Kendrion N.V.

and good morning everybody. Welcome to Candrion's Q1 2024 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 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. 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 2024 results, I would like to reflect on the transaction with Soliro that we announced on April the 12th. The sale of our automotive franchise to Soliro is the result of an important strategic decision to put our focus exclusively on opportunities within our industrial breaks and industrial actuators and control business groups in Europe, China, and the US. We believe the transaction will strengthen our ability to invest in the significant opportunities in the industrial sector, fueling sustained, profitable growth. So why did we decide to focus exclusively on industrial? As we all know, the automotive industry is in a major transition. And to make full use of the opportunity that this transition presents requires substantial investments in R&D and in production equipment, The level of investment needed makes it more difficult for an automotive tier one, two of Candrion's scale to make a play in all the opportunities on offer, limiting the growth potential that is available in the US and Europe. Over the past years, we have found ourselves increasingly in a position that we had to choose. Do we invest in a specific automotive opportunity or do we instead allocate the funds and the resources to industrial? By staying active in both automotive and industrial, we run the risk of being subscale in both. We have therefore made the strategic decision to transform Kendrion into a pure industrial company. With this, we can make better use of the growth opportunities in brakes and in actuators and controls, and we improve the group's EBITDA margin profile. As we mentioned on April 12th, Based on full year 2023 pro forma figures, the transaction is accretive for both the EBITDA margin and earnings per share. In other words, in our view, Candrion's profitability in 2023 would have been higher, not just as a percentage of revenue, but also in absolute euros. Our Q1 results also illustrate the effect of the transaction on profitability. In Q1, the automotive market was cyclically strong and industrial was cyclically weak. On the back of ramping projects in E and price increases in Core, automotive revenue grew with 12% year over year. On top of that, also related to the price increases, the added value margin of automotive increased with 260 basis points. In contrast, IB, because of the well-documented economic slowdown in both Europe and China, saw its revenue decline with 27% compared to last year, in line with activity levels that we saw in the second half of 2023. And its value margin for IB was similar to a year ago. So with automotive at the highest revenue since Q1 2018, and IB 27% down compared to last year's, IB's EBITDA margin was still 240 basis points higher than automotive. And IAC, with revenues 2% lower than last year, realized an EBITDA margin that was more than double that of automotive. The reported figures tell the same story. EBITDA from the continuing operations exclusive of the sold automotive assets was 13.4%, and EBITDA for the Candlion Group as it operates today was 12.1%. So even with cyclical headwinds in industrial and a robust performance in automotive, the profitability in industrial is better, and industrial is also less capital-intensive than automotive, which means an additional plus for cash flow generation. Let us talk about Q1. We've had a strong first quarter, particularly considering the continued challenging market circumstances. Our revenue of 133 million euro was down 3% from a record Q1 last year, as the weakness in IB was almost offset by growth in automotive. Our group added value margin saw a 70 basis points increase with all groups contributing to this improvement and despite the negative impact of the higher proportion of automotive business. We implemented strict cost control measures, particularly in industrial breaks, which continues to be impacted by lower economic activity in Europe and China. We continue their emphasis on cash flow management and reported net debt of 145.7 million euro at the end of Q1, just 700,000 euro higher than at the end of 2023, despite the seasonal effects on working capital. Our leverage ratio stayed the same at 2.7 as at the end of 2023, and is well below our covenant of 3.25. A bit more detail on the business groups. As mentioned, our normalized revenue in the first three months of the year totaled 133.0 million euro. Currency