Hello. Welcome to TKH Group Q3 2025 market update conference call. My name is George, and I'll be your coordinator for today's event. Please note this conference is being recorded, and for the duration of the call, your lines will be in the listen-only mode. However, all sell-side analysts will have the opportunity to ask questions at the end of the presentation. 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. I'd like to hand the call over to your host today, Mr. Alexander van der Lof, CEO of TKH Group, to begin today's conference. Please go ahead, sir.
Good morning, everyone, and welcome to the conference call for our Q3 update. Before we move into the remarks to the result, I'd like to point out the cautionary note regarding forward-looking statements. Yeah, going into the market update, we have seen a strong growth of 8%, mainly driven by vision technology and the electrification activities. Within automation, we saw a strong performance in the smart vision on the back of a stronger market demand and a decline in smart manufacturing based on the lower order intake and strong comparison base. Electrification was up strongly, also with a strong increase in the demand in the onshore energy segment. Contribution of the services activities in the offshore energy segment contributed very well, and the technical issues in the Eemshaven plant being largely resolved.
Q3 output was still limited due to the release of new cable types that we had to start up and the finalization of type approval tests for the upper bandwidth of the product range that we need to manufacture for upcoming projects. We signed a new contract for 140 km inter-array cables for the Gennaker offshore wind farm, and that is good progress for continuation and for our order book. Dewetron was divested, the divestment was closed in October. Total turnover divested as of 2019 is amounting to a substantial amount of EUR 458 million. A further EUR 250 million in non-core turnover will be divested, including digitalization. Going into the EBITDA, we saw a minus of 6.4%, which was mainly due to a higher cost level at the connectivity business, especially the offshore wind, and not yet a full utilization. We moved to the three segments.
Within Smart Systems, Vision Systems, we saw an organic growth of 11.4%. Improved performances in both security and machine vision. Within the machine vision, 3D vision performed very well, benefiting from several well-performing end markets, including the consumer electronic market. Security vision turnover increased due to delivery of some larger projects, as also announced in the previous communication. Smart Manufacturing, we saw a turnover decrease of -8.9%, and the turnover was mainly lower due to a strong comparison base towards Q3 last year as a result of the catch-up effects. Besides that, the lower order intake in the previous quarters had an effect on the volumes that we were able to manufacture. The order intake in the quarter continued to be impacted by geopolitical circumstances, and we will come back in the outlook on what the future looks like.
Smart Connectivity Systems turnover increase that was really substantial was 21.2%. Organically, the offshore energy benefited from the ramp-up in Eemshaven and increased accessories and services turnover. Production processes of offshore inter-array cables in Eemshaven stabilized further, and a plant changeover to different cable types and type approval tests impacted in the end the output and utilization. The higher cost base due to the Eemshaven plant being fully operational impacted the EBITDA. Growth in onshore energy from increased demand foreseen to continue in even the coming year. It looks like we are fully booked. Digitalization, we still see pressure on volumes and pricing from oversupply in the European fiber optic market. Yeah, we move to the outlook. First of all, we reiterate the outlook. Going to the three divisions, we see within Smart Vision Systems that it is expected to continue its strong performance.
Turnover and adjusted EBITDA in the second half of 2025 are expected to grow compared to the first half of 2025 on the back of the delivery of some larger secured orders within machine vision as well as in security vision. Within smart manufacturing systems, as anticipated, H2 turnover 2025 and adjusted EBITDA are expected to be lower than in the first half of 2025 due to the lower order book. Although we have not seen an increase in our order intake in entire building systems in Q3, we continue to expect an improvement in the coming quarters. We move on to smart connectivity systems. Turnover and adjusted EBITDA in H2 are expected to grow substantially compared to H1. A higher output level is projected in the Eemshaven factory, contingent on continued stable production processes.
In addition, we expect further turnover increase in offshore accessories and services, and furthermore, in onshore energy, we anticipate a further increase in demand from the network companies that support higher utilization levels. Within digitalization, a lower cost level and higher utilization will also support an improved result. Finally, subject to ongoing market uncertainties and bearing unforeseen circumstances, on balance, TKH expects turnover and adjusted EBITDA for H2 2025 to be substantially higher than H1 and to be above H2 2024. So far, my comments to the result. I'd like to hand over to the Q&A.
Thank you very much, sir. Ladies and gentlemen, as a reminder, if you have any questions, please press star one. Just make sure that your line is not muted so I still reach your equipment. Our very first question today is coming from Chase Coughlan of Van Lanschot Kempen. Please go ahead. Your line is open.
