Good day, and welcome to the Konesberg Automotive ASE Third Quarter 2020 Earnings Call. At this time, I would like to turn the conference over to Mr. Norbert Lohrze. Please go ahead, sir.
So thank you, operator. Good morning, everybody. I'm Norbert Loers. I'm the CFO of Kontzak Automotive and Co CEO together with Robert Pick. And first, we will briefly introduce ourselves and then continue with the presentation.
Robert?
Good morning, everyone. I am Robert Pigg, Co CEO with Norbert Lower is responsible with for the business segments. Also serve as Senior Vice President for the Off Highway Business Unit. I've been with Kongsberg for roughly 14 years and responsible mainly for engineering functions and program management until I took the role over Senior VP in 2017. 17.
Thanks for your attendance today, and I'll turn it back over to Norbert.
Thank you, Robert. So I have joined Konstberg Automotive in January 2017 as the CFO. My background is in finance and I was appointed together with Robert in the Tampa this year as Co CEO. So we want to start now with the presentation. And the first page is key topics and that is Robert's page.
So we'll talk about the markets and revenue. As we know early in 2020 between coronavirus and the weak start had a major impact on the automotive markets. But we also know that the light duty vehicles and the heavy duty markets totally evolved differently over the year. Worldwide light duty vehicle production for Q3 recovered nicely on a sequential basis From a low point of 12,600,000 vehicles in Q2, Q3 came in at 20,300,000 units. The Q3 production figures were only 3.5% behind the Q3 numbers in 2019.
It should be noted that China was the only significant region that had significant growth year over year. Heavy duty vehicle was very different from light duty vehicle market, although on a global basis the year over year production figures decline was roughly 5.3%. It was heavily skewed by very strong growth in China and stronger declines in other regions. In Q3 of 2020, China production represent almost half of the global heavy duty vehicle production. With the exception of the non China heavy duty vehicles, the Q3 production levels represent a strong recovery from the coronavirus impact generally expected.
Our revenue for Q3 finished at €255,200,000 24,000,000 or 8.6 below our Q3 2019 figures, if we include negative currency translation effects of 10,700,000 dollars At constant currency, a true representation of the volumes, the year over year decline was around 5%, which was in line with the overall market development for the quarter. Driven steadily by improving our order books throughout the quarter, we recovered by September the volume similar to those in 2019. And if we look at a constant currency basis, we had year over year growth for the month of September. As was the case for the total market, for Kongsberg, regional revenue developed very strongly by region. Overall, strong revenue growth in China was partially offset by the revenue declines in both Europe and North America.
The revenue levels for Q3 2020 are still impacted by the effects of the coronavirus outside of China. If we look at our quarterly revenue in Europe and Americas was lower by about 10% year over year for Europe and 17% year over year respectively. Quarterly revenues in China increased for KA by 32% year over year attributed to quick recovery from the coronavirus and strong general vehicle demand and KA market share gains in China. Q3 2020 revenues in all regions recovered quicker than expected and if we compare it to our previous On new business wins, we were awarded roughly $50,000,000 new business on an annualized basis, corresponding to $224,000,000 for expected lifetime during Q3. Although weaker than our previous years, we see this as a strong booking quarter taking the account that we had lower quoting activities at the major OEMs during the coronavirus periods.
On to you, Norbert, for the next slide.
So next slide, Page 4. Our adjusted EBIT amounted to almost €14,000,000 same level as prior year's Q3. Our EBIT margin increased from 5% to 5.5%. So we consider that a pretty good operational result. We have introduced in the crisis quarter, 2nd quarter and continuing in Q3 very strict cost controls, reducing fixed costs and overheads.
And we're also benefiting a little bit from lower material costs since some commodity prices went down. Compared to the Q2, so the previous quarter, we increased revenues by €1,500,000 with an EBIT fall through of 48%. We had a positive change in cash in that quarter that has 2 components. First, a capital increase, a subsequent offering of €27,000,000 and secondly, a negative cash flow of €12,400,000 that was driven a lot by the very heavy working capital increase, primarily by our strong increase in accounts receivables. We have no usage of our RCF line, so no bank debt.
