Kongsberg Automotive ASA (KOA) Earnings Call Transcript & Summary

Welcome, ladies and gentlemen, the investors for this investor call, and welcome to this question-and-answer session in connection with our announcement this morning that we are updating our full year 2021 financial targets. So as you no doubt have seen already, we have lowered our expectations for adjusted EBIT from EUR 60 million to now EUR 50 million and the revenue accordingly from EUR 1.13 billion towards EUR 1.1 billion. These reductions are the net result of the headwinds we want out of the Q2 presentation already, combined with the significant progress and very great results we made in mitigation with our Shift Gear program. In total, we are still confident that the improvements we are making will show in our results for 2021 and certainly for the future results, in particular for 2022. So we are happy to answer your questions in this call this morning. Together with me on the call to help answer any questions is also Frank Heffter, my colleague here, the CFO of Kongsberg.

Good morning.

Good morning. And we would be ready for receiving question.

The first questioner.

[Operator Instructions] And the first question is from the line of Bendik Engebretsen from Danske Bank.

There have been reports that the semiconductor shortages that we see now, they may last well into 2023 and even beyond. So with the updated guidance, Kongsberg EBIT margin looks to slip down to 4.5%, 4.6%, well below the margin back in 2018 and '19 prior to the pandemic. So my questions are, number one, how certain can you be that these shortages are resolved in the near term in the fourth quarter? And secondly, is this margin level what we should expect for the next year and onwards if the shortages just remain unresolved in '22?

Thank you very much for the question. I mean that's really interesting to see what's going to happen with the semiconductors in 2022 or even in the outer years. What we're seeing here from our automotive perspective, then we're seeing that there's going to be a recovery in the semiconductor market in certain technology trends. So everything below 90-nanometer wafer technology is going to be certainly recovered according to market expectation and automotive experts in 2022. And looking into our product portfolio, we are in this area with our chips on more than 60% in this recovered area. And majorly, everything beyond the 90-nanometer, which is in high processing wafer technology, is as well in to be forecasted to stay on a certain shortage level as well out in 2022 and as well partly in 2023. For us, it's difficult to now finally say what this year the semiconductor supplier strategy in terms of adding additional capacity. We are confident that they are with full speed on that. So what we are doing, we're expecting still going to have a certain shortage in the market in 2022. I think that's a common opinion and common outlook. We think for us, it's going to be reduce the impact as our major parts are going to get in terms of availability better. But there will be certainly as well as shortage in 2022, that's right. We will price that in certainly into our budget process and in our outlook for 2022. And we certainly are going to share that on time. What we currently seeing, that's really motivating and certainly, that we have a great book-to-bill. So our order books are full. Our new business wins are extraordinary high and encouraging. So we are on a good path forward. And finally, we need to see what at the end can be then finally delivered in terms of availability of components. But I think that's currently too early to really predict, but we will here inform on time.

If I may add. On the midterm margin levels, obviously, the measures -- with the countermeasures we have initiated in 2021 will, to a good extent, also benefit 2022 and the years to come. And in addition to that, the second gear of the Shift Gear program to review the product portfolio is obviously also aimed at improving the profitability going forward. So it's definitely our aim to return at least to these margin levels you have mentioned of 2019, 2018 going forward.

And if you're going to look into that, then certainly, our first gear, our Shift Gear, first gear, our performance improvement program, then we are confident that this will then kicking in this positive trends for the entire year in 2022, where we have now kick in for half of the year. So this is going to continue and keeps us confident for the outlook in 2022.

[Operator Instructions] As there are no further questions from the conference call at this moment, I will hand it back to the speakers for any written questions.

Okay. This is Jakob Bronebakk at Kongsberg Automotive. Just reading questions from the web. One question is from an unmanned participant is, if you could say something about what has changed that led to the updating of the guidance and how this is divided across the different areas or business units?

So changes that we are seeing and continuing an extensive reduction on production of our customers, of the car manufacturers of the OEMs. So this is going to affect our top line, so our revenue. So that's why we had to revise our top line due to missing production of OEMs, from EUR 1.13 billion to EUR 1.1 billion. So we have a EUR 30 million less revenue which we're seeing. This reduced production at OEMs has been caused by other suppliers who's suffering certainly as well under the chip shortage and the raw material component shortage. So we had to react on that and took out EUR 30 million of our revenue. And this has then one to one -- an effect on our bottom line, on our EBIT of, respectively, EUR 10 million. So that's what has changed. The other thing is going to continue as we predicted. And yes, that's the current outlook in terms of what has changed. And in terms of which business has been infected, this is majorly our interior business, with a high degree on semiconductors, but it's partly as well in our off-highway area. But here, we are more confident to find -- or we are working on alternative solutions in the off-highway area, which is certainly due to validation and approval process is much easier compared to the passenger car OEM automotive business. So -- but these are the 2 areas which are majorly impacted.

Okay. The next question is another on the side, but [ Eric ] is asking, how exposed are Kongsberg Automotive to electrification? And is this impacted by the semiconductor shortage?

