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

Good morning to everyone, especially warm welcome to you here in the Experience Center of TKH, and very good to see you here and that you are daring to be physically here. Also a warm welcome to everyone in the Teams meeting and also in the webcast for the presentation of our half year results. We are, of course, ourselves quite enthusiastic about what has happened in the first half year, especially the second quarter, went quite well. Of course, the comparison base was easy because of the heavy COVID situation last year. When we review the first half year, we saw that especially the first 2 months were still quite difficult. That was also why we were initially careful with our outlook for the first half year. In May, we were somewhat more positive, and we upgraded the outlook that it would be better than the first half year last year. And that went actually quite well. And I especially have to give a compliment to the team of VMI, Tire Building, which really did an incredible job in increasing the capacity utilization in a very short term. And that led, in the end, also to a substantial improvement of the profitability in Q2 and better than that we originally forecasted. And that is also the reason that other activities also performed very well. Very good demand, especially Machine Vision. And that we had a substantial profit increase even compared to the first half year of 2019, which is a better comparison base, of course, than the first half year of 2020. Very high organic growth in Q2. Return on sales, 13.4%. I believe, well on track to get to our target of at least 15% and yes, we are really on the move. If we see what also was very positive is the order intake, about 40% more than the first half year last year. Also, the order book, much higher, 50% higher order book than that we had at the end of June 2020. So yes, why is that so much higher? Of course, because of the catch up of demand. You saw a very high order intake in Tire Building. Especially, Q2 was very good, Q1 was also already quite good and Q4 2020. So continuously further improvement of the order intake. And yes, we need all our creativity and energy, how to organize the capacity in the end. Well on track with respect to the targets that we have set for Tire Building. And yes, also the other innovations are doing quite well. Subsea systems, some nice orders that came in, especially within the vision activities, the 3D confocal technology, which was acquired, I believe, in 2019 -- end of 2019. And really spot on technology for all the challenges that we have in the industry are there to analyze all kind of measurements and to improve further quality of high-tech systems. Indivion, we mentioned that also already last year that we are on the move there, breakthrough in further positioning and orders. And I believe the perspective is really, really good also for the Indivion. And that means also that for the care vertical, we are also on the move, and we will come back later to the developments per vertical. A quick update of the Simplify & Accelerate program. We have announced that we will have a Capital Market Day on the 17th of November. And of course, we will update then more in detail where we are, and also we'll update about targets that we set and also about our further simplification, where we believe we have some very nice ideas and also based on investor feedback and, of course, also after intense analysis and looking at options ourselves within TKH. Then when we go to the verticals, a mixed picture. Some areas doing really well and especially, I believe the other vertical markets. I know that some investors questioned if we should be active in the other vertical markets, but we always said there are also some interesting activities there. Of course, the, let's say, more long-term view is that the growth is more close to 5%, and the other growth verticals should have a high perspective with a higher growth rate. But what we see is that even with some minuses, Tire Building, minus 9.7%; and Infrastructure, minus 1.1%; and especially Parking, but not a very big figure, absolutely seen, but minus 13.6%, but we still had a quite good organic growth. So I believe we still have some in the pocket for next year to further perform because we believe that those markets that -- where we today see no increase that there will be potential to get back on track with organic growth. Machine Vision, especially did very well, 11.5%, but organic growth was even close to 16%. Elling might come back what the gap is between the organic growth and the year presented growth. So yes, we are really enthusiastic with the progress that we made in the verticals. I believe -- or we believe that the targets are really realistic, and especially with the Tire Building, with the high order intake in Q2, we are really on track to get into the growth scenarios, the bandwidth of EUR 450 -- EUR 550 million, not too far from now. Yes, a quick update of the solutions. I prefer to have the audience asking questions. So we walk through it quite quickly. Turnover increase in Telecom Solutions organically around 14%. And of course, because of the incremental margin, quite substantial growth of the EBITA. We see that 5G is really stimulating all the investments and also the lessons learned about the needed bandwidth for all the people that had to work at home. We believe that many people will continue to work at home in the future, and that gives you a quite high priority for many countries in Europe to further invest in the fiber networks. Then Building Solutions, also quite good organic growth, 9.4%. And especially because of the mix of activities, higher increase of the result of the EBITA, a nice step-up of the return on sales. And what we see is that the subsea activities are also performing much better in respect of result, good order book and well development also of the margin development in that activity. And of course, the Machine Vision activities with a very high added value, performed well and contributed also well into the increase of the EBITA. Airfield Ground Lighting, and that was part of the infrastructure vertical, did not yet perform well, but positioned really well for 2022 with a very big sales funnel. And the same is also applying to Parking Solutions with the underutilization of parking garages and air fields. We see that the investment priority was very low, and -- but the outlook is getting much better for also the parking environment and the airfield investments. So that we are very positive for 2022, not yet for this year. But the good news is that we make many, many quotations and yes, the interest is especially going into the set direction, which is a disruptive way of improving the security and the efficiency on airports. When I go to Industrial, we see that turnover was still impacted and especially because of the Tire Building activities. We saw in the other markets, a very good movement in the industrial connectivity. That was impacted quite heavily last year, not many investments in capital goods and therefore, also not in the connectivity solutions behind the capital good investments, the equipment segment. But this year, it is really strongly on the move, very attractive segment and a nice niche segment where we are also quite profitable. And I already mentioned how the Tire Building activities recovered and not only in the non-top 5 area, but especially also in the top 5 area, which came in much earlier that they expected to be back and mentioned in several other trading updates and presentations that we had. We saw also quite good figures from the tire manufacturers, and that made them also more positive to do their investments. And yes, of course, the TKH technology is spot on in what we can offer to them. The UNIXX development was somewhat postponed in respect of the fact that we are really still having negative effects of the COVID situation, traveling and being present at the customers' site. But we are well on track with all the final points that we have to settle. And we now expect by the end of 2021 that we will have the completion of the CEDD. And what is also interesting to mention is that we are selling units of the UNIXX -- modules of the UNIXX -- within the UNIXX, and that we are performing quite well there, also within the top 5 tire manufacturers and that's a good step forward already to get to know better the opportunities of the UNIXX technology. Yes, that was my last slide, and I'd like to give the floor to Elling. Thank you for your attention.

