Kitron ASA (KIT) Earnings Call Transcript & Summary

Welcome to Kitron's Capital Markets Day 2021. We have a packed schedule, so let's move ahead. Next slide, please. As usual, there's a substantial disclaimer. I underline that this presentation contains forward-looking statements. There are always uncertainties, and you should keep that in mind. Next slide, please. I'm Peter Nilsson, CEO of Kitron Group. With me today are parts of the group management team. Cathrin Nylander, CFO; and Israel Salvador, COO. Together with the MDs for Norway, Sweden, Lithuania and China, we've been running the company for the past 6 years. The agenda for today starts off with me giving a brief overview of Kitron, followed by markets and growth strategy. Cathrin will then dig in down into the numbers with an overview of our long-term financial targets, finishing off the presentation with Israel discussing how operations will manage growth and profitability improvement. Finally, I'll return for a quick summary before we proceed to Q&A. Next slide, please. So I understand quite a few of you watching this may not be acquainted with Kitron. So let me give you a quick introduction. Next slide, please. Let's talk about our core business. We have our roots in a company founded in 1962 in Arendal, Norway. Today, we're an industrial partner to many companies you know and use products from. An EMS partner takes care of manufacturing and other services to companies that design, own and sell those products. So who are the customers? Well, we have just over 100 customers. And the top 20 account for just about 75% of annual sales. Kitron's customers are often leaders in their market. They tend to lead technology-wise, be innovative with new solutions and grow more quickly than the market in general. So on to our positioning in the market. Our tradition is to manage complex, high-margin products with special requirements. Within several market sectors, Kitron is recognized as a strategic and critical supplier. Over the years, we've evolved to become a leader known for delivering agility and flexibility in many different market sectors. In terms of volume, I would say that we are a medium volume business from a few thousand to several hundreds of thousands of units per year. Taking a look at operations, we're just over 1,800 employees. Our corporate headquarters is outside of Oslo, Norway. We have 6 modern, highly competitive facilities globally: Norway, Sweden, Lithuania, Poland, China and the U.S. Overall manufacturing footprint is over 60,000 square meters or close to 650,000 square feet. Next slide, please. So briefly, our financials. 2020 turned out to be a record year for Kitron, with over 20% growth. Contributing to the remarkable growth were extraordinary medical sales in the second and third quarter, driven by the demand generated by the corona pandemic. Operating profits grew more than 55% to NOK 312 million. And although net working capital increased, NOK 327 million in cash flow was generated. Over the past 6 years, we at Kitron have delivered a compound annual growth rate of 15% for sales and 48% for EBIT profit. The company is listed on the Oslo Exchange since 1997. Our strong commitments to dividends and year-on-year profit improvements have resulted in more than 1,000% increase in shareholder value over the past 6 years. Next slide, please. Let's talk briefly about sustainability. Our approach to sustainability in ESG is grounded in our code of conduct statement. This is a guiding document for all employees and suppliers. We report on our commitment, goals and progress in our annual sustainability report. Many of our investors are interested in how Kitron stands in regards to the EU taxonomy classification. According to a recent survey by Danske Bank on the Oslo Exchange, 10% of the revenue generated by companies listed is aligned with taxonomy. We at Kitron can comfortably say that 20% of our revenue is aligned with the taxonomy classification. We expect this to grow as we see a rebalancing between market sectors, driven by new growth. When it comes to the global environment, we systematically work to minimize adverse impact to the environment. For example, we target energy-efficient equipment and sourcing of renewable energy. To improve our working environment, we actively work with increasing the number of employees that think Kitron is a great place to work. We also promote gender and diversity balance and put effort into reducing the gender pay gap. Next slide, please. So what is it that drives us as individuals and as a company? Well, let's start with vision. You see it in every logo type, every poster and every roll up: your ambition, our passion. We are committed to customer success, to employee development as well as the interest of other stakeholders. We know our mission is to help others shine. As leaders, we live by 3 values: commitment. We keep our promises, we know our numbers. We are committed to being the best we can be; innovation. We always look for a better way. We embrace change and we promote creativity; engagement. At Kitron, everyone gets an equal chance, we include support and promote participation. Our organizational structure supports agile operations. As a leadership team, we set targets for both the short and long term. And when it comes to execution, our organization is highly decentralized, with each site manager being responsible for the P&L. A strong common platform provides systems, group functions and best practice procedures. We pride ourselves in creating synergies in a common way of working. To further align ourselves, we share common financial performance targets and incentive plans. We are committed to delivering year-on-year operational and financial improvements. In the short term, we focus on delivering annual targets on revenue, profits and growth. In the long term, our focus shifts to improving shareholder value, i.e., share price and dividends over a longer multiyear period. Next slide, please. Market overview. We've had a brief introduction to Kitron. Let's take a look at the general market in which Kitron operates. Next slide, please. The European market trends. Well, the European EMS market is expected to approach EUR 38 billion by 2023. In general, smaller EMS companies, less than EUR 50 million continue to struggle or are acquired. Market is filled with entry barriers with high demands on cybersecurity, contingency planning and sustainability, and they're all sharpening the competition. Over the past few years, there's been also an accelerating trend on regionalization of supply chains. The main drivers was shorter lead time in designing and time to market, introducing new products and a shorter lead time to customer fulfillment. Automation continues to level the cost playing field between regions. And finally, trade barriers, intellectual property, cyber concerns, technological sovereignty and geopolitical risks also contribute to decisions to localize supply. When it comes to Nordic growth, the market is expected to grow to more than EUR 2 billion by -- EUR 2 billion by 2024. The industrial sector is now bigger than the previously dominating communications sector. European growth continues to be driven by cost savings, where customers are choosing to outsource more, even higher-level assembly and integration work. New companies choose to partner with an EMS company from the very beginning. And the move to electrification and connectivity are replacing older generations of products, and this drives volumes on electronics. Next slide, please. So after that really brief, quick review of the market in general, let's take a look at the specifics of how Kitron will be successful and will continue to grow. So next slide, please. Starting this year, Kitron has updated its 5 market sectors. 