Welcome to the 2020 first three quarters and third 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. Slide two, please. Q3 2020 is a second record quarter revenue for Kitron, with well over NOK 1 billion in sales. The first three quarters of 2020 is over NOK 2.97 billion. The third quarter for Kitron is usually considered the weakest quarter of the year. 2020 has seen exceptional sales in Q3. The market sectors, defense, Industry, and Medical Devices have been driving this growth. Medical Devices has been particularly strong, with an unprecedented high demand generated from the coronavirus pandemic.
Profits improved with Q3 EBIT at NOK 90.5 million, and the first three quarters of 2020 at close to NOK 237 million. Order backlog shows an improvement over Q3 last year, with a growth of 18.5%. Cash flow suffered during the quarter as a higher degree of sales were generated in the back half of the quarter, and also exceptional growth. However, the 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 quarter. On that note, let's move on to slide three, important events in the quarter. This year, all sites have run throughout the quarter with no holiday or vacation shutdowns, contributing to an overall strong performance and profitability of 8.6%. We have yet again upgraded the full year 2020 targets for revenue and EBIT.
With over 18% growth, our order backlog continues to develop strongly. Growth is particularly strong in Industry and Energy sectors, with over 50% growth in each. We see Medical Devices returning to more normalized levels. We're also pleased to see that many customers that have struggled during these past six months are starting to show signs of recovery and growth. Net earnings developed significantly, with an increase of 69% over the first three quarters of 2020, generating an EPS of 0.93 NOK per share compared to last year's 0.55 NOK. The Kitron board decided to proceed with the 2019 dividend payout, and the payout was announced of 0.50 NOK per share yesterday on October 20th. Now let's take a look at some new wins in the quarter. During the quarter, MedAvail, a supplier of automated medication dispensing equipment for pharmacies and hospitals, awarded a contract to Kitron.
We estimate the value to be $50 million over the next three years, starting in 2021. During the fourth quarter this year, deliveries of prototypes have started. We're particularly pleased as this is a win well-suited for our newly renovated facility in Windber, Pennsylvania, and it was won during the coronavirus pandemic with tough restrictions on travel and personal meetings. This concludes our introduction. Cathrin will now share some details of our financials. Slide five, please.
Thank you, Peter. Slide six, please. Exceptional growth in the Medical Devices sector. The quarter ended up at NOK 1,054 million, an increase of NOK 361 million and 43% compared to last year. The underlying growth is 35% and up from 10.5% of underlying growth last quarter. Foreign exchange effects in translation is at 7.5% compared to 10.5% last quarter. A general comment, normally Q3 is seasonally affected. However, this year we see much less of that driven by several sectors and the fact that we had no shutdowns in the factories during the summer. The Q3 sector revenue has similar structure as Q2, with a strong growth, defense aerospace industry, and exceptional Medical Devices revenues, which is driven primarily by the increased demand for ventilators. For the sectors Offshore/Marine and Energy/Telecoms, we see substantial reductions compared to last year.
As we have said before, for Offshore/Marine, the effects are project timing related and caused by the oil price development. For Energy/Telecoms, it's mainly related to the disengaged customer. Now we start to see the sector strengthening again. We will continue to have strong growth in defense aerospace with a large amount of projects and high activity. For Industry, now in Q3, we see it strengthening again for existing product areas. Also demand driven by warehouse automation and IoT. Looking at the sites. Norway show strong growth at 28.9% and ending at 228 million NOK, which is in line with Q1 and Q2. A very robust quarterly revenue. Sweden has a 49% growth. Sweden's numbers are actually affected by the customer that was disengaged last year. Volumes are now with other customers, many of them new, and increased volumes with Medical Devices in the quarter.
CEE in total are now starting to pick up again, as in the strengths and in Q3 particularly, we see this for Lithuania. In the others, U.S. and China, very strong growth. For China, strong demand due to the Medical Devices sectors, but also good demand in industry. The Chinese numbers also include a higher degree of group internal sales this year. Apart from Norway, there are translation differences in consolidation in the presented numbers. Slide seven, please. Improved profits and profitability. It's a record Q3 EBIT. Another record EBIT for Kitron, above our long-term strategy targets of 7% over a business cycle. It's driven by the growth in revenue, overall profitability improvements, and high utilization. We have a good performance in the quarter in the larger facilities, but exceptional performance and profitability in China. A massive output over a short period of time has enabled exceptional utilization of overhead.
