Kongsberg Automotive ASA (KOA) Earnings Call Transcript & Summary

Good day, and welcome to the Kongsberg Automotive ASA Third Quarter 2020 Earnings Call. At this time, I would like to turn the conference over to Mr. Norbert Loers. Please go ahead, sir.

So thank you, operator. Good morning, everybody. I'm Norbert Loers. I'm the CFO of Kongsberg Automotive and co-CEO, together with Robert Pigg. And first, we will briefly introduce ourselves and then continue with the presentation. Robert?

Good morning, everyone. I am Robert Pigg, co-CEO with Norbert Loers, responsible with -- for the business segments. Also serve as Senior Vice President for the off-highway business unit. I've been with Kongsberg for roughly 14 years and responsible mainly for engineering functions and program management until I took the role over Senior VP in 2017. Thanks for your attendance today, and I'll turn it back over to Norbert.

Thank you, Robert. So I have joined Kongsberg Automotive in January 2017 as the CFO. My background is in finance, and I was appointed together with Robert in the [ tempest ] this year as co-CEO. So we want to start now with the presentation. And the first page is key topics, and that is Robert's page.

So we'll talk about the markets and revenue. As we know, early in 2020, between coronavirus in the weak start, had a major impact on the automotive markets. But we also know that the light-duty vehicles and the heavy-duty markets totally evolved differently over the year. Worldwide light-duty vehicle production for Q3 recovered nicely on a sequential basis. From a low point of 12.6 million vehicles in Q2, Q3 came in at 20.3 million units. The Q3 production figures were only 3.5% behind the Q3 numbers in 2019. It should be noted that China was the only significant region that had significant growth year-over-year. Light -- heavy-duty vehicle was very different from light-duty vehicle market. Although on a global basis, the year-over-year production figures decline was similar -- was roughly 5.3%. It was heavily skewed by very strong growth in China and stronger declines in other regions. In Q3 of 2020, China production represented almost half of the global heavy-duty vehicle production. With the exception of the non-China heavy-duty vehicles, the Q3 production levels represented a strong recovery from the coronavirus impact generally expected. Our revenue for Q3 finished at EUR 255.2 million, a EUR 24 million or EUR 8.6 million below our Q3 2019 figures, if we include negative currency translation effects of EUR 10.7 million. At constant currency, a true representation of the volumes, the year-over-year decline was around 5%, which was in line with the overall market development for the quarter. Driven steadily by improving our order books throughout the quarter, we recovered by September, the volume similar to those in 2019. And if we look at a constant currency basis, we had year-over-year growth for the month of September. As was the case for the total market, for Kongsberg, regional revenue developed very strongly by region. Overall strong revenue growth in China was partially offset by the revenue declines in both Europe and North America. Revenue levels for Q3 2020 are still impacted by the effects of the coronavirus outside of China. If we look at our quarterly revenue in Europe and Americas was lower by about 10% year-over-year for Europe and 17% year-over-year, respectively. Quarterly revenues in China increased for KA by 32% year-over-year, attributed to quick recovery in -- from the coronavirus and strong general vehicle demand in KA market share gains in China. Q3 2020 revenues in all regions recovered quicker than expected and if we compare it to our previous outlooks. On new business wins, we were awarded roughly EUR 50 million new business on an annualized basis, corresponding to EUR 224 million for expected lifetime during Q3. Although weaker than our previous years, we see this as a strong booking order, taking into account that we had lower quoting activities at the major OEMs during the coronavirus period. On to you, Norbert for the next slide.