2 old classifications are retired, so gone are Energy/Telecom and Offshore/Marine. This move will help us market Kitron's capabilities more clearly as well as focus our teams to further grow business. In addition, each of the 5 market sectors is built for and allow for multilevel drill down to truly identify business growth, market share, what to grow, what to defend and what to divest. Taking a look then at the first one, market sector connectivity. Within this market sector, we find machine-to-machine, Internet of Things or devices, sensors, wireless communication, networking products, optical transmission and much more. In 2019, there's approximately 19 billion IoT devices. In 2020, 35 billion. By 2025, it's estimated that there will be more than 75 billion devices in use. Many of these devices are connected to multiple sensors, monitoring or controlling processes from water flow and level to temperature, pressure, gas and the whole slew of other measurements. These sensors and IoT devices are, of course, connected to a backbone of wireless networks, optical networks and many other devices and systems. This creates a massive ripple effect in demand for communication and infrastructure. To be successful in this sector, Kitron has to focus on expanding the customer base, as many of the programs generate limited revenue compared to other market sectors. Volumes tend to be higher, especially when it comes to sensors and IoT devices. High utilization, competitive prices and economies of scale are crucial to success. We win new business because we can demonstrate application knowledge and superior agility. Next up, electrification. Within this sector, we find battery management systems, power grid transmission systems, power and electric drive management, charging and fuel cell technology. This is currently on its way to becoming the largest market sector for Kitron and will continue to lead through 2025. Customers offer large multinational entities with global sales. We expect to continue to grow with existing customers as well as adding new customers to diversify our base. To be successful, we'll have to continue investing in capabilities and application know-how. We compete on scale and technology. On to market sector industry. Although we have moved out substantial sales into connectivity and electrification, the industry sector still remains impressively large. Within this sector, we find equipment for automation, robotics, recycling and equipment for construction and infrastructure. We will continue to expand the customer base. It's important to capitalize on our capabilities, wide application knowledge and reputation. Finally, 2 of our traditional areas of growth. Defence/Aerospace and Medical devices. Both sectors have extremely high requirements, high entry barriers to do business and long product life cycles. We will continue to grow with existing customers as well as adding a select few additional. Next slide, please. So distinguishing -- what are the distinguishing features from each market sector? Well, broadly generalizing, Kitron's market sectors can be viewed through several layers. We can look at volume, possibility for automation and running high utilization on investments. Typically, connectivity will be on the high side and Defence/Aerospace on the low side. The cost of failure is usually lower on connectivity products and the cost of failure tends to grow as you move on to Medical devices and Aerospace. Much of the life cycle is determined by technology maturity, newer technology and products resulting from this tech will often have a life cycle of 6 to 18 months. Products that serve public investments, infrastructure and medical tend to have longer life cycles from 3 to 30 years or more. Life cycle also gives an indication of visibility. The longer a life cycle, the further into the future we can predict sales. It's also important to understand how demand is affected by the general business cycle to be able to diversify appropriately. Viewing through this lens, we can, in general, say that connectivity and electrification products run in higher volumes from tens to hundreds of thousands. A high degree of production automation is required. The life cycle is relatively short. So time to market is continuously important. Our co-development, prototyping, supply chain setup and production setup has to work flawlessly in a very short amount of time. And pricing is very competitive in the initial win. Kitron's industry sector is characterized by a more fragmented customer base with lower volumes and more fluctuations in demand. Agility and flexibility is important. Medical devices and Defence/Aerospace share many traits. Volumes are often too low to justify automation and products are generally not designed for automation. On medical products, it's normal with a high degree of vertical integration. This means that we build and supply the product the way you see it in a hospital or medical center. Our quality reputation is critical. Recalls and replacements are difficult and expensive. The life cycle is long. Price pressure from competitors and end-of-life components forces redesign initiatives to protect margins and delivery capability. The entry barriers are high and increasing. Investments in infrastructure, cybersecurity, security clearances, certification standards for aviation, for QSR and FDA approvals are some of the obstacles that competitors have to overcome. Next slide, please. So what do we see in the market sectors in the next 5 years up through 2025? Overall, our ambition is to grow faster than the market. We can achieve this as a result of choosing high-growth customers and targeting high-growth market sectors. Our repeat business is high, including when customers introduce new generations. Our target from '21 through '25 is to grow this existing business with NOK 1 billion. We also target NOK 1 billion in new program wins. Much of this growth is targeted towards connectivity and electrification sectors, as indicated by the 15% year-on-year growth. We expect a more moderate growth in Medical and Defence/Aerospace sectors. As a result of contrasting growth rates, the share of the total is expected to change by 2025. Next slide, please. So 2025 targets. Well, after an exceptional growth in 2020 and the continued growth in 2021, we feel confident in raising our targets for 2025. Our ambition is now to deliver NOK 6 billion in 2025 with an 8% EBIT margin. 2020 demonstrated what we can achieve on earnings improvement by focusing on and increasing economies of scale. As a group, we have enough capacity to achieve this. The challenge is to keep the load level across the group. In addition, any potential M&A would provide an upside. Next slide, please. And with that, I'd like to hand over to my esteemed colleague, Cathrin Nylander, who will give you more details on our finances. Cathrin?