Good morning, everyone. Thank you, Alexander. I'll walk with you through the financials for the first half '21. First of all, we'll have a look at the geographical distribution of the revenue. Still, Europe is about 2/3 of revenue, not much change there. We see a little bit of shift from the Netherlands to the countries around us. I think we have been explaining in the past that France has become a more important country, and we have seen a good recovery compared to the first half in 2020, especially in the French market. So therefore, also the European revenue share goes up. North America, that's where we saw a drop, and that has a lot to do with the mix in the portfolio going into the North American market. So 10% only of total revenue. Looking at the revenue development. We've seen already the top line itself. To mention is the 3.3% impact as a result of higher raw material costs, predominantly copper for our connectivity systems. And we have seen some top line pressure as a result of foreign exchange effects, and that's mostly the U.S. dollar. Important to mention, I think, is the development of our gross margin. In the last couple of years, we have seen a nice development where the gross margin has increased as a percentage of turnover. In the first half this year, we're a little bit below that of last year. So 48.2 compared to 49, has to do mostly with the product mix and some effect of the raw material pricing, but product mix is the key thing. We see a higher share of the connectivity portfolio in the total, and that has an impact on the percentage for added value. If we then go down in the P&L, looking at operating expenses, in absolute figures, more or less flat as compared to first half 2020. In percentage of revenue, it's down to EUR 36.6 million, which has a couple of elements in there. Of course, we have taken as part of the Simplify & Accelerate program, some cost-saving programs, integrations, et cetera, somewhere started in the course of 2020, has some effect in the first half of this year. And on the other side, you also see that selling expenses are still at a lower level due to the COVID restrictions. Depreciation came in at just above EUR 22 million. That's about a small EUR 1 million less compared to a year ago. EBITA increased in all the 3 solution areas. Biggest one, of course, in the Building Solutions with 32%. And I think also worth to mention is the return on sales performance improvement from Q1 to Q2. All solutions segments improved its return on sales in the second quarter compared to Q1. If you look below the EBITA line, there are some points to highlight. First of all, the amortization cost, EUR 25.5 million. About EUR 12.6 million is related to amortization of R&D cost. That's slightly up compared to a year ago, about EUR 300,000. The total amortization charges are substantially lower, I would say, than a year ago, EUR 2.3 million, has to do with the fact that the amortization on purchase price allocation of some companies, which we acquired in the past are phasing out, and that effect we will not see going forward. Then if I look at the financial results, better than a year ago by about EUR 1.5 million, is mostly to do with the foreign exchange results, which we had. Interest charges were more or less in line compared to a year ago. And as the next line result from associates, they are clearly -- we see a gap with last year, but that's -- it's very logic because in the first half of 2020, we had the divestment of ZTC in China, which had a book profit of EUR 5.5 million. Of course, that was creating a positive balance in the periods last year. We don't have that this year, of course. So as a matter of fact, you'll see that the result of associates improved there. Important also to mention is that in 2020, we had some purchase price allocation effects in there still related to the initial start of the divestments, which we did with our connectivity group, which was divested in the second half of '19. And we had in the start of 2020, still some costs related to the purchase price allocation. And that, of course, in the like-for-like is not coming back. Then the change of financial liabilities, that works maybe a little bit in conflict in the sense that if the performance in some of the acquired companies is doing better, where earn-outs, for example, are still existing, you take a charge in your P&L. So it's a good sign in a way that we have this because it means that the acquired companies are performing better than expected, and we have taken additional let's say, cost for meeting the earn-out criteria. The tax rate, that's up and it's on the high side with 27%. In the last couple of years, we have been always below the 25% level. It has a lot to do with the allocation of results. And if you have seen the shift in where our revenues and profits came from, we see that more of the result ended up in this first half of this year in the high tax countries, Canada, France, Germany. And of course, with our Tire Building activities, VMI having an important share in the tax calculation, in the sense that the innovation box which we can use on the result of VMI, of course, impacted by the level of performance, and that is in a delta compared to last year negative. So we are able -- or not so much able to use the innovation box and that, of course, pushes up the tax rate. We expected the second half tax rate to go down. For the full year, we're looking more about something in the range of 26%. And that brings the net profit before amortization and one-offs attributable to shareholders to almost EUR 50 million, and that's 37.5% up compared to a year ago. Looking at the balance sheet, I think, of course, we'll get to some of the working capital items here. I think important to highlight is the increase at half year of the assets held for sale. You see, on the asset side, the EUR 111 million and corresponding on the liability side, the EUR 46 million. Basically, once you get to a stage in the divestment process, that the likelihood of a