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

Good day, and thank you for standing by. Welcome to the Kendrion Q4 and Full Year 2023 Results Conference Call. [Operator Instructions] Please be advised that today's webcast is being recorded. I would now like to hand the webcast over to your speaker today, Joep van Beurden. Please go ahead.

Good morning, everybody, and welcome to Kendrion's Q4 and full year 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. I will start with an overview of the progress we've made strategically over 2023, and hand over to Jeroen for a review of the Q4 and full year 2023 results. After which, I will give you an update of the operational progress over the past period, including a section on our third 5-year ESG plan. Next, I will discuss the outlook for 2024, and then we'll go to Q&A. Before the strategic update, 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. 2023 was a momentous year in which we demonstrated our resilience. In an economic environment of prolonged geopolitical unrest and slowly receding inflation, our company delivered a solid performance. We managed to keep our revenue stable. We raised prices in Automotive. We reduced our costs, and we lowered our net debt in Q4 by EUR 15.2 million, bringing our leverage ratio from 2.9x at the end of Q3 to 2.7% at year-end. The management focus was not just on our operational performance. We also made important strategic progress in 2023. The split of our Automotive group into Automotive E and Core and the finalization and start-up of our manufacturing facility in Suzhou's Industrial Park. A bit more on both. Since we announced our medium-term financial targets in September 2020, we have used the Kendrion's strategic house as the metaphor for our strategy. The top of the building indicates our strategic intent and linked to this are our medium-term financial objectives. Underpinning our strategic intent are 3 pillars: industrial brakes, industrial actuators and controls, and the Automotive group. For January 1, 2023, we have split our Automotive group into 2 separate organizations: Automotive E and Automotive Core. The main goal of this organizational model is to create more focus on innovation in products like sound suspension and sensor cleaning for E and on operations excellence, lean production, cost efficiency, profitability and cash flow in Core. And as I will discuss later in a bit more detail, this split has been successful. Underpinning the 3 pillars is the foundation of Kendrion, our people, our culture, our ESG program, where we have made substantial progress. So we split Automotive in Core and E in 2023, and we finalized our China facility. The construction of the facility in Suzhou's Industrial Park was completed in May of 2023, and this picture shows the completed facility. Please note the solar panels covering most of the roof. Over the summer of 2023, we have moved the production equipment of our 2 previous facilities in Suzhou and Shanghai to this new facility, and it was fully operational by Q3 of last year. In addition, we have started to ramp 2 of the 6 new Automotive E projects during Q4, which has had an immediate positive impact on the sites revenue and profitability. With the market for electrical vehicles growing strongly in China and with ample growth opportunities for both IB and IAC, we are focused on leveraging additional Automotive and industrial revenue opportunities. Our 2024 priority lies in ramping the recently won automotive projects and on enhancing our profitability in China. Let us now go to the business review with Jeroen.

