We are here together with our President and CEO, Trond Fiskum, and CFO, Erik Magelssen. We are joined by participants joining us on the webcast, as well as physically here in Oslo. On the screen, you see today's agenda, and as always, we will conclude today's presentation with a Q&A session. If you're joining us here physically, you can raise your hand, and we will be walking around with a microphone, and if you're joining us through the webcast, you can use that tool to raise your question. With that, I will hand the word over to our President and CEO, Trond Fiskum.
Thank you, Therese. Good morning to everyone. We start with Q4 highlights. Overall, we had a good quarter with strong earnings improvements and solid cash generation in a market that is stabilizing. Our Q4 revenues reached EUR 167 million, compared with EUR 185 million in Q4 last year. This is 9.6% down from Q4 2024. However, it's up 2.8% compared with Q3. This reflects that the market conditions are stabilizing, which is positive. Regarding profitability, we delivered a strong EBIT improvement.
When we compare with Q4 last year, we have a Q4 EBIT of EUR 9.4 million and an EBIT margin of 5.6%, this is compared with EUR 1.1 million and an EBIT margin of 0.6% in the same quarter last year. It is an improvement that is primarily driven by structural cost reductions. We have some reduced warranty accruals, it is also supported by one-time positive effects of EUR 4.9 million, that we'll come back to. Cash flow development was also solid and on an improving trend. Operating cash flow improved to EUR 11.5 million, up from EUR 4.2 million in the same quarter last year.
The risk of certain warranty liabilities, they remain. They are well identified, and being very actively managed, with also mitigation actions in place to avoid a reoccurrence. We held a Capital Markets Day in December last year, where we presented our revised EBIT margin target, the long-term EBIT margin target of 6.5%, and also together with how to achieve that. Finally, the market outlook has slightly improved from the second half of 2026. This is something that provides a more supportive environment for us to continue improving our financial performance. Overall, we see a stabilizing trend in revenues.
We see a step change in profitability, a solid cash flow generation for the quarter, and a more supportive outlook as we close 2025 and move into 2026. On some more details on the Q4 financials, Erik will, of course, go into even more details afterwards. Starting with the revenues, we ended up with as mentioned, EUR 167.5 million in Q4. It's EUR 17.7 million less than Q4 last year. 9.6%. It's a meaningful part of this reduction is related to a weaker dollar, $6.7 million, while the remaining impact reflects basically a weaker market compared to Q4 last year's, but in particularly in North America.
As mentioned on the previous slide, we do, however, see that the market is stabilizing, which is encouraging, with the increase from Q3 to Q4 of 2.8%. Moving to the profitability and the EBIT. In spite of the lower revenue levels, EBIT improved to EUR 9.4 million. It is a strong improvement from Q4 last year, and as mentioned, a result of structural cost savings, the lower warranty accruals. It's also important to note that this one-time effect of EUR 4.9 million is a reversal of accruals that we made. These are related to some customer contracts and operating costs, and is a result of a year-end evaluation of accruals that we made across all legal entities in the group.
Finally, on cash flow, our free cash flow reached EUR 11.5 million, which is a EUR 7.3 million improvement compared to Q4 last year. Again, it's a reflection of several elements: cost saving programs, net working capital reductions, and generally an improved financial discipline. The cash flow development is now positive over several quarters, and we do also see that this has a positive effect on very important financial ratios for the company, that Erik will show later in our presentation. Overall, a good quarter in terms of progress.
There are still a lot of work that we need to do in order to get to the levels that we want on a longer term view, it's strong indications that we are on the right track. As we reported in Q3, we did a comprehensive review of our warranty liabilities during 2025, and we did identify some additional risks. The identified cases are related to certain legacy contracts, combined with management practice or warranty management practices that were far from optimal. At this stage, the potential financial impact is uncertain. The cases are complex, and the variability of potential outcomes is significant. We have taken proactive measures to reduce future risks and to prevent a reoccurrence.
