Earnings Call: Q1 2021

Apr 30, 2021

Ladies and gentlemen, good morning and welcome to the presentation of Kongsberg's First Quarter 2021 Results. The presentation today will be given by our President and Chief Executive Officer, Geir Heu as well as our Executive Vice President and Chief Financial Officer, Girit Skalberg Ingra. I will ask press and journalists that are to set up interviews with us after the presentation to contact our Corporate Communications Department. You will find their contact details on our webpage, www.kongsberg.com. And with that, I will leave the floor To our President and CEO, Geir Heu. Thank you, Jan Erik. Good morning, and welcome to everyone on the call. And thank you for joining us this morning for the presentation of our results for the Q1 of 2021. As I have been these last quarters, again, I'm very pleased with the consolidated figures. And even more pleased with the efforts and performance of my colleagues across the entire group. For those of you who have had the time to read the press release, You see that Kansberg is off for a very good start of 2021, and I will say, especially due to the current circumstances. Here in Norway, the spring is upon us. And globally, the vaccination program are being rolled out. And society is gradually reopening as infection rates are slightly on the downturn, at least in some regions. So I think there is reason for cautious optimism. Todd, we are prepared for the pandemic to continue to affect us also in the remainder of 2021. Our partners, customers and our own organization continue to exhibit impressive Adaptability to the situation. And impressive, in fact, is a word I have used a lot in the past year. As my Kansberg colleagues have stepped up again and again to tackle the various challenges. So with that, let's look at the figures. Following a year with so many variables, I must say that it's a good experience to be standing here today presenting you with the kangsburg numbers as we have started 2021 well. We are continuing to we are continuing the positive trend from previous quarters. We have delivered strong performance across the group. Our continued focus on efficiency initiatives and cost discipline is paying off, and we have a favorable project mix in both defense and maritime. The order intake ended at SEK 7 point SEK6 billion, which is up 12% compared to Q1 last year. This is due to both the number of contracts signed as well as the size of some of them. I will come back to this on the next slide. When it comes to the book to bill, I'm also very satisfied that we managed to deliver a book to bill of 1.2 this quarter And particularly with the Kilometers, which again delivers a book to bill over 1 in a very challenging market. For the EBITDA, we delivered solid results here, close to NOK 900,000,000 which is with a margin of 13.9%. Gerrit will come back to details later. Another good thing is that we continue to realize the cross sales from our expanded combined KMCM portfolio, which was one of the rationale for acquiring the Rolls Royce commercial marine. And this quarter, we have Cross sale contribution of approximately SEK 200,000,000 in revenue. Also this quarter, Norway and Germany enter into the strategic maritime cooperation on material aimed at the acquisition of identical submarine and the naval strike missiles. We expect that this agreement will generate major order intake for Kongsberg in the years to come, both related to the submarine, but also as well as the NSM missiles. The first submarine is about to be delivered in 2029. As you can see, Kongsberg continued to sign contract, and we have also this quarter signed several in all business areas. Klaasberg's maritime, we have secured several contracts where sustainable technology are very central to many of these deliveries. We have signed a comprehensive retrofit package for the training vessel, MS Gal. It's a low emission solution helping to both reduce the emission vessels emission and also enhance the education offered on board. We are also to design and deliver an innovative low emissions service vessel. It's a live fish carrier to the shipping company of company Seltrans. This is in fact the 8 vessel to Seltrans, which is delivered or ordered with KMCM scope. We have also signed a long term service agreement with Zeltrans for maintenance of their entire fleet. And then we have also got a supply to the for ecosystem monitoring and management. 2 of them are unmanned surface vehicle And the other 2 is unmanned underwater vehicles. And then we also have signed a substantial integration technology package for a wind turbine installation vessel. The value is approximately $40,000,000 And this is with the U. S. Energy company, Domenino Energy. This is a very important market for Kongsberg, We are extremely well positioned for a significant part of the deliveries. Our extensive portfolio is actually perfect fit with the scope for such a high end vessel. Looking at Kongsberg Defense and Aerospace. We have won the contract for both we have won contract both strategically important and also considerably size. We have signed the Lot 15 to 17, which is the production for components to the 35 Joint Strike Fighter Program. This is then for more than 500 aircrafts. Today, we are already on full rate production and have so far successfully delivered and finalized more than 800 fighter An upgrade contract for the Norwegian Nascent, the air defense systems in Norway. This is has a value of NOK266 if you take a closer look at our business in maritime, we have in this quarter