Kitron Asa · OSL:KIT
Kitron Asa — Investor Day (March 2019)
75 slides from Kitron Asa's investor day presentation, Mar 21, 2019
Slide 1: Capital Markets Day 2019
2019 Capital 2019-03-21 Markets Day
Slide 2: Disclaimer
Disclaimer This presentation contains certain forward-looking information and statements. Such forward-looking information and statements are based on the current, estimates and projections of the Company or assumptions based on information currently available to the Company. Such forward-looking in
Slide 3: Chairman's Welcome
CHAIRMAN’S WELCOME Tuomo Lähdesmäki Chairman of the Board Capital Markets Day 2019
Slide 4: Agenda
AGENDA Strategy Growth Central and Eastern Europe North America Operations M&A Financials Summary Cathrin Nylander Israel Losada Salvador Mindaugas Sestokas Hans Petter Thomassen CFO COO MD Kitron Lithuania MD Kitron Norway Acting CEO Sales Director VP Central Eastern Europe VP North America
Slide 5: Strategy
STRATEGY Cathrin Nylander CFO and acting CEO Capital Markets Day 2019
Slide 6: The essence of Kitron
The essence of Kitron Kitron is a leading Scandinavian Electronics Manufacturing Services company, delivering improved flexibility, cost efficiency, and innovation power throughout the value chain. 6
Slide 7: Complex, high-margin products, medium volumes
Complex, high-margin products, medium volumes Margin/complexity Local niche providers High-volume, low-margin providers Volume 7
Slide 8: Kitron on three continents
Kitron on three continents 8 8
Slide 9: Current strategic horizon 2020, now extended to 2025
Current strategic horizon 2020, now extended to 2025 2020 strategy set new direction for company 1. Accelerated organic growth 2. Continued operational improvements 3. Growth through targeted M&A 2015 2020 2025 Significant Refining changes 9 9
Slide 10: Path to 2020 - Capacity and Overall
Path to 2020 Expansion New factory New Factory Expansion in Lithuania in Norway in Sweden in China CAPACITY Group services Investment plan Re-alignment of IT expansion in lower-cost OVERALL workforce countries P&L by manufacturing, Operational performance metrics (OPM) service/development, Cost pric
Slide 11: Path to 2020 - Sales
Path to 2020 Common Common Automation, OPERATIONS Lean process production processes robotization equipment Sourcing category Preferred vendor segmentation and strategy and quarterly Global sourcing SOURCING organization analysis business reviews Common request for CRM companywide quotation model “On
Slide 12: Growth and margin improvement on track towards 2020 targets
Growth and margin improvement on track towards 2020 targets Including API EMS Division we see about 10% upside to 2020 revenue target of NOK 3 billion Revenue EBIT margin* 7,0 % 6,2 % Organic 2020 target 2619 1632 1,5 % 2013 2014 2015 2016 2017 2018 2019 2020 2013 2014 2015 2016 2017 2018* 2019 2020
Slide 13: We have created shareholder value
We have created shareholder value Dividends 40 35 25 21 20 5 0 2013 2014 2015 2016 2017 2018 15 March Ordinary dividend Additional dividend Market cap NOK 9.28 1 635 Dividend policy: At least 50% of net profit Total shareholder return: More than 294 End 2014 500% 2014 2019 NOK 1.70 OSEBX 13 13
Slide 14: Towards a new strategic period
Towards a new strategic period 2015 2020 2025 Significant Refining changes Overall strategy the same: Complex, high-margin products, medium volumes Growth Operations M&A Growth, existing customers Capacity expansion Value chain expansion Growth, new customers Operational excellence Enter
Slide 15: Summary: Main financial ambitions
Summary: Main financial ambitions 2020 2025 Revenue NOK 3 billion Revenue NOK 5 billion M&A adding upside M&A adding upside EBIT margin 7% EBIT margin 7% ROOC 25% ROOC 25% 15 15
Slide 16: Growth
GROWTH Israel Losada Salvador COO and Sales Director Capital Markets Day 2019
Slide 17: Setting the stage: The European EMS market
