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Edited Transcript of KOA.OL earnings conference call or presentation 27-Feb-20 8:00am GMT

Q4 2019 Kongsberg Automotive ASA Earnings Call

Kongsberg Mar 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Kongsberg Automotive ASA earnings conference call or presentation Thursday, February 27, 2020 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Henning Eskild Jensen

Kongsberg Automotive ASA - CEO & President

* Norbert Loers

Kongsberg Automotive ASA - CFO

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Conference Call Participants

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* Mats Liss

Kepler Cheuvreux, Research Division - Equity Research Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Kongsberg Automotive Q4 2019 Earnings Call.

At this time, I would like to turn the call over to President and CEO, Henning Jensen. Please go ahead, sir.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [2]

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Thank you, operator, and welcome, everyone, and thanks for showing interest in our company. Today, we're going to go through our Q4 results. We're also going to talk a little bit about full year 2019 as well as try to give you an outlook for at least part of 2020. A little bit of uncertainty in the marketplace, so you got to bear with us for a slightly lower level of detail than what we normally have.

With me today, I have our CFO, Norbert Loers. You're going to hear from him once we start getting into the financials. So let's jump right into it.

Let's flick over to Slide #3, which is the 2019 fourth quarter highlights.

From a revenue standpoint, year-over-year, we've declined for the first time in 2019 by EUR 7.5 million and achieved revenues of, give or take, EUR 281 million, and that includes positive FX effects of approximately EUR 2 million. In other words, on a fixed exchange rate basis, we declined by approximately 3% year-over-year.

In Q4, which was somewhat strange quarter, we actually had very strong revenues in October, and then in November and December, the decline was very, very strong compared to prior year. On -- at this time, I can only speculate on this. But it seems like our decline in November and December was greater than what the customer production rates decline was, which is a sign that material is being taken out of the channel and inventory is basically being reduced in the channel. We do not believe that this is related to any kind of loss in the market share as all our programs are continuing to run.

In the passenger car market, we actually gained market share. And that was primarily driven by strong growth in China for our P&C segment, so very, what should I call it, in contrast to the general trend in the market.

Overall, we had pretty much flat year-over-year revenues in the passenger car market, and the production output in Q4 declined by approximately 5% for our customers.

In the truck market, our revenues declined 10% year-over-year, and that is pretty much in line with what happened with the volumes of our customers.

Other end markets, primarily industrial and power sports, agricultural machinery and construction machinery, that declined 3% on a constant currency basis.

So just to put that a little bit into perspective, the markets declined just about every quarter in 2019. We had growth in Q1, 2 and 3, but in Q4, the market decline basically was stronger, a stronger effect than our new business wins additions, and that's the reason that we had somewhat of a decline in our fourth quarter.

From an adjusted EBIT standpoint, Q4 amounted to EUR 15.1 million, which is approximately EUR 5.5 million lower than what it was in 2018. The primary reason for our shortfall in earnings compared to the guidance that we gave back in November was that our revenues fell sharply and the fall-through from that. We did have positive impact from our operational performance, generally speaking, but we had one plant with significant issues in Q4 in our Interior segment, and that plant is located in Poland. So that offset a lot of the operational improvement.

Also, for reference, back in 2018, in the fourth quarter, when we did our annual inventory valuation exercise, that led to a huge increase in the inventory value. This year or in 2019, our inventory valuation exercise, that has led to a decrease in value, which personally, I see as somewhat of a good news as that is an indication that when we basically adjust to lower our cost to market, we took down the value of inventory because we actually have lower production costs or manufacturing costs of our inventory at the end of 2019 than we had at the end of 2018, which indicates that our competitiveness has somewhat improved.

From a cash flow standpoint, we have plus EUR 1 million in overall cash flow for the quarter. That leads to virtually unchanged liquidity reserve versus prior quarter of EUR 65 million, of which approximately EUR 1 million is restricted. From a gearing ratio, slight deterioration from 3.0 to 3.1, that is obviously including the IFRS effects. And excluding it, it's approximately 0.5x lower.

