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Edited Transcript of KENDR.AS earnings conference call or presentation 13-Aug-19 11:00am GMT

Half Year 2019 Kendrion NV Earnings Call

ZEIST Aug 21, 2019 (Thomson StreetEvents) -- Edited Transcript of Kendrion NV earnings conference call or presentation Tuesday, August 13, 2019 at 11:00:00am 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

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Presentation

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [1]

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Well, good afternoon, everybody, here in the Crowne Plaza and on the webcast. Welcome to Kendrion's Q2 and First Half 2019 Results Presentation. First of all, I'd like to apologize for the short delay. We had some technical problems with the webcast, but hopefully, that's all fixed now. My name is Jozef van Beurden, Kendrion's CEO; and with me here is Jeroen Hemmen, our CFO.

First, this morning -- this afternoon's agenda, I will start giving a little bit of context as to the market and trading environment we are currently in and then Jeroen will take over reviewing our Q2 and first half 2019 results. I'll give an update of the progress we are making towards our strategic plan that we announced in August of last year. And finally, I will discuss the outlook for 2019 and go to Q&A.

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

I will now proceed with trying to give some context as to what is happening in the Automotive and Industrial market as we continue to be in an environment of significant geopolitical and economic uncertainty. First, Automotive. I think it's fair to say that we are currently in a tough spot when it comes to the automotive trading environment. I'm sure many of you will have seen the FT article yesterday about what is called a crisis in the German car industry, affecting the entire automotive supply chain.

This slide illustrates what is going on in the short term, globally. Overall, in the first half of 2019, year-over-year car production was down 6.7%. The United States held up relatively well, which we, at Kendrion, also experience looking at the revenues in our Shelby facility. Europe is weak at minus 5.6%, and China is particularly poor, as car production dropped 13.5% in the first half compared to last year. And that is not just affecting our Chinese facility in Suzhou, many of the higher-end cars, for instance, Daimler make their way into China. Volumes in that segment are hard hit, affecting our European operations.

Next, let's have a look at the industrial environment. First, as a reminder, it's difficult to analyze the so-called Industrial markets. These are many different segments, large and small, and Kendrion, with around EUR 150 million in revenue in the Industrial markets, is active in around 30 different segments. What we have learned over the past years is that indicators like the German machine building index and various purchasing managers indices, such as published on this slide are a good proxy for the health of all these Industrial segments combined.

This slide paints a clear picture. Without going in too much detail, this graph combines manufacturing activity and several purchasing managers' indices for several large European countries and the euro area. Above 50 indicates expansion and below 50 points to contracting activity. And this picture correlates well with our own experience. Over the second half of 2018, the Industrial markets weakened somewhat, but we're still at a good level. We shared as much at our Q4 results.

In the first half of 2019, we've seen headwinds in Industrial. I want to stress that we view the difficult environment in both Automotive and Industrial as cyclical. There's a lot going on in the world with increasing tension in the trade relationship between the U.S. and China and, of course, the continued uncertainty as the Brexit saga drags on. So our response is clear. We are battening down the hatches to weather the storm that we're in, and we are using our lean and simplified organization in combination with our strong financial position to continue to invest in the opportunities that we see for the medium and for the long term.

In the strategic update, I will say more about that. But before we get there, I hand over to Jeroen for the business review.

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Jeroen Hemmen, Kendrion N.V. - CFO [2]

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Thank you, Jozef. So good afternoon, everybody, also from my side. I will take you through the financial overview of the second quarter and the first half year of 2019. First, I will provide some background to the key figures of Kendrion, and I will then proceed by giving some more insights on the performance of the Automotive and the Industrial markets activities.

Slide 8 shows Kendrion's key figures for the second quarter and the first half year of 2019. As indicated by Jozef, Kendrion has been in a tough trading environment since the third quarter of 2018. As a direct consequence of this trading environment, we saw our second quarter revenue decrease with 9% at constant exchange -- rates of exchange. For the first half year of 2019, revenue decreased 10%, also at constant rates of exchange.

Lower revenues affected profitability with the EBITDA margin decreasing from 14.6% in 2018 to 11.7% in the second quarter of 2019. Both from a revenue and profitability perspective, the second quarter largely resembles the first quarter of 2019. The quality of the profit, however, did improve as costs were almost EUR 1 million lower in the second quarter of -- in the second quarter, and in the first quarter, the profitability was helped by increased production of inventory, while in the second quarter, we saw a significant reduction in inventory.

