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

Hello, and welcome to the TKH Q1 2025 market update. 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, to begin today's conference. Thank you.

Good morning, everyone, and welcome to the Q1 TKH market update call. Yes, with the first slide, I'd like to point out to the cautionary note regarding the forward-looking statements. And then, I move over to the Q1 market update. Yes, the turnover came in quite good with an organic growth of 2.2%, driven by Smart Vision and Smart Connectivity, and with a small decrease in Smart Manufacturing. The EBITA, we saw a small decrease of 3%. And yes, what the main developments were is that Smart Connectivity was still impacted with a very weak digitalization market. The cost savings that we have put in place last year will have a positive impact starting in Q2, and that was mainly related to the closing of the plant in Haaksbergen. We see a good progress towards stable manufacturing in the Eemshaven and especially the longer lengths have been a blockage in respect of creating production and turnover. But the first long lengths have been delivered in April. So that is, I believe, good news and good progress. And what is also important that we still see a very, very good sales funnel with more than 70 projects further increase compared to the last communication and totaling to more than 11,000 kilometers under tender until 2030. The order book, I believe it's good that we see a small increase, but really very small compared to the end of last year. And yes, the order intake also has been quite good. And in the end, we will come to that with the outlook -- that the market outlook, especially in respect, of course, of the development of the Smart Connectivity activities, where we have a very big order book that will support, of course, the higher turnover during the rest of the year. The recent tariff announcements, and there have been even more recent when we started to make up the press release. But again, even before that, the last announcements between the U.S. and China, we see that there's a limited direct cost impact. And of course, it's difficult to oversee what the uncertainty in, let's say, the market will mean with respect to investments. I believe that is too early to comment already on that. And what is, of course, good, our focus on automation and electrification, where we believe that, we are more resilient to negative macroeconomic developments. We are happy to comment related to the divestment of Dewetron on track there with a very good valuation that we were able to achieve. The closing is expected in Q3. And then, I move to the next slide, where we go a little bit more in depth to the 3 divisions. Within Smart Vision, we saw a very nice organic growth of 5.2%. And that was especially related to the machine vision activities where we were close to 20% organic growth even. Within Security Vision, a slightly lower turnover, and that had mainly to do with the timing of a few larger projects. Sometimes, yes, they just move into next quarter. And what is also very interesting to look into is that it is the fifth consecutive quarter of a gradual increase in the order book. And then Smart Manufacturing, as expected, had a turnover was slightly lower than last year, and that compares with a very strong Q1 2024. Also very good news is that the return on sales remained at the high levels recorded in 2024. Very strong and good efficiency programs that compensated the slightly lower turnover. And last but not least, the order book is slightly lower today than at the end of 2024, but also as expected. And within Smart Connectivity systems, it was good to see that we had an organic growth in the offshore energy. And that also had to do with the fact that we already recorded also the first turnover of the T&I business within the Inch Cape project. Onshore, after many quarters of decrease in turnover, we saw in the first quarter a nice increase in turnover, and that is related to the fact that, we see that rollout in the Dutch network at the DSLs is moving in the right direction. Of course, there were still some relatively high ramp-up cost of the Eemshaven as we did not have any utilization or output in the first 3 months. And that is now gradually turning into higher volumes in the coming quarter. But that had a considerable impact on the result and the order book increased slightly compared to the end of 2024 for the whole Smart Connectivity systems. And of course, we were able to announce a very nice project, the Waterkant project, which we signed in April. I then move to the outlook. We reiterated the organic growth in turnover and EBITA in 2025. In Smart Visions, we expect EBITA to grow, driven by an increased order intake and expected further market share growth. And of course, we see effects of the implemented cost-saving measures that we took last year. In Smart Manufacturing systems, the turnover is expected to decrease organically, and that is related to the lower order intake and the very strong comparison base of 2024 with the catch-up effects that we had. And then Smart Connectivity systems, we expect that the new Eemshaven production capacity and the good order book will contribute to significant turnover and EBITA growth. And then on balance, we expect that the organic growth in turnover and EBITA, excluding one-off income and expenses, will be there. So that is the last slide that we have to present. I'd now like to all for go to the Q&A.

[Operator Instructions] We will now take our first question from Martijn den Drijver of ABN AMRO/ODDO BHF.

