Kongsberg Automotive New

Good morning, ladies and gentlemen. Welcome to the Kongsberg Automotive second quarter earnings call presentation for 2022. In a moment, I will be introducing Mr. Jorg Buchheim, our CEO, and Frank Hefter, our CFO. The presentation is ready for you to begin.

All right. Thank you very much, Jacob. Welcome as well from my side. Good morning to all of you. I would like to go through our regular agenda, as you are well aware. I would like to start with an executive summary, providing you all a market update, led then through a financial update by Frank. Then we're going to give you more insight about our strategic and performance improvement shift gear program updates before we're heading to the outlook and finishing as usual with the Q&A. So going to the executive summary, I'm glad to share that our revenues went up in Q2 to a level of 225 million euro, which is up by 4.7% compared to Q1 of the previous year. This has been supported by a full order book, but as well by commercial price increases towards our customer base and the 30 million translation effect. While from a volume perspective, we are 1.4% short versus Q2 2021. The earnings remains pressured by cost as the adjusted EBIT came out at the level of €4 million, which was €8.9 million lower than in Q2 of the previous year. And this was driven majorly by three reasons. First, the ongoing higher raw material cost and non-material inflation, as well as production inefficiency driven by supply chain constraints, but as well very volatile customer demand schedules. And this is across all our segments. And secondly, the China lockdown situation, which we have all experienced in the Q2 of this year. And then last, third, a significant semiconductor supply problem at an individual customer in our highway segment, which continuously caused significant impact on both revenues and our EBIT results due to spot buys and lost revenues. So we estimate that alone with this individual related off-highway impact, the adjusted EBIT would have been 10.7 million higher roughly in the second quarter of this year. So when it comes to free cash flow, we have generated, despite ongoing market challenges, a positive result of 4 million euro, following 12 million euro at the previous year. in the same quarter and we could book new exciting business in the value of 167.9 million lifetime revenue in Q2. So at the next slide I would like to share with you the distribution of our revenue per region and market as the automotive sector has been divergent growth between vehicle and geographical segments and that's as well at Kongsberg. So looking in this slide As usual, this is providing you at a glance how we have the split geographically and per segment. And the change in commercial vehicles is largely PNC and couplings, while passenger vehicle is PNC, powertrain and chassis, and others is majorly dominated by FDS. So looking on the PV, on the passenger vehicle segment, it's largely related to our P&C business, as mentioned. Kiel Kongsberg Automotive had great recovery in North America with the big three customers, General Motors, Ford, and Stellantis, and they outperformed by 24% the market. While K8 sales in Europe have been weaker compared to the market, in particular in driveline, where Kongsberg is over-averagely present primarily in low-cost passenger vehicles. And that's therefore not surprising for us, as car companies prefer currently to use their allocated semiconductor components to build high-margin premium vehicles instead of low-priced cars. So therefore, we saw a drop in the European market and we saw a drop as well in Asia. And this was driven by China as this has been strongly impacted by the lockdown, in particular in the passenger vehicle segments being short on paths. on commercial vehicle with sufficient parts available and with the circumstances that our strong customers base on the less COVID impacted north and east region rather than in Shanghai that has helped to get limited impact in commercial vehicle in Asia versus the market. Europe Truck Sales came out with our strong Scandinavian customer base significantly better as a market and supported by price increases and backlog reductions. This was a good quarter while commercial vehicle in North America has been lower as we were here majorly lacking on enough subcomponent parts and major by stacking deliveries from China due to the lockdown in China. So looking then in the next slide, when it comes to the supply chain situation and the related direct and indirect impacts, we saw actually with the start of the quarter, two raw material prices globally have been on a historical high level by logistic cost inflation kept elevated. So the semiconductor shortage has been slightly improved. That's what we saw as well. but not for an individual customer, which I referred to before, with Kongsberg automotive of highly division, where we consequently lost significantly revenue and profit for Q2. So raw materials at the beginning of Q2 on a very high level, logistic cost and inflation kept high as well. But single conductor, we see the first signs, we saw the first signs of relaxing, but with our individual problem, we had here an extraordinary impact temporary in Q2 in the off-highway division. However, again, we have noted first signs of improvements later in the quarter, and this keeps us very confident for potential rebound in H2. So all these supplies, let's say all these supply chain disruptions has caused a volatile order behavior by our customers, which generates production inefficiency. And this is across all our segments. And therefore, we're seeing temporary higher cost and inventory levels as well on our sites. So, nevertheless, we at Comsberg Automotive countering those with our well-known performance improvement program called Shift Gear 1, which contributed after 7.6 million in Q1, 12 million in Q2, and this provided us then in a sum an upside of 19.5 million in the first half of the year. And we have, in the meantime, a huge organization involved who is delegated and motivated to work here on further improvements. And that's what we're seeing as well, what we're expecting for the second half of the year. We will see here further customer price increase impacts, but as well continuously improvements in our production and efficiency base. which always comes with a delay into our P&L and balance sheet. And therefore, we are confident that we will see here an additional impact of 32 million, at least for the second half, countering these supply chain constraints. So looking then at the next slide into our shift here to our product portfolio transformation program where we are focusing on, let's say, the modern and our core future product portfolio. So when it comes to that, we are continuously