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

Good morning, everyone here in Amsterdam, the Okura Hotel for the presentation of the half year results. Also a warm welcome to everyone in the audience of the webcast. Before I go to the -- I have to move this -- to the presentation, I'd like to point out to the cautionary note regarding forward-looking statements. Yes, we have a nice key messages, and we can start with the fact that we delivered strong results -- a strong set of results, both in the half year and especially in Q2, with an organic growth of 18% in turnover and 67.5% in result. What we see is that the Vision Technologies performed very well and the electrification performed very well. Underlying performance is related to high market demand in Vision Technology. What we saw in automated machinery is that we are still impacted with a lower order intake, and that has mainly to do with geopolitical circumstances and led to -- that led to postponement of orders. I have to mention that we have a very good pipeline of orders and we are looking forward that these orders are coming in the coming quarters. What we saw is that within electrification, we had an especially good performance in the Eemshaven, strong improvement in output and also the yield improvements. But also in Onshore energy, we saw that there was a very good performance, very high growth rate due to the fact that we have a very good order book there and also that the installation of the projects of the cable is running at a much more smooth trajectory. The separation process is well on track. Important strategic development within the TKH Group, of course, the separation of the Automation and the Electrification activities, we have come in with a new segmentation to address the real, the pure electrification activities and then the other activities within electrification. I believe that's a good -- helps the transparency and information stream to make the right analysis of our business. What we also did is that we upgraded the -- or replaced the forecast for Electrification into a medium-term guidance. And in that medium-term guidance, we upgraded the organic growth, and that has mainly to do with the fact that we see a better performance, higher demand in the Onshore Electrification activities. I go in detail now to the half year results, Q2, especially important to mention, besides all the growth rates here, is the order intake, I believe, a very good development of the order intake -- more than EUR 500 million, and we have to take into account that the order intake in the automated machinery division was really low. So when that comes back, I believe we are really performing really well. And what is also good to see that not only the comparison towards 2025, showed very nice growth figures, but also the comparison to Q1 '26 showed a very good performance. Yes, then the half year performance. I mentioned that we are quite happy with a 40% organic growth, very nice development of the EBITDA plus 43.5%. We have a kind of stable added value and a quite high added value. And I'll come back later to that, especially when we look into the separate divisions. What is important to mention here is the innovation rate. It's still a quite high innovation rate. We have seen years where we have been above 20%, but taking into account very high organic growth and we still keep up with an innovation rate of above 16%. I believe we are doing a quite good job. And to remember you that the innovation rate is a really growth engine to gain market share. And I believe we are doing a quite good job there in several areas where we have seen that the market share increased. Also, important to mention here is the award we get -- we got from EcoVadis -- we are with VMI in the top 1% of companies in respect of the sustainability rating, very important building stone for TKH in addressing our market and desires of our customers to be a very sustainable company, but not only sustainable as a company, but also especially sustainable with our technologies, that can help our customers to improve their sustainability performance. The separation activities are on track. And yes, we made good steps, especially with the preparation for the EGM to get a shareholder approval for the proposed separation. We are doing that on a voluntary basis. We are not yet meeting the criteria that it's an obligation. But we consider the views and support of our shareholders is very important for the separation process. I move into the different divisions. I would like to mention here with the Vision Technologies, especially the high added value. We continue to perform on a very high added value in this activity, which again proves the technology leadership we have here and in that respect, the performance and rewards we get from our