Kitron ASA (KP5.F) Earnings Call Transcript & Summary

Good morning, and welcome. Today, we're proud to announce the acquisition of DeltaNordic, a Swedish provider of advanced electronics and electrical systems with a strong footprint in the defense market. This acquisition marks the next step in Kitron's strategic journey, strengthening our position in high reliability and mission-critical electronics. I'm Peter Nilsson, CEO of Kitron Group. And with me today is Ms. Cathrin Nylander, CFO of Kitron Group. Next slide, Slide 2, please.

Disclaimer. Before we begin, a reminder that this presentation contains forward-looking statements. It's prepared for information purposes only and should not be regarded as an offer to sell or solicit any securities. Slide 3, please. Forward-looking statements. Some of today's remarks will address forward-looking expectations, particularly regarding revenue, margins and integration effects. These projections are based on current assumptions and may be adjusted as the transaction closes and the integration proceeds. Slide 4, please.

Well, here's today's agenda. We'll start with key transaction highlights, then introduce DeltaNordic and its operations and move into strategic rationale and financial impact and, finally, close with summary remarks and the Q&A. Slide 5. Next slide, please. So transaction highlights. This acquisition is a natural next step in Kitron's growth journey. DeltaNordic adds strong confidence in defense/aerospace electronics, expands our presence in Sweden and brings complementary expertise in rugged electrical systems. There is minimal customer overlap, creating clear cross-selling potential. The deal is earnings accretive and supports long-term shareholder value creation. Next slide, Slide 6, please.

Transaction overview and timeline. We've agreed on an enterprise value of SEK 1.255 billion or EUR 114 million, corresponding to 9.65x 2026 EBITDA of SEK 130 million. The settlement combines SEK 760 million in cash, SEK 150 million in Kitron shares and an earn-out of SEK 345 million linked to revenue performance up to and including first quarter 2027. Financing of the acquisition is contemplated by way of available funds and facilities. Kitron may consider existing facilities in combination with other financing alternatives including new bank facilities, debt equity or other third-party financing to settle the cash part of the purchase price at closing. There are no financing conditions for the acquisition. Regulatory approval is expected within 25 working days and closing is targeted for late December or early January 2026. Slide 7.

Introduction to DeltaNordic. DeltaNordic is a full-service provider from design and prototyping to certification, production and aftermarket support. Their core strengths lie in mission-critical electronics and electrical systems serving defense, industrial and infrastructure customers. Next slide, Slide 8, please. DeltaNordic at a glance. They deliver robust electronics, electric cabinets and complete system assemblies ranging from PCBAs to box build assemblies. Based in Sweden, a NATO member with a strong defense cluster, DeltaNordic serves blue-chip customers such as BAE Hägglunds, supplier of the CV90, the CATV and the Beowulf combat vehicles, together representing roughly 47% of revenues. Revenue is projected to grow from SEK 498 million in 2025 to around SEK 1.4 billion by 2028, with the full 3-year outlook exceeding SEK 3.4 billion. Slide 9, please. Market exposure. Well, today, defense accounts for about 50% of sales, covering combat vehicles and naval systems. Mining and construction contributes 30%; industrial automation, 17%; and infrastructure, around 3%. Over the medium term, the defense share is expected to reach around 70% as new NATO-related programs ramp up. Slide 10, please.

Product and service offering. DeltaNordic's product range spans electronics, electronic systems and value-added services. Their strengths include high durability through thermal coating and potting and electric cabinets built to withstand dust, heat and vibration. Their DISP process, integrating design, sourcing and production ensures traceability, quality and efficiency through product life cycle. Slide 11, please.

Geographic footprint. The company operates from Örnsköldsvik in the north of Sweden and Kungsängen, just outside Stockholm, Sweden and a site also in Nanjing in China. This provides both proximity to Nordic defense customers and global cost flexibility. Combined with Kitron's 11 production sites across Europe, U.S. and Asia, we will gain broader capacity and sourcing reach. Next slide, please, Slide 12.

Why DeltaNordic is an attractive addition. DeltaNordic is highly agile and deeply embedded in its customers' development processes. Their prototyping and NPI capabilities generate sticky long-term business. They bring mission-critical expertise in harsh environments and have a management team with strong combined experience. With clear growth, visibility and ample capacity, they're ready to scale. Slide 13, please.

Strategic rationale. Strategically, this acquisition strengthens Kitron's defense and aerospace offering, our fastest growing market sector. It adds complementary competence, deepens our presence in Sweden and provides an access to a broader customer base with minimal overlap. DeltaNordic will gain scale and support through Kitron's global network and industrial platform. Next slide, Slide 14, please.

Integration and growth platform. Our integration philosophy remains decentralized, and DeltaNordic fits very well into that. DeltaNordic retains its entrepreneurial spirit while benefiting from Kitron's legal, IT and financial infrastructure. That gives them freedom to focus on production, innovation and customer support while leveraging our purchasing scale and global capacity to accelerate growth. Slide 15.