Hi, good morning all, and thank you for taking my questions. Maybe starting on the guidance, I guess it's more of a semantics question, but you reiterate this substantially higher comment. Could you give an indication of sort of maybe in some form of quantitative terms how large that substantially really is? I mean, I know consensus is expecting quite the pickup now in Q4 from a profitability standpoint, but of course, if the sell-side expectations differ a lot in terms of how we're interpreting that substantially, then there might be a mismatch there. Could you provide any more color on that, please?
Good morning, Chase. This is Elling, by the way. With regards to this substantial, it is very much related, of course, to the comparison with H1. I think the second part of the guidance refers to at least the same as H2 2024. I think that gives you a little bit of guidance at which level we at least should be landing for the second half. That would be EUR 108 million EBITDA for the second half this year to match at least the similar level of 2024 H2.
Okay, great. That's very helpful. My second question would be on the manufacturing business. You just flagged in the press release now that, yeah, you expect, let's say, order intake to improve in the fourth quarter despite not really seeing any inflection year to date. What is providing that confidence for you?
Good morning. Harm Voortman here. I think the most important part is the fact that orders do not come in just within weeks. It takes months for preparations and engineering meetings. All the projects that we are discussing right now will lead to orders in the coming period. When you look at the current projects that we are all working on, we expect an increase in order intake in the coming quarters.
Okay, great. So it's more based on the conversations and macro improvements or something like this?
Yeah, it's actual projects that we are discussing.
Okay, perfect. Okay, for now, that's all from me. Thank you, gentlemen.
Thank you.
Thank you. Thank you for your question, sir. We will now move to Martijn den Drijver of ABN AMRO. Please go ahead, sir.
Yeah, thank you, Operator. It's a difficult name, I realize. Good morning, gentlemen. I have a few as well. On Smart Connectivity, you mentioned that the problems in subsea have been largely solved. What is the issue that remains? Secondly, you mentioned these type approval tests and probably equipment resetting. Is that going to happen more often, or is it exceptional this time as it's the first time that you're manufacturing shorter cable? I have some few other questions, but I'll take them one by one.
Yeah, thank you, Martijn, for your question. The issues that we see are, let's say, normal issues that you see in a new production plant. It could be a sensor that fails and, yeah, small things that are not related to the technology that we have in the plant, but more related to, yeah, issues that can happen in a new plant because everything is new. Related to the types, yeah, we have to move through the range of types that we have to manufacture. That is a total of, let's say, around 10 different types. Yeah, the changeover times and the setup, that takes, let's say, at the start of the move into new types, a little bit longer than it normally will take. Yeah, we are, let's say, at around 50% of the types that we need to manufacture now.
That will also ease out in the coming quarters.
Okay. If you've done the other 50%, then after that, you don't have these hiccups as you've now had in this particular quarter.
Yeah, it will continuously improve. Also, there's a learning curve from the setup and all the challenges that you get, especially moving into the higher square mm cables. We are now manufacturing even 1,000 instead of the 630 we had in previous quarters and had the challenges more when you have to move upwards. Yeah, it looks also with the 1,000 square mm that we are, let's say, managing now the right output and without issues.
Got it. Moving on. Alexander, I thought I heard you say that you are almost fully or fully booked. I assume that relates to 2026. So based on what you have in your order book right now, you can achieve the targeted 600 km in 2026, or do you need one or more project wins? It wasn't quite clear.
No, with the latest win of project Gennaker, we have the order book to manufacture at least 600 km. We also see a small shift from 2025 into 2026, and that is also supporting to even perhaps get above the 600. Let's say the 600 is the target we are looking for in 2026, and that order book is there.
Got it. On the optical fiber activities, can you update us where you stand on that transfer and the whole optimization? Has that now been done in Q3, or will there still be a tail end of that process in Q4?
Now, the transfer of capacity into the location in Poland has been completed. From now on, we are in the stage that production is getting into a more normalized level and at the right volumes. You will see in the coming quarters the pickup or the effect of that completion coming through.
Got it. Moving on to Smart Vision, very strong organic growth in Q3. Can you talk us through the trends throughout the quarter? Also, given the order intake, although that's not been disclosed, what should we expect for the near term for Q4?
If you look at the organic growth there, clearly we have highlighted also that machine vision and especially 3D had a strong quarter. You've seen some of our competitors also, let's say, moving at good growth rates. I think there's some good sentiment in the market in quite a few areas at least. The market segments where we have a good share and a good position, like in consumer electronics and battery inspection and a few more, but of course the wood industry, not to forget North America. These are key markets which have proven to be very solid in not only the third quarter, but also in the earlier part. That's something where we think also for the, let's say, near future, a similar trend can be seen.