Staff costs were 5% lower in the second quarter hereby more than overcoming annual wage inflation and the ongoing capacity additions in China. Lower staff costs were fueled by simplification measures we took in Automotive last year as well as adjusting capacity to the lower production levels.

Total costs decreased 1% as our other operating expenses were affected by periodic cost fluctuations, higher depreciation charges and one-off consulting costs. These one-off consulting costs are related to a project we started to make our global IT organization more effective and also more efficient. Kendrion continues to take a long-term view when it comes to investments and spending, but will in the current market circumstances, reduce discretionary spending to an absolute minimum. The reduction of discretionary spending is enforced by the Executive Board.

The second quarter financials were affected by several one-off effects that have been normalized in the results for increased comparability. The 3 effects are: firstly, after a careful review of our legal risk position and increasing legal costs, we settled a claim from a U.S.-based supplier for an alleged breach of contract for an amount of EUR 1.6 million in the second quarter; secondly, we increased the provision related to the German tax audit with EUR 300,000 after having received the final settlement offer from tax authorities in Northern Germany, the tax audit in the south of Germany is still open; and finally, we realized a one-off EUR 2 million financial gain in the P&L following the liquidation of legal entities in Switzerland and China, which operations were stopped as part of the simplification program. This item is merely a shift from equity to the income statement.

Normalized free cash flow for the first 6 months ended up at negative EUR 2.7 million, substantially below the EUR 4.3 million in 2018, when profitability was higher. Second quarter free cash flow was EUR 3.3 million positive, driven by reduced inventory levels as our increased focus on working capital started to bear fruit.

Investments in the first half year ended up at EUR 10.2 million, which is 15% below depreciation. And due to strict CapEx control, Kendrion anticipates 2019 investments to end up in line with depreciation. Our financial position remains strong with a solvency of 47% and a net debt EBITDA ratio of 1.7%.

I will now proceed with the Automotive activities. As mentioned before, Automotive revenues were affected by market headwinds, including 10 straight tariff conditions, WLTP, U.S.-China trade tensions, Brexit and stricter emission regulations in, for example, India and China. All this fuels consumer uncertainty across the globe.

First half year Automotive revenues ended up 12% below the first 6 months of 2018 at EUR 135 million. EBITDA decreased 30% with the EBITDA margin ending up at 10.8%. Staff costs were 8% lower than last year, as earlier indicated, largely caused by the simplification measures taken last year. The total costs were affected by periodic cost fluctuations and the already mentioned one-off consulting costs related to IT. We continue to invest in additional resources in China, where our pipeline indicates substantial growth in the coming years. Since the second quarter of 2018, we have added 30 full-time equivalent personnel in the Chinese organization, of which the majority are engineers and supply chain specialists.

Then to close my part of today's presentation, I turn to the Industrial activities. As indicated by Jozef earlier, some softening in the Industrial markets is also visible. The weakening market conditions affected all our 3 business units in the Industrial activities. Total Industrial revenue decreased 4% in the first 6 months to EUR 82 million. The EBITDA margin went down from 16.7% last year to 13.2% in the first 6 months of 2019.

Industrial Control Systems decreased 5% compared to a strong first half year of 2018, and a decrease in ICS was partly caused by a delay in 2 new customer projects in the flow control activities. Both customers, however, have indicated that production will start in the second half year of the -- second half of the year.

In the second quarter, ICS also has successfully insourced a valve production line for our flow control activities. The future production of these valves will take place in Romania, and this will make ICS less dependent on a third-party supplier and will also generate substantial cost savings.

For IDS, the weaker machine-building market led to a 2% revenue decrease, and our investments in growth -- in IDS where we produce brakes for robotics continue despite the cyclical downturn. Finally, IMS decreased 5% due to the aforementioned market circumstances.

This concludes the financial review, and I now give the word back to Jozef.

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

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Thank you, Jeroen. As I said before, we've had a difficult first half of 2019 as the global markets continue to be challenging. The 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. As we are experiencing continued market-related headwinds, Kendrion will maintain its focus on further improving operational effectiveness and containing cost levels. But at the same time, we will continue to invest in the longer-term opportunities in front of us, our areas of focus. Now let me talk a bit about these.

In Automotive, we have a strong focus on products relevant to development of autonomous, connected, electric, shared vehicles, the so-called ACES. I will drill down on this in the next couple of slides. We have implemented our new functional automotive organization to increase commercial visibility and to further optimize our production facilities. In electromagnetic brakes, we see a significant number of new inquiries for brakes for collaborative robots, and Phase 2 of production capacity expansion in Suzhou is on track.

