Ladies and gentlemen, good day and welcome to the Kongsberg Automotive's Q4 2020 earnings call. Today's conference is being recorded. At this time, I would like to turn the conference over to Norbert Loers. Please go ahead.
Thank you, operator. Good morning, everybody. We welcome to our Q4 earnings call our shareholders, analysts, and business partners. Today's presenters are Robert Pigg and myself. We are both currently the co-CEOs of Kongsberg Automotive. Let's go to page five. Before we start with the detailed presentation, let me quickly summarize the highlights of the fourth quarter and full year 2020. As you know, top line is the first and the fundamental number in our P&L. Q4 2020 set a new record for a fourth quarter in the company, with sales of about EUR 300 million. That is a true V-shaped recovery. It does not come without challenges, especially as the supply chain started to suffer under shortages in electronics. We all know what finally matters is cash and bottom line, and we deliver on both.
An adjusted EBIT of EUR 22.5 million sets a new quarterly record for Kongsberg Automotive for the last four years. Free cash flow improved significantly compared to expectations and reached almost breakeven in the fourth quarter, despite heavy investments in the fourth quarter of EUR 27 million. For the full year, we deliver, for first time, a positive cash flow from operations and investment activities, which is very significant for us. Without the about EUR 100 million revenues we missed from COVID-19 effects, our cash flow would have been positive already in 2020. Looking forward, our strong bookings in Q4 secured further business growth in a challenging market environment. Finally, we continue to benefit from a very significant liquidity reserve that comes close to EUR 200 million again by the end of this quarter.
If you go to page seven, with the highlights of 2020, I want to highlight on that page two segments. First, performance, and secondly, liquidity. We had to concentrate on both. When in second quarter revenues dropped so dramatically, we went into crisis management mode and contained and flexed costs as much as we could. At the same time, we envisaged that we have a liquidity need, and we started various initiatives to improve our liquidity. Most important is the capital raise, which was done with a private placement and with the second subsequent offering. Since third quarter, we have liquidity reserves of about EUR 200 million, and that is almost the same number in Q4. If you go to page nine, please. We show you here over time, quarter- by- quarter for the last four years, our revenue developments.
You see that we had in the second quarter a dramatic decline, and that missing top line caused, of course, lots of missing margins, profits, cash flow. For the whole year, we declined to EUR 969 million revenues from EUR 1.169 billion in 2019. When we look into page 10, Q4 2020 became the best quarterly earnings quarter for the past four years in terms of adjusted EBIT. On an annual basis, however, our adjusted EBIT dropped from EUR 71 million to EUR 11 million only in 2020. That was very much caused by second quarter, as you can see. When we look into our free cash flow, on a quarterly development, we have stabilized in 2020 our spikes, our peaks in cash flows, compared to previous years. The overall was obviously very much impacted by missing revenues and margins. However, we could improve significantly in the last quarter.
I would like to draw your attention to page 12, where we show you first a free cash flow over the last years, and then you see in the shaded box where we show cash flow from operations and investing activities only, where we exclude the cash flow from finance costs and FX. You can see here that we achieved for operating cash flow, including investments, a cash turnaround in 2020 already is EUR +15 million. On the right side, you see how these categories developed over time. Operating activities is the cash flow, and all the details are shown in our quarterly report. Operating cash flow is the result from our operations. That is a strong positive trend year-over-year. In this number also is included the restructuring expense of the past, and that this is behind us.
In last year, in 2019 already, restructuring was very close to zero. Our investment cash flow is negative, but we could also improve on investment. We have now a pretty high and well-invested base, and we don't need to invest as high amounts as we did in the past. The finance cost cash flow increased or decreased to EUR - 52 million. This is driven by two effects. First, we had additional expense last year on various financing activities, and secondly, we have a strong translational FX effect in that as the year ended with a pretty weak dollar, and that is the main driver of that effect in 2020. When we go to next page, new business wins, you see here that there was, in the first two quarters, pretty low activity in 2020, but we could catch up a lot in fourth quarter.
A good thing is also that we have a good balance of new business wins across our segments. When we look into page 14, you can see our new business wins over the last three years by quarter, that we maintain every single quarter a very healthy book-to-bill performance. That positive book-to-bill performance of our new business wins ensures going forward the growth of Kongsberg Automotive even above market growth. I'm handing over now to Robert to continue with the market summary.
