Kongsberg Automotive ASA (KOA) Earnings Call Transcript & Summary

Good day, and welcome to the Q1 earnings release call hosted by Kongsberg Automotive. Today's conference is being recorded. And at this time, I would like to turn it over to Mr. Joerg Buchheim. Please go ahead, sir.

Thank you very much. This is Joerg Buchheim, the new CEO of Kongsberg Automotive. It's my day 8. And I'm together here with Norbert Loers, who is the CFO of Kongsberg Automotive, and he is the CFO and have been the interim CEO over the last months. Thank you, Norbert for being here together with me. We would…

Thank you, Joerg.

We would like to present the first quarter earnings in this call. And we would like to go, as usual, through the executive summary, starting with that going then via the financial highlights, the market summary, segment highlights, group financial updates and outlook. Finally, to the Q&A. The whole session is scheduled as usual for 1 hour, yes. And I would like to go remembering the normal disclaimer for the looking-forward statement, I would like to start with the major executive statements. So we had a great first quarter. We could reach sales of EUR 300 million, and it could have been even higher if there would be not the exchange rate negative impact and the raw material shortage crisis. The good news is, as well, we could here in Kongsberg, through operating very good management, translate the top line into the EBIT, and we had a great EBIT of EUR 20 million in the first quarter, which led us to an EBIT margin of 6.6%. The free cash flow, very good news here as well. We could show now, in Q1, the breakeven, so we could reach almost EUR 5 million, EUR 4.8 million positive cash flow. So thank you very much to the entire team. And in terms of bookings, we're still on a 1.2 book-to-bill performance, which is showing the growth potential further out. And this is very promising in terms of forward-looking revenue path. In terms of liquidity, we're still staying on a very solid headroom of EUR 200 million, which is giving us the possible room for maneuver. So 5 strong statements and thanks to the entire Kongsberg team for this great performance. Going then to the next slide, a little bit more color into the numbers. As said, we had a great Q1 with EUR 302.8 million to be precisely on revenue. And as said, if we would have considered here the global raw material shortage crisis and the exchange rate impact, we would have here normally shown a record high sales in the Kongsberg Automotive history. So we are at 15.6% on revenue growth, so that would be 20.1% with normalized effects. So -- and this is over average over market because the market has been grown in the same period Q1 2020 to Q1 2022 with 14%. So clear outperforming in terms of growth, which is showing our potential. We could as well lead this growth into our EBIT. So we have grown by incredible 157% on year-on-year numbers. And as said, we are at EUR 20 million in Q1 on EBIT to compare EUR 7.8 million in the previous year quarter. And this has been, again, just limited by the raw material price impact, which has taken away an opportunity of additional EBIT of EUR 7.6 million, majorly in our passenger car oriented Interior business. And as said, excluding these negative effects, we would have been at above 8% on EBIT, which is actually a very good number and a very good pathway on towards the 2-digit EBIT company. Free cash flow, based on our continuous improvement programs in terms of cash flow management, which we have started in Q3 2020, we are really proud to deliver now a free cash flow positive result in Q1 with the EUR 5 million even we have been supported slightly by a FX tailwind, but that's a very good result, where the entire company can be really proud on. In terms of new business wins, we come up to EUR 347 million of additional or new wins in lifetime sales in the Q1, which is as well a respectable and sustainable number. In terms of gearing, we are at 4.2% versus 3.5% of previous year quarter, and there are certainly the Corona impact still with a certain kind of aftermath. So having said that, I would like to go to a little bit more on the financials, the revenues and adjusted EBIT numbers in our typical displayed graphs here. On the left side, again, EUR 303 million on revenue in 2021. With this, we are actually back on pre-Corona crisis level; if you compare that to the EUR 307 million in 2019. And this was majorly as said, driven by our business unit Specialty Products with couplings, fluid systems, and off-highway. But as well in our Powertrain & Chassis division, all performing above market growth, as mentioned, and we will touch that a little bit later. From a regional perspective, China was outperforming as well. We see that in a later slide deck and as well the truck business was pretty strong, in particular, in Europe and North America, which gave us a good foundation for this nice EUR 303 million revenue in 2021. If we would add here, the FX effect, we would even come up here above EUR 310 million, EUR 315 million. So it would have been a record high sales. So again, a good number. Seeing into -- or looking into the quarterly adjusted EBIT. And here mentioned, we are at a 6.6 percentage level, slightly below if we compare that to the 2019 pre-COVID level, where we have been at 7%. But mentioned here, again, we would have been above 8% if we would normalize this by this extraordinary effect of raw material shortage and the 8% or 6.6% in this case, has been supported, in particular, by our attractive Specialty Product off-highway and on-highway areas. And this is actually really giving a good outlook because if we're really moving more and more revenue and growth from the commodity seat business or commodity business, commodity passenger car business towards the Specialty Product, off-highway, on-highway market, it's giving us a good runway towards the future 2-digit EBIT potential. Going then to the next slide. Based here is our good cash flow result from operating activities. As you could see, the EUR 17 million, solid ground, and it's including already the typical, let's say, usual, seasonable working capital increase. And certainly, it's considering here as well the bond interest payment. So this has been offset by partly good management in terms of investing activities and a tailwind in terms of currency translation effect, which then led us to a well-managed EUR 5 million positive free cash flow. What is good here to see is it sustainable? That's the question here. But as you can see, looking back the last quarters, back to Q1 2019, and that's the trend line underneath here, you see a continuously improvement and sustainable improvement in terms of free cash flow or cash flow management at all. So the tendency is there, and it's now all about to keep this level above the positive line. Looking then into the new business wins. As mentioned before, on the next slide here, we see a solid win per quarter of EUR 92 