Earnings Transcript for KOA.OL - Q2 Fiscal Year 2023

Mads Langaard: Good morning everyone, and welcome to the Kongsberg Automotive Q2 Earnings Call presentation. My name is Mads Langaard. I'm Head of Investor Relations at Kongsberg Automotive. With me today, I have our new Interim and President and CEO, Linda Nyquist-Evenrud; and our CFO, Frank Heffter. Linda, the word is yours.

Linda Nyquist-Evenrud: Hey, thank you, Matt. And once again, welcome to this Q2 earnings call. I'm happy to be elected the Interim President and CEO of Kongsberg Automotive. And through my 15 years of KA, I've come to appreciate the strength of all my colleagues. I understand the solid bond we have with our customers and our impressive product portfolio with market-leading positions, and not at least, the opportunities this company gives us as a company with a global footprint. In the last few years, KA has faced different challenges, mainly operational. Therefore, going forward, I will focus on operational improvements and employee satisfaction. Together with our highly skilled and motivated team, I'm looking forward to embarking on the journey of continuing the positive revenue trend, and more importantly, regaining profitability as soon as possible. But before we move into the executive summary, I would like to start with the KA in brief and give a short recap about the company and its product portfolio. So let's move to the next page. As most of you know, Kongsberg Automotive is a global supplier of automotive systems and components. The company specializes in providing products related to driver control systems, powertrain, and fluid handling systems. We serve various markets, including passenger car, commercial vehicles of highway and industrial markets, and we operate in multiple countries with manufacturing facilities, research centers, and offices across different continents. Our focus is on innovation and engineering expertise to deliver high quality solutions to the automotive and industrial industry. Our total revenues in 2022 summed up to €906 million. Next page, please. Commercial Vehicles, this segment is representing more than 50% of our revenues and include a number of products provided from both business segments. The vast majority of our products are also compatible with EV applications, ensuring a future-oriented product portfolio. On the right-hand side, we have highlighted key products that also represent new product offerings and starting with the electric actuators. KA has a broad portfolio of electric actuators for future commercial vehicle, drivetrain requirements, which is patented solutions. We offer actuators, for example, for differentiation lock, decoupling, or shifting applications. Our actuators are designed for efficient movements, high performance and have a unique can and spring design. Furthermore, we serve both linear and watery application requests. In terms of the steer-by-wire automobiles, KA is a smart thermal management valve for commercial vehicle applications, which combines both modularity and efficiency, specially designed for its application segments. It comes with an integrated activator, which is based on a KA long-term expertise and with a smart control. Our compressed air coupling is a technology leader focused on supplying state-of-the-art products to the global commercial vehicle markets. Raufoss ABC product range provides customers with valuable flexible solutions that can be tailored to their specific requirements. Our air coupling ensure an airtight system for vehicle energy savings and optimize system airflow to improve the braking response time and thus consistently reduce vehicle stopping distance. The Raufoss Couplings brand has existed for more than 30 years and is a well-known product in the global markets. The thermal management system is one of our new innovation areas where we utilize existing competence and technology across BUs and segments, adding in a good portion of engineering development to create new coolant lines and couplings for the thermal management systems, both in terms of hybrid and battery electric as well as a fuel cell. This is done in close cooperation-ship with the original equipment manufacturers or what we say OEM. If we move into the next slide, please. Moving on to the off-highway segment that represents vehicles and machinery that are not primarily designed for use on public roads, such as construction, agriculture, and mining. Just as for the commercial vehicles, the vast majority of our products for the off-highway segment is designed to also match with the growing EV market. Some of our key products are showcased on the right-hand side, and starting with the steel columns, which is a mother design that can be configured to all vehicles with both tilt and telescoping features. The anticipated growth rate for this product is in the area of 15% to 18%. Halos [ph] is another key product designed for the