Kitron ASA (KIT) Earnings Call Transcript & Summary

Welcome to Kitron's Capital Markets presentation for 2022. I'm Peter Nilsson, CEO of the Kitron Group. And joining me today is CFO, Cathrin Nylander; COO, Kristoffer Asklöv; MD Norway and VP Americas, Hans Petter Thomassen will be presenting. But also here today is the CEO of BB Electronics, Carsten is here also. You can meet him. And our CTO, Stian is also here. The agenda today covers a brief introduction to Kitron before we dive into markets and growth. Hans Petter follows with a look at growth opportunities within the defense sector, then Kristoffer will review the future capacity and efficiency efforts; finally, Cathrin and I will present strategic objectives and long-term financial targets before wrapping up with our thoughts on ESG, sustainability and EU taxonomy. So let's kick off the review. Let's start with a brief introduction to the Kitron Group. We have our roots and the company founded in 1962 in Arendal, Norway. Today, we're an industrial partner to over 200 companies, many of them leaders in their segments. We are a preferred partner for electronics manufacturing and other services needed throughout the product's life cycle. Our core business is building electronic assemblies. In addition, we provide services upstream and downstream, for example, design and industrialization. These services help customers to launch products into the market or downstream like logistics that allow customers' products to quickly reach markets globally or redesign services that extend the lifetime of the product. Our services and efforts allow many of our customers to focus on product design, market development and introduction, while we take care of the rest. To enable our growth, we continuously invest 2% to 3% of sales in capacity and capability upgrades and extensions. Toward the end of last year, 2021, we acquired Danish EMS company, BB Electronics, with about EUR 130 million of sales in '21 and growing to EUR 220 million in '22, a growth of close to 70%. This acquisition added over 100 new customers, strengthening our market presence in Germany and Denmark. Growth from this acquisition comes from strong revenues within market sectors smart home, sustainable residential energy solutions, asset tracking, communications and critical components for e-mobility solutions. Today, you'll find more than 2,800 Kitron employees spread over 10 locations and 100,000 square meters. Corporate headquarters is in Billingstad, Norway. Let's talk about long-term growth and value creation. Over the past 7 years, Kitron has delivered a CAGR of 16.5% for sales and close to 40% for EBIT. The company is listed on the Oslo Exchange since 1997. Our commitments to dividend and year-on-year profit improvements has resulted in more than a 1,500% increase in shareholder value since 2014. The first 6 months of '22 have been challenging due to the constrained material situation. In the second half of the year, material constraints started to ease and we saw improvements in revenue, operating profit and capital efficiency. The acquisition of BB Electronics also provided a substantial contribution. So last week, we raised our outlook for '22. And because of record strong demand, we now expect revenues between NOK 6.45 billion and NOK 6.55 billion with an EBIT between NOK 440 million and NOK 470 million. This is a revenue growth of approximately 75%. High component prices on spot buys affect the top line with about NOK 400 million in '22. As we look at 2023, we see further growth driven by global megatrends, green technology and sustainability. The European security situation adds to defense spending and gross demand from Kitron customers. Although the outlook for some parts of Europe currently look challenging, our diverse customer base with end markets in many regions globally continue to secure growth. For 2023, our revenue outlook is between NOK 6.7 billion and NOK 7.3 billion, with an operating profit between NOK 460 million and NOK 540 million. If we exclude the spot buy cost in '22 and look at the midpoint of NOK 7 billion for next year, this is a growth of 13%. Now before we look at the future and deeper into our markets, let's take a look at the past, what we've done in the past 8 years and what we've learned. We targeted a CAGR of more than 10%. Since 2014, we've delivered an organic growth of close to 12% per year and 17% with acquisitions. We've worked hard on customer development and growing existing accounts with more than 10%. We've grown new customers with more than 7%. We've -- to provide the opportunities for this growth, we've gone from 4 to 9 factories globally and from 28,000 square meters to 100,000 square meters. Through world-class operations management, we've reduced OpEx from 35% to 22% and delivered on profitability with a CAGR of EBIT for more than 40%. We've proven economies of scale. When our sites run at high utilization, they deliver 8% to 12% margin consistently. And regarding expansion, we've not only extended existing facilities but also completed 2 international acquisitions, 1 OEM carve-out in the U.S. and 1 EMS competitor in Denmark, adding facilities in the U.S., China, Czech and Denmark. But we've also ramped the Greenfield in Poland, reaching profitability in record time. All in all, we spent, we've invested about NOK 0.5 billion in new equipment and capabilities. As we now move forward, we take with us this experience and learnings from our past performance. So let's move on to markets and growth, starting with customers for positioning. Who are the Kitron customers? Well, they're defined by long-term repeat business. They're often innovative market leaders, providing fast-growing new solutions. Examples include Kongsberg, Husqvarna, ABB, Atlas Copco, Getinge, Saab, Kollmorgen, HMS, Motion and many, many more. We have just over 100 customers with substantial sales, 200 in total. The top 20 account for about 60% of our annual sales; the top 30, about 75% of our sales. No customer exceeds 10% of sales. After the BB acquisition in 2021, the customer base doubled, adding many customers from Denmark, Germany within the industry and connectivity. Many of these customers are growing rapidly by global megatrends like sustainable energy, IoT and e-mobility. What about our positioning in the market? Well, our tradition is to manage complex products with tough requirements enabling high margins. Within several market sectors, Kitron is recognized as a strategic and critical supplier. Over the years, we have evolved to become a leader known for delivering agility and flexibility in many market sectors. In the terms of volume, we would say we're in the medium-volume business from a few thousand to 1 million units a year. Let's take a look at our market sectors and what features separate these. First of all, volume. This determines how much automation and how much machine utilization we can get, usually much more higher volumes towards connectivity and lower volumes on medical and defense/aerospace. Also, cost of failure. Can you afford to make a mistake? Certainly not. Failure is not an option within medical or defense/aerospace. Life cycle. It determines how often a product is replaced by a new generation. Within connectivity, new generations can be launched every year and live for 18 to 24 months. For products in aerospace or medical, product verification and product qualification takes a long time, many, many years, and life cycles tend to be at least 5 to 10 years between upgrades or changes. Life cycle also gives an indication of visibility. The longer a life cycle, the further into the future we can predict sales. Many of our aerospace contracts like -- have the contract length is 25 to 30 years. It's also important to understand how demand is affected by the general business cycle to be able to diversify properly. Using these different layers to describe our market sectors, we can, in general, say that connectivity, electrification and industry products run in higher volumes from tens to hundreds of thousands. The degree of production automation is high and the life cycle is relatively short. So time to market is continuously important. Our co-development, prototyping, supply chain setup and production setup must work flawlessly in a very short amount of time, and pricing is very competitive in the initial win. Medical devices and defense/aerospace share many traits. Volumes tend to be low, automation tends to be low and products are generally not designed for automation. It's normal with a high degree of vertical integration. This means that we build and supply the product the way you might see it in a hospital or at a medical center. Our quality reputation is critical and recalls and replacements are difficult and expensive. The life cycle is long. Price pressure from our customers' competitors and end of life on components, forces redesign initiatives to product -- to protect product margins and delivery capability. The entry barriers are high and increasing. The business tends to be noncyclical, which takes us to the concern lately regarding recession in parts of the world. However, Kitron sees a strong demand over the next year. But let's take a look at how Kitron copes with recession. At Kitron, our strategy rests on 4 pillars: first, establish an exposure to global markets, even the 1 region may be suffering challenges many of Kitron's customers are successful in multiple markets globally. Second, over the years, we've built a strong base of defense and security customers focused on communications, surveillance and encryption as well as avionics equipment. We have a base of volumes under long-term contracts, and these are supplemented by new projects that are won from time to time. Spend is determined by security outlook. Budgets are longer term. Defense and aerospace provides opportunities and stability even over a possible recession. In addition, medical devices, where product demand is driven by recurring public investment, tends to be noncyclical and resilient even during a downturn. The fourth pillar in our strategy is targeting growth segments driven by global megatrends, trends like connectivity, electrification and sustainable energy solutions. All of these, by the way, supported by public spend. Furthermore, where there is demand driven by consumer spend, you have to make sure that the consumer is recession-resilient. Finally, looking at customers and competitors. In recession times, new opportunities will arise when companies work to reduce their balance sheet exposure, optimize profitability and where investments focused on R&D, marketing and sales, leading to a reevaluation of internal manufacturing operations. Also competitors that struggle in good times will certainly not perform when times are tough. Customers want stability, security and predictability. Let's take a look at our growth strategy in the different market sectors. Overall, our ambition is to grow faster than the market. This can be achieved by choosing high-growth customers and targeting high-growth market sectors. As I've said, our repeat business is high, including when customers introduce new generations. We also target new program wins. Much of this is focused on the market sectors, connectivity and electrification, as indicated by the 15% CAGR. Let's dive into market sector connectivity. Within this sector, we find machine-to-machine IoT, sensors, wireless communications, networking products and much, much more. Volumes are high, leading to utilization, economies of scale and competitive pricing being crucial to success. Next, electrification. Here, we find maritime and land-based energy storage and control systems for wind and solar energy production, battery management systems, power grid transmission systems and charging and fuel cell technology. Customers are often large, multinational entities with global sales. We will have to continue investing in capabilities and application know-how. We compete on scale, technology and reputation. Looking at market sector industry, it remains impressively large. Here, we find equipment for automation, robotics and recycling, seismic seabed exploration, subsea production control, equipment for construction and infrastructure. We'll continue to grow with the existing customer base. It's important here to capitalize on our capabilities and our wide application knowledge. Finally, 2 of our traditional areas of growth: Defense/Aerospace and Medical, both have very high requirements, entry barriers to doing business and very long product life cycles. The long product life cycle leads to growth in the strategic period primarily coming from existing customer base. We expect a moderate growth of around 5% in Medical sector, but for Defense/Aerospace, we see strong growth possibilities in Europe, as Europe increases defense spend. We, therefore, increased our growth expectation from 3% to 5% to 10%. As a result of these contrasting growth rates, the share of the total between the market sectors is expected to change by 2027. Next, Mr. Defense, Hans Petter Thomassen, will help us understand growth opportunities within Defense/Aerospace. Hans Petter?