Thank you, Peter. So I'll talk about the long term -- I am Cathrin Nylander, and I'm CFO, will now present our updated financial targets and give some comments on the current status. Next slide, please. We have now concluded on our first strategic period. Our ambition was to have NOK 3 billion in revenue in 2020. We reached almost NOK 4 billion. The growth is mainly organic. The M&A added only a couple of NOK 100 million. In '19, we outlined a new ambition, NOK 5 billion top line in 2025 through organic growth. Now in 2021, we see that we have to raise the bar even further to NOK 6 billion, which were given an organic growth trend of 10% per year. M&A will potentially add upside to this and it's, of course, assuming no major macro or currency changes. For '21, we have given the guidance of NOK 3.9 to NOK 4.2 billion. We have had an exceptional year in 2020, with a revenue growth of over 20%. Let's break that down into the new sectors. Next slide, please. This slide shows the revenue per sector from '16, including an estimate for '21. To the right, a table of the compounded growth, CAGR, and the share of revenue in '20. Starting from top left, with connectivity, where we in '20 ended at NOK 331 million, a substantial reduction from '19 and a substantial improvement going into '21. The reason for the reduction between '19 and '20 is a disengaged customer at the end of '19. Adjusted for this, for the other customers, the CAGR is 20%, i.e., strong growth and we expect even stronger growth in '21. Mid-top, electrification. Electrification ended at NOK 939 million and has a CAGR of 25% from '16 to '20. '21 show continued growth or strong growth. Top right, our redefined industry sector. Industry ended at NOK 716 million in '20, down from '19. The reduction mainly in the oil and gas and infrastructure subsectors that has been substantially affected by the world situation. The other subsectors, however, show good growth. Going into '21, we see the infrastructure part recovering and the other subsectors continue their growth. The '16 to '20 CAGR per industry is 24%. Bottom left, Medical devices. Exceptional demand for ventilators in '20 shows very clearly in this graph. In the years before '20, CAGR was 7%. There's a slight rebound effect in '21 on the normal volumes and the revenues, therefore, expected to be in line with '19. Bottom right, Defence/Aerospace. Defense has had a CAGR of 15% from '16 to '20 and ending at SEK 973 million in '20. We see continued growth in '21, but at a slightly reduced level. Next slide, please. Margin improvement, target's up. Now moving on to EBIT and EBIT margin. So what have we achieved so far? In 2015, we set a revenue target of NOK 3 billion and EBIT margin at 7%, which corresponds to NOK 210 million in 2020. What we achieved was NOK 3,964 million, and EBIT margin was 7.9% and EBIT in NOK 312 million. So we superceded with about NOK 100 million. The EBIT margin in '20 has been affected by the economies of scale and exceptional utilization that we had on the temporary high volumes in Medical devices. We won't not have the same effect in '21. Hence, the guiding back along the strategic trajectory and the guiding in '21 to be between 6.8% and 7.4%. For '25, we're increasing the long-term strategic target to 8%. And the reason behind the increase is very short that the sites have stabilized, their performance at a higher level and that we see that by further growth and utilizing our economies of scale, we will be able to reach percent. Next slide, please. Ambition's maintained. We set 3 strategic targets: revenue growth; EBIT margin; and return on operating capital, ROOC. It's important to us to make efficient use of our capital to fund our growth and to be able to give dividends. During this strategic period, we have been only partially successful in keeping the capital efficiency targets. We are growing, and that requires some capital and the industry at the regular intervals go through component allocation, which challenges the capital binding. In addition, the different sectors have different capital binding. I think a correlation to the length of the contracts in the sector can be made, the longer the contracts, like with defense, the larger the capital binding ratios. In this sense, we've been growing rather strongly with defense, and that's part for the reason of the current capital binding. Going forward, efforts to reduce capital binding for all and a slight reduction of the defense share of the total revenue as the other sectors are growing quicker, will improve our capital efficiency going forward. Net working capital in percent of revenue is currently at 27%. We expect an improvement in '21. For '25, we maintain our strategic target at 20%. For CCC, currently, we're in line with our strategic targets for DCO and DPO, and it's the DIO that drives the CCC. Also here, we expect improvements in '21. The target for CCC is set to 60 days in '25. Next slide, please. Improving return on capital. An important measurement for us is the return on capital. In 2015, we set a strategic target of 25%. Although we have improved the ratio in 2020, we ended below our strategic target at 19%. However, moving forward, we expect this key metric to improve through a combination of higher EBIT and better capital efficiency. Our long-term target is adjusted from 25% to 20% to 25%. We see that it's difficult to grow and remain at the higher end of this target. On this slide, we also show return on equity and return on capital employed, both having a more stable development than ROOC, ending at 24% and 25%, respectively, in 2020. Next slide, please. Cash flows. In general, our business has a strong operating cash flow generation. We are a growing company. So the challenge is to make sure that we are capital-efficient as we grow and thus finance the growth ourselves. In '18, operating cash flow was temporarily pulled down by the increase in inventory due to the component situation. In '21, there are component challenges, too, but on a different level. And we are drawing on the learning points from 2018 to make see that we see -- to make sure that we see less of that effect in our cash flow for '21. CapEx. For going forward, we expect the normal CapEx level to be around 2%. We have previously said, 2% to 3%, but we're adjusting it down slightly as we see, we can manage the planned growth at around the 2% level. Naturally, there might be deviations between the years, of course. Next slide, please. Solid financial platform. Net interest-bearing debt is slightly reduced from last year, ending at NOK 758 million. We have targeted net interest-bearing debt over EBITDA to be less than 2.5x. And adjusted for IFRS 16 effects, it's 1.6. To the right, for information, we have specified our interest-bearing debt. The long-term debt that we had is with credit institutions and regular term loans. Short-term debts are also with credit institutions and mainly our ICP. And the increase in short-term part of long-term debt is due to short-term loan we took last year to make sure we had enough liquid funds during the COVID. Finally, the covenants that we have our equity in percent and net interest-bearing debt over EBITDA, both of them exclusive of any IFRS 16 effects. Next slide, please. Strong dividend history. Since a few years back, we've had a dividend policy to pay out at least 50% of the net income. We have a very clear ambition, ability to pay competitive dividends and we are strongly committed to doing so. The graph shows our dividend has been growing over the years. On February 11, the Board proposed a dividend on NOK 70, that is to be payable in 2 tranches, one in May and one in October. The background for dividing the dividend into 2 tranches is mainly to split the cash outlay. We see that as we continue to grow dividends, this is becoming increasingly important. And this concludes the long-term financial targets part of the presentation. Before we welcome our COO, Israel Salvador, on profit and growth. Join me on a brief virtual tour on a typical Kitron facility. [Presentation]

