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

Good morning, everybody here in the Novotel and on the webcast, and welcome to Kendrion's Q2 and First Half Year 2026 Results Presentation. My name is Joep van Beurden, Kendrion's CEO. And with me here is Jeroen Hemmen, our CFO. First, this morning's agenda. I will start with summarizing the key highlights of the first half of 2026 and the strategic position of Kendrion after our move away from automotive as an industrial motion control specialist. I will then give you an update of the progress we have made operationally over the past half year. Jeroen will review our Q2 and first half 2026 results. Next, I will discuss the outlook for '26, look at our 2027 financial targets, review our Capital Markets Day planned for the 17th of September and go to Q&A. Before discussing the strategic repositioning, 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. Let us look at the highlights of the first half of 2026. Starting with the financials. Normalized EBITDA margin was 18.1% in the second quarter and 17.5% for the first half at the upper end of our target range of 15% to 18%. Normalized return on invested capital increased to 26.3% from 13.9% in the first half of last year on the back of a strong EBITA and much reduced capital base. That means we have met or exceeded our 2027 financial targets ahead of schedule. We also returned EUR 17.9 million to shareholders in the first half. The order book is healthy, which supports a positive outlook for the second half. Strategically, we've completed the pivot to 4 carefully selected growth markets: Robotics &Automation, Healthcare & MedTech, Energy & Transmission Infrastructure and Industrial Safety. The project pipeline for these markets is at record levels. And mobility, which we are gradually exiting, continues to deliver a stable cash contribution with no further investment. Let us move to the strategic and operational update. Kendrion is an industrial motion control specialist, one focus, one set of end markets, one investment case. We specialize in actuation, fluid control, braking and the control electronics that go with them, all for industrial applications. These 4 capabilities sit closely together technically. They share engineering, they share customers, and they are increasingly sold as systems rather than as components. We have deliberately concentrated on 4 end markets: robotics and automation, Healthcare & MedTech, Energy & Transmission Infrastructure and Industrial Safety. These are secular growth markets driven by automation, by AI, by electrification and by demographics, not by the industrial cycle. That selection was a choice, and we made it early. Now to the character of the products because this is where the economics come from. Our products are what we call mission-critical and built for durability. If a brake were to fail in a wind turbine or an actuator were to fail in a kidney dialysis machine, the impact for the customer and for the end user can be severe. At the same time, our products typically represent a small share of system -- total system cost. High cost of failure, small share of cost, that is the combination that gives us pricing power and keeps us designed in. We believe the position is defensible. It rests on customer relationships measured in decades on advanced IP, on product quality, on long-cycle co-development where we sit with the customer from the first specification and on regulatory certifications that take years to earn. Those are high barriers to entry, and they are why our designed-in positions are stable and why this business earns the margins it does. Let us look in more detail at where we focus our advanced motion control products. The previous slide describes what we are. This shows where we have pointed the company and the revenue already sitting behind each choice. These are 2025 numbers. Robotics and automation represents our largest revenue segment at around EUR 120 million in 2025. Three forces drive it: the shortage and rising cost of manual labor, the retooling of strategic industries to keep those costs in check and the reshoring of supply chains. The products needed for this market demand precision, efficiency and reliability, which is exactly where our industrial brakes compete. Healthcare & MedTech is around EUR 20 million. Aging populations, a shortage of expert clinical labor and the AI-driven shift towards personalized medicine and diagnostics drive significant market growth over the coming years. We have a lot of traction in brakes for surgical robots. These robots need permanent magnet brakes as the requirement is so demanding. The robotic arm needs to stay exactly where the surgeon left it. Zero backlash, no drift, fail-safe under all circumstances. The segment carries a high barrier to entry and the traction we have is large and growing. Energy & Transmission Infrastructure, around EUR 25 million. The global shift to electrification as a result of unprecedented growth in electric power demand from data centers, AI compute and automobiles. That build-out needs high-performance critical motion control components like brakes for wind power and high-voltage circuit breakers for current switching. On a fault in the network, the switch needs to open in milliseconds, also when it hasn't been used for years. And industrial safety, around EUR 30 million, machines and people increasingly work side by side and strict regulatory frameworks govern that interaction. It calls for high-precision components combined with safety control electronics, and it sits directly adjacent to robotics with largely the same