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

Good morning, everybody, here in the Novotel and on the webcast. Welcome to Kendrion's Q2 and First Half 2023 Results Presentation. My name is Joep 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 of 2023 results, after which I will take over and talk a bit about the current state of the global economy [ give an update ] of the progress we have made both strategically and operationally over the past period. Next, I will discuss the outlook for the remainder of the year and go to Q&A. Now as to Q&A, there is the opportunity to ask questions not only here in the Novotel, but also for those attending this presentation virtually. You can type your questions through the Q&A icon on the bottom of the webcast. Please state your name and company. 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 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.

Thank you, Joep, and good morning. So I will present the most important financial results of Q2 and the first 6 months. So in Q2, our revenue increased with 9% when measured at constant exchange rates. The revenue growth was driven by IAC reporting 11%, and automotive 12% growth, both when measured at constant exchange rates. IB reported 2% year-on-year growth as relatively weaker industrial production in Germany and China affected IB's larger international customers. Inflation is persisting in the supply chain and continues to affect the added value margin. On average, we increased our prices with 6% in Q2. Our second quarter normalized operating costs slightly decreased compared to last year as cost savings offset wage inflation. As a result, our normalized EBITDA increased with 2% to EUR 14 million. Normalized net profit before amortization decreased 17% to EUR 4.4 million as significantly higher interest expenses were only partially offset by lower taxation expenses. Interest costs were affected by higher interest rates and unfavorable currency movements, while taxation expense was positively affected by additional R&D reductions in China. In the first 6 months, our revenue increased by 7%, and our EBITDA decreased 3%. Reported net profit ended slightly below last year at EUR 8.6 million. The 3% lower EBITDA and higher interest costs were almost fully offset by lower tax expenses, lower amortization and lower restructuring costs compared to last year. Then moving to the industrial activities. Revenue growth here at constant exchange rate was 6% in Q2 and 5% over the first 6 months. Sales prices contributed 4% to second quarter revenue. Growth in IAC was driven by the Medical Aviation and Control Technologies segments, which more than offset a weak textile machinery sector. Volumes in IB are affected by a slowdown in industrial production in Germany and China, where IB realizes most of its indirect and direct revenues. Industrial EBITDA ended up at EUR 23.3 million compared with EUR 24.4 million in the first 6 months of last year. Wage inflation and capacity increases in IB implemented in the second half of 2022, in combination with the slower growth momentum affected the industrial margin, which still ended up at 16.5%. Investments exceeded depreciation, mainly driven by expansion investments in IB. And switching to automotive. Organic revenues increased 12% in Q2 and 10% in the first 6 months, supported by a recovery of the global car production. Price increases continue to be an important factor in automotive and sales price increases contributed 6% to the quarterly revenue, all realized in core. Volume growth in automotive was entirely driven by E, showing 30% growth for the quarter and 18% for the first 6 months compared to last year on a pro forma basis. Existing business in suspension and sound systems accounted for the majority of the growth in E. The 9 new projects referred to earlier will start to ramp up in the coming quarters. Automotive core revenue increased 7% in Q2 and also in the first 6 months, but this is largely due to the higher average sales prices. Normalized EBITDA in Automotive increased 5% compared with the first 6 months of 2022, and 68% when compared to the second half of 2022. The letter indicates the effect of the higher sales prices and cost reduction [Indiscernible]. Automotive investments were EUR 10.9 million, but include the finalization of the China building, which accounted for EUR 5.7 million. Then finally, to cash flow and our financial position. Our free cash flow in the first half year was negative EUR 12.5 million compared with negative EUR 7.6 million in the first 6 months of last year. First half year cash flow is affected by the seasonal effect on working capital, the finalization of the China building and EUR 2.5 million payments related to the settlement of a long-standing tax audit dispute and restructuring costs that were provided for earlier. Q2 free cash was negative EUR 5.8 million, which together with a dividend payment of EUR 7.1 million contributed to the EUR 13.1 million debt increase in Q2. As a result, our leverage ratio increased from 2.6 at the end of Q1 to 2.8 at the end of Q2. With the China building now fully realized, most provisions paid and the seasonal effects on our working capital turning now positive in the second half year, we expect that our net debt will decrease significantly in the coming 2 quarters. And with that, I hand over to you for the strategic and operational update.

