Kendrion N.V. (KENDR) Earnings Call Transcript & Summary

Good morning, everybody, here in the Crowne Plaza and on the webcast. Welcome to Kendrion's Q4 and Full Year 2019 Results Presentation. My name is Jozef Beurden, Kendrion's CEO; and with me here is Jeroen Hemmen, our CFO. First, this morning's agenda. Jeroen will kick us off reviewing the Q4 and full year 2019 results. Then I will take over and give you an update on the progress we have made strategically and operationally. Next, I will discuss the outlook for 2020 and go to Q&A. Before I hand over to Jeroen, I would like to draw your attention to the following. Certain statements contained in this presentation constitute forward-looking statements. These forward-looking statements rely on a number of 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. Jeroen?

Yes. Thank you. So good morning, everyone, also from my side. So as Jozef said, I will take you through the financial overview of the fourth quarter and the financial year of 2019. I will start to give some background of the key figures of Kendrion, then I will proceed by giving some more insights on the performance of the Automotive and the Industrial activities. Our fourth quarter results were affected by ongoing weak market circumstances in our end markets, and also significant destocking at many of our industrial customers. Consolidated revenue in the quarter decreased 10%, when measured at constant rates of exchange. For the full year, revenue decreased 9%, again at constant exchange rates. Revenue decreased both in Industrial and in Automotive, and the positive exception was China, where we were able to report 29% year-on-year growth despite weak market circumstances. Our staff cost in the quarter decreased with 7% or EUR 2.1 million. For the full year, our staff cost decreased EUR 6.1 million, despite wage inflation and EUR 700,000 negative currency impacts, mainly caused by the stronger dollar. Lower staff cost were partly the result of further simplification measures taken in 2019 -- of '18, sorry, and partly realized in response to the market circumstances. Total cost for the quarter, including other operating expenses and depreciation were EUR 1.8 million lower, and for the full year, EUR 3.5 million, despite EUR 1 million currency translation impact. The decreased cost levels could not fully compensate for the revenue loss, and EBITDA in the fourth quarter decreased 28% to EUR 7.7 million. EBITDA for the year ended at EUR 43.4 million, which is 26% lower than the EUR 58.5 million realized in 2018. EBITDA as a percentage of revenue for the year was 10.5%, down from the 13% we realized in 2018 and well below our long-term target of 15%. The EUR 5 million cost-saving program announced in the last quarter has been fully implemented in the fourth quarter and will be effective as from the start of 2020. Another EUR 500,000 will be effective in the course of the first half year. The saving program involves approximately 70 indirect employees, mainly in the U.S., Germany and Austria. Total one-off cost related to the saving program are now estimated at EUR 3.5 million, of which, EUR 2.9 million have been recognized in 2019. In total, in the fourth quarter, we incurred EUR 3.4 million one-off costs that have been adjusted in the results, EUR 1.2 million related to transaction costs related to the acquisition of INTORQ, and EUR 2.2 million related to the cost-saving program I just talked about. For the full year, we incurred EUR 5.7 million one-off operating cost and a EUR 2 million positive one-off currency gain. The after-tax amount is EUR 2.7 million. In 2018, Kendrion recorded a provision of EUR 2.3 million for the expected outcome of German tax orders in Northern and Southern Germany. The settlement that we expected to realize in Southern Germany did not occur, and Kendrion will now most likely refer to mutual agreement procedures to avoid double taxation. During 2019, we charged another EUR 500,000 to the income statement related to these tax audits, partially due to additional interest charges. Now I will continue with some statements about our free cash flow and financial position. Despite the difficult market circumstances, we realized a normalized free cash flow of EUR 25.5 million, which is a record. Performance on all components of working capital improved. Inventory levels decreased 11%, receivables decreased 13% compared to last year, and normalized payables decreased with 7%, but this is in line with the lower activity level. Investments for the year were EUR 4 million lower than depreciation, and this was in part due to strict capital control in which we prioritized investments directly related to future revenue growth over investments in, for example, improvements of facilities. The industrial activities also benefited from high investments in previous years, limiting the need this year for capacity extensions or machine replacements. Our financial position continues to be strong with a solvency of 56.8% and a net debt-to-EBITDA ratio of 1.1. Based on the definitions used in our loan documentation, the year-end leverage ratio was 0.8. Please note, however, that the financial position at year-end is positively impacted by the proceeds of the successful equity offering on the 21st of November. The proceeds of which have been used to help to fund the acquisition of INTORQ on the 8th of January. The pro forma solvency when including INTORQ at year-end would be approximately 44%, while the pro forma leverage ratio exceeds 2. We now turn to our dividend proposal and cash returned to our shareholders. As the graph indicates, we have returned an increasing amount back to our shareholders over the years in cash dividends and buyback programs to avoid dilution of stock dividends. The increased cash return was based on the developments of our profitability, but also taking into account the strong financial position of Kendrion. Considering the impact of the INTORQ transaction on our net debt position and our objective to reduce our debt leverage, Kendrion proposes a 35% dividend of our normalized net profits, which is in line with our dividend policy, this is EUR 0.25 per share. Then turning to the Automotive activities. The Automotive downturn that started in the second half of 2018 continued throughout 2019, affecting car production, mainly in China and in Europe. Global car production was down 6% in 2019 and also in the fourth quarter. Our Automotive revenue decreased 10% in 2019. The decrease in the second half year was 5%, which indicates that the pace of the decline slowed somewhat as the comparables ease. Our automotive cost base continues to decrease, fueled by structural cost savings and in response to the lower revenue. Staff cost decreased with over EUR 5.6 million or 8%, more than offsetting wage inflation and EUR 600,000 negative currency impacts. A further EUR 3 million in structural cost savings have been implemented in the fourth quarter and will be effective as from the first quarter of 2020. This is the Automotive part of the EUR 5 million cost savings mentioned earlier. Then moving to the Industrial activities, market circumstance for our Industrial activities weakened during 2019. What started with a slowdown at some customers that were exposed mainly to the textile and automotive industries began to widen to the total manufacturing sector in the second half and especially in Germany. Manufacturing PMI in Germany had a 10-year low in September of 41.7%, indicating contraction. All 3 business units were affected by the initial slowdown. ICS revenue was down 9% compared to 12% growth in the previous year, IMS posted a 7% decline after decreasing also 4% in 2018, while IDS decreased with 5% after a 1% increase in 2018. Staff cost in Industrial decreased EUR 700,000 in 2019 and EUR 1.1 million in the second half year in response to the lower activity levels. This concludes the business review, and I'll now give the word back to Jozef for the strategic and operational update.