divestment is getting more firm and that you expect closing to take place within the next 12 months. And basically, you transfer your assets on the balance sheet for the related divestment to the category of assets held for sale. And that's basically what we represent here. In the press release, we have a more detailed breakdown in the attachment on where each balance sheet item is hit by the allocation of the assets held for sale. If you look at the other working capital items, of course, contract assets, where we see a much favorable position compared to the end of the year, has to do, of course, with the deliveries of some of the also tire equipment, which we still have on our books, but also the order intake has helped this position and helped the overall debt and working capital structure. If you look at the working capital, a substantial reduction. Normally, at half year, you hear from us or from me explaining a slightly higher working capital. It looks a little bit different this year. We have a working capital target being 12% to 15% of revenue. That's what we use already for quite a few years. It's not that we are changing that. Normally, at half year, we are at the high end or slightly above. Last year, it was maybe a special year. We came to 16.5%. This year, with a good performance and also the high order intake on which we get, not on all contracts, but the substantial part also down payments coming in, the working capital has substantially improved, and we are below the threshold of 12%, actually, we're at 11.2%. And this represents, compared to last year June, an improvement of about EUR 85 million, working capital coming out at EUR 150 million. Slightly more usage of some of the financial instruments, partly to do also with the higher volumes and the increase of raw material costs. For the net debt, obviously, these elements have worked in favor of a net debt development. So we had a good cash flow from operations. Of course, there are some investments which we executed as well. And you can see them in the middle of the chart here. So in intangibles, close to EUR 20 million was invested. Maybe to give you the picture a little bit more clear, we roughly had R&D expense at the level of EUR 32 million in the first half and 51%, 52% has been capitalized. So that's EUR 16.5 million, more or less. That's part of this almost EUR 20 million. Also there, going forward for the second half of the year, similar pattern you will see in the second half. The other investments in the tangibles, EUR 15 million for the first half. Second half will not be materially different, maybe a few million up. So a pattern where second half is not materially different than the first half. Of course, the H1 debt was affected by the dividend payout of EUR 41 million in the share buyback. But all in all, we came out at EUR 275 million in net debt, which represents a covenant of 1.5. The free cash flow that follows out of this and again, here, this is not the pattern you see very often, more at year-end, we see the substantial increase in the free cash flow. But with almost EUR 50 million in free cash flow at H1, but a conversion rate of about 46%, 47%, this closes well for the first half. Moving on to the outlook. Of course, we have seen the market improving. We have also seen, as Alexander also mentioned, us being able to increase the manufacturing capacity utilization. These are 2 key factors to help the financial performance. And that's also the basis for a positive outlook, I would say, for the second half of the year. We expect further organic growth of turnover and result in the second half. Of course, there are supply chain challenges. So far, they have been fairly limited on the performance in H1, and we might see some increase of that in the second half of the year. When I go to the various segments for Telecom. We had a good development in the first half, and we expect turnover and result to be more or less in line with the first half. The driver remains fiber optics and of course, the strengthening of the need for further rollout of optical fiber is there. So a high level of investment priority in Europe. And we expect that the lockdowns, which had in the past negatively impacted our performance, are gradually disappearing and that clients are therefore able back to install the various projects. And also in the market, we see a gradual price improvement on optical fiber side coming, but that's a gradual part here. On Building Solutions, turnover and EBITA in the second half to increase compared to H1. We expect a lower turnover in the 3D Machine Vision segment due to the seasonality and the supply chain shortages. But it will be offset by further growth in the security systems, the energy connectivity systems, subsea and also a further improvement in the 2D Machine Vision segment. For Industrial Solutions, the turnover and EBITA, we expect them to grow strongly in the second half of this year compared to the first half, driven by the high order intake in Tire Building from the last few quarters. And the return on sales improvement is expected to be driven by the volume effects as well as keeping a close control on the cost. All in all, baring unforeseen circumstances, we expect for the full year, the net profit from continued activities before amortization and one-offs attributable to the shareholders to increase to a level of EUR 106 million to EUR 112 million. And as a reference, 2020 came out at just above EUR 70 million. So for the outlook, just one last, maybe more logistical point, in the sense that on the 17th of November, Alexander already mentioned, actually, we will have a Capital Markets Day. We'll give you the progress on the Simplify & Accelerate program, which we introduced in the middle of '19. And also, we give you a strategy update and also a new segmentation, which we will discuss at that point in time. And we'll do this together with some new innovations, which we will highlight to you during the day as well. So far the presentation. We open up for Q&A.

