Good day, and welcome to the Kendrion first quarter results 2022 analyst call. This call is being recorded. At this time, I would like to turn the conference over to Joep van Beurden, CEO. Please go ahead.
Thank you and good morning, everybody. Welcome to Kendrion's Q1 2022 results teleconference. My name is Joep van Beurden, Kendrion CEO, and with me on the call is Jeroen Hemmen, our CFO. I will 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 2022 results, I would like to reflect a little on the current economic and market environment that we are operating in. As we went into 2022, we started the year with a certain degree of optimism, and for good reasons. The COVID pandemic seemed to recede, industrial demand was strong, and on the automotive side, the market was about to pick up. As in 2021, 10 million cars that could have been sold were not produced because of supply shortages, and this was expected to ensure a bit of an upturn in passenger car production despite the ongoing shortage of semiconductors. Reality turned out to be different. The Russia-Ukraine conflict caused significant economic uncertainty, sharply increasing energy prices, continued unpredictability in the automotive supply chain, and more pressure on all sorts of input materials like steel and copper.
Right after the war started, major German OEMs like Volkswagen had to shut down some production sites because they lacked vital components like wire harnesses. As a result, car production was down 18% in Europe compared to Q1 2021. In addition, the COVID pandemic is now disturbing life in China, and the Chinese government implements strict lockdowns in Shanghai and other major cities. Inflation is high, and the labor market is tight. Is there a positive as well? Most certainly. Demand for our products in our industrial groups, both for IB and IAC, was strong in Q1. Looking at our order book, this is expected to stay strong as our actuators enabling the transition towards clean energy continue to drive growth. Let's talk about the quarter. We delivered a good first quarter under difficult circumstances.
Group revenue grew by 13% compared to the strong Q1 2021, reaching a record level of EUR 129.9 million. On a normalized basis, we grew our EBITDA by 4% and net profit before amortization by 19%. I'm proud of this achievement. In an environment of macroeconomic uncertainty, supply chain volatility, high inflation, we again continue to grow both revenue and normalized profitability. Q1 represents the sixth consecutive quarter where we report revenue growth and the seventh consecutive quarter with normalized EBITDA growth. I'm also happy to report that in Q1 2022, we were well above the pre-pandemic revenue level, taking INTORQ and 3T acquisitions pro forma into account. In short, our growth potential is good, also in difficult economic circumstances. What is driving this potential?
Many of our stakeholders view Kendrion as an automotive Tier Two company with a bit of industrial side business. That may have been the case in the past, but today, the reality is different. We're an actuator company focused on products that help enable the global push towards electrification and clean energy. Whether it's brakes for wind power, robotics, automated warehouses, sound actuators for electric vehicles, or induction heating technology, helping industrial processes move from oil and gas to electrical solutions. In all our business groups and in China, the broad push towards electrification determines our product development decisions, and it has determined these decisions for a couple of years now. They have been amplified by the INTORQ acquisition in 2020, and most recently by the addition of 3T to our group.
It has resulted in a balanced portfolio exposed to the global and accelerating trend towards electrification and clean energy, and not overly dependent on any specific vertical or market segment. As a result, we've been able to deliver significant growth in revenue and profitability over the past year and a half. I'm proud of our global team who have delivered this. Now, let me talk in a bit more detail about Q1 and some of its highlights. Our industrial businesses continued their strong performance as we benefited from strong demands for products related to the energy transition. Our industrial revenue increased by 28% compared to a year ago and significantly above pre-pandemic levels. Taking our industrial acquisition pro forma into account. Automotive revenue was 1% lower, so largely flat, while in Europe, passenger production, car production was 18% lower.
Demand for Industrial Brakes continues to be strong in all segments and across all regions, driven by the accelerating electrification. Revenue for IB in Q1 was 24% higher than a year ago. In industrial actuators and controls, organic growth was 34% compared to last year, as our business development efforts in recent years are beginning to pay off. Demand for new products, such as rotary locks for industrial washing machines and inductive heating for industrial baking, is increasing. Recently acquired electronics and embedded system specialist 3T is performing well, and we have started recruiting software and electronics engineers for our automotive group. To accommodate anticipated FTE growth at 3T, we are opening an office at the High Tech Campus in Eindhoven for July 1, 2022. In automotive, the market continues to be difficult, driven by ongoing semiconductor shortages, demand volatility, and inflation in raw materials.
