Kitron ASA (KIT) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to Kitron's Q2 2026 Results Presentation. I'm Peter Nilsson. And as always, I'm joined by our CFO, Cathrin Nylander. Thank you for taking the time to be with us today. The theme for today's call is on the slide in front of you, resilience by design. Across our markets, customers are reorganizing their supply chains around resilience and origin rather than lowest cost. That shift is structural, and it plays directly to the platform we spent the past decade building, distributed, disciplined and close to the programs that matter. Q2 is what it looks like in numbers. I'll cover the quarter highlights, our operational position, the sector and order backlog picture and the strategic outlook. Cathrin will then take you through the financials, including a cash flow story we're particularly pleased with this quarter. I'll close with the case for our medium-term ambition before we open the floor for your questions. So let's get started. Next slide, please. Q2 extended the longest run in Kitron's history. Revenue of EUR 296 million, operating profit over EUR 28 million with an EBIT margin of 9.6%. The order backlog, EUR 794 million, up 56% year-on-year and an operating cash flow of EUR 47 million in the quarter. I'll let Cathrin tell the story, but I'll say this much now. The cash engine is turned on. The real story isn't in any single number. The real story is breadth. All 5 of our market sectors grew year-on-year, and all 3 of our regions did too. Defense and Aerospace more than tripled and now represents around half of group revenue. But connectivity grew 18%, medical 16%; Industry 13% and electrification 7%. The diversification we've been talking about for several years keeps showing up in the numbers. One thing to flag upfront, our Nordic and North America region delivered margins slightly below target. I'll explain exactly why when we get to the regional picture. It's a supply timing story, not a demand story. With that, let me walk you through where we stand operationally. So next slide, please. Four points on operations and growth. First, execution. And it starts with our teams delivering customer ramp-ups across every site. In Central Europe, that discipline showed up as 14.7% EBIT margin as capacity expansion converts the defense ramp into profit. In Asia, Malaysia reached breakeven in June for the first time. And what matters more is what comes next, a significant volume ramp through the rest of the year. The outlook is stronger here than the rearview mirror. This is a volume story. And in Norway, we're building for what's ahead. The Long site came into service early in the quarter, and now we've largely completed the production transfers from Shieldsund. The 2 sites will specialize ShieldSund on electronics and PCBA, Longum on high-level assembly and systems integration, so we can scale defense work without losing focus. Second, the supply chain because that is the defining condition of 2026. The Electronics supply chain tightened further in the first half, and we expect allocations conditions to persist into the second half. This cycle is different from the last one. AI compute is structurally reallocating memory substrates and board capacity and industrial manufacturers now compete directly with data center demand for the same certified high reliability capacity. Our response is discipline, long horizon purchase orders, inventory commitments backed in many cases, funded by our customers, dual sourcing and early escalation. Late supplier decommitments and pushouts remain part of daily life. We planned for them, and we're managing this, not absorbing it. Third, new business, and this is a point about the quality of demand, not just the quantity. During the quarter, we booked a broad set of new programs across all 5 market sectors, split evenly between new and existing customers while extending business in competition. We welcome new customers in autonomous defense, 5G connectivity and solid-state power units, alongside new programs in ruggedized edge computing and quantum security. Individually, these wins fall below our threshold for public announcement. Collectively, they're exactly the diversification we've been building for. Fourth, our 2026 outlook. We're now trending towards the top end of the ranges previously communicated, the EUR 900 million to EUR 150 million in revenue and the EUR 84 million and EUR 108 million in EBIT. Our task in the second half is converting demand through a tight supply chain and the capacity keeps expanding where the demand is. Further expansion is in early planning in some cases, together with our customers. Let's look at the sector picture. So next slide, please. Well, the chart tells the story at a glance, Defense and aerospace is the headline, EUR 154 million in the quarter, up 234% year-on-year, now around half of group revenue. European rearment, unmanned systems, missile programs, combat vehicles, naval hardware, structural demand that shows no sign of cooling. But the point I want you to take away is that every single sector grew, again, connectivity was up 18%, driven by industrial IoT and smart sensor solutions. Medical was up 16%, led by Critical Care. Electrification was up 7% with data -- as I said, order backlog stands at EUR 794 million, up 56% year-over-year, and about 1.5% below the record we set in Q1. I want to spend a moment on the sequential move because it's exactly what a healthy backlog should do. The decline sits at 2 sites where our largest defense and industrial programs are shipping. That's backlog converting into record revenue you just saw. Year-to-date, book-to-bill is 1.15, and it keeps refilling the book. EUR 653 million of order intake in the first half, EUR 1.25 billion on a rolling 12-month basis. Defense and Aerospace now represents 60% of total backlog, up 45% from a year ago. Our R6, which is the forward-looking 6-month demand communicated to our customers and our system, stands at approximately EUR 609 million. As always, 2 things are to keep in mind when you read it. First, R6 is intentionally front loaded. We deliberately built in roughly 10% of flexibility so the supply variability can be absorbed without disrupting customer commitments. That doesn't mean that we're looking at 2 quarters around EUR 300 million. Second, Q3 seasonally are softer for us, and that's a normal feature of our calendar, not a sign of demand weakness. What matters the most is the structural shape, a record level book broad sector distribution, intake ahead of billings and customer relationships that are deepening. We've never entered the second half with this kind of forward visibility. And with that, I would like to hand over to Cathrin for some financial details. So next slide, please.