In China, we again posted double-digit revenue growth despite automotive headwinds like we did in Q1, as multiple new production lines continue to ramp up. We are investing significantly both in organization capacity and capabilities, as Jeroen just mentioned.

Next, I would like to spend a bit of time to discuss some of the specifics behind the opportunity in Automotive and our activities there. Or in other words, how are we addressing the future of automotive? Over the next 10 to 20 years, we expect big changes to effect the Automotive industry. Autonomous driving, connected vehicles, electrification of the powertrain and shared mobility, the so-called ACES, are mutually reinforcing developments in the Automotive industry. Combined, they disrupt the automotive value chain impacting all stakeholders and represent a real opportunity for growth in the systems, subsystems and components that help enable the ACES. In short, we expect that in the next 10 years, the Automotive industry will face a magnitude of change greater than it has experienced in the past 100.

Let's look at some numbers. This slide presents a scenario around 2 of the most important disruptions in the sector, electrification and autonomous driving by the market research firm, IHS Markit. I believe both electrification and autonomous driving will happen. I also believe that these are long-term trends that will play out over the coming 10 to 20 years. From this analysis, it follows that pure electrical driving, meaning without an internal combustion engine and true autonomous driving, meaning without a driver will take many years. However, the need to work on the enabling technologies is now. We see a clear and strong shift to both hybrid and battery electric vehicles by 2025, with hybrid engines to grow significantly.

Full electric cars may get a larger than 50% market share, but it will take another decade. For autonomous driving, it's expected that true autonomous driving, so we're talking about Level 4 and 5, will remain a niche market for another 10 years, all the statements of Tesla and others notwithstanding. However, Level 3 are forecasted to grow fast between now and 2025. We have been focused on this at Kendrion for over 2 years now and are working on several products that help enable these important trends as we are moving into a new era.

In Automotive, we are working on so -- 6 so-called ACES lighthouse projects to make maximum use of the opportunities created by the disruption that is upon us. The projects are focused on autonomous driving, which includes developments in sensor cleaning valve and control systems, active damping actuators and positioning sensors for truck automation. And on electrification of the propulsion system, where we are working on a battery cooling valve and control system; acoustic vehicle alerting systems, or so-called AVAS sound systems; and a clutch for a drivetrain in specific hybrid vehicles. All these products are relevant for the ACES and all are in development in collaboration with key customers, but with Kendrion in the lead.

Now let me zoom in on one of these products to give you a flavor of the opportunity. Smart sensor cleaning. First, the sketch of a vehicle and its sensor setup. As you can see, for a Level 2 a car typically needs 8 sensors; for Level 3, that grows to 12; and for level 4 to 5, it is around 24. The sensors are a combination of cameras, short-, medium- and long-range radars and long- and short-range LiDARs. And as the car gets more capable of driving itself with less and less need for a human driver, the importance for its sensors to be clean of mud, snow, moist, leaves and dirt gets more and more important. And looking at the IHS market forecast that we discussed earlier, the number of cars at Level 3 or higher that need competent sensor cleaning will grow from around 2 million to 3 million this year, to 25 million to 30 million in 2025, to 80 million to 90 million in 2030, clearly, a serious growth opportunity. We are well advanced developing smart sensor cleaning for exactly this use case.

You can see the attributes on this slide, efficient water valve block for up to 16 sensors. Innovative positioning and actuation mechanism. This system is modular so it's customizable to the customers' use -- needs. It's a true mechatronic product with a built-in ECU with a local interconnect network, or LIN bus, which enables in car communication and status feedback. And this is not just a slide, we have developed B samples and are currently working on C samples for a large European OEM, which leads me to growth.

I realize that in today's environment, with declining revenues for pretty much all automotive players, talking about growth may seem far-fetched. However, we are confident that the medium- and long-term growth opportunities for both Automotive and Industrial activities are intact. We've optimized our organization. We are financially healthy, and we are relentlessly focused on operational performance, cost, cash and cash flow. We use our financial strength to continue to invest in important organic growth opportunities, such as the ACES lighthouse projects, brakes for robots and China, despite the short-term headwinds.