So next slide, Page 4 (sic) [Page 5]. Our adjusted EBIT amounted to almost EUR 14 million, same level as prior year's third quarter. Our EBIT margin increased from 5% to 5.5%. So we consider that a pretty good operational results. We have introduced in the crisis quarter, second quarter and continuing in third quarter, very strict cost control, reducing fixed costs and overheads. And we're also benefiting a little bit from lower material costs and some commodity prices went down compared to the second quarter. So the previous quarter, we increased revenues by EUR 1.5 million, with an EBIT fall through of 48%. We had a positive change in cash in that quarter. That has 2 components. First, capital increase, the subsequent offering of EUR 27 million. And secondly, a negative cash flow of EUR 12.4 million, that was driven a lot by the very heavy capital -- working capital increase, primarily by our strong increase in accounts receivables. We have no usage of our RCF line. So no bank debt. As previously announced, we entered into a receivable securitization program. That is a global program that covers our North American and European entities, that is a committed EUR 60 million liquidity reserve to us with a 3-year tenure and with the usual options of extension. We had no usage of that program at the end of Q3. That brings our liquidity reserves by the end of September to more than EUR 200 million. That is the highest amount of liquidity reserves since 2017 since I'm reporting these numbers every quarter. Adjusted gearing ratio deteriorated compared to prior year. We will have the second quarter effect on an LTM business now for next 3 quarters as well. But it's slightly improved over second quarter, obviously. If you go to next page. That is our graphical presentation of quarterly revenue developments and adjusted EBIT margins. And there, you can see very well what the second quarter did to our P&L in revenues. So that was a huge loss in top line. And how well the recovery in the third quarter worked from adjusted EBIT margin percentage. When it comes to EBIT and net income, we only had small restructuring costs in the third quarter. So EBIT and adjusted EBIT are pretty similar. And our net income in the third quarter was also positive with a EUR 1.7 million result. I'm handing over now back to Robert to continue on Page 8.

If we talk about our new business wins. As I said, we had EUR 50 million booked business in Q3 at an annualized basis. And EUR 224 million in expected lifetime revenue. Even though like you -- when you look at year-over-year comparisons, the numbers were lower. It's still a strong quarter taking into account the lower quoting activity that we had to OEMs through the corona crisis. If we go to the next slide on Slide 9. What we're -- here is we continue to secure business in all business segments to secure the future growth in the company. What we notice here on this side is that the higher-margin segments, such as Specialty Products, has continued to book at the same level before the corona-19 periods. If you compare year-over-year in Q2 and Q3, from an annualized and from a expected lifetime revenues, Specialty Products has continued to book even with the corona crisis upon us. Next slide is Slide 10. Book-to-bill performance. Still strong even though we had a decline in revenues for the last 2 quarters in bookings when we compare it to the previous quarters. We're still running at our book-to-bill ratio of 1.37. If we move to the next slide and talk about the market. The China market showed positive development in Q3, whereas the rest of the world still is hampered by the effects of COVID-19. The global passenger car, their market was down overall 3.5% year-over-year. If we take a look at outside of China, then the production volumes declined by 8.8%. We need to note that one of the hard-hit areas is APAC without China. But for KA, we don't have much market share in this region. So it's not a negative effect on our revenue. For global truck production, the market was down 5.4% year-over-year. Outside of China, the production volumes declined by 25.6%. So with the -- with the return to the market in China, plus our market position in China helped with the -- helped with the KA revenues in Q3. We move to the next section, which is the segment highlights. What we can see here is Interior revenues climb back to the same level as they were in Q3 of 2019. Powertrain & Chassis revenue finished 9% down year over -- versus year-over-year. And Specialty Products revenue was down 14% on a year-over-year comparison. If you look at the adjusted EBIT, Interior was down when we compare it to Q3 of 2019, and this is due to onetime effects, whereas Powertrain & Chassis and Specialty Products were both -- had an increase in EBIT even though we had less revenues in both of the segments. Next slide. If we focus on Interior on Slide 15. Revenue for Q3 showed a slight increase year-over-year if we exclude the negative currency translation effect of EUR 2.8 million. This is driven by the fact that Interior segment mainly serves the premium passenger car market, which performed well on a relative basis after the coronavirus-imposed lockdowns, particularly in China and North America. On EBIT, if we -- excluding the one-timer, the adjusted EBIT has improved year-over-year through strict cost discipline, offsetting increased freight costs as we needed to ramp up production and material shortage driven by the strong spikes in our customer demand. From an operations standpoint, we are back to normal. We are normalizing our volumes. We're benefiting from the operation improvements achieved last year and the cost control measures implemented this year. Within Q3, the segment continues to focus on maintaining a higher [ level ] of productivity and efficiency, controlling our variable and fixed costs. Our new plant in China that we opened this year contributed to the sales growth, which was driven by an increase in production and premium vehicles in China and the new energy vehicles. Through the -- if we look at year-over-year, the China revenues for this vehicle segment grew by 50% from EUR 6 million to EUR 9 million for KA. Moreover in the quarter on the net working capital side, we had stock builds as we are building up to relocation of production into the new plant. On the high new business levels and Q3 were significantly made up the shortcomings in Q2 as we had a low booking in Q2. Within the quarter, Interior was awarded 2 large contracts, one to supply heat seats to major premium U.S. car makers and one to supply seat support systems to a major European carmaker with the start of production in Q2 of [ 2022. ] Those programs total EUR 24.5 million and EUR 16.3 million in expected revenue -- lifetime revenues. Next slide, please. If we focus on Powertrain & Chassis, the revenue decline was mainly driven by low revenue levels in Europe and the U.S., which was positively offset by the growth in China where the revenues in Q3 reached an all-time high. Through an increase in KA's market share in the Chinese passenger car market. The increase in profit and profitability for Q3 was benefit by our additional revenues and more efficient control of our variable and fixed costs in both the European and American plants. Operations are back to normal, and we're benefiting from the operational improvements that we achieved last year and early this year. On the supply side, this segment has been hit by some suppliers that have struggled through the corona crisis and the market environment and have ceased deliveries to their customers. Therefore, we're doing a lot of resourcing activities in the P&C business segment to transfer over to suppliers. On market achievements, new business wins were generally very low for P&C in the quarter. We did a large product, we did secure a shift-by-wire project for a Chinese customer with expected revenue of EUR 2.5 million (sic) [$2.9 million] for expected lifetime. If we go to off-highway -- I mean, to Specialty Products. The revenue developed in this segment was mainly driven by weaker heavy-duty vehicle end markets. And specific passenger car platforms and FTS and a slow ramp-up after the lockdown period in off-highway business unit. This was partially offset by a strong performance from our Couplings business unit, mainly driven by that Chinese customer. Excluding the negative currency effects, Couplings had flat revenues when we do a year-over-year comparison. On the EBIT standpoint, year-over-year increase in adjusted EBIT is attributed to favorable foreign exchange rates, positive operation efficiency improvements plus some effects from our brass and resin raw material prices. Like any other segment, all plant operations are back to normal, and we're benefiting now from the operational improvements from last year and our cost control measures that we implemented earlier this year in Q1 and Q2. Also from the operations standpoint, we did make our first serial production shipments from the new Coupling manufacturing facility in Cluses, France. And on the new business wins included were fluid transfer systems to a major European car market. And off-highway on mechanical cable projects for a premium European OEM and outdoor power equipment. These programs will account for approximately 20.2% and 11.6% on expected lifetime revenues, respectively. On to you, Norbert.

