Earnings Transcript for KOA.OL - Q3 Fiscal Year 2021

Jakob Bronebakk: Good morning, and welcome to this Earnings Call Conference Presentation for the Third Quarter 2021 by Kongsberg Automotive. I will now hand over to Joerg Buchheim, the CEO and President of Kongsberg Automotive.

Joerg Buchheim: Thank you very much, Jakob. Welcome as well for my side to the Kongsberg Automotive Q3 2021 earnings call. So if we are going to move to the next slide please, again my name is Joerg Buchheim. I’m the CEO and President at Kongsberg Automotive. And I’m joined by my colleague, our CFO, Frank Heffter. And I would like to welcome you to our Q3 earnings call by providing you an insight on our Q3 highlights, the financial update and followed by a year-end outlook and guidance. If we’re going to go to the next slide, please, yes, this is our forward-looking statements, our lawyers always proving our eyesight. So allow me not to read through and I would like to move to the next slide, please. So that’s the summary and highlights going then into the details on Slide 5, on the revenue slide. So we had a good third quarter. As you know, the seasonality of revenues means that the third quarter is lower than the others due to summer holidays. By taking that into account, it was with almost 5% increase compared to the third quarter 2020, still a good quarter and its underlying growth close to a level of Q3 2019. Our adjusted EBIT was, of course, impacted by the supply chain situation, but we have seen some great business wins, which bought our book-to-bill ratio up to 1.5 and strong positive cash flow of €7.6 million. With this going to the next slide. As we mentioned after the previous quarter, we are currently undergoing a company of wide transformation program, which we have called shift gear. The first gear is improving the performance of our existing business. The second gear will ensure that we have the optimal product portfolio and the third gear will ensure that the business is both financially and environmentally sustainable. The performance improvement has already helped us to offset the impacts of supply chain situation by improving our supply chain management, our operational and commercial excellence. The team did here an excellent job and we set our targets as well for the next year continuously at €20 million potential saving level on a sustainable base. However, we want to make sure that our business is focused on areas where we are or can be second to none or better to say a top three industry leader and supplier. This will allow us to build highly valuable business on the strengths of our engineering, on our operational excellence and build on strong relationships we have with our customers. Therefore, we have launched a product portfolio transformation process as our second initiative within our shift gear transition program. And here I’m glad to refer to yesterday’s announced strategic divestments within our interior business segment, where I would like to elaborate more in a minute in the outlook part. Looking then into this Slide 7, please, before we are coming to this, I would like to look with you first at the three different segments where the situation were right in Q3 as follows. The P&C segment showed good performance, despite the supply chain situation, upholding revenues compared to the same quarter last year. Adjusted EBIT is down again due to the current situation, but we had some great business wins, which set us up well for the future. Interiors had a more difficult quarter with a small decrease in revenue and a negative adjusted EBIT. EV also saw strong business wins with annualized revenues of more than 50% of our current revenue won this quarter. Special products grew strongly with almost 20% revenue increase and some good business wins. This segment also saw some decreases in adjusted EBIT, but is still our most profitable business. It also showed excellent continuous business wins during the quarter. There are details about previous quarters in the appendix, so you can see there’s a very positive trend here. Q3 is usually a weak quarter for business wins because of the holiday season, so this has been an outstanding quarter in this regard. Please go to Slide 8. These are some of key contracts which make up the business wins I just mentioned. I won’t go into details here, other than to point out that the contracts underscore the global and diversified nature of KA business as well our excellent book-to-bill ratio and the strong commitment of our customers to KA. So we are continuing to share this with you on actual events by our media and social media platforms proactively. Heading then to the next slide, I would like to hand over to Frank Heffter for details on financials. Frank?

