Kongsberg Automotive New

Good morning, everyone, and welcome to Kongsberg Automotive's first quarter 2024 earnings call presentation. Today's presenters are our president and CEO, Linda Nyquist-Evendrud, and CFO, Frank Hefter. Linda, the word is yours.

Thank you, Matt. Once again, welcome to this Q1 earnings call. So together with Frank, I will take you through our Q1 results. So let's move to the executive summary. As per our Q1 report, as well as our Q1 announcement, we have put all our focus on regaining profitability and generating positive free cash flow. And Q1 therefore marks a significant step in the right direction for us. The results show year-over-year an increased operating profitability on a slightly lower revenue. EBIT ended at €10.1 million, an increase by €6.5 million versus Q1 last year. We have high ambitions to lower our cost base and are fully on track to deliver on our promises. And in line with our cost optimization program, We continue to evaluate our current footprint and are also relocating to countries and areas with lower costs. In terms of new business wins, in the quarter we managed to sign another record high amount of €450 million lifetime revenues, which is an increase from €198 million in the same quarter last year. We are glad to see increased interest in our wide range of products from our top tier one customers and we are especially pleased with the development and interest in our electric actuators. Q1 revenue ended at 212.1 million euros, an improvement versus Q4 last year and a slight reduction versus Q1 2023, primarily related to the commercial vehicle market and the European region. This was related to exceptionally high revenues in clutch actuation systems, vehicle dynamic products and couplings in Q1 last year. A result of program ramp-up and post-COVID effects still impacting our customer base, such as supply chain issues and maintained high backlog levels at their side. This situation has improved since Q1 last year, and Q1 this year is reflecting a more normalized situation within both the commercial vehicle segment as well as the European market. In the Americas, as well as in Asia, including China, we outperformed the market in Q1 this year. In the first quarter, we are showing a significant improvement in free cash flow compared to Q1 last year. I'm confident that the measures we have taken will lead to a positive free cash flow for the full year 2024. Leverage ratio is set to 1.8, up from 1.3 in Q1 2023. In terms of our net interest bearing debt, it amounted to 114.9 million euro, a deterioration compared to Q1 last year, driven by the decrease of the cash balance during 2023. Moving into the next slide, you can see the numbers reflected on the previous slide linked to core and non-core business, as well as the development over the past quarters. As already highlighted, our core business revenues in Q1 last year represented exceptionally high revenues in Europe, driven by program ramp-ups, as well as post-COVID and supply chain effects, while Q1 this year is representing a normalized level. All in all, comparing year over year, we increased our operating profitability on a lower revenue. The non-core business declined in terms of year over year revenues, a result of the program slowdown addressed in our Q4 earnings call. EBIT for our non-core business amounted to 5 million euros, an improvement year over year of 5.9 million euros, benefiting from one-time effects as well as the impaired assets and onerous contracts provisions of 2023. So let's take a look into the business areas, starting with drive control systems on the next page. We can see a revenue reduction from 102.7 million euros to 92.5 million euros year over year, including the negative currency translation effects of 1.1 million euro. Once again, Q1 last year represented exceptionally high revenues related to commercial vehicle market and the European region. The impact of declining volumes was offset by operational improvements in variable costs and other operational costs, as well as settlement with a supplier on a warranty claim. Comparing with Q1 last year, the change in impact from inventory revaluation was negative with 2.3 million euros. New business wins amounted to 282.8 million euros of lifetime revenues for DCS in Q1. Moving into the business area flow control systems, Q1 ended up with revenues of 82.7 million euros, 1.5 million euro lower year over year, including negative currency translation effects of 100,000 euros. As mentioned a couple of times already, The strong sales related to commercial vehicle market and the European region in Q1 2023 also had a positive impact on the FCS business last year. EBIT came in on €4.5 million, a reduction year-over-year driven by one-time valuation effects in relation to inventory in Q1 last year, being positive with €1 million, whereas Q1 this year they were negative with €2 million. New Business Wins amounted to 144.7 million euros of lifetime revenues for FCS in Q1. And the main driver for this result was a large contract with a European OEM with a contract value of 105.7 million euros to supply metal and plastic fluid transfer assemblies used in heavy duty truck engines. So moving on to our New Business Wins chapter. And starting with the book-to-bill, as per our guidance in the Q4 earnings call, we are expecting to exceed our 2023 book-to-bill ratio of 1.1 and lifetime revenues of 989 million euros in 2024. With all-time high bookings now in Q1, we already see the results of this with a book-to-bill increase to 1.2 for the quarter. We have announced several significant contracts now in 2024, confirming that we are progressing well. Let's move into the next slide to see how the wins are divided per segment