Setting the stage: The European EMS market Number of Sales from each Companies group (Euro Billions) 3% annual growth expected 2017–2022* 12 Group 1 €15.9 B +€300m Expect consolidation as companies in Group 2 and 3 seek to increase Group 2 22 €100-300m €4.6 B economies of scope and scale Group
Slide 18: Trends in the EMS Industry
Trends in the EMS Industry CUSTOMIZATION More batches, shorter series, more complexity INDUSTRIAL PARTNERSHIP EMS broadening service offering and partnering with OEMs and technology providers NEARSHORING Shorter time to market, increased flexibility, NPI closer to customer CONSOLIDATION Search for p
Slide 19: Why Kitron…
Why Kitron… Footprint 6 sites, 3 continents References Proven track record with industry leaders Human capital Highly committed and competent workforce, 1700 employees Supply Partners Global support and competitive terms . Value chain From concept to scale Technology focus Continuous improvement of
Slide 20: Summary: Growth strategy
Summary: Growth strategy 2020 10% 5% 10% Growth with Growth with new Revenue from existing customers customers technical services: 20 20
Slide 21: Kitron Sales Strategy
Kitron Sales Strategy Service sales as % of revenue 10% New customers New revenue 5% Existing customers Current Attrition 10% revenue 5% 21 21
Slide 22: Growth with existing customers
Growth with existing customers 10% Existing large customers are market leaders with significant growth opportunities Focus on winning next generations Broaden services provided Utilize strong customer relations and strong performance to gain access to other regions and divisions Follow our c
Slide 23: Growth with new customers
Growth with new customers Target customers within our sectors that are larger, growing, profitable customers with demanding requirements Leverage our footprint, competence, application knowledge and references Focus on strategic geographical regions 5% o Priority 1 - Home countries o Priority
Slide 24: Revenue from Technical Services
Revenue from Technical Services Extend the range of services we provide – “pushing to the sides” o Test development o Product development o Industrialization o Rapid prototypes o Simulation o Augmented reality o Auditing and supplier selection o Product deployment 10% 24 24
Slide 25: Our customers: From the bottom of the sea to outer space
Our customers: From the bottom of the sea to outer space 25 25
Slide 26: Customers and market sectors
Customers and market sectors ENERGY/TELECOMS DEFENCE/AEROSPACE OFFSHORE/MARINE MEDICAL DEVICES INDUSTRY 26 26
Slide 27: Sectors development
Sectors development ENERGY/TELECOMS DEFENCE/AEROSPACE OFFSHORE/MARINE MEDICAL DEVICES INDUSTRY Focus Energy: Specific focus Get ahead of the Approach oilfield Nordic region Increase Product sector contract services providers Take advantage of Deployment offer Build from existing Leve
Slide 28: Summary: Growth strategy
Summary: Growth strategy 2020 10% 5% 10% Growth with Growth with new Revenue from existing customers: customers: technical services: “Market leaders with “Current market sectors, “Extend range of significant growth strategic geographical services – pushing to the opportunities” regions” sides” 28 28
Slide 29: Central and Eastern Europe
CENTRAL AND EASTERN EUROPE Mindaugas Sestokas MD Kitron Lithuania VP Central Eastern Europe Capital Markets Day 2019
Slide 30: Central and Eastern European EMS market
Central and Eastern European EMS market EMS revenues 2018 CEE EMS market has passed Western Europe in size and growth Large EMS companies have extensive capabilities in CEE Focus on higher-volume products Wage levels still substantially below Western Europe 44% 56% Some production moved ba
Slide 31: Strong growth in Lithuania
Strong growth in Lithuania Kitron entered Lithuania in 2001 Accelerating growth and nearing optimal capacity Revenue 1009 Primary focus: Industry market sector About 900 employees 13 000 sqm production area Kitron’s largest business unit NOK million 330 2013 2014 2015 2016 2017 2018 31 3
