Kendrion N.V.

day and thank you for standing by. Welcome to the Kendrian Q3 Results 2023 Analyst Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Mr. Joep van Beurden, CEO, Kendrion. Please go ahead.

Thank you very much, and good morning, everybody. Welcome to Kendrion's Q3 2023 results teleconference. My name is Joep van Beurden, Kendrion's CEO, and with me on the call is Jeroen Hemmen, our CFO. I will start the meeting with some remarks regarding our Q3 results, after which we'll have time for Q&A. We will post a recording of this call and of the Q&A on Kendrion's website as soon as is practicable. I would 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, and 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 Q3 2023 results, I would like to reflect a little on the current economic and market environment. Unfortunately, and for many quarters now, the overall trading environment has not been great. We highlighted this at our first half and Q2 2023 presentation in August as well, when we mentioned a slowing Eurozone with a risk of recession. We mentioned that the German manufacturing was slowing down to levels reminiscent of the pandemic period, and we mentioned a lackluster economy in China. We are still in that mode. On the more positive side, order patterns in automotive became more predictable, which helped us in terms of production planning. and our relentless focus on increasing our product prices has helped achieving a better added value margin. In this tough economic environment, we have successfully protected our profitability and cash flow. Looking at our business groups, industrial breaks after two years of stellar growth now encounters a significant revenue slowdown related to the lower economic activity in Germany and China. and this is particularly clear in the industrial automation and wind power segments. Industrial actuators and controls remained relatively stable, with revenue 3% lower than last year, and supported by the strong performance of 3T, the customer-specific electronics and embedded systems company we acquired in 2021. We partially mitigated the decline in industrial revenue through revenue growth in our automotive group. Automotive increased its added value margin as we implemented further sales price increases. The split of automotive into core and E works well. It provides us with additional transparency, enabling us to enhance the focus on growth in E and on profitability in core. In China, our new factory is now fully operational, and the six China-based automotive projects are ramping up according to plan. As you may have seen in the press, at the end of August 2023, we were the victim of a ransomware attack. Our IT team and production staff across all locations literally worked day and night, and we managed to resume production within one week. Besides some external consulting costs and a temporary increase in working capital caused by a week-long delay in our invoicing process, we experienced no substantial financial impact from the attack. Importantly, all customer deliveries were made without significant delays. We are currently implementing additional safeguards to further enhance the security of our systems. Now let's drill down a bit on the financials. Revenue in Q3 2023 was 124.5 million euro, down 6% from 132.9 million euro in the same period of last year. As mentioned, the decline was mainly a result of the slowdown in economic activity in Germany and China. When measured at constant exchange rates, the revenue decrease was 5%. Higher average sales prices played a significant role, contributing 5% to group revenue. In automotive, the contribution of sales price increases was 8%, and in IAC, the contribution was 5%. In IB, sales prices remained stable. In automotive, revenue of automotive core grew by 8% pro forma year-on-year to €47.2 million, while automotive E revenue was 17.6 million euro, which is a 7% pro forma increase. The growth in core is entirely attributable to sales price increases, whereas the rise in E resulted mainly from higher volumes. Adding this, the revenues of our automotive group increased by 7%, rising from 16.3 million euro in Q3 2022 to 64.8 million euro in Q3 2023. In industrial and especially in IB, the deterioration of the macroeconomic conditions hit hard. After two years of 20% per year growth, IB saw a sharp year-over-year decrease by 30% to 28.2 million euro compared to 40.0 million euro a year ago. Industrial automation and wind power segments were especially weak. IAC's revenue is less exposed to the Chinese market and is also more diversified, with approximately activities in 30 different market segments. Good growth in control technology, aviation, medical applications, and in 3T helped to offset weakness in industrial automation. As a result, IAC revenue decreased with 3% to 31.5 