Hello and welcome to the TKH Q1 2024 Market Update Conference call. My name is Laura, and I will be your coordinator for today's event. Please note this call is being recorded, and for the duration of the call your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. If you require assistance at any point, please press star zero and you will be connected to an operator. Today we have Alexander van der Lof, CEO, and Elling de Lange, CFO, as our presenters. I will now hand you over to your host, Alexander van der Lof, to begin today's conference. Thank you.
Good morning, everyone, and a warm welcome in this conference call. Yeah, this morning we published our Q1 market update, and we will walk you through the presentation that we have made for this call. I will go through that very briefly so that you can ask your questions. I believe that is the main focus of this meeting, that you can ask questions. Yeah, it was a weak quarter, but anticipated that it would be weak and continuing, let's say, the destocking effects in Smart Vision and Smart Connectivity. And the Smart Manufacturing doing quite well, especially related to the Tire Building activities with a very high order intake, continued high order intake, but also continued good performance, especially also related to last year when we still had a quite weak situation. I believe what is very important to point to is the strong increase in the added value.
Of course, the divestments are supporting the increase, but in all three segments we saw an increase. Although the demand is lower due to the destocking, we have not seen that we are under pressure in respect of our margin, and we were even able to increase the margin. That is, of course, a very strong basis for also developing ourselves to the higher return on sales and the target that we have set for that. The cost level was high, and in anticipation of higher turnover in the coming quarters, the ramp-up costs were also in there. Ramp-up cost means that we have, especially for the offshore wind activities, double cost. We are manufacturing today in our existing plant in Lochem, and we are preparing for starting by the end of Q2 to manufacture offshore wind cable in the Eemshaven.
It was good that we could announce that in the first quarter we were able to manufacture the test cable, and that also the first test went very well. But double cost, and that is what we have to absorb in at least the coming quarter, and then we will be able to reduce that cost during Q3 and Q4 and normalize. Also related to the fiber optic, we saw that, and I'm also already referring now to the second sheet, that we had some ramp-up cost. And the ramp-up went a little bit less smooth as we had planned. So somewhat higher waste and a lot of homologation that took more time, homologation of products that we previously manufactured in China and now have to manufacture in the new plant in Poland.
Yeah, we also have mentioned that the second quarter will be considerably better than the first quarter, with, yeah, growth coming back again in Smart Vision, continued growth in Smart Manufacturing, and improvements in Smart Connectivity. Yeah, then continuing with Smart Vision, we saw the organic decrease of 12.4%. Yeah, the good news is that we see that the order book has increased now for two consecutive quarters. And what especially in the second quarter will support us is that the consumer electronic business is coming back, and that has a substantial impact in Q2, and is mainly related to our 3D activities. And then, yeah, I already mentioned Smart Manufacturing doing well, high order intake, and it was also very good that at the recent exhibition we were able to introduce the AI-driven foreign object detection system.
And what is also really key that with our technology we are focused on the sustainability improvements and opportunities for our customers, and that is attracting a lot of additional attention towards our technology and is also bringing in additional orders. In Smart Connectivity, we saw continuation of the destocking effect. As mentioned in previous meetings, we see that our main customers have substantial stock, one or two of them even close to 9-12 months. And that means, yeah, a strong effect in respect of the demand. And that will continue as we foresee at this moment, at least till the end of this year. Yeah, I believe that is the most important points that I want to clear with you.
We reiterated our outlook, and yeah, I believe that is also a clear message that we still believe that we can continue to get on the growth path this year in the coming quarters. Thank you for your attention, and I'd like to open up for questions.
Thank you. Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now take our first question from Chase Coughlan with Van Lanschot Kempen. Your line is open. Please go ahead.
Hi, good morning, all, and thank you for taking my questions. I have a few, and I'll take them one at a time if that's okay. Maybe starting off with the Smart Vision segment, I have more of a strategic question, I suppose. I think you spoke about it on the last earnings call that you were pushing to become sort of the TKH Vision brand, and I think you were attending some trade shows under a TKH Vision label instead of the separate brands. I'm just curious on how that strategy is progressing and if you see any sort of risks associated with that. For example, do you think you'll lose some of the brand image for some of the more niche applications, or how is that progressing?
