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Edited Transcript of KOA.OL earnings conference call or presentation 7-Nov-19 8:00am GMT

Q3 2019 Kongsberg Automotive ASA Earnings Call

Kongsberg Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Kongsberg Automotive ASA earnings conference call or presentation Thursday, November 7, 2019 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

* Ralf Hoppe

Kongsberg Automotive ASA - VP of IR & Planning

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Conference Call Participants

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* Ashley Heatwole

Shenkman Capital Management, Inc. - Credit Analyst

* Prateek Gupta;Goldman Sachs;Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Kongsberg Automotive Q3 2019 Earnings Announcement Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Henning E. Jensen, President and CEO. Please go ahead, sir.

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

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Thank you, operator. First of all, welcome to all of you, and thanks for showing interest in our Q3 earnings call.

Before we start, I'd like to make a quick introduction. We've just hired a new person to head up our Investor Relations activities. His name is Ralf Hoppe. He's also on the phone today. Ralf, do you want to say a couple of words?

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Ralf Hoppe, Kongsberg Automotive ASA - VP of IR & Planning [3]

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Yes. Thank you, Henning. Good morning, ladies and gentlemen. Also, a warm welcome from my side. My name is Ralf Hoppe. From October 1 this year, I'm responsible for Investor Relations and planning at Kongsberg Group. I spent more than 20 years within the automotive industry. The last 12 years, I was Head of Investor Relations and Communications at GRAMMER AG, a global supplier from Germany. And now of course, I'm looking forward to a regular communication with all of you.

Before we start with the presentation, I would like to remind you that the following presentation, of course, includes certain forward-looking statements. These statements are based on the current expectations of Kongsberg management. And of course, these statements are subject to certain risks and uncertainties.

Yes, that's all from my side. And so I'd like to hand back to Henning. Thank you.

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

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Thanks, Ralf, and welcome to the team. Let's go right to it.

On Slide 3. For Q3, top line-wise, we grew our revenues year-over-year by almost 8% to EUR 279 million. That includes positive FX effects of EUR 4 million. Without the FX effects, so in other words, with constant rates, we had a 6% growth year-over-year, which we are pretty satisfied with, given the overall decline in the industry of somewhere in the 3% to 4% range.

From a new business award standpoint, we were awarded EUR 65 million worth of business on an annualized basis. That corresponds to about EUR 300 million on a lifetime basis. This is a little bit slower than what we had last year, not really driven by neither less wins nor less activities from the OEMs, but I would rather say a slowness in terms of the OEMs actually coming in and giving us the official awards. We do expect that level to pick up again come Q4. And we have a lot of indications that that's going to happen.

From a performance standpoint, adjusted EBIT margin was pretty much flat compared to last year. And in absolute numbers, it increased by a little bit less than EUR 1 million to EUR 13.9 million, and there was a little bit of favorable FX effect in there. Again, we're pretty happy about that one. Throughout the year, we've basically seen our margins fall as a result of primarily macro effects. And as we now get later on in the year, we're seeing that our cost savings initiatives and our operational execution both have improved, again, Q3 is an example of that. And it's the first quarter this year, where in spite of all the macro factors that are blowing in our face, we're actually holding margins. And we believe that the combination of some top line growth and holding margins is making us pretty unique in the automotive sector right now.

As far as cash, we had, at the end of the quarter, give or take, EUR 65 million worth of liquidity reserves, of which EUR 23.5 million was unrestricted cash.

And from a gearing standpoint, we ended up with a gearing of 2.4x, including the IFRS effects and -- sorry, excluding the IFRS effects and a ratio of 3.0, excluding the -- including the IFRS 16 effects.

Flipping to the next chart, Slide 4. If you look at the left side of this chart, you can basically see that ever since Q1 2016, on a year-over-year quarterly basis, we have been growing revenues just about every quarter, and then particularly for the last year, that has been in a declining market, which again is a sign of our new business wins and turning those actually into top line for the company.

On the right side, it's a very similar picture, if we look at the nominal figures for the adjusted EBIT. So we pretty much had nominal growth in the adjusted EBIT amounts for all the same quarters, except for our previous quarter, which was Q2 of 2018. And in Q3, we're essentially back to having an increased adjusted EBIT amount for the quarter.