Flipping on to the next chart. That will be Slide 4. For some reason, the page number is missing. This is the highlights for 2019 as the fourth quarter wraps up the year. So for 2019, overall, we did grow by EUR 38 million to 1.161 billion, and that included positive FX effect of approximately EUR 15 million. So in other words, we grew at, give or take, 2% on fixed exchange rates, despite the declines in our end markets, and we've gone through the reasons and backgrounds for that previously. We're basically gaining market share as a result of our, I would call it, great successes in new business wins over the past couple of years.

In the passenger car market, we grew our revenues by 2.5%, again, on a constant currency basis. Strong growth in China and also strong growth in our Interior business, and that's mostly outside of China. From a light vehicle production volume standpoint, that declined 6% year-over-year. So that gives you an indication as far as how much we, so to speak, beat the market with. In the truck and bus markets, our revenues increased 3.5%, and that at the same time as the industry volume basically declined by 3%. So again, pretty solid performance.

In other end markets, that would be the industrial markets, and to a certain extent, also the off-highway markets, but it's primarily oriented around industrial market and specialty products, we declined 3% year-over-year on a constant currency basis.

From a new business win standpoint, overall for the year, we were awarded EUR 330 million worth of annualized business or EUR 1.5 billion worth of lifetime revenues during the course of 2019, which, again, is, in our opinion, a pretty good result. From an EBIT standpoint, we came in EUR 3.8 million less than last year at EUR 70.9 million. There's going to be a little bit more a reconciliation on that later on. But long story short, and you've seen this before, positive impact from higher volumes; positive impact from net operational improvements -- net operational improvements would be essentially the balance of the price erosion, the inflation and economic effects, the cost improvement actions in the plants as well as the purchasing savings or material cost savings, so that came in positive.

We did have a very unfortunate effect, and then there's very little we can do about that, in that the growth rates in our 2 lowest-margin segments was high and positive. And in our Specialty Products segment, we actually had a decline, and that created a mix effect, which cost us quite dearly from a profitability standpoint. And there were multiple markets and multiple end customer exposures that basically caused that. It was not a result of losing any programs.

Lower fixed cost absorption than what we planned for, and I think we all planned for a very different 2019 than what it actually turned out to be. We've been through the Mexican labor rate, and I think everyone is aware of the raw material price development and the tariffs or changes in tariffs that happened throughout 2019. And then we've got a small gain of IFRS 16 as well as from FX effects.

Overall, for the year, from a cash flow standpoint, we ended up at minus EUR 44 million, which is obviously disappointing. Part of the problem here was we were obviously planning for higher revenues. We have certain commitments when it comes to our investment spending, and that is closely related to our future growth, and that amounts to about 80% of our CapEx. So that was pretty much tied to that. And yes, I would say that we could probably do somewhat better on working capital than what we ended up doing, and we're going to get more into that later on. But that's the fundamental driver between -- behind our negative EUR 44 million cash flow for the year.

Flipping over to Slide 5. And by the way, I have a message on my screen saying that the slides are not updating. I think they are now. Flipping over to Slide 5, this is just a graphical representation of the revenue development and the adjusted EBIT development over the quarters. And as you can see, from a full year basis, and also from a quarterly basis, except for Q4, it was always sequential and year-over-year increases, Q4 basically breaks that trend and that is truly market-driven.

If you look at adjusted EBIT, a little bit of the same there, where we've fairly consistently increased our adjusted EBIT year-over-year, and to a certain degree, sequentially, although, there's a lot of seasonality in this, except for our fourth quarter of 2019 and also our full year 2019 due to the reasons that I just mentioned.

Flipping over to the next chart, a little bit of a different picture, Slide 6. This is pure EBIT and net income. So this is not the adjusted EBIT which has the combined -- the total EBIT. So no exceptions. And here, we are actually showing healthy growth over time, particularly year-over-year, from an EBIT standpoint, and that is obviously due to the much lower restructuring costs year-over-year than what we had last year, essentially because substantially all of our restructuring costs from our improvement program are now behind us.

From a net income standpoint, pretty much a similar type of picture. It's a little bit of a contribution from a lower tax rate effect, but fundamentally speaking, that is essentially being driven by the higher EBIT.

Jumping over to new business wins, Slide 8. Talked briefly about this already from an annualized business awards for the quarter, we finished the fourth quarter at EUR 89 million, which is slightly above what we had last year. If you look at the total year, we were awarded EUR 330 million worth of business on an annualized basis in 2019, which is slightly below what we had at the same time 1 year ago, and that pretty much reflects what the market is doing. And I think that we can still say that our business award level is at high levels and at levels that should justify growth, relatively speaking, to the market in the upcoming years.