harsh applications off-highway vehicles are subject to. We have a whole effect sensor that can be configured for all applications. And our anticipated growth rate for this product is in the range of 8% to 12%. Fluid transfer or PTFE hoses are used for applications such as turbo, exhaust gas recirculation, fuel transfer, hydraulic brake, air compressor, exhaust lines, and coolant for various subsystems. Compared to steel and rubber lines, the PTFE hose are lightweight and compared to nylon and rubber, shows a very low permeability. PTFE does have the lowest coefficient of friction of any solid material known, making the fluid transfer smooth with minimal pressure drops. Additionally, PTFE hose can be appreciated for a tight packaging on the vehicle. If we move to the next slide, our passenger car segment or the light-duty vehicles, the product offering is targeting the growing EV market and applications such as air suspension. Products that are designed to enhance the performance and safety of the vehicle. Adding a bit flavor to the product on the right-hand side, starting with electric actuators, KA shift and select actuators with its compact-like packaging offers premium performance with a back drivable gear train, including high position accuracy. Actuators that can be offered both with embedded hardware and software as a standalone unit or with hardware containing only sensor systems for applications where other separate control units is planned to operate in. For the shift-by-wire systems, it's worthily to mention that KA is an established supplier for various types of shifters in shift-by-wire context. But the future trends towards, for example, shift by touchscreen, Kongsberg Automotive offers a modular concept, combined with excellent performance and flexible touch and press characteristics. As a summary, I would like to underline that our product offering for all three end markets are well positioned for the growing EV markets, and our continuous focus will be on areas where we can find our position as second to now. And with that, I would like to move into the Executive Summary on Page 10. Okay. So let's start on the upper left side. Our revenues in quarter two ended on €224.5 million, which is equivalent to a 17.5% growth rate year-over-year at constant currency rates and excluding the BRP sales divested at the end of quarter 2022. Our adjusted EBIT came in open €0.3 million, which is a decrease by €3.7 million year-over-year, impacted by operational one-time effects of €5.4 million within the P&C segment, as well as the divestment of BRP amounted to €1.1 million and a less favorable product mix. Our free cash flow came in positive with €4.8 million, an improvement of €0.8 million year-over-year, while the leverage ratio and the net interest-bearing debt improved significantly, mainly as a result of the proceeds received from divestiture to BRP completed in quarter four 2022. In terms of new business wins, we managed to sign €171.5 million of new business wins in quarter two, which is an improvement year-over-year of €3.6 billion. Next slide, please. So looking into the segments, starting with P&C for Powertrain & Chassis. We can see a revenue increase of €9.2 million year-over-year, equivalent to plus 8.1%, despite the negative currency translation effect of €6.7 million. The revenue growth was mainly driven by increases in the European and American commercial vehicle markets, partially offset by the significant decrease of revenues in the passenger car market in China, declining with €9.2 million. It is worthwhile to mention that we are pursuing a case related to infringement of our electro property in the Chinese market. Adjusted EBIT was as previously mentioned, hit by operational one-time effects mainly related to the one product warranty case and write-down of inventories in North America. In terms of value creation within P&C, our focus is on finalizing negotiations to charge out supplier price and labor cost increases anticipated to give them positive impact in the second half. Following the reduction in the passenger car market in China, we have successfully implemented measure to right size our organization and activity that will continue in other regions where needed. We will also continue to promote our new generation of smart actuators with an increased focus on the Chinese and Asia-Pacific markets. On activity that is progressing well. Next slide, please. Moving on to the segment Specialty Products. Quarter two ended up with revenue of €16.6 million higher year-over-year on a constant currency rate and excluding the BRP sales divested at the end of 2022. This was mainly driven by the growth of the Flow Control Systems, revenues then linked into Europe and in the United States as well as the growth of off-highway revenues in Americas. Adjusted EBIT came in on €8.6 million, a reduction of €0.9 million year-over-year, excluding the BRP sales, where