Carel Industries SpA
MIL:CRL
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Carel Industries SpA
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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the CAREL First Quarter 2023 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO of CAREL. Please go ahead, sir.
Thank you. Good afternoon, everybody, and thanks for joining our call for the presentation of the first quarter 2023 results. I will start from Page 2 with the main highlights of the period. I'm very pleased to report that Q1 '23 was the ninth consecutive quarter that CAREL reported a double-digit organic growth in revenues in spite of some very challenging supply chain issues in the first weeks of the year that did not allow us to express full growth potential.
Profitability was also very good with an EBITDA margin very close to 21%. Revenues grew in the quarter by 24.8% over the first quarter of 2022 with an organic growth of 11.3% exceeding the expectations provided in March, thanks to the capacity of the group to mitigate the strong supply chain issues experienced at the beginning of the year. We continue to record a very positive demand in HVAC, in particular, heat pumps, data centers and indoor air quality. This offset the expected temporary slowdown in refrigeration that started to materialize and that is due to the uncertain global economic scenario as well as to cost inflation.
EBITDA margin was 20.8% of sales, above the 20.5% of the full year '22, and slightly less than the 21.1% of Q1 '22. In spite of the fact that in this quarter, we had high marketing expenses due to the group participation to 2 very big trade shows, not present last year and that we had the slightly dilutive effect of recent acquisitions we made, particularly Klingenburg.
This result is due to the continuous deployment of the effects coming from previous price increases and from positive operating leverage offsetting raw material cost inflation, which is still present this year, even if to a lower extent compared to 2022. The net financial position at the end of the first quarter is substantially in line with the full year of '22 due to the acquisition of Eurotec and also to an approximate EUR 20 million net working capital increase related to higher inventory and also to higher receivables which in turn are due to the fact that in March, we had a strong sales recovery after the supply chain issues of January and February. So this receivable effect is, of course, absolutely temporary, and the quality of our receivables is at record levels.
I'm now moving to Page 3 for some more details on the results. Revenues at EUR 161 million grew by 24.8% from the EUR 128.9 million of Q1 '22, with EUR 14.6 million coming from organic growth and EUR 17.4 million coming from M&A. This is the third consecutive year in which the group reports a top line growth exceeding 20% in Q1. and also the ninth consecutive quarter with a double-digit organic revenue growth at 11.3%. This is remarkable, especially if we consider the fact that we had a very challenging supply chain scenario, as you know, at the beginning of the year, and so we're not able to fully satisfy demand.
EBITDA at EUR 33.4 million was up 22.8% over the EUR 27.2 million of Q1 '22 and was 20.8% of sales, slightly down from the 21.1% of Q1 last year. But again, we have to consider on the OpEx level that we participated to 2 very important exhibition in this quarter that were not present last year and also that we had a slightly dilutive effect coming from recent acquisitions, especially Klingenburg. Of course, as you know, over time, the profitability of these companies will increase, thanks to the execution of the integration.
Net profit at EUR 18.5 million grew by 13.2% from the EUR 16.4 million of last year, benefiting from the operating results, but discounting a tax rate of 22.3%, which is in line with the full year '22 and with expectations but it's higher than Q1 last year when it was 20.5% due to a different country mix and regulatory changes, especially in Croatia. CapEx were EUR 3 million in the period, down 35.3% from the $4.7 million of last year due to a different quarterly distribution we confirm in any case, our expectation of approximately 5% of revenues for the full year.
I'm now moving to Page 4 for the revenue breakdowns. As usual, to the last, we can see the regional breakdown. In EMEA, sales grew by 26.2% net of the foreign exchange close to 13% like-for-like, mainly driven by HVAC applications like pumps, data centers and ventilation. In APAC, sales grew by 13.6%, net of the foreign exchange, mainly driven by South APAC.
In China, the market is gradually improving. In Q1, we had positive results from heat pumps, also for export to Europe and from applications related to electrification like energy storage. North America grew by 32.6% net of the foreign exchange with a strong contribution from the Senva acquisition. Organic growth in the region was heavily impacted in the quarter by the shortage issues we had in January and February, but the situation is improving fast.
We had in also in this region, interesting developments from electrification applications like battery storage. South America grew by 9.5%, net of foreign exchange, in spite again of a strong impact coming from the supply chain issues.