customer base. For markets close to EUR 200 million in revenue 2025 served from a single technology base. The same actuation, braking and control electronics competencies run through all 4. And the drivers behind them are structural, not cyclical. We will drill down on these segments in more detail at the Capital Markets Day, and we will also be displaying some of the products we have launched recently. Let us go to the operational update, starting with IAC. IAC revenue in the first half was 1% higher at EUR 56.4 million. Behind that number, market demand continued to grow. The offset came from customer-specific volumes at a limited number of accounts, not from underlying market conditions. The order book is healthy, and we're seeing improved demand from the European machine building industry. We are running a high number of development projects for customer-specific products across all of our markets of focus. In summary, order intake points to continuing growth in the second half. How about the longer term? Looking further ahead, I want to highlight products in 3 areas. First, actuators. Beverage dispenser valves are growing, and we expect more demand in the coming quarters. The automation and robotics market is showing high and increasing demand for oscillating rotary solenoids. And in medical, our medical-grade valves and pressure regulators have significant market traction. Our Shape-Memory-Alloy based lock development is finished, and we are ready to enter the parcel locker business. We will demo this lock on the 17th of September. Second, inductive heating. We have a high number of projects in the implementation phase. Our low-power induction generator is in the testing phase at the customer site. And on the high-power side, we have won a dryer project requiring up to 1.5 megawatts. Third, controls. We won an important project with a new 48-volt drive controller, the VIPER platform. VIPER is a highly efficient motor control platform enabled to run the motor with up to 98% efficiency. It's used in battery powered tools and devices where the motor can be designed smaller and the duration of the battery until reloading is longer. Together, these are some of the building blocks of IAC's growth beyond this year. Next, IB. IB revenue in the first half was EUR 51.5 million, up 8% on last year. That growth is driven by secular growth in our markets of choice, sustained demand in automation and robotics and an encouraging ramp-up in medical application. Profitability and cash flow were both well above the prior year. Looking ahead, the order book is healthy and the secular growth trends in robotics and automation and in Healthcare & MedTech are expected to drive further growth in the second half and beyond. Now about the longer term. First, robotics and automation. We have delivered our so-called "Perfect Duo" servomotor brake prototypes, a small form factor slim permanent magnet brake and a high-performance, slightly larger High Torque version. Together, they form a platform for industrial robots, for cobots and ultimately for humanoids. We have on Customized Servo Line Brakes for a new AGV motor platform in warehouse automation, and it's now in ramp-up. And our new Spring Applied Brake line for intralogistics is meeting strong interest as the IE5 top efficiency motor rollout gains momentum. We also see strong interest in our heavy rare earth-free brakes across servo motor and robotics applications. Heavy rare earth elements like dysprosium and terbium is where the supply chain bottleneck is, and we develop them brakes that do not use that heavy rare earth. Second, Healthcare & MedTech. We have a significant traction and ramping revenue in surgical robots and related equipment. And our new Halo line is under evaluation for a surgical robot with potential of up to 20,000 units per year. Next, mobility, starting with a short reminder about the Knorr-Bremse deal. The cooperation between Kendrion and Knorr-Bremse is structured in 2 distinct phases designed to ensure continuity, stability and a smooth long-term transition of the CBU plant. In Phase 1, where we are now, Kendrion remains the full owner of the plant and continues all existing operations exactly as today. Kendrion is manufacturing small volume Knorr-Bremse prototype and pilot batches planned carefully so they do not affect current customer commitments. All CBU employees stay with Kendrion. We expect the flip ownership of the plant on the 31st of December 2028. And at that moment, the model reverses and KB produces for Kendrion. This ensures continuity and long-term stability for the [ CBU ] team and the cooperation secures factory continuity and profitability as Kendrion volumes decline. So let us talk about how mobility has been doing in the first half. Revenue in the first half was EUR 20.9 million, up 4% compared to the first half of 2025. The fuel pump controller business is running well, while sound is below expectation. But more importantly, this was an excellent 6 months on profitability. EBITDA was up 44% in the first half and the margin rose to 24.9% from 17.9% last year. That reflects execution of the segment's cash generation strategy, and it reflects the cooperation agreement. That cooperation is working very well. Contractual milestone payments are on schedule and one such payment of EUR 1.3 million was recognized in the first half. This agreement has made the cost base of [ CBU ] largely variable. So as the existing programs gradually phase out, mobility continues to contribute positive cash flow with no further investment from us. I now hand over to Jeroen for the financial review.

