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Edited Transcript of KENDR.AS earnings conference call or presentation 5-May-20 9:00am GMT

Q1 2020 Kendrion NV Earnings Call

ZEIST May 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Kendrion NV earnings conference call or presentation Tuesday, May 5, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jeroen H. Hemmen

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

* 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

Edison Investment Research Limited - Research Analyst

* Maarten Verbeek

The Idea-Driven Equities Analyses Company - Equity Analyst

* Tijs Hollestelle

ING Groep N.V., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Kendrion N.V. First Quarter Results 2020 Analyst Call. (Operator Instructions) Today's conference is being recorded. Joep 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 Joep van Beurden. Please go ahead.

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

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Thank you very much, and good morning, everybody. Welcome to Kendrion's Q1 2020 Results Teleconference. My name is Joep van Beurden, Kendrion's CEO; and on the call, albeit in a different location, is Jeroen Hemmen, our CFO. I'll start the meeting with some remarks regarding our Q1 results, after which we'll have time for Q&A.

We will post a recording of this call and of the Q&A on Kendrion's website as soon as is practicable.

We'd like to draw your attention to the fact that certain statements contained in my remarks and in the answers to your questions 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.

Before reviewing our Q1 2020 results, let me start with giving an update on the impact of COVID-19 on the way we operate at Kendrion. Our priority in dealing with the pandemic is the health and safety of our employees, their families, customers, suppliers and all other stakeholders. Five of our employees have been infected with COVID-19 and all have fully recovered, so we currently have 0 known active cases. We've had no instance where one Kendrion employee has infected another.

As the COVID-19 pandemic first affected our operations in China and subsequently in Europe and the U.S., we have implemented strict operating procedures to continue production in all our factories around the world in a safe and responsible way. This procedure includes working from home for all employees for whom this is possible, strict separation between production shifts, keeping enough distance between colleagues, professional cleaning and disinfecting between shifts, temperature screening and the use of face masks in almost all our factories with a goal to apply this everywhere. We are also looking at the layout of all our production lines, introducing safe working distances to ensure our operating procedures can be implemented for the long term, if necessary. In all of this, we've acted decisively, and we've acted early, making full use of the experience of our operations in Suzhou and Shanghai where the pandemic was first felt.

We continue to deliver to our customers around the world, which leads me to our Q1 results. As you have seen from our press release of this morning, we've had a solid first quarter. Our operations in China were affected throughout the quarter. And in the final 2 weeks of March 2020, we saw a strong negative impact on revenue and order intake for our automotive business in Europe and the U.S.A. Our revenue increased by 1% compared with last year to EUR 109.6 million, and our normalized EBITDA increased by 8% to EUR 13.7 million, helped by a good contribution from newly acquired INTORQ.

Over the past years, we have built a robust and lean organization, maintaining its focus on operational effectiveness and cost levels. This is always important and of course, especially now. The EUR 5 million cost-saving program initiated at the end of 2019 was fully effective as from the start of 2020 and another EUR 600,000 of annualized structural cost saving was added during Q1. Total one-off costs amounted to EUR 1.1 million, of which EUR 0.5 million was related to the acquisition of INTORQ and EUR 600,000 related to the cost-saving measures.

As of January 1, 2020, we operate in 3 business units: The Automotive group, Industrial Brakes and Industrial Actuators and Controls. Within the automotive group, we have continued to make progress with our 5 lighthouse platforms, including significant traction in sensor cleaning and sound actuators. We are limiting capital spending as much as possible, giving priority to investments that are required for successful and timely launching of the projects for which we have received nominations over the last years.

In Industrial Brakes, we completed the acquisition of INTORQ on January 8, 2020. The acquisition strengthens our position in the markets for Industrial Brakes, where we see good growth opportunities. The integration of INTORQ was complete in schedule. And as of the 1st of April 2020, INTORQ and Industrial Drive Systems, formerly IDS, are combined into one Industrial Brakes business unit. The realization of the targeted EUR 2 million run rate for cost synergies as per the end of 2020 is on track.

China had a tough first quarter as demand, especially for passenger cars, decreased significantly when large parts of the country went into lockdown during Q1 2020. Our pipeline is strong, and we expect strong growth in China from 2021 onwards when 2 large new automotive projects will start production. And our focus on liquidity notwithstanding, we continue to invest in production equipment, our local workforce and supply chain.