Thank you very much, Norbert. As we talk about market recovery and in Q3 presentation, we saw the first signs of recovery. As we finished Q4, we saw the recovery come much faster than everyone expected and everyone forecasted. If we go to slide 16. We see here that light vehicle production recovered to pre-COVID levels in Q4 after significant downturn in 2020. On an annual basis, the product volume still declined by approximately 16% in 2020 when we compare year-over-year to 2019. Similar to on commercial vehicles, production volumes mostly recovered to the pre-COVID levels. It is important to note here that China is a dominant regional market driving the global demand at approximately 35% growth rate in 2020.
As we said, the markets did come back, but much more faster recovery than what we had expected, and that gives us a strong order book as we roll into 2021. If we go into the next slide and we talk about the segment highlights. As we highlighted in Q3 results, the financial performance of each segment was heavily impacted by COVID-19, but we experienced a strong recovery in Q4. Looking at the financial performance on the segment levels, we still had some COVID-19 impacts. However, we see the recovery path to pre-COVID levels. Interior beat Q4 2019 sales by approximately EUR 11 million, but the adjusted EBIT came in lower due to one-time cost. Also, P&C improved its performance, beating both Q4 2019 in sales and adjusted EBIT. Specialty Products had a strong operation performance in 2020, topping Q4 2019 with basically flat sales.
We saw a strong recovery in Q4 after the COVID-19 shock in Q2 and portions of Q3. If we go on to slide 19 and we look at new business wins per segment. As a company, new business wins almost returned to the pre-COVID-19 on an annualized basis in Q4, EUR 87 million versus EUR 89 million. However, on lifetime sales, we were up approximately a little over EUR 40 million year-over-year, thus securing the future growth of KA. In the following slides, we'll cover each segment in more detail. If we go to slide 20, if we look at our Interior segment, shows strong top-line performance and new business wins in Q4. Sales were increased by EUR 11 million, despite a negative translational effect of EUR 4.5 million.
Sales were mainly driven by strong performance in North America and China due to production ramp-up and a gain in market share for KA. EBIT in Q4 decreased in % of sales and in absolute values compared to Q4 of 2019. However, we saw positive effects of the operational improvements and strict cost controls were offset by one-time costs and supply chain stress. As we're all aware, the global supply crisis for electronic components already started hitting Interior in Q4, and it's approximately half a million we spent in Q4 to secure components, and we expect to see this continue well into 2021. If we look at operations, Interior continued to focus on controlling variable and fixed costs and implementing further operational improvements. Interior had a strong Q4 bookings with contracts amounting to EUR 41.3 million annualized sales and approximately EUR 327 million in expected lifetime sales.
This was driven by two large contracts for seat support systems, one with a major European OEM and one with a major U.S. OEM. These programs totaled EUR 17 million and EUR 11.6 million annualized, respectively. EUR 153 million and EUR 80 million in expected lifetime sales. For Interior, sales were strong for the second quarter in a row, and we are seeing positive evidence of the operational improvements that we made last year. If we move on to Powertrain & Chassis.
In Powertrain & Chassis, improved sales and adjusted EBIT performance, but had lower new bookings. Sales for Q4 were up EUR 4.1 million when we compare it year-over-year, despite a negative translation effect of EUR 4.8 million. This was mainly driven by market share gain in both passenger car and commercial vehicles in China. Improved adjusted EBIT was driven by efficient control of variable and fixed costs in Europe and American plants.
This was somewhat offset by a warranty charge of EUR 5 million that we had to take within the quarter. All plant operations are back to normal and at normalizing volumes. We're starting to see the benefit of the operational performance plans achieved in 2019 and the cost controls implemented earlier this year. In Q4 2020, global demand wrapping up, we have faced supply chain issues relating to resin, steel, and electronic components, and we expect to see these issues continue into 2021, not just for Powertrain & Chassis, but for most business units. Again, P&C and new business wins were heavily impacted by COVID-19. They were much lower versus Q4 2019. All in all, it was a very strong quarter for Powertrain & Chassis when we factor in the EUR 5 million warranty charge that we had to take within the quarter.
