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Edited Transcript of KENDR.AS earnings conference call or presentation 5-Nov-19 10:00am GMT

Q3 2019 Kendrion NV Earnings Call

ZEIST Nov 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Kendrion NV earnings conference call or presentation Tuesday, November 5, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jeroen Hemmen

Kendrion N.V. - CFO

* Jozef Aloysius Johannes van Beurden

Kendrion N.V. - CEO & Member of Executive Board

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Conference Call Participants

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* Frank Claassen

Banque Degroof Petercam S.A., Research Division - Analyst

* Johan van den Hooven

NIBC Bank N.V., Research Division - Analyst

* Maarten Verbeek

The Idea-Driven Equities Analyses Company - Equity Analyst

* Mark Prins;ING;Equity Sales

* Martijn P. den Drijver

ABN AMRO Bank N.V., Research Division - Analyst

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Presentation

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Operator [1]

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Good day and welcome to the Kendrion's Third Quarter Results 2019 Analyst Call. (Operator Instructions) Today's conference is being recorded. Jozef van Beurden, Kendrion's CEO, will start today's call with a short statement, after which there will be time for questions.

At this time, I would like to turn the conference over to Jozef van Beurden. Please go ahead, sir.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [2]

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Here in the Mövenpick Hotel and on the webcast and on the phone, welcome to Kendrion's Q3 2019 results and INTORQ acquisition announcement presentation. My name is Jozef van Beurden, Kendrion's CEO; and with me here is Jeroen Hemmen, our CFO.

First, thank you for joining us here at short notice. Normally we announce our Q3 results by phone only, but given the strategic importance of the INTORQ acquisition announced this morning, we felt that a presentation and a webcast highlighting the merits of the transaction would be appropriate.

First, this morning's agenda. We will start with Jeroen, who will review our Q3 2019 and first 9 months of 2019 results. I will then give a brief update of the progress we are making towards our strategic plan that we announced in August of last year. And then we'll talk about the announced INTORQ transaction in some detail, the strategic merits, a summary of the transaction terms, our proposed financing and the transaction timing. Finally, I will discuss the outlook for Q4 and 2019 and beyond, and then we'll go to Q&A. But let me start by drawing your attention to the following. Sorry, the slides do not progress or should I use the keyboard? Okay. Sorry about that.

So let me draw your attention to the following. Certain statements contained in this presentation constitute forward-looking statements. These forward-looking statements rely on several assumptions concerning future events and are subject to uncertainties and other factors, many of which are outside the company's control that could cause actual results to differ materially from such statements.

I now hand over to Jeroen for the business review.

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Jeroen Hemmen, Kendrion N.V. - CFO [3]

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Okay. So good morning also from my side. I will take you through the financial overview of the third quarter and the first 9 months of 2019. First some background to the key figures of Kendrion.

In the third quarter, the ongoing weak market circumstances affected revenue in our Automotive as well as our Industrial activities. Consolidated revenue in the quarter decreased 4%, and year-to-date revenue is 8% lower than in the first 9 months of 2018. Besides the lower revenue, also the reduction in our inventory of finished goods affected our third quarter income especially when compared to the same quarter in 2018 when our inventory sharply increased. A lower production of finished inventory reduces the amount of production costs that are absorbed on the balance sheet and hence, impact income.

The 3% lower cost that we realized in the third quarter could not fully offset the above 2 effects, leading to a normalized EBITDA of EUR 10.8 million, which is 20% lower than last year. Our total staff costs were 4% lower in the third quarter, which is fueled by cost measures taken in our Automotive activities in 2018. We have, in the meantime, further identified areas for efficiency improvements in an annual amount of EUR 5 million. Most improvements are in the indirect staff area and will be implemented as from the fourth quarter in 2019, which will impact in 2020. The savings will not impact our investments in ACES, industrial brakes and China. And the total amount of corresponding nonrecurring costs are expected to end up at EUR 3 million, of which EUR 700,000 have been reflected and normalized in the third quarter results.

Cash flow developed positively in the third quarter with a normalized cash flow -- free cash flow of EUR 7.8 million. Cash flow was driven by inventory reductions realized in Automotive as well as in Industrial and as well strict capital control. Investments in the first 9 months were EUR 15.2 million, around 15% below depreciation. Kendrion anticipates 2019 investments to end up slightly below depreciation. Our financial position remains strong, with a solvency of 47% and a net debt-to-EBITDA ratio of 1.7%.

I will now proceed with the Automotive activities. Automotive headwinds continue with 4 -- EUR 5.6 million, 6% lower global car sales in the first 9 months and 3.4% in the third quarter affecting our Automotive revenue. The year-to-date staff costs are 8% lower than last year, as earlier indicated, largely caused by cost savings realized last year and as well adjusting capacity to the lower revenue level.

