Kongsberg Automotive New

Good morning, everyone. Thank you for joining us today and welcome to Kongsberg Automotive Q3 2024 earnings call. My name is Therese Skudal, communication director, and I will be the moderator for today's session. Before we begin, I would like to remind you that questions can be raised in the webcast tool. We will prioritize questions posted in English and encourage everyone to limit the number of questions to two per participant. Joining us today as presenters are President and CEO Linda Nyqvist Evenru, and CFO Christian Johansson. On the right hand side of the slide, you will see the topics that they will present today. Now I will give the word over to our President and CEO Linda Nyqvist Evenru.

Thank you, Theresa, and good morning, and once again, welcome to this Q3 earnings call. Christian and I will take you through our results for the quarter. So let's move to the next slide and the executive summary. 2024 is a turnaround year for Kongsberg Automotive. We are pleased to see that the results of our strategic initiatives to improve long-term profitability announced a year ago are materializing. Cost reductions and operational efficiencies help us to offset impact of reduced customer volumes. We have initiated new cost savings to further lower breakeven turnover and position Kongsberg Automotive for increased long-term profitability. The revenues came in at €181.6 million in Q3, a decrease of 16.9% compared to Q3 last year, reflecting the present lower demand in the automotive markets and changes to customer orders. We deliver an EBIT of €1.1 million for the quarter, including a non-recurring provision for higher than expected warranty costs. Year-to-date EBIT is at €17.6 million, equalling an EBIT margin of 2.9%, up from 0.1% in the same period last year. The margin improvement is achieved despite lower revenue levels through a significantly reduced cost base. Two key drivers for K's profitability and cash generation are cost efficient operations and growth within higher margin products. We are on track for overhead cost reductions of 17 million euro in 2024. And last week we announced additional savings of at least 10 million euros with full effect from Q3 next year in response to lower demand while also updating our 2024 guidance. These steps will help us to stay efficient, sustainable and competitive in a market with strong underlying long-term growth. Let me also add that cash flow from operations is positive both in Q3 and year-to-date, reflecting our attention to cash generation, including reduction of working capital. Free cash flow was negative 5.2 million euro in Q3 after investments and financing. We are also continuing the review of the operational structure with a goal to enhance our operational efficiency and ensure the delivery on our financial ambitions of about 1 billion euro in revenues and an EBIT margin at or above 8.5% in 2028. New business wins are at record 1.23 billion euros year to date, proving that our products are well aligned with the needs of top tier one customers. Our rolling four quarters of new business wins represent 1.644 billion euros or 2.0 in book to bill. As you can see on this slide, the softening global automotive markets are affecting the industry and CA's revenues year to date. Europe, our largest geographical market, accounting for 47% of total revenues, has experienced lower volumes coming off exceptionally high levels in 2023. Looking behind the aggregate numbers, we are seeing a 13.7% reduction in revenues within commercial vehicles in Europe, while sales to passenger vehicles are down almost 20% year to date. Looking at year to date figures in our second largest geographical market, North America, Revenues from commercial vehicles are down 7.6%, while passenger vehicles are 4.5% lower. The development is even more pronounced in Q3, driven by customer inventory adjustments. Revenues from other geographies have increased so far in 2024, led by a 5.9% growth in commercial vehicles in China, which now accounts for 9% of our revenues. Just let me add that in Q3 isolated, 11% of our revenues came from China as we ramp up new programs. One year ago, we announced measures to optimize costs, right-size the company and enhance our competitiveness. Around 110 positions have been reduced and 40 positions moved to best cost locations. And we have closed our offices in Dortmund and Tokyo. In total, we are achieving the targeted overhead reductions of 17 million euros this year. In addition, other measures have contributed net positively by approximately 6.6 million euro, bringing the total cost base reduction to 22 million euro year to date. On top of this, we can see that measures regarding direct material cost optimization, resourcing and operational excellence are materializing. Last week, we announced new initiatives to adjust costs, maintain efficiency and enhance competitiveness in response to lower near-term customer demand. These measures are expected to have full effect from Q3 2025 at the latest, improving our earnings with another 10 million euro. We are also continuing the review of the operational structure to ensure closeness to customers as well as optimizing production, technology, and product portfolio based on competitive advantages and profitability requirements. Our global footprint is made up of 32 locations, split on 22 production plants, eight site offices, six technical centers, and two warehouses. The structure reflects our need to be close to our customers in all the industries we deliver to, A global reach where we are not dependent on one single plant. We will continue to rebalance globally and regionally, meaning we become less European heavy and generate more of our revenues from North America and Asia. Examples of