I do not want to give a full outlook for 2026, but I think we are very well positioned for growth in this segment. That is on the machine vision side and similar on the security vision part, where we have in the past, we mentioned quite often that some of the growth was driven by larger size projects. What we currently see is that in the last couple of quarters, we consistently have larger size projects in our books. I think also there we see that with our proposition, we are able to get access on a more structural level to these larger size projects. Hopefully that is also going to be a kind of fixed part of the growth trend which we can see for the coming quarters.
Got it. Got it. My final question is on divestments. Can you talk a little bit about how far you are with the equity carve-out of digitization and possibly also some comments on where you stand on the other divestments? Have those processes started yet, or are you going to do them one by one?
First, to start with the digitalization, I think an important element is referring to your question earlier, what the progress is we are making. As I mentioned, as we see that the proof points of the improved structure and setup of our especially fiber optic activities is going to help us, of course, to get on the path of the execution of the divestment. Also there, we want to have certainty or we want to make sure that these proof points are actually getting back into a proper valuation. It is not something that we will have executed, let's say, tomorrow, but it is definitely on our list.
With regards to the bigger question, when we talk about the, call it the new ownership structure of electrification and what we presented in the CMD, of course, I mean, that's a couple of weeks after the CMD, but we are executing this in full force with full commitment as we're working on the carve-out related issues. It's a little bit too early to give more comments on where we actually stand, but it's in swing, let's call it like that.
Great. Thank you very much. Those were my questions. Thank you for your questions, sir.
Ladies and gentlemen, as a reminder, if you have any questions or follow-up questions, please press star one. When I move to Tais Holst, calling from ING, please go ahead.
Yeah, thank you, George. Good morning, gentlemen. Yeah, Harm, I got a follow-up question on Chase's first question. If I look at my notes from the August meeting, it's stating that the so-called sales funnel and the order pipeline looked very good for smart manufacturing. There was also a comment that orders arrived just outside of the second quarter, but it seems it didn't have a real impact on the third quarter. It is now November, so is there a trend that the tire OEMs place orders towards the end of the year? Is there kind of budget management effects? A second question in this one is, how does it come that TKH is so often wrong-footed by talking to clients about these orders?
Good morning, Tais. Thanks for your questions. The first one, it's not a trend that based on budgets that customers place orders at the end of the year. It is more an effect of what is, yeah, you could say the disturbances in the whole economic environment in the tire industry that is causing hesitations here and there and calculating business cases based on import duties that change overnight. That makes that decision-making processes take a bit longer time. That is, I think, more explaining why expected orders and projects that we actually were discussing in the first half of the year were delayed. That is moving ahead. I do not completely recognize your statement that we are always wrong-footed on the expectations on order intake.
We are still confident that the larger amount of projects that we are discussing will result in firm orders in the coming period. We mentioned in August that we had a lot of so-called handshakes. To convert that into orders, specifically when it comes to new factories, Greenfields that are located outside countries where customers already operate, that takes here and there some more time. It is just a delay effect. One side is the hesitation that was in the market certainly in the beginning of the year. Secondly, to change the plans and move them forward, that takes some time. It is still not the end of the year. I think we are still confident that it will result in work.
Yes, it is, of course, an effect that in Q3 we did not really see the uptick, but the project moved from Q2, definitely went into Q3. I think that part is still good.
Yeah. Okay. So it's also fair from my side to assume that, let's say, if the macroeconomic uncertainties continue, that, let's say, actual signing of orders could also take place at the end of Q1 or maybe even Q2 next year.
I think the orders that we mentioned or indicated in August, those are not related to the macroeconomic circumstances. That is more the complexity of Greenfields to start that up. That takes time. Indeed, if you talk about the total improvement in the situation, for instance, at the Tier 1s, that is obviously more related to the automotive industry in general and the macroeconomic circumstances. It is clear that longer term, customers really have to invest in new technology. Also, when you look at the sustainability, when you look at all these developments, longer term, it looks still very good, but on the short term, we are facing, yeah, the disturbances that we currently see in the market.
Okay. Yeah. Okay. Thanks, Harm. That's helpful. Yeah. The second one, it's also basically a follow-up on Martijn's question, but the EBITDA guidance specifically for the subsea business, above 17%, is that now based on, let's say, a theoretical EBITDA margin executing the factory on full utilization at full production, so not taking into account switching costs, back-to-back production gaps, testimonials, any specification controls from the clients? Meaning that in reality, the way we look at it from the stock market, that you cannot reach, let's say, the 17% EBITDA margin on a 12-month basis?
