Progress on strategy
Kendrion has built a robust and lean organisation, operating in three business units: Automotive Group (AG), Industrial Brakes (IB) and Industrial Actuators and Controls (IAC). We maintain our focus on operational effectiveness and cost levels and continue investing in growth in Automotive, Industrial Brakes and China. In IAC the focus is on profitability and cash generation.
Within the Automotive Group, we have continued to make progress with our five Lighthouse platforms. We see significant interest in solutions for sensor cleaning and our solution for the so-called acoustic vehicle alerting system (AVAS). Furthermore, we have received additional nominations in active suspension. We are prioritising capital investments for revenue generating projects for which we have received nominations over the last years.
The COVID-19 effect on IB in Q2 has been limited and revenue was ahead of its original budget. IB experienced strong orders in the wind power segment in China, driven by Government subsidies for clean energy. Within Industrial Brakes, INTORQ performed ahead of expectations. The realisation of the targeted EUR 2.0 million run rate for cost synergies as per the end of 2020 is on track.
Revenue in IAC decreased in the second quarter as demand from customers in textile machinery and aviation was weak, with customers in the medical segment and infrastructure being more stable, IAC experienced some COVID-19 related supply chain interruptions resulting in a greater than normal revenue backlog.
China had a strong second quarter as the economy experienced a ‘V-shaped’ recovery, with current volumes of passenger cars sold back at pre-pandemic levels. Our pipeline is strong, and we continue to invest in production equipment, our local workforce and supply chain. The training of the Chinese R&D team by our German engineers is now fully virtual. We expect continued growth in our Chinese operation as we add to our project pipeline in all three business units.
Kendrion will host a Capital Markets Day on 10 September 2020, to present a comprehensive strategy update for the enlarged Kendrion Group, reflecting our changed profile. This will include updated medium-term financial targets.
Financial review
Revenue
Q2 2020
Revenue in the second quarter of 2020 came in at EUR 85.1 million, a decrease of 22% compared to the second quarter of 2019 (EUR 109.0 million). Excluding the revenue contribution of INTORQ, organic revenue decreased by 34%. Exchange rates had a limited adverse effect of 0.1% on consolidated revenue.
Automotive revenue decreased by 44% in the second quarter as a result of the global decline in passenger car and commercial vehicle production, most notably in April and May 2020. Revenue recovered sharply in June 2020, but still at a lower level than pre-COVID-19. The Industrial activities increased by 15% compared to the second quarter of 2019 and generally showed more robustness. Organic Industrial revenue decreased by 18%.
Revenue in China showed a strong recovery from the first quarter with 13% organic growth compared to the same quarter last year and 63% higher revenue compared to the first quarter of this year when China faced the largest impact from the COVID-19 pandemic. Both the Industrial and Automotive activities in China reported year-on-year growth.
HY1 2020
Overall revenue for the first half of 2020 decreased by 10% to EUR 194.7 million (HY1 2019: EUR 217.3 million). Organically, revenue decreased by 23%. Exchange rates had a limited adverse impact of 0.1% on revenue in the first half year of 2020.
Revenue for our Industrial activities, representing 50% of Group revenue, increased 19% and organically, excluding the contribution of INTORQ, decreased by 14% compared to the first half year of 2019. Automotive revenue decreased by 28% in the first six months, impacted by the global car production declining 32% and commercial vehicle production declining 28%.
Results
Q2 2020
The normalised operating result before depreciation and amortisation (EBITDA) was EUR 8.1 million (normalised Q2 2019: EUR 12.7 million). A positive gross margin development and cost reductions helped to mitigate the profitability impact of the EUR 37.5 million lower organic revenue. The added value margin increased 310bp on the back of the increased revenue share of Industrial activities and positive product mix effects in Automotive. Total staff and other operating costs decreased on an organic basis by EUR 8.9 million, or 23%, as a result of strict cost control, structural cost measures implemented in the previous quarters, voluntary and temporary salary reductions and the use of available governmental measures, such as short-time work arrangements in Europe. For the Group, the EBITDA margin in Q2 2020 was 9.5%, compared to 11.7% in Q2 2019.
HY1 2020
Normalised EBITDA in HY1 2020 decreased by 14% to EUR 21.8 million (HY1 2019: EUR 25.4 million). The normalised EBITDA margin was 11.2% compared to 11.7% in the first half year of 2019.
Normalised EBITDA for the Industrial activities increased to EUR 14.2 million from EUR 10.8 million in the same period last year on the back of a strong contribution from INTORQ and strict cost control in both Industrial Brakes and Industrial Actuators and Controls. Total staff and other operating costs in Industrial were EUR 3.4 million below last year on an organic basis.
The Automotive activities posted normalised EBITDA of EUR 7.6 million compared to EUR 14.6 million in HY1 2019. Automotive has shown resilience amidst the COVID-19 pandemic and was able to reduce costs by EUR 8.6 million, or 20% compared to the first half year of 2019.
The added value margin of the Group increased to 49.0% (HY1 2019: 47.2%) with most of the improvement coming from the increased revenue share of the Industrial activities. Total staff and other operating costs decreased by EUR 3.5 million more than offsetting annual wage inflation and the addition of INTORQ. Depreciation charges increased by EUR 0.8 million to EUR 12.8 million.
Normalised net finance costs of EUR 1.6 million in the first six months of 2020 were higher than in the same period last year (HY1 2019: EUR 1.2 million) due to the additional debt taken on to fund the acquisition of INTORQ. The normalised income tax expenses for HY1 2020 was EUR 1.1 million (HY1 2019: EUR 2.8 million). The normalised effective tax rate in the first six months of 2020 was 21.3% (HY1 2019: 25.6%).
Normalised net profit, before amortisation of intangibles arising on acquisitions, in HY1 2020 was EUR 5.8 million (HY1 2019: EUR 9.1 million). Normalised earnings before amortisation per share amounted to EUR 0.39 (HY1 2019: EUR 0.68). Basic reported earnings per share amounted to EUR 0.20 (HY1 2019: EUR 0.66)