As previously announced, we entered into a receivable securitization program that is a global program that covers our North American and European entities. That is a committed €60,000,000 liquidity reserve to us with a 3 year tenure and with the usual options of extension. We had no usage of that program at the end of Q3. That brings our liquidity reserves by the end of September to more than €200,000,000 That is the highest amount of liquidity reserves since 2017 since I'm reporting these numbers every quarter. Adjusted gearing ratio deteriorated compared to prior year.
We will have the second quarter effect on an LTM basis now for the next three quarters as well. But it slightly improved over Q2, obviously. If you go to the next page, that is our graphical presentation of quarterly revenue developments and adjusted EBIT margins. And there you can see very well what the 2nd quarter did to our P and L in revenues. So that was a huge loss in top line.
And how well the recovery in the 3rd quarter worked from an adjusted EBIT margin percentage. When it comes to EBIT and net income, we only had small restructuring costs in the Q3. So EBIT and adjusted EBIT are pretty similar. And our net income in the Q3 was also positive with €1,700,000 results. I'm handing over now back to Robert to continue on Page 8.
If we talk about our new business wins, as I said, we had 60,000,000 dollars book business in Q3 at an annualized basis and $224,000,000 in expected lifetime revenue. Even though like when you look at year over year comparison, the numbers were lower, it's still a strong quarter taking into account the lower quoting activity that we had at the OEMs through the corona crisis. If we go to the next slide on Slide 9. What we hear is we continue to secure business in all business segments to secure the future growth in the company. What we noticed here on this side is that the higher margin segments such as specialty products has continued to book at the same level before the corona 2019 periods.
If you compare year over year in Q2 and Q3, from an annualized and from a expected lifetime revenue, specialty products, it's continued to book even with the chronic crisis upon us. Next slide is Slide 10. Book to field performance, still strong even though we had a decline in revenues for the last two quarters in bookings when we compare it to the previous quarters. We're still running at our book to bill ratio of 1.37. We move to the next slide and talk about the market.
The China market showed positive development in Q3, whereas the rest of the world still is hampered by the effects of COVID-nineteen. For global passenger car, the market was down overall 3.5 year over year. If we take a look at outside of China, then the production volumes declined by 8.8%. We need to note that one of the hard hit areas is APAC without China. But for KA, we don't have much market share in this region.
So it's a non negative effect on our revenue. For global truck production, the market was down 5.4% year over year. Outside of China, the production volumes declined by 25.6%. So with the with the return to the market in China plus our market position in China helps with the KA revenues in Q3. We move to the next section, which is the segment highlights.
What we can see here is interior revenues climbed back to the same level as they were in Q3 of 2019. Powertrain and chassis revenue finished 9% down year over versus year over year. And specialty products revenue was down 14% on the year over year comparison. If we look at the adjusted EBIT, interior was down when we compare it to Q3 of 2019 and this is due to one time effects, whereas Powertrain, Chassis and Specialty Products were both had an increase in EBIT even though we had less revenues in both of those segments. Next slide.
If we focus on Interior on Slide 15, Revenues for Q3 showed a slight increase year over year if we exclude the negative currency translation effect of €2,800,000 This is driven by the fact that interior segment mainly serves the premium passenger car market, which performed well on a relative basis after the coronavirus imposed lockdowns, particularly in China and North America. On EBIT, if we excluding the one timer, the adjusted EBIT has improved year over year through strict cost discipline offsetting increased freight costs as we needed to ramp up production and material shortage driven by the strong spikes in our customer demand. From an operation standpoint, we are back to normal. We are normalizing our volumes. We're benefiting from the operation improvements achieved last year and the cost control measures implemented this year.
Within Q3, the segment continues to focus on maintaining a high labor productivity and efficiency, controlling our variable and fixed costs. Our new plant in China that we opened this year contributed to the sales growth, which was driven by an increase in production and premium vehicles in China and the new energy vehicles. Through the if we look at year over year, the China revenues for this vehicle segment grew by 50% from $6,000,000 to $9,000,000 for KA. Moreover, in the quarter on the networking capital side, we had stock builds as we are building up to relocation of production into the new plants. On the high new business levels in Q3 were significantly made up to shortcomings in Q2 as we had a low booking in Q2.
