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

Hello, and welcome to the TKH Q3 2023 Analyst Call. My name is Laura, and I will be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Alexander Van Der Lof, CEO of TKH to begin today's conference. Thank you.

Good morning, everyone. A warm welcome to this first analyst call -- official analyst call that we have introduced and our webcast. We believe we have delivered a strong set of results. And that amidst a challenging market circumstances, especially in the Smart Vision and Smart Connectivity related to destocking effects. I have to say that all long-term growth drivers related to the defined mega trends are still well in place. There is a short-term effect with the destocking. What is also very interesting to mention is the added value, which increased by about 3%, and that is mainly, of course, related to the cost inflation where we had to increase also our prices. And I believe we did a good job there to be able to compensate the cost inflation. We also see that we have invested quite a lot of money into hiring of people. It was around 200 more employees, FTEs related to the ramp-up of the new plants. And we can also say that the ramp-up is going quite well, especially related to the opening of the new plant in Poland, which is not yet in full operation, but in a further ramp-up stage with the official opening on the 6th of September. Amazing to see what has been created there in a relatively short period and especially also to see the good performance coming out of these plants. Yes, as you all know, we have to [indiscernible] by the end of September of the cable distribution activities with a net profit of around EUR 20 million. We initiated the second share buyback program this year. I believe that shows also a lot of confidence that we have in TKH. And we mentioned in the press release that we are going to further accelerate the divestment opportunities that we have in the coming 12 months. We see good opportunities for investment in our core technologies, and that is, of course, a higher priority than continuing these activities that are not fitting that well in our future. And including with that, we also have decided to look then into further share buyback programs. The last but not least, on the first slide, here we make very, very good progress with our strategic program. The execution is well on track. And that supports, of course, the realization of our 2025 targets. And I believe I can say that it is still not impossible to reach these targets. I move then to the next slide. And that is going in a little bit more in depth in the 3 divisions. First of all, the Smart Vision activities, where we saw that Security Vision is doing quite well with a stable turnover after a few quarters where we saw nice growth. Machine Vision declined, and we have a stable situation at Security Vision than the decline of the Machine Vision activities is around 14%, 15%. And again, mainly related to destocking effects, where we also have seen that the destock effects have become worse compared to, let's say, August, when we presented our outlook for the rest of this year. Some lower demand also in consumer electronics and factory automation. And it's really difficult to see -- have what is related in the end to the destocking and to lower demand because of a worsening situation in the end markets. What we still saw is that the added value continued to be at a very high level, close to 60%. And yes, that is again a good confirmation of the quality of the activities that we have, the pricing power that we have, the innovations that we have in that segment. And yes, we are really positive -- have when the market will come back to destocking effect will be gone, that the contribution margin is high of this segment, and we have to realize that while we keep at, let's say, the levels that we have today, and we are not cutting costs there, but I have to mention there that the cost level is higher than last year, about EUR 4 million higher than last year. And that is all in anticipation of the next upturn that we are expecting. Then I move to manufacturing systems, Smart Manufacturing, a very, very good performance. We already saw that in the second quarter that the supply chain was moving in the right direction with the easing of the component shortages, continued strong order book, and that's especially of course, related to a very strong order intake. We believe that for the whole year, we again have the opportunity to come above EUR 500 million order intake. And that is also an important building stone to achieve the targets in 2025 in our original plan we had there to achieve at least EUR 500 million in the entire Building segment in 2025. What we further see is that Smart Connectivity is on the move, especially strategically seen, have we mentioned in the second quarter or in August that we were selected for TenneT as 1 of the 4 suppliers for the Dutch market, and we are progressing well there to position ourselves for the first orders. The announcement of the single source supply agreement with [indiscernible] is a major milestone to get confirmation and show confirmation to the market about the unique position that we have with our advanced technology in the inter-array segment. What we see, of course, is the destocking effect that is a difficult situation for the short term. However, what we see as confirmation that the demand is being prepared to take really off. And also in the direction of a very good utilization of our investments that we are doing in the onshore energy cable business. And the question is how many quarters will it take that the inventories that our customers are being normalized. Very important is that the offshore energy cable demand is looking still very, very good. And after the announcement of the Vattenfall framework agreement, we believe we can announce in the coming quarters more orders in the preparation of a good utilization of our new plant in Eemshaven, which is quite on track in the realization by the end of this year and the first cables to be manufactured early January already and in preparation of a serial manufacturing in the second quarter. Yes, then we see, of course, the import duties that have a quite substantial effect on also the result as we have not yet fully been able to substitute with the plant in Poland, the activities in China. But that is now coming on stream and will have a more positive effect and also on the return on sales. And besides that, we have decided to close the cable production activities in China due to the fact that we see a continuation of the high import duties and in addition to that, also antidumping duties in the U.K., which limits now, let's say, the end markets that we can supply with the capacity from China. And we have decided to take a one-off cost in Q4 for that closure of the plant. Yes. Perhaps also mentioning the added value in the Connectivity Systems area, substantial improvement compared to last year was about 4-percent points. And that is, of course, very important also to translate that in the end to a good EBITA margin and is a good -- yes, proof of the potential that we have to move up the return on sales towards the target that we have set there. In the third quarter, the return on sales was relatively low with around 7.6%. And if we look back to the first and second quarter, we were at around 11.5%. So yes, the effects of missing an order in our subsea factory, and the destocking effect is really having a huge short-term impact. However, the steps that we have made with the added value and also what we have already realized in Q1 and Q2 is also very promising for the future. I'm moving to the next slide, the outlook. You all have been able to read that. So I'm going quickly do that through that slide. Have we continued to face the strong destocking effects. The question is how long will that continue? We believe that, yes, the chance is that within the coming 12 months that upturn can be there, but it is very difficult to predict exactly when that upturn can be there. And as mentioned, we are completely prepared with all the capacity and resources to take full advantage out of the upturn. The outlook for Smart -- but for the first -- or for the second half year, we now see a slight decrease in the result compared to what we previously saw that we still would be able to show growth in that segment. Within Smart Manufacturing, it has substantially further improved with the easing of the supply chain, but especially also in combination with a very high order intake that we see going in. We are very happy there with the additional capacity that we created in Poland in the last 12 months, which is supporting in a very good way, the additional demand that we have today in this very nice segment. And yes, about Connectivity Systems, I already mentioned that the destocking is currently an issue there. But there is a perspective for further growth in coming 1 to 2 years. Yes. And then overall, the outlook, we have reiterated the previous outlook of a profit between EUR 230 million and EUR 240 million. However, today, it is likely -- more likely that we will be at lower end of the forecasted range. And that the same applies to the net results, which we now forecast to be 127 -- EUR 126 million to EUR 134 million, but also at the goer end. Yes, so far, my presentation, and I would like to hand over to the Q&A.