Thank you, Peter. Let me walk you through the financial picture in more detail, starting with the headline numbers. revenue of close to EUR 296 million, up almost 72% year-on-year. EBIT of over EUR 28 million, up almost 89%. EBIT margin of 9.6%, 90 basis points higher than Q2 last year. EBITDA of EUR 35 million, up 79%, net income of EUR 21.4 million more than doubled, EPS of EUR 0.10, double from EUR 0.05. Operating cash flow was EUR 47 million in the quarter against EUR 19 million in Q2 last year. That's the number I'm most pleased with, and I'll talk more on the cash flow slide in a moment. On the balance sheet ratios, ROC on a rolling 3-month basis at 39%, up 16 percentage points from a year ago. Net working capital at 15.4% of sales, down from EUR 26.8 million. Cash conversion cycle at 60 days, down from 104. Net interest-bearing debt over EBITDA at 0.3x, down from 1.4, net equity ratio of 9%. Let's take a look at what this means for the first half of the year. Next slide, please. The half year view puts the quarter in context, revenue of EUR 568 million, up close to 69% in the first half of last year. EBIT of almost EUR 54 million, up 96%, essentially doubled. EBIT margin of 9.5%, 130 basis points higher year-on-year. Net income of EUR 41.4 million, up 135%. EPS of EUR 0.19, up 111%. And the line I would like to draw your attention to operating cash flow of over EUR 52 million for the half year close to our strategic target of 80% of EBITDA. At the half year mark, profit is converting fully into cash even while we fund close to 69% revenue growth. Very few companies growing at this rate can say that. Capital efficiency ratios, as you see on these slides, are the same rolling measures as the previous slide. They described the business as it runs today. ROC at 39%, working capital at 15.4% of sales, 60-day cash cycle and leverage of 0.3x EBITDA. Let's move to the regional breakdown. Next slide, please. Three regions and three tables. Starting with revenue. CE is now our largest region at EUR 140 million in the quarter, up 147% year-on-year. This is the capacity expansion delivering supporting the major defense customer ramps. Nordic and North America came in on EUR 131 million, up 36%; Asia at EUR 28 million, up 25%. On EBIT, CE delivered EUR 20.6 million, a margin of 14.7%, well above the group target. Asia delivered close to 10%. Nordics and North America delivered EUR 10.6 million and 8.1% margin, slightly below target, and this is where the supply phasing showed up. Defense deliveries at specific Nordic sites moved to the right because boards and components arrived late, not because demand changed. Uses exit rate points the right way recovering this region's margin, a clear second half execution priority. In Asia, I want to highlight the milestone. Malaysia reached breakeven in June for the first time since we started the greenfield operations there. And with a significant volume ramp-up projected for the rest of the year, the outlook is stronger than the rearview mirror. The site is maturing exactly as planned into our non-China alternative for Asia manufacturing. On headcount, we ended the quarter at 3,359 FTEs, up 36% year-on-year, but actually down slightly from Q1 as ramp proceeds to 0 production. The capacity buildup supports backlog conversion is largely in place. The focus now is productivity, and sales per employee is recovering. Now, the organic versus inorganic split. Next slide, please. [indiscernible] formerly Delta Nordic was consolidated as of 1st of January with no prior year comparables. So this slide splits the quarter into organic and inorganic for a clean underlying rate. Deette headline, even excluding Eltek, revenue grew 62% year-on-year. Defense & Aerospace tripled organically, up 214%. Connectivity and Medical are essentially pure organic growth. Industry shows small organic dip against a strong comparator. The Eltek contribution takes reported growth to plus 13%. On the order book, organic backlog is up almost 45% year-on-year to EUR 737 million, record level visibility even without the acquisition. Eltek adds EUR 57 million on top. One note on book-to-bill because the quarterly figure will attract questions. Organic book-to-bill was 1.05 in the quarter. Organic backlog is still building. Year-to-date, group book-to-bill stands at 1.15. Now, cash flow and working capital. A slide I've been looking forward to. Next slide, please. The short version, the cash engine has turned on. The quarter delivered EUR 47 million of operating cash and year-to-date operating cash flow of EUR 52.1 million and close to our strategic target of 80% of EBITDA. So where did it come from? Receivables were collected at the record deliveries of the spring converted to cash, thus keeping receivables stable. Payables were built in step with the growing purchasing volume. This is the customer funded working capital model doing what it is assigned to do even after all that, working capital still absorbed EUR 11 million in the first half, which is remarkably little for a growing to close to 69%. Net working capital ended at EUR 158 million, down almost 13% from a year ago in absolute terms, even though revenue is up 2/3. As a share of sales, that's 15.4% from 26.8% a year ago. What be straightforward about wanting, Q2 was exceptionally strong. The structural story is the trend. More our cash conversion cycle has come down from 117 days 4 quarters ago to 60 days today. The improvement is disciplined, not timing, and it's what we intend to sustain through the second half. On the investing side, capital expenditure that affects our capacity and footprint expansion, deliberate investment against contracted demand. Let me close the financial section with the ratios. Next slide, please. The ratios on this slide are the cleanest summary of how the business is performing. Three things stand out. First, return on operating capital is 39% on a rolling basis, up from 23% a year ago. This is operating leverage on a stable cost base, and it puts us at the top of the industry. Second, balance sheet strength. Net interest-bearing debt, that is EUR 30 million, 0.3x EBITDA with net gearing of 0.08 and an equity ratio of 39%. We have ample room to fund the growth in front of us, including further M&A if the right opportunity appears. Third, earnings per share, EUR 0.10 for the quarter doubled year-on-year, EUR 0.19 for the half. Revenue growth is translating directly into shareholder return. And the headline I'd leave you with, every important capital efficiency and balance sheet ratio improved year-on-year and cash conversion now matches to profit growth. With that, back to Peter for the strategic outlook. Next slide, please.