this is production of flow control systems in Asia and our upgraded state-of-the-art manufacturing facility in Mexico, delivering reference couplings and powertrain and battery electric vehicle applications for commercial vehicles to the North American markets. Cost-efficient operations enable delivery on Kongsberg Automotive's long-term financial ambitions, while proactively addressing the impact of more uncertain market conditions near-term. The assessment is ongoing and potential measures will be decided in 2025. Based on recent customer dialogues and industry developments, we have adjusted the 2024 full-year revenue guidance last week to the range of 760 to 790 million euros. The updated EBIT guidance of 18 to 23 million euros includes 4 to 6 million euro related to lower revenue, 2 million euro in non-recurring costs related to the new overhead reductions, and 4 million euro related to higher than expected warranty costs on a drive control systems product manufactured between 2019 to 2022. We maintain the guidance for new business wins of more than 1.5 billion euro as communicated during the Q2 earnings call. The record year-to-date new business wins of 1.23 billion euro confirms our attractive product offering. This is a leading indicator for delivering on our 2028 ambitions. For the first time, we showed new business wins split between incremental or new business and extensions of existing customer programs. Additions to our renewals of existing programs represent 59% of lifetime sales last 12 months, reflecting deepening relationships with existing customers. The remaining 677 million euros is attributable to new customers or programs. Our book-to-bill ratio stands at 2.0, up from 0.9 one year ago. Our progress in 2024, supported by several significant contracts, shows steady progress in building a solid foundation for Kongsberg Automotive's future growth with new customer programs on track for production. If we look at the new business wins in Q3, they are mainly in the commercial vehicle, industrial and off-highway segments. in line with strategy of focusing on markets with higher margins over time. In Q3, we secured an extension of contract from a long-time customer worth over €13.5 million in estimated lifetime revenue for our air couplings and the RAFOS ABC systems. The three-year contract, which starts in January next year, is awarded by a global brake manufacturer based in Europe. The product is to be distributed to regional equipment manufacturers of trucks, buses and trailers. Having strong partners within the brake system supply area remains a critical component to the continued market leadership position that our air couplings and the Rofos ABC systems enjoy. At the Capital Markets Day in May this year, we presented our financial ambitions of above €1 billion in revenues and an EBIT margin at or above 8.5% in 2028. By then, driveline, which is no longer considered core business, will be insignificant in terms of revenue. Also, let me emphasize that our ambitions are not affected by the near-term lower market demand the industry currently is experiencing. We have a sizable and secured order book, including 85% of our anticipated revenues in 2026, already booked or awarded, and 70% of the 2028 anticipated revenues. Earlier today, I highlighted cost-efficient operations and growth within higher margin products as two key drivers for KS profitability and cash generation. We are therefore pleased to see that the portfolio transformation that began in 2021 now is finalized. Products affected by the initial portfolio optimization make up more than half of the revenues of the entire 2021 portfolio. This year, we have conducted a strategic product review of all remaining products, resulting in that we, within both flow control systems and drive control systems, have a clear plan to grow revenues towards 2028 and beyond. Our focus is on organic growth and improved profitability. As shown on the previous slides, we have successfully won several long-term contracts with well-reputed automotive brand names, primarily within commercial vehicles. By 2028, we expect more than 80% of our revenues will be linked to commercial vehicles of highway and industrial applications, where margins are higher than for passenger vehicles. Looking at our flexible product offering, bundling more than 65 years of experience from world-class mechanics with advanced engineering and technology in close collaboration with our customers and end users. Here you see three products which are going to help drive Kongsberg Automotive's profitability towards 2028. Our air couplings have a lightweight design that improves fuel efficiency, aligning with market demands for greener and more economical vehicle solutions. Our gear control units offer precise, smooth shifting, which enhances driver experience and safety. And our electric actuators are designed for lower power consumption and emissions. Overall, we expect these three products alone to account for more than 40% of our revenues in 2028. As mentioned on the previous slide, our products are well positioned with market trends and regulations. A diversified portfolio of different products suited for both automotive industry and industrial applications. We focus on cost-effective solutions engineered for sustainability and safety, and we deliver mobility solutions for the future. Combined with closeness to markets, long-term customer relationships, trusted business partnerships, and the dedication of our hard-working organization, I'm confident that Kongsberg Automotive will continue to outpace the market growth in the coming years. And with that, we conclude the executive summary, and I leave the word over to you, Christian, to take the team through the market and financial updates.