and per area. On the left-hand side, you can see the lifetime revenues already mentioned per business area amounting to an all-time high total lifetime revenue of 450 million euros. As you can see on the illustration on the right-hand side, more than 70% of the booked business is linked to commercial vehicles, followed by the passenger car, driven by their new business one in FCS. Within the industrial segment, the awards include a new product such as Ultipure and Ultiflex, and the awards are shared regionally between North America and EMEA. Our agriculture and construction and new growth markets won over 17 million euros in sales. And the company continues to focus on new opportunities in this important segment. So we had a great start to 2024 with significant wins across all segments, with the most dominant market area being the truck, trailer, bus and coach markets. which, as we have stated previously, is of major strategic importance and is a clear priority for us. It is also pleasing to note that we have won significant new business wins with our actuation technology, vehicle dynamics portfolio and our host and tube assemblies for low emission engines. So before we move into the market update, I would like to put some light on the announcement we made on April 26th. And let's move then to the next slide. A major contract extension worth 523 million euros in estimated lifetime revenues for our gear control unit or GCU with integrated clutch actuator. The GCU is a valve based device designed for manual transmission trucks, allowing them to be driven as automatic transmission trucks if desired. This innovative technology enhances operator convenience by eliminating the need to switch gears while preserving the fuel efficiency typical of manual transmissions. We have been producing the GCU product for over seven years and the contract renewal is awarded by a major global manufacturer of transmissions for heavy duty trucks. This five year contract is a continuation of our existing business that will extend until 2028. Our plants in Nuevo Laredo, Mexico and Wuxi, China will produce and deliver the products. And this contract extension underscores our position as a preferred long-term partner for critical technical products that prioritize innovation, technology and customer support. The GCU with integrated clutch actuation is a world-class product that allows for easy service with rapid and precise clutch actuation. Securing such a significant contract extension is the ideal building block for the ambitions that we have within the actuation area. And it confirms our competitive position in both North America as well as in Asia. So let's move into the chapter market update, where we then start with a well-known page describing how the global production for both commercial vehicles and passenger cars is developing. As you can see, the global commercial vehicle market is showing a growth development year over year, driven by higher production volumes in all regions except for North America, resulting then in a 5.2% growth year over year, as well as comparing 2024 with full year 2023. The global passenger production indicates a decline of 0.7% year over year, triggered by Asia Pacific, excluding China, Europe, as well as South America. Comparing the full year, we see a reduction of 0.4%, comparing then 2024 production with full year 2023. And for completeness, we are also including a market forecast on the next page. And from the more long-range perspective, we see moderate to strong market growth in the commercial vehicle segment, The LMC March 2024 report indicates a growth rate of 14%, including China, for the timeframe 2024 to 2028. Worthwhile to notice is that there is no significant impact of the Chinese market, something that has been a trend over the last quarters. In terms of the global passenger car market, we see a low to modest growth, market growth. IHS March 2024 report indicate a global production growth of 6%, including China, for the timeframe 2024 to 2028, and 4% growth if we exclude China for the same timeframe. If we look into the Q1 performance on the next page, where we have the different areas and regions, We can see that we have outperformed the growth in the commercial vehicle market in China, something that is also valid for the Americas. The significant growth in China is mainly due to the new customer programs related to gear shift systems. While the production output in Europe was relatively low in Q1 2023, KA and we had sales in the same period on an exceptional high level. and that is resulting in the opposite trend line when comparing Q1 2024 with Q1 2023. Our sales to passenger vehicle market declined in Q1, driven by a reduction in Europe and our non-core business. However, revenues in Americas outperformed the market, and this was driven by increased revenues in North America related to our FCS business. Moving on to the next page, the development of the global market situation within the automotive industry. As we have reflected in the subtitle, we see a general gradual improvement in the supply markets. Labour cost is related to increases in best-cost countries, such as Mexico, coming then from a low base. Energy prices are flattering and have been stable over the last couple of quarters. And raw materials such as steel, copper and aluminum have shown an increased price trend, driven then by the geopolitical risks. In terms of our customer demands, it is worthwhile to reiterate that we have limited ability to influence the short-term demand, and we are highly dependent on our larger customer programs. And with that, we conclude the executive summary. And I'll leave the word over to you, Frank, to take everyone through the financial updates.