Within the quarter, interior was awarded 2 large contracts, one to supply heat seats to major premium U. S. Carmakers and one to supply seat support system to a major European carmaker with the start of production in Q2 of 2022. Those programs totaled $24,500,000 $16,300,000 in expected revenue, lifetime revenues. Next slide please.
If we focus on powertrain and chassis, the revenue decline was mainly driven by low revenue levels in Europe and the U. S, which was positively offset by the growth in China where the revenues in Q3 reached an all time high through an increase in Ks market share in the Chinese passenger car market. The increase in profitability for Q3 was benefited by our additional revenues and more efficient control of our variable and fixed costs in both the European and American plants. Operations are back to normal and we're benefiting from the operational improvements that we achieved last year early this year. On the supply side, this segment has been hit by some suppliers that have struggled through the corona crisis and the market environment and have ceased deliveries to their customers.
Therefore, we're doing a lot of resourcing activities in the P and C business segment to transfer over to suppliers. On market achievements, new business wins were generally very low for P&C in the quarter. We did the large product, we did secure a ship by wire project for a Chinese customer with expected revenue of 2,500,000 dollars for expected lifetime. If we go to Off Highway, I mean to Freshly Products, The revenue developed in this segment was mainly driven by weaker heavy duty vehicle end markets and specific passenger car platforms in FTS and a slow ramp up after the lockdown period in the off highway business unit. This was partially offset by a strong performance from our couplings business unit, mainly driven by our Chinese customer.
Excluding the negative currency effects, couplings had flat revenues when we do a year over year comparison. On the EBIT standpoint, year over year increase in adjusted EBIT is attributed to favorable foreign exchange rates, positive operation efficiency improvements plus some effects from our brass and resin raw material prices. Like in the other segment, all plant operations are back to normal and we're benefiting now from the operational improvements from last year and our cost control measures that we implemented earlier this year in Q1 and Q2. Also from the operation standpoint, we did make our first serial production shipments from the new coupling manufacturing facility includes France. And all the new business wins included were systems to a major European car market and off highway on mechanical cable projects for a premium European OEM and outdoor power equipment.
These programs will account for approximately $20,200,000 $11,600,000 on expected lifetime revenues respectively. On to you, Norbert.
I continue on Page 19, which is an overview on year over year revenues by segment and adjusted EBIT. And there you see that the adjusted EBIT contributions were pretty uneven. So in Interior, we had a slight decline on Powertrain and Trustee, a significant increase. And on Specialty Products, a very significant increase. Unfortunately, much of that was offset by FX effects and others that are some cost in corporate overheads.
If you go next page, quarter over quarter, that looks very evenly split in revenue increases and adjusted EBIT increases and there all business units or all segments had very similar contributions. Page 21, net income development. So our adjusted EBIT was positive year over year, Q3 versus Q3. We had a slight increase in restructuring costs. We had a strong effect on other financial items that is primarily non cash unrealized FX movements.
We had very strong FX effects in the last quarter, primarily driven by the U. S. Dollar weakness versus euro. That has impacts on our P and L and balance sheets. And on taxes, we had a tax income, so positive taxes in this quarter versus tax cost a year ago.
So that's why we have a positive contribution there of €2,200,000 Quarter over quarter, you see impairment charges did not repeat and they will not repeat. Adjusted EBIT, the strong increase and then the other financial items and taxes also played a role. We 3rd quarter is relatively $5,000,000 less of that. 3rd quarter liquidity development. Our adjusted EBITDA €25,000,000 positive.
On other receivables, we also had positive contributions. Our change in net working capital was minus €19,000,000 That is significantly lower as we have previously estimated, but in that is a €79,000,000 increase of receivables with negative cash flows for the quarter. We had net investments of almost €11,000,000 And then on financials, FX is the equity increase net of purchase of treasury shares contributed with €26,900,000 and then interest paid and other financial charges were almost €10,000,000 We also show here now the available liquidity from the securitization facility with a committed amount of €60,000,000 and that brings us to more than EUR 200,000,000 of a level of liquidity per quarter end. If you look at free cash flows on Page 24, So you see here quarterly movements. We limited negative free cash flow much versus what we had to estimate earlier this year to €12,000,000 that is still a loss.