Thank you, Jeroen. Now we'll proceed with the update of the progress that we have made strategically and operationally over the past year, but I'd like to start with our strategy. Let me talk about our strategy the way we do internally, we talk about it as our strategic house. The top of the building indicates our strategic intent. We aspire to continuously grow revenue and profitability in a sustainable way with a lean and focused organization and to provide a top-quality work environment to our employees. Linked to this, our medium-term financial objectives of a return on investment of at least 20% and an EBITDA margin of more than 15% by 2023. So how do we underpin this strategic goal? We support it with 3 pillars. The first is Automotive, representing past the INTORQ acquisition around 55% of group revenue. And in Auto, we focus on growth and especially on the opportunity we see developing actuators for Autonomous, Connected, Electric, Shared mobility, the so-called ACES, more about the progress we made here later. The second is Industrial Breaks, which is now around 25% of group revenue. Here too, we focus on growth. With INTORQ, we offer a full range of brakes and see ample growth opportunity in robots, both industrial and collaborative, in wind power, in elevators and more. The third pillar is industrial actuators and controls, which is the merged combination of ICS and IMS. And here the focus is on profitability and cash generation. Internally, we refer to this new business unit as our cash engine, and that's a deliberate choice of words and one I quite like. It's a cash engine and emphatically not a cash cow, as we want this engine to keep generating cash and profits focusing on selected industrial segments such as energy distribution, fluid controls and transportation applications. And then, of course, we have our focus on China, active in all 3 domains with the same intent: growth in auto and brakes, profit in industrial actuators and controls. So in the metaphor of the strategic house, this looks like a strong and balanced structure. But of course, we haven't talked yet about the most important part of our building. And that's the foundation: Our global organization and our people across the world. And here too, over the past years, we have made significant progress, reducing complexity, applying focus, moving from 2 divisions and 7 business units to the 3 pillars, plus China I just mentioned, taking out around EUR 25 million of cost, mostly in indirect labor. But most importantly, creating a more global organization, leveraging our international footprint, sharing best practices, optimizing our actions for the group rather than for all the various factories we have on 3 continents. I feel that our strategic house is strong, and that we have made significant progress to ensure we can deliver our midterm strategic plan over the coming years. And now let me share some of the program -- progress, starting with Auto. As we all know, the automotive market is going through exciting times. On the one hand, the production of vehicles is down. As Jeroen said, production around 6% lower in 2019 compared with '18. On the other hand, the disruption in especially passenger cars triggers enormous investment in new technologies at all large OEMs and Tier 1s and provides us with a significant opportunity for organic growth. Over the past years, we have been investing relentlessly in our product roadmap and our commercial organization to make full use of these opportunities, and it is yielding results. This slide presents the lifetime revenue in automotive nominations won in 2019 and 2018. We calculate this by assuming that projects for passenger cars have a lifetime of maximum 7 years after start of production, and for commercial vehicles, we take a maximum of 10 years. We used the volumes and pricing agreed with our customer, but do add our own judgment to that. And we keep track of the nature of the nominations. Is it for a combustion engine or is it independent of the drivetrain? So for instance, related to the ACES. In 2019, we won EUR 320 million worth of new business or a book-to-bill ratio of 1.25x. And I'm really pleased with the level of nominations over the past 2 years, EUR 660 million, well over our revenue level of the past 2 years. And I'm even more pleased with the product mix, about half of the nominations over 2018 and '19 have been won with products, independent of their traditional combustion engine. Because this is where the automotive future lies and where we see fantastic opportunities for growth. Autonomous driving, connected vehicles, electrification of the powertrain and shared mobility are mutually reinforcing developments in the automotive industry. Combined, they are not only disrupting the automotive value chain and impacting all stakeholders involved, but are also a significant driver of growth in automotive software and related electrical and electronic components. Through our Lighthouse platforms, we aspire to develop forward-looking disruption of our products. And this slide shares some of the progress that we've made. Smart actuation, which