Thank you, Cathrin, encouraging numbers, and something to be really proud of. So what does our medium-term outlook look like? Why is EUR 1.5 billion that we're talking about of annual revenue credible in the medium term? Let's start with some arithmetic. From this year's level, EUR 1.5 billion is not a moonshot. It's just a few more years of compounding what you've already watched us deliver on demand that is largely booked or in structured evaluation rather than imagined. EUR 794 million of backlog and above EUR 1.25 billion of order intake over the last 12 months and the pipeline that has changed character. It's no longer a list of opportunities. It's a schedule of decisions, named evaluations where we're shortlisted in, requests for quotation with dates on them, programs with production slots attached. Then the structure underneath, European defense rearmament, where EU instruments are now dispersing real money into multi-program -- multiyear program cycles and where 8 of our sites build defense and aerospace today. Grid and data center electrification, a demand cycle with years to run as Europe rebuilds its energy and compute infrastructure. And industrial digitalization, where industry's 1.4 book-to-bill tells you the recovery is being ordered now, not forecasted. And the honest framing, the constraint on that path is not demand. It's conversion, which is why you'll hear one word from us all second half, convert backlog into orders, pipeline into orders. or backlog into deliveries, pipeline into orders, right, profit into cash and capacity that follows the order book, and the order book keeps growing. Let me summarize with a few takeaways. Next slide, please. So 5 things to take away from Q2 2026. One, strength, record revenue, broad-based growth, EUR 296 million, up almost 72%, 62% organic. All 5 sectors and all 3 regions grew. Defense and Aerospace tripled and is now around half of group revenue. Two, profitability above target and converting to cash. EBIT of EUR 28 million at 9.6% margin and EUR 47 million of operating cash in the quarter. Year-to-date cash flow close to our strategic target of 80% of EBITDA. Three, record level order book and visibility, backlog of EUR 794 million, up 56% year-to-date book-to-bill 1.15. R6 demand outlook, approximately EUR 609 million, intentionally front-loaded for flexibility. Four, KitronNiltech delivering. footprint is expanding, EUR 16.5 million contributed in the quarter. Five, on the road to EUR 1.5 billion. We're currently trending towards the top end of our 2026 outlook of EUR 900 million to EUR 150 million in revenue and EUR 84 million to EUR 108 million in EBIT. And the task for the second half is converting demand through a tight supply market. So the demand is on the books and the platform is funded and standing. And what defines the rest of 2026 is conversion, backlog into deliveries, pipeline into orders and wins and profit into cash. And that's the work we have in front of us. And that's the work this company was built for. And with that, Cathrin and I, next slide, are ready to take your questions.

