Kongsberg Automotive ASA (OTCPK:KGAUF) Q3 2023 Results Conference Call November 7, 2023 3:00 AM ET
Company Participants
Mads Langaard – Head, IR
Linda Nyquist-Evenrud – Interim President and CEO
Frank Heffter – CFO
Mads Langaard
Good morning, everyone, and welcome to Kongsberg Automotive’s Third Quarter 2023 Earnings Call Presentation.
With me today, I have our Interim President and CEO, Linda Nyquist-Evenrud; and CFO, Frank Heffter. Due to some time delays we appreciate if you will submit your questions to the web for the Q&A session as soon as possible during the presentation. Linda, the word is yours.
Linda Nyquist-Evenrud
Okay. Thank you, Mads. And once again, welcome to this Q3 earnings call. I’m happy to take you through our Q3 results in today’s call together with our CFO, Frank Heffter. So let’s move to the executive summary to start. Okay.
So our revenues in Q3 ended at €220.6 million, which is equivalent to a 14.8% growth rate year-over-year at constant currency rates and excluding the BRP sales that we divested end of 2022. Our adjusted EBIT came in at €14.3 million, increase by €1.4 million year-over-year, supported by positive operational one-time effects of €5.7 million, partially related to retroactive price increases and one-time compensations from [Technical Difficulty].In terms of our free cash flow, that came in negative with minus €13.4 million. This was mainly related to a normalization of accounts payable, it was built up in previous quarters, as well as an increase in net working capital to support the future growth and to facilitate the footprint optimization. The leverage rate and the net interest-bearing debt has further improved, mainly as a result of the proceeds received from the divestiture to BRP completed in Q4 last year. In terms of new business wins, we managed to sign €207.1 million of lifetime revenue of new business wins in Q3, which is an improvement then year-over-year of €78.2 million. So let’s move into the next slide, please. So let’s take a look into the segments, starting with P&C.
We can see a revenue increase of €7.4 million year-over-year, equivalent to plus 6.2%, despite the negative currency translation effect of €10 million. The revenue growth was mainly driven by increases in European and Chinese commercial vehicle market. Revenue in the passenger car market grew by €2.5 million on a constant currency basis, which was mainly driven by the increase of €5.1 million in the United States. Retroactive price increases also supported the growth. Adjusted EBIT amounted to €12.2 million, an increase of €10.9 million year-over-year, mainly driven by the positive onetime effect of €4 million, predominantly related to onetime reimbursements from customers and the release of the provisions for customer claims. Furthermore, adjusted EBIT in Q3 2023 benefited from cost savings in engineering and other OpEx.
New business wins amounted to €144.5 million of lifetime revenues ,or €39.6 million in annualized revenues. Within the quarter, P&C was awarded 2 significant contracts. The first one is to supply the electronic actuators to our major European Tier 1 supplier, €9.2 million in expected annual revenues and €73.4 million in lifetime revenues. And the second significant contract was supply of gear shift systems to our major American OEM, which is then €20 million in expected annual revenues or €40.1 million in lifetime revenues. In terms of value creation within P&C, our focus is on finalizing negotiations to charge our supplier price and labor cost increases anticipated to give positive impact also in Q4. Following the reduction in the passenger car market in China, we continue to monitor the situation and to take measures to rightsize our operations and organization .Let’s move to the next slide, please. So moving on to the segment Specialty Products.
Q2 ended up with revenue of €94.8 million, €12.9 million or 14.8% higher year-over-year on a constant currency rate and excluding the BRP sales divested at the end of 2020. This was mainly driven by the growth of the Flow Control Systems’ revenues in Europe and in the United States as well as the growth of highway revenues in Americas, supported also by retroactive price increases as well as one-time reimbursement of €1.7 million. Adjusted EBIT came in on €7.8 million, an increase of €0.2 million year-over-year, excluding the BRP sales. This increase was mainly attributable to the higher sales volume, partially offset by the unfavorable product mix. And during the third quarter, in 2023, total new business wins amounted to €62.5 million of lifetime revenues or €27.5 million in annualized revenues. Within the quarter, Specialty Product was awarded 2 significant contracts, the first one to supply fluid transfer assemblies to an American truck manufacturer, which is then expected as a €2.5 million annual revenue or €8.9 million of lifetime revenue. The second one is to supply couplings composites to various customers, which is then €12.6 million in expected annual revenues or 20.7 million in lifetime revenues. Key value creation measures within Specialty Products are focused on finalizing negotiations to charge our supply price and labor cost increases similar to also for P&C, something we are anticipating giving positive impact also within quarter 4, continued strong focus on operational performance, improvement projects and cost control in all areas. Next page, please.