Yes. Thank you, Joep. Good morning. So I will present the business review for Q4 and the full year of 2023. So the economic conditions continue to be challenging in the fourth quarter and affected revenue in IB in particular. The markets that IB serves, including industrial automation and wind power offer above average underlying growth trends but are as well cyclical. As a result of this cyclicality, revenue in Q4 decreased 6% at constant exchange rates. Industrial brake revenue decreased 13%. IAC reported a 2% increase and revenue in automotive increased 9% as a combination of stable revenues in Core and 16% growth in E. Our added value margin in Q4 remained stable compared to last year. The negative mix effect caused by a higher share of automotive revenue was offset by a 150 basis points margin increase within automotive. Our operating costs were EUR 3.3 million or 7% lower. These lower costs were due to the cost adjustments in IB and the effect of the automotive restructuring towards the end of 2022. The lower cost did not fully offset the lower volumes. And as a result, our normalized EBITDA ended up at EUR 10.3 million compared to EUR 12 million in Q4 '22. Also in Q4, we were able to realize the announced reduction in net debt of EUR 15.2 million. And as a result, our leverage ratio decreased from 2.9 at the end of Q3 to 2.7 at the end of Q4. We also agreed to lift the 1-year extension option in our facility agreement with HSBC and ING Bank that now will mature in April 2027. That option was granted at equal terms, indicating the confidence our lenders have in our financial position and our ability to further deleverage. Then to the full year '23. For the full year, revenue remained stable and increased 1% at constant exchange rates. Normalized EBITDA ended up at EUR 53.1 million compared to EUR 57.4 million last year. Profitability for the year was affected by margin pressure in automotive in the first 6 months and a sudden drop in volumes in IB in the second half year. In automotive, we were able to reverse the negative margin trends in the second half year by implementing higher sales prices. This led to a significant EBITDA margin increase in the second half year for automotive. In response to the market weakness in IB, we started to implement short-time work and reduced discretionary spending. We are confident that these measures, in combination with rightsizing the fixed cost base will bring back IB to healthy profitability levels in '24. And in addition, will improve IB's resilience against market fluctuations. Normalized profit before amortization decreased to EUR 13.9 million and was affected by higher interest charges. The effective tax rate increased to 30%, but mainly driven by a lower valuation of carry-forward tax losses in the U.S. Without this adjustment, the tax rate would have been equal to the 27.4% in the previous year. In total, we normalized EUR 2.6 million costs outside the ordinary course of business. These costs related to the relocations in China and the closure of the Shanghai plant and also restructuring activities in IB. Then to the financial review of the business groups. First, Industrial, where revenue and EBITDA in the second half year was significantly affected by the downturn in IB. IAC is exposed to some of the same markets, but benefits from a more diverse market segmentation. While the general machine building market was weak in IAC, this was offset by growth in medical control technology and aviation. All in all, IAC had another strong year with both revenue and profitability in line with the previous year. Industrial incurred EUR 1 million restructuring charges in Q4, which are related to IB. These are expected to lead to more than EUR 1 million lower fixed cost. Capital investments in Industrial exceeded depreciation by 21%. IB accounted for the majority of the investments that included capacity extension investments in permanent magnet brakes in Villingen that were ordered in the previous year and other investments include production lines to further localize production in China. Then to Automotive. Automotive revenue in Q4 increased 6% at constant exchange rates. Revenue in Automotive Core increased with 1% compared to a strong comparable Q4 of last year. Increased sales prices, it contributed 10% to the Automotive Core revenue. Automotive E increased 17% at constant exchange rates. Growth in E was driven by increased volumes in existing sounds and suspension programs and the start of production of 3 new projects in China and in Europe. On the back of the sales price increases, the Automotive added value margin is now gradually recovering to the historic levels we were used to. The higher added value margin led to the EBITDA margin increase in the second half year when the margin improved to 8.2% from 3.1% in the second half year of '22 and 4.8% in the first half year of '23. The step-up in added-value margins is expected to further contribute to the Automotive results going forward. Total Automotive normalized EBITDA came in at EUR 17 million, which is a 72% increase compared to the previous year. Automotive Core realized EUR 23.6 million in normalized EBITDA, a margin of 12.5%. And the EBITDA in Automotive E of minus EUR 6.6 million reflects the deliberate choice to invest in the market opportunity in this segment. For example, substantially all of the EUR 15 million R&D expenses in Automotive are allocated to E. Our EUR 13.2 million capital investments were as well primarily focused on new production lines in suspension and sound and as well capitalized R&D in Automotive E. Then finally, some words on cash flow and dividends. As I mentioned already, we did realize the announced debt reduction in Q4. The total net debt decreased EUR 15.2 million to EUR 145 million at year-end. As a result, our leverage ratio decreased from 2.9 to 2.7. The debt reduction was driven by EUR 16.3 million free cash flow, which was supported by a reduction in working capital. Normalized free cash flow for the year ended at EUR 11.3 million, which compares to EUR 3.1 million in '22. When excluding the finalization of the China building, the normalized cash flow ended at EUR 17.9 million, which is stable compared to 2022. We will remain focused on further deleveraging in '24. And with the large capital investments in China now behind us, reduced pressure on working capital, the margin improvements in Automotive and the cost adjustment in IB, we feel confident that we will significantly decrease the leverage ratio in '24. As mentioned already, our lenders share this confidence as indicated by the agreement to the 1-year extension of our facility agreement. The extension was granted without changing terms and conditions. Based on our financial position and strong business fundamentals, we will propose to the AGM a dividend payout within our policy. As you can see on the chart, Kendrion has consistently paid out dividend at the upper end of the policy to distribute between 35% and 50% of normalized net profit before amortization. The only exception was the dividend over 2019, which was passed in the earlier phase of the COVID-19 pandemic. With regards to the '23 profits, we will propose a dividend payout of 50%. This comes down to EUR 0.45 per share and a total dividend amount of EUR 6.9 million. And as usual, the dividend will be payable in cash or in stock at the option of the shareholder and will be paid out in May '24. And that concludes the business review, and I will hand back to Joep.

