KGAUF (KGAUF) Q3 2026 Earnings Report, Transcript and Summary

Good morning, and thank you for joining Kongsberg Automotive's Q3 2026 Earnings Call Presentation. Today, we are here at Danske Bank in Oslo. With me here today is our CEO and President, Trond Fiskum; and CFO, Erik Magelssen. On the screen, you can see today's agenda. And as always, we will host the Q&A session after today's presentation. [Operator Instructions] So with that, I will give the word over to our President and CEO, Trond Fiskum.

Thank you, Therese, and good morning, everyone. Both those of you that are present here in Danske Bank's offices and those that are participating online. We will start with an update on the business and the overall financial performance. Before I will hand it over to our CFO, that will go into more financial details. The main messages here today is that the transformation that we started last year continued to deliver tangible results. We see a stronger profitability. We see improved capital efficiency and a more robust financial situation for KA. And at the same time, as we see these results, we continue to take additional structural actions to further improve the business and build the foundation for future improvements and profitable growth. Looking at our financial KPIs, we see a broad-based improvement in the performance in Q3. EBIT increased to EUR 9 million with a margin improving to 4.8% compared to 3% a year ago. Net profit increased significantly to EUR 6.4 million. And we do see a positive net cash flow of EUR 2.2 million. And importantly, return on capital employed continued to improve to 11.4% compared with just 1.7% a year ago. So across profitability, cash flow, capital efficiency, we continue to move the business in the right direction. If we look at development in a little more detail. And over the last 7 quarters, we see that the underlying fundamentals continue to improve. Revenue was in Q3 EUR 185 million, almost 40% above Q3 last year. We now see that our key markets, including North America, have recovered from the drop that we saw during second half of last year. And there is some reduction in Q3 from Q2, but this reflects normal seasonality due to summer vacations that several of our customers have and they closed their production during summer. EBIT reached EUR 9 million despite both higher material costs that we see across the business as well as tariff costs that continue to impact us. So the results here reflects a wide range of actions that we have systematically implemented across the business and the higher material costs are being offset by either cost improvements or passed on to our customers. Cash flow was also positive at EUR 2.2 million. This is below Q3 last year, but it's also a reflection of a higher business activity compared to last year and the resulting increase in net working capital. There will be some variations from quarter-to-quarter. When we look at the longer-term trend, we see the positive trend on the cash flow. And year-to-date, we have generated EUR 1.8 million in positive cash flow compared to negative EUR 4.8 million last year. So overall, we see a stronger top line in a stabilized market environment. We see an improved profitability, and we continue to see a positive development on cash generation. We also continue to address our cost base, our structural cost base and optimize our manufacturing footprint. In October, the restructuring of our Cluses facility in France was approved by the authorities in France. As part of the restructuring, the production of the Driveline products in this plant will be transferred to other KA plants in Slovakia and in Brazil, while Cluses will become a dedicated Couplings production site. The financial rationale is very clear. We expect an annual saving of approximately EUR 5 million, once it's fully implemented against a onetime cost of approximately EUR 7.5 million, and this results in a payback of less than 2 years. The restructuring is expected to be concluded during first quarter next year, possibly earlier. Importantly, Cluses is a part of a broader footprint optimization. It follows plant consolidations both in Sweden and in China that we have completed during 2026. So taken together, these are important actions for us that structurally reduce our cost base. It improves our competitiveness. And of course, it's supporting further profitability improvements. Regarding the warranty and recall related matters that we have communicated previously, there are no fundamental changes to report. I continue to be personally involved in driving the cases forwards and towards the conclusion, it's high priority. And we do have meaningful progress, and we will provide you with update this once we have additional clarity. Moving over to commercial activities. We see an improved momentum in Q3. We secured EUR 142 million in estimated contract revenues in the quarter. These are values that reflect our best estimates of the revenues from these contracts during the length of the contracts. And the contracts, you can see that are, as in previous quarters, they are well balanced between the 2 business areas, Drive Control System and Flow Control System. And it's also a mix of incremental business, meaning new business and extension of existing contracts and business. What is important here is that we are securing contracts based on improved commercial terms, both when it comes to pricing and the contractual terms itself. This is -- reflects a greater or clear direction and a greater discipline that we are applying when we are evaluating the businesses and are performing the negotiations with our customers. And our focus is not only growth for the sake of volumes. We need to ensure that we have a sustainable business financially, and we need to have a fair share of the value creation that we bring to the table. So we are focused on winning the right business on the right terms and that will support a profitable growth and long-term value creation. You'll see that the contract awards are spread also over the main and the key customer segments. And we also see that the pipeline of business opportunities, they remain solid. When we go behind the numbers, you can see some good examples there of the type of contracts that we are winning. You see here a quite diverse examples of different contracts, both geographically and across different product segments and customer segments. And starting on the top left, we see EUR 34 million contract that was awarded as a contract extension. It's cabin stabilizers that we are making for a global truck OEM headquartered in Europe, and it will be produced in our plant in Poland. On the top right, we have EUR 24 million incremental business. These are hose and tube products that we are going to supply to an autonomous people mover in North America. It is an interesting business. It's a new market segment in many ways with -- which shows that we are competitive and relevant also for these market segments. These are electrical autonomous vehicles. On the bottom left, we see the incremental Couplings business, it's a EUR 20 million contract awarded by an Asian truck OEM, more specifically Japanese. And this is another important step in the gaining in market shares in Air Couplings business. And this will be produced in combination between our plant in China and in Raufoss, Norway. And finally, on the bottom right, we have a EUR 50 million contract extension for automatic transmission shifters. This is a part of our Driveline business and fits well with our revised strategy for that business unit, where we are now selectively pursuing attractive shifter opportunities or business opportunities. So overall, it's a good mix of contracts, both contract extensions and incremental business across a wide range of customer segments, products. It also reflects the diversity we have in our customer and product base which also gives us a lot of strategic alternatives going forward. And interestingly, all these 4 programs, they have an SOP either this year or next year. So it is a business that will contribute to our revenue base already within the next 6 to 12 months. So a key takeaway from what I have shown here is that the improvements that we are seeing is a result of systematic and deliberate actions across KA. We have been focusing on 4 priorities: drive cost efficiency and operational improvements. improved cash conversion, strengthen the leadership and the KA culture and accelerate innovation and profitable growth. And we are seeing that these priorities are delivering tangible results. Profitability is stronger, capital efficiency is improved, leverage has come down. We've seen strengthened accountability and execution across the business. And we see a positive trend on the contract awards. At the same time, we see that there is much more we can do. And we are far from being satisfied. We still see significant potential to further improve the performance of the existing business. And at the same time, we see that the progress that we made means that we are building a company that is much stronger, both operationally and financially. Our position is much better. It gives us a stronger platform for the next phase of KA's transformation, where the focus will be on further performance improvements. and increasingly on growth and profitable growth. With that, I will hand it over to Erik to take us through the financials in more detail.