strong in executing our portfolio cleanup and modernization on the runway to become a more on-highway and special application-focused company, less exposed into passenger vehicle, and which allows us then at the end of the day to generate profits EBIT levels of above 10% with a strong cash flow and shareholder return. So with the LDC divestment reported before, we executed here a further step on this roadmap with a cash income of €38.1 million, which came in in April, and that supported certainly as well our positive cash flow of €4 million, and reducing our net debt to €125.5 million, at the end of Q2, and certainly what is very positive, it's increasing as well our liquidity reserves to a comfortable level of so far 218.7 million euro. Then brand new, and we announced this this morning prior to the earnings call, new really is our sale of our Canadian Charbinigan plant, which is part also of Highway Division. And the plan is doing a forecasted 74 million euro revenue per annum with a 9 million euro EBIT in 2022, forecasted. And KA with BRP just entered, and this is Bombardier Recreational Products, just entered into a definitive agreement to sell this highly customized plant to BRP for a total enterprise value of 136 million Canadian dollars, which is worth of roughly 104 million Euro. Here in this plant, we are producing customized products like sensors, actuators, but as well power steering and other parts for PowerSpot applications and largely dedicated more or less to a single client as mentioned, which is Bombardier recreational products, so shortly BRP. So with this, we are following the strong wish of our respective customer to upgrade their value chain by vertical integration, which we agreed on. And KA reduced business as well as exposure on customized operations, but it allows us as well to free up our resources to focus on our ambitious roadmap, which we presented in the Capital Market Day in December, by scaling up now with specialty products towards agriculture, construction, material handling, and further new niche markets, which we always presented in our so-called honeycomb structure. And we will host a special investor and media call on this news at 10.45 this morning. So please feel invited to as well join this special call where we are outlining more details on this successful deal. So with this, I would go over to the market update. And yeah, I mean, in this slide, we're showing that the global market situation remains still in a precarious situation due to this macroeconomic and geopolitical special times. So again, the four major areas of impact remains with COVID, war, semiconductor shortage, and material and non-material inflation, the major root cause for the industry. So as well to us, so raw material prices peaked in beginning of Q2, but the good sign is now we're seeing first sign of stabilization towards the end of quarter two and in the Q3. We had the Shanghai lockdown, which disrupted supply chain, but as well with significant less revenue during this time in our operations in China. We see that semiconductor shortage starting to recover, but still costing Q2 2 million fewer vehicle bills. And if it comes to energy prices and inflations, we see, for instance, the inflation level in Q2 on a level of 8.6 in the U.S. and 8.1 in Europe, which is record high, while U.S. went already two quarters into a technical recession. And we see that certainly this has impacts not only on interest rates, but as well on the consumer behavior, where we saw here slightly dropping consumer confidence index, which fell to a 96.5 level, two percentage points lower than compared to Q1. So this will keep us busy, certainly. And if you're going to look then how that has been reflected into the growth of the markets at the next slides. So we see here lower activity, certainly based on this impacts. We saw that the automotive industry, when it comes to passenger vehicle, has been flat with 0% growth. in the passenger vehicle from Q1 2021 to Q2, sorry, Q2 2021 to Q2 2022. And we saw a 33% drop over the last 12 months in the truck division. So looking into a consolidated picture, so looking in the global demand truck and passenger vehicles, in a total, there was a 1.5% reduction from Q2 previous year to Q2 this year, where Comspect lays with 1.4% volume reduction. So normalized by effects impacts exactly on the market performance level. We're looking then into our book to build performance. So when it comes to new business wins, the Q2 was an extraordinary quarter as the ongoing negotiations on the Chevening plant our brand new divestment has taken out consequently a 260 million LTA extension in Q2 2022. So normalized by this special one time effect, we would have ended up on a 1.1 book to bill ratio, which is more reflecting our level of ambition and our increasing attractiveness. So how the different business segments perform, we're gonna see that on the next slide. So our activities on the market. So I would like to refer first to powertrain and chassis. So when it comes to operations, we had a number of piecewise increases successful in particular in this powertrain and chassis area in a good phase with our major customers. And we saw the first positive impacts starting now in the end of Q2 and beginning of Q3. So this is going to be a strong driver for our improvements, performance improvements certainly in the second half of the year and looking here as well into our internal shop floor improvements as part of our shift gear program. We see here record pace and largely high benefits when it comes to operational improvements as well in the second half of the year as we're adapting our planning processes towards the new environments. Positive here as well to a mention, you see that looking into the gray area, the new business wins of the previous year in the same quarter, we have been significantly increased here in terms of new business booking, which have been very positive. Looking then into specialty products, the couplings operations in Norway ran well, but they suffered certainly from a backlog due to high level of COVID related absence, which we saw here, which has been stabilized in the meantime. We see the fluid transfer system on a very strong first half of the year in terms of revenues and bookings. And here it's rather the challenge, the higher inflation and let's say the volatile behavior, order behavior of our customer, which caused some variances in our production. When it comes to new business wins, again, here we need to relativize the numbers as here the off-highway power spots booking for drop-off this view. So that's why we have here a lower level compared to the previous year. Looking then into the financial updates, and I would hand over to our CFO, Frank. So it's all yours, Frank.

