Kitron ASA (KIT) Earnings Call Transcript & Summary

Welcome to this presentation of Kitron's acquisition of BB Electronics. My name is Peter Nilsson, and I'm the CEO of Kitron. Let's move on to Slide 2, please. Let's get the formalities out of the way. Please study the disclaimer on this slide and Slide 3, please, on this slide. So let's jump to Page 4. Before we move ahead, I'll introduce my co-host for this event, Kitron's CFO, Cathrin Nylander. Hi, Cathrin.

Hi.

Cathrin joined Kitron as CFO in 2013. I became CEO in 2014 and basically have all of my professional background within electronics production. And Cathrin and I have been on this road trip with Kitron for the past 7 to 8 years now. So I guess what I'm saying is we know this industry. We know quality operations when we see them. Slide 5, please. This brings me to BB Electronics. As you know, since you're here, we've announced that we're buying BB Electronics, which is a Danish EMS company. We're paying DKK 600 million, and BB Electronics has about DKK 1 billion in revenues this year. This acquisition is about growth. It's not about turnaround or cost cutting or finding synergies forever. BB Electronics is a well-run, profitable company and has grown substantially over the recent years, and it adds some very interesting geographies to the Kitron Group. In the chart below, you can see Kitron's growth trajectory over the past years with BB added in, in 2021. This, of course, is to illustrate what the effect would have been in 2021 based on estimates. Let's move on to Slide 6, please. Now let's have a closer look at BB Electronics. The company focuses on three market sectors, with industrial and telecom being the largest, followed by medical. As you may notice, this fits well with the market sectors that Kitron also focuses on. As a rule, BB Electronics focuses on high-complexity segments, which fits perfectly with Kitron's position. On the right, you see where the customers are. And as you see, BB has a strong position amongst Danish customers, adding an exciting market for us. Below, you see some key financials. BB Electronics had a slight dip in 2020, in part related to the corona pandemic. But the business came roaring back in 2021, and we currently see about 20% growth for the next year. Next slide, please. Production facilities. BB Electronics has three production facilities. The site in Denmark is the smallest in terms of employees. But it is highly automated and has a clear advantage of being close to the Danish customers. So we see this as a key bridgehead for Kitron. The second site is in the Czech Republic. It was established in 2019 based on an acquisition. It provides a lower-cost alternative while still being close to the European market and European customers. And it will strengthen our position in Central and Eastern Europe by adding to our sites in Lithuania and Poland. Lastly, BB Electronics has a substantial operation in Suzhou, China with about 500 employees. This site is a bit north of our current facility in Ningbo, about 2 hours north of us. And we see this as benefiting our Chinese operations, making it bigger and more robust, and we intend to keep both facilities. Let's move on to Page 8, please. I've said that we see BB site in Denmark as an important entry point to the Danish market. It is also very well run and highly automated. I visited the facility, and I must say I was impressed by this operation. A key point here is the potential to increase revenue through automation. The chart shows three customer cases and increased revenue driven by automated production. Now I think we've run some pretty good operations in Kitron, too, but there's always things to learn. And when you get into the details, I've already picked up things from visiting BB Electronics in Denmark. Further automation will clearly be something we'll be working with the BB team on, sharing best practices and developing together. Slide 9, please. BB Electronics has an excellent customer base with a very low churn rate and long-term relationships, as you can see in the charts attached. The customer base is also diversified, making us less vulnerable should a customer choose to leave after all. And importantly, there is essentially no overlap with Kitron's customer base. This is positive as we'll probably identify the potential for upselling to each other's customers, and we avoid the potential problem of some customers leaving because they want to maintain several EMS partners. Slide 10 breaks down the market sectors and customer locations served by the three BB sites. As you see, the mix varies among the sites, letting each leverage its own advantages. For instance, serving a larger portion of the Danish customers from Denmark and a larger portion of customers within industry market sector from the lower-cost sites. Slide 11, please. Here's where we sum up why to do this. I won't go into all of the bullet points, but some of the key points are at the bottom. Firstly, it adds significant size, growth and profits to Kitron, including new geographies. Secondly, BB Electronics is a quality company, and we see minimal downside risk. We plan to run BB more independently than after previous acquisitions. The company will continue to operate under the BB name much as today. And thirdly, we complement each other, and I see a lot of benefits in joining forces. So let's jump to Slide 12 and see where we are after the transaction. Now this map shows what the Kitron Group will look like after the transaction. We've added two new countries. These are in gray and a second site in China. So the BB sites are in gray, giving us a well-diversified portfolio with a modern, highly competitive production facilities. So in terms of positioning, Slide 13, please. We have the standard Kitron positioning slide of how we see the market. And as you see, Kitron and BB are broadly aligned. We don't compete in the mass segment, which is dominated by giants and mainly located in Asia. We both favor higher-complexity parts of the market where margins tend to be better. So Slide 14, I'll hand it over to Cathrin to get some of the nitty-gritty financial details. Cathrin, go ahead.