[Operator Instructions] We'll now take our first question from Martijn den Drijver at ABN AMRO.

If I may, I'm going to take my questions one by one. On Smart Vision, you're guiding for a lower EBITA -- slightly lower EBITA in the second half versus the first half. Normally, Smart Vision, if there's a lower sales, it has a gross -- high gross margin, therefore, high operational leverage. Can you explain to me why -- if you're so negative or so cautious, why you only expect a slight decline in EBITA. And related to that, you mentioned you've got capacity and costs steady, anticipating an upturn. What is giving you that believe that there will be an upturn in the next 2, 3, perhaps 4 quarters? Is that RFPs, RFQs, elaborate a little bit on that? That's question one.

Okay. Yes. To react to a slight decrease, have we still see turnover growth, so we are pointing to the EBITA. And there was a turnover growth, we still have this contribution of the higher turnover that we expect. However, the growth is much more limited than that we had in line in August, although also in August, we warrant for a potential worsening situation. And then about the upturn, it is all about the sales funnel that we are looking at. And what we see is that the sales funnel is more sensitive in respect of translation from quotes into orders. But yes, the sales funnel looks really good, and there are many, many projects that we are working on. And yes, that is giving, let's say, good feedback that the market is still very eager to do investments related to automation. But again, if you also look at what competitors see, I believe there is a similar picture that competitors see, let's say, starting from second half year an upturn. And yes, that's a similar situation that we see from, let's say, the sales funnel feedback we get from customers to be that optimistic.

Okay. Then a question on Smart Connectivity. Well, you already mentioned destocking, not quite sure when that's going to end. But you probably have perhaps, I hope, more insight into these project delays. What's the current situation with those delays to the best of your knowledge? Is that just a one quarter delay? Or again, like with the destocking, it could last a little bit longer?

