Good morning, everybody, here in the Holiday Inn Hotel. Very good to see you all and on the webcast. Welcome to Kendrion's Q2 and First Half 2021 Results Presentation. My name is Joep van Beurden, and with me here is Jeroen Hemmen, our CFO. Although I don't see him in his seat yet, but I'm sure he will be here very shortly. First, I will present this morning's agenda. Welcome, Jeroen.
Thank you. I was locked out.
First, I will give a brief update regarding the COVID situation at Kendrion, and then Jeroen will review the Q2 and first half 2021 results. After which, I will take over and give you an update of the progress we have made, both strategically and operationally over the past period. Next, I will discuss the outlook for the remainder of the year and then go to Q&A. Now, as to Q&A, because of COVID, we created the opportunity to ask questions not only here in the Holiday Inn, but also for those attending this presentation virtually. You can type your questions through the Q&A icon on the bottom of the webcast, and please state your name and company. Before the COVID update, I would like to draw your attention to the following.
Certain statements contained in this presentation constitute forward-looking statements, and 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. Next, the COVID update. Our priority in dealing with the pandemic is the health and safety of our employees, their families, customers, suppliers and all other stakeholders, and to safeguard the group's continuity to ensure that we come out of this pandemic stronger than ever. Although in most areas where we operate, the incidence rate of COVID is lower than, for instance, a quarter ago, the situation remains unpredictable, with sudden clusters of cases emerging in a short period of time, and we, therefore, continue to enforce all our COVID prevention measures for as long as is needed.
Let's go to the business review. Jeroen?
Yes. Thank you, Joep, and good morning also from my side. I will present the business review for the second quarter and the first six months of 2021. In Q2, we saw a further increase in activity level. The organic growth rate of 41% is, of course, driven by the low comparable revenue in the previous year. Also compared to the first quarter, our revenue increased with 4%, with a higher activity level in all three business groups. Higher revenue also translated to a significant step-up in profitability, with normalized EBITDA almost doubling to EUR 15.8 million, in line with the EUR 16.1 million in Q1. Our total number of FTE increased with 119 people compared to the end of Q1, which reflects the higher activity level and therefore required direct labor.
It was not all good news in Q2 as supply chain constraints and the resulting order volatility continued to affect our businesses. On the one hand, this means that industries cannot fulfill the full underlying demand potential, and on the other hand, the resulting order volatility and raw material price increases leads to increased production costs. Although raw material prices are largely passed on in a supply chain, some impact could not be avoided in Q2. The added value margin in the first half year ended 0.4% below the previous year, which is partially caused by a higher relative share of Automotive revenue compared to the previous year, and partially due to a time lag between increased input prices and the effectuation of higher sales prices in the second quarter.
Our total staff and other operating expenses in the first half year were EUR 10.4 million higher than last year, when significant temporary cost measures were taken in response to the first COVID lockdowns. As a percentage of revenue, our cost decreased 2% to 35.8%. Also compared to 2019, our staff and other Operating Expenses were still EUR 1.6 million lower as structural cost savings more than offset wage inflation. Despite the supply chain constraints and the temporary cost measures taken last year, our operational leverage was 25% in the first six months, with an organic revenue increase of 22%, leading to 46% higher EBITDA. The EBITDA margin improved to 13.6% in the first half year, and the return on invested capital further improved to 15.5%. Continuing to our cash flow and financial position.
Free Cash Flow in Q2 was EUR 1.2 million, not far from the EUR 2.2 million in Q2 of last year, despite EUR 5.5 million higher inventory levels, largely driven by the aforementioned supply chain constraints. Capital expenditure in the first six months amounted to EUR 10.1 million, which is below depreciation of EUR 12.3 million. Also, capital expenditure is affected by increased lead times for ordered equipment. We do expect investments to pick up in the second half-year, in part driven by the building activities in China. For the full year, we anticipate investments to exceed depreciation. Our net debt ended at EUR 112.7 million, which is almost EUR 18 million below the level of last year.
The EUR 3 million increase compared to the end of Q1 is largely the result of the EUR 4.3 million cash portion of the dividend. On the back of the improved profitability, our leverage ratio further decreased to 2.1 from 2.3 at the end of Q1. Switching to the business groups. First, Automotive. They saw their revenue increase with 29% at constant rates of exchange. Despite supply chain issues, the passenger car and truck market showed strong year-on-year growth. The long-haul coach market is still very much affected by COVID-19, with demand basically on the level we witnessed in the second quarter of last year. Although high order and demand volatility affected the Automotive group, the EBITDA increased 69% to EUR 12.8 million in the first half year.
