Speaker #1: We are here at the Domske Bank in Oslo, with me here today is our CEO and President, Trond Fiskum, and CFO, Erik Magelssen. On the screen you can see today's agenda.
Speaker #1: And as always, we will host the Q&A session after today's presentation. If you're joining us virtually, you can raise the questions during the call in the tool, and if you're here, you can raise your hand and we will come around with microphones.
Speaker #1: So with that, I will give the word over to our President and CEO, Trond Fiskum.
Speaker #2: Thank you, Therese, and good morning everyone. Both those of you that are present here in Dansk Bank's offices and those that are participating online.
Speaker #2: We will start with an update on the business and the overall financial performance. Before I will hand it over to our CFO, that will go into more financial details.
Speaker #2: The main messages here today is that the transformation that we started last year continued to deliver tangible results. We see a stronger profitability, we see improved capital efficiency, and a more robust financial situation for KA.
Speaker #2: And at the same time, as we see these results, we continue to take additional structural actions to further improve the business and build the foundation for future improvements and profitable growth.
Speaker #2: Looking at our financial KPIs, we see a broad-based improvement in the performance in Q3. EBIT increased to 9 million euros, with a margin improving to 4.8 compared to 3% a year ago.
Speaker #2: Net profit increased significantly to 6.4 million euro, and we do see a positive net cash flow of 2.2 million. And importantly, return on capital employed continued to improve to 11.4% compared with just 1.7% a year ago.
Speaker #2: So across profitability, cash flow, capital, efficiency, we continue to move the business in the right direction. If we look at the development in a little more detail and over the last seven quarters, we see that the underlying fundamentals continue to improve.
Speaker #2: Revenue was in Q3 185 million euro, almost 14% above Q3 last year. We now see that our key markets, including North America, have recovered from the drop that we saw during the second half of last year.
Speaker #2: And there is some reduction in Q3 from Q2, but this reflects normal seasonality. Due to the summer vacations, that several of our customers have and they close their production.
Speaker #2: During summer. EBIT reached 9 million euro despite both higher material costs that we see across the business, as well as tariff costs that continue to impact us.
Speaker #2: So the results here reflect a wide range of actions that we have systematically implemented across the business. And the higher material costs are being offset by either cost improvements or passed on to our customers.
Speaker #2: Cash flow was also positive at 2.2 million. This is below Q3 last year, but this is also a reflection of a higher business activity compared to last year.
Speaker #2: And the resulting increase in net working capital. There will be some variations from quarter to quarter, when we look at the longer term, trend we see the positive trend on the cash flow.
Speaker #2: And year to date, we have generated 1.8 million in positive cash flow, compared to negative 4.8 last year. So overall, we see a stronger top line, an stabilized market environment.
Speaker #2: We see an improved profitability, and we continue to see a positive development on cash generation. We also continue to address our cost base, our structural cost base, and optimize our manufacturing footprint.
Speaker #2: In October, the restructuring of our Kluse facility in France was approved by the authorities. In France, as part of the restructuring, the production of the dry land products in this plant will be transferred to other KA plants in Slovakia and in Brazil, while Kluse will become a dedicated couplings production site.
Speaker #2: The financial rationale is very clear. We expect an annual saving of approximately 5 million euro. Once it's fully implemented, against a one-time cost of approximately 7.5 million.
Speaker #2: And this results in a payback of less than 2 years. The restructuring is expected to be concluded during the first quarter next year, possibly earlier.
Speaker #2: Importantly, Kluse is a part of a broader footprint optimization. It follows plant consolidations, both in Sweden and in China, that we have completed during 2026.
Speaker #2: So taking together these are important actions for us that structurally reduce our cost base. It improves our competitiveness and, of course, it's supporting further profitability improvements.
Speaker #2: Regarding the warranty and recall-related matters that we have communicated previously, there are no fundamental changes to report. I continue to be personally involved in driving the cases forwards and towards the conclusion.
Speaker #2: It's high priority, and we do have meaningful progress, and we will provide you with updates once we have additional clarity. Moving over to commercial activities, we see an improved momentum in Q3.
Speaker #2: We secured 142 million euro in estimated contract revenues. In the quarter, these are values that reflect our best estimates of the revenues from these contracts during the length of the contracts.
Speaker #2: And the contracts, you can see that are as in previous quarters, they're well balanced between the two business areas, drive control system and flow control system.
