Earnings call transcript: Kitron ASA sees growth in defense sector in Q2 2025

Kitron ASA reported its Q2 2025 earnings, highlighting a 4.6% sequential increase in revenue to €100.2 million. The company’s EBIT margin stood at 8.7%, with a notable growth in the defense and aerospace sectors. Despite a slight dip in first-half revenue, Kitron remains optimistic about the second half of the year, projecting significant growth in its defense and aerospace segments. The company’s stock saw a decline of 2.3% following the announcement, though InvestingPro data shows an impressive 80.88% year-to-date return. According to InvestingPro’s comprehensive analysis, the stock is currently trading above its Fair Value.

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Key Takeaways

• Revenue for Q2 2025 increased by 4.6% sequentially.
• Strong performance in the defense and aerospace sectors with 25% growth.
• Stock price declined by 2.3% following the earnings release.
• Strategic investments in capacity and innovation to meet rising demand.
• 2025 revenue guidance set between €675 million and €725 million.

Company Performance

Kitron ASA demonstrated resilience in Q2 2025 with a 4.6% increase in revenue compared to the previous quarter. The company continues to strengthen its position in the defense and aerospace sectors, which experienced a robust 25% growth. Despite facing challenges in other sectors, Kitron’s strategic focus on high-growth areas has bolstered its performance.

Financial Highlights

• Q2 Revenue: €100.2 million, up 4.6% sequentially.
• EBIT Margin: 8.7%.
• Operating Cash Flow: €19.3 million.
• First Half Revenue: €336.8 million, a 1.4% reduction.
• Net Interest Bearing Debt: €1.99 million.
• Return on Operating Capital: 23%.

Outlook & Guidance

Kitron has set its revenue guidance for 2025 between €675 million and €725 million, with an EBIT target of €55 million to €65 million. The company anticipates a stronger performance in the second half of the year, driven by projected 30% growth in the defense and aerospace sectors. Recovery is also expected in the connectivity and electrification markets.

Executive Commentary

Peter Nelson, CEO of Kitron, emphasized the company’s growth in defense and aerospace, stating, "Defense and aerospace continues to drive our growth fueled by significant orders and increased NATO spend." CFO Catharine Nelander added, "We successfully expanded profitability, increasing EBIT by nearly 8%."

Risks and Challenges

• Potential impact of North American tariffs on connectivity sector growth.
• Challenges in the e-mobility segment of the electrification market.
• Macroeconomic pressures affecting the medical devices sector.
• Dependence on defense and aerospace sectors for growth.
• Uncertainties surrounding ongoing M&A activities.

Kitron ASA’s Q2 2025 earnings reveal a company capitalizing on strategic sectors while navigating broader market challenges. The focus on innovation and capacity expansion positions Kitron for continued success in the evolving market landscape.

Full transcript - Kitron ASA (KIT) Q2 2025:

Peter Nelson, CEO, Keytron Group: Welcome everyone to Keytron’s second quarter twenty twenty five results. We’re pleased to present the solid quarter characterized by continued growth, strategic wins, and robust financial performance. Today, we’ll explore the drivers behind our positive momentum and highlight our outlook for the rest of the year. I’m Peter Nelson, CEO of the Keytron Group, and presenting with me today is miss Catharine Nelander, CFO. So let’s kick things off by looking at some of the quarter highlights.

Slide two, please. This quarter was marked by operational strength. Our order backlog increased significantly, up 12% year over year, reflecting strong demand. Defense and aerospace stood out with a remarkable 25% growth in revenue, driven by new contracts in advanced defense communications, radar applications, and unmanned systems. Our EBIT margins remained strong, over 9% across all regions, showing resilience despite some localized challenges.

Next slide, please. Taking a look at operations and growth. Operationally, we’ve successfully managed ramp ups and executed key strategic contracts, particularly in defense and industrial and electrification sectors. Our ongoing m and a project will help us further expand our capabilities. Given our robust order intake and current trajectory, we’re confidently raising our revenue and EBIT guidance for 2025 despite ongoing global uncertainties such as trade wars and economic volatility.