I believe it will take at least 2 to 3 quarters before that is normalized again. There is a substantial stock at our customers, at least. And what we see is that there are many, many initiatives at our customers to see that they can get up the rollout according to original plans. And yes, these plans were quite ambitious. You also read the newspaper, you see all kind of reactions also from the government to see that they are working in, especially the area of easing the permits, and that would be already very helpful if you get more efficiency from the permits. But I don't believe that, that is, let's say, realized that change in one quarter, that will take a few quarters. And in combination with that, we see that our customers are also working on -- yes, a kind of efficiency solutions to get into work around for the permits to make it much easier to get a permit to build in a much more standardized way. And yes, that perspective gives us at least some optimism that it will not take years before the market will come back. And as you also know, had the pressure is really high with all the connections that need to be realized and the very, very big issues we have in the Netherlands at this point of time related to the rollout of the network and not keeping up the promises that have been made.

Yes, that's true. Just one follow-up on the closure of the Chinese optical, the Chinese plant. What kind of charges are we talking about? Is that low single digit, mid-single digit in terms of euro millions?

Well, this is a low single digit will be the one-off for the closure of the cable activities.

Okay. And perhaps savings of -- is slightly slower, lower magnitude than in 2024?

Well, I mean, of course, the rationale behind this is, of course, having broad capacity in Poland. So from that point of view, yes, when you talk about saving, you have to look at the integral picture because we have built up the capacity which we have idle, let's say, in China, in Poland. So from that point of view, doesn't really end up in a saving as such, but it's just a shift of cost base from China to Europe.

And you talked in the past about perhaps divesting this unit. Did you try that already? Or is that now off the table given that you're really bolting on this?

I don't think we have been, let's say, communicating that or have taking steps into that in the sense that we have a plan of divesting these activities. So that's not on the table at all. No.

Okay. And then moving on to the divestments. And you mentioned an acceleration of the divestment process. Let me talk about potential divestments in terms of opcos, does this go beyond distributor wholesale businesses?

Well, related, maybe a little bit of strange way, but it's not that, let's say, the connectivity has the exclusive right to divestments. We look, of course, within the group activities, which are not, let's say, having a clear value proposition within the framework, which we have identified. So the core technologies, which we want to push, and that basically sets the scene of the scope of which companies would be applied to. But we have not disclosed a particular list of companies or reference to specific areas. We will not do that today either.

All right. And then just a follow-up on that one. You mentioned you're going to use the proceeds to invest the core business. Now that can mean M&A or CapEx. Is it both? Or is it one more -- is one more important than the other?

Well, it's not in terms of priority, but both are, of course, necessary to execute our strategy. And both are on the road map. Obviously, we have, let's say, in 2022, second half and '23 are the key main highlights of our activities being the strategic investment program. So there's a lot of CapEx already going into strengthening our core technologies. So definitely, it's something which will be there in the future as well, but not the scale as we highlighted through this strategic investment program. But you're quite right, it's both CapEx as well as M&A, and of course, the share buyback, which we have included in the same potential use of proceeds line.

And we will now move on to our next question from Jay Heflin at [indiscernible].

I'll take them one at a time, if that's okay. Just beginning with the order book. So you report that you had a relatively stable order book versus June of this year. And you also mentioned that manufacturing obviously performed quite well. Within that, could you please provide a little bit more color on the order book for Vision and Connectivity there, assuming there some decline there?

Yes, correct. In Smart Vision and Smart Connectivity has been some decline, and the upside, of course, is within manufacturing systems. Without going into the specific numbers in itself, but that's basically where the delta comes from.

Okay. Okay. And then with regard to Smart Vision, I know you mentioned that the volume impact you're seeing now is a result of both some destocking or primarily destocking and then also maybe a decreasing level of business activity there as well. Can we expect this sort of destocking to also spill into 2024 quite a bit considering you said I think the effect was larger than you anticipated last quarter? Do you expect that then to continue quite strongly into 2024 to eventually ease out by then?

I believe that is still difficult to predict because we don't know the exact stock levels at our customers. I would be some disappointment -- disappointed if it would continue in the same pace as it has been the case in this quarter and the coming quarter. but that is all I can say about it.

