Good morning, and welcome to a review of Kitron's third quarter 2021. I'm Peter Nilsson, CEO of Kitron, and with me today, as usual, is CFO Cathrin Nylander. I'd like to remind you that we will conclude with a Q&A session, and I strongly encourage you to post questions during the presentation. Let's look at an overview of the quarter. Next slide, please. Slide 2. Kitron's revenue for the third quarter was NOK 831 million versus last year's NOK 1,054. A decrease was expected within the Medical Devices market sector, as the exceptional Corona related demand wanes. Customer demand has been very strong. However, revenue growth was limited by ongoing component shortages. The order backlog ended at a record NOK 2,568 million, an increase of 38% compared to last year. This is a record and reflects the strong total demand situation. The order backlog increased within all market sectors.
In absolute numbers, the order backlog grew the most within Electrification and Defence/Aerospace. While the percentage growth was particularly strong within Connectivity. Adjusted for currency rates, the order backlog increase was close to 40% compared to last year. Next slide, please. Slide 3. Some highlights and important events. As demand continues to be very strong for both 2021 and 2022, with significant growth opportunities in most market sectors, the general material supply situation has rapidly become more challenging in the third quarter and continues to be difficult on lead times and deliveries. We currently believe that we're at the worst of these constraints, and we expect the situation to start showing some improvements as we progress into 2022. After last year's high deliveries of Medical Devices driven by the Corona pandemic, 2021 has now returned to normal levels with normal seasonality in the third quarter.
Given this year's increase of inventory and working capital, we now turn our focus on executing demand into deliveries, improving our cash flow, and protecting competitiveness and profitability. Next slide, please. Slide 4. What are some of the activities and actions we're taking to execute the order backlog? Well, we've strongly suggested that our customers should secure demand and components for longer horizon, as supply on some parts is severely constrained and lead times have significantly increased. Customer behavior is changing, and the future demand is being secured on a longer horizon. Last year, in October 2020, less than half of the expected output for 2021 was actively being ordered or forecasted by customers. This year, in October 2021, more than 90% of expected output for 2022 is already on order with suppliers. In addition, several customers have secured critical parts for the full year of 2022 and 2023.
Many customers are also redesigning or approving alternate parts where possible. From a new sales perspective, Kitron targets growth in market sectors less affected by supply chain constraints, such as high level assemblies and others. Next slide, please. Slide 5. Let's talk a little bit about the strategic outlook. While demand continues to be very strong, and although supply chain constraints are projected to continue into next year, many constraints should taper off, and we'll see a normalization in supply chain. We will continue to monitor the situation, and we will continue taking proactive measures. We see long-term strong customer demand and well-identified strategic program acquisitions to support our strategic path. We maintain our long-term growth targets. Next slide, please. Now, here's CFO Cathrin Nylander to walk us through the financials. Cathrin.
Slide 7, mixed sector development. Let's go from left to right and start with Connectivity. Connectivity has a growth of 45% and NOK 39 million compared to last year, a continued increase from last quarters. Connectivity has two sub-sectors, communication and sensors. This quarter, both sectors have grown, but sensors more in %. On to Electrification. Electrification grew 13% and NOK 22 million compared to last year. As for the growth in the largest sub-sector, power transmission continued the strong growth compared to last year, and this quarter also, battery technology has strong growth. Power management, however, show a decline during this quarter. On to Industry. Industry grew 19% and NOK 29 million compared to last year. Sub-sector automation, which is the largest, grew 35%. The other sectors were not so large differences in absolute figures.
Medical Devices is down NOK 227 million and 58%, and is around the level of previous two quarters. Last year, there were exceptional volumes in the life support sector in Q2 and Q3, and we're expecting this year to be on 2019 level. We are currently running at 20% above that in Q3. Of course, this is not currency adjusted. Defence/Aerospace, a reduction of 36% and NOK 85 million. We continue to have a low revenue here in the U.S. and Norway, and in general from U.S. customers. We see COVID-19 related delays from U.S. government, and Sweden is now also performing below last year's level in this sector. The revenue delays in the quarter are spread across the sectors and across all the countries.
How much it has affected in net is dependent on how they're able to compensate and move volumes around, and how high the demand increase coming into the quarter was. Let's look at the countries. Norway showed a decline of 6% compared to last year due to lower Defence volume, but still a strong growth in transmission within the Electrification sector. Sweden show around 18% decline. Adjusted for the reduction in Medical Devices, there is a growth on 20% in all other sectors. CEE has a decline of 7%, mainly demand delay driven and all across the board really. Others, being China and the U.S., a reduction of 50% compared to last year. For China, it's primarily the exceptional Medical Devices last year, and for the U.S., reduced volumes in Defence. Slide 8, please. Minor but negative effects on currency compared to last year.