The EBITDA margin ended up at 10.4%. Capital investments in Automotive exceeded depreciation, mainly driven by new production lines and production line extensions.
The China building investment is reported as part of Automotive and contributed EUR 1 million to the total investments in the first half year. Both industrial groups benefited from a broad-based further improvement of market circumstances. Despite the continuing supply chain constraints, also here, activity level is high, as also indicated by the German manufacturing PMI that rose to 65.1 at the end of June. At constant exchange rates, the industrial activities increased 15%. Industrial Brakes saw their revenue increase with 15% to EUR 61.9 million, despite a more difficult comparable with high wind power revenue in China in 2020 on the back of a subsidy scheme for wind turbines on land. Revenue in Industrial Brakes in the first six months also significantly exceeded the pre-pandemic level in 2019, when we include INTORQ on a pro forma basis.
Revenue in Industrial Actuators and Controls increased 14% year-on-year, but here the activity level is still somewhat below the level of 2019, with especially lower demand for applications for aircraft and textile equipment. EBITDA in the industrial activities increased 35%, and the EBITDA margin further improved to 17.1%. Investments in industrial are affected by longer lead times and were significantly below depreciation. We do expect also here that investments will increase in the second half year. That concludes the business review, and with that, I give it back to Joep.
Thank you, Jeroen. I will now proceed with an update of the strategic and operational progress we have made so far in 2021. As Jeroen just explained, I think that we can look back at a good first half of 2021, with revenues growing on the back of increased economic activity levels compared with those of 2020. In Q2, our underlying EBITDA almost doubled, and over the first six months, our EBITDA was 46% better than in the first half of 2020. I'm proud of the Kendrion team who have achieved this despite the continued difficulties the COVID pandemic presents us with.
I'm excited about the acceleration in transition towards clean energy that we believe will benefit our three growth areas. Automotive, where we focus on the ACES, Industrial Brakes, as it boosts demand for wind power, robotics, and various other segments, and China, where we see the same transition towards clean energy. Let's get into a bit more detail. You probably know this picture. It's Kendrion's strategic house. The top of the building indicates our strategic intent. We aspire to continuously grow revenue and profitability by investing in opportunities that help society become more sustainable with a lean and focused organization, and to provide a top-quality work environment to our employees. Linked to this are our medium-term strategic objectives, such as our target to grow with at least 5% organically on average between 2019 and 2025. Underpinning this strategic goal are three pillars.
The first is Automotive, representing around half of group revenue. In Auto, we focus on growth and especially on the opportunity we see developing in actuators for Autonomous, Connected, Electrified shared mobility, the so-called ACES. The second pillar is Industrial Brakes, which is around a quarter of group revenue. We offer a full range of brakes and see ample growth opportunity driven by the accelerating trend towards electrification in robots, both industrial and collaborative, in wind power and elevators, in logistics, and in more segments. Here, too, we focus on growth. The third pillar is Industrial Actuators and Controls, where the focus is on profitability and cash generation. We refer to this BU as our cash engine. We want this engine to keep generating cash and profits focused on selected industrial segments such as control technology, energy distribution, fluid controls, machinery, and logistic and transportation applications.
Then, of course, we have our focus on China, active in all three domains with the same intent, growth in Auto and Brakes, profit in IAC. Let me now share some of the highlights of the past year, starting with Auto. The past half year, I should say. As we all know, the automotive market has been negatively affected by the pandemic. In this slide, IHS Markit illustrates by how much. Year-over-year, vehicle production in 2020 was 16% lower than in 2019, at 75 million vehicles. This is relative to 2019, which in itself was around 5% lower than 2018. According to IHS, it will take until 2024 before we return to the 2018 production levels. There is a significant opportunity.
The disruption in especially passenger cars triggers significant and ever-growing investment in new technology at all large OEMs and Tier 1s, and especially the investment in software and electronics capability is striking. The size of this opportunity is illustrated by the next slide, looking at electrified vehicles. Here we look at the number of battery electric vehicles and plug-in hybrid vehicles. As is clear, the growth of both classes of electrified vehicles has been, and is projected to remain strong. In fact, these numbers represent an annual growth of over 40%. As a proportion of total vehicle production, the share of electrification is expected to rise from less than 3% in 2019 to over 11% in 2023. It's therefore not surprising that all major OEMs and Tier 1s are investing heavily in this.
