Earnings Call: Q2 2021

Jul 14, 2021

Ladies and gentlemen, good morning, and welcome to the presentation of Kongsberg's Second Quarter Results. The results will be presented by President and CEO, Geir Heuig as well as Executive Vice President and CFO, Girid Skalberg Ingra. You may submit questions through the webcast, and the answers will be given after the presentation. With that, I'll leave the floor to Geir Hoei. Thank you, Jan Erik, and good morning and welcome to everyone. Thank you for joining us this morning in mid July for the presentation of our second our results for the Q2 of 2021. This second quarter is yet another quarter where Kongsberg delivered strong performance. We continue our positive trend with increased revenue and EBITDA. We are now 16 months into the pandemic. Kongsberg has shown that we are able to maneuver well through restrictions, changing conditions and rough waters. And I'm very proud to say that we stayed the course and we delivered as promised. I'm also deeply impressed by the determination and collaboration and flexibility among our employees, customers and partners. All in all, I think there are reasons for some optimism looking forward. Countries are gradually opening up. The vaccines are proving efficient and the financial results are solid. And we have a strong position to build on. Before I go into the Q2 results, I would like to mention that we have had some major and important milestones in the beginning of July. This is with the submarine combat system and the naval strike missiles to Germany and also new offshore wind vessel wins. I will come back to that a little bit later. So let have some let us look at some highlights and the results for the quarter. As I mentioned, we have maintained our good development in Q2 2021. Our revenue has increased by 13% The EBITDA is all time high in the quarter with almost SEK 1,000,000,000 in profitability. This is an increase of more than 30%. And looking at the Fence, they are demonstrating very sound profitability. And they are also reporting high activity in all their major programs. When it comes to new orders, defense secured the significant expansion of the Krausz frame agreement in the quarter. But as always, defense order intake typically varies from quarter to quarter depending on when we are able to close and sign major contracts. In the maritime area, we experienced tough competition globally. But I'm very satisfied that we are able to continuously improve our margins and also to take out synergies from the acquisition of Commercial Marine. Furthermore, we take new important positions in the green maritime transformation and also are increasing our competitive edge. I'm also pleased to see that Kilometers continue to deliver on book to build above 1. I think we could say that we have a favorable project mix in both defense and maritime this quarter. Together with the mentioned efficiency measure and good performance In general, I think this explains much of the solid results. For our digital business area, our main focus is still to scale by expanding our customer portfolio and also further developing the digital ecosystem for vessel in sight and also the Karmnic VIN. So if we look a little bit closer at our business areas and some of the contracts signed this quarter. Starting with Kansperm Maritime. In maritime, there are much to note on the positive side, such as the improvements of both the efficiency and also the profitability, as I mentioned. And if we look at the market, we are seeing an increase in new contracting to date year to date with 840 ships contracted within our scope. And I think we must go back to 2014 to see the same level of newbuild activity within a 6 months period. And I think this is a promising sign. Many of these newbuilds are commodity ships, where each delivery normally means a somewhat smaller scope for KLM. However, this is a volume market, and it represents an important part of the revenue stream for KN. We see this increase activity as a signal of more promising market going forward, believing that this trend will follow be followed by more newbuilds within the more advanced high end vessel. We also expect the LNG market will gain more traction again towards the end of this year or beginning of next, very much depending on the announced large LNG program for Qatar. As you know, the aftersales market is highly important to us. The activity in the aftersales is also developing positively. We experienced that customers and partners are taking a growing interest in energy efficient and more sustainable solutions. We also expect this market to continue to rise as restrictions due to the COVID-nineteen are lifted and the global situation is more normalized. And for the maritime area, I would like to mention a couple of contracts. The conversion of the 3 vessels for Hurtigruten to hybrid operation. And here, the ambition is to cut the coastal CO2 emission off by at least 25%. Another important contract is The offshore wind contract, where we recently secured an