million in Q1 2021. That's per annual sales. But looking then into the lifetime sales, which for me is the more significant number here, is the EUR 347 million, which is on the level of Q1 2019 and a level on Q1 '18, slightly higher. And I think it's reflecting further good growth path, which the company is following. We haven't lost any significant business just to make that clear, but there are a lot of changes quarter-to-quarter in terms of exact nomination dates. Looking then into the next slide. This is then showing a little bit where did we won this new -- did we win this new business, and it's pretty diversified, certainly. So all areas had a steady bookings and this is certainly securing our future growth path. As mentioned, strong booking in particular in Specialty products, which is certainly still a very attractive field of business, where we are operating in. So that's very promising. But overall, bookings are really very diversified and keeping our balance in terms of revenue perspective very well. On the next slide as well, the book-to-bill ratio, as mentioned, 1.2. We had that the last time on that level in Q3 2019, but 1.2% positive above 1 is still always cementing the growth. And looking into the Q2 outlook, there are further upsides. So I'm still pretty optimistic to continue on this level, at least at Kongsberg. So then I would like to walk you through the market summary. And I mentioned that prior or at my initial statement. So our business, but as well the automotive market business was pushed or driven by 2 specific circumstances, and that is the circumstances of this incredible market growth, which we have or which we see in the passenger car vehicle in the first quarter in China, a growth of 77% compared to the previous year quarter. That's an incredible push and a very prosperous future in terms of China's economy. The other second driver was certainly the commercial vehicle market, where we see an opposite picture here, the rest of the world, and I'm talking about everything in Asia Pacific, without China, Europe, North America and the South American market was tremendously catching up and distribute to the -- supported the economical growth perspective, which coming up post COVID. We could participate here, in particular, in terms of our strong performance in terms of Specialty Products and couplings about as well fluids, in China. And certainly, we could hear as well participate on the commercial vehicle market in terms of fluids and in particular, Powertrain & Chassis. So very diversified and very stable for Kongsberg, and we could really position here our products and participate on our global footprint in a very positive way. The segment highlights, on the next slide, showing here our sales perspective and growth and as well our EBIT development over the last 5 quarters. And again, Interior is certainly the area which has been or is affected majorly from the raw material crisis or from the shortage on semiconductors. As you can see, this had led us despite a good sales of EUR 82 million, has led us to minus 2.8% on adjusted EBIT. And here, I have to point out if we would normalize that because it's not really rightly displaying our continuous improvement performance, which we initiated and worked through the last quarters. If we would normalize this by the special raw material price effect, we would have been here at above 4% EBIT. And this is actually more or more fairly representing our operating performance in this area. In Powertrain & Chassis, as well here, we had 6.9%, which is a very good number looking into the revenue, good growth in that area. And as well here, we are partly by far not as much affected like at the Interior. But here, as we're normalized, we could add here EUR 1 million to EUR 2 million, which was bringing us up by another 1 percentage point of EBIT. So a clear improvement in terms of profit margins. The Specialty Products, excellent growth as well from the Q4 to the Q1. That's showing the potential we have outside of passenger cars, and we are offering here. And let's say, these numbers showing that when we are offering the right products with the global footprint, it shows the potential of this area. And yes, we can be very proud here on the sustainable EBIT margin of 18% and this incredible great growth perspective, which we have in this area. So very excellent. So looking then into the specific segments. In terms of Interior, again, we have grown 14% quarter 2020 to quarter 2021, 14%. So that's at market growth and yes, supported by here, in particular, premium and new energy vehicle markets, which were running quite well as reported before, in particular, in China. So we could participate on that. But again, we had a EUR 6 million EBIT effect only in Q1 in terms of material shortage, which caused spot market buy efforts and certainly additional freight and logistic costs here. In terms of new business wins, we could win here EUR 44.5 million on lifetime revenues in the first quarter, and this was bringing up our annual sales by EUR 3 million. Looking into Power & Chassis, market growth above average. So 14% market versus a good 16% and solid 16% growth. Majorly, as mentioned, driven by commercial vehicle growth. So that was a push here in Powertrain & Chassis. And looking in, as mentioned before, in our adjusted EBIT growth, so we could come up from minus EUR 1.4 million in the previous year quarter to EUR 6.9 million, so which is a roughly EUR 9 million increase, which is a significant number. So many thanks to the P&C team here on this operational performance. Looking into the new business wins, again, this should not concern. We have a lower booking in this quarter compared now to the previous year quarter. But again, there are push outs of potential acquisition or nominations. So we are still confident to catch up here in the following quarters. Looking then into our very attractive Specialty Product area segment, which consisted of the business divisions or business units here fluids, couplings and off-highway, so strong growth performance, 16% as well in this area, very well perceived. And in particular, couplings here had provided major growth and a solid platform for further growth perspective throughout the next quarters. The adjusted EBIT has been even further or over averagely increased by 30%. It could come up here from EUR 15 million in Q1 2020 to EUR 20 million in 2021. So that's really a remarkable number and keeps us on a very solid and stable 18% adjusted EBIT margin. Looking into the business wins. We are winning in all areas. So we could as well provide here in great increase from previous year to this year. And in particular, we could win attractive business in the fluid transfer systems, and we got awarded by major American OEMs here in this field, while as well couplings and off-highway contributed to the new bookings. With this, I would like to hand over to Norbert to give us a quick insight in the group financial update.