means combinations of modular mechanical valve systems and software and electronics that match the evolution of the future car central -- car computer platforms. Another word for this is mechatronics. Here we got the first nomination for our battery cooling actuator. AVAS sound supporting the low end for sound requirements for electrical cars. We made progress defining our new standard AVAS platform, which enables electrified car entrepreneurs and large global OEMs to adapt our sound system as a plug-and-play solution. First, customers are testing our new sound creator tool, enabling customers to customize our standard hardware platform by custom sound patterns. The new AVAS platforms integrated the latest generation of microcontrollers and is based on the new Kendrion software architecture. Smart clutch is another mechatronic development driving the convergence of mechanical, electromagnetic clutches and software-controlled actuation. Several OEMs and Tier 1s are testing our new clutch under mass production conditions from extreme drivetrain situation to desert like driving conditions. Our system is substantially improving robustness and endurance compared to traditional clutch systems, and our active damping actuation platform, enabling our customers to develop leading suspension systems and already a substantial part of our Automotive business. In 2019, we delivered A and B samples of new damping products to our lead customers and expect this segment to continue to grow in the coming decade. Over the past 2 years, we felt a lot of pressure on our Automotive trading as the market for cars has slowed considerably. At the same time, we feel good about our pipeline, and probably most importantly, about the products we are developing for an exciting future. Next, let's talk Breaks. The main accomplishment for our Brakes business in 2019 has been the acquisition of INTORQ. A reminder, INTORQ is a leader in Industrial Brakes with great strength, especially in spring-applied brakes. In their fiscal year ending at the end of Q1 2019, they had a revenue of EUR 57 million, selling around 1 million brakes. INTORQ has 300 employees in 4 factories around the world. Aerzen, Germany; Shanghai, China; Atlanta, Georgia; and Pune, India, with a significant market share in brakes for geared and servomotors, electric forklifts, wind power, cranes, hoists, elevators and escalators. These strengths complement Kendrion's position in Industrial Brakes. It substantially strengthens our position in the market for Industrial Brakes, one of our focus areas where good growth is available. It also further expands our footprints in China, where we have great momentum in both automotive and in brakes for industrial robots. INTORQ strength and spring-applied and electromagnetic brake products is complementary to Kendrion's strength in permanent magnet brake technology, we will offer our customers a full range of technologies. It expands us geographically on top of Europe and China, we will be present in the U.S. and India, we will be stronger in shared market segments, including electric motors, wind power and elevators and add several complementary market segments, including geared motors, forklifts, cranes and hoists. Our improved market position and product range offer ample potential for cross-selling opportunities across the globe. And we will strive to achieve operational efficiencies with integration of selected manufacturing sites. We expect that to result in substantial cost synergies of more than EUR 2 million per year, which leads to a transaction that we expect to be double-digit EPS accretive from year one. So all in all, a long list of potential strategic benefits that we are in the process of delivering. To run the enlarged brake business, we recruited a new business unit manager, Andreas Laschet, who has started as of January 1 in 2020. We closed the deal on January 8, and we kicked off the integration a week later, January 15. We have 9 work streams, consisting of combined teams with a weekly reporting cycle and biweekly steering committee meetings to facilitate fast decision-making. Currently, we run the 2 business units independently, but the joint BU management team is to be announced shortly, and effective April 1, 2020, our new integrated business unit Industrial Brakes will be in full swing. We do expect to deliver the cost synergy potential of more than EUR 2 million per year during 2020 on a run rate basis. Commercially, both Kendrion and INTORQ made good progress in 2019. Kendrion started mass production of our servo slim line brakes for collaborative robots, and won several customer nominations for customers in Japan, China, the U.S. and Europe. The pipeline with potential customers is excellent. INTORQ launched several new products over the past couple of months and has experienced significant market traction in the U.S. and China, especially the market for wind power. Early March, we will open a brand-new factory in Pune, India, another location with large growth potential. Next, we go to Industrial Actuators and Controls. For January 1, we merged our 2 