Kitron ASA (KIT) Earnings Call Transcript & Summary

I'm Peter Nilsson, CEO of the Kitron Group. And joining me, as usual, is Ms. Cathrin Nylander, CFO. Following today's brief presentation, we'll have a Q&A. So please post any questions you may have in the Q&A section of the webcast. Thank you. Next slide, please. Let's take a look at an overview of the quarter and the full year 2024 numbers. Kitron delivered a Q4 revenue of close to EUR 161 million with a 7.3% margin, contributing to a full year revenue of just over EUR 647 million or a 7.4% margin. Throughout the year, demand softened across key sectors such as Connectivity, Electrification, and Industry, leading to a 16.5% year-over-year decline. The CEE market fell by 34%, primarily due to weakened Electrification demand, while Asia declined 19%, affected by reduced Connectivity investments driven by downturn in capital investments in manufacturing. Defense & Aerospace was a bright spot, growing quarter-over-quarter and year-over-year as well as the backlog growing 23%. To navigate shifting market conditions, Kitron initiated a restructuring program in early 2024, which resulted in EUR 4.8 million of onetime costs. These operational adjustments streamline cost, optimize production and increase efficiency. In Q4, Kitron accounted for an additional EUR 1.3 million in accrual related to customer impairments. Excluding these onetime costs, the underlying EBIT reached EUR 54.1 million with an 8.4% EBIT margin, demonstrating strong operational control and profitability improvements. With no further restructuring plan, Kitron is well positioned now to capitalize on growth opportunities in 2025, driven by strengthened order backlog and continued sector demand. Next slide, please. Over the past 4 months, we've announced several new deals. Let's review some of those markets driving growth. In the fourth quarter we announced the EUR 15 million maritime IOT deal for smart asset tracking. We also announced the 5 million dollar U.S. Army Defense Contract, expanding our U.S. footprint in Defense solutions. Now, in addition, this January, 2 major contracts were secured. First, a EUR 25 million Naval Strike Missile contract with Kongsberg, then a EUR 30 million contract for Advanced UAV optics, strengthening our expertise in aerospace surveillance and autonomous systems. As announced before, by the end of 2025, our Nordic sites will start to see capacity constraints. So to accommodate the growing demand, we are investing in 2 new facilities to focus on high-level assembly and systems integration and new 7000 square meter facility in Longum, Norway planned to be operational from Q1 2026. An additional 6000 square meter building next to the site in Sweden expands capabilities from the fourth this year. Our M&A strategy remains active, focusing on technology-driven acquisitions and regional expansion. For 2025, we expect revenues in the range between EUR 600 million and EUR 700 million with an expectation to exceed EUR 650 million. The book-to-bill ratio in Q4 of 1.03 confirms a positive momentum heading into 2025. Next slide, please. Let's move on to some fourth quarter sector trends. Connectivity saw mixed results. After a poor first half of the year, we saw a turnaround in the second half. The order backlog grew 28% year-on-year. Sensor and asset tracking solutions remain key growth areas, while traditional network and infrastructure started to pick up towards the end of the year. Going forward, new customer wins and smart integration of emerging technologies are expected to drive recovery. Inventory destocking continues to an extent, but should be exhausted by Q2 this year. The Electrification sector showed regional disparities, declining 32% overall year-on-year, driven by a 50% drop in the CEE region, whilst the Nordics and the U.S. grew 28%. Energy Transmission saw strong growth, but consumer-driven Electrification, including home energy storage, solar inverters and EV infrastructure and connecting equipment around that declining. Looking ahead, industrial Electrification investments are expected to drive a recovery in 2025, but consumer-driven adoption remains uncertain due to economic pressures. The industry sector contracted 33% year-on-year, although AI infrastructure and subsea applications remained resilient against the overall slowdown. Demand for automation and maritime equipment is beginning to pick up, while traditional manufacturing equipment remains somewhat weak. Moving forward, renewed investments in industrial automation and maritime applications present long-term growth potential. Finally, Defense & Aerospace was the best-performing sector with 22% growth year-over-year and 6% quarter-over-quarter. Avionics, surveillance, missile systems were leading growth categories. Looking forward, the government defense budgets continue to rise and NATO-related investments are boosting long-term demand. Next slide, please. Let's talk about our order backlog, which is continuing to improve. We ended Q4 2024 with an order backlog close to EUR 472 million, a 3% sequential increase. The strongest performing sectors were Defense & Aerospace, which grew 23% and Connectivity improving 28%. However, Electrification and Industry saw declines. And with the late update, the January 2025 order backlog grew further to EUR 505 million, the highest level since mid-2023, mostly driven by Defense & Aerospace and somewhat by Electrification. Looking ahead, our 6-month rolling outlook stands at EUR 331 million, representing a book-to-bill ratio of about 1.02. Overall, we're optimistic about 2025, especially in Defense & Aerospace, Connectivity and Industrial Electrification investments. These should help offset continued weakness in consumer-driven segments. Next slide, and Cathrin you are up.