Strategic positioning. Both companies operate in the high-mix, low-volume sweet spot, where complexity and recurring business creates value. This is precisely where Kitron has a competitive advantage and DeltaNordic fit seamlessly into that positioning. Next slide, please.

Outlook. Kitron reiterates its outlook for 2025 with a revenue of EUR 700 million to EUR 740 million and an EBIT of EUR 59 million to EUR 66 million. In 2026, excluding DeltaNordic, we forecast EUR 785 million to EUR 865 million in revenue and EUR 70 million to EUR 84 million in EBIT. DeltaNordic adds a further EUR 70 million to EUR 78 million in revenue and EUR 11 million to EUR 13 million in EBITDA, making the acquisition earnings accretive from year 1. Slide 17.

Some summary and final remarks. To summarize, this transaction strengthens our defense and aerospace portfolio. It expands our Swedish footprint and it adds new engineering capabilities to the group. Minimal customer overlap means immediate new growth opportunities. The transaction is financially disciplined and strategically transformative for Kitron.

And we expect the deal to close by year-end with full integration support from the global platform starting in '26. Slide 18.

Q&A. Thank you for your attention. I will now open the floor for some questions on the transaction, financial impact or strategic integration plan. So Cathrin, this has been a really fast process, right? We've worked hard long, long hours, making it happen.

Yes.

We signed the LOA just, what, 23, 24 days ago.

Yes. It was important to have a speedy process for all parties.

Let's go to the first question. The first one is from Petter at the SB1 Markets. And he has not one question, but he has six questions. So how many employees are there in DeltaNordic?

You take the second one, and I will help with the numbers.

Okay. Can we elaborate on the comment, high visibility? Is it better than Kitron? And if so, why? The comment is they're more deeply integrated in the deliveries and manufacturing to primarily BAE, working very closely with the different customizations for the different vehicles that are delivered on different programs. So there's a strong visibility. There's a build plan from BAE, so that's completely correlated into DeltaNordic's build plan also. The order horizon is about the same as in Kitron, if you look at order backlog. But there's an understanding of what's going to happen in the next 1, 2, 3 and 4 years out. Can we talk about the history in DeltaNordic over the last 5 years, what has been the -- both on growth and margin? I think the historical values have been related to the development of BAE and other customers. There's been a big transformation of the company in the past 2 years with a completely new management team brought on board, more professional, looking to transform the company to something that very, very much looks like Kitron when you start talking to them and looking at processes and business decisions. So the growth journey really kicked off this year. I think it's extremely strong growth for '26. And just like Kitron, right, we see the tsunami coming in '27 with defense orders. Number four, was it a structured process? Yes, it was a structured process. The new company has a leverage, net interest-bearing debt to EBITDA of around 1.3. Why is equity any alternative? Cathrin, that's for you.

Part of our very good net interest-bearing debt to EBITDA is, as we said in the quarterly reporting, due to very high customer deposits for ramping up of strong projects going on. So we always need to look at that in the vision. So we are looking into several sources of financing for this acquisition.

Want to jump back to the employee question?

Yes. So there are around 200 people. And they're growing, so it's sort of what number to say. Mainly all the people are in Sweden. So their Nanjing facility is quite small in that sense.

Yes, serving a more limited portion of customers for the Chinese market. So it's around 20 employees building product there. But a very nice site. Our people visited it, and it seems like it will be a good fit for us also.

Yes, very -- only 2.5 hours from our other sites. They're sort of 2.5 hours from each other, which is a nice distance in China.

What capabilities that DeltaNordic have that Kitron does not have? Well, it's the very complicated, complex cabinet assembly. The system integration involved in building those very, very large products on the civilian side, on the mining side, in the industrial side in Europe, together with all of the types of different cabinets that are used in combat vehicles for both the naval part and the land-based part, so those are traditionally not products that Kitron has built. We've based our portfolio much more on electronics, whilst DeltaNordic has the capability and competence to build and understand and quote these difficult products that also contain, in many cases, high voltage and high amperage type of challenges, where Kitron, really, we can't even quote the product. We don't have that experience and understanding how to do that. But this opens up a market for other types of combat vehicles where we have a lot of connections and already are discussing with those potential new customers, not about DeltaNordic yet, but capability or opportunities for Kitron. I think that -- and finally, can you bridge the gap from '25 and '26 in Kitron in the updated guidance, both in terms of growth and margins?

I think we are continuing on our growth journey within defense and we also see pretty strong growth actually within connectivity coming into '26 and where the other sectors are more stable, I would say. And that's basically the comment on that at this point of time. We will be more specific, I think, in the Capital Markets Day in December on the buildup on the whole revenue part for Kitron. But as you look at the numbers, we are planning to stay above 9% in '26.