industrial business units, ICS and IMS into 1 joint business unit called Industrial Actuators and Controls. In this business unit, we serve around 30 different niche segments, all of which are profitable, but only some of which were investment in commercial activity and R&D. By focusing on the segments of transportation, energy distribution, fluid control and selected machinery applications, we aspire to further improve profitability and cash flow. Next let's go to China. First, the situation regarding the COVID-19 coronavirus. Key point, at this moment, no Kendrion employees are diagnosed to be infected by the virus. And both Kendrion's factories are operational. In Shanghai, we started -- restarted, I should say, for February 10, and in Suzhou, we restarted February 11. At Kendrion, we stopped traveling to and from China and Hong Kong. And the impact on our supply chain so far is limited as our business is mostly local for local. But this is a developing global situation with potentially severe effect on our business just as it is for everybody else. We monitor the situation daily. Let's have a look at our China operation over 2019. We had a good year in China last year with year-on-year growth of 29% despite the market that was difficult in China as well. We successfully ramped up the production of park lock line for a large local automotive OEM. This ramp-up was in line with customer demand, but well ahead of the time line generally accepted in Europe and in the U.S. Interestingly, we are crossing traditional business unit boundaries in China as well. We won an industrial permanent magnet brake project for an innovative brake-by-wire bus brake system. So in fact, in Industrial Brake for an Automotive application. We also saw strong growth in permanent magnet brakes from wind power in 2019. Lifetime nominations in 2019 in China were again significantly higher than the size of our business. And the nomination pipeline supports substantial further growth, especially in 2021 and beyond as large automotive projects will ramp in that time frame. We now employ 190 FTEs in Suzhou compared to 160 FTEs at the end of 2018, and we will continue to invest in both quantity and quality of our local team and our local supply chain. And finally, a few words about our foundation. We continue to work on our organization, making it as lean and efficient as possible. And this is, of course, also reflected in our management team, where we made some changes that we believe will help us deliver our strategy. We added group IT to the management team as we expect that IT will help us becoming a more global, more transparent and more fact-based organization. And further simplified the business part of the management team with the manager for brakes that we just mentioned, one for our cash engine and actuators and controls, and the functional group of the FD, COO and CCO, tasked with delivering on the global organic growth opportunity of Automotive. Now before I go to outlook, let me also share our long-term CSR targets. As you know, corporate social responsibility is an integral part of the way we do business at Kendrion. And just as we have ambitious targets for our 2023 financial performance, we have the same for CSR. We strive to make substantial improvement in all 3 pillars that comprise our CSR framework, natural capital, social and human capital and responsible business conduct. In 2019, we completed the 5-year CSR roadmap and started with implementation. We delivered a 2.5% reduction in energy use and 8.5% decrease in absolute CO2 emission. We also established a health task force to further reduce illness rate from the current level of 2.9%, and to zoom in on our safety performance. Next let's go to the outlook. The overall sentiment regarding the global economic outlook remains uncertain for 2020. Looking ahead, we do see our market stabilizing, albeit still at a lower level than in early 2019. The effects of the COVID-19 coronavirus on our business are limited to date. However, its impact on the global economy is uncertain and has the potential to be severe. The mid- to long-term outlook is unchanged and remains good for both the automotive group and the industrial activities. And as to our long-term financial targets, we remain confident about our business fundamentals, with our main objective to deliver sustainable, profitable growth for the business in the medium to long term. We reiterate our medium-term targets of a return on investment of at least 20% and an EBITDA margin of more than 15% by 2023. As Jeroen mentioned, we proposed a dividend payout of 35% of net profit at the lower end of the range to help to facilitate with deleveraging post the INTORQ acquisition. And we expect that on August 18, 2020, as we announce our first half 2020 results, we will hold the Capital Market Day with a comprehensive, strategic and financial update of the enlarged Kendrion, so including INTORQ. And this will likely include updated medium-term financial targets, fully reflecting the effects of the INTORQ acquisition. Thank you for attention, and let's go to Q&A. Who wants to kick it off?