From a margin standpoint, it's a very similar type of picture. As I said, slightly lower margins in Q1, lower margins in Q2 than we had last year. And Q3 pretty much being flat versus last year. So it's actually a rounding area both of them turn into a 5% when we look at it, it's the third -- second decimal point where we have the variation.

Flipping over to Slide 5. If we look at EBIT and net income, we are seeing significant growth on our EBIT side this year and, for that matter, also on net income side on a year-over-year quarterly basis. And the reason for the big discrepancy between the adjusted EBIT and the EBIT development is obviously that the restructuring costs, which were of significant nature of the past, are behind us. And that's why, from both an EBIT and from a net income standpoint, the development is very, very [terrible] compared to last year.

Flipping forward into new business wins, talk a little bit about that going to Slide 7. As I indicated earlier, we had new business wins annualized of EUR 65 million this quarter; in terms of lifetime revenues, EUR 300 million, which is less than what we had last year. We expect to pretty much make up that shortfall versus last year come Q4.

Flipping over to Slide 8. That shows new business wins by segment. And I think there's 1 notable difference here compared to earlier quarters, which is certainly something that we appreciate. And that is at the very beginning of the year, there were very few quoting activities and very few awards taking place in our Specialty Products segment. That improved somewhat in Q2, but still that was not our segment where we had the biggest business wins. Come Q3, we actually have our Specialty Products segment being the segment with the most new business awards, which is obviously welcome, given that it is our strongest margin business segment.

Flipping over to Slide 9. You can basically see the development in terms of book-to-bill ratio, obviously on an absolute only quarterly basis, given that we fell somewhat short in Q3, that ratio went somewhat down. If you look at sort of an LTM type curve, which is a line at the bottom of the chart, you can see that, that is relatively flat.

Getting to our market summary, that will be Slide 11. In the third quarter of this year, we saw both the passenger car markets -- or both the passenger car and the truck and bus markets with declines; little bit less than 3% decline in the overall production of passenger cars and a little bit more than 4% in the truck and bus market, which also includes trailers.

If you start looking at the regional differences, the regional differences are somewhat significant. For passenger cars, we actually saw a little bit of growth in North America. Europe and South America are virtually flat. China was negative big time and the rest of Asia was negative even bigger time, which actually does not have a huge effect on us. China does have an effect on us, but contrary to what I would almost call common sense, we actually had good growth in China, not because of the Chinese market but rather because of market share gains in China. And particularly with our biggest customer for one of our biggest products in China, we actually doubled our market share at that customer, and that contributed to us actually, in the bottom right-hand corner of the chart, we actually showed up with growth in China for the quarter, which I also think is pretty unique.

As far as global truck production, global truck production was essentially flat in Europe. It started showing negative signs for North America. North America has had some fantastic quarters. That is clearly coming to an end in 2020 where just about all industry, or should I say, forecasters are looking at a sharp decline in North American truck and bus volumes. The range is somewhere between 10% and 20%. And then we're seeing that the industry is slowly but securely sort of turning a little bit down the volume in order to adjust to what's coming in 2020. The backlogs are getting smaller, and we're also seeing it even more sharply in the trailer markets, which are dropping off faster, and are typically bellwethers for the overall truck volumes. All in all, a slightly declining market, less dramatic than what you would think if one only picks up sort of the press releases that one sees in newspapers, et cetera. But there's no question about it, there is a decline taking place in the market as we speak. And particularly, for the truck market, we expect that to continue into next year.

(technical difficulty)

And I apologize for the fall out with sound. I do believe that I lost the sound, give or take on Slide 5. So I'll try to do a very quick run through in order to still stay somewhat within timing here.

Slide 5 was EBIT and net income, which obviously show significant improvements in this calendar year, and it gets stronger and stronger, and that is obviously because we have no more restructuring costs or virtually no more restructuring costs. And as a result of that, the gain in EBITDA and net income versus last year are mainly driven by that, which kind of puts us in an even more unique position.

Flipping ahead to Slide 7, new business wins. I talked about the EUR 65 million annualized business wins for the quarter and the EUR 299 million from a lifetime standpoint. That is obviously somewhat less than it was same quarter last year. And that is primarily driven by slow award processes rather than fewer award processes. We do have some pretty strong indications that we're going to be able to catch up most of what we lost compared to last year in this -- in the third quarter; that we're going to be able to catch that up in the fourth quarter.