Okay. Thank you, Peter, for the introduction. In this section of opportunities in the defense industry, I will briefly address what is driving the market and secondly, how is Kitron positioned in this sector. So starting up. In Europe, over the past decade, U.S. foreign military presence has shifted towards other regions in the world, and hence, leaving European countries with a greater responsibility for Europe security. The war in Ukraine has changed the security situation dramatically and is driving the urgency for delivering increased defense capacities. Most countries have established long-term acquisition plans now to renew capabilities and to increase capacity. These plants are now funded and the timeline for delivery is moving to the left, meaning early is appreciated. In the U.S. side, the U.S. government is the world's largest defense export through their foreign military sales program, supplying defense capabilities to NATO countries and other allies of NATO. The defense industrial base in the U.S. is the largest provider of defense capabilities to the NATO alliance and worldwide. Kitron's position in this landscape. Well, Kitron is well established with long-term relation towards prime defense contractors, both in Europe and in the U.S. Major defense acquisitions often require localized industrial participation. This adds a requirement on the defense OEMs to establish local production. Kitron as a contract manufacturer is really well suited to support this effort. Our factory footprint is well positioned to support offset obligations in several countries. With that, we're moving on to what does it take to deliver to the defense industry? Well, first and foremost, our long-term strategy and commitment is a must. If you're not there in for the long game, then you have nothing there. Kitron has already delivered to the defense industry for decades. Most opportunities we come across, they take years to develop from the time they emerge as a prospect until they're actually contracted. So secondly, a robust process for the entire value chain from the point of quoting through completion of delivery is essential. A compliant quote is actually the first step. If you don't have one, you're not in the game. Typical long-term initiatives like the one you see in the lower right-hand corner, they are the weapon stations where we just communicated renewal over the next 5 years. It takes 1 to 2 years from we receive the initial RFI until we have a contract in hand. Through that process, we are audited by customer. We're audited by end users. They're focusing on true cost. They are focusing on quality. They are focusing on security aspects. All of these are tough entry barriers that we have to overcome. So Kitron has, throughout the years, cooperated with numerous OEMs and both in the U.S. and in Europe, and we have built the competence to meet these requirements. Through the experience, Kitron has already overcome the main entry barriers in the marketplace. Broadening of the defense customer base is also ongoing. New technology providers are coming into the market space, and Kitron is actively searching for new customers. Kitron does believe that the defense market will be strong for years to come. And with that, we will hand it over to Kristoffer for talking about future capacity. Thank you.

