TKH Group N.V. (TWEKA.AS) Q3 FY2025 Earnings Call Transcript & Summary

Hello, and welcome to TKH Group Q3 2025 Market Update Conference Call. My name is George, and I'll be your coordinator for today's event. Please note, this conference is being recorded. [Operator Instructions] I'd like to hand the call over to your host today, Mr. Alexander Van Der Lof, CEO of TKH Group, to begin today's conference. Please go ahead, sir.

Good morning, everyone, and welcome to the conference call for our Q3 update. Before we move into the remarks to the result, I'd like to point out to the cautionary note regarding forward-looking statements. Yes, going into the market update. We have seen a strong growth of 8%, mainly driven by Vision Technology and the Electrification activities. Within Automation, we saw a strong performance in the Smart Vision on the back of a stronger market demand and a decline in Smart Manufacturing based on the lower order intake and strong comparison base. Electrification was up strongly, also with a strong increase in the demand in the Onshore Energy segment. Contribution of the services activities in the Offshore Energy segment contributed very well and the technical issues in the Eemshaven plant being largely resolved. Q3 output was still limited due to release of new cable types that we had to start up and the finalization of type approval tests for the upper bandwidth of the product range that we need to manufacture for upcoming projects. We signed a new contract for 140-kilometer inter-array cables for the Gennaker offshore wind farm. And so that is a good progress for continuation and for our order book. Dewetron was divested -- the divestment was closed in October. Total turnover divested as of 2019 is amounting to a substantial amount of EUR 458 million. A further EUR 250 million in non-core turnover will be divested, including Digitalization. And going into the EBITDA, we saw a minus of 6.4%, which was mainly to a higher cost level and at the connectivity business, especially the offshore wind and not yet at full utilization. Then we move to the 3 segments. Within Smart Systems -- Vision systems, we saw an organic growth of 11.4%, improved performances in both Security and Machine Vision. Within Machine Vision, 3D Vision performed very well, benefiting from several well-performing end markets, including the consumer electronic market. Security Vision's turnover increased due to delivery of some larger projects as also announced in the previous communication. Smart Manufacturing, we saw a turnover decrease of minus 8.9%. And the turnover was mainly lower due to a strong comparison base towards Q3 last year as a result of the catch-up effects. And besides that, the lower order intake in the previous quarters had an effect on the volumes that we were able to manufacture. The order intake in the quarter continued to be impacted by geopolitical circumstances, and we will come back in the outlook what the future looks like. Smart Connectivity Systems turnover increase that was really substantial with 21.2% organically. The Offshore Energy benefited from the ramp-up in Eemshaven and increased accessories and services turnover. Production processes of offshore inter-array cables in Eemshaven stabilized further and planned changeover to different cable types and type tests approvals impacted in the end, the output and utilization. The higher cost base due to the Eemshaven plant being fully operational impacted the EBITDA. Growth in Onshore Energy from increased demand foreseen to continue in even the coming year. It looks like we are fully booked. Digitalization, we still see pressure on volumes and pricing from oversupply in the European fiber optic market. Yes, then we move to the outlook. First of all, we reiterate the outlook. Then going to the 3 divisions, we see within Smart Vision systems that it is expected to continue its strong performance. Turnover and adjusted EBITDA in the second half of '25 are expected to grow compared to the first half of 2025 on the back of the delivery of some larger secured orders within Machine Vision as well as in Security Vision. Then within Smart Manufacturing systems, as anticipated, H2 turnover '25 and adjusted EBITDA are expected to be lower than in the first half of '25 due to the lower order book, although we have not seen an increase in our order intake in Tire Building systems in Q3. We continue to expect an improvement in the coming quarters. And then we move on to Smart Connectivity systems. Turnover and adjusted EBITDA in H2 are expected to grow substantially compared to H1. A higher output level is projected in the Eemshaven factory, contingent on continued stable production processes. In addition, we expect further turnover increase in offshore accessories and services. And furthermore, in Onshore Energy, we anticipate a further increase in demand from the network companies that support higher utilization levels. Within Digitalization, a lower cost level and high utilization will also support an improved result. And then finally, subject to ongoing market uncertainties and bearing unforeseen circumstances on balance, TKH expects turnover and adjusted EBITDA for H2 2025 to be substantially higher than H1 and to be above H2 2024. So far, my comments to the results. I'd like to hand over to the Q&A.