ING, Tijs Hollestelle. The first question is on the INTORQ acquisition. You're mentioning this EUR 57 million of annual revenue, and that's on a broken annual accounting year. So how is the revenue progressing so far because we almost have another 12 months of history? And in addition to that, what are the financial performance metrics of how much organic growth up and down this business has shown in the past? Also are there a lot of investments required for INTORQ? And so is the CapEx levels for the business. And thus, the trade working capital levels are similar to Kendrion or quite different? And can you also obtain efficiencies here? And in your EUR 2 million savings target for this acquisition, is that also including the potential R&D savings because you probably have a lot of overlap with this company? Is that included in that number? And is the EUR 2 million based on a kind of going concern, so all things equal? Because if -- yes, if the top line of INTORQ also drops, are you still able to reach the EUR 2 million?

Thank you for all these questions. I will -- let me take 3 of them. And then on the investment and working capital, Jeroen will answer you. Okay, INTORQ. So you're right. So we said EUR 57 million. This is now about a year ago, it's actually quite remarkable. If you look at INTORQ and IDS, as we used to call it, both in terms of the growth and -- but also the way they are affected by ups and downs in the market is remarkably similar. So you can actually model, if you look at what happened to our IDS over the past year, which is market related, a similar effect on INTORQ, maybe a touch better, but not materially different. The same is true for growth profile. I would say through the cycle, if you look at our IDS performance over the past years, we've been growing this with 5% to 6%. And then, of course, you have to distract away from 2019, which was a bit of a down year. INTORQ, very similar. I think the good news for both businesses, and again, that's remarkably similar. If you look at 2019, I alluded a bit to that in terms of commercial traction, when it's wind power or if you look at traction there INTORQ has achieved over the past years in the United States, et cetera. Looking forward, again, let's forget for a minute, overall global economy circumstances through the cycle, we feel that these joint businesses should be able to grow with at least 5% going forward. Then you've asked about the EUR 2 million. These synergies. So these are synergies that are related to -- mostly to the integration of sites. So we thought they have a site in Aerzen, we have a site in Aerzen, a site in Shanghai and Suzhou, and then there is Atlanta and Shelby. So there's, of course, always a little bit of overlap from a managerial perspective, some of that. So we feel very secure that these EUR 2 million are not aggressive, are certainly not related to R&D, but because you mentioned there's some overlap. Well, there is very little. It's -- part of the strategic attractiveness is that is, they are the spring-applied brakes experts, we are the permanent magnet brake experts. So we feel that on the R&D side, the integration task is that the product management, so creating a product road map, making full use of both technologies, but we will probably keep the 2 R&D teams independent of each other, working on the technologies that they're both so good at. And then finally, the EUR 2 million is indeed assuming it's through the cycle. So these are structural opportunities for synergies. If we grow, you obviously also need more people, if you shrink, we will respond to that as we always do.

