Good morning, everyone, and welcome to Kitron's Q3 report, 2023. I'm Peter Nilsson, CEO of the Kitron Group, and joining me, as usual, is Ms. Cathrin Nylander, CFO. Following today's brief presentation, we'll hold a Q&A, so please post any questions you may have in the Q&A section of the webcast. Thank you. Next slide, please. Slide 2. So let's take a look at some highlights. I'm excited to present our achievements for the Q3 of 2023. Despite the normal Q3 challenges, we've had an excellent quarter with significant growth in many areas of the business. We achieved a record Q3 revenue of over EUR 179 million in sales. That's an 8% growth over last year. Our operating margin, measured as EBIT for this quarter, stands at EUR 16.2 million, marking a 41% increase over last year.
The EBIT margin of over 9%, in the Q3 is indicative of the operational efficiencies we've achieved. Return on operating capital is now 23.2%, up from the 19.8% last year. Many, many financial metrics have improved further, strengthening our financial position, and Cathrin will come back to those numbers later. In summary, Q3 2023 has yielded some noteworthy results, showing the effectiveness of our efforts. Next slide, please. Slide 3. So let's take a look at the year-to-date values. Building on a strong Q1 and an even stronger Q2, Q3 continues the momentum. Year to date, we've generated a revenue of EUR 576 million, a 23.5% increase over previous 466. Our EBIT has grown substantially, reaching almost EUR 53 million, close to 80% up from earlier EUR 29 million.
We now have 4 consecutive quarters with operating margins exceeding 9%. The net income stands at EUR 38.7 million, more than doubled compared to last year, and the cash flow year to date is EUR 24.4 million, more than tripling last year's cash flow. We've invested EUR 8.4 million in manufacturing equipment upgrades and capabilities, up from the EUR 5.6 million last year. It's evident from these metrics that our initiatives are bearing fruit, and we're committed to ensuring that this momentum persists. Now let's take a look at some of the business trends. Next slide, please, Slide 4. Starting with the sector trends, a highlight is the growth we're seeing in the electrification sector. Energy grid and energy storage solutions are growth areas.
This aligns with the global trend towards robust and resilient energy grids in 2023 and bullish on the outlook for the coming years. A significant trend in the other quarters is the uncertainties our customers see in the economic outlook. Customers are addressing market uncertainties by optimizing inventory levels and forecasting practices. While this poses challenges in the terms of visibility, it also underscores the need for agile solutions and flexible manufacturing models. Let's move on to some regional trends. Geographically, the Nordics, U.S., and Central Eastern Europe continue to be our strongholds. The upward trajectory is buoyed by defense contracts, electrification projects, and the introduction of new business. This speaks volumes about the strategic importance of these regions and our firm foothold in them. The business landscape in China is evolving. While the region holds immense potential, the prevailing realignment trends are redirecting China for export volumes elsewhere.
We remain vigilant and adaptable, ensuring that we capture emerging opportunities in the China- for- China business and transfer business out of China. Western Europe is seeing some interesting changes. The rising operational costs are nudging businesses to explore cost-effective alternatives, and we're witnessing an increased inclination towards our facilities in Poland, Lithuania, and Czech. A steady flow of new customers are inviting us to discuss production transfers, and this validates our strategic investments in these regions and furthers our commitment to providing efficient, value-driven solutions. In sum, these trends shape our approach and strategy, and we're not just reacting to them, we're proactively positioning ourselves to harness their potential. Next slide, Slide 5, please. So let's take a look at our order backlog, and our order backlog shows an expansion, with electrification and defense leading the way.
Their robust performance emphasizes the strategic alignment of our business operations with sectors that are currently experiencing a surge in demand. Some customers across other sectors see a softer market for one or two quarters, and by reducing stock levels and employing shorter lead times, they're standardizing their forecast durations to less than four to six months. While this may present a challenge in terms of visibility, it also provides us with insights into market dynamics and customer behavior. Sitting at EUR 502 million, our order backlog reflects an increase of close to 10% compared to last year. This growth, even in the face of dynamic market conditions, is a testament to our diverse market sectors and rapid introduction of new customers and products. There's also a seasonal influence on the order backlog, especially during the Q3.
We see a 6% contraction in the order backlog as we transition from Q2 to Q3, which is a pattern we've observed historically as well. This cyclical trend aligns with the broader industry norms and reflects the inherent ebb and flow of order placements. In our view, our order backlog paints a picture of growth, with certain sectors leading the charge. Next slide, please, Slide 6. So let's expand our outlook with the R12 and R6. These are essential metrics that we use on a weekly basis, providing insights into our forward demand for the 12-month and 6-month horizon, respectively. Historically, they've been indicative of our sales prospects in subsequent 5-6 months for R6 and 9-12 months in R12. For the defense sector, the outlook is particularly promising with a significant outlook. We're seeing a trend of customers wanting to expedite orders.