My first question is about Smart Manufacturing. I was expecting, because of the lack of that catch-up effect in the lower order book, a higher decline in Q1. So what drove that strong performance, relatively strong performance? Did some of the deliveries come faster than expected in anticipation of tariff issues? If you could elaborate on that performance and how to think about phasing in the remainder of 2025, given your expectations of lower sales and lower EBITA? That would be question one.

Martijn, this is Elling. If you look at the catch-up effects in '24, then the majority of the catch-up effects took place in the where we currently are remainder of '24, so in Q2 and more in Q3 and Q4. So from that point of view, the delta in the like-for-like Q1, the catch-up effect is not that material. And that also then, of course, sets a little bit the pace for the coming quarters. That's where the comparison base will be slightly different. We have not seen a major push out or something due to tariffs or things like that. That's not the case.

Clear, clear. And then on subsea, it's positive that the long lengths have now been able to be produced and shipped to the customer in April. But you still talk about good progress in ramping up towards stable manufacturing. What's the disconnect between the 2? Because it seems as though if you are able to produce at lengthy cables and you have shipped them, meaning that the quality was at the right level. Why are we still talking about good progress in ramping up? Isn't it finished? And shouldn't it have been finished? Or otherwise, when will it be achieved? Is that Q2, Q3?

Yes. As mentioned in the press release, we said we made good progress. But yes, you are not yet there. So it's a matter of making more kilometers to get further through the learning curve. So the 5 most critical processes we are -- we progressed really well, but are not completely there. So we still see that, the yield is not at, let's say, 98%, which is our target. So the further improvement of the yield will then help us, of course, to reduce cost and increase output. And that takes at least still during Q2.

Okay. And then hopefully, in Q3, we'll have normalized operations, normalized production costs and yield.

Yes, exactly.

Just one follow-up on that. You guided for incremental costs of between EUR 6 million and EUR 8 million in relation to subsea and the use of Lochem. Is that still your estimate today?

Yes, that is still the estimate today, yes.

And then my final question, you sold Dewetron, nice multiples, well done. Is there something you can already share in terms of the proceeds and what you intend to do with them? Is this something that will immediately go to net debt reduction? Or do you think that based on your normal seasonality, you have better free cash flow in the second half that this might already be a first sign of another share buyback?

Yes. Important criteria here is, of course, the net debt-to-EBITA ratio, where we have set a maximum of 2. Of course, we want to have some headroom there, and I believe we can judge during Q3 when the proceeds come in, what we are going to do with the proceeds.

We will now move on to our next question from Chase Coughlan of Van Lanschot Kempen.

I'm going to bring it to Vision, please. You mentioned in the outlook that you expect to see some market share gains there. And I'm curious on why do you expect that or where do you see you have this real clear competitive advantage? Yes, that would be my first question, please.

Yes, it is in, I would say, almost all the end markets. So smart manufacturing, consumer electronics, the battery business, the wood business. So it's not a specific one area, and it has to do with the overall very, very good performance of our technology. And yes, the time we have spent in respect of specking in our technology in the past 12, 18 months. And that is now bringing us a good return of, yes, also the growth that we saw in Q1, where we were at almost 20% organic growth. And I believe that, is, of course, also in relation to what other companies have seen in organic growth, a big, let's say, step-up compared to competition.

Yes. Okay. That's clear. And actually, maybe on that point, you mentioned the 20% organic growth for machine vision. And I believe you mentioned that, the Security Vision saw a decline basically driven by a timing effect. So could we expect in Q2 if that -- if the contract goes through and you get some revenue growth in the security space there that we could expect quite a fast acceleration actually of growth -- organic growth in the Vision segment in Q2, maybe 15% organic growth.

No, we believe that the traction will really come in starting from Q3. So at this point of time, Q2 will not be a big improvement compared to -- or yes, not a big improvement compared to Q1.

Okay. Okay. That's very clear. Then maybe one final question going back to subsea. Of course, you flagged the 130-kilometer projects in April that you landed. Can we still expect sort of total kilometers in 2025 between 500 and 600 for subsea? Or is the ramp-up still really -- that doesn't look so realistic anymore? Or what are your internal expectations there?

Yes, I believe, we have guided for around EUR 180 million turnover, and that turnover is still, let's say, achievable. It has become a little bit more a challenge compared to 3, 6 months ago, as we have to organize a kind of catch-up of the number of kilometers that we didn't manufacture until April. But it looks still achievable if it runs smoothly in the coming quarters.