the decline was mainly attributable to the lingering unfavorable product mix. In terms of key value creation and measures within the specialty products, they are focused on finalizing the negotiations to charge out supplier price and labor cost increases similar to P&C, something that we are anticipating also to give them a positive impact within the second half. A strong focus on operational performance, improvement projects, and cost control in all areas. Within the business unit flow control systems, there is a high focus level on people development and best practice sharing across regions and plants. Next slide, please. As a last page in our Executive Summary, we would like to give some light to the good news we shared on July 11th that KA has acquired 20% of the shares in Chassis Autonomy with an option to acquire up to 100% of the total outstanding shares within 2027. Chassis Autonomy specializes in the design and development of steer-by-wire and brake-by-wiring systems for use in highly automated and fully autonomous vehicles as well as agriculture and construction applications where KA is seeking a strong market position. This technology will allow KA to empower customers to incorporate fail-operational steer-by-wire solutions in their vehicles today, preparing them for autonomous driving for road and farming vehicles. And if we go then a couple of slides and moving into the chapter market update, please. Okay. Very good. We start with a well-known page describing how the global production for both commercial vehicles and passenger cars are developing. As you can see, both markets are showing a positive growth development year-over-year, where commercial vehicles is driven by higher production volumes in China and European markets, resulting in 18% growth year-over-year and estimated growth of 7.3%, comparing 2023 with fiscal year 2022. The global passenger car production indicates a 13.9% year-over-year growth, triggered by growth in all regions. And comparing the full-year, we see an increase of plus 4.5% comparing 2023 production estimates with the fiscal year 2022. Next slide, please. For completeness, we're also including a market forecast, and on a more long range perspective, we see a low to moderate market growth in both segments, where China is the primary driver for the growth in the coming years. LMC quarter one report indicated a growth rate of 18%, including China for commercial vehicles and the same time frame from 2023 to 2027. And on the passenger car side, a 10% growth rate, including China, for the same time frame. And this is also what we then showcased in our quarter one earnings call presentation. If we move into the next slide, talking about the challenges that remains within the automotive industry. Here, we still see some clouds on the sky, although situation is improving in terms of semiconductor shortages as well as for the supply chain situation. On the positive side, we see further reductions related to energy prices and raw materials, and worthwhile to mention is that our recovery rates is exceeding 90% year-to-date related to semiconductors. Next slide, please. So looking into the KA Q2 performance within the different segments and regions, we can see that KA has outperformed the growth in the civil market in both the Americas and in China, a trend that has been maintained for three quarters in a row. The growth is driven by new product launches to a well-known global Tier 1 customer as well as global OEM customers. The growth in the commercial vehicles market is part of the strategic shift for KA. On the contrary side in the passenger car market, we see the impact of the lower sales in China related to our Driveline business and increase in local competition in China. The decrease in other is related to the divestment of Powersports business to BRP completed end of last year. Hence, it's not included in the quarter two 2023 revenues. However, excluding these revenues from quarter two 2022, the other revenue would have increased by 25.4% on a constant currency basis comparing year-over-year. Next slide, please. To wrap up the market update, I would like to touch base on the book-to-bill performance and future-looking development in terms of growth. KA is still on track. New business wins for quarter two amounted to €70 million annualized, with lifetime revenues of €171.5 million. Due to seasonality effects and customer award cycles, we expect a strong second half in terms of new bookings. We expect to finish 2023 with a book-to-bill higher than one, again showing growth higher than the markets. Wins in quarter two was again strongly weighted towards our commercial vehicle and the industrial segments. A major contract extension for our gear transmission management products and new business awards for air suspension assemblies. And with that, I would like to give the word over to Frank and the financial update. So Frank, please.