Yes, thank you very much, Linda. And a warm welcome as well from my side to this earnings call. Let me shed some more light on the financial, starting with the top line, the revenues. which came in at 212 million decline over previous year of 17 million, which was driven by, on one hand, the expected decline in driveline or the other operations, 5 million or 12% decline. We are expecting that this is going to continue going forward. There was a small currency effect of 1.6 million as well. And in the core, specifically in the on-highway segment, we were facing tough comparables, i.e. the 2023 Q1 revenues were very high and thus solid performance in Q1 2024 still led to a reported decline of revenues. the number is still fully in line with our overall guidance on a prorated basis. When we look at the bottom line, then I'm happy to report that despite the lower revenue, we were able to significantly increase our EBIT to 10.1 million or 4.8%. This was combined by 5 million contribution from the core business, as well as 5 million from the other operations business or the shifting business from driveline. Also here, we are prorated well in our full year guidance. When we look at the decomposition of revenues and EBIT by business area, then you see that the drive control systems business area showed the highest decline in revenues based on the strong 2003 Q1. But still the profitability increased by 3.1 million on lower cost, specifically variable cost and material that will also support the quarters to come. In the flow control systems business area, we saw less of a decline as especially the fluid transfer system business performed very well. On the bottom line, we saw a significant swing in the inventory revaluation from 2023 positive to 2024 negative, which basically explains all of the 3 million deterioration. Very positively, development in driveline or other operations, despite the already mentioned topline decline. The profitability improved on the back of the impairment, obviously, that we have taken in 2023, which results in no further depreciation burden in 2024. as well as the honoris contract provisions that we have built in 2023 and now are benefiting 2024. And last but not least, the efforts to reduce the overall cost in this business area as certain engineering and sales and support function are not required anymore, as we continue to wind down the business. So in all in all a 4.5 million increase in driveline compared to previous year. Last but not least, on the FX and others, specifically others. So corporate costs, we also saw an improvement compared to previous year of more than 1 million. When we look at the net income, then obviously the improved EBIT is one of the two main drivers leading to a significantly improved net income with 6.5 million. The other driver is the currency losses, which in 2024 Q1 were significantly lower than in Q1 2023 and amounted to 2.5 million overall. So this led us to a reported net income of minus 0.4 or basically break even. Talking about the FX losses on the next page, we see the accumulated effect of this net currency effects now amounting to minus 13.4 million with the additional 2.5 million of this quarter. On the other financial items, we see a zero as we have had a little less interest on our excess cash from money market funds in Q1 2024 compared to the previous quarters and normal, let's say, other financial expenses. Net interest further improved to minus 2.9 million on the back of repurchased bonds that are now not applicable for interest anymore. Looking at the free cash flow development, we reported minus 14.9 million for the quarter. When you look at the previous years, you see that Q1 tends to be a negative quarter. So, expectedly, we also showed a negative Q1 2024. When you look at the seasonality of the business, then you see relatively low revenue in the fourth quarter of the year. which then leads to lower inflows from the customers in Q1, while at the same time, we are ordering material for the revenues in Q1 2024 already in 2023, which then need to be paid in the first quarter. This, on top of the interest that we pay in the first quarter, 5 million, then naturally kind of leads to a slow start of the year. We're still confident that for the full year, we will be able to report a positive cash flow. When we move on to the liquidity development, then you see that we started with a headroom of almost 220 million. The additional EBITDA widened or increased this headroom. while the change in net working capital predominantly driven by accounts receivable increase on the higher revenues lowered it again, as well as the investments and the interest paid and the other items you can see in the bridge. All in all, at the end of the quarter, we are still reporting a solid more than 200 million headroom consisting of a cash position of 147.7 million, the revolving credit facility, which is undrawn, of 30 million, and the also unutilized securitization facility in the amount of 25 million. Moving on to key financial ratios, we are at a leverage ratio of 1.8, basically unchanged compared to Q4 2023, slightly higher than Q1 2023. on the back of the reduced adjusted EBITDA of the last 12 months, now including the impairments that we have taken in Q2 and Q3 on the driveline business. The row C, here to mention that we have adjusted the calculation of the row C based on a slightly different capital employed calculation, which now excludes the excess liquidity. So capital employed, when you compare it to the previous presentations, we were at 450, 470 million. If you now exclude the excess cash, we are at 331 million in Q1 2024. And this together with the negative last 12 months adjusted EBITDA leads to EBIT leads to a ROSI of minus 3.9%. The equity ratio still stands at a solid 30.9%, so above 30%. Slight increase from Q4 2023 on the back of positive comprehensive income. With that, I conclude. I move to the liquidity policy. um we have given us a liquidity policy in order to increase the governance and also provide security to the outside world of what are we going to apply in terms of guard rails going forward so it is structured in three basic chapters. First, it's the financing strategy, where we define certain ratios and limits that we are applying to. Certainly, we want to always provide sufficient liquidity to the business in order to operate. and also to pursue opportunities that are on the horizon. Nevertheless, we have to limit our financial risks and secure our financial independence. And therefore, we are targeting to maintain a net interest bearing debt to EBITDA ratio of below two. At the same time, a minimum equity a ratio of 25%. I just mentioned the 30% we are having. So this 25 is really the absolute minimum that we would allow. And at the same time, we want to continue also going forward to leverage a diverse set of financing instruments. And I will talk about the refinancing in a second. The second chapter is on capital allocation. So obviously, our first priority is to support the growth of the business in both ways. On one hand, to fuel the organic growth through capex investments and R&D, engineering, And on the other hand, the second priority to also be able to look for inorganic opportunities, be it equity investments, joint ventures or acquisitions. In case of excess cash, we are then applying the third chapter, which is the return policy. where we obviously want to allow the shareholders of the company to participate on our success in generating cash through either payout of dividend up to 50% of our consolidated net income or through additional share buybacks. Moving on to the refinancing, then, Let's start on the lower right corner. When I just mentioned share buybacks, do not expect additional share buybacks in the short term because we have clearly stated that 2024 is a year of consolidation. And after the 2.5% share repurchase that we have concluded in March, we are not foreseeing any additional share buybacks this year. We are... On the opposite, concentrating ourselves on our refinancing, where I'm happy and pleased to announce that we are very well on track to conclude this refinancing exercise. We are in the preparation of going to the market and install a Nordic bond. If you remember in the last earnings call, I still talked about a dual track, looking at a syndicated banking loan and a Nordic bond. We have by now concluded that the Nordic bond is going to be the more attractive option for us and are thus only concentrating on the Nordic bond now. The revolving credit facility renewal is ongoing in parallel, and we have already first commitments also to participate from banks. So that's also well on track. And like we said, from a timing perspective, we will continue Watch the market. And the first window of opportunity is still before the summer break. And likely we are going to tap into this window already. With this set, I'll hand it over back to Linda.

