Earnings call transcript: Keytron Q1 2025 sees strategic growth in defense

Keytron Group’s Q1 2025 earnings call revealed a mixed financial performance, with revenue slightly declining year-over-year but showing sequential growth. The company is capitalizing on strong growth in its defense and aerospace segments, which have become pivotal for its strategic positioning. Despite these gains, Keytron’s stock experienced a 5.03% dip, reflecting market concerns over its immediate financial performance and future guidance. According to InvestingPro data, the stock has shown remarkable resilience with a 68.42% return over the past six months and currently trades near its 52-week high of $5.12. The company’s overall financial health score is rated as GOOD by InvestingPro analysts.

Key Takeaways

• Revenue for Q1 2025 was €164.6 million, slightly down year-over-year but up 2% sequentially.
• Strong performance in defense and aerospace, with 30% year-over-year growth.
• Stock price dropped 5.03%, reflecting investor concerns.
• Proposed dividend of €0.35 per share.
• Order backlog increased by 18% year-over-year.

Company Performance

Keytron’s overall performance in Q1 2025 showed resilience despite a slight year-over-year revenue decline. The company benefited from robust growth in the defense and aerospace sectors, which offset weaker performance in other areas. Keytron is actively expanding its production capabilities in Norway and Sweden to meet the increasing demand in defense and aerospace, potentially tripling its capacity.

Financial Highlights

• Revenue: €164.6 million, slightly down year-over-year, up 2% sequentially.
• EBIT: €12.5 million, with an operating margin of 7.6%.
• Net Income: €7.5 million.
• Operating Cash Flow: €12.1 million, representing 70% of EBITDA.
• Equity Ratio: 36.3%.

Outlook & Guidance

Keytron’s full-year revenue guidance is set between €640 million and €710 million, with EBIT expected to range from €47 million to €65 million. The company anticipates higher margins in upcoming quarters, driven by a recovery in electrification and continued growth in defense revenue, projected to increase from €137 million to €180 million by the end of the year. InvestingPro data shows analysts maintain a bullish consensus with a target price range of $4.18 to $5.70, suggesting potential upside. The company’s EPS is forecast to reach $0.25 in FY2025, supporting its growth trajectory. For detailed analysis including Fair Value estimates and growth projections, access the comprehensive Pro Research Report, available exclusively to InvestingPro subscribers.

Executive Commentary

CEO Peter Nelson emphasized the importance of the defense and aerospace sectors, stating, "Defense and aerospace continues to be a strategic cornerstone for us." He also noted, "We’re seeing early signs of momentum rebuilding," reflecting optimism about future performance. Nelson reassured stakeholders by affirming, "Our fundamentals remain strong."

Risks and Challenges

• Supply Chain Disruptions: Potential delays in production due to global supply chain issues.
• Market Saturation: Risk of market saturation in non-defense sectors impacting revenue growth.
• Macroeconomic Pressures: Economic downturns could affect demand across various sectors.
• Regulatory Changes: Changes in defense regulations could impact strategic projects.
• Currency Fluctuations: Exchange rate volatility could affect international revenue.

Keytron’s strategic focus on defense and aerospace appears to be paying off, with significant growth in these areas. However, the company faces challenges that could impact its broader market performance. Investors are cautiously optimistic, as reflected in the current stock price movement.

Full transcript - Kitron ASA (KIT) Q1 2025:

Peter Nelson, CEO, Keytron Group: Good morning, and thank you for joining us for Q1 twenty twenty five results presentation. I’m Peter Nelson, CEO of the Keytron Group, and joining me as usual is Ms. Kathrin Nelander, CFO. I’m pleased to share that we’ve had a strong start to the year driven by sustained momentum in our key sectors, particularly defense and aerospace. Today, I’ll walk you through our performance, strategic developments and outlook for the rest of the year.

But before we start, I’d like to remind you about the Q and A session at the end of the presentation. So please post any questions you may have in the Q and A section of the webcast. Next slide, please. So as I said, we’ve had a strong start to 2025. As we closed Q1, Keytron delivered a solid performance across the board.

Although the first half of the quarter was operationally challenging, we made our numbers in the back half. Our order backlog grew 11% sequentially to 525,000,000, demonstrating a robust market demand, especially in our strategic pillars. Most notably, defense and aerospace space revenue surged 30% year over year. That’s not that’s not just growth, that’s acceleration built upon the trust and partnership we have with many key customers. This DNA growth is also reflected in significant new orders booked in q one and totaled €76,000,000.

