Concentric AB

STO:COIC

Earnings Call Transcript

[Operator]

Hello, and welcome to the Concentric Interim Report January to June 2021. [Operator Instructions] Today, I am pleased to present David Woolley, CEO; and Marcus Whitehouse, CFO. Please go ahead with your meeting.

[David Woolley, CEO & President]

Thank you, and good morning, everyone. Welcome to a very bright and sunny day as we want to take you through how we see the first half of 2021 on this Q2 interim report. And now welcome to you all. So if we go to the next slide, we'll see our usual agenda. And on those points, there's going to be no surprises. We're going to tell you about the summary for quarter 2 2021. Once I've done that, I'll then pass over to Marcus to talk about the financial results. And then it will come back to myself to go through the outlook, how we see quarter 3 2021. Then after that, then we'll go to Q&A. And hopefully, we can give good answers to good questions. So if we go to the next slide. You see the separator for summary, Q2 2021. And if we then go to the next slide, again, we're going to come to the highlights for quarter 2 2021. And as ever, we'll start looking at sales, net sales and revenue. So what do we want to tell you about our very, very busy first half of the year and even busier quarter 2? Well, sales were up, up 38% year-on-year. Actual sales coming out as SEK 473 million against last year's SEK 342 million. There's quite an adjustment for currency, which pushed us back 14%. And then, of course, now we have Allied Enterprises as part of the Concentric family, giving us a 7% of lift. So if we look at sales on a constant currency basis, then year-on-year, we're up actually 45%. The market is absolutely coming back. If we look at the demand from our end markets, then basically, we can see that very strong increase is very much centered on Europe and rest of world, looking at 69% and the Americas at 14%. We think that the big difference in those numbers is purely down to the phasing. If we cast our mind back to 2020 and we saw COVID coming around the world in a westerly direction, rest of the World and Europe was taken out first and the Americas survived a little longer. So that explains that difference in the big numbers. If we look what's keeping us busy on every single day, then basically supply and demand. The supply and demand balance is very, very strongly in favor of demand. And if we look at the supply chain, we've seen extremes of pain in the supply chain, whether it's availability of certain metals, plastics, bearings and everyone will talk about microprocessors. And then basically, we've worked very hard in our supply team to meet those very strong customer schedule requirements. And I'm really pleased to say that overall, I think our team have done a fantastic job keeping our customers moving. No doubt, we had some very exciting moments over this last quarter as the world got stronger in demand. But again, team really handled those long supply chains extremely well. Last point on this slide, if we look at the order book, then no surprises as ever. The order book remains very strong, and the book-to-bill ratio still sits at 107%. And so if we go to the next slide, we'll start to talk about the earnings. What was the output of running very hard to make those sales okay. So what we're going to tell you about is basically the strong sales and basically really came through to support operating income, SEK 107 million against the prior year of SEK 28 million. Last year's SEK 28 million was suppressed somewhat by a restructuring provision. COVID was in full swing. And the operating margin came at 22.7% against the prior year, 8.3%. So overall, we were pleased that the extra sales, we did a good job of converting them and dragging them down to the bottom line. If I look at that next point here, commodity prices and freight rates, they have moved in a dramatic direction. Again, people listening to this call will follow the same ratios. But commodity prices moved by 100% over a 12-year -- 12-month period, my apologies. If you look at freight rates over that same 12-month period, we've seen freight rates have increased between 300% and 400%, looking at which routes and which method of transportation. So the supply/demand really rocked metal prices and freight rates. Of course, that's starting to have an impact in the quarter. The margin was strong, but we're feeling the impact of that. And in many cases, we have metal escalator contracts with our customers. And so there is a pass-through in most cases. There is a lag, of course. If we have 3- or 6-month reviews, then there