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

Good day, and welcome to the Kendrion First Quarter Results 2021 Analyst Call. [Operator Instructions] Today's conference is being recorded. Joep van Beurden, Kendrion's CEO, will start today's call with a short statement, after which there will be time for questions. At this time, I would like to turn the conference over to Joep Van Beurden. Please go ahead, sir.

Thank you very much, and good morning, everybody. Welcome to Kendrion's Q1 2021 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 Q1 results, after which we will go to 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 Q1 2021 results, let me start with giving an update on the impact of COVID-19 on the way we operate at Kendrion. Our priority in dealing with the pandemic is the health and safety of our employees, their families, customers and suppliers. We continue to keep strict operating procedures in place in all Kendrion's facilities, except for Suzhou and Shanghai, where COVID-19 no longer puts a constraint on daily life. In Q1, we made limited use of short-time work. However, the current schemes remain available until the end of 2021 in most of our European facilities. And although our employees have, of course, been affected by COVID, we continue to deliver to our customers around the world. We are working closely with our suppliers, and I'm pleased to say that currently, our supply chain is fully operational as we continue to navigate production capacity constraints and the shortage of certain components such as semiconductors, certain types of steel and some plastics. Let's talk about the Q1 results. As you have seen from our press release of this morning, we had a strong quarter where all of our business groups increased revenue and EBITDA. A year ago, we prepared ourselves for the impact of the COVID-19 pandemic on our operations. We now have to navigate various capacity and supply constraints to be able to supply our customers as demand increases. As such, we have shown true agility. I'm proud of the commitment and the flexibility of our employees in all parts of the world as we continue to build upon the recovery that started in Q3 and Q4 of 2020. In Automotive, revenue was 4% higher than Q1 2020 despite shortages in semiconductors, certain types of steel and even plastics. And as you perhaps recall, Q1 2020 was only modestly affected by the pandemic, which began to impact trading in earnest towards the end of March 2020. We have strong momentum in actuators for Autonomous, Connected, Electric and Shared mobility or as we call them the ACES in the passenger car segment. The transition towards the ACES in automotive is accelerating. In Commercial Vehicles, the market for long-haul buses is still slow. Industrial Brakes benefits from a strong trading environment. We see a wide-ranging increase in demand in most of Industrial Brakes business segments across all regions. Just as in Automotive, in Industrial Brakes, we see a broad and accelerating energy transition towards electrification, and this boosts demand for electro motors and as almost all electro motors have to be fitted with either a spring applied or a permanent magnet break, it boosts demand for our brakes. Industrial Actuators and Controls also had a strong start to the year with demand challenging our production capacity in several market segments such as medical and machine safety. Our China operation had strong year-over-year growth as well, and our commercial momentum in China and growth opportunities continue to be healthy. Importantly, the construction of our new factory in Suzhou's renowned Industrial Park progresses as planned, and we expect to open the facility on schedule in the first half of 2022. Next, let me review our financials. First quarter revenue came in at EUR 115.3 million, which is 5% higher than in the first quarter of 2020 or 6% higher at constant exchange rates. As I mentioned, all business groups contributed to the growth. The Automotive Group continued the positive development since the second quarter of 2020 and realized 4% organic growth on the back of particularly strong demand from its European passenger cars customers. The Commercial Vehicles segment, and especially the long-haul coach market, was still weak due to COVID-19. Overall trading levels in Automotive are still below those we experienced in 2019. Industrial Brakes continues its strong performance with an organic year-over-year revenue increase of 11%. Trading here is now above pre-COVID-19 levels, driven by the growing trend towards electrification across manufacturing industries. Revenue in Industrial Actuators and Controls increased by 5%. While some segments were still under pressure, notably aerospace and textiles, strong demand in others, such as medical and machine safety, more than compensated. China performed well with continued strong demand, especially in Industrial Brakes. Our profitability developed well, normalized operating results before depreciation and amortization or EBITDA increased across all business units to a total of EUR 16.1 million, 18% higher than the EUR 13.7 million of Q1 2020. This means that the EBITDA margin in Q1 was 14%. The increased normalized profitability compared to the first quarter of 2020 is the result of a better added value margin and combined -- which combined with solid operational leverage. Total operating costs as a percentage of revenue decreased with a full point from 37.1% a year ago to 36.1% in Q1. And the product mix in Q1 contributed to the higher added value margin. Depreciation charges decreased EUR 0.1 million to EUR 6.3 million in the first quarter, leading to a normalized EBITA of EUR 9.8 million, 34% more than the EUR 7.3 million realized in the same quarter last year. The effective tax rate on normalized income in Q1 2021 was 30.7%, a bit higher than in Q1 2020. Our net finance costs were stable at EUR 0.7 million as the effect of the lower net debt and positive currency results offset the higher interest rate markup. Normalized net profit before amortization charges arising from acquisitions increased to EUR 6.4 million, up 36% compared to last year. Reported net profit was EUR 5.9 million and includes a net one-off benefit of EUR 0.2 million that has been normalized from the results. Our financial position is strong. Total net debt, including IFRS 16 lease liabilities, increased to EUR 109.7 million from EUR 103.2 million at the end of 2020 and decreased significantly compared to a year earlier, where net debt was EUR 131.8 million. The increased debt relative to the end of last year is fully caused by traditional seasonal effects with higher revenue and, therefore, higher working capital levels in Q1 compared to Q4. First quarter free cash flow of EUR 5.1 million negative was EUR 1.0 million better than the cash flow of the same period last year. The leverage ratio based on total net debt divided by 12 months' rolling EBITDA was stable at 2.3%, well below the financial covenant of 5.8% at the end of Q1 and the long-term covenant of 3.25, which will be applicable as from the 31st of December 2021. Investments amounted to EUR 5.1 million in the first quarter, a bit lower than depreciation of EUR 6.3 million. Kendrion's solvency ratio is strong at 46.8% at the end of March 2021 compared with 44.1% at the same time last year. As to the outlook, continued constraints in the global supply chain for various components and especially for semiconductors for our Automotive Group remain a concern as this has the potential to negatively affect short-term revenue. However, we are confident that the underlying demand for our products continues to be strong and expect the current healthy economic activity level to continue in the second quarter and depending on the efficiency of national vaccination programs into the rest of the year. Longer term, we do expect the accelerating push towards clean energy to benefit our 3 growth areas, automotive, brakes and China. In Auto, the ACES in industrial brakes, wind power, robotics and various other segments and in China, where we have exposure to both automotive and industrial brakes growth opportunities. As presented at our Capital Markets Day in September 2020, we have a medium-term financial target of 5% organic growth between 2019 and 2025, an EBITDA of at least 15%, and a return on invested capital of at least 25% in 2025. Our strong business fundamentals and the positive start to 2021 strengthens our confidence that we are well positioned to attain these targets. I now open the line for your questions.

