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

Good morning here in the Novotel and on the webcast. Welcome to Kendrion's Q2 and First Half 2022 Results Presentation. My name is Jozef van Beurden, Kendrion's CEO. And with me here is Jeroen Hemmen, our CFO. This morning's agenda, Jeroen will start and review the Q2 and first half 2022 results, after which I will take over and give you an update of the progress we have made both strategically and operationally over the past period. This will be a bit more concise than usual as we will have a more elaborate review during our Capital Markets Day planned for September 8, so in just over 2 weeks. After the review, I will discuss the outlook for the remainder of the year and go to Q&A. Now as to the Q&A, there is the opportunity, of course, to ask questions here in the Novotel, But also for those attending this presentation. [Operator Instructions] Before handing over to Jeroen, I would like to draw your attention to the following. Certain statements contained in this presentation constitute forward-looking statements and these forward-looking statements rely on several assumptions concerning future events and are subject 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?

Thank you, Jozef, and good morning, everyone. So I will present the business review for the second quarter and also for the first 6 months of 2022. Our consolidated revenue for Q2 ended at EUR 126.9 million, which is 6% the same period last year. Exchange rate translation effects due to the weaker euro contributed 2% to the revenue and so did the addition of 3T. The estimated impact of the COVID lockdowns in China on total revenue was around EUR 3.5 million or 3% of total revenue in the second quarter. All business groups were affected, but in particular, IB's operation in Shanghai. We were successful in passing on the higher raw material prices and our added value margin increased 0.8% compared to the second quarter of 2021. Implemented sale price increases contributed around 6% to consolidated revenue. Normalized EBITDA decreased 13% to EUR 13.7 million. Profitability was affected by low production volumes in Automotive and a 7.5% organic increase in cost when measured at constant rates of exchange. Increased energy prices, demand and production volatility and higher staff cost in IB in line with the increased activity level contributed to these increased costs. Automotive incurred as well relatively high engineering costs for new projects won last year. Then moving to the first 6 months of the year. Revenue in the first half year increased 5% on an organic basis when measured at constant rates of exchange. The Industrial segment reported a further 16% organic revenue increase while automotive saw their revenue decrease with 2% as global and, especially European car production, continues to be affected by supply chain shortages. Normalized EBITDA for the first 6 months ended 4% below the comparably strong first half year of 2021. A strong 28% EBITDA increase in Industrial could not fully offset lower profitability in Automotive. In Automotive, the lower volumes coincided with higher costs due to energy prices, demand volatility and relatively high expenses for engineering for projects on last year, as just mentioned. Our normalized net profit before amortization increased with 3% compared to the same period of last year, as lower finance cost and a slight reduction in the effective tax rate contributed positively to the net profit. Our finance costs were positively affected by currency results, while negative currency results were incurred in the first 6 months of 2021. In total, in the first 6 months, EUR 2.4 million operating expenses and EUR 0.6 million finance expenses have been normalized from the result -- from the reported results. Normalized operating expenses mainly related to -- restructuring charges related to the closure of the Austrian automotive plant, while the finance expenses mainly related to amortized transaction cost of the previous facility agreement. Then switching to cash flow and our financial position. Operating cash flow increased with EUR 3.6 million in comparison to the first 6 months of last year, but this was offset by relatively high capital investment program that exceeded depreciation by EUR 5.3 million. EUR 5.3 million of the total EUR 16.5 million capital investments related to the construction of the new facility in China. Higher investments and seasonal effects around working capital drove the negative free cash flow of EUR 7.6 million compared to negative EUR 4.2 million in the same period last year. Total working capital increased EUR 14.8 million compared to the end of Q2 2021. This increase includes EUR 5 million temporary buffer stocks in relation to the closure of the Austrian automotive plant and another EUR 5 million relates to the higher revenue level in the first 6 months of the year. Especially inventory levels are under pressure as supply chain shortages and order volatility affects inventory management. We do expect capital investments to further increase in the remainder of the year when we expect to materially finalize the construction of our new China facility. We do further expect to fund these investments with operating cash flow. Our net debt in Q2 increased with EUR 8.2 million, and this was mainly due to the payout of the cash portion of the dividend. Our leverage ratio increased from 2.4 at the end of Q1 to 2.6 at the end of Q2, well below the agreed financial governance of 3.25. Then switching to the business groups. The Industrial groups continued their strong performance and reported a 16% organic revenue increase and 28% higher EBITDA in the first 6 months. The estimated effect of the COVID lockdowns -- the China lockdowns on the Industrial revenue was 2% of revenue in Industrial. Industrial revenue ended at EUR 136.1 million and EBITDA ended at EUR 24.4 million. The EBITDA margin further increased with 80 basis points to 17.9%. Industrial Brakes revenue increased 19% and IAC grew with 13% when excluding the contribution of 3T. The added value margin developed favorably in Industrial and in particular, in Industrial Brakes where sales price increases effectuated have now caught up with the rising material prices. Capital investments in Industrial were well below depreciation in the first half year, but are expected to increase in the second half year, driven by various capacity extensions, especially in IB. Then to Automotive, low and decrease in global and European car production numbers continue to affect the Automotive volumes. Global car production decreased 2% while production in Europe, Kendrion's most important market, was 12% below the first 6 months of last year. Our Automotive revenue ended 2% below the first 6 months of 2021, but this was positively affected by the aforementioned currency translation effects and also by sales price increases. Automotive has successfully protected the added value margin by passing on input price increases to customers. The EBITDA decrease compared to the comparable strong first 6 months of 2021 is driven by the lower volumes in combination with pressure on costs due to energy demand and production volatility and engineering costs in relation to the high amount of new project wins last year. Normalized EBITDA and EBITDA margin did improve slightly from the second half year -- half of 2021 when supply chain shortages and inflation started to significantly impact Automotive production. The closure of the Austrian automotive plant is largely finalized with the relocation of a large production line for suspension valves to Villingen. We expect to fully stop operations in the third quarter and cost savings to be fully effective as from the fourth quarter of 2022. Capital investments in the first 6 months were EUR 13.8 million, including EUR 5.3 million related to the China building, which is recording -- recorded in Automotive Business Group. Capital investments in the second half year will increase further as we expect to finalize the construction of our China building. And that concludes the business review. And with that, I hand it back to you.