Thank you for your question. Yeah, we are already positioning the TKH Vision brand since, I believe, around three years. And yeah, what we especially stipulate is the one-stop shop, and until now we are keeping the brands as they are, but under the TKH Vision label. And that works out very well, and we are making good progress. We especially see also within the sales organization that they see the big advantages, and especially related to the excitement of our customers, that they are served in the best way possible to get their vision technology delivered from TKH.
Okay, thank you for that. And then maybe moving on to the cabling business. We've seen some price inflation for copper and aluminum prices, and I'm just curious on how that's impacting the business there. Is that beneficial for you margin-wise? Are you able to pass that raw material inflation on, or how should we look at that?
Yeah, it's a standard procedure that you pass on the price increases of the metals to your customers. Yeah, with a price increase in the end, it has a negative effect on your added value as you make no margin on these price increases.
Okay, so no major margin improvement expected from that in the near term, I guess.
No.
Okay. And then my final question, I think you mentioned already that you expect considerable improvements in the second quarter of the year versus what we've seen in the past quarter. And I understand, so this is primarily to do with the recovery of the vision because we still see some destocking in the onshore energy cabling. You already mentioned the double cost for the Eemshaven facility, and I think you said you expect now in the end of the second quarter to actually see the production ramping up there. So it sounds like most of the sort of the headwinds are still present, but the only one that maybe is changing is this vision environment, or are there other moving factors as well?
That's, of course, the vision segment, but we will also see in the Smart Manufacturing improvement in the result compared to last year and also this year or this quarter, the first quarter. Yeah, for Smart Connectivity, there's also improvements foreseen in the second quarter in the EBITDA margin and result.
Okay. Okay. Thank you very much, gentlemen.
Thank you.
Thank you. Once again, as a reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now move on to our next question from Tijs Hollestelle with ING. Your line is open. Please go ahead.
Yeah, thanks, Laura. Morning, gentlemen. Yeah, my question is about the connectivity division. We already discussed it, I think, earlier this year, but it indeed showed a major increase in the second half of last year in the OpEx levels in relation to the ramp-up for subsea and onshore cable capacity. So how did this cost item develop in the first quarter compared to, let's say, the average levels seen in the second half of last year?
Hey, good morning, Tijs. Yeah, if you look at the OpEx for connectivity, then in the second half of last year, we had in Q3 still our TKH France activities. If I normalize that, then basically you're looking at a kind of uplift for Q1 in the range of about 8% compared to average of the H2 2023 levels.
Okay. Yeah, that's.
That's to do on one side, of course, with the full staffing of the facilities, which we have up to have completed and are ramping up further, let's say, commercial utilization. And at the same time, of course, we also have to deal with some of the, let's say, inflationary indexation effects, which we are not yet able to pass on, of course, to the customer base as the capacity is still not commercially used.
Okay. That's helpful. And I would say that for the coming quarters, the level more or less remains stable. So you've basically done all the investments.
There's a slight increase as we go along, but basically most of it has been included already. But with the full utilization, especially in the Eemshaven in the second half, you will have a little bit more headcount than we currently have. But by far, the majority is already included, yeah.
Yeah. And Alexander's remark about starting production indeed in the second quarter, will there also be revenue recognition in Subsea cable in the second quarter?
Yes. Yes, there will. And as it was also in the first quarter, since we still have our manufacturing plant in Lochem that is manufacturing the Greater Changhua project.
Okay. And what kind of step-ups can we expect, kind of range?
Yeah, in respect of the volume that we manufacture, the ramp-up will not be leading to substantial higher utilization than that we have in the first quarter. The only thing is that we will reduce cost in the second half year because we are eliminating the double cost that we have. And then so this year, we are targeting around 300 km production. And that will grow then further into 2025, where we are today with our sales funnel looking at around EUR 450 million to 600 km. And so what we see is that there is a kind of window where we have not been able to get to a higher utilization this year as most of the projects were already ordered, yeah, two years ago, three years ago for 2024.
Okay. So the real step-up in terms of revenue will happen in 2025 then.
Exactly.