If we move to Specialty Products. Specialty Products segment proved to be our most crisis-resilient segment with strong sales and margins in the second half of the year and especially in Q4. Sales in Q4 grew by EUR 2.7 million, despite a negative translation effect of EUR 5 million. This was driven by strong performance in our Couplings business group. In terms of EBIT, the year-over-year increase of EUR 4.9 million is driven by positive operation efficiencies and positive effects we see from brass and resin raw material pricing. All the plants are back normal and are benefiting from the operational improvements and cost control measures that we put in place earlier in 2020. Likewise, as I said, we still have supply chain stress in these business units as well. If we look at new business wins, overall, the segment achieved good levels.
Couplings was awarded a contract with a major European OEM, totaling EUR 6.1 million in annualized sales and EUR 43 million in expected lifetime. Likewise, Off-Highway secured three contracts with major construction OEMs amounting to EUR 6.2 million in expected lifetime sales. Specialty Products continues to deliver strong results every quarter, as we've seen the second half of the year. Now I'll turn it back over to Norbert and he'll cover group financials.
Thank you, Robert. We continue on page 24, which is EBIT and net income year-over-year, quarter-by-quarter. You see that heavy impact we had in the second quarter, first from operational results, but secondly from an impairment of EUR 83 million. That impairment loss is a non-cash effect, but it reduced our equity accordingly, and it reduced the balance sheet by impaired assets. Most of them were goodwill. If we go next page, sales and adjusted EBIT improvements. You see here that year-over-year, Q4, Interior had the biggest recovery in revenues. P&C and Specialty Products were also strong, but we also have very significant FX effects that reduce the overall top-line growth. When you look into adjusted EBIT, Interior could not benefit from the additional revenues, mainly to two effects that are already described in the segment area.
First, they had some one-timers to recognize in the financials. Secondly, Interior has the biggest exposure to our electronics raw material pricing, and that already impacted quite materially the fourth quarter. That was pulling them down in profitability. P&C is only a relatively small increase, huge increase in Specialty Products. If we look into net income, you see here that Q4 2019, Q4 2020, Interior this time on that layer is the biggest contributor to net income improvements with EUR 7.4 million. P&C also with EUR 3.3 million, and Specialty did not improve so much, but they were already on a very high level in 2019 and could maintain that very high level in 2020. Other financial items, there we have significant FX variances in it that is impacting that category. In taxes, we have a small change only quarter-over-quarter of EUR 0.3 million in the quarterly results.
Liquidity development on page 27, that's also one of our main focus areas. I don't walk you through every single category here there, I want to highlight a few. Obviously, adjusted EBITDA or profit from operations played a major role in improving from third to fourth quarter, EUR 34 million+ . We had a positive change in net working capital. In net working capital, we have since years, very intensive focus of the whole business, first to manage better inventories, and we could reduce our inventories in 2019 already and in 2020 by focusing on inventory turns and avoiding excess inventory. This is pretty well implemented now in our day-to-day routines, and the quality of our inventory and the currentness has improved significantly. We have very small restructuring payments.
That is from previous years, restructuring projects where we still have some long-lasting lease agreements where we have to pay for until these agreements are over. This is for facilities we don't use anymore. We had tax payouts in the quarter, and we had almost EUR 27 million of net investments. We pushed hard for having all the investment pipeline implemented in the plants and the cash paid to our suppliers so that we have, from that perspective, a clean sheet going forward into 2021. Finally, what is also worth mentioning is the currency effect on cash. Currency effects in 2020 were all in all very significant with impacts on top line, on bottom line, and on cash. If we move next page, that is the composition of net financial items in the course of the year.
There you see again that currency effects played a major role in that year. Our net interest numbers are pretty stable. This is driven by the bond interest, which we accrue for in the quarters where we don't have the payments and by our interest payments that come from the IFRS 16 lease payments. Yeah. We have also some small effects from the accounts receivables securitization project in Q4. We look into financial ratios. Our adjusted gearing ratio obviously took a big hit in second quarter, where we had that big loss in top line and in EBITDA. Until that second quarter 2020 is part of our last 12 months, we're going to have a gearing ratio that is relatively high. We keep improving it. You see here quarter- over- quarter, we are reducing it already.
Return on capital investment, second and third quarter was very little due to the operational results, but we're coming back in fourth quarter with positive returns, even though way below of where it should be. If you look into equity ratio, you see here that we could maintain through the crisis despite that heavy impairment loss and the heavy operational losses. Thanks to the capital raise and the capital addition from our shareholders, a very healthy equity ratio that is now around 27%, and that is a sound balance sheet. If you look into capital employed, these numbers are relatively stable, slightly increasing in Q4 with the continuous investments we make into our installed base. Next page is Outlook 2021.
