Welcome to this, Kitron first half year and Q2 results to the til Mægler, Peter Nilsson, that will join me today.
Happy to be here. Happy to be here, and looking forward to coming back full time here at the, in September.
That's great. Why don't you start, Peter?
Thanks. Well, you know, the first half of the year has been really, really busy. Strong, continued strong growth in the top line, in both, Q1 and Q2 . In the Q2 , we had 29% growth and almost 27% growth year-to-date. Really a well above the levels we're comfortable with when it comes to efficiency, and I know Cathrin will get into that a little bit later. Both the U.S. acquisition and Norway and Lithuania contributed heavily to the strong revenue growth. The EBIT margin in the second quarter was 6.6% with continued margin improvements in Norway and in Sweden. The order backlog has stabilized at a high level, or at the end of the Q2 . I think just over one... Close to NOK 1.5 billion even.
Close to, yes.
With a strong growth of 44%, compared to last year. Contributions again, mostly from offshore maritime and the defense and aerospace sectors. The working capital has been a challenge for us the past six to nine months, really. It all started with the constraints in the raw material supply and some decisions taken to early on secure material with long lead times and components and such.
Mm.
We feel that the increase in working capital year-on-year is mostly related to higher revenue and somewhat still on raw material constraint situation. Even though we see the raw material constraints have started to ease, and when we look isolated at the end of the quarter, we see that the working capital efficiency is getting closer to where we want to be, and we expect improvements as we move forward.
Yes. Thank you. A bit on the financial highlights for the Q2 then. Revenue ended at NOK 860, which is, as Peter said, up 29%. Of that, organic growth is 19%, and the acquisition is then about 10% of the growth. We see strong growth within defense, aerospace, offshore and industry. EBIT, NOK 56.4, all-time high, and an EBIT margin of 6.6%, slightly down from 6.8% last year in the same period.
Hey, it's the second consecutive quarter with all-time high on EBIT.
Yes.
Are you gonna deliver that in Q3 as well?
No. Or maybe. No, I don't think so. Q3 is normally our slightly slower quarter due to vacations in Europe. The EPS is on the same level as last year, NOK 0.20, which is also the same basically that we had in the Q1 . It was quite strong last year, but also in this year we have some non-cash Agio effects in Q2, which affects the EPS value. Also the increased financial cost based on the acquisition and also the increased working capital level. Order backlog, as Peter said, up 44% compared to last year, same level as Q1, basically, which is a similar development we had last year. Q1 and Q2 are similar. Partly, that is a seasonal thing.
We see that for some large customers that have the season or the production is high during Q4 and Q1, and the order backlog go down in Q2 and then start to go up again in the industry sector. Operating cash flow, NOK 53 million, up 25.3 for the quarter, which is good. Well, 25.3% from last year, which is good. We now see, when the working capital stabilizes, the operating cash flow is also improving. The net working capital, about NOK 933, basically the same level as Q1. We see a difference in the working capital. It's less inventory, but same amount of trade receivables, but trade payables are lower as well as we are buying less for the mean. Same level, no net working capital.
This development in the working capital is what we expect to see to be able to reduce it going forward. Where are we at the half year? We're at NOK 1.7 billion, almost, growth of 27%. Of that, organic, 19% again, same sectors growing for the year to date figures. EBIT margin year to date is 6.4%, which is the similar figure it was last year, actually. However, the numbers are substantially higher. The operating cash flow now at NOK 79 million, approximately for year to date, which was slightly above NOK 20 million last year, same time. The EPS accumulative is NOK 0.41 compared to NOK 0.35 last year, same time. Of course, the agio effects comes in in Q2 and is also apparent year to date. A bit on the orders, Peter.
Yes, yes. In the Q2 , Kitron signed a major new contract with the Efore Group. This is primarily within power products. We'll be one of the main manufacturing partner for the EMS production. The value approximately starting out is NOK 25 million in the first year of full production. The production will take place in Kitron's plants in Lithuania. We had some Kongsberg orders in April. We received orders worth more than NOK 50 million under long-term manufacturing agreement with Kongsberg Defence & Aerospace. We expect the deliveries to start in the second half of 2019 and proceed into 2020. The production will take place in Kitron's plant in Norway, in Kilsund.