Thank you very much, Georg, and also welcome from my side. Happy to lead you through the financial update here. Starting with the top line revenues came in at 226 million and on a reported basis are the highest revenues in the last four years. It nevertheless needs to be noted that this was supported by 13.2 million of positive revenues. Currency effects, mainly US dollar, Chinese renminbi, and contribution from our shift gear commercial excellence work stream with price increases in the magnitude of 8 million. If we take this out, then we see that the... Volume was slightly below 2021, which was then also reflected in the earnings. What is good to note that going forward, when we look at Q3 and Q4, the previous year's quarters were at a lower level than in Q2. And our expectation here, when you also take our revenue guidance, is that we maintain this level of Q2. And therefore, we should see positive effects as well going forward. If we go to the earnings adjusted EBIT, we reported 4 million, some 8.9 million lower than in the previous year's quarter. Both segments are contributing to that P&C with around 5 million. of which around 2 million is impacted from semiconductor impacts and the other effects are the volume and the elevated cost levels and the time delay to pass it on to the customers. On specialty products, the decline was majorly driven by off-highway and significant impacts from the semiconductor shortages, while FTS, the fluid transfer system business, showed a growth and couplings stable behavior. When we look at the margin development, then we saw the decline to 1.8% in the quarter. And we also provided you here the outlook, what we expect now. We expect Q2 to be the trough and that we are recovering to five respective 7% of profitability in the third and fourth quarter of the year. um if we look at the segments um on the next page then again powertrain and chassis 140 million of sales of revenues um cleaned up for for fx and price increases it would be also below the q1 2022 level and the margin effects i mentioned already volume as well as semiconductor impacts. On specialty products, we see a slight recovery in the margin from Q1 2022, although it is below the previous year's quarter of 13.1. Here again, we had the significant impact from semiconductor, which I think we quantify on the next page. There you can see it in PNC. There was a drop of 1.5 million, but 1.7 million was the impact from semiconductors. So net, it would have improved by 0.2. and in specialty products even more pronounced on one hand we continued to purchase semiconductors on the spot market and nevertheless could not secure enough parts so we also lost a revenue here in total a nine million miss so without that we would have also improved significantly in the specialty product segment. In the other bucket, we continue to invest in our setup here, centralizing our activities, driving the shift gear program forward. And therefore, we had some higher costs in the quarter than in the previous year. On the net income side, obviously the drop in adjusted EBIT negatively contributed to the development. We had slightly higher restructuring costs, again, in setting up Kongsberg for the future, making organizational changes to better serve the customers going forward. On the positive side, we paid less interest as we have repaid partially our bond. And that is obviously saving some money compared to previous year. And then we have smaller other elements. So at the end of the day, the net income from continued operations was minus 2.9%. in the quarterly report you also find the net income from the discontinued operation with 3.4 million positive in the quarter including the initial gain from the ldc divestment so for the group overall the net income for the quarter was positive 0.5 when we look at the um not adjusted EBIT, then we see 2 million here compared to the 4 million adjusted EBIT, mainly restructuring costs are the variance to that net income 2.8 we already discussed in the previous slide. When we come to the financial items, you see the good development on the interest side, 3.5 million compared to still 4.5 million a year ago. Again, the bond repayment, and we also repaid our revolving credit facility earlier