Yes. Thanks, Peter. Then on for some numbers. I won't go through them all. But I would like to highlight that we expect the transaction to be completed rather quickly in January so that we can consolidate BB for the full 2022. The enterprise value of DKK 600 million corresponds to an EV/EBIT of 9.1 in 2021 and 7.3 in 2022. Kitron is currently trading at 17, and the average and the median of peers is around 15. EBIT increases from 2021 to 2022, driven by the 20% volume growth but also an increase in margins from 6.6% EBIT margin in 2021 and 6.8% in 2022. The net debt stated here is NOK 792 million for Kitron and around NOK 75 million for BB. Kitron had a net interest-bearing debt to EBITDA at 2.2 third quarter in 2021. As we say here, we have identified synergies of DKK 10 million. This is mainly due to increased purchasing power. Otherwise, synergies are not what we look for. This is all about growth and broadening and improving our offering to the customers. In terms of financing, there are no conditions related to the acquisition. Worth noting is that we have established a term loan, and we are evaluating different financing alternatives prior to close, and we will revert with details on this point as we move ahead. On this page, we might also comment a bit on some of the key factors that we look or key performance metrics. And we are focusing in Kitron on return on operating capital, and we want to be above 20%. Currently, BB is trading at 21% on ROOC. When it comes to revenue, we want to be around 20% again, revenue in percent of sales or in percent net of working capital -- sorry, it's about 21%, so it's very close to that one, too. When it comes to CCC, they are around 40, which is a lot better actually than what we're managing currently. And a few of those numbers that are important to us and earn on financing conditions for the acquisition shortly at the end. And then I'll leave it back with you, Peter.

Thank you, Cathrin. So Slide 15, some of the key takeaways. Summing up, firstly, we're convinced that this will create significant shareholder value and be clearly earnings accretive. BB is growing, profitable and well-run. We think the terms are favorable. We're paying less than 10x 2021 EBIT and slightly more than 7x 2022 EBIT. The transaction also adds some very attractive geographies for Kitron. And the deal fits with Kitron's long-term strategy, which includes carrying out the targeted M&As where we identify opportunities to create value for Kitron shareholders. And with that, I think, Cathrin and I are ready for some questions. And we'll see if anything turns up here. I think maybe we have a little bit of -- nothing here. So it's been a pretty quick process, Cathrin, hasn't it? I think we started some time here in -- was it mid-October when we first looked at this?

End of September, mid-October. Yes.

End of September, early October. And the quick trip and the reason for it being quick is we liked what we saw. And it's been very helpful process from our colleagues at BB also. Even though with COVID and corona, we've managed to visit all sites and do some pretty significant due diligence there. I guess there are no public questions. Maybe people call us later. They usually do.

Or there is some technical issue.

There. Okay. Can you elaborate on -- here we go. Bunch of questions all of a sudden. I think somebody turned the button on some.

Yes.