My name is Israel Losada Salvador, and I am Kitron's Chief Operating Officer and Sales Director. Today, I will talk about how operations is going to support Kitron's growth and profit targets. But before that, I would like to give you a quick update on how Kitron is handling the ongoing pandemic and the shortages of components. First, let's talk about our facilities. All sites are up and running at full capacity. Preventive measures against corona are working. We have had individual cases at our factories, but we have ensured that transmission was contained and that delivery commitments to customers were kept. When it comes to supply chain, these days, the situation is challenging for reasons other than corona. There are widespread allocations in the global semiconductor supply and shortages in the raw materials for PCBs. But we have worked together with our customers and supply partners to keep the lines running. As for technical services, I am happy to report that all technical departments and all sites are fully available. Currently, logistics from China are still a challenge, but the situation has improved now that the pre-New Year rush is over. The freight rates of China and Hong Kong continue to be 3x higher than the standard rates as the capacity is still reduced. But the situation is expected to continue for a few months until passengers traveling pick up. If we now talk about Kitron's ability to meet our commitments, it's worth mentioning that the current corona pandemic plus the shortages in the electronic components has forced us to constantly monitor the market to be one step ahead of events and to be very flexible to react quickly when needed. All in all, we are succeeding and making sure that our customers receive their products on time. Lastly, when it comes to traveling and physical meetings, some countries are opening for visitors from abroad, but there is still very little movement of passengers. We will continue monitoring developments and in the meantime, we will keep our preventive measures in place. You've heard me talking about the challenges we are facing on the supply chain side due to component shortages. So let's spend a few minutes talking about this topic. Next slide, please. Widespread shortages aren't an unusual event. This kind of situation appears cyclically every few years. The last one took place in 2017, '18 and affected passive components. Currently, the main issue are semiconductors. On the top left quadrant, you can see a table showing the worldwide demand for semiconductors. In blue is what the expected demand was, in orange the actual. 2020 was supposed to be an adjustment year that would see a slow start in production while the stocks were consumed, followed by a production ramp-up in Q3, Q4. Reality was rather different as a result of corona. Q1 and Q2 saw a very steep drop in demand when the pandemic broke out. Towards the end of Q2 and the beginning of Q3 when it was clear that the world was not going to end, the demand for semiconductors, driven by 5G, automotive and Internet of Things showed up hard and fast. This might look like a simple case of demand exceeding supply that should be solved by having the semiconductor manufacturers investing in their own production capacity. Unfortunately, it is not that simple. Let me explain you why. Let's move on to the top right quadrant. The base material to manufacture semiconductor chips are the wafers, which are produced in factories called foundries. A pure-play foundry focuses on producing wafers for other companies, like the ones on bolt on the table. Most electronic component manufacturers don't have their own foundries, and they buy wafers from pure-play foundries. The issue here is that everybody must go to the same source for wafers. The only way to increase the overall availability of semiconductors is by increasing the wafer supply. And this takes time. If now we move to the bottom left quadrant. A shortage in supply is always difficult to manage. But if you can see it coming and plan around it, it's manageable. One of the biggest challenges faced under the current situation is the abrupt increases in lead time. As the inventory of finished goods and wafers are depleted, the lead time increases in big steps. Eventually, every new order will face the full manufacturing lead time. In this case, 35 weeks. The current situation is made worse by the panic effect. Everybody is trying to secure short-term supply at the same time. This is the same behavior that leads to massive purchases of bottled water in areas expected to be affected by a natural disaster, like Florida, when there is a hurricane alert. This is confirmed by the fact that electronic component distributors currently have a book-to-bill ratio between 1.6 and 2.1 with deliveries before summer. Everybody is placing orders with immediate delivery to secure supply. The expectation is that the situation will improve for many component families and sizes by the end of Q3 and the beginning of Q4. For others, the shortage will remain until well into 2022. At Kitron, what we did was to contact our customers at the end of Q3 to make them aware of the situation and to suggest them a course of action that included the immediate purchase of critical items to cover the first half of 2021 and in some cases, the whole year. That put us and our customers ahead of many others in the queue that, combined with the partnership that we have established over the years with distributors and manufacturers has greatly reduced the impact of the shortages in our ability to deliver product to our customers in timely fashion. I hope this brief explanation helped understanding the current global shortage of semiconductors. Now having described the landscape that we have seen around us for the past year, let me look further ahead into 2025. Next slide, please. And let me explain you how our operations will get us to our 2025 targets for growth and, equally important, for profitability. Firstly, growth. Our operations can support growth by having a competitive