Kongsberg Automotive New

Good morning and welcome to this earnings call conference presentation for the third quarter 2021 by Kongsberg Automotive. I will now hand over to Jörg Buchheim, the CEO and President of Kongsberg Automotive.

Thank you very much, Jacob.

Welcome as well from my side to the Kongsberg Automotive Q3 2021 earnings call. So we're going to move to the next slide, please. Again, my name is Jörg Buchheim. I'm the CEO and President at Kongsberg Automotive. And I'm joined by my colleague, our CFO, Frank Hefter. And I would like to welcome you to our Q3 earnings call by providing you an insight on our Q3 highlights, the financial update, and followed by a year-end outlook and guidance. If we could go to the next slide, please. Yeah, this is our forward-looking statement, where our lawyers always proving our eyesight, so allow me not to read through, and I would like to move to the next slide, please. So that's the summary and highlights. Going then into the details on slide five, on the revenue slide, So we had a good third quarter. As you know, the seasonality of revenues means that the third quarter is lower than the others due to summer holidays. But taking that into account, it was with almost 5% increase compared to the third quarter 2020, still a good quarter. And its underlying growth close to a level of Q3 2019. Our adjusted EBIT was, of course, impacted by the supply chain situation, but we have seen some great business wins, which brought our book-to-bill ratio up to 1.5 and strong positive cash flow of 7.6 million euros. With this going to the next slide, as we mentioned after the previous quarter, we are currently undergoing a company-wide transformation program, which we have called ShiftGear. The first gear is improving the performance of our existing business. The second gear will ensure that we have the optimal product portfolio. And the third gear will ensure that the business is both financially and environmentally sustainable. The performance improvement has already helped us to offset the impacts of supply chain situation by improving our supply chain management or operational and commercial excellence. The team did here an excellent job and we set our targets as well for the next year continuously at a 20 million Euro potential saving level on a sustainable base. However, we want to make sure that our business is focused on areas where we are or can be second to none or better to say a top three industry leader and supplier. This will allow us to build highly valuable business on the strength of our engineering and our operational excellence and build on strong relationships we have with our customers. Therefore, we have launched the product portfolio transformation process as our second initiative within our shift gear transition program. And here I'm glad to refer to yesterday's announced strategic divestments within our interior business segment, where I would like to elaborate more in a minute in the outlook part. Looking then into this slide 7, please, before we are coming to this, I would like to look with you first at the three different segments, where the situation varied in Q3 as follows. The P&C segment showed good performance despite the supply chain situation, upholding revenues compared to the same quarter last year. Adjusted EBIT is down again due to the current situation, but we had some great business wins, which set us up well for the future. Interas had a more difficult quarter with a small decrease in revenue and a negative adjusted EBIT. Here we also saw strong business wins with analyzed revenues of more than 50% of our current revenue won this quarter. Special products grew strongly, with almost 20% revenue increase and some good business wins. This segment also saw some decreases in adjusted EBIT, but is still our most profitable business. It also showed excellent continuous business wins during the quarter. There are details about previous quarters in the appendix, so you can see there's a very positive trend here. Q3 is usually a weak quarter for business wins because of the holiday season, so this has been an outstanding quarter in this regard. Please go to slide eight. These are some of key contracts which make up the business wins I just mentioned. I won't go into detail here other than to point out that the contracts underscore the global and diversified nature of KA business, as well as our excellent book-to-bill ratio and the strong commitment of our customers to KA. So we are continuing to share this with you on actual events by our media and social media platforms proactively. Heading then to the next slide, I would like to hand over to Frank Hefter for details on financials, Frank.