It includes, and significantly strengthening our warranty management practice, and also an improved process to ensure that we have more robust customer contracts in place. We will provide further details on these cases once there is greater clarity. Due to ongoing discussions and negotiations with customers, we cannot go into more details at this point. We are working constructively with our customers on this and also other stakeholders to resolve this, and it's handling these cases is a top priority for the management. I'm personally involved in handling some of these cases. Regarding business wins, we secured in Q 4 new contracts with an estimated lifetime revenue of EUR 77.6 million. The majority of the contracts came from the business area Flow Control Systems, with EUR 56 million.
Drive Control Systems contributed with EUR 21 million. By customer segment, the largest segment is commercial vehicles, which you see on the truck, trailer, and bus. Which also reflects that this is our biggest customer segment overall in the company. For the full year, we secured contracts representing EUR 339 million in estimated lifetime revenues, while the business wins are lower in 25 than previous years. We have not lost any major new opportunities during the year. We do continue to have a very strong portfolio of business opportunities, and we are optimistic and confident about our future growth prospects. Also, as we communicated in Q3, we have revised our investor relations policy.
We will now only announce strategically important business wins for KA between the earnings calls. What we mean by strategically important business wins are those that are considered basically to be inside information, meaning business wins that are likely to have significant impact on the share price. This is an issue that has been thoroughly discussed in the board of directors. It's also a policy that is in line with the Oslo Stock Exchange disclosure guidelines. I think in particular, we want to avoid, let's say, frequent announcement of smaller contracts that are not strategic and should not have any significant effect on the share price, and this is in order to avoid unnecessary market volatility and speculations. Again, very much in line with the Oslo Stock Exchange disclosure guidelines.
We want to take a look at one of the interesting contracts that we secured during the quarter. The contract itself, it's not deemed to be strategic, but it's a very good example of how we work in KA, and it's a good demonstration of our ability to innovate and to develop unique and high value add solutions to leading global OEMs. This is a contract with a leading global OEM. It's one of the world's largest, and this is for our Twist lock coupling solution. It's a contract that in itself represent EUR 22 million in estimated lifetime revenues. It's something that we would call a next evolutionary step of our proven and market-leading Raufoss ABC coupling system.
The Twist lock system itself connects the air brake valve directly to the chassis brake chambers on the axles, and that ensures a leak tight air supply, while still You know, allowing continuous axle movement. It's a solution that is built on the same principles as the Raufoss ABC air coupling system, and provides many of the same benefits to customers and the end users of the vehicles. A special feature of the solution is that it's a quick connect, and it saves significant time on the OEM assembly line. This is a very important of our part of the value proposition, and it also have excellent serviceability once the truck is out in the field. Easy to replace.
It also improves safety, increase overall vehicle uptime, and reduce overall complexity, risk, and cost in the commercial vehicle air brake system. Very importantly, it's a patented solution, so it offers a unique and differentiated product that is only available from Kongsberg Automotive . Overall, it's an extension of the Raufoss air coupling system. It increases the overall revenue potential for this very important product segment. And it's also expected to be a wear and tear part that can contribute over time with attractive aftermarket sales for us. During the quarter, we had a Capital Markets Day that we held at our headquarters and tech center in Kongsberg. This was on December 16th. We had quite a few participants, more than 50, including investors and analysts.
During the event, we presented our revised long-term EBIT margin target of 6.5%, and also how we're planning to achieve that. We provided some deep dives into some of the key product segments or product areas, where we believe that we are well-positioned and are able to create value also in the longer term. We organized a tour of the tech center, so those that participated had an opportunity to gain some insights about our engineering capabilities and innovations. We also had a live demonstration of Kongsberg Automotive's Steer-by-Wire technology. This was installed in a demo car that was available and in the tech center. Participants were able to test it a little bit.
I will share some of the key slides from that presentation for those that, did not have the possibility to, participate and, to repeat some of the important, messages from that event. First, we have made very important changes in the leadership, in the company. Significant changes in Kongsberg Automotive was absolutely necessary, and changes in an organization like, KA, needs to start from the top, and this is what has, been done. We have a new board of directors and a new executive leadership team that brings experience, that brings determination and a clear vision for the KA's future. We have, Olav Volldal, who is, the Chairman of the Board since December 24th. He has previous experience from, the company as CEO for, more than two decades.
