Kongsberg Automotive ASA

OSE:KOA

Earnings Call Transcript

[Operator]

Welcome to the Kongsberg Automotive, Q4 2017 Earnings Announcement Conference Call. At this time, I would like to turn the conference over to Henning Jensen, the President and CEO of Kongsberg Automotive, please go ahead, sir.

[Henning Eskild Jensen, Chief Executive Officer and President]

Thank you, operator. And thank you, everyone, for dialing in to our earnings announcement for Q4. With me here, I obviously as always have Norbert Loers, our CFO. We will go through a fairly short presentation, although it's a little bit longer than normal due to Q4 being end of year and obviously, we will facilitate Q&A at the end of the call.We made a presentation, so if you have that in front of you, from the web that is certainly advantageous, I'll just jump immediately to Slide 2. Highlights for Q4, revenue-wise, we achieved EUR 267 million worth of revenues in the fourth quarter. As with just about all the quarters in 2017 that is a fairly significant increase, this time of EUR 17.6 million, give or take 7% growth. And that is a net number, it obviously also had some currency translation effects, which in the quarter were almost negative EUR 10 million. So a very solid growth in Q4 for us particularly, excluding the FX effects.As far as annual business wins, a figure closely followed by a lot of you, we actually had a stellar fourth quarter, when it came to new business wins. I know I was a little bit, almost defensive in our Q3 earnings presentation, sort of sending out a little bit of warning signal that I didn't think that we will be able to achieve the same type of full year new business win figure as we had in 2016. However, we came in very strong in the fourth quarter and we got EUR 122 million worth of new business wins, which was actually a slight increase over the previous year.And the really delightful thing about that one is, not as in 2016 and especially in 2015, where the fourth quarter came in with extremely strong bookings due to some single big programs, this time it was essentially a lot of small programs which obviously is great from an exporter standpoint et cetera. So but very good job as far as getting that done, all that credit is not Kongsberg's credit, there is also some credit to our customers here, which actually are the ones dictating when certain business awards are taking place. But nevertheless, I will certainly take that one -- and we are very satisfied with our business wins in the fourth quarter of 2017 and for that matter the full year.From a performance standpoint, adjusted EBIT came out to EUR 13 million for the quarter. And that is almost a doubling, compared to last year of EUR 5.6 million up.We did put the locks on one of the facilities that we're in the closing process on, the Heiligenhaus plant in Germany. And as we announced, we did agree to sell the ePower business in December. And we closed that transaction as subsequent event in mid-January so that business transaction is essentially closed off.From a gearing standpoint you'll hear much more from gearing and financial ratios from Norbert when we get to the financial section but basically ended up the year at a 2.4 ratio of net interest-bearing debt to EBITDA, which was also a slight improvement over previous quarters.Flipping over to Slide 3. I figured it would be appropriate to include a couple of slides on basically the whole year and how we progressed. It was kind of a full, first full year of what I call the improvement projects or improvement plan. So a little bit of an update on that in terms of all kinds of small little items, and I'll try to run fairly fast through it.But as I said 2017 was our first full year of improvement activities and I think that we've pretty much delivered on most items that we outlined first time back in our Capital Markets Day, 2016 and then obviously following on that in November of 2017 on our Capital Markets Day [indiscernible].Obviously, as we go we're further improving and fine-tuning our improvement plan, we've communicated it pretty widely both externally and internally. And anywhere you go in the company you certainly have a feeling that, yes, there are just a slew of activities taking place, and they're all oriented towards us becoming a better performing company. It's a complex plan, it's also an all-inclusive plan, it's one of those things when we have 30 to-do items on your list, yes, you're going to be a little bit ahead on some, you're going to be a little bit behind on others. And I think we have communicated pretty widely that particularly on the closures, there's 1 closure that we're slightly behind on, but overall I think we're pretty much on the plan that we first presented back in 2016.From a leadership team standpoint, we have strengthened that significantly since our Capital Markets Day, 2016. It's starting to show some great results, we're having less silo-ed culture, we're talking more across business units; we're getting more, let's call it, synergies across business units; we're sharing more best practices et cetera. So the leadership team is clearly coming together in a good way.One issue that has been raised by some of you, some of our investors, some of our analysts is from a compensation philosophy, we need to align better the remuneration principles with the stakeholder and particularly the shareholder interests, which we have done, though it is more variable, it's more modest pay raises as far as base salary. We have put in place essentially a new bonus program with key criteria measuring progress towards our improvement plan. And we're also at the point of having put together a longer-term incentive plan, which is basically a combination of options and shares, which we obviously we will bring forward to our general assembly for shareholder approval since it involves stocks.As far as closures, we said that we wanted to close 6, 1 closure was pseudo on the way when we held our Capital Markets Day, 2016, so that sort of brings total closure list to 7. Of the 7, we've completed 2, those are locked up, 3 are solidly on the way. That would be the Burton closure, the Eaton, the Easley closure and also the Rollag closure in Norway, that's the one that's somewhat delayed. And 2 have