Kongsberg Automotive New

So good morning, everyone, and welcome to the Kongsberg Automotive third quarter earnings call presentation for 2022. I will soon introduce Mr. Jörg Bohem, or CEO, and Frank Hefter, or CEO. My name is Mats Langor, and I'm responsible for the investor relation. Jörg, feel free to start whenever you're ready.

Thank you very much, Mats, as well from my side. A warm welcome to the entire audience. And as usual, I'd like to start with our executive summary. And yeah, the next slide, please. Looking on the numbers, I'm glad to share with you that our revenues increased despite challenging macroeconomical circumstances. So this reflects a 27% growth from the same quarter of 2021. The numbers, fairly to say, certainly include positive translation effects of roughly 9.7 million out of translation foreign currencies into Euro. But even with this, we could increase the revenue by 17%, which is a very remarkable result. The adjusted EBIT came out slightly above guidance, but with a 56% higher value as in Q3 2021. So this includes cumulated time delayed compensation of roughly 8.2 million for semiconductor spot by cost, which have been accrued in the first half of the year. But it's a very good result if you're looking into the development of Kongsberg automotive in Q3. The net interest bearing has been significantly reduced, which you can see on the right side compared to the previous year, which continuously leads to a leverage ratio at a stable two times. You can see above and that's 30% better than the last year. And this will be further improved to a very healthy 0.7 post our BRP Power Sports transaction, which we closed in Q4. If it comes to the free cash flow, still at the minus 1.5 million, as on one side, the net proceeds out of the recent power spot divestment arrived in October. And secondly, operationally, we decided in Kongsberg to keep the stock high in Q3 for being best prepared to serve the strong order books we've seen and in Q4 and ensuring availability in particular when it comes to our industrial market. So looking then more in detail on the segment, on the next slide, please. We see that P&C on the left side came in with higher revenues compared to previous quarter, but still didn't fully break through in Q3, as the over-average profitable truck market in China still hasn't relighted. So besides this, we have booked crisis expenses into Q3, while customer price compensation payments are confirmed but arriving time delayed in Q4. Very positively on the right side, the already seen strong EBIT recovery trend in specialty products is really encouraging because we see here in trend, which we have been seen already in Q2 and which is going to continue with 40% bullish revenue compared to 2022's quarter three. So real breakthrough proven by the third improved quarter in a row. So on the next slide, our market update, we are going to see how the global vehicle market has developed in Q3. And if it comes to the passenger vehicle market, in Q3, we see a 9.4% higher sales in Q2 versus Q2, and a 25.6 higher sales than in the same quarter of the previous year. Looking into KA's major focus market, It's the commercial vehicle market. This strong passenger vehicle recovery effect is still to come in commercial vehicle as the global truck market was in Q3 still waiting about the start of demand recovery in China, as mentioned before. This kept the growth so far still flat compared to the previous year and versus the quarter before. For when this recovery is expected, we do see in the outlook session later on in this presentation. moving to the next slide when it comes to the ongoing challenges in the automotive market we do see promising trends in particular when it comes to semiconductor shortage recovery and when it comes to the raw material sites as situation getting stabilized and even in certain areas clearly improved the next challenge on the other side in the industry is to master energy prices and inflation. And these are pretty consequences of the war conflicts, which are uncertain how long this is going to continue. So that means that the next focus is to accelerate efforts to reduce consumption, increase efficiency and looking into alternative power supply to further counter the hardly influential impacts from external. So looking on the next slide, we see KA's revenue growth in segments versus the market. And we do see in particular that KA couldn't fully participate on the passenger vehicle change. And this has two reasons. First, the passenger vehicle says that KA has been influenced in Q3 majorly by lower demand for manual shifter business in Europe, which we have honestly seen already in Q2. are still priorities laying on premium segments during these crisis days. Secondly, due to a generation change in the powertrain segment of our passenger vehicle business in China, with switching to the next generation at new customers, we expect to run up not before the quarter four. So very positively is the development in the truck area in our focus market, in particular in KA's biggest region, Europe, where we are gaining further market share. The substantial increase in others, which you'll see on the lower left side, coming from general market recovery, supported by the non-automotive, majorly industrial and aftermarket, where availability is the key for catching additional market share, what we are doing, and where CA's high inventory in this case helps. So moving to the next slide, we take a look together on our new business wins as usual. And we do see here two impacts as well. First, the sale to BRP impacting our order books in short term, which we see on Q2 and Q3 of this month. And secondly, customers showing currently less activities when it comes to the driveline area, as running programs rather get extended, instead customers spending further resources and new money into new programs. And further, the circumstances the sourcing originally scheduled for Q3 are literally moved out to Q4. So these are the main reasons for the current values, but nevertheless, The experience in Q4, in general, very encouraging activity already, and we are working actively with existing and new customers towards new contracts. In particular, and that's promising, in the electrical vehicle area and in industrial. So with this, I would like to hand over to Frank to provide us some more insights in the financials of quarter three. Frank, please, your turn.