For sure. We are -- in terms of electrification, we are for sure impacted in this regard, that 70% of our product portfolio and that's continuously increasing, tailored or switched now to applications in the e-vehicle areas. So we are affected on that. But honestly, not more than the other market players and competitors. So it's not majorly -- or it's not more infected or less. We have, I think, now a really big advantage in terms of our, let's say, as well non-EV or direct EV applications. This is our Couplings and our fluid system, for instance, that's helping us currently positively because we are having here much brighter market assets. We are not only delivering in the typical or conservative automotive and in particular passenger car area. Yes, here, really, this product portfolio, with this promising product portfolio as well as good possibility to mitigate as we are delivering in the industry and construction and agriculture area. So this is currently really supporting our revenue and our situation here to have a better balance and mitigation compared to the automotive business.

Thanks, [ Eric ]. There's a, I believe, a related question from Mr. [ Christopherson ]. In the stock exchange announcement, you talked about optimizing the portfolio and focusing on sustainability. Can you elaborate on what this mean?

Yes, certainly. I mean, we are looking -- as mentioned already in the last earnings calls and in investor calls, we have a 3 Shift Gear program or 3 gear shifted program. The first one is performance improvement. We are on that and reporting here continuously about the progress. The second topic is the, let's say, modernization and upgrade of our product portfolio. We are intensively and fully on this. And I'm more than happy to -- going to share an outlook at the Capital Market Day at 9th of December. But it's looking really promising and exciting. That's what I can say. And -- yes?

Sorry. Go ahead, Joerg.

No. It's certainly what -- what I wanted just to add is certainly that this is then as well combined with our third step in our improvement program is here, the sustainability, and let's say, environmental or green environmental situation. So this is in part and embedded of our new product portfolio, certainly looks as well into this embedded requirement.

Okay. A couple of follow-ups, which I'm going to try to merge a couple of questions into one. The current -- so the current market cap of Kongsberg is actually lower than a quarter's worth of revenue. How do you see the revenue developing in '22 and onwards based on the new business wins that we are currently experiencing?

I think we are constantly reporting on our book-to-bill ratio. So how many new business wins on an annualized sales level are we winning? And this ratio consistently exceeds 1, more to the tune of 1.3. That obviously implies the potential to grow significantly in the years to come. And that is our expectation that with our great customer relationships and the product portfolio, we will be able to grow the company in the next years.

Okay. There's a related follow-up question from [ Erik Mu ]. He says, you said that order booking has been extraordinarily good. Does that mean you have gained market share during the last quarter?

Definitely, we are going to gain market share. We are growing extraordinarily. So we are gaining market share, which going to, let's say, will be then hopefully get into the books over the next quarters. But again, it's all depending on the -- currently, on the availability of chips, which, as we all know, limiting currently our OEMs in the first extent. But yes, there is a market share growth.

Okay. There is another question from [ Yale Uldebald ], who is asking, how does [indiscernible] for your result expected to impact cash flow levels?

Yes. That is still something we are currently reviewing. Obviously, these supply chain impacts and shortages, disruptions at our customers, they're all -- also having an impact on our net working capital. And just mathematically, obviously, a reduced EBIT also has an impact on the cash flow. But we are looking into what additional measures we can take and initiate until year-end. Reviewing the planned CapEx and the like in order to minimize the impact on the cash flow. And that's currently undergoing, and therefore, we will provide an update on that along with our Q3 earnings. And what can be said is that certainly, our target is to remain positive for the year on the cash flow.

Okay. There's a related question on that from Mr. [ Christopherson ]. Guidance showed that profitability increases in the second half of the year. Will K achieve a double-digit EBIT margin? And how far ahead do you think this will be if so?

With all the measures initiated with Shift Gear, that certainly should have a positive impact in the second half of the year compared to the first half. A lot of the recovery that is related to semiconductor and raw material is going to materialize in the second half. So therefore, margins should improve. When it comes to double-digit margins on an annual basis, that is a good ambition. But I think it's too early to commit to anything here on that level.

Okay. There are no further questions from the web that haven't already been addressed. In that case, maybe Joerg, you would like to just wrap up and then we can end the call.

Certainly, first of all, thanks to the audience for the questions and the opportunity to answer that. We stay positive here definitely in terms of our results for 2021. And I would like to underline -- take the opportunity to underline here that despite the crisis, Kongsberg is on a very good way. The Shift Gear program is kicking in very greatly, very successfully and could mitigate most of the impacts. That's why we as well state here on our guidance. So far this revenue drop was, I think, from the entire market not expected. So we have to react on that. And this is certainly because other suppliers cannot fulfill the requirements and demand from the OEMs. So we are in this indirectly affected, as you could see on the top line drop, which is going really one to one in this case into our EBIT. So the program is running. We are completely on track. And we're staying very positively here in our performance improvement here in Kongsberg. And I'm more than glad to share with you as far in the near future what else are we doing in particular in our second gear, which we're going to shift here. And we are full on that in terms of product optimization and modernization, yes, and more than happy to continue with you in the dialogue. So thank you very much to everybody.