not yet been initiated, it's not announced and the reason for that is the delay on the Rollag closure, which is holding up the 2 next ones because the receiving plants are basically the same and we don't want to overwhelm the receiving plants and then create chaos. So we've got to do this in an orderly way.The good news is from a Rollag closure standpoint, we believe that no later than the end of Q2, possibly somewhat earlier, we are going to be able to finally get full closure of that plant and have that whole manufacturing transferred to our new Polish facility.As far as Headrest Armrest business that's a long time ago, it was back in the early phases of last year. We did complete that transaction in fiscal 2017 and as I said earlier we did agree to sell our ePower business in Q4 and closed that transaction back in January of 2018.From a headquarters' standpoint, our headquarter is fully functional. This place has grown from essentially -- I guess it was myself and one other person being on headcounts in our new headquarters back in January of 2017, and as of today we have a headcount of approximately 30. It is fully functional; one of the business units is fully represented with its whole management there. It's growing slightly; we are not planning for this to become any kind of a hybrid castle.We are probably looking at, over a period of time -- and I don't know if that's going to be '18 or if that's going to slip into '19, but I don't think it will ever be more than sort of a 60-person headquarter and that would include a lot of business units activities as well. This is not just corporate, which I guess on a financial standpoint is essentially a burden to the organization.Now, one of our goals with the headquarter was to create a better business model from a taxation standpoint, and our whole taxation, or should I say a situation, got a little bit of a curve ball in Q4 with the U.S. tax reform, which led us to an unexpected write-down of our deferred tax assets in the United States, as a result of lower tax rates and that basically set us back EUR 8 million. That is a non-cash event, we actually look upon it as something terrible because obviously in the future our tax rates are going to benefit from the lower U.S. income tax rates, but that did provide us with an EUR 8 million hit, so to speak.Excluding that, we actually saw the first benefits of our new headquarter location, our new step-by-step implemented business structure and we saw benefits on the tax side compared to our old model in the range of EUR 2 million to EUR 3 million, which obviously to us, is a significant figure.Flipping to the next chart that will be Slide 4. I already talked about the booking figures, we're very satisfied with the overall net business wins. A little bit of footnote there, and I've listed it as a separate bullet point is, as most of you'll remember, we decided to keep our Light Duty Cable business with the new management in place. It's a lot of excitement around that business, and we're starting to see good first results, particularly in the form of new business, wins. And what's remarkable about that, and I can only say thank you to the whole Light Duty team for this, is we have not had better bookings in our Light Duty Cable business for the past 5 years than we did in 2017, so that was sort of a 5 year record as far as bookings.Some of these changes we are making in some of these revitalizations of business units, whether it's Light Duty Cable or it's Specialty Products, it's starting to show and you can sort of feel a lot of excitement in some of these organizations as a result of that.Another big note is, we have a big automated manual transmission program in the heavy duty area that we launched in Nuevo Laredo. This is, as far as I've been able to look up into our records, this is the single biggest program in Kongsberg Automotives' history. We launched that towards the end of last year in Q4. We launched it successfully and this is going to be great program for us going forward, so very happy about that one.From a market standpoint, obviously, we did get some tailwind, no question about it, vehicle sales were developing favorably, both on the heavy duty and on the passenger car side. And from a profitability standpoint, that growth obviously helped us greatly, and it helped us make up for some headwinds that were of external nature, particularly raw material commodities pricing sort of hit us in a relatively big way, but obviously the additional volumes helps us offset some of those effects, as well as some two offs and terrible on exchange rate developments. A little bit more on that later on.Flipping over to Slide 5, from a financial results standpoint, one thing that we are particularly proud off and Q4 is another quarter of essentially improved performance versus 12 months ago. And every single quarter of 2017 we improved versus the same quarter of 2016.Overall, as a full year, we grew revenues by, give or take 7%, from adjusted EBIT standpoint and we grew 75%. Now, we're not going to have that kind of fall through forever, but obviously you guys know what kind of expectations we have as far as 2018, and not going to be quite as strong development, neither on the revenue side nor on the adjusted EBIT side, but to get 7% revenue growth and 75% earnings growth on the adjusted EBIT side, which is what we feel really matters from an operational performance standpoint that is something that we are certainly satisfied with and then that certainly also matches up to our overall commitments from our Capital Markets Day's goal from 2016 and 2017.Now that's on the earning side, on the cash part, we obviously have weak cash flow. We increased inventories, and part of that was due to restructuring activities, part of that was due to increased raw material prices, we also had some growth issues and as you ramp up your production you will suffer from increased inventories for a period of time and these ramps basically happen towards the end of the year, so that cost is from a cash flow standpoint.Also we grew our business significantly in China. And given that China has much longer credit terms than just about everywhere else in the world, except for Italy that obviously drove our average credit terms to