Yes. Thank you, Joep. So let me take you through the financials. Starting with the second quarter. Revenue came in at EUR 63.6 million, up 4% on the EUR 61.4 million we reported in Q2 last year. Growth was led by automation and robotics, our largest selected growth market, driven by both a market recovery and a conversion of pipeline into revenue. The more important line is below that. Normalized EBITDA ended at EUR 11.5 million, up 16%, which translates into a margin of 18.1% against 16.1% a year ago. That is a 200 basis point improvement, and it's a record quarter for the company in margin terms. So the drivers of the EBITDA expansion were positive pricing, operating leverage on the higher volumes, lower staff costs as a result of the cost savings initiated at the end of last year and our cooperation agreement signed into Mobility, adding EUR 0.9 million contractual milestone contributions in the second quarter. EBITDA ended at EUR 8.4 million, up 27%, with a margin of 13.2% against 10.7% in the previous year. And net profit before amortization from continuing operations was EUR 5.9 million, up 37%. Then moving to the half year in the lower table. So revenue of EUR 128.8 million was up 4% reported and up 5% at constant currency. All 3 business units contributed to the increase. EBITDA for the first half was EUR 22.5 million, up 18%, with the margin expanding 210 basis points to 17.5%. That puts us at the upper end of our target range at the half year mark. Our added value margin remained essentially flat at 57.2% with positive pricing effects offset by sales mix effects. EBITDA increased 30% to EUR 16.4 million, up 30% and net profit before amortization 26% to EUR 11.1 million. Our return on invested capital almost doubled to 26.3% on a 12-month rolling basis, which is a reflection of EBITDA growth in the numerator and a significantly reduced invested capital base in the denominator following the transformation. On cost, our operating expenses were up 2% in the half year, driven by stranded costs that were previously borne by the divested Chinese entity. These increased costs were, however, largely offset by increased other operating income. Then to the developments by segment. The chart on the left shows quarterly revenue over the past 5 quarters. The one next to it shows the same split for the half year. Industrial Brakes grew 8% in the quarter and 8% in the half year to EUR 51.8 million. The demand is mainly coming from automation and robotics and from medical, the two markets where we have deliberately concentrated. Growth here is partially economic recovery, but as well clearly pipeline conversion to new revenue. Industrial Actuators and Controls was down 2% in the quarter and up 1% in the first half year at EUR 56.4 million. The quarterly decline is not a market signal underlying demand in our main segments is good. European machine building is improving and robotics and automation demand is improving as well. What we are seeing is reduced volumes at a limited number of specific accounts, and it does not change our view of the market. The order book in IAC is healthy, and we have a record number of customer-specific development projects running. Mobility revenue was up 8% in the quarter and 4% in the half year at EUR 20.8 million. Project ramp-ups more than offset the phaseout of existing programs. This business is running down by design, but it's running down profitably. Industrial EBITDA rose from EUR 15.4 million to EUR 17.3 million, with a margin improving around 120 basis points on pricing, volume and cost discipline. And mobility EBITDA rose from EUR 3.6 million to EUR 5.2 million, with the margin stepping up to around 25%. This reflected good volumes plus the contribution from the cooperation agreement with Knorr-Bremse. So the mobility phaseout is doing what we told you it would do. It is generating cash and margin on the way out without absorbing further investments. Then finally, cash flow and financial position. Our normalized free cash flow in the first half was EUR 4 million. Year-to-date cash flow is affected by the seasonal buildup of working capital that we see in every first half year. I would expect the usual unwind in the second half. The bridge on the left walks you from the net debt of EUR 30.3 million at the end of '25 to EUR 48.1 million at the half year mark. Normalized cash flow from operations contributed EUR 7.5 million positive. And against that, we had EUR 3.5 million one-off cash out and EUR 3.4 million of capital investments and the largest bar, EUR 18.1 million of capital returned to shareholders through the dividend and the share repurchase program following the transformation to an industrial motion control specialist. On CapEx, EUR 3.4 million against a depreciation of EUR 6.1 million. The reduced invested capital base I mentioned on the first slide is a direct consequence of this discipline, and it's also part of the ROI increase. Our balance sheet is in good shape. The leverage ratio is 1.2 against 2.4 a year ago. And on our refinancing, we have agreed on key terms for a new EUR 70 million committed credit facility to refinance the facilities that mature in 2027. So to summarize our financial position, we realized broad-based growth. We have a healthy order book. Our EBITDA margin is at the top of the target range. Our ROI close to doubled and our leverage halved. And that is the basis that we go into the second half year with. And with that, I hand back to you.