translation had no significant impact on first quarter revenue. In IAC, revenues were flat at 32.3 million euro compared to 33.1 million euro a year earlier, with weakness observed in segments related to the machine building industry and electrical infrastructure, and strength noted in aerospace, medical, and 3T. In IB, we contended with continued lower activity in both Germany and China, aligning with the activity levels seen in the second half of 2023. This led to a revenue decrease of 27% to 28.2 million euro. The market for capital goods, such as robots and wind turbines, remained slow. Revenues in the automotive group increased by 12%. In automotive E, first quarter revenue reached €22.4 million, up 41% from €15.9 million a year earlier, as we benefited from robust growth on the back of ramping projects, especially in smart suspension and in China. Revenue in automotive core increased by 3% to €15.1 million from €48.9 million attributed to higher average sales prices. Strong revenues in automotive, stable performance in IAC and weakness in IB, partly offset by cost-saving measures, resulted in improved profitability over Q1 2024. Normalized EBITDA increased by 3% from €15.7 million in Q1 2023 to €16.1 million, despite the slight decrease in revenue. As mentioned, the added value margin increased to 47.1%, 70 basis points higher than in Q1 2023, with all business groups contributing. Depreciation charges increased by €0.3 million to €6.1 million in the first quarter, resulting in a normalized EBIT A of €10.0 million compared to €9.9 million in the same period last year. The effective tax rate on normalized income for Q1 2024 was 26.4% compared to 26.6% a year ago and normalized net finance costs were 2.1 million euro, consistent with 2.2 million euro a year earlier. Normalized net profit before amortization charges stemming from acquisitions amounted to 5.8 million euro. In accordance with IFRS 5, all assets and liabilities related to the automotive activities that will be discontinued following the announcement on April 12th are classified as held for sale and discontinued operations. Results of the discontinued operations are reported separately from continuing operations in the financial statements. The net loss from discontinued operations was €1.5 million in Q1 compared to a net loss of €0.4 million a year ago. This includes 3.8 million euro loss on the measurement to fair value, less expected transaction costs. Our financial position is good. The leverage ratio based on total net debt divided by 12 months rolling EBITDA was 2.7 compared to 2.6 a year ago and 2.7 at the end of Q4 2023, well below the financial government of 3.25. At the end of Q1, Kendrion had 65 million euro available in cash and unused credit lines. Capital investments of 6.3 million euro were in line with depreciation and well below the 10.0 million euro in the same period last year. Total working capital ended at 17.3 million euro in Q1, which is 4% below last year's 73.5 million euro. The improvement compared to last year was driven by significantly lower inventory and trade receivables. On April 12th, we announced the agreement to sell our electromechanical automotive business in Europe and the United States to Soliro Technologies. At the same time, we announced to stop all investments in product development for automotive sound. We expect that a shift towards a pure industrial company will enable us to strengthen our position in driving the global transition to electrification and sustainable energy at much higher profitability levels than before. Immediately upon the signing of the agreement with Soliro, we have started with the carve-out of our automotive business. We are also preparing the associated restructuring process. We expect to close the transaction in Q3 2024. Before we go to Q&A, let us talk a bit about our iBlock. For the near term, we expect a comparable economic environment to that of the second half of 2023 and Q1 2024. With our China factory fully operational, we are prepared for the ramp up of our China-based automotive business from Q2 onwards, and we will continue our strict cost measures in IB for as long as is necessary. Looking ahead, we maintain a positive outlook on our long-term prospects as a pure-play industrial company focused on the global shift towards cleaner energy. We look forward to the opportunity to share our plans and outline our medium and long-term ambitions at our Capital Markets Day of September the 5th of this year in the Novotel in the south of Amsterdam. I now hand back to Heidi for the Q&A.