Thank you, Jeroen. So as Jeroen said, I will now proceed with an update of the strategic and operational progress we've made so far in 2023. Jeroen just explained, we had a solid first half year despite deteriorating market conditions. Our revenue increased 7% compared to the first half of 2022, and we protected our profitability despite inflation induced pressure on our added value margin, especially in automotive. In industrial growth slowed, a direct result of lower economic activity. Industrial Brakes primarily exposed to industrial activity in Germany and China, managed to achieve revenue on par with the previous year and Industrial Actuators and Controls with more diversified activities grew by 6%. In the Automotive market, we saw a bit of improvement as the volatility in order patterns subsided. We benefited from the increased focus brought about by the split of the Automotive Group into Automotive Core and E. Our revenue grew by 10% year-over-year and on a pro forma basis, Automotive E grew with 18%, while Core saw 7% growth in the first half. I'm proud of the Kendrion team who have achieved this in an unpredictable volatile and difficult market now for the fourth consecutive year. Before I get into a little bit more detail, let me illustrate the current economic environment with 2 slides. On this slide, we see the sentiment in the main economies of the world as reported by the S&P Global Purchasing Managers Index through June 2023. An index larger than 50 indicates expanding economic activity and index below 50 signals an expectation of declining activity. And looking at this slide, the global picture is clear. Over the course of the first half of 2023, economic activity has slowed considerably. Europe and the U.S. are well below 50. China and Japan are at roughly 50. The anticipated COVID rebound in China did not materialize, and we've certainly felt this pressure, especially on the industrial side. The S&P Global Purchasing Managers Index and various other publications like the VDMA and the IFO Business Climate Index, all report the same thing. The global economy is not in a good shape. In Europe, the Eurozone economy is slow and expected to grow by just 0.5% in 2023. And clearly, the risk of a recession is still present. In Germany, business activity fell to its lowest level this year, and in fact, the economist reported that the German manufacturing has slowed down to levels reminiscent of the pandemic period. Recent reporting indicated that China's GDP grew by just 0.8% between the first and the second quarter of 2023. Exports are low and counter to most of the world, the risk in China is deflation rather than inflation. The U.S. seems to do a bit better. GDP growth forecast was revised upwards to 0.9% in 2023 as consumer spending remains a steady engine of growth, although that is now under pressure too. And in the U.S., the uncertainties remain high because of the growing impact of high interest rates and persistent inflation. So unfortunately, the weak trading conditions that we experienced towards the end of the first half are expected to persist, and I will come back to this when we discuss the outlook for the second half. Even amid the persistently challenging economic landscape, which is now extended to -- into its fourth year since the outset of the COVID pandemic, we remain confident in our strategy and more specifically in our focus on products that play a pivotal role in driving the global shift towards electrification and the adoption of sustainable energy. Our product portfolio is balanced and not overly dependent on any single vertical or market segment. Our product range spans from wind power, robotics and automated warehouses in IB to inductive heating technology, circuit breakers for electricity distribution stations in IAC, to sound actuators active suspension valves and smart actuators for electrical vehicles. The trajectory towards electrification has guided our product innovation and has been a compass for shaping our strategic decisions over the years, and it will continue to do so across all our business groups and geographies. Let me now share some of the highlights of the past half year, starting with IB. In IB we are experiencing the reduction in economic activity in especially Germany and China and increased our revenue by 3%. This is, in our view, purely market related. We are not losing key customers or market share. But we are taking short-term cost reduction measures to protect profitability and cash flow, most importantly, short-term work in one of our German-based facilities. It is important to note that the broad-based energy transition towards electrification is continuing and that we are positive about our longer-term business fundamentals. So a flat first half for IB, but with continued opportunity for more growth once the economic circumstances improve. Next, IAC. Our first half revenues were in line with our expectations with volumes slightly up, despite significant weakness in textile machinery. Compensating for that weakness are aircraft products, electrical distribution, beverage dispensing valves, laser shutters and inductive heating systems. We managed to keep our added value margin stable as we successfully passed on raw material price increases. And some other good news, the semiconductor supply crunch is finally easing up. Going forward, we see a solid order book and continued interest in new products such as industrial locks, inductive heating and valve products. So let's look at 2 of these new innovative products that we have developed over the past couple of years, and which are beginning to contribute to IAC's revenue. The first example is a so-called motorized lock, where we focus on industrial washing machines, refrigerators and household appliances like industrial ovens. The Loxam modular and can be integrated in a broad range of these appliances without elaborate engineering work. We are beginning to see the first revenue come in. And based on our pipeline, we expect that to grow over the coming years. The second is an inductive heating module, which can be used to replace heating equipment in, for instance, industrial baking for waffles and cookies, et cetera. The first product is now in the market and can deliver up to 5 kilowatts of energy. Demand is strong. We have many projects in the pipeline, and the first revenue has been realized in 2022. Currently, the team is developing a 20 kilowatt solution based on the same principle. Current heating solutions rely on oil and gas-based heating. So this module is replacing fossil fuel-based solutions. It's also a lot safer, especially compared to gas-based