offering, by working closer with our customers and providing integrated solutions tailored to their specific needs. And lastly, by increasing the utilization of our current facility footprint. I will expand more on this topic in the next slides. Secondly, profitability. Several factors contribute to our profitability, including our relentless work on operational excellence. Digitalization and automation, also a key focus for Kitron and realizing the economies of scale are being offered by our increased size. This is another area that I will cover in subsequent slides. All of the above can only happen if we have the right people. We have to attract the best possible employees, train them, empower them and give them the best tools to do their job. The following slides will stand on this. Next slide, please. Let's first look specifically at our growth. We have set a revenue target of NOK 6 billion for 2025. That means adding roughly 50% to our current revenues. From an operational perspective, are we ready for that? Do we have the capacity? And the short answer is, yes, we can deliver NOK 6 billion with the current facilities. That would mean an average of EUR 100 million or NOK 1 billion for each of our 6 production facilities in Norway, Sweden, Lithuania, Poland, the U.S. and China, which is perfectly within reach for these factories under today's conditions. But our plan is to go beyond that. We are taking the necessary steps to ensure that by 2025, we can get revenues between EUR 125 million and EUR 150 million from each facility. That means getting 10% more revenue out of every square meter offshore floor. And this can be done in several ways. We can invest in more equipment, new machines and production lines. We can also replace equipment with better, faster equipment. We can add more services to the revenue mix. And we can run more ships, getting more output from the same equipment. Some of this would clearly mean investments, and we see CapEx of about 2% of revenue moving forward, translating into about NOK 500 million over the period until 2025. That said, looking beyond 2025, we will need further expansion to continue growing. It's likely that we, in the 2023, '24 time frame, will set up a seventh production site. Here, we will be looking at cost competitive locations, probably Eastern Europe. What I would like to underline is that access to a skill and well educated workforce is just as important as cost. That is one thing we saw very clearly in Poland. Where we were able to onboard first rate colleagues who not only could do their job virtually from day 1, but they could also contribute to improvement efforts. Our customers are very demanding, and the services we offer them are advanced. So low-cost without scale is worthless to us. In short, we can definitely reach NOK 6 billion in 2025 with our current facilities, but we are making sure that we are able to do even more than that. But growth is not worth much unless it translates into improved profitability. So let's talk about how we are going to further improve our margins. Next slide, please. Let me start by saying that we believe that we are not just going to be able to maintain our past EBIT target of 7%. We believe that we are going to push this to 8%. Now throwing a figure out here is easy. But I don't want you to think that this is easy. We are in a very competitive global industry. So increasing our margin takes hard work. In fact, even maintaining our margin takes hard work. For me, the keyword is relentless. We are not in a business where you make money from a single stroke of luck or genius. It's about continuous improvement of our operations. Working smarter, improving the flow, reducing labor, reducing cost of material. It's 1,000 little things. And yes, it is relentless. The end result is that we are able to hand on cost reductions of up to 4% to our customers year-on-year, while at the same time, we manage to improve our profitability. In this slide, I have illustrated various factors contribute to our profitability. I have divided them into some factors that are primarily a necessity to maintain our operating margin, which is already above the normal level for the EMS industry. And then some factors that we need to focus on in order to move our margin from 7% to 8%. Starting with lean. These, as you know, is about running a smooth operations with minimal waste of resources. Our efficiency projects, we do this all the time. And a key for us is bottom up. More and more, we have tried to build a bottom-up improvement culture. We would much rather have 100 small projects at one side than a big one. It's about things such as an operator suggesting a small change to his work bench. Probably something that can be implemented weekly and will cost almost no money. Automation and digitalization. This has, over the past years, been extremely important to us and will continue to be so. We need to increase output without just throwing more people at it. Then we move into factors that can actually push our margin. The first is capability investments. This is about making our employees able to do more advanced work, and it's about adding more services to our offering, for instance. The last 2 parts are related to growth, which we have already talked about. It's about increasing the utilization of the equipment that we have, getting more revenue from the same machines with the same depreciation. It's about realizing the benefits of economies of scale, bring -- as we keep on growing. Increased purchasing power would be an obvious example. So in short, we have a clear growth plan ahead. We can get to NOK 6 billion in 2025 with our current facilities. At the same time, we will start planning for further growth beyond 2025. We have also a firm commitment to push our operating margin beyond our old target of 7% through relentless focus on doing things a little bit better every day. And reaping the benefits of being a bigger player. With this, I finish the operations section of this presentation. Peter, back to you.