Slide 32: Construction of new facility in Poland
Construction of new facility in Poland Facts: Located in Grudziądz, northern Poland Purpose-built for Kitron First phase: 8 000+ m2 After planned second phase: up to 15 000 m2 Construction ongoing Production expected Q4 2019 32 32
Slide 33: Strategic rationale
Strategic rationale Poland Facility in Lithuania nearing optimal capacity Industry market sector growing strongly Country diversification seen as advantage Poland: attractive business climate and labour pool, EU and NATO member 33 33
Slide 34: Summary: Kitron in CEE – towards 2025
Summary: Kitron in CEE – towards 2025 2500 Building on strong performance in Lithuania CEE revenue ambition Production will gradually be moved from Lithuania 2000 to new site in Poland To be replaced by new business in Lithuania 1500 Main focus on Industry market sector NOK million Product
Slide 35: North America
NORTH AMERICA Hans Petter Thomassen MD Kitron Norway VP North America Capital Markets Day 2019
Slide 36: Limited US presence so far
Limited US presence so far Established foothold in US in 2010 Revenue Located in Johnstown, PA Approximately 20 employees 1000 sqm production area Primary focus: Defence market NOK million Not reached critical mass, variable profitability 33 36 2013 2014 2015 2016 2017 2018 36 36
Slide 37: Acquisition of API Technologies' EMS division
Acquisition of API Technologies’ EMS division Facts: Located in Windber, PA 15 minutes from Kitron in Johnstown Industry and defense hub 115 employees at single facility Facility footprint 10 000 sqm Suitable production equipment and certifications 37 37
Slide 38: Strategic rationale
Strategic rationale Kitron Technologies Inc. Need to build US presence faster than organic growth at current site would allow Footprint and available capacity close to current location Quickly creates scale and credibility Certified and operating within Kitron sectors Broadens customer bas
Slide 39: Summary: Kitron in the US – towards 2025
Summary: Kitron in the US – towards 2025 API acquisition: From marginal foothold to 800 credible presence with broader customer base US revenue ambition Main focus on Defence market sector 600 Operational improvements Optimization of resource utilization between NOK million the entities 400
Slide 40: Operations
OPERATIONS Israel Losada Salvador COO and Sales Director Capital Markets Day 2019
Slide 41: Main operational themes for Kitron towards 2025
Main operational themes for Kitron towards 2025 Capacity expansion Prepare to sustain growth Operational excellence Standardization, best practice sharing Competence roadmap Identify, attract, develop, cooperate, leadership, culture Digitalization Support growth Technology roadmap Standardization, b
Slide 42: Capacity expansion towards 2025
Capacity expansion towards 2025 Potential third site in Eastern Europe NOK 500–1000 revenue per factory Potential new site in Asia Preferably one site per country 42 42
Slide 43: Operational excellence - Lean
Operational excellence - Lean 2015 to 2018 – Set the foundation of the program “this is how we work” Improvement 2019-2025 – Continuous iterations of the program combined Value Stream Maps Projects with systematic improvement projects 8D DMAIC Process Yields SOP Flowcharts TPM 5S Daily Managemen
Slide 44: Competence Roadmap
Competence Roadmap IDENTIFY EMPLOYER COMPETENCE EXCHANGE LEADERSHIP COMPETENCE NEEDS BRANDING DEVELOPMENT COMPETENCE & CULTURE Based on company Further develop Intensify development Collaboration Foster customer focus, strategy, ability to attract of workforce and with trust, innovation, market, req
Slide 45: Digitalization
Digitalization Purchase to pay Customer connectivity Structured and coherent digitalization of entire process Making more information available to customers in real from purchase of raw material to customer invoice time Services E-commerce Supporting processes Making services available
Slide 46: What does the Kitron factory of 2025 look like?