Flipping over to Slide 8 on new business wins. I think the notable thing here is for the first 2 quarters of the year, we had relatively small business awards in our Specialty Products segment and very strong awards in our P&C and Interior segments. In the third quarter, we actually came back strong in our Specialty Products segment, which is obviously something we're very happy about, given that, that is our strongest margin segment.

Flipping over to market summary, Slide 11. We are playing in a setting where there is decline in the markets. The passenger car market tends to decline by close to 3% from a production standpoint in the quarter. And for the trucks and buses, that figure was, give or take, 4%. There are big regional differences. If you look at the passenger car production, it's basically slightly up in North America. Then it's virtually flat, and it's slightly down in Europe and South America. China is big time down. Asia Pacific outside of China is down even more, which is actually not too relevant for our sales portfolio.

As to China, we actually had growth in the third quarter in China. So we counter that effect, and the major driver for that was that we actually went from, give or take, 50% market share to 100% market share for a key product with our biggest customer in China during that quarter. And in addition, we had new launches for new products. So we actually showed year-over-year growth in China, which again is something that's quite unique to Kongsberg Automotive, I believe.

Getting to truck production, down 4% for the quarter year-over-year, and that is very much driven by Asia Pacific outside of China, which again does not affect us enormous. It affects us a little bit in Korea. But except for that, we were virtually unaffected by that. Except for that, it was pretty much flat in China. It was pretty much flat in Europe. In North America, we started seeing a decline, which is a little bit of a sign of what definitely is to come in 2020 when mostly regulations driven we are going to start seeing some pretty sharp declines versus 2019. And then the OEMs over there are clearly starting to dial production somewhat down as their backlog is getting smaller and smaller. And then that obviously does have an effect on us.

Flipping over to financials and performance. Slide 13 is basically an overview. From a margin standpoint, we're basically -- compared to last year, we had a slight decline in Interior, and I'll get to that. We had a good growth and margins in Powertrain & Chassis and in Specialty Products, primarily due to, internal within the segments, mix of growth rates in the various business units we have inside of Specialty Products; we lost a little bit less than a percentage point worth of margins.

Flipping over to Slide 14, Interior. And I will go in a little bit more detail with that than we normally are, simply because there are some very strong developments within Interior. Interior has 2 business units. One is called Light Duty Cables, the other one is called Interior Comfort Systems. Overall, we had very good top line growth, which was uniquely driven by the Interior Comfort Systems. If you look at margins and adjusted the EBIT, again, we had good developments in our Interior Comfort Systems margins where we actually grew margins. And in terms of adjusted EBIT, that actually grew by almost 50% year-over-year.

However, in Light Duty Cables, our revenues went down, and our adjusted EBIT actually turned from a gain to a loss for the quarter. And the primary driver of that is the Mexican labor increase that I think we've talked about many, many times. And slowly but securely, we're getting better on it, but it's a big one to fix. On short-term basis, we believe that once we get to 2020, we're going to be more in line on that one.

Getting to Powertrain & Chassis. Again, huge top line growth year-over-year. It is the segment where we have been the most successful as far as new business wins, and it does show. In terms of margins, we have solved some of the past problems. At the very beginning of the year, we had some launch issues. We are also seeing some of our cost savings initiatives and the effects of all the efforts that we put into P&C starting to come into fruition. And year-over-year, we had a nice gain on our overall profitability there. And that is something that we do see as ongoing from an effect standpoint.

And Specialty Products overall and flipping to Slide 16. Overall, we had pretty much flat revenues. We had relatively good growth in our off-highway business units, pretty much flat in our FTS business units. And in Couplings, we actually had a revenue decline, mostly driven by what started out as decline, and I would say, turn into a sharp decline in the trailer market, which again is a little bit of a bellwether for the truck market so that they're typically ahead, like 6 to 12 months ahead of time compared to what happens in the general truck market. Because the big operators, they typically slow down purchases of trailers before they slow down purchases of trucks primarily because there's more flexibility as to the length of life of the trailer than there is for the life of a truck. And that mix, obviously, also had some effects on the profitability. So it's -- with there -- we lack volume in our Couplings business units and also that changed a little bit the mix effect between the 3 different business units, which do have different levels of profitability.

That takes us to the financial update, and I'll hand that one over to Norbert, who will start on Slide 18.

