Elringklinger Ag

Yeah, ladies and gentlemen, I welcome you to our earnings call here on the second quarter of 2025. Today, I'll walk you through the detailed results of the second quarter. With the publication of today's figures, we reaffirm our guidance for 2025, as well as our medium-term outlook as outlined in the annual report published in March. As always, We'll conclude the presentation with a Q&A session, and I look forward to addressing your questions. Before we begin, I am pleased to welcome Isabel Dahmen as our new Chief Financial Officer. She joined us on August 1st and brings a wealth of experience and fresh perspectives to our leadership team. With that, I would now like to hand over to Isabel Dahmen for a brief introduction.

Thank you for the warm welcome. It's a real pleasure to speak to you today in my new role as Chief Financial Officer of Elwin Klinger. I officially joined the company last Friday, August 1st, and I'm truly excited to be part of this journey. Elwin Klinger is a company with a strong foundation, a clear strategic direction, and a deep commitment to innovation and sustainability. I'm proud to now contribute to shaping its future, especially at such a dynamic time for the industry. In my role, I will be responsible for the areas finance, IT, and legal and compliance. These areas are critical to ensuring transparency, financial strength, and a long-term value creation. And I look forward to working closely with the team to further develop the group. Before joining Elwing Klinger, I held CEO positions in several international industrial companies, where I gained broad experience in financial leadership, transformation processes and capital market communications. I'm confident that this background will help me to support Elwing Klinger's continued development and strategic goals. I'm very much looking forward to engaging with all of you our investors, analysts, and further stakeholders, and to building a strong, open dialogue in the quarters ahead. Thank you, and I'll now hand back for the continuation of today's presentation.