Despite the weak current trading, our pipeline and R&D project portfolio is developing well with an increased market interest in our smart actuation products, which combine actuation and control. This is evidenced by our first commercial contracts for our battery cooling system, which improves the range of an electric car. Also, China develops well with over 20% year-on-year growth on the back of new project -- product launches.

Despite the strict CapEx control, we continue our investments in production lines for projects that we have won in the recent years, which include a particle filter for China, new active damping applications in Austria and a piston cooling valve in Germany. Then to close my part of today's presentation. I turn to the Industrial activities.

Our Industrial markets were resilient in 2018 and the first months of 2019, but we now see lower activity levels and destocking at our major customers. The weak German manufacturing industry is affecting revenue in all 3 business units with the impact on Industrial Drive Systems being partially offset by stronger demand for industrial brakes in China. On the back of the higher demand for brakes, the Industrial revenue increased 35% in the third quarter in China.

This concludes the financial review, and I'll now give the word back to you for the operational update and the acquisition we have announced this morning.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [4]

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Thank you, Jeroen. As you've just heard, the global markets continue to be challenging. The weak market affected our revenue as trade tensions and their broader impact on consumer confidence continued. In Automotive, the market slowdown continues with decreasing vehicle sales across the globe. And in the Industrial market, Jeroen just mentioned, resilient in 2018 and the first months of '19, we now see lower activity levels and destocking. This difficult trading environment inevitably puts our short-term results under pressure.

I want to emphasize how important it is that we have simplified and streamlined our organization, decreasing our costs significantly over the past 3 years. We will maintain our focus on further improving operational effectiveness and containing cost levels. We have decreased staff levels -- staff costs with another 4% compared to the same period last year, and also just mentioned, identified further areas for efficiency improvements of EUR 5 million on an annualized basis for 2020, which excludes the INTORQ synergies. At the same time and equally or even more important, we will continue to invest in the longer-term opportunities in front of us, our areas of focus.

Now a few words about that before I will talk about the INTORQ transaction. In Automotive, we focus on actuators and valves that help enable autonomous, connected, electrified and shared driving, the so-called ACES. In Q3, we added significantly to our project pipeline as we continue to win new projects in both China and Europe. Importantly, we won the first commercial contract for our battery cooling valve and control system, 1 of our 6 new Lighthouse platforms. This valve helps to keep the temperature of batteries in electrical vehicles at the optimal temperature, hence extending its driving range and longevity.

China continues to be a bright spot with around 30% year-over-year revenue growth in the third quarter, up from 21% growth in the first half of 2019. We continue to invest in China and now employ 189 staff members in Suzhou, up from 163 a year ago to facilitate our substantial growth in the region.

And this brings me to the third focus area, industrial brakes for robotics. In this area, we announced a significant transaction this morning. Kendrion is to acquire INTORQ to create a leading industrial brake company within our group. First, the transaction highlights. As announced this morning, Kendrion will acquire INTORQ for a consideration of EUR 80 million on a cash and debt-free basis. This translates into a multiple of 10.4x EBITDA based on INTORQ's fiscal 2018, 2019 earnings, and 8.0x EBITDA on those same earnings if we consider the expected run rate synergies. Strategically, this strengthens us in 2 of our 3 focus areas. It substantially strengthens our position in industrial brakes and it further expands our footprint -- our fast-growing footprint in China. We've identified significant and tangible synergies and expect double-digit EPS accretion in the first year of the transaction. In addition, the addition of INTORQ will increase the share of Industrial revenue in the group from 37% to 44% on the 2018 pro forma basis.

In terms of financing, we have a committed bridge financing of EUR 75 million in place to fund the transaction and anticipate refinancing this with a combination of equity and debt. Our share buyback program that we started on August 14, 2019, has been canceled per today, November 5, 2019, as a direct result of this transaction. You will understand that if we finance the acquisition with a combination of equity and debt, then it doesn't make a lot of sense to keep buying our own equity. So without the -- and I want to stress that, without the INTORQ acquisition, we would not have discontinued that share buyback program. It is directly related to it. The closing of the transaction is subject to customary conditions and is expected in the first quarter of 2020.

Next let's drill down a little on these highlights, starting with INTORQ itself. INTORQ is a leader in industrial brakes with great strength, especially in spring applied brakes and electromagnetic brakes and clutches. In their fiscal year ending at the end of Q1 2019, they had a revenue of EUR 57 million selling around 1 million brakes. INTORQ has around 300 employees in 4 factories around the world: Aerzen, Germany; Shanghai, China; Atlanta, Georgia; and Pune, India. INTORQ has a significant market share in brakes for geared and servomotor, electric forklifts, wind power, cranes and hoists and elevators & escalators. They sell using their own sales force and utilize a global network of 63 sales partners in 49 countries.