Thank you, Trond. So before going through the financial slides, I must say it's very encouraging and motivating for us to see that restructuring process and transformation is delivering tangible and solid results. The results for Q3 are good, and there are no significant special or extraordinary items affecting the results. So when I look at the results for Q2 and Q3, it's a clear demonstration that we are on the right way. So first, look at the 2 -- our 2 business areas: first, Drive Control Systems. The revenue level here is 4.4% higher than in Q2 2025. And we do see a stabilizing upward trend in the top line level. I think as Trond mentioned, the reduction from Q2 is mainly reflects normal seasonality. When we look here at the EBIT level over the last 7 quarters, there are 2 outliers by Q2 last year being affected by significant warranty cost accruals and Q4 affected by certain extra items. I think and as Trond noted, the underlying fundamentals continue to improve, and we are on the way to achieving a long-term higher profitability within this business area. The higher material costs that we are experiencing similar to many other companies compared to last year have been compensated EBIT-wise within this year, to a large extent, by the reduction in the operating cost base. So we turn to our other business area, Flow Control Systems. We have volume increases in all business units, compared to last year. And in total, reported leverage is a strong 26.7% higher than in Q3 last year. Again, we have a certain seasonality effect from Q2. Think it's contribution from increased volumes and revenue is the large extent here maintained down to EBIT, giving EBIT as a strong EUR 7 million in Q3 this year, more than double the EUR 3 million we had in Q3 '25. The EBIT margin has also increased to a strong 8.2%. Also here, we are affected by higher material costs compared to last year, but they have been offset either by reductions in our cost base or passed on to our customers. So just on the EBIT bridge for the group as a total. We have a revenue level, which is 13.7% higher than in Q3 last year. And the point there that we managed to maintain the increased contribution from the increased revenue down to the EBIT line. So this is the key driver for the increased EBIT. You also have cost savings in the quarter. And this kind of, in total, brings the EBIT from EUR 4.9 million in '25 to EUR 9 million in Q3 '26. As you see on a year-to-date basis, it is the overhead cost reductions and the lower warranty cost that drives the EBIT improvement. And also importantly, we have a very positive increase in our net income, which is our bottom line. As the overview shows the key driver for the net improvement are the operational improvements including the cost reductions and giving the improvements in our EBIT. Then you see here that the net income in the quarter alone has increased from EUR 1.6 million to EUR 6.4 million in 2026. And I think on a year-to-date basis, we have managed to return a loss of EUR 2.6 million in '25 to now a EUR 16.8 million profit. So now all very positive and very encouraging for us. We see that the work we are doing are giving tangible and good result. The net working capital that Trond also touched upon is closely linked to our activity and revenue level. And when we measure our net working capital to our revenue level on an annual basis, we see that the level is fairly stable as you see in the red line. And we have stronger business volumes in Q3 this year, that gives increased revenue that drives higher working capital requirements. As noted on the common share, we have several ongoing activities within net working capital, and we have identified significant opportunities to reduce net working capital relative to revenue going forward. So here, we have a significant upside potential. As Trond noted, the cash flow in the quarter alone was EUR 2.2 million positive. Also in light of the increased revenue level on a year-to-date basis, we have a positive cash flow of EUR 1.8 million compared to a negative EUR 4.8 million in 2025. I think the difference in net working capital is a driver for the variance in cash flow between '26 and '25. And the increase in volumes and revenue, which is positive for the company, gives high working capital requirements. And this is a timing difference and increased revenue probability will over time materialize in higher cash conversion. So I think both improved profitability and positive net cash flow materializes in a reduction in net interest-bearing debt. And the net interim debt has been reduced with EUR 27.3 million from Q1 2025. And as you also can see from the slide, the net interest-bearing ratio has been reduced by more than 50% from the level in Q2 '25. It's now at 1.5x. And the leverage for bond term definition is the key innovation to our bond loan, and this that has now also come to the same 1.5x. This positive development strengthens our financial position and gives us increased financial flexibility going forward. So I think the improvements in our underlying profitability that we achieved without increasing our assets at the same rate, gives us a significant increase in the return on capital employed. And this measure has now increased over 4 consecutive quarters, as you see from the graph and is now up to 11.4% level. This is very important for us because it gives us kind of operational leverage, and we are managing to kind of get the profit without kind of increasing and keeping the investment levels going at the same rate and as you see here, the leverage ratio has then come down to 1.5x and it has come down from a level which was way above 3x before Q3 '25. As you also see that the -- on the bottom right side, that the equity ratio has increased to 34% which is, of course, also a measure for solidity. And then lastly, before I hand over to Trond again. A new dividend policy has been approved by the Board of Directors and this is now available on our website. The long-term target is to distribute up to 50% of annual net profit as dividends over a business cycle. We have some excerpts of the policy here. You can read the whole policy on our website. I think coming into a position to potentially pay dividends is positive and it will be a result of a significant restructuring and transformation process that we are starting to show results. And then Trond back to you.

