Good day, and thank you for standing by. Welcome to the Kendrion Q1 2024 Results Analyst Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one and one on your telephone. You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star one and one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Joep van Beurden. Please go ahead.
Thank you very much, Heidi, and good morning, everybody. Welcome to Kendrion's Q1 2024 Results Teleconference. My name is Joep van Beurden, Kendrion's CEO, and with me on the call is Jeroen Hemmen, our CFO. I'll start the meeting with some remarks regarding our Q1 results, after which we'll have time for Q&A. We will post a recording of this call and of the Q&A on Kendrion's website as soon as is practicable.
I would like to draw your attention to the fact that certain statements contained in my remarks and in the answers to your questions constitute forward-looking statements. These forward-looking statements rely on several assumptions concerning future events and are subject to uncertainties and other factors, many of which are outside the company's control, that could cause actual results to differ materially from such statements.
Before reviewing our Q1 2024 results, I would like to reflect on the transaction with Solero that we announced on April 12th. The sale of our Automotive franchise to Solero is the result of an important strategic decision to put our focus exclusively on opportunities within our Industrial Brakes and Industrial Actuators and Controls business groups in Europe, China, and the U.S.
We believe the transaction will strengthen our ability to invest in the significant opportunities in the industrial sector, fueling sustained, profitable growth. So why did we decide to focus exclusively on industrial? As we all know, the Automotive industry is in a major transition, and to make full use of the opportunity that this transition presents requires substantial investments in R&D and in production equipment.
The level of investment needed makes it more difficult for an Automotive Tier 1/2 of Kendrion's scale to make a play in all the opportunities on offer, limiting the growth potential that is available in the U.S. and Europe. Over the past years, we have found ourselves increasingly in a position that we had to choose. Do we invest in a specific Automotive opportunity, or do we instead allocate the funds and the resources to industrial?
By staying active in both Automotive and industrial, we run the risk of being subscale in both. We have therefore made the strategic decision to transform Kendrion into a pure industrial company. With this, we can make better use of the growth opportunities in Brakes and in Actuators and Controls, and we improve the group's EBITDA margin profile.
As we mentioned on April 12th, based on full year 2023 pro forma figures, the transaction is accretive for both the EBITDA margin and earnings per share. In other words, in our view, Kendrion's profitability in 2023 would have been higher, not just as a percentage of revenue, but also in absolute euros. Our Q1 results also illustrate the effect of the transaction on profitability.
In Q1, the Automotive market was cyclically strong and industrial was cyclically weak. On the back of ramping projects in E and price increases in Core, Automotive revenue grew with 12% year-over-year. On top of that, also related to the price increases, the added value margin of Automotive increased with 260 basis points.
In contrast, IB, because of the well-documented economic slowdown in both Europe and China, saw its revenue decline with 27% compared to last year, in line with activity levels that we saw in the second half of 2023. Added value margin for IB was similar to a year ago. So, with Automotive at the highest revenue since Q1 2018 and IB 27% down compared to last year's, IB's EBITDA margin was still 240 basis points higher than Automotive.
And IAC, with revenues 2% lower than last year, realized an EBITDA margin that was more than double that of Automotive. The reported figures tell the same story. EBITDA from the continuing operations, exclusive of the sold Automotive assets, was 13.4%, and EBITDA for the Kendrion Group, as it operates today, was 12.1%.
So, even with cyclical headwinds in Industrial and a robust performance in Automotive, the profitability in Industrial is better, and Industrial is also less capital-intensive than Automotive, which means an additional plus for cash flow generation. Let us talk about Q1. We've had a strong first quarter, particularly considering the continued challenging market circumstances.
Our revenue of EUR 133 million was down 3% from a record Q1 last year, as the weakness in IB was almost offset by growth in Automotive. Our group added value margin saw a 70 basis points increase, with all groups contributing to this improvement, and despite the negative impact of the higher proportion of Automotive business.
We implemented strict cost control measures, particularly in industrial brakes, which continues to be impacted by lower economic activity in Europe and China.
We continued our emphasis on cash flow management and reported net debt of EUR 145.7 million at the end of Q1, just EUR 700,000 higher than at the end of 2023, despite the seasonal effects on working capital. Our leverage ratio stayed the same at 2.7 as at the end of 2023, and is well below our covenant of 3.25.
A bit more detail on the business groups. As mentioned, our normalized revenue in the first three months of the year totaled EUR 133.0 million. Currency translation had no significant impact on first quarter revenue.