Thank you very much. So in this section, I will cover how we will improve our competitiveness and our margins, what strategies we have when evaluating acquisitions and greenfield investments, and finally, what is the current state of capacity and utilization and our plans for expansion going forward. Starting with how to improve our competitiveness and our margins. Number one is to focus on economy of scale. We need to maximize utilization of all our investments. Our machines should ideally run 24/7. A common base of automated production equipment must serve the whole customer base. We need to plan our production layout, maximizing the opportunity for operators to monitor several processes on multiple steps on multiple lines, and completely customer unique processes must be priced as such. To enable a high and efficient utilization, we need good, reliable and real-time data to understand where our bottlenecks are now and also in the future. If you're wondering what we actually do and produce within Kitron, this is an example of a PCB, or a printed circuit board, which contains -- it's from a medical device that we produce here in Norway, contains of hundreds or even thousands of electric components that we are buying and then assembled through different kind of processes. It contains a lot of different kind of components, even semiconductors, which I think everyone here also learned a lot about since the last couple of years. It can take up to 30 different process steps to make some of our PCBs. Many of those processes are very advanced and highly automated, but there are still a lot of manual processes within in our production. We will also improve and optimize our tied-up capital and material in stock. The whole operations need to understand the chain of constraints and our delivery schedules. Sourcing and procurement need to push and pull depending on the demand and the component availability, operations and planning need to maximize the production output and our operators need to know at all times how they are performing versus targets. We also need to continue our process automation journey. Significant steps have been taken during the last 5 years, and we are ready to roll out our best practice accomplishments across more factories. And some of those examples are automated through holding certain lines fully automated high-level assembly lines and also utilizing of 3D printing machines and rapidly adapting machines for new end product use. Our customers expect us to deliver more value. And so we are stepping up our continuous improvement efforts that will deliver capacity boosts, cost reductions for our customers as well as margin expansion for Kitron. Best-in-class in attracting new employees, onboarding them and providing strong growth opportunities within the group is getting very important going forward. And one key takeaway is that Kitron has demonstrated a tremendous economy of scale when reaching more than 50% margin improvements when fully utilizing our flexibilities and our capacity. Over the next 5 years, we will need to increase our capabilities, and we need to double our capacity. Additional capacity can be created within existing entities through extension and additions during 2023 and '24, existing facilities will continue to expand. Some of our -- some sites might even double up in size. Looking into 2025, new capacity will be needed most likely in Central Eastern Europe. Most likely, this capacity will be created by launching a new greenfield site, similar to the launch we did in Poland in 2019. Over the next year, we will evaluate the region and country to go for. The most important factors when do this is the access to competent and competitive labor pool. The growth strategy for a new facility is to introduce existing growing customers and to do a carbon copy footprint of the transferring sites. Acquisitions are interesting to help us grow by adding capabilities, regional presence, new customers and new capacity. We continuously evaluate different kind of projects to determine how they fit in our overall growth strategy, how profitable they are and if they provide new customers, market sectors, geography that allows us to grow even faster or if we can use them as a bridgehead to launch additional initiatives in new markets. Currently, our priority for potential acquisitions are primarily in Asia, primarily outside China. Looking at our footprint. Kitron is currently present in 10 countries. We have 9 manufacturing sites in 8 different countries. In these facilities, we find more than 30 fully automated production lines for electronics, multiple line for high-level assembly of end customer products and more than 2,800 employees. During 2022, we established an automation center in India, and this team is dedicated to developing new automation solutions for Kitron Group going forward. Planned investments for '23 will improve our capabilities and increase our capacity by 15%. Currently, we are investigating full production automation and test line for battery packs and the high-level automated assembly line for a sensor and connectivity device. These projects are scheduled to deliver volumes beyond 2024 and going forward. Over the next 5 years, we plan to double our organic capacity, and we are looking for additional possibilities on -- in acquisitions. So financial targets, Peter?