So moving on to the next slide and book-to-bill. This is a slide that has been used for some time now. We have understood that there is an interest to gain more knowledge about the business development in KA and contracts being awarded to our segments. We have evaluated this feedback and decided to both extend our executive summary with additional information linked to new business wins and to release a separate sales report with quarterly highlights. So starting with the book-to-bill slide. KA is still on track.
New business wins for Q3 amounted to €67 million annualized or €207.1 million lifetime revenues. Wins in Q3 was again strongly weighted towards our commercial vehicle and industrial segments. Thus, for Q4, we have a very healthy pipeline of sales opportunities. Due to the customer sourcing behavior, certain key awards could move into 2024, but we feel confident that Q4 will be at least as strong as Q3 with the potential for an upside. Our aim is, therefore, to close the full year 2023 at book-to-bill ratio above 1.So let’s move into the next slide to see how the wins are divided per segment and per area.
On the left-hand side, you can see the lifetime revenues already mentioned per segment. And on the right-hand side you can see that 75% of the booked business is linked to commercial vehicles, followed by the independent Aftermarket and Industrial segments, summing up to €24.5 billion or approximately 12%. Within the Industrial segment, the awards included new products such as Ulti-Pure and Ulti-Flex. The awards are centered regionally in North America and in EMEA. Next slide, please. So looking into this slide, we can see that products that are driving book business in Q3.
The highest sales are linked to our electric actuators as per our press release on September 11. We have received a business award from China worth €73 million lifetime revenues for our innovative Dog Clutch Actuator that will be used on E axles for commercial vehicles. In the second place, we find our Gear Shift Systems driven by a contract extension of approximately €40 million for our gear control units to one of North America’s premier suppliers of gear boxes for heavy trucks as well as €5 million for our mining vehicle manufacturer of our gear shift and shift lever products.€30.7 million of awards for our technical hose assembly and technical PTFE hoses, including our unique Fluoro-comp products from a variety of both European and North American OEMs as well as awards linked to our new industrial products, Ulti-Pure and Ulti-Flex. Our ABC couplings product continues to grow with €21.6 million of awards in the quarter. This includes €6 million win from our key distributor in Africa as well as Tier 1 and independent [Aftermarket].
And in Agriculture and Construction and new growth markets, we won €4 million of new sales for our electronic pedals for an off-road vehicle manufacturer. Next slide, please. So in our latest press release from October 31, we announced that KA and the Norwegian Research and Development Company, Romoline, have entered into a definitive agreement to purchase patents related to camera washing technology intended for vehicles. This is KA’s second investment in technology that will be used in vehicles that are on the road today, as well as in the autonomous vehicles. Developed in Norway, Romoline’s technology is a modern camera cleaning technology. Unlike traditional nozzle cleaners, this technology uses less fluid and sprays away from the camera lens leading to an optimal cleaning. The product’s intention is to improve functionality, quality, environmental impact, customer satisfaction, and cost of use.
Developing the product into complete systems and sensor cleaning solutions are the potential next steps for KA for our forward expansion into this product area. And we expect that this new technology can generate revenues in a 2 to 3 years’ time frame. And with the acquisition, KA now directly and indirectly controls in total 28 patents for technologies relevant to autonomous vehicles. Next slide, please. As per our announcement on October 23, we have initiated a cost optimization program that we expect will generate €15 million to €20 million of savings in next year 2024. Measures that we are anticipating within this program is cost optimization, rightsizing of the organization and our global footprint as well as workforce reduction.
As part of our global footprint evaluation, we have decided as a first step to close our office in Dortmund in Germany, effective as of January 1, 2024. This initiative and the cost optimization program will not change our guidance for this year, fiscal year 2023.Next slide, please. Okay. So we are moving into our market updates chapter where we then start with another well-known page describing how the global production for both commercial vehicles and passenger cars is developing. As you can see, both markets are showing a growth development year-over-year, where commercial vehicles are driven by higher production volumes in China and the European markets, resulting in a 9% growth year-over-year and estimated growth of 9.6% comparing 2023 with fiscal year 2022.The global passenger car production indicates a slight increase of 0.4% year-over-year, triggered by growth in Europe and North America, offset by a reduction in China and South America.