Frank Heffter: Yes. Good morning, and also a warm welcome from my side. Let's start with the revenues. Revenues for Q2 2023 were €225 million, basically flat on a reported basis versus Q2 2022. But if we adjust 2022 for the €24.7 million revenues to BRP that were divested later in the year and 2023 for the negative €10.6 million currency impact, the underlying development was very positive with a growth of 17.5%. And it's also worthwhile to note that both P&C and SPP contributed to this growth. If you add Q1 and Q2 at half year, with revenues of €453 million, we are well on track to reach our full-year guidance on the top-line. If we look at adjusted EBIT, we reported €0.3 million for the quarter and an adjusted EBIT margin. If you go to the next slide, please, of 0.1%, driven mainly by a negative one-off effect in P&C and overall unfavorable product mix in both P&C and SPP. On the next page, I will elaborate a bit more on the reasons behind that. So when we look at the previous year's quarter two, the numbers still included the revenues with BRP that we later divested, €24.7 million, and the contribution of €1.1 million. So a comparable base is actually revenues of €200.9 million with €2.9 million of adjusted EBIT. From that base on, we saw good sales growth in Americas and Europe in P&C with €22.8 million and an adjusted EBIT increase as well of 0.8%. Sales in Asia-Pacific decreased slightly, as well as the adjusted EBIT. The adjusted EBIT of P&C without China also includes negative one-time effects of €5.4 million. There are coming, on one hand from a warranty case related to an actuation product in the U.S., where we had to make additional accruals as well as extraordinary inventory write-offs related to inventory that became obsolete due to the production of new product variances. In P&C China, we continue to see the declining top-line on high margin business, €4.4 million lower revenue, and related impact of €2.8 million on adjusted EBIT. Looking at SPP. Also here, again, a solid growth in FCS, €10.2 million, but the adjusted EBIT decreased by €0.5 million as we are continuing to see challenges on the shop floor, on execution, having higher labor variances than expected, and this we need to get out of the organization. In BRP, again, excluding the sold revenues, we also saw a growth of €6.4 million and a slightly declining EBIT. Here, we are still working through the backlog for one customer with over time and expect this to end in the third quarter, that will also then trigger already negotiated price increases that will materialize in the third quarter. Looking at net income on the next page, where we reported a loss of minus €2.8 million in the last quarter of 2022. We had the adjusted EBIT declining by €3.7 million on the back of the mentioned one-time items. In addition, we have conducted an extraordinary impairment test at half year on the back of triggering events, i.e. a reduction of the long range plan figures in Driveline and also a new assessment of potential opportunities in the future on new business wins. When conducting this impairment test, we had to acknowledge that in Europe, we do not see positive cash flow generation in the foreseeable future and thus decided to impair all the non-current assets in this region. In China, one customer project also was impaired or assets related to this customer project as the customer has moved the volume to a competitor of ours and thus left us with idle capacity. We are currently pursuing intellectual property infringements on this supplier and expect here a positive outcome, but potentially not anymore in this fiscal year. So also, here, we took an impairment of the non-current assets. Restructuring interest and other financial items were somewhat in line with previous year on the financial items. We had a gain on investments that we took in money market funds that was positive. We continue to face currency losses, although significantly less than in the first quarter. Now in the second quarter, amounting to a net minus €2 million that we have accounted for. And last but not least, we had higher income tax expenses than in the previous year's quarter, predominantly due to the fact that on this low profitability, we have not recognizable or unusable losses in Switzerland as well as in Norway. Moving on to the net financial items. Then we again see that on the net currency effects, we are now slightly on the negative side in Q2 2023. And also accumulated, we are now slightly negative with this €3.5 million reported in Q2 2023 with overall minus 0.2%. But we also see the NOK strengthening. So this should actually turn in the different direction again in Q3. Other financial items continue to be in the positive territory, and the net interest, again, is on a significantly lower level than in 2021 and also 2022 on the back of the deleveraging. Looking at the free cash flow on the next page. We see a positive €4.8 million for the quarter in free cash flow, a total change in cash of €1.1 million as we have repurchased some of our bond notes in the quarter in the open market. The cash flow from operating activities was positive €12.7 million, with also a positive change in net working capital. Here, we were able to increase our accounts payable by €6 million, that significantly contributed to the positive change in the quarter. Needless to say that these payables need to be paid one time. So this will happen or has already happened at the beginning of quarter three. The investing activities amounted to minus €4.6 million, there in investment expenditures of €5.1 million. We continue here on a relatively low basis, containing our cash and making only very selected investment decisions. Financing activities came in at minus €7.6 million. Again, normal lease liabilities, cash outflow, and then the repurchase of the bond notes. When we look at the overall liquidity development, then we see on the back of this positive €1.1 million change in cash, basically flat development, adjusted EBIT and other operating cash flow items contributed positive, whereas the tax payments and investment expenditures contributed negative. And then the financing activities, like I mentioned, interest-bearing liabilities are leasing, and bond notes were the cash outflow that we use the money for. I just realized that the chart did not change. But I think we can show it again. Here this is the page I was referring to. So overall, a flat liquidity development and with €255.8 million, we are still in a very comfortable position with €50 million of the undrawn revolving credit facility, €25 million of the unutilized ARS, and then €180.8 million in cash. On the last page of the financial section, let's look at the key financial ratios. So the gearing ratio amounted to €1.2 million, including IFRS 16 effects and very low 0.3%. Excluding these effects, so still very solid levels and a significant improvement again versus the prior year quarter. The adjusted ROCE on the back of the relatively low adjusted EBIT was at around previous year levels, slightly above at 4.1%, respectively, 4.7%. The equity ratio decreased to 34.5% or respectively, 31.7% on the back of the net losses that we have to account for, including the non-cash impairment of the Driveline assets. And the capital employed also on the back of the write-down and the improvement in net working capital and below, relatively low divestments decreased to €451 million or €492 million, including the IFRS 16 liabilities and assets. With this, I'd like to hand it back to Linda for the next section.