Yes. Thank you, Jeroen. I will now proceed with an update of the operational progress we have made in '23. As you just heard from Jeroen, in an economic environment of prolonged geopolitical unrest and slowly receding inflation, our company delivered a solid performance. We managed to keep our revenue stable, raised prices in Automotive, reduced our costs and reduced our net debt in Q4. We also ramped up our new factory Suzhou, an important catalyst for growth in 2024 and beyond. Let us look in a bit more detail at the operational progress we've made in '23, starting with IAC. IAC is active in around 30 different product market combinations. One of the tasks for IAC's management is to invest in those segments that offer potential for growth, while ensuring the other segments are optimized for profitability and cash flow. What we are seeing in IAC is that some segments, especially the ones related to the transition towards clean energy are offering opportunities for substantial growth. On the actuator side, we acquired additional business with industrial locks and valves for medical devices and industrial washing machines. And these locking solutions are also important for the electrification of warehouse automation with interest for customers in Europe, the U.S. and China. Our cooperation with Durr Dental is going well, and the first water/air supply units for dental chairs have been sold. On the controls side, we developed 3 new FIO controllers, each for functional safety applications. And for our inductive heating product line, we have developed the first 20-kilowatt solution. It's passing reliability tests and can be applied with high energy efficiencies in industrial bakery ovens. For 3T/Kendrion, we have successfully created brand synergies, which have resulted in substantial new business opportunities. I'll talk more about that on the next slide. As to our different geographies, the market in Europe is slower than last year, but we kept revenue and profitability at a satisfactory level. And in China, we see a lot of opportunity and the U.S. market developed well in '23 as demand from beverage dispensing equipment makers increased. So it was a good year for IAC. And next, let us look into 3T. 3T offers a significant enhancement of IAC's control technology portfolio with substantial cross-selling opportunities. And these cross-selling opportunities are yielding results. 3T realized revenue growth in 2023 of 23%. And there's more growth to be had. The constraint is our ability to recruit software and electronics engineers. To help alleviate that constraint, we are opening a new office in Drachten, the Netherlands with initially 3 engineers and of course, the ambition to recruit more. Next, let's talk about IB. IB had a difficult year with a sudden severe market slowdown in the second half of 2023. As you can see on this slide, after 2 years of around 20% organic growth per year and the flat first half of '23, the market for capital goods that deploy our brakes suddenly fell away. In the second half, revenue at IB was 30% lower than in the second half of 2022. We responded quickly to ensure the return to healthy profitability in the short term, we deployed Kurzarbeit in our 2 German production sites in Villingen and Aerzen. This started in Q4 and is now fully deployed for both the direct and the indirect workforce. For the longer term, we are taking a good look at our key business processes to improve our resilience in what will always be a cyclical market. And of course, we continue to localize R&D and production in Suzhou in line with Kendrion's local-for-local strategy, where we aspire to eliminate geographical interdependencies within the group. So it was a tough year for IB, but with a better outlook for 2024. Next, Automotive, and let's first take a look at the market. Here, we look at the expected development of the passenger car market by S&P Global, the report of January 2024. This slide indicates the actual and expected production in a number of cars of internal combustion engine powered vehicles and the number of battery electric and plug-in hybrid vehicles between 2022 and 2030. The current forecast for the total number of vehicles is a bit of growth with a CAGR of 2%. We also see here that the automotive market recovered from the slowdown induced by COVID, supply chain issues and inflation. In 2023, global production was at 90 million vehicles at the level that we last saw in 2018 and 2019. Within that, the growth of both classes of electrified vehicles has been and is projected to remain strong. In fact, the number of battery electric vehicles, which is in red on this slide, is forecasted to grow from 8 million in 2022 to 44 million by 2030, an average annual growth of 23%. And as a proportion of total vehicle production, the share of battery electric vehicles is expected to grow from around 10% in 2022 to over 45% in 2030. Compared to a few years ago, the forecasted and actual penetration of electrical vehicles continues to accelerate. And it's therefore not surprising that all major OEMs, Tier 1s and Kendrion too are investing in this. And this slide serves as a clear illustration why we decided to stop investing in combustion engine technology and focus our R&D efforts entirely on battery electric vehicles. A few more words on this as we are truly entering a new automotive era. This slide zooms in on the combination of battery electric vehicles and plug-in hybrids over the same time, 2022 to 2030, again by S&P Global. Some interesting takeaways. First, the production of electrified vehicles is led by China-based automotive companies. Last year in 2023, close to 65% of the production of battery electric vehicles and plug-in hybrids was based in China. And although Europe, the U.S. and other countries are reducing the gap by 2030, China still represents around 45% of global production. To conclude this section on the market, it's clear that the market for battery electric vehicles is large and a growing opportunity. So next, let's have a look at the Automotive group itself. The split of Automotive in Core and E effective for January 1, 2023, was successful. The split IN sales responsibility improved our ability to raise prices as we incentivize the 2 sales teams differently, which has helped to restore a healthier added value margin, and by separating the R&D organization, we have been able to improve the visibility into Core and E R&D investment. The result has been higher R&D effectiveness. In other words, getting more innovation per invested R&D euro. Finally, the increased focus on operational performance of our factory reduced the cost of quality and improved our direct labor efficiency. And the result was improving automotive profitability throughout 2023. As Jeroen already mentioned, Automotive revenue was up 8%. Core revenue was 6% higher and E 15%, both on a pro forma basis. We reduced our overall cost despite substantial wage inflation and Automotive EBITDA increased 72% to EUR 17 million compared to EUR 9.9 million a year ago. And we had another year of strong nominations and our 9 E projects for 2024 are ramping as planned. So a good year for Automotive with a positive outlook for 2024. So let's have a look at the 2023 nominations. This slide presents the lifetime revenue in Automotive nominations won over the past 5 years from 2019 to 2023 for E and for Core. In '23, we won EUR 300 million worth of new business, representing an overall book-to-bill of 1.15. After 2023 nominations, EUR 230 million or 77% is related to E and EUR 70 million or 23% is Core. The Core nominations are all contract extensions. On this slide, you can see the nominations over the past 5 years presented in a different way. The trend is clear, in line with the developments in the Automotive market and with our own increasing focus on E, the nominations in Core, both in absolute and relative terms, have decreased while the E nominations have grown and become much more important. Looking at the book-to-bill ratio of 5-year average nominations compared with 5-year average revenue in Core was 0.7%, while the average book-to-bill ratio in E was 2.3. And if you look at just 2023, the book-to-bill ratio of the '23 nominations compared with '23 revenue in Core was 0.4%, while the average book-to-bill ratio in E was 3.2. We expect for Core just extensions of existing programs as we do not longer work on new projects. For E, we are looking at a filled pipeline and many more opportunities in sound, suspension and smart actuation. And looking at our pipeline, we are confident we can continue to grow both our Automotive revenue and our profitability in 2024 and beyond. So let's look in a bit more detail at the E nominations. For our AVAS Sound Phantone product line, we received nominations for a new generation interior sound system for a leading European OEM. And in China and Europe, we started Phantone production for major OEM brands. In active suspension, the momentum continued. In Europe, there is continued interest for our eCDV valve. We were nominated for an eCDV at a major suspension supplier in Europe in '23, and the interest in our air suspension valve continues as well. We were nominated by a leading air suspension supplier in China, and we have now 2 of the largest 4 air suspension suppliers in China as our customers. In Smart Actuation, we won a project for a first-generation sensor cleaning valve with a European top 3 OEM, which is on track to be launched in 2025. The focused marketing campaign around smart valves resulted in an opportunity funnel of EUR 1.3 billion. All in all, we are pleased with our commercial progress over 2023 in Automotive E. Now let's move to China. In China, as mentioned, we've moved into our new factory. We saw earlier our China today is globally dominant in electrical vehicles. We have a substantial pipeline in China and especially smart damping is a significant opportunity. 