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

Hello, and welcome to the TKH Q1 2024 Market Update Conference Call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded. [Operator Instructions] Today, we have Alexander Van Der Lof, CEO; and Elling de Lange, CFO, as our presenters. I will now hand you over to your host, Alexander Van Der Lof to begin today's conference. Thank you.

Good morning, everyone, and a warm welcome to this conference call. Yes, this morning, we published our Q1 market update. And we will walk you through the presentation that we have made for this call. I will go through that very briefly so that you can ask your questions. I believe that is the main focus of this meeting that you can ask questions. Yes, it was a weak quarter, but anticipated that it would be weak and had continuing, let's say, destocking effects in Smart Vision and Smart Connectivity and the smart manufacturing doing quite well, especially related to the tire building activities with a very high order intake, continued high order intake, but also continued good performance, especially also related to last year when we still had a quite weak situation. I believe what is very important to point to is the strong increase in the added value. Of course, the divestments are supporting the increase, but in all 3 segments, we saw an increase and although the demand is lower due to the destocking, we have not seen that we are under pressure in respect of our margin, and we were even able to increase the margin. And that is, of course, a very strong basis for also developing ourselves to the high return on sales and the target that we have set for that. The cost level was high and in anticipation of higher turnover in the coming quarters, the ramp-up costs, we're also in there and ramp-up cost means that we have, especially for the offshore wind activities, double cost. So we are manufacturing today in our existing plant in Lochem and we are preparing for starting by the end of Q2 to manufacture offshore wind cable in the Eemshave. It was good that we could announce that in the first quarter, we were able to manufacture the test cable and that also the first test, it went very well. But double cost, and that is what we have to absorb in the -- at least the coming quarter, and then we will be able to reduce that cost during Q3 and Q4 and normalize. Also related to the fiber optic, we saw that -- and I'm also already referring now to the second sheet that we had some ramp-up costs and the ramp-up went a little bit less smooth as we had planned. So somewhat higher waste and a lot of homologation that took more time. Homologation of products that we previously manufactured in China and now have to manufacture in the new plant in Poland. Yes, we also have mentioned that the second quarter will be considerably better than the first quarter with, yes, growth coming back again in Smart Vision, continued growth in smart manufacturing and improvements in Smart Connectivity. Yes. Then continuing with Smart Vision, we saw organically a decrease of 12.4%. Yes, the good news is that we see that the order book has increased now for 2 consecutive quarters. And -- but especially in the second quarter, will support us is that the consumer electronic business is coming back, and that has a substantial impact in Q2, and this is mainly related to our 3D activities and then, yes, I already mentioned Smart Manufacturing, doing well, higher order intake and it was also very good at the exhibition we were able -- a recent exhibition, we were able to introduce the AI-driven foreign object detection system. And what is also really key that with our technology, we are focused on the sustainability improvements and opportunities for our customers, and that is attracting a lot of additional attention towards our technology and also bringing in additional orders. In Smart Connectivity, we saw a continuation of the destocking effect as mentioned in previous meetings, we see that our main customers have substantial stock, 1 or 2 of them even close to 9 to 12 months. And that means, yes, a strong effect in respect of the demand. And that will continue as we foresee at this moment, at least till the end of this year. Yes, I believe that is the most important points that I want to clear with you, and we reiterated our outlook. And yes, I believe that is also a clear message that we still believe that we can continue to get on the growth path this year in the coming quarters. Thank you for your attention, and I'd like to open up for questions.

[Operator Instructions] We'll now take our first question from Chase Coughlan with Van Lanschot Kempen.

I have a few, and I'll take them one at a time, if that's okay. Maybe starting off with the Smart Vision segment. I have more of a strategic question, I suppose, I think you spoke about it on the last earnings call that you were pushing to become sort of the TKH vision brand, and I think you were attending some trade shows under TKH vision label instead of the separate brands. I'm just curious on how that strategy is progressing and if you see any sort of risks associated with that? For example, do you think you'll lose some of the brand image for some of the more niche applications? Or how is that progressing?

Thank you for your question. Yes, we are already positioning the TKH Vision brand since, I believe, around 3 years. And yes, what we especially stipulate is the one-stop shop. And until now, we are keeping the brands as they are but under the TKH vision label. And that works out very well, and we are making good progress. We especially see also within the sales organization that they see the big advantages and especially related to the excitement of our customers that they are served in the best way possible to get their vision technology delivered from TKH.

Okay. And then maybe moving on to the cabling business. We've seen some price inflation for copper and aluminum prices. And I'm just curious on how that's impacting the business there. Is that beneficial for your margin wise, are you able to pass that raw material inflation on? Or how should we look at that?

Yes, the standard procedure that you pass on the price increases of the metals to your customers. And yes, with price increase in the end. It has a negative effect on your added value as you make no margin on these price increases.

Okay. So no margin improvement expected from that in the near term, I guess? Okay. And then my final question. I think you mentioned already that you expect considerable improvement in the second quarter of the year versus what we've seen in the past quarter. And I understand, so this is primarily to do with the recovery of the Vision because we still see some destocking in the onshore energy cabling. You already mentioned the double cost for the Eemshaven facility. And I think you said you expect now in the end of the second quarter to actually see the production ramping up there. So it sounds like most of the sort of the headwinds are still present, but the only one that maybe is changing is this vision environment? Or are there other moving factors as well?