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 star 1 and 1 again.

We will take our first question.

Your first question comes from the line of Tim Ellers from Kepler Chevro. Please go ahead. Your line is open.

Yes, good morning. Thanks for taking my question. I have two questions. One would be, Where should we see the growth in Automotive E for the parts of the business that are staying within Candrion? And then the second would be what was the impact of the cost savings and what was the impact of the margin improvement in Automotive to get a better feeling of the moving parts there?

Yeah, let me talk first about your question on growth for the retained automotive business. So as a reminder, that's the sound and electronics in Europe and then mostly smart suspension in China. The growth that we expect over the coming years is predominantly in China. As you remember or you may recall from when we announced Q4 and full year 2023, late February, We also disclosed the pipeline of projects that we won and a large chunk of that was actually projects that we won in China. One is already ramping as we speak and others are about to start in Q2. So that will be reasonably substantial over the coming years. In Europe, there is a little bit of growth as well in sound, but I wouldn't say it's not as material as what we expect from China.

Your second question, I'm not sure we disclosed it, but Jeroen, you want to... On automotive, the margin improvement was quite substantial and contributed a bit less than 2 million euros to the automotive result improvement as well. Also, the costs were 2 million lower than last year, and that is driven by IB. The other units basically had to deal with wage inflation as usual, so the cost savings were around 3 million offset by a million higher cost in the other units.

And maybe also to amplify a bit the IB point, so we talked extensively also in February that we were going to deploy a short-term work, Woodside Byte. We've done that. I think it was quite effective. but is also disclosed in the press release through national attrition and also release of temporary workers. We also have around 100 FTE currently less employed in IB. Now, let me immediately add to that. This is cyclical in our view. So the balance we strike is that on the one hand, we want to be effective and we want to be efficient and make sure that we repair the profitability and get that to acceptable levels. In Q1, we definitely achieved that. But we also want to be ready for the rebound when it comes. And it will inevitably, of course, arrive. And we are ready for that.

Okay, great. Thanks for that. Maybe just one follow-up on the growth question. Because the growth, especially in E, was pretty strong in Q1 with the 40%. That mainly comes from the China business. Or how should we see that going?

So you can also see if you deduct, let's say, the remaining business from the total business, you can also deduct, let's say, the automotive business that remains, and that also increased by 40%. So let's say 41% in E is pro rata China and Europe. Yeah.

So actually, it's quite balanced. And Tim also, I'd like to forward reference you also to the Capital Markets Day. So specifically also on the pipeline in China, our aim would be to disclose a bit more on that as well. Okay, great.

Thanks a lot. That was it from my side.

Thank you. Once again, if you wish to ask a question, please press star 1 and 1 on your telephone. We will take our next question. Your next question comes from the line of Frank Klassen from Degroof Pettikam. Please go ahead. Your line is open.

Yes, good morning, gentlemen. Good morning, Frank. Good morning. The question on the added value margin increased by 70 bps. Is that driven by raw material declines or pricing? Could you elaborate on that? And then second question on your stopping of your development and sound systems. Have you already started with this? And when can we expect, let's say, the restructuring measures or cost restructuring charges for this? Thank you.

Yeah, thank you, Frank. Let me talk about the added value margin that is predominantly pricing. And within that, it is predominantly automotive. So we have strong, I mean, the gross margin added value margins in industry are always a bit higher than automotive, as you know. We improved it everywhere. But I mentioned that also in my prepared remarks in automotive, it was particularly successful. That started, as you know, last year. We already saw margin expansion then. let me add to that that this is from quite a low base so we're basically at a level that we feel we should have been all we should have been at all the time but it clearly helps as you also heard your room mentioned earlier with with the impact of that is two million euros in q1 one one thing in addition so it's indeed predominantly price increases sales price increases but but for the first time in in quite some quarters

The last couple of quarters it was increasing purchase prices more than offset by higher sales prices. This quarter we do see some decreasing purchase prices as well for the first time. So that I think is a good trend going forward. Yeah, absolutely. On the restructuring. So yeah, we did start, but the charges will come in the second half year, probably the beginning of Q4.

Frank, we started the preparations. As you can imagine, it's quite an operation. We want to be fair. We want to be observant of our social partners where we need to. So the summer, we will be focused on both getting the deal closed as quickly as we can, but also preparing for this restructuring.

Okay.

Thank you very much. Thank you.

Once again, before handing back to the speakers for closing remarks, as a reminder, if you do wish to ask a question, please press star 1 and 1 on your telephone.

No more questions?

There are no further questions.

Okay, then I thank everybody for your attention, and if you do have follow-up, then you know where to find us. Thank you very much.