Thank you, Linda. Good morning and good afternoon, everyone. The market data for vehicle production show that both the commercial vehicle and the passenger car market presently are weak. The graphs on the right-hand side show that the global commercial vehicle production in quarter three was down 6.8%, while excluding China, it was down 7.6%. The reason we comment including and excluding China is that China alone stands for close to 25% of the global commercial vehicle production. Global passenger car market was down 5.4% in the quarter, while the market outside China was down 6.1%. And correspondingly, the global car production, more than one-third of the cars are produced in China. The global map to the left shows the third quarter by region. And when it comes to commercial vehicles, all regions except South America had declining sales in Q3 versus Q3 last year. And already in the second quarter earnings call, we talked about the weak second half of this year, which also was the base for the revenue guidance adjustment at that time. The forecast for the full year 2024, which you have on the right hand columns, on the regions as well, for global commercial vehicle production is now minus 3%. At the time of the second quarter earnings call, the forecast was minus 1.5% for the full year. So the forecast for quarter three and quarter four has been lowered. Excluding China, the forecast is minus 5.6 and it was minus 5.3 in Q2. Comparing our sales in the third quarter with the global market, we see that our sales have declined more than the global market, which is due to the regional mix of our sales, as Linda showed, where we in quarter three had 81% of our sales in Europe and North America, when the market is weaker and the vehicle production has been reduced more. We have close relations to our customers and we are regularly discussing their production situation. However, being a supplier, we cannot do much about the customer decision on volumes, except being agile in adjusting our own production. Our commercial vehicle sales in Europe was somewhat better than the market in the quarter, while in North America our sales declined more than the market. We should note that in the second quarter we performed better than the market in North America, so our customer situation and production decisions can deviate from the general market. It's good as well to be aware that the amplitude of the fluctuations on volumes also differ in the value chain. From customer to dealer to the OEMs to tier one suppliers and to us being a component supplier. And typically fluctuations are higher the further away from the end customer you are. And we are very early in the value chain. In North America, we have a tier one business where production volumes have been adjusted significantly in quarter three and quarter four due to the uncertainty ahead of the presidential election in the US, which we also discussed back in the second quarter earnings call. Our core business in China and Asia outside China, where India is the largest market and we are also active in Korea, is presently small. However, we are growing and we outperform the market in the quarter, as you can see on the slide for those regions. We have good market acceptance in China for our mechatronic products, and we are winning business with local Chinese OEMs. When it comes to our sales to the passenger car market, it reflects our decision to wind down our driveline business, which to almost 100% is a passenger car business. And if you take the passenger car sales in our core business, that was approximately 80% of the sales in third quarter that performed in line with the market. Looking at the forecast beyond 2024, LMC, the Forecast Institute, the forecast for commercial vehicle production is flat or slightly negative development in 2025 versus 2024 in Europe and North America. The global market will grow by approximately 4%, which fully relates to the Chinese market, where volumes will grow by 148,000 units, as you can see in the slide. For the period 2026 to 2028, there is a robust broad bias growth in the commercial vehicle production forecasted. And it's also good to know that commercial vehicle has an underlying growth trend since many years back. And there is no reason to believe that this will change going forward. Truck transports are gaining market share versus other transport means. And the weaker market we presently see in 24 and eventually also in 25 then, according to forecasts, mean that the truck fleets are getting older and the replacement need is building up. And certainly truck companies cannot afford vehicles to stand still, so they will invest in new vehicles when service costs are increasing. One more note related to North America. If you look at that graph on the slide, there is a new emission regulation step coming in in 2027. Truck owners in the US normally want to avoid the price increase that follow new technology, which means they will buy before the new legislation comes into force. You see that in the graph with some strong growth in 2026 and very weak volumes in 2027. Still early to see effects from this in our order books, but it will probably start to happen in end of next year and early 2026. Moving into financials and starting with revenues, this is a new slide we intend to use going forward. You see nine quarters of revenues splitted in core and non-core in the bars. You also see three lines showing trends, the 12 months revenues. The top trend is Holsberg Automotive total. The mid-trend is the total revenues excluding revenues in companies that have been divested. The last divestment was done in Q4 2022, where the power sport business was sold to Bombardier. This is therefore taken out. The lower blue trend is revenues in present core business, so excluding revenues in divested units and excluding the non-core, so the driveline revenues. And the 12-month trend in core business has grown from €609 million in Q3 2022 up to €780 million in Q4 2023. This year's market decline has taken this down to 673 million euro after Q3, but this still leaves a growth of more than 10% in the two years since Q3 2022. So we are growing the core business. However, the weak market this year has impacted negatively on this growth trend. Same basic slide layout for EBIT. EBIT for core and non-core in the bars and 12 months rolling in the line at the top, excluding results from the VIP business and excluding the gain from the sale of the power sport business in Q4 2022. And as you know, EBIT, not adjusted EBIT, is our main measure for operating results, which means the large one-time effects in Q2 and Q4 last year impact the trend. So 12 months rolling per Q3, 24 is negative 2.9 million euro. We have made positive EBIT results in each quarter this year, but the weak result in Q4 last year with various negative one-time effects impact the trend. We also had some positive onetime effects supporting a good EBIT result in Q3 last year, which I will come back to in a couple of slides. We will see a better picture of the Q4 this year based on our guidance. I will now go through the Q3 results and start with the flow control system business area. FCS revenues held up quite well in the weak market, down 3 million euro corresponding to 3.6% decline adjusted for currency. The fluid transfer system business had flat revenues, while the