Who can I give the first? I think there's a microphone here and I think maybe you can. [Operator Instructions]

Emmanuel Carlier, Kempen. A couple of questions. First of all, on Tire Building. So on Tire Building, the order intake was very strong, I think, more than EUR 200 million in H1. If I remember well, I think historically, the maximum order intake you had was around EUR 330 million or something like that. So the question I have is why is the order intake so strong? Is it mainly driven market recovery? Or do you also see the first green shoots that you are gaining some market share with innovation? Like I saw, for example, a press release, I think it was from Bridgestone quite recently, that they would be investing in the kind of future-proof plans. So yes, if you could give a bit of color on that. And then second question on Tire Building is what is the maximum sales you can deliver in the second half because it looks like there might be some capacity constraints on that end? Then the second big question is on the new segmentation. If you could maybe already provide a little bit more color on your thoughts on why you would change it? And I think one of the key pushbacks investors have always given is that it's quite complex, still the reporting structure. It's good that you disclose sales, but you don't disclose any EBITA. Personally, I would be a big fan of indeed getting more disclosure also on an EBITA level because that explains, in my opinion, a big gap if you make a sum of the parts on TKH and you compare it to the share price. So that's the second big question. And then my final question for now would be on profitability. So you target a 15% EBITA margin target. But if I look at H1 and if I kind of normalize the Tire Building sales, to me it looks like you're already close to the 15%, while many other growth verticals like Parking, Airfield Lighting, et cetera, still need to perform. So it looks like there is upside on a midterm basis to raise that level. So if you could give any color on that.