Comparing the full year, we see an increase of 6.3% comparing 2023 production estimates with the full year. Next slide, please. For completeness, we are also including a market forecast. And on the more long range perspective, we see a low to moderate market growth in both segments, where China is the primary driver for the growth in the coming years. LMC September report indicate a growth rate of 16%, including China for commercial vehicles and the time frame 2023 to [Technical Difficulty] and an 8% growth rate for passenger vehicles, including China, for the same time frame. Okay. Next slide, please.
So looking into the KA Q3 performance within the different segments and regions, we can see that KA has outperformed the growth in the CV markets in both the Americas and in China, a trend that has been maintained for 4 quarters in a row. The growth is driven by new product launches to a well-known global Tier 1 customer as well as global OEM customers. The growth in the commercial vehicle market is part of the strategic shift for KA. KA sales also outperformed the passenger vehicles market. This is mainly due to the growth in sales of the Fuel Systems to one of the major European car manufacturers. Revenues from the passenger vehicle market in China were negatively impacted by increasing local competition.
Increase in other of 7.9% is based on constant currency rates and excluding the revenues divested to BRP end of last year. Next slide, please. So moving into the next page and the challenges that remains within the automotive industry. We still see some clouds on the sky, although situation is improving in terms of semiconductor shortages as well as for the supply chain situation. On the positive side, we see a flattering and — or further reductions related to energy prices and raw materials. On the contrary side, we see increasing labor costs in core markets, i.e., the UAB strike in North America that ended last week. And with that, we conclude the executive summary, and I leave the word over to Frank to take you through the financial updates.
So Frank, please.
Frank Heffter
Yes. Thank you very much, Linda, and good morning from my side as well to everyone. Let me allow to lead you through the financials in a bit more detail, starting with the revenues. Q3 revenues amounted to €221 million compared to the €246 million a year ago, which still included €40 million of revenues to BRP. If we exclude those revenues, we already see that Q3 2023 was the strongest quarter in the last 3 years.
Taking then on top the negative €15 million currency translation effect into account, then we see a growth from €206 million to €236 million, almost 15%. If we apply the same logic on the Q3 year-to-date numbers, then we would also see growth from €606 million comparable base to €696 million at stable currency, which represents also a 15% growth. If we move on to the adjusted EBIT then we reported on the next slide, €14.3 million of adjusted EBIT, a strong 6.5% EBIT margin, certainly including the mentioned €5.7 million of one-time effects that also relate to prior quarters. The comparable Q3 2022 figure, €12.9 million includes a strong contribution from BRP reimbursement, predominantly of spot-buys, total contribution, €12.6 million. So absolutely a strong increase that we see from quarter-to-quarter, also excluding the one-time impacts in each quarter. On a year-to-date Q3 basis, on the right side, we see us now being at €18.7 million adjusted EBIT, 2.8% adjusted EBIT margin, which is 100 basis points improvement versus 1 year ago when we take the numbers, excluding BRP, €11.2 million and 1.8% margin. With the €18.7 million, we are also fully on track when it comes to our guidance as it represents 75% of our upper range of the guidance. If we move to the next slide and decompose the revenue and EBIT contribution, we compare on the revenue side against the €205.8 million, excluding BRP and positive 0.3% adjusted EBIT, as already mentioned, €12.6 million were related to the BRP business in Q3 2022.
It’s positive to note that other than in previous quarters, now P&C China is positively also contributing to the quarter-over-quarter comparison with €4.3 million of additional revenues and €1.5 million additional contribution. Also here, it contains partially the [indiscernible] €5.7 million one-time effects, around €1 million is attributable to China. When we look at the rest of P&C, we see growth of €13.2 million coming from both regions, Europe and Americas and solid fall-through, €9.4 million, obviously, here as well, around €3 million of one-time impacts are included in the P&C without China. Little bit more challenging is the look at SPP. Here on the positive note of highway grew on a comparable basis, also supported by the €1.7 million one-time impact and higher revenues from product sales as well and had a positive fall-through. On the other hand, we saw growth in FCS of €8.6 million, but a decrease of adjusted EBIT by €0.3 million. Here, we continue to see challenges when it comes to the product mix.