[Operator Instructions] We will now take our next question from Tijs Hollestelle of ING.

I was a bit late in the call, so maybe I missed it. Sorry for that. But yes, my question is also on the connectivity business because I'm really anticipating, of course, to see the impact on the divisional margin from the sales contribution from the subsea cable. Going backwards the kind of bumpy ride TKH had with reporting the numbers. What is the likelihood of, let's say, unexpected misses of the other 2 business? So I think you mentioned that, onshore energy cables are doing a bit better after 2 years of destocking.

It is very difficult to hear you, Tijs. Somewhat better.

Completely over?

No, no, no.

Yes. So what are, let's say, the risks that are, let's say, disappointments coming from the other business blocks within the connectivity business?

Now, the risk is mainly related to digitalization where we have the cost saving program in place that is running quite well. However, the market is really, really difficult, and that is difficult to predict where it will move. We see opportunities to get a high utilization, but they are not yet in the books. So there is a, I believe, a reality for risk in the onshore energy business, I believe we are doing quite well. The risk is very limited. And yes, so I believe that is what I need to comment here.

Yes, the problem is that as outsiders, we don't have any clue about, let's say, the margin sensitivity. So it would be, in my view, rather disastrous for the share price if you finally have, let's say, the higher turnover and high margin of the subsea cable and then on divisional result, which is heavily pressured by the other business. But yes, you're probably not willing to provide more detail on that. I mean, if there is, let's say, a quick further decline in the turnover of the digital business, is it becoming loss-making on the EBITA line?

Well, I mean, you can never exclude those kind of things, but we have, of course, made major steps last year already. We have in Q1, finalized the transfer of all activities from Haaksbergen in this particular field to Poland. So we have not yet a full optimized quarter in Q1. Going forward, we will have that, including the lower cost, which are attached to this. And of course, where risks will come up, of course, we further create self-help programs to make sure that we mitigate as much as possible. And of course, we have made some more general statements towards our strategic outlook for this segment in a different perspective.

Okay. Yes, I'll have to wait for the actual results.

We will now take our next question from Thibault Leneeuw of KBC Securities.

First, a follow-up question. I would like to know, if you would be able to quantify the catch-up effect for the offshore subsea cables that would be needed to get to the EUR 180 million in 2025.

Yes, the catch-up effect is, let's say, around 150 kilometer of cable that we need to manufacture in the -- additionally in the coming from now -- 8 months.

Okay. That's clear. And then with respect to the Smart Manufacturing, I was just wondering how the UNIXX adoption is going. Also, I would like to be -- to have a little bit more details within the components. I believe, the ASP was EUR 12 million compared to the EUR 4 million for MAXX. Some is for the component building, but also for the assembly. So I would like to know the modules that have been sold so far, was that all in the assembly? And could you remind me again, how much the addressable market increases with the UNIXX system compared to the MAXX's system?

Harm Voortman here. First of all, in general, there's a lot of interest in the UNIXX technology in itself. It's really barrier breaking, I would say, in the production of tires where you can really address all the challenges that tire producers nowadays face. The -- if you look at the current applications of UNIXX technology in the tire building area in production, then you look at mainly on the production of the thread, so the outer layers of the tire, where UNIXX strip winding is used, and that's going extremely well. So really used for the ultra-high-end tires. It is also being deployed in the component manufacturing of tires where you look at, for instance, the steel reinforced parts of a tire. We call the machine that produces these parts, the UNIXX Belt Maker. And that is -- and we sold a number of these machines last year. And also in Q1, we had sales in that. So that's all going quite well. Indeed, if you would look at a total system where you would make all the components and the assembly of a tire, then you look at a sale of around EUR 10 million to EUR 12 million, whereas if you look at, for instance, a MAXX machine that is assembly for a tire, that is roughly, say, EUR 4 million. It depends a little bit on what kind of options and technology is included in the MAXX. So it can also be an expensive machine, but also a lower-end version. So yes, there is indeed quite a potential for growth if this technology is further adopted. Right now, we're running a lot of tests with multiple companies. And well, we're excited about this, but it will take still a couple of quarters before you really see this kicking in the revenues.

And just on the increase in the addressable market, is that from the EUR 4 million to EUR 10 million to EUR 12 million? I don't assume it's a doubling or tripling of the addressable market. I assume it's somewhere lower, but still an increase in addressable market. Would you be able to quantify that more or less just to have an idea?

