Kongsberg Automotive ASA (KOA) Earnings Call Transcript & Summary

Good morning, and welcome to the Kongsberg Automotive Investor Relations Media Call regarding the divestment of our Interior Comfort System and Light Duty Cables businesses. There will be a short presentation by Joerg Buchheim and Frank Heffter, followed by Q&A. The Q&A will be done through the web interface. So if you have any questions, please submit them through the webcast interface. And with that, I'd like to hand over to Joerg Buchheim, CEO and President of Kongsberg Automotive; and Frank Heffter, CFO.

Thanks a lot, Jakob. Thank you very much. And again, welcome to our dedicated session here on our just yesterday announced strategic divestments in the interior business area. And with me in the room is Frank -- Frank Heffter, as the CFO and as well Christian Amsel, our CTO. And we are more than glad to answer right after a quick insight here on a couple of slides your questions. And I would like to start with the first overview again to remind and recall our Shift Gear program, which has been launched here with the launch of our new management. And the Shift Gear is our way to a new Kongsberg Automotive. And it's going along. And I certainly repeat myself here, but it's worth to mention again, it's going along with our first year, which we have shifted right from the beginning of May. This is our performance improvement program, which is undergoing and currently foster the effects or the impacts very much in terms of current automotive challenges, but which is going as well to support us in a sustainable way beyond 2021, certainly. Then the product portfolio transformation as a second gear, which we have shifted. And this is clear what you can -- could saw yesterday in our divestment announcements. So we are undergoing here to transform our product portfolio towards the new Kongsberg Automotive where we are heading to. Last but not least is our strengthen and sustainability, the typical topic where we really going to invest as well tremendous efforts to getting us here on a second to none level on sustainability, environmental and governance focus. Our ambition, and this is as well part of our new Kongsberg Automotive, is certainly becoming second to none in all what we are doing. So we're heading really, to be a top global supplier in any area where we are operating, which then certainly, and we elaborated on that quickly on a question in the earnings call, should provide us a sustainable 2-digit EBIT on a long-term base. Moving then to the next slide, and this is what you took out certainly out of the press releases yesterday, and we are more than glad to announce here our 2 partners, who are the receiving party for our business units. And this is the Interior Comfort system solution, and these are our products related to seat comfort, which is heating, which is cooling, but it's as well lumbar and massage support here. And we are more than happy to announce here Lear Corporation, who entered with us in a sales agreement for this business which have been announced last night, CET. Lear, as you most or most probably everybody knows, is a global leading seat supplier, one of the top 4 worldwide. It's a very well-known and respective company, ranked on position 179 on the Fortune 500, operating in 38 countries with very excellent network and management here and it's headquartered in Southfield in Michigan. On the right side then as well, more than glad and very happy to announce that Suprajit Engineering is here our receiving party for our light-duty cable business. And as well here, we entered into a sales agreement with Suprajit and Suprajit is India's largest automotive cable and halogen bulb maker with an annual global capacity of more than 300 million cables and 110 million halogen bulbs. So Suprajit, a very well-known partner, and we are more than glad to found here the right harbor for our cable business. So looking then into the next slide, please. And here, I would like to tell a little bit why the transaction makes sense. And yes, for the ICS business or seat comfort business moving to Lear. So there's a clear vertical integration and trend to intelligent seats in the market. So this is going to be demanded more and more, at the end customer base and with moving this business to Lear, there is a fantastic upside opportunity by combining seat technology or seat function technology with the entire seat know-how and innovation power Lear provides, which then at the end, providing a full fledged system, let's say, intelligent seat in the future for the sake of modernization and upgrades up to the end customers. So we are joining forces here instead of facing a customer turned to a competitor, and we're really honoring here the very good and large wide relationship with Lear which we are fostering already over years. And certainly, Lear make here a difference as well in terms of growth opportunities. And on the other side, it's really a safe harbor of our employees who are joining in future in our automotive seating powerhouse and which certainly provides us both for our employees and personnel and functional development opportunities in a growth perspective area, which we couldn't generate in this extent. So looking then in what is the global footprint? What are we moving? So to bring it to the point, we are moving in total 3,800 employees. And these are out of 9 countries involved. We are going to move 