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Norbert Loers, Kongsberg Automotive ASA - CFO [5]

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Thank you, Henning. Good morning to everybody. So on Slide 18 we give you an overview on revenue development by business segment. And you can see that Interior had very significant increases. That's all driven by the ICS business. And there, the main driver is new products, new programs, getting now into real volumes. And of these products, the SMA valve is something that really stands out with creating new business for us.

In P&C, even stronger growth as a result of the big business -- new business wins of the past. And primarily in our Chinese passenger car and in the North American commercial vehicle car, we had very good growth rates in that quarter. Specialty Products was virtually flat. And then we had a small gain from exchange rate and other effects.

And that leads immediately to the next page, 19. In Interior, unfortunately, we could not lever the revenue growth due to some operational issues in our LDC sector. ICS, as such, contributed well. But in P&C, you'll see first the effects from the increased revenues and, also, some of the operational launch problems reported in the first 2 quarters are behind us now. So we have good operational improvements, especially in P&C.

In Specialty Products, it is a small decline as we had no growth. That's just a result of that. Operational margins were holding, but there was a small mix of the different business units, and especially Couplings had less than before. And there's also a small effect from FX and other.

If you turn the page to net profit development. That reflects some of what we already said. So we had some EUR 0.8 million effect from adjusted EBIT. A big driver in improvement was restructuring cost, EUR 5 million less than last year, same quarter. We have also higher interest costs, and that is driven by 2 effects. First, the bond financing versus the bank financing we had before. Third quarter last year, there was still 2 weeks of bank financing. The biggest difference here is IFRS 16 as IFRS 16 has interest costs included in that. And other financial items also contributed with negative EUR 1.8 million. The biggest change there was in unrealized currency effects, which was negative in that quarter compared to a small positive of last year.

If we go to Page 21, free cash flow, you'll see the trend line starting with 2016 and from 2017 onwards, quarter-by-quarter. We try to show here and make transparent the IFRS 16 effect on free cash flow. And on the bottom line, we give to you the definition of free cash flow, and that excludes repayments of interest-bearing debt. So as IFRS 16 liabilities are interest-bearing debt, that is excluded. So we have negative cash flow in third quarter this year of minus EUR 8 million, and on top of that, there was a repayment on IFRS 16 lease liabilities of EUR 2.5 million. So that leads to the EUR 11 million. However, strictly speaking, free cash flow was minus EUR 8 million and not minus (inaudible). And we show you the same effect for the prior -- 2 prior quarters, so that shows a proper trend line.

Also important to mention and you'll see the details in the quarterly report Page 13 on our cash flow statement. Our operating cash flow was positive EUR 16 million, and that compares to minus EUR 31 million last year same quarter. We had -- on working capital, significant, let's say, improvements as third quarter, you have seasonality effect on working capital that's normally quite negative, and that showed last year. This year, we only have a small negative effect on working capital. It only increased by EUR 1.9 million, and that compared to a much higher number last year. So that is the main driver on operating cash flow being much more favorable now than it was a year ago.

Next page is liquidity development. We reduced our liquidity -- overall available liquidity in that quarter from EUR 75.6 million to EUR 64.5 million with the free cash flow negative we reported before. We have positive contributions from adjusted EBITDA; however, our investments are very strong this month, this EUR 16 million, which is higher than last year. And our interest payment, which is bi-annual. There's always a payment in July and another payment in January. That interest payment was also in that quarter, a strong negative liquidity -- had some negative liquidity impact. So we end up with available liquidity of EUR 64.5 million at this quarter, which is still a very comfortable situation for us.

When it comes to the next page, net financial items. If you see that on the trend line, the currency effects are always the ones with big variations. So -- and that is just driven by the FX markets. The last 2 quarters, we had very small currency effects, which is good. The gray -- the dark gray area net interest, you see that as of third quarter 2018, we show here the net interest on the bond, which is higher than the bank financing we had before. And by 2019, it also includes the net interest effect on IFRS 16. So -- and that is a pretty constant amount that will continue going forward with similar amounts around EUR 5 million per quarter.

