Kongsberg Gruppen ASA (KOG) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the presentation of Kongsberg's Fourth Quarter and Preliminary Annual Accounts 2022. Today's presentation is a webcast only, and you are able to ask questions through the webcast. The results today will be presented by our President and CEO, Geir Haoy as well as our Executive Vice President and Chief Financial Officer, Gyrid Ingero. Before Geir enters the stage, I would like you to have a look at this. [Presentation]

Good morning, everyone, to this fourth quarter presentation and webcast. Let me start by saying that I'm very proud of what all my colleagues in Kongsberg have achieved and how we have performed in 2022. We delivered on our strategic priorities and met the targets that we laid out for the group back in 2019 on our Capital Market Day. We have continued to grow our top line and earnings despite challenging conditions. And we entered 2023 with an order backlog higher and stronger than ever before, both in our civilian as well as our defence business. Our positioning in all business areas are strong. We are in the middle of the major trends affecting our businesses in a world where sustainability and security are at the top of the agenda. I strongly believe that Kongsberg is uniquely positioned to prosper further. We are an ocean expert with solutions for a more sustainable shipping and utilization of the ocean as a sustainable resource. We have solutions that enables a green shift. We have the most modern and sophisticated defence and security portfolio within our niches. And our digital portfolio is getting a solid traction and is an enabler for both the heavy asset industry as well as the general shipping to run the operation, both more efficient and more sustainable, which are adding up to a world-leading portfolio of industrial scale and world-class sustainable and secure solution for our customers with the aim of generating superior value for our shareholders and for all our stakeholders. And I must say that the pipeline is stronger than ever. But there are concerns. In short time, the world has gone from peace and a happy global village to a world filled with global tension, economic challenges, warfare and fight for resources. Nobody could foresee the corona crisis and few did foresee the challenges with logistics and components. Russia's large-scale and brutal attack on turn seemed unthinkable and the extreme price increase in the energy market came as a surprise. Inflation retrenchment measure and interest hike very faster and more heavy than most of us believe was possible. And in parallel, we have a climate crisis, which escalates as cyberthreat that continue to increase. The sum of all these events create challenges for us, and it makes it harder to predict and adjust to the future. At the same time, we have solutions that could make a difference to these issues and these challenges are also opportunities for us. Kongsberg is agile. We are determined, and we will never give in. And we will continue to deliver strong performance in a world where sustainability and security are at the top of the agenda. Based on the solid 2022 financial performance that Gyrid is about to give you more details on, the Board will propose to pay out a total of NOK 2.1 billion or NOK 12 per share in dividends. And with that, it's time for to give us 2022 financial highlights. Gyrid?

Thank you, Geir, and good morning, everyone. Thanks for attending the presentation of our Q4 and preliminary annual accounts for 2022. Geir has already touched on the big 2022 picture, how the environment surrounding us has changed significantly and also made our portfolio of products more relevant than ever. Nevertheless, our performance in 2022 on defence is a result of sales prior to the ongoing war and clear result of long-term commitment and dedication. On the civilian side, our positions are stronger than ever and not only in single maritime segment, but basically throughout the entire maritime value chain. In 2022, we delivered NOK 4.4 billion growth corresponding to 16%. We achieved 15% growth in Maritime, 18% growth in defence and 17% growth in digital. At the same time, we secured more than NOK 45 billion in new orders corresponding to a book-to-bill of 1.42. This is a clear indication that we will continue growing Kongsberg. A lot of the orders signed are, of course, for delivery over a long period of time, both in defence as well in Maritime, but we now have a solid confidence in growth margin. Our group target for the year laid out at the Capital Markets Day back in 2019 was at 14% that we met. Maritime ended the year at NOK 2.39 billion EBITDA and a margin at 12.6%, slightly below the 13% target, but still a solid level. Keep in mind that with the sanction against Russia, we had to make loss provision in the beginning of this year. Without this, we would deliver approximately 13% Defence over delivered on EBITDA compared to the long-term target and ended with NOK 2.5 billion EBITDA and a 21.2% margin for the year. The strong margin is, first of all, a result of efficient project execution, combined with favorable project mix and achieved milestones. But we also had challenges in defence, especially with the remote weapon stations, where we have seen delays in deliveries due to challenging component situation affecting more or less whole 2022. For digital, the focus has been on growing the business area and rolling out systems and new users. Digital showed a solid growth on all our most important KPIs and recurring revenue grew by 38%. And I will come back to the Q4 details after Geir has given you a more thorough update of the business areas.