We too have been investing relentlessly in our product roadmap, our commercial organization, and our software and electronic capabilities to make full use of this important trend. A few more words on this. The transition towards the ACES keeps on accelerating, supported by several significant government initiatives. For example, the Biden administration calls for a $100 billion electric vehicle rebate program. The German government has announced it is targeting up to 10 million battery electric vehicles on its street by 2030. All major OEM and Tier 1s are investing heavily in the ACES. Daimler has launched the all-electric EQ series, Volkswagen is expanding its successful all-electric ID. series, and GM has announced plans to introduce 30 new fully electric models by 2030. To enable all this, the software and electronics content in all vehicles keeps increasing significantly.
Volkswagen is mapping out a software-centric future with its own operating system, and software upgradability and over-the-air updates is seen as critical features of future cars, which determines the overall architecture of how a car is designed. In summary, the internal combustion engine is being superseded as the beating heart of a car by the electronics that control safety and infotainment systems. This is a significant transition in which software and electronics are a major component of the vehicle. Car makers will have to become more like technology firms. Kendrion aims to be part of this change. Operationally, we made progress in the first half. Here's a few examples. The design wins of our AVAS PHANTONE platform continue, with two global OEMs selecting our latest platform release. The production ramp of these wins is planned for the second half of 2022 in China and in Europe.
Our unparalleled sound experience and PHANTONE's strong cybersecurity feature are key differentiators for us. On the sensor cleaning front, we signed a partnership with a leading Tier 1 to develop a turnkey sensor cleaning system. This product is expected to be in production from 2024 onwards, with autonomous driving cars Level 4 and 5 as the main target market. For this product, we experience strong industry interest from OEMs and from robotaxi developers. Before we go to our industrial business groups, let's look at the economic climate there. Jeroen already referenced this. On this slide, we see the German manufacturing index as reported by IHS Markit. As you can see, the confidence level of the purchasing managers is high, well above 50, which indicates growing economic activity. In fact, it's even higher than in 2018, which was a strong year for the industrial segment.
We do see that in our order patterns as well, although demand is held back somewhat by similar supply chain constraints as in Automotive. Let's look at industrial, starting with Industrial Brakes. Operationally, we have aligned and unified our R&D organization globally to achieve more focus in our development efforts, and we managed to maintain excellent customer satisfaction ratings as we kept our high delivery performance despite all the issues in the supply chain. On the product side, we continue to expand our existing product portfolio to serve the opportunities created by the broad electrification trend. For example, we expanded our product portfolio for wind turbines. This has led to even better market traction with several successes with both existing and new customers.
Without being too specific about those successes, as our customers typically do not like to be mentioned, our commercial strategy is to combine our global presence, unified product roadmap, and the central R&D organization with a regional growth strategy, and this has led to a series of successful project wins in a range of growth markets. We see substantial opportunities in robotics, in automation, in wind power, intralogistics, such as AGVs, industrial trucks, and in medical application. All in all, also as evidenced by the revenue growth in IB, a strong first half for IB with ample opportunity for further growth in the pipeline. Next, IAC. IAC is active in around 30 different product market combinations. One of the tasks for IAC's management is to invest in those segments that offer potential for growth while ensuring the other segments are optimized for profitability and cash flows.
These segments, just as in IB, vary per region. We operate globally but take full advantage of regional market opportunities. On the actuator side, we started production for industrial locks for devices like DCS testers, freezers, centrifuges, et cetera. We see growth in medical equipment like dialysis and anesthesia equipment, in logistics, machinery automation, and electrical distribution. We also enjoy strong momentum in our control products. Here we launched a new drive controller for automated guided vehicles. We provided inductive heating samples for applications like industrial ovens, coating, and embossing. Like in Automotive, the importance of capabilities in software and electronics becomes ever more important. Before we move on to an update on our progress on corporate social responsibility, let's have a look at China. In China, we continued to grow during 2021. Our nominations continue to be higher than the size of the business.
As in Europe, we see a significant opportunity in industrial market driven by the same electrification trend, strongly supported by China's 14th Five-Year Plan. For China's high-speed railway, we will produce the main circuit breaker system for the AC system. Wind power robotics and motion control continue to enjoy significant momentum as well. To accommodate all that commercial opportunity, we are building our own factory in Suzhou. Here you get an impression of our planned facility located in Suzhou's Industrial Park, or SIP. SIP is recognized as the most high-tech area in Suzhou and is the premier location for technology and advanced manufacturing companies there. In phase I, we plan to build more than 27,000 sq m with the possibility to later add another 16,000 sq m in phase II.
For this project, we are receiving strong support from the Suzhou local government, who have granted us favorable conditions for 30 years of land use rights. The building, including a fully automated warehouse, has been designed with final approval by the local government expected soon. This means we expect to be breaking ground in the next few weeks to move in by the second half of 2022. Final point, as you can see, we are planning photovoltaic panels on the roof and expect to generate 1.1MW hours, which should cover up to 60% of our internal energy requirements. Which brings us to the progress we made on our CSR program. Corporate Social Responsibility is an integral part of the way we do business at Kendrion.
