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

Kitron ASA reported its second-quarter 2025 earnings, highlighting a revenue of €172.2 million, marking a 4.6% sequential growth. The company also raised its full-year revenue and EBIT guidance, reflecting optimism about the second half of the year. According to InvestingPro data, Kitron’s stock is currently trading above its Fair Value, with a P/E ratio of 35.2x. The stock showed a modest increase, rising by 0.86% to €57.85 following the earnings announcement, contributing to an impressive year-to-date return of 72.25%.

Key Takeaways

• Kitron’s Q2 revenue grew by 4.6% sequentially, driven by the defense sector.
• The company raised its 2025 revenue guidance to €675-€725 million.
• EBIT margin stood at 8.7%, with improved operating cash flow.
• Order backlog increased by 12% year-over-year.
• Stock price increased by 0.86% post-earnings announcement.

Company Performance

Kitron demonstrated solid performance in Q2 2025, with significant contributions from the defense sector, which saw a 25% revenue growth. The company also reported a sequential revenue increase of 4.6%, although the first half of 2025 saw a slight year-over-year decline of 1.4%. Kitron’s strategic focus on defense, aerospace, and electrification sectors continues to drive its growth trajectory.

Financial Highlights

• Revenue: €172.2 million (4.6% sequential growth)
• EBIT Margin: 8.7%
• Operating Cash Flow: €19.3 million (10% improvement YoY)
• Net Interest-Bearing Debt: €95.9 million
• Order Backlog: $509 million (12% YoY increase)

Outlook & Guidance

Kitron has raised its revenue guidance for 2025 to a range of €675-€725 million and EBIT guidance to €55-€65 million. The company expects robust growth in the defense sector, projecting a 30% increase in the second half of the year. Additionally, Kitron anticipates a recovery in the connectivity and electrification sectors.

Executive Commentary

Peter Nilsson, CEO, emphasized the company’s strong performance in the defense and aerospace sectors, stating, "Defense and aerospace continue to drive our growth, fueled by significant orders and increased NATO spend." Katrine Nylander, CFO, highlighted the improvement in operating cash flow, saying, "Our operating cash flow improved to €19.3 million, benefiting from efficient working capital management."

Risks and Challenges

• Supply Chain Issues: Potential disruptions could affect production and delivery timelines.
• Market Saturation: Increased competition in the industrial and connectivity sectors.
• Macroeconomic Pressures: Global economic uncertainties could impact demand.
• Tariffs: North American tariffs could affect profitability in the connectivity sector.
• E-mobility Challenges: Facing headwinds in the electrification sector.

Q&A

During the earnings call, analysts inquired about the sector-specific outlook, with a focus on the defense volume ramp-up. The company confirmed even revenue distribution in Q2 and discussed ongoing M&A activities and potential investments.

Full transcript - Kitron ASA (KIT) Q2 2025:

Peter Nilsson, CEO, Kitron Group: Welcome everyone to Kitron’s second quarter 2025 results. We’re pleased to present a 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 Nilsson, CEO of the Kitron Group, and presenting with me today is Ms. Katrine Nylander, CFO. Let’s kick things off by looking at some of the quarter highlights. Slide 2 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 and advanced defense communications, radar applications, and unmanned systems. Our EBIT margins remain 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, industrial, and electrification sectors. Our ongoing M&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 2025. Electrification’s 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, while business to customer is projecting a recovery in late 2026, early 2027. In industry, we see a positive momentum with significant growth in automation and oil and gas solutions 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 order horizon is short and becoming even shorter, really reflecting on the uncertainty from the market when it comes to tariffs. We expect more strength in the second half of 2025. 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 2025. Next slide please.

Slide 5, order backlog, the strength of our order backlog, now at $509 million, positions us strongly for future revenue growth and generation. Defense and aerospace dominates, reflecting robust long-term customer commitments. A rolling six-month outlook, R6, continues to support our positive outlook for the second half of 2025, although we remain vigilant about potential market volatility. Slide 6 please, and on to you Katrine for some second quarter highlights.

Katrine Nylander, CFO, Kitron Group: Thank you, Peter. Q2 highlights. Financially, Q2 showed steady revenue growth, reaching €172.2 million, which is up 4.6% sequentially and maintaining a strong EBIT margin at 8.7%. Our operating cash flow improved to €19.3 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 7, please. Half Year Highlights. The first half of 2025 ended at €336.8 million, and despite the 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’ve seen growth sequentially in all business sectors, with particularly encouraging EBIT margins consistently above 9%. Operating cash flow is improved with 10% from last year and is at 86% of EBITDA. Slide 8, 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 at 9.5%. While Asia faced 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 9, please. Cash flow and working capital. We delivered strong operational cash flow in this quarter of €19.3 million. 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. A disciplined approach to cash management provides stability and positions us well for future growth and growth initiatives. Slide 10, please.

Ratios. Our financial ratios illustrate our strengthened balance sheet with significantly reduced net interest-bearing debt at €95.9 million and improved gearing ratios to 1.4. Return on operating capital improved to 23%, nearing the strategic target of 25%. Net working capital as a percentage of revenues at 26.8% is 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 Nilsson, CEO, Kitron Group: Thank you, Katrine. Some key takeaways for the quarter. In summary, our strong second quarter outlook bolsters our confidence to raise our guidance for 2025. Revenue and EBIT. Defense and aerospace continue to drive our growth, fueled by significant orders and increased NATO spend. Non-defense sectors also show strengthening, positioning us well for 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 million and €725 million with an EBIT range between €55 million and €65 million. That said, let’s go to the next slide and we have our Q&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 non-defense sector strengthening outlook for the second half, but at the same time it looks like you’ve pushed the recovery somewhat on connectivity and electrification compared to the Q1 commentary. Is it industry and/or medical where you feel comfortable in the second half? Really pretty comfortable in all market sectors. Industry, we see a stronger momentum right now over the past month or so where we see a lot of orders coming in and industry was the only sector that we actually were almost flat versus sequentially. At this point the outlook looks stronger. Particularly when we see the Nordics connectivity. I mean, I spoke about connectivity being a bit softer, shorter horizon, more competition, less investment in maybe industrial capacity, pushing out some of the investments there. The tariffs in the U.S.