Yeah, Isabel, thank you very much. Driving forward, the implementation of our Shape 30 transformation strategy remains a key priority. Since its launch last year, we have made substantial progress in reshaping the Erwin Klinger Group and further steps are already underway. One such milestone was the divestment of two group entities aimed at sharpening or strategic focus in streamlining the product portfolio. Another measure is a streamlined program which aims to reduce personnel costs. The program is progressing with good acceptance at this point. Coming now, To the financial highlights, with an adjusted EBIT margin of 5.9% in the second quarter of 2025, we are well on track to deliver on the margin guidance for 2025. In addition, organic sales performance during this period has been relatively strong, exceeding both the underlying market trends in our core region, Europe, and the prior year's second quarter figures on an organic basis. In this year's annual general meeting in May, the dividend of 15 euro cents per share was confirmed by the AGM as proposed by the management board. In addition, Dr. Sabine Lutz was newly elected to the supervisory board of Erin Klinger. Let us now turn to the detailed financial figures for the second quarter of 2025. The order situation is mainly influenced by three factors. First, it reflects the challenging market situation. Production figures are expected to fall this year in the coal regions of North America and Europe with manufacturers producing fewer vehicles. This trend is visible in the order book. However, there are two additional factors when comparing the quarter under review with the previous year's second quarter with the previous year. On the other hand, prior year's figures include orders from the two group entities that were divested with effect from December 31st, 2024. And on the other hand, currency effects had a reducing impact on this year's figure. As a consequence, assuming stable exchange rates and adjusting the previous year's figure for the two divested entities, order intake fell by 3.3%. from 339 million Euro in the second quarter of the previous year to 328 million Euro in the quarter under review. If both effects were taken into account, the decline from 365 million Euro in Q2, 2024, which means including the two group entities to 296 million Euro in Q2, 2025, which means including the headwind from exchange rate movements would be more significant. The same logic applies to the half-year figures. Adjusted for both effects, this metric decreased slightly by €5 million, or 0.6% from €770 million to €765 million. Order backlog, which comprises customers' aggregated and yet unrealized short-term call-offs, amounted to 1 billion and 40 million euro at the end of the first half. The figure of 1 billion and 249 million euro posted at the end of the previous year's reporting period included the backlog of the two divested group entities. Currency effects were also a factor in the quarter under review, excluding M&A effects and assuming stable exchange rates. Order backlog fell by 1.8%, from €1,101,000,000 to €1,081,000,000. Starting with sales and its organic change on slide number 5. Operating within a challenging environment, Erring Klinger recorded revenue of €408.3 million in the second quarter of 2025. This corresponds to a year-on-year decline of 8.2%. We have faced challenges from currency and M&A effects this quarter. The two entities in Switzerland and the United States whose sale was finalized at the end of 2024 had contributed revenue of 44.1 million Euro in the second quarter of 2024. This means the relevant basis for a year on year comparison would be 400.9 million Euro. Additionally, Revenue was diluted by currency effects equivalent to €14.1 million or 3.2%. Excluding currency and M&A effects, revenue grew organically by €21.5 million or 4.8% in the second quarter of 2025. This represents a stronger performance than the overall market, which, according to S&P Global mobility data, grew by 2.6% globally and declined by 1.7% in Europe during the same period. The sales mix on slide number six will explain the organic growth in more detail. Among the segmental revenues, the original equipment segment is the largest one, making up 67% of group total or €276.9 million of sales. In the second quarter of the year, segmental revenue declined compared to prior year's quarter, reflecting the divestment of the two entities in the US and Switzerland and the challenging market conditions. Within the OE segment, e-mobility revenue more than doubled, due to the ramp-up of a large-scale, serious order of cell contacting systems. E-mobility sales increased from around €17.7 million to €40 million in the second quarter of 2025, and now represents 10% of group sales, which underlines the ongoing transformation of Ehrenklinger. The aftermarket segment once again performed strongly and increased sales by 12.7% to €95.5 million. Regionally, growth was recorded in Asia-Pacific, South America and the rest of the world while revenues in Europe and North America declined year on year. In addition to currency effects and a sluggish market environment, The main driver of this development was the divestment of the two entities in the US and Switzerland. Adjusted EBITDA of the group rose slightly to 50.2 million euro compared to 49.8 million euro in last year's second quarter. Adjusted EBIT was able to recover over the last quarters and exceeded the prior year level. As a result, Adjusted EBIT reached €24.2 million, which corresponds to an adjusted EBIT margin of 5.9%, and is, in the quarterly review, even above target level for the full year of approximately 5%. The adjustments include exceptional items of €17.9 million in total due to is the first point to the streamlined program to structurally reduce personnel costs with an amount of 5 million euro due to the insolvency of one of the group's customers of 9 million euro and due to the measures taken as part of the Shape 30 transformation strategy of 4 million euro. So all in all, the group recorded a reported EBIT of 6.3 million euro corresponding to a reported EBIT margin of 1.6%. One of the key drivers of the improved adjusted EBIT was the positive effect of strategic measures taken in 2024, including the divestment of the two planes of the United States and Switzerland. However, in Q2 2025 adjusted EBIT was affected by higher tariffs, which had a dampening impact on earnings. And let me say that at this point, the tariffs may also influence business in the future, not only directly, but also indirectly. Overall, neither the introduction nor the level of further burdens can be reliably estimated today due to the high degree of volatility. In Q2, The company was able to reduce the R&D ratio to 5.4%, and in absolute terms, R&D expenses slightly declined from €24.9 million to €22 million. This means the company remains well within its target corridor of 5% to 6% of group revenue. In the second quarter of 2025, Aaron Klinger's net working capital amounted to €417 million. With a net working capital ratio of 25.2%, the group is moving closer to its short- and medium-term target of keeping the ratio below 25%. This reflects ongoing efforts to optimize capital efficiency and strengthen operational flexibility. Following elevated expenditures around the turn of the year in Q4 2024 and Q1 2025, capex normalized in Q2 2025 amounting to 26.3 million euro. The capex ratio for the second quarter of 2025 stood at 6.4%. Yeah, Erring Klinger is continuing to sharpen its strategic focus and to align its activities for enhancing profitability. As part of its transformation, the group is laying the groundwork for sustained growth in U-Drive technologies, an area where it has already secured major series production contracts, such as for cell contacting systems. The goal remains clear, to generate more than 50% of group sales from non-ICE applications meaning internal, known internal combustion engine applications by 2030. This is what CAPEX is used for. We're