been quite busy. We have done several development projects. We have launched new product And also done several green upgrades. And I'd like to mention a few of them here. The HUGEN Endurance, which is the next generation of our advanced HUGEN AOV, boosting operational duration and enabling a substantial extended survey and inspection mission far from shore. And then another exciting project, the Rekko tug. This is the world's first fully operational and fully Remotely controlled tugboat, and this is to be developed together with Switzer and American Bureau of Shipping. Some more green upgrades. We have entered into collaboration for low emission solution to offshore drilling operations with Kusal and National Oilwell Varco. This has resulted in an integrated solution where we combine Kilometers Energy Management System with NOE's research into energy optimization. And if we look at the figures here, they are quite impressive. We here we will achieve an overall fuel and emission reduction On top of this, Kilometers synergy and efficiency improvement continue to supporting improved margins. We have now the full year effect of the integration of CN. And obviously, we also still have some COVID-nineteen effect. If we look at the Kansberg Defense and Aerospace, Together with the contract I have already mentioned, we have also been awarded what we call call off on our framework agreement with the U. S. Navy, which is the over horizon program. Also, Kamsberg Aviation Maintenance Service Has secured a very strategically important contract. This is to maintain and make ready for sale 2 F-sixteen aircraft. These have been then be taken out of the service in the Norwegian Air Forces. The contract Signed with the Norwegian Defense Material Agency. And this award position comes For future opportunities, as a considerable percentage of the entire F-sixteen fleet may The potential to relevant for repair and making ready for sale. So It's exciting. This might generate considerable activity. In addition, there are also business opportunities related to maintenance of these and other F-sixteen aircrafts with both existing users as well as new potential owners. KDDI are continuing expanding and ramp up our capacity as planned to deliver our substantial to deliver on our substantial order backlog. And as you have seen, this is continuing to grow. Our nascent production is progressing at a very high rate. We are expanding our production sites such as the new building at our production facilities in kansper city. And we just also decided to another new customer customized facility Our space efforts is commencing successfully. In fact, we have now Kongsberg Technology on March As NASA latest March rover per service landed smoothly and safely on the surface of the planet in February. For Kongsberg, it's great to contribute to such historical technology adventures in space. It really demonstrates our reach from the deepest ocean with HUGEN Endurance and now with our technology at work on March. With our expertise, we have also contributed to expand the lifetime of a satellite 36 1,000 kilometers above the equator. If you look at the Kongsberg Digital, I've already talked about the digital progress. So I'll just add that we are continuing to ramp our up also in this business area. We, in fact, hired about 100 new colleagues in 2020, and we will continue to expand our capacity also in 2021 as we are working diligently to deliver on our backlog. In March, we secured a contract To install vessel Insight to the entire fleet of Dorian LPG, and the agreement is expected to commence operation in the upcoming months. We are also continuing to roll out our dynamic digital twin, Cognitwin, under the Shell agreement. And the agreement is and we are also increasing the number of users in parallel. I'm also satisfied to see that there is interest from other customer where we have additional And by that, I leave the floor for Giri to take us through some more details on the figures. Thank you, Geir, and good morning to all of you again. Once again, Kongsberg is moving in the right direction. Fine. New records and healthy development beating Q1 last year with even with COVID Restrictions. Strong financial performance in Q1 with EBITDA growth from a combination of higher gross margin And lower OpEx spend in all business areas brings the EBITDA up from Q1 last year. Maritime with lower year to date The revenue year on year, while defense continues to grow according to plan. Return on capital employed of 24.1%, up From 10.2 last year, driven by the combination of increased EBIT and reduction in capital employed. Number of employees increased with 81 FTEs this quarter. The increase is shared between defense and digital to be able to deliver on growth. Kongsberg had an order intake of NOK 7,600,000,000 for the 3 1st months of 2021. As Geir mentioned, defense with 1 large contract on F-thirty 5, while maritime finally Saw some large contracts again and a positive tendency in global customer support at the end of this quarter. Despite COVID, 53% of the new orders came from our maritime business area. Our order backlog continues to grow and has now increased To NOK 37,000,000,000. I will comment on the split later. On digital, we have focused on the recurring revenue, which is not part of the order backlog, as you can see. Decline in revenue of 4.7% From the company, driven by a decrease in maritime on 16%, while defense grew by 21%. Digital grow on recurring revenue, while the division Maritime Simulation has been heavily affected by COVID over the