Of course, to make possible such a quick and hard ramp-up, resources from all of the group have been pulled together to support, and the equipment needed had mostly been short-term rented to prevent great excess capacity going forward as the situation normalizes. For the group results, the world situation has affected the NOK since consolidation in NOK. It has affected the accounts. Revenue has an underlying growth of 35%, and EBIT, the underlying growth is around 117% adjusted for currencies. Although the NOK has a favorable development in consolidation, it does not in general affect the local accounts. Dependent on the currencies the site do business in, there are some local effects due to revaluation of net working capital.
Therefore, in Q3, we have around a negative 0.8% negative effect of the EBIT margin, and in Q2, it was about 0.5 positive effect in other gains and losses, which was below 0.1% positive, I think, last year. Worthwhile commenting is also that we below EBIT, have a non-cash negative of NOK 1.7 million in the finance net compared to a gain of NOK 2.7 last year. Tax rate is slightly above 24%, which is slightly lower than last year's 25.5, and it's mainly because of the income mix that we're having. In Q2, we normally have a stronger high tax revenue, and when I'm saying that, it's revenue coming out of China, which has a 25%. All in all, a very strong quarter and, unusual because of the normal seasonality, as you can see in the graph. We normally have a lower EBIT in NOK in Q3.
Here now we're standing at the same level or even improved to Q2. Slide eight, please. Improved profits and profitability. Norway and Sweden now both at strong margins, both about 6% in Q3, which is good. As mentioned, the factories were running without shutdowns. Norway expands EBIT margins from 4.6%-6.5%, a significant improvement. The growth in revenue of 29% also adds to increasing profits from NOK 8.1 million-NOK 14.9 million. Sweden improves profitability from 6%-6.2%, which also here with revenues growing some 49% adds to the profit increase from NOK 8.5 million-NOK 13.2 million. Central and Eastern Europe, consisting of Lithuania and Poland, reduced EBIT margin from 6.1%-5.5%. All in line with our expectations. Lithuania was at 7.1% and Poland contributing less this quarter.
Although CEE is lower than the 6.1% last year, we are satisfied with the result as these profits are from two sides now and not one as it was last year when we are comparing. The others consisting of U.S. and China show exceptionally strong performance, primarily due to exceptional growth in medical devices and strong growth in industry sector. However, if we start with the U.S., we moved back from the temporary facility during the summer, and now we have also moved out of our original site in Johnstown, so collected everything at Windber. We have also merged the legal unit, and everything is now set for a new modern facility and to have a good progress forward. For China, we have had a very high utilization, and the efficiency is driving profits.
High volumes, known products, limited number of part numbers, and amazing performance by the whole team makes this possible. Resources have been pulled from the whole group, part of the cost to drive this demand is also carried elsewhere. An exceptional profit margin in total for the others. Slide nine, please. Working capital efficiency improvement. Working capital ended at NOK 1,134 million, an increase of 27% compared to last year. Adjusting for foreign exchange effects in consolidation, it's around a 20% increase on last year's level. The NOK 247 million increase from NOK 887 million to NOK 1,134 million, NOK 64 million relates to currency and NOK 183 million is related to the underlying growth in net working capital. The main increase in net working capital in local currencies are due to demand growth in defense aerospace and Medical Devices sectors.
In general, we have had a much higher activity in Q3 than a normal Q3, and it affects the net working capital in value. In general, many of the comments we made for Q2 are valid for Q3. We are carrying more inventory, the increase mostly in WIP and finished goods, represented as contract assets in the balance sheet. It's related to the previously mentioned growth in defense, aerospace, and Medical Devices. That said, part of the increase are covered by advances from customers. We also see reductions in the inventory levels in local currencies for several sites. Trade payables are increasing as a result of the higher activity. The number of days outstanding are basically in line with what they've been before. Trade receivables in line with revenue. Overdues are slightly up to 3%, compared to what they have been before, where it was around two, 2.3.