2 out of the 6 projects are already in mass production, and the other are expected to ramp in the course of 2024. Nominated projects end up in EV brands such including BYD, Li-Auto, Nio, Great Wall, Geely, and SAIC. Let's look at China industrial. The commercial focus for our industrial business in China is unchanged. We prioritize large existing markets like wind power, robotics and energy distribution. And many of these segments are actively stimulated by the government's 14th 5-year plan. Next, I'd like to move to ESG, sustainability. Corporate social responsibility is an integral part of the way that we do business at Kendrion. And we respond to the increasing environmental awareness of society and our stakeholders by focusing our resources on the development of sustainable products. At Kendrion, we set ourselves ambitious targets to continue to improve on ESG. And in 2023, we have finalized our second 5-year plan that ran from 2018. This slide indicates that we have achieved 2 of our most important targets, relative reduction of energy consumption and relative reduction of CO2 emission. As you can see at the end of '23, we have reached the relative reduction target of 15%, and when it comes to CO2, we've achieved 23%, so well ahead of our 5-year target of 15%. And as mentioned, this is our second 5-year plan. In the first, we also had targets for CO2 reduction. So the cumulative relative CO2 emission reduction compared to the start of our first plan in 2015 is 56%. We're happy with this, but of course, we do not stop here. And today, we proudly announced the targets for our third 5-year ESG plan, which will run from 2024 to 2028. Over the coming years, it's our plan to accelerate the progress made over the last 10 years. And on this slide, you see the outlines of that third 5-year ESG plan using the same framework of natural capital, social and human capital and responsible business conduct. Well, let's go over them one by one. In natural capital, we aspire to achieve a further 70% reduction in CO2 emissions, and we want to establish reporting frameworks for Scope 1, 2 and 3 reporting. The goals in social and human capital include setting gender diversity targets at business group level for indirect staff aiming for a 25% improvement over time with a minimum threshold of 33%, and we want to continue progressing our corporate norms and values such as the Kendrion Way and our Circle of Trust. In responsible business conduct, we will integrate ESG metrics into our sourcing process and sustain or improve ESG ratings from EcoVadis and CDP. And of course, we will comply with the disclosure requirements such as the EU taxonomy, C-Band and CSRD. ESG and all its components, natural capital, social and human capital, responsible business conduct, we'll continue to get full attention by all Kendrion employees starting, of course, with the Supervisory Board, Jeroen and me. Now let me highlight some of the key elements of this plan. This slide indicates the progress we've made reducing our CO2 emissions over the past years. And please note, these are the tons of CO2 that Kendrion emits. So in CSRD parlor, this is our Scope 1 and 2 emissions. In 2015, our baseline year, Kendrion's revenue was EUR 442.1 million and we emitted 12.3 kilotons of CO2. In 2023, at a revenue of EUR 518.5 million, that was down to 6.2 kilotons, so almost 50% lower. And in relative terms, so relative to revenue that's 56% lower. If we had a 2028 target, our absolute CO2 will be just 15% 1/5 of what it was in 2015. We are proud of what we have achieved and committed to push for more CO2 savings. Now let's have a look at our Scope 3 emissions. First, I'd like to remind everyone of the definition of Scope 1, 2 and 3. Scope 1 are direct emissions from sources owned or controlled by Kendrion like our company cars and the heating of our building. Scope 2 are indirect emissions coming from energy purchase, i.e., Kendrion's use of electricity. So Scope 1 and 2 is what we control directly and where we have made the progress I just talked about over the past 10 years. Scope 3 are indirect emissions that are not produced by Kendrion and are not directly resulting from Kendrion activities, such as the CO2 related to the production of steel that we are using in our products. To determine Kendrion's baseline Scope 3 emission under this definition is a significant amount of work. And over the past 1.5 years, we've had 2 employees work on this full time. The analysis is not ready yet, but we are making progress. What is clear, however, is that our Scope 3 CO2 emission dwarfs our more controllable Scope 1 and 2 emissions. 96.8% of Kendrion's total is Scope 3, and we're not done yet with the full analysis, as you can see. So our target for the coming period is, first, to ensure we can report a reliable baseline for our Scope 3 and then to determine a credible and ambitious target for our Scope 3 emission reduction. So let us move to social and human capital. Here you can see Kendrion's gender diversity at the end of 2023. At group level, we are quite balanced, but looking at indirect staff and at the top 50 leaders, we have work to do. For the coming 5 years, we aspire to get at least 1/3 of these groups to be female. And finally, as part of a responsible business conduct sustainable sourcing. In the area of sustainable sourcing, we will enhance our supplier selection and screening, transitioning from basic risk assessment to integrating ESG metrics into our sourcing process. On this slide, an impression of the automated questionnaire that we are sending to all our key suppliers, and we will start with the top 30 suppliers for the first year, followed by our remaining suppliers, taking a structured and tiered approach. You're invited to fill our questions about the main ESG areas such as natural capital, ecology, compliance, social and human capital, which determine the degree of sustainable sourcing and they will receive a rating based on their input. So in summary, we feel we have a comprehensive and ambitious 5-year ESG plan and will, of course, keep you closely informed of our progress over the coming years. Let us go to outlook. We anticipate the current economic environment to continue in the first half of 2024. We also expect inflation will continue to decline, although the timing of that is uncertain. In Automotive, we anticipate a stable market, and we think we will continue to benefit from our price increases and from the ramping projects in Automotive E. The market for brakes has stabilized, and we are back to healthy profitability levels as we have adjusted our cost to the current revenue levels. For IAC, we foresee continued reliable robust performance. In short, we are positive about the improving business fundamentals, which support us in our main objective, the delivery of sustainable profitable growth, which brings me to our long-term targets as announced in September 2020. Over the past 4 years, with COVID-19, the war in Ukraine, supply chain issues and high inflation, I believe we've shown resilience and achieved good operational performance under difficult circumstances. We've also kept progressing our strategic agenda, having invested close to EUR 130 million in acquisitions and production capacity. Over the past years, we've delivered a robust performance, finalized our Chinese facility, reduced cost and raised prices in Automotive. With near-term growth evident in the project pipeline in Automotive, cost reduction in IB, continued robust performance in IAC and our China factory fully operational, we feel we are well positioned for an economic rebound. This confidence is also reflected in our dividend proposal, which at 50% of our underlying net profit is at the maximum of our policy range for the fourth year in a row. Our focus remains on stringent cost management, optimization of working capital and prudent investments with expectations to reduce our leverage ratio in H2 2024. We maintain a positive long-term outlook driven by the global shift towards cleaner energy sources, and we are confident that this rapidly advancing trend will create significant organic growth prospects for all our businesses in 2024 and beyond. As to our 2025 targets, we realize we do have work to do. But assuming no negative surprises from external developments, we believe we can reach the 5% organic growth between 2019 and '25, an EBITDA of at least 15% and a return on invested capital of at least 25% in 2025. With that, I would like to go to Q&A.