Next slide, please. Looking at the trends over the sector, we’ve observed varied trends across the sectors this quarter. Within connectivity, there’s slight growth driven by IoT gateways, but offset by softening demand due to tariffs in North America. We expect more broad recovery in the second half of twenty twenty five. Electrifications.

Continued challenges, particularly in the e mobility and sustainable energy segments, although power management remains strong. Business to business should pick back up in the second half of the year, whilst business to customer is projecting a recovery in late twenty six, early twenty seven. Industry. We see a positive momentum with significant growth in automation and oil and gas segments driven by successful ramp ups. Medical devices facing some headwinds primarily due to some high comparative base from last year and tariff uncertainties.

Forecast and an order horizon is short and becoming even shorter, really reflecting on on the uncertainty from the market when it comes to tariffs. But we expect more strength in the second half of twenty twenty five. Defense and aerospace, our standout sector, up 25%, benefiting from high demand of missile systems, UAV optics, and encrypted communications driven by the geopolitical uncertainties we see. We project 30% growth in the second half compared to the first half of twenty twenty five. Next slide, please.

Slide five, order backlog. Right. The strength of our order backlog now at 509,000,000 positions us strongly for future revenue growth and generation. Defense and aerospace dominates, reflecting robust long term customer commitments. Our rolling six month outlook, r six, continues to support our positive outlook for the second half of twenty twenty five, although we remain vigilant about potential market volatility.

Slide six, please. And on to you, Katrin, for some, second quarter highlights.

Catharine Nelander, CFO, Keytron Group: Thank you, Peter. Q two highlights. Financially, q two showed a steady revenue growth reaching a €100, 172,200,000.0, which is up 4.6% sequentially and maintaining a strong EBIT margin at 8.7%. Our operating cash flow improved to EUR19.3 million, benefiting from efficient working capital management. Our debt ratios improved significantly, reducing our leverage and improving our financial flexibility, positioning us well for future investments.

Slide seven, please. Half year highlights. The first half of twenty twenty five ended at NOK 336,800,000.0. And despite a slight reduction of 1.4%, we successfully expanded profitability, increasing EBIT by nearly 8%. The improvement reflects disciplined operational efficiency and cost management across the group.

We’re seeing growth sequentially in all business sectors with particular encouraging EBIT margins consistently above 9%. Operating cash flow has improved with 10% from last year and is at 86% of EBITDA. Slide eight, please. Business sectors. Regionally, Nordics and North America continued to lead with steady revenue contributions, sequential growth of 2.4% and solid EBIT growth and EBIT margin now at 9.8%.

Central And Eastern Europe also delivered a strong performance with sequential growth of 9.9% and EBIT margins up 9.5%. And while Asia Minor minor challenges due to market softness, profitability endured. Efficiency has improved. Revenue per employee is up 5.8% from last year. Recent hiring shows a return to growth, aligning with our expanding activities.

Slide nine, please. Cash flow and working capital. We delivered strong operational cash flow in this quarter of NOK 19,300,000.0. Inventory and receivables were efficiently controlled, leading to lower net working capital, down 4% year on year and sequentially. Our investments are at around 1.1% of revenue.

Our disciplined approach to cash management provides stability and positions us well for future growth initiatives. Slide 10, please. Ratios. Our financial ratios illustrate our strengthened balance sheet with significantly reduced net interest bearing debt at $1,995,900,000.0 euros and improved gearing ratios to 1.4. Return on operating capital improved to 23%, nearing strategic target of 25%.

Net working capital, as a percentage of revenues at 26.8%, finally starting to move downwards. And our equity ratio also strengthened, forming the foundation for our financial health. Slide 11, and over to you, Peter.