Yes. Maybe speaking -- another question. Do you -- have you seen that they are, let's say, spending too much money on research instead of development? Because one of the big changes Kendrion did in the past that it was moving much more cash allocation to real development instead of research is an opportunity with INTORQ? If it already...

No. So far, we haven't seen that. It's quite similar. Also there, I say, we always talk about R&D, but if you're honest, in -- where we are at, it is mostly development and a little bit of research, and that's exactly the same for the INTORQ team. Yes. Jeroen, on investments and working capital?

Yes. So on working capital, their working capital level is substantially higher than Kendrion working capital. So they are around at 25% of revenue. And I just mentioned that we are at 10%. Having said that, Industrial tends to be higher anyway. But I do see room for improvements, especially on the stock and on the payable side. But yes, the detailed analysis need to be done, but I think we can do better by combining know-how on the topic. And investment, sorry, I was thinking about the other questions. So I forgot the question.

Oh, yes, the investment. Whether there was any substantial investments that we need to do because they had been underinvested?

No. So basically, the opposite is true, which you don't see a lot, I would say. That's for example, the new establishments that will be opened in Pune, the previous owners have paid for that, also the establishment in Germany is basically brand new, and also the manufacturing plant looks fully up to date.

It's Philip Scholte from Monolith. I have a question regarding the nominations you're running now for the second year in a row, it's slightly over EUR 300 million. What's your feeling about that level? Is that -- is it still early days and will the further growth in the Lighthouse Projects lead actually to a much higher number than that? Or is this a run rate we should expect for the next couple of years?

Yes. A couple of points to that. First, an obvious point to make, but let me make it anyway. If you win consistently 4, 5, 6 years in a row, around EUR 320 million, EUR 330 million, EUR 340 million of new nominations, that is where your business is going to grow to, which, of course, is substantially ahead of where we are today. So embedded in these 2 years is organic growth. Our ambition is to do better. So the target is that, over time, as we develop more of these Lighthouse Projects, as we get more traction with them, but also as the development of the car of the future, which is not so much so far in the future anymore, is taking hold, and we see bigger volumes on hybrid cars on electrical vehicles. We also expect that the volumes of the projects we win in this part of our business will grow. So my personal expectation is, certainly, the ambition that we have is that this nomination level will continue to move up. Will that immediately happen in 2020? I'm not sure, but we certainly push for that. The pipeline of nominations looks healthy. The pipeline of current projects that we're engaged with, both in terms of the ACES, but also in others is looking as extremely exciting as well. So I'm quite positive in the medium to long term about translating this level of nominations to a growing automotive market.

Yes. And do you already dare to maybe say something about that for this year? Because...

Well, so let me go back to last year. So what you've seen that -- and this is in China, we've already seen what can happen now. I know China, of course, is still a relatively small part of the group's business. The other part of China is that the pressure on -- or the time between winning a project and the request for mass production is much faster than what you typically expect in Europe or in the United States. Now that has -- the disadvantage is that you guys have been working like mad men to do that. The benefit is, if you're successful, you get the ramp much sooner than you would otherwise get. So these types of ramps, you can expect in other parts of our business as well. Albeit that for the business, one in Europe, typically, the lag is between 2 to 3 years between nominations. So what you get nominated in 2019 typically starts to begin -- contribute towards the end of 2021. So personally, if you look at our China pipeline, I think I said that also in my remarks, we had 30% growth last year, great. We will grow this year, probably not quite as aggressive. But then if you look at the ramp that is now foreseen, based on all the stuff we won in 2018 and in '19 in China in '21, you will see steep growth again. Now the same, I expect to see elsewhere as well.

Well, because this year, I think if you compare your growth in Automotive versus global car production, it's in line-ish. But of course, you would hope that at a point in time, you would actually beat market growth?

Definitely. That's definitely the ambition and the leading indicator, which is what these nominations are, and that's why we selected to -- on an annual basis to make these types of disclosures. The leading indicators are good.

Yes. But you wouldn't go as far as saying that it will happen this year?

No, no, no, I wouldn't. On the contrary, I would simply say, look the nominations of '18 and '19, in China, we're already seeing that filter in. In Europe will take a bit longer. And then of course, you always have to overlay with the overall state of the car market itself. That's a disclaimer, of course, I always have to make.

Maarten Verbeek, The Idea. You already made announcement that in August you will organize a Capital Markets Day, whereby you will provide new set of financial targets. You just reiterated the financial targets you issued in August 2018. Should we still be looking at those targets since you say in a couple of months' time, we will provide new ones?

Well, you should because the targets reflect an underlying ambition. The reason that we feel that we need to come back with an updated set is because of the INTORQ acquisition, which does materially change the nature of the group. Personally feel, as I explained I think quite elaborately, it strengthens our strategic position. So the underlying ambition, as now laid down in the targets that you just mentioned, will remain at least at the same level, but the metrics might be slightly different. Return on invested capital is an obvious example, the nominated changes after this acquisition. So that may look different, but the underlying ambition, and I really want to reiterate that, will at least be the same, if not higher than what we currently see. So from that perspective, that's why I still think it's good for us to reiterate this because it indicates where we want to take this company to in the medium to long term, and we're confident we can do that.

