Good morning, everybody, here in the Holiday Inn Hotel. Very good to see you all and on the webcast. Welcome to Cambrian's Q2 and First Half twenty twenty one results presentation. My name is Joop van Borde. And with me here is Jerome Hammond, our CFO, although I don't see him in the in his seat yet, but I'm sure he will be here very shortly.
First, I will present this morning's agenda. Welcome, Jeroen.
I was locked out.
First, I will give a brief update regarding the COVID situation at Kendron. And then Jeroen will review the Q2 and first half twenty twenty one 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 and A. Now as to Q and A, because of COVID, we created the You can type your questions through the Q and 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 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.
And 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. Now let's go to the business review. Jurgen? Yes.
Thank you, Jup, and good morning also from my side. So I will present the business review for the Q2 and the 1st 6 months of 2021. In Q2, we saw a further increase in activity level. The organic growth rate 41% is of course driven by the low comparable revenue in the previous year, but also compared to the Q1, 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 €15,800,000 in line with the €16,100,000 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 in raw material price increases leads to increased production costs. Although raw material prices are largely passed on the 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 Q2. Our total staff and other operating expenses in the first half year were SEK10,400,000 higher than last year when significant temporary cost measures were taken in response to the first COVID lockdowns. As a percentage of revenue, our costs decreased 2% to 35,800,000 percent. Also compared to 2019, our staff and other operating expenses were still SEK1,600,000 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 1st 6 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%. Then continuing to our cash flow and financial position. Free cash flow in Q2 was €1,200,000 not far from the €2,200,000 in Q2 of last year, despite €5,500,000 higher inventory levels largely driven by the aforementioned supply chain constraints. Capital expenditure in the 1st 6 months amounted to €10,100,000 which is below depreciation of €12,300,000 Also capital expenditure is affected by increased lead times ordered equipment, but 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 112 €700,000 which is almost €18,000,000 below the level of last year. The €3,000,000 increase compared to the end of Q1 It's largely the result of the CHF4,300,000 cash portion of the dividend. On the back of the improved profitability, our leverage ratio further decreased to CHF2.1 from 2.3% at the end of Q1. Then 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 shows strong year on year growth. The long haul coach market is still very much affected by COVID-nineteen with demand basically on the level we witnessed in the Q2 of last year. Although high order and demand volatility affected the Automotive Group, The EBITDA increased 69 percent to CHF 12,800,000 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 €1,000,000 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 €61,900,000 despite the 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 breaks in the 1st 6 months also significantly exceeded the 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 we're 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 Juve.
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 twenty twenty one 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 1st 6 months, Our EBITDA was 46% better than in the first half of twenty twenty.
I'm proud of the Cambrian team who have achieved this despite the continued difficulties the COVID pandemic presents us with. And I'm excited about the acceleration in transition towards clean energy that we believe will benefit our 3 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. Now let's get into a bit more detail. You probably know this picture. It's Candrion'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 2025. Underpinning this strategic goal are 3 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, in elevators, in logistics and in more segments. Here too, we focus on growth. The 3rd 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. And 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. And 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 75,000,000 vehicles. And 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, that 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 Cation 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. And we too have been investing relentlessly in our product road map, 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 ASYS keeps on accelerating, supported by several significant government initiatives. For example, the Biden administration calls for a $100,000,000,000 electric vehicle rebate program.
The German government has announced it is targeting up to 10,000,000 battery electric vehicles on its street by 2,030. 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 2,030. 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 controls safety and infotainment systems. This is a significant transition in which software and electronics are a major component of the vehicle And carmakers will have to become more like technology firms, and Kymriah 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 AVIS Sound Phantom platform continue with 2 global OEMs selecting our latest platform release. The production ramp of these wins is planned for the second half of twenty twenty two in China and in Europe. Our unparalleled sound experience and Fintone'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 team sorry, sensor cleaning system. This product is expected to be in production from 2024 onwards with autonomous driving cars level 45 as the main target market.
For this product, we experienced strong industry interest from OEMs and from RoboTaxi developers. Now before we go to our industrial business groups, let's look at the economic climate there. Jeroen already referenced this. On the slide, we see the German Manufacturing Index as reported by IHS Markit. And 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 auto patents as well, although demand is held back somewhat by similar supply chain constraints as in automotive. So let's look at industrial starting with industrial brakes. Operationally, we have aligned and unified our R and 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 product portfolio to serve the opportunities created by the broad electrification trend. For example, we expanded our product portfolio for wind turbines. And this has led to even better market traction with several successes with both existing and new customers. And 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 road map and the central R and 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 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 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. And we operate globally, but take full advantage of regional market opportunities. On the actuator side, we started production for industrial locks for devices like PCS testers, freezers, centrifuges, etcetera. And to 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 and 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 continue to grow during 2021, And 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 5 year plan.