is a lag that we're paying metal before it goes forward. Freight rates meant we've had to negotiate with many customers to help out with unavoidable and significant cost. So basically, I think a lot of that pass forward on costs will be into Q3 of this year. We had good cash conversion. And when I say, good cash conversion at SEK 76 million. To qualify that, clearly, any business going into sharp growth is going to drag in inventory. It's going to increase its receivables from customers. And so we're actually pleased that the cash is as strong as this. And again, we expect to see a bit of a positive rebalancing in quarter 3. And we did pay a dividend as well in the second quarter of SEK 133 million. Our net debt remains very strongly in control. The net debt was actually a negative SEK 22 million compared to last year's negative 63 -- last year's negative SEK 67 million. So our gearing still remains safely in the minus territory. Just a point of note. We spend a lot of time measuring and managing our pension liabilities. The strong recovery in the economy of these last 6 months meant that we had a balance sheet improvement as our liabilities fell by SEK 109 million. The graphic is quite powerful. If we look at what the graphic is telling us in terms of actual income or percentage of profits, you can see that our quarter 2 2021 is pretty much now on par where we were in quarter 2 2019. So pretty much out of COVID, pretty much working very hard, very fast and pretty much dealing with some exceptional supply and cost issues. So if we go now to the next slide. It's good to look into the future. It's great to talk about the quarter. It's great to be able to thank the team for their fabulous reaction to crises and fast recoveries. But it's still a 10-year picture. So we need to talk about electrification. And what this slide is trying to tell us is that the main drivers in the market do not change, and they're extremely positive and kind towards the Concentric business. Our customers are absolutely on course to reduce CO2, heading towards CO2 neutrality. The aim in so many sectors is to go to 0 emissions in those next number of decades. So basically, what we try to do across this last quarter in June in particularly, we try to send out some of the relevant press releases, which helped guide the investors to say what the progress we're making. We'll talk about 4, and each one was important in its own particular way. Because I think it shows the broad strength of the business, and it talks about the geographic impact. At start of June, we announced a new contract to supply electrohydraulic steering equipment, EHS, to a North American truck manufacturer, electric trucks. Everything about the last mile of delivery and returning to base segments, short-cycle trucks. So again, we're pleased to win the business. The second one there, 7th of June, it was an important development contract, not our first, but it's a development contract for fuel cell applications. We are absolutely insistent that electrification, whether it's by battery or fuel cell, whether it's on-highway or off-highway, they're all absolutely relevant markets to Concentric. And this win of development contract for fuel cells is important. And next point, we'll talk about our joint venture business, Alfdex. The Alfdex product -- patented product has had an excellent market-dominating position for more than a decade. Typically, the product is turned by hydraulics. It's turned by oil. And what we've managed to do in this last part of the year is actually win electrically driven disc separators. So it's significant. The business doesn't start until another 2 or 3 years, but it's product significance that we're moving Alfdex into the world of electrification as well. Last point I wanted to talk about was, again, it was another electric coolant pump, electric water pump. It was basically for cooling batteries and it goes on to battery electric vehicle truck applications. So a very, very steady beat. So if we go to the next slide, what that will say and it's the important direction that we want you to understand is that we've been saying now for the last 2 years that by 2025, 20% of Concentric's revenue will be from electrified products. And with these 4 press releases alone, these are worth SEK 900 million over those 5 years based on innovative class-leading, high-performance e-Pump technology. So a deeply positive story and that will continue to grow in the time to come. So if I ask you to go to the next slide, I will then pass the presentation over to Marc Whitehouse to talk about the financial results for Q2 2021.