couplings business decreased from high levels in Q3 2023, which was due to inventory buildup after COVID and other supply chain disturbances in previous periods, as we also have talked about in earlier earnings calls. EBIT improved from €5.1 million in Q3 last year to €5.6 million this quarter. We do have negative effects, obviously, from a loss contribution from the lower sales volumes. And we also have a negative product mix with less couplings business. But good work done in FCS to compensate this by operational improvements, including reduced capacity costs and lower overheads. In our dry control system business area, we had significantly lower revenues, down by 19.4% to just the currency. We had high volumes last year for the same reason as for FCS. And we had also ramp up of a new customer program in the autumn last year. In addition to this, we have seen significantly lower volumes to tier one suppliers that have reduced their production due to the market uncertainty, as I already mentioned. The off-road market, which is construction equipment and agriculture machines, has also been weak and contributed to the lower revenues. The loss contribution due to lower sales has also in DCS to a large degree been offset by lowering manufacturing costs and lower overhead costs. In Q3 last year, we had a positive one-time effect of €5.7 million related to prior periods, and that included, for example, retroactive price increases. And then this year, we have, as Linda has mentioned, higher warranty expenses. in total by 6.2 million euro versus last year where a four million euro is a one-time adjustment then related to recent information showing that we have a higher force frequency than we earlier had expected on a dcs product adjusted for the positive one-offs last year and the four million negative one-timers on warranty this year ebit declined 2.3 million euro versus last year on a sales decline of about 20 million This slide shows the EBIT bridge for the quarter and the year to date. In the quarter, we had net off items last year of plus 2.4, bringing the baseline to 7.3 million euro. We have an EBIT effect of negative 7.7 million euro related to loss contribution from lower sales, as well as the effect of price and mix on sales side, which is net positive in the quarter. Costs have been lowered by 8.1 million, excluding warranty, and then we have the negative warranty expense of 6.2, talked about before. Currency effect of negative 0.4 million euro, giving an EBIT for the quarter of 1.1 million. Same for the year to date. We have a base after the one-offs items of 10 million euro. We have volume price and mix of negative 10 million euro, which means that we see the sales decline that has accelerated after Q2 and that we also foresaw and talked about in the Q2 earnings call that that will happen. And this is also what we see. We have adjusted our cost base significantly this year and that corresponds to positive 22 million euro. which is the effects of the cost reduction programme announced in Q423, mentioned earlier by Linda, that will give 17 million euro savings on a full year basis, where we have one quarter left of the year. In addition, we have reduced capacity costs by efficiency improvements and adjustments down to the lower volumes. Warranty expenses year to date, 3.7 million euro higher than last year, which corresponds then to the 4 million. um higher than expected cost and easiest as commented negative currency of 0.6 million in total and ebit for the nine months of 17.6 million euro so a good improvements from 0.8 million euro last year here follows the net income bridge for the quarter and year to date so in addition to the ebit development that we covered in the previous bridges We have some smaller negative year-over-year effects in the quarter in the financial net of 0.7 million euro and 0.6 million euro related to net interest expenses, respectively to other financial items. In the Q3, we have our larger year-over-year currency effect of negative 9.1 million euro. And this consists of unrealized currency losses in quarter three, 2024. while we had currency gains in Q3 2023. So the currency effect are, in this case to a large extent, unrealized effects when we, at the end of the quarter, we have to value our bond notes. It's a Euro-based bond. However, it is Kongsberg Automotive in Norway that has the debt in its balance sheet, and then it's valued in Norwegian crowns. And the NOC versus the euro has this year weakened during the quarter by 3.3%, while in the quarter three last year, it depreciated versus the euro by 3.8%. Tax expenses have decreased in quarter three versus last year, despite higher withholding taxes due to lower deferred tax expenses. Year-to-date, the net income has significantly improved, from a loss last year of close to 33 million euro, to a loss of 5 million euro this year. EBIT improved by 16.8, as we saw in previous slides. Other financial items, negative 2.1 year-over-year. This was an event in Q2, that mainly builds this up, due to non-depreciated part of the financing cost for the old bond, That was expensed in Q2 when we took up the new bond. Year to date, we have positive currency effects of 6.5 million. So different than in the third quarter isolated. And we have lower tax expenses due to lower deferred tax due to less losses not capitalizable versus last year. Free cash flow, same logic as in the initial slides with nine quarters and with the proceeds from the sale of the PowerPoint business to BRP in Q4 2022 taken out. So as we see, we are negative on free cash flow in quarter three by 5.5 million euro. However, as you see in the table, we have a positive development of our cash flow from operating activities. Close to 12 million in quarter three and 18.7 million year to date. Last year, cash flow from operations was positive 1.7 million after nine months. So a good improvement here. Compared to last year, we are better in quarter three, also when it comes to cash flow from investments and cash flow from financing activities. However, we see negative effects from currency translation due to strong euro, not only versus NOC, but also versus US dollars and, for example, the Chinese renminbi during the quarter. The rolling 12-month trend on free cash flow are presently at minus 19.9 million euro compared to negative 36.9 million euro after Q3 last year. When it comes to liquidity, we have 80 million euro in cash and cash equivalent by end of the quarter three. And we have our revolving credit facility of 50 million euro undrawn. So we do not see any liquidity problems. We have a high focus on cash flow in everything we do. And as you know, sometimes in business, it's a trade-off between profit margins and cash. And we are in CA assuring these decisions are taken very consciously. Our financial ratios, finally. Our leverage has increased from 1.7 in second quarter to 2.1 end of this quarter, 3%. And this is due to that the rolling EBITDA result now is lower, and then that interest bearing debt has slightly increased. Return on capital employed, no significant improvement yet. EBIT in the quarter was relatively weak, as you've heard. Equity ratio is at a good level and has improved slightly since second quarter, due to that we are reducing our capital employed and the total balance sheet. With that, I'll leave over to you, Linda.