agreement for 2 construction service operation vessels for the Norwegian based shipowner Avian. Here, Kilometers will do the design and equip the 2 production service operation vessels with a comprehensive technology solution. Also here is a clear focus on reducing the emission and enhanced sustainability with which fits us perfectly. This is a combined contract value at approximately NOK 250,000,000 We have a strong expectation to the offshore wind market as we believe it will continue to grow the next 10 years and onwards, and it will play a key role in the transition to a low emission society. And here, Kongsberg is determined to play a key role also in this market. We are involved in all life stages for an offshore wind farm during the pre survey, installation, operation, digitalization, maintenance and also during the decommissioning at life end. Our solution is based on our waste vast offshore expense for decades, And we have among the earlier and we have been among the earlier providers of required technology when the wind farms moves further offshore. So as you can see, we are already a part of this market, making a difference our broad domain knowledge in this area with capability throughout the entire value chain. Also last quarter, I emphasized our increased gross sales from our expanded combined KMCEM portfolio. Therefore, I'm also pleased to see this quarter that the trend is continuing as the gross sales contributed with more than €500,000,000 revenue. Looking at the CommScope Defense and Aerospace. Our defense business is solid. It's growing, delivering steady revenue growth across all division, especially within land systems and integrated defense systems. In general, we have had a very high activity in the period and especially related to the air defense contracts, where some of the contracts are at their peak, while others are just picking up kicking off. And also the pipeline is looking promising. I have already mentioned the extension of the Krausz Frame contracts with the U. S. Army. And this agreement is extremely important for us. I think it's demonstrating our world leading position as we are continuing to develop new and advanced versions of the remote weapon station systems. CROWS has become an essential capability for the military platforms and the soldier safety. And we have now delivered more than 20,000 systems to 26 nations since the turn of the century. Further, I'm also pleased to see that see the development in the Kansberg Aviation Maintenance Services this quarter, which, of course, is important to realize our MRO ambition. The advanced F-thirty five engine maintenance is now up and running in at Rigi, and we are already performing engine maintenance for the F-thirty 5. We see an increased potential in this market going forward and are well positioned to capitalize on this. Also last quarter, I mentioned the F-sixteen fighters. We have now conducted maintenance, repair and overall for the F-sixteen for 40 years. So the last phase inspection of the F-sixteen was actually performed last month. However, while the Norwegian Air Force is facing out F-sixteen, there is still a considerable market potential for Kamsberg related to the F-sixteen. Kams is the only licensed operator for maintenance of the F-sixteen outside the United States. And Kongsberg can play a significant role in the preparation for sale of F-sixteen to new users, but This position also opens up for future MRO services globally. Then to Kansper Digital. For our digital business, we continue to invest in strengthening our position as a leading industrial digitalization player in the energy and maritime sector. Shell is now also using Kraspor Digital Digital Twin Solution, Cognitwin, to create a virtual replica of their Omen Lange deepwater gas field, which deliver gas to the Nihana facility, where the Cognitin already has been in operation since the end of 2019. And the combined solution is resulting in the 1st ever fully integrated reservoir solution to utilize a dynamic digital twin, combining upstream, midstream and downstream. We have now delivered 5 dynamic digital twin to Shell and we will continue to roll out the new digital twins in the quarters to come. In parallel, we are pleased to see that the customer is including more users into the system as we go on. Also, we continue to secure new customer for the vessel inside in the quarter. We have signed contract with several new customer, and we have also signed multiple new partnership an application to the Cognify marketplace. And here I would like to mention one in particular and that is the strategic agreement with digitalization partnership with BV LNG and Alfa Audi. This is a very exciting partnership for Kansberg considering BV's competence and overall substantial fleet. As I mentioned in the start of my presentation, we have signed several significant contracts just after Q2 closed. So even though this is a presentation for the Q2, I cannot refrain from addressing them as we are really excited about these achievements. Starting