What does the Kitron factory of 2025 look like? Some products moving independently through production Large amounts of real-time data generated during production process Flexible production lines Collaborative robots key element Highly technically competent workforce Simulation tools par
Slide 47: Technology roadmap
Technology roadmap 02 AUGMENTED REALITY 04 VIRTUAL SIMULATION 06 PRODUCT DEVELOPMENT Prototypes and Training, traceability and Develop together with Simulate product and When appropriate, focus Develop products with production tools quality product - SATS manufacturing line on common processes manuf
Slide 48: Additive Manufacturing
Additive Manufacturing Increasingly used in mainstream manufacturing. Available at most Kitron’s sites o Prototypes – reduce time to market and development costs o Manufacture our own production equipment – customize our lines 48
Slide 49: Augmented Reality
Augmented Reality By 2025 HLA A Complex assemblies 50% REMOTE SUPPORT Nordics B R&D, Eng., Operators 50% TRACEABILITY USA 30% 60% C Components, people, CEE Asia equipment TRAINING D New employees Patent pending in Norway Percentage of products manufactured by and in process of applying Kitron with t
Slide 50: Test development
Test development Capable of designing tests to verify product functionality in sectors with very little room for error Developed a proprietary test platform called SATS – Standard Automated Test System o Reduces investment cost o Easy to transfer products across Kitron sites SATS – focus on de
Slide 51: Virtual Simulation
Virtual Simulation Before we build a new product, we will first create and optimize its digital twin using a software model We also simulate how the production line will work, including robots. 51
Slide 52: Automation
Automation 25% Share of revenue Competence Product design, mechatronics, from fully automated lines embedded 20% Design 15% Design products for automation 10% Collaborative robots Intuitive to program, work side by side with humans 5% Flexible lines 0% Common processes, modular architecture 2017 201
Slide 53: Product development
Product development Traditionally: Support customers by improving manufacturability and testability of products Now: Support customers from concept to volume Focus on products where we have extensive manufacturing experience 53
Slide 54: Summary: Operations
Summary: Operations Continuous improvements Ongoing operational excellence initiatives continue Expanding capacity through construction and M&A Human resources initiatives key to competitive advantage Digitalization and technology to increase efficiency and quality 54 54
Slide 55: M&A
M&A Cathrin Nylander CFO and acting CEO Capital Markets Day 2019
Slide 56: Exploring M&A along three axes
Exploring M&A along three axes Entering new geographies Existing Geographies Value Chain Expansion Leverage existing customer relationships Synergies Leverage existing customers’ value Expand customer base chain 56 56
Slide 57: Likelihood of M&A activities
Likelihood of M&A activities Existing geography New geography Existing value chain More likely Most likely Value chain expansion Likely Not likely Ongoing industry consolidation creates M&A opportunities 57
Slide 58: M&A adds upside to future revenues
M&A adds upside to future revenues Actively evaluating opportunities Revenue range €10–100 million Must see potential for same profitability as rest of group But time lag while optimizing to be expected Transactions most likely financed through combination of own cash and debt M&A may add
Slide 59: Financials
FINANCIALS Cathrin Nylander CFO and acting CEO Capital Markets Day 2019
Slide 60: Growth beyond 2020: "5 in 25"
Growth beyond 2020: “5 in 25” 2020 Revenue 5000 Revenue growth continues according to strategy Annual trend growth approximately 10% Organic growth above target of NOK 3 billion Organic 2020 target Including API EMS division we see about 10% 2619 upside to 2020 target 1632 2025 Organic amb
Slide 61: EBIT growth continues, margin expected to stabilize