To the right, we can see the market breakdown. HVAC grew by 39.4% or approximately 20% organic with an excellent result driven mainly by heat pumps, data centers and ventilation. And this offset the softer result in refrigeration that was basically flat in the period due to a stronger impact of the raw material shortages in the period compared to HVAC, as anticipated, and also to an expected deceleration in demand in food service and food retail. We believe this deceleration is temporary, and we're optimistic about a gradual improvement in the coming quarters also because of the strong secular investment growth drivers underpinning the food retail sector.
Just a quick comment on the noncore. It declined by 59.3% in the quarter following the expected exit of the group from this business accelerated by the divestiture of a small activity in this field that took place last year, which was not material on the overall group results.
I now leave it to Nicola to comment the items below the EBITDA on Page 5.
Thank you, Francesco. The Slide #5 details the group result from the EBITDA to the net profit. The first quarter 2023 was impacted by higher G&A costs than related to the purchase price allocation from M&A activities for EUR 600,000 and relevant investment in CapEx in the last years. The financial charges increased for the impact of the interest rate evolution. It should be noted that the increase is mainly influenced by accounting methods like the time [indiscernible] factor of the full closure auction of CFM at the IFRS 16. The tax rate of the period was around 22.1% higher than last year, mainly due to a different country mix. The minority result increased for the good performance of the [ Darkish ] legal entity CFM. The group net profit in the first quarter 2023 was equal to EUR 18.5 million compared to EUR 16.4 million over the same period of 2022.
Slide #6 shows the net financial position evolution of the first quarter 2023. The growth from operation was stronger and equal to EUR 27.1 million. The increase in net working capital was mainly driven by strong growth of revenues and to the increase in inventory influenced by the shortage of components. It should be noted that the DSO is better than the same period of last year and the overview of account receivables is at a minimum level of the last years. Taking out the effect of IFRS 16, the net financial position with banks amounted to EUR 64.4 million a level typically below the 12-month EBITDA. Francesco to go on with the presentation.
Thank you, Nicola. So I'm on Page 7 for the closing remarks. In Q1 '23, we reported a double-digit organic revenue growth for the ninth consecutive quarter in spite of very challenging supply chain issues in the first weeks of the year site of the expected slowdown in refrigeration. This is a confirmation of the capacity of the group to execute and also the resilience of the wide portfolio of products, end markets and geographies that we serve. Most of them enjoy secular medium, long-term growth drivers, but they have different short-term cycles and scenarios, providing great resilience to our business model.
M&A activity of the group continued in Q1 23 with the acquisition of Eurotec, a distributor and system integrator based in New Zealand and longtime commercial partner of CAREL. This is in line with our strategy of deploying a direct sales force globally to better control the commercial deployment of our technologies and services.
Several work streams have been open to quickly integrate the companies acquired in '22. In Europe, we have designed the digital integration of kleinburg and we also started integrating the purchasing and production processes for all the platform companies in the indoor quality area, namely kleinburg, Recuperator and Enginia that share similar materials and production technologies.
In the U.S., with Senva, we are designing the road map of future product innovation, and we already started getting significant commercial synergies from the Senva strong presence in its reference application. Obviously, relevant challenges are still present. The supply chain situation is definitely improving, but is still subject to long lead times and unexpected disruptions on specific components and applications.
On the macro side, the restrictive monetary policy and the geopolitical tensions are having as expected an impact on the most cyclical applications the group serves, in particular, industrial HVAC and commercial refrigeration Industrial HVAC fortunately, though are some areas that are still performing well like data centers and some opportunities like applications related to electrification, for example, energy storage. Another big opportunity is, of course, related to the booming hit market as well as to the transition to low global warming potential refrigerants that is now gaining traction also outside Europe.
To conclude, taking into consideration the above-mentioned situation, the group maintains a positive and optimistic outlook for the rest of the year. An improvement in the supply chain is expected and the slowdown in refrigeration demand should be temporary. In the first half of 2023, we expect to report the low- to mid-teens like-for-like revenue growth at current exchange rates.
Thank you very much. for your attention, we are now more glad to answer to all of your questions.
[Operator Instructions] The first question is from Niccolo Storer with Kepler.
Maybe we go one by one, Francesco.
Yes, sure. As you prefer, Nicolo.
Okay. So the first one is related to your organic growth reported in Q1. Is it fair to say that the big versus the guidance you provided in March was entirely attributable to some easing in the supply chain issues and so to the refrigeration business.