That's, of course, the Vision segment, but we will also see in the Smart manufacturing improvement in the result compared to last year and also our -- this year or this quarter, the first quarter. And yes, for Smart Connectivity, there's also improvement foreseen in the second quarter in the EBITDA margin and results.

[Operator Instructions] We'll now move on to our next question from Tijs Hollestelle, with ING.

Yes, my question is about the Connectivity division. We already discussed it, I think, earlier this year, but it indeed showed a major increase in the second half of last year in the OpEx levels in relation to the ramp-up for subsea and onshore cable capacity. So how did this cost item develop in first quarter compared to the, let's say, the average levels seen in the second half of last year?

Yes, if you look at the OpEx for connectivity, then in the second half of last year, we had in Q3 still our TKH France activities, if I normalize that, then basically, you're looking at a kind of uplift for Q1 in the range of about 8% compared to average of H2 '23 levels. It has to do on one side, of course, with the full staffing of the facilities, which we have up to -- have completed and are ramping up further, let's say, commercial utilization. And at the same time, of course, we also have to deal with some of the let's say inflationary indexation effects, which we are not yet able to pass on, of course, to the customer base as the capacity is still not commercially used.

Okay. That's helpful. And I would say for the coming quarters, the level more or less remained stable. So you've basically done all the investments.

There's a slight increase as we go along, but basically, most of it has been included already. But the full utilization, especially the impact on the second half, you will have a little bit more headcount than we currently have. But by far, the majority is already included.

Yes. And let's say on the remark about starting production indeed in the second quarter. Will there also be revenue recognition in subsea cable in the second quarter?

Yes. Yes, they will. And as it was also in the first quarter since we still have our manufacturing plant in Lochem that is manufacturing the Greater Changhua project.

Okay. And what kind of step-ups can we expect kind of range?

Yes. In respect of the volume that we manufacture, the ramp-up will not be leading to substantial higher utilization than that we have in the first quarter. The only thing is that we will reduce costs in the second half year because we are eliminating the double cost that we have. And then -- so this year, we are targeting around 300-kilometer production and that will grow then further into 2025 where we are today with our sales funnel looking at around EUR 450 million to 600 kilometer. And -- so what we see is that there is a kind of window where we have not been able to get to a higher utilization this year as most of the projects were already ordered 2 years ago, 3 years ago for 2024.

Okay. So the real step-up in terms of revenue will happen in 2025 then?

Exactly.

Okay. Yes. And then basically still on the Connectivity division, but I also have some questions about the onshore cable, just from my understanding, there is destocking going on. So your -- let's say, your existing capacity in onshore cable is now, yes, I mean underutilized, but less utilized than it was in the past, so therefore, it's less profitable and then the new capacity is not utilized at all. So therefore, it's loss-making. Is that kind of the situation right now?

No, it's a mix. We are not segmenting new capacity compared to existing capacity because some of the new capacity has efficiency improvements. So we are utilizing that and we are profitable in the onshore business. So -- but much less profitable than 1 year ago. So it's not a complete standstill in respect of demand from our existing customers, it's substantially lower as they want to gradually also reduce their inventory. In several areas, we see a higher demand but, yes, the impact of the large inventory of close to 9 to 12 months is having a big impact that they cannot organize a higher demand this year.

Yes. And if I remember correctly, you were also, let's say, looking into the opportunity to sell onshore cables to clients outside of the Netherlands. Any progress on that? Is that possible on the short term?

Yes, but not in the first half year. We are looking at opportunities in the second half year and continuing in 2025. And so it takes some lead time, but the outlook is quite positive of the opportunities.

Okay. One final question because you mentioned indeed some, let's say, one-off kind of cost in the fiber optic business. Can you provide us with a number on that, the impact?

Yes. If you look at the part of ramp-up costs related to the ramp-up in Poland fiber optic, you're talking about just over EUR 1 million more or less.

And we will now take our next question from Michael Roeg of Degroof Petercam.

I also have a question about the Connectivity systems activity. If I look at the results from last year and try to remove TKH France for Q1 '23 and one month in Q4. I have a split in operating profit about EUR 42 million in the first half and well, basically, the result having in the second half of the year from EUR 42 million to EUR 21 million. And I was wondering should we be afraid that it will fall any further because of the increase in OpEx and the double costs in offshore wind. And then bottom out with recovery in the second half?

No, we will see an improvement in Q2 already. And -- that also has to do with the fact that we see a higher utilization in the second quarter. And so the outlook is that we will have a better result in Q2 than compared to Q1.

Yes. What I meant was if added to and comparing to my estimate of EUR 21 million for the second half of last year will then H1 '24 results be lower than that? Or do you think...

I don't believe that it will be lower.

Okay. Good. Clear. Then I have a question on your guidance for the full year, organic sales growth and organic EBITDA growth but there were, of course, some M&A influences from last year. TKH France, you gave us all the numbers, so that's relatively easy, but there's also Euresys acquisition. And what is the EBITDA level that you consider the basis from which to grow organically this year, if you strip out all the M&A from last year?

Good question, especially as we really stress that the like-for-like is important, when we talk about our outlook, then we are more in the range of to be very precise here, I just want to make sure that you get the same definitions I have about EUR 224 million.