In IAC, revenues were flat at EUR 32.3 million, compared to EUR 33.1 million a year earlier, with weakness observed in segments related to the Machine Building industry and Electrical Infrastructure, and strength noted in Aerospace, Medical, and 3T.
In IB, we contended with continued lower activity in both Germany and China, aligning with the activity levels seen in the second half of 2023. This led to a revenue decrease of 27% to EUR 28.2 million. The market for capital goods, such as robots and wind turbines, remained slow. Revenues in the Automotive group increased by 12%.
In Automotive E, first quarter revenue reached EUR 22.4 million, up 41% from EUR 15.9 million a year earlier, as we benefited from robust growth on the back of ramping projects, especially in Smart Suspension and in China. Revenue in Automotive Core increased by 3% to EUR 50.1 million from EUR 48.9 million, attributed to higher average sales prices.
Strong revenues in Automotive, stable performance in IAC, and weakness in IB, partly offset by cost saving measures, resulted in improved profitability over Q1 2024. Normalized EBITDA increased by 3% from EUR 15.7 million in Q1 2023, to EUR 16.1 million, despite the slight decrease in revenue.
As mentioned, the added value margin increased to 47.1%, 70 basis points higher than in Q1 2023, with all business groups contributing. Depreciation charges increased by EUR 0.3 million to EUR 6.1 million in the first quarter, resulting in a normalized EBITA of EUR 10.0 million, compared to EUR 9.9 million in the same period last year.
The effective tax rate on normalized income for Q1 2024 was 26.4%, compared to 26.6% a year ago, and normalized net finance costs were EUR 2.1 million, consistent with EUR 2.2 million a year earlier. Normalized net profit before amortization charges stemming from acquisitions amounted to EUR 5.8 million.
In accordance with IFRS 5, all assets and liabilities related to the Automotive activities that will be discontinued following the announcement on April 12th, are classified as held for sale and discontinued operations. Results of the discontinued operations are reported separately from continuing operations in the financial statements.
The net loss from discontinued operations was EUR 1.5 million in Q1, compared to a net loss of EUR 0.4 million a year ago. This includes EUR 3.8 million loss on the measurement to fair value, less expected transaction costs.
Our financial position is good. The leverage ratio, based on total net debt divided by 12 months rolling EBITDA, was 2.7, compared to 2.6 a year ago, and 2.7 at the end of Q4 2023, well below the financial covenant of 3.25.
At the end of Q1, Kendrion had EUR 65 million available in cash and unused credit lines. Capital investments of EUR 6.3 million were in line with depreciation and well below the EUR 10.0 million in the same period last year. Total working capital ended at EUR 70.3 million in Q1, which is 4% below last year's EUR 73.5 million.
The improvement compared to last year was driven by significantly lower inventory and trade receivables. On April 12th, we announced the agreement to sell our Electromechanical Automotive business in Europe and the United States to Solero Technologies.... At the same time, we announced to stop all investments in product development for Automotive Sound.
We expect that a shift towards a pure industrial company will enable us to strengthen our position in driving the global transition to electrification and sustainable energy at much higher profitability levels than before. Immediately upon the signing of the agreement with Solero, we have started with the carve-out of our Automotive business.
We are also preparing the associated restructuring. We expect to close the transaction in Q3 2024. Before we go to Q&A, let us talk a bit about our outlook. For the near term, we expect a comparable economic environment to that of the second half of 2023 and Q1 2024.
With our China factory fully operational, we are prepared for the ramp-up of our China-based Automotive business from Q2 onwards, and we will continue our strict cost measures in IB for as long as is necessary.
Looking ahead, we maintain a positive outlook on our long-term prospects as a pure-play industrial company focused on the global shift towards cleaner energy. We look forward to the opportunity to share our plans and outline our medium and long-term ambitions at our Capital Markets Day of September 5th of this year in the Novotel in the south of Amsterdam. I now hand back to Heidi for the Q&A.
Thank you. As a reminder, to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will take our first question. Your first question comes from the line of Tim Ehlers from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, good morning. Thanks for taking my question. I have two questions. One would be, where should we see the growth in Automotive E for the parts of the business that are staying within, Kendrion? And then the second would be, what was the impact of the cost savings, and what was the impact of the margin improvement in Automotive? To get a bit of better feeling, of the moving parts there.
Yeah, let me talk first about your question on growth for the retained Automotive business. So, as a reminder, that's the Sound and Electronics in Europe and then mostly Smart Suspension in China. The growth that we expect over the coming years is predominantly in China.