Linda Nyquist-Evenrud: Thank you, Frank. So as a quick update on our Shift Gear program, I would like to highlight that the net result quarter two came in slightly positive with €0.1 billion means that we have been able to offset the negative impacts linked to supply chain inflation and warranty costs, inventory revaluations and also a weaker demand in Driveline with the positive impact generated by customer price negotiations and continuous operational improvements. Our full-year forecast indicates a net positive effect of €0.7 million, which is a reduction of €4.3 million compared to a net positive effect of €5 million reported in quarter one. Next slide, please. Very good. So moving into our last slide and the outlook section, starting with the guidance. We are confirming previous revenue guidance of €880 million to €900 million. And following the operational one-time effects in quarter two, we have updated our adjusted EBIT guidance to €20 million to €25 million. In terms of the ongoing strategic review that was announced during the quarter one earnings call back in May, I would like to underline that we are working in close cooperation-ship with both Rothschild and ABG Sundal Collier to explore and evaluate options to maximize future shareholder value. This is an activity that normally takes time. And when there is an update to be shared, we will ensure that this has been close to the market. Last but not least, we are planning a breakfast meeting in quarter three, more precise within September month to give the chance for our shareholders to meet myself and the team in-person. This will take place in Oslo, and we will get back with venue and time within short. And with that, we conclude our presentation and we move over to the Q&A session. So Mads, please take it from here.

