Kendrion N.V.

Good morning, everybody. Welcome to Candrion's Q1 2023 results teleconference. My name is Joep van Beurden, Candrion's CEO, and with me on the call is Jeroen Hemmen, our CFO. I'll start the meeting with some remarks regarding our Q1 results, after which we'll have time for Q&A. We will post a recording of this call and of the Q&A on Candrion's website as soon as is practicable. I'd like to draw your attention to the fact that certain statements contained in my remarks and in the answers to your questions constitute forward-looking statements. These forward-looking statements rely on several assumptions concerning future events and are subject to uncertainties and other factors, many of which are outside the company's control that could cause actual results to differ materially from such statements. Before reviewing our Q1 2023 results, I would like to reflect a little on the current economic and market environment that we are operating in. The positive here is that the overall trading environment was more stable than what we've seen since the onset of the COVID pandemic, now three years ago. The order patterns in automotive became more predictable and helped us in terms of production planning. A second positive is that despite a lot of talk about a recession in the US and Europe, this did not yet materialize. On the negative side, when China abandoned its zero COVID policy late 2022, it triggered a sharp rise in infections, which reduced the overall economic activity significantly in Q1 2023. And this affected China-based revenues in all our business groups. especially IB, our largest group in China by revenue, felt the effect. We expect this effect to be temporary, with order patterns coming back to normal levels as the year goes on. Inflation, too, stayed stubbornly high, and the various central banks have kept on raising interest rates. This puts pressure on our added value margin, especially in automotive. So in summary, a bit of a mixed bag. with on the one hand more stability and a bit of underlying economic growth, and on the other hand persistent inflation and a temporary slowdown in China. And still pervasive talk about a recession around the corner. In this environment, we have delivered a solid first quarter, delivering further growth and record revenues. Group revenue grew by 5% compared to a strong Q1 2022, reaching 136.8 million euro. Our industrial business grew with 3%, somewhat below our expectation, mostly caused by the slower market in China that I just talked about, and compared to a strong Q1 2022. We grew our automotive revenue by 8% relative to Q1 2022, and as mentioned, in a more stable environment than in the past few years. On a normalized basis, our EBITDA was a healthy 15.7 million euro. Q1 represents the 10th consecutive quarter where we report year-over-year revenue growth despite the negative impact from the temporary slowdown in China. It illustrates once more that we have strong growth potential with significant opportunities for our products that help advance the global transition towards electrification and clean energy. We have a balanced product portfolio and are not overly dependent on any specific vertical or market segments. Our product range from brakes for wind power, robotics and automated warehouses to inductive heating technology, circuit breakers for electricity distribution and suspension valves for electrical vehicles. The broad push towards electrification has determined our product development and strategic decisions over the past couple of years and will continue to do so in all our business groups and in China. The new automotive core and E setup, which came into effect at the end of last year, is proving successful. In automotive core, with inflation persistently high, we have increased our sales prices, which we expect will result in improving added value margins in Q2 and the second half of 2023. In automotive E, we want a sizable additional suspension order for China, which is expected to ramp in 2024. The construction of a 28,000 square meter manufacturing facility in Suzhou's renowned industrial park was completed in the first quarter of 2023. Our operational tests are in full flow, and we expect to be ramping the factory in early July of this year. In addition, we plan to start production of six new automotive key projects at our new facility in China during 2023. Jeroen and I will travel to China later this month to officially open the new facility. Let me review our results in a bit more detail. Our revenue in the first three months of the year came in at 136.8 million euro, which is a record, and 5% higher than the 129.9 million euro of the first quarter of 2022. Higher average sales prices added 3.5% to first quarter revenue as inflation continued to affect our supply chain. Currency translation had no impact. All business groups contributed to the revenue growth. Revenue and IB increased by 3% to 38.9 million IAC revenue came in at 33.1 million, an increase of 2%, and both were held back a bit by the temporary slowdown in China. Revenues in the automotive group were 64.8 million euro, of which E was 15.9 million euro and core 48.9 million. On a pro forma basis, E grew with 7% and core with 9%. Around half of the revenue growth in automotive core was driven by higher average sales prices. We do expect that increasing sales prices will continue to positively affect automotive revenue in the remainder of the year. The added value margin for the group ended at 46.4% compared with 49.0% in the first quarter of 2022. several effects contributed to the drop in added value margin. First, the margin dilutes by passing on material price inflation 101 in the sales price. Second, we had lower direct engineering revenues in Q1 2023 compared to Q1 2022, which is in essence a product mix effect. But in the end, the added value margin is best protected by further sales price increases which we continue to pursue with urgency, especially in core. Staff costs in the first quarter included a one-off inflation compensation payment that is part of the wage increase agreement in Germany between the trade unions and the employers association. Kendrion follows these agreements. This one-off payment increased wage costs by 1.3 million euro in Q1. Our normalized operating result before depreciation and amortization was 15.7 million euro, 7% below the comparably strong first quarter of the previous year when it was 16.8 million euro. Depreciation charges increased by 0.4 million to 5.8 million euro in the first quarter of 2023, leading to a normalized EBIT A of 9.9 million euro compared to 11.4 million in the same period last year. The effective tax rate on a normalized income in Q1 was 26.6% compared to 27.3% in Q1 2022. Normalized net finance costs were 2.2 million compared to 1.0 million a year earlier, The increase was mainly caused by realized currency results as a result of the stronger Euro and the increased market interest rates compared to Q1 2022. The normalized net profit before amortization charges arising from acquisition was 5.6 million compared to 7.6 million Euro in Q1 2022. Total net debt, including IFRS 16 lease liabilities, amounted to 147.7 million euro, up from 137 million euro at the end of last year. The debt increase was mainly driven by typical seasonal effects and higher activity level compared to Q4 2022. The leverage ratio based on total net debt divided by 12 months rolling EBITDA was 2.6, up from 2.4 at the end of 2022, and well below our financial covenant of 3.25. Capital investments increased significantly to 10.4 million, compared to 7.4 million in the first quarter of 2022, and of this, 4.3 million euro was related to the finalization of the construction of the new production facility in Suzhou. In the first quarter of the year, we have agreed with our lenders ING Bank and HSBC to use the extension option in the credit facility. This extends the maturity date of the 102.5 million euro facility by one year until April 2026. Other terms remain unchanged. Now, before we go to Q&A, let's talk a bit about our outlook. We expect the economic climate to be unpredictable for the foreseeable future. In China, we expect to return to normal activity levels and the planned ramp up of new production lines in our factory will further support our growth there. Bringing our new factory up to speed is one of the key priorities for this year. We remain positive that our strong position in the growth markets of industrial brakes and selected segments of industrial actuators and controls, automotive and China, will help deliver our medium-term financial targets of an average 5% organic growth per year between 2019 and 2025, an EBITDA of at least 15% in 2025, and an ROI of at least 25% in 2025. I now open the line for your questions.

Thank you. As a reminder to ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 1 and 1 again. We will take our first question, and the question comes from the line of Frank Klaassen from DeGroof Petercam. Please go ahead, your line is open.

Yes, good morning, gentlemen. Good morning, Klaassen. Good morning, Joep. First of all, on the pricing, if I listen to you, do you think that you can accelerate pricing in the coming quarters? It was 3.5%, but given your announced price increase, do you think that can accelerate? How about the raw materials? Don't you see any relief there? And what could that bring for gross margins? So some words on that, please. And then secondly, working capital was a bit higher than I had expected. But do you think there's room to improve this? And how do you see your working capital development? Thank you.