For China's high speed railway, we will produce the main circuit breaker system for the AC system. And 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 plant 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 1, we plan to build more than 27,000 square meter with the possibility to later add another 16,000 square meter in Phase 2. 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 twenty twenty two. Final point, as you can see, we are planning photovoltaic panels on the roof and expect to generate 1.1 megawatt 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 Cambrian. 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. And with our focus in automotive on the Aces, 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 5 year sustainability plan. And 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 Cambrian's diversity step by step over the coming years. And this includes specific initiatives such as unconscious bias trading and targeted recruitment efforts to get Candrion as diverse as is possible. We know we continue to have to work on this and on other sustainability goals, but we make a good progress towards our 2023 sustainability targets.
Next, let's go to outlook before the Q and A. Over the past 6 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 for 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.
Therefore, 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. Over the past 18 months, I believe we have shown resilience, making full use of available cost savings and cash preserving instrument 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 So EBITDA margin of 15% and the return on invested capital of at least 25% by 2025. Thank you for your attention.
And with that, let's go to Q and A. Frank, microphone is on its way.
Yes. Frank Claesen, 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. And what can we expect going forward?
Is it easy? 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. Do you want
to take that?
Yes. So we don't exactly quantify it. It's actually, it's quite fluid. It's a combination of price Decreases which are not happening, plus price increases, different contract lengths. So 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.
So the majority of the price increases have been passed on. Also the majority of the contracts, especially in automotive, contain raw material prices clauses. And in the industrial area, The contracts are mainly negotiated on an annual basis. So there you have you can do it much, much easier, more often and the smaller customers that you can simply increase the catalog prices. So if you calculate the 0.4 percent, that is less than €1,000,000 in Q2 and that is then partially mixed effect and partially the raw material prices.
And Will, just one more thing to add to that. There is and Jeroen mentioned that also in his prepared remarks, And there's, of course, also always a bit of a time lag. So prices increase, these contracts are in place. On the way down, you benefit. On the way up, You always realize it a bit later.
And then 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 because you mean because of the inflation in the pricing? Yes. Yes.
That's even more difficult. But I would certainly not overstate that, certainly not in the short term. So in the end, the way we think about it 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. I mean, we've seen all in the press also where I can talk about so many cars that they could have shipped, but we're not able to because of semiconductor shortages.
Well, if they don't ship the car, We don't ship the actuator. So the effect on the top line from that indirect effect is much larger. The other thing it does is another thing we 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. So the demand imbalance, the volatility, the indirect effect of the supply chain and direct effect altogether, If you look at how we did in H1 and Q2, I think we managed that fairly well.
Okay. Then 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.
Yes. So if you look at the payables and the receivables, they It's in line with the activity levels. If you compare it to year end, that is always a bit impacted by seasonal effects. But if you look at Q2 compared to Q1, And I would say that, that is yes, 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, yes, because most important is, of course, that you are able to deliver. And in other cases, yes, you have some stock.
But Yes. If you cannot complete the product, then you still have it. I expect not that the inventory levels will increase further compared to that compared to the current level. And but it will prolong as long as the supply chain constraints are there.
Okay. Thank you.
In English, yes?
Yes.
Sorry.
Yes. The first
question is on the comment on the weakness in the long haul coach market. I think, yes, that is understandable, given the situation With COVID, but how is the exposure of Canyon to the transit versus the city buses? And then the reason I'm asking is I also noticed the huge electrification programs of various governments and transit buses or city buside ideal to do that. And are you in conversation with the big European bus makers Volvo, Daimler, Scania In order to develop that because that could be a huge growth market in the near future.
Yes. So there's indeed there's 2 parts To the answer, just as there were 2 parts to your question. So 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. And we don't really know when this comes back. This affects revenue in the short term. It's 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. So 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.
And 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. And lots of people talk about NIO, but 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.
But specifically in the first market?
Yes, we are not well, we don't have design wins yet. And I think it's a bit early for that, but we're certainly in touch with
Okay. With new players. Okay. That's interesting. And then basically a similar question on the offshore wind market.
You have a big position in China. But is your position on a global level, let's say, Europe, because Europe is more dominant in that, are you also providing products To the top 3 European wind turbine makers?
We certainly have I mean, as you rightfully point out, in China, the position is very strong. 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 these for investment in wind power, so that helped. But 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. So 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. So yes, for the coming years, we expect a lot of
Yes. For Canyon, it doesn't matter whether it's onshore, offshore, so you will also benefit from the offshore. Correct.
Yes.
Okay. That's interesting. And then yes, you already basically commented on the progress on the new Chinese facility. But are you also willing to share your internal budgets of the possible annual turnover? And that's probably ramping up in the second half of twenty twenty two, but What are you calculating with for 2023, 2024?
