Good morning, ladies and gentlemen, and welcome to the 2017 third quarter results from Kitron. I'm Peter Nilsson, the CEO, and with me today, as usual, Cathrin Nylander, CFO. We're here today to present the third quarter results. The third quarter usually is a quarter of seasonality with a lot of vacations and usually a slightly lower revenue and top line. This year, however, we've had continued strong growth, 16.8% overall coming in of a, at a revenue just above NOK 535 million. The EBIT margin slightly lower than last year, 5.5%. We're going through a restructuring program in our Norwegian operations, which will be completed by the end of November. We had some slight effect on that in the third quarter.
Still a strong EBIT margin of 29.2%, NOK 29.2 million. There's also some products with a slightly higher material content in our sales in the third quarter. Order backlog remains strong at over NOK 1 billion. Operating cash flow favorable at NOK 22.4 million, slightly reduced to last year. However, we are continuing to see a strong growth. Net working capital is down to NOK 448 million. That's almost a 10% reduction, a higher capital efficiency which shows where, that our actions on operational excellence are on track when it comes to managing our cash and our inventory and such. For the first three quarters, first nine months of this year, overall growth over 16%.
Underlying growth actually 18.6%, discounting the effects of currencies. Profitability strong on track towards our long-term goals at 6% margin for the first nine months. Improvement versus last year on that with over 26%, taking us year to date to NOK 105 million on EBIT. Order backlog, I commented on that on the third quarter, over NOK 1 billion on order backlog. Operating cash flow NOK 70 million, slightly, you know, flat towards last year on operating cash flow. Again, the net working capital is a reduction of 10%. In the quarter also, we've done a major investment in our U.S. operations.
Over the past three years now, we've invested in manufacturing capacity and capabilities in most of our sites, and really on all of our sites, starting out with Lithuania, Norway, and Sweden. This time around, it was, it's time for our U.S. operations. We've invested in Surface Mount Technology and the capabilities added to that in our Johnstown, Pennsylvania facility. We now have the possibility to locally offer complete solutions to our customers from PCBA through box-build and high-level assembly. Actually, we've added two customers to that operation from our Nordic countries in the past six months to new customers. Another thing we'd like to point out and talk about is the increasing demand of electronic components in 2017.
This is primarily driven by the automotive industry and Internet of Things connected to a lot of the automotive industry again. The increase is dramatic, but the electronics components manufacturer supply has not increased at the same rate. We haven't seen an effect of this during the first three quarters to any significant level because we've had strong processes and safety stocks in place both internally and with our supply partners. Looking forward into the fourth quarter, we see that this trend continues and material availability, component availability challenges are escalating. We have strong processes in place and a strong corporate team to manage these issues. We currently don't foresee any meaningful loss of revenue.
There could be impact to our efficiencies as production scheduling, rescheduling becomes more and more frequent.
Now to the financial statements for the first three quarters. We're starting with Q3 2017. We had a good growth, 15.7%, up to NOK 535 million. As Peter mentioned, there is a certain seasonality in the Q3, our lowest quarter in the year nowadays, as some of our customers don't really appreciate a lot of deliveries during July and beginning of August. What we can see, which is rather specific and special for Q3, is that industry has a growth of 51.4% and is totally dominating in the quarter. Defense aerospace has a slight reduction of 7%. Medical devices is about stable compared to last year. Energy telecoms are also growing. Offshore marine, although minuscule, has a slight reduction.
Industry and energy telecoms are industries as such that when they're so dominating, they affect also the material content on what we deliver. If we look on how the situation is for the full year, is that we are now at NOK 17.69, NOK 17.70, up NOK 229 from last year, or 16.2%. As Peter said, an underlying growth of 18.6%. If you compare to the growth we had between 2015 and 2016, that was about NOK 100 million, so we more than doubled the growth in the same period this year compared to last year. Here we see a more balanced growth rate when we look at the year as a whole, where industry's growing at 30%, which they have been so far. Defense are up 17%.
Medical is sort of stable to a slight reduction, at -8. Energy and telecoms are growing. Offshore Marine is small, as we have talked about, earlier. What we see is that Medical is basically stable and the other ones are growing.
Which gives a reduction in-
Yeah
... total share for us.
Yes. When we look at the sites, we see for Q3, we see sort of similar development as we had before this year. Norway is continuing on a slight decline, down 4% now from last year and are ending up with about NOK 150 million. Sweden, continued growth, about 13%, up to NOK 157 million. Lithuania, a continued growth and now at 35% growth compared to last year, up at NOK 170 million, NOK 174 million and the largest site now for sure going on. The others, primarily US and China, where China actually has a growth of about 20% and where there is a decline in the US. First three quarters, where have we ended up?