Thank you, Jeroen. I will now proceed with an update of the strategic and operational progress we've made so far in 2022. As Jeroen just explained, I think we can look back at a solid first half of 2022, with revenues growing despite a difficult trading environment in Automotive and a loss of around EUR 3.5 million in revenue in China due to the COVID-related lockdown. Growth was especially strong on the industrial side of the group. IB grew with 19% year-over-year and IAC with 25% and with 13% excluding 3T. I'm proud of the Kendrion team who have achieved this in a volatile market. And with the effects of COVID in China and on the availability of our people, still a significant factor. And I'm excited about the accelerating transition towards clean energy that we believe will benefit our growth areas. In Industrial Brakes as it boosts demand for wind power, robotics and various other segments, in IAC, where several new products are ramping, in Automotive, where we focus on sound suspension and sensor cleaning, in China, where we see the same transition towards clean energy, providing us opportunity for all business groups. Before I get into a little more detail, let me illustrate the current economic environment with two slides. On this slide, we see the Purchasing Managers Index in several parts of the world as reported by IHS Markit. An index larger than 50 indicates expanding economic activity, an index below 50 signals an expectation of declining activity. Looking at this slide, the global picture is clear. Although the average level is still around 50 it has decreased significantly over the past 6 months by around 10 points. And we have certainly felt this pressure, especially on the Automotive side. For our Industrial Groups despite the lower index, we see continued strength in both IB and IAC. Next, let's look at the forecasted pace of electrification in automotive. Here, we look more in depth at the expected development of the passenger car market, again, by IHS Markit. And this slide indicates the number of internal combustion engine powered vehicles and the number of battery electric and plug-in hybrid vehicles between 2018 and 2027. The current forecast for the total number of vehicles over that period is flat. But within that, the growth of both classes of electrified vehicles has been and is projected to remain strong. In fact, the number of electrified vehicles is forecasted to grow from 1 million in 2018 to 30 million by 2027, which is an average annual growth of more than 40%. At the same time, the number of vehicles that has a combustion engine, so ICE vehicles or plug-in hybrids, will shrink from 93 million vehicles in 2018 to 71 million in 2027, which means an average annual growth of negative 3%. As a proportion of total vehicle production, the share of electrification is expected to raise from less than 2% in '18 to over 30% in 2027. And it's, therefore, not surprising that all major OEMs and T1s are investing heavily in this. And we, too, despite the volatile trading, have continued to invest in our product road map, our commercial organization and our software and electronics capabilities to make full use of this important trend. We will elaborate on this during our Capital Markets Day. Talking about our Capital Markets Day, our strategic house is unchanged. The top of the building indicates our strategic intent. We aspire to continuously grow revenue and profitability by investing in opportunities that help society become more sustainable with a lean and focused organization and to provide a top-quality work environment to our employees. Linked to this are our medium-term strategic objectives, such as our target to grow with at least 5% organically on average between 2019 and 2025. Underpinning this goal are the three pillars of Industrial Brakes, Actuators and Controls and the Kendrion Automotive Group. The two Industrial pillars, Brakes and IAC together represented 53% of group revenue in the first half of 2022, and Automotive represented, therefore, 47%. And then, of course, we have a focus on China, active in all three domains with the same intent and with similar growth opportunities driven by the broad energy transition towards cleaner form of energy like electricity. Now let me share some of the highlights of the past half year, starting with IB. IB had a great first half of 2022. Organic growth was 19% despite the COVID related shutdown of the Shanghai Brake factory. And after a 4-week complete shutdown, we operated in so-called closed-loop production at roughly 50% of capacity for another 4 weeks. So, in total, around 6 weeks of production got lost. Closed-loop production means that the colleagues who operate the plant entered the facility and stayed there for as long as the closed loop is maintained. In my view, it speaks to the extraordinary motivation and dedication of our Chinese colleagues that we could operate in this mode for 4 uninterrupted weeks. With raw material prices increasing, we successfully protected our gross margins as we worked with our customers to reflect the increased cost in the price of our brakes. We've continued and we will continue the investment in the IB R&D team and in more production capacity as we anticipate further organic growth for the short and medium term. And finally, we continue to enjoy strong traction at both existing and new accounts based on our complete product portfolio and the broad transition towards clean energy. So a strong first half for IB with ample opportunity for more growth in the pipeline. Next, IAC. IAC also did well during the first half. Organic growth was 25% and 13%, excluding 3T. This was despite shortages in semiconductors and various other raw materials like, for