4 factories, and 6 additional offices are involved in this transaction. So looking then into the LDC business. And here you see what makes this transaction useful is certainly with Suprajit, we can generate here with the [ LDC ] business, a lot of growth. So there is a future growth perspective for [ LDC ] at KA as 1 out of 6 products units competing for transformation, which was limited. So LDC moves now to a full dedicated, focused and specialized experts in this field. So a top 3 player in this area and who is really dedicated and combining our technical know-how with their market and global footprint leverage, which is generating enormous upgrade potential and a leverage of economies of scales. As well here, we are really glad to move LDC employees to a well-known partner, and we are absolutely convinced that they are offering here an ideal environment and a promising perspective in, and that's certainly as well upside experience in a multicultural environment. So as I said, Suprajit know-how and expertise of our LDC experts, and they're fully honoring here everything in terms of offering, in particular development objectives for our people. And it's certainly a lending in a long-term oriented LDC environment, which can offer a perspective which we couldn't see in this extent at Kongsberg Automotive. The deal in terms of global footprint, we're talking here about roughly 1,300 employees involved. It's 4 countries, and it's 3 plants out of Mexico, Hungary and China and a warehouse in the U.S., who is going to move. But as well, our couple of engineers out of our technical centers over different locations. So looking into the transaction impacts before we're heading to the Q&A. Yes, the improved focus -- improved future profitability, that's clear as well. And looking into the deal perspective, the Interior Comfort System has a transaction volume of EUR 175 million, as went public yesterday. We are moving here roughly a EUR 240 million revenue business. And I'm referring to 2021. It's an adjusted EBIT currently of minus EUR 8 million, but it's certainly, we have to refer here to the strong impact in terms of semiconductor shortage directly, but as well indirectly. But certainly, this business has a different long-term perspective. Looking into the LDC investment, we see here a transaction volume as well as announced of EUR 37.7 million. We're talking about an EUR 80 million unit revenue position, which is majorly coming out of automotive, but as well -- slightly out of power equipment. And we're talking about here an adjustment EBIT in 2021 of EUR 3 million, both certainly reflecting financials here out of 2021, which is in a normalized way in an outlook certainly much more profitable. So we are evaluating and developing our technology-driven business towards e-mobility, and that's certainly one of the major regions here to support the divestments into the partners here of Lear and Suprajit. And yes, as mentioned already before, the divested business units in the long term, do not fit with our aim to be a top global supplier in this area where we are operating, as mentioned before, they are certainly the receiving parties here with Lear and Suprajit having different opportunities in this area. Transactions are value accretive on both revenue per employee, earnings per employee, and that's what we're definitely generating here in the remaining Kongsberg in the new Kongsberg. There is certainly an upside here on our KPIs, looking on our remaining product portfolio. So building the new Kongsberg Automotive, and that's heading us to the next slide. And this is clear, our vision, we're concentrating our full focus On-Highway, in particular, on our powertrain and chassis products. We are here, and Christian is sitting here beside me, our CTO, looking into new product innovations, which are majorly supporting transformation to e-vehicle. And we're seeing here interesting and innovative upsides, which we are pushing. We see a really huge opportunity to go ahead in Off-Highway in regard to new products, new regions and new markets which is really very promising and prosperous path forward and the same as well as our transfer system, we have the opportunity to just briefly elaborate on our battery terminal management system. And this is certainly in combination out of fluid and couplings, where we are as well having additional market, but as well huge perspectives in terms of conquering here regions where we are today underrepresented. Proceeds from the sales, certainly, we're looking in all opportunities. And looking here, as mentioned before, we're certainly looking in growth perspectives here in our attractive product portfolio. We're looking into innovations. We're looking into smart systems, again, like BTMS, but there will be more. And we're certainly looking in deleveraging and strengthening our balance sheet. And at the end, I mean, everything -- what we are doing here certainly should maximize the shareholder value and as well support our stock price developments for sure in the sake of better results here for all parties involved. But more, I'm going to elaborate on our Q4 2021 Capital Market data -- market day. And there, I'm going to come up with the strategy update with my colleagues here, and this is going to give you more insight on Kongsberg's future mobility solutions. So with this, I would like to open up. Thank you for the attendance, and would like to open up the Q&A.