[Operator Instructions] We can now take our first question from Frank Claassen.

Frank Claassen, Degroof Petercam. Three questions, please. First of all, on the component shortages. Did it have any impact on your revenues in a sense that you missed revenues? Some comments on that, please? Then secondly, of course, we see quite a bit of raw material inflation. How are you dealing with this? Are you passing this on in the sense of price increases? And then finally, could you remind us on the CapEx for this year and the phasing of the new Chinese plants. CapEx seemed quite low in Q1. How will that evolve for the rest of the year and maybe also looking into next year with this new Chinese plant?

Yes. Frank, thank you for your questions. So first on the component shortage, a bit more color maybe. So the first thing to note is that there's both a direct and an indirect effect and accumulation of which is really difficult to gauge. Indirect, by that, I mean that if OEMs have a shortage of semiconductors and they can't produce the car, then clearly, we also don't ship our actuators. The effect of that in Q1, by the way, was limited, although we now see also from press reports that perhaps in Q2, that is going to be a bit more pronounced. The second effect is on our own supply of mostly certain types of steel, which were hard to get by. We have managed in Q1 to limit the effect of that. There's no doubt that without these shortages, we would have been able to ship a bit more. But I think we did reasonably well in still compelling our supply chain to deliver the goods that we needed. So the combination of the 2, the direct and the indirect effect, my statement would be we would have -- we could have sold a bit more. It is not overly dramatic. The big question, of course, is how this is going to evolve over the next couple of quarters, specifically on the semiconductor side. We have no more visibility than the rest of us. As I say, we always -- we all read the same newspapers, but it is expected to be with us for a bit of time and the indirect effect on the OEMs will ultimately, of course, also affect us. Having said that, the overall economic activity level, the underlying demand for products that we are part of, not just cars but also in industrial, specifically on the brake side, is really strong. So on balance, we remain positive for the remainder of the year, as I mentioned also depending a bit, of course, on the vaccination programs. So that is point, your first question. On raw materials, there is definitely pressure. It's a combination. In some cases, we have somewhat longer-term contracts. We try to pass this on. This is also sort of a gain that we play at all times. Prices go up, prices go down. We, of course, try to mitigate as much as we possibly can. This has been the case in Q1. I think we did that really well. I'd point to our gross margin that has held up nicely. We will continue to act in that same fashion going forward. And then maybe on your third point, Frank, on the CapEx, Jeroen, maybe you can shed some light.