instance, certain ball bearings. As in IB, we managed to keep our added value margin stable. We have a strong order book and continued interest in new products like industrial locks and inductive heating. During our Capital Markets Day, we will be able to show you some of our newly developed products. Next, we look at Auto. We faced an extremely difficult trading environment as quite a few market-related issues combined, persistent semiconductor shortages, significant order and call-off volatility, raw material inflation and OEM delay tactics when it comes to product price increase mechanisms. The semiconductor shortages have put automotive industry production levels under pressure. Jeroen already mentioned it, analysts assess that global car production fell by 2% in the first 6 months with production in Europe, Kendrion's most important market, 12% lower than in the first half of 2021. Volatile order patterns reduced direct labor productivity is hard to respond with mechanisms like Kurzarbeit when demand fluctuates on a weekly and sometimes on a daily basis. We are proud that we have kept our added value margin stable despite the increased raw material pricing. In the first half, we completed the transfer of production lines from our Austrian production facility in Eibiswald, to Villingen and CBU. We experienced sustained interest in sound suspension and sensor cleaning, and we continue to invest in that. Next, let's look at China. In China, the loss of 6 production weeks in Shanghai due to the COVID-related shutdown made for a difficult first half. As mentioned, the total impact on group revenue was 3% or EUR 3.5 million. We do believe that most of this revenue will be realized in the second half, though, invariably, some of it will move into 2023. And with China's Zero COVID policy in place, there is, of course, always the risk of another shutdown, which may directly or indirectly influence our revenue. In China, as in Europe and the U.S., we do continue to see growth opportunities for all business groups in medical and in automation for IAC, in robotics for IB and in sound and in suspension for Auto. We continue to expect strong growth for the medium term, which is why we are pleased to report that the construction of our manufacturing facility at Suzhou Industrial Park is progressing well and on track to be fully operational in Q1 2023. We will show more at the Capital Markets Day, but here are a few pictures of the state of our building right now. So this is an artist impression of our planned facility located in Suzhou's Industrial Park. SIP is recognized as the most high-tech area in Suzhou and is the premier location for technology and advanced manufacturing companies there. In Phase 1, we plan to build more than 27,000 square meter with the possibility to later add another 16,000 square meter in Phase 2. And for this project, we've received strong support from the Suzhou local government, who have granted us favorable conditions for 30 years of land use right. And as you can see, we are planning photovoltaic panels on the roof and expect to generate 1.1 megawatt hours, which should cover up to 60% of our internal energy requirements. And this is the building as it is right now, with the warehouse, the building -- the production building, the office building and the space reserved for Phase 2 in view. From another angle, the warehouse will be able to store 6,500 pallets and is over 50% complete. For the production and office building, the frame construction is ready, and we are currently building the internal structures. And finally, building picture taken from the plot of our neighbor Zeiss. And as you can see, substantial progress has been made. Next, let's go to outlook. We've seen a difficult market situation so far this year, and we expect this to continue. This includes the constraints in the supply chain, especially when it comes to semiconductors and upward pressure on raw material prices. At the same time, the broad-based energy transition towards electrification is continuing, which, in our view, means positive longer-term business fundamentals supporting our main objective, the delivery of sustainable profitable growth. Therefore, our long-term outlook -- longer-term outlook is unchanged and remains good for Industrial activities, the Automotive Group and China, which brings me to our long-term targets as announced in September 2020. Over the past 24 months, since we announced these targets, I believe we have shown resilience, making full use of available cost saving and cash preserving instruments when orders were down and using our operational leverage to grow our profitability when demand improved. We've also kept progressing our strategic agenda, and we, therefore, reiterate our medium-term targets of average organic growth of at least 5% per year from 2019 to 2025. And an EBITDA margin and return of invested capital of at least 25% by 2025 -- sorry, the EBITDA margin of 15% and the return on invested capital by 25% by 2025. I have one more point to make. On Thursday, September 8, 2022, at 2:00 p.m. Central European Time, we will be hosting a Capital Markets Day here in the Novotel. The full Kendrion business management team will be present, with Asian President, Telly Kuo joining online for obvious reasons. We expect to give a comprehensive update of the progress we've made over the past 2 years on route to our ambitious financial targets and, of course, fill you in on our plans for the coming years. We will also have some of our new products on display. For those who cannot join in person, there will be a live audio webcast with playback facility, and we hope to see you all on the 8th of September. Thank you for your attention, and let's go to Q&A.

