Kongsberg Gruppen ASA (KOG) Earnings Call Transcript & Summary

And welcome to the presentation of KONGSBERG's second quarter results. This presentation is done as a webcast only, and you will be able to send in questions through the chat function. Please note that this presentation contains forward-looking statements that, by their nature, involve known and unknown risks, uncertainties and other important factors that could cause the actual results to differ. Today's presentation will be delivered to you by our CEO, Eirik Lie; and our CFO, Martin Wien Fjell. With that, I will hand it over to our CEO, Eirik.

Thank you, Jan Edvin. Good morning, everyone, and welcome to this second quarter results presentation. The second quarter of 2026 was characterized by high activity levels across the company, both in new orders and in our production facilities. We continued to sign significant new contracts, and we made key deliveries to our customers. Last week, I was in Ankara for the NATO Summit and Industry Meeting. The messages from NATO were clear. Europe must continue to invest in its own defense capabilities and seek joint procurement with other countries. The need for high industrial production is increasing and urgent. And the Ukraine war continues to show the importance for air defense, missiles and anti-drone capabilities. There is also a critical need for missiles that can be produced in high volumes as well as protection against tactical ballistic missiles. In Ankara, NATO countries announced more than USD 50 billion in new procurements. Several countries announced major investments in their own defense capabilities. Many of these were relevant for us. Canada joined the German-Norwegian submarine program for which KONGSBERG is a major supplier. Lithuania signed an agreement with Norway for the potential procurement of standardized vessels, which we are designing with Salt Ship Design. And finally, Belgium joined the Netherlands with its intention to acquire multiple NASAMS systems. The contracts for these systems will come at a later stage, but they are strong examples of the overall trend. Europe and NATO are making investments, and KONGSBERG has products that meet current demand. In the second quarter, revenues increased by 31% to NOK10.4 billion from the same period last year. This is the first time we report revenues about NOK 10 billion, a major achievement. Earnings before interest and tax were NOK 1.7 billion, resulting in an EBIT margin of 16.1%. The results were driven by high volumes across the company with strong growth in air defense, missiles and remote weapon stations projects. Order intake in the quarter was NOK 17.1 billion, not including the NOK 400 million contract to deliver NASAMS to Kuwait. This took the total order backlog to NOK 158 billion. As usual, Martin will provide further details about the financials in his presentation. Activity levels were high throughout the second quarter. We completed the acquisition of Zone 5, which we see as a potential game changer for us. I will come back to this later in the presentation. We are on track with establishing new facilities. The missile factories in the U.S. and Australia are under construction, and we are preparing new establishments, for example, in Poland. This summer, we are moving into new facilities in Horten, in Norway. We also shared our new financial ambitions on our Capital Markets Day, presenting plans to triple revenues to NOK 100 billion by 2029 and NOK 150 billion in 2033. High demand for our key products drove the order backlog to NOK 158 billion. As I mentioned in the first quarter presentation, we expected to see new contracts for the Joint Strike Missile. In the second quarter, new orders for JSM totaled NOK 11 billion. Both Germany and the U.S. placed repeat orders for NOK 3.5 billion and NOK 2.7 billion, respectively. And at the end of June, we signed a contract to deliver JSM to Canada, making it the sixth country to select the missile for its fighter aircraft fleet. Recent events in the Middle East are driving up demand for air defense and anti-drone solutions. KONGSBERG has strong positions in select markets in the region. In June, we signed a contract with our partner, Raytheon, for deliveries of the NASAMS Air Defense System to Kuwait through the U.S. foreign military sales program. While the contract did not impact on the second quarter results and order backlog, the overall program has a value for KONGSBERG of about USD 400 million. Preventing and detecting threats and attacks are essential to protect critical infrastructure. KONGSBERG has solutions to support countries and industries, and we're now starting to see countries making investments. In June, we signed contracts worth more than NOK 200 million. The project is for an unnamed international customer and will focus primarily on underwater surveillance and protection. One month ago, we closed and completed the acquisition of Zone 5. Zone 5 was founded in 2011 and is based in California. It has about 400 employees and is growing fast. It is an established maker of high-volume missiles, also called affordable mass. These are highly capable interceptors that are designed to be reduced in tens of thousands per year. Zone 5 has developed combat-ready strike and air defense interceptors and are under contract with the U.S. government. The Zone 5 portfolio includes 2 key products. Rusty Dagger is a cost-effective, strike missile with long-range and flexible launch options. White Spike is a cost-effective air defense interceptor. We acquired Zone 5 because modern warfare shows that defense capability is not only about the most advanced systems, but also about volume, production pace, stock levels, and having the right cost per effect. This places new demands on both defense capability and industrial capacity. Zone 5 gives KONGSBERG complementary capabilities. High-end missiles are still required against demanding targets and in complex threat environments. Together with Zone 5, we have started work to add White Spike to our Air Defense and counter U.S. offering. Zone 5 is industrializing and scaling up manufacturing in the U.S. It is well positioned to win more contracts in the U.S. KONGSBERG aims to establish manufacturing of Zone 5 missiles in Europe. We are looking for countries and partners to create European hubs for high-volume production. With Zone 5, we can also introduce new and different business models. For very high volumes, it is unsustainable to produce at maximum levels every year. We are, therefore, proposing a subscription model to countries by which the manufacturer will be paid to secure that we can scale up production fast within a fixed time frame. This model also means we can continuously introduce upgrades and new technology. And this type of scalable production is exactly what Europe needs. Our expectation is for Zone 5 to generate annual revenue of more than NOK 10 billion in the medium term. The pace of innovation in our industry is happening faster than ever before. New entrants often from Sweden sectors, propose novel solutions, and established players are pushed to stay relevant. Collaboration between these 2 types of businesses is often challenging. KONGSBERG is in a unique position. The combination of our civilian business in the Discovery division, and our established Defense Solutions means we can innovate internally, but we're also looking outside our own company. I would like to highlight 2 examples of collaboration that address some of the biggest topics in our industry. We recently signed an MoU with the Ukrainian defense technology company, DevDroid, for large-scale production and development of remotely operated robotic combat systems. With operation with DevDroid combines the battle proven solutions with KONGSBERG experience in developing autonomous defense systems. We have an ambition to add long-range capabilities to our Air Defense offering, to come to the full spectrum of our aerial sets. Today, we are working with Ukrainian and international partners on integrating long-range anti-ballistic missile solutions. This system will be based on NASAMS. These are examples of how KONGSBERG finds the right partners to accelerate the time to market. Activities show how KONGSBERG is positioned in the market. We are big enough to be a prime contractor to the world's largest customers, but we are also agile enough to move fast and drive rapid innovation internally and with partners. In today's market, this is a very powerful combination, and I don't see many other companies in the same position. That concludes the first part of my presentation. I'm now happy to hand over to our CFO, Martin. Thank you.