with KDA, I would like to share some highlights from the new Norwegian and German Submarine and Naval Strike Missile Program. Konsberg will deliver combat systems and naval strike missiles to the German and Norwegian Navy with a combined value of NOK 8,200,000,000. This is an important program and will create value, activity and innovation way into the 2030s. Combined, these are record high contracts for Kongsberg, representing important and strategic milestones, which will strengthen our foothold in Europe in general and in particular with Germany as an important and near partner as the nation has been over several decades. Furthermore, this puts us in an exclusive position for future deliveries of our combat to Thyssenkrupp Marine Systems globally. I've talked about the growing offshore wind market earlier in my presentation, and we are very pleased to have secured another substantial delivery to COSCO Shipping Offshore for the Denmark based service provider, Cadleyr. Our contract is for the industry leading wind turbine installation vessel technology. And here we are supplying comprehensive technology package for these 2 new wind turbine installation vessels at a value of 49 €1,000,000 And our integrated solution will be crucial to the delivery and the operation of the new vessels and puts us in a leading position when it comes to advanced offshore vessel scrubbering. And then to KDI, another important agreement is ExxonMobil's choice of exploring the use of Cognitin for their new asset in their Guyana portfolio. Here we will be building on our existing experience from working with ExxonMobil, where we previously had delivered, among others, real time dynamic simulation models. By that, I think it's time for Gilead to take us through the financial results for the Q2. Geddit? Thank you, Gerd, and Thank you for listening into our Q2 cast. Highlights this quarter, record high EBITDA, EUR 1,000,000,000 Continued strong growth in and margins in defense, revenue growth of 9% in maritime and new customers as well as commissioning of new assets in Kongs by Digital. So what is then our current focus? Larger position on the fast growing offshore wind market, increasing recurring revenue in digital and monitor the efficiency agenda in defense to be able to secure the delivering of the order backlog. Return on capital employed this quarter or this half year of 26 0.8% for the first half year, up from 13.6% last year, mainly driven by increased operational performance. Number of employees have increased with 247 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Feet Feet Feet Feet Feet Feet Feet First Half of twenty twenty one. The increase is shared between defense and digital and it's really about scaling up to be able to deliver on current order backlog and growth in recurring revenue in digital. So let's look at the numbers. Order intake. Kongsberg had an order intake of €5,500,000,000 this quarter. Order intake below last year as growth in maritime is offset by somewhat more limited order intake in our other business areas. As we already have seen, We have announced SEK 9,000,000,000 in new orders already so far in July. So a book to bill way above SEK 1,000,000,000 for the group in Q3 is already secured. 76% of all new orders this quarter came from maritime, with global customer support as the main driver. For the 1st 6 months of 2021, Kongsberg has a book to build of 1. Our order backlog is now €36,000,000,000 and I will comment on the split later. In addition, we have the aftermarket business in maritime, where the majority of the orders are passing straight through the order backlog and the same applies for the recurring revenue in KDI. Looking at the revenue, 13% growth in revenue, driven by increase in maritime of 9%, while defense had an increase of 22%. Defense continues to grow in line with last quarter. And after some declining quarters, it's a pleasure to announce growth in Kongsberg Maritime again. The optimism and willingness to invest is slowly coming back in the maritime industry. We saw growth both in propulsion and engine and decker machinery in addition to global customer support this quarter. Digital increased its recurring revenue, while the division Maritime Simulation that has been heavily affected by COVID is down 16% since Q2 last year, resulting in aggregated KDI revenues more or less on pair with Q2 last year. Out of our order backlog today, almost 31% will be delivered in second half of this year. I said last quarter that we believe that we will be delivering growth for the group also in 2021. Looking at the steady growth in defense for the first half year, Combined with the positive signs in maritime, we now confirm that statement. Delivering €993,000,000,000 in EBITDA this quarter or almost €1,000,000,000 with a margin of 14.7%, up euros 254,000,000 from last year and up euros 110,000,000 from Q1. There is improved profitability, both in maritime and defense, that is the main drivers. Maritime with contribution from revenue growth, improved project