DSO is around the normal 60 days that we have. All is driven basically by the higher revenue. All in all, net working capital percentage of sales is reduced from 29.5% last year to 25.1% now. Cash conversion cycle is reduced to 20 days to 96 days, although it's slightly up from last quarter. There is a slight negative cash flow of NOK 3.2 million in the quarter compared to a positive NOK 19.2 this year. High invoicing late in the quarter affects the cash flow. However, we expect the release of capital binding in Q4. Net Interest-Bearing Debt and EBITDA is improved from 3.0 last year to 1.9 this year. If we adjust for IFRS 16 of around NOK 130, we're at approximately 1.7. In all so far, in spite of the cash flow, we see that the capital situation in Kitron is satisfactory. Slide 10, please.
It's back to me.
Yes, Peter.
Let's talk about market development, and let's move on to the next slide looking at the order backlog. It's important to remember our definition of order backlog. I repeat this every time because we have many new shareholders, and I think we need to explain what it is. Our order backlog does not include all future demand. Our definition is all firm orders and the first four months of customer forecast. We do have forecast beyond four months, but we do not include it in the backlog. Our strong order backlog ended close to NOK 1.9 billion, compared to almost NOK 1.6 billion last year. The order backlog increase was very strong in Energy and Industry market sectors, with a solid growth over 50%. We see Medical Devices returning to more normalized levels. Sequentially, we see a slight reduction compared to the first and second quarter.
This is due to strong deliveries in the quarter on defense, where the backlog is down approximately NOK 170 million. We expect this to recover during the next six months as additional block orders are placed by our defense customers. Oil and gas continues to have a weak outlook. Let's talk about our expectations for the rest of 2020. Next slide, please. The outlook. One more, please. There we go. Overall demand has developed stronger than expected. During 2020, the market sectors defense, aerospace, Medical, and Industry have performed strongly. Our third quarter was exceptionally high due to higher demand than normal for Medical Devices. Fourth quarter settling on more normalized levels for Medical Devices. We expect Energy, Industry, and defense to continue strong.
We're also pleased to see that many customers that have struggled during this past year now are starting to show signs of recovery and growth. Several new customers won during late last year and early this year also are showing nice growth. Overall, we raise our outlook for the full year. Revenue is now expected to be between NOK 3.85 billion and NOK 4 billion.
Profitability is expected to increase to an EBIT margin of between 7.6% and 7.8%. Finally, let me summarize some key takeaways this quarter. This is a record third quarter in many ways. The five points you should make a note of is for the first time, our Q3 is stronger than our Q2. This is a lot to do with our remarkable performance of our Kitron employees. They've helped deliver this strong quarter. The record Q3 revenue is also a record for the first three quarters.
The margins have increased, our outlook is updated, and the 2019 dividend payout has been announced. This concludes the presentation portion of our webcast. We now move on to the Q&A session. So far it looks pretty weak. Not many questions up there.
Let's wait a bit and see if we get some more. We have a certain time lag, so I think it's worth waiting for to see if there are any questions showing up. Peter, remarkable performance from our employees. This has been a giant team effort.
Giant team effort. We've pooled all of our corporate resources in really all of our countries, and tasked them to basically work with this since late March, early April. We very quickly also decided on investments and basically and really prepared before we started to get any requests.
Within a three-week period from when the customer request came in, I think we had pretty much built almost two new factories from a capacity point of view when it comes to equipment. It was all in place, and then the big challenge started, trying to get all of the material in place.
It's also we have had a thought, because we know this was a ramp-up, it might not last forever.
We've been trying really hard to figure out how to solve capacity needs that we've had in machinery and equipment without having to invest at all and keeping it.
No, I can't say a percentage, but I'd say a significant portion has been short-term leased, six-month lease or things like that. Some equipment has been bought. Some of the really good equipment you need is not possible to lease. We will have uses for that in other sites, if not in China. We have a couple of questions come in here. They're both COVID-19 related. From Knut Erik Løvstad, "You expect medical to return to more normal levels in Q4 despite the surge in the number of cases in COVID-19 reported in Europe and the rest of the world?" Right. Excellent question.
Excellent question. I think we're prepared for anything at this point. Right. We have capacity out there on the supply chain, I think, because that's the most limited part. At the same time, we need to listen to the market and what our customer is telling us. As it looks right now, we're returning to more normal levels here in the fourth quarter. We know that the timeline for us to restart or to continue on a high level is extremely short. Also, Trygve Bruland says, "Is it fair to assume that medical boost will not be sustainable since it's driven by COVID-19?" I think that that's what we've said, specifically on these products where the two or three times higher than normal.