Yes. So at the beginning of the year, we said that for the, let's say, regular investments in equipment, we anticipated around depreciation, that is for the year, EUR 25 million. So in Q1, we are indeed a little bit below that. But we still expect that this will be the level that we will end up on top of that regular investment we have, the China building, which we said that, that will be around a net investment of around EUR 15 million, that increase, split over 2021 and 2022. Because it involves, obviously, large numbers and whether it's something that falls in December or in January, it's a little bit difficult to estimate '21, '22. At this moment, I would say a little bit more into '21 compared to '22. So we are a little bit below depreciation. But yes, I would say the guidance in that respect is unchanged.

We can now take our next question from Johan van den Hooven from Edison Group.

Johan Van Der Hooven, Edison Group. Also 3 questions from me. Could you please give an update on the development of the cost savings, the message you took last year that have sort of overrun to [ 2021 ]? And -- but also an update about the plans and the planning of the closure in Austria. Second question, perhaps I missed something that you said continued growth in China. Could you perhaps please provide a growth number? That was longer term, sort of you expect at least 20% growth? And the third question for now is the commercial vehicles. Was the -- well, sort of the weaker area within Automotive. Also, could you give a bit more detail about developing an order book? So what sort of can we expect or do you expect for the remainder of the year?

Okay. Jeroen, would you like to talk a bit on the cost side of things?

Yes, sure. So on the cost savings that we mentioned last year had to do both with synergies in IAC and also the synergies related to the Industrial Brake integration. The total of EUR 4.4 million, of which roundabout half was implemented -- was already effective last year, but the full EUR 4.4 million is effective as from the 1st of January because the last synergy effects were realized in -- actually in December. And that was the integration of the manufacturing locations in Aerzen in Germany. And related to Austria, there -- the plant closure, we are preparing it. We are preparing moving gradually lines to other locations, but the final closure will be in 2022. And the costs that we have flagged at this stage, an estimate of around EUR 2.5 million, yes, that will fall either in the second half year of 2021 partially and the remainder in 2022.

So then on the cost savings, Johan, other than generically, as you know, we are always on the lookout for additional efficiency opportunities. But as in terms of the big programs such as the integration in Austria, that is pretty much the situation. On China, we have over the past years, grown on average within the 20% year-over-year. Then of course, we got an additional boost when we did the INTORQ acquisition. INTORQ had a relatively large operation in Shanghai. And we have also stated that one of the reasons that we are building this new facility there is that we continue to see similar growth rates over the next couple of years. Now that is not a quarterly number, as you can well appreciate. So -- but that growth number is something that underlies also our confidence of the 5% that we have stipulated for the entire group between 2019 and 2025. So that's unchanged. If you look -- we don't disclose the specific quarter-over-quarter numbers from China, but you can well imagine, last year Q1, actually, interestingly enough, Europe was still not that affected by the pandemic, but China was. So the year-over-year growth in China is extremely healthy, but that's also because the comparable was skewed by COVID. You see that, by the way, also in the automotive world where the automotive growth, this is overall production in China, is huge, while in Europe, year-over-year growth in car production is actually basically flat. So also there, because China is such a big impact on automotive-wise on the global industry, let's not forget in terms of these comparables, that China carries a lot of weight. Then on commercial vehicles?

Yes, please.

So yes, in commercial vehicles, so specifically, when we talked a bit about long-haul buses but actually also in a few other categories, it's still, as we say, slow. It's certainly also they're improving, but compared to passenger cars, we still see that the activity level there is a bit lower. It's actually comparable with what we see in the aerospace segment, in Industrial Actuators and Controls. So in terms of the order book and if you see at the activity level in that respect, everything is actually going well. So we continue to feel that our presence in the commercial vehicles over the -- in the medium to long term is good. But for now, short term, it is lagging a little bit behind the recovery that we see in the passenger car segment.

And with slow, do you mean there's some growth? Or is there still also decline?

Yes. So basically, it's largely driven by the buses, and that is not -- so it's not declining anymore. We saw really a sharp decline in -- actually, it was a little bit later than the cars last year. And from that, it is slightly improving, but it's on the bus side, which is not a huge percentage. But yes, if it's really like aircraft, on an extremely low level, it does have an impact on the overall growth. It's increasing a bit. It's recovering a bit, I have to say, but it's still on a quite low level.