Thank you, Erik. Let me summarize some of the key messages here from today's presentation. First, Q3 was another strong quarter, solid year-over-year revenue growth and significant improvements in profitability. Second, our financial position continues to strengthen. We generate positive cash flow and we have significantly improved capital efficiency and further increased leverage, improved and reduced leverage. Third, we continue to improve the structural competitiveness of the business and reduce our cost base. The restructuring of our cruise facility is another an important step in this and is creating a more efficient manufacturing footprint for us. And finally, we are preparing and planning for the future. There is still further performance improvement potential in the existing business. While the progress we have made gives us a stronger operational and financial platform for -- to grow the company in the years ahead. So looking ahead, we will be hosting a Capital Markets Day in Oslo on the 25th of February next year. Over -- as we have shown over the past period, we have had a strong focus on strengthening the business and improving our results. At the Capital Markets Day, we will set out KA strategic priorities and ambitions for the next phase. We will explain how we intend to drive further performance improvements and how we want to grow the company. And also how we see product and technology opportunities that we can develop into future business and value creation for all stakeholders. We look forward to share that with you in February. The Capital Markets Day will take place in Oslo at the same day as our Q4 presentation. We will share the exact location later, but please save the date in your calendars already today. Finally, to the outlook. We expect a positive underlying development in profitability to continue to be driven primarily by further operational improvements additional cost reductions and eventually also benefit from the more cost-efficient manufacturing footprint. Looking at our key markets, the near-term outlook remains cautiously positive. We see a strong truck order intake in North America that is positive and also a positive and stable market development in Europe in our key markets. At the same time, there are uncertainties when it comes to the geopolitical and trade-related topics. And we will continue to manage the business with financial and operational discipline. I think overall, we will enter also Q4, the last quarter of the year with a strong position and with optimism. That concludes our presentation here today. And Erik and myself will be happy to take questions.

