Kongsberg Gruppen ASA (KOG) Earnings Call Transcript & Summary

Good morning, and welcome to the presentation of KONGSBERG's First Quarter 2025 Results. Today's presentation will be given to you by President and Chief Executive Officer, Geir Håøy; as well as Executive Vice President and Chief Financial Officer, Mette Toft Bjørgen. This is a webcast-only presentation, and questions may be submitted through the webcast frame. If journalists who requires or are requesting interviews with the management after the presentation are requested to contact Head of Communications, Ronny Lie. And with that, I want to welcome Geir Håøy to the stage.

Yes. Thank you, Jan Erik, and good morning, everyone. KONGSBERG operates in a rapidly changing world. This requires us to be both agile and adaptable. In 2025, uncertainty around international framework condition have placed challenges on international trade. This demonstrates the importance of cross-border cooperation and a global footprint. Today, we are presenting the first quarter results, but I think it is important to remind everyone that we have a long-term focus with high ambition. At our Capital Market Day last year, we stated an ambition that we aim for at least NOK 120 billion revenues in 2033. The uncertainty we are experiencing today is a reminder that during such a long period, we will experience changing condition. The current environment creates uncertainties for most companies. However, our job as management is to handle short-term turmoil and at the same time, navigate towards our long-term ambition. Despite the current turmoil, I am confident on our long-term trajectory. Maritime transportation is the backbone of global trade. More than 80% of the world's goods are transported by sea. This underlines its unique importance in global logistics. Maritime activities currently account for around 3% of the global greenhouse gas emission annually. The International Maritime Organization has aggressive targets to reduce emissions from the industry. However, the global supply of green energy is not sufficient to meet the needs of all industries, and we must increase energy efficiency. As an ocean technology expert, we are uniquely positioned to be a frontrunner in this transition and ensure that we find solutions to make energy consumption more efficient. Ongoing war in Europe and conflicts elsewhere in the world demonstrates the importance and need for increased security. The KONGSBERG management have recently met with important stakeholders, both in the EU and the U.S. We experienced that we play an important role and are highly relevant in the dialogue on European and Transatlantic security, which is more important than ever. The European Union has placed defense and security at the top of its agenda, and KONGSBERG is recognized as a trusted partner in shaping the future of European defense closely aligned with NATO. In the U.S., KONGSBERG has a solid and well-established setup with partners, production and supply chain. Last year, we announced that we will build a new missile factory in Virginia, and we will invest further in the U.S. going forward. We have been and are a long-term and strategic partner on critical defense capabilities to the U.S. Army, Navy and Air Force. KONGSBERG offer a range of solutions that can directly respond to the current security needs among allied nations. I would like to mention some of them before I dive into the quarterly results. Within the sea domain, we have the only fifth-generation strike missiles, which can be operated from combat aircraft's naval and coastal platforms. We are well leading in subsea monitoring and submarine warfare. In the land and air domain, we delivered the world's most used medium-range air defense system, NASAMS. And I'm very proud that this system so far has destroyed almost 1,000 Russian crews, missiles and drones with a hit rate of 94%, protecting people and critical infrastructure in Ukraine. In the space domain, we are a provider with solutions from launch, satellite payload as well as world buildings, ground station infrastructure for downloading satellite data. And recently, we also launched our first maritime surveillance satellite. We bring a unique and strong defense portfolio to the table, which will be fueling our long-term growth going forward -- going together with our maritime and subsea solutions. Turning our attention to the quarter. We delivered a very solid start to 2025 with order intake above NOK 20 billion in addition to growing revenues and operating results. We made several strategic steps during the quarter. Kongsberg Digital Maritime portfolio was integrated into Kongsberg Maritime, enhancing our ability to deliver comprehensive solutions for the digitalization and decarbonization of the maritime industry. We have also completed the sale of our steering gear and rudder business to Norvestor and strengthened our underwater technology base through the acquisition of Naxys Technologies. When it comes to order intake, all business areas delivered book-to-bill above 1 and are increasing their order backlogs. Kongsberg Maritime continues to build backlog with solid signing both for deliveries to new vessels as well as to existing fleet. We continue to see a very diversified order intake from the newbuilding segment with deliveries to LNG carriers and offshore vessels being the 2 largest segments. The LNG contracting is still driven by the large Qatar project while the offshore contracting typically relates to new OSV vessels. In Kongsberg Discovery, we continue to experience strong demand for our underwater technologies. And in Q1, we signed orders for deliveries of 6 new HUGIN autonomous underwater vehicles. Sustainable management of ocean resources and security are important drivers for Kongsberg Discovery. The demand for solutions to better protect and understand the ocean space from commercial actors, public administration and defense customer is increasing. We also see a positive development for our drone detection solutions. Kongsberg Defence & Aerospace is also continue to grow their order backlog. Many of the major orders the past years have been related to missiles and air defense, but it is important to remember that we are involved in more than this. Maintenance, repair and overhaul has been an area of focus for us for several years. And in Q1, we signed a new important contract when the Norwegian Defence Materiel Agency chose us for the maintenance and future upgrade requirements of the Norwegian F-35 aircraft. The agreement has a long-term perspective and is a result of close cooperation between the Norwegian Armed Forces and KONGSBERG. Another growing area within Kongsberg Defence & Aerospace is space. Close to 3 years ago, we acquired a small sat producer, Kongsberg NanoAvionics. And at the end of Q1, SpinLaunch selected Kongsberg NanoAvionics as its exclusive satellite supplier for its low earth orbit broadband communication constellation, the Meridian Space. The contract is for delivery of 280 microsatellites. In March, we also launched our first own new satellite. The satellite was launched from the Vandenberg Space Force Base in California, which marked a milestone for KONGSBERG. In Q1, we added a new user of Naval Strike Missile when we signed the delivery contract with Denmark. Denmark will integrate the missile on one of their frigate classes, and the contract was valued at NOK 2.1 billion. An important milestone was also met when the U.S. Air Force expanded their initial joint strike missile order with another USD 70 million. Kongsberg Defence & Aerospace is currently in a final negotiation with a new JSM customer for a contract valued at around NOK 6 billion expected to be concluded this summer. Later this year, we will also start the construction of our new missile production facility in U.S. This comes in addition to the recently opened new facility in Norway as well as the facility, which is under construction in Australia. For the remaining year, KONGSBERG has already secured NOK 30 billion worth of orders for deliveries. We are exposed to markets in demand for our technology. We are continuously adapting, and we have a worldwide network of both own business and partners. That, together, found a solid foundation for continued growth. So with that, I leave the floor to Mette to take us through the financial status.