We strive to make substantial improvements in all three pillars that comprise our CSR framework, natural capital, social and human capital, and responsible business conduct. When it comes to our product portfolio, we aspire to develop products that will help to either keep you safe, that reduce climate impact, or improve health. With our focus in Automotive on the AVAS, with our brakes helping to further enable electrification of many industrial segments, and with the opportunities we have in medical in IAC, we feel we are well on our way. Our goal is not just to create sustainable growth, but to grow to help sustainability. As we do every year, we zoom in on a specific theme that is part of our five-year sustainability plan. For 2021, this theme is diversity.
On the back of a detailed analysis in 2020, a special team is implementing our diversity framework with as its goal to improve Kendrion's diversity step by step over the coming years. This includes specific initiatives such as unconscious bias training and targeted recruitment efforts to get Kendrion as diverse as is possible. We know we continue to have to work on this and on other sustainability goals, but we're making good progress towards our 2023 sustainability targets. Next, let's go to outlook before the Q&A. Over the past six months, the global economy has improved, and underlying demand is strong in both automotive and industrial. Having said that, we do expect the constraints in the supply chain and upward pressure on raw materials to continue.
Longer term, the broad-based energy transition towards electrification is advancing and even accelerating, driving growth opportunities in our focus areas of Automotive, Industrial Brakes, and China. These positive business fundamentals drive our business with, as our main objective, delivery of sustainable profitable growth, or in CSR terms, to deliver growth to help sustainability. Our long-term outlook is unchanged and remains good for both the Automotive group, our industrial activities, and China, which brings me to our long-term targets as announced in September 2020. In the past 18 months, I believe we have shown resilience, making full use of available cost savings and cash preserving instruments when orders were down and using our operational leverage to grow our profitability when demand improved. We also kept progressing our strategic agenda.
We reiterate our medium-term targets of average organic growth of at least 5% per year from 2019 to 2025, and an EBITDA margin and return on invested capital of at least 20%. EBITDA margin of 15% and a Return On Invested Capital of at least 25% by 2025. Thank you for your attention. With that, let's go to Q&A. Frank, microphone is on its way.
Yeah. Frank Claassen of Degroof Petercam. I'd like to zoom in on the raw material prices. Could you quantify the effects of the raw material price inflation in the first half or maybe on top line and on margins? What can we expect going forward? Is there still more to come and how easy is it to pass it on? Do you have contracts which allow for that, or how is that working?
Okay. You want to take that?
Yeah. We not exactly quantify it. Actually, it's quite fluid. It's a combination of price decreases which are not happening, plus price increases the different contracts lengths. The 0.4% lower added value margin is partially caused by mix and partially caused by raw material price increases that could not be passed on. The majority of the price increases have been passed on. The majority of the contracts, especially in Automotive, contain raw material prices clauses. In the Industrial area, the contracts are mainly negotiated on an annual basis. There you can do it much easier, more often. The smaller customers, you can simply increase the catalog prices. If you calculate the 0.4%, that is less than EUR 1 million in Q2, and that is then partially mixed effect and partially the raw material prices.
Just one more thing to add to that. Jeroen mentioned that also in his prepared remarks, and there's of course also always a bit of a time lag. Prices increase, these contracts are in place. On the way down, you benefit, on the way up, you always realize it a bit later.
On top line, how much of the, let's say, growth is coming from raw materials? Is that quantifiable?
The top line growth of the raw material? You mean because of the inflation and pricing?
Yeah, that's even more difficult. I would certainly not overstate that. Certainly not in the short term. In the end, the way we think about it is, it is certainly something that keeps us very busy. Both the pressure, I mean, the shortage of the raw materials, the demand fluctuations, because let's not forget, we feel that, but actually the indirect effect is for us is much larger. We've seen all in the press, Volkswagen talk about so many cars that they could have shipped but were not able to because of semiconductor shortages. If they don't ship the car, we don't ship the actuator. The effect on the top line from that indirect effect is much larger. The other thing it does is another thing I think we manage quite well, is the demand fluctuates with more volatility than normal.
Which of course means that if you have certain orders and you're prepared to produce it with the inventory and all that stuff, and all of a sudden it disappears, you obviously have a bit of work to do. The demand imbalance, the volatility, the indirect effect of the supply chain, indirect effect altogether, if you look at how we did in H1 and Q2, I think we managed that fairly well.
Okay. A second question on the working capital. That was a bit higher than I had expected. Is it also because of these supply chain issues, and what can we expect going forward for the working capital requirements?