Higher-margin business contributes with a lower amount of revenue compared to lower-margin business. We also see challenges in us creating the output that we target. So operational improvement measures are high on the agenda. In addition, we have to face the fact that although we have quite a big amount of customer contracts with raw material adjustment clauses, that these adjustments do happen with a timely delay. And therefore, we first have to face the higher input costs and then get the reimbursement from the customer, which we again expect also to support in the fourth quarter. When we move on to the next slide and our shift gear performance improvement program, then I’m happy to report that we could improve the expected net contribution for the third quarter from a negative €400,000 forecasted last quarter to a positive €3.9 million for Q3 2023. This is on the back of on one hand, being able to increase the positive effects slightly to €18.5 million, but also due to the fact that the risks and negative market impact that we have anticipated in Q3 did not fully materialize so that around €3 million of lower negative impacts were reported.
Some of it is a little bit preponement on Q4, but some of it, like the customs declaration release of provisions, certainly is something that will also last for the full year. Therefore, the total expected net improvement for the full year increased from positive €700,000 to €2.1 million. If we switch to the net income bridge, then we compare against an €8.5 million of net income in Q3 2022. This includes the positive impacts from BRP. And therefore, the adjusted EBIT swing is also only €1.4 million, but this means we have more than compensated the loss of the BRP business in the respective quarter. Impairment, only minor changes in the restructuring costs.
We accounted for the change in C-level management as well as costs related to the strategic review that were slightly higher than the restructuring costs reported in the previous year. Interest remained unchanged. Other financial items slightly improved on lower expenses related to the securitization program and other financial items. Then we had a positive currency gain net of €2.1 million. And then we see a significant negative swing in the tax position. Here, previous year was only minus €0.7 million, whereas the tax position amounted to minus €6.4 million in Q3 2023.
Fact is that in this €6.4 million, we considered losses not to be usable in the foreseeable future and thus did not capitalize the deferred tax assets on the balance sheet. And therefore, we faced higher tax expenses than in the previous year. When we move on to other net financial items, then we see the expected positive swing in our net currency effects, €5.6 million for the quarter, which brings the accumulated net currency effect back to minus €1.5 million only. Here, the favorable development of the NOK is the main impacting factor. So that is definitely positive. On the other financial items we continue to stay in the positive territory, which certainly is also positive. And we see on the net interest side also a slight improvement quarter-over-quarter given that we continue to repurchase smaller amounts of the bond, and we continue to invest our excess cash in areas where it generates interest income.Moving on to the free cash flow.
We saw a decline in the free cash flow of €13.4 million in the third quarter. If you decompose the free cash flow, then you see operating activities contributed negative €1.4 million, predominantly driven by an increase in net working capital, which I will elaborate on the next page. Investing activities amounted to €7.6 million. So continuous stringent management of these expenses and careful investment in order to safeguard cash on one hand, but also allow for future growth in the coming quarters. Financing activities amounted to minus €14.8 million as we, on one hand, paid the bond interest in the third quarter, we made smaller acquisitions and repurchased own bond notes in the amount of €5.8 million, which is also highlighted in the lower part as it does not account for in the free cash flow. Last but not least, we could record positive currency and translation effects on the cash flow of €4.6 million. Obviously, the situation overall, looking also at the first 3 quarters in total is all but satisfactory, and that is also the reason why we continue to implement additional measures in order to improve our cash flow generation. When we look on the next page in even more details of the cash flow composition, then we see that the adjusted EBITDA contributed a positive €22.2 million.
Restructuring cash outflow was €4.5 million for the quarter. Other items, 3.4 million. And then we see the change in total net working capital of €15 million. Here, again, we saw a slight increase in inventory on — ahead of transfer of production to other locations and bank build, also certain last buys and buys ahead of price increases. That was a repetitive pattern.
At the same time, we had a reduction in accounts payable compared to the previous quarter as we had to pay due payables to our suppliers. Tax payments, the cash out only amounted to €0.7 million. The investment expenditures — CapEx amounted to €5.6 million. And the small acquisition, I mentioned, was the investment in the 20% shares of Chassis Autonomy amounting to €2 million. Interest payment €5 million, and other smaller items, €0.6 million. Then the leasing liabilities that we repaid amounted to €3.4 million for the quarter.