Okay. Thank you, Joerg. There's quite a lot of questions that have come through, some of which are duplicates. So I will try to go through them as fast as we can. And the first category of questions is regarding the net and gross proceeds from the transaction and the use to which they're going to be put. If you could -- perhaps you could summarize slightly and elaborate on what's already been said in the presentation and the press release.

Yes. On the proceeds, obviously, the final numbers can only be determined at the time of closing, as the deal comprises the usual standard adjustments on things like net working capital. But overall, we are expecting the net proceeds to be at around the range, perhaps slightly lower than the enterprise value, but still in this magnitude. So sizable, let's say, between EUR 150 million to EUR 200 million. And in terms of use, I think you have just elaborated on it. We will be in the comfortable position once the proceeds has been received to use them for various options that we are evaluating the development, investment in the future business, strengthening the balance sheet and that can be on the debt side, on the equity side. So all options are to be evaluated.

Okay. Thank you, Frank. And the next question is regard -- there's a couple of questions regarding the light cable division. The revenue and EBIT margin, EBITDA margins, what the production numbers have been like for the last few months, for last few years. Could you say something about that?

Jakob, we couldn't get the question. Can you repeat it, please?

Yes, of course. Sorry. There are some questions regarding the LDC business. Specifically, what kind of revenue levels and margins we have seen over the past 2 years and what kind of production numbers specifically, that the unit has had?

To answer your question, I think we have obviously seen, also seen in the LDC business an impact on COVID in the recent past. But on the midterm, I'd say, it's a rather stable business. And the margin profile that is reflected here in the 2021 number I think is kind of representative to the business.

Okay. Thanks, Frank. There's also a question regarding the transaction. Will there be any debt transferred into Suprajit as part of the transaction?

No. That's not going to happen.

Great. There's some still on the LDC transaction. There's a question regarding the retention of employees. Is it the case that employees of LDC will be retained at Suprajit?

Yes. Absolutely. Thanks for the question. I mean that's one of our clearly, desires. And this was important for both parties to have our people retained and one-to-one transferred to Suprajit on the same conditions on the ongoing perspectives, which we had in Kongsberg. So Suprajit completely taking everything over and supporting here the same towards our employee development like we did. So we're really appreciating that.

Okay. There's also a question asking for clarification about where LDC traditionally has set. Is it purely within the legacy Interiors division? So the pro forma, the P&C and specialty products won't be impacted? Or is it a mix?

No. We have actually, as mentioned, as elaborated before, out of the EUR 80 million, roughly EUR 60 million coming out of the interior applications, and we have EUR 20 million out of our specialty products. And that's majorly the part of outdoor power equipment. That's very simple. I mean, for instance, a green cutter, starting up a green cutter to different applications. So 60%, so 2/3 out of Interior and 1/3 out of power equipment.

Okay. Thank you. There's another category, again, looking at the use of proceeds. We have said that we -- there's a comment regarding supporting stock market development. One of the listeners wanting to know whether this is specifically referring to, for example, stock buybacks. We have addressed some of this, and perhaps you could reiterate the -- what we have been seeing around this.

So I said before, I mean, currently, we are glad to have this sales agreement signed. Now we are heading towards the closing. And then at the closing, we know what are the net proceeds certainly. And then at that time, we are going to look more and we'll share as well, certainly this information where exactly and how much we are going to invest or allocate to the different levers, deleveraging again, but as well investing into our growth of our future Kongsberg Automotive portfolio and system setup up to other opportunities. But again, it's all about generating shareholder value and maximize shareholder value and certainly, let's say, financing the plan to become here second to none in where we are operating. So we will share that on time or in time at the moment of closing.

Okay. Thank you. There's a question which we also had on the Q3, but which we didn't answer because it was related to the transaction. The bond that we have outstanding has a call feature coming up next year. There's a question regarding how we see the opportunities to call respond to finance -- to refinance it. There's a related question regarding the rating. One of the things that Moody's has been looking for is obviously lower leverage. So could we comment on this?

Yes. How we are then executing the deleverage, I think that's too early to elaborate on that, and I hope that the audience can understand that. We will come back on that on time. But certainly, we are looking in all options and very carefully and are going to maximize here again, the shareholder value and as well the company value.

Okay. There's another question asking whether we are currently looking at acquiring any new business or technology?

And so here, I would like to refer to our Capital Market Day. Again, we're looking into all options as well in terms of developing here our company second to none. And again, looking into our current portfolio already provides a lot of development opportunities. And we're certainly looking then there as well, how does extension make sense. And again, we will elaborate there on our let's say, new vision, Kongsberg Automotive mobility solutions at our Capital Market Day.

Yes. We are all looking forward to the Capital Market Day. Then there's a few questions coming in regarding employee retention. You did mention this earlier in the presentation. But there are questions as to whether there are any restrictions in the agreements put on layoffs for employees for a particular time? And if so, what that time period is?

So, I think these are not known from our side. In this regard, as I elaborated before, both Lear and as well Suprajit took over 100% of our contracts and the benefits and everything. That was a very smooth transaction. And please keep in mind business is just as valuable as the employees and our employees, and that's clearly understood and honored by our partners, very knowledgeable and a guarantee for the future success. So I don't see any reason why employees should be here, limited employed. But I cannot speak for the partners here. So this question should be then on a mid- and long-term basis rather addressed to our partners, but I saw them here both very much honoring on a mid- and long-term base here, our knowledged and very skillful employees.

