Kitron ASA (KIT) Earnings Call Transcript & Summary

Good morning, and thank you for joining us for Kitron's Q1 2025 results presentation. I'm Peter Nilsson, CEO of the Kitron Group. And joining me as usual is Ms. Cathrin Nylander, CFO. I'm pleased to share that we've had a strong start to the year, driven by sustained momentum in our key sectors, particularly Defense & Aerospace. Today, I'll walk you through our performance, strategic developments and outlook for the rest of the year. But before we start, I'd like to remind you about the Q&A session at the end of the presentation. So please post any questions you may have in the Q&A section of the webcast. Next slide, please. So as I said, we've had a strong start to 2025. As we closed Q1, Kitron delivered a solid performance across the board. Although the first half of the quarter was operationally challenging, we made our numbers in the back half. Our order backlog grew 11% sequentially to EUR 525 million, demonstrating a robust market demand, especially in our strategic pillars. Most notably, Defense & Aerospace revenue surged 30% year-over-year. That's not just growth, that's acceleration built upon the trust and partnership we have with many key customers. This D&A growth is also reflected in significant new orders booked in Q1 and totaled EUR 76 million. Next slide, please. So taking a look at market operations. Defense & Aerospace continues to be a strategic cornerstone for us. We have now 5 sites in the Nordics, EU and CEE focused on Defense & Aerospace, and we're accrediting an additional EU site, proof of our ability to scale quickly and efficiently. In Norway, the ramp-up of production is proceeding smoothly with the target output to increase 50% year-over-year. The construction of new expansions to the sites in Norway and Sweden are proceeding according to plan. In the near term, our production capacity, both in the EU and the U.S. can triple as needed, offering unmatched flexibility to meet rising demand. Next slide, please. Tariffs remain a challenge, particularly for sales in the U.S., which accounts for around 15% of our revenue. However, we've adopted well. Nearly 1/3 of our U.S. revenue is fulfilled by domestic production, and we built in tariff pass-through mechanisms that preserve our competitiveness. On M&A efforts, they're on track with strong momentum towards closing. These acquisitions are aligned with our strategy to expand capabilities and to solidify our market leadership. With a very strong order intake in Q1 of EUR 217 million, our book-to-bill ratio stands at 1.32, an encouraging sign of growth. We're guiding full year revenue between EUR 640 million and EUR 710 million, with an EBIT of between EUR 47 million and EUR 65 million. While we remain alert to the global uncertainties, our fundamentals remain strong. Next slide, please. We're seeing a clear message emerge across our business sectors. Connectivity is bouncing back with smart tracking and IoT solutions. Electrification shows resilience in energy transmission, even as consumer tech remains soft. Industry is up 21% over last year with a solid activity in subsea and AI-driven automation. Medical devices took a dip to the end of life of one product with expedited orders are trending up. Defense & Aerospace, our star performer, grew 29% year-over-year, with strong demand for missile systems, avionics and surveillance. This sector is set to drive long-term growth, powered by defense innovation and rising NATO budgets. Next slide, please. Taking a look at our order backlog, it reached EUR 525 million, a growth of 11% sequentially and 18% year-over-year. Defense & Aerospace led with a remarkable 79% year-over-year increase, while other sectors are stabilizing after a year of destocking and uncertainty. Connectivity and Industry have stabilized sequentially. The consumer side of electrification and medical devices is beginning to recover. Across the board, we're seeing early signs of momentum rebuilding. Now over to you, Cathrin, for some details on the numbers.

Thank you, Peter. Next slide, Slide 7, please. So 2025 Q1 highlights, let's take a closer look at our financials. Revenue landed at EUR 164.6 million, down slightly from last year, but up to 2% sequentially. EBIT came in at EUR 12.5 million, pushing our margin to 7.6%. Although our operating margin is lower than we targeted, we saw strong sequential improvement month-over-month in the quarter with most sites ending at hitting double-digit margins. Return on operating capital improved to 18.7%. Operating cash flow hit EUR 12.1 million and net income increased to EUR 7.5 million. Our equity ratio now stands at 36.3%, and we are proposing a dividend of NOK 0.35 per share. These figures reflect operational strength and disciplined execution. Next slide, please, Slide 8. Our business sectors. Looking at the regional performance, the Nordics and North America held steady, showing slight revenue growth and margin stability. Norway special show sequential improvements month-over-month in the quarter. The CEE sites saw reduced volumes due to last year's high electrification based yielding difficult year-over-year comps. Asia declined modestly, reflecting the broader industry adjustments. Importantly, we managed to increase in most regions and reduced our workforce strategically, especially in CEE and China, aligning our cost base with the new realities. Next slide, Slide 9, please. Cash flow and working capital. We posted a solid operating cash flow of EUR 12.1 million, which is 70% of our EBITDA. We reduced working capital now down to EUR 189.8 million. Inventory levels reduced also, and we improved collections while keeping close and supply payments. This financial discipline puts us in a strong position to invest and grow. So next slide, Slide 10, please, ratios. Our key financial ratios have improved. Our net gearing is down to 0.52%. Net interest-bearing debt remains well managed at 1.6. We have reduced our debt another 4% during the quarter. Our return metrics, ROOC and equity ratio are trending positively. And these metrics reinforce that Kitron is in a healthy position, both operationally and financially. So next slide, please. And over to you again, Peter.