systems, which brings me to automotive. Let's first look at the expected development of the production of engines based on engine type by IHS Markit. The current forecast indicates that the number of engines produced over the coming years will continue to grow modestly with just over 2% per year on average. Within that, the growth of both classes of electrified engines, plug-in hybrid and battery electric is projected to remain strong. In fact, the number of battery electric engines shows a CAGR of more than 25% and plug-in hybrids at 10.5%. The combustion engine will decline with around 11% per year, at the same time, there continues to be significant combustion engine volumes for many years to come with the crossover point where there are more electric vehicles than combustion engines expected in 2028, 5 years from now. We are truly entering a new automotive era with plenty of opportunity for products related to electrification. Valves for active suspension is such a product. This slide indicates the forecasted growth in active suspension systems in millions of these systems. And as you can see, the semi-active damper systems, where we have been active for years is forecasted to continue to grow with a CAGR of 13% from 14 million systems in 2023, to 24 million systems in 2026. For air suspension system, forecasted growth is around 15% from EUR 5 million in 2023 to EUR 10 million in 2026. Putting the valve part of these systems at a conservative EUR 60 per system means that the total available market for Kendrion will grow from around EUR 1.1 billion to EUR 2 billion over the coming years. And with a strong presence in damping and our modular eCDV about to start ramping in China, we feel good about this opportunity, which brings me to Automotive E. Pro forma E revenue grew with 18% to EUR 34.4 million. And in line with the opportunity just discussed on the previous slide, we received a new nomination in China for our air suspension valve platform. More broadly, we have significant interest in the market for active suspension for sound and smart actuation. We changed our segment sensor cleaning to a broader segment called smart actuation. And the preparations for 7 new production introductions in China are progressing well, despite the slowing economy there, which brings me to China. We talked about this in February at full year results. China is the largest market for both EVs in terms of its global market share and in terms of its growth rate. According to EV volumes, almost 60% of all EVs produced globally in 2022 are sold in China, with a growth rate of 85% from '21 to '22. The Chinese market for EVs is moving fast ahead, and this trend is supported by a well-developed charging network, low electricity prices, and driving restrictions for combustion engines in some cities. This growth fuels a vibrant Chinese car industry with many new entrants. This slide shows the sales figures of the top 20 battery electric vehicles and plug-in hybrid models into the China market in 2022. And as you can see, 82% of the sales volume comes from Chinese brands. This means that in 2022, around half of all electric vehicles sold globally were produced in China by a Chinese car manufacturer. Also interesting is to note the sheer number of models, 18 of the top 20 models are produced by a local Chinese car company. We view our local presence in this market as a strategic advantage in all 3 E products, sound, suspension and smart actuation. Now let's look at some of the highlights of the first half in China. On [ May 24, ] Jeroen and I opened our new building in Suzhou, constructed almost entirely under COVID lockdown. Since then, the team has made great progress, bringing up all our production lines on schedule at the start of August and closing the previous factories in Shanghai and Suzhou. We progressed with the localization of all relevant functions in China, consistent with our local-for-local strategy. Ultimately, the goal is to have Kendrion's products and product road maps globally aligned with our locations in China, Europe and the U.S., not dependent on each other for development, testing, sample building quality assurance and with a local supply chain, local-for-local. Before we go to outlook, let's look at the projects we are ramping in China. On this slide, we mapped out 7 project that we expect to start over the coming quarters, an indication of the time line and the relative size in revenue per year. As you can see, we've quite a few projects ramping, a total of 7, as I mentioned. The new addition compared to when we presented in February is the AV suspension valve and that's top right on this foil. It's a sizable nomination of a product we have already in production for another customer, and it's expected to start to ramp early in 2024. As you can see, the difficult economic situation in China, notwithstanding, we have a lot in the pipeline expected to ramp soon, which brings me to outlook. Half a year ago, we expected the then economic environment to continue in the first half of 2023, with potentially a better second half as China was reopening. This has not materialized as we've also seen on the S&P Global Purchasing Managers Index slide. We're experiencing a reduction in economic activity globally and expect that to continue in the second half, and we are therefore taking short-term cost reduction measures to protect profitability and cash flow, including short-term work in one of our German-based facilities starting for October the 1st. We're also reducing our discretionary expenses and investments that are not directly related to revenue generation. We are confident that the global acceleration towards electrification and clean energy will persist, offering opportunities for the coming years. Assuming a return to a more stable economic environment at some point, we continue to execute on our strategic plans aimed at achieving our medium-term financial targets, which brings me to our long-term targets as announced in September 2020. Over the past 3.5 years, dominated by COVID-19 and now the war in Ukraine, I believe we have shown resilience and achieved good operational performance under difficult circumstances. We also kept progressing our strategic agenda, having invested close to EUR 130 million in acquisitions and production capacity. And assuming a return to a more stable economy ahead of us, we do reiterate our medium-term targets of average organic growth of at least 5% per year from 2019 to 25% and an EBITDA margin and return on invested capital of at least 25%, so EBITDA margin of 15% and return on invested capital of 25% by 2025. And with that, let's go to Q&A.