Yes. It's creeping back up.

Just if I may follow-up on the cost savings. Just noted the phasing of the cost save in 2021. Of course, your EBITDA margin of 14% was very strong, well, in my opinion. So how much cost savings fell in Q1, if you want to disclose the number?

Sorry, you were a bit hard to hear, Johan. So you said the EBITDA number was strong in your opinion. And then you're asking for phasing of cost savings?

Yes, the phasing of cost savings. Jeroen, you, of course, explained sort of the half of the EUR 4.4 million falls in 2021, but what falls in Q1, 2, 3, 4?

Yes. So 1/4 of that, so that's around about EUR 600,000 was the effect of the annualized impact of the synergies, in addition to last year.

Okay. So we can expect sort of an equally spread over the quarters in 2021?

Yes. It's all done now, yes.

[Operator Instructions] We can now take our next question from Tijs Hollestelle from ING Groep.

Could you, by a way of exception, provide, let's say, the absolute revenue number of the Automotive business in the second quarter of last year?

Okay. All right, exception. Why do you ask, if I may? It's very strange, but it's because to get a good feel for the comparables last -- next quarter?

Yes, because of COVID-19, these growth rates are indeed all over the place. So is it like EUR 30 million or was it EUR 40 million?

Pretty good. So it's a bit hard, but I'm sitting here without that document on Q2 last year, but EUR 37 million, roundabout EUR 37 million, might be EUR 37.5 million, but that is the number.

You ask this every quarter, Tijs.

Yes. Look, by exception, I will never ask it again. So that's clear. And then, I mean, I'm still looking, let's say, at the periods 2017, 2018. We, of course, have then 6-month revenue numbers. But then the Automotive business, that generated between EUR 70 million to EUR 80 million of quarterly turnover. So you -- based on my estimates, you're still, let's say, trailing 20% below that. And I'm understanding that it is gradually ramping up Q-on-Q. But for instance, the passenger car sales, are these already back at, let's say, pre-COVID-19 levels? And I know that is not comparable to the situation in '17 and '18, but at least to '19?

No. We -- in our estimation, it depends a little bit on the region. It's getting there, but it's not quite there yet. So the overall -- if you look at the overall production numbers, for instance, in Q1, it's clearly recovering from 2020, but it is not at '19 yet. And as you know, '19 was a reasonably weak year compared to '18. So '18 is a little bit off now. For us, as we also talked about, I think, at the last quarter, the most interesting element of Automotive for us is everything that happens around the energy transition there. So electrification, hybridization, autonomous driving. And we see that the momentum there and the content that we can sell into these newer cars is substantially higher than what it was in '17 and '18 when it was still more the traditional combustion engine. So I always like to point out that we don't -- of course, more cars being sold helps us, but we don't rely on it. It's really a different product slate that we are currently selling and that we're developing and that's we are getting nominations from than what we had in '17 and '18.

Yes. I understand. Yes, so you're basically hinting that if economy's really normalized, you would have, let's say, also upside to the revenue numbers seen in, let's say, '17 and '18. And if you -- and then maybe a strange question, but if you, let's say, take these 2 years, which are more or less normal, and I understand that each vehicle has its own specific cycle, but if you would make a revenue breakdown of your automotive over a period of 2 years in a normal year, how much is then, let's say, trucks versus passenger cars, what have you, special purpose vehicles to get any feel for the mix and where there's still upside, I'd say, in the recovery?

So in normal circumstances, around about 2/3 is cars and then 1/3 is buses, trucks and, like I said, special purpose vehicles. And of that, I would say also, there, 1/3 -- of the 1/3, 1/3 is buses, 40% trucks and the remainder, for example, agricultural vehicles. So those are roughly the allocation over the sectors.

Okay. That's helpful. And then also a question on -- I'm not sure whether it's a question. But if I look at, let's say, the employee, the number of employee development, is that -- has that been built up, let's say, gradually during the first quarter? Or is that, let's say, a lot of employees, let's say, in the last month? Because I also see quite an increase also in salary costs? Or is that the reflection of the salary cuts you implemented, I think, in March or so last year when COVID just broke out?

