Kendrion N.V.

Good morning, everybody. Welcome to Kendrion's Q3 2024 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. 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 2024 results, I would like to reflect on the transaction with Soliro that we announced on April 12th and that became effective on September the 30th, the last day of the third quarter. 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 brakes and industrial actuators and controls business groups in Europe, China, and the United States. As we all know, the automotive industry is in a major transition. 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 1-2 of Cambrian scale to make a play in all the opportunities on offer limiting the growth potential that's available in the US and Europe. Over the past years, we have found ourselves increasingly in a position that we have to choose. Do we invest in automotive, 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. So we've therefore made the strategic decision to transform Kendrion into a pure industrial company. We are now in a position to invest in the significant opportunities in the industrial sector, fueling sustained profitable growth. So these Q3 results are the final quarterly results where we report on Kendrion being active in both industrial and automotive. As we did in Q1 and Q2, We report the results in terms of continuing operations, so IB, IAC, and the part of our automotive franchise that we retained, and the discontinued operation, which means the automotive factories that we have sold to Soliro. We are taking a range of measures to right-size our organization, and we expect to have implemented all these changes by the end of Q4. And this means that by the end of the year, we will have reduced our costs by 9 million euro compared to the full year 2023 cost base. This includes 7 million euro from the discontinuation of automotive sound R&D and an additional 2 million euro in operating costs from the retained automotive business. The right sizing leads to the reduction of about 70 FTEs. We will also transition from our bespoke automotive IT, ERP, and other IT systems to off-the-shelf solutions with significantly lower implementation and running costs. This, however, will take a bit longer, especially transitioning our ERP system. All this means that we will start the year 2025 as a pure-play industrial company with a cost base appropriate for the size of Kendrion. Let's talk about Q3. Despite the persistent slow economic conditions, our continuing operations, industrial brakes, industrial actuators and controls, and our retained automotive business in Europe and China saw slight improvements in both revenue and profitability in Q3 2024 compared to Q3 2023. Q3 revenue from continuing operations was 72.7 million euro, a little higher than the 72.1 million euro of Q3 2023. The added value margin, a key metric going forward, declined by 90 basis points due to a changed sales mix. And normalized EBITDA from continuing operations was 8.9 million euro compared to 9.1 million euro a year ago. Normalized EBITDA declined to €4.8 million compared to €5.7 million a year ago as depreciation charges rose to €4.1 million from €3.4 million in Q3 2023. Net profit from continuing operations was higher, €1.9 million in Q3 compared to €1.6 million in Q3 2023. The discontinued operations posted a net loss of €9.0 million in Q3, of which €7.4 million was related to the automotive transaction. Let's talk in a bit more detail about the business groups. The industrial brakes group grew with 7% year-over-year from a low comparable. Revenue was €30.3 million in Q3 2024, up from 28%, This growth was mostly realized in China, while revenue in Europe and the US was stable. Industrial actuators and controls revenue decreased by 6% and came in at 29.3 million euro compared to 31.5 million in Q3 2023. Strong performance in the food and beverage and infrastructure segments only partially offset the downturn in the general machine building market. In our retained automotive business revenue increased by 4% on a like for like basis to 12.9 million Euro compared to 11.4 million a year ago. And this growth was driven by the ramping up of new automotive projects in China. On the back of the Solero transaction, our balance sheet has strengthened considerably. Total net debt decreased to 101.1 million euro down from 160.2 million euro at the end of Q3 2023. We expect to receive an additional 11.5 million euro following the finalization of the Romanian subsidiaries legal transfer and the final settlement of the working capital adjustment. The leverage ratio at the end of Q3 was 2.5 compared to 2.9 at the end of Q3 2023, well below the financial covenant of 3.25. As of 30 September 2024, Kendrion had 75.8 million euro available in cash and unused credit lines, which also reflects an agreed reduction in offer credit facilities with 27.5 million euro following the sale of automotive. The total number of FTEs at the end of Q3 2024 was 1,832, down from 2,527 in the previous quarter, and 2,624 at the end of Q3 2023. The decline in FTE is of course due to the completion of the automotive business sale, while FTEs in the industrial business remain stable. Following the legal closing of the Romanian subsidiary, the discontinuation of automotive sound R&D and organizational rightsizing, the number of FTEs is expected to decrease by an additional 244. This means that we expect to start the year 2025 with 1,588 full-time equivalent employees consisting of 866 direct and 722 indirect employees. Before we go to Q&A, let's talk about the outlook. We expect the economic environment for the first half of 2025 to be similar to the current conditions. Stability in the US economy and persisting weak trading in Europe, and particularly in Germany, combined with subdued economic activity in China relative to historical levels. The lowered interest rates in Europe and the US are good news, and could positively influence the economic environment over the medium and longer term. Our strategic repositioning enables us to make full use of economic rebound when it occurs. As mentioned, in the remainder of the year, we will implement the planned cost-saving measures and work to improve our added value margin. With the strategic shift to our industrial operations, we believe we can achieve the financial targets as announced on our Capital Markets Day of September 6, 2024. An EBITDA of 15 to 18% from 2025, a return on invested capital of 23 to 27% by 2027, and annual dividend payments of at least 50% of normalized net profit starting next year. Over the longer term, we expect we can harness substantial organic growth opportunities driven by the global shift towards cleaner energy and other emerging market opportunities. We are now ready for your questions.

Thank you. As a reminder, to ask a question, you'll 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. Please stand by while we compile the Q&A queue. We will now go to our first question. Our first question comes from the line of Frank Clarson from DeGroof. Peter Cam, please go ahead. Your line is open.

Yes, good morning, gentlemen. Two questions, please. First of all, good morning, Joep. First of all, on your 9 million targeted operational expense savings, how much was already reflected in Q3 and how much do you still need to kick in in the coming quarters? And also related to that, do you still envisage to have restructuring charges to get to these 9 million savings? That is my first question. And then the second question on the gross margin, 90 bps down in Q3 sales mix, you said. What exactly drove that 90 bps down and do you see it as a sort of one-off or could it improve to, let's say, more normal historical levels again? Thank you.