Yes, thank you very much, Jörg, and also a warm welcome from my side. I'm happy to provide you some more insights into our financials. If we look first of all on the overall revenue and adjusted EBIT figures, then we have to mention that the Q3 seasonality kicks in here, and therefore the most meaningful comparison is against the Q3 of 2020. Yes, this was impacted by COVID, but on the other hand, we are still facing the semiconductor crisis this year. When we look at the overall number, 267 million in revenues in Q3 2021, compared to the 255, a 4.8% growth. Some tailwind from currency, which at around one percentage point, a bit more than one percentage point to the growth, but more than 3% coming organically. If you look at the segments, obviously the strongest growth fueled by our specialty product segment, which at the same time is the most profitable one, so good mix. On the group adjusted EBIT, we see a decrease compared to Q3 2020. Here, obviously, the semiconductor and raw material crisis has a major effect although we are able to offset some of it in the same quarter there is a timing difference and therefore a net negative effect also in this quarter which exceeds 15 million in adjusted EBIT. So, taking this into account, the probability would be more in the range of 22 million and thus with almost 8% on sales, an expected performance. When we go to the next slide, we see the development in the different segments. On powertrain and chassis and interior, more flat development on the top line. The underlying impact from semiconductors are actually exceeding 10 million in powertrain and chassis, and about 5 million in interior, where we have lost revenues. These are partially compensated by reimbursement from customers for extra costs in the range of 3 to 4 million, and these net effects are then weighing on the top line. And specialty products, there's less of an effect on the top line. So we see strong growth and also good to note is that this growth comes from all three businesses, be it off-highway, be it couplings or FTS. When we look at the profitability, we see in powertrain and chassis the impact, A, from the volume that is even more pronounced, like I mentioned, than you see in the top line due to the customer reimbursement. And the material cost increases that we faced in the quarter, so here a deterioration to around 5%. In interior, we see a recovery from the Q2, but still below break-even performance. Again, semiconductor is weighing in here, as well as material cost and freight. As we have the timing issue on recovery, This is still visible this quarter. We should see a significant improvement here in the next quarter, where this actually turns into a slight positive net effect, our expectation. So the worst, I'd say, on that is over. On specialty products, on the EBIT, we have had certain impact from semiconductor and off-highways that weigh on the margin here and to a lesser extent, some higher cost. But we have compared to Q3 2020 invested significantly also in the growth of our profitable business. So added engineering resources, that are working on the new business wins and making sure that we see profitable growth going forward. When we look at the cash flow development, then I'd like to highlight here the strong operating cash flow from operating activities with plus 23 million, including an improvement in networking capital of 4 million. And that is certainly a good performance for the quarter. And once again, we have tightly managed the capex in Q3 and selectively invested only. So a cash outflow of 8 million only in the quarter. Then like in Q1, we paid our bond interest and some other financial cost that then led to a net outflow of 12 million from financing activities, some tailwind from currency, which then resulted in a total of 8 million of positive cash flow. When we look at the group liquidity development, Then compared to the last quarter, you see an improvement from 205 million to 211 million, a 6 million improvement that added from the cash flow. And we have paid back 1.4 million on the ARS. that therefore only increases the balance by $6 million, whereas the cash flow is $8 million. To highlight here, again, the positive impact from earnings and net working capital and the selective investments I've already mentioned. So when it comes to overall liquidity availability, we are still having at the end of Q3, the unutilized securitization program with 60 million and the undrawn revolving credit facility of 70 million needs to be noted here that Part of that 20 million that we added back in April 2020 was expired or is expired beginning of October. So, as of today, there is 50 million of capacity available. With that said, I will hand back to Mr. Buchheim to offer further evaluation on the outlook.