Thank you, Kristoffer. When we kicked off our last strategy period in 2015, our target was to double revenue to NOK 3 billion by 2020. Back then, this seemed like a faraway dream. But when we wrapped up 2020, we had exceeded this target, and we're close to NOK 4 billion. Now we raised our ambition for the next 5 years. We feel confident about the target. We know our customers and we know our market and powered by global megatrends, connectivity, electrification, automation, defense and security, our ambition is raised for organic growth to reach more than NOK 10 billion or more than EUR 1 billion in the next 5 years. This means an annual growth rate of about 10%. In addition, we see upside possibilities from M&A. Through continued operational excellence, our ambition is to deliver more than 8% operating profit or EBIT. Now Cathrin Nylander, our CFO, will share with you some of our top targets going forward.

Thank you, Peter. We have selected 5 long-term financial targets. The first one is a 10% CAGR on revenue or a 10% annual growth rate over time. And this is the organic growth rate that we've had since 2015, and we estimate that this is a fair representation of the growth rate going forward as well. Of course, experience has shown that customers which have strong demand can push this upwards. So we have a stronger growth rate over some years and specific events like the material allocation, can put it downwards. But over time, we think this as an average, we think 10% is a good representation of what we can grow. The second target is an EBIT above 8%. We have started to deliver on our previous target of 7% EBIT margin. We say it's a strong belief that an 8% profit margin or above is achievable. We know we will gain on further economies of scale and that we have improved efficiencies that still can be had within the current setup. We say above 8% because we see it's possible to achieve higher, but we expect that the top end will vary and thus would like to communicate the firm ground on 8% going forward in the long term. The third target is to have a return on operating capital above 25%. As the profitability improves, the term returns are likely to improve as well. We are coming from a period with capital inefficiencies due to the material allocation. As we work this out, our capital efficiency ratios will improve. When we talk about operating capital, we not only include net working capital, we also include our fixed assets, that is all the machines that we use, all the buildings we use and also all our rent obligations on our leased facilities. When taking that into consideration when we make decisions, we make sure that we make decisions on expansions on capacity and footprint and that they will give the return over time that we want. And the fourth target, which is a cash flow of 80% over EBITDA. To be able to finance the growth by our own cash flow as stable and positive cash flow is key. But the same growth is also a limiting factor to the cash flow as we grow. Also, since this is a long-term target, we expect that if we can improve the capital efficiency ratios over years, we can have a higher cash flow on this, but over time, this is what we strive for. And then to the last target, net interest-bearing debt over EBITDA. Our long-term target is to be below 2.5, and thus have a more conservative balance sheet. We are currently at 2.8, and we have been above 3 previously. In addition, with the current interest rates, it is becoming increasingly important to reduce debt to protect our net income, not only to improve our debt efficiency ratios. Our aim is to free capital, so we have the freedom to act when we want to, whether or not it's expansion on capacity, dividends or M&A. That was a bit on the financial targets and then to something equally important, sustainability. Kitron has a firm base to move forward with our ambitions within ESG. We have since long environmentally certified sites, ISO14001. Our ethical guidelines are based on the UN conventions and on -- what you say, relevant governance principles. We support the UN Global Compact and have targets supporting the ambitions. We have signed for the WASH pledge. In Kitron, we aim for 100% sustainable power supply on all our sites. We're currently at 66%, so we have some way to go, but we're working hard to find alternative and sustainable sources for the other sites. And then to the second target, the EU taxonomy. As an EMS partner, the taxonomy alignment is based on our customers' end products. Products that qualify are currently mainly in the electrification sector and partly within the connectivity sector. Right now, we're at the 18%, and our long-term target is to be above 20%. And at the bottom are qualifiers. We're part of the Oslo Stock Exchange ESG Index. We have a silver medal with EcoVadis and we are operated on position green and sustain analytics. And for further information, please look into our sustainable report -- sustainability report. Finally, as a key takeaway, we have strong stakeholder requirements whether it is the number of hours that we were able to work a week in China or life cycle analysis on the customers' products, we are as committed to their ambitions as to our own. And with that, Peter, I will leave it to you.

Thanks, Cathrin. So let me summarize today's message. Kitron will continue delivering superior performance to customers and shareholders. Our ambition is to have 10% growth each year growing with existing customer base and through new program acquisition. Our ambition for 2027 is sales of NOK 10 billion and acquisitions add an upside. We'll continue to focus on high-growth sectors, electrification and connectivity, where we expect the annual growth rate to be more than 15%. To achieve margin -- profit margins of more than 8%, we'll maximize the utilization of existing capacity. And with that, we are ready for some questions.

So for the time being, maybe we can have some on the webcast. It's 45 seconds late. So maybe there are some questions in the room.

Go ahead, [ Petter ].

Yes. Wait for the microphone.

The first question goes to -- if you were to operate at full capacity today, for example, given the existing footprint, what would be kind of the revenue that you could be able to deliver?