Peter Nelson, CEO, Keytron Group: Thank you, Kathrin. Well, some key takeaways for the quarter. In summary, our strong second quarter outlook bolster our confidence to raise our guidance for 2025 revenue and EBIT. Defense and aerospace continues to drive our growth fueled by significant orders and increased NATO spend. Non defense sectors also show strengthening, positioning us well for a balanced growth.

Strategic investments in capacity and innovation allow us to scale quickly to meet rising customer demand. Given our current momentum, we’re raising our outlook for 2025. We now expect revenue to be between 675 and €725,000,000, with an EBIT range between 55 and 65,000,000. That said, let’s go to the next slide, and we have our q and a session. And I see that there’s also already, Kathleen, some questions coming in.

Maybe we should start with some questions from Eric here. You’re stating nondefense sector strengthening outlook for second half, but at the same time, looks like you’ve pushed the recovery somewhat on connectivity and electrification compared to the q one commentary. Is it industry and or medical where you feel comfortable in the second half? Well, really pretty comfortable in in all market sectors. Industry, we see a stronger momentum right now over the past month or so where we see we see a lot of orders coming in.

And and industry was the only seg sector that we actually were almost flat versus versus versus sequentially. But but at this point, the the outlook looks stronger. So we particularly when we see it in r six. Connectivity, I mean, you spoke about connectivity being being a bit softer, shorter horizon, more competition, less investment in maybe industrial capacity pushing out some of the investments there. The tariffs in in The US affect one of our major customers on tracking where their a big part of their market is in The US.

So though that demand is softer than expected, whilst, the tracking units we have for containers and re refrigerated containers, those continue to grow even though some of that that is is shifting more towards the higher volume and and lower value part of the production. Medical, it looks it looks it’s stronger for the second half. We expect it’s not massive growth, but it’s always good to see strengthening.

Catharine Nelander, CFO, Keytron Group: Mhmm.

Peter Nelson, CEO, Keytron Group: Yeah. In q one, we commented we made our numbers in the back half of the quarter. Well, mean, fortunately and and how do what what what’s the indication of the how q two developed in terms of relative speed? You wanna take that, Katrin?

Catharine Nelander, CFO, Keytron Group: No. I think it’s, more even in, in q two, I will say. And also, I think the revenue is quite evenly distributed in q two.

Peter Nelson, CEO, Keytron Group: Right. So which means also when we look at margins every month, the margins were pretty good. There was no there was nothing special coming in in towards the end of the quarter. And we’re happy about that. That that means there’s efficiency in production.

In terms of 50% ramp up in defense volumes in Norway, how far are we towards that target? Did you progress in q two? I think we progressed really well, and we see it when I look at the margins of of of of Norway in particularly in particular. You know, they’re not all the way there, but I don’t think should we expected them to be all the way there. But there is a continued ramp up into q three and into q four.

And, basically, q three volumes are are on the q two level even though we have some summer vacations. Traditionally, we have summer vacations in Europe. But this year, we expect q three to to be in line or higher than q than q two. Am I right or am I right?

Catharine Nelander, CFO, Keytron Group: You’re right.

Peter Nelson, CEO, Keytron Group: Yes. Thank you.

Catharine Nelander, CFO, Keytron Group: Not any more questions currently. Maybe we should talk a little bit about the revenue second half now. It’s it’s it’s higher than the first half. Right?

Peter Nelson, CEO, Keytron Group: Yeah. That’s what we see at least. Right? We’re we don’t have we don’t have historical proof yet, but, but the the the demand sure looks, stronger. The bookings are stronger.

And even as I just walked into this meeting, I I participated in another meeting in for one of our central European sites. And and right now, before vacation period, all of the customers are coming in with increased demand into into third quarter, new NPIs, new product introductions. So they were pretty excited. And and, of course, that helps me because it was our Polish facility where we’ve struggled a little bit after after this sustainable energy, reduction in demand.