And the mentioned bond notes, €5.8 million, that certainly helped us to further deleverage. So from an overall liquidity perspective, we were at €255.8 million a year ago. On a comparable basis, we would be — would have been at €236.6 million, but we reduced the size of our revolving credit facility when we prolonged it from €50 million to €30 million. And thus, we stand at the end of Q3 at available liquidity of €216.6 million, still very comfortable. Let me close on the next page with some important financial ratios. The adjusted gearing ratio slightly increased from 1.3 a quarter ago to 1.5 on the back of the negative cash flow. Still an okay level, I would say, and definitely an improvement towards last year where we still stood at 2.0.
The adjusted ROCE improved to 4.9% from 4.6% previous quarter. That is positive. It needs to be said that it is a decline of 0.5 percentage point towards the Q3 2022, which, again, was very much supported by the positive BRP contribution. Equity ratio improved back to 33.4% from the 31.7% a quarter ago, still slightly below 1 year ago on the back also of the losses occurred in the first half of the year, including the impairment of assets on the driveline business. Last but not least, capital employed, stable at €492 million despite the slight increase in net working capital and significantly reduced by almost €70 million compared to a year ago. With this, I hand it back to you, Linda, for the next chapter of the strategic review.
Linda Nyquist-Evenrud
Very good. Thank you, Frank. Okay. So let’s move into the next slide. So strategic review in Q2, or more precise in March, KA’s former Board of Directors and former CEO and management decided to initiate a strategic review of KA with the aim of unlocking the full potential of the company.
The purpose of the strategic review was the investigation into other paths for KA to create more shareholder value than running the company ourselves, future-proofing the company by exiting certain segments, divestments or mergers. Developing case grow past half by exploring bolt-on acquisitions in related growth areas and rightsizing, improving organizational and operational efficiency. Ultimate objective has been value creation for KA shareholders. There have been several constructive dialogues with KA’s advisers and market participants in recent months, and the process has given invaluable insights into different areas of improvement, both operationally and financially. In Q3, KA’s new Board of Directors and management have decided to conclude the structural consideration of the strategic review. The cost optimization measures are seen as a continuous measure for the company. Next slide, please.
So coming back to the time line for the strategic review. We have received feedback that this process has been ongoing for a long time. We would like to point out that 2 quarters is not defined as a long time in this type of process. As you can see on the timeline on this page, there has been a number of activities that have influenced on the strategic review, including also now — lately, we had announced cost optimization program on October 23, as well as the acquisition of patents from the Norwegian company, Romoline, announced on October 31.Next slide, please. So conclusion made by the KA Board of Directors and management is that by retaining and developing the current activities, we will create the highest value for KA and its shareholders.
Our focus is on regaining acceptable levels of profitability and secure our positive cash flow in the next years. We have to continue to explore options for mitigating the earnings pressure deriving from the business units in the declining segments. And we are to focus on growth areas where KA is well-positioned, and as well to allow for bolt-on acquisitions in the coming year so we can strengthen businesses in areas where we are well-positioned. As a conclusion, as I said, KA’s Board of Directors and management have decided to conclude a structural consideration of the strategic review. Next slide, please. Now moving on to outlook and our last chapter for this presentation.
We start with the guidance. So based on the year-to-date quarter 3 results, we can see approximately then 75% delivery of the full year guidance, both in terms of revenue and as well as adjusted EBIT. And with that, we maintain the full year guidance for 2023, meaning revenues of €880 million to €900 million and adjusted EBIT of €20 million to €25 million. Next slide, please. Other activities that we would like to highlight under the Outlook section is that the Board of Directors have decided to launch a new share buyback program of 2.5% of the total outstanding shares or upwards limited to €4.2 million. This will now be initiated with immediate effect.
As already stated during the executive summary, we have a very healthy pipeline of sales opportunities. So our clear target is therefore to close the full year 2023 at a book-to-bill ratio above 1.In terms of upcoming events, we would like to highlight the following. We are invited to a breakfast meeting in Oslo, Norway on Thursday this week, November 9, at Danske Bank’s facilities. We have an exhibition called AGRITECHNICA in Hanover, Germany, that goes from November 12 to 18, where we will also then exhibit. In terms of our Q4 release and 2023 annual publication, that is set to March 12 next year. And last but not least, we are also planning a new Capital Markets Day in — within quarter 1, 2024.And with that, we conclude our presentation and we move over to the Q&A session.
So Mads, please take it from here.