As mentioned, European car production declined with 18% year-over-year. Despite these challenges, we protected our added value margin and delivered revenues in line with Q1 2021. The construction of our new 28,000 square meter manufacturing facility in Suzhou's renowned industrial park in China has been delayed due to COVID-19 outbreaks, as we lost around 40 building days due to the pandemic. We now expect to start production in the new facility early in 2023. Now let me review our profitability in a bit more detail. Normalized operating results before depreciation and amortization, or EBITDA, came in at EUR 16.8 million, 4% higher than in the same period last year when it was EUR 16.1 million.
You will have seen that our profitability grew in absolute terms, but not as a percentage of revenue, and about half of the lower profitability percentage was caused by passing on of high, higher raw material prices into the sales price. Depreciation charges dropped by EUR 0.9 million to EUR 5.4 million in the first quarter of 2022, leading to a normalized EBITDA of EUR 11.4 million, which is 16% above the EBITDA of EUR 9.8 million in Q1 2021. The effective tax rate on normalized income in Q1 2022 was 27.3% compared to 30.7% in Q1 2021. Normalized net profit before amortization charges arising from acquisitions increased to EUR 7.6 million, up 19% compared to last year.
We normalized a gain on the sale of our building in the U.K. and the expected closure costs of the automotive manufacturing location in Eibiswald, Austria. The closure was announced in 2020 and is expected to be finalized in 2022. The combination of the gain and the expected closure costs resulted in a EUR 2.1 million and net of tax EUR 1.6 million normalization. Reported net profit came in at EUR 5.1 million. Total net debt, including IFRS 16 lease liabilities, increased to EUR 137 million compared with EUR 130.6 million at the end of 2021. The debt increase was caused by normal seasonal effects on working capital.
First quarter free cash flow amounted to negative EUR 6.0 million compared to negative EUR 5.4 million over the same period last year. The leverage ratio based on total net debt divided by twelve months rolling EBITDA was 2.4, well below the financial covenant of 3.25. Kendrion solvency ratio remains strong at 45.3% at the end of March 2022. We secured a financing arrangement of in total EUR 175 million to refinance our existing EUR 162.5 million credit facilities. The refinancing comprises a EUR 72.5 million transaction in the Schuldschein private placement market and a revolving facility agreement of EUR 102.5 million with ING Bank and HSBC. Both instruments are sustainability-linked based on Kendrion's sustainability rating by EcoVadis.
With the refinancing transaction, we have extended our debt maturity profile at competitive terms, reducing our expected interest payments by around EUR 500,000 per year. Financial covenants remain unchanged with a leverage ratio coverage of 3.25. Before we go to Q&A, let me talk a little bit about our outlook. We expect the economic climate to continue to be unpredictable for the foreseeable future. Despite that, we see substantial opportunity for growth with products that help advance the global transition towards electrification and clean energy. This is reflected in our order books.
The outlook for industrial continues to be good. Longer term, we are confident that our strong position in the growth market of Industrial Brakes, selected segments of industrial actuators and controls, automotive, and in China will help deliver our medium-term financial targets of on average 5% organic growth per year between 2019 and 2025. An EBITDA of at least 15% in 2025, and a return on invested capital of at least 25% also in 2025. We talk about our confidence reaching our targets every quarter, and at our Capital Markets Day of September 8, we will give more insight in our growth opportunities and how we expect to reach our ambitious growth and profitability targets. I now open the line for your questions.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure the mute function on your phone line is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself from the queue by pressing star two. But again, please press star one to ask a question. We will take the first question from Frank Claassen from Degroof Petercam. Please go ahead.
Yes, good morning, gentlemen. Two questions, please. First of all, on China, you've indicated that you've seen revenue pressure because of the lockdown. Could you quantify this pressure? Also, could you elaborate on what is the current situation in China? Are you still open? Are you still selling, or what is the situation there? Then secondly, in Austria, have we now seen all the charges related to this closure of the Austrian plant? And could you remind us of the savings kicking in? Thank you.