[Marcus Whitehouse, Chief Financial Officer]

Super. Thanks, David. Hi, everybody. Next slide, please. That should take us on to the quarter 2 2021 market data. You will see the same graphic, as we normally talk about. At this time, it's a sea of green. It's showing a strong recovery in all of our end markets and all of our end applications that we serve. I'm not going to talk about the individual quarter, I think, because of the scale of the pandemic in quarter 2 of 2020 and the noise that we have in an individual quarter within the market indices. It's not actually meaningful to talk about the scale of change. I think what is meaningful is to actually look at the overall year once some of those inconsistencies in the quarter have ironed out and take what is the general direction from what the market indices are suggesting. And that says that we are going to continue to see growth within the second half of the year across pretty much all of our end markets and geographies. And that outlook has changed in a positive way from the first quarter where they were indicating growth of 9% year-over-year to what they're now indicating is growth of 16%. That's up 7%. And that may look, again, a little conservative from what we see within the overall market, but it is positive. And directionally, it feels correct. If we move to the next slide, we'll come on to our quarter 2 2021 trading performance. As David touched on, sales have been reported at SEK 473 million for the second quarter, up 38% as reported and with an underlying sales of 45%. Our operating income is reported at SEK 107 million, up 123% from that second quarter. But as we've noted, that second quarter was heavily impacted by the global pandemic. But what we do see now is that our operating margins have returned to levels of pre-pandemic era of 22.7%, up from 14.2% in quarter 2 of last year. And when we look at the operating margin percentage as reported, we're up against the 8.3%, but that was impacted by the restructuring provision of SEK 20 million. When we look at the half year, we can now see that our sales have been reported at SEK 905 million. As reported, up 13% year-on-year, but underlying it's up 20%. Our operating income is now SEK 202 million, up 50% on that we reported for the first half of 2020. And our year-to-date margin is now reported at 22.3%, a good healthy margin on the business post pandemic era. If we move to the next slide, please. Now this starts to break out the segmental analysis by region. The first thing I want to draw your attention to is just that top graphic, the sales and the book-to-bill ratios. We've been reporting growth now consistently quarter-on-quarter since quarter 3 of 2020 and this quarter is no exception. The quarter-on-quarter growth, which I think is an important measure, has been 10% quarter-on-quarter, showing again the markets are recovering and we are continuing to supply our customers' demand. It's also interesting to see the 2 book-to-bill ratios, whilst overall for the group were at 107%. There is 2 different beats that we have as we break into the segments. Europe is roughly around the 100% mark, whilst the Americas is still ticking up at 126%. And that ties into the point that David was touching on earlier, we are struggling with some of our supplies from our suppliers to get components into our factories, particularly into the U.S. And that is meaning that we are set on a slightly higher order bank in our U.S. businesses, which we are looking to supply and build out during the latter half of the year. Again, we've seen that our overall margin for the group year-to-date now is sitting at sort of normalized levels of 22% and what we were enjoying in 2019. And so to our 2 segments, they have both returned now to normalized levels, and we've been reporting pretty much now consistent margins on the Americas and Europe. Europe nearing the 22%, the Americas at 15%. If you move to the next slide, please. Let's talk about our cash flow and gearing, and yes, we've touched on it. Cash flow from our operating activities in the quarter was SEK 76 million, SEK 148 million for the first 6 months. Both of those conversion ratios of profit to cash are around about the 70% to 75% mark, not normally what we would expect and not normally what we would enjoy. We always look to have that 1:1 cash conversion ratio. But we have got growing sales, which is consuming a little more cash. And we are being cautious with our stock. As we've touched on, we're struggling to get some of those components in. So we are wisely just holding a little bit more stock on our factories to normalize the production and the production flow and meeting the needs of the customers. Overall, we're pleased with that. And as we touched on, the gearing ratio is still sitting at a good place at minus 2% and down from the 8% reported at the end of the last financial year. If we move to the next slide, please. Now this breaks us out into the cash flow and cash that we've generated on the business. Pretty much flat, as we've said, it was SEK 76 million in the first quarter, SEK 148 million for the half year. So 2 quarters are pretty much consistent cash generation of the business. And whilst we talk about higher working capital, it should be noted our working capital is still at a relatively low level. We're reporting at a positive 1.3% of sales. And even when we were operating slightly better than this, we're only at minus 1%. And we like to be in that tight band of plus or minus, depending on where we are within the cycle. So whilst, yes, not quite what we would want, it's certainly no bad measure overall for the business. Lastly, and we've touched on it, it's just really pension liabilities. The big adjustment on the pension liabilities was in the first quarter. We saw the discount rates move in favor, reducing our overall pension liabilities. And year-to-date, they are now standing at SEK 109 million. There was a minor correction that we had within the second quarter as those rates moved a little. Net debt, we're in a good position. We're at only minus SEK 22 million at minus 2%, but more importantly, the cash position. In the second quarter, we did pay out the dividend payments, but we're still holding cash at SEK 498 million. We entered the year at just over the SEK 500 million mark. So that is a good cash position to be holding for the business. Again, no external debt at this point in time and well positioned to enter into the latter half of this financial year. If I just hand you back to David Woolley now, he will take us through the Q3 2020 outlook.