Mm-hmm.
Harris also, one of the partners on, in the F-35 program, awarded the next big block buy contract to Kitron. For the integrated backplane assembly for the F-35. The contract covers production through lots 12 through 14, which I'm not sure exactly how long that takes us in the timeline, but it's.
Two years .
Two years at least, yeah. The potential value in this contract is $18 million, so pretty significant for us. The integrated backplane assembly is a very advanced and complex high-level assembly. We built this product for some years now and under these new higher volumes, the deliveries start in this year and continue through 2021.
Yeah.
It's been a, in summary, Cathrin, it's been a pretty darn busy, first half of the year.
I have to say so. I mean, organic growth of almost 20%, that is above actually the ideal growth rate than when it comes to efficiency, considering the product mix and of customers that we have. A more rapid growth that we've had that affects our margins in the short term as you know.
What's the status on the new capacity we're bringing online?
Well, China, they have taken over the new facility where they have actually doubled the footprint, and they have reorganized and started production into the new structure.
I've seen the photos from that facility. Really nice inside.
It's really, really nice. The construction of the facility in Poland is progressing according to plan, and where we will start then production in Q4, and we'll take over it late Q3, in Q3 as planned [crosstalk] basically.
I know the pictures. It looks pretty much done.
It does.
Yeah.
There is always something to be done at the end.
Yeah
Which takes time.
Yeah.
Also in the U.S., there are actually changes. As of next week, we are moving to move the activities at Windber, our newly acquired site, to a temporary site where production will take place for the next months. The factory will, during that time, be refurbished, and that is a consequence of water damage from flooding, actually.
As I understand, a lot of products have been built and really affects to deliveries and customers will be minimal.
Yes. I mean, we're quite quick at moving. We have done it several times before. We expect to have some inefficiencies due to this move, but revenue targets for Windber and that site are withheld for Q2. There is a change for sure.
I'm happy to say with the, when I look at the customer base and the prospects and the RFQs when it comes to the U.S. operations, primarily with Windber now sort of being the locomotive pulling along, there's a lot of interesting things going on.
Mm-hmm. Definitely.
New revenue also.
Yes, a lot of competent people within the site, I have to add. They're working hard now to do the relocation as quickly as possible, into a site very near the old one.
Mm-hmm.
A bit more on the financial statements for the first quarter and Q1 for 2019. We talked about the strong revenue growth, ended up NOK 860 million. It's up NOK 193 million. Of that, again, organic growth 19%. We see on the value-wise, you know, we see a growth in defense aerospace of NOK 63 million and about 53.5%. Offshore marine is growing NOK 67 million and a number of hundreds percent for that. Also industries is strong on NOK 45 million, medical and energy telecoms, you know, below 10%, but still a very good growth in general for the quarter, I have to say. Equally strong, we might add, is the year to date, at NOK 438 million increase compared to last year, and now ended at NOK 1.7 billion almost.
The strongest grower there is, you know, offshore marine that had grown NOK 100 million compared to last year, over 500%. Also defense aerospace is up 30% and NOK 75 million, industry up NOK 86 million and 15%, and then medical devices at 13%, and energy telecoms at 29%-30%. All in all, first half year very strong in many sectors actually, double-digit growth for all.
I think my expectations, I got a question from one of the investors.
Mm-hmm
I think last year sometime-
Mm-hmm
On offshore marine.
Mm-hmm.
You know, speculating what do you think the volumes are gonna be for this year?
Mm-hmm.
I think I said somewhere between NOK 150 and NOK 180. Yeah. You know, 100, now in the first half of the year is pretty spot on then.
It is. Good.
I'm happy because, you know, you never know when you're starting up something like that either.
No, it's been very strong and a strong ramp up too. Talking of which, when we look into where is the growth for the different countries, you see Norway has grown to NOK 250 million and 25%, and now turning around from years where there's actually been a negative growth, we now see very strong growth. Also Sweden close to 10% growth, now ending at NOK 180 million. Lithuania, 22% growth, up to NOK 288 million. The U.S. sites, both of them, added up at NOK 80 million. China, which is basically the others, when it comes to revenue, at NOK 97 million and a growth of approximately 18%. Really strong growth from most sites actually. The growth is spread. Similar picture when we look at the first half year.