Before I go to outlook, let me share our long-term CSR targets. As you know, corporate social responsibility is an integral part of the way we do business at Kendrion. Just as we have ambitious targets for our 2023 financial performance, we have the same for CSR. And as you can see on this slide, we strive to make substantial improvements in all 3 pillars that comprise our CSR framework: natural capital, social and human capital and responsible business conduct. For example, in the pillar, natural capital, we aspire to reduce our relative energy consumption and our relative CO2 emission with 15% over the next 5 years on top of the significant improvements we have already achieved over the past period.

We have similar ambitious goals for the other pillars in terms of, for example, health and safety, diversity, our role in local communities and sustainable sourcing. We will keep you informed on the progress we make as we move towards these ambitious goals over the coming years.

Next, let's go to outlook. The overall sentiment regarding the global economic outlook continues to be weak. Kendrion expects the pressure for its automotive activities to continue in the second half with some demand weakness for Industrial as well. 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 and are announcing an additional share buyback program, having completed the share buyback program to neutralize the dilutive effect of our stock dividend in July. The maximum amount of the program is EUR 10 million or 625,000 shares between now and December 31, 2019. The total number of shares that we can buy back depends on trading volumes in the remaining months of the year and can, therefore, end up lower than the maximum number. We intend to cancel the shares upon repurchase. This means that we will have returned around EUR 20 million to our shareholders if the maximum amount of EUR 10 million is reached, which brings me to our long-term targets.

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

And before we go to Q&A, one more point. We have moved into our new office a couple of weeks ago in Amsterdam Zuidoost, you are all warmly invited for a coffee.

So let's go to Q&A.

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Questions and Answers

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [1]

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Yes. Frank Claassen, Degroof Petercam. 2 questions. First of all, on diesel, how much of revenues is currently diesel and also broken out maybe between passenger cars and heavy duty? And what do you see -- what kind of development do you see in diesel and, yes, how you're feeling about that? And secondly, on cost-cutting measures, what are you currently doing to count away the current environment? And how much of the, let's say, measures of the past are still kicking in, so some words on the cost-saving measure, please?

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

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Yes. Let me first talk about the development in the diesel, what is happening, and then maybe Jeroen, you can talk a bit about the diesel revenue and a bit about the cost measures. So on the development, so you saw us we talked about the ACES lighthouse projects, and this is clearly a main driver for the growth of the future. At the same time, we still have many combustion engines around. And at the same time, as you saw from the market analysis, a hybrid car also has a combustion engine. So the more traditional technologies are still -- are not a growth driver, but are absolutely important for Kendrion and for many players in the supply chain to continue to drive revenue. So the same that's true for petrol, that's true for diesel. So we certainly still see a lot of incremental developments around the more traditional diesel valves. And in some cases, we are engaged with that. But I would like to reemphasize that's not the key growth driver. It's certainly an important part of the revenue for a couple of years to come, but the future for us lies in the projects that we talked about around the ACES.

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

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Okay. Then on volumes. So last year, during the Capital Markets Day, we disclosed EUR 44 million revenue to passenger cars from diesel. If I would do the same exercise now, then it would be around EUR 33.5 million, so that's almost 25% decrease. But half of that is basically due to a normal phaseout of the older diesel projects. So over the last months, what we see is that diesel basically is declining with the rest of the market, not more, not less.

And then on the cost side, so as also indicated earlier, so the big simplification topics, they have been done. And what we have done over the last 3 years by removing management layer, adjusting the footprint, some restructurings. So what we do currently is really strict cost control. So we reduce all discretionary spending where we can. We also will continue to decrease the capacity in the direct area, so the people really working on the line to reduce that capacity and then to adjust that to the volumes. And besides that, as was also mentioned, we started a project in IT, where we believe that over the coming period, we can reduce the cost substantially, so we continue to look to save cost where we can.

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

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Next, if there is any next.

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [5]

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Johan van den Hooven. We do it in English? Sorry, yes. I was asleep I think. You're mentioning of the quite a positive free cash flow in the second quarter and also due to some working capital initiatives, you announced the share buyback. So are you feeling confident that the cash flow is no longer negatively impacted by trade working capital inefficiencies? Or you see more benefits coming?

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Jeroen Hemmen, Kendrion N.V. - CFO [6]

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So basically, what I see in the quarter -- the last part of 2018, we actually did a poor job on working capital. And so we were slow to adjust the working capital on the lower revenue, so part of that is completely understandable and explainable. But since this year, we have really a lot of focus on reducing the working capital and what we see since the first quarter, we seem to have made this turn. The most sticky is always the inventory and that we have been able to reduce by EUR 3 million in the second quarter. So I feel comfortable that we are now adjusting the working capital to the lower volumes so that in the second half, we will generate positive cash flow.