Yes, thank you, Jörg, and also a warm welcome from my side in this early morning hour. When we look at our revenues, again, an all-time high in this portfolio constellation with the new continued operation, certainly good news, although we have to clarify Take into account that the 27% growth versus the Q3 a year ago was supported by positive currency effects in the magnitude of 25 million. And additional reimbursements from our customers also contributed with additional 4 million. What's positive is that the price increases added some 15 million to the growth and that the underlying business grew around 4% organically. So very strong also compared to the last quarter, a 9% increase, certainly a very positive development. When we look at our adjusted EBIT on the next slide, then we came in with 12.8 million in Q3, significantly higher also than a year ago. And basically in the recent history also here, the best Q3 that we had to report on. The EBIT margin came in at 5.2%. In Q2, we guided that we expect around 5%, so slightly better here. And the recovery should continue also in the fourth quarter so that we will achieve our respective year-end targets. When we look at the segments, We see that on the adjusted EBIT side, PNC had a decline versus one year ago. That is basically driven by two factors. One, the mentioned challenges in our driveline business, especially in Europe. as well as a one-time 2.5 million accrual that we accounted for, for customs that we still need to pay for prior years, as we have decided to go for self-disclosure on errors that lie back up to 2013. And here we are expecting charges in the magnitude of around 3 million for the whole year. Positive development in specialty products, strong growth in off-highway and fluid transfer systems. And on top of that, significant reimbursements from customers for spot buys that have occurred predominantly in the first half of this year. With some positive foreign exchange effects, we then end up at the 12.8 million. When it comes to net income, certainly the increased adjusted EBIT supports an increase also in the net income. We had some additional restructuring costs for the portfolio transformation. Interest improved on the back of lower bond that we repurchased and then smaller financial other items. Also here, a positive FX effect supported growth in the net income. And then last but not least, 3.9 million on taxes reported where we also adjusted for certain tax loss carry forwards that we intend not to use in the future. So at the end, 8.5 million positive net income for the group. When we take a deeper look at the financial items, then very positively, it's a net positive 200,000 as the interest rate. and other accounts receivable securitization fees were offset by positive currency effects and smaller other items. So here again, a very positive development and the lower interest will also serve us positively in the future. When we look at the free cash flow, then it is slightly negative for the quarter. And you can see that with the operating activities, we generated 7.5 million, but we continued to invest in networking capital, an additional increase, a slight increase in inventory, but also some additional accounts receivables on the higher sales. that led to a negative 8.9 million here. Investing activities stayed relatively low with 7 million, and the financing activities came in at 18.2 million, of which around 10 million is used for the share buyback, which by now is executed... By around 70% of shares that we wanted to repurchase, we have already repurchased. So that's all going according to plan. Currency translations also in the cash flow positive 7 million. So that overall we came in at minus 10.7. If we now exclude the share buyback, then we end up at the minus 1.5. For the fourth quarter, we definitely expect a positive cash flow development. And also for the full year, we are still targeting the positive overall cash flow. When we look at the walk from December 31st last year to September 30th, then we see a very positive development in our cash position from 58.3 million up to 135 million. Certainly, the divestment proceeds supported this. On one hand, 162.8 million that we received, as well as the positive contributions from the discontinued and continued business in the operating activities. We have used around 137 million here to fuel the financing activities by repurchasing our bond with 75 million, repayment of our revolving credit facility in the magnitude of 20 million. And as I said, by now we have repurchased around 55 million shares As of September, so 14 million euro went into the share buyback so far. And positive translation effects added some 16.8 million, bringing us to a very comfortable 135 million cash on the balance sheet. This is nevertheless slightly lower than in Q2 2022 or at end of Q2 2022. as we have also in the third quarter used 10 million for the share buyback in the financing activities. We did pay the bond interest. in the third quarter of 5 million and that took some money off the balance sheet, whereas from the operating activities, we earned enough cash to also finance our investing activities of 7 million in the quarter. when we look at our headroom and the liquidity development overall we are still in a very comfortable position of 210 million of headroom slightly lower than at the end of q2 also here i want to highlight the share buyback 10 million which basically constitutes the difference The other items, adjusted EBIT, is kind of financing the working capital and investment activities. And then the smaller items wash each other out against the currency effects. So very comfortable. And as we will continue with the share buyback program, that is a planned development. And we accept that for sure. Last but not least, looking at some key financial ratios, very positive development here as well. The gearing ratio stayed at two, including IFRS 16 effects, 1.1 excluding these, so same as in quarter two. The ROSI even increased on the higher EBIT and basically stable capital employed. So the increase in net working capital did not lead to an overall increase in capital employed as fixed assets and IFRS assets decreased. So once the network and capital elevated levels normalize, the capital employee should improve even further. Last but not least, on the lower left side, our equity ratio slightly improving from 35.8 to 35.9. So also here, very healthy and strong. So on this end, we can be very sure that we have enough equity to also fund our future. With this, I would like to hand it back to our CEO, Jörg Buchheim. Please, Jörg.