EBIT growth continues, margin expected to stabilize 2020 2025 Operational improvements continued in 2018 Target 7% but with an upside ambition Component shortages challenging Acquired businesses or start-ups may Maintain target of 7% EBIT margin for current temporarily be below margin ambi
Slide 62: Component shortages
Component shortages Temporary build-up of component Kitron’s allocation level* inventory has successfully protected interests of customers and Kitron The allocation issue has stabilized Number of shortages decreasing Inventory levels at distributors are rising (for some sub-commodities) Ki
Slide 63: Capital efficiency: Temporary setback, ambitions maintained
Capital efficiency: Temporary setback, ambitions maintained Net working capital Cash conversion cycle 32% 30% 100 84 20% 20% NOK million 50 50 779 522 2013 2014 2015 2016 2017 2018 2020 2025 2013 2014 2015 2016 2017 2018 2019 2020 2025 Net working capital NWC as % of revenue Target NWC 20% of reve
Slide 64: Improving return on capital
Improving return on capital Higher EBIT, temporary balance sheet Return on operating capital expansion 25% 25% Improvement expected to continue: Higher profit 20% Capital efficiency Gradual easing of component shortages Long-term target 25% 5% 2013 2014 2015 2016 2017 2018* 2020 2025 • R
Slide 65: Stable capex as percentage of revenue
Stable capex as percentage of revenue Expect average annual capex approximately 3% Capital expenditure of revenue Investments will focus on automation and robotization New facility in Poland Will invest to remain competitive in high-margin 70 sectors 2,7 % 2013 2014 2015 2016 2017 2018 2019
Slide 66: Free cash flow expected to rebound
Free cash flow expected to rebound Strong underlying operating cash flow trend Free cash flow Temporary increase of inventory to handle component shortages Expected to be reversed Capex stable as percentage of revenue Cash flow from operations will over time approach EBITDA level 0 2013 20
Slide 67: Solid platform for organic growth, acquisitions and dividends
Solid platform for organic growth, acquisitions and dividends NIBD/EBITDA Net interest-bearing debt NOK 396 million (175) 4,4 Expected to decrease in 2019 NIBD/EBITDA 1.9 (0.9) Target below 2.5 Target below 2.5 Net gearing 0.57 (0.26) 1,9 Equity ratio 37% (43%) Future ratios will be af
Slide 68: Strong dividend capacity
Strong dividend capacity Strong commitment to dividends Earnings and dividends Free cash flow underpinning dividend outlook 63 Proposed for 2018: 57 Ordinary dividend NOK 0.40 per share 42 43 40 35 NOK 1/100 25 21 20 14 “Kitron’s dividend policy is to pay out an annual dividend of at least 5
Slide 69: Summary: Financials
Summary: Financials Main financial ambitions Revenue NOK 5 billion M&A may add upside EBIT margin 7% ROOC 25% 69 69
Slide 70: Summary
SUMMARY Cathrin Nylander CFO and acting CEO Capital Markets Day 2019
Slide 71: Path to 2025 - Capacity and Overall
Path to 2025 Acquisition in New factory in Expansion in Further capacity the US Poland China CEE/Asia CAPACITY Competence roadmap One Kitron approach Refine M&A rollout process OVERALL Standardization and Reporting Artificial intelligence automation of financial model automation and big data FINANCE
Slide 72: Path to 2025 - Sales
Path to 2025 Systematic OPERATIONS Purchase to pay Statistic Process Control improvement projects Rapid quoting Alternates at RFQ Real time supply chain SOURCING status Extended services Global quoting team portfolio Customer connectivity SALES 72 72
Slide 73: On a steady course forward
Summary On a steady course forward On track towards 2020 strategic ambitions New strategy set for 2025 Building on and refining current strategy 73 73
Slide 74: Questions and Answers
Questions and Answers 74
Slide 75: Appendix: Definition of alternative performance measures
Appendix: Definition of alternative performance measures Order backlog Return on operating capital (ROOC) R3 % Cash conversion cycle (CCC) R3 All firm orders and 4 months of committed customers forecast at (Last 3 months Operating profit (EBIT))*4 /(Last 3 months Operating Days of inventory outstand