Kongsberg Automotive ASA (KOA) Earnings Call Transcript & Summary

Good morning, and thank you for joining Kongsberg Automotive's Q2 2026 Earnings Call Presentation. Today, we are hosting a digital webcast. And with me here is Trond Fiskum, our President and CEO; and CFO, Erik Magelssen. On the screen, you see today's agenda. And as always, we will host a Q&A session after today's presentation.[Operator Instructions] And with that, I will give the word over to our President and CEO, Trond Fiskum.

Thank you, Terese, and good morning to all. Thank you for joining today's earnings call. We go straight to the highlights of the quarter. We have had a positive development in the quarter, and the numbers shows a clear improvement in KA's financial performance. Q2 EBIT improved to EUR 12 million, representing 6.2% EBIT margin compared with same quarter last year that was a negative -- where we had a negative EBIT of EUR 2.9 million. Cash flow also improved and moving in the right direction with a net cash flow in Q2 that was positive EUR 4.3 million compared with a negative EUR 0.9 million in the same quarter last year. Net profit increased to EUR 5.2 million compared with a loss of EUR 2 million in Q2 last year. And finally, return on capital employed improved to 10.2% compared with 0.5% in the same quarter last year. So overall, a good quarter that shows that we are on the right track. So the fundamentals of the business continue to improve across all key financial metrics. On this slide, we compare the Q2 results with the previous 4 quarters, and we can clearly see the positive development. Starting with revenues. Q2 revenues reached EUR 193.8 million, which is slightly above same quarter last year and almost 8% higher than Q1. Revenues have now increased for 3 consecutive quarters, indicating an improved market environment. While we see that the overall market conditions remain mixed across regions and the different market segments, we do see encouraging signs in some key markets for us, particularly in North America, both in the commercial vehicle segment, but also in other market segments, for example, construction vehicles. We also see positive developments in the European commercial vehicle market. Moving on to profitability. EBIT for the quarter is, as mentioned, EUR 12 million and an improved margin to 6.2%. This is the strongest EBIT -- quarterly EBIT performance in a long time for KA. The improvement is primarily driven by reduced overhead costs and also some reduced warranty expenses. Erik will provide more details on this later in the presentation. It is worth noting that in the quarter, we have a positive one-time effect of EUR 2.2 million related to a reversal of impairment due to a successful customer contract renegotiation. And it also includes a negative effect from a restructuring cost of EUR 1.8 million. Cash flow is also moving in the right direction. Q2 net cash flow was positive EUR 4.3 million, as mentioned. And the last 12 months cash flow has now improved for 6 consecutive quarters and is now at EUR 17.7 million. Overall, the key message here is that the actions that we're taking over the last 12 to 18 months are delivering positive and measurable results. Profitability has improved. Cash generation has strengthened. Leverage continues to decline, and we are developing a financially healthier and stronger business. We continue to take additional initiatives to reduce KA's cost base and improve our competitiveness. A key element of this is to simplify and optimize our manufacturing footprint. During the quarter, we announced the consolidation of our manufacturing operations in China. Following the acquisition of the remaining ownership interest in our China joint venture in 2025, we achieved greater flexibility to optimize our footprint in the region. And as a result of a strategic review, we decided to consolidate our manufacturing operations in China from 3 plants into 1. The initiative will reduce our cost base and create a stronger consolidated unit in Wuxi in China. The restructuring costs associated with this consolidation were recognized in Q2. The second initiative is in France. There, we have initiated a restructuring process related to our plant in Cluses. We follow the procedure as defined by French law. The statutory and mandatory information and consultation process with employee representatives, labor unions and relevant authorities commenced in June, and we expect to have a conclusion during the second half of this year. These initiatives are fully aligned with our broader strategy of creating a leaner and more competitive manufacturing footprint and to improve KA's profitability and cash generation. Regarding the warranty and recall related matters that we have communicated previously, there are no fundamental changes to report. The matters remain unresolved and continue to be actively managed. I'm personally involved to drive these cases forward and towards conclusion. During Q2, we continued with constructive discussions with the relevant counterparties regarding potential resolutions, and we have made progress in several areas, but no final agreements have been reached and the discussions remain ongoing. In parallel, during Q2, we initiated legal proceedings related to insurance recovery in one of these matters, and it is ongoing. So we are working actively to achieve commercially reasonable outcomes. And as communicated previously, we will provide further updates as additional clarity is obtained. Moving to our commercial performance and contract awards for the quarter. During the quarter, we secured contract awards with an estimated revenues of EUR 135 million. This represents a meaningful increase compared to recent quarters and reflecting an improved commercial momentum across the business. Our focus continues to be on profitable growth, not volume alone. Several contracts awarded during the quarter were secured on improved commercial and contractual terms, including the successful renegotiation and extension of the contract previously mentioned that led to the impairment reversal recognized in the quarter. Looking at the business mix, awards were well balanced between Driver Control System and Flow Control Systems. The awards were broadly aligned with our revenue profile with the largest share coming from the commercial vehicle segment, which remains our largest revenue base. Looking ahead, our commercial pipeline remains solid. Customer engagement is high. We continue to actively pursue a number of attractive opportunities that supports our ambition of sustainable and profitable growth. We continue to execute against our 4 clear priorities for 2026, improving cost efficiency, strengthening cash flow, building stronger leadership and culture and accelerating innovation and profitable growth. And the Q2 results demonstrate that these priorities are translating into real and tangible results. We continue to take additional initiatives to optimize our cost base and improve our competitiveness. And at the same time, we continue to strengthen the organization, the leadership teams and our performance culture. Sustainable improvement is not only about cost actions and restructuring projects, it also requires strong leadership and strong performance-oriented culture. And finally, we remain focused on innovation and profitable growth. The contract awards secured during the quarter is a step in the right direction, and we have, as mentioned, a high business development activity level. Our work is far from finished, but it is encouraging to see that we have improved results. It gives us confidence in that we are on the right track and confidence in the future of KA. We'll now take a more detailed look at the financials, and I will hand over the word to Erik.