Thank you, Gyrid. Then to the business updates of the businesses. Kongsberg Maritime has delivered yet another impressive quarter with revenue growth in all divisions and a record high order backlog of NOK 18.6 billion. The solid order intake in Q4 is due to good activity and especially within the offshore wind, seaborne and PACs and also the aftermarket. That said, looking at the distribution of the order intake, I'm very satisfied with the diversification across segments. The past couple of years, we have benefited from a strong growth in the -- in ordering from areas such as LNG carriers and also the offshore wind. In 2022, there were contracted more than 180 LNG carriers. This was up 90 vessels from 2021. Our order intake in these LNG vessels were close to NOK 1.2 billion in 2022, which is close to doubling from previous year. From offshore wind, we signed contracts worth more than NOK 1.7 billion in 2022, which is up from NOK 1.4 billion a year earlier, showing that our solutions for this still relatively new and sustainable segment are well received by the vessel owners and operators. Looking at the market, we have seen a slowdown in the number of contracted vessels from 2021 to 2022. And -- the most important segment for KM, though have shown a positive trend. It is yet to be seen how the expected economic slowdown will impact maritime contracting. But it seems likely that we will not see a major improvement in 2023. Another factor supporting this view is the yard capacity that currently are stretched. When ordering a new vessel today, delivery times could easily be in 3, 4 years out in time. On the other hand, with regulations kicking in, both from IMO, EU as well as other more geographical specific regulators -- it generates a pull for renewable of existing fleet, either by ordering new vessels or upgrading existing vessels. The regulation implying taxation on different fuels requirements to file reports on emission and minimum standard to enter ports and more sustainable shipping in general. This puts pressure on the industry to make changes and introduce new solutions. This is a major driver to our aftermarket business, and we put a lot of efforts supporting and partnering with our customers to enable them to comply with these regulations. We have also seen a major change during the past years with a move from push from both the regulators and the providers of solutions like ourselves to a pull from the customer to improve. This has created a major increase in demand for our solutions. This applies both to the merchant fleet as well as to the more traditional offshore fleet, where we have seen stricter and stricter demands from majors like Equinor and others when they're selecting their suppliers. We have achieved a 22.4% growth in sustainable offerings order intake in 2022 or NOK 710 million, which represents approximately 18% of our project orders intake in the aftermarket. One example here is a contract secured in 2022 with Allseas for hybridization of 3 of their vessels. Allseas is a world-leading contractor in the offshore energy market with a long history with Kongsberg -- they are now investing in a 10 megawatt hour of Kongsberg Maritime own battery technology. And this is to make their fleet more efficient and less polluting. This is the largest as far as I know, the aftermarket battery delivered to 1 single vessel globally. This is a trend that we expect to continue, both as a result of current implemented regulation, but also when future taxation regimes are decided. All in all, we see a mixed overall demand picture. But that said, with the current phase, KM will continue to deliver -- then to KDA. KDA continues to grow in 2022. The growth was especially driven by the air defence and the midsize. Over more than NOK 12 billion in order intake in Q4, NOK 9 billion comes from the missile. This indicates that the growth is set to continue, and I'm extremely satisfied with the financial performance. But I'll let Gili come back with the details in a few moments. The interest and demand for our naval strike missile is increasing. NSM is an anti-ship and land attack missile recognized as the most advanced precision strike vessels in. In the quarter, we signed several new contracts for NSM, including a contract with the Australian Navy for more than NOK 5.5 billion for replacement of their existing missiles. In total, 11 user nations have now either ordered or selected NSM from Kongsberg. We see a huge need for replacement of the world existing anti-ship capability, that in general, are starting to become obsolete. NSM is a solid proof of the long-term determination we have in Kongsberg. The development started back in the mid-19s and now more than 25 years later, we have the most modern capability in the world in this field and have signed orders worth more than NOK 20 billion over the past 2 past years. And there is more to come. As I mentioned on the -- our Q3 presentation, we expected orders for more than NOK 50 billion from NSM and/or GSM over the next 12 to 18 months. And in Q4 last year, we have already secured more than half of this. We managed to speed up remote weapon station deliveries somewhat in Q4, but we still experienced some delays, and it is a high priority to solve this case in close collaboration with our customers and partners. A solid proof that our customers believe in us is the new USD 1.5 billion framework agreement we signed for rosin Q4. This ensures that we will continue to be the supplier into this program. So far, we have delivered more than 14,000 systems since we won the first contract with the U.S. Army back in 2007. Going forward, with the current situation, where we experienced increased defence spending and budgets, we expect the demand for our product lines to remain strong, and KDI will continue to grow. Then to Kongsberg Digital. Kongsberg Digital was also showing good progress in Q4. We are continuing the rollout of our digital twin Kognitwin and have close to double the number of new users during the quarter to more than 8,000 individual users using the twin. In Q4, we also signed a solid contract under an existing framework agreement, securing future -- further future growth for the system. By the end of 2022, we have signed contracts with approximately 80 shipowners for more than 2,000 vessels on the vessel insight. In total, these ship owners control more than 3,000 vessels, showcasing the significant potential for KDI going forward. Also in the number of connected and paying vessels has increased substantially during the quarter. The established business in KDI is also showing good progress, both with a significant contract that we signed on the Maritime Simulation and on the work transferring existing customer on our wealth solution from traditional lease to the SaaS business model. While there is no secret that we have high expectation for KDI as digitalization of the maritime market and heavy asset industry are a significant contributor to optimize these industries. The market is still somewhat immature. This is particularly true in certain maritime segments. That said, we see a movement on a positive signs. Further, the energy transition to new and sustainable energy source is an important driver for our digital solution. Therefore, we expect increased demand for the business area solutions going forward, and our growth ambition for KDI remain unchanged. Then I will hand over to Gyrid again to go through the Q4 financial details.