A - Mads Langaard: Thank you very much Linda and Frank. We have received some questions related to the departure of Mr. Buchheim. Please note that the departure of the previous CEO is the Board of Directors' decision. So please understand that we, as a management, cannot comment to this. We've also received questions regarding reduction of inventory. And Frank, what is the reason for the reduction in inventory? And why is it being written down now? Why do it now? We did not make sense to wait for the write-downs?

Frank Heffter: Yes, you have to write it down once you realize that it is unusable in the future. And in the last quarter, we realized that these will not be used anymore as the customer basically exclusively asks for the new variances of the product. And we have tested as well whether we can still sell it or not and whether it has a residual value. But at the end of the day, you have to make the correction once you realize that you cannot use it.

Mads Langaard: Thank you, Frank. Another one for you. On the warranty case with the actuators in the U.S., what was exactly the fault of the product here? Could that happen with other customers as well?

Frank Heffter: So it was a manufacturing defect process topic, and this was fixed at the customer, and it is specific to this one product. So it cannot repeat in other products, because it is a specific topic with one single product.

Mads Langaard: Yes.

Frank Heffter: With this increased warranty, we believe we are fairly covered for the cost in this year.

Mads Langaard: Yes. Thank you, Frank. We have some questions related to the ongoing strategic review. The questions are what can it tell us about the time frame going forward? Have there been any meetings? And can you provide some updates to the strategic review? And has Rothschild and ABG provided a preliminary revaluation of the company. Linda, maybe you can give some flavor to this?

Linda Nyquist-Evenrud: For sure. And as I just mentioned a few minutes ago as well, we have initiated the strategic review of the company. And the aim of the review is to evaluate options to maximize the future shareholder values. And over the coming quarters, okay, will inform the market as soon as there is relevant results of the review that are being obtained. And I think that's what we can share for now.

Mads Langaard: Yes, thank you, Linda. We also have some questions related to Chassis Autonomy. The questions related to the transaction value, and maybe you can make a brief comment to that as well, Linda?

Linda Nyquist-Evenrud: Yes. We stated in the presentation, the parties have agreed not to disclose the purchase price. Well, that's being said, this will, of course, also come out in our future quarter three report for that sake, but as of now, the decision taken not to disclose the value.

Mads Langaard: Thank you. Another questions related to Chassis Autonomy. Could you provide more insight into your thoughts about the company and the synergies you see for the future?

Linda Nyquist-Evenrud: And in case, when it comes to that one, first of all, we have customer sample orders anticipated now in 2023, a series nomination in 2024 and start-up production for the different levels is anticipated for 2026-2027.

Mads Langaard: How many patents contracts does Chassis Autonomy currently have?

Linda Nyquist-Evenrud: This is unfortunately not possible to disclose, I would say.

Mads Langaard: What does KA think about the statement that the company aims to become a unicorn business with a valuation of more than $1 billion in five years' time?

Linda Nyquist-Evenrud: Yes. Their focus on future technology and the synergies that we see with our product portfolio are promising, and it's also part of the reason why we have chosen to invest in them. So we're looking forward to follow their development of Chassis Autonomy.

Mads Langaard: Thank you. And there's also a last question. Could we receive a presentation that provides more detailed information about the company? It will be fair to say that we, as a company, have, of course, seen some more information other than what's available to the public on the company's website. So we would please refer to Chassis Autonomy's website in the first place. And some questions for Frank. After the sale of the divisions, KA has experienced reduced margins. Can you provide the information on the number of people in administrative roles when the company had 11,000 employees and how many are in administrative roles now with 5,500 employees?

Frank Heffter: Yes. Before the divestments, we had around 440 FTEs in administrative roles. And this number has reduced significantly to around 320 as of today. So this is somewhat in line with the revenue we divested, although not with the number of FTEs overall, because the divested businesses were significantly, say labor intensive than the remaining business. So with that, if you only look at FTEs, the percent of administrative FTE increased from 4% to 6%. But that, again, is only one number to look at and potentially not necessarily only a right one.

Mads Langaard: Thank you, Frank. Another one for you. When does KA plan to review costs and explore opportunities for savings in terms of employees, office locations and consultants?

Frank Heffter: This is actually a daily task, an ongoing task. As well as part of Shift Gear, we are looking at optimization measures. We have launched and publicly announced the overhead cost reduction program of €10 million for this year, and that is a daily task for us.

Mads Langaard: Thank you, Frank. Another one maybe also for you Frank. Does it mean that the Shift Gear program is still greatly contributing? And how is the charging to the customers developing?

Frank Heffter: Yes. So yes, the -- if you compare also to what we have disclosed in Q1, you see that the positive effects of the Shift Gear program actually increased. So it is of great value to the company. Unfortunately, on the other hand, we also saw an increase in the negative effects that all in all, the net effect declined. But without this program, we would definitely not be on the profitability levels that we see currently and in the future.