Catharine Nelander, CFO, Keytron Group: We are changing the guiding now. So we have 07/25 to to, as a top level from six from June and the mid guiding of July. But when you look at the r six demand that we have, Peter, that’s slightly higher than we actually brought in, right, in India?

Peter Nelson, CEO, Keytron Group: Yeah. Yeah. It is. Well, I mean, we there you always need a bit of a little bit of a buffer. The or the the defense part, which is a in in in q if we look at revenue, right, revenue in in in in in q one was 90,000,000, just over 90,000,000 on defense.

Right, in the first half of the year.

Catharine Nelander, CFO, Keytron Group: Yeah. It was.

Peter Nelson, CEO, Keytron Group: First half. Yeah. First half. Second half now, a 118. That’s what the r six shows.

So, you know, that that’s a substantial ramp. A lot of that is taking place in in in in Norway, but I think believe there’s increased a little bit increased demand in Sweden. There’s a new defense coming online in Poland also during the second half of the year. So that helps drive that. All of that is on order.

Like, all the one eighteen is on order. Medical industry electrification, about 65% of that is order, firm orders today. The the rest is forecast. Connectivity, it’s it’s it’s lower. It’s like 35, 40% of that 61,000,000 is on order.

The rest is forecast from the customers. And why is it forecast? Well, I mean, one of the largest customers there has a call off, you know, twenty four hour call off or or thirty six hour call off on the products, and that’s when the order comes in. Yeah. So that that gives us pretty strong underlying demand.

Also, that number has been increasing week over week, month over month for the past three months. So that helps build some confidence that the low point has has has been passed, and we’re seeing growth.

Catharine Nelander, CFO, Keytron Group: Also, we are upping the guiding from 47 to 55, but we’ve kept the 65 as a top level. I would assume that maybe we should have upped it a little bit, but we have decided not to. Right?

Peter Nelson, CEO, Keytron Group: Well, we’ll leave that for q three and see what happens. Right? We also we’re we’re spending a decent amount of money on on on our m a M and A activities. So that has some bearing on on the overhead cost. The underlying sites are all, you know, they all delivered over 9% in in in the past quarter of the of the operating margin.

Catharine Nelander, CFO, Keytron Group: Yes.

Peter Nelson, CEO, Keytron Group: There was some extra cost on the group level.

Catharine Nelander, CFO, Keytron Group: Mhmm. And we are also ramping up in Malaysia, which brings a little bit more cost.

Peter Nelson, CEO, Keytron Group: That’s right. Yeah. Yeah. I mean, so far, the cost there have been very, very moderate. Now there’s some sort of investment in in in head count and organization prior to actual some volume coming online.

Catharine Nelander, CFO, Keytron Group: It’s not huge, not easy to say that we at current level, we will reach 65 easily. That’s that’s the point.

Peter Nelson, CEO, Keytron Group: So Vincent wonders if we can give an update on the progress of potential m and a deals.

Catharine Nelander, CFO, Keytron Group: Probably can’t.

Peter Nelson, CEO, Keytron Group: No. Yeah. Yeah. No. No.

We can’t.

Catharine Nelander, CFO, Keytron Group: But the project is on running, we are, as you Peter said, we’re spending money. So that will give you an idea of where we are in the process.

Peter Nelson, CEO, Keytron Group: I think that’s about it. Right? We managed to report the second quarter here in in just about fifteen minutes. So that’s gotta be a new record.

Catharine Nelander, CFO, Keytron Group: It is. And there’s no more questions coming in.

Peter Nelson, CEO, Keytron Group: Okay, everyone. Of course, we’re always available to to to meet with you either either virtually or or in person over the over the next over the next quarter. So just get in touch with Catherine, and we’ll see how we can continue our discussions.

Catharine Nelander, CFO, Keytron Group: Yes. Okay.

Peter Nelson, CEO, Keytron Group: Thanks, everyone. Thank you.

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