Okay. Yeah. And then basically still on the connectivity division, but I also have some questions about the onshore cable. Just from my understanding, there is destocking going on. So let's say your existing capacity in onshore cable is now, yeah, underutilized, but less utilized than it was in the past. So therefore, it's less profitable. And then the new capacity is not utilized at all, so therefore, it's loss-making. Is that kind of the situation right now?
No, it's a mix. We are not segmenting new capacity compared to existing capacity because some of the new capacity has efficiency improvements. So we are utilizing that. And we are profitable in the onshore business, but much less profitable than one year ago. So it's not a complete standstill in respect of demand from our existing customers. It's substantially lower as they want to gradually also reduce their inventory. In several areas, we see a higher demand. But yeah, the impact of the large inventory of close to 9-12 months is having a big impact that they cannot organize a higher demand this year.
Yeah. If I remember correctly, you were also, let's say, looking into the opportunity to sell onshore cables to clients outside of the Netherlands. Is there any progress with that? Is that possible also on the short term?
Yes, but not in the first half year. We are looking at opportunities in the second half year and continuing in 2025. So it takes some lead time, but the outlook is quite positive of the opportunities.
Okay. Okay. That's reassuring. One final question because you mentioned indeed some, let's say, one-off kind of cost in the fiber optics business. Can you provide us with a number on that, the impact?
Yeah, if you look at the part of ramp-up cost related to the ramp-up in Poland for fiber optic, you're talking about just over EUR 1 million, more or less.
Okay. That's small. Okay. Yeah, thank you very much.
Thank you. We'll now take our next question from Michael Roeg of Degroof Petercam. Your line is open. Please go ahead.
Yes, good morning, gentlemen. I also have a question about the connectivity systems activity. If I look at the results from last year and try to remove TKH France for Q1, Q2, Q3, and one month in Q4, and I have a split in operating profit about EUR 42 million in the first half and, well, basically the result halving in the second half of the year from EUR 42 million to EUR 21 million. And I was wondering, should we be afraid that it will fall any further because of the increase in OpEx and the double costs in offshore wind? And then bottom out with recovery in the second half.
No, we will see an improvement in Q2 already. And that also has to do with the fact that we see a higher utilization in the second quarter. And so yeah, the outlook is that we will have a better result in Q2 than compared to Q1.
Yes. What I meant was if I add the two and compare them to my estimate of EUR 21 million for the second half of last year, will the H1 2024 result be lower than that, or do you think it will be the same?
Oh, I don't believe that it will be lower.
Okay. Good. Clear. Then I have a question on your guidance for the full year, organic sales growth and organic EBITDA growth. But there were, of course, some M&A influences from last year. TKH France, you gave us all the numbers, so that's relatively easy. But there's also Euresys acquisition. What is the EBITDA level that you consider the basis from which to grow organically this year if you strip out all the M&A from last year?
That's a good question, especially as we really stressed that the like-for-like is important when we talk about our outlook. Then we are more in the range of be very precise here. I just want to make sure that you got the same definition as I have. About EUR 224 million.
EUR 224 million is the base for 2023, and guidance is organic growth against that.
Yep.
Good. That's clear. Yeah, manufacturing systems, you expect growth to normalize in the course of this year? Well, it was already normalizing to only 16% growth. It was 32%, of course, in the second half of last year. Is it fair to assume that in the second quarter, you will also still have a very strong growth year on year because of the H1 base from last year, and then it will normalize only as of the second half of the year? Is that correct?
Not sure if I got your question correctly, but yeah. Repeat it once more.
I see organic sales growth in manufacturing systems last year was 3% in the first half, 32% in the second half, and you predict normalization in the course of this year because, well, a strong base. Now, you had 16% in Q1, which was quite a good number, but of course, slowdown versus 32 from the second half. Now, given that the H1 base was relatively easy last year, should we expect another strong quarter in terms of growth in Q2, and then it will level up only as from Q3 to a normal number, say, it to high single digits?
Well, I think if you look at, let's say, the ramp-up last year, definitely you see H2, let's say, being very material compared to H1. Q1 and Q2, the revenue base in the second quarter was a little bit higher than in Q1, but not that much. But we have seen, let's say, the impact coming through out of the supply chain effects on our EBITDA. So let's say in the second half of the year, that's where the highest part of the revenue is, and therefore, the mobilized part is more towards that end, yeah.