Norway growing 30% up to NOK 422 million, and Sweden then to, with 8% to NOK 354 million. Lithuania slightly lower than some other years, NOK 18.2 million for the half year. Still the largest site is probably NOK 578 million. I think it's hunted down by Norway soon. The U.S., again, growth due to the acquisition as well but now at $129 million, and then China at NOK 190 million for the half year. Very strong half year for many of the sites on the top line, and very stressful I have to add. It's been a lot of hard work. An interesting part of this is when we go to the another quarter with improved profits. We have an all-time high.
Last one was last quarter at NOK 51.2, now we're at NOK 56.4. It's very strong in monetary, and it's a relatively strong percentage as well of 6.6% when we're aiming for 7% strategically. It's an increase on the EBIT with 25% per year, and the 6.6% versus the 6.8% that we had last year. We see that the margins due to the ramp-ups that we are mentioning, they are slightly lower than we would normally have with a slower growth rate, I have to say.
When then we look at the percentages and how the different sites are developing in profitability, we see a good change in the profitability in Norway from 5.2% last year to 6% EBIT margin and from 9.3% to 13.2%. Happy about that, to be on the 6%. We have to add that, for the first time ever, Norway reached the 7% for in one month in the quarter. So congratulations, Norway. They're working on their targets. Sweden at 6.6%, up 1% from 5.6% in EBIT margin last year, also good improvement. Lithuania is quite stable, and it has to do with large ramp ups on the revenue. Stable on the EBIT in value and slightly lower margin, but the revenue is growing. It has to do with large ramp ups of customers where we don't get the efficiency out immediately, so the margins are slightly lower than we would have wanted them to be. U.S., where actually the Windber facility is showing good profits. However, we at Inca are struggling slightly with the profitability [crosstalk].
The older existing [crosstalk]-
Yeah, the older one.
Version, yeah.
The volume levels are too low to get a good profit currently. We're working at that. Then, good profitability change in China from 10% to 12.5% EBIT margin and ending at 14.6%. I think we're seeing good promise on many of the sites. Oops. Then for the first half year. For the first half year, we still see profitability improvements in Norway and Sweden compared to last year. Norway ended at 5.3% compared to 4.7% in EBIT margin last year and growing. Sweden at 6.5% compared to 4.5% same period last year. Again, Lithuania having a value-wise same type of profits as last year, but the margins are lower. U.S., the same comment for the full years for Q2, basically.
The others at around NOK 11.2, so it's quite good actually for China. Another part here than the cash flow for the working capital. The cash flow from the operations, as I said, is NOK 53 and a half and NOK 42.7 in the quarter last year. We see the improvement in the cash flow is a result of the stabilized working capital.
Where are we going to end up for the full year?
On cash flow?
That's what I wanna know.
Yeah, I'm not gonna tell you. We expect to see this positive development continue up through the year. Year-to-date cash flow at almost NOK 80 million compared to NOK 20 million last year. We see the financial gearing. It's at 2.9 currently. We still are quite heavy on the net interest bearing debt due to working capital. It's also affected by the implementation of the IFRS 16 of the lease standard when we actually activate loans for financial for lease agreements, and that's about NOK 90 million. If you deduct that from the net interest bearing debt, the net interest bearing debt EBITDA is 2.6, so slightly lower.
Working capital, the ratios are actually worsening in the quarter compared to last quarter, and it has to do with the trade payables going down significantly as a result that we are buying less raw materials. The inventories are going down, and the trade receivables are about the same level. This is an effect that we have now, and I think we are paying basically at the level on trade payables we should be. Any further reductions in inventories will reduce the working capital. The ratios are not very happy, I might say so.
No, as we move into more of a just-in-time status on.
Yes
On materials again, then payables will sort of stabilize at the normal level. Until that just-in-time is reached.
Mm-hmm
Payables will suffer.