affect one of our major customers on tracking where a big part of their market is in the U.S. so that demand is softer than expected. Whilst the tracking units we have for containers and refrigerated containers, those continue to grow even though some of that is shifting more towards the higher volume and lower value part of production. Medical, it’s stronger for the second half we expect. It’s not massive growth, but it’s always good to see strengthening in Q1. We commented we made our numbers in the back half of the quarter. Fortunately. What’s the indication of how Q1 and Q2 developed in terms of relative speed? You want to take that, Katrine?

Katrine Nylander, CFO, Kitron Group: No, I think it’s more even in Q2, I will say. I think the revenue is quite evenly distributed in Q2.

Peter Nilsson, CEO, Kitron Group: Right. Which means also when we look at margins every month, the margins were pretty good. There was nothing special coming in towards the end of the quarter, and we’re happy about 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 Q2? I think we progressed really well, and we see it when we look at the margins of Norway in particular. They’re not all the way there, but I don’t think we expected them to be all the way there. There is a continued ramp up into Q3 and into Q4, and basically Q3 volumes are on the Q2 level. Even though we have some summer vacations. Traditionally, we have summer vacations in Europe, but this year we expect Q3 to be in line or higher than Q3.

Thank you too. Am I right or am I right?

Katrine Nylander, CFO, Kitron Group: You’re right.

Peter Nilsson, CEO, Kitron Group: Yes, thank you.

Katrine Nylander, CFO, Kitron Group: Not any more questions currently. Maybe we should talk a little bit about the revenue. Second half now, it’s higher than the first half, right?

Peter Nilsson, CEO, Kitron Group: Yeah, that’s what we see at least. We don’t have historical proof yet, but the demand sure looks stronger, the bookings are stronger. Even as I just walked into this meeting, I participated in another meeting for one of our Central and Eastern European sites. Right now before vacation period, all of the customers are coming in with increased demand into third quarter new NPIs, new product introductions. They were pretty excited. Of course, that helps me because it was our Polish facility where we’ve struggled a little bit after this sustainable energy reduction in demand.

Katrine Nylander, CFO, Kitron Group: We are changing the guiding now. We have $725 million as a top level from $675 million and the mid guiding of $700 million. When you look at the R6 demand that we have, Peter, that’s slightly higher than we actually brought in, right?

Peter Nilsson, CEO, Kitron Group: Yeah, it is. I mean you always need a little bit of a buffer. The defense part, which is in Q. If we look at revenue, right, revenue in Q1 was $90 million. Just over $90 million on defense, right? In the first half of the year.

Katrine Nylander, CFO, Kitron Group: Yeah, it was first half.

Peter Nilsson, CEO, Kitron Group: Yeah, first half. Second half now 118. That’s what the R6 shows. That’s substantial ramp. A lot of that is taking place in Norway, but I believe there’s a little bit increased demand in Sweden. There’s a new defense coming online in Poland also during the second half of the year. That helps drive that. All of that is on order. Like all the 118 is on order. Medical industry, electrification, about 65% of that is firm orders today. The rest is forecast connectivity. It’s lower. It’s like 35%, 40% of that $61 million is on order. The rest is forecast from the customers. Why is it forecast? I mean, one of the largest customers there has a call off, 24-hour call off or 36-hour call off on the products and that’s when the order comes in. That gives us pretty strong underlying demand.

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

Katrine Nylander, CFO, Kitron Group: Also, we are upping the guiding from $47 million to $55 million, but we’ve kept the $65 million 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 Nilsson, CEO, Kitron Group: We’ll leave that for Q3 and see what happens. Right. We’re also spending a decent amount of money on our M&A activities, so that has some bearing on the overhead cost. The underlying sites are all, they all delivered over 9% in the past quarter of operating margin. There was some extra cost on the group level.

Katrine Nylander, CFO, Kitron Group: We are also ramping up in Malaysia, which brings a little bit more cost.

Peter Nilsson, CEO, Kitron Group: That’s right. So far, the costs there have been very, very moderate. Now there’s some sort of investment in headcount and organization prior to actual some volume coming online.

Katrine Nylander, CFO, Kitron Group: It’s not huge. Easy to say that we at current level we will reach 65 easily. That’s the point.

Peter Nilsson, CEO, Kitron Group: Vincent wonders if we can give an update on the progress on potential M&A deals.

Katrine Nylander, CFO, Kitron Group: Probably can’t.

Peter Nilsson, CEO, Kitron Group: No, we can’t.

Katrine Nylander, CFO, Kitron Group: The project is running and, as you, Peter, said, we’re spending money. That will give you an idea where we are in the process.

Peter Nilsson, CEO, Kitron Group: I think that’s about it. We managed to report the second quarter here in just about 15 minutes. That’s got to be a new record.

Katrine Nylander, CFO, Kitron Group: It is. There’s no more questions coming in.

Peter Nilsson, CEO, Kitron Group: Okay everyone, of course we’re always available to meet with you either virtually or in person over the next quarter. Just get in touch with Katrine and we’ll see how we can continue our discussions.

Katrine Nylander, CFO, Kitron Group: Yes. Okay.

Peter Nilsson, CEO, Kitron Group: Thanks everyone.

Katrine Nylander, CFO, Kitron Group: Thank you.

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