So how do all these strengths complement Kendrion's position in brakes. From the overview just discussed, it's clear that there is a compelling strategic rationale putting INTORQ and Kendrion IDS together. First, it substantially strengthens our position in the market for industrial brakes, one of our areas of focus, where good growth is available. It also further expands our footprint in China, where we have great momentum in both automotive and in brakes for industrial robots. INTORQ's strength in spring applied and electromagnetic brake products is complementary to Kendrion's strength in permanent magnet brake technology. We will offer our customers a full range of brake technologies.

It expands us geographically. On top of Europe and China, we will be present in the U.S. and in China. We will be stronger in shared market segments, including electric motors, wind power and elevators and add several complementary market segments, including geared motors, forklifts, cranes and hoists. Our improved market position and product range offers ample opportunity for cross-selling across the globe, and we will strive to achieve operational efficiencies with integration of selected manufacturing sites. We expect that to result in substantial cost synergies of more than EUR 2 million per year, which leads to a transaction that we expect to be double-digit EPS accretive from year 1.

So all in all, a long list of strategic benefits, but at the same time, short-term operational and financial benefit. The transaction is expected to lead to a more balanced revenue mix between Automotive and Industrial parts of our company. And on a pro forma 2018 basis, we will move from the 2/3 automotive and 1/3 industrial revenue mix that we have had for many years to one that's closer to 45% Industrial and 55% Automotive. And the proportion of revenue that's part of our growth initiatives will also increase.

A few more points about the synergies. We have identified substantial tangible and concrete run rate cost synergies of more than EUR 2 million per year. We intend to integrate selected manufacturing sites in Europe, China and the U.S. and anticipate overhead cost savings in, for instance, IT and insurance. The transaction will give rise to amortizable goodwill for income tax purposes and is expected to lead to annual tax payment reductions with a net present value of around EUR 6 million. This number is not included in the cost synergy figure. We will strive to implement most of these synergies during 2020.

Next, a few words about financing. As we mentioned, we have a committed bridge financing in place of up to EUR 75 million to fund the transaction. We do anticipate refinancing the bridge with a combination of equity and debt. At the same time, the share buyback program we launched on the 8th of August 2019 will be canceled per today, and we will continue to invest in our organic growth opportunities in the ACES, in brakes and China.

Now before I go to outlook, let me share with you 2 slides that attempt to capture the significance of this transaction for Kendrion from a strategic perspective. As you know, in terms of strategic intent, our main objective is to deliver sustainable, profitable growth. Our medium-term targets are a return on invested capital of at least 20% and an EBITDA margin of more than 15% by 2023. This strategy is currently supported by 2 main pillars: one focused on growth opportunities, and one focused on optimizing profitability. Growth opportunities are automotive brakes and China, and our so-called cash engines, and that's a very deliberate word. It's not a cash cow but a cash engine are the Industrial business units of ICS and IMS who are active in areas such as machinery, industrial, transportation, energy distribution and fluid control. The foundation of this strategic building is formed by our excellent people around the world.

Now with this transaction, we will transform this picture. With INTORQ as part of Kendrion, we believe that our strategic house is now supported by 3 pillars: an Automotive growth pillar, representing around 55% of our revenue; an Industrial brake growth pillar, representing about 25% of revenue and an Industrial cash engine, representing around 20% of revenue. It is our view that this puts Kendrion in a better and more balanced strategic position than before.

Next let's go to the outlook. The overall sentiment regarding the global economic outlook continues to be weak, and Kendrion expects the pressure for its automotive activities and industrial activities to continue in Q4 and into 2020. The medium and long-term outlook is unchanged and remains good for both the Automotive group and the Industrial activities.

In summary, we face the future with confidence. Remain confident about this -- our business fundamentals with our main objective to deliver sustainable profitable growth for the business in the medium to long-term and reiterate our medium-term targets of a return on investment of at least 20% and an EBITDA margin of more than 15% by 2023.

That concludes my prepared remarks. And I now would like to hand it to go to Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

(technical difficulty)

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Unidentified Analyst, [2]

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And then impacted as you have been?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [3]

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Yes. Well, just a few things. I don't want to go too deep into [diesel], as you can probably well imagine, but their financial performance has resembled ours on the brake side, actually quite well. So as we mentioned, there's good growth available in brakes. We've seen that at INTORQ as well. In terms of their profitability levels, similar to what we see on the industrial side, so quite healthy. We've given you the multiples and the revenue and the acquisition price, so you can probably get a bit of a feel for what that is from those numbers. And also in line with us, I mean they are a sizable brake company. They're clearly not immune to the overall economic environment that will part -- so they have seen very similar pressures on the top line as we have.