Okay. But well, you gave a bit more information that last year, the Q2 base was higher than Q1, so then I can figure out what the trajectory will be in Q2. And then in Q3, Q4, we will have the real normalization. That's clear. Good. That's it from my side. Thank you.
Thank you. As a final reminder, ladies and gentlemen, if you would like to ask a question, please press star one on your telephone keypad. Thank you. We'll now take our next question from Maarten Verbeek from the IDEA!. The line is open. Please go ahead.
Good morning. It's Maarten Verbeek of the IDEA!. Firstly, you mentioned your EBITDA before exceptional items. Did you recognize any exceptional items? If you did, could you quantify that and give some information where you have used those proceeds for?
No, we didn't have them.
Okay. That's clear. And then secondly, during the full year update, you mentioned that you expected subsea cable production this year for which you still had to sign the contracts. Has that materialized, or do these contracts still need to be signed?
Yes, they have materialized.
Okay. And are they also thus in your order book you have stated at the end of Q1?
No, this has been materialized in April.
Okay. So it's not yet in that order book. Yeah, concerning vision systems, could you give some color about the developments within that sector? So on one hand, geographically, but also within the industrial side and consumer side because you stated that consumer side is picking up, and I think that is very much related to what's happening in Asia then. Yeah, the main manufacturing of this consumer electronic business is still in Asia. Yeah. But how are the developments within the industrial side of your business?
Also picking up. That is good news. We mentioned that we have a higher order book that is not only related to the consumer electronics, but also to the factory automation activities. That is more in the 2D sector.
Okay. Thanks very much.
Thank you. And we'll now take our next question from Ruben Devos with Kepler Cheuvreux. Your line is open. Please go ahead.
Yes, good morning. Thanks for letting me on. Just to follow up on the previous point of the consumer electronics business, so machine vision generally, I think it's about 85% of the Smart Vision segment. You talked about consumer electronics up in terms of orders and also the factory automation. Consumer electronics is 3D. Factory automation is 2D. If you combine these two, what is the percentage basically of the vision for these two end markets?
Well, if you look at the 85% within Smart Vision is indeed the vision systems. And of that, of course, you have a split between our security vision portfolio and the industrial parts of the machine vision. It's not that factory automation is an exclusive area for 2D. It's also an end market which is served by 3D. You're right that consumer electronics is a little bit more 3D-driven than 2D. They are, let's say, important markets, but it's not that they make up the majority of each of these two technologies. That's not the case. So it's fairly well split, and it's one of the larger markets. Let's call it like that.
Yeah. Would it be possible to somewhat quantify it? I mean, if you just look at the order book maybe today, these two combined, what do they represent?
I think if you add them all together into factory automation and consumer electronics, then probably just over half is related to these segments.
Okay. Okay. And then just thinking about price versus volume in Q1, yeah, what was the volume effect and the price effect basically for Q1, I think, for full year? Last year, on the group level, I think most of the 3% organic growth was coming from pricing and less so for volume. How did it look like in Q1?
Basically, everything is volume. It's very small what the price effect is.
Okay. Okay. All right. So I get the scope impact. So purely the portfolio factor in Q1, the biggest segment was, of course, TKH France, which then you had Euresys and I think JCAII. Could you quantify what that total impact was?
Well, not on line item for each company, but.
In aggregate.
Of course. Yeah. I mean, you're talking about a few million, say, in the range of EUR 5 million-EUR7 million, which is related to the revenue coming out of acquisitions in the like-for-like to Q1 2021 2023. Sorry.
All right. All right. That's all from me. Thank you.
Thank you. I don't see any questions coming through. Once again, if you would like to ask a question, please press star one on your telephone keypad. Thank you.
Okay. Thank you.
There are no further questions in queue. I will now hand it back to Alexander for closing remarks. Thank you.
Okay. Thank you very much for all of you attending this meeting and the questions that have been asked. We will continue to do our best in a good performance. At least for us, it is good to see that the outlook for Q2 is much better than the performance in Q1. We hope to see you all again in August at our half-year conference call or webcast in Amsterdam. Thank you very much.
Thank you. Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.