Who can I give the floor? And please, you're going to get -- Karina will hand out a microphone for the online participants.

Yes, Martijn den Drijver for ABN AMRO ODDO. 2 questions, if I may, now it seems to work. The short-term measures that you've announced, the furlough in Germany, the discretionary cost reductions, can you help us understand what that means in terms of actual numbers? Can you help us understand that? What type of OpEx are we talking about savings? And how much of that can you realize in the second half and perhaps what you can save in 2024? And in relation to that, if you look at consensus 2023, EBITDA stands at EUR 66 million. If you deduct from that what you've reported in the first half, it actually implies that you're going to have to do roughly EUR 36 million, EUR 37 million in the second half, looking at consensus sales that implies and EBITDA margin of EUR 13.4 million. You've just stated that market circumstances are difficult. Do you think that, that consensus EBITDA margin is still realizable?

Let me talk about the first one and then maybe, Jeroen, you can give some -- a little bit of help on the short-term cost measures. So as you know Martijn, we do not guide explicitly on revenue or EBITDA margin, and I don't want to start doing that. But I think we've been abundantly clear also as illustrated by the fact that we're taking short-term cost reduction measures, including short-term [Indiscernible] because the activity level at least in Q3 and by our expectation also in Q4 is going to be lower than what we thought it was going to be. So without giving you specific guidance, and you can look at the first half performance, which I think in these circumstances, we call it solid. And I still believe we -- that's what it is. And I'm actually quite proud of it and of the team that achieved that, you can guess what that would mean for the second half is my answer. Jeroen?

Yes. So on the cash cost measures, on the short time work -- so the majority of the cost measures you will see in OpEx, so not other operating expenses, not so much in the staff cost. Of course, the short-term work -- short time work does impact the staff cost. But yes, in COVID times, it contributed roughly EUR 1 million per quarter. But we're far away from that because, for example, in COVID also R&D activities stopped basically and the pipeline is still quite well developed. Nevertheless, it's quite a painful measure because a couple of quarters ago, people were asked to operate in 21 shifts and now for a certain percentage, they will sit at home. On the OpEx side, and then you have to think about travel cost -- also what I referred to earlier, our outsourced R&D expenses, that's in Q1, impacted our results continued also in Q2, but towards the end of Q2, that has been scaled down dramatically. And going forward, we will only consider external R&D if the customer pays for it upfront. So the majority will be in OpEx, travel, consulting, promotional expenses. And then you have to think yes, over EUR 1 million per quarter, something in that area.

But let me reiterate that when it comes to investments in our strategic direction, when it comes to staying the course on investing in products that help enable the transition towards the electrification, et cetera. We're not changing that. So this is purely a tactical measure. We like to think of ourselves as quite disciplined when it comes to that. But the confidence that we have in the direction of the company and the opportunity ahead of us remains very high.

If I may have one follow-up on that statement, Joep. If I look at the capital commitments, which were in the notes of the accounts, it says that you have EUR 10 million of CapEx committed. That's directly related to what you just mentioned.

Correct.

That EUR 10 million is going to be spent in the next 12 months? Or is it over a longer period?

No, that's for sure, in the next 12 months -- in the next 6, sorry, it will depend on delivery times. But typically, that is, yes, window 6 to 12 months.

And what kind of level will it fall back then afterwards? What would be a normal between brackets normal CapEx and after that investment period?

So yes, well, CapEx -- total CapEx, what we have said. So within 5% and 10% above depreciation is what I would expect going forward. Okay, Tijs?

Tijs Hollestelle, ING. Also a couple of questions. I appreciate, let's say, the slide on the -- the balloons on the new projects in China, but also remind me of Kendrion a long time ago, the previous management, in which the way I look at it, you have your existing Chinese business, let's say, that made EUR 100 million revenue. So that's now been transformed to the new facility that's up and running.

So you said EUR 100 million?

Yes, let's assume EUR 100 million.

You can assume EUR 50 million. 10% of revenue roughly.

Okay. [ 10%. ] And then I want to know the new projects, they're going to add, let's say, within 12 months, let's say, 20% on top of that unled. And also are there, let's say, projects phasing out because that is something that's never on the slides, but that is, of course, also happening on the back side of Kendrion, so your lose from revenue from production machines that have been producing for 5 years. So what can we expect? And I understand that you cannot predict the 100% China in terms of currency impact, which is negative in the second half as far as it now looks and also the GDP impact, but I'm looking for, let's say, your minimal scenario for additional revenue from these projects in China.