In several of our sites today, we are near that full utilization capacity. For example, I'd say primarily Lithuania, Czech Republic probably are very, very near that full capacity, as we stand now. Now that capacity can also be extended. Your question was in regards to what margins are.

No. Just with regards to revenue, what kind of...

Right now, we are -- our annual run rate right now in Q4, NOK 7.3 billion. That's where we're running at now. Of course, you don't want to do that over an extended time. You want to come down to maybe 85% to 80% utilization of the site, so that you actually have some free spare time to catch up if something goes wrong. So that's really the issue now in December and towards the end of quarter 4 this year. It leaves very little time to catch up if something goes wrong.

And the second question goes to -- if you were to deliver on the NOK 10 billion revenue targets organically, is that within the 2% to 3% CapEx scope to get there?

Correct.

Okay. And just with regards to the cyclicality that you mentioned, are you able to give some sort of clarification with regards to industry and what type of customers and end application that you deliver to? Because I guess the majority of the question goes to the cyclicality industry, the industry vertical?

You're talking about the business cycle and possible...

Yes, implication for the industry vertical. So I'm just curious as to why or what type of customers you have and what type of end applications, if you have some sort of examples?

Well, I mean, we spoke about -- I spoke about the electrification, I spoke about energy storage solutions, both land-based and offshore. So on the offshore side, you have a customer like Corvus Energy, working with electrification of maritime, battery management systems that we deliver to Corvus Energy. On the land-based side, we have a very big Scandinavian customer who we can't use their name, but where we deliver energy storage solutions for them. On e-mobility, we won a new customer that's just starting to ramp up and they released their new generation of products for EV charging that will start to sell probably in January-February next year. That's another big product coming into next year. So those are a couple of examples on electrification. On the automation side, you have big U.S. customers delivering to warehouses and to, in general, industrial automation, electric motors and such that are used all over in different kinds of automation. Yes, I think that's it.

I have more questions, but I can leave the microphone to others, meanwhile, if there's any other questions.

Well, let's see if there's any other hands that come up here.

Okay. Then, I'll just continue then.

Go ahead. You have to wave if you have something else on it.

All right. Great. And I'm just curious about the defense growth of 10%, which seems at least outside-in somewhat conservative given, I guess, one, you have to restore the inventory levels in Europe; and secondly, the defense spend is increasing as a percentage of GDP, which is kind of a more of a long-term driver. Can you give some comments? I guess it might have something to do with what type of end application that you deliver to, I don't know? But any thoughts around that would be helpful.

I think many of our contracts are long term. So we've counted those already as part of our growth. For example, the F-35 program with the Gripen program out of Sweden, and other big projects that are in the long term. We've also known about some of the shorter-term wins that we've had before. But when we know the market has been stable. So I think the 10%, Hans Petter, any comment?

Well, first of all, there are 2 distinctly different types of contracts out there. Typically on the U.S.-based contracts, they have framed agreements that are very scalable in a short period of time. Going over to Europe, the acquisition process is much, much slower. So actually, the limiting factor for the growth is going to be the procurement process from the government and the long -- so what I stated in my presentation also, we are looking at a surge of demand lasting for years. I would even go as far as possible decades just to replace what has been used in the Ukraine and increasing our capacity beyond that, it's a pretty big undertaking.

Is there any major gross margin differences between the sectors that you have or the verticals that you deliver to, which are within defense versus industry versus connectivity, et cetera?

No, you can speak to the...

No, a couple of margin points, right? So if we go back to that slide we have where you see the market sectors and you see the sort of see that the way you can view them through different layers, we'd say probably the most competitive is on connectivity products and also the margins are probably a tad lower. So going from maybe 6%, 6.5% margin on the left-hand side of that slide to 9%, 10%, 12% margin on the right-hand side of that scale. But it all varies between when you actually then look at specific products inside those market sectors. But if you just want to sort of a general way of looking at and how do we justify that? Well, usually, there's more tied-up capital on the right-hand side, you're looking at medical or Defense/Aerospace. Tied up capital, return on operating capital target of 25%. The only way to compensate is with margins, so.

Yes. And just a final question for me. Just curious with regards to the guidance on 2023 because the implied OpEx growth that you assume from '22 to '23 is pretty high on your guidance. So I'm just wondering what are the drivers for the OpEx growth? Because I guess you would have some easy comps with regards to maybe electricity, transportation costs, et cetera. But can you just comment on what you have kind of assumed with regards to the OpEx growth from '22 to '23 within your guidance?

We're not guiding on OpEx growth.

No, we're not guiding on OpEx.

No, but we can calculate that on our own.

Yes, I think you need to.

Okay. That's all everything from me.

I think we have a very strong fourth quarter this year, so we cannot repeat that every quarter next year, I think.

Let's just say we're maybe a tad conservative.

Yes.

Go ahead, Otto.

Yes, we have some questions online here. And one is about a topic that's very much in the news. So how are you handling the extraordinary electricity prices? Are you able to pass on these cost increases to customers? Are they split or do you carry them yourself? What is your strategy going forward with respect to this? So it's sort of a multi-faced question.

For the most part, on higher costs that are outside the budget that we create every year, right? Your budget costs and that sort of reflects the pricing you implement in the first quarter, and that rolls on to every quarter beyond that. But during this year, we've had extraordinary price increases on transportation for one, and of course, on energy as another. And those we try to pass along as much as we can to customers. And we usually we do it as an additional add-on or markup in percentage to customers. So somewhere around between 2% maybe on transportation, 2% to 3% on energy as an additional markup on the sales price just to cover that cost.

