Kongsberg Automotive ASA Second quarter 2018 - July 27, 2018
Q2 2018 Highlights
An eventful and strong quarter
- ▸ Revenues increased YoY by MEUR 19.5 (~7%) to MEUR 287.5 including negative FX effects of MEUR 11.6.
- Similar growth rate at constant currency as in the previous quarter.
- ▸ Adj. EBIT increased YoY by ~50% from MEUR 13.9 to MEUR 20.8 including negative FX effects of MEUR 1.3.
- ▸ Free cash flow was MEUR 22.8 mainly due to strong earnings and concurrent reduction in working capital.
- ▸ New Business Wins of MEUR 121, an increase of 70% vs Q2 2017.
- All time high in LTM New Business Wins with MEUR 372.
- ▸ The LTM adjusted gearing ratio (NIBD/Adj. EBITDA) was 2.2.
- ▸ Two further plant closures completed (Easley, US and Burton, UK)
- Brings the total completed closures to five.
- Transition activities from Easley and Burton continue into Q3 and Q4.
- ▸ Although partly subsequent events;
- Following an initiative from a major shareholder, we completed a 10% capital increase at a premium to the market price.
- We refinanced our bank debt by placing a MEUR 275 bond in mid July.
Revenue and Adjusted EBIT
Revenues and profitability continue to consistently improve YoY
Revenue including HRAR EBIT adjusted for restructuring - see details in the quarterly report.
Market Summary
Q1-16 Q2-16
New business wins
Another strong booking quarter
New business wins per quarter (per annum value) MEUR
Q4-16
Q1-17 Q3-17 Q1-18
Q2-17
Q3-16 Q2-18
Q4-17
Market summary
Solid car market – Truck market strong due to India
Global Truck Production, Units in thousands ▸ Global Truck Production
▸ Global Passenger Car Production
- Global light vehicles production in Q2 2018 was 24m, a YoY increase of 4.0%, equivalent to approx. 1m units
- The biggest contributors were China and Europe where production grew with 8.5% and 4.7%, respectively.
- The growth in Europe was primarily driven by Spain and Portugal which produced 150k more cars than same quarter last year.
- Production fell by 1.7% in North America. This comes as no surprise as the trend towards high content cars at the cost of fewer lower priced cars continued.
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South America continued to experience strong growth with 7.8% YoY, albeit from low levels. The South American growth was primarily driven by Brazil.
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The production of medium and heavy-duty commercial vehicles increased by 7.1% YoY (55k units).
- The strong growth was primarily driven by India which produced 64k units more than same quarter last year.
- This weighs up the decrease in production in China which declined by 10.4%, primarily due to the significant advancement of production completed in 2017.
- North and South America continued the strong growth seen in previous quarters with YoY growth rates of 13.7% and 29.3%, respectively.
– In Europe, the truck YoY growth rate came in at 2.8%.
Source: LMC Global Commercial Vehicle Forecast, Q2 2018
Segment Highlights
Segment financials last five quarters
Steady improvement in Interior and P&C
First signs of performance improvements – still more to come.
Q4 2017 Q2 2018 Q1 2018
Specialty Products
Slow and steady progress. Consistent performance, Q1 affected by gain from divestiture.
Interior Segment - Update
- ▸ Interior New Business Wins (NBW) amounted to MEUR 9.4 annualized in Q2 2018
- Wins include Seat Heating to a major Asian OEM and Seat Cables to an European OEM, worth an estimated annual value of MEUR 3 combined.
- ▸ 2018 Q2 Revenues increased by MEUR 11.2 (~18%) compared to Q2 2017 excl. FX effects
- 2018 Q2 Revenues of MEUR 71.9, including negative FX effects of MEUR 2.5.
- The revenue increase is primarily driven by the ongoing ramp-up activities in ICS across all continents, including volume ramp-up of comfort products to a major North American EV Manufacturer.
- The LDC business unit more than doubled revenues (YoY) in Asia due to NBWs in 2017, coming from a low base.
- ▸ 2018 Q2 Adjusted EBIT increased by MEUR 2.4 compared to Q2 2017
- 2018 Q2 Adjusted EBIT of MEUR 4.2 including negative FX effects of MEUR 0.3.
- As expected, excess operational costs related to ramp-up of products based on new technology in Poland continued. This quarter we saw the first signs of improvement as the yield rates continued to improve.
- ▸ Footprint activities
- Ramp-up of the new facility in Brzesc, Poland continued in the quarter.
Powertrain & Chassis Segment - Update
- ▸ P&C New Business Wins (NBW) amounted to MEUR 50.3 annualized in Q2 2018.
- Major win includes Shift by Wire product to a large Asian OEM. Estimated annual revenue of contract is MEUR 27 with an expected SOP in 2022.
- ▸ 2018 Q2 Revenues grew by MEUR 12.7 (~12%) compared to Q2 2017 excl. effects from FX.
- Revenues of MEUR 112.4, including negative FX effects of MEUR 4.8.
- Continued ramping of recently launched products in North America was the main growth driver.
