Good morning, everyone, and welcome to Kongsberg Automotive's Q1 2026 earnings call presentation. Today, we are at Danske Bank in Oslo, and we are joined by participants joining us digitally as well as physically here in Danske Bank in Oslo. Up on the screen is today's agenda and today's presenters, Trond Fiskum, our President and CEO, and Erik Magelssen, our CFO. As always, we will have a Q&A session after today's presentation. You can both ask questions even if you are here or also by using the tool in the webcast. With that, I would give the word over to our President and CEO, Trond Fiskum.
Thank you, Therese. Good morning, all, those that are here, physically, and also those that are joining online, for joining today's earnings call. I'll start today's presentation with some reflections on my first year as CEO for Kongsberg Automotive. At the end of March, one month ago, I marked one year as President and CEO of the company. I remember when I accepted this responsibility, I did that with a deep sense of responsibility for the company, for the employees, and for the shareholders. I stepped into this role with a clear conviction that KA had a significant untapped value creation potential, that unlocking that potential required a fundamental change in the way that the company was run.
Over the last 12 months, we have made quite a lot of changes. We have acted with determination and speed. We have renewed the leadership team. We have simplified the organization model. We have reestablished a performance-oriented culture with clear accountability and execution focus, making sure that we have the right people in the right roles. In parallel, we have worked with structural and operational actions to improve our cost base and strengthen cash flow, while also addressing systemic issues in our company. That includes how we handle warranty cases and how we handle contracts. Also many other issues that we're not bringing to this audience and doing the report, but that we're dealing with internally.
We also set very clear long-term direction, including selective investments in innovation and a 6.5% EBIT margin target, long-term target. The journey is far from complete. We have, I would say, just started. A lot of work remains. It's a multi-year effort. There's no shortcuts. There's no silver bullets. It's about disciplined execution. It's about consistent deliveries, continuous improvement, and a clear long-term strategy. I must say that after one year in the role, I'm still very convinced and optimistic about KA's long-term value creation potential. Going into Q1 results, financial performance. Starting with revenues. Our revenues are slightly down 1.7% compared to Q1 2025. We delivered EUR 179.6 million. This excludes currency effects.
This is a reflection of the market that is stabilizing, which is encouraging. Profitability continued to improve. We have an EBIT of EUR 5.5 for the quarter, which is up from EUR 2.2 same quarter last year. Net profit, we delivered EUR 5.2, up from negative minus EUR 2.2 compared to one year ago. This also Erik will go into more details later in the presentation. Cash flow also goes in the right direction. Although it was a negative EUR 4.7, it's a significant improvement from last year's result, which was minus EUR 10.5. Here we have some seasonal variations that explains the negative. Also here will explain a bit more further, but we see the continued positive trend here.
Here we see this over a five-year quarter period. You see the revenues are stabilizing and are increasing now for two consecutive quarters. We see the EBIT. We have some positive one-offs in Q4, but if you know, exclude those, you will see the underlying positive trend also on EBIT, on increasing trend. Also you see on the positive trend on the free cash flow, especially the last 12 months trend going from - EUR 16 to + EUR 12.6. The fundamentals of the business is going in the right direction, and we are working hard to continue these trends.
Having looked at the shorter-term financial performance over the last five quarters, I want to spend a moment on what we're doing to further improve our results for the next quarters and the next years ahead. First, the previously announced cost reduction programs have now been largely implemented. Their impact is now becoming very clear in our financial results. The full effect of them are still not fully visible. They will continue to lead to margin improvements over the next quarters. This work or structural and cost improvement work will continue. We are actively working on improving the way we set up our organization to continue to streamline that. We're looking at our manufacturing and our office footprint.
We will continue to work on simplifying the way that we have set up the company to reduce complexity and cost. Third, we're also working on our commercial discipline. We're highly focused on entering customer contracts that are favorable in terms of profitability and pricing and that we have acceptable terms and conditions. Fourth, all of this is guided by very high ambition. We challenge status quo. We're also looking at how we can leverage AI technologies and how we can set up the organization to be more competitive and cost efficient in the future. Always having the short-term needs of the business and the longer-term needs of the business in mind and finding the striking the right balance.
Taken together, all these actions are key for us to deliver the 6.5% EBIT target. That, by the way, also includes the warranty cost. This is a target that is set on a revenue level of EUR 730 million. With revenues above that level, there's also an upside potential as we have communicated earlier. We have reported earlier that we have some risks related to warranty. These are cases related to a certain or a limited number of legacy contracts. We have had, as I also mentioned in the past, suboptimal warranty practices. The cases are complex, and the variability of the possible outcomes are significant.