[David Woolley, CEO & President]

So if we go to the next slide, we're going to come to the header, which talks about Q3 2021, the outlook. And then if we go to the next slide again, we will see the words that try to describe how we see this next exciting quarter. Now you've picked up the picture. The world is a very turbulent place, but a very positive place, extremely strong demand in all sectors, in all geographies. And on balance, Concentric stood out as being one of the performers to make sure that whatever the difficulties were. And then basically, we've managed to protect the customer and protect the investor. So the words here. Next quarter, we see the recovery is going to continue. If we look at our actual orders received from customers, we see the world is getting to be a brighter and busier place. Absolutely, it seems that the rollout of the COVID-19 vaccination program is helping to normalize markets. Again, we're seeing that confidence in -- within our customers. We had a particular issue that the government in India reacted very strongly to have absolute hard lockdowns from manufacturing as well as economic and social activity, and that hurts. But we're now past that. So some of the difficulties, particularly local difficulties we saw in India in Q2 have moved on, and our Pune facility is stabilized. If you look at the market indices, which as Marc has talked about, they're absolutely bouncing around all over the place at the moment because we're comparing a crash quarter last year versus a very strong quarter this year. But if we do try to focus on the year-on-year, the indices indicate that year-on-year is going to be about 16%. And to us, it sounds reasonable. Again, the recovery that we've seen in the first half of 2021 is going to continue. And if we look to our customers, the people who have gone public and talked about the market demand, whether it's in trucks or construction or ag, they're all saying the same thing. The first half year was very busy but the output was slightly constrained by supply chains. And whatever they couldn't make in the first half of the year, they're looking to make in the second half of the year. So again, there are plenty of reasons to say strong demand will continue across the next half of the year. When we look at the supply chain in a critical and calm way. Once we get past the excitement that it's been very, very busy, and we've had to take some exceptional measures to get material across the world. We do see the capacity in the supply chain is coming forward. It is repairing. Again, geographically around the world, there are some areas which are struggling more than others. So we still will see some pockets of disruption, I'm sure, in the third quarter. We mentioned it in the Q2 results. The commodity costs and freight rates have continued on up and everything that we can see says that this trend will continue. And so there will be some tension with incoming costs and discussions with customers to share the cost at least. If we look at the demand for the range of our engine and hydraulic products, which do typically move out of phase with one another, engines is a lead indicator in hydraulic products as a following indicator. Both are seen quarter-on-quarter improvements. And basically, we expect that the North American to continue to catch up, again, compared to the phasing going into COVID as the phasing coming out of COVID. So again, positive and positive again. If we try to quantify it or try to guide, if you look at the level of orders that we actually received in the second quarter, it would indicate to us that sales in the third quarter will actually be still significantly higher than the second quarter, maybe even double digit. The obvious thing to say as well, that the team managed this economic crash and this recovery, this pandemic and its impacts extremely well. We're definitely on the other side and coming out. But what Concentric has managed to do is to maintain a financial very strong position, whether it's capital structure or liquidity. And so we're in a great place to enjoy the continuing stronger demand. So that's -- if we go to the next slide, that's all we have to say based on the prepared narrative. What we'd like to do, of course, is invite any questions. And if we can answer them, we'll absolutely will.

[Operator]

[Operator Instructions] Our first question comes from the line of Erik Golrang of SEB.

[Erik Golrang, Analyst]

I have a bunch of questions actually. First one, on the current demand level, given what you're saying about sequential improvements here into the third quarter, would you enter into a guess on how much of what your experience is restocking, i.e., how much will sales fall off once we sort of rebuild inventories to a bit more decent levels here? Second question on improving or raising selling prices to compensate for higher input costs. Should I read it correctly that you see a quite big cost increase into Q3, but a 1 quarter lag before prices come through. So there'll be a bit of a squeeze on the margin in the third quarter. And then the third question is on e-orders, SEK 900 million in accumulated orders there. How much of that has been delivered already?