a higher overall average.That being said, overall cash flow and Norbert is going to talk much more about this later on. Overall cash flow was slightly negative. If you exclude restructuring activities from cash flow calculation the operations actually provided positive cash flow, which is important and then when you grow by 7% that should be fairly easy to automatically finance, so to speak, through your earnings, and it did. From a restructuring cost standpoint and the cash associated with that obviously that did cost us some money, as we indicated in 2016 Capital Markets Day, and for all practical purposes, we confirmed in the 2017 Capital Markets Day, we wouldn't ignore this nor external funding in order to carry out our restructuring programs, which is something we also lived up to.From a segment performance standpoint, it was a bit more of a mixed bag, Specialty Products performed very well. Essentially, all business units within that segment did either as good as or better than what we planned for. Now, both on the top line and on the bottom line, we did well on that one, especially given that some of those units are very exposed to commodity prices. And I think we did a, to sort of hand out grades to ourselves, I think we did a pretty good job as far as Specialty Products in 2017.In Powertrain & Chassis, the business that we characterized as a sick business 18 months ago, we made great progress. And we had a full year with positive adjusted EBIT, which was very important for us. We've come a long way here, there's still a lot of work to do in Powertrain & Chassis in order to get it into the type of shape that we want to get it into, but so far we're sort of checking the box on that one.The unexpected part and we talked about this both in Q3 and on the Capital Markets Day, we deteriorated rather unexpectedly in the Interior segment, mostly due to growth pains and also some operational issues in the comforts part of the Interior business units, related to product launches and new technologies. And now if it's one thing that's very clear to that whole organization is, that is job #1 that is what we're really working on fixing in 2018. It's not going to be a super quick fix, but as 2018 progresses we are going to see improvements in that area.And then we talked about Light Duty business the Light Duty Cable business unit, which obviously started showing some very good signs of life in 2017. We talked about FX rates, the unrealized and non-cash FX losses of close to EUR 4 million for the full year. We don't have a whole lot of influence on that one but it kind of is what it is, it's certainly something that we did not assume at the beginning of the year.Looking a little bit into the future and I am going to talk more about that at the way end of the presentation. We are essentially confident that the 2018 and beyond plan that we presented back in our Capital Markets Day that we will be able to perform to those levels that we outlined there. It's still a lot of improvement projects going on, there is still a lot of projects but overall we feel good about that, we obviously don't have a whole lot of monthly results in the [indiscernible] 2017 that we're not seeing any alarm signs there so we are essentially confirming what we told you in our Capital Markets Day, 2017 presentation back in November.Flipping to next slide, Slide 7 on new business wins, I don't think there's a whole lot of surprises there, I think I've covered most of that; strong quarter in Q4, basically building up to a strong full year for all of 2017.Flipping to Slide 8, the overall markets for automotive split up in two, one is for passenger cars that's the top section, the bottom section is the heavy duty market or truck production, so to speak. And obviously, 2017 as a whole was a great year for the automotive industry. Production basically increased a little bit more than 2% for total passenger cars built in the world. Europe had a growth of 3.7%, and North America actually went a little bit down, and we elaborate a little bit on this back in our Q3 presentation. That is something that's not really hurting us because it's the very inexpensive vehicles that have been reduced and the higher content vehicles, which are the vehicles that matter the most to the suppliers, they are still selling very well.It's basically something that General Motors initiated and that they basically looked at what kind of margins do they have on all kinds of different cars and as one example they basically stopped selling to the fleets, which in the U.S. is primarily rental car fleets. That takes out volume but it doesn't take out a whole lot of content for us and as a result of that even though the North American market decreased, we are not seeing a decrease in our North American revenues as a result of that because it's basically on average much higher content vehicle being sold in the U.S. today than what it was a year or 2 years ago.South America obviously coming from a low base and after many years of deteriorating volumes is starting to bob somewhat back. South America isn't going to make it or break it for us but it certainly nice to see that South America is somewhat coming back and then contributing to overall growth.Asia, fairly moderate growth in the total standpoint, 2% outside of Asia, 2% outside of China, 2% in China that the growth in that market continues. Obviously, for us, we are underrepresented in China, the biggest market in the world right now. The good news is we are winning business there at an above rate -- above average rate. We are slowly but securely grabbing market share and now are we -- are we ever going to get to our -- now if you look at the cars in the world produced in China, it's almost a third of all the cars in the world produced or made in China.And if you look at our revenues historically this has been a figure somewhere in the 7% to 8% range. That is growing it's going to take us a long time to get to 30% but getting to a 16% to 20% level that is certainly something that we're aiming for within a relatively short period of time, which translates into our plan period. And that we are growing in China, yes, it is in our accounts receivable somewhat, but it's a good source of growth for us overall. And then we're