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Unidentified Analyst, [4]

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And how long -- and who are the selling shareholders. And how long has this company been around?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [5]

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So the company is originated as a buyout, a spinout from Lenze around 2005 by 3 gentlemen who are the owners of this company. They will continue in an advisory capacity. It is a, I would say, very friendly and well-managed transaction. So they are clearly going to help us with integration and everything, but they will step aside.

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Unidentified Analyst, [6]

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Is there an earn out? Or are -- okay.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [7]

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No earn out.

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Unidentified Analyst, [8]

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And then on the cost savings, the EUR 2 million you envisage, do you expect to have restructuring charges to get to these savings?

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Jeroen Hemmen, Kendrion N.V. - CFO [9]

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It's -- yes, we will incur nonrecurring costs. And probably the ratio will be close to 1 to effectuate those synergies.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [10]

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Yes, Martijn den Drijver for ABN AMRO. I realize that you don't want to disclose too much about INTORQ, but maybe a sales breakdown of the 3 product groups that they have, give us a bit more insight of the sales breakdown? Maybe also per geography just to give us a bit of a sense.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [11]

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Yes. I'll try to be a bit helpful on that. So first of all, if you look at the product technologies, the vast majority is spring applied brakes. That is really where they are, they're very strong, just as with us. If you look at our product set or product breakdown in IDS, as we call it, that is -- the vast majority is permanent magnet brakes. Now it's interesting because these are 2 different technologies of -- with different advantages in terms of torque, in terms of power density, in terms of size, and they're very complementary. So we have been competing with them in the past, but not really head on in the sense that some applications are typically more suitable for spring applied; ours is more for permanent magnet brake. So it's a very nice complementary product offering that we have.

Geographically, they are mostly in Europe, but also with quite a nice footprint in China. We've been growing our brake business in China substantially over the past couple of years. We've doubled in size on the brake side in 2019 alone on the back of the investment in production facilities. They have started there a little bit earlier. So they are already quite present in China. As a result, post the integration of INTORQ, a couple of years ago, our Chinese revenue, group revenue was around 3% to 4% of the overall group revenue 3, 4 years ago. We are now up to 6%, 7%. And with INTORQ, that's going to be 8%, 9%. So China will become 8% to 9% of group revenue post this acquisition, both on the back of our own organic growth and the success that they have had. So also from that perspective, as I highlighted in the presentation, we feel that this is complementing us quite well.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [12]

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Then going back to the run rate synergies. I understand that facility in Germany is actually brand-new 2017, major refurbishment expansion. If I look at the U.S., there in Atlanta, you're in Indiana. How do you expect those synergies?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [13]

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Yes. So a couple of things to say about it. So there's more than just that. But in Aerzen, we actually have a small facility in Aerzen as well. They do have a modern quite large that's there. Today, that is their headquarters. So you will not be surprised if we say we're going to take our small facility in Aerzen and move that into theirs. That's one. In the U.S., there in Atlanta, that's a rather small facility. We are in Shelby, North Carolina. It's a couple of hours drive. It's also there, we are looking at integrating their smaller production facility and our bigger one in North Carolina.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [14]

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Okay. And then moving onto the cost savings, the EUR 5 million in annualized savings in 2020. Is there any impact of that already in Q4? Or would that be too positive?

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Jeroen Hemmen, Kendrion N.V. - CFO [15]

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I think that would be too positive, minor impact, minor impact.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [16]

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Minor, you say 10% of the savings or...

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Jeroen Hemmen, Kendrion N.V. - CFO [17]

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No.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [18]

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Less?

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Jeroen Hemmen, Kendrion N.V. - CFO [19]

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Yes.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [20]

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All right. You also mentioned that to realize those savings, you have about EUR 3 million in restructuring charges. Is there -- are those charges all going to be incurred in Q4 or also in 2020?

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Jeroen Hemmen, Kendrion N.V. - CFO [21]

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So probably spread over Q4 and the first part of 2020.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [22]

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Okay. And then the final one, obviously, a tough market, you say no signs of improvement. But if I look at your Automotive, Q1 was minus 13%; Q2, minus 11%; Q3, minus 5%. So the decline is decelerating.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [23]

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Yes. That is -- so I'm also an optimist. So that is the positive and you're right. So it is certainly decelerating, but it's still going down. Of course, compared to where we were, it feels long ago, but it's just 5 quarters ago, we are still at a pretty low level. But you're right. And so that is certainly encouraging. Another one, I mean the news of this morning, we saw that the German machine building index, which is a good proxy for industrial activity is at a low level, but it's slightly up from September. September was a 10-year low, by the way. So it's slightly up. So also there, you could argue maybe we have hit the bottom. But the size for improvement from our perspective, and of course, we have limited visibility because we talked -- we had Tier 2 to Tier 1, but are not really present.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [24]

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Just a follow-up on that. So in your discussions with your clients, you see no indication whatsoever?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [25]

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Well, we don't have a lot of visibility. Usually, it's a running quarter. So we don't see any indications that is necessarily going to go further down. But we have also not seen indications, and this is also because of geopolitical tensions persist, the trade tension between the America and the U.S., Brexit still not resolved, all this uncertainty overhang is still there and we see that.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [26]

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Okay. And then final one on the financing. You obviously mentioned equity and debt. What kind of debt are you thinking of?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [27]

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Jeroen, you want to?