Yeah. Thank you, Frank, and good morning. On China. As mentioned, we have seen a bit of an effect, and this is purely related to lockdowns. As you will have read in the newspapers, this was particularly an issue in Shanghai. It is getting better now. These lockdown measures are being somewhat released, and we've resumed production there. In terms of quantifying it, in Q1, the impact was relatively limited because it was towards the tail end of the quarter that we saw that. Now, we're not going to break it out very specifically, but to give you a bit of help, we have two facilities there, one in Suzhou and one in Shanghai.
The one in Shanghai has had some a couple of weeks of production interruption. That will certainly affect the second quarter a little bit. Now, at the same time, if you also look at the order portfolio and of course the exposure we have to other parts of the world, I'm not expecting this to be really material, but clearly it does have an effect. The situation there is, yeah, I mean, as I mentioned in Shanghai, the situation is more stable and we have resumed production there. It is fluid because, of course, the pandemic is not yet over, so we're keeping a very close eye on this.
I think if you look at China a little bit longer term, and you look at the order book and you look at the EUR 50 million that we produced there and the potential that we see that all, as you will understand, is unchanged. The other thing to remark is what we also, you saw us announcing a bit of a delay, a one-month delay, in taking control or moving into the new building that we're currently building, constructing in Suzhou. That was also related to COVID. We lost about 40 building days. This is also resumed, but of course a bit of uncertainty there as well. We're keeping a very close eye on that too.
Maybe for your questions on Austria, let me hand over to Jeroen.
The cost we heard in Q1 relates to the social plan for the staff. In principle, this should be it. There's one big so we anticipate the final production line to be relocated to Germany in the summer, after which we can also finally close the plant. The main thing still to do is selling the building. We are confident that we can sell it for more than it's currently in the books, but obviously we still have to sell it. On the savings, that also it depends a bit.
We try to absorb as much of the indirect costs in the existing organizations in Villingen and in Romania. We anticipate savings in excess of EUR 3.5 million, and roughly EUR 1 million of that has already been realized on annual basis, from the second half of 2021, from people leaving the organization.
Okay. That's helpful. Thank you very much.
Thank you.
You're welcome.
We'll now take the next question from Axel Stasse from Berenberg.
Yeah. Hi. Thanks for taking my questions and congratulations for your seventh consecutive profitability growth. I have four questions on my side. Can you please elaborate a bit more on how easy it is for you guys to change pricing strategy and your prices with existing customers given the inflationary environment? My second question is more related to the actions that Kendrion can take right now given the supply chain disruptions. Are you, for example, working with
Several key suppliers. What are the key components missing for you guys to deliver the products to your customers? My third question is more related to the organic growth that you guys expect across the three business, you know, units. Do you have discussions with customers, for example, automotive manufacturers? Do you have, I would say, a visibility that we don't have in terms of supply chain shortages that are expected to ease? Is it in H2 2022? Is it more beginning of 2023? Last but not least, should we assume that working cap should increase in the coming quarters, or do you think that from current levels yeah, it should not massively increase? Thank you very much.
Well, thank you, Axel. Good morning. Let me take the first three, and then on the working capital, hand over to Jeroen. Your first question on pricing. So, is it easy? The answer is no, it's hard work. At the same time, when you look in, certainly in the automotive segment at the contractual situation, is sound, in industrial as well. For the smaller customers this is more on a negotiated basis. Of course, with smaller customers, there's also a little bit, there's a different pricing power, balance, if you like, in that discussion. It's certainly not easy. The legal position is strong. It's hard work.
We spend a lot of time on it, you know, we've managed to protect the added value margins because that's where you see this quite well. It was 49.0%, and a year ago I think it was 49.1%. If you compare this to Q4, which we haven't highlighted in the release, but you will see that it's actually better than it was in Q4. Spending a lot of time between purchasing and sales, not easy, hard work, but so far we managed to defend that added value quite well. On the supply chain, the first thing to note is that the one benefit we have is that our supply chains are not global, they're local.
We operate according to a strict local-for-local policy, and it means that in the region, so Europe, China and the United States, and to a large extent also in India, where we have a small facility, we source pretty much everything from local sources. We're not dependent on, you know, on big shipping lanes or flying stuff across the world. That helps. Now, at the same time, it's tough. It's tough on copper, it's tough on steel. There is an inflationary discussion to be had that, of course, the purchasing guys will need to do. You know, the whole situation around semiconductors is still very much yeah, very much an issue. Not just in automotive, but across the globe in more segments.