So we're going to fix that. But I believe under given circumstances with the very welcome increase in business levels, triggering increases in receivables, that is a decent result. When we go to net financial items, we give you here a breakdown of net financial items on the timeline. We always have that net interest that is driven by IFRS 16 interest cost, which is pretty constant and by accruals for the B annual payments on the bond interest. So that's why that is a pretty even number every quarter.
The number that is changing a lot on a time line is currency effects and we had 5.2 percent offset in the Q3. Financial ratios, adjusted gearing ratio is this 5.8 very high as long as we have that 2nd quarter in LTM, it will remain very high. But it's coming down with the results of the Q3. Adjusted return on capital investment doesn't from 27.2% to 27.5%. That was tailwind from the equity increase and the positive net income.
Our capital employed increased in line with the working capital increase of the quarter. I'm now handing back to Robert on Page 28 with summary and conclusion.
In summary, well, first of all, Norbert and myself are proud of the KA team's work in the Q3 as we continue to execute our plans, why continue to protect the safety of our employees, serve our customers and our communities. If we take a summary of where we finished the quarter at, revenues come in at $255,200,000 and our adjusted EBITDA at 13.9 percent. And we had year over year revenue decline of $24,000,000 in combination with an increase in our adjusted EBIT margin from 5% to 5 point 5% for the quarter. The EBIT improvement was mainly driven to our strict cost controls on all managed costs, fixed cost reductions, but also benefit from the previous operation improvements that we had put in place. If we take the P and L measures together with our relatively small increase in working capital limited to cash burn in Q3 to, as Norbert said, to minus 12,000,000 dollars a much improved figure compared to our earlier outlooks, driven mainly by our proved performance, our cost controls and our strong working capital management tools and procedures.
Our liquidity improvement plan was fully executed and completed in the quarter, leading to a very solid liquidity reserve of over $200,000,000 and that is a very comfortable position for us to be in for potential rough roads ahead. The capital increase process was completed through the oversubscribed repair capital raise. And the last component of our liquidity improvement initiatives, receivable securitization program providing additional liquidity of $60,000,000 with 3 year tenure was also completed within the quarter. On to the next slide and Norbert will take to talk about the outlook.
Just want to add a comment on our liquidity improvement plans. We communicated frequently on our measures and plans throughout the year. We delivered on all major items at very economic terms, I must say. We did not enter into any agreement that is overly with conditions. When we looked into the small print of these conditions, we could not met it sometime, meet it sometimes.
Also those huge period of unclarity what these conditions are finally. And they were then finally relatively expensive. So that's why we did not conclude anything of government support. But I don't think that we would have needed that since we deliver on all the big ticket items. When it comes to outlook, when we look into our company, as Robert said, we can be very proud of our people of operational performance and discipline.
And on the level of motivation we have in the company, everybody is aware of the situation that is a very serious situation for all of our communities, but also for our, let's say, business operations, we employ some 11,000 people in 28 plants. So there are many, many people coming together every day to do business together. Despite adverse macroeconomic signals from the emerging pandemic second wave, we have a very strong order book. And we will have also a very strong October that is almost done. And when we look into first quarter, I have never seen such a strong outlook of the Q1 at this time of the year end of October.
So that looks really strong. Consequently, we raised our revenue outlook from previous outlook to €945,000,000 And on adjusted EBIT, we are now targeting a positive number. And that is some €25,000,000 improvements from previous outlook. From cash flow perspective, we still have to anticipate negative cash flows this last quarter of the year with continuing working capital increase, but also with significant CapEx cost. We are cleaning up all our CapEx activities to have a clean sheet for next year.
But still, this is an improvement of €18,000,000 versus the August 4 update. With projected negative cash flow of €13,000,000 for the next quarter, that will leave us liquidity reserves of around €187,000,000 at the end 2020. Our end markets continue to be volatile and difficult to predict. Very recent developments, I mean, you all have the same news as we have in the newspapers, on TV. The pandemic, the 2nd wave of the pandemic is, especially in Europe, increasing in all our European countries we operate in.