Can you elaborate on BB providing pathway to expansion in India? Yes, I can. BB is in the process of establishing an automation center in Chennai, in India, which is a region which is where the -- a lot of EMS businesses are located. And the reason is they want to continue their expansion on automation, and finding good resources for automation is slightly difficult and hanging on to them, I think, even more difficult. So they're setting up an automation center in India. There's [indiscernible] from [indiscernible] executive company but also -- a bit echo. Okay. There we go. That also has -- is familiar with the Indian market. So that allows us, on a very quick basis, to expand into operations, if we want to and if necessary. Second question from Vincent was -- is company was acquired from Axcel through MBO in 2016. What motivated the current owners to sell? Was that an auction process? How many owners are still involved in the management of BB Electronics? I can say that in the management, there's about 10% ownership of the current management of BB, and they'll continue on with Kitron. I think they were -- the MBO and the rest of the people that were involved, many of them have had Board positions. They're -- I think they're done with their journey of this company. I didn't have to -- I don't have insight into any further motivations of them, and I don't want to comment on the process. So I think we've paid for what we were, and we're very close to what we thought initially we would be paying. And that goes to the current owners once a holding company consisting of management, 10%, and other private shareholders, several of them on the Board. And another question on the India entry, and we -- I already addressed that. Is BB Chinese facility currently locked down? No. The BB facility is about 2 hours north of Suzhou, and Kitron's facility is about to 2 hours south of Shanghai, 2 hours south of the Suzhou Industrial Park. And not all of Ningbo's even locked down. There are three zones in this special district we're in, and two of them have opened up already. And the third zone, which we're in, is slated to be opened up or expected to be opened up by the end of this week. So that's another good thing about being -- establishing in several regions and having contingency plans for when things like this happens. And another question from Vincent. Cathrin, why don't you take this one? Can you explain the weak performance of BB before 2021? And what makes us confident that the company can generate more than 6% EBIT consistently?

Similar to Kitron, BB has been on a journey since the management buyout basically, and they have been improving the operations and have been adding on customers. Last year, in 2020, they were having some troubles due to corona, but we see now that they are clearly delivering on their forecast. In the process, you're very early to get an estimate on the year-end, and more likely than not, the companies when you look at, they don't normally reach their forecast, but they've been very, actually, increasing their numbers as we have gone by the last few months. So they've been quite according to plan, I would say. And when it comes to consistently, you see the target or the budget for 2022. We know that they already have all of that in demand and even more so. So we're pretty sure that's going to happen. And the margins seem reasonable to what they're doing. So we're pretty -- what we have seen and the numbers we have seen builds up on a margin of about 6% to 7%, or even more than that in the future.

So let's see. Will current BB management stay on? Yes, they will. We have not heard anything else ending their enthusiastic about...

Then Robert asked for if the management to lay our own shares in Kitron afterwards. Not as a result of the transaction, no.

No. But they're on an individual basis. They -- it will be qualified depending on the position of Kitron's long-term incentive program. Could we give an update on the situation for component shortages for both BB and Kitron? Well, when it comes to Kitron, this is not about the component shortages. There's a special webcast tomorrow afternoon for -- where the CEO for Kitron will review the whole market situation. And there are links out there, either on LinkedIn or other parts of social media on how to get onto that webcast. I can comment briefly that the difficulties continue. It's the new normal. And there's a lot of extra work that goes on, and there's a lot of push out and roll forward of top line. Demand is extremely strong. I think BB has fared a little bit better than Kitron. It seems like the types of customers, the types of components and the size of BB has also been a little bit easier for them to get some volumes, but that's an opinion. You say BB will operate independently. Well, it will operate as a part of Kitron. And the new position of Carsten Christensen, who is the current CEO, is he will report to me as part of the management team for the Kitron Group, along other MDs and regional VPs for Kitron. [ Pieter Herman ] said the price looks surprisingly attractive. Why haven't others bid higher? Well, I think our bid was good. And it's -- and we were a good fit. And I think that has had a lot to do with closing this deal. The companies fit well together, and the culture was important also, being able to work together. Can you share anything else on the M&A process that may be a competing interest? I don't think so. Well, if not, can you divert some volumes? I don't know, if not its current facility -- okay, that's a follow-on question from the Chinese [indiscernible]. Can we divert volumes from our facility to theirs? I don't think that will be necessary. And we were already in process of starting production in some of our other facilities in Europe to compensate and to support customers. That's purely as a backup solution. And also in our Chinese facility, we just brought -- we just decided immediately that we'd add another production line for our facility, and that's in the process of being installed next week as the site opens up. So that should put us back on track with backlog within the matter of January. The synergies is a question also from Benjamin, is where the synergy is coming from. And I think it's purely, at this point, buying power. So that's where we have facts and figures, and we can see that just immediately during the first quarter, early in the first quarter being able to divert BB to Kitron's terms and conditions and also the increase in buying power will give -- should generate this amount of money. Next question is telecom seems like a huge sector for the acquisition. What is your take on demand outlook in that segment? I think the telecom part of BB is very diversified. And I have no issue about any part of that market being in a particular risk. That's -- so I can't really go... And then there's follow-on question on that, elaborate on telecom exposure for BB. I don't think -- I don't see any telecom exposure again. It's a similar type of products that we find within Connectivity segment for Kitron, which is where we have tremendous growth in percentage, the fastest-growing market segment for us. Can you add some more flavor on top customers and concentration of top 5? How many customers above 10% of sales? Have you looked at that, Cathrin?