Speaker #2: And it's also a mix of incremental business, meaning new business, and extension of existing contracts and business. What is important here is that we are securing contracts based on improved commercial terms, both when it comes to pricing and the contractual terms itself.
Speaker #2: This is reflect a greater or a clear direction and a greater discipline that we are applying when we are evaluating the businesses and our performing the negotiations with our customers.
Speaker #2: And our focus is not only growth for the sake of volumes, we need to ensure that we have a sustainable business financially and we need to have a fair share of the value creation that we bring to the table.
Speaker #2: We're focused on winning the right business on the right terms. And that will support a profitable growth and long-term value creation. You'll see that the contract awards are spread also over the main and the key customer segments.
Speaker #2: And we also see that the pipeline of business opportunities, they remain solid. When we go behind the numbers, you can see some good examples here of the type of contracts that we are winning.
Speaker #2: You see here a quite diverse examples of different contracts, both geographically and across different product segments and customer segments. And starting on the top left, we see 34 million euro contract that was awarded as a contract extension its cabin stabilizers that we are making for a global truck OEM, headquartered in Europe.
Speaker #2: And it will be produced in our plant in Poland. On the top right, we have 24 million euro incremental business. These are hose and tube products that we are going to supply to an autonomous people mover in North America.
Speaker #2: This is an interesting business. It's a new market segment in many ways. With shows that we are competitive and relevant also for this market segment.
Speaker #2: These are electrical autonomous vehicles. On the bottom left, we see the incremental couplings business, a 20 million euro contract awarded by an ocean Asian truck OEM, more specifically Japanese.
Speaker #2: And this is another important step in the gaining and market shares in air couplings business. And this will be produced in combination between our plant in China and in Raufos, Norway.
Speaker #2: And finally, on the bottom right, we have a 15 million euro contract extension for automatic transmission shifters. This is a part of our driveline business and fits well with our revised strategy for that business unit.
Speaker #2: Where we are now selectively pursuing attractive shifter opportunities or business opportunities. So overall, it's a good mix of contracts. Both contract extensions and incremental business across a wide range of customer segments, products, it's also reflects the diversity we have in our customer and product base, which also gives us a lot of strategic alternatives going forward.
Speaker #2: An interestingly, all these four programs they have an SOP either this year or next year. So it is business that will contribute to our revenue base already within the next 6 to 12 months.
Speaker #2: So a key takeaway from what I have shown here is that improvements that we are seeing is a result of systematic and deliberate actions across KA.
Speaker #2: We have been focusing on four priorities: drive cost efficiency and operational improvements, improve cash conversion, strengthen the leadership and the KA culture, and accelerate innovation and profitable growth.
Speaker #2: And we are seeing that these priorities are delivering tangible results. Profitability is stronger, capital efficiency is improved, leverage has come down. We've seen strengthened accountability and execution across the business.
Speaker #2: And we see a positive trend on the contract awards. At the same time, we see that there's much more we can do. And we are far from being satisfied.
Speaker #2: We still see significant potential to further improve the performance of the existing business. And at the same time, we see that the progress that we made means that we are building companies that is much stronger, both operationally and financially.
Speaker #2: Our position is much better. It gives us a stronger platform for the next phase of KA's transformation. Where the focus will be on further performance improvements and increasingly on growth.
Speaker #2: And profitable growth. With that, I will hand it over to Erik to take us through the financials in more detail.
Speaker #1: Thank you, Trond. So before going into going through the financial slides, I must say it's very encouraging and motivating for us to see that restructuring process and transformation is delivering tangible and solid results.
Speaker #1: The results for Q3 are good. And there are no significant special or extraordinary items affecting the results. So when you look at the results for Q2 and Q3, it's a clear demonstration that we are on the right way.
Speaker #1: So first look at the two our two business areas. First, drive control systems. The revenue level here is 4.4% higher than in Q2, 2025.
Speaker #1: And we do see a stabilizing upward trend in the top line level. I think as Trond mentioned, the reduction from Q2 is mainly reflects normal seasonality.
Speaker #1: When we look here at the EBIT level over the last seven quarters, there are two outliers. By Q2, last year, being affected by significant warranty cost accruals.
Speaker #1: And Q4, affected by certain extraordinary items. I think and as Trond noted, the underlying fundamentals continue to improve. And we are on the way to achieving a long-term higher profitability within this business area.