Okay. Thank you. And there's -- the next question is regarding what KA will look like after the transactions are completed. So in pro forma terms, what does our end market exposure look like split between commercial vehicles, light vehicles and Off-Highway?

Yes. Thanks a lot for the question. We are going to head towards an EUR 8 million revenue company, and there is a EUR 50 million EBIT outlook and a slightly positive cash flow. But please keep in mind, 2021 should be not the indicator as we have the onetime effects of EUR 15 million in the cash. So this -- and let's say EBIT margin perspective, we are raising here from EUR 4.5 million to a little bit more than 6%, 6.2%, which is giving you an outlook in terms of profitability growth.

Okay. Thank you. And there are some questions regarding the LDC business and how it relates.

Sorry, Jakob. Before, certainly -- Jakob, it was certainly EUR 800 million, not EUR 8 million revenue, I think. Yes.

Of course. Yes. So the next question, there are a few questions regarding the LDC segment and how it is exposed to vehicle electrification. Are there any risks to the LDC segment from electrification? And how much in percent of revenue of the LDC business is from electric vehicles?

In the LDC business, that's majorly interior business and functional interior business. So seat movements, it's activating hoods, fuel filler flaps all this business. And I would say that's pretty much unaffected in this regard from any electrification trend. And it's a mechanical business, which in a certain extent, going to continue. And I would not rate that in or let's say, I would have problems to link that to an electrification share.

Okay. There's a question regarding capacity utilization of the LDC business and how this was developed over the last 2 years and our estimates for 2021.

As I've mentioned earlier, the LDC business was a rather stable business. And therefore, also the capacity utilization was on a rather stable level in the -- as part of the transaction, we are now optimizing as well, moving certain parts of the business that is currently located in other Kongsberg locations to consolidate it in these locations that are being divested. So also going forward, the path might not be fully representative. I think we are heading over, very well set-up business to the buyers that's geared towards the future.

And certainly, there will be a leverage of Suprajit in terms of optimizing utilizations across their new global footprint.

Okay. Thank you, Joerg. And there's a question regarding the Pruszkow site and whether this will remain after the takeover or whether this will be transferred?

No, that's going to get transferred as part of the ICS transfer and deal. Pruszkow is going to move to Lear.

Just looking through the remaining questions, could we say something about the geographic revenue split for the remaining business for Kongsberg Automotive?

Yes, I would say the divestments are happening in all 3 regions, but a certain way on Europe and Americas. So therefore, you will see a more pronounced impact on those 2 regions for the overall portfolio of Kongsberg, which then leaves us with an even more balanced portfolio going forward on our revenue distribution across the 3 regions.

Yes. But certainly, it's majorly North America. It's Europe. But then on the other side, and that's why I gave some hints already. This is great opportunity as well to develop our business in China and Korea, but as well in India. And for the remaining business area, this should be certainly one of the major drivers in terms of regional growth and upside potential. So that's actually very, very great and outlooking opportunity.

Okay. And there's a question that came in earlier, but which is perhaps good to address now. How will we measure whether KA is among the top 3 suppliers in the areas that we are operating in?

That's certainly there underlie different criteria. It will be from a content point of view. It will be looking into technology. So are we an innovative leader in the fields where we are operating, to be we offering high quality and for affordable and very competitive price. And then it's certainly as well all the commercials towards the customer, so are we competitive. On the other side, are we generating here in the areas 2-digit EBIT numbers, which is a very good indicator in the automotive area to be a top supplier, and that's what where we are heading to. And then last but not least, certainly, we want to get that as well reflected in our customer satisfaction rating. And we are clearly committed here to be second to none in all these areas, which should push us to a top supplier rating.

Thank you. And going back to the LDC business. There's quite a few questions around the valuations there. I think perhaps the most specific question is, what's the tangible assets of the LDC business are that are being transferred?

The assets that will be transferred are covered by the enterprise value. So they are below the EUR 37 million, and that is the magnitude we are talking about, less than EUR 35 million.

Okay. We have gone slightly over our allotted time. We will attempt to answer any remaining questions through the Web interface. I encourage you all to attend either in-person or via webcast our Capital Markets Day on December 9. There will be both a tour of the Kongsberg tech facility as well as presentations in Oslo. And with that, I would like to thank you all for attending this conference call. And see you again next time we present results for our -- at our Capital Markets Day.

Thank you very much as well from our side.

This concludes today's call. Thank you for your participation. You may now disconnect.