I continue on Page 19, which is an overview on year-over-year revenues by segment and adjusted EBIT. And there you see that the adjusted EBIT contributions were pretty uneven. So in Interior, we had a slight decline on Powertrain & Chassis, a significant increase. And on Specialty Products, a very significant increase. Unfortunately, much of that was offset by FX effects and others that are some cost in corporate overheads. If you go next page, quarter-over-quarter, that looks very evenly split in revenue increases and adjusted EBIT increases and there all business units or all segments had a very similar contributions. Page 21, net income development. So our adjusted EBIT was positive year-over-year, Q3 versus Q3. We had a slight increase in restructuring costs. We had a strong effect on other financial items. That is primarily noncash unrealized FX movements. We had very strong FX effect in the last quarter, primarily driven by the U.S. dollar weakness versus euro. That has impacts on our P&L and balance sheet. And on taxes, we had a tax income, so positive taxes in this quarter versus tax cost a year ago. So that's why we have a positive contribution there of EUR 2.2 million. Quarter-over-quarter, you see impairment charges did not repeat, and they will not repeat. Adjusted EBIT, a strong increase. And then the other financial items and taxes also played a role. We also had a significant tax income in the second quarter, and the income in third quarter is relatively EUR 5 million less of that. Third quarter liquidity development. Adjusted EBITDA, EUR 25 million positive on other receivables, we also had positive contributions. Our change in net working capital was minus EUR 19 million. That is significantly lower as we have previously estimated. But in that is a EUR 79 million increase of receivables with negative cash flows for the quarter. We had net investments of almost EUR 11 million. And then on financials, FX is the equity increase, net of purchase of treasury shares, contributed with EUR 26.9 million and then interest paid and other financial charges were almost EUR 10 million. We also show here now the available liquidity from the securitization facility with a committed amount of EUR 60 million. And that brings us to more than EUR 200 million of level liquidity per quarter end. If you look at free cash flows on Page 24, so you see here quarterly movements. We limited negative free cash flow much versus what we had to estimate earlier this year to EUR 12 million. That is still a loss. So we're going to fix that. But I believe under given circumstances, with the very welcome increase in business levels, triggering increases in receivables, that is a decent result. Then we go to net financial items. We give you here a breakdown of net financial items on the timeline. We always have that net interest, that is driven by IFRS 16 interest cost, which is pretty constant. And by accruals for the [b-annual ] payments on the bond interest. That's why that is a pretty even number every quarter. The number that is changing a lot on a timeline is currency effects. And we had EUR 5.2 million of that in the third quarter. Financial ratios. Adjusted gearing ratio is this 5.8%, very high as long as we have that second quarter in LTM, it will remain very high. But it's coming down with the results of the third quarter. Adjusted return on capital investment doesn't calculate if we have LTM with negative profits. Equity ratio increased from 27.2% to 27.5%. That was tailwind from the equity increase and the positive net income. Our capital employed increased in line with the working capital increase of the quarter. I'm now handing back to Robert on Page 28 with summary and conclusion.