With INTORQ now part of the Kendrion group, our revenue mix has changed. The automotive group represents about 55% of group revenue and Industrial Brakes, around 25%; and Industrial Actuators and Controls, around 20%. The Automotive Group and Industrial Brakes focus on organic growth while industrial actuators and controls focus on profitability and cash generation.

Next, let me review our financials. As mentioned, revenue increased by 1% compared with the first quarter of 2019. Excluding the revenue contribution of INTORQ, organic revenue at constant exchange rates decreased by 12%. In the Automotive group revenue decreased by 12% compared with Q1 2019. As the underlying market for passenger cars stabilized the levels seen in the second half of 2019, the impact of the pandemic was largely responsible for the decline. Specifically, revenue was impacted in China and in the last 2 weeks of March 2020 in Europe and the U.S.A.

Industrial revenue increased by 23% compared with Q1 2019. Excluding the contribution of INTORQ, revenue in the industrial activities decreased by 11% compared with Q1 2019. Revenue in Industrial Brakes without INTORQ, so essentially the former IDS, decreased 7% year-over-year. Industrial Actuators and Controls experienced some delays in its supply chain affecting the first quarter revenue, which decreased 13% year-over-year. The destocking we experienced in Q4 2019, when industrial revenues decreased by 16% year-over-year, has ended.

Our normalized operating results before depreciation and amortization, or EBITDA, increased by 8% to EUR 13.7 million compared to EUR 12.7 million of Q1 2019. EBITDA margin rose to 12.5% as a percentage of sales.

In the Automotive group, the reduced cost base, in combination with aggressive cost control in the last weeks of March 2020, compensated for the lower revenue. This means our automotive EBITDA margin in Q1 increased year-over-year despite the lower revenue.

In our Industrial business, profitability also went up, driven by the cost measures initiated toward the end of 2019 and a good contribution from INTORQ. The effective tax rate in Q1 2020 was 29.7% compared to 25.1% in Q1 of last year's.

Next, finance charges increased by EUR 0.3 million due to the funding costs of the INTORQ acquisition. Normalized net profit before amortization of acquisition-related intangibles was EUR 4.7 million, unchanged from Q1 2019.

Next, a few words about our financial position. Kendrion's financial position is robust. The net debt position at the end of first quarter was EUR 131.8 million compared with EUR 47.4 million at year-end 2019. The EUR 84.4 million increase was the result of the EUR 78 million net purchase price of the INTORQ acquisition and the free cash flow of minus EUR 6.4 million in the first quarter. The free cash flow includes EUR 1.5 million of one-off cash expenditure related to restructuring costs and transaction costs for the INTORQ acquisition that has been normalized in the results.

The leverage ratio, based on the definitions in our loan documentation, which excludes IFRS 16 lease liabilities, is 2.3 at the end of Q1, which means we are operating well within the financial covenant level of 3.5 agreed with our banks.

We invested EUR 3.8 million in the first quarter, well below the depreciation of EUR 6.4 million. We expect 2020 investments to be below depreciation as we focus on cash flow and prioritize investments that protect existing and future revenue. Kendrion solvency ratio remains strong at 44.1%.

As to the outlook for Q2 and beyond, as we move into Q2, we expect our automotive business to be impacted heavily, especially our revenue related to the production of passenger cars. So far, the markets for trucks, buses and agricultural products has been less affected and our automotive production in China is approaching pre-COVID-19 levels.

In our industrial businesses, revenue is more stable. And in some areas, such as actuators for food production and medical applications, much stronger than before. How the pandemic will affect the global economy is highly uncertain and most market research and consulting firms expect a significant decline in global GDP this year.

Until there is more clarity how the pandemic will affect the economy and our markets, we will continue to focus on the preservation of our cash liquidity.

We've taken a range of measures to reduce costs and protect our financial position. Short-term work has been put into effect in several of our European facilities and Kendrion senior management, including our Supervisory Board, has agreed to a temporary salary reduction of 15%. We have suspended all uncommitted and nonurgent capital expenditure, and we are making use of any relevant facilities or arrangements provided by the various national authorities to assist companies through the COVID-19 pandemic, including deferred payment of taxes.

Our product pipeline is healthy, and the work on all future products is continuing. We have the robust liquidity position and are confident we can withstand the pressure currently being applied to our business. Despite the unprecedented economic situation, Kendrion remains positive about its business fundamentals with its main objective being to deliver sustainable, profitable growth.