Thank you, Jeroen. So before we go to Q&A, we'll talk about the outlook. Macroeconomic visibility remains limited and geopolitical and trade uncertainty persists. Against that backdrop, Kendrion expects its strong performance to continue in the second half, supporting by a healthy order book and a strong pipeline. Over the longer term, we are well positioned to benefit from structural growth in the high-value segments of Robotics & Automation, Healthcare & MedTech, Energy & Transmission Infrastructure and Industrial Safety. As industrial systems become smarter and more autonomous, the need for safe, precise and reliable motion solutions is increasing. And we see these trends as important drivers of sustainable and profitable growth for Kendrion in the years ahead. Our markets of focus are structural growth markets, and we are confident in delivering further profitable growth in 2026 and beyond. We will set out our strategy and financial targets for 2027 to 2030, and we'll present them at our Capital Markets Day on the 17th of September here in the Novotel in Amsterdam. Next, our 2027 financial targets. This slide shows these targets unchanged against where we stand after the first half. Revenue growth, our expectation is 5% to 8% annually over 2024 to '27. And in the first half, we grew 5% at constant currency. EBITDA margin, the target is 15% to 18% from 2025, and we delivered 17.5% in the first half, so at the upper end. Return on invested capital, the target is 23% to 27% from 2027, and we are at 26.3% today, so 1.5 years early and at the upper end here of the range too and dividend at least 50% of normalized net profit and our payout was 61%. So we've met or exceeded our 2027 financial targets ahead of schedule. In our view, this is unmistakable evidence that the transformation is paying off. But it also means that these targets have served that purpose. And at the Capital Markets Day on the 17th of September, we will present our strategy and new financial targets for 2027 to 2030. And talking about that Capital Markets Day, here's a preview of what we will discuss. The key topics. We will open with the Kendrion strategy, a focused industrial specialist in motion control, and we will then go into more detail into the 4 markets of choice, the key application segments and where we see the secular growth opportunities. Third, technology, why our content is mission-critical and performance enhancing for our customers. Fourth, commercial traction. This is where we will give you more detail on key customers and on the project pipeline that I've referred to several times this morning. Fifth, we'll do a short update on mobility and the managed runoff with secured cash generation, and we will close with the financial section, how we are invested for growth and as just mentioned, our financial targets for 2030. Of course, we will also demonstrate some products, and we look forward to seeing you here in the Novotel in Amsterdam. And with that, I would like to go to Q&A.

[indiscernible] Question on the IAC, let's say, the decline in Q2, you say it's a limited number of accounts, which showed the decline. Could you elaborate, is it in certain segments? And do you think it will be temporary so we can see normal growth again in the second half? Or yes, could you elaborate on this?

Yes. So first of all, in IAC is more diverse than, for example, in IB. So typically, also in economic upturns and downturns, you see that IAC is a bit more flat than stable, you could say, than IB. We see the underlying growth in the main markets, as we said in the presentation, are comparable. So industrial automation, the machine building industry, so what we -- also new projects ramping comparable to what we see in IB, but we have a number of customers. I would not say it is specific sector related. One sector, but it's only part of the explanation is textile because it's a small sector that is indeed against the normal cycle. So that is not helping us. But like I said, that's only part of the explanation. It is a couple of individual accounts not specified to sectors besides the textile one. We do expect it's temporary. So there's no -- not really a structural reason. Does that mean that it comes fully back in Q3? That remains to be seen. But the underlying strength in the market and also in the project pipeline is there.