From a lifetime revenue standpoint, EUR 427 million in the fourth quarter, and for the year, as I said previously, approximately EUR 1.5 billion. And to translate that into future revenues, long story short, that means that in somewhere in the 3 years plus minus 0.5 year type of time frame, if the markets hold and the volume assumptions behind our new business wins are still valid, that means that we should turn into a EUR 1.5 billion of revenue type of company.

Flipping over to Slide 9. This is basically the same chart, just showing the distribution by segment as far as where the business wins actually did take place. I think the good news about the fourth quarter of 2019 is that it was a more balanced approach as far as which segments we actually had our business wins. This year, we've had very strong business wins in Interior and P&C.

In the first quarter of the year, we were weak on Specialty Products. That has since picked up and continued to perform at a relatively stable basis, which is obviously good for us, given that, that's where our margins are the most favorable.

Flipping over to Slide 10. This is just a book-to-bill type chart just to look at how much higher our award levels are as compared to our billing levels, and that remains at a healthy distance. And as the financial markets call it, as long as you beat the buck, you're basically in good shape, and 1.3 is a significant beating the buck.

Getting a little bit to market. Flipping over to Slide 12. As you can see, from a quarterly basis, year-over-year, Q4 volume-wise for the passenger car market declined by 5.5%, give or take. Of that 5.5%, Europe was pretty much right smack in the middle of that range, North America had a stronger decline in that. And China, paradoxically enough, there was actually a slight market growth. Other smaller markets basically had fairly strong declines.

If you look at year-over-year, '19 versus '18, you're looking at, give or take, 5.8% as far as the decline. So fairly compatible with what's happened in Q4. However, the geographic spread is different, with China being significantly lower and Europe and North America, the 2 other big markets in the world, being fairly consistent with approximately 4% year-over-year declines for a full year.

As far as trucks are concerned, the opposite picture, declined very strongly in Q4 by approximately 10%, driven mostly by Europe and North America. China was fairly constant. Rest of world on balance was somewhat negative. If you look at full year, the overall market declined by 3.3%, and that was very different in the different regions, slight decline in Europe. A fairly healthy increase in North America driven by the first couple of quarters of the year. Same thing for South America, although, that has kind of continued up until Q4, but not including, and China being surprisingly stable.

Getting a little bit into segment highlights. Slide 14, essentially a representation of the performance that we had in our various segments. I'll get more into each of these as we get to the more detailed pages, and I'll start off with Interior on Slide 15.

From a revenue standpoint, year-over-year quarterly, now we had virtually flat revenues. From an adjusted EBIT standpoint, we ended up with lower earnings. That was partly due to the issues that I talked about in the plant in Poland. Also, as is the case with all business units, we were hurt by the unfavorable effects of the inventory valuation exercise that we do at the end of each year.

New business wins, relatively strong. For the year as a whole, relatively strong. I would say that from an operational standpoint, Interior is clearly the place where we need to focus the most and also where the need to improve is the greatest. If you look at Interior as a whole, and we look at it year-over-year, for the full year, we should have been able to get more earnings out of the additional revenues than what we actually ended up doing, and we're working very hard on improving our performance in the plant. And that's mainly an effort in our Polish plants, but to a certain extent, also in our Mexican plants.

By the way, we have a question that I got online, and I think I'll answer it now because it's primarily relating to Interior. And that is: Can you elaborate on the Mexican labor rate headwind? How much of a headwind was this for the full year and Q4, specifically? For the full year, for the total company, this was approximately EUR 3 million. It was relatively evenly distributed by quarter, although, it was somewhat more front-loaded. So I would estimate that approximately EUR 2 million of that EUR 3 million took place in Q1 and Q2, and then EUR 1 million evenly distributed throughout the year, and approximately 2/3 of that is attributable to Interior.