Due to the ongoing customer discussions and negotiations, we cannot provide, you know, a lot of details here. What we can inform is that the issues have been identified, they have been contained, and very actively managed. It's a top priority for myself and my team to handle these cases. We have a meaningful progress, meaning this is going in the right direction for us, and this work, of course, continues going forward. Once we are able to share more information, we will do so. Let's move to another part of our business, which is customer contracts. Before going to the numbers for 2026, we have made some adjustments. We call this now contract awards instead of business wins.
We also, as a part of a more, let's say, disciplined approach, we are reporting contract revenues only, not estimated life cycle revenues. We stick firmly to the definition of a contract duration and the estimated revenues within the contract. This is a slight change there. Let's also clarify exactly what we are reporting on. Estimated lifetime revenues can be up for interpretation. We decided to stick to contract revenues only. This slide summarize the contract awards for Q1. We see that we have EUR 77 million in estimated revenues from those contracts, and it's mainly in Flow Control Systems and mainly in the commercial vehicle segment where we have the truck, trailers, and bus.
We have a clear focus on establishing contracts with, let's say, high quality in terms of profitability and good terms and conditions. We are growing in, I would say, attractive segments for us. We continue to have a pipeline of good opportunities. They are solid. We also have a very high customer engagement in the quarter. A lot of activities that have not yet materialized into contracts. As you can understand, there's a lot of things going on in industry with electrification and all that, and we are in the game for that and discussing with several customers on the future. Going a bit behind the numbers, we have a contract here that we would like to show.
It's an important contract within our air couplings business. This is with a North American electric truck manufacturer. It's interesting due to several reasons. One, it reinforces our leadership in the market as with our coupling product line. It shows that we are taking market shares in North America. It's a very important market for us, and it's a key growth market for us. Second, it also confirms our co-competitiveness in the Electric Truck segment. With the transition from diesel, and internal combustion engine to electric driveline, you will still need the air system. Not dramatic changes there, but it's still, it's important to demonstrate that we are competitive in this segment.
Third, the contract here is not only on the, let's say, the traditional ABC building block system, it also includes a twist lock solution, which is an add-on and an evolution of the system and adds attractive additional revenues for us in this segment. This is the same solution as we also announced in the previous quarter with another customer. It's a six-year contract estimated at EUR 31 million, the contract length here is six years. We're going to produce most of this in Mexico, close to the customer, and delivers also from that site into the region. Here we bring a slide to show some insights about how these contracts impacts our revenue profile.
It explains how the estimated revenues from the Q1 contracts are distributed over the next eight years. What we see here is there's two elements here. One is the distribution over the years. We have split this in two categories. One that is extension, which is the continuation of existing business, and incremental, which is new business for us. What you see here is on the first year, 2026 or this year, it's dominated by short-term business extensions. This reflects a part of our business where customers work with shorter-term contracts and in some cases also ad hoc purchases. This is typically aftermarket and non-automotive customers in industrials. From 2027, 2028 and onwards, we see a stronger portion of incremental, and this becomes the primary driver.
This is typically longer term contracts, typically three to five years, but we also, as we can see here, up to seven, eight years. These contracts are very important for us. They give us stability over time, enables us to work with long-term, systematic, continuous improvements as we have long-term visibility. It's also important to note this is Q1 contract profile. It doesn't mean that this is what we will see in Q2 and onwards. The revenue mix will naturally vary from quarter to quarter. It's also, you know, just to give some insights about how this works for us. Last on contract awards, as we have communicated earlier, we will now only announce externally the contract awards that are considered to be strategic.
Strategic contracts are basically those that are, they constitute inside information, meaning contract awards that can expected to have an impact on the share price or investors' assessment of the company. We have included the definition here. I'm not going to read it, but it's basically quantitative criteria A and B related to our revenues over a certain threshold. It will trigger that it's a strategic contract, but there are also a list here of qualitative criteria. This has been thoroughly reviewed, discussed, and also now approved by the board of directors. We concluded this discussion yesterday. It's also fully aligned with the Oslo Stock Exchange disclosure requirements, and the KA investor policy is also updated accordingly as of today.
