Kendrion N.V.

Please be advised that today's webcast is being recorded. I would now like to have the webcast over to our speakers today, Joep van Beurden. Please go ahead.

Good morning, everybody, and welcome to Candrion's Q4 and full year 2023 results presentation. My name is Joep van Beurden, Candrion's CEO, and with me here is Jeroen Hemmen, our CFO. This morning's agenda I will start with an overview of the progress we've made strategically over 2023 and hand over to Jeroen for a review of the Q4 and full year 2023 results, after which I will give you an update of the operational progress over the past period, including a section on our third five-year ESG plan. Next, I will discuss the outlook for 2024 and then we'll go to Q&A. We managed to keep our revenue stable. We raised prices in automotive. Hold on. Before the strategic update, sorry guys, I fumbled my script here. Before the strategic update, I would like to draw your attention to the following. Certain statements contained in this presentation 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. 2023 was a momentous year in which we demonstrated our resilience. In an economic environment of prolonged geopolitical unrest, and slowly receding inflation, our company delivered a solid performance. We managed to keep our revenue stable, we raised prices in automotive, we reduced our costs, and we lowered our net debt by in Q4 by 15.2 million euro, bringing our leverage ratio from 2.9 at the end of Q3 to 2.7 at year end. But management focus was not just on our operational performance. we also made important strategic progress in 2023. The split of our automotive group into automotive E and core and the finalization and startup of our manufacturing facility in Suzhou's industrial park. A bit more on both. Since we announced our medium term financial targets in September 2020, we have used the Candrion Strategic House as the metaphor for our strategy. The top of the building indicates our strategic intent and linked to this are our medium term financial objectives. Underpinning our strategic intent are three pillars, industrial brakes, industrial actuators and controls, and the automotive group. For January the 1st of 2023, we have split our automotive group into two separate organizations, Automotive E and Automotive Core. The main goal of this organizational model is to create more focus on innovation in products like sound suspension and sensor cleaning for E and on operations, excellence, lean production, cost efficiency, profitability, and cashflow in core. And as I will discuss later in a bit more detail, this split has been successful. Underpinning the three pillars is the foundation of Kendrion, our people, our culture, our ESG program, where we have made substantial progress. So we split automotive in core and E in 2023, and we finalized our China facility. The construction of the facility in Suzhou's industrial park was completed in May of 2023. And this picture shows the completed facility. Please note the solar panels covering most of the roof. Over the summer of 2023, we have moved the production equipment of our two previous facilities in Suzhou and Shanghai to this new facility. And it was fully operational by Q3 of this year, of last year. In addition, we have started to ramp two of the six new automotive e-projects during Q4, which has had an immediate positive impact on the site's revenue and profitability. With the market for electrical vehicles growing strongly in China and with ample growth opportunities for both IB and IAC, we are focused on leveraging additional automotive and industrial revenue opportunities. Our 2024 priority lies in ramping the recently one automotive projects and on enhancing our profitability in China. Let us now go to the business review with Jeroen.