So that leads to the last page, with financial ratios. We are making here again the effort to explain on all these ratios the IFRS 16 effects. Our adjusted gearing ratio was increasing slightly over the last 2 quarters in line or driven by the negative free cash flows we had to report. So it's now at 2.4 net of IFRS 16 effects. Including IFRS 16 effects, it was flat. It was stable. Our adjusted return on capital employed is this quarter 13.9%, and that is identical to what we had a year ago, excluding IFRS 16 again.

Equity ratio increased. We have very good net income development over the last quarters. This year was very good. So that is driving up our equity and then equity ratio also excluding IFRS 16 is increasing as well as if you measure it with IFRS 16. So comparing apples-to-apples, there is a positive trend on equity ratio. And finally, capital employed increased slightly from second quarter to third quarter. That was driven by investments and slightly higher working capital.

So that's it on the financial pages, and I'm handing back to Henning.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [6]

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Thanks, Norbert. Before I get to the summary slide, just to be very precise as far as the net financial items and the so-called currency effects. The main driver of this, and it's probably more than 90% of the effect is essentially the mark-to-market that we are doing for intercompany loans in various currencies. And that's the reason that it's fluctuating. So this is a non-cash event, but it is a valuation difference type event. So it has no influence on our cash flow. It does have an influence on our official P&L, simply because there are gains and losses on those intercompany loans depending on which way the currency moves, and that's the reason for those fluctuations. So whenever all of you are doing model building, that is a noncash event.

Getting to our last slide, Slide 26, which is our conclusion. Just to quickly summarize the quarter. Overall, global market conditions continue to deteriorate in the quarter. We squeezed out growth again. So we are beating the market. And so far, we beat the market pretty consistently by somewhere in the 8 to 10 percentage point range in terms of growth, which obviously helps a lot. And we believe we can continue to deliver above-market top line performance in our coming quarters.

From an earnings standpoint, we believe that Q3 was a pretty good quarter. It's sort of a catch-up from our performance back in Q2 where the macro effects were the strongest for us. And then those are obviously headwinds, and we believe that's going to somewhat carry over into Q4.

Now as to Q4, we're a little bit more specific with our guidance this time than we've been previously, primarily because we did go out for the guidance as far as overall year not too long back, and then we are adjusting that slightly. So for Q4, we expect revenues to come in at, give or take, EUR 298 million (sic) [EUR 293 million]. We believe that we're going to get adjusted EBIT of somewhere around EUR 19 million, and that would lead to full year revenues coming at around EUR 1.180 billion or EUR 1.178 billion; and adjusted EBIT of, give or take, EUR 75 million. And that is a little bit of our line that has been the line all year long.

We have very, very strong macro effects going against us year-over-year. We've talked about them. It is raw material. It's Mexican labor. It's tariffs and import duties, trade restrictions basically. There's also the big ones. Then we have uncertainty on the Brexit, which isn't really hurting us P&L wise, except on the top line. And our growth for the year, which isn't exactly double-digit type growth, but we're sort of seeing it in the 4% range. That is essentially something that's helping us make that up. And we do believe that we're going to make slightly more adjusted EBIT in 2019 than we did in 2018, which is something that we believe puts us into a little bit of a unique class as far as automotive suppliers.

So that pretty much rounds up where we are. So operator, I think we can get ready for taking some questions. So if you can tell people what buttons to push, et cetera. And then when you actually have done that, I'll take care of some of the questions that we've gotten over the web before we start answering the questions that come directly on the phone.

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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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While we wait for some questions, let me try to answer some that have come over the web.

So from Philip at MediumInvest out at Denmark. Question one is, "How will the transition to electric cars affect your 3 segments in the medium to long term?"

It's a question we often get. Long story short, and we can get into details, but that's probably going to be in a follow-up phone conversation because it's something we've talked about with most of our investors. In our Interior segment, electrification will definitely help as one of our main products there is seat heating, which is done electrically. And what we see consistently across all platforms of battery electric vehicles is that the seat heat implementation rates are much higher in electric cars than they are outside of electric cars. They also tend to be more expensive cars. And that means there are more comfort features, and that means that there's also more comfort features built into the seats of those cars. So Interior is definitely getting a gain from it.

If you look at Specialty Products, that has 3 business units. It has Couplings, which provides air couplings for trucks and buses. No difference there regardless of what the powertrain is. So that is unaffected. We have our off-highway business unit, which is basically non-automotive and virtually unaffected by powertrain because that's typically not the products that we serve in those products. And then we have FTS providing hoses and tubes. And obviously, there's less plumbing in electric car than there is in an internal combustion engine car. So all in all, an electric car will have less content from FTS than an internal combustion engine car.