Thanks, Peter. And on to some of the highlights for Q4 2024. So revenue ended at EUR 160.1 million, very much in line with the outlook. It's some 19% lower than last year, which also was the case actually for Q3. Our EBIT ended in the end at NOK 11.8 million in the quarter, down from NOK 18 million. And as mentioned, we had some impairments in the quarter and adjusting for those, it would have been slightly higher and a profit margin of 8.2%. ROOC and other capital efficiency indicators are improved to last year -- last quarter and more in line with previous quarters in 2024. The financial situation continued to be stable with a Net Interest Bearing Debt/EBITDA of 1.7. Operating cash flow is below last year's level, but still at 85% of the quarterly EBITDA. So net income is at EUR 4.9 million. It's down from EUR 12.3 million last year. It's mainly a result of the lower EBIT in euro, but also affected by some tax effects in Q4, which I'll come back to. Next slide, please, Slide 7. Revenue year-to-date ended at EUR 647 million, slightly above that and 6.5% below last year and in line with our outlook. And as mentioned, EBIT at EUR 48.1 million and 7.4% and adjusted for the one-offs and underlying percentage of 8.4%, which again is in line with what we have said previously. Cash flow ended at EUR 43.7 million and at 67% of EBITDA. And the Board has proposed a dividend of NOK 0.35 per share. Next slide, please, Slide 8. And I'll just comment a little bit on the total. Nordics and North America show a growth of 9.4% for the year and Q4 ended just below the same quarter revenue as last year. For CEE and Asia, the year ended with reductions for CEE of 33% compared to '23 and Asia 40% compared to last year. That said, Asia has stabilized now at around EUR 24 million, EUR 25 million at the quarter for the last 3 quarters. CEE delivered EUR 51 million in Q4, which is about the same level it was also in Q2. Nordics and North America ended the year with a 7.4% profit margin, which is a reduction from last year's 8.4%. There has been some inefficiencies in the quarter, bringing the profitability down, where actions have been taken to rectify coming into 2025. For CEE, EBIT margin for the year was 8.2%, 9.6% last year and for Asia, 11.6%, 12.6%, respectively. CEE in the quarter is affected by the EUR 1.3 million impairment in Q4; and adjusted for that, it would have been 8.8% for the year. Employees now at 2,411. It's down 589 then from the 3,001 last year. And compared to last quarter, which was 63 FTEs higher, Nordics and North America reduction of 54, CEE is down 14, and there's a slight increase in Asia. Next slide, please, Slide 9. Cash flow and working capital. So cash flow ended at 14.8% and 85% of EBITDA in the quarter and for the year, 43.7% and 66%, a bit shy of the strategic target of 80%. At the Capital Markets Day in December, we estimated an operating cash flow of EUR 50 million, which would have required the operating capital to stay at Q3 level. Unfortunately, it was increased with some EUR 4.9 million in the quarter and hence, slightly below than the EUR 50 million forecast that we had. Investments are substantially lower this year. We did increase machine capacity substantially last year and several sites have moved some equipment around to optimize. And investments now, we ended at 1.3% of revenue, which was in line also with our estimates for the total year. So next slide, please, Slide 10. Net working capital as a percentage of sales is at 28%, and down 3% in the quarter, but still up from last year's 24.4%. Both sites have had an improvement from last quarter. And the CEE and Asian sites are closing in a strategic target of 20% for net working capital and the Nordics and North America carry more working capital in general, bringing it up. CCC ended at 106 days, down from 111 last quarter, but still up from the 95 days last year. ROOC at 18%, up from last quarter's 16.8%. Net interest debt/EBITDA is at 1.7 and slightly up from 1.5 from last quarters. The debt is reduced with 4.1%, but we are exchanging the rather high EBIT in Q4 2023 in the measurement. So that's why it's slightly lower or slightly higher. Finance net is a cost of 1.5 million, down from last quarter's EUR 2.3 million. Interest rate is still around 6% for the group. And in total, year ended with EUR 8.4 million of interest cost, EUR 1.6 million of positive[ RGU ] and EUR 1.4 million of other financial costs to a net finance cost of EUR 8.2 million. So tax. Tax for the quarter is quite high. It's EUR 5.3 million, and we have some larger items in there. So -- in the quarter, we have had -- we have to make a financial impairment in U.S. of EUR 1.6 million. So this is a reversible and only a financial write-down. In addition, we brought home some more dividend from China, giving a EUR 0.4 million more tax. So about EUR 2 million, these are related to those 2 items. And the rest bringing it down to where it should be around 23% are true-up of tax calculations in general. So we foresee around 23% going forward. So -- and at the end, we have proposed a dividend of NOK 0.35, which is 21% of net income and amounts to approximately EUR 6 million and which is in line with the dividend policy that states that we should pay out around 20% to 60% of the company's consolidated net profit for the year. Okay. Now and then Slide 11, and back to you, Peter.