Okay. Great. That's very clear. And then maybe my last question on Connectivity. So one of the leading European cabling manufacturers a few weeks ago mentioned in an earnings call that they saw some increased activity from Chinese players in the inter-array market. I'm just curious if you've seen any impact of this at all or if you're seeing any pressure there? Or any sort of color in that regard.

No, there is no, let's say, increased activity. I believe the Chinese always have been present and even they've been now and then a project. But yes, we are positioned, especially related to the superior technology that has many advantages also in the cost of installation to which we are really cost competitive against also Chinese, let's say, competition. And so yes, we are not seeing any, let's say, increased competition, but only can confirm that there has been competition also in the past.

And we will now take our next question from Tijs Hollestelle at ING.

Yes. My first question is also about the Machine Vision business. The decline you're mentioning is, of course, also helped by the consolidation effect because that is allocated to the division. So if I do a rough calculation, also assuming there are some positive pricing, volumes were down about 15% in the quarter. And I myself are bit suspicious about companies calling it destocking ever you see that on a wide front, it's not TKH specific but it sounds better than calling it underlying demand. So how is it that you are, let's say, sure that it is destocking because it's so many end markets and customers, different products. So can you have a view on that? That is, let's say, the first question about Machine Vision. And then also in addition, overall, the predictability of this business, does the development surprise you in a way that maybe clients in conversations are telling you different stuff than they are actually ordering, let's say, a few months later. So is that -- do you feel comfortable with how the overall Machine Vision business is going on. So those 2 questions about Machine Vision, please.

Okay. Thank you very much. Yes, the decline, we know definitely from the customers, the distributors that we are supplying that they are reducing their stock. And if you talk to some of these distributors, then you had that are publicly listed, then you will also notice that they see that effect at their customers. And yes, it is also feedback we directly get from customers that they had too much inventory and that was quite obvious, why that happened and that is because of the long lead times that were in place there with technology that you could not do without. And so with the short lead times, and that's not only the case at the TKH Vision group, but also at competitors is now between 2 and perhaps 4, 6 weeks. And that means that, yes, you don't need that stock. I have to admit that there are certainly also something going on in the end markets. If you look at some of the manufacturers in the capital boot side, then there's definitely, in some areas, weakening of end markets also. On the other side, you see the automation trend, which gives you a very high priority for investment in the -- specialty the Vision technology. It is all about eyes or hands of manufacturing. What we also see is that new applications are continuously being developed. We see that in our own group also why we continue to invest very heavily in the innovations and in the new applications, including the software proposition that we have. But yes, certainly, there is a part that is related to lower demand but going to our on Smart Manufacturing activities, we see even an increased demand. So it's a mixed picture. We see customers that are doing well and also have continued to increase the volumes that they are buying. Yes, the good thing is, again, that the automation needs to be continued and it's all about eyes of hands of manufacturing. And that is a great trend, which you cannot do without and that will drive demand in the coming 1 to 2 years. But we are also heavily depending on that as the incremental margin is very high. I mentioned close to 60% added value. So every euro that we are missing is having a big impact, but also taking it from a positive way, every euro additional turnover is also contributing quite strongly as we have all the costs already in place for a substantial higher turnover.

Yes, because it's a growth market. I'm always hoping that you can also have the opportunity to, let's say, add new customers. And I think you also spoke about that in August that there were new projects adding as of the fourth quarter that, that can compensate a little bit. But indeed, for us, just outside it's very difficult to track the true underlying market development.

It is.

Okay. It is also for TKH different to escape the wider cycle. And just to be sure, the acquisition of Euresys, it was not -- it's not a company, which has extremely high margins compared to the divisional level that, that is posting kind of in the reporting.

No, that is about similar level, but at the high end.

Okay. Yes. Okay. That's helpful. And then I have a question about is it -- yes, on the offshore wind for the subsea cable business. Also here, a lot of conflicting news flow. You do see a lot of delays now on the global offshore wind market. But at the same time, the lead times or the engineering phases and a lot of projects in execution, a lot of them are still going on. The Vattenfall framework agreement is good news. I agree. But are you able to provide us a bit more feel for how does this going to trend into actual revenue and results for TKH because we, of course, yes, we have been slightly disappointed by the -- already the shift from the third quarter. Can you [indiscernible].