So we have all measures possible in our plans to protect our people. And so far, it works very well. But we are included in complex supply chains. We depend on our suppliers and on our customers. And so that is under given circumstances something we have to be very careful about.
We will provide a 2021 outlook early next year provided that we then have a overall market situation that we can reasonably talk to giving a 12 month outlook. So that concludes the presentation. And we will now go through the questions that we received from the audience and I read them through. Our website is still says creating value for shareholders. My question is simply why is it still there?
The answer is also simply since we are still committed to it. I know our share price development over the last years was not satisfactory and we are very well aware that the situation this year and the equity increase was having major impacts on shareholder values. Still, I believe that was the measure we had to take to secure the company. And the increase in equity was instrumental and absolutely required to also meet the other conditions for all the other improvements we could do. I mean, we increased our RCF in total amount and in covenants threshold significantly.
We secured €60,000,000 from the receivable securitization program. That would not have been possible without an equity increase. The next question is, do we have any components other than seat heat for Tesla? That is a question for Robert.
Currently for Tesla, we supply heat seats and we supply light duty mechanical cables to Tesla. In the future, we are in the process of working on RFQs, both for seat comfort and for couplings for the Tesla truck coming in the future. Next question, Nelrich?
So what was the reason to push the presentation forward to today instead to remember? The reason was that we felt that we have good news to share and that we were able to close the, let's say, quarter end accounting work a little bit earlier, thanks to our corporate finance team. So once you have that information, you have to share it. That was the reason why we pushed forward. Next question is, are prior forecast for global passenger volumes now redundant in management view?
Where does management see volumes heading now? Can we see a complete recovery next year? Or should we brace for a bumpy recovery? And that is a great question. I mean, we receive our information first from professional market forecast services.
We use IHS for passenger cars, LMC for truck. We use our own, let's say, relationships and intelligence what we hear from customers. We will see for next year in revenue volumes a recovery for our own revenues that it will be very similar to 2019 volumes. So pre corona volumes for next year. That's what we currently see.
We see especially strong increase in our interior segment, which benefits from premium cars. Next question, how P and C why has P and C less revenues more than EBIT? Robert, do you want to take that?
Yes. We have less revenue and more EBIT. That's driven by basically two factors. 1 is we are getting the benefit from the operational improvements in the plan that P and C executed starting last year. And the second factor that goes into that is the efficient cost control of the variable and fixed cost in our European and American plants drove the additional the improvement in EBIT for Q3.
Next question, Tolbert?
So can you please repeat your comment on the €79,000,000 increase in receivables and provide more context around what is driving this and when you expect cash inflows, any charge offs or delinquencies expected. So that is just mechanics. If your revenues increase, then your receivables increase. And with some 76 to 77 average terms, it takes a time before that turns into inflows. On delinquencies, we have a record low in Q3.
I mean, since we measure that since the last 4 years I'm in that company here, we reduced delinquencies or overdues, how we call it, constantly, systematically, that is one of the main management targets. And we are now around 3% on delinquencies. And if you're familiar with that industry, then you will recognize that this is a very good value. Next question is, for how long do you consider the company to be fully financed given the current outlook? I believe we are fully financed for a long time now.
The previous statements when we had modeled scenarios high, medium, low for the years 2020 2021. We had very conservative assumptions due to the high uncertainty that was going on. We also had no experience at this point in time on reducing our revenues by almost half and what that makes to fixed costs and how we can manage fixed costs and how we can flex fixed costs. So we I think we are very successful in doing that, thanks to the very diligent work in the plants of our people. And we have the target to become a cash positive number company sooner than later.
So fully financed, we are fully financed now for a time period that has from my perspective no limitation anymore. How is Kongstberg looking to grab further market share from the German EV market? Robert, you want to take that?