Now that we are past the section dealing with the third quarter, thank you very much, Frank. We can say a little bit more about the transactions we just announced yesterday. We have, of course, communicated earlier that we are looking at structural changes as part of shift gear. But now we can show our work in the form of these Kongsberg strategic driven divestments. While interior has been an important and always important area for KA, and one where we have developed certainly some key technology, it is a sector where scale is very important, both to counter cost pressures and to deal with the tendency of OEMs to vertically integrate, which we see strongly. LEA has the scale to do this and will be a great new home for our ICS unit. Similar light-duty cable is very solid but rather traditional technique business where we are convinced that Superjet Engineering is a specialist in the sector, can provide economy of scales and leverage a wide global footprint while also upgrading their product line with all electronic actuation. So a great fit as well. Both transactions are providing us now the opportunity to consolidate all our resources, strength and focus on our highly potential business within on and off highway. Here we are undergoing a strong transformation with high speed on making all our products fit for the electrical and autonomous vehicle future by upgrading our current product portfolio, creating smart systems and conquer new markets and highly potential so far underdeveloped regions. So a great outlook. Slide 16, please. As you see from the numbers here, the transactions are accretive by most key performance measures. Just as an example, revenue and earnings per employee are by this much higher than the current levels for CA. And this will set us up for stronger profitability from 2022 onwards. There are, however, some one-time transaction costs, which means that we won't see the full benefits already in 2021. Just as a heads up, we will report these units as discontinued business in 2020, so the impact on our 2021 guidance varies slightly. This leads us to the next slide, 17, please. As everyone who follows the automotive sector is well aware, The semiconductor supply chain situation is causing problems all through the value chain and this is going to continue certainly. We are mostly impacted in the interior segment and to a lesser extent in the powertrain and chassis segment, although there are others, let's say indirect impacts of higher raw material cost, freight, energy and availability throughout. But we are continuing to strongly counter these impacts with steady results out of our shift gear performance improvement program. Further, as a result of the transactions, we are going to report a revenue of 800 million euro. But despite an around 28% take out of revenue, I'm glad to confirm that our latest 2021 guidance remains at 50 million euro EBIT for the year end. while the cash flow is predicted to be slightly positive despite almost 15 million one-time deal expenses. In terms of 2022 guidance, some of what we have already talked about is, of course, important for the outlook. The business wins means that we have a solid order book and a 1.5 book-to-bill ratio. But in the current situation, it's really difficult to forecast at this moment. We will therefore provide the guidance for 2022 at the annual results presentation for 2021. So please stay with us on that. So finally, prior moving to the Q&A session, please let me point out that we are going to invite you to join our special divestment-related call at 10.30 AM CET, where we would like to provide you more background. And with this, I would like to open up the Q&A.

Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach other equipment. We will pause for just a moment to allow everyone an opportunity to signal for questions.

Ladies and gentlemen, once again please press star 1 to ask a question. Once again, ladies and gentlemen, please press star 1 to ask a question. We can perhaps start with some of the questions that are coming in through the online interface.

We have a question, there are several questions which I'm going to summarize because they're all covering the same thing. What was the revenue and EBITDA for the divisions that are currently being sold off?

Can you say something about that?

Like we have stated in the announcements, the to-be-divested businesses comprise around 320 million of sales and slightly negative EBIT margin, and the current performance is in line with these full-year numbers.

Okay, thank you, Frank.

There's also a follow-up question regarding the plans for the proceeds. We have said something about this, but perhaps you could elaborate a little bit to answer the caller's question.

Yes, certainly.

Thanks a lot, Jacob. And thanks for the question. Certainly, we're looking in all options how we are going to deal with the proceeds. And what we are definitely doing here, considering strongly to deleverage here our debt as one of the options. And all other options are as well under evaluation, but certainly going to support strongly

the development of the shareholder value here.

Okay, there's quite a lot of questions coming in regarding the transactions, some of which we will perhaps keep for the call that we're doing later regarding the transactions. I will focus on the questions that are related to Q3. There's a question regarding the one-off raw material impact on EBIT in Q3 and whether we could quantify the impacts there.

Yes, we certainly can. Like I have mentioned, it has been, I'd say, the worst quarter in that respect. We continued to purchase certain parts on the spot by market in order to secure deliveries to customers. And these actually exceeded 10 million in the quarter, plus higher raw material and freight costs. So overall, an impact of around 15 million. Half of that has been offset in the quarter by direct reimbursement from customers to one-time payments. and therefore still net negative effect in the quarter, which we expect to reverse going forward. Then additional payments will come in, but only to a lesser extent additional cost shall occur.

Thank you, Frank.

There's also another question regarding the semiconductor situation. Do we have any comments on how we see the outlook for the semiconductor problems?

Yeah, it's difficult to exactly predict because there are multiple different effects. It's not only actually semiconductor, but it's clear it's going to continue in 2022. But what we are going to expect that there is a washout in the market in this regard that we in general will see an entire market price increase throughout the value chain. That's what's going to be expected for next year. And crucial is in the first step that this is balanced out among suppliers and customers. This is a step where we see a strong movement towards 2022. Yes, the semiconductor shortage is going to continue for next year until the 90 nanometer wafers are in a broad and wide way available again, but there will be a balance in the entire price segment here in the industry. That's what we're expecting. So it will be a more fair balance in terms of supplier and customers. So we are cautiously optimistic in this regard.

Okay, thank you.

There's a question regarding the time lag of the raw material prices. What is the time lag of passing through the raw material prices on average? And are we passing it through on a backward basis as well?

