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.