Frank traditionally asks the first question.

Frank Claassen. Three questions. First of all, on the revenue impact, you've indicated EUR 3.5 million on the lockdown the China lockdown. Could you also maybe give us a hint how much impact it had on EBITDA or roughly what that has been? And secondly, a question on the raw materials and the pricing, 6% in the first half, both in Q1 and Q2. Do you expect it to further accelerate? How much more is there to come from the price increases, but also from the raw material impact? And then finally, probably also for you Jeroen, the working capital. You've indicated in your storage, EUR 5 million extra buffer stock for Austria and EUR 5 million from some other effects, which I didn't get much. But could you elaborate on how much, let's say, is the working capital elevated? And how quickly could you see it return to more normal levels.

Yes, Frank. So Jeroen, if you take the EBITDA -- EUR 3.5 million EBITDA and the working capital, then I'll answer the raw material.

Yes, sure. Yes. So on EBITDA, so EUR 3.5 million revenue roughly translates to EUR 1 million EBITDA, just as an order of magnitude. Then on the working capital. So working capital was roughly EUR 15 million higher compared to the same quarter last year, EUR 5 million of that relates to basically a higher activity level. So we have 9% growth, revenue growth and even that includes price increases, but that is also reflected in the raw materials. So EUR 5 million, I think, is yes, justified by the higher activity level. Then another EUR 5 million is temporary buffer stocks. We had some major line moves from Eibiswald and Villingen, where we had to build buffer stocks to secure continuation of production. And then, yes, you have a remaining EUR 5 million, which you could attribute to -- yes, basically pressure, especially on the inventory. So I do expect in the second half year that we will be able to reduce those inventory levels, definitely the buffer stock -- so the 5 million will basically go automatically, but also as raw material situation stabilizes somewhat, we should be able to manage the inventory down a little bit, not to the levels of last year. It remains volatile, and we -- it's also important to secure revenue. But I'm confident that we will be able to drive down towards year-end. .