[David Woolley, CEO & President]

Okay. Erik, thanks for the 3 questions. Let's see if between the 2 of us that we can answer them. The question about current demand, what is new orders? What is supply line refill? I spend a lot of my time personally talking to our top 10 customers asking that same question. By policy, they won't answer it. And so by policy, it's difficult for me to answer it. I think it is a statement of the obvious, though, through COVID, our customers absolutely did empty supply lines. They did sell everything they could from their warehouses as they were struggling with both material supply and people getting into factories in that time, Q2 last year. So whether they -- our customers don't give a number to it, but I think if I could try to estimate it, we think that they are still refilling the supply line to some extent. And we think some of that safety stock, which will be the aversion therapy for avoiding the same problem again, I think that we are still going to see some level of refill in Q3. The underlying demand, the -- what customers are buying absolutely is very real because whilst, for instance, truck manufacturers and machine manufacturers weren't selling last year, then the stock, the park of vehicles and machines out there, we're still working hard. Food was still being produced, e-shopping increased. So the capital out there will be worked very hard and wasn't being replaced. So there is definitely a very strong demand to actually fill the gap. Public demand now publicly reported episodes on passenger cars, for instance. They can't get enough passenger cars through. So the prices of secondhand cars are shooting up. So some refill, Erik, but I think there's a very, very strong demand on top of that. In terms of impact to selling prices, I would describe the lag is actually 3 to 6 months. If we consider metal prices and again, whether it's copper or aluminum or neodymium, rare earth magnets. Then the impact that we've seen over 12 months is a doubling of commodity prices, it's 100%. And typically, not always, where we have contracts with customers, there are 6 months review periods. So it's absolutely the case that we're sitting on a lot of metal cost through the first half of the year, which will translate into metal price changes on July 1. So absolutely, we can put a ring around metal impact by contract to a 6-month lag. The thing which has been more difficult to manage and report and talk about is freight costs. Again, to give numbers from publicly available indices, the cost of a container going from Asia to Europe or U.S. has gone from $1,500 last year to nearly $6,000 this year, again, pushing 4 times. And as that's come through, we don't have escalators with customers. So these are much tougher real-time negotiations with customers to say. We can share and we are sharing that cost. We are absorbing some of that cost but absolutely real time with negotiations, and those have been going on since the start of Q2, where it was -- it was obviously inevitable that rates were going up. And we'd already set on 3 months of pain before we have to start taking it to customers. So that lag is probably 3 months as opposed to a metal lag, which is 6 months. The other thing which we haven't spoken about in the presentation, but it's a given as the economy has rebounded as supply and demand has swung heavily over to demand, then there are underlying economic price increases which we're working with as well with ourselves and our customers. So 3 to 6 months lag, absolutely. We expect the Q3 will see a good part of our money coming back to us, and we'll expect to see that in cash. The third point, Erik, around e-orders. The vast majority of that SEK 900 million is not in our sales. This is future based. So these are sales which typically will be a year or 2 years out, which is why I always take time to calibrate. For the listener, for the people who follow the business, we'll keep coming back to that one heavy data point, which will prove us right or prove us wrong, and I'm fairly confident we'll be proved right is that by 2025, our very good business will be selling 20% of its revenue coming into and from electric products, whether it's high pressure, steering systems, whether it's lower pressure cooling systems or oil lubrication and cooling systems, the trend is to absolutely set. This SEK 900 million just absolutely is a great mini milestone to say we're on target for our 20% by 2025.

[Marcus Whitehouse, Chief Financial Officer]

And just to add to that, Erik, just to give you a little bit of guidance, the demand -- there is expected to be a bit of a margin squeeze in that third quarter as we have that lag that David talks about. It may be 1%, it may be 1.5%. It'll be in that sort of magnitude. And then we're hoping that for the fourth quarter that those price increases then come through and the margins head back to normalized levels. Just bring again, just a little bit more to that SEK 900 million. We've talked many times the turnover from electric products last year was around about the 1%, we know that. And we know that it's going to go on a fairly -- not linear growth, exponential growth over the next few years. We are seeing sales from quarter 1 to quarter 2, again, being stronger within the electric area. But again, we are right at the start of supplying the SEK 900 million. So yes, there's plenty more to be going out as we go at the back end of this year and into 2022.