[Operator Instructions] Our first question today is coming from Chase Coughlan of Van Lanschot Kempen.

Maybe starting on the guidance. I guess it's more of a semantics question, but you reiterate the substantially higher comment. Could you give an indication of sort of maybe in some form of quantitative terms, how large that substantially really is? I mean I know consensus is expecting quite a pickup now in Q4 from a profitability standpoint. But of course, if the sell-side expectations differ a lot in terms of how we're interpreting that substantially, then there might be a mismatch there. Could you provide any more color on that, please?

Well, Chase, this is Elling, by the way. With regards to this substantial, it's very much related, of course, to the comparison with H1. I think the second part of the guidance refers to at least the same as H2 '24. And I think that gives you a little bit of guidance at which level we at least should be landing for the second half. So that would be EUR 108 million EBITDA for the second half this year to match at least the similar level of '24 H2.

Okay. Great. That's very helpful. And then my second question would be on the Manufacturing business. You just flagged in the press release now that you expect, let's say, order intake to improve in the fourth quarter despite not really seeing any inflection year-to-date. What is providing that confidence for you?

Harm Voortman, here. When -- I think the most important part is the fact that orders don't come in just within weeks. It takes months for preparations and engineering meetings. And all the projects that we are discussing right now will lead to orders in the coming period. So when you look at the current projects that we are all working on, we expect an increase in order intake in the coming quarters.

Okay. Great. So it's more based on the conversations and macro improvements or something like this?

Yes. It's actual projects that we are discussing.

We will now move to Martijn den Drijver of ABN AMRO ODDO BHF.

Operator, it's a difficult name, I realize. I have a few as well. On Smart Connectivity, you mentioned that the problems in subsea have been largely solved. What is the issue that remains? And secondly, you mentioned these type approval tests and probably equipment resetting. Is that going to happen more often? Or is it exceptional this time as it's the first time that your manufacturing shorter came on? I have some few other questions, but I'll take them one by one.

Yes. Thank you, Martijn, for your questions. The issues that we see are, let's say, normal issues that you see in a new production plant, and it could be a sensor that fails and yes, small things that are not related to the technology that we have in the plant, but more related to issues that can happen in a new plant because everything is new. And then related to the types, yes, we have to move through the range of types that we have to manufacture, and that is a total of, let's say, around 10 different types. And yes, the changeover times and the setup that takes, let's say, at the start of the move into new types a little bit longer than that it normally will take. And yes, we are, let's say, at around 50% of the types that we need to manufacture now. So that will also ease out in the coming quarters.

Okay. But it is -- if you've done the other 50%, then after that, you don't have these hiccups as you've had now had in this particular quarter?

Yes, it will continuously improve. Also, there's a learning curve from the setup and all the challenges that you get and especially moving into the higher square millimeter cables. So we are now manufacturing even 1,000 instead of the 630 we had in previous quarters and had the challenges more when you have to move upwards. And yes, it looks also with the 1,000 square millimeter that we are, let's say, managing now the right output and without issues.

Got it. Moving on. Alexander, I thought I heard you say that you are almost fully or fully booked. I assume that relates to 2026. So based on what you have in your order book right now, you can achieve the targeted 600 kilometers in 2026? Or do you need one or more project wins? It wasn't quite clear.

No. With the latest win of project Gennaker, we have the order book to manufacture at least 600 kilometer. So we also see a small shift from '25 into '26, and that is also supporting to even perhaps get above the 600. But let's say, the 600 is the target we are looking for in '26, and that order book is there.

Got it. And then on the optical fiber activities. Can you update us where you stand on that transfer and the whole optimization? Has that now been done in Q3? Or will there still be a tailwind of that process in Q4?

Now the transfer of capacity into the location in Poland has been completed. So from now on, we are in the stage that production getting into a more normalized level and at the right volumes. So you will see in the coming quarters, the pickup -- or the effect of that completion coming through.

Got it. And then moving on to Smart Vision. Very strong organic growth in Q3. Can you talk us through the trends throughout the quarter? And also given the order intake, although that's not been disclosed. What we should expect for the near term for Q4?