However, for the internal combustion engine cars, it still will be around and there will be a significant amount of them around for a long time, they will have hotter engine compartments, harder driven engines with more turbos and that is exactly the market where our specialty hose is serving well. So in FTS, we are saying that net-net, it's probably a 0, but it's a little bit plus because of the content in the surviving internal combustion engine cars. And it's a little bit of a minus because the battery cooling systems, the plumbing around that is of lesser value than it is in a comparable internal combustion engine.

Second question from Philip is, he's stating, "In your presentation, you expect Q4 2019 adjusted EBIT margin of 6.5% versus 7.2% back in Q4 2018. What's the driver behind this expected decline?"

That's very easy to answer. Back in Q4 2018, primarily due to some very sharp increases in material costs, we had a fairly significant gain because we were writing up the value of our inventory as a result of the increased material costs. That, we do not see this year. Yes, material costs have gone up, but we've done a much better job as far as our cost savings and overall cost of our products. And then, therefore, this year, we actually expect our valuation of inventory to go slightly down in the fourth quarter. So instead of getting a gain, we're actually getting a little bit of a cost. And if you take that out, our Q4 should probably be a little bit better this year than what it was last year.

But in naked numbers, you're absolutely right. It looks like we're losing 0.7 points worth of -- worth of margin, but it's really driven by -- this year, we expect no gain and actually a little bit of a cost or loss coming from the reduction in inventory value, which again is driven by our efficiency and cost improvement activities, so that we basically manufacture the same product this year for less money than we did last year. I hope that answers your questions on that one.

I have a second set of questions from Petter at Sparebank. "How should we think about reported versus adjusted EBIT for 2020?"

So your real question is really what kind of restructuring costs are we seeing in 2020. I can't give you a final answer to that one yet but it should certainly be no higher than what it's been this year, to put it that way.

Second follow-up question from Petter, "Only thing where I'd like to see an improvement now is cash flow. Can you remind us of CapEx going into 2020?"

Let's put it this way. 2019 is an exceptionally high investment cash flow year, and that's obviously being driven by new business wins. 2020 is also going to be high investment, but it's not going to be at the same level as we have it this year. I would reckon that the investments for 2020, and we're not completely final with this yet, is going to be somewhere in the EUR 10 million to EUR 20 million neighborhood, lower than what we had this year. So I hope that answers your questions, Petter.

Getting to next 1 from [Eivind Veddeng]. "What about dividend outlook?"

Well, I think what we've said for a long time, and Norbert, maybe you want to confirm this, but we basically indicated that when we get to an equity ratio of so and so, and then Norbert, if you want to give them the -- give the exact -- of 35%...

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Norbert Loers, Kongsberg Automotive ASA - CFO [3]

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35%.

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

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Yes. So when we get to a dividend or an equity ratio of 35%, then we will consider distributing dividends or other means of wealth to shareholders, whether it's in the form of buybacks or whatever. Before then, we're really not looking at it. And that could, of course, change if our cash generation starts becoming very strong, which we don't expect to happen in the near term. But anyways, it would do -- generate a lot of cash from whatever activity, and we don't have strong needs for that cash in the short term. That is obviously something that we would look into.

Another question is, "Are you comfortable with your liquidity position? At present, what's the minimum level of cash that Kongsberg needs to hold? Do you expect Q4 to be free cash flow positive?"

Norbert, that's probably a question for you, and that's from [APGI] Asset Management.

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Norbert Loers, Kongsberg Automotive ASA - CFO [5]

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We expect Q4 to be cash flow positive, yes. We don't have exact numbers yet. Typically, in Q4, from a cash flow perspective, it's one of the better quarters. Q3 is typically negative. Q4 is typically positive. We're looking at a positive net cash flow for Q4, yes? And I want to also make a qualifier to Henning's statements on planned investments. So this year's budget for CapEx was around EUR 83 million. And next year's budget will be, as Henning said, at least 10% lower than that. But our current CapEx forecast for this year was already much reduced since we had lots of effort in getting that number down, primarily for cash flow reasons. So this year's forecast is around EUR 70 million and next year's budget is similar to that. And the budget will stay at least EUR 10 million below of what we have budgeted for this year.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [6]

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And then there was also a follow-up question on the -- how much cash do you need to run the company? Are you comfortable with the cash balances?