Frank Heffter: Yes. Thank you very much, Joerg, and also a warm welcome from my side. I am happy to provide you some more insights into our financials. If we look first of all on the overall revenue and adjusted EBIT figures, then we have to mention that the Q3 seasonality kicks in here and therefore the most meaningful comparison is against the Q3 of 2020. Yes, this was impacted by COVID, but on the other hand, we are still facing the semiconductor crisis this year. When we look at the overall number €267 million in revenues in Q3 2021 compared to the $255 million, 4.8% growth. Some tailwind from currency, which at around one percentage point a bit more than one percentage point to the growth, but more than 3% coming organically. If you look at the segments obviously the strongest growth fueled by our Specialty Products segment which at the same time is the most profitable one. So good mix. On the group adjusted EBIT we see a decrease compared to Q3 2020. Here obviously, the semiconductor and raw material crisis has a major effect. Although we are able to offset some of it in the same quarter, there is a timing a difference and therefore a negative effect also in this quarter, which exceeds €15 million in adjusted EBIT. So, taking this into account, the profitability would be more in the range of €22 million, thus with almost 8% on sales and expected performance. When we go to the next slide, we see the development in the different segments on Powertrain & Chassis and Interior more flat development on the topline. The underlying impact from semiconductors are actually exceeding €10 million in Powertrain & Chassis, and about €5 million in Interior, where we have lost revenues. These are partially compensated by reimbursement from customers for extra costs in the range of €3 million to €4 million. And these net effects are then weighing on the top line. In Specialty Products, there is less of effect on the top line. So, we see strong growth. And also good to note is that the growth comes from all three businesses, be it Off-Highway, be it Couplings or FTS. When we look at the profitability we see in Powertrain & Chassis the impact a) from the volume that is even more pronounced, like I mentioned, than you see in the top line due to the customer reimbursement. And the material cost increases that we faced in the quarter. So here a deterioration to around 5%. In interior, we see a recovery from the Q2 but still below breakeven performance. Again, semiconductor is weighing in here as well as material cost and freight. We have the timing issue on recovery, this is still visible this quarter. We should see a significant improvement here in the next quarter where this actually turns into a slight positive net effect, our expectation. So, the worst I’d say on that is over. On Specialty Products, on the EBIT, we have had certain impact from semiconductor and Off-Highway that weigh on the margin here and to a lesser extent some higher cost. But we have compared to Q3 2020 invested significantly also in the growth of our profitable business. So added engineering resources that are working on the new business wins and making sure that we see profitable growth going forward. When we look at the cashflow development, then I’d like to highlight here the strong operating cashflow from operating activities is plus €23 million including an improvement in networking capital of €4 million that is certainly good performance for the quarter. And once again we have tightly managed the CapEx in Q3 and selectively investors only. So, cash outflow of €8 million only in the quarter. Then like in Q1, we paid our bond interest and some other financial cost that then led to a net outflow of €12 million from financing activities, some tailwind from currency, which then resulted in a total of €8 million of positive cash flow. When we look at the group liquidity development, then compared to the last quarter, you see an improvement from €205 million to €211 million, of €6 million improvements where that added from the cash flow. And we have paid back €1.4 million on the ARF that therefore only increases the balance by €6 million, whereas the cash flow is €8 million. To highlight here, again, the positive impacts from earnings and networking capital and the selective investments I’ve already mentioned. So when it comes to overall liquidity availability, we are still having at the end of Q3, the unutilized securitization program with €60 million and the undrawn revolving credit facility of €70 million needs to be noted here that part of that €20 million that we added back in April 2020 was expired or expired beginning of October. So as of today, there is €50 million of capacity available. With this said, I will hand back to Mr. Buchheim for further acceleration on the outlook.