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Jeroen Hemmen, Kendrion N.V. - CFO [28]

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Yes. So it has not been finally decided. We're thinking about taking out private placement.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [29]

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U.S. or European?

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Jeroen Hemmen, Kendrion N.V. - CFO [30]

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Probably Europe (inaudible).

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Unidentified Analyst, [31]

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[Mark], (inaudible). Firstly about -- you mentioned a leverage ratio of 1.7, that's excluding IFRS 16. I do believe it's somewhere like 2, including IFRS 16. So what's exactly your current leverage ratio and definition? And secondly, what kind of ratio do you want to have after you have concluded this refinancing?

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Jeroen Hemmen, Kendrion N.V. - CFO [32]

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Sorry, the first part I didn't get.

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Unidentified Analyst, [33]

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You mentioned a leverage rate of 1.7, that's excluding IFRS 16.

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Jeroen Hemmen, Kendrion N.V. - CFO [34]

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Correct.

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Unidentified Analyst, [35]

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Going to meet some 2 including IFRS 16. So my question is what's currently your definition of the leverage? You have a max up to 3? And then secondly, where do you want to be after you've refinanced this acquisition?

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Jeroen Hemmen, Kendrion N.V. - CFO [36]

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Okay. So the 1.7 indeed excludes IFRS 16 and also in the definition of what we strive for and also the governance with the banks. IFRS 16 is excluded. We have a level of 3 with a temporary spike of 3.5 for a period of half a year. After the acquisition, we target to remain well below 3. And obviously, afterwards, deleveraging based on the positive cash conversion in both companies.

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Unidentified Analyst, [37]

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Okay. You mentioned 2 streams of savings. First of all, of INTORQ, creating the synergies and secondly, stand-alone. Is there also some overlap because we talked about the 2 facilities in Aerzen, we talked about facilities in the U.S., is there some kind of overlap? Or should we simply add these 2 together?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [38]

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No, you can add them together. Explicitly, we've separated them out explicitly.

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Unidentified Analyst, [39]

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And then about -- you mentioned that INTORQ's also some kind of competitor to you. Are there certain clients who do dual sourcing, whereby now certainly they currently source from you and INTORQ, and in future, they might say, we have to find another partner for sourcing?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [40]

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Very limited. And that has to do with the fact that the dominant technologies are so different. So you can never exclude this altogether, but it's certainly not material.

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Unidentified Analyst, [41]

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And then lastly, going back to the Q3 results, and particularly the order you won with respect to the battery life of the battery cooling valve. Could you give some more information about the size, when it will start, so to say, if you still have to make investments?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [42]

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Yes. So yes, first of all, on the nomination side, we will in -- when we do, as we always do, when we announce our Q4 and full-year results, we give visibility into how this has played out over 2019. We had a good quarter in Q3. We added quite a few projects. This was one of them. Not the biggest, certainly not, because it is a valve that helps, it's part of a system to keep the battery and operate at optimal temperature. Now there's a lot of discussion, an enormous amount of investment and a lot of attention in electrified vehicles, but the fact of the matter is the market share in absolute terms today is still quite low. So it's not massive. But it is an important win because it puts us on the map as one of the suppliers into a system that ultimately is going to be, in our view, in every single hybrid and electrical vehicle because that battery temperature is critical. So therefore, we took this out. Not necessarily, it's not the hundreds of millions of euros of lifetime revenue, but it is a Lighthouse Project. It is our own IP, it's scalable to other platforms within the electrified market. So it's significant from that perspective.

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Unidentified Analyst, [43]

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And again, just for information purposes, when do you start to ship the first ones?

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Jeroen Hemmen, Kendrion N.V. - CFO [44]

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2022.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [45]

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Yes. So typical 2 years ahead of us. A question here at the front, I think, yes.

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Mark Prins;ING;Equity Sales, [46]

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Mark Prins, ING Bank. First question, on the cost savings as in stand-alone, so without the synergies coming from INTORQ, where are we now in terms of cost saving? You've had already a program within Automotive since 2018, I think, now you do an additional 5. I mean where are we in terms of, is there more possible afterwards if needed? Or are we already kind of cutting into the bone, if we do more on top of this 5, if needed. Hopefully, I'm wrong but...

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [47]

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I hope you are wrong, too.