Yeah. We always have to take into account that there will be some changes in specifications. That is normal business, I would say, and that will also further normalize. It has normalized already in Q4. Our guidance will be based including this kind of, yeah, disturbances. It has been more extreme and above average in the past quarters.
How many different projects do you expect to produce in 2026?
I believe that will be 5.
Five. And the back-to-back?
Sorry. Part of that is continuation of the projects in 2025. If I look at really new projects, I believe it is between 2 and 3.
Yeah. You can do it also next to each other.
Yeah, absolutely. Yes. Yeah.
Okay. Okay. That's smoothing it out a bit. Okay. Yeah. That's helpful. Then, yeah, a final question referring to the discussions during the capital markets day. I think this question is for you, Elling, about the future divisional reporting structure. Have you already, let's say, decided to maintain a separate reporting with all the details as you currently have for the manufacturing and the vision division?
Tais, I always listen to you and your colleagues. I look forward to the disclosures in the future.
Okay. I take that as a positive, that it remains as it is today. Okay.
It will not be disappointed.
Okay. Great. Thank you.
Thanks.
Thank you very much, sir. We'll now move to Maarten Verbeek of The Idea . Please go ahead, sir.
Good morning. I'm Maarten Verbeek of The Idea. A couple of questions. Also like to get very briefly back on the order intake, Harm. If I understand you well, we are talking simply about a delay of signing and no cancellations or no downsizing of orders.
Yes. What we are currently discussing are projects, and we're already doing that for quite a while where, as I indicated, if you look at the sales funnel end of last year, when you look into 2025 and had your expectations and discussions, there you see that indeed projects have shifted in time. Yeah, I would say it's not a canceling, but those projects did not materialize in 2025. The total effect is indeed a lower intake in the first quarters. The outlook is certainly for the coming quarters is very good.
Okay. Thanks. Could you say anything about your operating expenses for Q4? Because you mentioned that still you have elevated cost at Eemshaven. But when you start to produce, I believe that incremental costs will be minimal. Looking at Q4, your operating expenses will be only increased moderately?
That's correct.
Okay. Okay. Looking at the CapEx expectations for this year, that still stands at some 20 million for the second half?
On the tangibles you referred to?
Yep.
Yeah. That's roughly more or less where we stand.
Okay. Lastly, with the developments within the offshore industry, no surprise that Netherbeek did not have any bidder. Apparently, there is modest appetite for the ARS7 in the U.K. Your sales funnel in the area cable, has that changed during the quarter?
No, that has not changed. It's still very positive and in line with what we disclosed at the capital market day.
Okay. Thanks very much.
Thank you very much for your questions, Martin. Next question will be coming from Thiebault Lenaerts of KBC Securities. Please go ahead, sir.
Good morning. Yeah. It's somewhat of a similar question with respect to the offshore. A company pretty early active in the supply chain. Also mentioned for the first time, lower demand in Europe. Other companies have been mainly focusing that the Americas, that the demand for offshore was there weak. Yeah, it does seem like the project Martin just mentioned that was canceled in Europe or that there were no bids for. Yeah. How are you seeing the developments right now in offshore? Because it does look that the supply chain, even in Europe, especially early in the supply chain, that demand has weakened a bit. My first question is with respect to that. A second question is basically with respect to the Q4 EBITDA outlook. Given that you assume a better performance than, yeah, second half 2024, you need a very significant step up.
I assume this will mainly come from the connectivity, but yeah, there is at least a $30 million step up compared to Q3. Would you be able to quantify where this exactly is coming from? Some will come from OpEx, some will come from higher revenues. Will this all be driven from the connectivity segment? Those are my two questions. Thank you.
I will take the first question. Yes, we have seen that some projects are, let's say, postponed. I would say they are postponed. They are not gone. Also important to remind you that we have a very high market share. I reconfirm that we are above 80% market share at the moment. I mentioned in previous meetings that that will not be our target for the future because then we have to build two additional plants and that is not in our plan. That gives a lot of additional headroom that if projects are moved, we are still quite safe, secure, secured that we will be able to have the right utilization in our plant. We have not targeted in our business plan to move that to the 1,200-km capacity.
For the medium term, we see that we will move above 700 km, and that looks still very, very comfortable in respect of the total amount. I do not have the detail, but I believe it is even more than 14,000 km. We are, let's say, in quotations and in negotiation. Yeah, that is a really big headroom. I believe it will not have a negative impact on TKH if there is a project that moves a few years or even some projects that would be canceled.