Thank you, Joerg. So we continue on Page 21. On the left side, we show the EBIT development by quarter, and you still see that, that chart is dominated graphically by the development in Q2 last year. We had a loss of EUR 117 million in EBIT. What is also remarkable is that our EBIT and adjusted EBIT in Q2 is now almost identical. Net income shows a slightly different development, since in net income, we always have significant effects on FX. But also on a net income level, we have a very positive Q1. And the chart is still dominated by the losses in Q2 last year. If you turn to Page 22, we show a bridge on development -- on revenue development by segment, and we give you here also an information, how much the semiconductor shortages impacted our revenue, our top line and our bottom line by segment. And in Q1, we had already a loss of EUR 2 million, which looks little, but it's the beginning of something. And that was where we were running short of raw materials and could not manufacture the part and could not deliver, even though we had orders for that. If you look on the right side, you'll see the impacts by business unit on cost or on EBIT. And most impacted is our Interior segment and the ICS business there. We have a pretty high electronics content in our material cost, and you see here how much that impacted profitability in Q1. P&C has also lots of electronics in their product. Modern gear shift systems always come with a computer inside. And that has effects then there as well, but not to the extent what we see in Interior. Specialty Products has, in Q1, very little impact from global supply crisis. If you turn the page next, there is a net income bridge from Q1 2020 to this year. And adjusted EBIT was the main driver on an EBIT level, obviously. We have small numbers on restructuring interest and other financial items. We have a very significant FX gain in that quarter relative to Q1 last year. This is all unrealized or most of it. So it has no cash effects. On taxes, we see increasing profitability in Q1, we also have to show increased tax cost, and that's reflected in the bridge, is minus EUR 4.7 million. If you go next, liquidity development, that is a bridge on Q4. Last year, where we ended with EUR 197.4 million. Our adjusted EBITDA improvement is driving a lot liquidity up, which is good so. We had some realization of cash flows from other receivables and liabilities. We have the typical Q1 negative effects from increasing our net working capital, mainly by accounts receivables. The year is always ending with December being a relatively low revenue months and low accounts receivables number. And we are ramping up a lot on that in Q1. It's just the normal seasonality effect. We had positive tax payments. So that happens also. We have a relatively small number on net investments untypically small for a quarter. We will catch up on this, but it helped with positive cash flow. And the other numbers are very much driven by our IFRS 16 and financing accounts with interest paid. And finally, we have a translation effect from currency movement in the balance sheet of almost EUR 7 million. And we paid back on a loan that was the only government loan we had in the balance sheet given to us under COVID conditions. We paid back on that loan since we don't need that anymore. And that results now in total available liquidity of EUR 201.3 million. Next, Page 25, net financial items. This is a breakdown of the net financial items. And you see in this solid dark green boxes, net interest is a pretty stable number in the [indiscernible] quarter. There, we have the important payments in and other financial costs, which is a relatively stable thing. What is of huge variance in our company and in our balance sheet are currency effects and most of them are. And they go in both ways. And this time, we had positive effects in Q1. Finally, financial ratios, Page 26. LTM ratios are still much impacted by the results of the second quarter last year. adjusted gearing still shows as 4.2% if we take the solid blue bar. This will change a lot with the next quarter, obviously, when we replace Q2 2020 with Q2 this year. All these measures are still impacted by that LTM effect in the upper level, so LTM measures. If you go down to equity ratio, we are still on very healthy ground, and we maintain that very healthy ground throughout the last year with the help of the capital raise. And we are now reporting 27.9% equity ratio, which is a very healthy number. Capital employed was slightly reduced in the new quarter. There we have a little bit tailwind when it comes to return on capital employed. So I'm handing back to Joerg to continue with outlook.