customers to get a good margin. And that translated now in the first half year in a return on sales of more than 20%. And very healthy activity, especially also if we look at the order book, which increased substantially. And that means also that for the second half year, we are positive in respect of the expectations and the strong order book is a good supporting. Automated machinery, I believe is still a very good performance. We saw the turnover coming down was not a surprise. Based on the order intake, which has been running at a lower pace in the last 3, 4 quarters. As I mentioned before, we see a very good order project pipeline, but postponements by many of our customers, we can come back later if you have more questions about that, but the return on sales is still at a good level of 16%. It is a cyclical activity, but keeping up the EBIT margin, the return on sales at 16%, I believe, is a very good job. We see here, of course, that the order book came down substantially. And we need in that respect, also additional orders to get our performance also in relation to 2027. What is very good? We didn't lose any market share. So that is, I believe, a key message here and that the long-term drivers for the high-end equipment that we have in our portfolio had a need for greater production efficiency, increased sustainability and especially also the higher levels of automation are really positioning ourselves at the key trends and the technology advantages that we have. Electrification, a very nice step-up in the return on sales. We are reporting now, especially also the EBITDA margin, which is let's say, common practice in the cable industry with our peers. There we see a very nice EBITDA margin already of 12.6%. With respect to the medium-term guidance of 19%, there is still headroom for growth, and that will especially happen through the further utilization of the capacity that we have in our hands. What we do also for the first time is split up the turnover for the 3 areas within the electrification activities. And again, this is the pure electrification activities consisting of 4 companies in the TKH Group. Very substantial growth within the offshore energy, which confirms the higher utilization rate, good improvements of the yield in the factories. We solve the majority of the issues. We did several upgrades. And again, that was mainly fine-tuning of the technology to get where we wanted to be. And yes, again, the outlook is also quite positive for the offshore wind with about 92 tenders we are participating in, with a total demand of more than 14,000 kilometers. Within Onshore Energy, it is important to mention the EUR 1.4 million framework agreements that we have signed. We cannot put that into the order book. So the order book is 500 -- a little bit more than EUR 500 million, but it does not include, of course, the framework agreements. And -- but it gives you a good outlook, a good fundament to value, let's say, what the potential is of the onshore business also for the future. Specialty cables did a quite good job. The German market was really affected with much lower investment levels in the capital goods market, but they still were able to increase the turnover with 2%. And yes, with respect to the outlook, we see that the improved operational performance recorded during the first quarters are -- of '26 are expected to continue in the second half of 2026. Then for the first time, we report the other business, which consists for about 75% of digitalization activities. We saw a significant growth -- organic growth of more than 15% and a very big step-up in the profitability, which is mainly being the contribution of our fiber production activities that are located in China with a very good performance of demand in the data center business and of course, all the AI developments that you see where fiber optic is the product to do the data transmission. And also interesting to mention is the demand in the defense business. We saw also a big reduction -- substantial reduction of the cost. In the activities last year, we closed down the activities of the fiber manufacturing in Holland, moved the capacity to Poland, and that helped us to have a much lower cost base and that also supported the improvement of the return on sales. Yes, the medium-term guidance, I already mentioned that we see a small upgrade of the organic turnover, and that is based mainly on the outlook for the medium voltage and high voltage cables for the onshore business. And what is important to mention here is the last 12 months development of the turnover towards more than EUR 600 million turnover, which is a different reference base as we had -- when we communicated the targets at the Capital Market Day in September last year. That was my last slide, and I'd like to hand over to Elling.