The demand for electrification solutions, specifically critical infrastructure, continues to grow. In other sectors, the defensive measures are evident, with frequent changes to demand and a prevailing trend for shorter lead time, which further decreases visibility into forward demand. Reducing stock levels also is a common action taken. Overall, in the R12, we see a 5.5% year-on-year growth, with a demand of EUR 745 million from the previous 700. However, sequential contraction is evident, from the EUR 812 million in the Q2 of 2023, and we see this primarily as reduced lead times and burning off excess inventories. On the R6, notably, there's a 10% year-on-year growth. The R6 metrics... Actually, it's more than 10% now, when I look at the numbers.
The R6 metric remains particularly relevant because it also has the it looks at more at the shortened demand horizon that we're observing from customers. And the uplift is to EUR 426 million on R6, a considerable leap from EUR 333 million we had last year. So in wrapping up, both the R12 and the R6 figures offer invaluable insights to our sales trajectory. These metrics underscore the importance of staying attuned to market dynamics, being proactive in our strategies, and remaining adaptable to the changing demands of our customers. Our forward-looking approach ensures that we're well-positioned to meet these challenges and opportunities that lie ahead. I'll be back in a little bit to discuss the outlook and key takeaways, but for now, Cathrin will review some details behind the numbers. Cathrin, please, the next slide, Slide 7.
Thanks, Peter. Currency and growth. First, I would like to present some comparative numbers for clarification, as we this year changed from NOK to euro as presentation currency. The presentation currency change will take out variations in translation differences in consolidation, not underlying currency risk as such in each of the sites. So the waterfall show growth on top in euro, below in NOK. To the left is the quarterly growth, and to the right, the year-to-date values. For Q3, underlying growth is just about 14% in both currencies, and in euro, a negative currency effect of 6%, and in NOK, a positive effect of 8%. As for year-to-date values to the right, underlying growth, 29% in both currencies, negative 6% in euro, and a positive 11% in NOK.
In general, the total euro growth rate is trending down from very strong percentages to the strategic growth rate of around 10%. Next slide, Slide 8, please. Business sectors. Large growth volumes overall continue to create economies of scale in CEE and Nordics, whereas we have volume reduction in China, as markets served from China show less demand. That said, all sites are profitable and all at strong margins also in Q3. So the Nordics, Norway, Sweden, and Denmark, revenue growth of 14% and a growth in profit of 27%, EBIT margin at 8.5% for the quarter. CEE, being Lithuania, Poland, and Czech, revenue growth of 35% and profit growth of 100%, EBIT margin at 9.7%.
The rest of the world, mainly our two facilities in China and the one in the U.S., has a revenue decline of about 26%, but a profit improvement still of 12%. U.S. is no longer loss-making and has shown improved, stable results all this year. In total, EBIT margin at 9%, slightly down from the 9.3% last quarter, and a strong improvement from last year's 6.9%, when material allocation limited output. As for the employees, in total, 3,069, the growth of 10% from last year, and actually a reduction of 6% from last quarter. Partially a reduction of temporary staff during the summer, but also a general alignment in China that has taken place. Next slide, please, Slide 6. Cash flow and Net Working Capital.
Operating cash flow ended at a positive EUR 5 million, compared to EUR 9 million last quarter, and EUR 14.6 million same quarter last year. Net working capital increased by some EUR 11 million in the quarter, mainly due to reduction in trade payables. Net working capital is at EUR 200 million, and a growth from last year with around 20%, following the year-to-date growth of around 20 as well, or 23. Next slide, please. Slide 10. Capital efficiency ratios are stabilized. Usually, Q3 affect any efficiency ratios, as revenue normally is slightly lower, although the balance sheet does not change fast enough, which is the effect we see also now in Q3. So the net working capital in percentage of sales is 26.7%, in line with last year's 25.8%, but up from 22.3% last quarter.
ROOC at 22.3, up from last year's 19.8, and at the strategic levels of 20-25. The strong ROOC continue to be driven by the strong profitability. CCC is at 103, and at the same level as last year. Net interest-bearing debt over EBITDA decreased slightly from last quarter's 1.8 to 1.7. The net debt ended at 141.6, a reduction of 10% from last year, and at the same levels as last quarter's outcome. On that note, we're currently funded at 6% interest rate. Interest cost in the quarter is around EUR 2 million, compared to EUR 1.4 million last year.