Under this policy, we will not announce smaller and, let's say, routine business extension, which do not meet the strategic contract criteria defined here. They will not be announced individually. The objective here is to avoid unnecessary market volatility and speculation to also comply with the Oslo Stock Exchange disclosure requirements and to ensure that our external communication remains focused on the information that is most relevant for investment decisions and our shareholders. Key priorities have not changed very much since last time. We continue to stay focused on the same topics to drive cost efficiency and operational improvements, to improve cash flow, to strengthen leadership teams and the K culture, and to accelerate innovation and profitable growth. This is what we're working on every day.
We have built up a solid momentum around a wide range of initiatives, and the results are becoming more and more visible. We expect more tangible results in the quarters and the years ahead. All right, we'll move over to the financials, and I'll hand over the word to Erik.
Thank you, Trond. Hello, everybody. Starting with the Drive Control Systems, the revenue level was recorded lower than in the Q1 2025, partly due to negative currency translation effects of EUR 4.5 million. The business area reported lower sales, both in the commercial vehicle market and passenger car market, but the Off-road Industrial segment reported growth in all regions. You see that even though we have lower sales than in Q1 2025, the EBIT improved compared to Q1 last year. The primary reason for this is the reduction in operating cost. Significant structural changes have been made within this business area that we will see higher effects of in coming quarters. You see also that Trond mentioned in the start that the EBIT in Q4 2025 was affected by certain extraordinary items.
That does kind of explains the kind of, let's say, the peak in Q4 2025. In Flow Control Systems, our other business area, we have now increased revenue level over two consecutive quarters, again, indicating a stabilizing market. This also despite the negative currency translation effect of EUR 2.8 million in Q1 2025. This business area, they are reporting increased sales both in the commercial commercial vehicle market, both in Europe and North America, and also a significant increase in sales to the passenger car market in Europe. The increase in EBIT here is primarily driven by lower operating cost again, both directly in the business area and through allocation of lower corporate cost. You also see the positive development in the EBIT margin here, now at 6.9%.
As noted by Trond in the start, the EBIT improvements are primarily driven by operational execution and structural cost actions and reductions, not by sales volume recovery. This is clearly demonstrated in this EBIT bridge, where you see the effect of lowering operating costs compared to the same period in 2025, the EUR 5.6 million. This more than offsetting the lower sales, the lost EBIT from lower sales volume. As we have communicated, commented earlier, there is a delay between when the tariff costs occur and the reimbursement process from our, with our customers. Achieving close to full compensation is a clear target and our, and one of our highest priorities.
Coming from a negative net income of EUR 2.2 million in Q1 2025, with the key effects shown on the bridge, we report a positive net income of EUR 5.2 million in Q1 2026, which of course is a substantial improvement in our bottom line. The EBIT is important, but also the bottom line, what we have at the end of the day at the bottom line, after all financials and taxes as well. You see here that the EBIT, the operational improvements is the key driver. We also have, in this quarter, certain currency gains, losses compared to the previous quarter, and also a lower tax or lower net tax cost. In all in all, very positive and very positive development.
On the cash flow side, we have a continued increase in the 12-month trend, and this is now positive EUR 12.5 million. I think coming from a negative level of close to 16 million in Q1 2025. Then compared to the same quarter in 2025, the cash flow improvement is coming both from operations, investing, financing, and currency effect. I think that it's important to see this in a trend line over time and focus on the underlying direction. We do, for instance, have a clear seasonality effect from Q4 each year into Q1 the next year.
Given that Q4 each year will normally have a lower revenue level than compared to the other quarters, also due to the December and the seasonality and the holiday season, there will normally be a buildup of working capital from Q4 into Q1 the next year. If you for instance, go back the last four years, you will see this very clear, and it's close to the same net working capital effect in each of these two months period. The increase in net working capital is the key reason why net cash flow in this quarter is negative. You also see here a negative cash flow in Q1 2024 and Q1 2025. This, of course, is a timing effect, and all EBITDA at the outset will be converted to cash.
The improved profitability and positive development in the cash flow trend also materializes in a reduction in net interest-paying debt over the last 12 months and reduction in the leverage ratio. This leverage ratio, per the bond term definition, is the key in the relation to our EUR 110 million loan, where the covenant is maximum 4.0. This has come down from 3.1 we had in Q2 2005. We maintain it now at a 2.2 level. I think this positive development, it strengthens KA's financial position and gives us increased financial flexibility going forward. The improvements we have in our underlying profitability, that we achieve without increasing our assets at the same rate, gives us a significant increase in the Return on Capital Employed, ROCE.