last year And are still waiting for the academies to open again. Although our order backlog today, almost 50% will be delivered already this year. Even with the decline that we see in maritime this quarter, we will still believe that we will deliver growth for the group also in 20 '21. We delivered an EBITDA of NOK883,000,000 with a margin of 13.9% this quarter, Up from NOK643 1,000,000 last year and up from NOK381 1,000,000 the year before. Improved profitability in maritime and defense, together with the COVID OpEx savings, brings EBITDA ahead of last year. The significant uplift from 2019 is due to cost synergies and cross sales after the acquisition of Commercial Marine in combination with the scale in defense. In terms of EBIT, which I normally comment on, I want to bring to your attention that Kongsberg will have a very steady depreciation and amortization going forward By approximately NOK 300,000,000 per quarter given today's business setup. Cash flow. We entered last year we ended last year with a cash at bank at SEK 7,200,000,000. During the COVID, the focus on develop has been on development in the working capital. It has The investments this quarter has been low with NOK 140,000,000 Main projects are Digital Twin, Engine Depot in Defense and IT. For time being, we have been running 2 different share programs, share purchase under the buyback program of NOK 80,000,000 And the employee share buyback program of NOK 59,000,000. In our cash position as March as the end of March 2021, You should also be aware that we have almost NOK 2,000,000,000 in prepaid from our customers. After approval for the general assembly next week, We will pay out NOK 8 per share in dividend. Together with the share buyback program, a total of NOK 1,800,000,000 We'll then be returned to our shareholders. Through the last 12 months, we then have been returning Approximately SEK4 1,000,000,000 to all our shareholders. And then A new credit rating has been performed. We have a solid liquidity and are comfortable with the remaining debt maturities in June December. Whether we will manage those from existing cash or refinance is something we will decide closer to the maturity. The credit rating agency, Nordic Credit Rating, assigned an A- long term issuer credit rating on Kongsberg Urpenassa With a stable outlook on the 7th April this month, the standalone credit assessment was set to BBB plus And there is a one notch uplift from the state ownership. The management's credit rating evaluation process Started already early last year in 2020, and the investment case was concluded during fall last year. Following the issuance of the public rating, Kongsberg has received material interest from debt investors. It is Too early to conclude on any pricing effects, but it seems for us that longer dated Funding, 7 to 10 years now will be more easily available for the company. The whole credit rating analysis, you can find on kongsberg.com. And on to maritime. Kongsberg Maritime received NOK4.1 billion in new orders this quarter and are Increasing the order backlog for the first time since COVID. Cancellations of NOK 24,000,000 1% are for deliveries in 2021. That is NOK7 1,000,000,000. In the Q1, maritime delivered a revenue of NOK3 €800,000,000 That secure a revenue of €10,800,000,000 before aftermarket. Aftermarket is normally at least SEK7 billion for a full year where the majority is not in the order backlog. We see some small optimistic Trends also in the aftermarket right now. It will be hard, but we believe in a flattish top line in maritime for 2021, Even if it don't seems like that after or not that optimistic after Q1. If I should bring point out one challenge here, it will be further COVID challenges, triggering delays or added cost. But if I should also bring your attention to an upside, it must be some increase of order intake from new buildings or increased activity on the existing fleet. Both could lead to increased orders and revenue towards the end of this year. Maritime came in with a strong quarter after a somewhat slow start in 2021. March ended on a positive note, especially for global customer support. Both sensor and robotics and integrated solution Contributed with positive development this quarter. Strong cost discipline, combined with focus Our new internal cost program and sourcing initiatives offset the reduction in revenue of 16% this quarter. The divisions are still waiting for the large contract that has been delayed over the last year. Maritime delivers So NOK 430,000,000 in EBITDA this quarter, with a margin of 11.2%. That is the highest margin that the combined Kongsberg Maritime and Commercial Marine together has delivered. Maritime do not have any integration cost anymore, but benefit from full year effect From the integration program. I also want to comment on Deka Machinery this quarter. That now delivers margin in line with the rest of the business end to end for the first time. That has been one of the main turnaround areas From the acquisition, AM has been diluting the margins in maritime for the last 2 years. With higher order intake, the contribution from this area Suddenly looks more promising. Kongsberg Defense and Aerospace. Defense with an order intake first quarter of NOK 3,300,000,000 increasing the order backlog to NOK 20 €4,500,000,000 Gaira has already mentioned the main contributors here. 29% of the order backlog will be delivered this year, So almost NOK7 1,000,000,000 on top of the NOK2.4 billion in revenue for the 1st 3 months. That gives a run rate Today for almost NOK 10,000,000,000 