In summary, well, first of all, Norbert and myself are proud of the KA team's work in the third quarter as we continue to execute our plans while continuing to protect the safety of our employees, serve our customers and our communities. If we take a summary of where we finished the quarter at, revenues come in at EUR 255.2 million, and our adjusted EBIT at EUR 13.9 million. And we had year-over-year revenue decline of EUR 24 million in combination with an increase in our adjusted EBIT margin from 5% to 5.5% for the quarter. The EBIT improvement was mainly driven to our strict cost controls on all managed costs, fixed cost reductions, but also benefit from the previous operation improvements that we had put in place. If we take the P&L measures together with our relatively small increase in working capital limited to cash burn in Q3 to -- as Norbert said, to minus $12 million, a much-improved figure compared to our earlier outlooks, driven mainly by our improved performance, our cost controls and our strong working capital management tools and procedures. Our liquidity improvement plan was fully executed and completed in the quarter, leading to a very solid liquidity reserve of over EUR 200 million, and that is a very comfortable position for us to be in for potential rough roads ahead. The capital increase process was completed through the oversubscribed repair capital raise. And the last component of our liquidity improvement initiatives, receivable securitization program providing additional liquidity of EUR 60 million with 3-year tenure was also completed within the quarter. On to the next slide and Norbert will talk about the outlook.

Just want to add a comment on our liquidity improvement plans. We communicated frequently on our measures and plans throughout the year. We delivered on all major items at very economic terms, I must say, we did not enter into any agreements that is overly expensive. What we did not deliver were smaller plans on government support programs for 2 reasons. They come with conditions. When we looked into the small print of these conditions, we could not met it sometimes -- meet it sometimes. Also, there's a huge period of unclarity what these conditions are finally and they were then finally, relatively expensive. So that's why we did not conclude anything of government support. But I don't think that we would have needed that since we deliver on all the big-ticket items. When it comes to outlook, when we look into our company, as Robert said, we can be very proud of our people of operational performance and discipline. And on the multi-level of motivation we have in the company, everybody is aware of the situation that this is a very serious situation for all of our communities, but also for our, let's say, business operations. We employ some 11,000 people in 28 plants. So there are many, many people coming together every day to do business together. Despite adverse macroeconomic signals from the emerging pandemic second wave, we have a very strong order book. And we will have also a very strong October that is almost done. And when we look into first quarter, I have never seen such a strong outlook of a first quarter at this time of the year, end of October. So that looks really strong. Consequently, we raised our revenue outlook from previous outlook to EUR 945 million, and on adjusted EBIT, we are now targeting a positive number. And that is some EUR 25 million improvements from previous outlook. From a cash flow perspective, we still have to anticipate negative cash flows this last quarter of the year. With continuing working capital increase, but also with significant CapEx cost, we are cleaning up all our CapEx activities to have a clean sheet for next year. But still, this is an improvement of EUR 18 million versus the August 4 update. With projected negative cash flow of [ EUR 30 million ] for the next quarter, that will leave us liquidity reserves of around EUR 187 million at the end of 2020. Our end markets continue to be volatile and difficult to predict very recent developments. I mean, you all have the same news as we have in the newspapers on TV. The pandemic -- the second wave of the pandemic is especially in Europe, increasing in all our European countries we operate in. So we have all measures possible in our plants to protect our people. And so far, it worked very well, but we are included in complex supply chains. We depend on our suppliers. And on our customers. And so that is under given circumstances, something we have to be very careful about. We will provide a 2021 outlook early next year, provided that we then have a overall market situation that we can reasonably talk to giving a 12-month outlook. So that concludes the presentation, and we will now go through the questions that we received from the audience, and I read them through.