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Mark Prins;ING;Equity Sales, [48]

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Right.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [49]

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So we're not cutting into any bones. So these are real efficiency measures that you need to think about standardizing processes, centralizing processes, so those type of things. And it is also excluding cost measures such as adjusting direct labor capacity to lower volumes. So especially the latter, we can breathe more if -- should that be needed. But yes, so far, we refrained from cutting into any bones. So as mentioned, these cost savings will not limit in any way our investments in the ACES, in the electric brakes, electromagnetic brakes and in China. Maybe a small addition, you said we had a program like that in automotive, it was group-wide. Initially, we talked about simplification. So trying to streamline the company more, trying to make sure we were less complex for all sorts of reasons. And initially, not even necessarily just for cost, but more for decision-making speed, et cetera. So we have -- that has helped us reduce about EUR 20 million of cost. And now on top of that, we're announcing an additional EUR 5 million. And it's important to emphasize, Jeroen said it, but just to emphasize, it is what we call on the indirect labor side. So this is overhead, and process, it is around processes. It's not related to production.

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Mark Prins;ING;Equity Sales, [50]

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And then the second question is, unfortunately, I'm not an engineer. So can you help me place this acquisition in terms of your own technology? You say it's complementary. It sounds actually quite different in magnetic brakes and spring applied brakes. So I was wondering to what extent you already have some kind of in-house technology in this area as well? Or is this actually completely new but complementary?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [51]

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No, we have a little bit of spring applied breaks ourselves as well. But it's 5%, 10%, order of magnitude. The same is true on the INTORQ side, they don't have a real permanent magnet brakes but they are developing all sorts of brakes that potentially could also compete with us. So there's some of that, but it is not material. And from that perspective, also there, you can now -- we can basically start repurposing the both R&D teams to the areas where they're already very strong. So these are all the intangibles as a result of complementary project portfolio that we haven't really quantified in any way in terms of synergies or valuation or anything, but it's real benefits that will help us in the long run as basically building on a great position.

The other thing that we haven't really talked a lot about, I mentioned it a little bit is if you look at the sales force, as you look at the cross-selling opportunities. So by definition, we now go into customer array with our portfolio of permanent magnet brakes. But if you go in and you have the full slate, you will find more opportunities is our expectations. Now again, this hasn't been valued at all, but this is the type of stuff strategically that in the long run in a growth market, I think is going to help us significantly.

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Mark Prins;ING;Equity Sales, [52]

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And to what extent is INTORQ also exposed to the kind of high-growth kind of robotics usage of these kind of brakes or emergency brakes?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [53]

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Very similar to us. And there also have permanent magnet breaks and spring applied brakes. But certainly, when it comes to smaller collaborative robots where price points are going to be important, the slightly simpler, slightly more standardized spring applied brakes are very well suited to these types of new markets. So we feel also there with the full slate of products, it will give us a leg up in what is going to be a very large market in the next couple of years.

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Mark Prins;ING;Equity Sales, [54]

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Right. And then coming back to your earlier comment about, let's say, how their top line was similar evolving like yours. I would have expected, also given, let's say their good margin that they make on this product, that due to their size, they would have been able actually to outgrow you historically over, let's say the last 1, 3, 5 years. But that is not the case. They experienced exactly the same top line...

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [55]

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Yes. They are also -- size-wise, they're similar to us, from a brake perspective. So I mean within levels of accuracy. So it is quite similar in terms of the revenue, quite similar in terms of growth, quite similar in terms of profitability, not exactly the same, but similar, but very complementary when it comes to markets when it comes to technology, when it comes to geographical footprint, so.

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Mark Prins;ING;Equity Sales, [56]

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And then one last question from my side. You hear quite different views in the market from automotive suppliers, be it, I mean from sensors to other applications, in terms of how their end market is behaving. And sometimes there are green shoots, and everybody gets excited, which is reflected in the equity markets. Now that's our fun. So how guys -- I mean I've heard your answer before, but I mean can you shed some light of how you see that evolving? Because obviously if car sales remain subdued for the coming time, you guys might still have some growth of inventory correction. I mean if car sales do 0%, your inventory correction, if it has been hard on your side, then you still -- actually, you guys can post growth. Do you see those kind of moves already in your end business? Or is it actually quite similar still to the minus 5.6% on car sales totally that you mentioned in the press release?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [57]

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Yes. My answer maybe should complement a little bit. But initially, when this all starts, as a Tier 1, Tier 2, more at the back end of the supply chain, you get an additional whiplash to the negative. When -- if and when growth resumes, we would expect the opposite of that. I think that whiplash effect is now mostly damped out. So that means that even if there's still a bit of pressure, there is no more destocking. In industrial, I have to be qualify that, there's still a little bit of that going on, I'm afraid, because we are not as long into a recessionary environment as we are in automotive. So and then the other thing, of course, we -- I also read the same thing in automotive, you see a bit of mixed messaging. Although if you really look at the big Tier 1s, the sizable companies, I think the picture is very clear, and that is we are in this energy transition phase with automotive. It's going to be there for a while. I think ultimately, this will stabilize. The opportunity is really into electrification, autonomous driving, now that's also the stuff we are very excited about and we're happily investing in. I don't know, you have anything you want to add?