Thank you, Eirik, and good morning to all of you following us through the webcast. I'm happy to present what is yet another solid quarter for KONGSBERG. Before I get into the figures, I will kindly remind you that consistent with our first quarter and our Capital Markets Day figures include the proportionate share of 50-50 owned joint ventures. This is relevant for order intake, order backlog, revenue and EBIT. This is done to align the external reporting with internal governance and highlights the significant value that these represent. Starting with this quarter order intake and backlog. The total order intake for the quarter came in at NOK 17.1 billion. Once again, this resulted in a record high order backlog, which is now at NOK 158 billion. Eirik already talked about the quarter's most significant contract wins, but I think it is worth repeating that we received 3 significant JSM orders totaling NOK 10.9 billion. Looking at our division Defense Systems, it experienced lower order intake in the quarter after having reported record order intake in first quarter. This is a natural fluctuation and the announced NASAMS agreement with Raytheon for an FMS sale to Kuwait highlights the current demand. For our Discovery division, orders were up from last year and at a steady level. The nature of our Discovery business is that orders come in at higher volume but at a lower contract value. On the slide, you will find our backlog split by both division and by delivery time. NOK 77 billion of our current backlog is in with the Defense Systems, NOK 68 billion belong to Missiles and Aerostructures, and the remaining NOK 12 billion belong to Discovery. 13% and NOK 21 billion of the backlog is to be delivered during the 2 remaining quarters of 2026. NOK 44 billion is for the delivery in 2027 and the remaining NOK 92 billion spans out into 2028 and beyond. This clearly shows the long-term growth pathway that we are on and provides a solid foundation going forward. Then let's move on to revenue. KONGSBERG delivered another strong quarter. Revenue came in at NOK 10.4 billion at an increase of 31% compared to second quarter 2025. This is the first time that we report revenues above NOK 10 billion, and it's really a milestone that we are proud of. All 3 divisions contributed to and it range from 19% to 53%. Activity is high across all areas, and we are working continuously on scaling operation ramping up production capacity in order to deliver on our backlog and the future demand that we see. Defense Systems grew revenues by 53% in the quarter, from NOK 3.3 billion to NOK 5.1 billion, a continued strong development. The division continues to execute well on several air defense projects. Also in the quarter, we saw a particular strong growth within the weapon stations, partly driven by the initial progress on the CUAS for Poland. Our Missiles and Aerostructures division delivered a top line growth of 19%, resulting in a revenue of NOK 2.9 billion, up from NOK 2.4 billion last year. The ramp-up of our missile production continues, and the program is well on track. In June, we completed the acquisition of Zone 5 and as a result, 3 weeks of operations have been included in the second quarter. Discovery grew revenues by 21% in the quarter, which is a solid growth. The main driver was increase in deliveries relating to space and in particular, the production of small satellites. Turning our attention to profitability. EBIT came in at NOK 1.7 billion with a corresponding margin of 16.1%. This compares to NOK 1.1 billion and a margin of 14.2% last year. As a result, we are increasing our EBIT margin by 1.9 percentage points. The absolute EBIT improvement is 49% versus the 31% revenue growth and it clearly demonstrates the successful scale-up of our operations. Our profitability will continue to vary between quarters. In the period, we also included IFRS impact of the revoked export license to Malaysia. We had other positive one-off effects in the quarter more or less offsetting this effect. Due to the ongoing negotiations, we will not go into further details. Looking at the divisions, Defense Systems delivered a growth in operating results of 38% in the quarter, resulting in an EBIT of NOK 902 million. The margin came in at 17.7%, down from 19.6% in Q2 2025. This is due to our varied product and project mix, which is to be expected between quarters. Specifically, the quarter included the new Norwegian donation project to Ukraine, and associated with this is lower margins. Missiles and Aerostructures delivered an EBIT of NOK 488 million. This yields a growth rate of roughly 18% due to higher missile production volume. The margin is around the same level as in second quarter 2025 at 16.9% versus the 17.1% last year. We are managing to scale and extract benefits from our existing missile production. The production ramp-up in Zone 5 is expected to impact margins going forward, as we also saw when it came to the scale-up of our NSM and JSM missile production. In short, we expect single-digit profit margins for the next 12 to 24 months for Zone 5 before normalizing at normal KONGSBERG levels. Discovery increased EBIT from NOK 330 million last year to NOK 347 million this quarter, a percentage increase of 5%. The margin ended at 15.3%, down from 17.6% last year. This was driven by a less favorable product mix in the quarter. Also, as we have communicated earlier, the division is in a phase of significant investment and moving into new facilities that will impact margins. For this quarter, we saw an adverse effect of about 1 percentage point. Adjusting for this, underlying EBIT margin was 16.5%. The new facilities will allow for improved efficiency and support margin expansion. Beyond the divisions, the other segment contributed positively, and we have realized positive development in Falkor previously known as KONGSBERG Digital, following the successful cost reduction program that we initiated in the first quarter. And Falkor has now turned EBIT positive in June. In addition, the other segment includes other positive periodization effects this quarter. This brings the EBIT margin for the quarter up to 16.1%, which we believe is a good representation of the underlying performance of KONGSBERG for the quarter. Next, let's look at Patria, which is not included in our APMs as our ownership share is less than 50%. As always, the Q2 numbers presented on the slide include March, April and May. Patria reported revenues of EUR 321 million and an EBIT of EUR 50 million. KONGSBERG's share on net income for the quarter was NOK 215 million. EBIT margin was doubled in this quarter compared to the same quarter last year and continued improvements in margins are expected. The revenue growth of 42% was particularly driven by the protected mobility business area and the recently acquired ILIAS business. Patria has over time grown their backlog and secured several significant contracts. The backlog stands at EUR 3.5 billion as of May, up from EUR 2.5 billion last year. Note that this is not included in KONGSBERG reported backlog. Similar to KONGSBERG, Patria continues to invest in increased production capacity to meet the significant demand. We continue to have a joint business through our remote weapon stations and the 6x6 vehicles. Finally, I will turn to cash flow and working capital. The cash position was reduced from NOK 16.4 billion at the start of the period to NOK 4.9 billion at the end of the quarter. Dividend payment of NOK 5 billion, cash payment for Zone 5 of NOK 3.7 billion and NOK 1 billion bond repayment were the main drivers. Our working capital position remains strong at a negative NOK 9.1 billion. Customer advances and milestone payments will result in natural fluctuations. Our focus is to manage working capital efficiently, while ensuring that inventory, supply chain capacity and project funding are at a satisfactory level. Overall, we continue to have strong financial position that provides a solid foundation for further growth. And with that, I will leave the floor to you, Eirik for some final remarks.