Getting to Powertrain & Chassis. Again, Powertrain & Chassis, relatively flat revenues. However, it's a little bit different within the units. In the passenger cars, we actually grew, and in the truck market, we declined, but overall, flat revenues, relatively flat earnings. And there's more to get out of this. I mean, explained very, very shortly, I think that in P&C, overall, and particularly, if you look at the full year figures, we are improving in P&C. I'm not especially known for my patience. I assume that most of the guys on the phone are also not very well-known for patience. I certainly like to have these improvements go significantly faster, but we are on the right track. We're making small steps and bigger than baby steps as far as improving this unit. But it's a lot of hard and heavy lifting in order to improve the performance of this business segment. But slowly but securely, we're starting to get some traction on that.

Flipping over to Specialty Products on Slide 17. Specialty Products is kind of our shining star with high margins, and up until fiscal year 2019, also fairly strong growth. 2019, we still have very acceptable margins. However, the growth rates declined, and we actually ended up both for the quarter and for the year as a whole, with slight declines on the top line. And this was primarily driven by our end markets, and then primarily, by truck markets.

We have 3 business units there. We have Couplings, we have FTS and we have off-highway. From a growth perspective and from an exposure to the truck market perspective, that's very much centered on FTS and Couplings. And in those markets, we saw stronger declines than in the other segments that we have with exposure to the truck market, which is somewhat related to the type of customer population you have. And there's also one particularity in FTS, and that is that we have a fairly significant exposure to cars from the OEM Ford, which declined significantly throughout the year.

Those are the primary drivers behind the revenue declines. Again, it's not because we're losing programs, but it's rather because for the programs that we have, have been very exposed to market decline.

A special effect took place in Couplings, where we have significant sales into the trailers. It's not the trucks but the trailers that hang behind them. And the trailer market had a very, very strong decline in the second half of 2019.

That very much wraps up the quick business update. I'll hand it over to Norbert for an update on the financials. So Norbert?

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Norbert Loers, Kongsberg Automotive ASA - CFO [3]

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Thank you, Henning. Good morning, everybody.

So we continue on Page 19 with the financial update. And this time, we have put the revenue development by segment and adjusted EBIT development side-by-side, as it's obviously related to each other.

So Interior and Powertrain & Chassis could more or less hold their revenues year-over-year, with this -- in the fourth quarter, with a strong passenger car content and market gain -- market share gains. Specialty had a significant decline, and that was driven by the high exposure of specialty to the truck market, to the heavy vehicle market.

If you look at adjusted EBIT, Interior and P&C could hold adjusted EBIT more or less compared to prior quarter. We had a big decline in Specialty Products, and that was driven by mix effects and also a relatively high inventory revaluation effect year-over-year, which was very positive in the fourth quarter 2018 and negative in the last quarter of 2019.

If you go to next page, net income development. So adjusted EBIT is the biggest negative, unfavorable change compared to last year. We also added or increased slightly on restructuring costs. The main driver there was a reduction in force program we had in one of our Mexican facilities, where we reduced overheads of significant amounts. The other financial items, there was positive contribution from unrealized FX gains. Interest decreased. That is an IFRS 16 effect, the non-IFRS 16 interest were stable year-over-year. And we had a positive effect from taxes. That is an effect that we had true-up in 2018 in the fourth quarter. So the quarterly tax expense in 2018 were not evenly distributed. This year, we had a much more even quarterly distribution of tax effect.

So that was net income development. If we go to Page 21, we show quarterly total cash flow. We changed the definition or we changed what we show in the quarterly presentations from free cash flow to total cash flow, just to eliminate the IFRS 16 effect that some of the IFRS 16 is related to interest-bearing liabilities. We just took it out to have a clear, plain total cash flow time line. We achieved in the last quarter a positive cash flow of plus EUR 1 million, and that adds up to total negative cash flow of EUR 44 million for 2019.

Page 22 gives you an insight in liquidity development quarter-over-quarter from quarter 3 to quarter 4. And I want to highlight that we had significant improvements in our net working capital. We focus a lot on inventory reduction. We could reduce inventory in the fourth quarter significantly.

The other net working capital elements like receivables are just driven by revenues and terms given by customers to us. We also could reduce their overdues as a percentage of our receivables compared to a year ago. Significantly, we also reduced accounts payables, which is a negative effect in liquidity, driven by lower inventory levels.

The other elements, tax payments. We had higher cash-out on taxes in the fourth quarter. The IFRS 16 element didn't exist in 2018, so it shows as a variance here. And we had higher net investments in the fourth quarter.