Thanks, Cathrin. Looking ahead or really key takeaways from today's presentation. The Q4 revenue closed at EUR 161 million, EBIT margin 7.3%. Our order backlog remains solid with a close of EUR 472 million in total, declining 4% year-over-year, but improving 3% quarter-over-quarter, providing us stability into 2025. And with the late update, end of January came in at EUR 505 million for the order backlog. So we're happy about that. Sector performance varies greatly with Defense & Aerospace remaining our strongest performing sector and Connectivity showing some positive momentum. Looking ahead, our 2025 revenue forecast is set to be between EUR 600 million and EUR 700 million with expectations to exceed EUR 650 million, provided that the market conditions remain stable. But we are keeping a close watch on macroeconomic risks such as trade war, global supply chain disruptions, interest rate volatility and others that could have impact in some sectors. While some sectors faced significant headwinds last year, defense/aerospace, energy transmission and some IoT solutions remain strong. With our continued contract wins, expansion initiatives and financial discipline, we're in a strong position for 2025. And next slide, please. So I'd like to remind you that we'll shortly start the Q&A. So post any questions you may have in the Q&A section of the webcast. Thanks. Cathrin, let's take a look at some of the questions that have come in.

Yes. Quite a few actually.

Quite a few, yes. Let's start with from Emily [indiscernible], you're expecting a material step-up in Electrification in 2026. On the CMD, we indicated that this was partly driven by certain subsegments like Power Grid. However, this only explains part of the growth in '26. What's remaining -- what we model for the rest of the growth? I think we have in the second half of the year, we are seeing a return of some of the segments in EV charging with forecast and orders for that starting June timeframe. That's the only thing I can really think of off the top of my head on that. Any additional comments, Cathrin?

No, I agree with you.

What drove the sequential decline in Connectivity in Q4? I would think we had a disengagement with one customer providing geostationary satellite communication on the maritime. And that we shipped out in Q3, I think the remaining, and then there was just sort of closing on some inventory in Q4. The only thing I can think of that makes any...

There is a larger customer in Denmark that has some reduced volume...