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

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Sorry, just to maybe to add to that. So earlier, we talked about in response to Frank's question about cost management, this is all part of the same picture. So whenever we get to discretionary spend, whenever we get to spend that is related not to our areas of focus, we are extremely stingy and strict, that includes cash, cash flow management. Now clearly, if your revenues go down initially, your stock level goes up, it's unavoidable. And we are now all over that to try and make sure that we adjust the stock levels and therefore, protect our cash flow.

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [8]

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A follow-up question on the growth opportunities in ACES, I can imagine that it is very difficult for you to initiate these kind of products because I would understand that the carmakers themselves initiate it and they tell you what kind of specifications and what kind of products they need. But if I were them, I would also do the same with competition. So the growth opportunities are also partly to compensate for decline in the other end, the more old-fashioned Automotive business. So how is it actually going? Because it seems to me a lot of pioneering. So you have to make a lot of costs. So you're not sure whether the client is going to use it because they themselves are probably also not sure which kind of technology they're going to implement.

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [9]

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It's certainly one of the dilemmas, one of the risks that you face when you do innovation. So generically, I agree with you. A couple of points. First point is to make that, as I also talk to -- answer to Frank in response to his diesel question. We're very excited about the ACES. We are very excited about brakes. We're very excited about China because we feel that will drive future growth, it's not the only thing. There is a balance to strike there also for us on the R&D side. So we absolutely still work on projects like Park Locks, the more traditional combustion engine valves to keep a certain revenue level present.

Then to answer your question, when you talk about these types of projects, there is indeed a lot of back and forth and a lot of canvassing and discussions with customers, but we're also reasonably active in industrial forums, including, for instance, the global semiconductor alliance, where the trends -- many of the slides we presented here are from that forum. The trends are being analyzed and being given hands and feet. And we take that to our customers and then we sit down with us in the lead to say, "Look, we think this is an important development. We think we can help. Here is not even an A sample, here is a concept. Would you like to see is this something for you?" In some cases, it's the end of the road right there; in some cases, they engage. So that is really the game that we're playing. The good news is, I do not expect that all these 6 projects are going to be equally successful. But if you have 2 or 3, where you really get into it, and you have -- you're in the lead, you have some IP and you become the key supplier, for instance, for sensor cleaning, you're talking about a phenomenal growth opportunity. That's really the game we're playing. It's very exciting.

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [10]

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(inaudible)

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

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Clearly, there's competition. I do believe, although, as you know, the competitive field in our -- unfortunately, in actuation land in automotive, most of these companies are private. So it's always hard for us to really figure out what exactly is going on. But we think that we are -- because this is not the first time we're talking about this, we've started this 2, 2.5 years ago. We think we have in certain areas a clear lead, not in all, but in certain areas we do, but yes, there's competition.

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

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Maarten Verbeek, The Idea. Just to clarify, do you have your long-term target? And indirect one is that you still achieve to -- target of 5% organic growth rate, that is still valid?

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Jeroen Hemmen, Kendrion N.V. - CFO [13]

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Well, if you -- we talked about this offline, Maarten. Without organic growth, it's very difficult to get to the target because you can't get there by just reducing your costs all the time. So the answer to your question is, yes, you will need that. I don't want to get caught, whether it's 5% or 4% or 6% or 7%, but you do need organic growth in order to get that. We feel -- of course, if this negative -- this downturn persists for another 5 years, we have a different story. I don't expect that. But we feel that on the back of the growth opportunities that we see, the actions we take and the traction we have, points you to China where despite quite a tough environment we have grown in the first half with more than 20% organically. We feel that we will be able to hit those targets.

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

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And secondly, you have always indicated and also last time that CapEx will be well ahead of depreciation. Now more or less you say it will be at par. Does it also imply? Because you mentioned discretionary investments will be somewhat low, but I don't think that whole difference can be explained by that. Do you also see that you have postponed investments for new projects?

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

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We have not postponed investments for new projects. We have not postponed investments in projects in the areas of focus like that line we're building in China for permanent magnet brakes. But as we do with costs, we are becoming more strict and we're becoming a little bit more stingy on other investments. You can well imagine that some of the investment projects you have are somewhat discretionary. An old machine needs to be at some -- needs to be replaced, can you maybe replace it a bit later? Some cases, that's yes, then we'll do that, upgrades to buildings, to facilities, things like that. We are really turning around every coin. And in some cases, we say no to things that maybe in better times we would have said yes to.