in the year, so no interest from that as well. We had some foreign exchange effects that consist of realized foreign exchange gains of 1.9 million and unrealized exchange losses of 3.4 million, so netting to minus 1.5 million, and then smaller other items. Looking at the free cash flow, as mentioned, positive 4 million for the quarter. Therein, positive contribution from operating activities in the amount of 8.1 million, still a negative contribution from net working capital as we continue to build the higher level of inventory to secure the supplies and also the value of the inventory is increasing due to also the price development of the materials. The investing activities were at 5 million for the quarter, again, on a rather low level as we are tightly managing the investments and cautiously spend the money here and make sure that not too idle capacities are being created. Financing activities, 8.8 million. Negative, that includes 4.2 million related to the share buyback that we continue to execute on a daily basis. And you see the publications, the regular publications of where we are. And the rest is basically interest and leasing. So that then... In addition, we had currency translation effects in the cash flow of positive 4.6 million, which brought us to a total of 1.1. If we then add back the repayment of a small loan, also here in conjunction with the sale of the Canadian facility and the share buyback, we come to the 4 million free cash flow positive. When we look at the cash flow development split into continued and discontinued operations here, starting with the year end 2021 or the fourth quarter 2021, where the cash amounted to 58 million. Then we see that operating activities, there was a significant contribution from the discontinued operations as we sold inventory and other networking capital in the amount of 34 million as part of the LDC transaction. We had in the investing activities the proceeds from intangible assets and tangible assets amounting to 126 million as well as the other net proceeds and the negative 9.1 million from continued operations. Again, rather low level of capex investments for half a year. And then on the financing activities, you see what we have used the funds from the divestments for, which is the partial repayment of the bond, the repayment of the 20 million revolving credit facility, as well as the 4.2 million for the share buyback. Taking into account positive FX effects that led to a cash position of 144 million at the end of Q2. If we look at only the Q2 effect, then I want to highlight here again the 34.9 million that were added in the second quarter from the divestment of our LDC business. And the rest is basically self-explanatory. When we look at our liquidity headroom. We see a positive development at first to say we started at 221 million. The adjusted EBITDA added some 14 million. Then the change in net working capital obviously burdened the liquidity with 9.8 million. The investment expenditures cashed out 5 million. And then the proceeds from the sale added 34.9 million. Some other smaller items, as well as currency, led to a liquidity headroom of 254.1 million. And then we took the decision to also adjust our currently undrawn securitization facility with the exclusion of the interior business, as well as now the BRP receivables, the 60 million. It was not decided. adequate anymore, so we reduced it to 25 million, also to save cost in the financial result, which will support the development going forward. With then resulting 219.1 million liquidity headroom, we are still very well positioned for the future. Last but not least, looking at some financial ratios, we see positive or saw positive development, obviously in our gearing, which went down to a level of 1.9, including IFRS effects and even 1.1, excluding IFRS. So very solid here. The equity ratio increased again on the gains. to a level of 39.1% excluding IFRS or 35.7% including. We saw the ROSI slightly improving from Q1 2022 to Q2 2022, also supported by the lower capital employed that was again reduced to a level now below 560 million, including even the IRS liabilities and assets. This concludes the financial overview and I hand it over back to you, Jörg, for the shift gear update.