margins and lower OpEx. Defense contributed with solid margins and an OpEx to sales reduction of 2.4% as a result of scaling effects. Full year effects of cost programs and COVID-nineteen savings contribute also this quarter. Cash flow. We started this quarter with a cash deposit of €7,780,000,000 The positive cash flow from operation continues. We have increased working capital this quarter. This is mainly due to the progression of in some of the large defense contracts, we have been typically received large milestone payments and no such payments were received during the Q2. In terms of the working capital, we monitor very closely the component storage. There are challenges in connection with logistics around component these days. For time being, we have not seen any material change in our working capital in terms of components, but we are monitoring this quite closely. We have received €84,000,000 in dividend from Patria this and EUR 63,000,000 in dividend from K SAAT. In 2nd quarter, Patria has contributed to our net result with EUR 34,000,000, while Ksat has contributed with €30,000,000 Main contributors in Patria this quarter has been Nammo as for the last two quarters and also Mailog. The investment this quarter has been around €200,000,000 and main projects are very similar to the last quarter. It's a digital twin, it's the engine depot in defense and IT. First half of twenty twenty one, we have been running 2 different share programs, share purchased under the buyback program and the employee share program. These two programs are now closed. And in the second quarter, a total of €120,000,000 has been accounted for. In our cash position, As of June 2021, you should be aware that we have around SEK1.6 billion in prepayments from our customers. We have solid liquidity and ended up by paying down the debt maturity in June. Whether we will manage the December maturity from existing cash or refinancing is something we will decide closer to maturity. In May, Kongsberg paid out NOK 8 per share in dividend, a total of SEK 1,400,000,000. Let's look at Kongsberg Maritime. Kongsberg Maritime received €4,200,000,000 in new orders this quarter and continues positive trend we have seen over the past months. The order backlog is now SEK11.7 billion. We have also put up a 12 months rolling order intake trend for you, showing this trend. We have seen positive trends in many maritime segments during the spring. Typically, there is a lag between a vessel being contracted at a yard and maritime receiving its order, meaning that most of what we have seen with regards to newbuild ordering is still not reflected in our order intake. Out of the order backlog of €11,700,000,000, €5,700,000,000 are for the deliveries already in 2021. €6,000,000,000 before aftermarket. Aftermarket is normally at least €7,000,000,000 for a full year where The majority is not in the order backlog and we see optimistic trends. I will provide you with an order intake on the aftermarket here on the next slide. When COVID hit us last year, the aftermarket in maritime was one of the areas that worried us most due to the importance with regards to volume and profitability to maritime as a whole. From Q1 Last year, 2020, there was a high quarter with regards to activity. 2, Q3, the same year, activity in the aftermarket fell with approximately 20%. Internally, we have gradually adjusted to a new normal, implemented routines and systems reducing the need for traveling to customer to solve issues. Externally, operation have gradually increased, service and spare sales are picking up and the willingness to invest in upgrades are stronger. This has led to a some development of our aftermarket business and compared to the low in Q3 last year, activity is now up 16% this Q2. The aftermarket is affected by short term cycles and may fluctuate, but the underlying development we have seen over the past quarters give room for optimism going forward. Nearly 50% of all the new orders in maritime this quarter came from the aftermarket. I also want to share new sales in different segments. So or to address some headlines for you. The main driver, as you can see here, is the seaborne where we have the container market. You can also see the Offshore Wind segment is starting to get traction and becoming visible as a larger part of our order intake. And as Geir mentioned, also in 3Q, we have received a large contract on offshore wind. So this is an area where we expect we will grow and be and we think it will be important for Kongsberg. As you can read from the chart here, we are also very not very exposed to the traditional offshore anymore. We strongly believe that LNG will start moving again, especially when Qatar Gas starts moving. We said last quarter that we saw some positive signs So we could hope for a flat top line even with a decline of 16% in the Q1. This quarter, maritime has increased its with 9%. And growth in 3 out of 5 division, as I briefly mentioned. Looking at 12 months rolling revenue, we clearly see the positive trend. And