Also, have to know that the energy prices are not growing in all of our countries that we are at. They have not changed significantly in China or nor in the U.S. So it's mainly a European issue. But we do know that the electricity prices for 2022 compared to 2021 have doubled. So that's what we have and have calculated and increased our prices for. We see a slower increase coming into 2023, of course, because we've had the higher prices for the second half already this year.

And then we have a couple of questions on defense. So the first one is, would you please expand on the various weapon systems which you provide services to, for instance, RWS NSM?

And while I can't go into deep details on that, but we are currently having a very broad portfolio, missile systems, remote weapon stations, military communication equipment for different purposes, both air defense systems and other general military communication gear, plus the well-known F-35. So we have a very broad range of products. Most of them are infrastructure types and not so much conflict driven. However, these days, everything is basically conflict driven. I don't know if that answers the question.

For the most part, communications and surveillance equipment as a percentage of the total.

And then there's sort of a more quantifiable question. Could you please quantify your exposure to the defense sector? Is it 20% of sales?

That used to be. I'm not actually...

Around this.

Somewhere between 20 and...

It is shrinking compared because we're growing so much more in other market sectors.

And then there's more of a financial question. Can you comment a bit on the debt situation? In what way are you affected by rising interest rates?

Cathrin, why don't you take this one?

Of course, we are affected by in terms of exchange rates, we are. We have about NOK 1.6 billion of net interest-bearing debt, so it does affect us. We have a general surcharge on the general interest of about 2% currently. And the more we can reduce our net interest-bearing debt, of course, our interest rate will go down also as a percentage because we have better terms when we reduce it. But that's basically the situation currently. Our net interest-bearing debt ratio compared to EBITDA is improving, i.e., being lower due to the fact that we are improving our profitability basically. And we have been sort of stable on the net interest-bearing debt the last 3 months, I think.

That's it for the online questions so far.

Okay. Anyone else? Yes. Go ahead. Hang on, just wait for the mic.

I was just wondering on energy costs on the kind of you're creating 100% sustainable energy supply and you have 66% today.

We had much higher prior to the acquisition of BB.

Okay.

We had 88%, sort of.

Okay. Is there any cost or margin risk or implications on this? I mean...

So far, we have not seen that it's more expensive.

Okay.

Right, so prior to the acquisition of BB, the only facility we had that did not have sustainable energy or green energy certificate -- not certificate, but certified green energy was the U.S. and -- primarily because it was at least last year it was impossible to get that.

We get the mix.

Even the Ningbo facility in China has certified green energy. Now we're working on getting that for the Suzhou facility, making sure we have documentation for Denmark and Czech also.

And in terms of M&A, which you still see open for, I mean you're already above your leverage targets. So I'm guessing any near-term M&A will be financed with equity and without -- if there are large synergies, to me, that would make sense to do?

Well, it needs to be earnings-accretive. So in order for us to utilize that option.

How accretive compared to BB Electronics, for example?

I mean that was -- I think that was a very good deal, especially in hindsight now looking at this year. But even at what we looked at when we did that. So obviously, we'll be looking for things like that. Anything other than that will be financed by either cash or sort of without going to the shareholders and asking for money, we would have to reduce our inventory, right? And that's the big thing now. That's the big buildup over the past months during this material constraint situation. But likely, our target is that, that's going to reduce quickly over the next 6 months, first half of next year. But before it bleeds off entirely, it's going to be a longer period of that. But that should start bringing that debt down.

And then net working capital?

Pardon?

The inventory levels?

Yes.

Yes. So you expect the net working capital to come down short term now?

Well, not short term, but into next year. It can take 6 months to be -- before we see a real impact on it. Yes, go ahead, Peter.

Yes. Looking at your reverse profit warning, it seems -- I mean you're saying 2 things: strong demand, you're saying -- and then you're saying that improving component situation. I would assume that improvement component situation would lead to reduced inventories that you have inventors on behalf of the customers that are almost finished kind of, lacking components and then you added last components and send them to the customers. So shouldn't that mean that we should expect to see lower inventories in the fourth quarter?

It's stable. It's stable. We still had an increase in November. As a percentage of the total, maybe 7%, 8% increase in November, actually. And that's because the inventory continues to flow in and not all parts are available. I mean it's an ease of constraints. It's not just going away. And that's the way it's going to continue being for some of these products. There's a big difference between what market sector you're in and how new your products are. We see that between the acquisition we made from BB Electronics and the sort of old original Kitron, where old original Kitron can have much older products on Defense/Aerospace but also on the Medical devices. Components that are sort of becoming -- going close to end of life, especially in the very hot market that was on components in the past couple of years. Those parts along with automotive parts, which also sort of resemble that sort of position in its life cycle are still difficult for the auto industry to get it on to also. So it continues, but I expect this to continue to become easier and easier. And really, we're not talking about constraints so much internally at all. We're talking more about our internal constraints on production capacity. Anyone else? Go ahead, Otto.

Yes, we have some more online here. One of them is about the customer base. On your top 20 customers, are you the sole EMS or do you compete with other EMSs also having deliveries?

I mean on a product level, we're probably -- I'm not going to swear by it, but we're probably the sole provider of the products that we built. Now some of the customers have other EMSs that they work out with and they have other products that we don't build at all. It could be that they're more specialized in something versus what we're more specialized on. For some customers, we are the complete sole provider. So it varies a little bit. But I'd say we're the majority supplier for many of these customers.