Then we go to Page 23, net financial items. You see the gray bars below the line, that is our net interest payments, which is fairly constant in the quarters. And we had a small gain from currency effects in the fourth quarter of EUR 600,000.

Financial ratios, Page 24. We show all these ratios including and excluding IFRS 16 effects, since IFRS 16 has massive effects on total assets. And all these balance sheet-related ratios, we slightly -- we have a slightly unfavorable development on adjusted gearing ratio, driven by results in the fourth quarter. And it also shows at adjusted return on capital invested.

Our equity ratio increased, driven by strong net income development in 2019 to 30.6%, which is a healthy development. And I want to point out in that context that from an overall P&L perspective, we improved with top line, we improved with EBIT, we improved with profit before tax and with net income, and the result is an improved equity ratio. So that was, from P&L measures, not a bad year in 2019.

Our capital employed is fairly constant quarter-over-quarter. It increased primarily with the reduced payables we have in the balance sheet in the fourth quarter.

So I think that's it on financials, and I'm handing back to Henning. Henning?

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [4]

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Thank you, Norbert. As you were talking, there was a question coming up on how large the impact of inventory reval was on specialty products in Q4. Give or take, the difference in EBIT as a result of the inventory reval 2019 versus 2018 was approximately EUR 3 million, a little bit less than that, and that is the main driver between the EUR 5.8 million deterioration in the Specialty Products EBIT. As you remember from one of Norbert's slides, we had EUR 7.5 million less revenues, give or take, between EUR 2.5 million and EUR 3 million of that -- of effect as far as the inventory reval, we ended up EUR 5.8 million lower on EBIT. EUR 5.8 million minus somewhere between EUR 2.5 million and EUR 3 million basically gives you a EUR 3 million effect. And a EUR 3 million effect on EUR 7.5 million volume is approximately the fall-through that you should expect from Specialty Products, both upwards and downwards. So with that, I think we've answered that one.

Let's flip to Slide 26, 2019 summary, before we start getting into the outlook. 2019, overall, we did achieve above-market revenue growth, translating into market share gains. We did maintain EBIT margins north of 6%, but still less than what we planned for and certainly what we intended for. From a net income standpoint, we did increase year-over-year, primarily due to the reduction in restructuring costs in Q1, 2 and 3. And as Norbert said, there was a slight increase in restructuring costs in Q4, primarily due to proactive downsizing of headcount that we have initiated in some of our plants as a result of the market development.

Fourth quarter, somewhat disappointing from my standpoint. The main driver was sudden declines in most of our end markets and customer demands towards the second half of Q4. But let's also not forget that we did have some operational performances that were certainly disappointing in the fourth quarter.

We've talked about the EBIT development. We've talked about the reval effect. We've talked about the net income effect. From the macro effects, we are -- or we did see very strong macro headwinds coming at us in 2019. The most prominent ones were raw materials, tariffs and the Mexican labor effects, all of whom, we are expecting to be much weaker in 2020.

Cash flow. Yes, we had significant negative cash flow, and that was probably, in my opinion, the biggest disappointment as far as our overall 2019 performance. I'll get more into that once we get to the next step or next slide.

That being said, on the positive side, and I would almost say, very positive side, in a challenging market environment, we still maintained very high degrees of new business wins, which certainly is a good sign. We did start seeing a decline in terms of actual quotes being out there and opportunities to chase, and we still finished 2019 with a pretty good performance on the new business win side.

Flipping over to Slide 27. That is our 2020 outlook. And the outlook for 2020 is, from a qualitative perspective, becoming a little bit more difficult for just about every day that goes. There's a lot of uncertainty in the market, a lot of turbulence in the market. Long story short, we do see declines in most of our end markets in 2020 based on both external sources and our own internal knowledge based on customer inputs and customer conversations and just general market observations. And we expect that decline to be somewhat stronger than it was in 2019.

In spite of that, we expect, fundamentally speaking, to have pretty much flat revenues compared to 2019. And thus, we expect that we will outperform the market, although, it will not lead to a net growth in 2020, and that statement is basically a statement, excluding any kind of corona effects, except for what we have seen so far in 2020 in the first quarter.