We have Bård Klungseth, who is the Deputy Chair of the Board. He has also more than a decade of experience from KA, being a previous COO of the company. The board has also been strengthened with several other new and very highly competent directors. On the management side, I came in as a CEO in April. I have previous background from the company, being in several leadership positions. Erik Magelssen came in as a CFO in June, coming back to KA, and coming in with a deep financial expertise and experience.
Finally, in October, we had Thomas Danbolt coming in as Executive Vice President for the business area Flow Control Systems, and he also had previous experience from the company from the operations in our very important, the Raufoss facility. This is a team that has a deep industry knowledge. It has a proven execution capability and a personal commitment to create long-term value. Most importantly, it's a team that knows what it takes to make KA successful. Second is a slide that is also very important for us. It's our business concept. It's very central to our vision and how to make KA successful. It is a concept that is several decades old, originally developed by Olav Volldal.
There has been some minor adjustments over the last decades, but it remains. The main principles remains, and it's just as relevant today as it was some decades ago. It's basically built on four different ingredients. One, it's a performance-oriented culture with the right people, with the right mindset, with the right values, the right competence, that can collaborate and do extraordinary things. Second, it is about unique products and solutions that clearly differentiate us from competition and that offers significant customer value. Third, it's to focus on the right market segments, attractive market segments, preferably those that are growing and where KA can be a recognized leader. Fourth, cost efficiency, which is essential in order to be competitive in this industry.
When all these elements come together, that's where we find value creation potential. The example I showed earlier, the Twist lock solution is a good example of how these four ingredients come together, and we're able to create value. Another important message in the Capital Markets Day was that we believe that KA is now at an inflection point, moving towards an improved trajectory. We see the indications of that in the Q4 results. We have a new leadership that is driving change. We have a turnaround program, led by a new management team and a more streamlined organization. We are very much focused on execution and performance with disciplined cost management and operational excellence to deliver the better and stronger financial results.
At the same time, we're investing in growth and innovation with strategic initiatives that strengthen core technologies and accelerate our market opportunities. We are rebuilding a high-performance-oriented KA that is leaner, more agile, more customer-centric, and with a culture of speed, flexibility, and a customer focus that creates sustainable value for both customers, the company, and shareholders. Importantly, we presented the revised long-term EBIT target of 6.5%. It is a target that is based on the current EBIT level and the revenue levels, and also a very thorough assessment of the improvement initiatives that we have identified in the strategic plan and that we're working on.
The reference level here, you see, is the previous four quarters before the Capital Markets Day, which was Q4 2024-Q3 2025. All the different elements here are initiatives that we have identified. Some of them are in progress, some of them are being assessed and being worked on. We have specific action items for all the elements. This EBIT bridge illustrates how we're going to achieve our long-term target. The final outcome might vary a little bit, it's a clear illustration of how we will get there. Behind all this, we have a lot of details. We're not going to into that today.
It's, I think the message here is that we have a very thorough assessment of this, and we have a good, and detailed plan to deliver on this. It is something that will require a lot of systematic and hard work. Yeah, I can assure you that we are very determined to succeed on this. Yeah, just comment on the growth. You see on the right side, we have indicated that with an improved market, there is an upside, potential on the EBIT margin. We have decided not to communicate any revenue targets. The reason for that is, this we can control. We can control our costs. The market development, we cannot control.
But of course, we will make our best efforts to make sure that we can capture as much value as possible with improved market conditions. Finally, we also looked at our key priorities for 2026. Not so surprisingly, they are not so different from the ones we had in 2025. First, we will continue to drive cost efficiency and operational improvements. We have now established very detailed plans for how to deliver improved financial results for 2026. We have more than 500 different action items across the organization. Each action item has a quantified target, has an owner, and a deadline. We're following up very tightly. This is a systematic approach to a relentless, continuous improvement that is key to our success.