Thank you, Christian. So summarizing this quarter, we see that the cost initiatives announced one year ago is having effect and is helping us to offset the lower demand we currently see in the markets. We are taking action to further improve K's operational efficiency, profitability and competitiveness. At the same time, we are pleased to see new business wins at record level in 2024, driven by more technological advanced products with higher margins in line with our strategy. To conclude, we are well positioned to navigate the current market uncertainties and deliver on the 2028 financial ambitions. We plan a breakfast meeting in December in Oslo, where we will share more details about our product offering and drivers for growth and profitability towards 2028. That concludes the presentation. I now give the word back to you, Therese, for the Q&A session.

Thank you Linda and Christian for the presentation. We will now begin the Q&A session. We have received several questions and will do our best to address as many as possible in the time that we have. Starting with the question related to products. How does Kongsberg Automotive view its innovation potential in rapidly changing automotive industry and can we expect new product launches and how many products will be ready for delivery from 2025 and onwards?

Okay, so let me take that one. We went through two major waves of product portfolio restructuring within the last three years. In the first wave, we sold business units that do not strategically fit KA in the long term. This year, we conducted an intensive strategic product review of all remaining products and defined the growth path to reach the 1 billion euro by 2028. The key drivers are the so-called core products, which will be developed further. Especially in these areas, we see that KA has a clear competitive advantage due to their unique design features, the strong intellectual property and competitive costs, which will secure the planned growth rates and defined profitability levels.