We estimate our first quarter revenues to come in at somewhere between EUR 275 million and EUR 280 million, which is a pretty sharp decline compared to last year. It's a decline of somewhere in the neighborhood of EUR 25 million. Of that EUR 25 million, approximately EUR 6.5 million to EUR 7 million is due to corona effects. It's extremely hard to predict what more will come out of corona.

So far, the only place where we have seen weakness in our top line because of it has been in our Chinese operations with deliveries to our Chinese customers. We have been able to avoid any effects from difficulties in getting components from China into our non-China plants in various places around the world, and that is a significant number of components. It's something we're fighting just about every day. But so far, we have not had critical material shortages that have less -- has led to any kind of decline in our revenues outside of China.

What we are seeing to a very small extent, but this is obviously a danger going forward, is that some of our customers have reduced their production schedules slightly because they have some supply issues with components from China. So far, we've only seen that from one OEM in 3 plants. And that has basically affected our Q1 revenue estimates by EUR 1 million downwards, and that's included in that EUR 275 million to EUR 280 million range.

For the rest of the year, we have made no assumptions as far as any changes in our revenues due to the coronavirus, but this is obviously a very live situation with, I would almost say, daily changes. There's a lot of panic in the financial markets as far as corona. There's a lot of concerns as far as what impact it's going to have, how long the impact is going to be, of what nature it's going to be. It's a very globalized world, it's a much more globalized world than SARS, which happened 15-plus years ago, which basically lasted for 6 months. This has lasted for 1.5 months and already seems to have had some pretty strong effects. The only thing I can say is we're going to fight this as good as we can. We do have solid processes, particularly in purchasing and very frequent contacts with all our suppliers in China. We are arranging for expedited and premium freights in order to secure the planned production in our non-Chinese plants. And so far, we've been pretty successful at doing that. So I think we're pretty much on top of it to the degree we can be, but what effect it's going to lead to in the end markets is very hard to say.

Getting to the bottom of Slide 27. Given the turbulence in the market, I would say that there's 3 main focuses that we have for 2020. We are predicting it to be a somewhat bumpy year from an end market standpoint. There's going to be some positives, there's going to be some negatives. There's going to be some turbulence. There's going to be some ups and downs. And then we've got to really stay on top of things in order to manage that properly because the more variation, the harder it is to manage. And that is a key priority of ours.

Secondly, it's obvious that we can't continue with having a minus EUR 44 million cash flow as we had last year. And then we do have plans in place to basically deliver cash for 2020, at least at the level of EUR 15 million positive. Note that there is some seasonality in this, and the first quarter from a seasonality standpoint, it's just about the worst cash quarter we have in the year. So that is still going to be at a low level. So Q1 of 2020, we're looking at cash flows somewhere in the EUR 22 million to EUR 23 million range as far as being negative. And that obviously implies that in Q2 to Q4, we're looking at positive cash flows of EUR 38 million. And these -- there are concrete initiatives behind this. Most of this is within the areas of working capital and CapEx, where we are trying to basically reduce CapEx as much as we can. I told you earlier that 80% of our CapEx is related to new programs. We're expecting some of those new programs to be somewhat pushed out as a result of the general economic trends. And also for the remaining 20% CapEx, we're basically slowing down some of the maintenance cycles and some of the investments that belong in that 20% range. Getting more into that on the next slide.

And thirdly, as far as main focus, we've talked about a long time that we have an extremely broad product portfolio. If we go 3 years back, we said that we need to improve the level of our operations up to profitability levels that are reasonable, and then we're going to be able to have some choices as far as what we want to do portfolio-wise. And in 2020, we're shooting hard for, to a certain degree, trimming our portfolio somewhat and focus on what we believe are going to be our end market activities of the future. I wouldn't expect to see a whole lot of transactions, but we're certainly hoping that there will be one or more transactions of portfolio nature taking place in 2020.