Well, I think in the September meeting for the Capital Markets Day, we can certainly give some more details on that. Right now, I would say, indeed, it is growth potentially, but it's also clear that it will not be triple the turnover. But I really would like to address this in the Capital Markets Day.

Okay. That's clear. And then a final question with respect to your revenue expectations for manufacturing, it looks like that the CapEx expectations for the Tier 1 players is around minus 4.6% for 2025. Is that an organic decrease that you would expect more or less in line for your business, including the timing components of the catch-up effect with a strong 2024 last year. Would that 4.6% be more or less a fair representation?

I think there's not a direct relationship between the total CapEx expenditure of the Tier 1s and the turnover of Smart Manufacturing. It's more complicated like that. There will be a decline in turnover compared to '24. But we already saw last year a hesitation in the Tier 1s, as you know from our press releases. And that while you could say is still the case, although we see some really starting to invest again. So it's -- yes, difficult to relate that exactly to the numbers that you say.

We will now take our next question from Ruben Devos of Kepler Cheuvreux.

I have a first one regarding order intake. I think the order book was flat versus year-end. I mean, -- but I guess underneath, there might be different takeaways across the segments. I think year-end was obviously a very strong order intake for Connectivity, I think 1.4 book-to-bill. Machine Vision was 1. I think Smart Manufacturing is 0.9. Yes, I was just curious for Q1, how maybe the order intake was different across the segments?

Maybe formulate slightly different. If you look at the order book, you said it's more or less in line with end of '24. The decrease in order book is taking place in manufacturing in line with previous communication. And both Vision as well as Connectivity had an increase in order book in Q1.

Okay. And did it further, let's say, improve from what you saw at the full year? So in other words, when it was 1 for Smart Vision, 1.4 for Connectivity, that further improved from that perspective and then for Smart Manufacturing further decelerated?

Well, not further, but in line with what we have been communicating. So I think I would leave that. Reference to the order book.

All right. Fair enough. Then just on the sales funnel, thinking about -- you're referencing 70 projects, 11,000 kilometers currently under tender until 2030. So that's like a time frame of 6 years. But what about, let's say, in the next 24 months, how many of these, let's say, 70 projects or 11,000 kilometers do you expect to be awarded?

Yes, we have not, let's say, all the details here, but I would say between 5 and 10 projects.

Okay. 5 to 10 projects. Because I mean, 11,000 kilometers, just doing simple math, you get to, what is it, 1,800 kilometers a year. You're talking about 150 kilometers this year. So that would give you, let's say, a bit less than 10% market share there. Is that a good way of thinking about it? Because I think the win rates you talked about earlier was well ahead of your initial anticipation, right? So that's where my question is coming from. Like obviously, maybe on the demand side, there's not much to be concerned about. Maybe it's rather going to be on the supply, like how time sensitive might some of your customers be in getting these cables in. So this is just some of the questions I have.

Yes. Perhaps a more direct answer is that we are still targeting, let's say, around 600 as a minimum kilometer in '26. And of course, we will also book orders for '27 and '28. But I believe for now, it is important also in respect of guidance that the 600 is what we are guiding for. And there are more projects to be, let's say, awarded starting from '27. So we need to have relatively high market share for the projects in '26. And I believe what I just mentioned indicated between 5 and 10, we are -- let's say, we still have some headroom in respect of the 600 kilometer for '26.

Okay. Yes. All right. Yes. I think my numbers were a bit wrong as I said EUR 150 million, but that was -- I guess, it was EUR 180 million sales, but then 500 kilometers of cables in '25, right? So you basically have a market share around 30%, I guess.

We will now take our next question -- follow-up question from Martijn den Drijver of ABN AMRO.

I would like to come back to onshore energy. So the regional and the DSL are now progressing with projects. So the sell-in is improving. Do you expect that situation to improve going forward? Is it really -- because on the permitting side, we hear quite negative stuff from contractors as well. So I was just wondering if you could shed some light on that development. Is this the first part of a real recovery? Or is it just a slight uptick and then it flattens off again? A bit more color there. And in relation to that, you were also seeking international sales for some of those -- for some of the cable. Is that still in the cards? Or do you think, well, maybe we'll just sell that in the Netherlands? That would be question one.