Next slide, please. So taking a look at market operations, defense and aerospace continues to be a strategic cornerstone for us. We have now five sites in The Nordics, EU and CEE focused on defense aerospace, and we’re accrediting an additional EU site, proof of our abilities to scale quickly and efficiently. In Norway, the ramp up of production is proceeding smoothly with the target output to increase 50% year over year. The construction of new expansions to sites in Norway and Sweden are proceeding according to plan.

In the near term, our production capacity, both in The EU and The U. S, can triple as needed, offering unmatched flexibility to meet rising demand. Next slide, please. Tariffs remain a challenge, particularly for sales in The US, which accounts for around 15% of our revenue. However, we’ve adopted well.

Nearly a third of our US revenue is fulfilled by domestic production, and we’ve built in tariff pass through mechanisms that preserve our competitiveness. On m and a efforts, they’re on track with strong momentum towards closing. These acquisitions are aligned with our strategy to expand capabilities and to solidify our market leadership. With a very strong order intake in Q1 of EUR $217,000,000, our book to bill ratio stands at 1.32, an encouraging sign of growth. We’re guiding full year revenue between EUR $640,000,000 and EUR $710,000,000 with an EBIT of between EUR 47,000,000 and EUR 65,000,000.

While we remain alert to the global uncertainties, our fundamentals remain strong. Next slide, please. We’re seeing a clear message emerge across our business sectors. Connectivity is bouncing back with smart tracking and IoT solutions. Electrification shows resilience in energy transmission even as consumer tech remains soft.

Industry is up 21% over last year with a solid activity in subsea and AI driven automation. Medical devices took a dip to the end of life of one product, but expedited orders are trending up. Defense and aerospace, our star performer, grew 29% year over year with strong demand for missile systems, avionics, and surveillance. This sector is set to drive long term growth powered by defense innovation and rising NATO budgets. Next slide, please.

Taking a look at our order backlog, it reached €525,000,000, a growth of 11% sequentially and 18% year over year. Defense aerospace led with a remarkable 79 year over year increase, while other sectors are stabilizing after a year of destocking and uncertainty. Connectivity and industry have stabilized sequentially. The consumer side of electrification and medical devices is beginning to recover. Across the board, we’re seeing early signs of momentum rebuilding.

Now over to you, Catherine, for some details on the numbers.

Kathrin Nelander, CFO, Keytron Group: Thank you, Peter. And next slide, slide seven, please. So twenty twenty five q one highlights. Let’s take a closer look at our financials. Revenue landed at a 164,600,000.0, down slightly from last year, but up to 2% sequentially.

EBIT came in at NOK12.5 million, pushing our margin to NOK7.6 million. Although our operating margin is lower than we target, we saw strong sequential improvement month over month in the quarter with most sites ending at hitting double digit margins. Return on operating capital improved to 18.7. Operating cash flow hit to 12,100,000.0 and net income increased to 7,500,000.0. Our equity ratio now stands at 36.3%, and we are proposing a dividend of NOK0.35 per share.

These figures reflect operational strength and disciplined execution. Next slide, please, Slide eight. Our business sectors. Looking at the regional performance, The Nordics and North America held steady, showing slight revenue growth and margin stability. Norway and Special showed sequential improvements month over month in the quarter.

The CE sites saw reduced volumes due to last year’s high electrification base, yielding difficult year over year comps. Asia declined modestly, reflecting the broader industry adjustments. Importantly, we managed to increase in most regions and reduced our workforce strategically, especially in sea and China, aligning our cost base with the new realities. Next slide, slide nine, please. Cash flow and working capital.

We posted solid operating cash flow at NOK12.1 million, which is 70% of our EBITDA. We reduced working capital now down to NOK189.8 million. Inventory levels reduced also, and we improved collections while keeping close eye on supplier payments. This financial discipline puts us in a strong position to invest and grow. So next slide, slide 10 please, ratios.

Our key financial ratios have improved. Our net gearing is down to 0.52. Net interest bearing debt remains well managed at 1.6. We have reduced our debt another 4% during the quarter. Our return metrics, ROC and equity ratio are trending positively, and these metrics reinforce that Keytron is in a healthy position both operationally and financially.

So next slide, please. And over to you again, Peter.

Peter Nelson, CEO, Keytron Group: Thank you, Katrin. So some key takeaways to summarize. Revenue and cash flow are solid. The order backlog is strong and diversified, especially in defense and aerospace. We’re scaling up rapidly with high agility in production.