There's as well, I mean, difference.

It's different between, well, let's say it varies between business units and it's different in regions and in regard to cost origins. So when we are talking about semiconductors, for instance, we were quite successful in a forward-looking way. And this has already helped us in Q3 to limit the damage. So we on the semiconductor more on a 50-50 base here, minimum in certain regions on a 100% base. So we did here a big step forward. in corporate and partnership discussions with our customers. On raw material, we started certainly as well to limit now this damage coming up, similar like the energy cost. and as well here we are entered into discussions with our suppliers and our customers on a partnership way and we are as well cautious confident that we getting here results as well and positive effects in order to counter the overall impact on this increased costs So cautious, optimistic started to discuss. And as I said, I'm expecting that this is an overall and widen approach, which we are going to see as a balancing out and sharing the pain between suppliers and customers throughout 2022.

If I may add to that, when we look at our contractual measures when it comes to raw material clauses. You find typically three to six months time lag when adjustments are being made to the raw material indexes or prices. What we are entering or have entered are individual dialogues with customers about earlier upfront true-ups given the magnitude currently and that is underway.

Okay, thank you.

And following on from that, we've a question, how close are you to achieving the stated goal of double digit EBIT margins? And would this have been achieved if the current supply chain situation was resolved? I think you did mention something about this earlier in the presentation, perhaps you could elaborate.

Yes, certainly. I mean, long term, as I've mentioned, it's our clear strategy. And that's part of our product portfolio transformation as well to become here a sustainable two-digit EBIT supplier. That's where we are heading to. And you saw that as well in our clear vision and future requirement. We want to be active. Wherever we are active, we want to be second to none or among the top three suppliers and partners of choice for our customers. That's crucial in order to generate a sustainable two-digit EBIT. If you're looking into this strategy and looking into our long-range plan, we certainly see these two digits coming up. How quick is now really depending on the, let's say, stabilization and back to normal situation in the automotive market and this will be certainly not next year the two digits because of the ongoing crisis but certainly we will see that along the next years as a very achievable goal. That's one of the reasons as well that we went strategically for divestments.

Okay, thanks.

There's a related follow-up question. You mentioned the net negative effect of raw material on semiconductor shortages of 7.5 million euros. What is your estimate on the 2021 total negative effect?

The total net effect for the year, including the direct compensation from the customer, is in the range of 20 to 25 million. We have stated that the gross effect is in the 50 million range. And that is still a reasonable estimate. So it didn't get worse necessarily, but it also did not significantly improve.

And what we're seeing actually is more indirect effects that our customers, the automotive car manufacturers here, reducing their top line further. And we see it in the media day by day that they are forced due to other supply shortages or other supplier shortages. have to reduce their production output and this indirectly affects us continuously over, as well over the Q3 and in an outlook towards the year end until this is stabilized.

Okay.

We also have a couple of questions regarding the R&D and CAPEX levels going forward after the divestment, whether we're expecting this to increase or to remain the same.

There is certainly the expectation that the capex levels will decrease as the two divested businesses were capex intensive. We still want to fuel the growth of the remaining business in order to generate additional value. But the overall amount should decrease from current levels. On the R&D side, same also here, the to be divested businesses had significant resources in engineering that will be divested as well. And we're not expecting to build up resources in the same magnitude, although we will invest in the remaining business.

But the attractiveness to add that of the so-called remaining products and segments is certainly that these segments are well prepared and having, let's say, much more opportunities currently to generate growth and revenue with limited capex. That's for sure and part of our second year initiative.

Okay, thank you.

We have a question on whether we see downward pressure on prices when products are nearing the end of a lifecycle or at renewal, and whether we see the downward pressure on prices being similar or higher or lower than the pre-pandemic periods.

No, actually, we don't see that, actually, these circumstances. At the end, I mean, if you're going to come to an ending life project cycle stage, then you actually see that product investments or project investments are amortized. assets are depreciated so it's actually you run through all cost optimization and all price reductions so it's actually a good time towards the project life cycle and in terms of profitability. And we don't see here any difference in this regard post-corona or compared to today. So we don't see here any abnormal or any additional risk.

Okay, thank you, Jörg.