And we have quite a few questions. Let's start with Martin supply chain, which specific component categories are most constrained? And how much revenue do you believe was delayed and deferred due to supply demand? And how much customer-funded inventories on the balance sheet and on what terms? Those are some very specific confidential questions, but let's start with component categories. Right now, I think the memories, for example, and high-level processors are constrained on allocation. We're seeing a lot of constraints on the PCB market. And we're talking about high reliability PCBs, advanced PCBs for across the type of products we built. And of course, the defense part of the PCB market where you're very much restricted to certain suppliers. So that's in general, right? I'm not going to go into detail. We have specific webcasts that we review the component market and about every 6 weeks or so. Do we want to talk about the customer-funded inventory and the balance sheet, Cathrin?

What we are mentioning in the quarterly report is as well, we have deposits from customers of about EUR 125 million, which is in the same level as last quarter. In addition, of course, we have customer consigned inventory, which is not in the balance sheet, for instance, as well. And we're not -- and therefore, we don't need to mention the sums.

And Martin follows up with last quarter, you mentioned results would probably end up between 9.5% and 10% EBIT margin, not above 10%. Is that still accurate? I'll let you take that one again.

Yes, I will say that's a reasonable accurate statement still. It requires a lot to grow this much. And also we need to prepare for growth coming into next year, meaning that some costs will increase slightly. So I think 10% is where the high end of it.

Torbjorn has then 3 questions. The first 1 is regarding our guidance for the year and that we're at the top end and R6 is above that, obviously. Even adjusting for front loading, this appears to imply revenue above the current top end and what is preventing the formal guidance today? Well, I mean, it's the tight supply chain, right? So there's risk to increase an outlook. And at this point, we're looking all the time at what is our clear to build for the rolling 6-month horizon, what's our clear to build for a 12-month horizon, what's our clear to build for what we have on order for the next month or so. So those are numbers we're following, and we see what's possible to execute. And what we thought was possible to execute and what was actually executed. So those -- all those parameters weigh in when we say -- when we talk about our guidance forward.

And when we have more clarity on that, we will be likely to reassess, but not until then. .

And more clarity when we report Q3, then we're into October. So that -- and then we should have a really strong picture of what it looks like.

But it's not about the demand. It's just about what we are able to source basically. .

Within D&A, what extent are PCB is required to be sourced from European suppliers and European PCB capacity? And is European PCB capacity currently limited your ability to convert orders into revenue. First question for all of the defense primes in Europe, they are sourced from European suppliers. For some of the new defense tech they can be sourced either from Taiwan or South Korea probably. I'm not sure exactly where we buy everything, but the scope is a bit wider there. It depends on the classification of the product and the end customer. And often the end customer here has validated and chosen the PCB supplier also. The manufacturer, not -- the supplier can be a distributor, right? We use 2 of the large European distributors for a lot of our PCBs. And on the back end there, they would have 1, 2, 3 or 4 that are qualified for each of the programs. And is European PCB capacity currently limited to your ability or maturities into revenue? The answer is yes, right? And that's what we said in the Q1 report that we were front-end loading, so we had some possibilities to play around. But yes, there was more demand loaded. Do you have an estimate for the portion of 2026 revenue you expect to be related to data centers? Yes, and that's been very stable for us. It's about EUR 120 million with a couple of pure plays that are about 90% or so of that revenue. But we see a lot more going on, on that. And I spoke a little bit about this on the lower tier companies and customers we have, specifically within -- yes, really across all of the other market sectors except medical, right? So within connectivity, there's customers that are being driven to have a lot of short term -- not short term, but on a very short lead time horizon, constantly increasing demand and the same thing within the industrial sector. Customers that I never thought was part of data center or AI demand, now specifically stating, okay, we have an order for this or we're building this or that, and what can you do to help us pretty much immediately. So the answer was EUR 120 million. Then, Martina comes back a major good program into serial production. Is that already in R6? Yes, it is an overall outlook, yes, it is. Then comes in here with -- can you give some color on the gross margin development being slightly down year-on-year and quarter-on-quarter? Is this a reflection of current supply chain situation? Or is this a mix effect? How should we think about this going into '26, '27? Cathrin?

Well, it's a percentage point down in Q2 from last year, that is true. But what we are following in general, is not a material share as a percentage of sales. We follow contribution margin, and that is stable.