Thank you, Alexander. Good morning, everyone. It's my pleasure to spend a few minutes on the financials of the first half. First of all, the segmentation. We discussed the segmentation at the Capital Markets Day in September '25, where, of course, the transition from the smart segments, which we had in the past towards the Automation and Electrification segment was applicable. Full year '25 was still reported under the -- what you see here on the left part of the sheet. The smart division, smart manufacturing and smart connectivity segments. But as of this year, we will be reporting -- confirm the right part of the sheet here, automation electrification and indeed, also listening to the feedback of some of you. We have grouped all the to-be-divested activities in a segment called Other. So therefore, you have a very clear performance indicator on how the business is running in the automation and electrification segments also when you want to compare them to peers. It is also -- of course, we don't like that you have a lot of work to do with our reporting segment, but we facilitated as well as of this morning. The last 3 years, KPIs and reporting have been made available on the website of TKH along the new segmentation, as you see here on the right side. So you can update your models accordingly. And basically, the step from the left to the right had to do with the fact that we grouped, as I mentioned earlier, under the segment Others, those elements, which are considered to be divested. Digitalization was already in that basket, but as you see, some other smaller activities have been entered into this segment as well. Then moving on to the top line and the developments in a geographical way. If you look at the sheet here, Europe still remains roughly 60% of overall revenue. But you see, of course, the Netherlands creeping up a little bit. That's on the back of the high growth of the electrification business, which is very much centered in the Netherlands and some countries around us. Slight increase in Asia. That's on the back of further activities of our vision activities in Asia and North America, a substantial reduction as a share of the total revenue, and that's due to the fact that especially on the tire building machines, there was less revenue base in North America than it was in the first half of '25. Looking at the P&L, quite a couple of things, of course, already passed in the presentation of Alexander. But I just want to highlight a few things. If you look at the organic growth in the first half, 14% on top line, we had about EUR 16 million or 1.9% of revenue in the category of divestments. Alphatronics and Divtron were divested. And they are also, of course, already in the adjusted figures in the other segment, just to clarify that. And if you look at our added value, Alexander mentioned, slightly lower than the first half of last year. We have seen that electrification has grown its added value. So that is an important step. And as electrification has become a more important share in the whole, it means that it puts a little bit of pressure on the group added value despite the fact that, that segment, as I mentioned, saw an increase. Then if you look at the EBITA a 43.5% increase for the first half organically. I think that's fairly well. Also, operational costs are well under control. So from the point of view, a return on sales and EBITA at 11.9% is a good level, I think. We had some one-off costs in the first half. As you are all aware, we are in full swing for the separation of electrification that also brings some one-off expenses in the first half as well as some of the divestments which we did in total of EUR 4.5 million. If you look at the line result of associates, the proceeds or the net effect of the divestment of Alphatronics resulted a small EUR 3 million in one-off gain. And on the financial result, we had seen lower interest rates and a slightly lower average debt compared to the first half last year. That helped a little bit. But foreign exchange effects basically caused the delta between first half '25 and first half '26. If you look at our tax rate, just over 24% as a normalized effective tax rate, also something -- when you look at your models for '26, a little bit to -- in that same basket, we will probably end. On the balance sheet, of course, working capital is always a big clear topic. We have not been able, compared to the start of the year to reduce the working capital as a percentage of revenue. It's at 18.3% and basically in euros, it increased by just over EUR 40 million, and that's in line with the actual growth organically of the group. Despite the fact that it's a slight increase, it has some, I would say, qualitative aspects to this as well because due to the fact that the order intake, especially in automated machineries, VMI has been low. It also means that the down payments have been substantially lower than what we have seen in prior periods. And that is causing, in the end, an increase. It's a net effect on one side improvements within some of the working capital items, but the lack of the down payments in the end brings the working capital up compared to where we started the year. And mind you, we, of course, always have a higher working capital at the middle of the year than at the end, and that's also what we are aiming for '26. Working capital leads to a further explanation on the net debt, just over EUR 500 million, according to the bank covenants or leverage rate, we are at 1.8, substantially different than the 2.6 where we were last year, of course, on the back of the improved results, this is a clear positive development. If you look at some of the main items here, cash flow from operations, you will see it in the next sheet in more detail, about EUR 95 million. But I think also here, the CapEx programs, both in tangibles and intangibles, close to EUR 30 million each in the first half. We expect this to be slightly lower in the second half. And of course, an important ticket as well has been the dividend payout in the second quarter. This leads basically to also the free cash flow as presented here. Also, here on the back of the swing in the working capital, we see that H1 is greatly impacted by the change in working capital. In the end, we end up a conversion of 15% low. But also here, we expect the second half to improve. And on the right side, you see, again, an overview of how working capital ratio develops during the last couple of years. So far, the short explanation, the outlook. And again, I have to be a little bit different than the couple of years before where we had a much more extensive outlook, basically almost going at line item. We are not able to do that. It's not that we don't want. But in the current process we are in, we have a lot of restrictions in terms of guidance going forward as we are in a dual track process. the electrification activities. So basically, what we say here is that we reiterate our outlook as we communicated during the results of the first quarter. And baring unforeseen circumstances, we expect organic growth in both turnover and adjusted EBITDA in '26. That's short. I know, but let's -- that's all I can do for you at the moment. I think so far, the presentation part, we would like to open up for Q&A, please.