Next slide, please. So we're into the summary section of the presentation. So next slide, please. So what are some of the key takeaways from this session? Well, first, we've introduced a new market sector segmentation, where we focus on high-growth sectors, electrification and connectivity, with a compounded annual growth rate of 15%. Second, overall, we aim to achieve 10% growth each year, with 5% from existing customer base and adding an additional 5% from new program acquisition. Thirdly, improvements in profits will come from improvements in capacity utilization and maximizing economies of scale. And finally, we will continue delivering a superior performance to customers. This concludes the presentation portion. We're ready to move on to Q&A. So by all means, hurry up and get your questions in. Next slide, please.

And I see here that we have a few questions already. And we're -- all of us are online. First question is from [ Dieter ], where he says, he has a comment really on the size of the market and how many EMSs are in Europe, where it looks like we're underestimating, I guess, what -- the size of the market, which is a good thing because really, the point of the size of the European market is it's a large market, and there's no meaningful restriction for growth from Kitron. I think the variance may be that we look at the addressable market for Kitron might be slightly smaller than the overall market. So that would be our answer. Any comment additionally to that, Israel? You're on mute, buddy.

Yes. No, I think your comment is relevant. Of course, we try to focus on what is our target market. And the relevant issue to bring up here is the fact that we have plenty of room over our heads to grow. I think we should just stick to what's important in this message.

Next question is from Tomas. Could you elaborate on -- no, let's see. Yes. That's it. Could you elaborate on your experience with the new Polish facility? What's the utilization now? Is it going to get better or worse than expected? And what's the margin development in line with expectations, et cetera, et cetera? Well, Tomas, let me just say that I'm extremely happy with the development in the Polish facility. The top line has been in line with expectations. Margin development has been higher and better than expectations and somewhat surprising even. But we have a strong team and a strong management running the facility. Our sort of economy of scale approach here where we try to use as much support resources from the Kaunas, Lithuania facility is also meant that we've been able to keep control of the costs that are much more than we originally projected. The growth and going forward and the utilization? We expect our utilization of current footprint to be around 30%, 35%, I would say. That's on footprint. On capacity and people, we're a couple of hundred employees about now. And so they're fully utilized. The amount of customers is still not enough. So if there's a -- if something happens with 1 customer, there's some seasonality, it tends to have an effect on what's going on at the site. We continue to grow the business this year. Primarily if you're looking at volumes, most -- a lot of volumes are coming in from Lithuania because Lithuania is growing like crazy. So we have some more overflow coming in that way. Customer interest has been magnificent. Israel, you could chime in here on the customer interest for Poland. Go ahead.