Yes. Let me give you some color on that, Tijs. So, first of all, because this is just on the automotive side of China. So China's revenue, we disclosed that before, is roughly 10% of group revenue, so call that EUR 50 million. We also talked about, I think we did that half a year ago, and you said what is the capacity of this new facility with that EUR 50 million, it's about half full. And we -- our ambition and supported by these types of projects is to fill up that factory in say 3 to 4 years. So that means that in 3 to 4 years, we'll be at EUR 100 million. Now that is not just automotive, mind you, that is -- we're active there in all business groups, IAC, brakes, and of course, also automotive. Now as to automotive and specifically, in China, the number of core -- the core revenue is close to 0. It's almost nothing. So there will be -- I mean it will obviously phase out at some point, but it's not material. And all the other projects and automotive that are ramping are all in E. So much as at some point, they will start to phase out over the next couple of years for the automotive side in China, that is not going to be a factor.

Okay. It's quite helpful. But then one of the things I always liked about Kendrion in the automotive business is that basically, you have, let's say, 90% of all the main OEMs as your client. And then within that, you also are producing products for different car types. So yes, if there is, let's say, a commercial success on one of the cars and then another one is losing market share, but because Kendrion basically has all of them in the client base, you're mitigating the cyclicality of that for customer. So how is that now looking in the E business? Because it feels to me that it is much less predictable for you, Joep, what is the conversion rate of all your old customers towards the new products?

Well, maybe I point to that let's stay with China for a while. But then if you're actually looking at the EV market, that is actually -- that is now -- I mean, today is dominated not by Tesla, but by the combination of all the Chinese new entrants, as I illustrated on the slide earlier. So as I said in my prepared remarks, we view our presence in China and the capacity that we've invested in there as a significant strategic advantage to make use of that opportunity. And as you well know, you get all these Chinese companies now are actually trying to make entrance -- entries into Europe like BYD, and a whole range of other companies as well. Now you saw the different models, and that's just the models that are selling best. So these certain projects are with various customers, most of them actually Chinese customers that are relatively new. Now I will agree with you that, that doesn't make it necessarily all that predictable. Some will be very successful. Others will be less successful. The size of these bubbles, therefore. And of course, we will disclose as we always do in February, the total size of the nominations may therefore vary. But if you look at the trends in the EV market in China, how it's been growing and how dominant it is, also globally, I feel good about that opportunity.

Okay. That is good. But if you, I would say, assume China doesn't exist, then there will be a massive decline in the European electric car customers for Kendrion.

I didn't say that. And also, of course, because this run rate is not over yet. And as I said, so China, if you assume that China produces 50% of all globally sold EVs, then America is not a factor yet. The others are in Europe from a small base. So also there, you see good growth opportunity. Now at the same time, our core business because people sort of you know that is, yes, of course, it's declining, but it's going to be around for a while. And the other interesting thing about core is investment-wise. There's not that much going on because most of the projects that typically would phase out after 7 to 8 years are now continuing. So there are certain benefits to that as well.

That's a cash cow. I understand that. But still for me, I don't get the numbers right because BMW, for instance, is now also starting introducing a lot of these electric cars. Do you have the same amount of contracts then in the E-base, because the E-base is really tiny still?

Yes, although it grew significantly. And if you look at the overall, it's 18%...

Pricings happen...

On E the pricing was all on core, as Jeroen said. So this is volume growth.

Okay. Can you make -- can you give us the split in volume and pricing for automotive E and automotive core.

In E, it was -- the 30% growth was fully volume driven. And it was 18% in the first half year, also fully volume driven. And I don't think there is a major difference in the diversification between core and E, if you look at the passenger cars, I would say actually that in E, it's more diversified. It used to be predominantly Volkswagen and Daimler. If I look at the current pipeline, it is actually widening both in China, definitely via Tier 1s but also in Europe.

Okay. I had something else. One final question. Yes, on the number of FTEs indeed there and also in the question for Martijn, that decreased year-over-year, it decreased also versus the end of the first quarter. And is there, let's say, an expected impact from China ramping up further? Are all these FTEs already been on the ground being trained handling the equipment? Or is there an additional...

No. So in principle, the staff in China is there. So of course, when you have sizable increases, then especially on the direct side, you only start hiring them when you really produce, so that we try to treat really a variable cost. On the indirect cost, it's more lumpy, but I would say currently, the organization is what it is and should be able to support largely these SOPs.

Maarten?