Martijn den Drijver for ABN AMRO. I'd like to start off with the last subject, the targets for 2025. In the Q3 call, you said, I think literally, we need a benign environment in order to get there. Stellar performance on the order intake or the wins in E Automotive. But you probably knew already that you had quite of that in the back. So what's really changed since November that you are now significantly more confident that you can get there? Because the E Automotive element, you already knew that.

Yes, in Automotive for sure. Now, let me first say, we said a benign environment. I stand by that. If you say no further external surprises, that means -- and we said we -- and it's not us just saying that. Everybody says that we expect the interest levels to come down. That's going to help us with our own interest expenses, but more importantly, it's going to change the investment climate. It will hopefully stimulate the investment in capital goods. That will help IB, et cetera, et cetera, unchanged. Of course, in the Automotive -- on the Automotive side, we knew what we had in the pipeline, but there is always operational risk in ramp. So we are now, let's say, 3, 4 months further down the road. So that has been confirmed. On top of that, we have established Kurzarbeit in IB that was, at the time, still in progress. Now it's done. So it's simply what we flagged in Q3. We're now 4f months further down the road. We reconfirm, indeed with a bit more confidence, having achieved significant and positive results operationally over that same period.

And then just a follow-up on that, because when we talk about profitability of IB, you mainly mentioned cost savings, lowering the cost base. Isn't there somewhat an expectation that, that will improve again in the second half and also in 2025? And if so, and I think it is, what gives you that confidence? Do you already see signs that there's a bit of restocking? Is there an uptick in RFPs, RFQs? What gives you that confidence there?

So the confidence is related to the fact that we have made IB much more resilient against this cyclicality. Now, let me be the first one to say the cyclicality that we've seen over the past 3 years -- I point to the slide that I've discussed -- we have never seen organic growth of 20% in any given year, let alone organic growth of 20% 2 years in a row. So now, clearly, you heard Jeroen say, when you talk about the investments that we did in '23, a large chunk of that was for capacity extension in IB. The decision was made in '22 because we looked at that growth, you say, look, we need to be ready for more if it comes. If you get a sudden severe slowdown of the magnitude that we have seen over the summer and then in the second half, it's always difficult to adjust that cost base to that new level of revenue. By the way, that level of revenue is nothing wrong with that. It's the level that we had, say, early '22, which was much higher than what it was in 2018 and '19. So it is more sort of the adjustment that we needed to do to that sudden slowdown. We've done that. We've done it in 2 ways. One is by using the mechanism of Kurzarbeit, which is immediate, without having to let go off your personnel. But we're also looking, as we said, more fundamentally at certain business processes, the increased efficiency. Looking at this market, it will always be cyclical. We continue to believe that for the medium to long term, brakes are exposed to electrification. That trend is unchanged. Will it be 20% growth year-over-year again? Probably not. But we do -- we are very confident that this market will continue to grow from the level that we are now. And the resilience we've built in, in our cost base will help us to absorb these shocks a little bit more effectively, and therefore, remain at profitability at a healthy level.

And that would be the final question on this subject. What is a healthy level in your book?

So, a healthy level, and I'm not claiming that we are -- I'm not claiming we are there. But our targets on average is 15% -- we want to hit 15% for the group. Automotive typically is a bit south of that. Industry is a bit north of that. That's a healthy level.

And then, my second question is on R&D. You specifically said, Jeroen, that E absorbed the vast majority of that EUR 15 million. What is going -- what should be our expectation for R&D in 2024? And will that also be fully absorbed by E Automotive?

So, the expectation is similar R&D cost. So only wage inflation now [indiscernible] fundamental changes. A bit lower on the OpEx because, you remember, at the end of '22 and also at the beginning of '23, we incurred quite high external R&D costs that phased out in Q3 and Q4. So, that will help us a bit going forward. But let's say, close to EUR 15 million is also what I expect for '24 and also for E -- essentially for E.

Okay. Got it. And then, final question from my side. Can you remind us what the value -- you showed that on the screen -- the EUR 230 million, what was the SOP of those new contracts?

Actually, you see that it's getting shorter and short, so it's a bit diverse. But the majority will start -- so already a significant contribution in '25 for the nominations won in '23. And the biggest one will actually start in the coming months, so let's say, March.