currently establishing our bear rehab for the Americas region in Eastly, South Carolina. The setup is progressing well, and we anticipate commencing operations in the third quarter of this year. In parallel, We're expanding our battery competence center in Neuven, close to our corporate headquarters. The logistical enhancements are nearing completion and will provide additional production capacity for the large-scale orders to be ramped up. This expansion is scheduled to go live in Q3 2025. Furthermore, we're preparing production facilities to support the launch and continued ramp-up of cell contacting system orders. We're also preparing production in China. These measures show that the investments are targeted and that the transformation is continuing with the startup of these orders. Importantly, these targeted investments are expected to have a positive impact on cash flow over the medium term as new production capacities come online and begin contributing to revenue growth. And after a significant investment related cash outflows in the first quarter of 2025, Erring Klinger returned to positive territory in Q2, generating an operating free cash flow of 23.8 million euro. This reflects the group's disciplined financial management and the initial returns from its strategic investments, particularly in preparation for upcoming large-scale production orders, as well as effects from working capital measures. Net financial debt slightly increased. to 374.9 million euro, corresponding to a net debt to EBITDA ratio of 2.1. As to the end of Q2 2025, group equity amounted to 659 million euro, reflecting a decrease compared to the 687.6 million euro reported at the end of Q1 2025. The equity ratio therefore stood at 36.7 Coming to the segment performance on slide 11. Overall, the OE segment generated sales of €276.9 million in the second quarter of 2025. In comparing to prior year's figures, you have to consider a sales contribution of €44.1 million of the divested entities. The adjusted segment margin rose to 1.0%. The aftermarket segment continues to successfully pursue its growth strategy, recording another increase in revenue. In the second quarter of 2025, sales reached 95.4 million euro, which implies a growth of 13% compared to previous year's quarter. With an adjusted even margin of 18.7%, the segment once again delivered a strong level of profitability. The engineered plastic segment delivered a solid performance in the second quarter of 2025, benefiting in particular from its diversified industry mix. The segment recorded sales of €35.7 million, marking an increase of around €4 million compared to the same quarter last year. With an adjusted margin of 8.8%, the segment demonstrated its resilience in a challenging market environment. Let us now take a look at the market expectations and the outlook for the group's figures. And let me briefly touch on what will determine our actions in the second half of the year on slide 12. Preparations for the ramp-up of further orders and battery technology required higher investments, particularly in the fourth quarter of 2024 and the first quarter of this year. This will continue to normalize in the second half of the year so that we will achieve a figure between approximately 4% and 6% of consolidated sales for the years ahead. The further ramp-up of the first large-scale production order will lead to a continued high level of sales in the e-mobility division. In conjunction with further measures, this will also lead to a further improvement in operating free cash flow. Once the main construction work has been completed, we'll start operations at our new battery hub in South Carolina. As a result, we'll capitalize the property in accordance with IFRS 16, which will affect financial liabilities. Overall, this will also increase the net debt to EBITDA ratio. Going forward, this ratio will improve again as a result of the plan for the reduction in net financial liabilities and the continued increase in profitability. Streamline, our program to reduce global personnel costs, will also lead to a structural improvement in earnings in the upcoming years. In conjunction with strict cost management, we're well on track to achieve our full-year target of an adjusted EBIT margin of around 5%. Moreover, we're continuing to implement our Shape 30 transformation strategy We're analyzing our product groups for marketability and deriving measures to sustainably increase profitability, particularly in the OE segment. One such decision, for example, was to discontinue the system business for electric drive units while continuing the profitable drive components business. We'll consistently execute this step in our portfolio. The same applies to our location strategy. We'll eliminate unprofitable setups and take the necessary measures to focus on the group's profitable core business. We have made such decisions for the Thale and Fremont locations, for example. All these measures serve only one purpose, which is improving the group's profitability and sustainably increasing its competitiveness for the future. The mixed situation on the markets is set to continue. While China's light vehicle production is on the rise, the markets, Europe and particularly North America, are still lacking momentum. However, the strong growth in China is helping to offset the weaker performance in these regions. Looking at the development from the first half to the second half of 2025, according to the latest S&P global mobility forecast, we can now expect growth in 2025 compared to the previous year. Whereas back in April, the decline had still been forecast. And this rapid shift in projections highlights the current volatility of the market environment. Regionally, China is expected to grow by 10.8% from the first half to the second half of 2025, significantly driving the global forecast of plus 0.4%. And in contrast, the North American market is projected to decline by 7.9% in Europe by 9.7% over the same period. And this trend in automotive production is also clearly reflected in the full year comparison emphasizing the uneven regional dynamics shaping the global market. While China is projected to see robust growth of 3.8% in 2025 compared to 2024, both the North American and European markets are expected to contract significantly with declines of 3.9% and 2.5% respectively. And as a result, The modest global growth forecast of plus 0.4% is largely attributable to China's strong performance, underscoring its pivotal role in stabilizing global automotive output in the broader regional downturns. Overall, the automotive market is showing a slight growth of 0.4% in 2025. With its strong exposure to the European market, Erring Klinger continues to be affected by the lack of market momentum. However, this is being at least partially offset by large-scale customer orders and a solid aftermarket business. Following a relatively strong first half of the year, we anticipate a weaker second half. Nevertheless, we confirm the outlook provided in the fiscal year 2024 annual report published in March against the backdrop of a volatile market environment. As stated earlier this year, the group expects organic sales to remain at previous year's level, meaning that sales revenue excluding the two divested entities forms the basis for comparison. Given the complex environment with a wide range of influencing factors, we continue to expect an adjusted EBIT margin of around 5% in line with the previous year. Thanks to our strategic measures and revenue contributions, we aim for a medium term margin range of approximately 7 to 8%. Operating free cash flows projected to reach between 1 and 3% of revenue. Yeah, looking ahead, Our financial calendar for the second half of the year includes two key events, the publication of our Q3 2025 results and our capital market stay. These milestones will provide further insights into our operational progress in strategic direction. That wraps up my part. I'm now looking forward to your questions. Thank you very much.