Maarten Verbeek, The Idea. It seems this slide is ahead of -- in front of us. Just seeking for some confirmation. Simply looking at those blues, it means that this last order doubled your backlog in China.

I didn't get that. So you said...

If you look at the blues, the latest one you have on top right. Does it imply that your backlog has doubled if you look at all the other blues.

Yes. That's a large one.

Yes. And therefore, just seeking for the information. In Q1, you mentioned that going ahead, you expected pricing to increase. Do you still expect it for Q3 and 4?

Yes. And we also expect on the auto side. So that's -- so far, especially last year in Q1 as well. So it had been one-on-one. But at one point, obviously, you have to make also some margins, so that that's -- the difference between the purchase prices and sales prices will deviate positively.

But that's implied if you have been able to change your contracts with your clients, because normally, it's very hard to increase price in the automotive industry.

Yes, it is hard work, but we are succeeding in achieving significant price increases. And I think there are also good reasons to convince the customers that the prices agreed 4 or 5 years ago, yes, cannot be applicable in the current circumstances anymore.

By the way, just an additional remark, just to supplement Jeroen a bit. This is mostly an automotive phenomenon. For instance, in IAC and IB, which, of course, the dynamics, as you can well imagine, between customers and suppliers is different from automotive. It's also work, but it's a bit easier.

On industrial, where you have a lot of clients offering -- servicing a lot of industries, where do you see particularly strong declines? And where do you still grow in the portfolio?

So I indicated for IAC, which is, as you know, is a unit with around 30 different segments that you see, for instance, in a purely industrial application like textile manufacturing, we see pressure. But then there is a whole range of other segments like aircraft manufacturing, like transmission of energy systems, circuit breakers in effect, like drinks dispensing, where we have an innovative new product. The 2 examples I gave, inductive heating and locking, they are actually doing quite well. So all in all, my statement for IAC specifically is that in a more normal industrial environment, economic environment, the growth would have been quite a bit higher. So on IB, it's a different story because IB, as you know, the brakes are for 95% to 100% integrated with an electromotor. An electromotor is typically finding its way into industrial applications. And we mentioned them all the time, robotics, intralogistics. And there, the activity level is down.

Just on the IC, could you more or less give a rough breakdown what you service, let's say, to the old industry, like the textile industry and would you service to the new emerging growth industry?

I would say that would go too far. I wouldn't necessarily qualify it as old industry. It is very dependent. We're also active in medical applications. We're active in trains, we're sitting in planes, as you know. So it's such a variety that in itself, there's always a hedge. And because we have quite a few products that are ramping, that helps us a bit stabilize it in today's economic environment.

Okay. And then lastly for the moment. Jeroen, could you give some more insight what you expect the interest rates to be for this year? Interest charge to be -- for this year. Interest charge, sorry. Interest charge to be for this year.

Yes, it highly depends on -- obviously, on the currency movement. So that impacted the first half year, especially compared to last year when it was the opposite. So then you have basically a double whammy. So if you take out roughly EUR 1 million from the first half year, and then you double it, then assuming interest rates do not climb sharply further, and most of the interest rates for the rest of the year are currently already fixed, and you should have a reasonably good estimate.

Any more questions? Johan? We'll get to you, Tim.

Johan van Hooven, Edison. I will ask the questions one by one. You expect a significant decline in net debt in the second half. Can you explain -- tell us how significant -- is significant in an amount, please, Roughly? If I remember correctly, last year half year, you sort of gained EUR 5 million in the second half. But the way you write it, it sounds more than that.

No, it will for sure be more than EUR 5 million. So as also said, so the free cash flow in the first half year was negative EUR 12.5 million. I do expect a positive cash flow and also, yes, significantly above 0. As it will not be a great year from free cash flow. We still have the finalization of China building. So if you calculate that, then it's indeed much more than EUR 5 million.

Okay. Also looking at price increases, just to get a feel for a number. In Q1, the price effect was 3.5%, came to [ 6% ], can we assume around 5% for the second half?

Certainly. It's hard to know. I think -- so the price increase -- as the inflationary environment persists, we will continue to push hard, as hard as we can on protecting our added value margin. Now initially, in the automotive side, there's also a time lag, you're well aware of that. We've lost a bit of that. We're clawing it back and I expect that to continue. It's very difficult to predict in percentages of revenue, how much it's going to be.

Okay. But really more new price increases on top of sort of the effect of...

Continuous agenda item for the sales force, not just in automotive but everywhere.

Can you explain a bit more about the trends in commercial vehicles? When we always talk about passenger cars, still an important part of automotive.