Question-and-Answer Session
A – Mads Langaard
Thank you, Linda and Frank. We will now welcome questions from the audience. We have also, during the quarter, received some questions from our shareholders related to Q3. We will try, of course, to answer all of them in this session, but due to some available time, I will kindly ask all of you that have additional questions to reach out to me after the call, and I will make sure that every one of them will be answered. That said, we — as Linda said, we have also communicated that we will host a breakfast meeting Thursday morning at Danske Bank’s premises at Aker Brygge, Oslo, Norway, and there will be possible to meet management and raise your questions directly to them there.
Then we start with the questions here. Frank, this one goes to you. Have there been any further bond buybacks in fourth quarter 2023? What are your plans for addressing the 2025 bond maturities? I think the question there is whether there’ve been any bond buybacks in the third quarter.
Frank Heffter
So, so far, we have not done any additional repurchases of bond notes in the fourth quarter. And on the refinancing, yes, that certainly is on our agenda, but not yet. We will start activities on that in early 2024.
Mads Langaard
Can you talk through costs associated with cost optimization measures and phasing through the area of action savings in addition to the Dortmund office closure?
Frank Heffter
So when it comes to the severance payments or restructuring costs related to the announced rightsizing, then we are currently looking at the expected expenditure in the magnitude of around €3 million. On the Dortmund office, that was the first or concrete measure that we can implement pretty fast, i.e., until the end of the year we can conclude. And that is why we have also decided to go for it. In addition, we do a complete review and evaluation of our global footprint in order to see whether there are additional savings and optimization opportunities.
Mads Langaard
Can you comment on the market environment for the fourth quarter this year? Guidance EBIT of €20 million to €25 million implies a meaningful drop in the fourth quarter EBIT versus previous year of €11 million. Can you give some color around the assumptions behind this forecast decline?
Linda Nyquist-Evenrud
Maybe I can start there as well. That’s one of the last slides I showcased. And clearly, we have a little bit of an uptick now in the quarter 3, as mentioned, also driven by some onetime effects, primarily then related to also coming into conclusion with the customers about price increases, that has also been having a certain time lag effect. All in all, we are on a 75%, both in terms of revenues and adjusted EBIT, as we said. So we are keeping up a good pace and in line with our anticipation and expectations for the full year.
Frank Heffter
Can you comment on the sustainability of commercial vehicles outperformance in China? Were there any one-off items driving outperformance in the third quarter?
Linda Nyquist-Evenrud
Yes. In terms of the commercial vehicle revenues as well and the performance then in China, clearly, we have — as also showed under the macroeconomic slide, there is tremendous growth in there. You could see in terms of percentage, and that also then indicates that we are in a ramp-up phase of some of those new programs. So that is, of course, one of the reasons behind that, but that also means that we are going in towards a good lifetime cycle and an upward trends also for the Chinese [Technical Difficulty].And in terms of one-off items, there is primarily then driven by the increase of volumes and then — partially also then in terms of our retroactive price increase that has been [Technical Difficulty].
Frank Heffter
How far has KA come with the big development of the BTMS?
Linda Nyquist-Evenrud
BTMS, we actually have, in a way, readopted that to TMS. BTMS stands for battery thermal management systems. Why we now call it thermal management systems or TMS is primarily because we’re not only focusing on battery management, we also focus on the thermal management system across the vehicle itself. And in general, to start with, thermal management systems will then play an important role in the transition from internal combustion engines to electrical vehicles. And in terms of further information about our engagements into the product area, we will also share a bit more of that in our Capital Markets Day next year. To be a little bit more specific then in terms of current status, we are running development projects, and we’re not in serious production yet. We have delivered prototypes to key customers, and we also act as a development partner in several customer projects.
Mads Langaard
There’s also some questions related to our buybacks. So is this buyback program a part of the LTI bonus program? That’s one of them. And when will the buyback program be initiated? And what is the time horizon for the buyback program?
Frank Heffter
We have touched upon some of it, but maybe we can just repeat.
Linda Nyquist-Evenrud
Yes. So it would start with immediate effect, as I also mentioned in the presentation. And in terms of the timeline, I would say that, that depends on the volume itself, and it will then partially cover for the LTI program. Frank, anything you would like to add?
Frank Heffter
We will certainly execute it as also the first share buyback program under safe harbor conditions. Thus we can only repurchase a certain amount of trading volume. But given the current liquidity in the stock, we should be able to conclude that in a couple of weeks.
Mads Langaard
How is the cost optimization proceeding? Has the number of employees already been reduced? How many employees are impacted in Norway? Is the headquarter moving back to Norway?