at the moment compared to NOK 8,500,000,000 last year. If we avoid prices in our supply chain, the growth for defense this year is quite firm. Since last quarter, we have also built more solidity, both for the order backlog in 2022 and onwards. KDA's revenue or defense revenue in the first Quarter are NOK408,000,000 higher year on year, 21% growth, largely driven by the significant increase in kroze and While we had some delays in Krausz delivery, supplier issue that have affected deliveries under Krausz was resolved in March And deliveries is now back on track. Despite supplier issues, Krogs is the largest project in Q1 and accounts for NOK 401,000,000 or 17% of the revenue. Top 15 projects in defense accounts for 68% of the revenue year to date. That show the robustness That we now see in the project portfolio of the running projects that we have today. Defense EBITDA increased From NOK231,000,000 last year to NOK469,000,000 this quarter, An increase of more than 100 percent. And EBITDA margin of 20% is up 8.1% from Q1 last year. A positive effect from air defense with cost reassessment of NOK 40,000,000, Effects of scale for the whole portfolio, limited travel cost and COVID-nineteen effect keep the OpEx at the lower level today. With 20% EBITDA margin in Q1 and 19.5% EBITDA margin for 2020, I can agree that the long term guiding on 16% in 2022 is low. But to deliver 14% for the whole group, We also need to keep up the increasing trend in maritime. Kongsberg Digital. Digital keep getting traction in the market and have order backlog of SEK 1,000,000,000. In terms of COVID, typical orders connected to maritime simulation are postponed. Energy with digital twin Are ramping up both in terms of employees and investments. In addition, we see high order intake both in ks Spice and in Lederflow. Digital delivered revenues this quarter of NOK 192,000,000 out of which recurring revenue is 40%, up from 35% last quarter. Our digital twin project connect more and more active users. The price model here is to invoice user and asset subscriptions in a SaaS model. Digital is current delivering quite well. And at the current state makes it natural to access both future partner models And other models in order to fully realize potential Kongsberg C in Kongsberg Digital today. Going forward, this could also include a stock exchange listing. So with that, I hand over to our outlook from our CEO again. Thank you, Gerd. So then to the outlook. Let me start with the group as a whole. As we've seen, our balance sheet is sound. We have a substantial order backlog at nearly NOK 37,000,000,000 Our position provides stability as well as confidence and Despite persistent resection, there is a proven ability to adapt throughout the entire group. We have managed to capitalize on identified opportunities in our markets, Both regards to larger contracts within defense but also within growing maritime segments such as the offshore wind segment and also within the digital transformation in sectors such as the energy. The transition to more sustainable solutions and energy sources will affect the investments level in our segments. This equals opportunities both in market where Kongsberg is already having a solid foothold, but also in new markets where our technology will make a difference. In maritime, the situation remain part challenging with a still low vessel contracting. However, there are some positive signals in certain areas. For example, container vessels, We have seen a strong contracting end of last year and which have also continued into Q1. Just to remind you that there is a time lag between the shipyard shipowner contracting with the shipyard And until Kongsberg, we'll receive an order from the shipyard. Kilometers is also a player in segments, which is not affected by the newbuild market, such as the sensor and robotics as well as also the aftermarket. And we are, as you know, supporting more than 30,000 vessels. In my view, I think we have never been better positioned for an upturn in the maritime market. In defense, I expect us to continue growing our business, driving the overall growth for the group. The business area is increasing capacity according to plan and to deliver on its significant backlog. And then, of course, also to continue to secure new orders. In digital, The last year has, in many ways, confirmed and reinforced the need for digital and remotely controlled solutions. Where Kongsberg through KDI has invested considerably in new digital solutions and services. I expect us to continue to strengthen and expand our positions in the market for dynamic digital twin as well as within the digitalization of the vessel market. And as Girid have already mentioned, It's also natural for us now to assess how to best proceed to fully unlock the KDI potential going forward. So in general, our current position And future potential combined with the experience and working methods obtained through 2020 as well as our continued focus on efficiency Improvements and cost discipline. I think this equipped Kamsberg well to reach the ambitious goals that we have set for ourselves. By that, thank you for the attention. And then I think we are ready for a Q and A session. Okay. We have received some questions from our viewers. The first Questions are from Hakon Amundsen, ABG. Revenues in Kongsberg Digital fell by 7% in versus Q1 2020. Do you expect fiscal year revenues in Kansper Digital to decline versus 2020, the full year revenues? It will depend on the COVID because 50% Of the revenues in Kongsberg Digital is from