Our website is -- still says creating value for shareholders. My question is simply, why is it still there? The answer is also simply since we are still committed to it. I know our share price development over the last years was not satisfactory, and we are very well aware that the situation this year and the equity increase for us having major impacts on shareholder values. Still, I believe that was the measure we had to take to secure the company. And the increase in equity was instrumental and absolutely required to also meet the other conditions for all the other improvements we could do. I mean we increased our RCF in total amount and in covenant threshold. Significantly, we secured EUR 60 million from the receivable securitization program. That was -- would not have been possible without a equity increase. The next question is, do we have any components other than seat heat for Tesla? That is a question for Robert.

Currently, for Tesla, we supply heat seats, and we supply light-duty mechanical cables to Tesla. In the future, we are in the process of working on RFQs both for seat comfort and for Couplings for the Tesla truck coming in the future. Next question, Norbert.

So what was the reason to push the presentation forward to today instead to November? The reason was that we felt that we have good news to share. And that we were able to close the, let's say, quarter-end accounting work a little bit earlier, thanks to our corporate finance team. So once you have that information, you have to share it. That was the reason why we pushed forward. Next question is our prior forecast for global passenger volumes now redundant in management view. Where does management see volumes heading now? Can we see a complete recovery next year, should we brace for a bumpy recovery? And that is a great question. Mean we receive our information first from professional market forecast services. We use IHS or passenger cars LMC for truck. We use our own, let's say, relationships and intelligence, what we hear from customers. We will see for next year in revenue volumes, a recovery for our own revenues, that it will be very similar to 2019 volumes. So pre-corona volumes for next year. That's what we currently see. We see especially strong increase in our Interior segment, which benefits from premium cars. Next question, how P&C -- why have P&C less revenues more than EBIT? Robert, do you want to take that?

Yes, so we have less revenue and more EBIT. That's driven by basically 2 factors. One is we are getting the benefit from the operational improvements in the plan that P&C executed starting last year. And the second factor that goes into that is the efficient cost control of the variable and fixed cost. In our European and American plants drove the additional -- the improvement in EBIT for Q3.

Thank you, Robert. So can you please repeat your comment on the EUR 79 million increase in receivables and provide more context around what is driving this? And when you expect cash inflows, any charge-offs or delinquencies expected? So that is just mechanics. If your revenues increase, then your receivables increase. And with some 76 to 77 average terms, it takes time before that turns into inflows, yes? On delinquencies, we have a record low in third quarter. I mean since we measured that since the last 4 years, I'm in that company here. We reduced delinquencies or overdues, how we call it, constantly systematically, that is one of the main management targets. And we are now around 3% on delinquencies. And if you're familiar with that industry, then you will recognize that this is a very good value. Next question is, for how long do you consider the company to be fully financed, given the current outlook? I believe we are fully financed for a long time now. The previous statements when we had modeled scenarios high, medium, low for the years 2021 -- '20 and '21. We had very conservative assumptions due to the high uncertainty that was going on. We also had no experience at this point in time on reducing our revenues by almost half. And what that makes to fixed costs and how we can manage fixed costs and how we can flex fixed costs. So we -- I think we are very successful in doing that, thanks to the very diligent work in the plants of our people. And we have the target to become a cash positive number -- company sooner than later. So fully financed, we are fully financed now for a time period that has, from my perspective, no limitation anymore. How is Kongsberg looking to grab further market share from the German EV market? Robert, do you want to take that?

Yes. I mean, we have our front-end teams, sales and engineering, working directly with the German OEMs to help them develop and put our products into the EV market. So we're looking at the different products in the Interior comfort systems. We're also working in our fluid transfer systems on battery cooling lines to continue to supply products for the EV market, not only in Germany but throughout the rest of the world to put more content on the electric vehicles that is out there.