If you look into top line first, we believe that we can deliver EUR 1.1 billion in revenues, based on our order book, based on market intelligence, and that is a strong recovery of our revenues. We really build here on our book-to-bill ratios of the past, and we also have an increasing ratio of electric vehicle-related products in our actual revenues and in our order pipeline. When we look into adjusted EBIT, we will come back. We envisage here a EUR 60 million adjusted EBIT for 2021. This is still a careful forecast. We will build on the operational improvements we did in 2020 on our cost reductions, fixed cost flexing. We have big focus currently on effectively managing the increasing shortages of electronics, and so far, we could successfully do that.
It's a key challenge right now to management to secure and maintain supply chain and deliveries to our customers. On free cash flow, it's a complete free cash flow definition. For clarification, we added it here on the page. It is also from the APM section of our annual report. free cash flow negative 2020, positive 2021 in our outlook. That is a swing of almost EUR 50 million. We believe that we can generate positive free cash flow in both half years. Assuming current FX rates, current market demand, the very strong order book we currently have, and also we make an assumption there that electronics availability is given. That's a key product in our sophisticated technical products.
This swing in free cash flow is possible since we can harvest now from the investments in the past, from all the years where we had restructuring efforts and from all the investments in CapEx that were between EUR 60 million and EUR 70 million for a few years. This is what we have prepared in our presentation. Operator, if we now look into Q&A.
Thank you. Ladies.
I would think the first question is for you, Robert.
The question was, who do you make new contracts with in Q4? We typically don't announce the final OEM of who the contracts are, until we get to production due to the contracting agreements that we have in place with the OEMs. As I said, we won business with premium European OEMs in both truck and passenger car. Likewise, major U.S. OEMs in passenger car, as long as three premium construction OEMs that we secured business with. As we get closer to production, you'll start to see who those customers are when we talk about how we focus on our customers and how the customer portfolio builds up. Next question.
Okay. Next question. I read it here. It's a brief comment. EBIT, 7.5% in fourth quarter 2020. Do we still stick to our target of double-digit EBIT? In principle, yes. With our products, our installed base, our customers and markets, that is the potential of Kongsberg Automotive. We are not having that outlook already for 2021. There are significant uncertainties in the market, as you all know. With underlying operational capabilities, that target is not impossible. We are not making here statements on when we can achieve it. That is subject to the development, over the next quarters, I would say. The company will come back to these statements. The next question is, going forward, is this level of sales higher or lower than in Q4, 2020? How do you consider opportunities in China?
We currently see in Q1, similar levels of revenues and profitability as Q4, 2020. For that short-term view, the answer is yes. For a longer view, we just have to be extremely careful since there are so many uncertainties around the marketplace. China, how do you consider opportunities? We consider opportunities great. We have the right product in our passenger car business for China, especially in Interior, in ICS, and in our P&C segment in Driveline, where we can sell a lot of our product, where we have profitable growth, and where our product exactly meets market needs and the demand of OEMs who build the cars the customers like in China. Next question, Robert, I would suggest for you.
The question is, how is KA prepared for the change to electric vehicles, cars, trucks, and off-roaders? We are very prepared, to answer the needs for electric vehicles in all segments. As we've spoken in the past presentations, if you look at our shift-by-wire technology that we have in P&C, you look at the new electric clutch actuator that we've developed also in P&C for commercial vehicles. Interior, on their Seat Heat, Seat Comfort products, we are in the latest new EVs and continue to grow in that market. Likewise, when we look at Off-Highway. We are working with the major OEMs in all segments, construction, agriculture, and powersports, to meet their needs to be able to help them with the transition over to electric vehicles. All in all, we're working in all segments, and we continue to win new opportunities in those segments.
Also, the next question is for you.
Question is, when will you later announce who you win contracts with? We typically announce that when the product goes into production. That's when we have the green light from our OEMs to declare new business wins. Any other questions, as we see none, no other ones on the screen?
These were all the questions posted in the Q&A section of the screen. Is there any other question? If you please put it in, then we will answer your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, please press star one to ask a question. We'll pause for just a moment to assemble our queue. We'll take our first question from Mats Liss from Kepler. Your line is open. Please go ahead.