coming from a low base there. We're having great growth figures there and that will continue for a; while certainly into 2018, where we have good visibility; partly into 2019, where our visibility is reasonable but not as good as for '18, obviously.From a truck standpoint, that market grew very strongly in 2017, mainly driven by the Chinese markets. Europe also increased 5%. North America increased, basically, the truck markets saw a great year back in 2017. So yes, we are having tailwind from the market, and as I said that did help us. However, when automotive markets are good that generally means that the economy is good and that also means that typically raw materials commodities prices are going up. So you can't have it all but we think that 2017 was still a reasonably good year for us.Jumping to Slide 9, this is slide titled KA's Customer Base, we've gotten some questions from some of the analysts and some of our shareholders, tell us a bit more about your customer portfolio and how exposed are you to single customers et cetera, et cetera, et cetera, and we've always answered those questions very openly in direct conversations and on investor conferences et cetera. And [ fairly ] alternate it was a good thing particularly from a transparency point of view to publish something on that.So here is the charts and that basically shows our biggest customers and the Y-axis here is a percentage of total cost per revenues -- total cost per revenues were a little bit more than EUR 1 billion last year. To be exact we came in at EUR 1.56 billion. So 10% of sales is essentially a bit more than EUR 100 million. Our biggest customer is Adient. Adient is a tier 1 supplier, so when we sell to Adient we're actually a tier 2 supplier. And that can end up in many vehicles from different OEMs.If you look at the OEMs, and then those are the ones that are shaded in blue, the Volvo Group is obviously big. Volvo Group here is Volvo trucks, Renault-Nissan is self-explanatory, BRP that is related to our biggest customer in -- our single biggest customer in our specialty cars area is basically Bombardier Recreational Products. FCA, Fiat Chrysler obviously being big, Lear is another tier 1 supplier that we sell into. The VW Group with its brands comes in then the Geely Group that includes Volvo car that obviously belongs to Geely. And I think the rest is fairly self-explanatory from this chart and from this standpoint.So that is the overall, so as you can see no single customer accounts for more than -- slightly less than 10% of our total sales, which is kind of a balance we like. And it means that we're diversified, we're not singly dependent on 1 specific customer, we're certainly not a company that is overly exposed to 1 single customer to a level of 40% of sales goes to a single customer, we do not have that issue.Flipping to the next chart, which is Slide 12, getting into the operational updates. I've talked about most of these issues, I'll go very, very quickly through them. Powertrain & Chassis, I think we've covered more or less all those points. Yes, we're happy about seeing adjusted EBITDA improving but we've been more happy about seeing that our improvement plan where we are checking off small boxes and we're obviously expecting significant benefits from all the ground work we did in 2017 when we got to 2018, which we are already in the middle.In P&C a year of good progress, a lot of things ahead of us, but it's also time to start harvesting some of the hard work that we did back in 2017 that's essentially the whole foundation for a huge portion of our improvements in 2018.I think I've jumped over Interior here, Interior obviously, the main focus in Interior. We don't have any concerns as far as growth in top line, we're basically focusing a lot on operational activity in the Interior area. And I bet you're getting all the industrialization products of our new technologies that we are introducing partially back in 2017 second half and partly in 2018 getting that behind us and improving our operations. That is, as I've said, job one in Interior that is what everyone is working hard on. And if we deliver on that then we will see steadily improvements of the Interior business throughout 2018. The current level of performance in Interior is clearly not acceptable, it's understood by the team, they're working hard on it and we will improve Interior performance, maybe not as fast as certainly, I want but we are putting all the actions into place in order to get better on that one.Specialty Products. What can I say? Looking at Q4 isolated we are a little more than 10% up on revenues, we're significantly more ups on that on adjusted EBIT, good bookings. We initiated the closure projects for Easley and Burton which belong to the Specialty Products segments. And I wouldn't, I would never sort of give all green lights to any kind of segment, if it is 1 segment that has a lot of green lights it's Specialty Products and Q4 was another good quarter, a good solid quarter from the segment. And we're seeing that trend continue. So we're very satisfied with that performance.So in short, if I think about the business in terms of business units and not just segments there are 3 business units in Specialty Products, there's 2 in Interior and then we have Powertrain & Chassis so I totally think about the business as 6 business units. Of those 6 business units I would say that's 4 performs very well in Q4 and in 2017 as a whole and we're seeing that trend continue. That's basically will be the 3 units in Specialty Products as well as LDC.In P&C I think we made good progress but there's still a lot to do. And we're kind of on plan. And then obviously somewhat unexpectedly and not at all related to our improvement plan projects, Interior fell somewhat behind in 2017, so that's sort of the part of the organization that did not perform up to the levels that we expected. Nevertheless, that's what we're working hard on fixing.So out of 6; 4 are doing well, 1 improving well, and 1 requiring more work. That basically concludes my updates from a market standpoint from looking at sort of recapping the whole year et cetera, to the financial portion of the presentation.I will hand it over to you, Norbert, and Norbert will start on Slide 16.