Okay. Thank you, Frank. So moving on to our last chapter and slide in today's presentation focusing on our guidance for 2024. So we reiterate the guidance communicated in our Q4 2023 earnings call to deliver revenues in the range of 830 to 880 million euros and EBIT of 34 to 44 million euros. Following the great achievements on New Business Wins in the first months of 2024 and the increased interest in our wide range of products from our top tier one customers, we upgrade our full year expectations for New Business Wins guidance to above 1.2 billion euros of lifetime revenues and a book to bill ratio above 1.2. 2024 is defined as a turnaround year. We have many important and exciting activities on the agenda. The first one coming up is the Capital Markets Day in Oslo on Monday, May 13th, and we invite all stakeholders to attend the physical and or digital event. In line with our cost optimization program, we continue to evaluate our current footprints and are also relocating to countries and areas with lower costs. We have high ambitions to continue to lower our cost base and are fully on track to deliver on our promises. We have introduced HOSH in Canry or policy deployments, which focuses on strategic planning that aims to set the high level objectives, which is then cascaded down to every function in the organization. And this process aims to get every employee pulling in the same direction at the same time. Refinancing is also on our agenda as per the update given by Frank. And we have mandated and legal and financial advisors and started preparing for the refinancing of the company's senior secured bond and revolving credit facility. And as Frank mentioned, we are well on track with the process and expect to conclude the refinancing in 2024. well ahead of the maturity date of the current instruments. And as a short summary, I would like to emphasize that our significantly improved performance makes me confident that we are heading in the right direction. I expect that all operational measures we are taking will continue to improve the profitability of KA considerably in 2024 and also onwards. And with that, we conclude our presentation and we move over to the Q&A session. So Mats, please take it from here. So Mats, could you please then refer to if there is any questions?