Okay. Many questions to remember. The last 2 questions are for Elling. So Elling can already think about that. The first question is that where does the order intake come from? But I have to say that it is mainly recovery. And there is still more order intake to come from nice projects, innovation projects within the top 5. And not everyone is ready back, but -- and so -- but we can say that the big part came from also the top 5 tire manufacturers. And then the capacity that we have, I would say it is, let's say, between EUR 180 million and EUR 200 million. And if necessary, of course, we can further ramp up, and we are also thinking about how we can create more capacity, with respect also to the targets that we have set. And I believe we don't have to do that many things to get to, let's say, a half year turnover of, let's say, around EUR 250 million. It will not mean very heavy investments, but we need to invest somewhat further into buildings. Probably, that will be in Poland. The good thing is that we also can rent buildings. So that is the first step that we made to have a quite quick solution for ramping up the capacity. And you have seen in the past that we have been able to quite rapid ramp up.

On Tire Building, did we expect kind of similar order intake in second half? Or do you really believe that the first half was quite unusual because there was a lot of pent-up investments that really kicked in, in the first half?

Now to match, the first half year order intake might be difficult. And normally, let's say, the Q4 is not the best quarter for order intake. Q1 is then normally, from a seasonality point of view, a better quarter. So I would say not the same as the first half year, but it will be quite good.

Then your other questions about the segmentation and investor feedback. I'm doing quite a bit of road shows and investor calls myself, so I'm quite familiar with some of the statements you're saying. Simplify & Accelerate program, I think maybe we have been focusing a lot on the acceleration part. Simplify is definitely not something which we forgot. I think we did quite a bit with the integrations, et cetera. But when you talk specifically about simplifying the reporting structure, and I don't want to turn this call today in the Capital Markets Day. That's something we'll do in November. But this feedback and also your comments, disclosure, simplification and the level of transparency and disclosure, that combination, of course, is for us, taken into the topics which we'll present in November. So from that point of view, I mean I refer to a later date to get you more specifics.

Do you see any pushback to provide EBITA disclosure on a segment basis going forward?

I mean there are different ways how this is being treated. And of course, I think the -- it's not just a particular point to take out and say this is a necessary item. I think you have to look at the overall picture of reporting. And again, I mean that's something I rather would like to discuss in November with you. But we hear what is being said, let's put it like that. Then your question about -- and this is maybe a little bit related to that as well in the sense that if you look strategically, I think we did quite a lot of steps. And yes, return on sales is improving, especially in the second quarter, showed a good performance. And is there room at some point in time to look at the midterm targets? Of course, there is. The question is when we get to that point when this will be addressed? And probably that's also something which we'll discuss or at least refer back on this topic. I'm not saying that we will change, but I'm just putting -- when we talk about Capital Markets Day, we talk about the midterm outlook. And of course, these are topics which are also on that agenda. So that's understood. Next one, please.

Michael Roeg, Degroof Petercam. First question I have is on your statement that you expect further organic sales growth in the second half of the year. Should I read further as in higher than the 5.8% of H1?

Yes.

Okay. That's clear. Then the second question for Elling. Assets for sale, quite a big number. Is there a one very large activity in there? Or is it a mix bag of many smaller entities?

I mean what we're talking about here, and I'm not going to disclose names or anything like that. It's more in the connectivity field where we look at the distribution of connectivity systems, and it's one set of activities, let's refer it to that.

Okay. Clear. So once you've divested, there will probably be 1 larger deals instead of having 6 different deals and some of the new ones?

That's correct. That's correct. That's also why the certainty level is higher than if you have to split that up in, let's say, 5 transactions.

Okay. Then a question on CEDD? Alex, I know you're very positive on the outlook for 2022 because of the sales funnel, many contacts with airports, which are currently non-investing, obviously. In the past, we've had occasionally an airport, every now and then, 1 project in the sales and profits. Do you consider it possible or even likely that next year, you will have, say, 3 or 4 different projects throughout the year?

Yes. That can be quite clear.

Good. And Then on one of the other new products, UNIXX, what does it mean that it is delayed until year-end for your commercial launch? When is that scheduled? And when do you expect first system sales instead of module sales?

To be honest, I believe, not before 2023 that it will contribute to, let's say, turnover and profitability. But what I mentioned is that we are selling modules, important modules with also a high value of EUR 1.5 million, EUR 2 million already part of the UNIXX concept. So we will gradually already see order intake coming from these modules and preparing for, let's say, selling the whole system starting from 2023, or taking turnover. So it might be that we get order intake already in 2022, but it being translated, I believe, just in 2023 and turnover and profitability.