[Norbert Loers, Chief Financial Officer]

Yes, good morning, everybody. This is Norbert Loers. I will start with Slide 15, which outlines the special financial analysis item for 2017 and for the fourth quarter. We aligned the quarterly report with our annual audited report. And as a consequence of that, we do not outline anymore the North American Headrest and Armrest business as discontinued business. It's represented some 4% of our overall revenues and is not considered to be material enough for that. Same applies to ePower. ePower is also not being carved out as a discontinued business.The second important thing is to understand how our interest expense and FX effects impacted the results. Compared to 2016 we increased our interest expense by EUR 3.2 million, much of that is due to the waiver period for our bank loan. We had 4 quarters of that waiver periods last year and that had higher interest margins. But also the U.S. portion of our bank loan had to be -- we had to pay higher margins to see underlying LIBOR rates on it. And LIBOR rates increased a lot in 2017 versus 2016 and they are continuing to increase.We also have a significant impact from unrealized FX, which is related to the bank loan. It goes up and down every month primarily euro versus U.S. dollar changes and it impacted us by almost EUR 8 million. And that was not something we did foresee when we gave guidance at our Capital Market Day in 2017.Taxes and net profit. The U.S. tax refund triggered for the year-end an extraordinary non-cash write-down of our deferred tax assets of EUR 8 million. Even though we believe that this is a positive thing for Kongsberg in the future, we have a fair amount of our business in the U.S. which is over average profitable. So we appreciate the lower tax rate in the U.S.Finally, our net profit was obviously impacted by both the FX and the noncash -- cash effects from the DTA loss, from the DTA, write down. Without these 2 unexpected effects, we would have had finally a net income of EUR 4.5 million positive and that is very close to our Capital Market Day guidance of EUR 4 million.If you then go next page please, 16, that is an overview on our quarterly revenues and adjusted EBIT. You see for the 2 years each quarter that for every single quarter we could improve revenue and we could improve EBIT profits. And that you see also very nicely here seasonality in our top line. We always have very strong first and second quarter, the third quarter has the lowest revenue in the year due to the vacation periods and then the fourth quarter is picking up again.So there is constant improvement quarter-by-quarter in Kongsberg Automotive 2017.If you go to Page 17. Slide 17, we show you the revenue development. And we break out here the Headrest and Armrest effect. So all 3 segments had good growth in the fourth quarter. We had a negative impact from translational effects of minus EUR 1.8 million and we missed obviously the Headrest Armrest sales we had in 2016 in the same quarter.If you go to full year. That is next page. Again, all 3 segments contributed to growth. The biggest contribution came from Powertrain & Chassis, EUR 61 million in top line growth. Also, Specialty Products grew very nicely and Interior also contributed to the growth.The year-over-year Headrest Armrest effect is minus EUR 32 million as we still had a first quarter in 2017 with revenues of some EUR 10 million.On the next page, we walk you through the Q4 adjusted EBIT development. We started -- the starting point is EUR 7.4 million in Q4 2016, we achieved EUR 13 million in 2017. We had a contribution from all segments. Contribution from Interior was relatively marginal. Powertrain & Chassis increased by EUR 0.9 million, Specialty Products EUR 2.5 million, and other segments, which is all the non-operational segments, had an improvement of EUR 2.9 million that is driven by group overhead cost reduction. Headrest Armrest was positive in the fourth quarter 2016, it was zero '17 so that's why we have a negative variance for that segment in Q4.If we go to next page then, which is full year EBIT, adjusted EBIT adjustment -- development, sorry. So Interior had a negative development and the reasons for that were already outlined, it's mostly related to growth pain and related operational problems, we had to ramping up that business. Powertrain & Chassis improved by EUR 4.4 million and Specialty Products by EUR 15 million, which is very significant. Others EUR 2.9 million and Headrest Armrest EUR 1.1 million.If we then go into the net profit development, net profit was obviously positively affected by adjusted EBIT and interest. So the net effect of these continuous business effects are some EUR 5 million. If we look into Q4 taxes, we realized improvement for the overall tax performance as a group. But we had also to anticipate that -- and to adjust for that significant U.S. DTA write-down of minus EUR 8 million and we accounted for EUR 3.9 million restructuring costs in the fourth quarter.The next page gives you the full picture for the full year and we have adjusted EBIT of EUR 22 million positive and we paid an interest, high-interest cost of EUR 3.2 million. If you add both together for continuous business operations that's an improvement of EUR 19 million. On the right-hand side you see restructuring costs and the U.S. DTA write-off these both effect have a one-time character non-recurring character. But they did cost us lots of net profit in the year 2017.In the middle section we have FX and other financial items this is mostly unrealized FX changes, non-cash changes and an improvement in tax of EUR 11.6 million. So the underlying business performance from financial analysis perspective is improving very strongly even though we have to pay these significant one-time effects on restructuring and the tax depreciation.If you look into free cash flow quarter-by-quarter, as already mentioned our year 2017 had a negative cash flow and this was driven by 2 main drivers, 1 is obviously our structuring expense and we show that outlined in the next slide, and a very strong working capital increase, to support the growth and to support the ramp up and the business transfers. So our working capital increase was over average and it will smoothen out during the year of 2018 and go back to normal levels relative to our business revenues.Next page 24 is the Q4 2017 cash flow and facility development, we group that into different categories, so first, we start with free cash flow from the business excluding restructuring effects and you'll see that the positive EBITDA EUR 26 million we used much of that money to invest into our business. So we had to finance an increase in net working capital and we had very significant capital investments in that fourth quarter, and also we had to pay for our financial costs.The second category is restructuring and there we had significant cash out in the fourth quarter that was a quarter where, for example, we had to pay for the severance plan in Heiligenhaus and we had some investments related to the restructuring activities.The final category is the facility development, so we drew EUR 14 million and that reduced our unutilized facility, every of these categories is a little bit overlaid and impacted by FX effects.If you then look into the full year cash flow and facility development we group it here again in the same categories. So our free cash flow from the business operations starts with EUR 87 million EBITDA and that money was spent in the working capital increase and in capital investments to support our growth plans, especially in Interior but also in Powertrain & Chassis.We had to pay out on restructuring expense some EUR 24 million. This is also related to restructuring costs we did already accrue for in 2016 in Basildon, where we had then our severance payout in 2017.The final category is a facility where we drew EUR 30.6 million and we had a reduction in our unutilized facility of EUR 39 million, again there was a strong FX impact, the unutilized is very much consisting of U.S. dollar loan capabilities.Page 26 we walk you through the financial ratios. Our gearing ratio, which is the net interest-bearing debts divided by the EBITDA is constantly improving quarter-over-quarter, we're now reporting the third quarter in a row at 2.4. Our equity ratio was going down from 30.2% in Q4 '16 to 26.4% that was related, of course, to the net income development, where we had the tax write-off and the unrealized FX effects going straight into our net income and straight then into our equity ratio.Our adjusted return on capital investment is improving quarter-over-quarter and from a 6.2% we achieved in 2016, we are now at 11.2% in 2017. And the underlying development of the capital employed shows there a small decrease of our capital employed.If we then go to Page 27, which is segment financials for the fourth quarter so we show you 5 quarters in a row, you'll see that Interior had a development quarter-over-quarter of those revenues, so it's a little bit going up and down, we had a very good quarter in adjusted EBIT and then ran into our growth pain and operational problems over the year in 2017, which reduced a lot second, third and fourth quarter profitability.Powertrain & Chassis has a little bit more straightforward positive development we see a more stable development in the top line and the EUR 96 million in the third quarter 2017 is seasonality again, and we see a very constant development of adjusted EBIT improving quarter-over-quarter.Specialty Products has also a good top line development and a very stable and a very profitable adjusted EBIT development over the time. Final on Page 28, where we give you a breakdown of our financial items quarter-by-quarter, and the big gray block is our unrealized currency effects. And you see here that this has a major impact on our quarterly results. And it's mainly driven by U.S. dollar versus euro development and for us, it's not predictable what happens there month-over-month and quarter-over-quarter. The dark blue block is net interest and during that waiver period, we have in 2017 and the higher LIBOR rates we had to pay higher interest on our bank loans over that period.So I'm handing over back to Henning.