Yes. Related to the Dutch market and the DSL rollout, it is, of course, difficult to really predict on our side what will happen in 9 months' time from now. But at least the forecast that we get point out until the end of the year that we see growth. And at the same time, we have put this mitigation of the international positioning, and that is moving in the right direction with also the first orders coming in here. And so we will continue with the internationalization. And again, we are also on the right track there.

Clear, clear. I was just wondering, the second question is with regards to Smart Manufacturing, just to come back to Harm's statement. Can you talk about, in terms of the order intake, you said that the Tier 1s are slightly coming back or some first green shoots. Does that mean that most of the intake so far in Q1 is from Asian, Chinese operators, customers? And if so, what does that mean for the sales mix and margin?

Good morning, Martijn. Yes, the -- if you look at the total order intake in Q1 and also the expected order intake for the remainder of the year, we believe that the percentage of coming from the Tier 1s will be a bit better than last year, but not at the same level as what we had previously. So there is, you could say, an improvement on that side. But it is moving slow. So far, the -- actually, we see 2 things. One is the continuous sales into North America and Europe for the automation and the reshoring. But definitely, Asia was an important part in Q1. So there's not really a different trend, I would say, in the order intake when compared to '24. I think I'll leave it like that.

Okay. So there is no real sales mix change, hence, no effect on margins. That would be the way to think about it.

Yes. Yes, although -- and that is also what you have seen in the communication is that the order intake is at a lower value than in the, say, 2 years ago.

Got it. Got it. And then my final question is moving back to subsea. The first one is a relatively easy one. Waterkant will that be produced in 2026 or in 2027?

'27.

Okay. And then a more general question. We've seen the giant Hornsea project being shelved. We've seen what happens in the U.S. under the Trump administration. It used to be that supply was very restricted on the inter-array cable. Now with this more recent trends, is that situation changing, meaning that you see perhaps Prysmian or Hellenic having more capacity available, therefore, competitive pressure moves up? Or is there so much demand from the various regions that, that doesn't -- that is not expected to happen?

No, there is still sufficient demand, and we don't need 100% market share. And by the way, we have adjusted also our sales funnel with the U.S. situation and also the Hornsea project, which was originally in our sales funnel. And still, we are above 11,000 kilometer. And yes, I believe what is really good is the unique design that we have, where we see that the desire to work with us is getting to higher levels every day. So it is really a unique selling point. And again, we don't need 100% market share.

[Operator Instructions] And we will now take our next question from Maarten Verbeek of The Idea.

Firstly, they're all around the offshore energy cables. You still have some issues with producing long-length inter-array cables. In your current order book and what you have to manufacture on the short term, will that give you any issues or problems of not being able to produce those all at very high cost or something else?

No. What we see is that it really normalizes with the finishing of the Ørsted project, Greater Changhua, and then it will run much more smooth because of less pressure for long lengths. So then we get into a situation where we have link lengths of around 1 kilometer.

Okay. Maybe another question with respect to the Waterkant order you won. The last one, the Inch Cape, you already took in your order book before the final close was taken. So just to clarify, this order of Waterkant, is it already in your order book or not?

Yes, today, it is, but it was not at the closing of Q1.

Okay. And then also with respect to this order, it's a very long or let me say, you ordered for -- you won an order for 130 kilometers of inter-array. Will this project only consist of 16 foundations that gives a tremendously high foundation to inter-array ratio. Let me address it like that. Could you give some explanation to that?

No, I cannot. This is the order we got. And so we have to do with it.

Otherwise, we'll take it offline. And then also maybe in relation to what Martijn asked because everywhere you see that installers of owners of offshore wind parks are getting more cautious. We have seen Ørsted people are -- want to have a better CFD. But still, your sales funnel is growing pretty rapidly. Could you provide more color? Is it that you are expanding more outside Europe into Asia or these kind of territories?

No, that is not the case. It is mainly Europe. Any other questions, Maarten?

Sorry, I didn't hear your answer because if you -- could you please repeat it because something went wrong.

Okay. It is mainly Europe where we see the sales funnel for us.

There are no further questions in queue. I will now hand it back to Alexander for closing remarks.

Okay. Thank you, everyone, for all the questions and being here in this meeting. We will continue to execute and do our best to meet the organic growth in turnover and EBITA in 2025. Thanks again, and wish you all a nice day and success.

Thank you. This concludes today's call. Thank you for your participation. You may now disconnect.