Yeah. If you look at the payables and the receivables, they increase in line with the activity levels. If you compare it to year-ends, that is always a bit impacted by seasonal effects. If you look at Q2 compared to Q1, I would say that there is no particular effect there, with the exception of inventory, and that indeed has to do with supply chain constraints, which means that sometimes you build some buffer stock, because most important is of course, that you are able to deliver. In other cases, you have some stock. If you cannot complete the product, you still have it. I expect not that the inventory levels will increase further compared to the current level but it will prolong as long as the supply chain constraints are there.
Okay. Thank you.
Yeah.
[ING Tijs]. In English, eh?
Yes, please.
Sorry. The first question is on the comment on the weakness in the long-haul coach market. I think that is understandable given the situation with COVID, but how is the exposure of Kendrion to the transit buses, the city buses? The reason I am asking is because I also noticed the huge electrification programs.
Yes.
Of various governments and transit buses or city buses.
Yes.
Are ideal to do that. Are you in conversation with the big European bus makers, Volvo, Daimler-?
Yeah
Scania, in order to develop that? That could be a huge growth market.
Yeah
In the near future.
There's two parts to the answer, just as there were two parts to your question. The immediate effect on the long-haul coach market, that's today, and we have certain reasonably old but proven components for long-haul coaches. That is down. As you mentioned, basically still at COVID levels, maybe a touch better, but not by much. We don't really know when this comes back. This affects revenue in the short term. We shouldn't overstate that because it's part of the commercial vehicles market where we also sell to trucks and others, but it's certainly noticeable. The flip side is that also in this market, not only for city buses, but for all these buses and also for trucks, the electrification is going, and we have exactly the same opportunity with sound actuation, potentially with sensor cleaning down the road, as we do in passenger cars.
The longer term, of course, the coach market and the buses and trucks are a little bit behind, but we see exactly the same trends and therefore the same opportunities as we see on the passenger car side.
Yeah. Did you sign the new clients because there seems to be new players on that market?
We are certainly in contact, as we are, by the way, on the Automotive side, as you know. Most of people talk about NIO batteries. There is an enormous range of different companies. We actually have some design wins on the passenger car side there, because again, it's a bit more advanced in time.
Specifically in the bus market.
Yes. Well, we don't have design wins yet. I think it's a bit early for that, but we're certainly in touch with them.
Okay.
Yeah.
With new players. Okay, that's interesting. Basically, a similar question on the offshore wind market. You have a big position in China, but is your position on a global level, or let's say Europe, because Europe is more dominant in that, are you also providing products to the top three European wind turbine makers?
We certainly have. As you rightly point out, in China, the position is very strong.
Yeah.
We also benefit from the fact we talked about it extensively last year, specifically in Q2 and Q3 it helped us, because the Chinese government had certain subsidies for investment in wind power, that helped. There is fundamentally no change in the position. A little bit in the momentum, maybe, in Europe, and also now with the change in administration in the U.S., a lot of announcements have been made for the similar investments in the U.S., which we're eyeing as well. Wind power generically is clearly a very good field for us. We have a strong position on all the different forms of movement that these turbines make, the pitch and the yaw, to be precise. Yeah, for the coming years, we expect a lot of that.
Yeah. For Kendrion it doesn't matter whether it's onshore or offshore. You will also benefit from the offshore.
Correct. Yes.
Okay. That's interesting. You already basically commented on the progress on the new Chinese facility, are you also willing to share your internal budgets of the possible annual turnover? That's probably ramping up in the second half of 2022.
Yeah.
Are you calculating with for 2023, 2024?
I don't want to go as far as to tell you exactly what our internal planning is of how fast that ramps, but in that first phase, if you fill that factory, the revenue level is around EUR 100 million, and then there's phase II as well. There is certainly a substantial opportunity to grow that, and you can imagine that we're not building this factory because we don't think we'll fill it. In a reasonable amount of time, we expect that to reach that type of level.
Okay. Thank you.
Johan van den Hooven, Edison Group. A few questions. We've seen a good recovery in Automotive. Can you perhaps give some more details about the different dynamics within passenger cars and trucks? We've known about the long-haul bus. If there are differences in growth and other dynamics. The other two questions about wind power. We've seen 12% growth in China. Could you give an indication of the growth apart from wind power? China excluding wind power, and also give some more explanation about the extended product range in wind power. How many products or how much value per wind turbine, please.