Thank you, Geir. And even if we have a fantastic 2022, we ended on a high note for the fourth quarter. So let me start. We signed orders worth a record-breaking NOK 19.2 billion during Q4. All business areas delivered strong order intake, but the major driver that I will come back to when I'm discussing the defence figures with our missile division. The order intake corresponded to a book-to-bill of 1.42 and increased our backlog to more than NOK 63 billion, the highest ever for Kongsberg. This also means that we already have secured some NOK 25 billion for delivery this year, and that is before the majority of the aftermarket is included. NOK 9.4 billion revenues are the third record shown on this slide. We increased revenue with 16% compared to Q4 last year and are entering 2023 with a solid pace. The records do not stop there. Looking at our EBITDA on the right-hand graph, it shows a NOK 1.4 billion EBITDA with 14.8% margin. The improvement comes from both defence and Maritime. After 3 consecutive quarters with continuous increase in net working capital, I'm pleased to see that we managed to turn the curve in Q4. The first 3 quarters of the year was characterized by both growth-related increases as well as effect from the delays on the remote stations. In addition, we made substantial progress on projects where the customers have made large payments upfront. In Q4, we received several large milestone-related payments in defence that you see moves the net working capital to sales down from negative 1% at Q3 to negative 13% at year-end. In Maritime, we kept the net working capital at the same nominal level. That said, we have a somewhat more favorable composition with lower trade receivables and somewhat higher inventory related to specific customer projects. Looking at the development for the full year, the main expectations are a combination of the delivery challenges in Land Systems, inventory buildup in the missile division and relatively few milestone payments expected from the Q4. We are always targeting a more efficient working capital, both with the continued expectations of growth in Q4. This implies year-end net working capital to sales around the same range. Looking at the cash flow. I touched on the working capital development in Maritime and Defence on the past slide. As you can see, the net working capital, in addition to our strong EBITDA were the main drivers for the positive cash flow this quarter. With regards to the capitalized R&D, the majority related to -- is related to our digital business and a bit a little bit on the starting of building a new missile factory. We have also spent NOK 123 million in Q4, buying back shares under the share buyback program. This program was completed on January 13 this year, and we bought back a total of 69 555 shares from the market. The dilution of these shares and the corresponding number of shares that we will bought back from our largest owner will be voted for on our AGM in May. At the end of the year, we had some NOK 3.9 billion cash. A solid balance sheet with investment-grade approach. At year-end, we had net debt of negative NOK 1.5 billion. Despite the level of cash lowering during 2022, we still have a very solid balance sheet when entering 2023 with limited debt. That said, a certain level of cash is required to finance the day-to-day operation in Kongsberg. We currently have NOK 2.45 billion outstanding bonds. And at the right, you can see the healthy maturity profile on this and with cash, comps dividend. For the fiscal year 2022, the Board will propose to return a total of NOK 2.130 billion to the shareholders as dividends. That corresponds to NOK 12 per share. Out of this, NOK 3.6 is considered under the ordinary dividend policy and will be considered payback of previously paid capital. The remaining NOK 8.4 will be taxed as normal dividends. So looking at Kongsberg Maritime, I just have to share this with you over the last 5 years, we acquired Commercial Marine back in 2018 and closed the transaction in 2019. It has been a quite healthy development since then. So at the quarter, Maritime continued to deliver strong order intake and the NOK 6.1 