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

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And then lastly, with respect to the statements of Continental, how does -- what kind of an impact will be there for you?

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

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What statement specifically are you referring to? They've said a lot of things.

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

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No, particularly what I want to put less -- much less focus all the combustion engines, everything we had (inaudible) et cetera, et cetera.

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

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I'd say that maybe they've listened to some presentations by Kendrion. We've been saying that for a while. So I think that they're trying to strike the same balance. That on the one hand, you look at the analysis, yes, we're going into electrification, yes, we're going into autonomous connected and shared driving, but it's going to take a while. And for instance, the electrification route is through the hybrid, the hybrid car has a combustion engine. So the balance to strike is on the one hand, you want to preserve that business that is basically your bread and butter today and is going to stay important for quite a few years. At the same time, you need to be ready for the brave new world, where, really in our case, a whole range of new actuators are going to be very relevant and will represent a fantastic growth opportunity. That's true for us. That's true for ZF. That's true for Continental, that's true for Schaeffler, everybody is in the same mode.

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Frank Claassen, Banque Degroof Petercam S.A., Research Division - Analyst [20]

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Yes, Frank Claassen, Degroof Petercam again. Looking through your share buyback, EUR 10 million, if I do some rough back on the envelope calculations, your net debt-to-EBITDA could already, let's say, approach 2x. What -- yes, what level do you still feel comfortable with? And does a share buyback mean that -- yes, let's say, M&A is now lower on the priority list? Or do you still see room for that, too?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [21]

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I will take the M&A one, and then Jeroen can talk about the comfort level around the ratios that you mentioned. So M&A is certainly still on the radar. We talk about it regularly in this and other settings. A couple of criteria. One, the first and foremost, it will need to be M&A that strengthens our position in the areas of focus. So it will need to be M&A that helps us developing the lighthouse projects for the ACES that helps us in our position in permanent magnet brakes or strengthens it, potentially although less likely, that helps us with our position in China. That's point number one. Point number two, of course, we like it to be meaningful. And then if there is a case like that or a target like that available, we will certainly engage very seriously. I personally believe that to share our share buyback, although a very strong signal of confidence in our future does not in a significant way change the calculations or the room that we have for M&A.

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Jeroen Hemmen, Kendrion N.V. - CFO [22]

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Then on the comfort level, so the level of 2 includes already EUR 15 million in IFRS 16 lease obligations, where in the past, this was obviously excluded. So without this, it would be significantly less. But also, if you look at the free cash flow development, what we have shown in the second quarter, second half year is traditionally the strongest half year of free cash flow. So I feel comfortable that we will remain significantly below 2 for the remainder of the year.

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Johan van den Hooven, NIBC Bank N.V., Research Division - Analyst [23]

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Johan van den Hooven, NIBC. Two questions. First one about active damping actuators. Of course, we're a larger customer in active damping system built in, that should be on, well, top revenues now for the first order. So some capacity expansion in Austria, is that related to built-in or new customers? Second question, sound systems. There seems also linked to competition. There are quite a few players in that area. So how do you see that development then impacting your potential market share in that segment?

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Jozef Aloysius Johannes van Beurden, Kendrion N.V. - CEO & Member of Executive Board [24]

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Yes, Johan, thank you. So on active damping first, I think it was in the press release, if not then you hear it now. We have actually won over the past half year another -- an additional active damping project for Austria. There is more, not one, but in the pipeline for us to be had. So that, I think, is an area. You also saw it mentioned on the lighthouse projects of great interest for us and great opportunity, not just with Bostoen, but also with other customers. So -- and that's another example of a product, it is highly relevant for autonomous vehicles, but also highly relevant for today. So a great example of how you can actually invest in something that can drive growth in the future and drive growth today as well.

Sound is a bit of the same story. You're absolutely right. A couple of presentations ago, maybe on the first Capital Markets Day that we did, I showed all the competition. There's a lot of competition out there. We feel we have a quite unique, albeit a bit of a high-end solution. We see a continued interest in that. The number of electric vehicles, that's for pure electric; hybrid, you don't need it. So it's still relatively small. But -- so slightly longer term probably, but in the same vein, I feel that we have a very good opportunity there for additional revenue over the next years.

Any more questions? No? All right. Then I will -- thank you very much, and I look forward to serving all of you a cup of coffee in our new office in Amsterdam Zuidoost. Thank you very much.