Agreed on that. Also when you look at the return investment because of the [indiscernible]. But you mentioned about EBITDA target was over 15%, but if you look at the run rate including synergies, EBITDA margin of INTORQ that's clearly ahead of the 15%. You also just mentioned about the organic growth that IDS and INTORQ should deliver at least 5% growth, that is what it should be. So are we now talking about the fact that in '19 and also in '20, you will be faced with such a low organic growth rate that the 5% you thought you would make on average for the next 5 years is simply impossible to make, and therefore, new financial targets, which are according to me still valid in EBITDA over 15% and maybe also a retail investment of more than 20% will simply be delayed in time, is it how we should read this announcement?

No. That's not how you should read it. You should read it what it says. It says that in August, there's a Capital Market Day, and we'll come with a comprehensive update of our strategy. The enlarged changed Kendrion with the embedment of INTORQ, and the matching set of financials that will reflect at least the ambition that you see today.

Okay. We'll just have to wait and see until August. You have also changed a bit your structure into 3 divisions. Will you also start to report by means of those 3 divisions on an annual and semiannual basis?

That's what we intend to do, yes.

Yes.

And then furthermore, particularly Industrial is very much phased by destocking. So not only the output but also destocking of clients. Do you get some -- because we also spoke about it with Automotive a couple of years ago that you were really faced with destocking that you have no input whatsoever. In this case, with Industrial, did you have already some clear indication that your clients were ordering less and showed it to you?

We certainly in Q4 did. Some of that is, by the way, reverting now, as it always does in Q1, so there is the -- in Q4, you always have some destocking because people start optimizing their working capital just as we did, with some considerable success. And then you get basically -- you get a bit of a -- then delayed action into the first quarter. So some of it is related to a slowdown in the market. Jeroen mentioned the German machine building index or Purchasing Managers Index was at a 10-year low in September. It's come off of that luckily a little bit. So that is the state of affairs in Industrial. Then you on top of that, get destocking, but that is certainly as a quarterly effect mostly. So don't -- you can -- don't read too much into that. That is really specific to Q4.

And then lastly, you mentioned Automotive had a decline of 10% in the year. Could you more or less break that down into the decline, not engine related and engine related? So not engine related and not engine-related.

I don't know you...

No. So I would say there's not a big difference in that.

But does it not mean that you have lost market share? Because outdoor sales itself was minus 6%, and you did minus 10%. So that more or less says that you lost market share?

No. You don't lose market share at these time frames, generically, you also don't win it because the nominations are the nominations that it takes a long time because they filter through. Further back in the supply chain, we're effectively a Tier 2. The more back you are, the more you get these, if you go down, you go down further. If the market and when the market recuperates, we expect to see a better than market performance to make up for that.

Michael, [indiscernible]. I have 2 questions. The first one is on the INTORQ acquisition. I just learned that their margins are higher than those of Kendrion, and their working capital is also higher, and therefore, manufacturing footprint. So all of this makes me wonder, if the company on a stand-alone basis makes a return that is better, in line or below your own returns?

The margins -- I mean when you say about this, but their business is extremely comparable to ours in terms of margin, in terms of growth, in terms of performance up and down with the market. So I would not say that they are -- their margins are better than ours, all right? They are comparable. The strategic opportunity is, of course, integrating that you get some synergies -- some cost synergies because you have some overlap. But most importantly, commercially, we are now the only industrial brake company offering a full range of these industrial products across the globe. We are truly present in the U.S., in China, in Europe and now also in India.

Okay. But on that basis, I suggest that the acquisition may actually be a little a bit of a drag on your overall return, considering the higher working capital and the manufacturing footprint.

No. So I think we can do -- we can make efficiency steps in this footprint, so that will bring some synergies. I also believe we can make some positive returns on this -- on the working capital so that we can decrease it. So definitely, including synergies. I don't know think this will be a drag. What you've said, the margins are comparable to our Industrial activities. If you look at the Kendrion as a whole, at least the last couple of years, 2 years, Automotive has been seen decreasing margins. So Kendrion, as a whole, it's I would say, the opposite of a drag.

Yes. We also mentioned -- to remind you that we expect it to be double-digit accretive basically in this year -- from the first year onwards.