Let's flip to the last chart. This is basically a little bit of an explanation as far as how we're going to achieve the EUR 15 million positive cash flow as opposed to the minus EUR 44 million last year, in sort of a waterfall type of display. As you can see, the biggest move is working capital, where we have very concrete initiatives both on receivables, payables as well as on inventories. And these movements are, or these actions are in place. We are working them. The results don't come overnight, but we certainly start -- expect to start seeing results of that once we start getting into the second quarter. It's very complicated. There's a lot of levers. We obviously, as any company our size and complexity, use modern ERP systems. And this is a question of basically resetting a lot of parameters there, without endangering customer supply. So I would say that, that one is underway and then reasonably confident about that. If we start from the left side, operational improvements. That's basically operational improvements from an EBITDA-related or applicable cash component. So we see EUR 9 million of improvement coming there. We're seeing somewhat lower CapEx than last year. We're also seeing somewhat lower tax payments. 2019 was, from a result standpoint, a disappointing year, and as a result of that, there is no payment whatsoever under our short-term incentive plan to executive management. That saves us a little bit less than -- between EUR 5 million and EUR 6 million worth of cash payments that we had in 2019, that we'll not have in 2020. Customer development costs and customer bonus of EUR 12 million. That is also something we do not expect to see in 2020. That was something that was related to a couple of very specific programs that were awarded in the 2018 and 2019 time frame, which we certainly do not expect to repeat in any way, shape or form in 2020. And then on some timings on prepaid and other expenses, which we had EUR 5 million of in 2019, we also do not see that happening in 2020.

So as you can see, it's a big bridge. It bridges basically from minus EUR 44 million to plus EUR 15 million. It has a lot of components in it. We have a lot of focus on it. But we certainly believe that this is achievable, and these are action items to various portions of the Kongsberg Automotive team, which has been worked very, very hard.

Which essentially concludes our presentation as far as both the fourth quarter, a little bit of a wrap-up of overall fiscal year 2019 and as good an outlook of 2020 as we're able to give you right now.

So with that, operator, if you could get the right instructions for what buttons to push as far as Q&A. And depending a little bit on how fast they come in on the audio, I'll try to cover the questions on the -- that have come in through the web as well, but let's go for the voice ones first.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [2]

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Well, while we wait for some questions, let me answer some that have come in online. First one is from Petter from SB1. Some questions on how come your CapEx came in more favorable in Q4 than what you guided for. What should we think for 2020? I think that question has basically been answered as well as the questions on what are your working capital initiatives. What are they specifically? Obviously, we're starting to -- or we're pushing hard to essentially get somewhat longer terms on payables and to get better at collecting receivables, and at the same time, to have a stricter and better discipline on inventories.

One question. There are actually a lot of questions from Petter. Another question from him is: With a seasonally weak Q1 from a cash flow perspective, how are you going to fund that quarter? And the answer to that is we do have more than sufficient liquidity to fund our estimated slightly more than EUR 20 million negative cash flow in Q1.

Another question that came up is -- another question on: Comment on your comfort level as far as liquidity going into Q1? I think I've answered that one. Are we comfortable where we currently stand as far as overall business and liquidity? And yes, we are. And we believe that we are not getting close to what I would call a company liquidity crunch. So from that standpoint, I think that we are in reasonably good shape on that.

Then there's a question related to portfolio transactions. And one question is: Are you guiding that you're going to sell parts of your business? Another question to that is: Are you sure that this is a smart thing to do in this current market, et cetera? Let's put it this way. The types of businesses that we are looking to potentially divest would be businesses that are subpar in performance. What does subpar mean? Subpar means less earnings, less cash generation and significantly below average capital productivity. These would be businesses where there's a cash burn. It would be businesses where, unless you start getting more scale into these businesses, and they could be portions of segments here, unless you start getting more scale into them, we do not see that these can be properly attractive businesses within a reasonable amount of time. At the same time, we're not going to go out and do a fire sale on this, and we're seeking industrial buyers and not financial buyers. So -- and they would typically have synergy effects from that. That is industrial buyers. And if that makes sense from a pricing standpoint, fine, we're not going actively out and announcing that we're selling. We're not running big auction processes, which typically is something that is very difficult to do in this industry because once you start announcing that, the new business win flow stops because the customers want to see who the new owners are. So we're not going to do that. But it's kind of a silent marketing type of effort. And it's relatively easy for us to calculate cost and benefits associated with potentially divesting. And if it is, overall, the most attractive for us to divest, even in this market, then that's what we're going to do. But at the same time, we're not going to do anything stupid. So I hope that somewhat answers the portfolio pruning part.

And that, I think, means that I've answered pretty much all the online questions. Operator, do you have any questions on the audio lines?

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Operator [3]

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It appears there are no further questions at this time. I'd like to turn the conference back to you.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [4]

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In that case, we're going to start playing boomerang here because I'm going to turn it back to you for a last chance for questions before we end the call.