Thank you, Cathrin. So some key takeaways to summarize. Revenue and cash flow were solid. The order backlog is strong and diversified, especially in Defense & Aerospace. We're scaling up rapidly with high agility in production. We anticipate higher margins in the coming quarters as we put our new capacity to more efficient use. Our 2025 outlook remains positive, driven by a strong market positioning, new technologies and the ability to execute at speed. Next slide, please. We'll now open the floor for your questions. So let's dive into any topics you might like to explore further.

And let's see here, Cathrin, if we have any. First point is from [ Henriette Thomson ] from Arctic. What was the customer forecast R06 in Q1? What is the backlog horizon? How much is firm orders compared to? Well, let's start with the first question. The R06, what was it in the last report?

It was 331, yes.

331 at the end of Q4. I believe it's around 344 at the end of Q1, the very beginning of Q2. And the follow-on question was, what is your back -- how much is firm orders compared to customer forecasts? I don't have the number on that, actually.

I'm looking. Yes, I have it. So I'll give a percentage.

Yes. In the raised guidance presentation from April, can you assume revenue acceleration in electrification in 2026, can you give us some details on this? You also assume somewhat slower growth in defense in '26 and stronger growth in '27, any comments on this would be helpful. The world changes really fast now. So giving any sort of detailed outlook, one thing you do know is in 2 weeks you'll be wrong. But on electrification, some of the EV stuff we see should be coming back get towards the end of this year, let's say, August, September, sometime in that time frame. That increases some electrification. We have new electrification on infrastructure, which I think is the major part of the increase actually in the U.S., where there's a $15 million, $20 million a year customer that just started ramping here at the very end of Q1, and the outlook for this year is somewhat in that region, and maybe up towards $10 million, $15 million or so. So I think that's part of the recovery or increase in electrification. Somewhat slower defense -- growth in defense in '26 and stronger growth in '27. Yes, well, we had what -- we're looking at about -- just over EUR 180 million revenue for defense for this year. And what did we have last year?

We have 50%. So last year in defense, I will find it shortly on this one. So continue and I will...

No, I mean, that's not something I'm focusing on because I think we have a strong growth and we continue to add more capacity. We continue to capitalize on opportunities that are quick moving in this market sector, especially in defense innovation from, let's call it, newer players in the market. So we'll come back to some of your detailed questions here...

Yes, EUR 137 million on last year for defense.

EUR 137 million to EUR 180 million. I think we're ramping up both our sites in Sweden and in Norway, where we should be doing in the vicinity of NOK 200 million plus per month, so around NOK 600 million, NOK 650 million or so in a quarter. So that's -- we're not quite there yet. So that's a continued ramp up. And we have a similar situation with about half that speed, half that size in Sweden. So from [ Pete Konkle ], can you comment on how you experience the gross margin development? It was down year-over-year despite the higher share of defense. 34% gross margin last year was abnormally high.

You're talking about gross margin, that's as a percentage of...

Yes, we're looking.

Yes, the material percentage, it's 67.2% in the quarter and it was 65.5% last year. And...

No, we do have -- we have -- even though there is a strong defense customer part of this, the gross margin on that customer is lower, the material content is higher. And the reason is extremely expensive parts and a lot of prepayments and deposits from the customer. So yielding us the possibility here, work with a lower margin and still get significant return on operating capital. So that's one thing I can think of here that is sort of a conscious decision taken. Can you comment on the size, Pete continues on the M&A projects, can comment on the size of M&A projects that are advancing as planned. Well, we're working on 3 of them. The top line is, what's about, 60, and there's 70 to 90 and there's about 100 to 120 on the 3 different topics. On top of that, there are several other structured processes that come in from outside into our project that we also take a look at. But -- so that's where we are. The comment regarding EBIT margin with month-over-month improvement, can you reiterate this and also comment why it's improved during the quarter. Well, it was just -- a lot of it has to do with slow starts in facilities and adding capacity towards the end of last year and additional capacity in the beginning of the quarter. So the output out of January was not where it should have been to match that capacity. So you would see typically margins in the 6% range from some of the bigger sites and then bouncing to double-digit margins by the end of the quarter in March. So that's where we want to stay. But to stay there, you need to complete -- you need to be reloading front-end loading every quarter on what you're doing and getting that recipe correct and getting material deliveries on time. So there can be no delays. One delay in Norway, well, then you're down significantly on revenue, right? You should be doing EUR 1 million a day or more in Norway. You should be doing EUR 0.5 million a day or more in Sweden. And if you're not doing that, then that's lost time, that's unused capacity, and that's cost. And in Norway and Sweden, particularly, that cost is big because it's the high labor cost. It's not as bad if you look at the Czech facility. If something happens there, and you're not fully loaded anyway, you can catch up. And from a cost perspective, it doesn't really impact as massively as it does in the Nordics. So it's important to have good linearity on sales and on production. And when you say it ended double-digit EBIT margin most sites, is that including allocated headquarter costs, et cetera? Yes, that is. The only thing not allocated is our shareholder cost.