There's quite a few questions regarding the portfolio modernization. Now, as you mentioned, we will be elaborating on that at our Capital Markets Day in December. Perhaps you could say something more about the battery thermal management system, which we published something about on social media a few weeks back. If you could say something about how that is being developed and whether it's being developed for a particular customer.

Oh, yes, certainly. We will elaborate certainly a little bit more on the divestments at our 10.30 a.m. call. And please be all invited to join us here. And again, I mean... Transaction goes along with our transformational program at Kongsberg. But looking, for instance, then in our very promising upsides which we can generate, and these we are seeing out of our strategic workshops and directions here in Kongsberg, which we are continuously driving on growth over the last weeks, is we see here really fantastic For instance, this battery thermal management system is one of it, which we see as a really very promising future business, providing our customers a real benefit beyond what is available today at the market. So what we are doing here is we're combining our different business units, um knowledge and as well our product portfolio um to generate here create a system and um for instance we're going to go with the coupling systems which has a fantastic business case here in the market in the total total cost of ownership. We're adding here our fluids, our pipes out of our fluids business division where we have a lot of knowledge in terms of flowing characteristics which we can provide here as a really system know-how. And then we are adding the valve, the distributing valve business for cooling a battery and the related other parts as an entire thermal management cycle, heating the car, cooling, heating the battery. So it's much more complex and upgradable as a modular system. So we're adding the valve from our powertrain and chassis. And then we are adding, and this is certainly new, additionally, and that's a future trend here in Kongsberg where we are carefully and strongly looking into it, adding electronic know-how. And here we are happy to use our off-highway electronic engineering team in Charvinigan, for instance, but as well in Texas, to really provide us here then as well a control unit and including software to get this entirely managed. And for instance, what is here the one of the benefits what I'm talking about looking into this is certainly today you have battery management system very much related to a battery. But our system is going to provide completely independent from a battery type. We can provide an independent, very efficient system for the OEMs. which makes them much more flexible. On the other side, we are going beyond that. We are going, for instance, looking in not cooling a battery at all. We are really having a system then selectively cooling hotspots in the battery to much more increase efficiency, which will then provide, and that's a decisive factor in the e-vehicle area at all, providing additional range for our OEM because of an increase of battery capacity on effective management on battery capacity. So it's a fantastic great system which we are currently designing here and again just allow me to add here we are doing this in close alignment with our preferred customers because we are designing here very closely to the needs of our customers and it's a really exciting program where I would like to elaborate more on our capital market day and as well our CTO is more than happy to give you more technical insights on this really promising system.

Thank you, Jörg.

I suppose this is a related follow-up question. Are we planning to expand any of the facilities in Norway? For example, the Rolfos plant where a lot of these couplings are produced.

Definitely. Rolfos plant will be one of our system suppliers and major contributor.

There's a lot of questions still coming in regarding the transaction. We will go through those very carefully to make sure that we do answer them on the 10.30 call. One question which has come up which is not transaction related is someone asking whether we are considering listing in Germany. There's a fair number of origin companies around our size which have dual listings or over-the-counter listings in Germany. Are we considering this to take advantage of the greater interest in the automotive sector in Germany?

This would certainly be an option to look into, but I'd say this is nothing that we will pursue short-term. We are currently very busy with executing on the just-announced deals because with signing, it's not over yet. There needs to be the closing and the carve-out of these businesses. We need to secure... our 2021 results and that for the short term keeps us very busy and everything else I think can be looked at later.

Okay, thank you Frank. There's a question regarding the shift gear program asking what kind of results we're seeing from the performance improvement efforts and whether there are any in particular that we would highlight. and also whether our employees are motivated, engaged in the program?

