Kongsberg Automotive ASA (OTCPK:KGAUF) Q3 2022 Results Conference Call November 8, 2022 2:00 AM ET
Company Participants
Mads Langaard – IR
Joerg Buchheim – CEO
Frank Heffter – CFO
Mads Langaard
So good morning, everyone, and welcome to the Kongsberg Automotive Third Quarter Earnings Call Presentation for 2022. I will soon introduce Mr. Joerg Buchheim, our CEO; and Frank Heffter, our CFO. My name is Mads Langaard, and I’m responsible for the Investor Relations.
Joerg, feel free to start whenever you’re ready.
Joerg Buchheim
Thank you very much, Mads, 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 yes — 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 the 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, up with a 56% higher value as in Q3 2021. So this includes cumulated time-delayed compensation of roughly €8.2 million for semiconductor spot-buy costs, which have been occurred 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 2 times.
As 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 powersports transaction, which we closed in Q4. If it comes to the free cash flow, still at minus €1.5 million. As on one side, the net proceeds out of the recent powersports 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 averagely profitable truck market in China still hasn’t related. So besides this, we have booked crisis expenses into Q3, while customer price compensation payments are confirmed by the arriving time delayed in Q4. Very positively on the right side, we’ve already seen strong EBIT recovery trend in specialty products is really encouraging because we see herein trend, which we have been seeing already in Q2 and which is going to continue with 40% bullish revenue compared to 2022’s quarter three. So a 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 the 25.6% higher sales than in the same quarter of the previous year — in the 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 [weighing] above 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 side 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 fully consequences of some war conflicts which are uncertain how long this is going to continue. So that means that KA 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 set at KA has been influenced in Q3 majorly by lower demand for manual shifter business in Europe, which we have honestly seen already in Q2, there 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 see on the lower left side coming from general market recovery supported by the nonautomotive, majorly industrial and aftermarket where availability is key for catching additional market share, what we are doing and where KA’s high inventory in this case, hurts.
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 in Q2 and Q3 of this month. And secondly, customers showing currently less activities when it comes to the driveline area, as running programs are 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, we experienced in Q4, in general, very encouraging activity already, and we are working actively with existing and new customers towards new contracts. In particular, 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 trend?
Frank Heffter
Yes. Thank you, Joerg, 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 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 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, P&C had a decline versus 1 year ago. That is basically driven by two factors: one, the mentioned challenges in our driveline business, especially in Europe as well as a onetime €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 System. 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 €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 carryforwards 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 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 net working 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 or in the — yes, 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 translation also in the cash flow positive €7 million. So that overall, we came in at minus €10.7 million. If we now exclude the share buyback, then we end up at the minus €1.5 million. 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 31 last year to September 30, 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 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.
So 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 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 2 on — including IFRS 16 effects, 1.1 excluding these, so same as in quarter 2. The ROCE 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 net working capital elevated levels normalize, the capital employed 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, Joerg Buchheim. Please, Joerg.
Joerg Buchheim
Thank you very much, Frank, for the good insights. Yes, 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 I. Our program to offset the negative market impact from the supply chain inflation and volume effects majorly, I would like to emphasize again that every employee continuously support on KA’s way for further increasing contributions, as you could see in the diagram. So coming from [€50 million] marked here with the blue arrow or marked with the weeks 31. For the full year outlook reported in the last earnings call, we are in the mean time at €59 million 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 remaining ideas and maximizing the positive impact. So major drivers 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 way more than 100% could be passed through either to our customers or got renegotiated with our supplier shows here our successful efforts of the teams and involved employees in this program. When it comes then to the indirect cost, that means like energy cost inflation and logistic costs, we couldn’t completely so far close this price cost figure 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 this logistic uncertainties and volatile of 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 II, 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 CAD136 million, which is equal to €104 million, and we came out with a net proceeds of CAD128 million and a net gain of [CAD46 million] and this is underlying here a successful sale.
So looking then on the next slide here, we are looking forward, looking forward in terms of market developments into our long-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 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, with 11% from ’22 to ’23. And you see here, this is majorly driven in our focused market in China with an 11% increase versus on the right side in comparison without China, the market is expected to grow in 2%. In the 5 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 base in passenger vehicle and 28% in commercial vehicle, when it comes on a 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 suite from ICE to EV and onetime according IHS expert market view and on the other side, on our view.
So here, we see that the passenger market — 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 sales, which then raised up to roughly 35% to 40% in 2028 and is expected to be more than ICE from around this year and onwards. In commercial vehicles, 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 it’s a transformational change of KA 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 KA for decades and even provides further significant growth for our Specialty Products 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. And in particular, in SPP, in our Specialty Products segment with 14% 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 speed, 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 e-vehicle CAGR of 36% to 40%. And this can be well viewed in the following slide. So in here, we see our 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 outperforming here our transition from conversional — conventional electrification, the typical ICE concept to the electrification. And which is 80% to 90% faster at the end of the day when 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 [volitative]. And certainly, the next focus is here, as mentioned before, is the — 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 KA’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 I 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 a remaining challenge for KA, you 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 for Q2, but with a lower, slightly lower EBIT assumption which is €3 million discounted. So our revenue stays at an expectation of €870 million to €905 million. But our adjusted EBIT be slightly dropping down here towards window of €35 million to €41 million towards the year-end coming from the last guidance, €38 million to €45 million. So a slight drop, but the decision has made in course of latest developments within an ongoing U.S. customs audit, where we decided to accrue further cash for higher expected subsequent payments in course of an ongoing investigation here. And this is a U.S. customs audit, which is looking into classifications and new regulations, which affecting retroactively from 2015, our customs payment. So this year leads to a €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 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 deleverage, 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 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 we — 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 into organic growth and innovation but we’re looking at all certainly into investing into our environmental footprint. So our going green and ESG ambitious road map and we’re looking as well into inorganic opportunities in general when it comes to M&A.
So with this, I would like to close the presentation. And I’m more than happy to start the Q&A session, Mads.
Question-and-Answer Session
A – Mads Langaard
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.
Joerg Buchheim
Could you say what were the questions. 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’re proving our product segments always in the second to none constellation 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 II program.
Mads Langaard
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?
Joerg Buchheim
As mentioned, thanks a lot for the question. The commercial vehicle market is substantial for us, and clear focus market when it comes to our On-highway strategy. And our second focus is certainly the Off-highway 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 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 underline these 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’ve seen, 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 yes, let’s work on it.
Mads Langaard
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.
Joerg Buchheim
Thank you very much.
Frank Heffter
Thank you. Bye-bye.
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