with this win, as it is well-suited for our Polish operations. That concludes the introduction. Now Cathrin will share some details on our financials. 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 NOk 1,041 million , and an increase of NOK 181 million and 21% compared to last year. The underlying growth is 11%, up from 2% 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 sites 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 show good growth at 7% and ending at around NOK 235 million, 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. 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 at a 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 Kitron, above our long-term strategic target 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%-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 do business in, there are some local effects on reevaluation of net working capital specifically. Therefore, in 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 non-cash positive accrual of NOK 1.7 million in the finance net compared to a loss of NOK 3.3 million last year. Tax rate is around 21.3%, which is slightly lower than last year, mainly because of the income mix. A very good quarter, I have to say, at the end, up from NOK 6.6 last year to NOK 8.5 this year. Slide eight, please. Q2 EBIT by country, improved profits and profitability.
Both Norway and Sweden are now at strategic target levels of 7%. Norway expands EBIT margin from 6% to 6.9%, a significant improvement. The growth in revenue adds to increasing profits from NOK 13.2 million-NOK 16.3 million. Norway also broke the 8% profitability mark within the quarter. Sweden continued to stay on a profitability around 6.6%-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 Q1-7.2% in Q2. Poland showed a gratifying 6.4% and Lithuania 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 in the medical devices and industry, and where we have a high utilization and efficiency in 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 NOK 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.
Main 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 WIP 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 a 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.
Actually, those that were overdue at quarter end have cleared a few days after. Receivables in % of revenue is approximately 21%, which is in line with last year. In total, net working capital in % of sales is reduced from 27.4%-24.5%. Cash conversion cycle is also reduced with nine days to 93 days. Our ROC is substantially improved to 22.1%, driven by the profitability in the quarter. There is a positive cash flow of NOK 5.5 million in the quarter compared to positive NOK 53.5 last year. Total cash flow is over NOK 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 to us over time from the insurance company, but now is 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 NOK 135 million, it's 2.0. In all, the capital situation in Kitron is satisfactory coming into the summer. With that, I leave over to you again, Peter. Slide 10.
Thank you, Cathrin. In general, we're seeing a lot of activity and many opportunities in the market. In total, our pipeline amounted to close to NOK 3 billion 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 6-18 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, we do not include it in the backlog. Our record strong order backlog ended at just over NOK 2.1 billion compared to NOK 1.5 billion last year. Just over NOK 1.6 billion 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 to the coronavirus pandemic. Let's talk about the rest of the outlook for the rest of 2020. 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 coronavirus 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 Kitron, 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. Let's move on to slide 13, 2020 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 from 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 3.5 billion NOK and 3.8 billion NOK. Profitability is expected to increase to an EBIT margin of between 6.7% and 7.5%. 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 outlook updated and raised. This concludes the presentation portion of this webcast. Before we move on to the Q&A session, Cathrin-
Peter,
Do you have any?
Yeah. While we're waiting for some more questions, why don't you talk about what actions Kitron has taken to safeguard capacity and our personnel during the coronavirus pandemic?
Okay. Yeah, I can do that. In the meantime, I encourage you to post your questions on the Q&A session. Well, since late February, Kitron 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 30 minutes. Production and common areas have been cleaned and disinfected more frequently and between shifts. All external visits to Kitron sites have been prohibited. Besides a brief shutdown of China in February, there's been little effect on Kitron'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. 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. Medical customers are prioritized by manufacturers, and other industries that are deemed critical to security have a special priority or waivers towards mandatory shutdowns. 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. 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 1st, and the Nordics and other sites are expected to follow in August or September.
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. That concludes. Let's take a look, Cathrin, at the Q&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 3D printing, Peter?
Well, I think there's a specific question here on 3D printing of advanced circuit boards, and see what it says here. I think this is, yeah, the 3D printing of advanced circuit boards. It's progressing. Results seem to be good. I still think this is a stretch away before it becomes any sort of part of serial manufacturing. I would say it's an opportunity for Kitron in prototyping and quick turn of testing. It's not a threat. 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? Will the focus to reduce material resources and carbon footprint be focused going forward? Cathrin, why don't you help me address this?