So there is a bit at the end. So obviously, if we have double digit, we should end up just at 9% if all of them have that.

Yes, if all of them have that. Right? See, [ Mark Isabelle ], will there be a meaningful change in the product mix within Defense & Aerospace in the upcoming years? Trying to understand if margins might increase or decrease? I think we'll be seeing some -- I think the margins overall, probably in that same range. There could be increases on some of the new products and defense innovation coming online because there's more risk to it, right? So there's more risk, there's more margin. Otherwise, there's not -- we're not -- our margins should become better, not by increasing prices or costs for our customers, but by utilizing our machines more efficiently.

And also, we have to say that we are following the contribution margin, which we don't show you because of competitive reasons. And normally, if you have a higher material or gross profit margin, you also have more labor cost. It's quite common. And if you have a lower material cost margin, you will have lower material expenses or lower personnel expense as well.

Yes, very much so.

So they kind of even each other out. And for the group on the contribution margin, it doesn't have all that much variation actually, it's around 1% variation between quarters and months.

I see that there was a follow-on question from Pete. Can we comment on what gross margin we have as an assumption in our EBIT margin guidance. We know that if you look at the actual forecast.

Yes, I will do that. Continue.

And he says the reason he asked about gross margin is if we look at the group gross margin, which seems to be really development in defense share of revenues, there are some worries in the investment market that you might experience price pressure. Not so much, right? I think we have competitive pricing, and we work very closely with our customers to make sure that they're successful. We're not bidding below where we need to be. And this is an extremely sticky business for these products, but you're not going to -- for guidance systems, for missiles or things like that, you're not going to be moving that around, right? If you have a process that's working, then we stay loyal to each other, both us and towards our customers and the other way around. There may be -- I can say if you -- if we get some really high-tech stuff on some new product sectors, right, based on where you see the war in Ukraine, how that's developing and what's happening on the battlefield there, there could be some products where the labor content is low, the material value is really high. And you'll see that what you call gross margin come down, material content going up. On the other hand, pretty much always the contribution margin, wherever that may be, say it's 20% of -- that comes in after direct cost, direct cost being labor and material remains stable. And it remains pretty stable between with almost never below 20% and then between 20% and 30% depending on product and market sector. I'm not going to get any more into it. You were looking up something, what the budget...

It's around slightly below 67%, the material.

Yes, exactly, that's what he's asking for. Very good. I see that the queue of questions has depleted. I think we'll wrap that up. Cathrin and I have -- okay, we've got one more coming in here. Again, from Pete, the gross margin questions about price pressure, more related to the EUR 75 million new business we announced in CMD. I think we answered the question, and that's all existing business. So it's new versions of existing business based on existing technology, most of it. The big part was also the advanced optics for drone technology, and that's a typical type of product where you have extremely expensive components and very low labor content and a lot of customer financing. So if you look at that part of the business, it's not as high as -- but it's also very fast moving. It brings stuff in, you refine it, you ship it out very quickly. Go ahead, Cathrin.

No, I was just thinking, we haven't mentioned tariffs that much in the questions. So actually, nothing is said here...

It's not something we should be running around and worrying about. It will be what it will be when we know what it's going to be.

Yes. No, I was more thinking to explain how it's done. And basically, in the U.S., it will be invoiced separately from.

Yes. I mean, usually, when we've -- earlier days back in the 2000s, there was some duty on electronic components from various parts of the world. And at that point, that was always included in the purchase price, especially if you buy through distribution. Usually, nowadays, a lot of component manufacturers will only supply through distributors, right? They don't want 1,000 customers or 5,000 customers worldwide. They'll sell their parts to the distributor and the distributor will have set-ups in each region, Asia, Europe, U.S. and their price is always -- previously always included any duties or tariffs on components. But what's going on now, if you look at that manufacturing in the U.S., where any sort of parts that have a country of origin or where they think the origin or the packaging is done or however they want to look at this, it is China, right? You have a tremendously high tariff on that. Nothing there is included in the product price when we buy the components from the distribution, even when we buy it in the U.S. So the setup right now is that tariffs are invoiced separately, tariffs to the U.S. operations, right, because they're the guys importing with tariffs out of China. So tariffs are invoiced separately. It's not taken as part of revenue. There's no margin on the tariffs for us either. It's just sort of invoice forward...

Yes, cost reimbursement basically.

Cost reimbursement. So we'll see once this settles down and it becomes a stable new world, right, that's when you can start implementing more permanent solutions and how things will work.

But seeing it's also involved separately, it doesn't affect the inventory values or anything like that, handled more or less like TPV...

I mean, short payment terms on that cost reimbursement, whilst there can be longer payment terms on product we sell, so no margin necessary. No, we shouldn't be benefiting on it at least not on the levels that the tariffs are today. Okay, folks, we'll see you in meetings across the quarter. And otherwise, we have our next session scheduled on July 11, I believe, for the Q2 report. Okay. Thank you.

Thank you.