Linda Nyquist-Evenrud
Many questions in one. In terms of the cost optimization program, that — yes, study is proceeding. And as we also then said, we are not anticipating any effects into 2023 or the 2023 guidance. So this is now coming into play for 2024. The press release went out on October 23.
So that also indicates then that we are now in the progress of informing both internally and sharing more information about that one. For Norway specifically, I believe we already have made a comment on that in the past, and that is less than 10 employees, as I can recall, that is under that matter. In terms of headquarter move to Norway, that is not yet part of any — or it’s not part of any plans as of today. And we as a company and management will continue to evaluate what is the best location, or locations for us in the future.
Mads Langaard
There’s also a question related to, are there any savings plan possible at C-level considering the cost optimization program? And for example, no bonus payment for the next 2 years at the C-level. We can just state that some of this is, of course, a question for the Board of Directors and not the management, but maybe we can touch upon briefly. Linda, a little bit more about the cost optimization program and how we run it?
Linda Nyquist-Evenrud
Yes. No, how we run it. It’s a little bit, as I said as well — clearly, this is a great amount of internal coordination for the time being, ensuring also that we take good care of our people and employees, both the ones that unfortunately need to leave as well as the ones that are to stay. And that is a process that is in progress in terms of commenting on C-level and bonuses as well for next year.
As you said, that is a decision that is sitting with the Board of Directors and will not be commented by the KA management.
Mads Langaard
Another question. Why is SPP so significantly underperforming?
Linda Nyquist-Evenrud
Yes. I think maybe to just rephrase — not rephrase but recap a little bit also on one of the first pages we had today. We tried also to showcase the development, excluding the BRP sales divested end of last year. And if we are to consider that one, we see then that we have a 14.8% revenue growth. On top of that, we also are over — outperforming our adjusted EBIT from last year with €200,000.
Clearly, as I also mentioned, in terms of the key value creations being on focus area is to ensure then that we finalize the negotiations to charge out our supplier price and labor cost increases. There has been a bit of a delay in there as well, as I also mentioned. Then we had a catch-up effect in P&C, and we are anticipating that also now for specialty products in the quarter 4. On top of that, we have a continued strong focus on our operational performance and ensuring a good cost control in all areas.
Mads Langaard
Frank, what has been built up on accruals in the second quarter and what has been released on accruals in the third quarter?
Frank Heffter
Yes. Let me just look at the balance sheet, and we see partially — I will look it up, it will take me a moment.
Mads Langaard
Yes. The book-to-bill ratio is continuously below 1, which means the company is shrinking. What is the growth scenario? We’ve already touched upon it and given some sort of guidance, but maybe you can elaborate a little bit more, Linda?
Linda Nyquist-Evenrud
Yes. And I think we’ve also said that — in the previous quarter as well that there is something also about the dynamics and cycles of our customers as well. And there is a tendency as well that the contracts are settled end of the year. So as we said, we see now the uptick as well within the quarter 3 versus also previous quarter and last year. So even if we are currently on 0.9% — or 0.9 book-to-bill ratio, with the strong pipeline we have, we are confident that we will come in with a book-to-bill ratio above 1.
And clearly then, as also mentioned, with this claim in terms of also some of the key awards coming in, where customers potentially would delay that into quarter 1 next year. But we don’t see any concerns regarding this one. We see then that we have a healthy pipeline of sales opportunities also for the coming quarters and years.
Mads Langaard
And Frank, another question for you. How much of your annual guidance of €25 million on EBIT is based on customer price increases?
Frank Heffter
Yes, this one is easier to answer. The shift gear ComX work stream is targeting to contribute slightly above €30 million in the year. So that is what we are accounting for and there is still not insignificant chunk of that, that we want to conclude in the fourth quarter. And that is part of our €25 million guidance — €20 million to €25 million.
Mads Langaard
Are the cost reduction measures sufficient or shouldn’t it be even stronger to achieve a positive cash flow?
Linda Nyquist-Evenrud
We’ve been doing those evaluations, and we will clearly continue to do those evaluations. We — yes, we believe that, that is sufficient and this will also then ensure that we can also ensure the right focus for the company and its future and ensuring then that we also have the necessary organization set up to continue then build on our future growth rate as well for the company.
Mads Langaard
What are the main moving parts to reach either the lower or higher range of the guidance? What do you expect for working capital movement in Q4 and trend for upcoming quarters?