First of all, I have to say that the MS business as such is quite light on the carbon footprint in general because the products that we make are small and lightweight normally, and so we have transportation in general is rather small. What we're doing is that we're working together with our customers because they're basically deciding how their product should be produced, and trying to find solutions that are more environmentally friendly going forward. ESG is definitely on the top of our mind, but we cannot do it ourselves. It's a sort of a full supply chain driver for us. Nobody can 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 cover us, but it's also 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 fourth quarter of 2021. Will we be back to normal levels in Q4? 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. Right now our 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. At this point, it's difficult to really say where is the whole pandemic situation heading and what the market requirement will be. There's a follow-on question to that. How much of the improved margin relates to medical? I'm throwing that one at you, Cathrin.
I thought you would. Of course, higher revenue gives higher profits, and you can see that the U.S. and China have higher profits in the quarter. It is driving it. I will not comment exactly how much, but it is a good contribution to our margin.
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 were not showing the details of the group other. Here's a question we pretty much knew that was going to come. Are 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.
We have a question on the revenue potential for Poland. What's the utilization right now compared to the potential? We said the potential is EUR 100 million easy. We are far from that now. With all of the currencies, we need to translate zloty in our head to euro.
No, it's about EUR 20 million, I will say.
Okay, we're about 20% utilization, yeah. Still with decent margins, so we have control of our cost in that site. Can you provide some color on the changes in the market you reported 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, 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 mark said that Q3 would be strong. Is that on group level or only for medical devices? It's on group level. We're looking at, for the first time since I joined the company in 2014, and I doubt that in any time before that either, all sites are running throughout the summer, with the exception for our Polish facility that has a three-week shutdown. That's the first time Norway or Sweden has not closed for anywhere between three to four weeks.
That tells you a story because Norway is not building any particular COVID-19 medical products, but are focused on 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. At this point, the whole plant is running over the summer, also in Sweden, driven very heavily by defense demand. China, of course, it usually runs and is continuing to do that, and so is Lithuania. I think that answered that question. It's on a group level, and it's not only for 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, margins should drop down a bit.
When there's a lot of demand, we see the economy of scale generate some very good margins for us. Does Kitron plan on expanding in more countries in the future, or are we focusing on growing within the countries we're already in? We're obviously focusing on both, from a capacity and a footprint point of view, it'll be in countries that we're not in. We have now very nice sites in Norway, Sweden, Poland, Lithuania, China, and the U.S. The U.S. is not one country, really. It's a really very big place. That means that there could be additional sites in the U.S. down the road. We're looking at other places, either within Europe or Southeast Asia, as we 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. Thank you, though. Then there's another one on dividend 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. Cathrin?
Yes.
Now, obviously our strategic target is 20% of top line. Not more than that in net working capital. I think our net interest-bearing 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 % of revenue, et cetera, as we are saying that the fourth quarter will normalize slightly, but we're building down, so we see a slight improvement. Between 22%-24% on net operating working capital in % of top line, I think.
Sounds like I'm going to have to light the blowtorch and chase some people.
Yeah, I think so too. Net interest-bearing debt, EBITDA is going to be around where it is now, I think.
Second to last quarter is what turnover and profit margins can Kitron reach in the medium term, 2-3 years? Interesting. Well, we've set our five-year plan at $5 billion, excluding any acquisition. Difficult to speculate, right? We're growth oriented. We've also said that we target to grow 10% organically per year. You look 10% next year in 2021, and 10% beyond that every year. Yeah, I can't comment any further, really. 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&A side. Oh, hey. Thank you so much for joining us. Again, thanks to all of our employees. Thank you to our investors for supporting us and believing in us, and thanks for all the nice congratulations that we've received so far. Hopefully we can come back and surprise you in the third quarter. You never know. Anyway, everybody have a great summer. Thank you so much.