[Henning Eskild Jensen, Chief Executive Officer and President]

Just a couple of additional comments on the financial charts and then we don't need to flip back the formal presentation to the different slides. But now going back to Slide 18, with all the different growth, blocks or bars and in all the different segments, the paradoxical thing is that P&C is the one that's growing the strongest pace. Stronger growth in P&C than in any other segment we have. The particularly good part about that story is that a significant portion of that growth actually comes from China, where we're seeing some fairly good success stories in terms of winning business and ramping up the business and so forth, so that is somewhat cementing our China growth plan.A little bit of a comment on Slide 20, in all our segments for the full year, we saw positive development on the revenue side. Obviously, that also translated into positive earnings, except for in Interior and I think we've kind of exhausted that story as far as our operational issues in Interior, but Slide 20 probably tells that story to the greatest extent.And then maybe a little bit of additional perspective on Slide 22, the net profit development. Now, the underlying effect here, which I think is very important to take note of, is if you look at our net profit development and you sort of group it into categories, and you say ongoing business cash type effects, if you look at adjusted EBIT effect and you look at interest and you group those together that's an improvement of EUR 19 million.If you then say okay, fine we improve EUR 19 million there we incurred EUR 16 million worth of restructuring costs. That's a conscious thing in order to improve the company for the future, it will not be recurring for all the future and all the coming years that figure is somewhat coming down in 2018, and then it will really start going away in '19. So that one is going to go down and then we have all the other effects, which are essentially the FX effects and the tax effects and obviously the US deferred tax asset write down that is something that's not going to repeat itself unless they take the tax rate down from 21% to let's see, what would the math be on that, that would be down to sort of the 5% level, I don't think that's going to happen.So it was a year where there were a lot of unexpected things happening but the long story short, we are seeing that we are positioning ourselves for a better future step by step. And once you start looking into the figures here that is definitely showing.Now getting to the wrap-up slide, Slide 30. I don't think there's too much comments to make on this, I mean 2017 obviously well one of the prouder issues we have is that from an adjusted EBIT standpoint our true operational performance, we improved every single quarter in 2017, and our expectation in line with what we presented at our Capital Markets Day is to continue that trend.We are confident that 2018 will be one more year of continued improvement, measurable progress in line with what we said on the Capital Markets Day. And then that is certainly something that's going to bring additional value to essentially all of the stakeholders and including obviously our shareholders.We typically don't guide specifically on a quarter basis. We do however give indications as far as what kind of revenues we're expecting in the next quarter, and for the first quarter of 2018, which we're basically 2/3 through we're expecting revenues to come in at give or take EUR 280 million, which is give or take a 4% percent increase compared to the same quarter last year when we exclude the Headrest and Armrest business.So that basically concludes our presentation of our Q4 results and a little bit of a wrap up as far as overall 2017. As I said many times it was an eventful year, it was a very exciting year for all of us at Kongsberg Automotive, a lot of activities, a whole slew of activities. And when we have this long to-do lists and you click off most of the items on that, some of the items you are slightly behind on and work a little bit harder on. Some issues came in from far less field type of thing particularly the operational issues in Interior that we are working hard on but we're looking towards 2018 with a positive attitude and we're confident that we're going to get another year of significant improvement in 2018.So that pretty much concludes our presentation. So operator, if you can facilitate Q&A, I believe that there's 2 ways to do this if you need to do it over the phone or you can do it over the Internet as far as asking questions. So operator, if you can facilitate some questions and answers, if there are any.