Yes. We have decided to be selective with the kind of companies that we introduced into Poland, to be able to match the capacities and the plans that we have for that facility. But what we realize is that there is definitely a great appetite for having facilities in that part of the world and being able to benefit from the great competence that we can get on those areas. So yes, we see the facility filling up at the pace that we consider satisfactory. And all in all, we seem to have very happy customers as a result of it.

Next question is from [ Knut ]. And he asks, when will the factory in America be operational? And let me just give you a quick recap, back in 2019?

July 2019.

July 2019, we had some massive flooding, nearby creek flooded and really put a river through the factory. With -- in some places, 5, 6 feet or 1 meter, 1.5 meters of water inside the factory, basically destroying the site. We quickly moved to a new external facility. And in about 2 weeks, we were up and running again, which is an extraordinary achievement. But -- and then during the next year or so, the facility -- the original facility was completely renovated. It now looks like a brand-new site. Everything, including the roof was replaced and strengthened. So we have a really nice, beautiful facility that we moved back into by year-end last year, so in Q4. And now we're in the new facility and building everything, and we're running like normal. Of course, there was effect when it came to customer demand and possible lost growth opportunities during this time when we were in this external temporary facility. We did -- we were able to achieve a nice win with MedAvail, a Canadian medical customer. We're targeting -- I can't really remember what the number was on the top line. I'm sure that Cathrin or Israel will chime in on that. But the ramp-up is now ongoing on MedAvail. We're delivering the first 2 units in the next couple of weeks. And then the ramp-up will continue over this year. But it's been a little bit of a struggle when it comes to top line. So we're doubling down on our efforts on growth in the U.S., that's the most important part now on the facility. We're adding some additional good resources from a management perspective. And then it's all about growing. Now we have so many questions, I don't know where to go. Which is good, which is good. Let me see. There we go. Yes, there we go. Yes, exactly. [ Augustin ] says you earlier highlighted that it's strictly to retain margins above 7% in the EMS business as end customers will push down prices to this level if they see the EMS suppliers are operating above it. How will you get around this dynamic to retain the 8% EBIT margins you target? I think we've answered it many times today. But let me explain it a little bit and it goes back to experience from last year when we had a lot of medical sales and really the double of normal in an existing facility. So you have a facility, it's dimensioned for NOK 100 million, and you run it at NOK 300 million, right? The overhead and the whole production apparatus is set up for a much lower cost, but you push through NOK 300 million instead 3x or 4x normal volumes. The margins you've quoted to the customer on cost-plus margin is maybe 6%, 7%, right? Around that level. But since your overhead remains fixed, as volumes go up, that falls down somewhere, and it falls down into increased profitability. And at some point, it also falls down to reduced cost to the customer. So it's all about utilizing economies of scale, pushing the facilities we have to EUR 100 million or above. 2 of the sites are already there now with Kaunas in Lithuania and Norway. Sweden is quickly approaching and will probably get through over the next couple of years. And then our target is we need to get that in Poland. And in Poland, I'd like to say, probably easier to grow in Poland than it is in China going forward, at least the way I see it. So maybe we will not have EUR 100 million in China. But maybe we'll have EUR 150 million in Poland. That's the sort of game plan we have internally. But it's all about that being able to run more volume, run more revenue, even though you've quoted 6% since you're more efficient than any other standard competitor. A little bit extra falls down on profit. If you want to jump in, anyone, you have to do that. Otherwise, I'm just going to continue on. And [ Henrik ] here, he has 3 questions. Wow. Please elaborate on investment in existing facilities, driving revenues to NOK 125 million to NOK 150 million per facility. Is this planned near term, '21, '22 in facilities that are close to maximum capacity? I mean, Kaunas already has that capacity, maybe not NOK 150 million, but at least NOK 130 million. And then the investments, Cathrin, why don't you answer this? I've been talking for a long time now.

No, we are looking into it. And I think the investments will be gradual because there are different stages, all the facilities, how much they can utilize, so they can utilize more shifts, et cetera. So you will see it won't be sort of a one-hit investment situation. It will come gradually during this period.

And Henrik's next question is on M&A. Are you actively seeking any opportunities? And with regards to M&A targets, what revenue size, sector and geography is most interesting? Let's see if you can take that one, Cathrin.

It's a very good one.

To see if we're all on the same team.

Yes, basically. No, we're looking at -- we're sort of opportunity based. What we have seen now is that the valuation of EMS companies are quite high. So what you buy will buy with a substantial goodwill, and the balance sheets are rather small. In addition to the COVID situation when you actually can't meet and see the facilities at all, I mean the people make M&A, at least in this time, very difficult. But we are looking, and we are looking, as you can see, we talked about extending capacity in Europe. So basically, we're looking into Europe, if we're looking into anything, and as Israel said, probably Eastern Europe, most likely. So that's where we are looking ahead.

And Henrik's final question. This one goes to you, Israel. We want you also to be happy here. So are you not planning to do any greenfield investments in Europe before '23 or '24?