Oh, certainly. I mean, in this regard, I think our employees are very much engaged and motivated to drive this program, as everybody sees here, direct results out of the efforts which we are spending. So I think that's one of the assets here in Kongsberg is the workforce. And this is clearly emphasized in each region, in each entity. There is really a big engagement, fantastic teamwork, and a lot of potential, what we are seeing. And it's not necessarily here by huge incentives. It's really the workforce likes to go with these measures, and they are very much motivated to make their business every day better. So that's really, really outstanding and I've seen this very seldomly before. So huge potential in terms of the results. I hope you can see the results because as we saw, and guided already in Q2 and later on during our ad hoc and now in the Q3, we're coming from big impacts generated also through semiconductor We started with 40 million impact, which we reported in Q2. We came with 50 million afterwards. We had the ad hoc and indicated that due to shutdowns of our customer base, the impact grows more in the range of 60 million. So you saw this deteriorating and the big impact in terms of P&L effects, but if you're going to see that we're still guiding here on 50 million, I think this should answer these questions very well. So allow me to say our performance improvement program is really hitting in and really strongly limiting the impact of this growth impact which we are faced to and I would say it's really a great program and the entire team here is already eager to continue that and we are looking already in having this sustainable counter measure as well for 2022 and as I've elaborated during the earnings call slides We see here a continuous positive impact of roughly 20 million on a conservative base on an annual base.

Okay, thank you.

There's a question which... It's somewhat related to the transactions, but which is regarding the order book for the rest of our business. I mean, we're selling the interiors business, which has seen most of the recent business wins. How does the order book look for the rest of the business?

Yeah, we currently have an excellent order book, honestly, and we have this 1.5 billion book-to-bill ratio, which is very, very good, as we could see. And our order business wins over the last 12 months have been 373 million, and certainly this is proper diversified. So if you're going to look, for instance, in the quarters and if you're looking a little bit in the appendix, for instance, on the earnings calls, you're going to see the first quarter in 2021 was very much in favor of new business wings for powertrain and chassis. The second one was actually for special products and the third one was an interior and this is a cycle which we always see in the industry different products due to just simple time effects on sourcing moving strongly in certain quarters. If you're going to look into the outlook and I'm elaborating now in a short term to Q4 We will see, and I can promise that as well already because we got them in, we see already strong bookings in powertrain and chassis division, but as well in special products. So Q4 will certainly underlying again this huge potential as well in this area by strong bookings in these two areas in our, let's say, remaining on-off highway segments. And we are very confident that we're continuing on this high booking rates. It's going to be always 1.5. We have to see. But it's towards 2022. We are very confident and promising that our book to bill ratio continues here in a positive manner.

Okay, thank you, Jorg.

There's a question which has come up before, but which may be worth reiterating. The question is whether CAE is ready for the transition of heavy goods vehicles from fossil fuels to electrification or hydrogen, and whether we have or can develop products that are suitable for the future of heavy goods.

Yeah, that's a very good question and certainly that's one of the key topics which we are looking in and working already hard on that and in particular This is one of our major tasks of our CTO. That's why he's here and pushing that forward. Yes, we are working on that, but I have to say a lot of our products, which we have in our product portfolio, and we elaborated on that as well in one of the dedicated investor presentations, which we did together with the spare bank here. A lot of these products are already fit for the e-vehicle application and in both regards, if it is battery driven or if it is hydrogen driven, but that's certainly not the end of the story. Now we are looking in generating systems for this e-vehicle trends, hydrogen battery, but as well for autonomous driving. And we will continuously pushing that and allow me to refer to our capital market day. We're more than happy to give you a little bit more insights in what exactly we are doing there. But clear on our roadmap and clearly part of our product portfolio transformation.

Thank you, Jörg.

And as you mentioned, Capital Markets Day will elaborate on this. There's really just one question left that is not purely transaction related. One listener is asking whether we are more strongly affected by the raw material and semiconductor price and availability issues than other suppliers and whether this is the case. How do we see the impact on KAA compared to our peers?

No, I would not say that we are more or less impacted. We are impacted as everybody else. Certainly, we have areas where we are in semiconductor more affected. For instance, in the interior area, certainly. Maybe on raw material, it's certainly a little bit P and C, but That's for our competitors exactly the same. I would rate us here in the average of our pair groups here, but I hope we're managing the countermeasures better, and that's our ambition here, again, to become second to none, to do exactly that, a little bit better than our competitors, and providing here a good outlook and a good shareholder return.

Okay.

Well, with that, we've come to the end of the Q&A session for the quarterly results. As we have mentioned several times, we are holding a separate call at 10.30 European time to go through some slides regarding the transactions that we announced yesterday. and to have an extended Q&A session there. If you had a question that was not answered, we will get to your question in the next session, as we are now coming up towards the end of our allotted time.

Thank you, Jacob. Thanks to all participants. Thanks a lot as well from my side. Goodbye.