Yes. Commercial vehicles, certainly, it's part of core. It is not saying anything surprising here, but much more stable than core. There is -- this is not, in a way, this market, although electrification for commercial vehicles is also ongoing. It's far behind for the simple reason that the ranges are much longer and the rates are much higher. So for the foreseeable future, we can say 10 years, I do not think that electrification is going to have a material effect on the volumes and the opportunities in our commercial vehicles business. It's part of core. It helps stabilize the core franchise, if you like, and also together with the fact that in the more -- the light vehicle segment, the investment level is significantly down. It's a good part of that part of the business.

You might be able to keep revenue stable in the next few years?

Yes, stable or maybe even growing a bit because you do see new projects, there are no opportunities much more than on the light vehicle side.

The last question for now. Just for a reminder, the split in automotive E, if I remember correctly, smart is not that big yet. Is it what's the split between suspension and smart?

Yes, if we break that...

Yes, let's say, 2/3s, 1/3. 2/3s suspension and the rest...

Yes. And suspension, as you know, is a business that started ramping in 2015. So we are well present there. Tim?

Tim Ehlers from Kepler Cheuvreux. I have a few questions regarding your costs. So the driver behind the decline in margins was apparently the material cost in the first half. How do you expect that to develop? And then also versus the staff cost going forward? So do you expect an impact of wage inflation in the second half? Or do you see offsetting effect by paying off more people or to the short-time work in Germany? What's your not guidance, but your view for H2?

So on the wage, you're talking specifically about wage inflation and also added value margin.

How material costs and wage cost will develop.

Yes. Okay. Now let me talk a bit, I mean on the material costs, as we earlier mentioned, protecting our added value margin on the industrial side and expanding it in automotive is a key part of what we're focusing on going forward, and we -- as we have done over the past year basically. So that will not stop. It's very difficult to predict or to guide what the impact will be, but we will do our utmost to try and get back to the added value margin that we were used to before the inflationary environment persisted. On the wage inflation, Jeroen, maybe if you want to.

Yes. So I think also in Q1, I mentioned. So we had a bit of a one-off additional wage inflation in Q1. So in Q3 and Q4, I expect the increase to be stable compared to -- a little bit higher compared to Q2, because part of the wage inflation started in the 1st of June, according to the tariff agreement in Germany. And I literally -- and again, these are very round numbers. I mentioned that the impact of wage inflation was roughly 2.8 in Q1, 1.5 in Q2 and then 1.9, 1.8 in Q3 and Q4, very round numbers because there are a lot of dynamics there, but that is what you can roughly calculate. And on the short term, yes, cost measures I mentioned already that will be predominantly driven by the OpEx. Obviously, there will be some impact on the short time work. But yes, as a percentage, it's not that material.

In absolute terms, staff costs will probably go up a bit [ in technology. ]

I would not see a drastic change. But again, there are a lot of dynamics there, but, yes.

Okay. And then one question regarding the margins of IB and IAC. You mentioned that we've seen stable gross margins in IAC. That means the decline in margins comes slightly from IB.

Yes. Look, these margins are also related, of course, to volumes, as you can imagine. The other effect is what you see in percentages, if you raise the sales price and your input price, of course, the percentage of the gross margin goes down a bit. So I would say, I'm not putting too fine point on the IB, although you always see a bit of fluctuation. It's also relatively stable.

And then one question regarding your E subdivision. I mean it grew nicely. But I think it also underperformed the overall market growth in the E segment a bit. What's your view on your market share there? Do you see it rather growing or stable...

Also there, I mean, this is a very dynamic industry as I put a few slides to illustrate that. If you look at that bubble slide in China alone, of course, today, the revenue there is almost 0. We're sampling. Now we expect over the next couple of years for that to grow materially. So you're always chasing the growth to some extent a little bit. So it's a bit too early to look at our growth and then look at the growth of the E market and then draw conclusions there about market share, simply not mature enough, I would say, to do that. But I mentioned earlier, I think our presence in China is a strategic advantage because of the dynamics in that particular part of the world. We won a large project over the past couple of months that was illustrated on the bubble chart on the top right corner. As [ Martijn ] rightfully pointed out, basically doubling the backlog, there's plenty more opportunity, and it's up to us to make full use of that.

Okay. And will we see some effects from the opening of the facility in the second half in China, some revenue effects? Or because you also mentioned that the current economic situation is not the easiest in China that...

No, it's not, and it's hard to predict because, obviously, but the ramping project, I mean, ramps by definition, they take a few months. So in the second half, it's hard even for us to see if the ramping volumes offset the pressure we feel that we're going to feel on the state of the economy. I mean you can reach everywhere about that. But in '24, given the size of the products that we have and hopefully in combination with some normalization of the economic environment, we should start growing.

Okay. And for IB and IAC in China, that's completely cyclical with...

