Kendrion N.V.

Good morning, everybody. Welcome to Kendrion's Q1 2025 results teleconference. My name is Joep van Buurden, Kendrion's CEO, and with me on the call here is Jeroen Hemmen, our CFO. I will 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 Kendrion's corporate 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, which could cause actual results to differ materially from such statements. We will start with the financial review. We are pleased to report a solid start to 2025 with first quarter revenue rising 4% to 78.1 million euro despite global economic challenges. Revenue in industrial breaks increased by 7% to 30.4 million euro in Q1 2025 following the gradual market recovery that began in the second half of last year. Revenue in industrial actuators and controls declined by 8% to 29.6 million euro, primarily due to ongoing weakness in the machine building markets. This was partially offset by growth in segments such as circuit breakers for electricity distribution and safety valves for nuclear power plants. Of course, the IAC revenue is compared to Q1 2024 when IAC trading was relatively strong. In the mobility segment, revenue amounted to €18.4 million in Q1 2025, which is 25% higher than a year ago. This growth was driven by the ramp-up of projects in China. We are making steady progress towards our 15% EBITDA target by the end of 2025. our EBITDA reached €10.8 million, which is 7% higher on a like-for-like basis compared to Q1 2024. This means an EBITDA margin of 13.8% compared to 13.4% a year ago. Profitability improved due to the increase in the added value margin across all business groups, IAC, IB, and in China. All actions to mitigate the synergies following the sale of automotive were implemented before the start of the year. Please note that the total savings of the synergies are €9 million, of which €7 million were already effective in Q4 2024. So in Q1 2025, we realized an additional €2 million in annual savings. Net operating costs and depreciation remained stable compared to a year ago, resulting in a normalized EBIT A from continuing operations of 6.9 million euro, which is 11% higher than last year. Net finance charges were 1.6 million euro, increasing 0.3 million euro due to negative currency results. The effective tax rate on normalized income was 29.5%. All this resulted in a normalized net profit before amortization of 3.7 million euro compared with 3.6 million euro in Q1 2024. Reported net profit increased by 19% to €3.2 million as the previous year's first quarter was affected by a net loss from discontinued operations. Looking at the balance sheet, we completed the divestment of our automotive business, receiving €8.6 million from Soliro. This resulted in a net debt of 97 million euro compared to 103.0 million euro at year end, of course supported by the Soliro payment, but also by the better profitability and by our disciplined working capital management. The leverage ratio improved to 2.5 compared to 2.7 at the end of 2024. Kendrion is focused on further reducing its net debt. Let us talk about the outlook. We are currently in a period of what I would call COVID-like uncertainty because of the global trade war. As you have seen from our solid results over Q1, so far the impact on Kendrion has been limited. And so far, trading in Q2 has mostly been business as usual as well. We started the second quarter well. The 90-day reduction in tariffs between the U.S. and China, as announced yesterday, is welcome and may help Q2. But as with all these announcements, this may change. Of course, as is the case for all other globally operating companies, a slowdown in the world economy would affect Cambrian's trading. However, I do want to emphasize the benefit of our so-called local for local strategy. Over the past years, we have implemented a strict local for local supply chain in our operations in Europe, China, and the United States. It means that our suppliers of raw materials, sub-assemblies, and also production equipment originate in the region where our factory operates. This is also true for our customers. A European customer gets supplied by a European factory. And as an example, the China-based factory of that same European customer gets supplied from a factory in Suzhou. Therefore, the flow of goods between regions when it comes to Candrion products is limited. There is no need for us to reconfigure the supply chain, which is costly and takes years. We started our Local for Local initiative in 2017. In summary, the Local for Local supply chains in the US, China and Europe help mitigate tariff impacts. Longer term, despite potentially reduced economic activity in the short term, our industrial focus and leading position in the niche markets we operate in will stay. Our local for local supply chain will stay, and this strengthens our ability to navigate potential challenges. At this point, we anticipate trading conditions in Q2 2025 will be similar to Q1, despite the aforementioned global uncertainties. Kendrion will focus on further improving margins, maintaining cost discipline and enhancing efficiency to meet our financial goals of an EBITDA margin of between 15% and 18% from 2025 onwards, and a return on invested capital of 23% to 27% by 2027. And Melanie, we are now ready for 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. To withdraw your question, please press star 1 and 1 again. Our first question comes from the line of Frank Plassen from Digroof. Pieter Kam, please go ahead. Your line is open.