Joerg Buchheim: Note that we are part of section dealing with the third quarter. Thank you much, Frank. We can say a little bit more about the transactions we just announced yesterday. We have, of course communicated earlier that we are looking at structural changes as part of Shift Gear, but now we can show our work in the form of this Kongsberg strategic driven divestment. While interior has been an important and always important area for KA. And one where we have developed certainly some key technology, it is a sector where scale is very important, both to counter cost pressures and to deal with the tendency of OEMs, to vertically integrate, which we see strongly. We have the scale to do this and will be a great new home for our ICS unit. Similar light-duty cable is very solid, but rather traditional technique business, where we are convinced that Suprajit engineering is a specialist in the sector can provide economy of scale and leverage a wide global footprint while also uploading their product line with all electronic activation. So a great fit as well. Both transactions are providing us now the opportunity to consolidate all our resources, strengths, and focus on our highly potential business within on and off highway. Here we are undergoing a strong transformation with high speed on making all our products fit for the electrical and autonomous vehicle future by upgrading our current product portfolio, creating smart systems and concur new markets and highly potential so far underdeveloped regions, so a great outlook. Slide 16, please. As you see from the numbers here, the transactions are accretive by most key performance measures. Just as an example, revenue and earnings per employee by this much higher than the current levels for KA. And this will set us up for stronger profitability from 2022 onwards. There are however, some one-time transaction cost, which means that we won’t see the full benefits already in 2021, just as a heads up. We will report these units as discontinued business in 2020. So the impact on all our 2021 guidance varies slightly, this leads us to the next Slide 17, please. As everyone who follows the automotive sector is well aware. The semiconductor supply chain situation is causing problems all through the value chain, and this is going to continue certainly. We are mostly impacted in the interior segment and to a lesser extent in the power train and chassis segment, although there are others, let’s say indirect impacts of higher raw material cost, freight, energy and availability throughout. But we are continuing to strongly counter these impacts with steady results out of our Shift Gear performance improvement program. Further, as a result of the transactions, we are going to report revenue of €800 million, but despite and around 28% takeout of revenue. I’m glad to confirm that our latest 2021 guidance remains at €50 million EBIT for the year end. While the cash flow is predicted to be slightly positive, despite almost $15 million one-time deal expenses. In terms of 2022 guidance, some of what we have already talked about is of course important for the outlook. The business wins means that we have a solid order book and a 1.5 book to bill ratio. But in the current situation, it’s really difficult to forecast at this moment. We will therefore provide the guidance for 2022 at the annual results presentation for 2021. So please stay with us on that. So finally, prior moving to the Q&A session, please let me point that we are going to invite you to join our special divestment related call at 10

Operator: Thank you. [Operator Instructions]

Jakob Bronebakk: We can perhaps start with some of the questions that are coming in through the online interface. We have a question – there’s several questions, which I’m going to summarize, because we’re all covering the same thing. What was the revenue and EBITDA for the divisions that are currently being sold off? Can you say something about that?

Frank Heffter: Like we have stated in the announcements the – to be divested businesses comprise around €320 million of sales and slightly negative EBIT margin and the current performance is in line with these full year numbers.

Jakob Bronebakk: Okay. Thank you, Frank. There’s also a follow-up question regarding the plans for the proceeds. We have said something about this, but perhaps you could elaborate a little bit to answer the callers question.

Frank Heffter: Yes, certainly. Thanks a lot to Jakob, and thanks for the question. Certainly, we looking in all options how we are going to deal with the proceeds and what we are definitely doing here considering strongly to deleverage here our depth as one of the options. And all other options are as well under evaluation, but certainly going to support strongly the development of the shareholder value here.

Jakob Bronebakk: Okay. There’s quite a lot of questions coming in regarding the transactions. Some of which we will perhaps keep for the call that we are doing later regarding the transactions. I will focus on the questions that are related to Q3. There’s a question regarding the one off raw material impact on EBIT in Q3 and whether we could quantify the impact there.

Frank Heffter: Yes. We certainly can like I have mentioned it has been, I’d say the worst quarter in that respect we continued to purchase certain parts on the spot by market in order to secure deliveries to customers. And this actually exceeded €10 million in the quarter plus higher raw material and freight costs. So over overall an impact of around €15 million, half of that has been offset in the quarter by direct reimbursements from customers to one time payments and therefore still net negative effect in the quarter, which we expect to reverse going forward, then additional payments will come in, but only to a lesser extent, additional cost shall occur.

Jakob Bronebakk: Thank you, Frank. There’s also another question regarding the semiconductor situation. Do we have any comments on how we see the outlook for the semiconductor problems?