We we anticipate higher margins in the coming quarters as we put our new capacity to more efficient use. Our ’20 our 2025 outlook remain remains positive, driven by a strong market positioning, new technologies, and the ability to execute at speed. Next slide, please. We’ll now open the floor for your questions. So let’s dive into any topics you might like to explore further.

And let’s see here, Katrin, if we have any.

Kathrin Nelander, CFO, Keytron Group: Yes.

Peter Nelson, CEO, Keytron Group: First one is from Henriette Tronson from Arctic. What was the customer forecast r six in q one? What is the backlog horizon? How much is firm orders compared to well, let’s let’s start with the first question. The the r six was was what was it in the last quart in the last report?

Kathrin Nelander, CFO, Keytron Group: It was $3.31. Yeah.

Peter Nelson, CEO, Keytron Group: $3.31 at the end of q four. I believe it’s around $3.44

Kathrin Nelander, CFO, Keytron Group: Yeah.

Peter Nelson, CEO, Keytron Group: At the at the end of end of q one, very beginning of q two. And the follow on question was, what is your back how much is firm orders compared to customer forecasts? I don’t have the number on that, actually.

Kathrin Nelander, CFO, Keytron Group: I’m looking.

Peter Nelson, CEO, Keytron Group: It is it is the this is the Yeah.

Kathrin Nelander, CFO, Keytron Group: Yeah. I have it. So I’ll I’ll give a percentage.

Peter Nelson, CEO, Keytron Group: Yeah. In the raised guidance presentation from from April 2, you assume revenue acceleration electrification in 2026. Can you give us some details on this? You also assume somewhat slower growth in defense in 2026 and stronger growth in 2027. Any comments on this would be helpful.

The world changes really fast now. So giving any sort of detailed outlook here, one thing you do know is in two weeks, you’ll be wrong. But but on electrification, some of the some of the EV stuff we we see should be coming back towards the end of this year, let’s say, September, sometime that time frame that that increases some electrification. We have a new electrification on infrastructure, which I think is the major part of the increase actually in The US where there’s a $1,520,000,000 dollar a year customer that just started ramping here in the very end of Q1. And the outlook for this year is somewhat in that region, maybe up towards million dollars 15 million dollars or so.

So I think that’s part of the recovery or increase in electrification. Somewhat slower growth in defense in 2026 and stronger growth in 2027. Yeah. Well, we had what we’re we’re we’re looking at about a hundred just over a hundred and 80,000,000 revenue for defense for this year. And what did we have last year?

One

Kathrin Nelander, CFO, Keytron Group: We have a 50%. So last year in defense, I will find it shortly. Yeah. And this one. So continue, and I will

Peter Nelson, CEO, Keytron Group: No. I mean, that that’s not something we’re I’m I’m, you know, focusing on because I think we have a strong growth set, and we we continue to to add more capacity. We continue to capitalize on opportunities that that are quick moving in this market sector, especially in the defense innovation from, let’s call it, newer players in the market. Mhmm. So we’ll come back to some of your detailed questions here, Anja.

Kathrin Nelander, CFO, Keytron Group: Yeah. Hundred and thirty seven on, last year for defense.

Peter Nelson, CEO, Keytron Group: 37 to to one eighty. I think we’re we’re ramping up. We’re ramping up both our our sites in Sweden and and in Norway. Norway, we’re we’re, we’re we we should be doing in the vicinity of 200,000,000 NOK plus per month. So around 600, 6 50 or so in a quarter.

So that’s a that that we’re not we’re not quite there yet. So that that’s a continued ramp up. And we have a similar situation with about half that speed, half that size in Sweden. So from Pet to Conkleya, can you comment on how you experienced the gross margin development? It was down year over year despite the higher share of defense.

34% gross margin last year was abnormally high.

Kathrin Nelander, CFO, Keytron Group: You’re talking about gross margin as a percentage of

Peter Nelson, CEO, Keytron Group: Yeah. We’re looking yeah.

Kathrin Nelander, CFO, Keytron Group: The material percentage. It’s 67.2 in the quarter, and it was 60, 65.5 last year.

Peter Nelson, CEO, Keytron Group: And No. But we do we do have a we have a even though there is a strong defense customer part of this, the gross margin on that customer is lower. The material content is higher. And the reason is, you know, extremely expensive parts and then and a lot of prepayments and deposits from the customer. So so yielding us the possibility here, work with a lower margin and still get significant return on operating capital.