And then maybe, Frank, on the raw materials. So the short answer, of course, is to 6%, and I don't really know what happens. I can talk to a few trends. One is that for certain materials, like steel and copper, the pressure seems to be off a bit. So that's helpful. Actually, copper and steel actually even went down. Now the situation, geopolitical situation, we all read the newspapers is still extremely volatile. So this could reverse, but that's a situation now, so that's good. On semiconductors, we and together with the analysts expect the shortages to persist, and this, of course, also has effects on prices. At the same time, we do see now profit warnings or these revenue warnings from large semiconductor companies like NVIDIA, AMD, Intel, Qualcomm. So we could also get a little bit reprieve there now. Very tentative. I'm not -- I don't know this, but -- so it could be -- I'm phrasing this very carefully, as you could tell that in the second half, this -- the pressure is going to be a little bit less than what we saw in the first half.

And related to that, do you need to pass on these, let's say, lower raw material prices right away? Or can you keep it for a little while? How does that work in your contracts?

It's the same mechanism. So there's always -- it depends. I mean, it's not every percent. So there -- there's a threshold of 6%, and it varies a bit, but let's say 4%, 5%. And then there is a bit of a time lag. So if that pressure alleviates, then there is -- we had, of course, in Q1, when on the way up, you have contraction. I think we protected the margin quite well. at the end of the day, and then we should get a bit of benefit if this happens in the second half.

Any more questions?

Tijs Hollestelle, ING. I'm also impressed by the way you protect your profitability given all the external factors. A specific question on the labor cost in the second quarter. They were down year-on-year, but also quite down compared to the first quarter. I've seen, yes, normally, you see a lot of cost inflation also on the labor cost. So what are exactly the dynamics in the second quarter on the labor on the staff cost?

Yes. Jeroen, do you want to talk a bit about that?

Yes, nothing really in particular. So wage inflation is this year still quite minimal because our most important country, Germany, we still live in the agreement of 2 years ago. And so that means roughly 2.5% wage inflation in Germany. That could, obviously, change next year based on inflation. But yes, other than that, no specific things in Q2 compared to the first quarter or compared to last year with the exception of the addition of 3T.

Although maybe 1 remark to add to that is that if you look at the effectiveness and the productivity, I should say, it's a better word of the direct labor force, specifically in automotive with this volatility that these are higher than what they were, for instance, in the COVID quarters. Because there, it was predictable and you could then take measures like Kurzarbeit to make sure that you didn't have the labor force when you didn't need the production. That is now in today's volatile environment with daily swings of production demands is impossible.

So basically, the first half year levels are a good proxy for the second half depending, of course, on...

Yes.

Okay. And then on the other operating costs, that did increase quite a lot.

Yes.

So what, for instance, is the exposure of Kendrion to the gas prices year-over-year or any other dynamics there in the first half?

So total energy prices roughly -- in the first half year, the impact of the energy prices was roughly EUR 1.5 million. And other contributing factors were also I mentioned in my part of the presentation that automotive incurred relatively high cost for engineering, for products that we won last year, specifically related to sound projects, for example, but also some suspension projects. They are now in what's called the hot phase. And during that hot phase, we also make use of external R&D services, and those are also recorded in other operating expenses. And besides that, yes, I mean, last year, we were still in lockdown. So travel expenses also went up a bit. So those are the most important factors there.

Okay. That's clear. And on the overall, let's say, client portfolio, were there any major new clients added to the portfolio, maybe your lost clients in Automotive or Industry? Any significant...

We didn't lose any clients, not in automotive, not in industrial. I would say the most activity when it comes to existing but also some new accounts, as I mentioned also in my remarks, is in IB. We still continue to -- I mean, we have been in takes about 2 years ago. One of the strategic benefits that we then mentioned other than just the scale is that we have a much fuller, much complete product portfolio, and we're seeing that the effect of that -- the positive effect on our ability to engage with accounts that eluded us and indoor for that matter for many years.

The cross-selling is going above your expectations on those acquisitions?

Yes.

Okay. That's helpful. And then final question. I think you elaborated quite well on what's happening in the Automotive industry, yes. We can read it in the newspaper every day. I know that the impact of supply chain issues and component shortages less in the industrial space, but it seems that you don't have a problem at all. Or can you say something maybe you have some, let's say, clients you have for many years in which you can see that you also missed out a little bit revenue in the first half because of also the shortage and supply chain problems in the industrial side? Is that possible?

