Release Date: August 21, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Continued automotive activities increased by 4% in Q2 and 18% in the first six months, driven by new projects in China.
- Normalized EBITDA for the first six months was 13.5%, showing a significant improvement from last year's total group margin of 10.9%.
- The company achieved a 6% reduction in operating costs, amounting to almost EUR4 million in the first six months.
- Free cash flow in the first six months was breakeven, a significant improvement from negative EUR12.5 million in the same period last year.
- Net debt reduced by EUR11.2 million compared to the same period last year, with a leverage ratio well below the covenant of 3.25.
Negative Points
- Revenue from continued operations decreased by 7% in Q2 and 8% in the first six months, particularly due to weak end markets in Germany and China.
- Normalized continued EBITDA margin decreased to 13.5% from 14.7% last year.
- The tax rate on normalized income increased to 30% compared to 24.7% last year.
- Industrial revenue decreased by 10% in Q2 2023, with IB down 16% year-on-year.
- Automotive revenue decreased by 2% in Q2, reflecting weaker market circumstances compared to the beginning of the year.
Q & A Highlights
Q: Earlier in the year, your expectation was roughly that you would expect to see some improvement during the summer. If I understand your outlook statement correctly, that is no longer the case. What has changed, and can you talk about that in terms of IB, IAC, and automotive, please?
A: What has changed is not all that much. There was indeed an expectation related to potential interest reductions by the Fed. Based on recent news, this may still happen in September or October, which would help. We see a bit of recovery in IB, stable conditions in IAC, and good growth in automotive. Overall, the economic situation is expected to remain stable with some potential improvement as the year progresses.
Q: Can you talk a little bit about order intake or the sales funnel? Is that supportive of the idea of some improvement, or is it more of an expectation?
A: The order book looks pretty good, especially in IAC. IB has stabilized, and destocking has ended. We see some light at the end of the tunnel in China. Overall, it's stable and perhaps a touch better as the year continues.
Q: Can you describe your thinking for the second half of the year for working capital, going through all three categories?
A: Compared to last year, we made a big improvement in working capital, in line with lower activity levels. In the second half, no major changes are expected outside the sale of automotive. Towards year-end, receivables and inventory will come down significantly, but the effect will be less due to the sale of automotive.
Q: Why did raw materials and contracted work increase by EUR2.4 million from Q1 to Q2, almost exactly in line with the increase in sales?
A: The increase is due to the sales mix, particularly stronger automotive sales, which have a lower added-value margin and higher material charge than industrial. There are no purchase price increases or sales price decreases underlying this impact.
Q: Can you talk about the Chinese contracts that were ramping up? Are they ramping up as expected?
A: The expected ramp has a range, and we have quite a few programs starting. Some are doing better, others are a bit slower or delayed. Overall, they are ramping up in line with our expectations.
Q: Could you provide some color on how the margins developed in industrial and automotive?
A: The EBITDA margins in Industrial for the first half were 14.8%, compared to 16.5% last year. In automotive, the EBITDA margin almost doubled from 4.8% to 8.5%. The difference in margin between continued operations and the group shows a two-point improvement, indicating better profitability for the focused industrial Kendrion.
Q: Do you still have short-term labor in place?
A: Yes, but it has been tailored down due to people leaving and not being replaced, and a slight increase in revenue compared to Q1. The cost effect remains the same, and we hope to phase it out as activity levels improve.
Q: Can you explain the sales decline in automotive in Q2, despite an increase in H1?
A: The decline is due to a strong comparable in Q2 last year. Generally, Q2 is weaker than Q1 due to the summer effect in Europe. The overall first-half performance is still better than last year.
Q: Can you explain the CapEx levels for the first half and what to expect for the second half?
A: Investments in industrial were below depreciation, while automotive was slightly above due to production lines and capitalized R&D. Going forward, CapEx will be in line with depreciation.
Q: Do you already see a decrease in R&D expenses now that you have decided to divest the automotive division?
A: Not yet in the overall P&L, but we are working on it. In the continued operations, there is already a reduction in R&D charges. The R&D expenses will decrease more than pro rata revenue due to the divestment of automotive sound, which had a significant portion of the R&D spend.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