This measure of our capital efficiency has now increased over three consecutive quarters and is now at the 5.4% level. This is a very key measure important for us that will generate higher profit without increasing our capital tied up at the same rate, then we get an increase in this Return on Capital Employed. This is a key measure for us when we measure the business areas and business units, and also our continued going forward. I think it's also noteworthy that the equity ratio has increased quarter by quarter now since Q2 2025, it's now at 32.4%. As we continue to improve operations and lower our cost base giving increased profitability, the equity ratio will continue to increase. This is, of course, a measure of our solidity.
Thank you, and back to you, Trond.
Thank you, Erik. To conclude, like to bring this slide. This is the share price for KA since January 2023 until yesterday. What we're here to do, you know, is to create shareholder value. The numbers speaks for themselves. The development has not been always that positive. We have, I would say a trend change in beginning of 2025 and we see that it's going in the right direction. Creating shareholder value is our key and top priority. We recognize that there's still a lot of work ahead and we remain very focused on that strategy to continue delivering value. Not any new points on the summary.
We continue on our profitability and cash flow improvements, and we see that in the results. We see that the revenue developments reflects a stabilizing market, which is encouraging. We see that the cost reduction programs are largely now implemented and giving, you know, the benefits and that we continue with new initiatives to drive margin improvements to deliver the long-term EBIT target of 6.5%. Looking at the outlook, our EBIT margin for 2026 is expected to continue the positive trend that we have established. Market outlook, we are cautiously optimistic. We all know about ongoing uncertainties due to the conflict in the Middle East and elevated oil price.
We don't see big impact of that on the demand for now, but it remains, of course, an uncertainty. We do see some cost impacts of course, but in terms of the market, it's relatively not that impacted, but it remains an uncertainty. That concludes our presentation, and we open up for the Q&A session. Free to ask questions here in the audience and also online and yeah.
Thank you, Trond.
Mm-hmm.
We have a few questions coming in in the webcast tool, so we'll start with, some of those. First question, how should we think about the warranty cost going forward in terms of normalized levels? Do you want to give some kind of indication and consider a reasonable best or worst case range, and what are the key drivers behind those scenarios?
Well, I can answer regarding the levels. On our Capital Markets Day, we talked about how we will get to the 6.5% EBIT target, and we show there that warranty cost improvements would be one of the drivers to get there from the starting point. I believe we were at a range of 1% EBIT impact improvement. That is what we expect as improvement from 2025 years level in the years ahead. I think that's what I can say about the improvements when it comes to the specific case. We refer to what we have presented here and announced, and I have no other comments to that topic.
The key drivers we also have stated it's related to legacy contracts. It's related to suboptimal warranty management practices that we have and RB are addressing. Yeah.
Thank you.
Mm-hmm.
Next question. Within your DCS segment, you report a -5.3% decline in European commercial vehicle revenues versus market growth of +7.2%. What explains this apparent loss of market share?
That was Which time period?
This quarter.
Okay. I don't have the answer to that. I will have to look at that and revert.
Thank you. That was the question in the webcast tool. If there are any questions here, you can raise your hand and I will come over.
Thank you. Thank you for the presentation. Could you elaborate, what's baked in into your cautiously optimistic market outlook? What are the drivers and the factors that you sort of look at?
Yeah. We look at, you know, where we have our primarily exposure is in Europe and North America, especially in the Commercial Vehicle segment. What we see that our customers are reporting and what we see in our call-offs, you know, delivery schedules from our customers, it remains, let's say, with a small improvement from last year, and is much in line with also what they communicate externally. They're. We do see a small improvement from 2025 levels in terms of commercial vehicle production. I think with reference especially to the Volvo Group report, where they are having a relatively positive outlook, and this is our biggest customer.
There are some variations, you know, between different customers and different segments. That, that is a main driver behind that. We see, you know, in general, we do typically see a 6 to 9, 12 months delivery schedule from our customers. We are monitoring that very closely. Every week we get an update, and we see that it is stable. It is not much impacted by the conflict in the Middle East. It is according to the levels and that reflects, let’s say, what we can call cautiously optimistic. Small growth, cautiously because of the uncertainty.
Thank you. It's no further question in the webcast tool, so if there are any more here in the room, we can take them. If not, then we can conclude.
Yeah. All right. Thank you very much for everybody's participation, and thank you for to Danske Bank for allowing us to have the earnings call, at your facilities here at, Aker Brygge.