Three
on three times higher normal demand on this product. You can't just say that COVID-19 has only been positive. Right? Many of our medical customers have suffered this year. Some of them due to most of the investments being allocated to COVID. Hopefully those should start picking up during next year. Not all of the industry customers have grown this year. Some of the really strong customers from previous years have had a weak year this year. Those have started to pick up. There's going to be some rebalancing. Unless something more happens on more outbreaks and whatnot and capacity needed in hospitals, this is probably over in the fourth quarter. Andreas Løtnen says, "The company is growing in an impressive fashion. Have you considered demerging some of the departments?" No, we have not.
No.
No, we have not. I think one of the strengths of us is the economy of scale and also pooling and consolidation of group resources. All right? For every unit to have full capabilities-
that's not economy of scale. That's where we've been successful. We've been able to create the teamwork and strong, I'd hate to say corporate organizations, but sort of common pools of people. Some of them located in Norway, some of them located in Sweden, a large part of them located in Eastern Europe. Being able to retask and use those common resources for everyone's benefit, with also all local organizations strongly supporting those resources. Who knows in the future, right? I think let's double the business we have first.
Yeah
before we start thinking about those things. Victor Higgins says, "Hello, congratulations on the strong results. Could you comment on the cash conversion you expect in Q4 2020 and the expected net interest-bearing debt, NIBD/A ratio?
I think most of the monies we release will of course be spent on the dividend that we're paying, and the rest of it will be overhead. I don't think the Net Interest-Bearing Debt ratio will deteriorate that much, I have to say. It will increase slightly, not much.
It was excluding IFRS, it was 1.7, 1.9 including IFRS.
Yeah. Around two-ish, I think.
Mm-hmm. Yeah.
Well, the fourth quarter is also another strong quarter in invoicing. It's by no means a low quarter.
No.
Right?
There's a mix change in where the revenues will come from.
There's a chance that it could be a NOK 1 billion odd quarter.
We should see all these profits that we've earned in Q2 and Q3 should be converted more to cash coming into Q4.
Again, with payment terms and such, some of that cash will be coming in in the beginning of next year.
Yeah.
I think that's it for questions. Good questions.
Very good.
Yeah. Well, we're on our road show the rest of the day today. We will be meeting many of our investors, and if any of you would like to meet us in some other way, please get in touch with us. Let's take a final question here from Arnoldas Dudonis. "Hello. Having in mind that some of the other EMSs are suffering during the COVID-19 pandemic, and their value" Hey, good question. "Their value has decreased. Any plans for new acquisitions?
It's a good thing. We have a strategy.
No comment.
No comment. No. We have a strategy for M&As, and obviously, we have been too busy trying to cope with the situation to look into any of these things currently.
We keep an eye on what's going on. We respond to all requests that come to us.
There are quite a few. We look at them, we respond. Some of them we file away for when we need to take another look at them.
Yeah. During the corona, when some of the EMSs are suffering, of course, the price will be low. What is the reason for the suffering? Is that actually so that it's the corona, it will come back up again or not? It's a difficult period, I think, to go into acquisitions, too.
It is. Not all EMSs have suffered. Some have performed very well.
You have to ask yourself, why are they suffering? Is there a fundamental flaw in the business model? Are they very dependent on a few markets? Is the business they have, does it inherently have low margins?
Is their cost structure too high?
Right? I think, from where we are, we're not a massive organization. It's not really possible for us to go in and take over someone performing extremely badly and try to turn all of that around in a short period of time without it costing a lot of money.
We always have to weigh the cost for turning something around versus the extra money maybe you pay for something that's performing quite well.
That's also affecting our thinking these days.
Yeah. In general, we keep a close look at all our competitors, basically because we are very competitive, and we want to make sure that we are performing well compared to our peers.
We have a pretty significant peer performance review we look at on a quarterly basis.
Hey, I think that's it. Thank you all for listening in. There's a pretty large audience today.
We're happy to see you join us, and we'll talk to you soon, I hope. Thank you all.
Thank you.
Bye.