Yes. I think I would like to mention 2 things. First of all, you heard us talking about how we're going to improve our margins. And one of the key of it is making sure that we can get more production out of our existing capacity -- our existing facilities and there is still capacity in all of them. So I think we're going to be careful when it comes to going out there and getting a new facility before we have really harvested and fully utilized what we have. There is still quite a long way to go in our plans, and we can load them more and reach the objectives that we have mentioned.

Yes. And speaking of the greenfield, we have additional expansion possibilities in Poland. We have substantially more just by expanding existing facility, which is already one of the larger facilities we have. So that's, again, focusing on economies of scale, putting more capacity or footprint in place. So both Kaunas and Poland. Poland, very easy because we have existing property. Kaunas, we'd have to go to a property close to, but not exactly where we are.

Also Sweden has the same capabilities. We still have some land there.

[ Philip ] asks what's your repeat by percentage from existing customers? Good question, Philip.

I can probably take that one.

Any takers?

Yes. So the repeating purchase from existing customers is actually very, very high. And that is the case, both when you get a direct allocation of business. But also, when we go head-to-head in an open competition with other potential buyers, potentially invest manufacturers. So hard to say it's extremely high. And also, we have had very few number of customers actually deciding to change horse over the last 6 years. So from that perspective, I think the company is well positioned and is doing a pretty good job.

Well, that's also, let's say, sort of a general rule in this business. If you're doing a really good job for your customer, right, and you're the incumbent, you have the business, even if someone else quotes below you, you'll have discussion with the customer and you'll try to figure out what's going on. And then you -- I mean, it's with a high degree of probability, the incumbent will win. We see that when we lose quotes. When we lose quotes to customers we don't have, right? They tend to stay with the incumbent, even though maybe our offer is, on paper, stronger.

And comment also the new investors looking into EMS business. The business as such is recurring. That's the basic turn point. Basically keep the customers all over the time.

Particularly in the European market, it tends to be long-term partnerships where you co-develop. And as I said before, our mission is to make sure the customer [indiscernible]. So we work really hard when it comes to getting new products to the market as quickly as possible. We know all about the market window. If you miss that window, and you end up as #2 or #3, you have, best case, a 10% market share instead of 60%, 70%. Knut Erik has a similar question to the one on M&A, so I'm not going to address that one. Hey, [ Johan ] says, "How do you win new business? What are your selling points? Maybe he works for a competitor, I don't know. What do you say, Israel?

Well, I think as Peter was mentioning, the number of competitors in our market is rather large. So one of the key -- of the key things that we need to do when we try to win a new business is to try to make sure that we differentiate ourselves from the rest. And we have good ways to do that. The fact that we have footprint in 3 continents, which means that we can service our customers literally anywhere they need to. The fact that we have a full portfolio of range of services that we can do from helping with design industrialization production to finding suppliers. And even though the end of it, logistics service, repair, overhaul of their products. And then, of course, is the secret recipe here is our processes and the people that we have managing those processes. The fact that we are able to be more efficient than many people around us. That we are able to understand what the customer needs, and we are able to service that in a way that makes them satisfy and want to do it again.

So final 2 questions. Where will the production of the new segments be? I'm thinking of IoT and renewable energy or connectivity and electrification. And well, actually, it's mixed even though all sites, all facilities, all regions are targeting growth everywhere. The success has been varied over the sites. And really, depending on what their home market looks like. So on renewable energy or electrification, you see a lot of strength in Norway. You see a lot of strength in Lithuania and Poland and also in China. When it comes to connectivity, there's more strength in Sweden than there is in Norway. So a lot of good connectivity, both sensors and types of communication equipment is strong in Sweden. As it is also, if you go back to Lithuania and China, also strong on those sections. So there is no specific since all of our sites are set up to manufacture difficult products and a high degree of complexity and meeting standards, the knowledge and the production equipment is there to deal with a lot of the issues. The best practice and crossover knowledge from other sites helps new sites with competence also. Final question. Looks like Israel, we're going to go with you. Lean and operational excellence, is there any activities where gap analysis or assessment is being performed regarding to lean maturity level?

Okay. It's a very good question. Yes, the answer -- the short answer is yes. We perform an internal audit on every site, 2 to 3 years -- 2 to 3 times per year to assess the level of development and performance when it comes to operational excellence and lean. I guess the short, again, answer to your question is that we are very happy, but we are not satisfied. We can do a little bit better every time. If you want to have some facts and figures, and as I mentioned during the presentation, we believe in a bottom-up approach. So the number of small improvement projects that we run in 2020 was 350% more than we did the previous year. And the savings that we generated from those projects was 150% more than the previous year. That -- those savings, those improvements go into cost reductions to our customers. And into protecting and increasing our margins. That's the key of it. It's the same word that I mentioned before, is relentless. We are happy but never satisfied.

Good. Thanks. I think this concludes Kitron's Capital Markets presentation for 2021. Thank you so much for participating, everyone. Thanks, Israel. Thanks, Cathrin. And I hope to see you soon in real life somewhere. Thanks. Bye.