It's less pronounced, but it is certainly there. And for instance, in IAC where we have also -- I mean, we have 3T, of course, is a soft electronics business. We had -- we acquired it, it was around EUR 12 million. We also then disclosed we have our own controls business in IAC, which was roughly a similar size, both by the way, are growing nicely. But there, we are definitely exposed to printed circuit boards, all sorts of semiconductors and not these higher-end semiconductors that end up in gaming machines and laptops and high-end televisions, but simple stuff it never used to be an issue like MOSFETs and capacitors. So we could have done even a bit more revenue on IAC. It's less pronounced, but certainly there. And then there is more stranger things like ball bearings, that was, who would ever think that was going to be a bottleneck, but now it is. And this is a very specific kind, and then it's difficult to get. So yes, a bit there. on IAC as well.

Maarten Verbeek, The Idea. Firstly, concerning the organic growth because it's pretty unclear throughout your press release was it organic or was it the current constant currencies and what does and does not include it in 3T? For example, if you look at Q2, you mentioned organic revenue growth at constant rate is 2%. So can I conclude from that, that 3T is not included in the 2%?

Yes.

So that implies that organically without ForEx, without acquisitions, you had a small negative results?

No, no, no -- sorry. So 6% was nominal. 4% at constant rates of exchange and 2% organic at constant rates of exchange. So 2% growth.

Okay. And also when I look at the recorded growth in Industrial Brakes and IAC. That's the same as what you present in the presentation, the same growth. So it does imply that within these two segments, there is no currency impact?

No, this is the nominal growth without acquisitions, so the 19% and the 15%. The currency translation effects, we have not broken it out per business unit. Most effect there is Automotive with sizable operations in the U.S. and also China and IB. So yes, 2.5% in automotive and 2.5% roughly in IB, you could say, a bit in IAC. So then you need to subtract that.

Okay. From the numbers you provide and that's a bit in contradiction to what has just stated, I can more or less conclude that 3T had a sales level of about EUR 6.0 million in the first half. Is that correct?

Yes.

When I also look back to Q4 and part of Q3, then more or less, it's still at a run rate of EUR 12 million on an annual basis. Whilst you just stated that it was nicely growing. According to me, it's more at par.

Yes. It's, I mean, 12% of EUR 12 million. It is nicely growing. And of course, you always have some fluctuations. I point to the semiconductor shortage that's clearly in that part of the business. So on the control side, in IAC, but of course, also for 3T impacts their ability, but I remain with that statement. I mean you're doing sort of a rough estimate of around 6% that's accurate, but there's definitely underlying growth there. Maybe also there -- to add to that, we have, in the meantime, opened to our office in oven Eindhoven the HTC because we see the need for more software electronics engineers, both for 3T's own business, in combination, of course, with IAC and because we see opportunities to strengthen our Automotive software and electronics in there.

Could you also indicate how much China represents of your total sales level in the first half?

Yes, we have always -- roughly 10% of total revenue is China.

But I mean, clearly, as you will understand, with EUR 3.5 million impacting, of course, predominantly China, that's a bit distorted, but yes.

And then lastly, you mentioned that you clearly benefit from the clean energy transition with the Automotive group, that's pretty clear. Could you give some examples within IB and IAC whereby you really see transformation in the market whereby they make the shift towards clean energy, where you are a really benefited with a really strong position in that segment.

Yes. So within IB, it's relatively straightforward. The brakes that we produce in all various kinds and sizes and technologies are 95% or more integrated with an electro motor. So that means that wherever you see electrification now the big segments are robotics, intralogistics, obviously, wind power, wherever these towers go up. Wind tower is full with electro motors and therefore, with brakes. We can sell -- I mean we don't usually sell directly. We sell to, for instance, Siemens. Their business is on fire because they see the need for electro motors is everywhere, and therefore, integrated as we are with that particular key customer. We then get the benefit to sell more brakes. Now -- so there's a couple of big segments, but there is also quite a few, I would say, general purpose electro motors that end up in 30, 40, 50 different types of applications. But wherever you see the drive towards more electricity, towards electrification, you automatically get more electro motors. And that's the trend that we see and that's the trend we're investing in.

But there's no example of why you do see that from a combustion engine or nonelectrical components being transferred into an electrical component where you clearly benefit from?