Yeah. Hi. Thank you. Two questions, please. First, we have seen these supply chain constraints due to semiconductor shortage and so on, and many of your customers have indicated they have production disturbances. Have you seen any impact of that already, or are you still waiting for them to change their?
Yeah, we already see impact of that. For global first quarter light vehicle production, forecasts are already reduced by 1 million units. It's across all regions. It varies from OEM to OEM. Some are more impacted, others are less impacted. There is huge focus on it, and we have established with our suppliers and our customers very close communication lines on electronics availability and logistics and planning.
Your company, have you also difficulties in getting supply of semiconductors?
We are a normal member of the industry family. The answer is yes. We have a very professional purchasing team, and that team is capable of sourcing all the products we need. We have to go in sometimes different ways. We have to go, in some cases, to spot markets, which is not the normal way to source for automotive. That's where we still have product availabilities.
Regarding the raw material cost in some, like copper, for instance, have increased quite substantially. How do you handle that if it's passed on to customers in raw material in the contract? What's the impact?
Yes, we have raw material adjustment contracts with customers or clauses when we have product that is purely driven by raw material, and that applies to the brass components we have in Couplings, but also to some steel components we have in Powertrain & Chassis.
You don't expect any more limited impact of the cost increases?
No, we can balance these things.
Regarding the outlook, you see a pretty strong improvement in 2021, but could you give some sort of indication how that play out throughout the year during the quarters?
As I said, it's very hard to give firm statements on the quarters that come further down the road. From a basic economic perspective, I believe if the overall COVID uncertainty is mitigated, and we all hope for that this comes with springtime. Secondly, that the electronics availability crisis remains manageable, then we are very optimistic for our second, third, and fourth quarter. When you look into our outlook, we are not putting all that optimism in our outlook. That is a basic outlook.
Okay, great. The final one, the tax line was a positive surprise, I guess, and the use of tax loss carryforward, I guess, to some extent. Do you expect to see that in 2021 as well, or should it go back to normal? Thank you.
Yeah. You need to see that the major loss we had in 2020 was the impairment, and losses from impairments are normally not tax effective. They didn't contribute.
No, I mean.
To losses carried forward. We have something, there is a development, and of course, with the positive outlooks we have, we're going to utilize that.
I was just referring to the fourth quarter where you had a positive, well, very small tax impact.
Right.
You're able to use some of those tax loss carryforwards into 2021. We should expect a normal.
Yeah.
Tax rate around 20%. Yeah.
We should expect a normal tax rate going forward in 2021.
Okay.
Absolutely.
Okay. Thank you very much.
Yeah.
Thank you.
You're welcome. The next question is, I'm reading here questions that came through the web: What actions will you do to future inform investors better? We continue our quarterly calls. We are approachable as management through our investor communications line to set up meetings with investors, like we were in the past. We have probably going forward also more resources on looking after that. If investors are interested and looking for meetings with management, you can please log your interest with investor communications and we will respond. Next question is, "What are the expectations of a new CEO?" I can make only a personal statement here. They are great. I believe it's a very good choice. We have talked already, I'm really looking forward to work together with Jörg Buchheim going forward.
Next question is, "What's the final date for the new CEO?" I think that was clearly stated in the announcement. It's at the latest by May 1st in 2021. Next question is, "Do you expect to see any increased pressure from OEMs regarding your receivable collection based on trends Q1 so far?" I can give you a clear answer, no. I don't see increased pressure. I see a remarkable discipline in the industry to pay on time. If we have a proper delivery, then customers pay on time. Yeah. We have sometimes extra efforts if something on the labeling or on the invoice or whatever is not correct, then we sort it out and the customer pays. Next question is, "Are you still seeing that costs in 2021 are covered by the capital raise that was done in 2020?" Maybe I do not understand the question in full.
If the question is whether the costs we have going forward are covered by positive cash flows, the answer is yes. I don't know what to answer differently to that question. Maybe you can rephrase your question. Okay. There is no further question coming through, neither through audio nor through the question list. We all invite you for our next call at 10:30. We are going to walk you through an updated company presentation that will walk through the whole company set up, our products, innovations, also looking a little bit into the future on trends. We're looking forward to meet you again at 10:30.
That concludes today's conference call. Thank you everyone for your participation. You may now disconnect.