Johan Hooven, Edison Group. A few questions. The first one, perhaps a simple one on Automotive. You expect more effect from price increases in 2024. Can you give us a number, please? Second question, it's good that you split the EBITDA between Core and E. The obvious question, when do you expect to reach breakeven in E or even more, of course? And third one for now, in E, we see many projects in sound and suspension, and you adjusted your strategy a bit towards sensor cleaning smart actuators. Can you give us an update where you stand there at the moment?

Yes. Sure. Thank you, Johan. Let me talk about the sales price increases and maybe a bit about the smart actuation and then, Jeroen, maybe you can speculate a bit on the breakeven period. So for the sales price, Johan, no, we cannot give you that number. I'm sure you will understand that. So the reason we say we continue to benefit is clearly what we have achieved in sales price increases will not go away. That's one. But we are also continuing to push for more. As Jeroen mentioned, we're approaching sort of the regular levels of the added value margin in Automotive that we were used to. And as you know, we've been in Automotive for a long time. We're not quite there yet. So we still have a bit of work to do on that, and that's what we're pushing for with our customers. On E, so, you're right. So if you look also at the products, so sound and clearly also suspension, we've been with [indiscernible] customer for a long time since 2015. So these are, if you like, almost more mature products. The smart actuation is newer, and the first instance of that is that valve for sensor cleaning. We have won a substantial European OEM product, sort of one of the top 3 OEMs, that will start in '25. And as I mentioned, if you look at our pipeline, now, the pipeline, of course, is not the same as the one nomination that is currently standing at EUR 1.3 billion. So there's an enormous amount of interest in this. I would also like to add, it's modular -- this is a modular product. So this is not the way we used to work in the diesel days, where effectively every diesel valve was specifically designed for a customer product platform or automotive platform combination. That's no longer the case. So it's quite leverageable. And also, from that perspective, it used to be between nomination and start-up production used to be 3 years, sometimes even more. Jeroen already mentioned it. That is shortening. And it's shortening not just in China, it's shortening everywhere. So, that also bodes well for that E business over the next couple of years. Any breakeven on E...

First of all, I think that is already clear, but the product margins in E are good. So they contribute positively. So it's really fixed cost base that we deliberately allocate to E. Also all the nominations we won, so it's not only in volumes that it's strong, but also in the expected profit contribution, and it's really quite detailed analysis of that, and they are above -- significantly above average what we have realized in the last couple of -- in the last years. So that is positive. And on an exact breakeven point, yes, that is obviously always difficult. But if we get around EUR 100 million, it should be EBITDA neutral or become positive. And again, to a large extent, that is reflected -- it comes due to a deliberate choice. If we stop tomorrow with investing in R&D, which we think is not a smart idea because you lose the opportunity, then it's profitable already. But let's say, in the current cost structure, I would say, EUR 100 million approximately, which we should be able to realize relatively shortly.

Frank Claassen, Banque Degroof Petercam. Two questions. Let me start first on the gross margin or added value margin. It declined from, let's say, 48% to 47% despite higher pricing.

Q3 to Q4.

Okay. Nevertheless, my question is, on the added value margin, can we expect a further improvement going forward, given, let's say, that the raw material prices are coming down and you still have a sort of spillover effect from the higher pricing? Or what is the dynamic there?

So, the dynamic is twofold. So Automotive will, even with the positive development, but also basically simply because of the structure of Automotive, it has a higher material share, but that's also because we have less production there. So we are basically assembly company there. So that mix, if Automotive continues on the growth path that we expect, so that will have -- yes, it's decretive on the overall margin, not on the EBITDA margin, but on added value margin that will be offset. The expectation is that we will be able to further improve the underlying EBITDA margin of the business groups, especially in IB, where also the material share is high. So there, we should have some benefit from the fact that the purchase markets are somewhat relaxing. So then, you also have this [ regulatory ] effect that surcharges go down. So then, your margin percentage goes up, again, as long as the current trends of more relaxing purchase prices continue. And if that reverses, of course, it will be a different story. And as you've already alluded to, also within Automotive, we expect that we will be able to improve also in the coming quarters.

Okay. That's clear. And then on CapEx, now that your Chinese plant has been finished, what can we expect going forward? Will it be slightly above depreciation?

Depreciation -- so we really see the positive impact now also from this platform philosophy that we have started. So more and more, especially in Automotive, you see 2 things. So first of all, real customer commitments that the customer actually pays upfront for the for the investments, and that helps obviously also -- that also helps us to become more confident that the volumes will come because the customer is really committed in this, but also the platform philosophy, which means that we can run multiple clients on one production line. So I think we can realize growth with CapEx around depreciation.

Tijs Hollestelle, ING. I appreciate your comments on the Automotive E business because I was complaining about that for a year. Your last remark, you can relatively easy reach the EUR 100 million.

We feel confident that, that EUR 100 million is in reach. It will not take that long. So we've already mentioned we have the 9 projects. If you also include the projects that we have won in the last -- latter phases of '23, and then also further ramps will happen end of '24 or beginning of '25. So that will also help there. So it is in the pipeline. It is in the pipeline. And so, we're currently at EUR 70 million. So these 9 projects alone will easily take us there, of course, always depending on actual volumes that the brands need to sell. That is always a topic. But also there, most of the clients are tier 1s themselves, and they sell to multiple OEMs. So it's quite a diverse portfolio of end customers in cars where our revenue will end up. So that -- yes, at least that also reduces the risk from this statement. So yes, we feel confident that the EUR 100 million is in reach.