Okay. So by year-end 2021, the testing phase will be finished? And does it mean that in 2022, the system will be fine-tuned and tweaked to based on the feedback?

No, that is already going on. That is important that we are seeing many -- products being manufactured on the system. And now we are fine-tuning, let's say, the performance. And again, that looks quite well, some software updates. And we are then prepared by the end of this year that we can go to the market without hesitation. You don't want to introduce equipment in the market where you still have to do development. So this is really important for us to finish this phase by the end of this year. And then we can also go full fledged into the market and knowing the way we have to manufacture and have a performance we have to deliver and can promise to our customers.

Okay. Supposed that I'm a tire manufacturer, and I have already your current systems. And now I see that UNIXX, it looks very promising, somebody else is testing, you're taking out all the tweaks and whatsoever and then say, well, now I want one as well. How many -- will they buy 1 system initially tested for themselves for a year and then come with a volume? Or can it already go 2, 3, 4 systems at once?

No. The industry is quite conservative. I believe it will start with 1 system and then doing testing. And what we see is that there are differences in tire constructions from 1 tire manufacture to the other one, and it could be that we also had to make some specific adjustments for a specific tire manufacturer. And -- but yes, it could be that there are 4 or 5 players that at the same time want to have the first system. And then, yes, I believe it takes another 12 to 18 months before they will order more systems. What is very good that, in respect of the development and the potential demand, is that you see a big trend to local manufacturing. And especially in the U.S., you see that a lot of capacity is in-sourced that was formerly organized outside of the U.S. And this is really spot on what we can deliver that with relatively small units close to car manufacturers that could bring in a lot more efficiency in the supply chain and the flexibility and time to market. So I believe the demand will be quite strong. There's one thing that we are also a little bit hesitating in a further launch. We don't want to have a big impact on our existing business that people are going to wait. So we want to shorten the time as short as possible to be able to supply the systems also.

ING, Tijs Hollestelle. Yes, I also had basically the same questions like Michael, because I'm also quite impressed by the results, and I also from the past node, yes, the recovery potential of the Tire Building business. But you have to place a critical note. We have seen, I think, 2 times in the past an annual turnover level of EUR 330 million, and your target for quite some long time on is between EUR 450 million and EUR 550 million. And yes, listening to your comments to Emmanuel, I mean the order intake will always be kind of lumpy. But to some extent, somewhere in the future, the business really should ramp up. So your order intake should really be above the EUR 100 million and you proceed in getting higher overall annual revenue numbers. And for me, I think the introduction of the UNIXX with an higher ASP, probably the installed base or your MRO revenue will increase on an absolute level, all these things combined will lead to, let's say, somewhere in the future of EUR 400 million and from there, it goes on.

Absolutely.

Yes, but that was also the story a couple of years ago. Have you in the past been more, let's say, picky on customers, so that you, let's say, selling less to Tier 3 Chinese or Asian players? That's not the case? So everybody is still a customer potentially?

Not everybody. We have a market share of 70% and the other 30% is not an attractive market for TKH. So we will never address that, at least not that I can foresee. And the -- let's say, the scope of what we can deliver and what the replacement cycle that will further come in and will be driven through our innovations, that is the biggest potential where we can get our growth from. And so yes, to be honest, we are really preparing to be above the EUR 500 million, not too long from now. And again, also, if we look at the order intake in the first half year, it's a new, I believe, record order intake. And yes, that's a very good sign, and there's more to come. It's not that we are already stretched in, let's say, having our share with all the customers. Now there are still some customers not yet in the order intake from the top 5, where we see potential that they will be active and coming to us with orders.

Listening to you, you already are capable of, let's say, delivering EUR 400-plus million revenue next year without having to do much more additional investments is already...

Exactly. I already mentioned that the second half year, we will be in -- have the capacity to be above EUR 200 million. And the question is we will be at that level. So that's why I mentioned the range of EUR 180 million to EUR 200 million. And we are preparing, we see really positive signs of further investments and getting our plan that we have with a good analysis of what the potential is to the targets that we have set. And we are not so far from that at this point of time.