Speaker #1: The higher material cost that we are experiencing similar to many other companies compared to last year have been compensated EBIT-wise. Within DCS, to a large extent by the reduction in the operating cost base.
Speaker #1: So in turn to our other business area, flow control systems. Here we have volume increases in all business units, compared to last year. And in total, reported level is a strong 26.7% higher than in Q3 last year.
Speaker #1: Again, we have a certain seasonality effect from Q2. The increased contribution from increased volumes and revenue is a large extent here maintained down to EBIT.
Speaker #1: Giving EBIT as a strong 7 million euro in Q3 this year. More than double the 3 million euro we had in Q3 '25. The EBIT margin here also increased to a strong 8.2%.
Speaker #1: Also here we are affected by higher material cost. Compared to last year, but there have been offset either by reductions in our cost base or passed on to our customers.
Speaker #1: So just on the EBIT spread for the group as a total, we have a revenue level which is 13.7% higher than in Q3 last year.
Speaker #1: And the point here that we managed to maintain the increased contribution from the increased revenue down to the EBIT line. So this is the key driver for the increased EBIT.
Speaker #1: We also have cost savings. In the quarter, and this kind of in total brings the EBIT from 4.9 million euro in '25 to 9 million euro in Q3 '26.
Speaker #1: As you see on the year-to-date basis, it is the overhead cost reductions and the lower warranty cost that drives the EBIT improvement. And also importantly, we are a very positive increase in our net income, which is our bottom line.
Speaker #1: As told, we chose the key driver for the net improvement are the operational improvements, including the cost reductions and giving the improvements in our EBIT.
Speaker #1: Then you see here that the net income in the quarter alone has increased from 1.6 million euro to 6.4 million euro in 2026. And I think on a year-to-date basis, we have managed to turn our loss of 2.6 million euro in '25 to now a 16.8 million euro profit.
Speaker #1: So in all very positive, I'm very encouraging for us. We see that the work we are doing are giving tangible and good result. The net working capital that Trond also touched upon is closely linked to our activity and revenue level.
Speaker #1: And when we measure our net working capital to our revenue level on an annual basis, we see that the level is fairly stable, as you see in the red line.
Speaker #1: And we have stronger business volumes increased revenue. That drives higher working capital requirements. As noted on the comments here, we have several ongoing activities within net working capital.
Speaker #1: And we have identified significant opportunities to reduce net working capital relative to revenue going forward. So here we have a significant upside potential. As Trond noted, the cash flow in the quarter alone was 2.2 million euro positive.
Speaker #1: Also in light of the increased revenue level, on a year-to-date basis, we have a positive cash flow of 1.8 million euro compared to a negative 4.8 million euro in 2025.
Speaker #1: I think also here the difference in net working capital is a driver for the variance in cash flow between '26 and '25. And the increase in volumes and revenue, which is positive for the company, gives higher working capital requirements.
Speaker #1: And this is a timing difference and increased revenue profitability will over time materialize in higher cash conversion. So I think both the improved profitability and positive net cash flow materializes in our reduction in net interest bearing debt.
Speaker #1: And the net interest debt has been reduced with 27.3 million euro from Q1 2025. And as you also can see from the slide, the net interest bearing ratio has been reduced by more than 50% from the level in Q2 '25.
Speaker #1: It's now at 1.5. And the leverage per bond term definition is the key in relation to our bond loan. And that has now also down to the same 1.5.
Speaker #1: This positive revenue strengthens our financial position and gives us increased financial flexibility going forward. So I think the improvements in our underlying profitability that we achieve without increasing our assets at the same rate gives us a significant increase in the return on capital employed.
Speaker #1: And this measure has now increased over four consecutive quarters. As you see from the graph, and it's now up to 11.4% level. This is very important for us because it gives us kind of operational leverage and we are managing to kind of get the profit without kind of increasing and keeping the investment levels going at the same rate.
Speaker #1: And you also see here the leverage ratio has then come down to 1.5. And it has come down from a level which was way above three before Q3 '25.
Speaker #1: As you also see that on the bottom right side, that the equity ratio has increased to 34%. Which is of course also a measure for solidity.
Speaker #1: And then lastly, before I hand over to Trond again, a new dividend policy has been approved by the board of directors. And this is now available on our website.