The first question was on the difference in dynamics between passenger cars and trucks. These markets operate independent and have their own cycles normally. Of course, these are not normal times, and last year during COVID, everything was down, as you well know. The truck market also varies regionally. If you look at the truck market today, and parking the long-haul buses, which is a very specific niche that we're exposed to, the truck market in the U.S. is actually doing quite well. In Europe it's okay, not as strong as in passenger cars, and this, I don't think this will change. These cycles operate independently. In itself, it's not so bad because it gives us a bit of a hedge.
Normally, one segment is strong, the other one is a bit weaker. You get a bit more stability, which is not necessarily a bad thing. The other thing is that most excitement in passenger cars is around electrification, autonomous driving, and you've heard us talk a lot about that over the past years. That is clearly there is more happening in the passenger car than on the truck side. They are a couple of years behind. The same fundamentals are at work. Just talk to also to Thijs' question. Today, if you look at our pipeline, if you look at the work that we do on design ins, the vast majority is on passenger cars simply because that's where the market is. We fully expect and of course, these technologies are transferable.
We fully expect the same thing to happen in the truck market and in the bus market over time as well. On wind power, China last year benefited, specifically China because of the subsidy program that ended at the end of 2020. Jeroen mentioned that if you look at our growth in China, we grew our business with quite a good clip in the first half, despite the fact that in China, the impact of COVID, the comparables are tougher because China did much better than Europe did in the first half and was impacted less by COVID. Despite the fact that wind power subsidy is now gone. China is a target rich area for us. All three businesses are active. It's the largest automotive market in the world, as you well know. The same electrification trend there is also picking up speed and pace.
Also on the industrial side, whether it's in wind power or in intralogistics or in robotics, all these, there's a lot of manufacturing going on in China, as you will. There is an enormous amount of activity which is also the reason why we're building this large factory. The growth number in China in the first half is quite gratifying in my view. Finally, the product extension. The dynamics in the brakes market are a bit different from in Automotive where new product developments typically take a long time, you need to design in. Here we have more degrees of freedom to change the size, optimize a brake for a specific application.
As the amount and the number of players in the wind power market increase, that means we get opportunities by effectively tweaking is maybe a little bit overstated, by changing existing product a little bit in a reasonable amount of time, you can then expand your product portfolio to suit other customers. That's what we're doing. I already mentioned there is various electromotors deployed for the pitch, for the yaw. We are serving all these segments, sub-segments within wind power.
Thank you. Just perhaps an indication of how large wind power is within China, the Chinese revenues?
Did we break that out, Jeroen, last year?
No, but it's a significant part, especially of INTORQ. We were also strong in wind power, but INTORQ added round about EUR 20 million in that and a significant portion of that is wind power.
Thank you.
More questions. Anything online maybe, Cleo? No? Thijs?
Yeah. Seeing the EBITDA margin of the industrial business at 17.1% on strong demand, but also reading your comments that you are continuing to optimize production within the Industrial Actuators and Controls. There's probably more margin upside then, even though market circumstances are quite okay, I guess.
Yeah.
Your assumptions about the new Chinese factory probably also has somewhat higher margins compared to the European business. Is that a false assumption?
Sorry, on China? I did miss that part on China.
Yeah, the general profitability levels you're calculating with for the Chinese facility, is that above, let's say, group average once it's fully running and all the inefficiencies are out there?
No, I would say that is similar. At the end of the day, the Chinese market used to be extremely price driven. If anything, it was always challenging to reach a similar profitability level. To some extent, that's still true. On the other end, that market is maturing as well. A big push that we have in China, we talked about that as well at the capital market day, is localization. We're building, obviously, the factory locally, production equipment is sourced locally. Our supply chain is made local, our R&D, we're investing in R&D. That we aspire to get similar profitability levels in China as we do in the rest of the world effectively. I wouldn't say there is a material difference up or down in the long haul.
Okay. Yeah, because in relation to your overall group EBITDA margin target, if Automotive just comes back to the historic normal levels, you would say that you're already exceeding your targets?
At the end of the day, this is another theme within Automotive, this scalability part of the products. We try to make them modular. We talked a lot about software and electronics. That's an addition that we're designing today that means that similar products, that large chunks of the mechanical part are the same and you differentiate with your software and electronics. That should help. This is all aspirational and reasonably long term. That should help the scalability in Automotive as well as the profitability level. Having said that, we all know Automotive purchasing functions, they are very strong, very well developed. You will always feel the pressure on the margin in that market.
Okay. One additional question. The constraints on the capacity in the industrial business, is that causing that your utilization rate on your equipment is just almost 100% or is that in relation to some key components? How much upside is there for me? How much additional demand can you take on in the industrial business before your own capacity is hitting?