even with decline of 5% in the first half year of twenty twenty one, we still believe in a flat top line for 2021. Maritime delivers €452,000,000 in EBITDA this quarter, with a margin of 11.1%. Contribution from revenue growth, improved gross margin and lower OpEx lifted the EBITDA with EUR 185,000,000 from the last year or an increase of 70%. So let's look at the defense area. Defense had an order intake in Q2 of SEK 1,100,000,000 and ended the quarter with an order backlog of SEK 23,200,000,000 Gerd has already mentioned the strong order intake we have seen over the 1st couple of weeks in Q3, supporting an uptick in order intake when we meet again to present the Q3. Euros 5,000,000,000 in order backlog will be delivered already in 2021, on top of the SEK4.5 billion in revenue for the first half year. This means that we are aiming for around SEK10 1,000,000,000 in revenue for 2021 at the moment compared to a revenue of 8.5% last year. The revenue growth first half year have been of 22 percent or €855,000,000 This year, we also built a more Solidity for 2022 and onwards. KDI or Defense revenues this quarter are €2,500,000,000 an increase of 22%, largely driven by significant increase both related to deliveries to the U. S. Growth program as well as NASAM Qatar. The NASAM Qatar project is developing quite well. The top 15 projects in defense accounts for 69% of the revenue this quarter. And the top 15 projects accounts for 86 percent of the total order backlog. EBITDA in defense increased from €437,000,000 last year to SEK513 1,000,000 this year, with an EBITDA margin of 20.9%. Revenue growth, Higher gross margin and nominal OpEx in line with last year contributes to growth in EBITDA, With 20% EBITDA margin in Q1, 20.9% in Q2, revenue growth of 22% and flat OpEx development, we believe that the EBITDA margins for defense for 2021 as a whole will remain at the same level as for the first half year. So, Kongsberg Digital. Digital delivered revenues this quarter of €204,000,000 out of which recurring revenue is €83,000,000 up from €67,000,000 last year or an increase of 24% since Q2 last year. As Gerd mentioned, we have now 5 digital twins up and running for Shell and have several new customers in the pilot As mentioned in the Q1, the price model here is to invoice active user on each twin and asset subscriptions in a SaaS business model. 40% of the revenue in digital is connected to maritime simulation that has been hit hard by the pandemic. Revenue in this area was down by 16% compared to last year, meaning that the positive development from the new initiative currently are offset by negative development in this legacy business. Digital are currently putting a lot of effort into scaling our business, both in terms of employees and in terms of investments. We need more employees to be able to both deliver and develop digital furthers. Continued effort are also put into sales campaigns. And even though we don't really see financial effects on an aggregated level, Yet the operational KPIs are now really moving in the right direction. So with that, let's have a look at the outlook for Kongsberg. Thank you, Gideon. Yes. I think what and delivers solid financial results. For the group, We have a healthy balance sheet and we have a strong order backlog. We have a deep domain knowledge and leading positions in both established and also future oriented markets. And we are also well positioned to capitalize on this going forward. Our defense activities will continue to grow. That is given when we are looking at strong order backlog. And as Kirid already mentioned, we expect KDA to continue to deliver EBITDA margin at similar level as H1 for the entire year. And I think we also continue to be quite optimistic about the defense the pipeline looking forward. Further, we are experienced a shift in several maritime markets, indicating that both newbuild and also the aftermarket activities are increasing. And Kongsberg has never been in a better position for an upturn in the market. And in addition to that, we are prepared to capture also new opportunities related to sustainable solutions and also the digitalization area. Furthermore, we are optimistic about development on the digitalization of shipping and asset heavy industries. Bergongsberg has become a key player, driving the development of dynamic digital twins and cloud based vessel solutions. So to conclude, the overall picture makes me confident that Kongsberg will continue to make a difference to our customers and partners and we'll also continue to deliver strong performance also going forward. Thank you for listening in. Now, Gerrit, you will join me for the Q and A session. Yes. First question from the webcast. Can you say something about And a potential listing of the business area? I think we said that last quarter that We are preparing for a potential listing of KDI as an alternative, and we are moving in that direction. Yes, we're working only. So we will see. Yes, next question. Leverage seems to open on the general assembly now