And then there's one going back to the green energy question. I would like to hear about your plan regarding green energy in the Scandinavian area and especially in Denmark?

Denmark. First of all, in Denmark, we have a higher degree of district heating, first of all. So we need to find sources to buy the rest of green basically. That's the comment. So we've been working with BB on that.

And then there's a sort of a big question. Are there plans to split Kitron into several companies?

As of now, no. There's no discussion on that.

That's it.

Okay. Go ahead.

I have 2 questions. One is about the spot market. Do you see the activity and the spot market changes -- changing and also about extreme prices in the spot market, how do you think that is developing?

I think to a large degree, it's going down. I think there's a fatigue amongst customers and us on continuing to spend a lot of money on this. And also with the demand, in general, going down from PC and iPhones and capacity shifting over to the types of components that we use, there is becoming less and less need for it. It still exists. But -- I mean there were crazy prices. Just 2 months ago, we were looking at ramping a new e-mobility product. And the standard price for a part was $1 and all of the different spot market suppliers wanted $55 or more for that same part. And that part was used multiple times in the product. So it became impossible. The product wasn't cost-competitive anymore. So we held off and then a few weeks later, problem solved.

Then I have a question about acquisitions. We saw the BB Electronic (sic) [ BB Electronics ] turned out to be a very successful acquisition, and that was probably executed during a situation where you had components restrictions or restraints? Now that component situation is easing, it's easing basically for all the EMS operators. And do you see in -- when you have a smaller EMS factories that may be for sale, do you see that the price expectations are going up or how do you think the opportunities for acquisitions are right now?

I mean there's a lot of opportunity for small, single plant EMSes for sale. We tend to shy away a little bit from that. There's a lot of work that goes into an acquisition and there needs to be a substantial gain for us, right? So not terribly interested on acquisitions where the top line is NOK 100 million, right? It's going to have to be, at the very least, the multiple facility combination. It's going to have to be at least over $30 million -- EUR 30 million in sales to be interesting to spend the money and the time to go through an acquisition, right? And have to weigh these different possible acquisitions against each other. But on the valuation side, I see both. I see some valuations coming down, I see other valuations remaining high and the sort of dream that things are valued the same that they were a year ago, which they should not be especially as some of these companies have a tougher exposure than, for example, we do at Kitron. So I think you need to take that into account. We're looking at possible acquisitions multiple times a week, sort of cataloging what's out there and learning what's going on. Okay, we have another question up there.

So I just wanted to dig a bit into the growth ambition. So you target 10% organic growth, and you say the market is expected to grow around 8%. The difference there is that mainly due to mix between the market sectors or is there any other factors? And maybe you could also comment a bit about price and volume assumptions in those 10%? So that's the first one.

There's a difference between how the market grows in general as a total. It may grow 8% as a total. But inside that total, you will have a significant portion, which is computer; a mobile, even in Europe; automotive, will be also another portion. If you go to the portion that where we are, that's probably about 40% -- 35% to 40% of that total market. And that slice is growing probably a little bit higher, I would say, right? The connectivity, in general, IoT is projected to grow about 22% between this year and 2027. So that's 1 growth factor. You look at electrification and e-mobility solutions, things like that, you'll have seen varying growth rates between 10%, 12%, 15%, 20% depending on subcategory of the product. And then, of course, how can we grow faster than our competitors? All those things add up to our target for growth.

So basically, what you're saying is that it's mostly about the mix, which type of market sectors you're exposed to versus, call it, the overall market?

I mean, yes, you wouldn't want to go for a market sector with no growth or negative growth in it.

Yes, sure. And then on the volume versus price, do you have any kind of implicit assumption on that in there or...

No, we try to maintain our strategy, which is if it's an interesting product that fits long term with us, right. We have our business model, 25% return on operating capital, we just look at how much operating capital do we need to use. That will determine the margin, which could be 6%, 6.5% to 12%, some cases, 15% even.

But how we factored in any price growth in our estimations, no, we have not.

No, no, no. We're not looking at doing general price increases.

No, that's not how we grow.

That's basically, that's volume, more of a volume.

Yes.

Okay. Okay, that's interesting. And then a bit on the margins. So they're going to go from 7% to 8% or above 8%? And you talked a bit about capacity utilization. And it seems to me like you're running pretty close to full capacity already, as we discussed a bit earlier. So what will drive the margin increase? Is it mostly scale on sales and general administration? Is it increased productivity, meaning lower costs in the facilities or is it something else?

Yes, yes and yes.

Okay.

Right. Volume is a big thing. Keeping overheads to where they are today or growing them significantly slower, right? But I keep telling my organization that overhead growth cannot be linear with volume. I don't know how many times I've said that this year, but that goes true for the future also. So becoming more efficient that way. Looking at -- we have a target next year, we say for every single process, we work in small, like an operator, doing some soldering to a big process. We want to cut the process time in half everywhere. That's a big project for the whole group working next year. And that will lead to also the significant improvements for profitability.

And also if you calculate backward for this quarter, you will see that we are in that range. So it's possible.

Yes. One last question from me. So this, call it, narrative of economies of scale, how does that fit into the contract pricing models with your clients? And basically, what I'm thinking here is that if you are able to cut cost per unit by, let's say, 10% that you produce for a client, how does that, call it, cost reduction occur between you and the client? Is that totally on -- you get all of that cost increase on your books or are you sharing some of that with your clients over time?