[Erik Golrang, Analyst]

And if I may, just a follow-up on that. Has there been a bit of a release on tendering activity on e-business or [ air ], which means there's going to be a bit of a pause? Or do you expect continued good order momentum here for the remaining part of '22 -- or '21?

[David Woolley, CEO & President]

I think I would answer your question, Erik, and I'll answer it in a slightly different way. I'll answer a question you didn't ask. In terms of activity quotations, we haven't seen a pause at all. We're extremely busy on the -- whether it's battery electric vehicles, whether it's fuel cells, whether it's steering, whether it's on-highway or off-highway, all sectors are affected. We haven't seen the pause at all. This is why I think if we look at this year, we've put out more press releases this year than we had in the entire 3 years before. I think the one interesting trend, which is a question that you didn't ask. Where we have seen the pause is when we look at our work on diesel engines, base diesel engines. We've seen the engineers that have worked on those engines for diggers or for on-highway or for tractors, move over to e-projects. So we've absolutely seen a softening of conventional diesel engine development in preference towards the clean technology. So that trend is absolutely clear. For what it's worth, I think that once the e-market really picks up its momentum, then I think that the work on diesel engines will actually revive itself because in that medium term, there is absolutely a need for mild hybrids. So we do see the electrification wave keep going strongly now on battery and fuel, but the way for them to move back on to diesel engines who are hybrid diesels, electrification of base diesel engines.

[Operator]

[Operator Instructions] Our next question comes from the line of Mats Liss of Kepler Cheuvreux.

[Mats Liss, Equity Research Analyst]

A couple of questions. First, the outlook there and sales is expected to improve. And I guess, book-to-bill in the Americas are very strong. Maybe diluting the margin outlook somewhat, I think, given the low margins in the Americas. But then again, you mentioned the margin squeeze on raw mats. So maybe operational leverage also in the U.S. So it's sort of a positive margin outlook as well.

[Marcus Whitehouse, Chief Financial Officer]

Yes. We'll go back to the overall business one to talk about the individual sectors. I'm not expecting those margins to change dramatically in their sectors. We know we're going to get a little bit of a squeeze on raw materials and freight in that third quarter. And as I said earlier, Mats, I'm expecting there to be 1% to perhaps 1.5% margin squeeze in quarter 3 as we transition. As we go through that quarter, we can provide further guidance, but that's what my expectation is at the moment.

[Mats Liss, Equity Research Analyst]

And just sort of if you could share some thoughts about if there -- the margins within the engine and the hydraulics business, is there any sort of major difference in tariffs?

[David Woolley, CEO & President]

I think to take a very positive stance here, Mats, if we go back into history, of course, our roots come from Haldex. If we look historically, there was quite a step change difference between the margins from hydraulic product to engine products. If we look at the many years of business excellence, this Concentric Business excellent model, what we're seeing is the margins across the 2 product ranges have pretty much normalized. So there are small differences, but nothing really to be that interested in as a business. They found same levels of productivity with labor, same levels of productivity with material recovery and material price and transforming the business that some of our hydraulic applications are fascinating. Some of our emergency steering projects and emergency braking programs. And so long answer to say, overall, the margins between the 2 are actually quite similar.

[Mats Liss, Equity Research Analyst]

Good. Then looking at the [ ML ] there. I mean the share of net income in joint ventures is continuing a good move. So it's no drama there. But what is the impact there from Alfdex and maybe the change order from China 5 to 6 there? Should we expect a slowdown there on that line in the second half?