Yes. That is true. The cash conversion is quite high, 101 compared to 75 last year. We will see cash conversion rates just improving going forward. The ROC, return on operating capital, 16.7 compared to 21.3 last year. It's still rather low. However, we have to also consider the IFRS 16 on the books to have a comparable figure. That deducted, it was 17.7, still lower than it should be. You can see here also that the working capital has stabilized now, and it should start to go down. Talking a bit about the working capital and trying to explain why we think it's gonna be better. I will try to show this in three graphs.
The graph to the left is showing procurement lead time, you know, the how long in advance we need to procure the material before we get it. As you can see, as it was at the worst, it was double the lead time compared to what it normally has been. That means that we are less agile, and we have less maneuverability to change things. Now, these component lead times are going down to historical level or approaching. They're not exactly there yet, but we will see them gradually being there maybe end of Q3 or beginning of Q4. That will make it easier for us to steer our working capital and inventory going forward.
Another part of this which is important is that the components on allocation, the number of components that are on allocation is about half to what it was before. It is now more on the longer-term products only, so it has much less effect on the, for instance, industry and other types of sectors. Good development there, and you can see that the numbers are going down quite rapidly, I would say. The third graph is our raw materials that is booked as inventory. As you know, we convert WIP and finished goods into contract assets. The raw materials now that had its peak in Q1 and are starting to go down, and we will see them continue to go down. An illustration on, why we are sure that we will be able to reduce our working capital going forward. Okay? Peter, market.
Mm-hmm. Very good. Very good. We spoke about the almost NOK 1.5 billion...
Mm-hmm.
That actually 1,453, I think on the order backlog.
Mm.
With, very, very strong growth, on the defense side, right?
Mm-hmm.
87 point-- almost 88% growth on defense at NOK 675 million. Also strong growth on medical, and it's been a while since we saw that type of growth on medical with 24%. Industry, slightly lower growth, right? We've been used to seeing 30%, 40% growth on the order backlog on industry, but still a strong and stable number. slight decline on energy telecom. I think we've delivered out some of the major contracts. Yes. on power-related products, energy-related products. Are now awaiting sort of evaluation of those deliveries.
Mm.
The next big order on it. Of course, offshore, marine, the offshore side, we're very, very, very happy with.
Mm.
Both, what we've delivered so far
Mm.
Also looking at the order backlog here of NOK 110 million. That tells us something about.
Mm.
You know, the short-term future because, you know, this is not over the next three years, this NOK 110 million. I think majority of it is probably this year and maybe in early Q1 next year.
I think it's this year.
Mm-hmm. Yeah.
It's good. Good order backlog. We have looked into the rest of the year and decided to change the outlook for Kitron. We have increased the top line guiding. We are now saying that they expect the revenue to grow to between NOK 3.2 billion-NOK 3.4 billion, actually. Previously, we said NOK 2.9 billion-NOK 3.2 billion. We're actually above the previous range in growth on top line. We see that earnings in value will be above previous outlook. However, the EBIT margin is expected to be between 5.9%-6.3%. We have a stronger growth than expected due to ramp-up of customers temporarily drive inefficiency in existing facilities.
We also have the startup of the Polish facility in Q3, Q4, which also drives the margin slightly down. We expect these margin challenges to be solved as we move into 2020. The values in numbers are actually slightly higher than what we have guided on before, but we see a different margin in the second half. That's why we have decided to alter it. We have growth, and it's primarily driven, as before, on the EMS division from API and for the defense aerospace, which we didn't comment on before all that much, and the offshore marine sectors, in addition to industry. We see a very strong year in top line and... [crosstalk].
Sometimes these are decisions you have to make, you know, take a short term, slightly depreciated margin.
Mm.
Long term, we have the volumes. You know, ideally, we'd like to ramp up in 16 or 18 weeks. Sometimes, you know, the customer requirements are different, and you just have to just put more resources into it and get the job done.
For sure. We're working our hardest to make sure that we are hoping to deliver on the top end of this range, but we need to be realistic as well.
Yeah.
I say thank you for listening in to this web conference. I say thank you to you, Peter, and I look forward to having you back.
Thank you. Thanks so much.
End of September.
Have a great summer, everyone.
Yes, great summer, and thanks.