Thank you very much, Norbert. And yes, I would like to give you an outlook for the remaining 3 quarters. And as mentioned, we had a very good and very promising Q1. And looking into our order books, it looks still continuously promising throughout the entire year. But I have to point out the effect which we see currently in the automotive industry. And this is again the well-known shortage of semiconductor parts, in particular, followed by resin and special metals. And just to share with you, this is most probably going to affect certain events in terms of call-offs. So we're expecting that there will be an increasing trend of customer production postponements on one side and certainly continuously extraordinary spending for getting the, let's say, shortaged material in time in. This will certainly cause additional spendings here. So just to understand, again, in terms of where does this crisis comes from, it's certainly the Corona pandemic has caused an increase on semiconductors, very simple spoken in the gaming and entertainment and communication industry, which were eating up the increasing demand of the automotive industry. And very simple as these gaming industry is more profitable for the semiconductor suppliers, they are preferring to deliver on a first priority into these markets. So late bookings, late ordering of the automotive industry, which were starting late in recovering has then caused a second priority in terms of allocation for the automotive industry. And now the topic is that there is a less or lag on available semiconductor components, and that's now heading over as well to resin and special metals for automotive. So we are buying here from spot markets to compensate that and other market competitors are doing so -- is the same. But looking into, how does this work throughout the next quarters and when will it [ at least ] to an end here this crisis. So the automotive -- the leading automotive market experts predicting for Q2, a certain kind of peak. So this quarter will be a peak effect in terms of raw material shortage and it's going to stress further, in particular, the passenger market area and in regard to Kongsberg Automotive, the Interior business, but then the leading automotive experts predicting for Q3, a consolidation in the supply chain which then in Q4, going back to normal and recovering in terms of revenue and growth again. So that's a market perspective, and that means as well for us that looking into our very promising order books, into our very good performance in Q1, which could lead us normally to a higher guidance like before, we are cautious here because we -- considering the effect on the semiconductor shortage here and expecting a EUR 40 million excess on direct material and freight cost. And looking into that, therefore, despite the minus EUR 40 million extra cost, we maintain our full year guidance at EUR 60 million EBIT at this moment. And that's then displayed as well in the next slide, more clear. So these forward-looking statements based on the assumptions, which I mentioned before, on positively the market demand, on FX rates, but as well considering the continuously stress on the electronic and other key components availability. So -- but again, despite that, we are remaining our guidance on the EUR 60 million adjusted EBIT throughout the entire year. In terms of sales, certainly, as mentioned, we will defend our strong position and focusing further on our book-to-bill for the continuously development of the company and the continuously growth perspective over averagely or over market level. And we certainly on the adjusted EBIT, we stay as well here to manage our operationally -- operations in an efficient and effective way to secure here our EUR 60 million, despite the impacts of the material shortage. And in terms of free cash flow, as mentioned before, we are going to continue to really manage here our net working capital in a smart way and looking into securing the free cash flow outlook here on a positive level at EUR 10 million by the year-end. So a significant improvement. So overall, again, let me state very good Q1, very promising throughout the entire year. Unfortunately, we can't ignore the effect on the material shortage, which is going to least -- at least until Q4, according to leading market experts. But overall, with our improvement, with our order book, minus the raw material shortage, extra cost and spendings expected. We confirm our guidance here towards the EUR 60 million adjusted EBIT throughout the year with a EUR 10 million free cash flow positive performance. So thank you very much. And with this, we would like to move to the questionnaire.