Yes. I mean, we have our front end team in sales and engineering working directly with the German OEMs to help them develop and put our products into the EV market. So we're looking at the different products in the interior comfort systems. We're also working in our fluid fluid transfer systems on battery cooling lines to continue to supply products for the EV market not only in Germany, but throughout the rest of the world to put more content on the electric vehicle vehicles that is out there. Is
there any change to the monthly cash burn estimate of €25,000,000 to €30,000,000 in a shutdown scenario following cost savings measures? Yes, absolutely. I think that's what we demonstrated here with our numbers. And our cash flow statements and efficiency statements, that statement is obsolete already with our 2nd quarter reporting. Next questions are, did the previous CEO leave for different opportunity or due to a decision made by the Board?
We will not comment on personal matters. Can you walk through the components of 180 €7,000,000 liquidity reserves? I think we give that breakdown on Page 23. It's the right hand column where you the breakdown. Can you comment in more detail about positive outlook Q1 2020?
I think that means 2021. What makes you feel comfortable? Are your clients giving you a clear order indications for that time period? Yes, they are. I mean, in automotive, we receive all our orders through EDIs, electronic data interface system.
They come straight from the order system of our customers into our order book, so we exactly see what our customers want from us. In the short term and over the next 4, 5 months. Of course, that outlook is not a commitment to purchase. Customers are free to change these orders at any time, but typically it's a very reliable indication of what will really happen and what our customers are really planned to do. And as I said previously, looking into the order book for the Q1 year, that looks really very positive.
Next question is for you, robot. Do you supply NIO?
Yes, we do. We supply both Ceteak and ScentV to Neo from our facilities in Wuxi and Shulong.
Thank you. So what are our thoughts next question, our thoughts on sterling stock price and how will that continue in the following months? I mean, stock price is a result of market activities, decisions made by investors. We are part of automotive industry. We had recent very good results from various automotive OEMs.
And I think more of that will come in the next days from other automotive companies. We are part of the industry. Our stock price didn't move in line with the industry. And I believe what the company can do in providing profits and cash flows will also have an impact on the stock price. Next question is for you, Robert.
Can you give more color on outlook order intake for non OEM business? How does that compare to OEM outlook?
I mean, if we look at both the non OEM business and the OEM business, as Norbert said, the outlook is much better than our previous guidance and forecast. We see the order book through the rest of this quarter and through Q1 in a strong position, whether it's OEM or non OEM business. So both of them are giving us the signals that the market is on its way back from the corona period and pandemic and we continue to see a strong outlook for both OEM and non OEM business.
Thank you, Robert. So next question is, could you give more color on what is driving negative free cash flow in the Q4? I think I made comments on that. So it's continuing working capital increase and that we Q4 in order to have clean sheet on that in next year. And that is also the next question is, when you say you're cleaning up CapEx, when is the earliest that you could return to free cash flow breakeven?
I strongly believe if markets hold what we see in forecast, in professional forecasts, in our own customer intelligence, provided currency rates don't change dramatically, then we have positive free cash flow at hand within the next year. From a seasonality perspective, Q1 is normally the quarter with the strongest negative cash flow. This has to do with year end. December is not a full month and that helps Q4 cash flows. And then in Q1, you have to catch up on these additional revenues compared to December.
But we are working hard on providing positive cash flows. It's hard to say whether the Q1 is already at this point in time, but at least we are committed to deliver positive cash flows whenever possible. Any chance with the better profitability in 2021 that we'll be willing to buy back bonds below par? That's a premature question. I mean, let's first have that positive cash flow and then talk about what to do with that money.
Any progress in regarding to deploying new CEO? As said, we don't comment on personal matters. And there are a few other questions very similar on CEO. We do not comment on that. In terms of cost savings and efficiency, do you expect any to be given up 2021?
That is
a question for you, Robert.
Our expectation is not to give any up during 2021, assuming the market holds and we continue to have the volumes through our manufacturing facilities. As we said, we are continuing to execute our operational improvements that we started the last few years And we have robust plans behind those that have delivered those cost savings. And so we don't see a reason to give those back. Next question, Oliver?
Okay. Can you please give full year guidance on CapEx 20 202021? 2020 will be close to €68,000,000 plusminus something. For 2021, we are looking at something closer to €60,000,000 So I believe that were all questions we received And operator, do you see any more questions we didn't answer? Then I would hand over to you.
This will conclude today's conference call. Thank you all for your participation. You may now disconnect.