It's a little bit the same as on the pricing. It's hard work. We're managing this well. There isn't a specific input raw material where we feel particularly exposed other than, you know, what you read in the newspapers where everybody, everyone is dealing with. The notion that our supply chains are reasonably short, if you like, helps. Then in terms of organic growth, look, if you step back and you look at the underlying long-term trends, then you see in automotive, our products are exposed to electrification, autonomous driving, which is, you know, you can read any market report on that and you see the underlying growth and the dynamics there are very favorable.
The visibility into how long the current disruption will take that we have is definitely not better than anybody else's. We all say we all read the same newspaper, and it is to some extent, I think the visibility, anybody who claims visibility, I would say, is probably overstating it a little bit because it has very much to do with this, you know, geopolitical situation and everything around that. On the industrial side, the situation is different. There, first of all, there are many more segments that we're exposed to. Of course, electrification is not just happening in automotive, but basically everywhere. Well, you've seen the performance in Q1, you've seen the performance on industrial last year.
We're looking at the order book that continues to be, you know, in a very good shape from our perspective. You know, barring some unforeseen other events that would impact the supply chain, I expect continued good growth in that segment for the remainder of the year. Again, there the trends, the longer-term trends are very favorable there as well. Working capital, Jeroen?
Yeah. Sure. Working capital, it's all about inventory. On the receivable and on the payable side, payment behavior has not materially changed, and I also don't expect that going forward. Inventory, we have seen some increases in inventory for two reasons. First of all, order volatility. That makes it more difficult to plan your inventory. Second of all, strategically we have to increase some stocks on materials that we think will be in short delivery going forward. I think that on a normal basis, the current stock level.
In relation to the revenue is appropriate in these times. The only exceptions are the accumulation of some buffer stock, the production of some buffer stock for the relocation of the final lines from the Austrian facility towards the summer. Second, towards year-end, the production of some buffer stocks in China because there also we expect that we can relocate the existing facilities in the new facilities that we are currently building early 2023. Then, we are talking about between EUR 2 million and EUR 3 million buffer stocks towards the summer and then again towards year-end. Besides that, I think the current level of inventory should be sustainable.
Okay. Very clear. Thank you very much.
Thank you.
As a reminder, to ask a question, please press star one. We'll now take the next question from Johan van den Hooven from Edison Group.
Good morning, it's Johan van den Hooven, Edison Group. Three questions from my side. The first one is about the good strong growth in industrial activities and controls. Can you tell us a bit more about the new products? For instance, how many customers are there or length of contracts? What are the contribution of these new products? Second question is, you mentioned the decline in car production of 18% in Europe in the first quarter. Can you also give a bit more information about the commercial vehicle side of your business and also the link to the order book, commercial vehicles. The third question is, can you provide us an insight in the CapEx level for the full year?
Might you need a bit more because of the delay in China, or are you saying 40 days delay, it's only a time delay and cost wise? Thank you. Yeah. Thank you, Johan. Good morning. So on IAC, uniquely very strong growth there in the quarter, 34% year-on-year. Also there, we are above the pre-pandemic levels. Now there is a couple of new products, and I I'll mention two that have been developed over the past couple of years. One is specific rotary locks for industrial washing machines and other industrial equipment. I mean, as with all IAC segment, quite niche.
It's a small market, but if you have, as we do, a very capable new product, then the growth potential of such a niche is actually very interesting at good margins. Because also, you know, these are proprietary products, so there is some intellectual property around it which makes it easier to defend the margin. The other one to mention is this induction product. Now, these are products for industrial heating. Now induction, there is a limit to how much energy you can actually create using induction. So for very large furnaces, this is not suitable, maybe in the future, but at this point in time, it is for instance used in industrial baking. It's a little bit the same nature.
It's a niche, but I mean, it's a very innovative and much cleaner and easier way to heat your products. Therefore it's the same, you know, we are now currently seeing the ramp, and we expect that the ramp to continue. Now you should think of these individual segments in the order of a couple of EUR million over the next couple of years. But it adds up because, you know, there is other segments that we started 3 or 4 years ago that are now ramping. A third example I want to mention is we're also producing certain safety valves that are being used in the nuclear power equipment, so nuclear power generators.