Second, we are focusing on improving, continue to improve our cash flow. Cash generation remains the top priority. In addition to the improved earnings, we have improvement initiatives to reduce net working capital. We are taking a very disciplined approach to investments, making sure we spend our resources wisely and where they give the best return. Third, we continue to strengthen our leadership teams and the culture. We continue to build stronger leadership capability across the whole organization on all levels and to build a stronger and a more performance-oriented KA culture. Finally, we continue to work on innovation and accelerate that, and to make sure we have a profitable growth.
This means prioritizing technologies and product areas where KA can have a competitive advantage, and that with unique solutions that matches our business concept that I presented earlier. We continue to take very, I would say, decisive actions to deliver on these priorities. We do recognize that it is a marathon. It is not a sprint. There's no silver bullets here. It's a long-term, systematic effort that gives results. I would say we are firmly on the way. We have quite a few initiatives that are ongoing. We believe we have a good momentum, and we expect more tangible results ahead. Good. We'll move over to the financials. I hand the word over to Erik.
Thank you, Trond. just first on Drive Control Systems, the revenue level was lower than in Q4 2024. as communicated earlier, we were expecting a weaker market in the second half of 2025, compared to the second half of 2024. EUR 6.4 million of the negative variance is related to currency translation effects. as Trond commented, we do see indications of a stabilized market, by the fact that we see Q4 revenue higher than Q3. even though we have lower sales, we record a higher EBIT in Q4 compared to the same quarter last year. This is driven by lower operating costs, lower warranty costs, and reversal of prior period accruals. This offsets the lower contribution from a reduced sales volume, more than offset.
The majority of the reversal of prior period accruals that Trond mentioned was done here within DCS, Drive Control Systems. You see in Flow Control Systems, we also have a lower revenue in Q4 compared to the same quarter last year, but the levels are closer than for DCS. You don't see that big a variance. Both for Drive Control Systems and Flow Control Systems, part of the reason of lower sales is the weak commercial market in North America. Also in Flow Control Systems, we have a higher quarter-over-quarter revenue than in Q3, so also indications of a stabilizing market.
Similar to Drive Control Systems, Flow Control Systems also record a higher EBIT in Q4 2025 compared to 2024, this is driven by lower operating costs and improved efficient, more efficient operations, which is good. We do see improvements, and as Trond told, this is a continual process, working on every day. I think in this EBIT bridge, you see the effect of the lower operating costs compared to the same period in 2024, in the EUR 3.3 and EUR 14.2, this effectively mitigates the lost EBIT from lower sales volume. Also then, when and if the market comes back, we are positioned to get uplift in margins and leverage.
As we have communicated earlier, there is a delay between when the tariff costs occur and when we get the reimbursement process with the customers. Achieving close to full compensation has been and is one of our top priorities. You see, for the fourth quarter, isolated, the warranty costs were lower in 2025 than in 2024. For the full year, the warranty costs were around the same level. That is one of our EBIT, long-term EBIT targets to reduce the level of warranty costs going forward. The key reason here why there's a higher net impairment cost of 2025 compared to 2024, is that 2024 included a reversal of prior period impairments. That was an income effect in 2024.
Coming from a negative net income of minus EUR 13 million in Q4 2024, with the key effects you see in the bridge, we report a positive net income of EUR 2.8 million in Q4 2025. The higher EBIT and the lower tax expense in 2025 are the key drivers for this increase. For the full year, 2025, we report a positive net income, although small, but at EUR 0.2 million. It's also good that we don't just look at EBITDA and EBIT, but also at the bottom line. We are coming out of this challenging year with, we can say, a positive net result, although I admit it's quite small, but, of course, the priority is going, building that further. We also see, you know, lower interest expense.
We have kind of a lot of kind of initiatives all around the P&L. I'm happy to report a slight positive net result for the year 2025. We look at this bridge the same time next year, Our, of course, ambition is to show the same trend here. The positive result in the period and the net working capital effects, that contributes to the strong net positive cash flow of EUR 11.5 million in Q4 2025. I think compared to the same quarter in 2024, it's higher cash from operations, lower investment level, and lower cash outflow related to financing, which gives a significant and positive increase in the three-month trend.