Mads Langaard: Another one, Frank. What are you doing against the huge FX losses which steels KAs profit?

Frank Heffter: Yes, there are, I would say, easier things to tackle and more complicated things to tackle. Obviously, on an operational basis, we are constantly looking to better match the customer contract currencies and our cost currencies, so that at the end we have a natural hedge. But then we have certain structural topics with intercompany financing activities in different currencies that we are looking at to optimize, but there is no fast fix at the moment.

Mads Langaard: Thank you. Another one for you, Frank. What was the thinking behind the bond buyback ahead of the strategic review conclusion and are further buybacks being considered?

Frank Heffter: Yes, it's actually more an opportunistic topic. From time-to-time, banks are approaching us to repurchase bonds as they have individual positions that they have been asked to sell. And here, we take the opportunity to repurchase under the nominal value.

Mads Langaard: Next question. Do you expect EBIT to recover in second half? And any guidance for the full-year, please?

Linda Nyquist-Evenrud: I believe in terms of the guidance, that was also then mentioned during our outlook section. As we said that due to those one-time effects in quarter two, we have updated our adjusted EBIT guidance to the level of €20 million to €25 million. And in terms of you do expect -- sorry, Mads -- expect to recover in the second half. I think looking into where we are then year-to-date, with adjusted an EBIT of €4.1 million, that means that there is a significant portion then to be generated into second half related to those improvements that we are talking about on the operational side in terms of commercial excellence as also mentioned already in the presentation.

Mads Langaard: Yes, another question. What EBIT margin is KA aiming for in 2026?

Linda Nyquist-Evenrud: I think in terms of, I've been in the chair now only for a couple of weeks, and I will make for analysis and evaluations before I go into any of those details. And for me, it's important now to use the time to sit down with the team and look into as well the future for this. That's being said, I have a good insight from previous positions into the company, and we have a great target to improve both operationally and financially going forward. That is clearly the target that we have.

Mads Langaard: Thank you, Linda. Another question, significantly higher revenue should lead to higher adjusted EBIT, significantly decrease in logistics costs, material and energy costs and better semiconductor market should lead to higher EBIT yet adjusted EBIT is going in the wrong direction. It leads me as an investor in the dark in terms of what it takes to generate positive development in adjusted EBIT in KA. Do you need a positive development in all areas, including better product mix in specialty products and better sales of private cars in China and lower labor costs to become profitable measured by adjusted EBIT? I would expect from a healthy business that it should be able to deliver strong adjusted EBIT even if not all areas perform optimally? Maybe you can elaborate a little bit on it, Frank.

Frank Heffter: Yes. I mean I don't disagree to the beginning of the long question here. It should and that is what we are also expecting lead to operational leverage when the top line is growing. If you have to account for certain legacy historical one-time effects related to the past, then this certainly overshadows your current performance. And you also know that the automotive industry is not a 20-plus percent adjusted EBIT margin business. So a lot of things have to go right in order to perform on a good adjusted EBIT margin level. Does it always have to be everything? No, because never everything goes right. But we need a couple of things. We can compensate for certain things with extraordinary measures with passing on higher input cost to customers with operational improvements, yes. So that is what also makes us believe that we will improve already in the second half of the year.

Mads Langaard: Thanks, Frank. Another question for you. The SPP EBIT in the coming quarter, Q3 2022 is extremely high and tough comparable, how much of this figure was linked to BRP in the previous quarter, i.e., Q3 2022?

Frank Heffter: Yes, you are right. There is a significant amount of one-time reimbursement for semiconductor spot buys included in the previous year's quarter in the magnitude of €8 million. And this, you certainly have to adjust for when doing a quarter-to-quarter comparison. And we will provide you, again, the related figures excluding DRP for the previous year period.

Mads Langaard: Next question is the downwards EBIT revision for the fiscal year '23 linked primarily to China passenger cars?

Frank Heffter: No. Also referring to the previous long question. We are confident that we can compensate the majority of these impacts already within P&C through the growth in on-highway and also through the cost containment measures. So the main reason for the reduction is actually the one-time impact we have accounted for in the second quarter.