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Norbert Loers, Kongsberg Automotive ASA - CFO [7]

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I'm comfortable with our cash position. I'm comfortable with our actions to manage cash. We have internally a cash liquidity requirement as communicated a year ago when we issued the bond. That was around EUR 30 million to keep the company liquid. In the meantime, we introduced a new treasury system, in-house banking system. And that allows us to manage effectively the company with cash levels around EUR 20 million. So we saved some EUR 10 million just from introducing that new system.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [8]

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So in other words, around EUR 20 million of liquidity is needed to run the company. And from a cash standpoint, yes, we do feel comfortable with that.

Those are the questions I had online, operator. I don't know if you have any questions coming from the phone participants?

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Operator [9]

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We can take our first person, who is Ash Heatwole from Shenkman Capital.

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Ashley Heatwole, Shenkman Capital Management, Inc. - Credit Analyst [10]

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I just had a few. The first is on your working capital. Was the seasonality that you typically see in the third quarter largely limited due to the treasury system changeover that occurred in the second quarter? And as a result of that, do you expect any further normalization for the remainder of the year? I'm just trying to get a sense of this, given your cash balances are at multiyear lows. We should look at...

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Norbert Loers, Kongsberg Automotive ASA - CFO [11]

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We expect, for fourth...

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

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Ash, nice to hear from you again. You're one of our most consistent bondholders showing interest for the company. So thanks. You should look at it the following way. Q3 seasonality is typically that revenues fall. They fall at the beginning of that quarter. So towards the end of the quarter, you typically have the same level of receivables, and for that matter, inventories that you would normally have at the end of Q2. But it is a lower revenue quarter, so therefore, all the stats sort of turn out the wrong way.

Q4 is exactly the opposite. You have strong October and November from a revenue standpoint, and you have a weak December because of vacation periods or shutdown periods. So the way you should look at it now is the primary reason for our low cash balances, Ash, I would call it poor cash flow, to be honest with you, is we've had investment levels which are very high, which are related to our new business wins, which is, again, related to our growth, which is related to our earnings power. So I don't see that one as negative. The one point where I could see that we should have done a better job is on inventories. And then I think we have a potential of somewhere in the EUR 10 million to EUR 15 million neighborhood on inventory reductions. It's not going to come all at once, and it requires some system changes and parameter changes, et cetera, et cetera. But you should see a little bit of improvement there in the fourth quarter. And net-net, you should look at sort of single-digit positive cash flow for Q4.

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Ashley Heatwole, Shenkman Capital Management, Inc. - Credit Analyst [13]

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Right. I guess, tying into that, just given you have -- it looks like some revolver still outstanding for any modicum of free cash flow in the fourth quarter, would you all expect to pay down that outstanding revolver amount just to keep that as open as possible?

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

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That would be correct.

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Ashley Heatwole, Shenkman Capital Management, Inc. - Credit Analyst [15]

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Okay. Okay. And then secondly, and unrelated to working capital, is just on your overall profitability. Should we continue to expect mix headwinds going into 2020 as your Interiors and P&C businesses are well outpacing Specialty Products?

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

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Very complicated question. And we're in the middle of those discussions internally. Obviously, you have the strongest margins in Specialty Products and weaker margins in Interior and P&C. At the same time, if for a second we steer away from Light Duty Cables within Interior, those are the 2 areas where we actually have margin improvements rather than either flat or slightly declining margins. So from that standpoint, I would say that both helped from a margin standpoint.

I think the big question is, we have one business unit within our Specialty Products segment, which is Couplings that exclusively serves the truck and bus markets and then the trailer markets. And then those are markets with big question marks for 2020. And it's just very, very difficult to predict. We have a little bit of the same going on in P&C actually with that exposure to the U.S. truck market with our AMT product that we're supplying to Eaton. So it's very tough to make a conclusion on that. I would say that generally, as we see the world right now, we would probably look at low single-digit top line growth and slight margin increase for the company overall for 2018, but I really can't get too much more exactly than that right now.

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Operator [17]

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We can take our next person from the queue. Prateek Gupta from Goldman Sachs.