- ▸ 2018 Q2 Adjusted EBIT increased by MEUR 2.7 compared to Q2 2017.
- 2018 Q2 adjusted EBIT of MEUR 2.8 including negative FX effects of MEUR 0.6.
- ▸ Footprint activities
- Continuing integration work at the receiving sites in Slovakia and Poland ongoing.
Specialty Products Segment - Update
- ▸ Specialty Products New Business Wins (NBW) amounted to MEUR 61.7 annualized in Q2 2018.
- Off-Highway extended a program with a major North American OEM with an estimated annual value of MEUR 40.
- Couplings won a contract with an Asian Truck OEM with an estimated annual value of MEUR 5.
- ▸ 2018 Q2 Revenues grew by MEUR 7.8 (~8%) compared to Q2 2017 excl. effects from FX.
- 2018 Q2 Revenues amounted to MEUR 103.1, including negative FX effects of MEUR 4.2.
- Strong growth rates in Couplings and Off Highway.
- ▸ 2018 Q2 Adjusted EBIT increased by MEUR 2.5 compared to Q2 2017.
- 2018 Q2 adjusted EBIT of MEUR 17.1 including negative FX effects of MEUR 0.8.
- The Specialty Product segment is more exposed than our other segments to raw material pricing.
- ▸ Footprint activities
- The closures of Easley (US) and Burton (UK) were completed in Q2, earlier than previously announced.
- Continued ramp-up at the Poland facility.
- The transition to the Mexican facility continued and will be completed with delay by the end of 2018.
- The main drivers are challenges in the supply chain transition and the ramping up of the greenfield facility.
Financial Update Norbert Loers
Q2 2018 - Revenue development
Revenue growth in all segments despite negative FX effects
Q2 2018 - Adjusted EBIT development
Q2 2018 - Net Profit development
* Increase of Adjusted EBIT of MEUR 5.0 + reversal of the negative FX translation effect on Adjusted EBIT (MEUR +2.1)
Free Cash Flow*
Solid inflow due to earnings and reduction in working capital
*Cash Flow from operating activities +/- cash flow from investments – interest
Q2 2018 - Cash flow and facility development
* Variance excluding Restructuring; ** Excluding unrealized foreign currency gain/loss;
Net financial items - Breakdown
Financial ratios
Improved solidity and decreased gearing ratio
Adjusted ROCE** (LTM)
Equity Ratio*** Avr. Capital Employed (MEUR)
• Excluding restructuring costs; ** Including IFRS 15 and IFRS 9 adjustments on equities amounting to MEUR +0.7, *** Q2 2018 has accounted for the ~MEUR 40 equity increase
Recent capital structure activities
Summary & Outlook
Possible effects of increased import tariffs on KA
There have been much speculation regarding increased worldwide tariffs potentially developing into a "trade war". The below is an estimate on how certain potential events could influence KA's operational performance.
- ▸ Increased US import tariffs on steel, aluminium, and other commodities including electronics components:
- In 2018, we estimate this to cost us around MEUR 1. For 2019, as some expansion of the affected HS* Codes is expected, this figure could increase to between MEUR 2 and 3.
- ▸ As KA is mostly having sales on vehicle platforms made and sold in the same regions, the effects of an increase in import tariffs on cars is limited unless this has a significant impact on the general economy.
- For potential import tariffs into China and the US, we have assumed a price elasticity in the end markets for vehicles of 1. In other words, if the tariffs increase by 10 % points, we estimate the direct demand for vehicles in the affected markets to also decline by 10%.
- If China increases its import tariffs by 25% points on US made cars, we estimate that the maximum effect for KA would be a decline in revenues of around MEUR 2.
- If the US increases its import tariffs by 15% points on EU made cars, we estimate that the maximum effect for KA would be a decline in revenues of around MEUR 3. That effect does assume a certain positive substitution effect as US consumers would most likely buy more US made vehicles.
- ▸ Based on current information, we reconfirm our 2018 guidance from the AGM.
- For 2019, we will provide an update at the 2018 Capital Markets Day on November 7.
Summary
- ▸ The overall automotive markets continues to be strong.
- Mainly due to the ramp up of new programs, our growth exceeds that of the general market.
- Our fall-through from the increased volumes is partly offset by negative FX effects, increased cost of raw materials, and some impact of increased import tariffs.
- ▸ Another strong quarter of New Business Wins.
- ▸ Six consecutive quarters with top line, bottom line and margin improvements.
- ▸ Operational performance in Interior shows first sign of improvement.
- The improvement progress will continue into 2019.
- ▸ Two further plant closures completed (Easley, US and Burton, UK).
- The main focus will be the integration and optimizing of the transferred production before further closes are undertaken.
- ▸ Capital increase and debt refinancing completed.
- Secures stable long term capital structure.
- ▸ We expect revenues of MEUR 260 in Q3 2018.
- From a seasonality standpoint, Q3 is the weakest quarter of the year driven mostly by vacation schedules and customer shut downs in NA and EU.