Thank you, Martin. At the end of the second quarter, the order backlog was NOK 158 billion. About NOK 21 billion of this will be delivered during the rest of 2026. Call-offs from framework agreements and aftermarket services will come in addition to this. As communicated in the first quarter presentation, we expect revenue growth in 2026 above the 2025 level. The development we have seen in the second quarter makes me confident that we are in a good position to realize our long-term ambitions in 2029 and 2033. We have a strong market position. We have a significant order backlog and solid financial position. This provides a good basis for continued growth in 2026 and beyond. Thank you.

Thank you, Eirik. We will then open it up for questions. First from Fabian Jorgensen in Pareto. Can you please quantify the margin effect of the Ukraine donations and the Others segment?

So as we have said earlier, our margins are a combination of project and product mix. And when it comes to the Ukrainian donation programs, that is one example of how our EBIT margins are impacted. When it comes into quantification, I will not go into those kind of details in this call.

And also from Fabian, the NATO Summit revealed several co-production agreements for U.S. systems in Europe, including Patriot. How does this affect the full-spectrum air defense outlook?

I think, it really supports our ambition to have a full-spectrum air defense system going forward. And it also points out how important anti-ballistic missile defenses in general for Ukraine and for the Berlin in all aspects. Our ambition is to be part of -- to take part in this. And U.S. has also an ambition to secure and support Ukraine in their efforts as well.

And then from Benjamin Heelan in Bank of America. There has been a strong decline in the margin year-over-year in Defense System. Is there anything in particular driving these? And are there other dynamics that we should be thinking about in margins for the midterm?

No. What we see in Defense Systems is a very successful ramp-up of production. So they are growing rapidly. And when it comes to the margins, this is a natural development. And again, it's back to the project mix that is really driving the composition of the margin.