Michael?

Micheal Roeg at Banque Degroof Petercam. I have a couple of questions. The first one on balance sheet. Assets for sale was zero, even your presentation showed the other category with a couple of activities for disposal and the separation process may lead to a sale or an IPO or something else. So I was a bit puzzled by that. .

It's not that we are not working on this. We definitely are executing this. But according to IFRS, you have to pass certain hurdles in order to get to this point that it becomes part of the assets held for sale structures. And that's not yet meeting those requirements at this point in time.

If I'm not mistaken, it should be likely that you sell something within 12 months for IFRS to put that asset for sale. So that applies to other

That's not the only criteria. There are a couple of more. So it doesn't mean that we're not meeting the target in terms of timing, but there are some other criteria, which make the overall evaluation like that.

Okay, clear. And then about the margin targets for the 2 activities. With automation, you are actually already within that range that you desire, even though tire manufacturing is currently experiencing some softness -- cyclical softness. So when that recovers, you are already above your target range. Why did you not raise it like you did with electrification?

I think there are 2 points. Electrification is a clear moment in the sense that there is a different kind of trajectory on where, let's say, the next steps of electrification will go and communicatino about it. It doesn't mean that automation is in the kind of dual area or whatever you want to call it. It's just the fact that where we currently are, we still have some time left before, let's say, the targets are being aimed for. And in that period of time, of course, we will evaluate whether there is a necessary point to upgrade or, let's say, come in with a new target itself. It's not something we have foreseen right now.

Once the company -- Once electrification is separated, would it make sense for you to put separate targets on Vision systems and Tire manufacturing systems?

I think that's a very premature statement. Of course, once the separation take place. For sure, there will be communication about the road forward, the strategy, et cetera, of the Automation group. That can be moments where these kind of topics will be discussed, but that's still premature at this point in time.

Okay. And then my final question is on the electrification margin. It was 12.6%, and the goal is to reach more than 19%. During the presentation, you mentioned that utilization will be one of the big drivers. But I was also wondering, will further efficiency improvements be a big component of that improvement. Is there still a lot of benefits to get from that?

Yes, I can confirm that. There are still improvements, especially related to productivity. And we did some -- especially in that direction investments in the past few years, and we are taking in the returns on these investments. And that helps, of course, to get to a different, let's say, cost conversion in relation to the turnover and that helps, of course, the bottom line percentage.

So if you suppose that sales would remain flat in the next 12 months than with efficiency improvements, there is already further margin upside? .

Yes.

Martijn den Drijver for ABN AMRO. My first question is for Alexander. What prompted the CEO change? Can you elaborate a little bit on why you decided in conjunction, obviously, with the supervisory board to lead electrification. .

I believe that, let's say, looking also at my age that the future for TKH Group is in automation. And I believe that there's a very good point to hand over that activity to a new leadership, bring also fresh blood in that area. And so I can focus myself completely on the transition -- a smooth transition of the separation of the electrification activities, which is a very important project and which also requires full attention.

Just 1 follow-up. Does it have anything to do with the potential makeup of the acquirers of electrification, strategic versus private equity mainly. .

That is nice that you say that, but it's purely speculation.

We'll see. And then digitalization is doing well. Electrification is doing well. So we're -- I'm assuming a sale. Let's hypothetically assume that it will be a sale for both units. The use of proceeds within the Capital Markets Day presentation was allocated primarily to shareholder remuneration and a portion was allocated to continued M&A in automation. Now you have announced a new CEO. Will that allocation change? Or will it remain as is?

Maybe just to make a small correction. We have mentioned a certain category or priority of deploying proceeds when we look at the capital allocation. Organic growth is the first thing in automation. We also look for a build and buy strategy. And then we have, of course, elements like share buyback dividends and that whole basket presented slightly different, but I think that's important to highlight that. And I think at the moment, this is the strategy which we have. This is the strategy we have communicated. This is the strategy we move on. And I don't see much change in there.

Okay. Because normally, CapEx and dividend could easily be paid from your free cash flow anyway?

I still keep to the set of priorities as a list we work with. .

I'll move on. On the Eemshaven, how many kilometers did you actually manufacture in the first half and by extension, do you stand by that 600 kilometers for the full year and that EBITDA margin above 15% for offshore?

Now as Elling already mentioned, we cannot be too specific on the, let's say, developments of the activities, especially not looking at forward. And we are meeting all the customer requirements and these customer requirements are close to the figure that you just mentioned.

Maart Verbeek, the IDEA! I'd like to get back to electrification and also your new targets going forward. And if I'm correct, the base level for electrification is EUR 525 million of EUR 25 million revenues. If I add 9%, you will need to achieve at least EUR 680 million in '28. But if I simply double this year's revenue, you are already -- so are you very conservative or -- and you mentioned already onshore energy will do much better? Or are you very cautious about your offshore development going forward?

Just to make clear, the reference point, the 9% is starting as of the 30th of June '26. So the reference is EUR 604 million going forward. And we have not specifically mentioned 2028. We have mentioned midterm.

And what is midterm?

The next couple of years?

Okay. And then I'm a bit surprised about the current pipeline for the inter-array consisting of 92 projects and over 14,000 kilometers because a while ago, you mentioned it was only between brackets 11,500 kilometers and 72 projects more or less. And the statement is always that is until 2030 whilst I only see cancellations and postponements. So bit puzzled by a tremendous upgrade and outlook, whilst the market is showing actually the opposite. .