Mads Langaard: Thank you, Frank. How to come back to the previous high two digit in SPP and how is Couplings developing?

Linda Nyquist-Evenrud: I think, first of all, in terms of we don't disclose information further down into the segments. Couplings is belonging to SPP. And I would say also mentioned during the KA brief section today, it's an area involved in both existing markets and customers as well as new technologies such as the thermal management system. As we also have indicated, there have been operational performance issues as well across the BUs and in the company, something that we are working very hard on. And as I also mentioned, in SPP, we are and flow control systems, especially working on also sharing best practice between plants and regions to ensure that we continuously improve our processes.

Mads Langaard: Thank you, Linda. We have another question. Are the figures in accordance with the master plan for a sale of the company? You can please elaborate a little bit on it, Linda or Frank, but please note that we have not said that we are selling the company. We have said that we are initiating a strategic review. And with that, you can please elaborate a little bit more Linda or Frank.

Linda Nyquist-Evenrud: I think that is the answer. We are running that strategic review. That is a process that is somewhat time-consuming as well. As we said, whenever we have any information to disclose to the market, we will for sure communicate that.

Frank Heffter: Yes. And on the figures, the figures are what the figures are. We are reporting about the past quarter and any strategic forward-looking action doesn't influence the past results. We are reporting the performance, the current performance of the company.

Mads Langaard: Another one for you Frank. Why do you obviously inherited Driveline impairments haven't been impaired already during the big impairment in 2020?

Frank Heffter: Obviously, I was not part of the company at that time, but I have to assume that there was also a thorough assessment made at that time based on the outlook of the business, and that correction at that time was based on that and did not require a full impairment of the assets at that time. And now the situation has changed, and the outlook, especially for Europe, has weakened compared to what was looked at in 2020. And therefore, we have to take, unfortunately, another hit.

Mads Langaard: Thank you, Frank. Linda, one for you. Are we planning more acquisitions and investments is Chassis Autonomy part of a bigger strategy.

Linda Nyquist-Evenrud: I think we have been touching base today in terms of Chassis autonomy. And all in all, we see their technology as a very interesting and promising technology with good synergies as well to our products and the future path we have in there. In terms of other acquisitions, I would say we always have a view into the market and follow that as well. And if there are cases coming up, that is matching well with our scope, we definitely say that that is of our interest.

Mads Langaard: Thank you, Linda. Another one for you. Is the previous outlined strategy to move up of Driveline and invest more into on highway, the absolute right way?

Linda Nyquist-Evenrud: I think what we've said in general, and that has been we mentioned since also the Capital Markets Day back in 2021, we will continue. First of all, we have a good positioning towards the electrical vehicle market. And we will continue focusing on areas where we can define our position as second to now. And that will also be valid now going forward.

Mads Langaard: So, last one for you, Frank. Is it right without the special effect in Q2 KA would have been significantly better than previous year's quarters, meals stabilizing more and more?

Frank Heffter: Yes. The math is right. As we have shown in the EBIT bridge, the comparable last year quarter would have been €2.9 million, excluding BRP. And if you add the €5.4 million in Q3 2023, then obviously, you would be significantly better.

Mads Langaard: Thank you, Frank. I think that's it. Yes, we have received one last questioner. When do you think you will get the first order in the Chassis Autonomy and you probably responded it to some extent, Linda?

Linda Nyquist-Evenrud: Yes, we can recap on that one. So we said that we are anticipating the first customer sample orders in 2023, serious nomination in 2024. Zero production start is set towards 2026-2027 for the different L4 and L3 levels.

Mads Langaard: Thank you, Linda. With that, it seems like we're through. Thank you all for participating. We wish you a nice day, and welcome back for the Q3 earnings call presentation, the 7th of November. And as Linda said, we will also host this breakfast meeting in September, and we'll get back to you in due course with the time and place to meet.