Thank you, Geir. Good morning, everyone. It's a pleasure to start 2025 by reporting solid financial performance for KONGSBERG. We have made some structural changes since our last reporting. So before we dive into the figures, I would like to go through these changes for more clarification. In Q1, we completed the sale of our steering gear and rudder business to Norvestor. In 2024, this business generated revenues of approximately NOK 950 million. This is a mature business with an EBIT margin close to Kongsberg Maritime's average EBIT margin. The gain from the sale of the steering gear and rudder business made a positive impact of NOK 1.05 billion both to revenues and operating results in the quarter and is reflected in other activities. As announced earlier this year, we have transferred Kongsberg Digital's maritime portfolio to Kongsberg Maritime. In 2024, this business had operating revenues of approximately NOK 600 million with an EBIT close to 0. We have also increased and strengthened offerings from Kongsberg Discovery through the acquisition of Naxys Technologies. This company achieved operating revenues of NOK 124 million in 2024 with a solid margin. Now looking at the first quarter, KONGSBERG delivered a total of NOK 14.62 billion in revenues. Adjusted for the gain of the sale of our steering gear and rudder business, the year-on-year increase is 19%. All business areas contributed to the growth. Kongsberg Maritime delivered revenues of NOK 6.74 billion, a year-on-year growth of 25%. The growth was driven by strong activity both related to the newbuilding and aftermarket. In the newbuilding market, the contribution from the LNG carrier segment continued to be solid in the quarter. The aftermarket is still strong and accounts for 57% of the revenues in the first quarter. Kongsberg Defence & Aerospace came in at NOK 5.38 billion, up 9% from Q1 last year. Last year included NOK 500 million in revenues from a project with extraordinarily high deliveries. Adjusted for this, the growth rate is 22%. The largest contributors to the growth were air defense and missile projects. Kongsberg Discovery achieved NOK 1.36 billion revenues, an increase of 29% year-on-year. The main drivers for the increased revenues were high activity related to autonomous underwater vehicles, drone detection radar as well as deliveries of mapping and positioning systems. The contribution from AUVs will vary between quarters due to the timing of project milestones and deliveries. Looking at operating results. The group achieved a quarterly EBIT of NOK 2.89 billion. Adjusted for the sales gain, operating results is NOK 1.84 billion, representing an underlying EBIT margin at 13.6%. This is an improvement compared to last year of NOK 382 million and 0.8 percentage points higher EBIT margin. All business areas improved operating results compared to last year. The largest contributor in nominal terms was Kongsberg Maritime with NOK 919 million and a corresponding margin of 13.6%. In Q1 last year, EBIT was NOK 753 million, and the improvement comes as a result of increased volume and solid project execution. Kongsberg Defence & Aerospace delivered NOK 848 million in EBIT and a margin of 15.8%. This is compared to NOK 703 million and a margin of 14.2% in Q1 '24. The improved margin is a result of strong project execution and favorable project mix in the quarter. As previously stated, defense margins will fluctuate depending on project mix. The overall mix in our current backlog confirms our previously stated expectations on defense margins going forward. Kongsberg Discovery reported a NOK 240 million and a margin of 17.7%. This is up from NOK 114 million and 10.9% margin in Q1 last year. Favorable project mix, strong project execution, and increased volume contributed to the increased margin. In addition, last year was negatively affected by high development costs related to 1 specific project. The cash conversion in the quarter is strong, driven by a solid EBITDA and relatively stable net working capital. Both Kongsberg Defence & Aerospace and Kongsberg Discovery ended the quarter with a working capital position approximately in line with last quarter. Kongsberg Maritime improved net working capital by NOK 0.4 billion in the quarter. Part of the improvement is related to structural changes but also reduced working capital as a percentage of revenues has contributed the last couple of quarters. Total contribution from associated companies were NOK 13.5 million in Q1. Our 2 largest associated companies are Kongsberg Satellite Services and Patria. Kongsberg Satellite Services delivered revenues of NOK 556 million in Q1, which is a year-on-year increase of 4%. First quarter see some impact from delays in several launches, which is quite common in the industry. The small satellite market is increasing with a significant growth in number of satellites. With KSAT's solid market share, we expect the revenue growth to pick up going forward. EBIT in the quarter is NOK 94 million with a corresponding EBIT margin of 16.9%. The EBIT margin is affected by investments, which is important to deliver on the solid NOK 5.2 billion backlog. Patria started the year with a 5% revenue growth compared to last year. The growth was primarily driven by deliveries of armored vehicles. Note that we, as previous years, only include numbers from January and February for Patria. EBIT is in line with the typical EBIT profile we see from Patria with most of the profits towards the end of the year. Now going forward, we expect Patria to grow further with the same seasonality effects that we have seen in previous years. Patria's order backlog is EUR 2.4 billion. The backlogs from our associated companies are not recognized in KONGSBERG's reported backlog. And with that, I'll leave the floor for Geir for some final remarks.