Sometimes we share, sometimes we have annual -- agreed upon the annual price reductions. So if we have an annual price reduction of 3.5% and we achieved 7%, well, we're going to give the customer 3.5%, right? And we're going to keep the other 3.5% to 4% for us. So that's 1 way to do this. But also we quote and offer market price, right? There's no other price than the market price. So we have to stay cost competitive all the time. Now if we can keep our costs lower than that, that's more margin for us. But we can't go out there and quote 12% and then also be expensive on our cost side. And that's going to be -- put us way out of competitiveness. And we know that we're not because we keep growing and we keep winning new business.

Yes. A couple of questions here. I just wonder about growth next year. Can you say anything about how much is expected to come from defense? I mean we read about new orders every day. And also how much of a, let's say, recession have you pencil-in into your outlook for next year? I mean is there also a risk maybe that some of your customers has maybe overstated demand due to that they have said that they want to you to deliver all components, et cetera, that you can, driven by the supply chain crisis or what have you pencil-in into your guidance?

Yes. Of course, we have some buffers, right? I don't want to exactly go out and say how much we have in buffers. But what I can say is that the next -- first 6 months of next year, I feel very confident about. Q1 is very strong. I expect the first quarter to continue rolling at the speed we have in the fourth quarter this year or even higher or even higher where customers are really, really coming after some very, very high volumes in the first quarter and expect that also to go into the second quarter. Beyond that, yes, we have demand for the rest full year, but there's always uncertainty what's going to happen in the market.

Yes, that's clear. And then just a question on the maybe margin side, more longer term, you target 8%, I mean, you will grow quite significantly. And if we look at some other EMS players here in the Nordics, we have both maybe NOTE in Sweden and INCAP in Finland, that are doing above or at 10% EBIT margins. Why are you not targeting the same goals?

Because we're much bigger on volume, right? The competition is higher when you go to a higher volume scenario. The requirement for open book and transparency is much higher with large competent customers, right? If you're looking to add, if we're going to grow now from NOK 6 billion to NOK 10 billion, adding another NOK 4 billion of business, do we want to add 8 customers of NOK 500 million each or do we want to add 80 customers of NOK 50 million each or do we want to add 800 customers of NOK 20 million each, right? So there's a difference there on how competent and how competitive the marketplace is. On a low-volume program, anything below NOK 10 million a year, you can charge much, much higher margins because the competition really -- foremost, really, it's not attractive to us to work with those customers.

So discussion on customer concentration, none of us -- our customers are higher than 10%. You will find other numbers with those 2 competitors.

Yes. And then just the last question on the market growth. You're saying the market is expected to grow by 8%. Is it possible to say how much of -- or how much more that is than the, let's say, historical figures? I think the EMS market in Europe has been said to grow by around 3% to 4% historically. Do you think that is a fair assumption maybe?

I think the change in the past 5 years with connected devices that, in combination with electrification, drives every single market sector for us. It drives defense and aerospace, right? Because everything is talking to each other now. Everything is -- every system has to be stand-alone also from an energy point of view. So you have these technologies coming in and affecting that. Within the medical sector, it's the same thing. Every machine in a hospital is connected somehow. And that data is communicated across the hospital and stored and sent. And -- so you have those megatrends that is changing every product we have and introducing new technology, that technology into where it has not been before. So that's driving this much, much higher growth, right? And then, of course, from a volume perspective, it's even -- the growth is probably higher because the cost is also coming down.

You have historically had quite limited visibility from your customers, but that's changed a lot during the component issue. But I assume that from what you said about the quarter is that now the visibility is coming down again, right, since the component issues are less...

We have not -- I mean, your question, I think, goes to our order backlog and the rolling 12-month demand. We've not seen any change in that, actually the opposite.

Okay. So you still have good visibility...

I think -- yes, I mean, the order backlog remains at the level that it has been before. The order intake has been strong and the rolling 12 continues to grow, not as fast maybe as it grew a year ago, but still continues to grow, and we'll see those numbers, but not until beginning of February when we have the Q4 report.

There is a comment also on the visibility because we normally have 12 months of visibility due to customer forecast. What we have seen now in this period when we've asked for firm orders, we've seen a higher degree of firm orders, but many of them not putting orders a lot more than 1 year regardless. But there has been customers now having orders over 1 year, but we expect it to go down to the 1 year clear visibility that we've always had. So it's not sort of -- it's not a bad visibility, it's actually quite good visibility that we have, which is shifting the forum.

Just to continue on the visibility. If you look into 2024, which is then more than 1 year into the future, how bad should the world economy be to see declining revenues, pressure on margin as some of the lead analysts believe in the company that you could see EBIT margin drop down to 6.5% and declining revenues. How bad should the economy be to see a such scenario? And is that likely how you see the world today?

Well, we -- for our budget for next year, we have a scenario where we -- just for preparation purposes, right, we've asked every 1 of our 8 production companies to deliver a budget, which still provides around that 6% margin level, but with a 30% cut from where they are today on top line. So we have that scenario, but -- and your question is how bad would we have to start to see? We're not seeing it now. I don't know when we -- if and when we'll see it. But that's the preparation we've done. And that would mean that significant parts of our top line goes down, and we're just not seeing that.

Okay.

Okay, I think that's it. Thank you so much, and welcome to join us again in February for our Q4 report.