Okay, that's clear. Then also a question on the -- what is it, yes, the supply chain issues. I think it's a big theme, I think, on the wider stock market ever basically every year company. In what areas or what basis or what components do you -- are you most concerned, where is the biggest risk within TKH for that?

It's mainly electronic components used for Machine Vision systems, but also for communication systems. There, we are not, let's say, they hit that much. But in the Machine Vision business, it is quite a heavy impact. We already saw that in the first half year. But what we also saw is that we finally found good solutions, and that the impact in the first half year was in that respect relatively small. If we look now half year ahead, it looks worse, but it could be that we still find good solutions. But in some areas for components, and you have heard it from other players, I believe also, we have delivery times up to 18 months. And yes, to wait 18 months is quite difficult. So we are trying to find all kind of work around redesigns and these kind of things. There some big challenges there. That's why we have been a little bit careful for the second half year, but it could be that we find good solutions and that we can be even -- see more growth in the second half than that we forecast at this moment. But it can be -- a small component of only EUR 0.15 that you cannot find and then you can pay EUR 10, and it still could be very interesting. But sometimes even that is not possible. But it's not an unique case at TKH. I believe you see it everywhere where hardware is made. And so I believe it's better to focus more on software, that is easier.

It's easier than hardware, yes. And listening to the suppliers, I mean they're adding capacity like crazy. But can they provide some guidance when that goes on steam because I think that everybody is over ordering and you need to reaching order rate because we make sure that makes it worse.

Yes. Absolutely. Absolutely. Yes, that's a real crazy situation. So it's difficult for our suppliers to have a good forecast because you see that everyone tries to get as much as possible and additional inventories. And that will normalize at some point of time. We already see that in some areas where it is relaxing already because some players have eaten themselves full and don't need additional inventory meal. So then the demand immediately goes down. But that's not the case everywhere. So for certain sensors, we know it's 18 months and redesigns are not that easy. But there is potential. And what is also, I believe, very good and a big compliment to all the people in procurement within the group that we have built very, very good relationships with our suppliers, and that we get a very high priority, is my impression that, yes, we work, I believe, more easy through the issues than some of our competitors. And we still have in some areas, in the Vision, 2 weeks delivery time, and that's unique in the industry. And that will support also, let's say, market share growth in the second half year. And of course, we are continuing to build headroom that we have sufficient components. But yes, it is an issue. It is having an impact, I believe, in the second half year, at least EUR 20 million, EUR 30 million that we cannot deliver.

Because...

And with a high contribution margin. So that has a quite substantial impact in the second half year. It could be even better. And again, we are working to see how we can find solutions to get a share of the EUR 20 million, EUR 30 million into our turnover this year. And especially, we are looking also already to 2022, had that we have sufficient inventory and resources to get our components.

Yes. And I guess because the other theme is, of course, the inflationary environment in general. I mean because you now are much more into systems, high priority products, your pricing power, whether it's labor cost inflation or raw materials is quite okay, and that most of your customers are willing to accept higher prices for these kind of work arounds in the -- yes, sort of...

I can give you an example on an order in the Vision sector of 250,000 that we had to increase the price with 70,000 to cover the increased cost of the components that we had to source. And that was done deal was not a lot of discussion about it. And that, again, confirms our USPs, our unique position also. And I believe that is where we further will build on in respect of organic growth and opportunities that we have.

Yes. Okay. And then a final question on the trade working capital. I think you already explained it, but it is indeed quite exceptional. We have to, of course, model that back to normal. Do you expect it to, let's say, go gradually back to the normal range? Or can it be at once so that we see a much higher, let's say, net debt at the end of the year because your seasonality is happening in the second, it was a bit strange to say? But do you expect it to be gradual throughout in the coming years back to normal?

I think if you look at the working capital itself, I mean below the 12% I think you will see that we are back into the bandwidth of the 12% to 15% by year-end. It's not that it's going to take like a couple of years. We will be back in that range. But I don't expect very big swings in there.

Yes. And the down payments, were they for specific business? Is it in the tire business or is it across all those divisions?

I mean of course, we try to get down payments on every order. That doesn't work always. We have seen, of course, that within the tire business, that's kind of standard policy. And there, the majority of the down payments, which I refer to, are coming from that segment.

Peter Olofsen, Kepler Cheuvreux. Maybe first on the order intake. You mentioned the contribution from the Indivion. Is that a follow-up order from the client that you placed a large order last year? Or is that from new clients?