Thank you very much, Frank, for the common sense guiding us through the financial overview. So I would like to switch now to an update on our shift gear. So when it comes to our three pillar strategic Kongsberg shift gear roadmap, I'm glad to share with you that we're executing diligently and flawlessly in all three areas. So on the focus on improving profitability, on the clear strategic roadmap for each business, including M&A activities, and last but not least, in regard to sustainability and green transformation. So it is well undergoing as displayed in the next slide. If you're looking here, into our K8 performance improvement program. We are seeing increasing contribution from our plenty of dedicated teams who are supporting the company diligently on this valuable activity. To be expecting a net impact forecasted so far at a level of 52 million, according to week 31. and which 19.5 billion have been contributed in the first half of the year, be consequently expecting here more than 30 million impact in the second half. And besides different initiatives which are all contributing, important to emphasize is in this regard as well the successful achievement of fair price increases with our major customers. So looking then into the next slide as well in regard to our shift gear two program, the performance, the product performance or product portfolio transformation and modernization is here as well clear on full pace. And in particular, when it comes over the last 12 months to divestments, which prepares the company for higher margin, reduced risk and commodity exposure, but as well in regard to modernizing our product portfolio, but as well when it comes to using net proceeds out of our divestments, meaningful for reducing debt or for creating shareholder value by our successful share buyback program. So we are going to execute here further and we are here on full pace. When we're looking then into the next slide, and this is our circular, the shift gear three, I'm glad to share for today that the roadmap has been successfully laid out and partners are selected. So it's an exciting initiative which is reporting reporting due to the importance he directly to me, the CEO. So with this, I would like then last to our last section, the traditionally outlook, and I would like to start with the IHA-based outlook. It shows a strong growth in 2023 in automotive with 7.5% in passenger vehicle and 14.5% in the global truck market. from an increase 2022 to 2023, which is very encouraging for KE, but as well, I think for all investors. On a long ways, it's more conservative, which increases in 20% towards 2026, and 10% in the truck area. But again, important is here the message which is currently displayed by IHS and the experts that they're expecting a strong recovery in the year 2023 by pretty stiff increase in passenger vehicle and even double on the commercial vehicle where Kongsberg is increasing their exposure, coping with the current strategic roadmap. So that brings us to the outlook and yeah, we will, as mentioned, continue to execute on our shift year program, but it comes to the global situation. So the industry will continuously getting impact as well in Q3 or for the second half of the year. But as though what we're seeing here, we're seeing the first signs of stabilization when it comes to raw material, we're seeing improvements in the semiconductor area, and we are as well confident to see as well stabilization in terms of inflation and stabilization of geopolitical outlooks. So considering the market volume and the order book remains strong, which we're seeing here currently for H2 and already in Q3, we expect the second half of 2022 for Kongsberg being significantly better. I think not only for Kongsberg, but as well before the automotive sector. And this confirms, at the end of the day, our strong guidance here. So following the divestment with the Chevelingen plant to BRP, we're updating here our guidance in regard to revenue. So we're subtracting here the remaining revenue for the next four to five remaining months, which impacting the revenue down, guidance down to 870 up to a range of €905 million for the fiscal year 2022. But we stay unchanged when it comes to EBIT guidance. Here we would like to confirm our previous guidance in the range of 38 million EBIT and 44 million. As we mentioned before, we are confident that the second half of the year will be much better than the first half, and therefore we would like to keep here our guidance unchanged in the previous corridor. So with this, Jacob, I would like to hand over back to you and open up the Q&A.