Yes. That's also how I look at it because you have, let's say, your existing volumes that the equipment producing for existing customers. That is depending on market demand and also on the competitive position of the specific customer. But you have a lot of visibility on the ramp-up. Of course, there is, let's say, a kind of a volume deviation, plus 5%, minus 5%, I remember from the Automotive. So I would say that your EUR 100 million is already quite visible during this year. The operational leverage of the Automotive E business is 25% to EBIT.

Yes. I think that's a good proxy.

The other way of looking at this, if you look at now, Jeroen mentioned, we have EUR 70 million roughly in E. That was 15% higher than the year before. Some of it has to do just with the organic growth of the E segment in itself. You've seen the slides. And then, we get on top of that, the ramp of these 9 projects. Now, they're not all 9 equally big, but a couple of them are pretty chunky, and they are the ones who are ramping now and will start soon. So, yes.

Yes, that's a lot of information. So you also announced, let's say, a Capital Markets Day in September. So if you're skeptical, you'd say, okay, you're going to [indiscernible] you're not going to reach the targets. But if you manage to get indeed Automotive E at quite high top line levels and then the profitability of the overall Automotive goes through the roof, and then maybe the IB businesses, but that's cyclical.

It depends a bit on your definition of roof, but it will certainly improve. It will go -- it will definitely go up now. Yes.

And that is also the reason you announced the Capital Markets Day.

Well, no, we do a Capital Markets Day every 2 years as you. -- yes, so we do that every 2 years. But of course, we are looking forward to that. That is going to be the final Capital Markets Day before the year 2025 when we're supposed to hit our targets. Now let me stress this. We have visibility to reach these targets. We have work to do. But with all the good stuff that we talked about, and that has been set up in '23 and before that, with the investments behind us and with some good ramping, absent any unforeseen, I don't know what, there are definitely -- we have a clear eye to reach it for sure.

That's helpful. Yes, then also over the short term, because I also was positively surprised by the state of the balance sheet and the covenants because I think that's a big risk for the investors at the moment. We're not completely out of the woods going into Q1 and Q2 because you have the rolling EBITDA, which was quite high in the first half of last year. You're losing that. But if I understand your decision to pay a dividend in May, so there's a cash outflow in the second quarter. You refinanced a big chunk of the debt. So you probably have a lot of visibility on the cash flow in the first quarter. So, no big pockets of cash outflows in taxes or interest. And trade working capital, you didn't push it to the limit towards year-end. You can still do that probably to generate some additional cash. Is that an appropriate way of looking at it?

Answering your own questions. So obviously -- yes, so we push working capital we have, but there is room to improve. There's also a bit of seasonality. And so, some of the working capital receivables will come up with a higher activity level on the stock. I think we can still do better, especially in Automotive. But just -- yes, so for example, we were able to -- banks agreed on relatively short notice on the request to extend the facility with a year. Obviously, we have shared the budget with the banks. We will not share the budget in this meeting. But the conclusion based on that sharing was that they said, okay, we will extend for 1 year on similar conditions. So it's not -- yes, I think it's fully responsible to pay out this dividend in May without jeopardizing the covenants.

Also, you are doing a disposal of a building in Austria. Has that already happened in the...

No.

And remind me of the potential cash inflow from that, roughly.

If you're interested, we can make a deal. Now, it has a book value of EUR 1.7 million -- EUR 1.8 million, I think. [ EUR 1.9 million ]? Thank you. There's also some stuff in the building, but thanks -- around that number should be feasible.

Maarten Verbeek, The Idea. Firstly, when we look at the IB, with the decline in revenue, could you maybe break that down into market and, for example, inventory reduction of your customers?

Yes, it's actually quite broad based, Maarten, because if you look at where these brakes end up into, and of course, I'm not talking about certain niche applications that we also have, it is all going into electric motors, and these go into capital goods, into robots, into wind power, into forklift trucks, into other intra-logistic applications, et cetera. So it is really exposed to the investment climate, if you like. Now, you would have seen, of course, the German export numbers. You have seen the German economy, specifically on the Industrial side, the Purchasing Managers' Index, you'll have read about the investment climate and the property crisis in China, which hasn't helped. So that combined has lowered the demand for electromotors and thus for our brakes substantially and quite suddenly. Now, having said that, and that's the more longer term, and this is not -- so it's not a market share issue. It is not a competitor who won a big customer of ours. It's -- we are very confident it's market related. We did a lot of work on that to make sure that was the case. And if electrification is here to stay, which, of course, we believe it will be, this -- the growth will resume. Will we reach the level of '23 -- beginning of '23 anytime soon? That, of course, I don't know. But with that cost base adjustment, we believe that in a normal cycle, we will be in a position to generate this, what we call, healthy profitability regardless.

I was more or less looking for -- because the market has not declined by 30%, [ much less ]. The market has not declined by 30%, the revenue decline you had. The economy -- but also the end markets in which you sell those initial brakes. So I was really trying to get a feel if you do have noticed that the inventory at your clients because partly, it must have been inventory correction. If that has ended? If you see clients coming back again?

No, definitely. So it was a combination of less demand that was certainly destocking, and these whiplash effects can be quite severe. There was a lot of -- we still remember that vividly, Q4 of 2022, which is one of the reasons that the comparables are actually quite difficult this year, was unexpectedly strong, specifically on IB. In hindsight, there was a lot of that stuff that we ship brakes went into inventory at our clients. And that destocking, in our view, is largely behind us. We're not here to say, oh, well, we can see the IB market recovering yet. What we see is it's stabilizing. So it's stabilizing at this level, and that is the level that we saw also in Q3 and Q4. And we'll just simply -- so our response to that is, let's make sure that our organization is in such a shape that at that level, we're fine. And of course, any growth that will, I'm sure will reemerge, will help us.