And I now open the line for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll now take our first question from Tijs Hollestelle from ING.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [2]

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My first question is about the remark in the press release about the demand in China being back to pre-COVID levels. Yes, as you can then imagine, this is a rather sensitive remark because the whole investment community is looking at sort of how the recovery will look like post the COVID-19 situation. So can you give us a bit more background of what type of demand it is? Is it catch up? What do the customers in China actually really see in terms of demand? That's the first question.

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

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Okay. So yes, it is indeed one of the things where many people look at, including us. So if you look at our China operation, which, by the way, also on the back of the INTORQ acquisition is around 10% of our revenues. So it also matters, it used to be 3% to 4% and now it's 10%. So it certainly matters.

If you look at Automotive, then you saw indeed that in the throes of this pandemic, the demand from Chinese customers was really low, at around 15%. So that's coming back relatively quickly. And I'm parroting market research firms that everybody can follow. Currently, we will see that demand at around 70%, 75% of what you would normally expect, if there was such a thing. And that is replicated in our -- what we see in the call-offs that we have. It's a bit better also because there was maybe a bit of a backlog that we -- that needs to be filled. So it's approaching pre-COVID levels. It's not quite there yet. But the remark in China is also -- of course, we also have an Industrial business and that is actually reasonably strong, especially on the brake side.

So if you look at our overall operation in China today, we are around what we expected before this whole pandemic started and budgeted or expected levels. Now the translation of that into how the recovery in Europe and the U.S.A. will be is very difficult. And I would hesitate to read too much into it or to model that one-on-one immediately, although in itself, it is a positive signal that the recovery, at least in China, is as fast as it is going.

Now the final thing to say is, of course, we're still at the start of all this. Things could change, but that is what we currently see in our Chinese operation.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [4]

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Okay. That's very clear, too. Yes, and then the second question from me. The bank covenant calculations. You already mentioned you have to adjust both EBITDA and the net debt for the IFRS 16 impact. That was [112] in IDS. What are the other potential adjustments? I assume restructuring charges, but are any others to calculate the leverage ratio?

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

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Jeroen, can you take that?

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Jeroen H. Hemmen, Kendrion N.V. - CFO & Member of Executive Board [6]

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Yes, I will take that. So you're right. So one-off costs, restructuring costs, but also one-off transaction costs related to the INTORQ acquisition are excluded from the EBITDA. And obviously, also, we take into account 12 months of EBITDA from INTORQ. So not only the 3 months as part of the Kendrion group, but also 9 months prior to that. Those are the most important differences to the normal leverage ratio as you would calculate it.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [7]

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Okay. And what was the 12-month adjusted rolling EBITDA at the end of the first quarter?

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Jeroen H. Hemmen, Kendrion N.V. - CFO & Member of Executive Board [8]

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You can calculate it. So it's -- the net debt, excluding the IFRS lease, was [EUR 118 million] around about. So that will -- if you calculate that back to the 2.3 that I've mentioned, then you will arrive at an EBITDA a little bit over EUR 50 million.

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Tijs Hollestelle, ING Groep N.V., Research Division - Research Analyst [9]

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Okay. One final question. Can you give us some kind of indication on your currently expected, let's say, employee cost level in the second quarter, and that's probably a range, but can you give us some guidance on that? And if possible, also on the other operating costs?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [10]

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Yes. Let me take that one and then maybe, Jeroen, you can add to that. But Tijs, it's generally really difficult and almost impossible to answer. And the reason I say that is that if you look at Q2, as I mentioned in my prepared remarks, so you look at Automotive, certainly on the passenger car, it is very tough, and you have to combine that with an extreme short visibility window. Normally, I have a couple of months and now, that is far less.

Now the good news for us within Automotive, 1/3 of our revenue there is related to buses, trucks and agricultural and farm equipment, which is more stable. And actually, on the farm side, food needs to be produced reasonably healthy. So that balances things out a little bit. But all the same, twice per week, we -- Jeroen and I sit down with all of the operating entities in automotive and we look at what the situation is and we then decide how much goods are bought or short-term work we apply because that is highly dynamic, and we have a lot of flexibility there.