Yes. And I believe that is also what people see that it is not in that respect, a stable business where there are -- I believe, if we look at the track record of the industry, there are almost always shifts and delays in orders. So what is our strategy to compensate for that? We have a plant that, in theory, could manufacture 1,200 kilometer. We already have a sound profitability meeting at least the TKH targets when we are at the utilization of 600 kilometer. And that's a relatively small volume, if you look at the total market. And what we are trying to do is see that we get at least 800 plus in the order books per year. And then they're taking into account that there will be always one project that might move to get to a minimum utilization of the 600 kilometer. That's where we are working on, and that looks quite positive. And especially when we look for 2026, when we see that the demand is all coming together. That's also one of the reasons that we see now these kind of framework contracts to get a kind of guaranteed slot for manufacturing. And yes, that is not for nothing that these kind of contracts are now being created for '24, '25. It might be more difficult to get the headroom in. But at this point of time, we believe, for the coming year to be around 450 kilometer. And for the year after around 600 kilometers. But the risk is there a little bit higher of a project move then it will be afterwards 2025 as we see a very good sales funnel coming in for -- starting from 2026 to go beyond, let's say, the 700, 800 kilometer even.

Yes. And to my understanding it's also not possible to really quickly, let's say, spec in a large order. I mean we talked in the past about those kind of maintenance repair orders, which are relatively small. You can do that quickly. But if you, let's say, have an open production slot for, I don't know, the second quarter next year, it will be very difficult to sign a project for that because the preparation time of these projects is very long. Is that a correct way to look at it?

Yes, there is a long lead time, but what we also see is standardization. So there's also room to move projects to an earlier slot. And what we also see is that there is flexibility. It might lead to some additional working capital if you move it to an earlier slot, but there are a lot of options in the end to continue kind of a similar utilization in the quarter you have. And yes, that is what we try to organize also, to have a kind of steady utilization and that looks possible. And that makes the business case, of course, even more sound than when you are let's say, confronted with these project moves and then underutilization in one quarter. But we think we can manage to be more immune for that. First of all, because of a harder order -- bigger order intake and order book that we are targeting and that we still have a very small market share with the approach that we have to get to the utilization of the 600 kilometer. It is still a market share of around 20%. And I believe with the superior technology we have, a higher market share could also be possible. But let's not be too optimistic at this point of time and try to be as much as realistic as we are with preferably upward potential instead of downward potential.

Yes. Okay. And one final remark because also hearing from listening to other players in the field. It also matters today who is the client because we have seen that there are some clients who are, let's say, a bit optimistic in their assumptions regarding financing costs, general cost inflation. So the likelihood that those kind of offshore wind developers canceled the orders are higher. Is that also something that you're probably aware of that, that do the clients -- do these clients also allow TKH to look into their own, yes, let's say, project financing approach? Or do you have that kind of information about the customers?

Yes, a lot is available, of course. We also have that on our rate there. And yes, we have, of course, a very close and intense discussions about probabilities and risks of projects to, in the end, have the right approach from our side that we get the right utilization. And again, what is very positive is that we have so much headroom in winning projects that we will not stop at 700, 800 kilometers. And that is good from a utilization point of view that we don't need to get to that high quantities and that we are really under pressure there. That is something that is quite unique that we have been able to manage already to have a sound business 600-kilometer utilization.

Okay. Okay. Yes. One final question, and I won't ask whether you're going to dispose these businesses, but TKH is still running a Parking Solutions business in the Smart Vision division. What do you expect is the annual turnover level of the parking this year? And did the business return to breakeven levels in 2023?