There are currency effects on a local level. Most sites invoice in other currencies in addition to their local currencies. The spread of the currencies for Q3 is USD 39%, EUR 27%, SEK 17, NOK 15, and CNY 5%. We have less currency effect in Q3 than in the previous quarters this year. The graph below show the Norwegian bank averages at closing rates per quarter, average and closing rates per quarter. EUR is down 3%, RMB is up to, USD down 4%, and SEK down 2%. With a mixed [feed from head], there's an average effect of 2% in the quarter. Not significant compared to the development we've had the last quarters. Slide 9, please. EBIT affected by material supply constraints and seasonality. The third quarter profit was NOK 50 million compared to NOK 90 million last year.
This corresponds to 6% EBIT margin, which is as expected down from 8.6% last year due to the economies of scale and exceptional utilization of overall revenue we had last year. In addition, the revenue delays of around NOK 200 million in the quarter creates a lower contribution margin and lower EBIT consequently. Year-to-date profit margin is 6.8% and in line with the lower end of the current year outlook. That said, apart from in 2020, Q3 had normally had a weaker profitability than the other quarters due to seasonality and lower activity in the vacation months. We have talked about the currency effects on revenue and dependent on the currencies the sites do business in, there are some local effects due to revaluation of net working capital in Q3, and this has a loss effect in Q3 of 0.4%, and whereas it was 0.8% last year.
Below EBIT, we have a non-cash net negative value of NOK 4.4 million in the finance net compared to a negative value of NOK 4 million in last year. This is mainly group internal loans, specifically euro loans in Poland. Year-to-date, we have a negative value of 12.6% compared to zero last year.
Could we have Egil Dahl verify that the sound is working for you, Cathrin Nylander? It is because there's so many comments all the time. Sorry, go ahead.
Yeah. Tax rate is higher than last year's 24%. This is due to a non-cash correction of temporary differences on write-down of assets and consequential effects of those. It's a non-time, non-cash adjustment and it will not have an effect on the general tax rate going forward. Slide 10, please. EBIT by country, mixed margin trends. Norway and Sweden continue staying at the margin levels of 6.5% or 7%. Norway at 6.5%, same as last year, and Sweden at 6.4%, up from 6.2%. Good margins in spite of lower revenue. Year to date, both Norway and Sweden is at 7% EBIT margin. Central and Eastern Europe, consisting of Lithuania and Poland, we reduced EBIT margins from 5.5% the last year compared to 5.0% this year. Even though Poland has substantially improved margins compared to last year, both Poland and Lithuania are affected by the volume delays.
Year to date, CEE is at 7.9% EBIT margin. The others, consisting of U.S. and China, show 6% profitability in Q3. China is performing well, obviously not at the same level as last year, the U.S. still needs improvement. EBIT margin in others of 6% is up from 5.7 in Q2 and actually 1.7 in the first quarter. Year to date, others at 4.6%. Slide 11, please. Capital build up due to material supply delays. Working capital ended at NOK 1,157 million, an increase from NOK 1,134 last year. Adjusting for foreign exchange effects and consolidation, it is around 6% increase on last year's level. Last year, working capital was driven by the exceptional demand for ventilators. As this graph shows, after the Q3 2020, working capital was reduced with around NOK 100 million, down to NOK 1,035, mainly a reduction of trade receivables.
The change in the last quarter this year going from NOK 1,034 to NOK 1,157, an increase of NOK 123 million, the main driver is mainly inventory, partly compensated by an increase in trade payables. A late push of the NOK 200 million in revenue will have consequences for the inventory, hence the increase. Our main focus is to bring in inventory in line with what is deliverable going forward and to secure allocated components into consignment. Currently, in addition to the inventory, out of our books, we're carrying NOK 200 million of inventory for our customers. Trade payables are increasing as a result of the high buying activity and off-balance-sheet activity. Trade receivables increase in percent of revenue as we're invoicing consigned material and prepayments to a higher degree than before. Overdue are slightly below last year's level.
In total, our three net working capital percentage of sales is at a staggering 31.8% and slightly higher, you might say, than last year's 25.1%. Cash conversion cycle is up to 124 days from 96 last year. Main driver is, of course, [DIO]. ROC at 12.8%, down from 22.4% last year. Thus, there's a negative cash flow of NOK 70 million in the quarter compared to a negative NOK 3 million last year. The negative cash flow is driven by the increase in net working capital and partly compensated by profitability. What do we expect for the next quarter? We expect stabilized net working capital, a slight reduction in inventory and a reduction in payables, and an increase in trade receivables due to higher sales, which in all should give a positive cash flow in Q4.