Revaluation loans affects the finance net negatively, EUR 1.4 million in the quarter, where it was a positive EUR 0.4 million last year. Tax rates year to date at 19%, a little higher than last quarter in this quarter, based on the regional income mix. So net income is affected by thus, by the higher interest cost and revaluation in the quarter. Equity as a percentage at 28.6%, an increase from 27 last quarter, giving a return on equity of 23.8%. And earnings per share, finally, then 0.045 EUR, and an increase of 29% compared to last year. And next slide, please. Slide 11, please, and over to you again, Peter.
Thank you, Cathrin. So let's move on to the outlook for the full year, 2023. Well, when we look at our, at our bookings, and we look at what we're running at our sites, we see that demand continues to support the current revenue and profit outlook. So our outlook is: we expect revenues between EUR 750 million and EUR 800 million, with an operating profit or EBIT between 65 and 75 million. Next slide, please. The key takeaways. So really, there are four bullets to think about from this quarter. We expect the growth to continue in the Nordics, U.S., and CEE, fueled by defense, critical infrastructure and electrification, regional initiatives, and the launch of new programs. A slowdown in the growth rates of certain customers in industry and connectivity due to destocking and some macro challenges. Regionalization is accelerating.
On a global level, China-for-China strategies are becoming clear, as well as the Nordics versus CEE benefits. This means that there are a lot of moving parts and many opportunities to capture new business, and Kitron is well positioned to succeed in this environment. Now, let's move on to the Q&A. So next slide, please. Again, I'd like to remind you that we'll shortly start the Q&A, so please post any questions you may have in the Q&A section of the webcast. Thank you. While we wait for some questions here to come in, Cathrin, what's the discussion point for this meeting?
We have introduced yet another metric now, Peter, the R6. Previously, we only talked about R12 and order backlog, so why don't you elaborate a little bit why we introduced R6 again?
I mean, we've been talking some about destocking and some defensive measures from customers, and as they shortened their lead time horizon and their own outlook on what the market is doing, I think there's a lot of uncertainty. So, you know, customers are de-risking this by waiting as long as possible before placing an order, and even placing a forecast, since there's a lot of liability to on the customer on the forecast. So they can drop in orders on a very short lead time because they know that maybe there is some extra inventory with Kitron, and they can just place an order in three weeks or so.
So as we see that dynamic, and this is far from the entire customer mass we have, but there are some customers that are more sensitive to the marketplace they are in. As we see that, it's important for us to understand what's happening in the next three months and what's happening in the three months after that. And usually, right, usually, when we budget to look at what does the demand look like on a longer-term basis, we're pretty happy when we have, you know. For the current quarter, we're booked to 105%-110%, then we feel pretty secure for current quarter.
For the quarter after that, we'd like to see bookings around 100, 105%, and then 90%, and then 70, 80, 80%, 70%, and then 60%. So, with that horizon and that sort of level of booking, when the horizon drops, it becomes the R12, becomes irrelevant, right? If you're looking at R12 and thinking that's what Kitron's gonna be doing, for one year or for the next rolling twelve months, then you're wrong, right? Because of that change of behavior. But the R6 still is, you know, it's a good indication of what's going to be, what the sales is gonna be for the next 5 to 6 months, something like that.
You know, not everything is even in that, and then there, in addition, there are service sales that we have also. That's, there's no forecast from customers on that. That's all project based. So that's why we introduced this to you, share with our investors, about the security that we're feeling when we look at least the near term, the coming 6 months.
Yes. I mean-
Okay, hey, let's move on to some questions, and the first one is from Marcus Ramström, and this is addressed to you, Cathrin. "How is Kitron's loan structure? Are the financial costs going to rise even more from here, or is the Q3 a reasonable level going forward if interest rates do not rise anymore?
I would say so. We believe that the net interest-bearing debt will change rapidly. I think it will stay basically the same. As we're paying, as I said, about 6% now, any changes to that will have to be an interest rate change from the central bank, as that is determining the level of the interest cost that we have. That said, in this quarter, we have a revaluation of a loan between Polish zloty and the euro locally that affects the quarterly finance net, which is a reversal of partly a positive charge another quarter. Totally, this charge is not so big, but it looks very large in the quarter.
This is unrealized changes to our income statement, and it might reverse in the next quarter again.
Is the debt level rising or decreasing?
No, it's been, you know, the debt level as such has been pretty stable the last three quarters, I would say. The metric that we have, net interest-bearing debt over EBITDA, is slightly improving. It improved from 0.1 to 1.0 point about this quarter, due to the improved profitability compared to last year.
Mm.
So I think, it's pretty stable in that sense. It's this euro that's creating the havoc as such.
Okay. And Marcus also has a follow-on question: "How do you view Kitron's current margins since they are higher than your targets?" Well, number one, I like it, right? And the follow-on question there: "Are they sustainable?" I mean, yes, they are sustainable if we're in this sort of current level of utilization of our factories. And even surprisingly enough, right, we had a contraction in our China business, in our two sites in China, right? And Cathrin, what happened to profitability compared to last year?