That is right. The area, and there was some push out into beginning of January on that also above and beyond what we thought December would give. But nothing major really on that. And that's one of our biggest top 5 customer, that customer, the one that pushed out a little bit out of Denmark. Also, are you seeing some signs of -- are you seeing signs that demand has stabilized in Electrification in industry? Are customers still lowering forecast? Well, no. I mean, it's stability. Looking at the latest order backlog, right, the one that came in here in January, there's tiny percentages changes up and down on Connectivity, on Industry and Medical. So basically, Zero. Basically stable. Strong growth on Defense. I think majority of the increase, the net increase of EUR 35 million on the order backlog was Defense, around EUR 32 million. And the remaining was Electrification. And we continue a lot of chatter in the market regarding potential pull-in of demand due to potential tariffs. Are we seeing any indications as we have several customers exposed to the U.S. market, right? Not that we can say where it's been specifically mentioned to us that they are pulling in due to tariffs. We've seen increased short-term demand, demand inside lead time. So really pull in, and expedited orders, specifically out of our sites in China in the fourth quarter and I would say, accelerating into December little bit. Even in January, we've seen it happen. Now I can't say that, that's due to potential tariffs. I can just say that on occasion, that happens when the market is about to turn around and customers have been projecting lower revenue and lower orders for a while, all of a sudden, they have customer demand and they have no stock to deliver from. What drove weaker margin in the Nordics and North America in Q4? Well, it is it's a 2-part thing, but it is, I will say mostly related to efficiency losses in the ramp-up in Norway. And that continues both of productivity on workforce driven by some difficulties on the material side to get material in on time and get everything out the door as it should be. So there's a lot of focus on making sure that the plan for this year, which is a significant growth versus last year is executable. And finally, despite higher sales in Q4, EBIT margin remained flat versus Q3. What do we think about the margin development across the different sites in '25? I think we have strong margins out of China, mostly out of CEE. Even Poland which had a 50% reduction in top line is, I think, delivering some pretty impressive margins overall. Sweden is delivering strong margins. I'd say it is the margin improvement is going to come without volume increase. It's going to come out of Norway. And then in Norway, there's additional volume increase. So I'd expect -- compared to the -- what could we have achieved if we had normal productivity? Well, we'd have probably a 10% better EBIT margin last year. That's the effect of it. So really important to get that -- get on top of that. Let's move on to -- could you comment a bit on new sales? Are you see -- what are you seeing today in the market mix to expand capacity now? And if you could comment on dividend and the lower level relates to the -- and if the lower level relates to these investments? Well, the site that we're in, in Norway was originally dimensioned for NOK 600 million a year. We did what, about NOK 2.1 billion last year. Right? We have demand for NOK 2.6 billion without any pull-ins from '26 in this year. So there you go, there's the demand for the Norwegian facility. And for the Swedish facility, it's about growing them also. So it's about -- there's about a 10%, 15% upside, maybe 10% growth this year for Sweden. They are just being able to manage with that -- with the about 8,000 square meter facility they have now. So we want to separate out and move all of the high-level assembly and systems integration into the additional facility for both sites, right, and then focus for electronic manufacturing in the existing facility. I do not believe that the expanded capacity and these things are at all relating to the dividend for the year. The dividend for the year is, I think, more to give us a freedom when it comes to M&A. Could we comment on what we're seeing in the market today makes thing -- that makes you -- make an FID on new sites and also? That was the same question, I think. Then Simon [indiscernible], despite strong sales growth of 9% in Nordics, the margin is down? Yes, I've elaborated on that. And that's all I see, right?

Wait a little bit and see if some more questions come in since we have the delay, Peter?

No. So we're pretty positive, but we have a lot of work to do on getting the sites up and running towards the productivity they should have, especially in Norway. We are alleviating -- hope to alleviate some of that but because there's a plan from our second biggest customer in Norway to start production in our Polish facility probably by midyear, but we know that those things can be dicey on exact timing.

You have talked about that before, but then it was another product line we discussed to be....

This is a new generation. I think that's it, Cathrin. Right?

Yes.

Thank you very much, and we'll see you in the Q2 report. Thanks.