In the list, they only show 20, right?

Yes. But how many have more than 10% of total sales?

I'm looking and see if I have the number because I only remember 65. That should be 10%, correct? On your own slide.

Yes. I don't know. Maybe the question is, how many have more than 10% of total sales? I don't know. I mean it's not many, but they are around that number.

What we have -- what we might talk about on the customers is that we see on the top 10, we see strong growth amongst all of them, basically, which we like, meaning that there is no single concentration on one customer driving the growth and the risk point. So that has been something that we have looked at and been impressed by, basically part of the risk.

And then a follow-on question there. In your midterm plan, you announced enough sites -- you have enough sites to generate NOK 6 billion in revenues in the past while bringing in additional three sites for NOK 1,500 million. Those sites seem less productive than Kitron's plant. Is that right? I think there is a different product mix. There's more heavily into China and the Chinese production also. But yes, we still have enough sites and capacity to deliver NOK 6 billion within the Kitron Group. But on top of that NOK 6 billion, we also discussed that there would be room for acquisitions on top of that. So our plan is still to generate organic growth to the NOK 6 billion level. Why bringing in additional sites? Well, I think there -- it's a good deal for Kitron. It's a good deal for Kitron's shareholders with the -- this acquisition and the profit that it brings to the shareholders. There's also room -- many of these sites are now growing. So -- and we see that for next year. Any thoughts about more acquisitions in the near future? Yes. With your midterm plan, you announced enough sites to -- okay, I answered that already. How do you view your ND position post...

Yes.

Okay.

Yes, it will be about 3.5, which is a bit too high for us. So we need to work hard to bring down the operating capital basically because we want to be -- work hard to be back on our target level, which is 2.5. So we're a bit too high just after the acquisition, but that's inevitable when you do refinancing.

Are you talking to any manager within Kitron? You know that I'm driving them hard on working capital. And it's a result of the buildup of capital because of the huge demand and then one or two shortages stopping deliveries. So we need to improve that drastically during the first half of next year. How do you compare BB's supply chain issues versus what Kitron is experiencing? I mean I think it's a percentage game. Many -- we look at some of our competitors and how much demand are they not being able to fulfill, and from -- on a percentage point of view, I think, on a like-for-like on products, if they contain electronics or not, we're pretty much similar. Of course, the demand that Kitron hasn't been able to fulfill is higher than many of our smaller competitors because our turnover is higher. But it's somewhere in the vicinity. So far this year, 10% to 15% has not been able to be fulfilled immediately, and it's been accelerating during the fourth quarter. Synergies are coming from material or purchasing power. And then there's a final question. Can we say something about the utilization of BB's facilities? Will it be necessary to add capacity in the near term? There's only normal investment in equipment planned for next year compared to very similar to the levels that Kitron has [indiscernible], so investments of 2% to 3% versus top line on equipment and facilities. The facility in Czech Republic was expanded just this year. So that's prepared for some transfers coming out of Denmark, new automated lines and ramp up for new products. So we were thinking from Kitron that we would support Czech facility with some overflow from our existing facilities, but that's not going to be possible because all that footprint is booked now for new customers coming from within BB Electronics. Another question on net debt, Cathrin.

It's a future estimate of our net debt. And yes, at the end of next year, with a good cash flow, we should be below the target as we said, working down the working capital. So what we have said in the paperwork that we are exploring different types of financing, whether or not a term loan or RCFs and also equity discussion. So that's not decided. But you -- and Vincent says it seems not needed. So it's his comment.

And with that, I think we've come into a close here on half an hour. I think that's -- keep it nice, short and sweet, and we're out of questions also. So Cathrin, that's been a great process. Thank you for your hard work. And you were up until, I don't know, I think I got you my last e-mail at 1:00 this morning. So thanks for that. And with that, we'll close this information meeting regarding to BB Electronics. We'll talk to you soon again. And Merry Christmas and a Happy New Year to all. Thanks.