Thank you, Trond. In Driver Control Systems, the revenue level was recorded lower than in Q2 last year, but we do start to see a stabilizing upward trend in the top line level again. This is also demonstrated by the fact that the revenue level increased with 8% from the first quarter this year. The business unit Driveline is where we primarily have a lower revenue level than in 2025, which is also in line with our plan. Even though we have lower sales than in Q2 last year, the EBIT improved significantly compared to Q2 last year. This is due to a combination of reduction in overhead and administrative expenses and lower accruals for warranty expenses. As noted, Q2 includes a positive effect of EUR 2.2 million related to reversal of prior period impairments but also restructuring costs of EUR 1.7 million related to this business area now in Q2. So significant structural changes have been and will be made within this business area that we will continue to see positive effect from in coming quarters. So moving on to Flow Control Systems. We now have recorded revenue -- recorded increased revenue level over 3 consecutive quarters, which is very positive and indicating a more stable market environment and gradual recovery in demand. And also here, the revenue level is 8% higher than in the first quarter this year. The increase in EBIT we see here is primarily driven by lower operating costs, both directly in the business area and through allocation of lower corporate costs. This in addition to the effect of increased contribution from the higher revenue level. You also see the positive development in the EBIT margin, which is now in Q2 close to 9%. The EBIT improvements in Q2 and the first half year '26 are driven primarily by operational execution and structural cost actions and reductions and by lower warranty costs and not by sales volume recovery. This is demonstrated in this EBIT bridge where you see the effect of the lower overhead cost compared to the same period in '25 in the EUR 9.8 million for the first half year. Q2 '25 was marked by significant gross warranty cost that also affected the first half year '25. In addition to the structural cost changes implemented, we are now seeing signs of improved market stability. So moving into the net income, our bottom line. Coming from a negative net income of EUR 2 million in Q2 '25, with the key effects from the bridge, we report a positive net income of EUR 5.2 million now in Q2 '26, which, of course, is a substantial improvement in our bottom line. For the first half year, we have improved the net income from a negative EUR 4.2 million to a positive EUR 10.4 million now in the first half year of '26. The operational [ profitability ] improvements reflected in the EBIT column here are the key driver for the improvements, and this is coming from our structural cost improvements, improved financial and cost discipline. On the cash flow side, as Trond also mentioned, we have continued -- we have a continued increase in the 12-month trend, and this is now positive at EUR 17.7 million, coming from a negative level of EUR 12.4 million in the same quarter last year. And the 4 quarters through the year will, to a certain extent, have different seasonality effects in relation to net working capital, and it is therefore most relevant to compare each quarter to the same quarter in the previous year. The net cash flow in Q2 '26 is EUR 5.2 million higher than in Q2 '25. So here, it's important to look at over time and the positive cash flow development over time reflects both stronger earnings, structural cost improvements, stronger financial discipline and improved working capital management. The improved profitability and positive net cash flow development also materializes in a significant reduction in net interest-bearing debt. And this net interest-bearing debt has been reduced with EUR 23.3 million from Q2 -- Q1 2025. As you can also see, the net interest-bearing debt-to-EBITDA ratio has been reduced by more than 50% from the level in Q2 '25 and is now at 1.7x. The leverage ratio per bond-term definition that you see in the blue line is the key ratio in relation to our EUR 110 million bond loan, where the covenant is maximum 4. And this has come down to 1.6 now per Q2 '26. This positive development strengthens KA's financial position and gives us increased financial flexibility going forward. Then on the financial ratios, the improvements in our underlying profitability that we achieved without increasing our assets at the same rate gives us a significant increase in return on capital employed. And this measure of our capital efficiency has now increased over 4 consecutive quarters and is per Q2 '26 at 10.2%. It is also noteworthy here that the equity ratio has increased quarter-by-quarter since Q2 2025, and this is now at 33.2%. So as we continue to improve our operations and cost base, giving increased profitability, the equity ratio will continue to increase. And this is, of course, one measure for our solidity. And then back to you, Trond.