Well, 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 €100,000,000 And then there's Phase 2 as well. So there is certainly 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. So in a reasonable amount of time, we expect that to reach that type of level.
Okay. Yes. Okay. Thank you.
Johan van Doelven, Anderson 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 holders.
So it's a difference in growth and other dynamics. Then 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? So China Excellent Windpower. And also, we gave you some more explanation about the extended product range in Windpower.
So sort of also how many products or how many value per winter
line, please? Yes. The first 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. So 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 In the United States, it's actually doing quite well. In Europe, it's okay, not as strong as in passenger cars. And this, This I don't think this will change.
So 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. So 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.
I mean, 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 in on the truck side. They are a couple of years behind, but the same fundamentals are at work. I just talked also to Thijs' question. So 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 But 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. Yes, on wind power, so 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 and despite the fact that, that wind power subsidy is now gone. So 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 The trend there is also picking up speed and pace. But 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. So the growth number in China in the first half is quite gratifying in my view.
Then finally, yes, 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 break 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 the existing product a little bit in a reasonable amount of time, you can then expand your product portfolio to suit other customers, and that's what we're doing. As I mentioned, there is various electromotors deployed for the pitch, for the We are serving all these segments, subsegments within wind power.
Thank you.
It's a pleasant 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 of especially of Interok. So we were also strong in wind power. But yes, Interok added Around about SEK 20,000,000 in debt and a significant portion of that is wind power.
More questions? Anything online maybe, Kleon? No? Thijs?
Yes. We are seeing the EBITDA margin of the industrial base at 17.1% On strong demand, but also reading your comments that you are continuing to optimize production within the industrial actuation control. So there's probably more margin upside then even though market circumstances are quite okay, I guess. And then your assumptions about the new Chinese factory Probably also has somewhat higher margins compared to the European business or is that false assumption?
Sorry, on China, I did miss the pause. Yes.
The general profitability levels you are calculating with for the Chinese facility is that above, let's say, group 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. So if anything, there was always it was always challenging to reach a similar profitability level. To some extent, that's still true. On the other hand, that market is maturing as well.
A big push that we have in China, we talked about that as well at the Capital Markets Day, is localization. So which we want I mean, we're building, Obviously, the factory locally, production equipment is sourced locally, our supply chain is made local, our R and D we're investing in R and D. So that we aspire to get similar profitability levels in China as we do in the rest of the world So I wouldn't say there is a material difference up or down in the long haul.
Okay. Yes, because in relation to your overall group EBITDA margin target, I mean, if automotive just comes back to the historic normal levels, you would say that you're already exceeding your targets.
Yes, I mean, at the end of the day, I mean, and this is another theme within automotive, this is scalability part of products we try to make the modular, we talked a lot about software and electronics. That's an addition that you can 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 there are very strong, very well developed. So you will always feel the pressure on the margin in that market.
Okay. Yes. And then 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 industrial business before your own capacity is hitting?
It's difficult to say. So if you start with brakes, I earlier mentioned that brakes is in itself reasonably scalable because you use similar equipment for a whole range of different products. And there, the demand is such that we are indeed we're not reaching the top of 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?
So how are we deploying then the labor that we have? There's typically enough capacity on the machines. These are there's more manual labor. We do a lot of CPU. We do it in Malente.
And then we optimize, say, the product mix according to the supply of raw materials, the labor and of course also the production equipment. But there is not a production equipment capacity issue there.
Okay. That's clear. So labor force show you're hiring people probably?
We are certainly trying to in some but also the demand fluctuation makes that tricky as well. So we work with temporary workers, and we disclosed that also in the release. We have quite a few temporary workers now. In some areas, the demand is where the demand is lower, we're in other areas, we're negotiating with the Employment Council for more shifts in the weekend. So that imbalance, of course, is also what we're dealing with.
Thank you. Jan Jan Voorhees, Teslin. Could you You said a bit more about the partnership within automotive for the turnkey sensor cleaning systems, perhaps on the structure, on the investments, etcetera. Yes.
So 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. So 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.
But if you have Car level 3.5, level 4, we have 18 of these sensors. If they are not 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. So it's the same theme. We try to make that modular that you can individually address 8, 10, 12, 15 centers.
But 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. So the partnership is about creating, as we call it, a turnkey solution, a subsystem with all the software 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 the fluid in 4 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. So that means basically the investment is it's a relatively straightforward structured partnership. We have our expertise. They have their expertise. We combine that as a joint team working on this current key solution.
And then we will bring that to market. I mean, we're already marketing it, but And we expect that production will start around 2024. So 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?