Is there any change to the monthly cash burn estimate of EUR 25 million to EUR 30 million in a shutdown scenario following cost savings measures? Yes, absolutely. I think that's what we demonstrated here with our numbers. And our cash flow statements and efficiency statements, that statement is obsolete already with our second quarter reporting. Next question, did the previous CEO leave for a different opportunity or due to a decision made by the Board? We will not comment on personal matters. Can you walk through the components of EUR 187 million liquidity reserves? I think we give that breakdown on Page 23, it's the right-hand column where you have the breakdown. Can you comment in more detail about positive outlook Q1 2020? I think that means 2021. What makes you feel comfortable? Are your clients giving you a clear order indication for that time period? Yes, they are. I mean, in automotive, we receive all our orders through EDIs, electronic data interface system. They come straight from the order system of our customers into our order book. So we exactly see what our customers want from us in the short term and over the next 4, 5 months. Of course, that outlook is not a commitment to purchase. Customers are free to change these orders at any time but typically, it's a very reliable indication of what will really happen and what our customers are really planned to do. And as I said previously, looking into the order book for the first quarter next year, that looks really very positive. Next question is for you Robert. Do you supply [ Neo ]?

Yes, we do. We supply both CT and [indiscernible] through [ Neo ] from our facilities in Wuxi and Shulan.

So what are our thoughts? Next question, our thoughts on restoring stock price and how will that continue in the following months? I mean, stock price is a result of market activities, decisions made by investors. We are a part of automotive industry. We had recent -- very good results from various automotive OEMs and I think more of that will come in the next days from other automotive companies. We are part of the industry. Our stock price will move in line with the industry. And I believe what the company can do in providing profit and cash flows will also have an impact on the stock price. Next question is for you Robert, can you give more color on outlook, order intake for non-OEM business? How does that compare to OEM outlook?

I mean, if we look at both the non-OE -- OEM business and the OEM business, as Norbert said, the outlook is much better than our previous guidance and forecasts. We see the order book through the rest of this quarter and through Q1 in a strong position, whether it's OEM or non-OEM business. So both of them are giving us the signals that the market is on its way back from the corona period and pandemic, and we continue to see a strong outlook for both OEM and non-OEM business.

Thank you, Robert. So next question is, could you give more color on what is driving negative free cash flow in the fourth quarter? I think I made comments on that. So it's continuing working capital increase and that we're going to have a cleanup on our CapEx with a relatively strong impact in the fourth quarter in order to have clean sheet on that in next year, and that is also the next question. Is, when you say you're cleaning up CapEx, when is the earliest that you could return to free cash flow breakeven? I strongly believe if markets hold what we see in forecasts, in professional forecasts, in our own customer intelligence provided currency rates don't change dramatically, then we have positive free cash flow at hand within the next year. From a seasonality perspective, first quarter is normally the quarter with the strongest negative cash flow. This has to do with yearend, December is not a full month, and that helps fourth quarter cash flows. And then in first quarter, you have to catch up on these additional revenues compared to December. But we are working hard on providing positive cash flows. It's hard to say whether the first quarter is already at this point in time, but at least, we are committed to deliver positive cash flows whenever possible. Any chance with better profitability in 2021 that we'll be willing to buy back bonds below par? That's a premature question. I mean, let's first have that positive cash flow. And then talk about what to do with that money. Any progress in regarding to employing a new CEO? As said, we don't comment on personal matters. And there are a few other questions very similar on CEO. We do not comment on that. In terms of cost savings and efficiency, do you expect any to be given up 2021? That is a question for you, Robert.

Our expectation is not to give any up during 2021, assuming the market holds and we continue to have the volumes through our manufacturing facilities. As we said, we continue to execute our operational improvements that we started the last 2 years. And we have robust plans behind those to then have delivered those cost savings. And so we don't see a reason to give those back. Next question, Norbert.

Can you please give full year guidance on CapEx 2020 and 2021? 2020 will be close to EUR 68 million, plus/minus something. For 2021, we are looking at something closer to EUR 60 million. So I believe that were all questions we received and operator, do you see any more questions we didn't answer? Then I would hand over to you.

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.

Yes. Thanks, everybody.