Yeah, thank you, Joep. Good morning. So I will present the business review for Q4 and the full year of 2023. So the economic conditions continue to be challenging in the fourth quarter and affected revenue in IB in particular. The markets that IB serves, including industrial automation and wind power, offer above average underlying growth trends, but are as well cyclical. As a result of this cyclicality, Revenue in Q4 decreased 6% at constant exchange rates. Industrial break revenue decreased 13%. IAC reported a 2% increase and revenue in automotive increased 9% as a combination of stable revenues in core and 16% growth in E. Our added value margin in Q4 remained stable compared to last year. The negative mixed effect caused by a higher share of automotive revenue was offset by a 150 basis points margin increase within automotive. Our operating costs were 3.3 million or 7% lower. These lower costs were due to the cost adjustments in IB and the effect of the automotive restructurings towards the end of 2022. The lower cost did not fully offset the lower volumes and as a result our EBITDA, normalized EBITDA ended up at 10.3 million compared to 12 million in Q4-72. Also in Q4, we were able to realize the announced reduction in net debt of 15.2 million euros. And as a result, our leverage ratio decreased from 2.9 at the end of Q3 to 2.7 at the end of Q4. We also agreed to lift the one-year extension option in our facility agreement with HSBC, an ING bank that now will mature in April, 2027. That option was granted at equal terms, indicating the confidence our lenders have in our financial position and our ability to further the leverage. Then to the full year 23. For the full year, revenue remained stable and increased 1% at constant exchange rates. Normalized EBITDA ended up at 53.1 million compared to 57.4 million last year. Profitability for the year. was affected by margin pressure in automotive in the first six months and a sudden drop in volumes in IB in the second half year. In automotive, we were able to reverse the negative margin trend in the second half year by implementing higher sales prices. This led to a significant EBITDA margin increase in the second half year for automotive. In response to the market weakness in IB, we started to implement short-time work and reduced descriptionary spending. We are confident that these measures in combination with right-sizing the fixed cost base will bring back IB to healthy profitability levels in 24. And in addition, will improve IB's resilience against market fluctuations. Normalized profit before amortization decreased to 13.9 million and was affected by higher interest charges. The effective tax rate increased to 30%, but mainly driven by a lower valuation of carry forward tax losses in the US. Without this adjustment, the tax rate would have been equal to the 27.4% in the previous year. In total, we normalized 2.6 million costs outside the ordinary course of business. These costs related to the relocations in China and the closure of the Shanghai plant, and also restructuring activities in IB. Then to the financial review of the business groups. First, industrial. where revenue and EBITDA in the second half year was significantly affected by the downturn in IB. IAC is exposed to some of the same markets, but benefits from a more diverse market segmentation. While the general machine building market was weak, in IAC this was offset by growth in medical control technology and aviation. All in all, IAC had another strong year with both revenue and profitability in line with the previous year. Industrial incurred 1 million euros restructuring charges in Q4, which are related to IB. These are expected to lead to more than 1 million euros lower fixed cost. Capital investments in industrial exceeded depreciation by 21%. IB accounted for the majority of the investments that included capacity extension investments in permanent backlit breaks in Villingen that were ordered in the previous year, And other investments include production lines to further localize production in China. Then to automotive. Automotive revenue in Q4 increased 6% at constant exchange rates. Revenue in automotive core increased with 1% compared to a strong comparable Q4 of last year. Increased sales prices contributed 10% to the automotive core revenue. Automotive E increased 17% at constant exchange rates. Growth in E was driven by increased volumes in existing sound and suspension programs and the start of production of three new projects in China and in Europe. On the back of the sales price increases, the automotive added value margin is now gradually recovering to the historic levels we were used to. The higher added value margin led to the EBITDA margin increase in the second half year, when the margin improved to 8.2% from 3.1% in the second half year of 22 and 4.8% in the first half year of 23. This step up in added value margins is expected to further contribute to the automotive results going forward. Total automotive normalized EBITDA came in at 17 million, which is a 72% increase compared to the previous year. Automotive core realized 23.6 million normalized EBITDA a margin of 12.5%, and the EBITDA in automotive E of minus 6.6 million reflects the deliberate choice to invest in the market opportunity in this segment. For example, substantially all of the 15 million R&D expenses in automotive are allocated to E. Our 13.2 million capital investments were as well primarily focused on new production lines in suspension, and as well capitalized R&D in automotive E. Then finally, some words on cash flow and dividend. As I mentioned already, we did realize the announced debt reduction in Q4. The total net debt decreased 15.2 million to 145 million at year end. As a result, our leverage ratio decreased from 2.9 to 2.7. The debt reduction was driven by 16.3 million free cash flow, which was supported by a reduction in working capital. Normalized free cash flow for the year ended at 11.3 million, which compares to 3.1 million in 2022. When excluding the finalization of the China building, the normalized cash flow ended at 17.9 million, which is stable compared to 2022. We will remain focused on further deleveraging in 2024. And with the large capital investments in China now behind us, reduce pressure on working capital, the margin improvements in automotive and the cost adjustment in IB, we feel confident that we will significantly decrease the leverage ratio in 24. As mentioned already, our lenders share this confidence as indicated by their agreement to the one year extension of our facility agreement. The extension was granted without changing terms and conditions. Based on our financial position and strong business fundamentals, we will propose to the AGM a dividend payout within our policy. As you can see on the chart, Canon has consistently paid out dividends at the upper end of the policy to distribute between 35% and 50% of normalized net profit before amortization. The only exception was the dividend over 2019, which was passed in the earlier phase of the COVID-19 pandemic. With regard to the 23 profits, we will propose a dividend payout of 50%. This comes down to 45 cents per share and a total dividend amount of 6.9 million euros. And as usual, the dividend will be payable in cash or in stock at the option of the shareholder and will be paid out in May 24. And that concludes the business review and I will hand back to you.