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Prateek Gupta;Goldman Sachs;Analyst, [18]

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I have a couple. So first, just following up on the commentary around trucks and CV and off-highway markets. So as you said, there is a bit of expectations that these will decline going forward into 2020. So I just wanted to understand, I mean, are you preparing for this in terms of -- from a margin headwind perspective, are you thinking about rightsizing cost ahead of this anticipated decline? So that is my first question.

And my second question is around deleverage, which has obviously ticked up even from a year-on-year basis. So kind of what is the thought process around maintaining leverage and maybe even reducing it potentially through some asset sales or increased focus on free cash flow generation? So if you could comment around that as well, that would be helpful.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [19]

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I'll take the first thing first. Truck, bus and trailer markets going down, what are we planning around that? It's a little bit different by business units. I mean Interior only serves passenger car markets, so they're unaffected by this. In P&C, we do have some new programs coming next year. And net-net, we expect P&C revenue-wise, in spite of the declines in the truck market, to be pretty much flat with smaller growth next year. For our Specialty Products area, there's essentially 2 units there that have exposure to the truck and bus industry. One is the Couplings that we talked about. And again, we do have some new programs coming online there, and we believe that we should still be able to have growth in our Couplings segment next year in spite of the declines. A primary reason for that is that our exposure to the North American truck market in Couplings is relatively small. And that is the market that is predicted to go down the most next year in the truck and bus markets.

As to the European markets, they have seen most of their declines already taking place. So we don't believe that's going to go significantly down from now on, and that's going to be made up with essentially the new programs that we have been awarded. For FTS, it's different. FTS has sort of 3 different end markets. You have passenger cars, you have trucks and you have what we call industrial markets, which is essentially everything else. And there, we are -- we have intensified, and we do see some growth taking place in industrial, and that should be able to offset what we see as the declines, primarily in the truck market.

So overall, we have not taken, let's call it, operational action related to the decline in the truck and bus market, except that back in Q3, early Q3, we did take some headcount measures in one of our Specialty Products units in order to adjust for the changes in the short-term and probably medium-term declines in some of those products.

That was part one. Part 2 was on the cash. Do you want to take that question, Norbert?

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Norbert Loers, Kongsberg Automotive ASA - CFO [20]

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Yes, it was a question on how we maintain or improve leverage. I mean the main source of cash is operational performance, and that is driven by revenue and by margins, and we will continue to improve there. We continue to grow. And we continue to have the benefits from, a, our restructuring and, b, from fixing some operational issues we had in the past. We are also looking to make significant further improvements on working capital levels, and Henning mentioned already inventory levels as the main targets. And that is something we have in our management team as a task for next year. It's not a quick fix since we really need to look into systems, processes and all kinds of things. But there we definitively have some reserves. And that should help us with cash flow and maintaining or even slightly improving on the leverage.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [21]

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So long story short, the main driver is going to be to continue to click on and perform operationally, and that's going to provide a larger pool of available cash. Then we believe that we're going to invest slightly less next year than what we've invested this year. And those are going to be key for basically doing better cash performance next year than this year. On top of that, comes some improvement in terms of working capital management, particularly inventories.

And then fourthly, you said, "Well, are you considering asset sales?" And needless to say, I mean we're -- I would consider ourselves to be an extremely value-driven organization. So obviously, if there's more value to us to dispose of certain assets than it is for us to hold those assets, that is something that we're looking at. And if interest parties contact us, we do respond and try to work out business cases on that.

That being said, we're not going actively out and doing it, but we're very willing, given that the price is right. That being said, in today's capital markets, getting decent multiples for asset disposals is not that easy. So it's not like we're betting our cash strategy on that. But if the opportunity comes, yes, we'll do it.

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Operator [22]

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(Operator Instructions) And it seems there are no further questions over the telephone. So I would like to hand the call back to our speakers for any additional or closing remarks.

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Henning Eskild Jensen, Kongsberg Automotive ASA - CEO & President [23]

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Thank you, operator. I think we've exhausted everyone's time, especially with our little hiccup on sound. So I apologize for that one. Again, thanks for your interest and certainly looking forward to speaking/meeting with some of you in the next time period. And if not before, then looking forward to having you all again for our full year announcement and our Q4 announcement, which will be towards the end of February. So thanks for participating, and have a nice day.

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Operator [24]

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Thank you. Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.