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Jeroen Hemmen, Kendrion N.V. - CFO [58]

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No.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [59]

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You are talking INTORQ, right?

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Mark Prins;ING;Equity Sales, [60]

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Yes.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [61]

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Yes, yes, yes.

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [62]

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Yes, Johan van den Hooven, NIBC. A few questions. The first one is about Christmas. Can you mention a few new names to Kendrion or perhaps a few names where you expect cross-selling? Second question, sort of indication of the equity part of the refinancing? Third question is you expect the deal to close Q1, I guess consolidation then 1st of Jan, 1st of March. And the fourth question, I think in the past, you've mentioned that the scale of Shelby was not optimal or could be better?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [63]

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Sorry, what?

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [64]

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The scale of Shelby in the U.S. Does this acquisition bring, well, much more scale, or is it a nice add on in the U.S.?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [65]

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I should have written down all your questions. So the first, on the customer side, so I do not want to belabor that too much, but I will mention one additional customer. I already told them this was a Lenze spinout, so you can imagine that there's a strong relationship there. We have, by the way, some sales into Lenze as well, but that is clearly, as an example, there are more, it also gives us a bit of a cross-selling opportunity. Remind me the second?

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [66]

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Equity part.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [67]

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Equity part, Jeroen?

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Jeroen Hemmen, Kendrion N.V. - CFO [68]

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Sorry, the exact question?

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [69]

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The equity part of the financing, debt equity.

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Jeroen Hemmen, Kendrion N.V. - CFO [70]

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Yes. Which percentage? Not finally decided, but we have disclosed that we will make use of -- added the 10%, which is allowed and/or the treasury shares that we have.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [71]

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Yes. And the third was also a financial question, I think?

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [72]

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Yes, timing of consolidation?

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Jeroen Hemmen, Kendrion N.V. - CFO [73]

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Time of consolidation in the first quarter of 2020 expected.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [74]

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Yes, we will start that. Of course, when you start merging production sites, that may take a little bit longer, but we'll get on with it right away. I mean the synergies are well identified, quite tangible, and it's a matter of planning it and implementing it.

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Jeroen Hemmen, Kendrion N.V. - CFO [75]

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And for Shelby, it's a nice add-on.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [76]

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Yes, it's a nice add on. By the way, so the [noise in] Shelby is actually one of our largest sites within the group. So in itself, there's more than -- we have quite a few sites that are smaller than Shelby that are performing really well. So the scale, there is not a scale issue in Shelby. Having said that, a nice add-on in terms of revenue, of course, always helps.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [77]

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Yes, Frank Claassen, Degroof Petercam. Follow-up on the financial side. You talked about the tax deductibility of the goodwill amortization charges here. Could you help us, how big do you think the goodwill amortization related to this acquisition will roughly be?

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Jeroen Hemmen, Kendrion N.V. - CFO [78]

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Yes. So the tax benefit is the fiscal amortization of -- for tax purposes, which is because of the structure of the target company. That's depreciable. So that for the coming 10, 15 years, we will limit our tax expenditure. So for the goodwill amortization under IFRS does not exist. So goodwill will remain on your balance sheet forever unless you have to impair it. We will have to value customer relations, technology and things like that. And that will lead to a purchase price allocation, which we need to amortize, but that will be done as from the moment from -- as from the moment of consolidation in the first quarter of 2020.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [79]

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Okay. And antitrust issues, you indicate first quarter, so you don't expect any issues, but you need to have approvals from U.S. (inaudible)?

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Jeroen Hemmen, Kendrion N.V. - CFO [80]

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Mainly Austria and Germany, and we expect no issues there, no.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [81]

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Martijn den Drijver, ABN AMRO. Just to follow up on this fiscal issue or solution. I was just wondering, you're not buying the shares then, it's an asset liability deal?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [82]

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No. So no, we're buying the interest. So only for fiscal reasons, it's an asset deal, but other than that, it's -- so legally, it's -- we buy the 100% of the interest, as we shared you.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [83]

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Now I'm confused. It's either you buy the shares or you buy the assets and the liabilities. Asset liabilities you have (inaudible)...