[Operator]

[Operator Instructions] We have a question that come from Mats.

[Mats Liss, Equity Research Analyst]

Just a couple of questions. First I guess that you give the guidance and it looks pretty good which stays improving, then again I guess the U.S. dollar have -- if you could please tell me indication there about the impact on the [indiscernible] in the first quarter if we should see the same negatives in this quarter given the current FX rates?

[Henning Eskild Jensen, Chief Executive Officer and President]

Yes, I'll probably take the start of that and then Norbert can get to the next financial items. Generally speaking from a profitability standpoint, if you look at, and I am sort of giving you a little bit of formula here if you look to way the beginning of the presentation, where we're essentially talking about negative currency translation effects on our top line. They will most likely continue into Q1 at the same rate simply because of the changing relationship between the euro and the U.S. dollar. So if you look at this in percents back in Q4, we had negative currency translation effects on our revenue line of, give or take, EUR 10 million out of a revenue base of EUR 267 million. If you look at it from a percentage standpoint that's a little bit more than 3%. Obviously, you also have currency translation effects on the earnings part and it's approximately the same percent, it's not significantly different although the U.S. sales are somewhat more profitable than non U.S. sales but it doesn't really make a huge difference in the big scheme of things. So the overall translation effects on earnings is very small and that's into sort of the category of less than EUR 0.5 million in the quarter so that's certainly not our biggest variance, so from an earnings standpoint that is not something that's going to move significantly compared to earlier quarters. From a net financial item standpoint, which is obviously the non-cash effect of the valuation of our outstanding loans. Norbert, you should probably comment on that one.

[Norbert Loers, Chief Financial Officer]

Yes, the U.S, dollar has a direct impact on our evaluation of the U.S. dollar portion of the bank loan. And when the euro gets stronger we have a unrealized gain and when the dollar gets stronger we have an unrealized loss to be recorded. So the 2 effects are kind of balancing out. So the translational effect for us is a stronger dollar is positive. As our U.S. business that has revenues in dollars and profits in dollars is an over average piece of Kongsberg Automotive in total and is over average profitable. But then with the stronger dollar, our loan has to be accounted at a higher value. And when the dollar goes down our U.S. portion of the business has lesser weight but then we have unrealized FX gain. So these 2 effects kind of balancing out each other in the different categories of the P&L.

[Henning Eskild Jensen, Chief Executive Officer and President]

Mats you said you had the -- sort of a 2 important questions. So what is your second question?

[Mats Liss, Equity Research Analyst]

Yes. And then for going to the Interior business area, I guess you saw some difficulties there and I was just was wondering, is it on your side or is it on the customer side, is it you have difficulties in adapting to the needs of the customers? I guess there are some technology effects.

[Henning Eskild Jensen, Chief Executive Officer and President]

There are certain things you can blame on customers, there are certain things you can blame on suppliers and there are certain things that perhaps you can blame on yourself. And to 80% this is internal. So this is our issues. And they are related to growth, they're related to some in sourcing activities and they're related to some industrialization of -- for us new technologies and that's what we're working very hard on. So this is not something that's driven by the outside. This is absolutely majority-wise driven from our own internal activities.

[Mats Liss, Equity Research Analyst]

And is it something that will gradually disappear during the year or are you sort of through it already in the first quarter or…

[Henning Eskild Jensen, Chief Executive Officer and President]

We're certainly not through this in the first quarter. I would probably use a slightly different word than just say disappear. I mean it's something we are working hard on improving and it will improve gradually through the year. But you're not going to see Interior up to the desired levels of performance in the first 2 quarters of the year. With a little bit of luck, we're going to be back on par, so to speak, in the third quarter and gradually improving in Q1 and Q2. Maybe we can do it a little bit faster, maybe it will go a little bit slower. That I just cannot predict right now but we're certainly having all hands on deck as far as attacking those issues.

[Mats Liss, Equity Research Analyst]

Okay. And finally, about the ramp-up of new business or I mean the guidance for the first quarter, you indicated [ space ] to improve and should we expect that to go on gradually during the year or is it sort of spun off now in the first quarter to have some new business to take care of and or is it an even improvement during the year with new business ramping up gradually or how should we see the year?