Thank you, Erik. Let me conclude on a few takeaways from the quarter. Q2 delivered a significant improvement in profitability and cash flow, demonstrating that our operational improvements and cost reduction initiatives are delivering tangible results. Revenues increased for the third consecutive quarter, indicating improved market stability and improved market conditions. We are taking additional decisive actions to reduce our cost base to further streamline our manufacturing footprint. And going forward, we remain focused on operational improvements, excellence and disciplined execution as we continue to work towards our long-term EBIT target of 6.5%. Final slide is regarding the outlook. We expect improvement in underlying profitability to continue throughout the remainder of 2026. And market conditions remain cautiously positive, supported by stronger truck order intake in North America and also a positive development in Europe, although there are geopolitical and trade-related uncertainties that remain. This concludes our presentation today, and we will open up for the Q&A session.

Okay. I think there's one question I can start with. Can you comment some more on the reduction in net interest-bearing debt and the leverage ratio and what this implies for Kongsberg Automotive? Yes. As you see from the graphs, we have managed to achieve a significant reduction, a good reduction in net interest-bearing debt and also in the leverage ratio. This is important for Kongsberg Automotive because it demonstrates a more solid financial company with a better balance between debt and equity. You can also say financial resilience. And it gives us greater financial flexibility with regard to financing and more financing opportunities and the combination of different types of financing. and also to finance new growth. So this is important for [ Kongsberg ] from any perspective. And I think everything we do, in a way, at the end, materializes in our cash flow and in our net interest-bearing debt, Trond.

Okay. There is a question here regarding the warranty. There's 2 questions actually. So the first one is, when can we expect the warranty cases to be concluded? We understand that there is a desire to have a time line for this, but we cannot provide one. These are complex matters, and the timing is not entirely within our control. We are very actively engaged in this, and we are making progress as reported and I'm personally also involved in driving these cases towards the resolution, and we will come back with updates when we have that. The second question regarding warranty is, can you explain actual accrual levels for warranty costs compared to risk estimates? Can we expect significant adjustment in accruals? The answer to this question is that we have made accruals based on our best estimate by management.

Yeah.

We can take the next one, which is on net working capital. While you report continued good free cash flow, there seems to have been an increase in working capital in the past few quarters. How should we view this for the full year 2026? I think I can just comment from my point of view, when we have increased revenues, this is naturally followed by higher working capital to support that revenue growth over the last few quarters. So that is my first immediate response to that question. Anything to add, Erik?

Yes, that's right. And I think it is kind of a function of the revenue and the top line and activity level. And if you look at -- if you take the net working capital in percent of the revenue level of the last 3 months and annualize this, we have a net working capital ratio at around 19% for Q2 '26, and it's the same as it was in year-end '25. So we are, of course, working to -- at all times to manage our net working capital. And in a way, all increases in net working capital will convert to positive cash flow in subsequent periods. It is very high on our agenda, of course. So we have managed to keep the level in relation to revenue fairly stable.