Thank you, Mette. Before we open for questions, let me touch up on the most important drivers for our business going forward. The global fleet is aging and the race for more energy-efficient maritime fleet is a key driver for the industry going forward. Looking at newbuild contracting at the yards, 2024 contracting was strong and ended higher than most analysts projected. We see estimates from such as Clarksons indicating softer newbuild contracting in 2025. On the other hand, the mix for us continues to look strong. There are expectations of continued solid volumes on LNG carriers as well as growing offshore contracting among others. With the uncertainty in the geopolitical landscape as well as more industry-specific challenges, such as the choice of fuel and long lead time on newbuilds from yards, we also see that demand for upgrades continues to be strong. The age of the fleet continues to increase and for the existing fleet to stay relevant for the vessel owners, the vessel owner has to modernize both systems and equipment, which is and will continue to be a good business for Kongsberg Maritime. We see continued increased demand for our portfolio of defense systems. Defense spending is increasing, both in Norway, NATO and other allies. The order backlog in Kongsberg Defence & Aerospace is about NOK 100 billion, whereof NOK 85 billion is related to missiles and air defense. Our position towards the current market demand has never been stronger. We're currently negotiating several projects. And as I mentioned in my introduction, this also includes the next JSM user, which we expect to sign within a couple of months. In Kongsberg Discovery, we are continuously expanding our offerings, and we are experiencing strong and increased demand for our world-leading portfolio of sensors, robotics and hydroacoustic products. The naval market and the water surveillance and monitoring as well as protection and surveillance of critical infrastructure are areas of specific interest. During my introduction, I mentioned the challenging geopolitical climate we, along with others, are experiencing. I would like to emphasize that KONGSBERG has proven to be agile and adapting to changing environment. We have a highly international business both in terms of our own customer base as well as our organizational setup. This global presence allows us to be flexible and adapt to shifting condition. Overall, KONGSBERG's market position and the demand we are experiencing throughout our business are strong. We are a key player in our markets, and I am confident that we will continue to deliver on our commitments and ambitions both in 2025 and onwards. With that, I would like to open up for questions from our viewers.