Our first question comes from Mark Renetton with World Book Research. Please go ahead.

It's good afternoon and thank you for taking my questions. Basically two to three, if I may. First one would be on tariffs, the three million negative impact in Q2, probably a pretty large number as a drag on your profitability. Two questions related to that. One is, do you expect some amount of that to be recovered in the second half through price increases, negotiation with customers. Secondly, when we look at a bit on the LFA profitability in the individual segments, is it fair to assume that a large proportion of that was attributable to aftermarket, where I think the EBIT margin was at least a bit lower than it was in the previous quarters, and if not, what was the reason behind the lower aftermarket margin in that quarter? Second question would be on the liabilities from supplier finance agreements in your balance sheet, which I think showed up there the first time. Could you kind of, let's say, first qualify what that is? Is it some kind of, let's say, similar to reverse factoring or part of trade liabilities figure on how we should look at that? That would be... And the third question perhaps, you have these pretty significant ramp ups now ahead of you in the third quarter and probably also ramping up in the fourth quarter for the battery cell connecting systems. And is there some way to go with regards to your free cash flow guidance in particular for the current year? Because you could give us an insight on let's say how much risk is in there or is it let's say As usual, often something goes wrong with these ramp-ups in terms of, let's say, working capital management or cost overrun or anything like that. But you could give us some indication on the risk profile there. And perhaps lastly, on the IFRS 16 effect for the ECA plant in the U.S., could you give us some, let's say, more quantitative number on the expected effect on the net indebtedness? Thank you.