As we have communicated earlier, one of our key priorities is to generate positive net cash flow over time. At the end of the day, that's more important than the results themselves. I think you see here that also the improved cash flow and profitability also materializes in net interest-bearing debt and reduction in the leverage ratio. This leverage ratio per bond term definition is key in relation to our EUR 110 million bond, where the covenant is maximum four. We have, I see we have our bankers here today, so happy to announce this graph as well. I think it's a very important development for Kongsberg Automotive. This give us increased financial flexibility going forward.
I think this is the last, before we go into the kind of summary and outlook and Q&A, that we do have reported now some improvements in return on capital employed, the ROCE. This is, of course, far from satisfactory. Also a key priority to improve. The equity ratio has increased from 30.7% at the end of Q2 to 31.3% at Q3, and now 32%. As our improvement programs continue, getting increased probability, this will also continue to increase. As Trond mentioned also, it is continual work for us to achieve reductions in capital employed. This is also an integral part of the operations in the business areas. Although we have improvements in working capital, this is, I think, we have much more work to do in this area. Okay. Good. Yeah.
Good, Erik. To summarize our presentation here today, let me conclude on the, on the summary and the outlook. As a summary, we do see, a strong, momentum. It's, it's positive development in terms of, both earnings and cash generation, and we do see that the market is, stabilizing, which is, which is positive for us. You see the revenue development that reflects this market stabilization, which is, well, it creates a good, environment for 2026 results. Our cost reduction programs are moving according to schedule. We are done, through most of the big programs that we have, announced earlier.
Of course, we are working now on the continuous improvements, which also have a big, a major, and important impacts for us. As mentioned, the warranty liabilities, they remain. We will provide information when we have information that we can provide. We reaffirmed our long-term value creation ambition with the long-term EBIT goal of 6.5%. Again, we have as a top priority to restore value creation for this company. We do believe in the future. We are very determined to make the changes that are required to realize KA's full potential. Finally, on the outlook, the margin for 2026 is expected to continue an overall positive trend from 2025 levels.
The market outlook has improved for the second half of 2026. We still want to be cautiously optimistic, as just the last week's events shows that there are uncertainties, and they persist. This concludes our presentation here today, and we will open up for the Q&A session.
Thank you, Trond. Let's get started with the first question. It's for you, Erik, and you have already touched upon it, but let's go ahead with this one. The U.S. dollar have weakened compared to other currencies. How does this affect the financial result of KA?
Yes, that's a good question. I think for KA, it's primarily the relationship between U.S. dollar and euro, which is important, and on that, the U.S. dollar has weakened around 16% over a 12-month period compared to the euro. How we see that for our results, you mainly see it on the revenue level, where I think we had a currency translation effect of EUR 6.7 million in Q4, and then reducing revenue, and then for the full year 2025, I think it's around EUR 17 million. That is mainly predominantly the weakening U.S. dollar, since we have this quite a large part of our operations in the U.S. We also have quite a good natural hedge, in the sense that we have significant cost base also in dollars.
When we look at both EBITDA and EBIT, that the currency translation is not an explaining factor. We have quite a good balance. The other way it impacts us is that it also impacts our balance sheet. When the U.S. dollar, the value, reduces, it will also reduce the balance sheet, and then it reduces the equity we have in the U.S. when it converted to euro. There you see a negative effect in the year-end, but that's, that will go up and down, and you still, we still have a increase in the equity ratio. It's not the weakening dollar has not been significant as in a large sense on the equity. I think we're fairly balanced on that.
Thank you. How does the recent development in the U.S. tariff situation impact KA?
Yeah, first of all, the tariff situation until now, we have been taking very firm position on that with our customers. That is basically we are not in a position to absorb those costs, and ultimately, this has to be passed on to the end customer and the end consumer, which is ultimately the U.S. consumer. As we have shown, both in Q3 and Q4, we have been able to neutralize those effects. That is also what we will work on, and I'm very determined to achieve that also on any new tariffs that are now coming. What the last week's events has... You know, the consequence of that is that we will have to, again, sit down with our customers, suppliers, to go through the agreements and how we handle this.