for more buybacks. And then we have a very clear dividend policy that we will have a floor and then an increased ordinary dividend. And out of that, every year, the board will do an evaluation to give out more. So if you look back now on the 12 last months, we have delivered dividend of SEK 4,000,000,000 in total. So if we don't find anything that we could put all our money into, then it seems very likely that there will be extraordinary dividends also going forward. But that's a board decision. Okay. Then a question about the long term targets. How or what is your target with regards to how large Kongsberg will be? And also, do you have any annual growth targets? And in addition, how are your targets regarding the results? And Finally, what are the main risk factors on achieving those targets? Hopefully, how large 22, and I think that is what we stick with for time being. And that means that we're going to at least turn €30,000,000,000 in revenue by 2022. We stick with that even though it has been a very special one point 5 year behind us. And we have also, as a group, and a target of an EBITDA of 14% as a group overall. So I think that is the target for now. Then of course, this is something that we are considering going forward. And then If these targets are changing, we will come back to that when the time is there. Just to elaborate a little bit on that. If you look at SEK 30,000,000,000 in revenue Next year? That could be a hard one if the maritime markets not are returning very quick. But if you look at the margin, as I just said, the defense had 16% last year. We said now that we believe in around 20% for this year already. If you look at the group, we delivered EUR 14.7 billion this quarter, but it's obviously very driven by the defense margin at the moment. If you look at maritime, that has 13% in goal for 2022, they have EUR11.1 billion for this quarter and EUR11.1 billion for the first half year. There's still an uplift there. And the risk is, of course, if you end up with a lot of bad contracts, it could be a risk or that the market will not come back at all and the pandemic will continue. That's obvious risk factors. How should we think about defense margins Into 2022, could you sustain the 2021 level on the margin side for defense? I definitely hope for that, but I think we have to come back with that because that has also to do with the mix of projects. We just received a large contract now, the largest ever with Germany, and we need to come back with the 2022 margins on that. But we have lifted them for 2021. So it's obvious that we will not down to 16%. That was the old target From Capital Markets Day 2 years ago. Okay. Then a question regarding KDI and more specifically, vessel insight. Are you satisfied with the number of vessel in site subscription estimated by the end of this year? And or given the target of the rapid increase you have in number of installations? I think what we are satisfied with is that we are signing on new shipowners in a, Let's say, a faster track than we saw earlier in the pandemic. Obviously, this is also I would say, It's also that the ship owners themselves need to mature about the solution. I'm looking at this in a very positive way because if you sign on 1 or 2 vessels and the ship owners see the benefit of cloud based solution, then they will continue to roll out for the entire fleet. And that we have seen in several cases where they have done the pilot. And then after they have get familiar with what this solution can do, they have rolled it out for the entire fleet. So hopefully, we will see a faster growing curve when it comes to rollouts of the vessel inside. Yes. And then a question regarding impact on from decreased Traveling. Can you explain the magnitude and impact on decreased travel in Maritime Service Division? And how should we think about that going forward? Yes. It's correct that we have, I would say, less travel these days. Obviously, when the restrictions are lifted, it will be more traveling, Obviously. But we are actually having a lot of engineers traveling today even though we have quarantine restrictions and so on. But obviously, I think both we and the customer have learned a lot during the pandemic. So I would expect that the number of traveling to attend to support a client will go down. Exactly how much, I think we need to come back to. But I have a hope that we will see, I would say quite much reduced in the traveling. But again, we are in 40 countries and we are 100 of our offices around there. And we have local expertise and knowledge to support clients basically where they are. So but somewhat reduced traveling, I'm quite sure. And you also have all the internal traveling because we have 125 offices around the world. You don't need to visit each other That much as we did before. Internal travels will really go down in the future. Thank you. That concludes the questions from the webcast. Okay. Then I would like to say once again thank you for listening in. And I wish everyone out there have a very good