No, no. It's -- if you look at the increase in employees, that is direct employees, so production employees. So you can imagine that activity level is up, and we're producing more than we did. Then, we need more people that actually work on those production lines. So if you look at -- if you were to look at the split of the indirect employees and direct, it is 100% attributable to direct employees. Clearly, we have to pay these guys so in absolute terms the salary costs or the cost for these employees is up. But as a percentage of revenue, it's actually down. So as we mentioned, the expansion in profitability is a combination of the product mix, but also the operational leverage, and that is what you see in that number.

Yes. And so quite pro rata. So if your revenue increases by 5%, then normally also your direct employees will increase also with 5%.

Yes. So we should not expect any other strange year-over-year movements because of the COVID-19 related -- so the situation as it is now, depending on your future production levels, will probably also determine kind of a normal relationship in the employee -- number of employees.

Yes, exactly. But of course, next month, so Q2 and Q3, all these comparables are going to be quite tricky. Because there, you have to do with all the Kurzarbeit and then the people are still formally part of the -- of your payroll, but you haven't paid them. So it gets -- it will become very complicated. But in this quarter, it's still -- it's a one-on-one comparison. And as Jeroen said, it is on the direct side, 5% more activity or more production means 5% more direct labor.

Yes. Okay. And to close on this, were there any contractual agreements when you did the INTORQ acquisition, that you could not touch, let's say, the employee or workforce of INTORQ for 12 months or so? Or...

No, no, no.

[Operator Instructions] We can now take our next question from Maarten Verbeek from The Idea.

It's Maarten for The Idea. A couple of questions from my side. First of all, if I'm right, according to me, there's still a little bit of an impact of INTORQ, an acquisitive impact of INTORQ since it was not acquired at the 1st of January. According to my estimates, that has contributed about 1% to this year's quarterly growth. Am I more or less in the right direction?

Jeroen?

No. No, actually not. So the full 2020 numbers of INTORQ are in our consolidation.

But you were right. We closed the deal, I think, officially on January 6 or the 8th or 11th. But you have to put all the numbers, so we put them in.

Okay. Okay. Clear. Then concerning the growth in China and the growth also since what you mentioned, China was very much affected last year and Europe not so much in the first quarter. If we take out China, would then more or less the organic growth have halved towards some 3%?

No, I don't believe so. We haven't really looked at it. I mean, China is, just to be helpful here, is around 10% of group revenue. So it certainly has an effect, but not that much. And of course, China was affected, but it wasn't 0, so they certainly did have an effect. So it would -- it does skew it a little bit, but not to the extent that you indicated.

And all units -- all business groups would also, without China, have shown organic growth.

Okay. And then lastly, could you give an estimate what the average value per car, what kind of increase per average car has been for Automotive?

Well, so I will point there to the presentation we made at September 10 last year when we did a sort of a rough estimate, certainly not a scientific estimate, of the content that Kendrion can ship based on our current product portfolio, but that is including the Lighthouse Projects that we're investing in. So including smart damping, including sound actuation, including sensor cleaning, battery cooling, et cetera. And there, we showed that in a traditional combustion engine, you need to help me, it was around 150 of Kendrion content. And for a hybrid, it was more like 250, so 100 more. So that's an indication. Now the momentum in electrification and hybridization has really accelerated. The investment has accelerated and the amount of energy that the OEMs put into those categories and those products has accelerated, all of that in 2020 under pressure of the pandemic. Basically investment and incremental improvement of the combustion engine at the OEM level have all but disappeared. So that bodes well for us because we see that in the engagements and the discussions that we're having, the designing projects we're currently undertaking with our customers and Tier 1s, which is more and more towards our Lighthouse Projects where -- which means that the content that we sell into these cars is going up.

But do you believe that the increase of -- content per car increase at this moment is above or somewhat below the average going forward?

I think this acceleration was just right at the start of this whole trend, because much as -- I think the analysis we showed was that if you look at the percentage of electrified or hybridized cars as a percentage of total is, of course, today still quite slow -- quite low. But that will grow with 40% to 50% year-over-year for the next couple of years. So if you get a disproportionate share of that segment as we aspire to do, that will definitely help the growth numbers independent of the overall state of the automotive industry. So as I said, we become -- of course, if there are more cars being sold, that helps. But what is more important for us is the penetration of these newer actuators in the ACES as we call them.

At this moment, there are no further questions. I would like to hand the call back over to Joep van Beurden for any closing remarks. Please go ahead, sir.

Well, thanks, everybody, for your participation. And if you have any further questions on the basis of this call, then you know where to find us. Thank you very much.

This concludes today's call. Thank you for your participation. You may now disconnect.