Well, I mean, if you look at the organic growth there, clearly, we have highlighted also that Machine Vision and especially 3D had a strong quarter. You've seen some of our competitors also, let's say, moving at good growth rates. I think there's some good sentiment in the market in quite a few areas at least. So the market segments where we have a good share and a good position like in consumer electronics and battery inspection and a few more, but of course, the wood industry, not to forget in North America. These are key markets, which have proven to be very solid in not only the third quarter, but also in the earlier part. And that's something where we think also for the, let's say, near future, a similar trend can be seen. I don't want to give a full outlook for '26, but I think we are very well positioned for growth in this segment. That's on the Machine Vision side and similar on the Security Vision part, where we have -- in the past, we mentioned quite often that -- some of the growth was driven by larger sized projects. But what we currently see is that in the last couple of quarters, we consistently have larger-sized projects in our books. And I think also there, we see that with our proposition, we are able to get access on a more structural level to the larger sized projects. So hopefully, that's also going to be a kind of fixed part of the growth trends, which we can see for the coming quarters.

Got it. Got it. My final question is on divestments. Can you talk a little bit about how far you are with the equity carve-out of digitization and possibly also some comments on where you stand on the other divestments. Have those processes started yet? Or are you going to do them one by one?

Well, first, to start with the Digitalization. I think an important element is referring to your question earlier, what the progress is we are making. As I mentioned, as we see that the proof points of the improved structure and setup of our especially fiber optic activities is going to help us, of course, to get on the part of the execution of the divestment. But also there, we want to have certainty or we want to make sure that these proof points are actually getting back into a proper valuation. So it's not something that we will have executed, let's say, tomorrow, but it's definitely on our list. With regards to the bigger question, when we talk about the, call it, the new ownership structure of Electrification and what we presented in the CMD. Of course, I mean, that's a couple of weeks after the CMD, but we are executing this in full force with full commitment as we're working on the carve-out related issues. It's a little bit too early to give more comments on where we actually stand, but it's in swing, let's call it like that.

[Operator Instructions] We'll now move to Tijs Hollestelle from ING.

Harm, I got a follow-up question on Chase's first question. If I look at my notes from the August meeting, it's stating that the so-called sales funnel and the order pipeline looks very good for Smart Manufacturing. And there was also a comment that orders arrived just outside of the second quarter, but it seems it didn't have a real impact on the third quarter. It is now November. So is there a trend that the tire OEMs place orders towards the end of the year? Is there a kind of budget management effects? And then a second question in this one is, how does it come that TKH is so often wrong footed by talking to clients about these orders?

Tijs, thanks for your questions. The first one, it's not a trend that based on budgets that customers place orders at the end of the year. It is more an effect of what is -- you could say the disturbances in the whole economic environment in the tire industry that is causing hesitations over here and there and calculating business cases based on import duties that change overnight that makes that decision taking -- decision-making processes take a bit longer time. So that is, I think, more explaining why expected orders and projects that we actually were discussing in the first half of the year were delayed, and that is moving ahead. I would -- I do not completely recognize your statement that we are always wrong footed on the expectations on order intake. We are still confident that the larger amount of projects that we are discussing will result in firm orders in the coming period. And we mentioned that in August that we had a lot of so-called handshakes. But to convert that into orders, specifically when it comes to new factories, greenfields that are located outside countries where customers already operate that takes here and there some more time. So it's just a delay effect. One side is the hesitation that was in the market in the -- certainly in the beginning of the year. And secondly, to change the plans and move them forward that takes some time. And it's still not at the end of the year. So I think we're still confident that it will result in work. But yes, it is, of course, a fact that in Q3, we did not really see the uptick. But the project move from Q2 definitely went into Q3. So that -- I think that part is still good.

Yes. Okay. So is it fair from my side to assume that, let's say, if the macroeconomic uncertainties continue that, let's say, actual signing of orders could also take place at the end of Q1 or maybe even Q2 next year?

I think the orders that we mentioned or indicated in August, those are not related to the macroeconomic circumstances. That is more the complexity of greenfields to start that up. So that takes time. And -- but indeed, if you talk about the total improvement in the situation, for instance, at the Tier 1s, that is obviously more related to the automotive industry in general and the macroeconomic circumstances. It is clear that longer term, customers really have to invest in new technology also when you look at the sustainability, when you look at all these developments. So longer term, it looks still very good. But on the short term, we are facing, yes, the disturbances that we currently see in the market.

Okay. That's helpful. Yes. And then the second one is also basically a follow-up on Martijn's question. That the EBITDA guidance, specifically for the subsea business above 17%, is that now based on, let's say, a theoretical EBITDA margin executing the factory on full utilization at a full production, so not taking into account switching costs back-to-back production gaps, testimonials, any specification controls from the clients. So meaning that in reality, the way we look at it from the stock market that you cannot reach, let's say, the 17% EBITDA margin on a 12-month basis?