[David Woolley, CEO & President]

There are 2 parts of that question, and I'll answer the first and Marcus will come up behind. If we look at our Alfdex business, then it has been good margin for the last decade as it's matured and matured, and it has a market-dominant position in Europe and U.S. So always good margin. And basically, as it crashed in COVID, like everyone else, it's bounced back post-COVID. And the truck market is more volatile, for instance, than construction machines and it's more volatile than ag machines. So the dip goes lower and decline goes faster. To talk about China. We've been -- we've invested into the China opportunity 4 years ago. And what we saw was a delay and delay and delay as we've seen in the last -- whether it's Euro 2, Euro 3, Euro 4 or Euro 5, Euro 6 or China National VI is the equivalent has slipped slightly. So to try to give maybe too much detail in there. We started selling quite a few separators in China during 2019 as gas engines went over to China National VI standard. China National VI standard went full on across the country and the 1st of July this year, but of course, it didn't. There was a massive pre-buy of the Euro 5 or China National V vehicles. So lots of stocks in the Chinese government has given permission to delay the introduction of China National VI standard in many regions across China. So the position is still extremely positive. Our investment 4 years ago is absolutely coming to fruition now in China, but the ramp up rather than a step change has gone to a steady climb. And operationally, I don't see that as a problem because the step change 1st of July was quite a scary concept. So very positive, getting better, but it's going to be graded. The impact on the margin overall, then, of course, we can tell you what we can on that, and I'll ask Marcus to pick up the question.

[Marcus Whitehouse, Chief Financial Officer]

Yes. No problem, though. Yes, you have to take the 2 lines as we've talked before, Mats, to understand the Alfdex position. We've both got the share of net income from the joint venture on the face of the P&L. And we've also, within the other income, have got the royalty that's coming in from the joint venture. Now this year, we've had a change in some of the accounting that we've changed the royalty rates. So it's flipped the level of profit that's been taken out against those 2 lines. So you have to combine the 2 to really understand the true picture. And when you look at the first half of the year, this time last year, we've taken net income from them of about 27. Royalty and net income combined this year, 49. So yes, it's doubled overall. Yes, Alfdex are having a good first half of this year, driven not as much as we want, with China, but certainly driven from China and overall the recovery from the global pandemic. But you need to just combine those 2 lines to see what the true picture of Alfdex is having on the business. And yes, positive is worth to say and, yes, driven by some extra volumes in China.

[Mats Liss, Equity Research Analyst]

Okay. But I mean China is not the main contributor here either? It's more Europe...

[Marcus Whitehouse, Chief Financial Officer]

No, it's not. It's not. It's becoming a significant contributor to the Alfdex business. But that year-on-year is, again, North America and European trucks. They, too, were almost 100% truck facing. We know in the second quarter, they absolutely collapsed last year. Concentric was balanced out a little, both by geographies and split between hydraulics, off-highway products and trucks. So they had the huge swing down into that second quarter and they've had the full bounce back. So that's why it looked so dramatic when you look at Alfdex in comparison to Concentric. It is skewed, just the trucks, almost 100%.

[Mats Liss, Equity Research Analyst]

Great. Then while I heard you very somewhat disappointed about the cash conversion. And should we expect that to sort of swing back already in the third quarter basically?

[Marcus Whitehouse, Chief Financial Officer]

Well, I'll pick that one up. I'll give you -- I'm not expecting it to swing back in the third quarter. We're still expecting there's going to be some sales growth as we've talked about, quarter-on-quarter sales growth. It will consume a little working capital as we know. We won't get that stock necessarily out until the supply chain's fully settled down, and we know that that's going to be over the balance of the second half of the year. But when it does balance out and the supply chains are normalized, then yes, we're expecting absolute normal cash conversion ratios to start to come back, and we'll start to see that wash back in. But for the third quarter, I just put a little bit of caution again on the cash conversion ratio.