Yeah, thank you for your questions. You know, I would start with the first one. Tariffs, in fact, hurt us, and they hurt us in a sense that they partially offset the improvements that we have achieved by the sale of the two entities last year. You know, if I look forward, then there is a further higher level of of tariff to be expected. Is that going to be recovered at some point in time? There is, you know, from today's perspective, there's really no visibility because when we look at tariffs, you know, it's central government driven essentially in the US and it's, you know, if not impossible, it's very difficult to recover to our knowledge. When we look at the profitability of the segments, then in fact, you know, we've been growing with the aftermarket in the U.S. in particular. So that is also the reason why here in Q2 we see an impact in particular here in regard to the U.S. business, but also to further ramp up costs that are associated with that. And it is going to be offset, but it's going to be starting in the second half of 2025 when there is an offset. So there is a higher level going forward to some foreseeable future, but it's going to be at least partially offset because some of the tariffs are not necessarily associated with aftermarket only, but also with some items here in regard to the OE segment. Yeah. In the second question here, you were asking on a working capital instrument that we have reported here in the second quarter, 2025, the first time. And this is, in fact, right. Yeah, this is a reverse factoring tool that we have here in place, which is a little bit over 50 million euros. June 30th, and this is an instrument that will help us to bridge the period where we have to fund a lot of, in particular, tooling, but also other items here for our ramp-ups that are going to be sold off at a later point in time. And for this purpose, we have implemented this tool here, which has a higher capability overall. in terms of financing possibility. And again, this is, you know, an instrument that helps us to bring us, you know, through this period until we realize a lot of cash inflows from the sell off of tools and other items here that are associated with a ramp up of those large scale orders. Number three, is a follow-up essentially on the same topic. We see still the possibility to reach a positive free cash flow for the whole year despite the fact that we are significantly negative right now. And there is, you know, a couple of points to that. There is the one that I was just describing, working capital instruments that will help us to offset, you know, some of the tied up capital for one. Number two, there's going to be a start of production in the second half of the year where our expectation is that we will be able to invoice and offload some of that inventory that we carry. And there is also in regard to the structuring of the group, there's some other opportunities here that I would, let's say, mention. in general. So there is a chance that we reach it and we have identified all the individual figures, how to manage that. But you're right, when we see delays coming up, which we don't see as of yet, then there is a risk also that if things are going to be delayed, then of course invoicing and offloading of those items could be. But it's too early to say that now going into the second half of the year at this point in time. And I'm coming to your fourth question now. This is your question on IFRS 16. There is leasing liabilities going to be coming onto our statement associated with a right of use. And the amount to be expected is somewhere between 75 and 100 million euro. as an amount that increases the financial debt, yeah, and will also increase in the short term the net debt to EBITDA ratio until it will come down through, you know, positive cash flows for one and also higher EBITDA ratio here related to the ramp up of those large scale production orders, yeah. I hope I answered all your questions.

Yes, thank you very much. Our next question comes from Michael Ponset with DT Bank.

Please go ahead. Yes, Michael Ponset, good afternoon. I have two questions. The first one is on the restructuring. Can you give us any idea what we could expect as restructuring provisions in the coming quarters? So for the full year 2035 and the second quarter is on the insolvency of one of your customers. Can you maybe share some more light on what's happened there and have you take measurements to protect yourself for such events in future?

Yeah, thank you for your question. Let me start with question number two. That is a startup. vehicle company that we identified in the past here as a chance to develop ourselves here into battery applications. And typically we assess, so to say counterparty risk. In this case, we have done so as well, but in the very negative market environment right now, this was something that just happened, and that will lead, in fact, to a point where we will further sharpen here product portfolio as a consequence of it. Yeah, question number one, restructuring. I mentioned that we target approximately 30 million cost reductions. through a streamlined program with a maximum amount here, roughly speaking, of 30 million restructuring expenses. This would be the high side of provisions to be expected, the way I look at it right now. But the, you know, other items that may be known cash, you know, the provisions for the restructuring of the cash flow, item going forward. There may be other non-cash related accounting items by deconsolidation of other group companies, but not in a very significant amount as I see it as of today. Is that answering your questions? Yes, that's it.

Thank you. It looks like we have no registrations for any further questions. So I hand back over to Mr. Gessler for any closing remarks. Yes, thank you.

Finally, I thank you all for your attendance. As always, if there's any further questions, give us a call. Our IR department is happy to answer it. See you or talk to you next time on November 12th for the Q3 figures and our capital markets day afterwards. We wish you a good summer season. Thank you very much.