It's difficult to say. If you start with Industrial Brakes, I earlier mentioned that Industrial Brakes is in itself reasonably scalable because you use similar equipment for a whole range of different products. There, the demand is such that we're not reaching the top of our production capability, but we're certainly investing to make sure that the future growth that we expect, that we can accommodate that. In IAC, it's a different story. There, you have so many segments and so many products that the optimization that we're referring to is more the deployment of the labor force and to say, "Okay, where do we have demand and supply? How are we deploying then the labor that we have?" There's typically enough capacity on the machines. There's more manual labor. We do a lot of CPU, we do it in Malente.
We optimize the product mix according to the supply of raw materials, the labor, and of course also the production equipment. There is not a production equipment capacity issue there.
Okay, that's clear. Labor for sure, you're hiring people probably?
We are certainly trying to in some, but also the demand fluctuation makes that tricky as well. We work with temporary workers, and we disclose that also in the release. We have quite a few temporary workers now. In some areas where the demand is lower, we're actually still in Kurzarbeit. In other areas, we're negotiating with the employment council for more shifts in the weekend. That imbalance, of course, is also what we're dealing with.
Thank you.
[Joe, good morning] It's Teslin. Joep, could you explain a bit more about the partnership within Automotive for the turnkey sensor cleaning systems, perhaps on the structure, on the investments, et cetera?
Yeah. Sensor cleaning is an area we've talked about that a lot in the past. If you look at cars becoming more capable, more autonomous functions, more driver assist, more sensors, it also means that you become more dependent on the fact that these sensors need to be unobstructed. This calls for sensor cleaning systems. Now, there are some of them today where you basically have a nozzle and you put a bit of water on your camera if it's foggy, and then you can see again. If you have a car Level 3 and a half, Level 4, where you have 18 of these sensors, if they're obstructed, basically the car cannot drive. Now, we are very good and we've developed a sensor cleaning block with all sorts of modular valves. It's the same theme.
We try to make that modular, where you can individually address eight, 10, 12, 15 sensors. The overall system needs more than that. It needs, obviously, the tank, it needs the pump, it needs the whole layout of all the lines that you get to that. The partnership is about creating, as we call it, a turnkey solution, a subsystem with all the software and electronics, with the algorithms to optimize the cleaning of the sensor, because you want to keep that fluid. You don't want to basically burn through the fluid in four hours before you get to your destination if it's bad weather, with a leading Tier 1 in these systems to create a turnkey solution. That means basically the investment is a relatively straightforward structured partnership. We have our expertise, they have their expertise.
We combine that as a joint team working on this turnkey solution, and then we will bring that to market. I mean, we're already marketing it, and we expect that production will start around 2024. It's a bit long-term, but we're quite excited about it because at the end of the day, it's the full solution for something we feel down the road is going to be a real issue for car manufacturers.
What's your assumption on the size of the market for this system?
At the end of the day, it depends a bit on your view on how fast this autonomous and driver assist is going to penetrate. At the end of the day, these are capable systems. They're complex and therefore they attract quite some dollars. It depends. It's basically the Level 3.5, Level 4, Level 5 cars in the market times the price of the system. We haven't really made any bold projections because, as I said, it's early days, so we feel we are at the right at this point in time to develop the system. As with sound actuation, as with smart damping which we also started quite a few years ago, it's significant.
Thank you.
Cleo, there's a question online.
Yes, sir. About Automotive, ''Can you provide an update of the lifetime value orders in Automotive? If I remember correctly, it was around EUR 350 million in 2020. How did this develop in the first half of this year?'' The question is from Dirk Verbiesen from [KBC Securities]
Okay. If I correctly understand, it's a question about the nominations that we won. Yes.
Yes.
We talk about nominations once per year. We do that at the end of the year. We announce them and we disclose exactly what is in the pipeline. I don't want to deviate from that. I will say that the momentum that we have in that pipeline on its way to the target that we set is good. There's always that dynamic in the Automotive. Most of the projects get awarded in the second half. I'm not here declaring victory. We're in a good position. Of course, when we announce Q4 and full year 2021, we will disclose how the year went. Maarten?
Morning, Maarten Verbeek, The IDEA. Just getting back to the previous or pre-previous question about the cleaning sensor technology, which you are developing with an OEM. Since you are developing that together with another OEM, are you then still allowed to sell it to another automotive manufacturer?
The answer to that is yes. The real question is if that is something that we would like to do, because at the end of the day, we do not have all the technologies necessary for that complete turnkey system. Do we have the right to sell the sensor or the control block that actually distributes all these different streams to the 18 sensors? Yes, we do. The question is if that is something that we actually want to pursue. My answer today would be no. We thought about this. We negotiated long and hard about this partnership. We are very serious about it. The goal is for both companies is to create this turnkey solution, this subsystem of something that is complex and important.