Linda Nyquist-Evenrud
Do you want to take that, Frank, or…?
Frank Heffter
Yes. Mads, can you say again, Mads, sorry?
Mads Langaard
Yes. What are the main moving parts to reach either the lower or higher range of the guidance? What do you expect for working capital movement in Q4 and trend for upcoming quarters?
Frank Heffter
So on the moving parts, obviously, one big element is customer demand, creation of revenue. Then the other one — important one is what I’ve just mentioned, the contribution from the ComX work stream. So the price increases to customers is another important one. I would say these are the 2 main elements that will help us to either reach the upper range or not. When it comes to net working capital, we are expecting and targeting a decrease in inventory. I’ve mentioned this bank build ahead of moves.
Some of these moves will be completed before year end. That should support a decrease in inventory. We also expect a decrease in accounts receivable on the back of lower revenue in the last 2 months of the year compared to August and September. That is also a reason why somebody asked the decline in the fourth quarter. Certainly, we have to take into consideration that there is the December month, which is traditionally a rather low month, and that weighs on the revenue, but supports the net working capital development. When it comes to the further outlook, we continue to see optimization potential in inventory.
On the other hand, we also want to continue to grow. And that obviously then brings some needs for net working capital with it. But I do not expect it to be as pronounced as we have seen it in 2022 and 2023.
Mads Langaard
What are you doing against the continuous erosion of the stock price? Can you elaborate more on this? We just recently dropped below NOK 2. So to that, we can, of course, as a management, not comment explicitly on the share price, that’s for the market to do, but we see the trend and we can comment on that. But more important, what are we doing, maybe some brief comments, Linda or Frank?
Linda Nyquist-Evenrud
Yes. I think in general, clearly, we are focusing on running the company as best as possible and ensuring adequate communication with the capital market, and that is what we will continue to do as well now. So we have now a Q3 that is solid from that perspective. And this is now clearly a trend line we want to continue on, including also then ensuring a good free cash flow situation for the company. So that is our focus. And with that, we also expect that will reflect into our share price as well.
Mads Langaard
When you expect book-to-bill to be above 1 by the end of this year, does that mean that you expect big contracts in the fourth quarter?
Linda Nyquist-Evenrud
Clearly, as we said, we have a healthy pipeline with opportunities and the current time frame for that in consideration with our discussions with customers as well are to close that out within quarter 4. So I would say, taking then the uptick from 0.9 to 1.0, there is some good opportunities in that pipeline.
Frank Heffter
Yes.
Mads Langaard
So I think we have the — one last question then. Do you expect to see any impact from the U.S. automotive and truck-related strikes?
Linda Nyquist-Evenrud
Yes. As I mentioned as well, the UAB strikes were concluded last week. And clearly, we need to see — wait and see then how that will also impact in the North American market primarily. All in all, I believe, Frank, we have some numbers showcasing that the revenue impact of that one is less than €2 million with an adjusted EBIT effect of less than €0.5 million, if I recall, correct.
Frank Heffter
Absolutely. Yes. And then maybe let me quickly come back to the question on change of accruals and provisions. So in the second quarter, in total, we had around €6.5 million of change in provisions in terms of build. And in Q3 we had around €4 million of net change in terms of release, and that includes warranties, payroll, customs, you name it.
Mads Langaard
And just to avoid any misunderstandings, there is another question. Could you please clarify if the strategic review is still ongoing and whether Rothschild and ABG Sundal Collier continue to be actively involved in it? I think we’ve already touched upon it, but maybe give one final comment, Linda, if possible?
Linda Nyquist-Evenrud
Yes. No, as we mentioned as well under the section of strategic review, clearly, Rothschild and ABG Sundal Collier has been involved into that activity and the structural consideration, as we also mentioned. And as also then said, we have concluded that together with the new Board of Directors that — for the structural consideration. So that means that, that is then a bit of a closed chapter and our continuous focus will then be on those bullet points mentioned. And the cost optimization is, of course, always a continuous activity in our company, in our industry.
Mads Langaard
Thank you very much, Linda. On that note, we conclude the Q3 earnings call presentation. And as earlier said, please reach out to me either by e-mail or by phone, and I will make sure that we get all of your questions answered. And then we, of course, hope to see as many of you for the breakfast meeting Thursday morning. Please also reach out to me if something is unclear or if you have some questions regarding time and venue and so on. Thank you very much, everyone, and see you soon.
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