million euro compared to 32.6 million euro a year ago. Looking at the year so far, for the first nine months of 2023, and because of the strong start to 2023, group revenue grew with 2% to 398.2 million euro. Automotive revenue increased by 9%. to 197.4 million euro with Core and E growing by 8% and 13% respectively on a pro forma basis. The revenue in IB decreased by 9% to 103.0 million euro while revenue in IEC increased by 3% to 97.8 million euro. One of the positive developments in the quarter was the increase of our added value margin after six quarters of inflation-related pressure. The added value margin saw improvement in all business groups, driven by the combination of the implementation of sales price increases and the positive sales mix. This resulted in an added value as a percentage of revenue for the group of 48.7%, 140 basis points higher than the 47.3% in Q3 2022. Together with our actions on cost, this better added value margin mitigated the profit impact of reduced revenue to some extent. Normalized EBITDA was 13.1 million Euro compared to 14.9 million in Q3 2022. Depreciation charges decreased by €0.3 million to €5.7 million, leading to a normalized EBITDA of €7.4 million, which is 5.9% as a percentage of revenue. We normalized €0.8 million in operating expenses, and these costs were related to the move to the new facility in China and to one of advisory costs incurred to deal with the ransomware attack. For the first nine months of 2023, normalized EBITDA was 42.8 million euro, which means the normalized EBITDA margin of 10.7%. In 2022, this margin was 11.6%. Depreciation so far in the years slightly increased to 17.3 million euro, resulting in an EBITDA of 25.5 million euro, which is 10% lower than in the first nine months of the previous year. Normalized net finance costs in the first nine months of 2023 were 7.1 million euro, which is a significant decrease from 1.9 million euro of the same period last year, mostly because of the substantial increases in interest rates. Normalized income tax expenses for the first nine months of 2023 were 4.1 million euro, meaning a normalized effective tax rate of 26% compared to 28.7% in the first nine months of 2022. The normalized net profit before the amortization of intangibles arising from acquisitions decreased to 13.9 million euro in the first nine months of 2023, down from 19.0 million euro in the same period of previous years. The total net debt, including IFRS 16 lease liabilities, amounted to €160.2 million at the end of Q3 2023, which is a decrease of €0.7 million compared to Q2 2023. This decrease in net debt was driven by a positive free cash flow of €3.0 million, partially offset by increased lease liabilities. Despite the temporary negative effects from the ransomware attack, which caused a one-week delay in customer invoicing, working capital was reduced by 1.4 million euro. The year-to-date capital expenditure amounted to 20.9 million euro, and this figure was above the depreciation level of 17.3 million euro over the same period, but included 6.3 million euro for the finalization of the China building. We expect no further costs related to this building. The leverage ratio at the end of Q3 stood at 2.9 compared to 2.8 at the end of Q2 2023, well below the financial covenant of 3.25. As of the end of the third quarter, Kendrion had 49 million Euro available in liquidity comprising cash and ungrown credit lines. We remain focused on reducing investments not directly related to revenue while further reducing the amount of cash absorbed in the working capital and expect to reduce debt significantly in the final quarter of the year. As to the outlook, we expect trading conditions to remain challenging in Q4 and the first half of 2024, so our focus will continue to be on stringent cost management, optimizing working capital, and prudent investment to safeguard our profitability and to maintain a strong financial position. Our cost-saving measures include the implementation of Kurzarbeit in some of our German-based facilities and reductions in discretionary expenses. As we address these short-term challenges, we will remain committed to strategic investments across our business groups to ensure we capitalize on our longer-term growth opportunities. We maintain a positive long-term outlook driven by the global shift towards cleaner energy sources. We are confident that this rapidly advancing trend will create significant organic growth prospects for all our business groups in the coming years. Melanie, can you now open the line for the Q&A session?

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. To withdraw your question, please press Start 1 and 1 again. Please stand by while we compile the Q&A queue. Our first question comes from the line of Martin Dendridgefer from ABN AMRO-ODDO. Please go ahead.