For clarity, it's not an OEM, it's an Automotive Tier 1?
Yeah, it's a Tier 1.
Okay. Could you more or less break down when we look at your sales to passenger cars, what is electrified and what is not electrified in %?
What do you want to say about that, Jeroen?
At this moment it's slightly above still the number of electric cars in the market. When that is five, we are a little bit more than that. The pipeline, last year, we said that of the passenger car pipeline, around about 40% were for electric platforms, and we continue to build on that. We think that the percentage will increase considerably over the coming years.
Okay. You compare yourself to the average of the market, and you're ahead of that?
Yeah.
average. Okay. Could you also more or less give an indication about the content you sell to these electrical cars? How much more that is compared to in either diesel or a fuel car?
Yeah.
Petroleum.
We tried to get a stab at that last year on September the 10th, the Capital Markets Day. It is a great question. It is difficult to answer, because first of all, it is unknown how many additional systems are going to get implemented in these types of cars. If you stick with the smart damping, which we feel all electric cars, you can see the trend there, is going to have a smart shock absorber system. The sensor cleaning down the road, the sound actuation, plus all the existing, if it is a hybrid, of course, you get all the existing combustion engine products as well. We feel that the content in a fully electric vehicle is higher than what we currently have, and this is a Kendrion specific statement, in the traditional combustion engine car of today.
In your comments, a number of times you mentioned software and electrification. Software is not something you do, or am I?
Well, traditionally, the answer is, when I joined five and a half years ago, I think we had one or two software engineers. That is changing, has changed. We have a team of hard and software engineers in Malente, that we have a lot of open positions there. We're not the only one, it's not that easy to get these people in, we are definitely looking. Well, sound actuation is an obvious thing to say. We have been for a long time in fuel pump controllers, which is also a software and electronics device.
If you look at our roadmap, not just in Automotive, by the way, but also in Industrial Actuators and Controls, also in Industrial Brakes, we expect that these products become smarter, more capable, more able to interact with the system that they're designed in with for all sorts of reasons, optimize the running energy consumption, preventive maintenance, et cetera. This is a clear trend that we have been investing in over the past years, and we continue to do so.
If you look, for example, to last year and to this year, could you more or less say we have now 5% of our workforce in software compared to last year, 2%? Something like that.
No. We have a team in Malente now, 35?
Yeah, 30 people around that.
Yeah, 30 people. That's significantly higher. We have quite a few vacancies. We have some people also in CBU. This is more a general trend, a theme that in our R&D department, if you look at everything that we're currently designing and also that we talk, of course, with our customers about, you can see that. By the way, you see that not just us, you see that everywhere. The OEMs, the Tier 1s, everybody is seeing the same trend. By the way, also as evidenced by the fact that there is a significant semiconductor shortage, because these products have much more semiconductor content than they used to have, and you need engineers for that.
This year, for the first time, you break down your total revenue in three business groups. However, you don't do that with respect to EBITDA breakdown. Why haven't you done that and stick still to the industrial part and Automotive instead of breaking down the industrial part in the IB and IAC?
The main segmentation is still Industrial, Automotive. In addition, now we provide the revenue numbers. The main segmentation and also internally, the allocation of, let's say, the central cost are based on Industrial, Automotive. This is also in line with how we internally report.
Has there been a specific reason why not provide this additional information?
We want to stick to the segmentation that we had. We feel at the end of the day, if you look, there is a difference in dynamics, a difference in profitability, in gross margin between automotive and industrial. I understand that, of course, from the market's perspective, the more you break out, the better it is. At the end of the day, from our perspective, EBITDA margins through the cycle in brakes and IAC are similar. Of course, quarter to quarter, that fluctuates. At the end of the day, if you look at the key long-term metrics that we've issued, that will drive through operational leverage, fundamentally everything, the EBITDA and the ROIC, that's the organic growth. We felt by disclosing that additional information, you can gauge the underlying growth in these two industrial segments. The rest will follow from there.
You also mentioned that IAC was there for growth and particularly for strong cash flow, because Industrial Brakes is more for growth?
Yeah. That's exactly what you can gauge.
That would be good to see this breakdown further down the road in some of the areas?
When the EBITDA margins would deviate really substantially, then we would flag it. As you've said, it is really comparable. One quarter, IAC is doing a bit better. The other quarter, IB is doing a little bit better.
I understand you're asking for it.
Thank you.
Okay, no further questions. I would like to thank everybody for being here in person, which was a pleasure. Hope to see you soon. If you have any follow-on questions, you know where we are. Thank you.