Tijs has been nagging for a breakdown in automotive. If I start nagging about Industrial, are you willing also to break that down into profitability of IB and [ AIC ]? And if you don't, why not?

No, this is all the segmentation. There's also an accounting discussion around that. In the end, we felt that before any -- and yes, you have been quite vocal about your wish to have that broken out, which certainly played a role in our decision to actually do that, Maarten. But we felt that was -- that visibility was helpful for IAC and IB. I'm less compelled.

And then lastly, more or less the theme of today, your '25 targets. You also just shared that a drop-through rate of 25% is realistic, and then I take it across the board. But that more or less suggests that your revenues have to go to EUR 700 million, more or less, up EUR 200 million to reach your 15% EBITDA margin target, assuming a 25% drop-through rate. So how realistic is it? And what have you penciled in to start with to get to your '25 targets that you still believe they are realistic?

I think the drop-down can also be a bit higher than 25%, especially also in Industrial, where the biggest drop has happened. So we do not need EUR 700 million to realize that 15%. You also see that in -- yes, let's say, in strong revenue months that you can have. You see immediately that also the EBITDA goes up quite sharply. So yes, the investments are done, both in capital goods, but also the organization stance. So, that means that really a large portion of your added value, which is 47% for the group, minus direct labor, which is roughly 10% for the group, it can deviate a bit between Industrial and Automotive. And then, of course, every now and then also, if you really increase the revenue, you also need to hire some more indirect people. But the drop-down is quite significant from where we are now. And it's not a linear thing. You cannot always say that. But especially when you have been confronted by quite a revenue decline, yes then you'll always also see that if it picks up again -- and it's cyclical, so it will pick up again -- that the drop-down to the EBIT is good.

Should we then more or less pencil in a drop-through rate of more than 50%, or about 50%?

Not 50%. No, that cannot be. And like I said, 47% added value, roughly 10% is your direct labor. And so, if you sell more, you do need to produce it. So the direct labor is also really a component. So then you're left with 37%, okay? Depending on where you are, it could be that you also need to invest in indirect people or OpEx. But from the organization that we currently have, I think we are equipped to grow substantially without essentially changing the organization.

And then lastly, in my notes, I did read that you anticipated to start with 6 new projects in 2023, and you only mentioned 3. So has there been some kind of delay? Or are my notes incorrect?

So, we said we -- so won them. They're ramping. Now, there are various stages to that. So these 3 are in true, so let's say, mass production. And the others are either in the sampling phase. All the production lines have been built and installed. And then, of course, it's also a matter of when the customer exactly starts calling off. Now, as you will appreciate, some of these 9, that's global; 6 in China. But globally, it's 9. Some are a little bit ahead of schedule. Others are a little bit behind. But the thing is -- and that also, again, factors into the confidence because they are 9 and some are bigger, some are a bit smaller. Initially, we talked about 7. Two were then consolidated into one. Then, it's 6. So not all these 9 will be exactly on the dot -- on the plan. But on average, if you have these types of numbers, as we already talked about, that growth is going to emerge in the course of '24 and then beyond.

A follow-up -- Martijn den Drijver, ABN AMRO. Jeroen, would you be willing to share with us what your -- what you've baked into your expectations for those savings from goods side and all the other measures that you've taken in IB?

Sorry?

For a range, if you don't want to give a specific number, but...

So, on the structural savings to reduce the fixed cost base, to improve the resilience, it's a bit over EUR 1 million for a year. So that helps. And the short-time work, based on the current revenue numbers, significantly -- are significantly higher than that, but completely also because it's really a dynamic between the level of revenue and the percentage of short-term work that you want to and can apply. So you really have to look at in tandem. So then, I think, I just want to reiterate what you've already mentioned. With the measures we've taken, at the current revenue levels, we can bring back IB to healthy EBITDA margins, and we've already alluded to what that means.

Okay. My second question relates to working capital. You said in the Q3, more predictable orders coming in, in Automotive. You have -- now they're ramping up. You have a pretty good view on how that's going to develop with some ifs and buts around that. Would you be willing to give us a sort of range for net working capital as a percentage of rate of sales for 2024 and perhaps even a longer-term target that you think Kendrion can achieve?

I think the 12% that we have realized at the end of the year, so during the year, it's a bit higher because working capital is lower in December. I think that is realistic for the group. So from the current working capital, structurally, a couple of million, and also on the current revenue level, a couple of million is possible to improve in Automotive, let's say, [ 3%, 4% ]. But yes, on the longer term, I think 12% is healthy.

Margaret, is there any questions online?

There are 3 questions from Tim Ehlers, Kepler Cheuvreux. I guess, 2 have been answered. And the third one is, when you say that customers increasingly pay upfront, does that mean that we can expect receivables going up?

Yes, they pay for the production lines. So, technically, the receivables go up. But on balance, obviously, it's good for cash flow, and it's also not that material. The 95% of the receivables will remain at what we sell in products. But yes, so customers pay more for the production lines up front. And obviously, that will be invoiced and therefore in the receivables.

But I think that the relevance of that statement is not so much on the receivables or working capital, but has to do, as Jeroen already said, with the commitment we get from customers. So we have several customers now who said, look, we'd like you to produce these types of products for us, more specifically in suspension. And then, they actually build the production line on their own nickel, which, of course, means we don't have to do it, which is great. But more importantly, that means they're truly committed to load up those lines. So it's -- that, I think, is why this is such an important development in some of our products -- projects. Any final thoughts or questions? Then, thank you very much. And if you have any follow-on, of course, you know where to find us. Behind me, there's lunch available for those of you who are hungry.