billion in Q4 corresponds to a book-to-bill of 1.16. Also in Q4, we saw good orders intake, both from the new building market as well as the aftermarket to mention some. We filed orders for equipment to offshore wind vessels worth more than NOK 650 million only in Q4. The aftermarket continues to perform strongly and deliver close to half of our maritime orders intake in Q4. This is driven by several hybridization and upgrade contracts but also a continuation of what we have seen during the first 3 quarters in 2022 that we have expected a shift in the aftermarket from a need to have, like we have experienced during COVID, to nice to have and would like to have. This means that instead of doing only the minimum of what is needed, we now see a lot of customers investing a little extra to become even better prepared for a greener future. As you see from the right-hand chart, we continue to build order backlog in Maritime has some NOK 18.6 billion for delivery going forward, both in the short and medium term coverage is good, but it's important to remember that yard capacity is stretched, meaning that lead time delivery, new orders signed today are longer than what it has been over the previous years. This again means that the level of new contracts signed impacting the short-term revenue, most likely will be somewhat lower than what we have been used to in the past years. Maritime delivered 9% year-on-year growth in Q4 and 15% growth up to almost NOK 19 billion for the year. This continues the solid trend we have seen during 2022. The Q4 growth was driven by the aftermarket as well as the division sensor and robotics that will be reported as a separate business area from Q1 2023. These are still lots of uncertainties out there, but the pace in the organization as well as solid track and long term, the previous slide, give comfort on our 2023 levels as well. I would also like to share that we had one area in the aftermarket with extraordinary growth last year. The aftermarket in propulsion had alone a growth in order intake of 36% and a revenue increase of 23% with strong profits. Maritime delivered NOK 662 million EBITDA, corresponding to 12.6% EBITDA margin compared to NOK 537 million and 11% in Q4 last year. The improved EBITDA is mainly a result of profitable growth and increased efficiency. Currency fluctuation in general and exchange rate between Norwegian krones and U.S. dollar is something that we will follow closely. The majority of Maritime revenues comes from customers outside Norway. However, it's important to notice that we typically hedge most delivery prospects. This means that eventual currency effect is typically spread over the contract period. A portion of the revenue, though, are, nevertheless, expect exposed to the spot market. And we have calculated approximately the same positive EBITDA effect in Q4 as the last quarter, around NOK 50 million, mainly from sensor and robotics and the spot side on the aftermarket. The ongoing inflation, of course, also hits the whole maritime value chain. To a large extent, we have been able to offset cost by actually taking part of the price increases as well. The situation around components and logistics could, of course, still impact profitability -- that said, we had the current trend, both when it comes to the green shift needs for renewals. And last but not at least, Com's strong market position. I continue to be very positive going forward. Then looking at defence and also had to share with you the last 5 years under development in defence that has been amazing. The order intake in Q4 came in at huge NOK 12.5 billion. The major driver here was missile orders where we announced a total of NOK 7 billion orders intake from Australia, Romania and Norway. In addition, we signed a contract with the Netherlands where the value is undisclosed. U.K. also announced that their intention to purchase NS missiles in Q4. Another pleasing moment was when we signed the USD 1.5 billion framework agreement. We have, as you know, faced challenges on delivering remote weapon stations during 2022. But it gives solid comfort that we have strong trust from our customer when they