So we respond to this changing picture. Sometimes it's up, sometimes it's down, twice per week, and that directly affects, obviously, the overall cost. So it is reasonably flexible. It is not just on the direct side that we do this. We're also looking at indirect level. So we're also looking at sales. We're looking at R&D. We're looking at finance. We're looking at HR. So we really, really go up and down with how the situation is evolving.

On the Industrial side, it's more stable. It's also at a better level. And I'm not saying it's not affected by the pandemic. It is, but it is not in the same way as what you see in Automotive. Then within Industrial, there is a couple of segments, like medical and also food production, that are actually a bit stronger. Now these are niche segments, but everything helps. And China, as in the first part -- to your first question is essentially back at pre-COVID level. So it's a mixed -- a total mixture. There is some good stabilizing elements in the revenue picture for Q2. On the Automotive side, we're looking at this almost every day. It's very difficult to tell anything about the overall cost level.

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Operator [11]

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We can now take our next question from Frank Claassen. Frank Claassen removed himself from the queue. (Operator Instructions)

And we can now take our next question from Maarten Verbeek.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [12]

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It's Maarten Verbeek from The Idea. A couple of questions. First of all, last year, on a quarterly basis, you mentioned each time what your revenue growth in China was and how many people you had employed. Could you provide the information for the first quarter?

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

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Maarten, no, we purposely didn't do that. By the way, we usually do this at half year anyway. But this would be such a mix between the underlying revenue growth that is happening and COVID that I think it's largely a meaningless number.

Now let me try to be a bit more helpful here. What we said when we did Q4 and full year '19 is that last year, China clearly had -- from a revenue growth perspective, we had a good year. It was around 30% year-over-year growth. Based on the pipeline, in 2020, we said we expect that growth -- that there will be some growth, but not at the same level. But in 2021, and I mentioned that also in my remarks, we do expect strong growth because we have 2 substantial automotive projects ramping in that time frame. And as far as we now look at the situation in China and also if you look at the way we invest in that, that is unchanged. So forget for the minute the situation around COVID, of course, which has affected Q1 and as you see that in our revenue numbers, and you see that in the Automotive and to some extent, in the Industrial as well.

We are now back at normal pre-COVID operation, at least for now. We do expect at that normal level a small growth, but a bit of organic growth. But next year, '21, we expect much stronger.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [14]

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Concerning new projects, do you see that projects are being canceled or even are being delayed? And with respect to new awards, what do you see there? Are still awards being awarded or, also in this case, are they being postponed?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [15]

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Yes. What we see is that if you look at the projects, as you know, we are, for many years now and ever-increasing fashion, we are focused on the ACES, Autonomous Connected Electrified Shared driving. Lighthouse projects, we see ever more intensity in investing in that and even more so now that this pandemic has hit. So that is -- continues probably with even more determination than before.

We see a little bit less intense activity on what we call classic business. So upgrades and updates to the traditional combustion engine. The good thing about that for us is that what that potentially means is that our current classical production lines could run a bit longer. So we see the automotive world shifting even more to electrification, hybridization, autonomous driving. That, for us, is an opportunity. If there's a little bit less investment in upgrades for combustion engine means that our current business would run longer. So that's fine, too.

Nomination-wise, we're doing absolutely fine. There is no visible impact on the way this is going. Now it's early days, so you know we talk about numbers once a year. We just did that in Q1. But for now, I'm optimistic about the pipeline and the pipeline development that we've had over the past 2 years. And I think this year could be just as good as last year, if not better.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [16]

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Would you see now that automotive manufacturers are starting up production again although at a low level? Do you have some insights at the inventory level? Or are they already ordering, although at lower levels again?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [17]

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So the short answer to the first question is no, we really don't. Now typically, in startup situations, there's usually -- and that's maybe also when we talk about China, we see actually the recovery in the volumes that we are delivering, is probably a little bit ahead of where the demand recovery is. So that could potentially happen in Europe as well. But the honest answer is, as I mentioned earlier, the visibility, yes, plans are starting up but the visibility into how this is going to play out is -- that's a day-by-day thing. So it's very difficult to speculate on how that actually is going to play out over the next couple of months.

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Maarten Verbeek, The Idea-Driven Equities Analyses Company - Equity Analyst [18]

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And lastly, could you more or less guide where you expect CapEx to be for this year?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [19]

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Jeroen, you want to say something about that?