So the first one is you commented on semiconductors as a headwind. Can you comment on what you are seeing in Q2? Are you anticipating the Q2 quarter to be sequentially weaker than Q1 for revenue and EBITDA?

We are expecting for Q1 similar revenue levels. As said, we have a very strong order book. But we anticipating that we have a significantly higher negative impact from the raw material issues; semiconductors, especially; and that Q2 will be the peak of that problem. So we will not maintain profit levels of Q1 in Q2. How much less is very hard to say. I mean, the nature of buying at spot market is that you really don't know pricing. You just know it's much more than normal.

Thank you, Norbert. This would lead us to the next question. Material price inflation seems to be one of your serious problem, especially in the Interior business. What are your plans to offset these effects? And how good do you see your chance to pass them to your customers?

So a very good question, certainly. I mean, yes, this is certainly not only a Kongsberg crisis. It's an industry crisis. And I have to admit [ got us majorly ] due to our diversified product portfolio. It's only or majorly hitting only our Interior business. But certainly, we are in close contacts, on daily contact with our customers to getting in a first priority, the parts in. And this is in a very cooperate way. And we are negotiating and discussing with customers as everybody is doing a share-of-pain approach in the major cases in really getting these extra costs shared between the 2 parties. That's our approach. And we do see here the first customers fully buying in and further customers who supporting this approach as well. So we're continuously discussing here on a very cooperative way with our customers, how we are dealing together with these costs.

You are calling out a EUR 40 million cost headwind and keeping EBIT guidance unchanged. How does this EUR 40 million higher headwind compare to your original expectation at the beginning of the year and how you are keeping guidance unchanged with that level of headwind? What are you doing to mitigate those costs? How are you passing it to your customers?

Peter, thanks for the question. We anticipated that question. And we also try to already answer that question in our presentation; when you look into the outlook comments. But what was expected, when we gave guidance in February, we didn't have that EUR 40 million on our list. We were very cautious since raw material crisis started to emerge. We could say that something like half of this was considered in our original guidance. We can make up a lot with better revenues and better mix. If you look into our first quarter revenues by segment, you'll see now that Specialty Products is the biggest revenue segment, and this is also the most profitable segment, yes. So that mix effect helps also to maintain the guidance and the profitability levels in our outlook.

Thank you, Norbert. And then the question 4. Many investors want more regular updates on contracts and new collaborations. What will Kongsberg do to make that happened? And this is certainly understood. And we are going to improve here our communication strategy to promote and to communicate here our new business wins and our new cooperations more actively, but certainly considering that this is limited in terms of information, individual information about our customers. But basically, we are very open to share here further information in time and more proactively.

And on that matter, investor communications, we may add that we have scheduled for today noon, a separate call on everybody who is interested that we walk you through our developments with new plants, new products, product developments, special focus on e-mobility, what can contribute on that major development in the industry.

So this was -- the last question posted -- there is another one. Why is the Specialty division seeming more immune from the raw material issues, you are experience. Is there more contractual pass-through in this division?

So there are a few reasons. First, Specialty is, to a certain extent, not depending on automotive customers. So in FTS, it's a fair amount of industrial business and the whole off-highway business is nonautomotive. So we're just operating there in different markets with different, if you like, terms and conditions. Secondly, the electronics content in 2 of our Specialty business units in couplings and FTS is very little, close to 0. We have significant electronics content in off-highway, but off-highway, as said, is nonautomotive. We have different sourcing strategies and different sourcing channels there anyway. And that helps us to manage the crisis, the supply crisis also better in Specialty than in the 2 other segments.

All right. Thank you, Norbert. Are there any more questions? We may open the phone line for questions.

[Operator Instructions] There are no questions at this time.

Then let me thank the entire audience here for participating in the Q1 earnings call. So thank you very much, and I wish each and everybody a good day and yes, together a good quarter 2. Thank you very much.

Yes. Thanks, everybody. Bye-bye.

Bye-bye.

Thank you. And this does conclude today's event. Thank you for your participation, ladies and gentlemen. You may now disconnect.