That for a long time was really only spare parts and not a lot of growth. On the back of this energy transition, you see now, of course, everywhere announcements of countries ordering more and more nuclear power generators. That is another example of a niche where, you know, we have a strong position, some proprietary products and some good growth opportunities over the next couple of years. That is the name of the game in actuators and controls. All right. Thank you. The second question you, so you talked about the automotive decline of 18%, right? Yeah. I mean on commercial vehicles. Yeah. Commercial vehicles. Yeah, commercial vehicles by nature more stable.
I would say far less affected in the same way. Of course, I will say that 18% is probably also an anomaly in the sense that it was, there was a couple of weeks where certain large factories were completely shut down. That is now behind us. I do not expect the same 18% lower level to persist. But of course, you know, we all know the volatility is in the passenger car market is substantial. Commercial vehicles a lot more stable. And the other thing to note is it's not just trucks and buses, we're also in things like farm equipment, which is also the nature there is, that's a lot more stable than what you see, the volatility that you see in automotive. Okay.
Thank you. CapEx? Yeah. On CapEx, on the regular CapEx, excluding the China building, we expect somewhat more than depreciation, between 10%-15% more than depreciation.
For the year and for China, we currently still estimate a total building cost of around EUR 20 million. Fourteen million in total to go in 2022. Of course, depending on how the situation develops with the building delays. That is the current guidance on CapEx.
Okay. So far with the 40 lost building days that doesn't move the needle a lot, related to the EUR 40 million?
No. So far.
All right. Thank you.
Again, as a reminder to ask a question, please press star one. We'll take the next question from Maarten Verbeek from The IDEA!. Please go ahead.
Good morning. It's Maarten of The IDEA!. Firstly, you mentioned that a part of your growth had to do with the inflation, so price increases, which were some 4%-5%. Could you break that down into the impact it had for the industrial group and what it had for the automotive group?
Yeah.
It was actually all around about 4.5%. In IAC, IB and automotive.
Okay. What we also have seen is that a lot of parties are strengthening their inventories. Could you say something about the inventory side of your automotive customers? Have they sourced more to secure their level of inventory?
Not from where we stand, Maarten. Good morning. I will immediately add to that the visibility we have into the inventory levels of the, certainly of the big OEMs is very limited. Looking at the order patterns, there is, you know, quite a bit of volatility in those patterns, and they were according to our view and our assessment related to volatility in the supply chain. Semiconductors, wire harnesses as an example. Of course, we've all seen that, late February, early March. We haven't seen any sign that there is a big restocking going on.
Okay. Lastly, if I understood well, your gross margin was virtually flat. But that had more or less to do with the fact that there was some kind of mixture shift more to industrial group with a higher gross margin than to automotive group. Could you say also something about the individual development of those two groups regarding their gross margin?
Just before, you know, a couple of points to make. Certainly the gross margin in the industrial are superior to those in automotive, as we all know. Clearly a shift in mix helps. There's also a mitigating effect on the gross margin if you in an inflationary environment, if you pass through input price into your sales price, that also has a negative effect on the gross margin, just mathematically. That effect is not as small as you may intuitively think. If you get a 5% input price increase and you reflect that into your sales price, your gross margin goes down by around 2 points at roughly the levels that we're at. That is material.
Now then, you wanna say something about the difference there? I think it's limited, right?
Yeah. It's not materially deviating from the levels of last year per group.
No. Clearly, if you shift, you know, your mix goes into the more industrial direction, clearly that has a positive effect.
Yeah.
At the same time, there is the negative effect across the board of basically inflation on your gross margin. These two probably balance out. I would say in the mix, if you look at the 49% related to the 49.1%, you know, that is, I think, quite a strong performance defending this gross margin. If you compare that to Q4, as I mentioned earlier, it's actually up.
Okay. Thank you very much.
As there are no further questions, I would hand the call back over to your host for any additional closing remarks.
Well, I would like to thank all of you for your attention. If you have any follow-up questions, then you know where to find us. Thank you very much.
Thank you. That will conclude today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.