Thank you very much, Frank, for the good insights. Yeah, I would like to continue with our shift gear update. And when it comes to KA's well-known performance improvement program, we call it the shift gear one, our program to offset the negative market impacts from the supply chain, inflation, and volume effects majorly. I would like to emphasize again that every employee continuously support on TA's way for further increasing contributions, as you could see in the diagram. So coming from 52 million marked here with the blue arrow or marked with the week 31 for the full year outlook reported in the last earnings call, we are in the meantime at 59 million euro as of today. So out of this 59 million, 46 million has been year to date already implemented. And looking into the focus in the remaining Q4 of the year is now really on executing the remaining ideas and maximizing the positive impact. So a major driver is here as reported the fair price increase initiative at our customers in order to compensate the direct and indirect crisis. And how successful the teams have been is going to be displayed on the next slide. And here we see the compensation of material cost where more than 100% could be passed through either to our customers or got renegotiated as our supplier shows here our successful efforts of the teams and involved employees in this program. When it comes down to the indirect cost, that means like energy costs, inflation, and logistic costs, we couldn't completely so far close this price-cost scissor, but we are on a promising level of 59%. So overall, KA could achieve year-to-date a promising 84% on-charge through of all special costs so far. So as I said, we are working very engaged and very motivated here further throughout the Q4. to counter additional impacts, external impacts. And the next step here to emphasize is now to negotiate terms and conditions with our customers and suppliers to normalize these logistic uncertainties and volatile off-ordering behaviors, which then can allow us to stabilize the manufacturing and avoid this additional cost in future. So looking then on the subsequent events and outlook, and here I would like to touch our second initiative when it comes to our shift gear program or shift gear to the product portfolio transformation program. And here, when it comes to our third divestments in our product portfolio, modernization and transformation, we have reported in October the successful closure of the sales of our power plant in Canada to BRP. So the related enterprise value has been 136 Canadian dollars, which is equal to 104 million euro. And we came out with a net proceeds of $128 million Canadian dollars and a net gain of $46. And this is underlying here a successful sale. So looking then on the next slide here, we are looking forward in terms of market developments into our low-range plan. And this is the market forecast. And I would like to share this. IHS view when it comes to the market development and which looks in particular promising when it comes to growth perspective in the truck segment from 2022 to 2023 with an expected restart in China and looking there on the long-term base as well for the passenger vehicle. So this is encouraging, in particular, the question on when the truck market supposedly should relight in China. And this is displayed here. On the left lower side is 11% from 22 to 23. And you see here, this is majorly driven in our focus market in China. There's an 11% increase, whereas on the right side, in comparison, without China, the market is expected to grow in 2%. In their five years plan, we see that we have a continuously strong growth, back strong growth as expected. as a post-crisis effect with 18% on a five-year space in passenger vehicle and 28% in commercial vehicle when it comes on business without China and respectively 19% and 8% when it comes on a global perspective, including China. So a second item, and with this I would like to move to the next slide, is a very interesting and exciting topic, because I would like to share here as a prominent topic on how we are transferring from, let's say, our traditional industrial area towards the electrification. So on this, I would like to share with you the expected transformation speed from ICE to EV, and one time according IHX expert market view, and on the other side, on our view. So here we see that the passenger vehicle market in 2025 will be at an expected electrification level of 20% to 25% when it comes on the typical battery electrical vehicle cells, which then raise up to roughly 35% to 40% in 2028. And it's expected to be more than ICE from around this year and onwards. In commercial vehicle, we see this trend as of today delayed by roughly 10 years. And if you would look into off-highway, like agro and construction or mining or other profitable niche markets, this would be even later. So with the transformational change of KE from less PV to more commercial vehicle means on highway and from even more to agro and construction and towards profitable niche markets, this is expected still to be a prosperous market segment for KE for decades and even provides further significant growth for our specialty product segment. So how to grow? We will see on the next slide. And here you can see this is our expected further outpace speed when it comes to how KA is growing towards electrification versus the market. So in particular in SPP, in our