No, not like -- I mean, in automotive, and lots of people talk about electrification and then the chart that I also presented indicates very clearly a huge trend in a market that is trillions of size. This is much more fragmented, but at least it's interesting.

Jordi Fierlings, Add Value Fund. I have a question regarding the automotive business. Profitability over there came in below last year and below our expectations as well. And my understanding, that's mainly because of the volatility in demand from the OEMs and thereby the volatility in production output of your own factories. Now one would think that the OEMs and the Tier 1 suppliers learned from the semiconductor shortage. So my question, do you see an increased willingness from the Tier 1 suppliers and the OEMs to hold more buffer stocks and thereby making your factory output less volatile.

Yes, the short answer is no. I mean it's not to be flippant about it. But I mean, the -- you also -- if you look at -- and this is a more general point, this is not for Kendrion. You look at the state of the Automotive industry. The production levels are down, that's undisputable. We talked about that minus 12% in cars produced. What the OEMs do extremely well is they use the shortages or they use the semiconductors that they have to produce the most profitable cars. This is clearly clever. And then everything else, they push down -- sort of down the supply chain. So this whole volatility and also by -- the contracts are still the contracts that we've been working with for many years. If there is a call off in the system, you are obliged to deliver, but they have the right to cancel and they frequently do and then reinstated. So it's highly risky to start playing, say a game to say, "Well, I count on them canceling this, and I do not have the raw materials and I do not have the labor to produce it because if the call off comes, you have to produce. So it's a tricky situation. Now the question, of course, then is, is this going to persist? My answer to that is no. At some point, don't ask me when, but we'll see a more normalized world. And then this should all even out a little bit, but it's a very -- I mean, they are tough task masters, the OEMs. For sure..

[indiscernible] Could you maybe give an update on the sensor cleaning. How that's progressing? I understand it for the longer term, but maybe some updates there. And then specifically as well, how much -- or can you give an indication on how much you're spending on engineering on the -- like the new -- the future products for [ ASUS ] figures.

Yes. So we'll talk in much more detail on this in 2 weeks. But for now, so if you look at the three [ ASUS ] products in Automotive, suspension, sound and sensor cleaning, and I put them in that order on purpose. Suspension is a business that we've had for 8, 9, 10 years almost. It's growing nicely. And these suspension valves are relevant for combustion engine cars, but specifically for electrified vehicles as they are much more heavy. And as they want to lower their footprint on the road to basically reduce the drag, the height of the car. Then the next on sound. Sound, I mean, we announced in January, how much orders we want. You see enormous amount of interest. It's, of course, a legal requirement. But it's beyond just the legal requirement of sound, well, I need to adhere to the law. It is almost like -- I mean almost it is like vehicle identity. So this is now becoming a way for makers to differentiate that brand to the consumers. So a BMW or Mercedes or a Tesla will make different noises inside and outside of the cabin as part of that brand, very interesting. Sensor cleaning, I come to your question, that is related to the push towards autonomous driving. Now this is not fully autonomous. Of course, ultimately, that will happen. My view is that is quite far away before you will see a vehicle without a steering wheel and without a break. So everything is fully autonomous. But it's also relevant for Level 3, level 3.5, level 4 autonomous driving. Now that's a bit longer term. We are investing in it at F pace. So that means we're trying not to get ready with a full system 3 years before there's a real need. Now, of course, that's a bit of a bit of a judgment call, if you like, but we do that actively. And therefore, if you look at the investments that we make in that order suspension, sound and sensor cleaning, sensor cleaning is definitely the least on a run rate basis over time, of course, there's still substantial investment needed.

You're able to give an indication as well?

No, we'd rather not because then also it's hard because we have -- it's mostly in software and electronics for -- not for suspension, but certainly for sound and also for sensor cleaning. And it's hard to split out these teams also because it's a bit fungible, right? Software guys can work on one project in 1 quarter and another project in another. So -- but we'll give a bit more -- a little bit more insight in 2 weeks.

Okay. Maybe one more question in the report, it says outperformance against the automotive market, of course, they are comparing volume against your revenue, so there's a bit of inflation in there and there's different markets, of course, you're more exposed to the weaker market, your European market. If you break down by volume and region, are you still outperforming the market? And what's that due to? Is that your more exposure to EVs, more high-end cars as well? You mentioned the OEMs are focusing more on the higher selling autos.