[Henning Eskild Jensen, Chief Executive Officer and President]

Well, programs typically ramp either at the very beginning of the year or right after the summer holiday. So typically, you see in Q1 or in Q4 you start seeing top line increases as a result of new business ramping up. A little bit of an exception this year is due to seasonality and Norbert talked a little bit about that obviously the third quarter is kind of the vacation quarter with summer vacations. But there is -- there are other seasonal effects too, for example, last year Easter fell entirely in Q2, which affects European volumes. This year Easter is split between the last day of Q1 and the first day of Q2. So we're having a little bit of a seasonal benefit for our Q1 figure, which means that we should probably see a stronger sales growth in Q2 versus second quarter last year because of that seasonal effect. But that except for that expect the same type of quarterly distribution of revenues as we saw last year.

[Henning Eskild Jensen, Chief Executive Officer and President]

Welcome. Any other questions, operator?

[Operator]

[Operator Instructions] And we have now having a question from Matt.

[Mats Liss, Equity Research Analyst]

One more question and I guess there is a lot of talk now about diesel and electrification and could you give some -- I mean, and you have talked about the impact of electrification on your sales, but could you sort of repeat those comments made previously.

[Henning Eskild Jensen, Chief Executive Officer and President]

Yes. Essentially, if we look at it segment by segment and we look at our exposure to fossil fuel versus non-fossil fuel powered cars with hybrid being obviously in the middle. If you look at Interior, we're basically not exposed to it. And I would probably add a comment that the more electrification, the more beneficial for Interior, as for example, heating of the interiors of the car would take place with more pure electricity and that would be very similar to the [ CT ] technology that we are putting into seats that we are seeing on some electric cars are being put into heated surfaces such as floors, door sides, armrests et cetera and also in electric cars the heat pads in the seats are bigger than they are in fossil fuel cars. So generally speaking Interior, I think we're positively exposed. If we jumped to Specialty Products, Specialty Products has 3 business units 1 is off highway primarily recreational vehicles, but also agricultural machines, construction machines et cetera. I would say that that portfolio is not affected at all. If we go to couplings, couplings is related to the pressurized air systems in heavy-duty vehicles such as trucks and buses. There's no indication whatsoever that that's going to be impacted by whatever powertrain you have, this is airbrake systems, this is opening and closing doors, this is suspension systems that that is basically unaffected. In FTS it's more complicated. FTS obviously lives off of specialty hosing. High tech for harsh environments, harsh environments essentially means either high temperature or it means and/or it is fluids that are corrosive that get handled through pipes and hoses. Obviously, if you go to electric powertrain you have less plumping and less hoses. So that's a negative. However, at the same time, if you go to hybrids and you go to downsizing of combustion engines, you typically end up with smaller engines that are being driven harder through turbochargers, through smaller engine compartments, through less cooling of the engine compartment et cetera. So that's kind of a plus-minus. And we believe that net, net in the medium term, which is sort of 5 to 10 years, we don't think that, that business unit is going to be hugely affected by these changes, although there are pluses and minuses that kind of cancel each other out. That takes us to Powertrain & Chassis, Powertrain & Chassis, a large portion of Powertrain & Chassis business is obviously gear shifters for passenger cars. And although the transmissions on electric cars -- today, most electric cars have no transmission at all, it's basically a direct drive through a rear axle, or in some cases a front axle. In the future, we'll probably see transmissions on electric vehicles, but it will be much simpler transmissions than what you have on typical combustion engine equipped vehicles. So the gear shifter operation and certainly the mechanical part of it that will slowly but securely decline. And that will be a challenge for P&C, on the passenger car side. On the truck side, we don't see any strong indications that that market is going to move in a significant way to electric powertrains eliminating transmissions and as a result of that we actually feel pretty good about that also because of our late entry into the so-called automated manual transmissions in the heavy duty area. We're actually seeing some growth in the heavy-duty part of Powertrain & Chassis. So on balance I would say that we are not -- we don't make engine components, we don't make valve trains, we don't make camshafts, we don't make cylinder heads, we're supplying automotive components, and generally speaking in Interior a shift towards more electric powertrain will probably slightly positive. In Specialty Products, we are net-net probably not exposed maybe a little bit of exposure in FTS and in Powertrain & Chassis we have some negative exposure in the passenger car side of the business. But we don't see that in the heavy-duty part of the business.

[Operator]

There appear to be no further question. Now, I would like to hand over the call over to Mr. Henning for further follow up or closing remarks.

[Henning Eskild Jensen, Chief Executive Officer and President]

Well, let's give it one more try and see if there's any questions, maybe it's, people are holding off and want the last question or something. So let's give it one more shot before we close out the call.

[Operator]

[Operator Instructions]

[Henning Eskild Jensen, Chief Executive Officer and President]

I guess not. So, operator, no more questions?

[Operator]

There appear to be no further question, Mr. Henning.

[Henning Eskild Jensen, Chief Executive Officer and President]

Very good. Well, thank you very much to everyone for dialing in and showing your continued interest in Kongsberg Automotive and our journey forward. Looking forward to talking to you again soon when we get to our Q1 announcement, and also we are seeing investors on a fairly regular basis. So we may actually have conversations with some of you before that time. So thank you very much and until next quarter.

[Operator]

This concludes today conference. Thank you, everyone, for your participation.