Thank you, Jörg. We've got a number of excellent questions here. I would remind everyone that we are holding a separate call on the Shewindigan divestment. So any questions that are exclusively directed to that, we may do on the later call. We could start with... some questions from one of our bondholders asking what we feel the demand outlook across our end markets, especially commercial vehicles, will be. Are there any signs of a slowdown? And also, what are the inventory levels like across the OEMs and tier one clients?

We see here when it comes to the commercial vehicle outlook still for this year, we see that on a still low level for this year, in particular if we're looking into China. But we see here as well incentives programs to to getting that up. And that's why I'm sharing the opinion, looking into the IHS figure, a strong recovery for 2023 is very reasonable, but for the remaining second half of the year, in particular in China and India, we keep that as well on a flat level. And we consider that as well into our revenue forecast.

Okay, we will, next question. Certain automotive OEMs are seeing consumer demand softening given high auto prices, inflation or recession concerns. Are we hearing anything similar in our discussions with customers?

What we're seeing is, as I've mentioned, that the backlog is still very high and we're looking into a backlog situation and into our order book which is highly positive if it comes to the next 12 months outlook. And the question is, is it going to be at a certain time of period, let's say a more balanced view again, going not only for premium cars, So spending more efforts in, let's say, high volume cars, this might come. But in total, we don't see a real drop in the demand situation when it comes to consumer demands. You have in certain areas, you have currently delivery times of more than 12 to 18 months And this is currently a huge backlog, which needs to be worked in and is going to continuously fuel the revenue.

Right. There's a question we've got from a number of callers. Has the off-highway customer, which was hit by semiconductor issues in the first and second quarters, returned to normal production? Or how is this production trending and how will this impact us going forward?

Yeah, we see signs of recovery here when we're looking in the second half of the year. So the first half was really an exception. We worked here as well into an alternative solution. Our engineering department did here a great job. And we're going here as well for the second half for a second source. So we see here a reluctant situation to a certain extent. So that's going to be certainly different like the first half.

Great. There's another related question there. Spot market purchases of semiconductors still seems high in the second quarter. How are they trending in the third quarter and how much can we pass on to customers?

So the situation is we're passing to all our customers for the second half of the year. 100% will be passed on to the customers. This has been agreed with all customers. So the serial conductor situation in terms of spot by effects is not affecting us anymore. It's just the quantity of availability and availability of parts at all, which could have a revenue impact, continuously revenue impact. But again, we see here a difference between the first half and the second half, as we see already now, in particular, starting with August, a real slide, a real relaxing situation. So we are more confident. Does this answer the question, Jacko?

We missed the last 10, at least the audio fell out in the last 10 seconds of your answer, unfortunately.

All right. No, what I said is the ongoing change on the semiconductor, but not on the spot buy, actually, because we can hand through all this additional cost for spot buy. It's rather how it turns out on the total available semiconductor. semiconductor capacity, where I mentioned before, we see in particular starting from August onwards a relaxing situation, but we will carefully watch that throughout the second half.

Okay, thank you. There's quite a few questions that have come in that are directly related to the Scheweningen disposal. I will hold those off until the next call, but one that has come along with that a caller asking about the substantial implied EVIT upgrade that we are indicating for the second half of the year. Can we please elaborate on what the main drivers for the margin acceleration are? Ideally by providing a share or margin impact of the individual drivers.

Maybe Frank can refer to that.

Certainly. I think there's, I would highlight three main elements that support the profitability improvement in the second half of the year. The first one is exactly the semiconductor, I would call it normalization or easing, less impact from spot buys and better availability. that contributed obviously significantly negative in the first half year alone in the quarter. We were talking about more than 10 million in the first quarter. We had also a slightly lower number, but also an impact. So overall, this should at least improve the second half by more than 10 million. The second one is the higher contribution from the shift year measures where we indicated 52 million for the year versus 20 million in the first half. So also here you have additional 12 million that will add to the profitability. And then last but not least, there is, based on the order book, the expectation of especially higher volume in the second half, predominantly in the fourth quarter. That should then also positively contribute.

Great. Thank you, Frank. With one final question that is related to the outlook, could we please elaborate on how a potential recession in our markets would impact on KAA, specifically on our near-term earnings and whether it would affect the pace of the shift gear plan, including potential investments there?

I mean, that's difficult to predict. I mean, what we're doing is we're working here as well with all the external input and with the customer feedbacks which we're getting. So it's all about how high is the level of recession at the end of the day. So the market is very carefully and so do we as well. And we considered this as well more on an extended level, the recession point into our forecast. So, but again, we don't know in which magnitude that will happen. I think we all are, let's say, observing the market. And, yeah, we are prepared to a certain extent and having that as well to a certain extent, like the entire industry into our forecast.

Great. Thank you, Jörg. At this point, there are no further questions from the audience regarding our quarterly presentation. So in that case, I would encourage everyone to attend the call at 1045 CET regarding our Sherwin-Winigan news. And other than that, to hope to see you again for our third quarter presentation later in the fall.