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Operator [5]

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(Operator Instructions) We will take our question from Mats Liss from Kepler Cheuvreux.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [6]

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Taking a chance there of getting some guidance for the second quarter as well. I guess, we have seen the corona impact in the first quarter. And I guess, there are a lot of uncertainty in the market. But yes, could you give some more flavor there for the first half?

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [7]

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Mats, thanks for calling in. It's extremely hard to predict second quarter and corona effect. It can go from things get back to normal, it can even be a little bit positive that there's going to be some level of catch-up from what was lost in Q1. That would be the most positive. And the most negative would probably be something like a 15% to 20% hit on overall volume in the overall global vehicle market. And I would say that the truth it's probably going to be somewhere in between. I would expect there to be some declines. I would think that China would actually be starting to come somewhat back in Q2. But I think you're going to see some supply chain effects, some global supply chain effects in Q2 in other parts of the world.

So overall, if I were a betting man, and I'm actually not, I would probably believe that you're going to have top line effect in Q2 from corona somewhere in the vicinity of what you've seen in Q1. And that's probably the best I can give you. And I apologize for the lack of accuracy here.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [8]

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No. It's good to have some indications there. Then secondly, I mean, you have the bond financing there. And are there any sort of covenants or so that, well, you need to meet? Or could you say something about that?

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [9]

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This is probably more of a Norbert question. I'll take the first part and then turn it over to Norbert. I mean, we have very little covenants associated with the bond. There are some covenants associated with our RCF, and that's in the form of a springing covenant, once we reach a certain level of drawdown of that RCF. But we do not see ourselves approaching that level. And also, if we were, we would also meet those covenants. So with that, over to you, Norbert.

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Norbert Loers, Kongsberg Automotive ASA - CFO [10]

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Actually, we make a statement on that one in the annual report. And there is a springing covenant on the RCF. And it's about a gearing ratio of 3.5 that, that covenant would kick in.

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Mats Liss, Kepler Cheuvreux, Research Division - Equity Research Analyst [11]

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Okay, great. And finally, I guess, the tax line was a bit surprisingly good. And what guidance can you give there for 2020 or going forward, I guess?

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [12]

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Okay, let's take the tax line for Q4, first of all. I mean, Q4 basically benefited from partly a true-up or actually mostly a true-up of doing the exact calculation for the full year, as Q1, 2 and 3 tax figures were more estimates and then scientifically calculated actual tax costs. So that's the reason that Q4 looked better on that part.

For 2020, for your models, I would assume that you're going to get 1 or 2 percentage points lower effective tax rates than what you saw in 2019. A condition for that, though, is that the revenue levels do not fall significantly. The lower the revenue levels fall, all other things being constant, which they never are, you are going to see a marginal increase in tax rates and vice versa. And that's just due to the nature of how these things work. And once you start generating some losses in some places, you won't be able to offset them anywhere else from a tax standpoint. So long story short, 1 to 2 percentage points less tax rate in 2020 than 2019, assuming that the revenue levels will not go down.

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Operator [13]

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(Operator Instructions)

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [14]

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Okay. There's one online question that came in while I was talking. And that is: Is the cash flow guidance before the IFRS 16 lease? The cash flow guidance is basically total cash flow, not to it anything just basically relating to all fund movements, except for, obviously, line drawing (inaudible).

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Norbert Loers, Kongsberg Automotive ASA - CFO [15]

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And there is one question on cash effect, IFRS 16. There is a Note 5 in our annual report. IFRS 16 is completely cash neutral. And you can see in that Note 5 all the details by segment on IFRS 16 effects.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [16]

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Okay. I think that's pretty much it as far as questions. Operator, you have no further questions?

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Operator [17]

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We have no further questions.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [18]

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In that case, we're 1 minute over the time, which is at least an on-time finish. So again, thanks a lot for dialing in and taking interest in our company. Looking forward to our next update. And hopefully, the markets will develop somewhat more favorably by that time than what they have up until now. So thanks again. Talk to you next time, and I'm sure I'm going to talk and/or meet with many of you before that time. So again, thanks for calling, and have a nice day.

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Operator [19]

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Thank you very much. This concludes today's call. Thank you for your participation. You may now disconnect.