Thank you, Linda. Continuing on product related questions. What distinguished Kongsberg Automotive products such as gear control unit and clutch actuator from the competition?

Good one. In the gear control unit product group, we are offering a high performance system with a robust and durable design based on reusable building blocks. It offers maximum comfort and performance for the driver and shows low total cost of ownership. Our gear control units, the unique selling points are the self-adjusting clutch actuator, significantly shortened time to market down to 18 months, and the ability of customer-specific integration. In terms of the Dog Clutch Activator, that's a unique design which has been launched first to market already in Asia back in 2024, or earlier this year. The product has fewer components and is a more compact design for transmissions compared to traditional solutions. It offers several unique features like efficient coupling actions and quick synchronization to accelerate gear shifting, which makes driving a smoother and more efficient driving experience, I would say.

Thank you, Linda. Continue on products tech-related. How does Conspiracy Multi plan to strengthen its position in electric car components? And is there expected to grow in revenue from this area in the coming years? Mm-hmm.

I would say we are serving three kinds of products. Products dedicated to internal combustion engine, like the gear control units. Products which are resilient to the transformation, like our couplings for air brake applications or air suspension systems. And products which are designed for future electric, hybrid or fuel cell vehicles. And in both cases, in terms of the last two ones, we are further investigating into these product groups, and we expect these products to contribute over proportionally to their 1 billion growth target in 2028. And as I mentioned in the presentation, more than 40% of our revenues in 2028 is anticipated to be there.

Thank you, Linda. Next question is for you, Christian. Commodity prices have been a global challenge. Does the company have contractual clauses that provide flexible in the event of price changes? Is KA able to pass on the cost over to the customers?

Okay. Yes, we do have such contract clauses, and we are actively working to get more contractual clauses in place in order to mitigate the risk of the fluctuation of raw material. to get compensation for abnormal cost increases after COVID. For example, energy, extra transport, high labour inflations and so on. But it has obviously now become more difficult in these challenging times, also for our customers, the OEMs and tier ones.

Okay, I'll continue with questions to you, Christian. If it has not been profitable from a tax point of view to have the head office in Zurich, how does the company have tax losses carried forward?

We have to be aware that tax losses in Kongsberg is due to the low profitability of the group during many years and has nothing to do with the location of the headquarters. And the tax value of the losses was We have checked here 46.5 million euro, as you can see in the annual report for December 23.

Thank you. Year-to-date EBIT is 17.6 million. You need 0.4 million to reach a low range of guidance. Where do you see yourself landing within this guidance range?

I mean, we have, I would say, quite some months to go up to the end of the year, and we have a guidance range based on our best estimate with the current available information. So unfortunately, we cannot be more precise than that at this moment.

Understood. Thank you. We have gotten some questions related to the announcement made last week related to the cost adjustment initiatives. So related to that, are the 1,010,000 euros sustainable going forward, Linda?

Yes, I would say so. These are overhead costs that will have a permanent effect once they are fully implemented.

Thank you. Continue on related questions. Other measures than the reduction of positions? Is there other measures?

Other than the headcount reductions mentioned, we are also initiating temporary hiring freeze, travel restrictions, and we are also evaluating operational expenses, projects and processes, just to mention a few of those actions.

Thank you. Last question on this topic. What is triggering the new overhead improvement program?

As mentioned throughout the presentation a few times already, this is a response to the current short-term lower demand in the automotive markets. That said, overhead cost and geographical and product footprint is something we are continuously reviewing. So the new overhead cost measures are implemented in continuation of ongoing improvement programs, which have contributed to a stable OPEC space over time. And this year we have realized the targeted overhead cost reductions of 17 million euros. And we have then identified additional annual savings of 10 million euros with full effect from third quarter next year, 2025. And that is then as a response to the lower near-term market demand.

Thank you, Linda. Next question is for you, Christian. Is it a risk that KA will breach a loan convenient for the next 12 months if the weak market continues?

Yeah, on the covenants. We have done several scenarios and we don't expect that there will be a breach. We have sufficient headroom to the covenants we have.

Thank you. Free cash flow of minus 24 million euro year to date realistically to deliver positive free cash flow first year 2024. What CF elements will drive cash flow developments in Q4?