[David Woolley, CEO & President]

Yes. And there are a few factors in there. Typically, we are very aggressive on inventory management. We drive it down as hard as we can get. But if we talk about the regions and particularly the U.S., by the way, it's nothing that isn't in the press. The ability to get material from Asia into U.S. has been deeply ended that the main ports across California have been absolutely blocked. We've had material stuck in ships for 4 weeks before they could get into port and then they couldn't get through a port. So we've taken a policy decision to be quite gentle on inventory because there's a cost of inventory and there's a value of inventory. And what we've seen on this absolute climb is we've softened off the view on inventory. And also, to be then practical and honest, if certain components you can't get in, then the inventory that you bought in to make the rest of the product is sitting there waiting for the missing part. So inventory is going to be a trailing point where we're going softer on it, but I think the global shortages will impact us a little bit. And then you've got to look at trade working capital. Our receivables are right way up there. I'm pleased to say. We're being quite kind to our suppliers. We're not going to mess around on payables because we want them to be shipping us parts. And again, there's going to be a slower burn to see some of the freight cost recovery come back. So complicated. I'm slightly more optimistic on Q3. It's going to be tough, but will be gentle as well. And by Q4, I think the rebalancing will be closer towards where we want it to be.

[Mats Liss, Equity Research Analyst]

Sounds great. And finally, just about the electrification, then you have this 20% target. And I guess, previously, you have been pretty clear about that this is more a back-end loaded 2024, '25, that sales could be expected to pick up. But I mean the European Union have sort of implemented or talking at least about hardening the emission standards and so on. Do you think that sort of will speed up the -- well, maybe moving forward a bit this sales pickup. Or maybe you see larger opportunities in the second half of the 2020s, yes.

[David Woolley, CEO & President]

I think, Mats, it is a really good question. And I think whether we were brave or reckless to put the target out there for the 20%, we were trying hard to give the magnitude to the investors that what's happening at the moment is a market and for Concentric business transformation. It is an absolutely exponential curve. But I think the biggest reason why it's exponential is its legislation. By the time we come to 2025, the manufacturers of whether it's a truck, whether it's a bus, whether it's a construction equipment or tractor, on-highway, absolutely, by the time we come to 2025, rather than it's a good thing to do, when they look at fleet CO2 output, then the manufacturers of trucks and buses need more electric vehicles. It's not a nice thing to do anymore. It's a legal thing to do. So that's why we see some exponential growth curve to 2025. The second part of your question would be, and it's a really good question, I think the -- our prediction for 2025 is absolutely safe. That big question would be, would it be stronger post 2025? And I think -- and it can only be a guesstimate, can't it? I think it will be stronger, but for different reasons. I think e-buses, e-trash collectors, e-fire engines, e-tractors are all going to be featuring on-highway stronger than the off-highway. But I think we will come back to, I mentioned in the presentation, the resurgence, the recovery of the development of hybrid diesel engines, I think once we get past the biggest wave on battery and fuel cell vehicles, there will be a resurgence to say but for long duty, heavy-duty vehicles, we will need more hybrid engines, mild hybrids. So I think we'll see more growth post 2025 in that sector. Nothing will go down, and I think it's an extremely positive future for us.

[Mats Liss, Equity Research Analyst]

Yes. Sounds reassuring.

[David Woolley, CEO & President]

Thanks, Mats. No, lovely. Thank you, Mats. Some very good questions. Thanks so much.

[Operator]

Our next question comes from the line of Erik Golrang of SEB.

[Erik Golrang, Analyst]

I just have one more question on the tax rate. Should we assume that, that stays sort of in the high teens because of the impact from Alfdex rather than coming out on 20-plus on a reported basis?

[David Woolley, CEO & President]

Yes. Erik, I'd probably feather you towards the 20% mark. The reason for that is, yes, you're absolutely right. It has been heavily affected with the lag we have to account for Alfdex in how we report. But we have also got a little bit of provision release that we've got. We were a little over provided on some of our taxes and that's been released in the first half of this year. But we've also got some internal dividends that are likely to be paid in the second half of this year from territories where we'll have withholding tax. So that tax charge is likely to come through in the second half. So I'd probably feather you more towards the 20% for the modeling.

[Operator]

We currently have no further questions. I'll hand back to the speakers for any final remarks.

[David Woolley, CEO & President]

That's super. Thank you. So once again, as ever, thanks very much for you taking time to listen to the presentation. Thanks even more for the questions. Hopefully, the answers were as good as the questions. Thank you all very much. Have an excellent summer and talk again at the next interim review. Thanks, everyone. Thanks so much.

[Marcus Whitehouse, Chief Financial Officer]

Thanks, everybody. Speak soon. Bye-bye.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.