Joerg Buchheim: Yes, it’s difficult to exactly predict, because there are more people, different effects. It’s not only actually semiconductor. But it’s clear, it’s going to continue in 2022. But what we are going to expect that there is the washout in the market. In this regard that we, in general, will see an entire market price increase throughout the value chain. That’s what’s going to be expected for next year. And crucial is in the first step that this is balanced out among suppliers and customers. This is a step where we see strong movement towards 2022. Yes, the semiconductor shortage is going to continue for next year until the 90 nanometer wafers are in a broad and wide way available again. But there will be a balance in the entire price segment here in the industry. That’s what we expecting. So it will be a more fair balance in terms of supplier and customers. So we are cautiously optimistic in this regard.

Jakob Bronebakk: Okay, thank you. There’s a question regarding the time lag of the raw material prices. What is the time lag of passing through the raw material prices on average and are we passing it through on a backward basis as well?

Joerg Buchheim: There’s as well, I mean, difference, we – it’s different between, well, let’s say, it varies between business units and it’s different in regions and in regard to cost of region. So when we are talking about semiconductors, for instance, we were quite successful in a forward looking way, and this has already helped us in Q3 to limit the damage. So on the semiconductor more on a 50-50 base, minimum in certain regions on a 100% base. So we did hear a bit step forward in corporate and partnership discussions with our customers. On raw material, we started certainly as well to limit now this damage coming up to similar, like the energy cost and as well here we are entered into discussions with our suppliers and our customers on a partnership way. And we as well cautious confident that we getting here results as well and positive effects in order to counter the overall impact on this increased costs. So cautious optimistic started to discuss and as I’ve said, I’m expecting that this is an overall and widen approach, which we are going to see as the balancing out and sharing the pain between suppliers and customers through our 2022.

Frank Heffter: If I may add to that, when we look at our contractual measures when it comes to raw material process, you find typically three to six month time lag when adjustments are being made to the raw material indexes or prices. We are entering or have entered our individual dialogues with customers about earlier upfront true ups given the magnitude currently and that is underway.

Jakob Bronebakk: Okay. Thank you. And following on from that, a question, how close are you to achieving the stated goal of double digit EBIT margins, and would this have been achieved as the current supply chain situation as a result? I think you did mention something about this earlier in the presentation, but perhaps you could elaborate.

Joerg Buchheim: Yes, certainly. I mean, long-term as I’ve mentioned, it’s our clear strategy and that’s part of our product portfolio transformation as well to become a sustainable two digit EBIT supplier that’s where we are heading to. And you saw that as well in our clear vision and future requirement, we want to be active wherever we are active. We want to be second to none or among the top three suppliers and partner of choice for our customers. That’s crucial in order to generate a sustainable two digit EBIT. If you are looking into this strategy and looking into our long range plan we certainly see this two digits coming up, how quick is now really depending on, let’s say stabilization and back to normal situation in the automotive market. And this will be certainly not next year, the two digits because of the ongoing crisis. But certainly we will see that along the next year as a very achievable goal, and that’s one of the – let’s say reasons as well that we went strategically for divestments.

Jakob Bronebakk: Okay. Thanks. There’s a related follow-up question. You mentioned the net negative effect of raw material on semiconductor shortages of €7.5 million. What is your estimate on the 2021 total negative effect?

Frank Heffter: The total net effect for the year including the compensation – direct compensation from the customer is in the range of €20 million to €25 million. We have stated that the gross effect is in the €50 million range and that is still a reasonable estimate. So it didn’t get worse necessarily, but it also did not significantly improve.

Joerg Buchheim: Yes. And what we’re seeing actually is more indirect effects that all our customers, the automotive common effect plus here reducing their top-line further. And we see it in the media day by day that they are forced due to other supply shortages or other supplier shortages, they have to reduce their production output. And this indirectly affects us continuously over as well over the Q3 and in an outlook towards the year end until this is stabilized.