With regards to the second part or the second question you had about the guidance of the EBITDA for Q4, you're quite right that, of course, the biggest part of the growth has to come from the connectivity part. The question of its OpEx or other items, we already mentioned earlier that OpEx is not the main delta towards Q4. It's very much about, on one side, the output, so the related added value contribution in the fourth quarter coming out of that, as well as, as we highlighted at the half-year meeting, that part of the H2, and that's also in the fourth quarter. Part of the revenue is coming from services and accessories, which will be part of the revenue stream in the fourth quarter. That causes this combination causes for a substantial increase also in the Smart Connectivity part if you look at prior quarters.
Thank you.
Thank you very much for your questions, Thiebault. Ladies and gentlemen, as a final reminder, if you have any questions or follow-up questions, please press star one at this time. Okay. We do have a follow-up question coming from Maarten Verbeek of The Idea . Please go ahead. You have his open again, sir.
Yeah. It's Maarten again for the idea. Quickly, one additional one. You mentioned you were quite positive for the short to mid-term on your onshore cable activities. Even you mentioned that you were sold out, if I understood you well. Is it particularly driven by demand in the Netherlands or your expansion abroad?
It is specifically driven by the Dutch demand and from several customers in the Dutch environment in the Netherlands.
Sorry. Is there no risk that these projects once again in the Netherlands will be postponed due to all kinds of nitrogen or whatever regulations or opposition?
I believe that would be strange because they are today in a flow with a much better performance and having found solutions to work around the previous issues that were there. I believe it can always improve further the permit situation. Yeah, again, we are further preparing on growth also outside of the Netherlands, and that looks really positive. Also, as mentioned in the capital market day, we are really in a sweet spot there up to 220 kV. Yeah, there is a high desire from TSOs and DSOs abroad to work with us. We are, of course, looking also to further grow our capacity. We have still some room there, also in combination with the Eemshaven. We will address, yeah, as much as possible that we can realize.
The strong demand from the Netherlands is not holding you back to expand abroad?
No. No.
Okay. Thanks very much.
Thank you, sir. We have another follow-up question. This time again from Martijn den Drijver of ABN AMRO. Please go ahead, sir.
Yeah. Thank you, operator. Yeah. Just coming back to Maarten's question, the Lochem Plant had a recently installed production line. So when you mentioned that you were almost sold out, is that including that capacity, or was that still on the older capacity that you had? Just wanted to clarify that.
Yeah. I believe a good question. We are sold out in the medium voltage. In the high voltage, we are by far not yet sold out. We made good progress this year with high-voltage projects, mainly in the area where we did not yet need to use the new installed capacity for the stranding, of course. That is more future-related, where we move up further into higher square millimeter cables where you need different cable construction. By the way, we have our type tests realized on the, let's say, equipment that we have now installed. There we see not an issue that could happen with, let's say, not stable manufacturing or something like that.
Got it. My second question, it's a minor one, but can you talk a little bit about parking? Because I watch these LinkedIn posts, and it seems like parking has been doing reasonably well. Can you update us a little bit about the parking activities, especially since it's probably part of the divestment plan?
Now, to be honest, it's not part of the divestment plan. It is a fully integrated activity within the security vision business where we supply many, many technologies in the parking garage environment with high profitability, as is also the case for this parking guidance system. We automate the parking garages, and that is probably what you also continuously see in feedback in the posts that we are making. We really recovered that activity, and it's on the move. We have in the order intake some projects that are more than $10 million. It is part of the strategic position of the, I would say, smart security vision. Also, AI is an important solution there for automating, let's say, the environment of parking. It is a really strategic asset in the automation business.
I stand corrected. When you mention highly profitable, should we be thinking about the targeted A margins for electrification? Excuse me, for automation, are they in line with that?
Yes. I believe they are quite in line with that. We have a very high added value also in this segment. We changed a lot in the technology to lower our cost price to get a better performance per unit. I believe really, really good, yeah, innovation in that segment that it is not, it's a well-performing activity.
Thank you. Those were my additional questions.
Thank you very much, sir. As we have no further questions at this time, Mr. van der Lof, I'll turn the call back over to you for any additional or closing remarks. Thank you.
Thank you. Yeah. We are fully focused on our execution, especially, of course, Q4, but also preparing for 2026 with all the actions that we have in place related to the capital market day. We are really excited about, let's say, moving forward. I'd like to thank you all for the questions, good questions that have been asked, and also being in this conference call. Thank you very much.
Thank you very much, sir. Ladies and gentlemen, that will conclude today's conference. Thanks for your attendance. You may now disconnect. Have a good day and goodbye.