Okay. Then the added value margin, 57%, quite stable, but there are quite a bit of movement, I would say, in the raw materials. So what can we expect going forward in the dynamic of pricing, raw materials? What is happening on that front?

Yes. So actually, on the input prices, we see some pressure on especially copper. But yes, it's really limited. So I would say 1% or less. So on the pricing, sales prices outweighed input prices in the first half year and also in the second quarter, and we do expect that to continue in Q3 and in Q4. So the only reason why it's stable despite positive pricing is the mix effects, what I mentioned. So the stronger growth in e-mobility versus more limited growth in IAC, for example.

Okay. And then finally, on the milestone payments, yes, what can you say about going forward? How should we model this or...

I think when we announced this cooperation agreement, yes. So to simplify it, over the course of 4 years since we announced it, which was at the end of last year, we will receive roughly EUR 2 million per year from this contribution. Half of that is more or less stable. So that is monthly contributions to our fixed cost base. And the other half is more lump sum related based on milestones. So for this year, the milestone payment has been recognized in the first half year. So let's say, if I guide EUR 2 million per year, EUR 1.3 million in the first half year, then you roughly know what you can expect for the rest.

But so basically, the one-off in Q2 was a real -- the lump sum is a sort of one-off and that will be once a year normally in Q2 or?

No, no. That we cannot really based on when that -- so that will remain lumpy.

Martijn den Drijver, ABN AMRO. In the Q1 call, when we talked about the order book, you said that we have good visibility for Q2. And now you guide for profitable growth in H2 and beyond. So you seem much more confident about the order book and the expected growth. What has given you that stronger confidence to come up with these statements?

Yes. Maybe similar to Q1, I talked specifically about the visibility of Q2. At the same point, we have now -- the order book that I referred to a couple of times basically is the same. It's the visibility into Q3. Of course, we're into Q3 already, similar level of confidence. The beyond part has to do with the pipeline. Now the pipeline doesn't build itself over 1 or 2 quarters. So that was already strong in Q1 as well. But it continues to build. And we say for the segments that we're active in, you can say for the industrial part of the business because our order book was, of course, always a mix between automotive and industrial. So if you forget that, you just look at the industrial side, it's really at record levels. And it's related to the trends that I've been talking about and that we will be talking a lot more about in September -- on September 17. So the beyond has to do with the pipeline. The second half, Q3, Q4 has to do with the order book.

Understood. Now you mentioned that record pipeline -- project pipeline yourself. But can you give us -- without providing details that you're actually looking to give us on the Capital Markets Day, but can you roughly break that down between the growth segments, so robotics and automation, Healthcare, MedTech and other?

We will, at the Capital Markets Day, give you a sense. We're not going to, of course, do these types of forecasting. I mean, these projects, as you know, design-in cycles are long. That's also part of the protection and part of the moat that we have in these segments. It's really you're working together on the medical side, for instance, but also in robotics with our customers. But if you look at the revenue makeup of these segments today, the largest is automotive -- sorry, automation, automation and robotics. So you can imagine that if you look at the size of the pipeline in that segment, it's also larger than the others. Having said that, the traction is excellent in all 4.

And just a follow-up on that. Is there any defense-related growth for these projects in the project pipeline? Or is that still something that is a bit of a promise?

Sorry, any?

Defense.

Defense that is -- we are talking to these guys, it's long cycles. So the reason -- I mean, you can say this is also automation in a way. But today, we don't -- it doesn't warrant to be broken out as a separate segment, but we are definitely looking at opportunities there.

Got it. And then my third question, if we take out the EUR 1.3 million, and I assume, Jeroen, that you've recognized it as revenue...

Other operating income.

Okay. But it's still in revenue.

Yes, if you take that EUR 1.3 billion out, both on revenue and on EBITDA, in fact, for Q2, you get to an adjusted EBITDA -- normalized EBITDA margin of 16.4%, whereas you reported 16.9% in Q1. So why has the EBITDA margin declined in Q2? It's 16.6% because in Q2, the, let's say, one-off, but for some years recurring contribution from the agreement was 0.9%. In the first quarter, we also had 0.4%. So the -- yes, I would say the margin development in Q1 and Q2 is reasonably similar despite the lower revenue, which is fully caused by also the lower number of working days in the second quarter. So underlying profitability, I would say, actually has improved. Slightly. Slightly.