maritime simulation. And they have been hit quite heavily by the COVID. With all the academies being closed, it will depend on that. But we don't believe in decrease in the top line even with If we include the maritime simulation. Okay. And then a couple of questions on Kongsberg Defense and Aerospace from the same viewer. Kansberg Defense and Aerospace delivered yet another strong EBITDA margin in Q1. Was there anything particular causing this performance? No, as I addressed also, I think the margin are developing quite healthy. And when we from the Capital Markets Day last year, guided on Steen percent, that's we are beating that definitely, but it's a whole picture. And in terms of that, I addressed NOK 40,000,000 in extraordinary reassessment from their defense area. Otherwise, it's actually developing quite healthy. The project The developing healthy, the margins are developing healthy and they are very effective project execution there right now. And also a very beneficial portfolio with a lot of international contracts. And then last question from the same year. With regards to contracts, it's actually three questions. First, do you have any updates on the Qatar contract? Yes. What I can say is that the dialogue is now back on track, meaning after the COVID, let's say, lockdown. We have people on the ground down there, and it's picking up. Dialogue is picking up, and we look forward to continue the dialogue with the governments and end users in Qatar. 2nd, with regards to NSM to Germany, what can we expect here? Yes. We as I mentioned in my presentation, the agreement is signed between Norway and Germany. And We expect that we will conclude the submarine contracts sometime this Yeah. And then also, of course, Germany had then committed to buy NSM for their fragrance programs. So we expect quite a lot, to be honest, on the missile side, both for NSM but also for No, next generation missiles together with Germany and Norway. And then a question from Kenneth Sivertsen, Pareto. With regards to Kansper Maritime aftersales, could you indicate the level that is running at in Q1 and how you expect it to perform going forward? As we said, we see some positive signs at the end of the first Quarter, actually in March. It doesn't seem that optimistic in January, February. But out of the whole, it's Approximately the same portion of revenue to Global Customer Support. So we are Following monitoring it quite tightly. But again, we saw some more positive trends, but it has been hard year for those as well. If I may, I may add some comments. This is still Quite, let's say, we have to handle this aftermarket due to the restriction in a different way than we would normally do. But I would say that in my view, there is positive signals now in the aftermarket, both when it comes to upgrades. As I mentioned in My speech, we see more owners wanted to do green upgrades. And then of course, as As the restrictions are lifted, I'm quite positive for the development in the aftermarket, hopefully, going forward. Okay. A question from Sindre Serbe, Arctic Asset Management. Were there any items So one off nature in the EBITDA in Q1 apart from lower cost due to COVID? Only the NOK 40,000,000 that I mentioned from the defense area. And then we have the 2 questions around KDI from Hakon Amundsen ABG as well as Martin Brennon. I will read both questions. Is there a time line for the potential listing for a potential listing of KDI? And with respect To your comments around KDI, can you give some more color on a potential process towards listing? For example, will you look for industrial partners first? And what is your time line? I think as we have said, we are considering and assessing different alternatives. One of the alternatives is to find a partner to KDI. Another alternative is to list KDI. The timing here is not decided and will be considered as we go along. I think it's several factors to consider If we're going to do either or when it comes to this. And I think it's not a secret that it has been a massive interest For KDI, both from industrial partners, from financial partners and also to do a listing of the company. And in terms of timing, it's all about timing when it comes to listing. So we will have that option in the toolbox as well. Having that said, it's we are Kongsberg Group and it's Kongsberg DNA. We want to do things the proper way and we feel that over the last year, the Company has developed healthy and the KPIs are moving in the right direction. So it's now that we feel that we can have all those assets in the toolbox For us. Okay. The final question from the webcast from Karl Mathiesen. Do you expect How do you expect revenue synergies between Commercial Marine and Carlsberg Maritime to develop going forward? Is the NOK 200,000,000 per quarter that you had in Q1 in a way normalized level? No, I think this will actually increase. But I think I've mentioned the harmonization program between Centimeters and Kilometers, that is ongoing. It's a 3 year program. We are at plan or ahead of the plan. And I think as this harmonization program is completed, We will also see increased cross sales further increased cross sales. I'm very pleased with the level that we have today, to be honest, Because it's not that long time since we have been fully integrated. But I expect that to continue to grow and also to, let's say, get positions in Other segments than we have today. Thank you. That was the final question from the webcast. Okay. Then I once again thank you very much for joining us this morning, and have a pleasant