specialty product segments, with 40 to 16% EBIT margin, which is our most profitable product segment, we expect to outpace the market with 10 to 12% compound annual growth rate. versus the market growth of just 3% in passenger vehicle and 7% in commercial vehicle during the same time. So we see a significant over-average growth when we look on our overall market, but not at all. KA expand and adapt their product portfolio exactly or slightly advanced towards this trend to greatly react here on time with upgraded product variants and completely new products and systems. As I have laid out a couple of times already, when it comes to our thermal management or battery thermal management system or high-performance couplings, as just mentioning two examples. And this is displayed very well on the right side of the slide, where we grow with lightning speeds, in particular, again, on the SPP area, displayed here by 78% to 141% when it comes to the perspective 22% to 2026%. versus the market EV vehicle CAGR of 36 to 40%. And this can be well viewed in the following slide. So in here we see our all average annual compound growth rate is 64% in average versus maximum 36% in commercial vehicle, according to IHS, and maximum 45% in passenger vehicle. So we are performing here our transition from conventional electrification, the typical ICE concept, to the electrification. which is 80 to 90% faster at the end of the day than the market, and therefore underlines our irresistible runway towards electrification. So with this good news, I would like to go to the next slide. And here I would like to share with you our guidance. And again, summing that up, We certainly have seen a drop or stabilization for many raw material price increases in the last quarter, which is positively, but it's still staying qualitative. And certainly the next focus is here, as mentioned before, is to counter and offset the accelerating electricity, labor, and rental cost increases. And this has certainly continuously effect on all players in the market and certainly as well on CA's profitability numbers. But looking into our specific situation, so despite challenging macro environments as laid out, we still have a very healthy order book and we're excited for how that works out in Q4. And we see an increased interest on our, let's say, most profitable products. As elaborated before, we see this good increase and over-average increase in our specialty products segment in particular. So the challenge which we see, and this is the remaining challenge for KA, we see this volatile ordering behavior still of our customers, which causing still a lot of indirect impacts on our production efficiency. And that's the major big thing which we are tackling here in Kongsberg within Q4. Good thing here to mention, around 40% of KA's direct cost is from countries where we don't have the similar inflation like in Europe. And that's a promising perspective when we're looking into 2023 as well. Nevertheless, we would like to slightly revise our guidance when it comes to adjusted EBIT. We certainly stick to our top line guidance from Q2. but with a slightly lower EBIT assumption, which is 3 million discounted. So our revenue stays at an expectation of 870 to 905 million euro, but our adjusted EBIT will be slightly dropping down here towards the window of 35 to 41 towards the year end, coming from the last guidance, 38 to 45. So a slight drop, but the decision has made in course of latest developments within an ongoing US customs audit, where we decided to accrue further cash for higher expected subsequent payments in course of an ongoing investigation here. And this is an US customs audit, which is looking into classifications and new regulations, which affecting retroactively from 2015, our customs payment. So this year leads to 3 million more careful guidance when it comes here to the lower level. So, certainly important to say here, this has certainly all based on my latest automotive industrial production forecast, the typical IHS industry forecast, certainly together with our internal modeling. So, looking on the next slide, and here I would like to underline again, and we saw that in the financial figures, KA's financial structure is very strong, and due to the product transformation program in particular, but as well due to our performance improvement program, we have been in the position to re-leverage, as mentioned before. And we see here as well that there is in Q4 an expected drop down as well when it comes to our gearing ratio from a 2.8 to 0.7. That certainly generates for our company very good flexibility in the market. When it comes then to shareholder value, so here as well we're continuing on our commitment. We are in the 10% share buyback program, which is running well. And certainly, I would like to underline that beyond that, looking continuously into opportunities to buy back shares when the stock is undervalued. And last but not least, on the right side, and that's exciting as well, this is liquidity. We further invest liquidity. uh into organic growth and innovation but we're looking as well certainly uh into investing into our environment an environmental footprint so our going green and esg ambitious roadmap and we're looking as well into unorganic opportunities in general when it comes to mna So with this, I would like to close the presentation, and I'm more than happy to start the Q&A session once.