Yes, thank you very much, Linda. The first question is regarding our contracts. Does Kongsberg have any other contracts of a similar size to the recent GCU renewable? If so, how big and when are they up for renewal or extension?

Okay, I guess I can take that one. In general, we don't comment on single contracts except for the ones being announced to the market through press releases. When that's being said, as we also have pointed out today, following the great achievements on the new business wind side in the first month of this year, We have now upgraded our full year expectations for new business wins and the guidance. I would say that also then gives a good indication of the pace that we have in the progression.

Thank you, Linda. A question for you, Frank. Can you comment on the expected level of investments going forward? Which areas will be prioritized?

Certainly. When it comes to prioritization, then it's very clear the priority is our core business. So, drive control and flow control systems. And here, the amount of investment will very much depend on the growth of the business as the majority of investments is related to new programs. where we have to increase the capacity. So, given the high amount of new business wins, I'm expecting the investments to slightly exceed the depreciation level and be in the range of 35 million for the year.

Thank you, Frank.

I don't think we have any more questions from the audience. If not, we will then conclude today's presentation. Thank you all for your participation. We look forward to seeing you at our Capital Markets Day on Monday, the 13th of May.

Thank you all and have a good day.

I think, sorry, there's one more question coming in here that we should address as well, in terms of minimum cash requirement to run the business. With our treasurer, I've discussed this topic and we do see that we need around 25 to 30 million of cash. in order to operate the business, given that we do have payment runs that are not always in sync with the payment inflows. And therefore, this is the amount of cash that we need. Obviously, with 147 million cash, we definitely have currently a lot of excess cash available. So handing it back to Obatz. Thank you very much, Frank.

Yes, we will then just reiterate what we already said. We really hope to see all of you at our Capital Markets Day the upcoming Monday. And by that, thank you all for today's participation.

Thank you.