As we presented, we are showing a positive trend on is improving in a good pace. So we certainly are having a high attention to cash generation and working capital reduction, and that remains high, and we intend to continue to improve on this. And in Q4, We expect cash flow improvements to continue, working capital optimization. Obviously, we have a high focus on inventory reduction now when volumes are coming down. Receivable collection is also top of the agenda. I mean, it's more difficult times for our customers as well. So you have to be in close relation and close contact with the customers to see that they pay on due date. And this will certainly support cash inflows. But then on the P&L side, of course, cost control measures, and to continue to see to that we reduce operating expenses. And we are also maintaining a strict capital expenditure discipline and work, as you've heard, on operational improvements.

Thank you. Next question is for you, Wenda. Can you share some more details about the quality claims and warranty costs? Mm-hmm.

When it comes to the warranty costs, and they are part of operations in the automotive industry, and due to very demanding quality targets required from all suppliers, which is measured in parts per million or PPM, as we say in our business. The reason for the higher than expected warranty costs related to the dry control system products are due to both manufacturing assembly issues, as well as supply material issues. These kinds of challenges are usually known only after the CA product has come into the final application or the vehicle. And when it has been used for some time, which is in this case several years. In this case, there are some quality problems that we have not been able to evaluate the severeness of before. Now we have the data and we are taking the cost to rectify the problems that we today are able to evaluate. We want to emphasize that this warrant issue is related to products as I mentioned as well produced back in 2019 to 2022. Thank you.

Continued with the question here for you Linda. The company has already secured 72% of the estimated revenue for 2028. Can you elaborate on which segments or products account for this hedging and which geographical markets are expected to drive the growth?

If we go back to the chapter where we had a bit about New Business Wins and if we look at New Business Wins Q3 last year to Q3 this year, We can see then that 73% of the lifetime revenues are within commercial vehicles, while 15% is within passenger vehicles, and 12% is within others, meaning then off-highway and industrial. With the lead times in our industry, as we also have been mentioning in the past, we have the testing phase of one to two years, ramp-up phase of minimum one year. This gives a good indication of the splits in 2027, 2028, I would say. In today's presentation, we show three products which are expected to drive profitability going forward, mentioning then the air couplings, the gear control units, and the electric actuators as well. And in terms of the geographies, we foresee strongest growth in North America, supported by cost-effective production in Mexico and Asia, primarily then looking to India and China.

Continue with the question here for you, Christian. What part of your business are more affected by supply chain related inventory corrections? Will the saving measures affect your ability to take on new business wins?

That's a very good question. talked about earlier in the presentation. I mean, you have inventories, and this is what you refer to, you have inventories between each step of the value chain. So the further, the earlier you are in the value chain, like we are, I mean, as a component supplier, there are a number of inventories that are adjusted on the way to the end customer, which means that we see higher fluctuations when you have a tipping point, when there are adjustments on demand. And also, what I talked about before, in North America in general, that market has more volatility. They are faster adjusting in both directions, of course, than elsewhere in the world. We see then, since we have a tier one business there related to engine components, and there has been significant adjustments with the market uncertainty. trucks when it comes to our ability to for new business when related to the cost we take out we don't do not see that we believe that we we will we are able to take the new business wins that we are aiming for also with these measures taken thank you christian

We are almost out of time, but we can take one more question, and I will send that over to you, Linda. We have seen a weakening of the market for passenger cars recently. Do you see the same for trucks, trailer and bus, as well as for off-highway?

As I mentioned in the start of the presentation, Europe, which is our largest geographical market, accounts for 47% of our total revenues. And if we look at the aggregated numbers, we see then a 13.7% reduction in the revenues within commercial vehicles in Europe. While the sales to passenger vehicles are down almost 20% in the same region. We also see then the revenues for commercial vehicles going down in North America, as we mentioned, and more now steeper, I would say, in second half. And in China, we have a growth of 5.9%, which is then also related to ramp up of new programs. But in general, you know, the commercial vehicle market is a cyclical business and it relates to trade and how much we consume and the world's manufacturing activities. So sometimes you can have legislations coming in that impacts the market, and with that you have some pre-buy effects. A good example is the anticipation then for North America in 2027. And at the same time, we expect some better business simply, you know, economic climate in the world with lower interest rates will have an impact on this one as well. And we know that there is an underlying growth in the coming years, and that's what we will continue to map out.

Thank you, Linda. Thanks for all these questions. As Linda already mentioned in the presentation, we will host a breakfast meeting in Oslo on December 17th, and the invitation will be sent out within the next few days. This concludes today's meeting. Thanks again for participation and joining the call today. Thank you.

Thank you.