Thank you, Jörg. We have received a couple of relevant and interesting questions here. The first one is, is there a plan to do something with P&C, for example, selling it? I'm not sure if you could hear me on that.

We're looking certainly in continuously, let's say divestment and acquisition opportunities certainly when it comes into further steps of product portfolio, cleanups or modernization. And as I said, we proving our product segments always in the second to none. and how we can improve it from the operational side, but as well in terms of what could be added or what could be divested. So this view is ongoing, and it's part of our Shift Gear 2 program.

Another question. Could you please elaborate on the development within commercial vehicles in KA and the markets you find attractive outside the passenger vehicles segment?

Yeah, as mentioned, thanks a lot for the question. The commercial vehicle market is substantial for us and a clear focus market when it comes to our on-highway strategy and our um second focus is certainly the off-high segment where we're moving more and more in two steps out of passenger vehicle into on highway into off highway and into niche markets so this path is continued and we are on our on on track fully on track in our transition phase We see in the commercial vehicles that China is going to recover. We saw that as well in the IHS data when it comes to 2023. And this is a clear growth market for us. But we see as well on the long-term perspective, as shown as well in the IHS long-range plan, that we see a significant growth as well in our major market segment as of today in Europe, with a 28% growth. So commercial vehicle is, for me, underlying business numbers, the clear decision of Kongsberg and the right decision to focus on this market. And looking on off-highway here, the agriculture and the construction market is coming back from 2023. That's what we're seeing in particular when it comes to, let's say, regaining the industry and the economics after the crisis. Niche markets, as mentioned, we're looking into that. Industrial is a strong further growth segment of Kongsberg. And we see here in particular huge potentials when it comes to fluid systems and coupling business. So exciting outlook. And yeah, let's work on it.

Thanks. It seems like that's it. If some of you have other questions, please don't hesitate to contact me and we will get back to you shortly. To all of you, many thanks for joining us for the call. We hope to see you all for the Q4 figures next year.