We should also give an improvement in the ratio together with the higher volume. Net working capital to be in the high 20s in percent of sales and ROC to be between 15%-20%. Finally, net interest-bearing debt over EBITDA increased from 1.9 last year to 2.2 this year. Adjusted for IFRS, it's about 2.0. Net debt is at NOK 791 million. Now back to you, Peter. Slide 12, please.
Market development. Thank you, Cathrin. Let's start with the order backlog. Next slide, please. Slide 13. The order backlog, as previously stated, ended at NOK 2,568 million, which is an increase of 38% compared to last year. It reflects a strong total demand situation, but it also includes delays in revenue due to extended lead times. The order backlog has increased within all market sectors, and as we've said in absolute numbers, we see the strongest growth in Electrification and Defence/Aerospace. Adjusted for the currency rates, the order backlog shows actually a growth of 43% compared to last year. Next slide, please. Slide 14. Let's move on to our guidance. Next slide, please. Slide 15. Well, as we've stated many times, total demand is very strong and the order backlog is at a record level.
However, in the very short term, supply shortages have somewhat limited Kitron's ability to turn demand into revenues, and the outlook for 2021 is adjusted to reflect this. For 2021, Kitron has previously indicated a revenue outlook between NOK 3.9 billion and NOK 4.2 billion and an EBIT margin between 6.8% and 7.4%. Due to the constraints in the supply chain and resulting delays of revenue, the revenue for 2021 is now expected to be between NOK 3.7 billion and NOK 3.9 billion, and EBIT margin is expected to land between 6.9% and 7.1%. Growth is expected within Connectivity, Electrification, and Industry sectors, whereas there's a decline this year within Medical Devices and Defence/Aerospace sectors. Next slide, please.
What are the key takeaways? Slide 16. Well, we believe it's a solid quarter despite the challenges in the supply chain and the normalization of last year's exceptional demand and deliveries of Medical Devices . Order backlog and 2022 demand outlook supports continued growth, and we see a long-term customer demand and well-identified strategic program acquisitions to follow our strategic trajectory. This concludes the presentation portion, and we're ready to move on to Q&A. Are you ready, Cathrin Nylander?
I am.
Okay. Well, this time around, actually, we have questions from the start, obviously.
Very good.
No delay here.
First question, can you explain and elaborate on the well-identified strategic program acquisitions to support your strategic trajectory? Right. Yes, I can. Let's just say, without going into things we haven't announced yet, that we're working on several programs within the areas we have identified as growth areas. Most targeted is the market sector Electrification, and all of the sub-sectors that are connected to Electrification. A lot of infrastructure projects, infrastructure products, power storage solutions, things like that. Those are types of programs that we're working on. Of course, there's a continued increase within Defence/Aerospace programs that are coming online over the next two to three years. As we're prepared to announce those, we'll obviously do that, but currently we're not in the position to do that. The next question is again from Johannes Nordheim. We'll just take it from Johannes in order.
Kitron seems to be somewhat harder affected by shortages than its peers. Is this correct? Is it driven by sector/product exposures or other measures? I would say your first conclusion is a little bit correct here. It's driven by sector and product exposure. For example, if we look at where do we have less effect, even if there is effect, we see less effect within our Swedish and Norwegian operations, where we have a higher level assembly of products. We do more of a complete build. Also from a market point of view, the Nordic customers tend to have been standing more on their toes when it comes to forecasting, proactively redesigning product, and securing material in the past 12 months, whilst other international customers maybe have not really been on that same level. More likely it's what kind of products are you building.
The highest effect we see is within our central Eastern European operations, where there's a lot of PCBA build. Pure electronics build, those sites are most affected, and they also have the most shortages that they work on. Moving on, Tomas Tang says, "How is the development in the order backlog adjusted for the changed customer behavior by placing more long-term orders to secure components?" Well, we have no adjustment, right? We're reporting order backlog as is, and order backlog for us is all fixed firm orders and the first four months of forecast. If we look at the order backlog and look at as a percentage of the order backlog, our fixed firm order is more or less than last year. You would maybe expect them to have a higher degree of fixed firm orders. It's very similar to last year. It's a little bit higher.
I haven't calculated the exact percentage, it's a little bit higher than last year. Still, it's the first four months of forecast, so it's not like the order backlog now looks at all of next year just because we have forecast in place to secure material. Jonas says, "Do you think the ongoing component shortage should sustainably change the industry structure and, in your perspective, lead to higher amount of fixed orders?" In the short term, right, it's necessary. It's necessary to have a close regional, preferably sustainable supply chain. That's what the COVID pandemic and this supply shortage situation has shown us. With everything from difficulties in transportation globally to the ongoing, I hate to say energy crisis in China, but let's say constraints in power and electricity in China.