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Jeroen H. Hemmen, Kendrion N.V. - CFO & Member of Executive Board [20]

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Yes. So we said significantly below depreciation. Last year, we did around about EUR 19 million. I think currently a good guidance would be a bit below that level, and that includes then INTORQ, but it's still quite a long time to go in the year, obviously. So we will prioritize all the investments that are needed to do the successful launches of the products we have won -- the projects that we have won. And other than that, we are extremely stingy.

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Operator [21]

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We can now take our next question from [Frank Anwitz] from [Monolith.]

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Unidentified Analyst, [22]

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A few questions, also a follow-up of Maarten's questions. Could you elaborate what clients tell you then if they start-up their production facilities, what they expect from you.

And another question regarding the projects, do you see any delays of planning that clients say, "Well, we ordered the -- we planned the new products to get them in Q1." For instance, 2021, but now we expect them to receive in the third quarter some postponements in the start of new projects.

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

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Yes. Thank you. Thank you very much. So yes, what do they expect of us? Basically, to summarize that very shortly. They expect us despite the lack of visibility to respond instantaneously to -- if they need product. And we're trying, of course, it's also in our interest. So we're trying to -- that's why we try to sort of exercise this maximum flexibility. So we are absolutely ready to produce.

I talked at the start of my prepared remarks on all the measures we've taken to make sure that we can operate safely and that if we happen to have a COVID infection that we do not infect other colleagues. So far, we've been successful at that. So we're ready to go and our customers basically say, "Look, as soon as we order something, we want it." And so far, that is how we operate with these guys. In terms of projects and delays, we haven't seen those. Now could that happen? It also depends a bit on how this is all going to play out, perhaps. But we talked about -- earlier, we talked about, for instance, 2 sizable projects that we expect to ramp in 2021. And so far, that is still on track to ramp as is planned. So far, everything remains as was originally planned.

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Unidentified Analyst, [24]

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Okay. And maybe a question on production. Can you tell how many production lines are stopped at the moment?

And maybe on Kurzarbeit, how can you plan that? I mean is it allowed to point out just a few people for Kurzarbeit? Or is it related to production lines or divisions or -- can you tell me a little bit more how it works?

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

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Yes. So if you look at -- within automotive, so the most -- we have a couple of plants that are largely dedicated to passenger cars. That's our operation in Villingen, in Malente, in Eibiswald, to name 3. So they are most heavily affected. So for instance, Markdorf is more related to commercial vehicles as is Prostejov, our facility in the Czech Republic. So different plants have been affected in different ways.

The way this Kurzarbeit works is, well, one, you need to have a very strong relationship and very strong communication with your employment councils, which we have. The benefit of, of course, this happening in China first is that we could see it coming. And we have really prepared well on the back of the experience there, not just on the health and safety side, but also to make sure that we had our operations in maximum flexibility mode, if you like, before this all started in Europe, which was the second half of March. But then there is actually quite a bit of flexibility. And you can then say, okay, we want -- because within those factories, there's -- every product has a dedicated line and you can say, "Look, I need this line for 1 day a week." That means the people employed on that shifts are in 80% Kurzarbeit and 20% in the factory or "I need it for 2 days a week." or et cetera. You get the point. And that is the thing we're trying to gauge very, very frequently, twice a week or more.

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Operator [26]

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We can now take our next question from Frank Claassen.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [27]

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Frank Claassen, Degroof Petercam. I missed part, so you may already have discussed this, but 2 questions, please. First of all, do you envisage any new restructuring charges for any new cost savings for the rest of 2020?

And then secondly, what about your receivables? Have you seen an increase in overdue receivables? And how do you protect yourself from potentially clients going into default?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [28]

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Yes, Frank. No, we haven't, I think, talked about this. Maybe, Jeroen, can you take those?

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Jeroen H. Hemmen, Kendrion N.V. - CFO & Member of Executive Board [29]

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Yes. So on the receivables, actually, that has been quite steady, a bit better than if you look at the overdues and at year-end when a lot of customers are delaying for the balance sheet, but I've not seen, based on the current numbers, that it's increasing. But obviously, we are anticipating that it will be. So in addition to what we normally do on credit tax and on following overdue items, yes, we have intensified that work, yes, really based on our tracking of payment behavior and things like that. And also yes, going quite quickly into drastic measures that if customers don't pay, yes, at one point, then they will also get no deliveries, things like that. So but currently, it is not -- it has not increased. And sorry, and your first question was related to?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [30]

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On the restructuring.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [31]

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Expected restructuring charges, yes.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [32]

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Restructuring, yes, sorry. Yes -- so no, not related to any further structural cost savings. I do expect some one-off costs still related to the acquisition of INTORQ for the realization of the synergies. And that will come later this year.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [33]

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And can you go...