Yes, it is not anymore until 2030. I believe, [indiscernible] it is 2032 that we are looking. So that makes the reference base different. But yes, of course, it is a fantastic outlook that we have.

Okay. That's clear. And for the moment, you have upped the outlook for electrification for revenue and your profitability. But you have not done so for your ROCE, which was between 18% and 23%. What will your ROCE be within this new target -- set of targets?

Yes. That's a good question. I don't want to, let's say, shy away from answering this. But the ROCE target is a little bit dependent on the final transaction structure and the actual, call it, opening balance sheet, which electrification will start off with. And not having, let's say, that level of flexibility where this may go in a target right now, and this might be something we will address once the separation has been completed. .

But in September last year, you had a view about that.

Correct?

So what has changed in the meanwhile.

You can say the actual process gives a little bit more dynamics to this. And the fact that we basically take back the '28 target into a midterm target also gives a little bit of new flavor to the whole topic. And that's why we want to address it at the proper point in time. And that's once the transaction parameters have been clearly defined and then use that as a base point rather than constantly going back to assumptions, which are no longer applicable going forward.

Tijs Hollestelle, ING. Also a couple of questions. I do indeed appreciate the breakdown of the numbers are really helpful, especially indeed the revenue categories in the electrification business. So I had a question about the order book. It's EUR 507 million. And I personally assume that most of that relates to offshore cable projects because in specialty cables, it's kind of short notice orders, I guess.

Well, sure. No, there's not really, but it has a different dynamics. That's correct. But your assumption is right.

Yes. And then maybe in onshore cable a few larger orders, but basically the same dynamics. So you have a lot of visibility in offshore cable production in the order book. .

That's correct? .

That's correct. In the past, you -- I think you guided about EUR 170 million annual turnover in the subsea cable business. Yes, looking at first half, you're going to exceed that this year by a mile. And additional upside, let's say, into '27, if operationally, everything is running, what kind of annual sales levels are you calculating with for offshore?

What we are calculating with is something which we are not able to disclose forward-looking statements related to electrification in terms of what the second half or even '27 will be, we have restrictions as we are in the dual track process. So I sympathize with the question you have, but I'm not able to help you very much with it. But your assumption about order book is correct. And I think also about in itself, the production capacities, et cetera, that I can confirm, but not a specific outlook.

Okay. Yes, that's clear. And then in addition to what Martin was asking, at what stage of an offshore wind development does a cable manufacturer typically gets the order. .

That is about 2 years before the installation will be taking place.

The installation of the foundations.

Yes.

Two years before that you get the order and then when you start producing?

They are 2 years before. So the order can be even longer before that can go up to 3, 4 years. But we start and have the flexibility to start the manufacturing in most cases 2 years before the installation will be executed.

Okay. That is helpful. It's a bit strange from the client perspective. .

Yes. It is an important mission-critical part of the infrastructure. And so what we see in general that the customers, I like to see headroom in respect of meeting the obligations. And yes, that is nice because we can also then play with the utilization of the plant by moving capacity forward or the other direction to get to the higher utilization and efficiency in the plant.

Okay. Okay. That's very helpful. One final question for Harm. -- what is kind of your worst case scenario for the second half? Because indeed, the order book levels are quite low. I agree that you're managing the costs quite well. But what is kind of a worst-case scenario in terms of further downside in the top line in the second half?

Yes. Again, a very good question, but since it relates to forward-looking results. Yes, we have to state with what we already said on group level. So I cannot be very specific on this. Indeed, order book is going down since the order intake is at a lower pace than our turnover. We still have an order book, so we still have work to go. So we also still have time to receive orders and catch up again. But that's all we can say about that. There are no strange elements in the top line of the first half. finalizing projects, a lot of revenue recognition. This kind of -- the underlying trend is visible in the first half numbers of the tire business.

No.

No furnish.

No. Just a very minute process, I think.

Yes, Martin, ABN AMRO again. On the Eemshaven, did Lochem provide any support in H1? And if yes, will it continue to provide the support in H2?

Well, it's very good that both factories support each other. So we have moved also capacity from Eemshaven to the onshore business. That is working out quite well and also some cables that fit better into the capabilities of Lochan, we are manufacturing in... .

Okay. And there was already a question about the plus 90% EBITDA margin of electrification. And you mentioned that it was not solidly, but mainly due to optimization. But what have you baked in, in terms of capacity expansion because you were expanding in high voltage in Lochem, for example? So is that 19% on current scope or including planned expansions. .