Got it. And then just a bookkeeping question, I guess, more or less. Yes, I'll give the microphone to another analyst in a second. At the 2025 results presentation in the Q&A, there was a question about CapEx. And you said, okay, the outlook for 2026, roughly around EUR 11 million. You've done now EUR 3.4 million. That's significantly lower. What should we expect? Is this -- that EUR 11 million still valid? And what should we think about 2027, given these and I already see you shaking your head? What should we think about 2027?

'27?

Yes.

You would ask '26. So '26, it will be significantly below the EUR 11 million. So it will ramp up in the second half year. So it will be more than 2x the EUR 3.5 million, but let's say, between EUR 9 million and EUR 10 million. 2027, so I think we did guide well below depreciation and also there around EUR 10 million, maybe between EUR 10 million and EUR 11 million. So there are no major expansions or refreshments needed. So most are, let's say, automation investments. We have investments in our ERP program and of course, the usual replacements that you need to do, but nothing out of the ordinary, I would say.

[indiscernible] I had the same question because my gut feel is that on the Capital Markets Day, there will be indeed a lot of focus on future growth. I think that you have become less cyclical compared to the past. So the strategic decision is, I think, working quite well, but still there's, of course, the GDP element. So if you're, let's say, in theory, growing rather fast, so in a high single-digit organic growth, what is, let's say, the room before you have to announce basically expansion CapEx programs, roughly.

Yes. Okay. So you're asking after, for instance, production capacity and stuff?

How much room -- and I understand there's many different equipments you have lined up, but...

Yes. So we said between 5% and 8% growth as an expectation for Industrial. So I say, for the coming 4 years, we should be good. Of course, when you have new programs launching, like tooling investments and things like that, but that will be within the guidance of investments well below depreciation. I do not expect in the coming 4 years that we need to do big expansions. So we have done, especially in IB, IAC is anyhow not capital intensive. And so we have good capacity there, relatively modern machine estate. So we're good.

And there's also always the possibility to add a shift. in many of the factories, we use 1.5 shift or 2. So you can then go to 3 and then obviously, that expands the capacity. And specifically, as Jeroen mentioned, in IB a few years ago, we had an up cycle. We invested quite significantly then in capacity. So...

Very positive. So does that mean that you already have stepped up, let's say, your negotiations with potential takeover targets? Has that increased?

The focus we have on potential takeover targets?

Yes, you too.

Yes. Look, we've talked about this. We have very clear and we'll definitely also touch upon that on the 17th, but we have very clear criteria for this. It has to be adjacent. It has to be mission-critical. It has to be -- the segment has to be adjacent. The technology has to be something we understand, and we can integrate it competently. And of course, then there's the whole financial aspect. You have to pay a premium. Are the synergies real? Is it some -- can you effectuate them reasonably quickly? That's a long -- that's a lot of bullets. Now we've done 2 in [ Torque and 3T. ] That hasn't changed. So that is still the way we're going about. We get a lot of teasers you know how this works. With this criteria in hand, most of the time, we can say no immediately, if it looks interesting, then we sign the NDA and we look.

Okay. And then a question for Jeroen on the refinancing, the Schuldschein and the existing bank loan, they're due April next year.

That's correct.

You are already in advanced stage with the negotiations. Will -- do you expect, let's say, that there will be features -- special features in the new debt loan?

No, it will be very comparable to what we have, slightly cheaper. And we have a signed term sheet. So I expect to have the final documentation in somewhere in October or something.

Slightly cheaper in that. So that's the follow-up. And then final question from my side on the -- yes, the one-off costs, a small restructuring charges in which area?

That was mainly in Actuators and Controls and related to a shift of R&D capabilities to -- from the Netherlands to CBU.

And no major things expected for the coming quarters?

No.

Okay. And then in the -- because you specifically mentioned that the underlying free cash flow would have been better if the cash outflow on former provisions was not there. Is the EUR 4 million on the balance sheet short-term provisions, is that, let's say, the cash risk still for the coming quarters?

Yes, that will gradually go out. EUR 1.5 million of that, yes, will take years.