award us a new major deal like this. Last quarter, I said that we expected missile orders worth more than NOK 15 billion over the next 12 to 18 months. We have already signed more than half of this, but it shows that there is more to come with the danger of repeating myself from previous quarters. The current backlog secures growth also for 2023. From the chart to the right, you can see that we already have secured more than NOK 13 billion for delivery in 2023. The total order backlog is now at NOK 43.5 billion, which is close to doubling just over the 2 past years. Our main focus now are deliveries. So order backlog can convert into revenue and profit. Defence came in at NOK 3.9 billion revenue in Q4 and NOK 11.9 billion revenue total for 2022, corresponding to a 29% quarter-on-quarter growth and an annual growth of almost 18%. Both the quarter isolated and the year -- for the year as a whole, the growth is driven by the major air defence deliveries. We have to Qatar, Australia and Hungary at the moment. In addition, our Missile division has started delivery solid growth and with orders worth more than NOK 20 billion over the 2 last years. I can assure you that this is just the beginning. Also in Q4, we had positive contribution of some NOK 300 million to our revenue from extraordinary high progress in air defence projects. In Q4, Defence delivered a very strong margin of 22.7%, giving an EBITDA for the quarter of NOK 885 million and NOK 2.5 billion for the full year. We see that the extraordinary high volume in the quarter proves our scalability. As I keep on reminding you on the margins, we will trend somewhat down due to change projects as we will -- as we have seen geographical mix on our deliveries. As mentioned earlier, we have started to see a mix change when it comes to orders, both regards to products as well as geography. The deliveries the last couple of years have been and still are boost with high-margin international sales. These programs will still be an important part of our revenue going forward. But remember that 50% on our order backlog now or missiles that normally have a lower margin. And then Kongsberg Digital. The revenue growth in Kongsberg Digital continues and KDI increased the revenue from NOK 229 million in Q4 2021 to NOK 285 million this quarter. For the full year, the business area delivered 17% growth and ended the year close to the NOK 1 billion mark. For digital, focusing on Software as a Service, recurring revenue is an important KPI to follow. Recurring revenue grew 38% from Q4 '21 to Q4 '22 and covered now 47% of the total revenues. This is both the proof of the success with the emerging portfolio around Kognitwin and vessel insight as well as a confirmation that we are able to transfer existing customers over the -- over to the SaaS business model. In 2023, we will continue our journey building KDI secure growth and scaling our market position. The financial result will continue to be affected by high investing related to this. Our ambition for KDI is to deliver a positive EBITDA in 2024. And last but not least, we also have some associated companies. And with regards to our associated companies, the 2 largest ones are Patria and Kongsberg Satellite Services. Patria delivered a 14% growth compared to the previous year to EUR 627 million. 1.27 book-to-bill and order backlog worth EUR 1.75 billion gives comfort going forward. Last year, Patria, among others, signed contracts with Finland for the 6x6 vehicles and the 8x8 vehicles was selected both by Japan as well as Slovakia. Kongsberg Satellite Service continued the positive path from previous years and entered the year with a 19% revenue growth to NOK 1.5 billion with NOK 562 million EBITDA. COSL has an order backlog of more than NOK 4 billion. This order backlog stretches over several years, but COSL has already secured the same level of revenue in 2023. So continued growth is definitely within reach. The backlog from our associated companies is not recognized in Kongsberg's reported backlog. The contribution to Kongsberg from these 2 companies was NOK 318 million in total for 2022 and is recognized as income from associates.