If you remember, or you may recall from when we announced Q4 and full year 2023, late February, we also disclosed the pipeline of product projects that we won, and a large chunk of that was actually projects that we won in China, that are one is already ramping as we speak, and others are about to start in Q2. So, that will be reasonably substantial over the coming years.
In Europe, there is a little bit of growth as well in Sound, but I wouldn't say it's not as material as what we expect from China.
Your second question, which we disclosed a bit, Jeroen, you want to...?
Yeah, so on Automotive, the margin improvement was quite substantial, and contributed a bit less than EUR 2 million to the Automotive result improvement as well. And also, the costs were EUR 2 million lower than last year, and that is, yeah, driven by IB.
And the other units basically had to deal with wage inflation as usual. So, the cost savings in IB were around EUR 3 million, offset by EUR 1 million higher cost in the other units.
And maybe also to amplify a bit the IB point. So, we talked extensively also in February that we were going to deploy Kurzarbeit. We've done that, I think. It was quite effective, but as also disclosed in the press release, through natural attrition and also release of temporary workers, we also have around 100 FTE currently less employed in IB.
Now, let me immediately add to that, this is cyclical in our view. So, the balance we strike is that on the one hand, we want to be effective and we want to be efficient, and make sure that we repair the profitability and get that to acceptable levels.
In Q1, we definitely achieved that, but we also want to be ready for the rebound when it comes, and it will inevitably, of course, arrive, and we are ready for that.
Okay, great. Thanks for that. Maybe just one follow-up on the growth question, because the growth, especially in E, was pretty strong in Q1 with the 40%. That mainly comes from the China business-
Mm-hmm.
or how should we see that?
So, you can also see if you deduct, let's say, the remaining business from the total business, you can also deduct, let's say, the Automotive business that remains, and that also increased by 40%.
Yeah.
So, 41% in E is pro rata, China, and, and-
... Yeah. So actually, it's quite balanced. And, and Tim also know, you know, like a forward reference, you also to the Capital Markets Day. So, so-
Yeah.
Typically, also on the pipeline in China, our aim would be to disclose a bit more on that as well.
Okay, great. Thanks a lot. That was it from my side.
Thank you. Once again, if you wish to ask a question, please press star one and one on your telephone. We will take our next question. Your next question comes from the line of Frank Claassen from Degroof Petercam. Please go ahead. Your line is open.
Yes, good morning, gentlemen.
Good morning, Frank.
Good morning, yeah. The question on the added value margin, it increased by 70 basis points. Is that driven by raw material declines or pricing? Could you elaborate on that? And then second question on your stopping of your development and sound systems. Yeah, have you already started with this? And when can we expect, let's say, the restructuring measures or cost restructuring charges for this? Thank you.
Yeah. Thank you, Frank. Let me talk about the added value margin that is predominantly pricing, and within that, it is predominantly Automotive. So, we have strong. I mean, the gross margin, added value margins in industrial are always a bit higher than Automotive, as you know.
We improved it everywhere, but I mentioned that also in our in my prepared remarks, in Automotive, it was particularly successful. That started, as you know, last year. We already saw margin expansion then. But let me add to that, that this is from quite a low base. So, we're basically at a level that we feel we should have been at all the time.
But it clearly helps, as you also heard Jeroen mention earlier, with the impact of that is EUR 2 million in Q1.
One thing in addition, so it's indeed predominantly price increases, sales price increases, but for the first time in quite some quarters, as the last couple of quarters, it was increasing purchase prices more than offset by higher sales prices. This quarter, we did see some decreasing purchase prices as well for the first time. So, that, I think, is a good trend going forward.
Yeah, absolutely. On the restructuring, may we sound?
Yeah. So, yeah, we did start, but the charges will come in the second half year, probably...
Yeah.
...beginning of Q4.
Yeah. Frank, we started the preparations. This is, as you can imagine, it's quite an operation. We, of course, need to want to be fair, we want to be observant of our social partners, where we need to. So, the summer, we will be focused on both, getting the deal closed as quickly as we can, but also preparing for this restructuring.
Okay. Thank you very much.
Thank you. Once again, before handing back to the speakers for closing remarks, as a reminder, if you do wish to ask a question, please press star one and one on your telephone.
No more questions?
There are no further questions.
Okay, then I thank everybody for your attention, and if you do have follow-up, then, you know where to find us. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.