Speaker #1: The long-term target is to distribute up to 50% of annual net profit as dividends over a business cycle. We have some extracts of the policy here and you can read the whole policy on our website.
Speaker #1: I think coming into a position to potentially pay dividends is positive. And it will be a result of a significant restructuring and transformation process that we are starting to show results.
Speaker #1: And then Trond, back to you.
Speaker #2: Thank you, Erik. Let me summarize. Some of the key messages here from today's presentation. First, Q3 was another strong quarter. Solid year over year.
Speaker #2: Revenue growth and significant improvements in profitability. Second, our financial position continues to strengthen. We generate positive cash flow and we have significantly improved capital efficiency.
Speaker #2: And further increased leverage. Improved and reduced leverage. Third, we continue to improve the structural competitiveness of the business and reduce our cost base. The restructuring of our crews facility is another and important step in this.
Speaker #2: And is creating a more efficient manufacturing footprint for us. And finally, we are preparing and planning for the future. There's still further performance improvement potential in the existing business.
Speaker #2: While the progress we have made gives us a stronger operational and financial platform for to grow the company in the years ahead. So looking ahead, we will be hosting a capital markets day in Oslo on the 25th of February, next year.
Speaker #2: Over, as we have shown over the past period, we have had a strong focus on strengthening the business and improving our results. At the capital markets day, we will set out KA's strategic priorities and ambitions for the next phase.
Speaker #2: We will explain how we intend to drive further performance improvements. And how we want to grow the company. And also how we see product and technology opportunities that we can develop into future business and value creation for all stakeholders.
Speaker #2: And we look forward to share that with you in February. The capital markets day will take place in Oslo at the same day as our Q4 presentation.
Speaker #2: We will share the exact location later, but please save the date in your calendars already today. Finally, to the outlook, we expect a positive underlying development in profitability to continue.
Speaker #2: To be driven primarily by further operational improvements, additional cost reductions, and eventually also benefit from the more cost-efficient manufacturing footprint. Looking at our key markets, the near-term outlook remains cautiously positive.
Speaker #2: We see a strong truck order intake in North America. That is positive. And also a positive and stable market development in Europe in our key markets.
Speaker #2: At the same time, there are uncertainties when it comes to the geopolitical and trade-related topics. And we will continue to manage the business with financial and operational discipline.
Speaker #2: I think overall we end we will enter also Q4, the last quarter of the year with a strong position and with the optimism. So that concludes our presentation here today.
Speaker #2: And Erik and myself will be happy to take questions. Okay. I'll take the first question here. What are the future prospects for KA as a company and for us shareholders?
Speaker #2: It has been many years now with poor numbers on the stock exchange. I think the future prospects is that we will continue to develop the company.
Speaker #2: To improve performance. We will continue to grow the business with new contracts that are on the right terms. That creates profitable growth for us.
Speaker #2: We will explain this also more in detail in the capital markets day in February. When it comes to the poor numbers on the stock exchange, we hope that our job is to manage the company.
Speaker #2: And communicate this as best as we can. How we are managing the company and what we see as prospects for the company for the future.
Speaker #2: And then someone else will decide what that means. Next question is flow control system delivered an impressive 8.2% EBIT margin. What improvements in drive control systems give you the most confidence that the group can achieve significantly higher profitability?
Speaker #2: So the question here is related to drive control systems. As you see we have a significantly higher profitability in flow control systems. Drive control system is still impacted by some legacy contracts.
Speaker #2: That we are addressing. And is also impacted by warranty cost. So those are I would say the most to most focus areas for drive control system that will also bring that business area up to a higher profitability.
Speaker #2: Okay. There's another question here. Which improvements in KA do you feel investors have not yet fully recognized? And what should we watch most closely over the next 12 months?
Speaker #2: That is a good question. I think we will digest that question a little bit more. And then we will come back to that on the capital markets day in February.
Speaker #2: We do think that there is an underlying potential in the business that is still representing a significant potential to improve performance. I think that's potentially one of the answers here.
Speaker #2: But let us come back to that on the capital markets day in February and we will provide some good answers to that question.
Speaker #1: Yeah. I think from the more quarters in a row that we can deliver with good results, positive cash flow, reducing net debt and increasing return on capital employed, that will kind of give investors more and more confidence.
Speaker #1: And as Trond said, there are significant elements of our restructuring process that are not yet fully visible. So I think that will also build on that.