It increased.
I think, substantially, right? So, I mean, it's like, you know, what's going on? How are they being so efficient? Continued efficiency improvements, continued investments in modern equipment and modern processes, will continue to build efficiency even if, God forbid, volumes don't increase-
Mm
... and remain the same. We expect to see continued efficiency improvements, and we want to stay above 9%. Let's move on to Ingemar Josefsson . "Considering these recently announced, in the last few days, economic stimulus packages, the need to rebuild enormous infrastructure destroyed in last year's floods, would this be considered as something Kitron could benefit from, perhaps sooner than expected prior to these announcements?" Well, that all depends on... We do not have a lot of production for local Chinese companies. We work with big Western companies, Sweden, Norway, Denmark, Finland, Germany, the United States, that have operations in the U.S., and we serve those that have operations in China, and we serve those China operations with local manufacturing since we're a known entity to these customers.
So if they win new business, right, if they're gonna rebuild electric grids, for example, that would put even more demand through our onto our customers and even more demand into our production of those types of products. So, but so far, you know, it's too soon to say if any of that is happening. We're not seeing it, and, I mean, this announcement was just done here pretty recently, and probably gonna take, you know, in the next 3-6 months, seeing if something happens on that. "How is the customer mix?" from Sander Brunstad. "How is the customer mix? How much of the revenue does the largest customer stand for?" Well, I mean, here it's pretty much unchanged. The top 3 or 4 compete about of being number one.
They're between 5% and 7% of our revenue, the top three or four or five customers. Some of them, one of those has a little bit more of a destocking going on, but the others are continuing to show growth. Then Sander also has a follow-on question: "Are any of our loans on fixed rates?
No, they are not. They're all surcharge-based.
Per Holmdahl continues with a question: "Do you think your long-term goal of 10% annual growth is at risk due to shorter lead times and changing market environment?" I think our goal remains the same, 10%. Even though we've grown faster in the past 18 months or so, our goal of 10% growth remains the same. We're not gonna discuss our outlook or plans and targets for the coming years in this meeting, but we hope to see you at the Capital Markets Day in the beginning of December, where we'll take a look at what's going to happen next year. But I'd be surprised if we don't have growth next year. So we'll come back to that.
I think 10%, you know, 5% growth driven by the successful customers you have, even in a tough environment, and another 5% by adding new business and new programs and new customers, is sort of a likely scenario. But we'll come back to that. I'm not gonna go into it any further than that. Christoffer Bjørnsen , "Hi. Hello. Looking at your R12 and R6 backlog, we can calculate the six-month backlog for Q2 and Q3 2024 for 745 minus 426 is 319. That would apply. That would imply a decrease of 17% versus reported revenues of Q2 and Q3." Yes, if we say that nothing more is gonna come in.
Mm.
But I just, I just also explained here that usually for the, for this, for the coming, three months, we have over 100% of our demand secured and, and forecast for orders. So a little bit less maybe than in the following quarter, but say 100% there, too, and then it drops to 90%, and then it drops off to 70% and 60% in subsequent quarters. And if you look even further, it's gonna drop down to maybe 20%. So, so... And 20% would be the demand for Q1 2025, right? If you look at right now what's booked. So we don't expect a sharp decline in revenues from Q2 onwards. That's why we're showing the R, R6, right?
We're gonna show the R6 in the next meeting and the meeting beyond that, and we're gonna hope that they're above EUR 400 million and climbing, confirming the trend and the indications we have now of growth. I hope that's clear.
Mm-hmm.
Then, from A. Wieringa , Wieringa, Wieringa: "Could you give some guidance on your hedging policy in relation to interest in foreign currency?
When it comes to foreign currency in general, we have a natural hedge when it comes to the income statement or the balance sheet, trade receivables, trade payables, et cetera. That means that we make sure that the balance sheet is balanced in all the currencies, so that there is no revaluation. And that's what you see under... The result of that is what you see under other gains and losses. So the revaluation that you see the effect of now is a loan between euro and Polish zloty that has a revaluation which is not secured and will probably be reevaluated again. So in general, for those loan, we don't have a security. No.
Yeah, and that's so far what we-
Mm
... we've received in questions. I think we'll just hang on for another 15 seconds or so to see if anything further drops in. Usually, after every time we sign off-
Yeah
... the previous meetings, there's been three or four questions that boom, come in there at the end, but,
Mm
By then, we've all, we're already gone. So... Okay, I think that wraps it up for us, and hopefully we'll meet the investment community in some of our meetings going on here throughout the quarter, and definitely on the Capital Markets Day in December. So we'll see you then and talk to you then. Thank you.
Thank you.