First, we have to understand that we have several technologies that we apply into the parking area. And I would say the majority of these activities are very profitable. So it's, for instance, mission-critical communication, access control systems and also OCR systems, video systems for license plate recognition. And then I believe you are pointing to the Parking guiding systems that we also have in our portfolio, which has been the bleeding in respect of the result. And that is mainly because of, yes, underutilization of that -- these activities, especially related to the airport markets where we have hesitate in investments. The good news is that the utilization at the airport is going to really high levels again. And that the appetite for investment is coming back. The differentiation power in that technology is not at the highest end of the TKH technologies. There's a strong software component in that, that is kind of decommoditizing the relatively cheap cameras we have in that system. And it has from a margin contribution point of view. It has an above-average TKH added value. So yes, we continue to focus on returning that business to the turnover level that is bringing us the -- yes, let's say, TKH target returns. We still believe that it's possible, and that has our priority to get that out. We are, today, I believe, around EUR 15 million turnover in that segment. And yes, we are trying to get it as quick as possible to EUR 30 million. And then we are at TKH target levels in respect of return on sales. So this year, it will be profitable. So we made a good move there. And there is more to come. But we keep a close look on that as we don't want to have kind of this activity as a leader in our portfolio, and then we would further decide to divest in a more rapid way.

Yes. Okay. That's clear. And the same question for the Airfield Lighting business because I think also that...

I was really afraid that, that question would come.

Yes. [indiscernible].

Yes, it's not moving as quick as we would have liked to see that developing, although continuously good progress, but that is this year, still a big bleeder of EUR 3 million to EUR 4 million results. And yes, it's an important building stone to get also towards the targets of the connectivity activities in 2025 to move up the average of the connectivity activities. And that still looks possible. We see bigger projects where we are positioned than ever. But you need to have them in the order book before you can execute and realize your profitability. But we also have a close look there more focused approach from also management -- top management. Elling is today full time working on that. And yes, we still are confident that there are good opportunities to improve that profitability.

And we'll now move on to our next question from Thibault Leneeuw at KBC Securities.

I only have one quick follow-up question. With respect to the Vattenfall, the size of the contract. I'm just looking for some additional color on the megawatts and the gigawatts and the relation between the amount of kilometers and cables. Is that more a linear relationship or which dynamics are at play there?

Yes, I believe for, let's say, 1 -- gigawatt, it's around 180 -- Jacqueline is correcting me. She says 150 kilometers. So yes, that is a way of calculating, although what you also have to take into account what is the distribution of the sizes of the cable you have in the project, and that is on the move. We have even capacity now to move up to 3x 1,600 square millimeter. We see that the average is moving up to more close 800,000 square millimeter where it had in the past, 1 or 2 years more close to 500 -- 400, 500 on an average. So it's not only the number of kilometers, but in the end, also the mix that will drive the turnover. And I'm not sure if I answered the question there.

Yes. No, that's clear. I was just looking for which components amount to the revenue. Well, from my end, this will be all.

And we'll have a follow-up. Sorry. No, we've got a question from Martin [indiscernible] from [indiscernible].

It's Martin [indiscernible]. A couple of questions from my side. Firstly, you mentioned your divestments, you're going to accelerate that. At your '21 CMD, you indicated that would -- you will have portfolio management changes of between EUR 150 million and EUR 200 million. CIA is about EUR 130 million. Does it imply that still the EUR 20 million to EUR 70 million remains? Or have you changed your view on your scope changes?

No, we execute what we communicated at that time. So you're quite right about the bracket of EUR 20 million to EUR 70 million to go.

Okay. You also mentioned your order book. But just before the close of the quarter, you have divested CIA Group. What kind of impact had that on your order book?

Relatively small because the business they're in, and that's one of the reasons why we divested them. It's very short-term driven. So from that point of view, it has, let's say, EUR 5 million to EUR 10 million bracket in terms of impact on order book.

Okay. And lastly, this year, you have signed a contract with TenneT and Alvium. Do those 2 parties already generate revenues for '23? And also, could you give some kind of indication what kind of revenues we could expect from these 2 parties in '24?

Yes, that is too detailed customer-related information. We are not allowed to disclose that. But yes, we are looking in the coming 2 years to generate at least between EUR 50 million and EUR 75 million additional turnover in high-voltage cable.

And concerning my questions, for this year, do they already contribute to revenues? Or is that more or less impactable?

Very limited.

There are no further questions in queue. [Operator Instructions] There are no further questions in queue. I will now hand it back to Alexander for any closing remarks. Thank you.

Okay. Many thanks to all of you for asking these good questions and attending the meeting. I hope we could give you a more in-depth view on where we are moving. And I believe we are still having a good perspective at TKH and the bright future. I'd like to thank you again, and wish you all a great day.

Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. Stay safe. You may now disconnect.