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [84]

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Yes, it's the typical German construction. So we don't buy the separate assets. But fiscally, it is treated as an asset deal. And I think that, that is what I can say.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [85]

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And why have you and the sellers opted for this structure then?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [86]

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Because also within Germany, this is for shareholders, for the (inaudible) kind of structure. It's a fiscally attractive structure. So you see that all the time. Also actually, the Aerzen acquisition that we have done in 2011, the smaller Aerzen facility that we have at the same topic, that's also there. We benefited from the depreciation of goodwill for tax purposes. It's a common German structure.

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Martijn P. den Drijver, ABN AMRO Bank N.V., Research Division - Analyst [87]

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And then another one, do you guys have an automotive CFO yet?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [88]

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Yes. Yes, and he will start as from the 1st of January 2020. Thank you.

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Unidentified Analyst, [89]

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I had another question about China. You've shown, let's say, you show continued growth there. And I was wondering towards -- I mean when should we start to assume that the production facility there and now also potentially included with INTORQ is actually also producing as efficient as you do in your other operations, i.e., growth is nice, but actually, let's say, when do the productivity actually make the margins that are up to group standards?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [90]

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Yes. Well, the thing is what is clearly, if you grow 30% year-over-year, with the pipeline that we have, and as I mentioned, we've actually, in Q3, again, added to that pipeline quite substantially. We are currently in an investment mode. If you strip away the investments, we don't really do that. But if you were to strip away the investments from the actual performance of that site, that site is performing very well. But we don't really do that. This is a growth area. That is one of the reasons why we are so keen on maintaining our ability to invest in these types of trends. Even though now it's difficult economically, because we know that ultimately, that is going to pay a significant dividend. So I would say, a clear example, so say on the brakes side, we have invested there. We are investing in the local production line. We used to produce it in Villingen and ship it over. Now we're producing it locally. You need to -- of course, you need to invest in the line itself, you need to invest in the people, you need to train the people. So there's quite a bit of training going on between our German facility and Suzhou that all that is weighing down the financial performance. But if you're prepared to look beyond that, the performance is already very good.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [91]

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Marteen Verbeek, The Idea. Couple of questions. Will this acquisition change your dividend policy that you might just only propose a base stock dividend or still with...

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [92]

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So the only thing to say about that is we -- our dividend policy is very clear. We pay out typically between 35% and 50%. And of course, sometimes we deviate from that, so usually on the upside; that won't change, in my view. Now it's not necessarily my decision, but if it is mine, then I would say we will keep that dividend policy intact.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [93]

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One of the slides, you mentioned what your long-term targets are, amongst others, the ROI of 20%.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [94]

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Yes. Yes, more than 20%.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [95]

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But it was an asterisk, but was no statement what that asterisk meant. But if I'm right, when you announced these long-term strategic targets you mentioned it excludes acquisitions. Is this the case for INTORQ acquisition as well?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [96]

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Well, to be fair, we haven't really looked at it yet in the context of this acquisition. Of course, we will. And if that means that we need to look at that and adjust it, we probably will. But for now, we've only just announced it. The fundamentals behind that ambition, the EBITDA, everything that's related to the implicit growth stance.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [97]

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Okay, fine. Then INTORQ has operations in Shanghai. Most likely, you will try to integrate that with your own and create synergies, but INTORQ doesn't own 100% of that facility. Will you be buying out the remainder shares of that facility to create the synergies?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [98]

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Yes. Yes. So we buy 100% of the shares on the moment that we close the deal. It is anticipated that the company owns 100% or otherwise, it will be shortly thereafter. That agreement has been made. Yes.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [99]

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Then a couple of years ago, Kendrion implemented the simplify strategy, whereby it looked at all the facilities worldwide, thereby it closed facility in Pune and in Brazil, if I'm right.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [100]

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Brazil, yes.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [101]

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If I now will also look at the facility of Pune, of INTORQ, is also very, very small. What are your thoughts about that? Will you still be implementing the strategy, and that would imply closing of the facility?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [102]

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It's a little bit early to say. I mean this is -- their facility is actually brand new. They have a bit of revenue there, which is growing happily and healthily. It is an interesting market. So we also had a facility in Pune, which was in a completely different situation. So it's hard to compare these 2. So my initial answer would be it's a great beachhead in a market that yet -- we yet have to explore. That's how we'll treat it. We'll see how this develops over the coming years.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [103]

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And then lastly, INTORQ is a well-recognized brand. Will you keep that brand? Or will you be relabeling every towards either the Kendrion brand or other way around?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [104]

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No, there -- from a product perspective, we will most probably keep the brand because the products are well recognized and well known, just as we do with other products. On the corporate side, it'll -- it's going to be Kendrion. So that's how you typically deal with these types of acquisitions. Any more questions?

Okay, then I'll thank you all for your presence here at short notice. And if you have any follow-on questions, then you know where you can find us. Thank you very much.

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Operator [105]

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That ends today's call. Thank you for your participation. You may now disconnect.