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [34]

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Sorry, Frank?

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [35]

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Could you quantify that roughly how much we can still expect?

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Jeroen H. Hemmen, Kendrion N.V. - CFO & Member of Executive Board [36]

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Yes. So we have said that we expect EUR 2 million run rate synergies and to realize those that we will -- the expectation is that we will also incur EUR 2 million in costs. So my current expectation would be that around 3/4 of that, I would expect in 2020. But it's an estimate.

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Operator [37]

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We can now take our next question from Johan Van Den Hooven.

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Johan van den Hooven, Edison Investment Research Limited - Research Analyst [38]

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A few questions from my side. The first one is about the development of INTORQ. Can you give us some more details about the organic development of INTORQ and perhaps also the pipeline of INTORQ compared to the sort of Kendrion industrial activities?

Second question is about the staff costs. Tijs already asked the question about the amount for it, but is there more room to maneuver with your flexible staff?

And last question is about the competition. Have you seen any changes with smaller companies struggling more than you?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [39]

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Yes, Johan, thank you. So on INTORQ, but I would say more generically in brakes, so not just INTORQ but also our former IDS. There's 2 elements. One is that, I think, generically, but this dates back to, if you remember the second half of 2019. Also, the German Machine Building Index was down and there was sort of -- the overall economy was down a bit, certainly when it came to the industrial segments. So that was still with us, although the destocking -- and that also affected the Industrial Actuator group, although the destocking that we saw in Q4 has ended.

If you look a little bit more fundamentally, then the organic development in brakes and not just INTORQ, but also at IDS, is very promising. We talk a lot about robotics. There is currently, for instance, in China, a big push towards wind power that we -- and we are strong in supplying brakes for the -- for wind power equipment. So we see good benefits there. In the United States, there is a promising pipeline of that -- where we expect growth. We see the same in China. So the combination of INTORQ and IDS, our Industrial Brakes units. Yes, organic growth is looking really good if you're prepared to move beyond this pandemic.

One more thing to say about that. One thing that we expect, and we're not alone in that, is that the potential change that you could see in the way global supply chains operates is that for various industries, there may be more manufacturing repatriated to Europe and to the U.S. that will point to the [actual] deployment of more robotics. As you know, that has been a spearpoint of us for a long time. So we're also expecting that, that trend could help us in brakes.

On staff cost, as I said, we talked a bit about it also when Tijs asked that question. Very difficult to quantify that, but the whole notion is that with this short-term work, that we have these different regimes and different systems everywhere. It's different in the U.S., it's different in Europe, in Germany, it's different from Austria, from Czech Republic, from Romania. But we have this deployed everywhere. And we literally look and on both direct and indirect side and as often as we can and need to see if we can reduce cost or we should increase it because we can actually produce more revenue. So it's highly flexible. And this is one of the things that Jeroen and I and our team spend a significant amount of time on, so that we get the maximum benefit of this flexibility both ways, that if it is a week where you say, "It's a bit worse than what we thought."

We then reduce the fall-through to the bottom line by reducing our costs as much as we can, but also what is the best protection is revenue. So if we see opportunities and we get those in medical, we get those in food production on the industrial side, then we quickly move to add shifts and to make sure that we can actually produce and deliver. That is the name of the game where we are currently.

The competition was your final question. So a bit early. We'll see how this plays out. So today, there isn't a lot of activity around M&A. I don't think anybody in the current market is really looking at that. There's other stuff to be working on. But as soon as we come out of this or as there's a little bit more visibility as how this is going to play out over the coming quarters, it could well be that there may be some opportunities. But so far, it's a bit early.

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Operator [40]

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At this moment, there are no further questions. I would now like to hand the call back to Joep van Beurden for any closing remarks. Please go ahead, sir.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [41]

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So thank you all very much for your attention and for your questions. If there's any follow on, then we are available, and you know where to find us. Thank you very much.

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Operator [42]

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Thank you. That concludes today's conference. Thank you for your participation. Ladies and gentlemen, you may now disconnect.