Okay. I'll take the first question here. What are the future prospects for KA as a company and for us, shareholders? It has been many years now with poor numbers on the stock exchange. I think the future prospects is that we will continue to develop the company, to improve performance. We will continue to grow the business with new contracts that are on the right terms that creates profitable growth for us. We will explain this also more in detail in the Capital Markets Day in February. When it comes to the poor numbers on the stock exchange, we hope that -- our job is to manage the company and communicate this as best as we can, how we are managing the company and what we see as prospects for the company for the future, and then someone else will decide what that means. Next question is Flow Control Systems delivered an impressive 8.2% EBIT margin. What improvements in Drive Control Systems give you the most confidence that the group can achieve significantly higher profitability? So the question here is related to Drive Control Systems. As you see, we have a significantly higher profitability in Flow Control Systems. Drive Control System is still impacted by some legacy contracts that we are addressing and is also impacted by warranty costs. So those are, I would say, the most 2 -- 2 most focus areas for Drive Control System that will also bring that business area up to a higher profitability. Okay. There's another question here, which improvements in KA do you feel investors have not yet fully recognized? And what should we watch most closely over the next 12 months? That is a good question. I think we will digest that question a little bit more, and then we will come back to that on the Capital Markets Day in February. We do think that there is an underlying potential in the business that is still representing a significant potential to improve performance. I think that's potentially one of the answers here. But let us come back to that on the Capital Markets Day in February, and we will provide some good answers to that question.

I think from the more quarters in a row that we can deliver with good results positive cash flow, reducing net debt and increasing return on capital employed. That will kind of give investors more and more confidence. And as Trond said, there are significant elements of our restructuring process that are not yet fully visible. So I think that will also build on that. But it's a good -- and then we have to be able to communicate that to the investors in the market in a good way. And we're also in the process of doing that. But we will get back to that in the Capital Markets Day.