Yes, we always have to take into account that there will be some changes in specifications. So that is normal business, I would say, and that will also further normalize. It has normalized already in Q4. And so our guidance will be based, including this kind of disturbances. But it has been more extreme and above average in the past quarters.

And how many different projects do you expect to produce in 2026?

I believe that will be 5.

Right. And back-to-back...

Sorry, part of that is continuation of the projects in '25. So if I look at really new projects, I believe it is between 2 and 3.

Yes, you can do it also next to each other.

Yes, absolutely. Yes. Yes.

Okay. Okay. That should smoothen it out a bit. Okay. Yes, that's helpful. And then yes, a final question referring to the discussions during the Capital Markets Day. I think this question is for you, Elling. About the future divisional reporting structure, have you already, let's say, decided to maintain a separate reporting with all the details as you currently have for the Manufacturing and the Vision division?

Tijs, I always listen to you and your colleagues. So look forward to the disclosures in the future.

Okay. I take that as a positive, that it remains as it is today.

You will not be disappointed.

We'll now move to Maarten Verbeek of The Idea.

Maarten Verbeek of The Idea. A couple of questions. Also like to get very briefly back on the order intake. So if I understand you well, we are talking simply about a delay of signing and no cancellations or no downsizing of orders.

Yes, what we are currently discussing are projects, and we're already doing that for quite a while where, as I indicated, if you look at the sales funnel end of last year, when you look into '25 and had your expectations and discussions, there you see that indeed, the projects have shifted in time. And yes, so that I would say it's not canceling, but those projects did not materialize in '25. So the total effect is indeed a lower intake in the first quarters and the outlook is for the -- certainly for the coming quarters is very good.

Okay. Could you say anything about your operating expenses for Q4 because you mentioned that still you have elevated cost at Eemshaven. But when you start to produce, I believe that incremental costs will be minimal. So looking at Q4, your operating expenses will be only increased moderately.

That's correct.

Okay. Okay. And then looking at the CapEx expectations for this year, that still stands at some EUR 20 million for the second half?

On the tangibles you referred to?

Yes.

Yes, that's roughly more or less where we stand.

Okay. And then lastly, with the developments within the offshore industry, no surprise [indiscernible] did not have any bidder. Apparently, there is modest appetite for the [ IRS7 ] in the U.K. Your sales funnel in the inter-array cable, has that changed during the quarter?

No, that has not changed. It's still very positive and in line with what we disclosed at the Capital Market Day.

Next question will be coming from Thibault Leneeuw of KBC Securities.

Somewhat of a similar question with respect to the offshore, a company pretty early active in the supply chain also mentioned for the first time, lower demand in Europe. Other companies have been mainly focusing that the Americas that the demand for offshore was [ weak ], but it does seem like the project Maarten just mentioned that was canceled in Europe or that there were no bids for. How are you seeing the development right now in offshore? Because it does look that the supply chain even in Europe, especially the early in the supply chain that demand has weakened a bit. So my first question is with respect to that. And then the second question is basically with respect to the Q4 EBITDA outlook, given that you assume a better performance than second half '24, you need a very significant step-up. I assume this will mainly come from the connectivity, but there is a EUR 30 million -- at least a EUR 30 million step-up compared to Q3. Would you be able to quantify where this exactly is coming from? Some will come from OpEx, some will come from higher revenues. Will this all be driven from the Connectivity segment? Those are my 2 questions.

I will take the first question. And yes, we have seen that some projects are, let's say, postponed. I would say they are postponed. They are not gone. And also important to remind you that we have a very high market share. So I reconfirm that we are above 80% market share at the moment. And I mentioned in previous meetings that, that will not be our target for the future because then we have to build 2 additional plants, and that is not in our plan. But that gives a lot of additional headroom that if projects are moved, we are still quite safe, secured that we will be able to have the right utilization in our plant. And we have not targeted in our business plan to move that to the 1,200-kilometer capacity. For the medium term, we have -- we see that we will move above 700 kilometer and that looks still very, very comfortable in respect of the total amount. I don't have the detail, but I believe it's even more than 14,000 kilometers. We are, let's say, in quotations and in negotiation. So yes, that's a really big headroom. So I believe it will not have a negative impact on TKH if there is a project that moves a few years or even some projects that would be canceled.