No, it's too specific to answer that question.

And -- but if you look at that particular market, my impression is that it's a market where you have a select number of very large clients. Or is the very diversified market where you also have many smaller clients -- potential clients?

It is diversified. There are customers that take only 1 or 2 systems. And there are bigger potential customers that use more than 30, perhaps even more than 50.

But general easy good interest from those bigger clients or prospects?

It's a mixed bag of smaller and bigger customers. Yes.

And then maybe on Machine Vision. When we sat here in March, you said that you felt that 10% organic growth was not impossible. If I adjust for currencies, I think you did something like 16% in the first half, but then some caution on 3D for the second half. With a lower second half into 3D, is that 10% still realistic? Or could it be still the conservative side depending on the strength on the 2D side?

I would say the 10% is still feasible for the second half, for sure, for the whole year. I think the swing factor could be, what Alexander just mentioned, is some of the supply chain effects.

That may be all the industrial segment? I think a couple of years ago, the margin in that segment peaked at around 15%, the ROS. Now you have the Indivion in there, which wasn't there a couple of years ago. But you also made some divestments somewhere around the connectivity systems. My question would be that looking at the composition of the business, that the margin potential will be higher than the 15% that we have seen a few years ago. Would you agree with that or am I missing something?

Yes. I agree. I'm not sure if Elling will agree, but.

I mean let's put it very simple. I mean if we have an overall target for TKH of 15%, and one of the big segments being Industrial Solutions would not be able to contribute at that level. It will be a very big challenge for the others to compensate for that. And we have been at this 15% plus levels in the past. And especially if you look at the explanation on what we currently see in the market and what is expected for us going forward, and the capacity address which we are addressing in order to further scale up, I mean this definitely shows a clear sign that we are back to these levels from the past or even beyond that.

And when you talked about the fact that you won't need major investments to scale the capacity for tire, does it also refer to the Indivion because I think it's also produced at VMI, so it will get part -- the business as well, also there are no major investments especially covered by the investments.

Yes, yes.

Then maybe on -- 2 questions on the margin. First, the gross margin. You said there was some mix effect, but also a small effect from the raw materials. Just to make sure that I understand it correctly. You have strong pricing power, so you saw raw materials going up, you adjusted your prices to maintain your absolute gross profit, but then mathematically, you have a slight effect on the gross margin percentage? And then the other element in the margin in the ROS was the still lower selling expenses. If those come back, what incremental amount of OpEx would there be?

I mean the questions -- come back. The questions come back to which level? I don't think it will be actually back to, let's say, what we considered let's say, in this '16, '17, '18, that kind of time frame. I think we're talking about probably a couple of millions at least, but not to the extent that it's really going to be a far overshoot. If you look at the first half of this year, our selling expenses in total, we're in the range of EUR 18 million to EUR 20 million. So if you talk about the recovery there, you can add a couple of million, but it's not going to be a major element. And that will be a gradual phase as well. Second half of this year, for sure, traveling start to come back, some commercial activities, some even exhibitions and conferences are back on the agenda, more in the back end of the year, so you will not see the big delta already this year. But going forward some of it, we work now, will remain as well. So it's difficult to say exactly to which extent, but it's not that we are talking about doubling this kind of cost level or something. That's not the ballpark you have to think of.

Martijn Drijver, The ODDO. A couple of questions from my end. First of all, last time you discussed that you were thinking about also starting to produce export cables and a new facility near the harbor. Have you already made a decision on that? If you already made a decision on this topic?

To build a new plant will be not on the short term. So we further investigated and the investments will be focused in our existing site, and that is also to make it possible to have a continuing order intake. If we would build a new plant, that would take perhaps a period of 12 months, but we could not work with new projects. And that is also because of the fact that a new plant to be built near the coast would take much longer than doing the investments in the existing plant. And that will limit the scope a little bit, but that is a concession that is a very valuable in respect of the business opportunities that we see for 2023. And we need to be in business in 2023 with a broader scope of bigger dimensions and even longer lengths, and we can manage in the existing plant to do that, let's say, before Q2 -- Q1 2023. And that makes the whole project much less complex. And we have our Simplify & Accelerate program. So also simplifying that helps us to accelerate.

But it does imply that you will start to diversify into export cable?