Yes, good morning Joep and Jeroen. Good morning. Good morning. Two questions, please. First of all, your added value margin went up. Could you elaborate what were the main drivers? Was it higher pricing or lower raw materials? So that's my first question. And then secondly, on the cost savings, could you also elaborate What is still to come and the phasing of new cost savings? Thank you.

Okay, Frank, thank you. So on added value, maybe first step back a bit because post the sale of automotive, we are active purely industrial in a whole range of niche industrial segments where we have a leading position and clear USP. So the pricing power of post that sale has improved. And what we're doing on the added value side is for selected products and selected customers, we're looking to increase pricing. And of course, at the same time, we're also analyzing our supply chain to see where we can save on our raw material and on our input costs. Now that is a plan that is running for the entire year. And what you've seen in Q1 is the first step in a number of initiatives that we still have ongoing for Q2 and beyond. So it's the same story. It's a good start. The added value margin has improved, but we have still more actions to take. So we expect that to expand a little bit further in the remainder of 2025.

Jeroen, maybe on the cost savings? Yeah, so on the cost savings, the announced cost savings of 9 million euros, of which 2 million related to the continued business, are fully effective. So the additional 2 million from the continued operations kicked in as from the 1st of January. So in the rest of the year will be more a matter of cost control, keeping the cost stable. and, yeah, try to reduce further by, for example, non-replacing levers, but no further big restructurings.

Okay. That's helpful. Thank you.

Thank you. We'll now move on to our next question. Our next question comes from the line of Tim Ellis from Kepza Shavra. Please go ahead. Your line is open.

Thank you, and good morning. One question about the margin target. So you reiterate the 15%. I mean, it's nice to see that there are some margin improvements in Q1. Could you maybe explain a little bit what needs to happen to go to these 15%? Because now we have the cost cutting effects in the margin. We did have some revenue improvements. So what really needs to happen to go to the 15%?

Yeah, if you look at the, so Tim, good morning. If you look at the initiatives that we're taking, so of course we do continue to expect a little bit of growth as we saw in Q1. That's not, by the way, the objective, but it's simply what is in the pipeline. We continue to push for more added value, and then also the cost control that Jeroen just elaborated on. It's not going to be, as we just said, a big restructuring, but we're certainly going to be mindful of our cost base and to make sure that where we can improve the efficiency and the effectiveness, we will. So basically, it's the same thing. initiatives that you've seen in action in Q1 that has led to that 7% EBITDA expansion for the remainder of the year. And based on our analysis, we are confident that towards the end of the year, we will have hit that 50% EBITDA on a run rate basis. So by the start of 2026, we will have achieved that.

Okay, clear. Thank you. Then one question about the divisional performance. So IB, good to see that there's growth again. Could you explain from which end markets that growth is coming from? And then in IAC, well, basically the same question, but more for the decline. And also what you expect for the rest of the year.

Sure. So for IB, our first remark for both, And that's, of course, always the case, as you well know. We're always comparing it with a year ago. Now, IB had very strong years, if you recall, in 21 and 22, and then in 23, it was much weaker. So compared to that, we saw some recovery in the second half of last year, and that has continued. The particular, also quite interesting for us, the particular segment that was rebounding a little bit here was wind power. And that's also a story of very strong performance in 21 and 22, then far less active in 23. And now we see a bit of a rebound there again. IAC, similar story. So last year, the machine building industry was actually not that strong, but for some reason, IAC's segments held up, but that has now come to an end. So we see, compared to a strong Q1 2024, we see 8% contraction. But at the same time, so some of the segments, and I gave some examples there, We're doing reasonably well. We also have some innovative projects that are ramping up. We've talked about this before, industrial locks, induction heating. So also for IAC, if you look further into the year, of course, notwithstanding all the uncertainty that we're looking at, we feel good about the remainder of the year also for IAC.

And then one last one about China. Decent growth with the ramp up of the new projects. Are there more projects expected to be ramped up going forward or is that the main chunk, let's say?

Yeah, these projects that we've talked about, they're actually ramping a bit later than we originally expected a year and a half ago. But they are ramping now. They will continue to grow during the year. But these are the projects that we've talked about earlier. But of course, we're always looking for more business. And we will talk about that when it happens. But that ramp there is based on the project that we've talked about, say, about a year ago. Okay, Kia.