Another question. How much of the strong Q3 revenue growth, particularly in North American commercial vehicles is sustainable into Q4 and 2027? Don't see any significant changes when it comes to Q4 when it comes to the revenues. North America has today on the commercial vehicles, they're impacted by regulations and uncertainties regarding regulations. So there has been a certain level of prebuy. The expectation is that first half of next year might see somewhat lower growth, but then it will pick up again second half. Overall, year-over-year stable. But we might see a small reduction in North America truck volumes in first half of next year and then with an increase again. But that's what we hear from the market. But fundamentally, the demand in commercial vehicle, both in North America and Europe that our 2 key markets are strong. Next question, despite significantly stronger earnings, operating cash flow declined year-on-year. When should we expect working capital to normalize and cash conversion to improve? We're not going to give a timing issue here. I think we have an answer to the timing here. We have a strong focus on working capital. We're working with accounts receivable, meaning payment terms with our customers. That is a key topic for our new contracts. We're working with payments on time. We have a certain level of overdue payments with our customers that we are working on, and we're also working to improve our inventory levels. Over time, this will give results, and you will see that impact on the net working capital and cash conversion. Next question. Could you update us on the progress on the steer by wire, particular customer demonstrations and collaboration with industry partners. What can you share about the partners involved and the next milestones towards commercialization? The Steer-by-Wire business unit or the Steering business unit as we call it, is the result of the acquisition of Chassis Autonomy that we made last year. We have set that up as a dedicated business unit in order to ensure a focus. We have a dedicated team working on this, working with several initiatives and customers and potential customers. We are in active discussions with other partners because we see this as a big enterprise to industrialize the Steer-by-Wire system. We do see that we need partners and we are working actively with those. And then we are working towards commercialization. I would like to come back with more details in February. So far, the partners and customers we're working with, we cannot communicate who they are. But I can say that we are actively pursuing those partnerships and customers and have active dialogue. Whenever we have a significant development, of course, we will communicate that. Okay. There is a very specific technical question here. How is the cooling system for the battery pack? I think I will jump that one and leave that to our engineers to revert. I Think we have the person here. Next is you are growing faster than the heavy-duty vehicle market. To what extent does this reflect new contracts entering production? And what opportunities do you see for further growth from programs already secured? We are growing faster than the heavy-duty vehicle market. I think this quarter, that is a correct observation. I think this reflects more the current programs that we are in today and that we are on the right programs. What we've seen over the last quarters, it's probably more reflecting the existing programs rather than new projects. Over time, our ambition is clearly to grow faster than the market. And also there, but that will typically take more time when new programs are entering SOP. Okay. You have identified significant opportunities to reduce working capital. What are the main measures? And when do you expect them to translate into stronger cash flow? I mentioned that previously. It's payment terms with our customers, it's managing payments on time and its inventory levels. Those are the main items. When do we expect them to translate into stronger cash flow you will see it in the results as we are presenting them. But it's a strong focus, and we should be seeing a result of that, I would say, over the next 6 to 12 months.

This is also a work that is kind of, of course, done at the plant level where the plant manager is responsible for its P&L for the accounts receivable for his inventory with the plant controller. So just to say that this is kind of a bottom up whether the kind of the operational units are responsible for this, and then we support and work with that from the group level.

Okay. I think we have come to the end of the questions. Any questions here in the audience? Yes?

I didn't see the warranty issues was mentioned in connection with the dividend policy. So can you just comment on that if that matters need to be resolved in order to pay a dividend?

I think that's a question to the Board when it comes to the dividend decisions. That's with the Board. So I cannot provide you with an answer to that one. There's no other questions? I think we can conclude the session. Thank you again to Danske Bank for us, and have a good day.