Again, Norway, slight reduction, 3.3%, down at NOK 550 million now. Sweden, again, 23%, slightly higher cumulative than in the quarter. Then Lithuania at 25% and now at NOK 596 million so far. The others, Lithuania and US, or US and China up at NOK 288 million, and also a total growth in China for over 20%, which is good. The US is also growing now for the year. When we look on the, on the profit margin, we're on the profit. We ended up at 29.2%.
Million.
Million. NOK 29.2 million before seven. 5.5%, which is decidedly lower than last year, where we had the same, basically the same figure, but 6.5% margin. We can see that the EBIT margin is affected by restructuring in Norway, where there have been some inefficiencies in production due to this, and which is affecting September, and which, where we see the end of it, hopefully November, at least. We also see that there is a higher share of revenue products with material, higher material content in Q3 compared to the other quarters, which is affecting the margin level, ending up at 5.5%.
Again, commenting that Norway, and you can see that here clearly, affects the profits in the quarter, with an EBIT margin of about 1.3% compared to about 5% last year. They have both effects in their accounts. They both have the restructuring effects and some higher share of revenue products with high material content as well, in this case in the defense industry, actually. Sweden also slightly lower margin, slightly lower profits than last year, also due to the fact that there is a higher share of revenue with higher material content. Lithuania is growing their profit decidedly, but they're, also they actually have some of this higher material share in the quarter, reducing the margin level slightly.
The others, China, US, still have strong margins, although the actual number is slightly reduced in the quarter. Looking at the full year so far, Norway has improvements from last year. In total, they're now at 4% in spite of the quarter, compared to 2.9% last year. Sweden at 3.8% so far with the, when you take into consideration the problems in the first quarter, which has been improved in Q2. Lithuania at 7.9%, so under NOK 47 million, a very strong contributor to the results in the year, and almost 8%, basically the same as last year. The US and China improving their results and also their margins, so they're at 8.8% strong.
We see a clear division that we have Lithuania, U.S. and China all over on 8% and Sweden and Norway around 4%.
I think it's important to point out.
Mm-hmm
... that some of the very rapid growth we've had...
Mm-hmm
... has cost some efficiencies. Even in Lithuania.
Mm-hmm
... we see a slight reduction of result. I mean, that will be gained back over time as production stabilizes and volumes continue.
That's true. If we go to cash flow and working capital, cash flow for the month was NOK 22.4 million compared to NOK 36.3 million last year. There is a slight change in compared to last year, and it's that we have a higher degree of income recognition that is not invoiced in Q3 this year compared to last year. It's about NOK 30 million that's in other receivables, where someone so if it would have been invoiced, would have shown a different type of cash flow. We hope that'll reverse in Q4. The year to date is basically on the same level as we had last year. We do see that we have improvements also in the financial gearing so far.
The net interest-bearing debt over EBITDA is now 0.9 compared to 1.3. Market improvement also going to this year. In total, our capital efficiency is improved. We see that our net operating working capital in percent of revenue is reduced in the quarter compared to last year from 26% last year to 22% this year. The cash conversion cycle, which is normally quite high in Q3, is also markedly improved from 99- 80 days. The ROC, however, is slightly reduced from the 17% last year, and that's basically because we have invested more in fixed assets and machinery, even though our, which builds up the net operating work.
The work operating capital so that the ROC is not improving as such as what we had hoped for, even though the net operating working capital is reduced. We see improvements, and we expect improvements, going forward into the fourth quarter in the capital ratios.
Yeah, I mean, that new equipment is needed in the fourth.
Definitely.
First, fourth quarter and first quarter.
Yes.
It may have been a month or two too early.
Yes. For the market.
In conclusion, the market development and outlook. NOK 1 billion in order backlogs, slight improvement over last year. We did have a strong order backlog last year. I think what's interesting here is to look at the shift inside the order backlog where there's a significant reduction on the defense order backlog, stable on medical and a significant increase on industry, stable on energy telecom and, you know, surprisingly, a slight improvement on the offshore side. To comment on the defense side, I think we spoke about this in the previous quarter also. The defense side now tends to issue larger contracts that span over a longer time period.
We will see that order backlog sometimes be published as very large and then be eaten away until a new order is issued. Also, we do see some tendencies that there is some softness in the defense side for next year. Not significantly, but a little bit before it picks back up in the fourth quarter and into 2019. That's the trend right now, but we'll see how it all works out before the end of the day. Industry side, you know, tremendous growth continues on the industry side, 50% in growth in Q3, and the order backlog also an increase of 40%. We expect that to continue being strong going forward. The outlook for the full year.
Previously, we've said we expect revenues to grow, and land somewhere between NOK 2,150 million and NOK 2,350 million. We expect the margin and EBIT margin to be between 5.6% and 6.4%. We now expect revenue to be in the higher end or slightly above the higher end indicated range. Growth is primarily driven again by the industry sector and the profitability increase we expect is driven by cost reduction and improved efficiency.
Yes.
That's it, ladies and gentlemen. We'll see you into the fourth quarter results presented. Thank you.