Well, at the end of the day, if you and it depends a bit on your view on how fast this autonomous and driver assist is going to penetrate. But at the end of the day, if you it's these are capable systems. I mean, they're not they're complex and therefore, they attract quite some dollars. So it depends. It's basically the level 3.5, level 4, level 5 cars in the market times the price of the system.
Now 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. But as with sound actuation, as with smart damping, which we also started quite a few years ago. It's significant. Thank you.
Pleo, there's a question online.
Yes. About Automotive, Can you provide an update of the lifetime value orders in automotive? If I remember correctly, it was around €350,000,000 in 2020. How did this develop in the first half of this year? And the question is from Dirk Verbisen from Evaluation capital.
Okay. So if I correct understand, it's a question about the nominations that we won. Yes. We talk about nominations once per year, and we do that at the end of the year. So then we announce and we disclose exactly what is in the pipeline.
I don't want to deviate from that, but I will say that the momentum that we have in that pipeline on its way to the target that we set is good. There is also as always, that's a dynamic in the automotive. Most of the Projects get awarded in the second half. So there is certainly not I'm not here declaring victory, but we're in a good position. And of course, when we announce Q4 and full year 2021, we will disclose how the year went.
Good morning. Marfel Baitt, 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. So 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.
So this is really I mean, we thought about this. We negotiated long and hard about this partnership. We're very serious about it. And but the goal is for both companies is to create this turnkey solution, this subsystem of something That is complex and important.
And for clarity, it's not an OEM. It's an automotive Tier 1. Yes.
It's Tier 1. Yes. 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 percentage?
What do you want to say about that, Jeroen?
Yes. So I would say at this moment, it's slightly above Still the number of electric cars in the market. So when that is 5, we are a little bit more than that. But The pipeline last year, we said that of the passenger car pipeline, around about 40% We're for electric platforms, and we continue to build on that. So we think that percentage will increase considerably over the coming years.
Okay.
So you compare yourself to the average of the market and you are ahead of that 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 Fuel car. Yes.
We tried to give a stab at that last year on September 10th, the Capital Markets Day. It's a difficult it's a great question. Difficult to answer because, first of all, it's unknown how many additional systems are going to get implemented in these types of cars. But if you stick with The smart damping, which we feel all electrical 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's a hybrid, of course, you get all the existing combustion engine product as well.
We feel that the content in a fully electric vehicle is higher than what we currently have. And this is a Chemdion specific statement in the traditional combustion engine car of today.
In your comments, you a number of times mentioned software and electrification. But software is not something you do or am I
Well, traditionally, the answer is so when I joined 5.5 years I think we had 1 or 2 software engineers. That is changing, has changed. So we have a team of hard and software engineers in Malente that we are actually we have a lot of open positions there. There is a bit of we're not the only one, it's not that easy to get these people in, but we are definitely looking. And sound actuation is an obvious thing to say.
We have been for a long time in fuel pump controllers, which is also a software electronics device. If you look and our road map, not just in automotive, by the way, but also in 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 designed in with for all sorts of reasons, optimize the running, energy consumption, preventive maintenance, etcetera, etcetera. So this is a clear trend that we have been investing in over the past years, and we continue to do so. 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 to last year 2%, something like that?
No, no, no, no, no. It's still I mean but we have a team in Malenta now, 35. Yes, 30 people. 30 people. So that's significantly higher.
We have quite a few vacancies. We have some people also in CBU. So this is more a general trend, a theme that in our R and 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. And 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. You need engineers for that.
This year, for the first time, you break down your total revenue in 3 year 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 Parts and automotive instead of breaking down the additional parts in the IB and AIC?
Yes. So the main segmentation is still industrial automotive. So in addition, now we provide the revenue numbers, but the main segmentation and also internally the allocation of, let's say, the central cost are based on industrial automotive. So this is also in line with how we internally report.
There's been a specific reason why not provide this additional information?
Yes, because 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 and 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. But at the end of the day, from our perspective, EBITDA margins through the cycle in brakes and IAC are similar. Now of course, Quarter to quarter, that fluctuates.
So 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. So we felt by disclosing that additional information, You can gauge the underlying growth in these 2 industrial segments. The rest will follow from that.
Because you also mentioned that AIC was Yes. For growth and particularly for strong cash flow, of course, industrial break is more for growth.
Yes. So that's exactly what you can gauge.
It definitely would be good to see this breakdown further down the road into the EBITDA margins
deviate really substantially, then we would flag it. As you've said, it is really comparable. 1 quarter, ISE is doing a bit better. The other quarter, IP is doing a little bit better.
But I understand you're asking for it.
Thank you.
Okay. No further questions. Then I would like to thank everybody for being here in person, which was a pleasure, and hope to see you soon. If you have any follow on questions, you know where we are. Thank you.