We have received several questions from our viewers today. And the first two questions, I'll ask them together, comes from Lukas Daul, Arctic Securities. The first one is regarding Kongsberg Defence & Aerospace outlook. Could you please give some color to what you mean by mix of projects impacting profitability going forward and preferably by giving some examples? And also question number two, with regards to the order size for the 6 HUGIN projects, can you be somewhat more specific?

Okay. I can answer to that. If I start with the last question, the order intake for the HUGIN orders are a couple of hundred million. So I'll leave it to that. And when it comes to the projects for Kongsberg Defence & Aerospace, we do have a quite variation of the projects that we are delivering on from time to time. And if we're looking at our project order backlog of NOK 105 billion, there are a number of projects that are deliveries to Norway. And we've said that deliveries to Norway are subject to profit cap regime, which means that it's a cost-plus contract. On other export contracts, we are competing in a competitive market, so we're able to price these contracts competitively. And as such, they will have a different margin. I can give an example of a development contract that we signed last summer, which is the joint development for the supersonic strike missile to Norway and Germany. This is a development contract where Norway and Germany are together developing a new missile type. This is a very low-margin project. And when we have milestones and deliveries on these type of projects, they will generate a much lower margin in a quarter, whereas when we're delivering on -- or big export project, for example, within air defense to a country that is not participating in development of our systems, will generate much higher margin in the quarter. So these type of milestones and delivery dates will significantly impact the margin in the quarter.

May I just add on the AUVs? I think it's important to remember that we have several type of AUVs, and it's -- the contract price depends very much on the payload on the HUGIN itself, what type of sensors, what kind of mission this vehicle should operate. So this contract with the 6 HUGINs is not -- it's actually undisclosed these figures. But again, it's very important to remember that there are several type of HUGINs with different payloads. So it's not one price for everything.

Thank you. With regards to a subject that has gotten a lot of attention lately, tariffs. Do you -- can you elaborate a little bit around the tariffs and how you eventually see this impacting KONGSBERG?

Yes, I can answer to that. Of course, we do have sales to the U.S. The majority of our U.S. exports is defense products. And when it comes to defense products, these are regulated by the FAR, DFAR regulations and as such, are subject to duty-free imports. So the majority of our export sales to KONGSBERG is tax exempt, and we expect this to continue going forward. When it comes to other type of products, we do also have some sales. Our contracts are in a majority put the tolls and the tariffs on the customer side. So in the short term, this has very little impact for our sales. Of course, the competitive situation and how this will change with these tariffs is something that we follow quite intensely, and we go through all the sales and the products that we have. I'd also like to emphasize that we do have a very global footprint with more than 40 -- we're in 40 different countries and more than 100 locations. So we are utilizing this global footprint to assess how we can also adjust to the new environment should the tariff and the impact be more significant on our business.

And as I mentioned that we have a fairly large footprint in U.S. today, including supply chain, which we, of course, also will continue to expand. So that is also, let's say, important part.

Thank you. Next question from Marta Frackowiak. Do you have any comments on the European boosting -- or Europe boosting military spending? And when do you expect higher European spending to roll into your order intakes and results? Are you already seeing it? Or do you eventually have an estimate when it will start showing?

I can start. We are spending a lot of time, as I mentioned, in Europe these days. We have done that for quite some time now. Obviously, it's important for us. Europe is the most important market for us, Norway and also an important market for KONGSBERG, and we are already well established in Europe. I mean we -- many of our customers are in Europe. We are also a supply chain, large supply chain in Europe. I would say that we see already the impact of the larger spendings in Europe. Of course, there are some very important programs coming online, which has been announced in the EU Commission. And Norway, even though we are not a member of EU, we are a part of the internal market. And that's also why it's important for us to be in Brussels and explain them and tell them what KONGSBERG can contribute with. And what we hear and what we see also from the last white paper that was released in March is that Norway and KONGSBERG are in there in these programs. These are huge programs, so it will take time before we will see the major impact, I would say. But these are programs that is coming online as we speak.

Thank you. Question from [ Darryl Carberg ]. Can you please elaborate around why you have stopped reporting Kongsberg Digital as a separate area?

Sure. As I mentioned in the portfolio changes for Q1, we have transferred a part of the maritime digital portfolio from Kongsberg Digital to Kongsberg Maritime. As such, this represents some NOK 600 million of the revenue for Kongsberg Digital, and the remaining revenue is around NOK 900 million. Now with our growing business and with the size of the other business areas, we don't see this business area big enough to report stand-alone as a -- from this year.

Thank you. That was the final question from the webcast viewers.

Okay. Thank you very much for joining us this morning, and look forward to see you next time.