Good morning, welcome to Kitron's webcast for the Q1 results 2016. I'm Peter Nilsson, CEO. With me today is Cathrin Nylander, CFO. Looking at the first quarter of 2016, we see continued strong growth in the industry and defense sectors. Not offsetting the declines in the offshore marine. We see a very strong underlying profitability growth. However, it's masked by some one-offs in the first quarter. Our backlog continues to show strong growth, primarily in the industry sector. Our net working capital and cash flow, however, are affected by some very low sales linearity, primarily from our Norwegian operations. An inventory buildup for the defense and aerospace sector for the second quarter. Revenues are at 497, up 5.6%.
Our EBIT remains stable, slightly below last year's result at $20.5 million. Order backlog $902 million almost, which is very good for, considering the seasonality this time of the year. Cash flow is negative $25 million due to the sales linearity and somewhat of the inventory buildup. Net working capital overall though is down to $522 million. In the first quarter, we won some significant orders. One we'd like to point out is with Northrop Grumman on the radar for the F-35 Lightning. This project kicks off now and we'll work with some design and building and test equipment and NPIs up until mid-next year when series production will commence after the validation and testing period.
The potential value of these subassemblies is more than NOK 500 million over the share lifetime of the F-35 program. In addition, several other defense contracts has been won on the Swedish market, and we'll come back to those. Cathrin, why don't you take us through the financial statements?
Thank you, Peter. In the Q1, we had a strong growth in the industry and energy telecoms sector. We ended at $497, up $26 million from last year and at 5.6% growth. Kitron normally has a very strong Q2 and Q4, and Q1 and Q3 is normally slightly lower and so also this year. Offshore marine continue on the downward trend, now down 71% compared to last year and is now a very small part of our total revenue. Medical devices is up 15.2% in the quarter. Defense aerospace, due to the variations in the contracts that we have, is down slightly, 13.4% compared to last year. Energy telecoms, a strong quarter, up 22.7%, and industry, a very good growth of 35.4%.
Industry is now by far the largest sector that we have. When we look at the countries or the revenue by country, we see that Lithuania and Sweden are driving our growth. Norway is down 20%. This is actually in line or slightly above our expectations for the first quarter this year. The decline is mostly because of the downturn in the offshore marine sector and some projects that are slightly moving into Q2. Sweden up 31.8%. Good growth due to medical and energy telecoms projects. Lithuania up a whopping 54.3%, we have to say.
Very strong.
Very strong, driven by the growth in the industry sector. The others, consisting of China and U.S., we see strong growth in China also too, but this is masked by reduction in Q1 for the U.S. due to the project related, how can I say? The project that are moving to Q2 or that will have deliveries in Q2. As we say, the underlying profitability is improved. In the quarter, in 2016, we have had a one-off cost due to terminated, contemplated, acquisition process that was deemed not in the interest of Kitron shareholders. We have taken cost for $5 million of that in the quarter. Last year, we similarly had a positive effect due to bias of pensions. Those two have a difference of $8.5 million.
If we adjust for this, the revenue in Q5 or Q1 2016 would be $25.5 million, and in Q1 2015 would have been $17.3 million. The EBIT percent for 2016 Q1 is on the underlying growth, would have been 5.1%.
Yeah, the earnings.
The earnings. We also see that in the quarter, we are affected by the move in our US dollar. Even though the move technically has been completed very good, we see that it takes time to get all the processes up and running and at the efficiency we want. We see now at the end, at the very end of the quarter, we are better off than we were in the beginning. Also this, looking into the EBIT by country. Norway, as we said, it's the reduction in profit here going from USD twelve and a half to a mere USD half million is affected by the revenue reduction that we have in the quarter compared to last year, and also the impact of the efficiency effects of the move in the quarter.
We also have to add that the $3.5 million positive buy out of pensions was primarily booked in Norway, also in the first quarter.
Last year, yeah.
Yeah, last year. Sweden, very good improvement due to the revenue growth and also the margin improvement. Lithuania, same thing. You know, profitability is quite high due to the same thing, the extreme growth in revenue. The other, China and U.S. then affected by the move of volumes into second quarter primarily. Large deviations between the different sites this quarter.
Yeah. Very much so, you know, with Sweden, Lithuania and China running around the 7, 8, 9% operating margin level.
Cash flow. We have a weak cash flow for the quarter. It's -$25.3. We had a positive $35 last year. What we see, we have a low sales linearity in the quarter, which affects the operational cash flow due to our factoring agreement. We also have a buildup of inventory for deliveries into Q2, which affects our inventories and ultimately our cash flow. Working capital, we are improving compared to last year. However, we are slightly up compared to Q4, we're on the same cash conversion cycle as the same quarter last year.
Even if the sales are better than expected in Norway. We have some very late sales each month and also in the quarter, and we book the revenue, but we don't get the cash in.
No.
Onto market development. Our order backlog at the end of Q4, so at the end of 2015, was about $976 million, really the strongest we've had in the past five years. Looking at the order backlog now at the end of March, it's $902 million. It's up from last year of $855 million. We have an underlying growth here of about 5%. Difference between Q4 and the end of Q1 now obviously is we're looking into the much weaker months of July and August, and those are becoming visible in our order backlog. We see this every year. Defense overall is sort of flat in our order backlog. Medical, we're showing some growth there.
You can see the industry growth very strong in order backlog, 56%. One thing to comment on also are the lead time differences between defense, medical, and industry. In general, the industry lead time tends to be shorter, so you tend to have less visibility in the order backlog, which again, then says that the 56% increase here is some very strong growth. Growth also in the telecom energy sectors on both telecom and energy. Of course, we see the continued decline on offshore, and I'm pretty sure I don't think we'll have any impact anymore from the offshore if we look out three or four quarters.
Overall, our outlook for 2016 remains firm. We expect our revenues to be between NOK 2,050 million and NOK 2,250 million with an EBIT margin between 5.3% and 6.3%. Our expectations is, we'll be on the complete linear growth path by the first half of this year. Growth is driven by our demand increases in industry and aerospace on the absolute top line. Even looking at the other sectors, excluding the oil service business in offshore marine, all sectors are growing to expectation. Profitability continues to increase. I think we've proven that with our developments in Sweden, Lithuania, and China.
I think the U.S. is gonna be back on track completely in the second quarter. The efficiency problems in Norway after the move are starting to come down.
Overall, that's the outlook and the presentation for the first quarter, from the Kitron team. Thank you so much.