So that’s one thing I can think of here that is sort of a conscious decision taken. Can you comment on the size, Petra continues on the on the m and a projects m and a projects? Can you comment on on the size of m and a projects that are advancing as planned? Well, that we’re working on three of them. The top line is, you know, what, about 60, and there’s a there’s a 70 to 90, and there’s about a hundred to a 20 on the three different topics.

On top of that, there are several others structured processes that, you know, come in from from from outside into our project that we also take a look at. But so that’s where we are. The comment regarding EBIT margin with month over month improvement, can you reiterate this and also comment why it’s improved during the quarter? Well, was just a lot of it has to do with slow starts in facilities and adding capacity towards the end of last year and additional capacity in the beginning of the quarter. So so the output out of January was not where it should have been to match that that capacity.

So, you know, you you would see typically margins in the 6% range from some of the bigger sites and advancing to to double digit margins by the end of the quarter in March. So that’s where we want to stay. But if you ought to stay there, you could need to complete you need to be be reloading or front end loading every quarter on what you’re doing and and getting that recipe correct and getting material deliveries on time so there can be no delays. You know, one one delay in Norway, well, then then then you’re then you’re down significantly on on revenue. Right?

You you should you should be doing a million euros a day or more in Norway. You should be doing a a half a million euros a day per more or more in Sweden. And if you’re not doing that, then then that’s lost lost lost time. That’s on the an unused capacity, and that’s cost. And in and in Norway and Sweden, that cost is big because, you know, it’s the high labor cost.

It’s not as bad when you if if you you look at the Czech facility, if something happens there, you know, and you’re not fully loaded anyway, you can catch up. And and from a cost perspective, it doesn’t really impact as massively as it does in The Nordics. So it’s important to have good linearity on sales and on production. And when you say then the double digit EBIT margin in most city most sites, is that including allocated headquarter cost, etcetera? Yes.

That is the only thing not allocated is our shareholder cost.

Kathrin Nelander, CFO, Keytron Group: Yes. So there is a bit at the end. So obviously, we have double digit. We should, you know, end up just at 9% if all of them have that.

Peter Nelson, CEO, Keytron Group: Yeah. If all of them have that. Right. Let’s see. I think, Mike Marcus Scavelli, Will there be meaningful change in the product mix within defense aerospace in the upcoming years?

Trying to understand if margins might increase or decrease. I think we’ll we’ll be seeing some some I think, the margins overall probably in in that same range. There could there could be increases on some of the some of the new products and and defense innovation coming on online because there’s more risk to it. Right? So there’s there’s more risk, there’s more margin.

Otherwise, there’s not you know, we’re not our margins should should become better not by increasing prices or costs for our customers, but by utilizing our machine more efficiently.

Kathrin Nelander, CFO, Keytron Group: And also, we have to say that we are following the contribution margin, which is the which we don’t show you because of competitive reasons. And normally, if you have a higher material or gross profit margin, you also have more labor cost. It’s quite common. And if you have a lower material cost margin, you will have lower material expense as well or personal expense as well.

Peter Nelson, CEO, Keytron Group: Yeah. Pretty much so.

Kathrin Nelander, CFO, Keytron Group: So it they kind of even each other out. And for for the group on the contribution margin, it doesn’t have all that much variation, actually. It’s around 1% variation, between quarters and and months.

Peter Nelson, CEO, Keytron Group: I see that there was a follow on question from Petter on can we comment on what gross margin we have as assumption in our EBIT margin guidance?

Kathrin Nelander, CFO, Keytron Group: Let me think.

Peter Nelson, CEO, Keytron Group: We know that if you look at the actual forecast.

Kathrin Nelander, CFO, Keytron Group: So Yeah. We’ll do that. So continue.

Peter Nelson, CEO, Keytron Group: And he says the reason he asked about gross margin is if we look at the group gross margin, which seems to be related development and defense share of revenues, there’s some worries in the investment market that you might experience price pressure. Not so much. Right? I think we we have competitive pricing on and we work very closely with our customers to make sure that they’re successful. We’re not we’re not bidding below where we need to be.

And and this is extremely sticky business for these products. But you’re not you’re not gonna you know, for for for guidance systems, for missiles, or or or or or things like that, you’re not gonna be moving that around. Right? If you have a process that’s working, you know, then then then, you know, we stay loyal to each other, both us and towards our customers and the other way around. There may be so I I can I can say, you know, if you if you if we get some some really high-tech stuff on some on some new, new product sectors, right, where based on where you see the war in Ukraine, how how that’s developing and what’s what’s happening on the battlefield there?