It's obviously if you have a closer supply chain, if you're in your region or in your home market with your supply chain, it is easier for you to deal with some of these issues. That said, components and electronics, that's a global supply chain. You can't find all of it in Europe even if you wanted to. Let's move on a bit. From Vincent asks, "Could you give us some details about capacity and load for your plants Q4 versus Q3? What makes you confident that the supply chain issues will improve in Q4?" Do you feel like talking, Cathrin?
No, I think why we feel more secure for Q4 is that we've spent, I think, some weeks now looking into Q4 and moving out volumes that we're not able to deliver. We have looked at all the orders we have, if we are secure the components that we need, if we have them in-house whether or not, et cetera. It's been a quality work to bring the expectations in Q4 down to what we actually can deliver. When we started looking at Q4, obviously, the demand was much higher again for Q4 than what we are indicating now in our adjusted guidance.
As we showed in some of our slides here, I think we talked about it on, and you spoke about it also, but back on Slide 3, we're looking at the revenue waterfall. If you sum all of those things up, that's what we were looking at as we entered Q3. We thought Q3 is going to be a record quarter. We thought it was going to be a record quarter up until mid-August. Even beyond that, there seemed to be a possibility of at least being close to a billion NOK. However, a lot of decommitments on confirmed orders from customers in mid-August through late September. Really pushed or delayed our sales to a lot of customers.
Mm-hmm. Kitron has been contacting suppliers and asking for recommitment on the deliveries, which are for the components that are on our
Also cutting back down to what we actually have on hand.
Yeah.
Still, the outlook is there's still a spread, right? We can't be more detailed than we are right now. Could you give us some, if Bjørn asks, can you give us some input, some information on input costs and selling prices, how are they affected through the shortages? Thank you very much. Well, thank you, Bjørn. Most of the time we work with a cost-plus model with our customers, so we pass along any extra cost, and that's the usual business model within our industry. We've seen some of our competitors actually announce that some of their top-line increase this year has been driven by increase in material cost and prices. I think for us it has had a marginal effect.
It's maybe in the tens of millions and not in hundreds of millions. We are securing ourself to a very large extent on extra cost or spot market buys, where component prices could be up to 100 times the normal price. Obviously we work with our customers to come to a resolution on those things and works out pretty well. Vincent has come back here and asked about the order intake excluding Defence/Aerospace. The order intake including decline quarter-on-quarter.
Yeah. That's medical, is that right?
Defense and Medical declined strongly quarter-on-quarter. 608 million versus NOK 858. Do you see change in customer behavior and the wait and see mode? I'm not entirely following here what's.
No. We have to look into. Order backlog is just part of what we know as we talk about, because it's a fixed and firm orders and four months forecast. Obviously, we're not looking at that. We're looking at the whole demand situation that we have, and that's increasing strongly quarter on quarter. We're talking numbers that are well above these numbers.
Okay. His question is if you exclude defense and medical. The order intake and the order backlog has decreased o n Electrification and the others.
Yes. The demand has increased. In total we have more, but that's over the four months forecast.
What is the follow-up question on the order backlog, can you help quantify how much of the growth in order backlog is due to long-term orders? I think I've addressed this already. We use the same time horizon, and as a percentage, the fixed and firm orders are not so much greater than last year.
No, they're not higher than last year, Peter.
I was just looking at the chart. Still firm, Egil Dahl asks, "Are you still firm on the long-term strategic financial targets?
Yes.
Yes, we are.
Mm-hmm. Yeah.
It looks like that is it.
Give some two more minutes.
another few seconds to see if there's any follow-up.
I understand that the sound fell out, Peter, for some time, but basically what we're trying to say in the first slide there is that most of the sectors are affected, or all of the sectors are affected by the revenue delays in all of the countries. Norway and Sweden seems to be less affected, I have to say.
Yeah. Well to win, huh? Okay. I'm not seeing any further questions.
There you go.
Here's a final one, right? From Ludwig, "How will you address your capacity in the medium term given what seems to be a strong demand growth?" We will address the capacity the way we do all along. I think when you look at the financial results in Sweden and Norway, they've continuously, they're working on adjusting, hence, the year-to-date financial results in Sweden and Norway are strong. They are also in Lithuania and Poland. However, in the third quarter, there was an expectation there of being able to deliver more, hence they had more production capacity than they needed. That's been adjusted, even though we see a growth in Q4 again, coming back strong and coming back even stronger into the first quarter of next year.
We are more careful and we are more analyzing and looking at actually having a stronger confirmation of being able to have supply before we commit to capacity increases. From a footprint point of view, we have a lot of capacity. We've talked about this before. That's that. Very good. 59 viewers remain. I'll thank you for sticking with us and hope to talk to you in February for our fourth quarter update and looking forward to presenting stronger numbers then. Thank you all. Thanks. Bye.
Bye.