With regards to the second part or the second question you had about the guidance of the EBITDA for Q4, you're quite right that, of course, the biggest part of the growth has to come from the connectivity part. The question if it's OpEx or other items, we already mentioned earlier that OpEx is not the main delta towards Q4. It's very much about, on one side, the output. So the related added value contribution in the fourth quarter coming out of that as well as we highlighted at the half year meeting that part of the H2, and that's also in the fourth quarter, part of the revenue is coming from services and accessories, which will be part of the revenue stream in the fourth quarter. And that causes -- this combination causes for a substantial increase also in the Smart Connectivity part if you look at the prior quarters.

[Operator Instructions] We do have a follow-up question coming from Maarten Verbeek of The Idea.

It's Maarten again, quickly one additional one. You mentioned you were quite positive for the short to midterm on your onshore cable activities even you mentioned that you were sold out, if I understood you well. Is it particularly driven by demand in the Netherlands or your expansion abroad?

It is specifically driven by the Dutch demand and from several customers in the Dutch environment, in the Netherlands.

Sorry, is there no risk that these projects once again in the Netherlands will be postponed due to all kind of nitrogen or whatever regulations or opposition?

I believe that would be strange because they are today in a flow with a much better performance and having found solutions to work around the previous issues that were there. And I believe it can always improve further the permit situation. And yes, again, we are further preparing on growth also outside of the Netherlands, and that looks really positive. And also, as mentioned in the Capital Market Day, we are really in the sweet spot there up to 220 kV. And yes, there is a high desire from TSOs and DSOs abroad to work with us. And so we are, of course, looking also to further grow our capacity. We have still some room there also in combination with the Eemshaven, and we will address as much as possible that we can realize.

But the strong demand from Netherlands is not holding you back to expand abroad?

No. No.

We have another follow-up question. This time again from Martijn den Drijver of ABN AMRO, ODDO BHF.

Just coming back to Maarten's question. The Lochem plant had a recently installed production line. So when you mentioned that you're almost sold out, is that including that capacity? Or was that still only older capacity that you had? Just wanted to clarify that.

Yes. I believe it's a good question. We are sold out in the medium voltage. And in the high voltage, we are not -- by far, not yet sold out. We made good progress this year with high-voltage projects and mainly in the area where we did not yet need to use the new installed capacity for the stranding of course. And that is more future related where we move up further into higher square millimeter cables where you need different cable construction. And by the way, we have our type test realized on the, let's say, equipment that we have now installed. So there, we see not an issue that there -- that could happen with, let's say, not stable manufacturing or something like that.

Got it. And then my second question, it's a minor one, but can you talk a little bit about Parking because I watch these LinkedIn posts. And it seems like Parking has been doing reasonably well. Can you update us a little bit about the Parking activities, especially since it's probably part of the divestment plan?

To be honest, it's not part of the divestment plan. It is a fully integrated activity within the Security Vision business, where we supply many, many technologies in the Parking garage environment with high profitable -- profitability as is also the case for the Parking guidance system. We automate the Parking garages, and that is probably what you also continuously see and feedback in the posts that we are making. So we really recovered that activity, and it's on the move. We have in the order intake, some projects that are more than EUR 10 million. And yes, it is part of the strategic position of the, I would say, Smart Security vision. And also AI is an important solution there for automating, let's say, the environment of Parking. So it's really a strategic asset in the Automation business.

I stand corrected. And when you mentioned highly profitable, should we be thinking about the targeted EBITA margins for Electrification? Are they -- excuse me, for Automation, are they in line with that?

Yes, I believe they are quite in line with that. We have a very high added value also in this segment. We changed a lot in the technology to lower our cost price to get a better performance per unit. And I believe really, really good innovation in that segment that it is not -- it's a well-performing activity.

As we have no further questions at this time, Mr. Van Der Lof, I'll turn the call back over to you for any additional or closing remarks. Thank you.

Thank you. Yes, we are full focused on our execution, especially, of course, Q4, but also preparing for 2026 with all the actions that we have in place related to the Capital Market Day. And we are really excited about, let's say, moving forward. And I'd like to thank you all for the questions, good questions that have been asked and also being in this conference call. Thank you very much.

Thank you very much, sir. Ladies and gentlemen, that will conclude today's conference. Thank you for your attendance. You may now disconnect. Have a good day, and goodbye.