Jakob Bronebakk: Okay. We also have a couple of questions regarding the R&D and CapEx levels going forward after the divestment, whether we’re expecting this to be to increase or to remain the same.

Joerg Buchheim: There’s certainly the expectation that the CapEx levels will decrease as the tool divested businesses were CapEx intensive. We still want to fuel the growth of the remaining business in order to generate additional value, but the overall amount should decrease from current levels. On the R&D side same also here to be divested businesses had to significant resources in engineering that will be divested as well. And we’re not expecting to build up resources in the same magnitude, although we will invest in the remaining business.

Frank Heffter: That’s an attractiveness to add that of the so-called remaining products and segments is certainly that these segments are well-prepared and having, let’s say more, much more opportunities currently to generate growth and revenue with limited CapEx that’s for sure. And part of our second year initiative.

Jakob Bronebakk: Okay. Thank you. We have a question on the – whether we see downward pressure on prices when products nearing the end of a lifecycle or a renewal, and whether we see the downward pressure on prices being similar, higher or lower than the pre-pandemic periods?

Joerg Buchheim: No, actually we don’t see that actually, this circumstances at the end, I mean if you’re going to come to an ending life project cycle stage, then you actually seeing that products, investments, or project investments amortized assets are depreciated. So it’s actually you once to all cost optimization and all price reductions. So it’s actually a good time towards the project life cycle and in terms of profitability and we don’t see any difference in this regard post quarter or compared to today. So, we don’t see here any abnormal or any additional risk.

Jakob Bronebakk: Okay. Thank you, Jorg. We also have – there’s quite a few questions regarding the portfolio modernization. Now, as you mentioned, we will be elaborating on that at our Capital Markets Day in December. But perhaps you could say something more about the battery thermal management system, which we published something about on social media a few weeks back. If you could say something about how that is being developed and whether it’s being developed for particular customer.

Joerg Buchheim: Oh yes, certainly. I mean, in general, we will elaborate certainly a little bit more than the divestments at 10

Jakob Bronebakk: Thank you, Joerg. There’s a – I suppose this is a related follow-up question. Are we planning to expand any of the facilities in Norway, for example, the Raufoss plant for a lot of these couplings are produced?

Joerg Buchheim: Definitely, Raufoss plant will be one of our system suppliers and major contributor.

Jakob Bronebakk: There’s a lot of questions still coming in regarding the transaction. I will – we will go through those very carefully to make sure that we do answer them on the 10

Joerg Buchheim: This would certainly be an option to look into, but I’d say this is nothing that we will pursue short term. We are currently very busy with executing on the just announced deals because with assigning, it’s not over yet, ready to be the closing and the top out of these businesses and we need to secure our 2021 results. And that for the short-term keeps us very busy, and everything else I think can be looked at later.

Jakob Bronebakk: Okay. Thank you, Frank. And there’s a question regarding the shift gear program. I’m asking what kind of results we’re seeing from the performance improvement efforts, and whether there are any in particular that we would highlight and also whether our employees are motivated, engaged in the program?

Frank Heffter: Well certainly. I mean, in this regard I think our employees are very much engaged and motivated to drive this program as everybody sees here, direct results out of the efforts which we are spending. So I think that’s one of the assets here in Kongsberg is the workforce, and this is clearly emphasized in each region in each entity. There is really a big engagement, fantastic teamwork and a lot of potential what we’re seeing. And it’s not necessarily here by huge incentives it’s really the workforce likes to go with this measures and they are very much motivated to make their business every day better. So that’s really outstanding and I’ve seen this very seldom me before. So huge potential in terms of the results, I hope you can see the results because as we saw and guided already in Q2 and later on during our ad hoc and now in the Q3 becoming from big impacts generated also for semiconductor crisis. We started with 40 million impact, which we reported in Q2, became 50 million afterwards yet to ad hoc and indicated that due to shutdowns of our customer base, the impact is gross more in the range of 60 million. So you saw this detraining and big impact in terms of – in terms of P&L effect spot. But if you’re going to see that be still guiding you on 50 million, I think this should answer this questions very well. So allow me to say our performance improvement program is really hitting in and really strongly limiting the impact of this growth, impact which we face to and I would say it’s really a great program. And the entire team here is already eager to continue that, and we are looking already in having this sustainable counter measure as well for 2022 and as I’ve elaborated during the owning schools slides. We see continuous positive impact of roughly 20 million on a conservative base, on an annual base.