Very similar. Yes. Absolutely. Martijn?

[ Martijn den Drijver ] [Indiscernible]. So if you indulge me please, help me understand 2023, let's say, that you end up at 11% hypothetically EBITDA margin. You need to go to 15% in 2 years. Was -- in a nutshell are the key building blocks to get to that 15%? And could you tell us in order of magnitude what they are? Well, simple terms...

Yes. I can make that very simple. It's operational leverage. So as I said in my remarks, we -- this is the fourth year of an adverse economic situation. And it took over years, then the Ukraine started, there was the hope and the expectation at the start of the year that the second half is going to be better. COVID was going in China, there would be a rebound, none of that has materialized. All we need -- if we look at the position that we have in the markets that we're active in, if you look at the pipeline and if you look at the opportunity ahead of us, all we need, which is, of course, by now after 4 years is a big ask, is a bit normalized economic environment, so that we don't have these downdrafts of cyclicality. If that happens, growth will rebound, the operational leverage will get us to our targets is our statement.

Just to drill down a little bit more than that because obviously, I understand that operational leverage is key. But is it -- the biggest component is recovery of the existing business than growth in the automotive and the growth in brakes.

It's all of the above. So at the end of the day, if you look at your existing business, obviously, that's much larger than whatever you grow on top of that. We said 5%. So the existing business, clearly, that's where the bulk of the volume is. So downward pressure on that is not going to be helpful. So it's -- but it's really the combination. You can't really dissect that and say, look, if the economy is not cooperating and the activity level is low, that also has -- that also means that many of our customers are also, as we do look at the investment levels and say, well, maybe next year. So it's very difficult to dissect that.

Tijs Hollestelle, I've got a follow-up question -- a housekeeping. The impact from the new facility on the depreciation and amortization in the next quarters? And then also, let's say, during the full impact for next year.

The depreciation -- yes, so the depreciation will go up. Yes, let's say, EUR 400,000, EUR 500,000 in Q2 -- in half year.

And the trade working capital was quite stable, I think, quarter-over-quarter. Are there still, let's say, significant effects from strategic inventory levels?

No. Actually, I think inventory has come down nicely. So last year, we had [ 5 million ] buffer stocks in there, but at the same time, the revenues have increased quite significantly. And the price impact obviously also impacts the stock. So on China, there were some buffer stocks towards the end of June because of the move, but I would not qualify that as material. And on the receivable and payable side, yes, nothing really specific that stands up.

Yes. That's a bit straight because most of the companies I cover do see, let's say, a return of normal payment behavior. So let's say, pre-COVID, people were dumping cash with a lower negative interest rates. We don't see any of that?

There's no big deviation in payment behavior of our customers, no. So actually, literally, for example, the overdue receivables were exactly the same percentage as last year.

And one more final and maybe I asked it the last time that you see in the big automotive industry, you see a lot of disposals of the, let's say, what you call core automotive but of the combustion engine business. Have you been approached by potential investors who want to buy your automotive core?

If there is anything to say there, we'll let you know. We're not going to speculate on...

Is it a say from a structural and organizational perspective, even a viable business case?

My statement is yes, it is. This is -- it is a viable -- it's a cash cow. So absolutely.

Maarten Verbeek, The Idea. About China, you have these 7 projects. When do you think all these 7 projects combined will be at their annualized revenues?

Very difficult to say, but I would say 2, 3, 4 years from now. I mean these ramps go -- it's typical -- we talked about this many times. It's a 7, 8 year cycle. So you have 1, 2 years of ramping, then you get to the peak and then you get some -- you get the decline in the sunset. But you all have to overlay the success of the model. That's why I'm actually quite pleased with the fact that it's not just one project, but there are 7. Some will do better than what we just represented here in the relative scale. Others will be worse. Hopefully, the average is going to be close to what we expect.

And hopefully, the last one will do better. Talk about one of your new projects that's motorized work. Firstly, could you inform us what the real added value of this product. And when I look at the market for washing machines, refrigerators and household appliances [ stent ] is massive. So what is your addressable market in the space?

So it's industrial appliances. So this is not for the washing machine and the oven that you have and I have in our homes. The added value is significant, but this is typical IAC business. It's niche by definition, drinks dispensing valves, I mean this is not -- this is also for bars and hospitality in the United States. We released oxygen masks in Boeing 737. It's all niche. The added value is excellent. But it's an innovative and new solution that makes these types of industrial machines much safer. And therefore, it's going to help us grow in IAC over the next couple of years. And these are just 2 examples. There are more projects in the works. Anything online, [ Tale ], no. Any final thoughts or questions. Then I would like to thank you very much for your attention, and we'll speak soon. Thank you.