We are going to take the same position, we are very confident that we will achieve and be able to neutralize the direct cost impacts of this. In Q1, it might be because of the changes that there might be some delays in getting that compensation. We have to, you know, also understand how this impacts us. We had a meeting with the broker a couple of days ago, and the customs broker, and they didn't know how to apply the taxes. There's all kind of uncertainties around this that we have to figure out. We will get compensation for the direct cost. That is not our biggest concern.
It's almost like business as usual, in a sense, because we're dealing with these kind of issues when it comes to supplier cost increases, raw material cost increases, et cetera. We're dealing with that and handling that. Yes, sometimes there are some delays in the effect, but over time, we will get it recovered. That is part of our job, and this we can influence. Our bigger concern here, as we also flagged on the previous tariff situation, is what we cannot control, which is the market uncertainty, and this is problematic. We're flagging that there are uncertainties, and they persist, and this is a very good example of that. This is what we closely monitor.
We have not received any feedback from our customers that this is negative. Obviously, uncertainty is not good for the market. That is our biggest concern, and that remains our biggest concern when it comes to all the tariff discussions.
Thank you. Before we go ahead with questions here from the room, let's have one more from the webcast. Do you see potential for strategic collaboration or project opportunities with Kongsberg Gruppen going forward, given the overlapping technologies and market? Can this be a meaningful growth catalyst for KA?
I cannot comment on specific, let's say, customer initiatives. We are located in the same city. We have a dialogue with them and are exploring opportunities to collaborate. It's a part of our agenda. It's nothing that has materialized into any things that we are able to announce. Then the question is: Does it fit into our business concept and our vision for this company? It's not something that is high on our agenda. We are, of course, evaluating opportunities that could be interesting, that where we could create value for the company.
It's most likely not the type of opportunity that would fit best with our business concept and how we're the direction that we're taking the company.
Thank you. Is there a question here in the audience?
Yeah.
You just get.
I can repeat the question.
Yeah.
The question was regarding the warranty liabilities, and when we will have more clarity on that. It's very hard to say, because this process can take a lot of time. That said, we are not in a rush to conclude it. We need time to do the proper investigations, the proper negotiations, and we want to solve this in the best possible outcome for the company. Very hard to say how much time it's going to take. Some of these processes can drag on for a long time, and then, I mean, years, potentially. It could also solve quicker, so it's very hard to say. This is a part of the, let's say, the all the variability of the outcome. It's also in terms of time. We don't know.
It's very strong focus, and we want to solve it as soon as we can, but we are not going to Let's say, if we need more time in order to get to the best possible outcome for the company, we are going to take more time. Very good. Then, uh- There's one more question.
My English isn't good enough, so I have to take the question in Norwegian. Okay?
Sure.
Avsetninger, garanti avsetninger. Nå vet vi at vi har tapt $6.7 million, fallet som har skjedd. Garanti avsetningene har de, er det en gevinst i motsatt retning i forhold til at garantikostnadene vil påløpe i dollar? Ikke jeg, det vil jo gi en utjevning i forhold til den tapen.
The question was if the warranty accruals that we made, if the weakening U.S. dollar has any impact, positive impact on the warranty accruals. What I can say is that if the warranty costs are in dollars, they, of course, in EUR will have a lower impact. It, you know, the accruals have been made. They were made in the past. Maybe, Erik, you can comment on how the accruals itself will impact.
Yeah. Yeah, yeah. I'll do that. The accruals are made in each entity. For instance, the U.S. part is made in dollars, and then it's converted to euro. It's a good question. I think that when and if any payments are made in the future, if they're made, of course, a weak dollar will kind of... we will use our, the value for the euro to pay that. It's that in just isolated that sense, the weakening of dollar is good, and the majority of the accruals are related to the U.S. side. Yeah.
Hvor stor del av avsetningene er relatert til dollar, opp mot euro?
I think just for, let's say competitive reasons and the customer negotiation, I don't think we want to go into details on the specific. Ye ah. Yeah. It's, yeah.
Any further questions? If not, we can conclude.
Yeah. Thank you for participating on this earnings call and also thank you to Arctic for having us here. Thank you.