There could be some some, some products where the labor content is low, the material value is really high, and you’ll see that what you call gross margin come down, material content going up. On the other hand, pretty much always the contribution margin, wherever that may be. Say it’s 20% of that that that comes in after direct cost, direct cost being labor and and and material. Remains stable. And it remains pretty stable between with the almost never below 20% and and then, you know, between twenty and thirty on on the depending on product market sector.

I’m not gonna get it more into it. So are you were were you looking up something with the budget? No.

Kathrin Nelander, CFO, Keytron Group: It’s around slightly below 67%. Mhmm. The material.

Peter Nelson, CEO, Keytron Group: Yes. Exactly. Normally, that’s what he’s asking for.

Kathrin Nelander, CFO, Keytron Group: So very

Peter Nelson, CEO, Keytron Group: good. I see that the queue of of questions has depleted. I think we’ll wrap that up. But Catharine and I have okay. We’ve got one more coming in here.

Again, from the gross margin questions about price pressure more related to the 75,000,000 new business you announced in C and D. I think we answered the question that was I know that that’s all existing business. So it’s or it’s it’s it’s new versions of existing business based on existing technology.

Kathrin Nelander, CFO, Keytron Group: But bigger Yeah.

Peter Nelson, CEO, Keytron Group: Most of it the big part was also the the advanced optics for drone technology. And that’s with typical type of product where you have extremely expensive components and very low labor content and a lot of a lot of a customer financing. So if you look at that part of the business, it’s not as high as but it’s also very fast moving. You know, you it’s it’s you bring stuff in, you refine it, you ship it out very quickly. Go ahead, Catharine.

Kathrin Nelander, CFO, Keytron Group: No. I was just thinking, we haven’t mentioned tariffs that much in the questions or actually nothing is said here.

Peter Nelson, CEO, Keytron Group: And and, it’s not something we should be running around and worrying about. It’ll be what it’ll be when we when we know what what it’s going to be.

Kathrin Nelander, CFO, Keytron Group: Yeah. No. I was more or less thinking to explain how it’s done. And and, basically, in The US, it will be invoiced separately from.

Peter Nelson, CEO, Keytron Group: Yeah. I mean, usually, we’ve earlier days, back in the back in the February, there’s always some there’s some some duty on on electronic components from various parts of the world. And and at that point, that was always included in the purchase price, except especially if you buy through distribution. Usually, nowadays, a lot of component manufacturers will only supply through distributors. Right?

They don’t want 1,000 customers or 5,000 customers worldwide. They’ll they’ll they’ll sell their parts to the distributor, and the distributor will have setups in each region, Asia, Europe, US. And their prices always oh, were all were previously always included any duties or tariffs on on components. But for what’s going on now, if you look at that manufacturing in The US where where any sort of parts that are have a country of origin or or where they where they think the origin or the packaging is done or however they want to look at this, It is China. Right?

You have a tremendously high tariff on that. Nothing nothing there is included in the product price when we buy the components from this distribution, even when we buy it in The US. So the setup right right now is is that tariffs are invoiced separately, tariffs to The US operations, right, because they’re the guys importing with tariffs out of China. So so tariffs are are are invoiced separately. It’s not taken as part of revenue.

There’s no margin on the tariffs for us either. It’s just a it’s just sort of a a invoice forward.

Kathrin Nelander, CFO, Keytron Group: Yeah. Cost reimbursement, basically.

Peter Nelson, CEO, Keytron Group: Cost reimbursement. So we’ll see, you know, once this settles down and it becomes a stable new world. Right? That’s when you can start implementing more permanent solutions and how things will work.

Kathrin Nelander, CFO, Keytron Group: But, you know, seeing it’s also, invoiced separately, it doesn’t affect the inventory values or anything like that. Handle more or less like PPV. You

Peter Nelson, CEO, Keytron Group: know what I mean? Short payment terms on that cost reimbursement, whilst there can be longer payment terms on product we sell. So no no margin necessary. No. And we shouldn’t be benefiting on it, at least not on the levels that the tariffs are today.

Okay, folks. We’ll see you in meetings across the quarter. And otherwise, we have our next session scheduled on July 11, I believe, for the q two report. Okay. Thank you.

Kathrin Nelander, CFO, Keytron Group: Thank you.

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