Thank you very much.

Thank you.

Thank you. We'll now move on to our next question. Our next question comes from the line of Martin Dendryva from ABN AMRO ODO BHF. Please go ahead. Your line is open.

Yes, thank you, operator. Good morning, gentlemen. Most of my questions have already been asked. I have, let's start off with one for Jeroen. The 9 million you say has been effective now fully in the quarter. yet the ERP implementation is still to be planned. And I assumed and I thought that part of that saving was still to come from the ERP. So isn't there still a bit of savings coming in from phasing out these licenses and getting a bit more efficient software architecture?

Yeah, so the main part of that is actually not. So the license part is for 25, I would say, noise, because we still have also some overlap with the old system. Let's say the big driver for this is to further simplify the organization, but for that to happen, the software needs to be implemented. And that will happen during 2025. And then let's say the benefits that we can reap as from 2026. So yeah, on the cost, it's really cost control saving where we can, but no big steps in 2025.

And going back to Tim's question on China, I was also perhaps slightly higher in my estimates for growth in China. You mentioned that they were ramping up a little bit slower. What was the reason for that slower ramp up of production? And should we assume an overall less steep growth path in Q2, Q3, Q4? Or do you think there's some sort of catch up in the coming quarters?

Yeah, I mean, it's, of course, also for where we sit, that's also quite difficult to assess what the source is, compared to what they initially indicated to us, but now we're talking about at least a year ago. You know, first of all, I mean, we've seen a lot of press and also numbers on the Chinese economy, not doing as well as we used to, but of course, it's still five to 6%, which is not bad at all. but we're using something like eight so so that is part of it um so so it's still i mean you saw the numbers it's still you know very solid growth um could have been a bit better perhaps but but i would make too much of that we do expect that these projects will continue to uh to do well uh for the for the foreseeable future

I understand the remarks about the general Chinese economy, but if I look at any V sales, so new energy vehicle sales in China, those have actually been better than expected in Q1. Hence my slightly more optimistic assumption.

No, that's totally fair. Let's not forget, if you look at the Chinese market for electrical vehicles, there's a list of around 20 different brands. not all are doing equally well. Now, the good news for us is we are, for instance, also supplying BYD, which is a brand, of course, we all know, and they're doing extremely well. But the flip side of that is there's also some brands that are not as successful as what was initially anticipated. So I would say in the mix, I mean, we are very pleased with the growth and with how these projects are performing. Did we have a year ago maybe a little bit more optimistic expectation? Yes. but it's still quite good.

Okay, clear. And then on IAC, you mentioned a couple of projects ramping up. Innovative, I assume that's the pressure regulator part of the business and the washing machine lock. How secure is the expectation that you've baked in given the macro environment? Are they confirming on a monthly basis what you guys need to produce? How does that work? And how secure is what you baked into your guidance?

So I would say in terms of, I mean, these locks and these washing machines, these are industrial washing machines that is reasonably, that is secure. I mean, we are designed in and these projects, it's ramping as we speak. What is difficult also for us is to assess impact of everything that's ongoing with the tariffs. So that's just impossible to do. As we said, so far in EQ1, we're looking at the order book, as you can imagine, on a weekly basis. We didn't see any anomalies. So you see late cancellations or the opposite. So it seemed to be Okay, now for Q2 so far, it's exactly the same. As I mentioned, the 90 days pause in the tariffs between the China and the US, my expectation is that will help a little bit. But the final thing to say is we usually, if you look at our customers, what they forecast, we usually tone that down a bit and bake that in anyway, so that we're not overstating what is to be expected. Our feeling is as I said, so we're off in Q2. We had a good April, so in line with our expectation at least, and if that 90-day pause holds and there's no further surprises, if you like, we think we're looking okay for Q2.

That's clear. And then my final remark is again for Jeroen. Can you confirm that the cash outs from the restructuring provision and the provision that you created recognized in fiscal 2024, that that cash out has completely happened in Q1, or is there still a bit of a tail end in Q2? That's the four and a half million.

Yeah, no, there's still a tail end in Q2. A bit less than two million is still to come.

Got it. Thank you, gentlemen. Those were my questions. Thank you for that.

Thank you. There are no further questions at this time, so I'll hand the call back to Joep for closing remarks.

All right. Well, thank you all for your attention and for your questions. And if you have any follow up for us, you know where to find us. Thank you.