Speaker #1: But it's a good and then we have to be able to communicate that to the investors and the markets in a good way. And also in the process of doing that.
Speaker #1: But we will get back to that in the capital markets day.
Speaker #2: Another question. How much of the strong Q3 revenue growth, particularly in North American commercial vehicles, is sustainable into Q4 and 2027? Don't see any significant changes when it comes to Q4 when it comes to the revenues.
Speaker #2: North America has today on the commercial vehicles their impacted by regulations and uncertainties regarding regulations. So there has been a certain level of prebuy.
Speaker #2: The expectations is that first half of next year might see somewhat lower growth. But then it will pick up again second half. Overall year on over year stable.
Speaker #2: But we might see a small reduction in North America truck volumes in first half of next year. And then with an increase again. So that's what we hear from the market.
Speaker #2: But fundamentally the demand in commercial vehicles both in North America and Europe that are two key markets are strong. Next question. Despite significantly stronger earnings, operating cash flow declined year on year.
Speaker #2: When should we expect working capital to normalize and cash conversion to improve? We're not going to give a timing issue here. I think we are an answer to the timing here.
Speaker #2: We have a strong focus on working capital. We're working with accounts receivable, meaning payment terms with our customers. That is a key topic for new contracts.
Speaker #2: We're working with payment on time. We have a certain level of overdue payments with our customers that we are working on. And we also working to improve our inventory levels.
Speaker #2: Over time this will give results and you will see that impact on the networking capital. And cash conversion. Next question. Could you update us on the progress at on the steer by wire, particularly customer demonstration and collaboration with industry partners?
Speaker #2: What can you share about the partners involved and the next milestones towards commercialization? The steer by wire business unit or the steering business unit that we call it is the results of the acquisition of Chassis Autonomy that we made last year.
Speaker #2: We have set that up as a dedicated business unit in order to ensure focus. We have a dedicated team working on this, working with several initiatives and customers and potential customers.
Speaker #2: We are in active discussions with other partners because we see this as a big enterprise to industrialize a steer by wire system. We do see that we need partners and we are working actively with those.
Speaker #2: And then we are working towards commercialization. I would like to come back with more details in February. So far the partners and customers we're working with, we cannot communicate who they are.
Speaker #2: But I can say that we are actively pursuing though partnerships and customers and have active dialogue. Whenever we have a significant development, of course we will communicate that.
Speaker #2: Okay. There is a very specific technical question here. How is the cooling system for the battery pack? I think I will jump that one and leave that to our engineers to report to.
Speaker #2: I think we have the person here. Next is you are growing faster than the heavy duty vehicle market. To what extent does this reflect new contracts entering production and what opportunities do you see for further growth from programs already secured?
Speaker #2: We are growing faster than the heavy duty vehicle market. I think this quarter that is a correct observation. I think this reflects more the current programs that we are in today and that we are on the right programs.
Speaker #2: What we've seen over the last quarters, it's probably more reflecting the existing programs rather than new projects. Over time our ambition is clearly to grow faster than the market.
Speaker #2: And also there but that will typically take more time. When new programs are entering SOP. Okay. You have identified significant opportunities to reduce working capital.
Speaker #2: What are the main measures and when do you expect them to translate into stronger cash flow? I mentioned that previously. It's payment terms with our customers.
Speaker #2: It's managing payments on time and it's inventory levels. Those are the main items. When do we expect them to translate into stronger cash flow?
Speaker #2: You will see it in the results as we are presenting them. But it's a strong focus. And we should be seeing result of that I would say over the next 6 to 12 months.
Speaker #1: This is also work that is kind of of course done at the plant level with the plant managers responsible for his P&L for the accounts receivable, for his inventory.
Speaker #1: With the plant controller. So just to say that this is kind of a bottom up where the kind of the operational units are responsible for this.
Speaker #1: And then we support and work with that from the group level.
Speaker #2: Okay. Okay. I think we have come to the end of the questions. Any questions here in the audience? Yeah.
Speaker #3: I didn't see the warranty issues was mentioned in connection with the dividend policies. So can you just comment on that if that matters needs to be resolved in order to pay a dividend?
Speaker #2: I think that's a question to the board when it comes to the dividend decisions. That's with the board. So I cannot provide you with an answer to that one.
Speaker #2: There's no other questions. I think we can conclude the session. Thank you again to Danske Bank for hosting us and have a good day.