Thank you, Gyrid. I think we have covered most of the outlook for the different business areas already. So, I will not repeat this. But just to repeat what Gyrid just mentioned, when reporting our Q1 2020 figures, we will report a new business area, sensor and robotics. That until now has been a division in Kongsberg Maritime. Sensor & Robotics is a growing business area, and we are in Kongsberg continuously looking for a new opportunity to grow our business. So by establishing sensor and robotics as a new business area in Kongsberg, we aim to accelerate the growth further in a market for underwater technology through a more focused investment in research and in development as well as other growth initiatives. We will come back with restated historical figures for both Kongsberg Maritime as well as Sensor & Robotics prior to the -- our Q1 reporting. All in all, we are operating in an unpredictable world, but unpredictability also comes with opportunities. And with our current portfolio and other ongoing initiatives, I'm firmly confident that we will continue our sustainable growth path also in 2023. By that, thank you. Then, Gyrid, you will join me for -- and we will open for the questions.

We do have a few questions from the webcast. First, a series of questions from Kenneth Sivertsen, Pareto Securities. First, congratulations with an impressive year. And first question, to what extent have the Russia, Ukraine war impacted the defence order intake, if any?

There are minor order intake on our -- related to the Ukraine for time being. But what we see is that the request for our products and solutions are increasing.

And we also see that the budgets are increasing around for products like Kongsberg have. So we will expect that the demand will continue to be high in the future in terms of defence.

Second question from Mr. Sivertsen. Could you give some more color to the lead time for new orders within defence, the orders you sign now as well as given the demand for missiles, shouldn't -- or how does that impact the margins going forward?

On delivery time, I can -- this is a huge value chain for our products. Just on the missile side, we have around 1,000 sub-suppliers and then a lot of components. So, I think the delivery time is not -- is basically the same as we have seen before. But as Gyrid mentioned in her presentation, we are investing in increasing our capacity as we speak. So, within a relatively short time, we will increase our capacity on both the missiles and then also we have earlier invested in facilities to produce our air defence systems. So that capacity is up and running today.

And in terms of the margins and the effect on the missiles, I will bring your attention back to the Capital Markets Day in June last year, where we say that we have a goal of 17% in 2025 on defence. But the missiles will blend in during the years, but we also have others with lower margin like MRO, more orders from the Norwegian defence and so on.

And a question regarding the new business area, Sensor and Robotics. Can you elaborate a little bit around the rationale to report this and operate this as a separate business area.

Yes. We will come back to more details on that on the Q1, but I can say that Sensor and Robotics and their business area is related to underwater and high-end sensor sensors. And I think that Kongsberg Maritime have grown the portfolio in consummate have grown tremendously last few years. And I think it's looking at the market focus that Kongsberg Maritime Core has today is somewhat different from what Sensor and Robotics is. So, I think this is going to strengthen both Kongsberg Maritime focusing on their core markets in the shipping maritime market. And then sensor Robotics will have their management focusing on the water, high-end sensor area. So, it's going to be -- I think it's going to accelerate the growth path that we have already seen in sensor and robotics as well as Kongsberg Maritime.

Absolutely.

Final question from Mr. Sivertsen and then a few from some others. The final question from Sivertsen goes on our current financial ambitions for 2025. With regards to that, you have some NOK 63 billion backlog as well as a lot of framework agreements to deliver on forward. Were there any reasons why you would lift that ambition today?

I think it has to do with the delivery time as the other question was also, we need to ramp up, and that takes time. At the moment, as Geir mentioned, we are putting up a new missile factory. Last year, we put up a new production line for space and the year before for air defence. So, we are continuously ramping up our productions but at the moment we still stand on those the guiding style from the Capital Market stay last year.

I think we will have another Capital Markets...

Maybe...

If you find the right to lift our ambitions, then we will come back to that on next Capital Markets Day.

But I think, for sure, if we had that missile factory today, we would obviously have been able to deliver a lot more than we do today.

Okay. One question from Mr. George [indiscernible]. Can you comment a little bit on the expected timing of the remote weapon station delays being resolved as well as how the earnings or margins are on the remote weapon stations compared to the rest of your portfolio?

We're not commenting directly on the margin on the remote weapon station. But as Geir mentioned, we are delivering each month and each quarter, but we don't have the speed as we wanted because we still have lack of components. So we're working very hard to solve those issues. And we think that we will still continue to ramp up and deliver during 2023 and so on, but we don't believe that we will have a huge delivery in one quarter or another. It will come gradually during this year and probably also next year.

And then a few questions from Lucas Dahl, Arctic Securities. While you're not providing any specific revenue guidance for 2023, your contract coverage implies approximately a 25% revenue growth using the 2022 dynamics as a proxy. Is that a level that you're comfortable with? And also with regards to CapEx, how do you see this develop in 2023?