Why don't you just jump right over to the next question from [ Espen ], how many employees are there in DeltaNordic and some discussions about management fees.

So we talked about 200 people. I think no, as we said, we run a decentralized company. So management fee structure, no. We want DeltaNordic to be run exactly as it is with the company management that they have today. I think what the point here is not removing things. It's adding things, right? It's basically bringing added capabilities that a company the size of DeltaNordic will need once they grow when they don't have today, as with IT, as with other structures and specifically a strong finance backbone which we have in Kitron to help them grow and capabilities to support them in their growth path.

The next question is, what's the estimated CapEx in DeltaNordic to complete new capacity in [indiscernible]? It's included in the outlook in the budget for next year. And in terms of Kitron investment, I think it's fairly modest, actually.

Yes, it's -- I wouldn't say modest.

I don't have the exact numbers.

So the added capacity when it comes to footprint, these new leases, they are within the cost levels that are in the agreement.

Martine asks, is it possible to get more info on the segment split for the outlook excluding the...

I just told you, Martine.

Yes. Mentioning some of the contracts that are not in the backlog for DeltaNordic. How will those affect net sales guidance and what the timing is there? No, but their backlog is like Kitron. When we look at '26 and we talk about the outlook for '26, doesn't mean we don't have an order backlog for all of that. And the same, it's very similar case for DeltaNordic, what's actually on order because what's on order is what you're building now and probably for the next 3 to 4 to 5 months. You're starting that actual specialization into exactly which vehicle is it and how will it be equipped. And then beyond that, there's a forecast and build plan on how many chassis of a certain version of the product you're going to build. But you have to have flexibility because you don't know exactly which order you're building vehicles in 6 to 9 months' time. So that's why the actual purchase orders come in closer as we get closer to date of delivery.

And for the other sectors, it's more in line with what we have in forecast and what will be converted into orders. So it's in a similar manner to how Kitron operates, basically. And then I think that's one of the things we recognized when we started to look at DeltaNordic, is that they have basically the same type of relationship with their biggest customer, as we do with Kongsberg. It's very strong. And you share and you have material buy early so that you have a good visibility on what's going to go on.

We've done a deep dive into exactly how projections and orders are created and when they come in and what the overarching outlook is for the next 3 years and how that is created. We had a really good update also with BAE yesterday also, and we feel comfortable on the relationship. Or actually, they feel very comfortable with the relationship, which is important for us.

Margin guiding, number three here. Of course, right, there's always upside.

Margin guidance on the upper end, quite high.

Excluding DeltaNordic, yes. And that's because basically, if things come in quickly, we see that there are certain projects and things going on there, that there are other upsides. And if they materialize, they will bring very quick revenue. And that means that the cost will be less changed from indirect cost. That's where the upper end is coming from.

For the total for Kitron, you mean?

Yes, for Kitron. It's extremely...

There are opportunities that are not even including in that upper end, right? So there's upside, but we hesitate to bring everything into the upside also into the outlook until we have some more order confirmations and see what happens. Petter Kongslie again. How many employees -- well, we took that one. I think that's -- okay, so here's the follow-on question, right, to what capabilities that DeltaNordic have that we don't. So it's similar to the new facility we're setting up in Arendal? Well, not really, right? Our sort of high-level assembly is more based on electronics, on pure PCBA builds, right? This adds capabilities. Imagine all of the electrical systems and cabinets and control systems that you may have in a submarine, right? It's low-volume build. You're not building a lot of submarines a year. But everything there needs to be connected, not necessarily just by PCBAs or like pure electronics, but connecting different systems together. That capability exists within DeltaNordic to understand and how to quote that and how to actually create better solutions for the customers. We design the product to make it more cost-effective or easier to produce and higher quality. Was Kitron the only potential buyer in the acquisition? I know that there were others also involved in the background. But we went in very fast with, I think, a strong offer and got exclusivity. So we were able to proceed at really fast pace, and there was no bid war at the end.

No.

How big is the largest customer as a percentage of the turnover? Well, it's around 45%, 47%, right? The other defense customers aren't really that big yet. They're coming in, in the next year or so. Eirik. Can you share some more information about '22 to '25 performance? The historical numbers are available to look at, right? But we're not looking back at something that was very small. Because now it's growing, that's why also it's interesting as an acquisition.

I think that's also what's interesting for us because we can add more into -- very interesting now because of defense, but our work is to strengthen the other part as well and to build that going forward. But they've been around over the SEK 400 million mark last 2, 3, 4 years, basically.

New question is, what about the depreciation profile, same as we have or higher?

A little bit lower, I would say.