Jakob Bronebakk: Okay, thank you. There’s a question which is someone related to the transactions, but which is regarding the order book for the rest of our business. I mean, we’re selling interiors business, which has seen most of the recent business wins. How does the order book look for the rest of the business?

Joerg Buchheim: Yes. We currently have an excellent order book, honestly and we have this €1.5 billion book-to-bill ratio, which is very, very good as we could see. And our business wins over the last 12 months have been 373 million, and certainly this is properly diversified. So if you’re going to look for instance in the quarters, and if you’re looking a little bit in the appendix for instance, on the earnings calls, you’re going to see the first quarter in 2021 was very much in favor and new business means for Powertrain and Chassis. The second one was actually for special Kodaks, and the third one was in interior, and this is a cycle which we always seen in the industry, different products, YouTube, just simple time effects on sourcing, moving strongly in certain quarters. If you’re going to look into the outlook and I’m elaborating on a short term to Q4, we will see and I can promise that as well already, because we got them in. We see already strong bookings in Powertrain and Chassis division, but as well in special products. So Q4 will certainly underlying again, this huge potential as well in this areas by strong bookings in these two areas in, let’s say remaining on off highway segments. And we are very confident that we continuing on this high booking rates. It’s going to be always 1.5. We have to see, but its two words 2022, we are very confident and promising that our book-to-bill ratio continues here in a positive manner.

Jakob Bronebakk: Okay, thank you Joerg. There’s a question which has come up before, but which may be worth reiterating. The question is whether KA is ready for the transition of heavy goods vehicles from fossil fuels to electrification or hydrogen, and whether we have, or can develop products that are suitable for the future of heavy goods.

Joerg Buchheim: Yes. That’s a very good question. And certainly that’s one of the key topics which we are looking in and working already hard on that. And in particular, this is one of our major tasks of our CTO. That’s why he’s here and pushing that forward. Yes, we are working on that. But I have to say a lot of our products, which we have in our product portfolio. And you elaborated on that as well in one office, dedicated investor presentations, which we did together with Sparebank here. Lot of these products are already fit for the E-vehicle application and in both regards if it is a battery driven, or it is hydrogen driven. But that’s certainly not the end of the story. Now we are looking in generating systems for this E-vehicle trends hydrogen battery, but as well for autonomous driving. And we were continuously pushing that. And yes, allow me to refer to our Capital Market Day. We’ll be more than happy to give you a little bit more insights in what exactly we are doing that, but clear on our roadmap and clearly part of our product portfolio transformation.

Jakob Bronebakk: Thank you, Joerg and as you mentioned Capital Markets Day, we’ll elaborate on this. There’s really just one question left that is not purely transactional related. One listener is asking whether we are more strongly affected by the raw material and semiconductor price and availability issues and other suppliers and whether this is the case, how do we see the impact on KA compared to our peers?

Joerg Buchheim: No, I would not say that we are more or less impacted via impacted as everybody else. Certainly we have areas we have the in semiconductor more affected for instance, in the interior area, certainly maybe on raw material, it’s certainly a little bit P&C, but that’s for our competitors exactly the same. I would wake up here in a average of our peer groups here. But I hope, we’re managing the countermeasures better. And that’s our ambition here again to become second to none to do exactly that a little bit better than our competitors and yes, providing here a good outlook and a good shareholder return.

Jakob Bronebakk: Okay. Well, with that we’ve come to the end of the Q&A session for the quarterly results. As we have mentioned several times, we are holding a separate call on 7

Joerg Buchheim: Thank you, Jakob. Thanks to all participants.

Frank Heffter: Thanks a lot as well from my side. Good bye.