Good. That's clear. And the second question is on the nominations, which look very encouraging. The run rate is higher than your automotive sales trend. Is this a reflection of the fact that modern cars require much more technology than in the past? Or are you also gaining market share?

So no, it's the first. Because it's very difficult, specifically if you look at the difference between the sort of the traditional combustion engine, where last year, we were -- about 35% the nominations were there. And as an aside, it's important too because the end of the day, everybody gets very excited about the car of the future, including me. But we still have quite a few combustion engines and that will -- they will be with us for at least 5 years, probably more. So you also want to keep winning some of that. In that other fields, there -- it's very difficult to speak of market share because most of these products are new developments. Sound actuation, central cleaning, this hybrid clutch we talked about, battery cooling. So this is truly new business that we win because we have been investing in this for a long time. And we are very much engaged and active in understanding what the architecture of this car is going to look like and then proactively working to develop the correct architecture in combination with the right electronics and software. So this is truly, which we talked about the word mechatronics, which is a word that I don't use lightly. But these products are truly a combination of the mechanical valve with relevant electronics that allows in these new cars, the car to basically address these actuators directly. That's really what it is.

[ William, Value Funds ]. On the organization, you mentioned that now it's lean and agile. Does that mean that further restructuring charges or additions to improve the organization are behind us? If the 2020 economic development is less than expected now, which is foreseeable, is there still room to streamline the current organization? Or does it mean this is it? And are we ready to see improved performance as soon as there is pickup in the economic activity? That's the first question. The second one depends on your acquisition policy. It looks as if the INTORQ acquisition is a very successful one. Given the current economic climate, is there an improved chance that there will be more acquisition candidates in order to be possible to get an even improved operating scale? In other words, are there interesting acquisition candidates at this stage? Let's review on that.

Thank you. First of all, [ William ], on the organization. I already mentioned it, and you're well aware of that we streamlined a lot. Are we done? I think we still have a couple of ideas to further optimize in the indirect area, but not of the magnitude that you've seen in the past. So we continue to be extremely diligent and vigilant on say, okay, can we maybe further optimize this. I talked about the fact that IT is elevated, that by the way is an investment drive. So we have appointed a new IT manager and created that position on the management team also because we feel there is more scope for us to automate further and potentially save some costs. I do not foresee any big, drastic restructuring programs. However, I would have told you that 1.5 year ago as well. So we need to be vigilant. We need to be on the lookout, and it also very much depends on how the market behaves, of course. I do want to reiterate that despite all this that we have spent a lot of time and effort on making this organization leaner, less complex, the management team is smaller than it was a year ago, which was smaller than it was a year before that. But at the same time, consistently, 2019 and in 2020, we continue to invest. We invest in IT. We are currently on the lookout for 6 to 7 software and electronics engineers for our R&D center in the northern part of Germany. We're investing in China. We hired 30 people there in 2019, we expect that to continue. So it's really both. We want to stay invested in what we feel are great opportunities for us in the medium to long term. But of course, we need to be realistic about the current state of affairs in the global economy as well. On acquisition, a few things. We've talked a lot about acquisition. We've always said, look, acquisitions, there's a couple of criteria. One is that it first and foremost, it needs to strengthen us in the direction of the strategy that we've chosen. I think INTORQ is clear, ticks that box. Second point is that we'd like it to be material. If you buy something of EUR 2 million or EUR 3 million, it doesn't really move the needle. So this ticks the box as well. And then third, of course, it needs to be affordable and financially responsible. And that hasn't changed. Now to be fair, of course, we've taken up some of the room that we have on our balance sheet, that's clear. We talked about the need for us to deleverage. We're very focused on that. But we haven't stopped looking around for acquisitions like this that could potentially strengthen us. And if we come across one, and we say, hey, this is potentially interesting in Automotive or in China or maybe in brakes, again, we will certainly look at it.

Tijs Hollestelle, ING. And I have another follow-up question. Yes, the growth in China, and I don't have the numbers in front of me, but I -- if I recall it correctly, you had, let's say, 30% growth in the first half of '19, and then over the first 9 months, it was coming down a bit. And now you're still reporting 29%, so it has nothing to do with the market conditions. It's just new facilities, production lines ramping up, starting to deliver to customers. So your visibility on that is quite high. So when you -- the agreement goes live commercially with the customer, you don't know whether the customer needs 800,000 of 1 million, but the 800,000 gives you tremendous growth year-over-year?