What does the earn-out structure look like in terms of timing? I mean, if we get the closing done and the approval process from authorities done this year, right, we'll be closing either late this year or early next year. And from that point, we'll take over. And the earn-out is first 12 months of '26 and first 3 months of '27. So over a rolling 12-month period, we have to achieve a certain financial revenue top line. So either it will be achieved in 2026 or it will be achieved second, third, fourth quarter and first quarter in '27 or it won't be achieved. That's basically what it looks like. There has to be some -- that's why it's called an earn-out. What kind of utilization are they operating in, in '26? Is there room to continue growing on the footprint they have today? No, we're adding -- there's a business plan for '26 and we're executing on that business plan. And it means a few expansions that are building out, a couple of thousand square meters in the factory in Örnsköldsvik. And the factory outside of Stockholm, in Kungsängen, they are moving into an unused segment of the facility that they're in. So they're also expanding some 1,500, 2,000 square meters, maybe. That gives them more -- I mean, these are pretty large products that they build. So the part that more -- the service mount or PCBA part, building electronics is only done in Örnsköldsvik. So it's only final assembly or high-level build in Kungsängen.

And China.

And China, yes. Revenue plan until '28, how concentrated is the revenue uplift across key customer's firm orders? How much is non -- I mean, the firm order situation is you have a build plan exactly what you're going to be building probably for the next 6 months or so. So that's firm orders. Other than that, there is a forecasting to create possibility for material acquisition and those kind of things. And I think there's more upside than there is downside in the numbers we've seen after a brief meeting with the customer yesterday. Then between China and defense, what it looks like, how much of the defense business is done in China? There's no defense business done in China, not in Kitron, not in DeltaNordic. No, the China side is for the civilian side, industrial and mining and such. We stated the '26 guidance for the first time. Well, we have to do that when we also go out with something like this. We have to give you an idea of what we think is going on. There will be a clearer update on the Capital Markets Day on December 10.

I'll just repeat that we are growing the defense around 30% and we'll have a pretty strong growth in connectivity. And the other sectors are fairly stable.

Yes. Olav Rødevand says, can you elaborate on potential synergies and breakdown between revenue and cost synergies?

So in this case, when you're acquiring a smaller company where you have a management and you want to keep the management and, in addition, they're having competencies that we don't have in Kitron, so there is obviously no cost synergies. What we see is maybe cost avoidance synergies going forward because we will help them to grow and use our systems going forward. So we haven't -- for the deal, for us to calculate it, we have not increased any the top line based on our acquisition or we have not calculated into any cost synergies or cost reductions.

How do we view additional production exposure to China? I think what was included here, it's a limited operation. It's a strong customer base with a strong relationship with those customers. So I am not concerned about that. [ Bjorn ] asked also about the percent of the customer. Who's the biggest customer, BAE Systems? Yes, correct. It represents 40% of delta revenue, yes, for this year, yes.

A little bit higher.

A bit higher, 47% is what we've said. Capabilities, Petter Kongslie again, let's see if they're coming out...

Just switching over there, you're coming back to the ones...

I know. But here, there's a new question on the bottom there. What's the revenue capacity in DeltaNordic with the new capacity? They have indeed more to reach in 2028. That will depend on how much more business and what type of business, right? We are flexible, if nothing else, at Kitron. We're fast and agile. If we need footprint, we can get footprint. And we will get footprint because we're going to get the business, all those new opportunities. So it's not an issue. It's not a huge cost thing. So not concerned about that.

No. And we have to bear in mind now that for Delta, the capacity is mainly when you grow within the competencies that we don't have so much in Kitron. It's not machinery based. It's people and footprint, basically. So it's a lower investment level and easier to find facilities or expand.

There's not a lot of expensive automation equipment.

No. Of course, there will be some, but not nearly as much as...

Petter also asks us why the earn-out is only based on revenues. Well, it's a point of negotiation in the contract. So no further comment.

We sort of mentioned it. It's not much. It's a couple of million euros for 2026.

[ William Hartner ]. Excellent work. May I ask whether your corporate teams is also following other companies that are being considered for acquisition? As I've stated earlier, we're working with a long-time adviser now for the past almost 18 months, right? So yes, we have a substantial list of companies we've looked at. And we're continuing to look at a few of those companies. We want to close this transaction before we start moving on aggressively on something else. This has been a lot of work in these past couple of months. Let's see, I think we have -- and the final question here is also from [ Magnus ]. Again, are we looking at further acquisitions in the next 12 months? Yes, as we are. Where do you expect the financial leverage to stand post the acquisition?

As we're saying, we're tapping into different expectations here. So it's not defined, the target. But we have ample room in whatever we do.

Yes. And I think that concludes the question part of this presentation. So any other questions or follow-ups, you're welcome to contact either Cathrin or myself, and we'll be happy to take your questions. If we don't see you before December, we'll see you probably in December 10 for our Capital Markets presentation. So thank you so much for attending, and see you later. Thanks.

Thank you.