Well, it's definitely related to an improvement of the supply chain issues that affected the capacity of the group to satisfy demand in the first weeks. We do expect a gradual improvement of refrigeration related to the easening of the shortage, yes, even if the refrigeration demand has been definitely slowing down. But we do expect a gradual improvement related, again, as you said, to the reasoning of shortage. Yes, yes, even if in the context in this very moment of a softer demand.
Okay. The second one, if you can give us a little bit more flavor of drivers behind the 30% organic growth in HVAC by refinance market. So how strong comps were, how strong growth in commercial business also in data centers, maybe also flavor on the refrigeration side with food service [indiscernible] for retail if we had maybe diverging performance is a consistent one with the other.
Okay. So yes, in HVAC, for sure, the fastest-growing application is heat pumps. In Q1, the growth rate of heat pumps approximately was in line with the growth rate we experienced in '22. That was not completely satisfying demand because, of course, also HVAC was impacted by the shortage in Q1.
So the main impact was high, in line with last year. We do expect that we will be able to better satisfy demand in the coming quarters. So also the heat pump application will probably have some improvements in the coming quarters.
The rest of HVAC more or less had similar growth rates between data centers and applications related to ventilation. So both end markets have been performing well. As I said, we are also having some interesting opportunities in Asia and North America, especially related to electrification, like energy storage applications or battery recharging stations. And these are not -- still not -- yet not very big in terms of absolute value, but we're having interesting developments there. concerning refrigeration both food retail and food service and were impacted by the shortage and the soft demand.
Let's say that in food service, probably the strongest impact was related to demand because, of course, the food service market in this moment is pretty soft overall globally. Food retail has also a softer demand related to the fact, which is very well known that the retailers are not investing because they are facing a reduction in consumption and higher costs due to inflation. But food retail, in particular, was impacted by the shortage also because for a number of reasons.
And one of the reasons is that food retail is more project related and less OEM related. So let's say, less plannable in advance. So it tends be affected more by the shortage, but there is also some technological reasons why it was more affected by the shortage.
So let's say, food service was more related to software demand. Food service was related to both soft demand and the shortage we do expect a recovery in this market already for the shortage, but also in terms of demand, we are optimistic that, especially in the second part of the year, we will see some improvement in demand, both on the food service side and on the food retail side.
Perfect. And my last question relates to North America. Is it trying to say that without taking into account, the Senva contribution, your revenues would be negative year-on-year this year . If yes? How do you explain that?
No, no, they were not negative organically. We had a slight growth in organic terms in North America. The reason why, in any case, growth in North America was not very high, even if we did grow but the growth was not very high because of especially the shortage because North America has a strong reliance on programmable controls that were highly affected by the shortage of a specific component in January and February. So this low growth was really -- almost entirely due to the shortage issue that was present in January and February. So the situation is already improving. The refrigeration in North America was pretty soft, like in the rest of the world for the reasons I mentioned.
The next question is from Gianluca Pediconi with Momentum.
The very first one [indiscernible] the very first is on what you wrote in the press release when you mentioned financial, digital and operational integration, which will be able -- will allow to seize important cost and revenue synergies. So what I would like to understand also from just a qualitative point of view, if they are exceeding your initial expectation. So if the integration of [indiscernible] are actually providing more synergies than initially expected. That is the first question. I don't know, Francesco, if you want to go a step -- one by one as with Nicolo.
Yes, yes, Gianluca. Okay. Thank you for the question. So yes, these activities basically -- in terms of digitalization, we're now designing the -- basically the road map for fully integrated klienburg especially because biggest one and also the less advanced from a digital standpoint integrated with the systems of the group. The most interesting synergies in terms of results in the, let's say, in the short- to midterm are related to purchasing and production because we basically built a platform of companies doing adding mechanical technologies related to ventilation, which are especially recuperator Kleinburg and [ Bengenia ] that share very similar production processes and raw materials.
We already started getting synergies from purchasing because that's the, let's say, the low-hanging fruit. So we were starting getting savings in terms of raw materials. In terms of processes, we are now designing, let's say, the possible integration of some process phases, some production process phases in, let's say, centralizing and integrating them among the 3 entities in order to have also efficiency, process efficiency savings definitely much higher than the individual entities. This will deploy their effect more in the, let's say, in the coming years. But we're very optimistic about, let's say, the synergies, better operating synergies we can get from having a platform of companies sharing similar technologies.
In terms of expectations, I think that the synergies we are getting are basically in line with our expectations. Also so far, these recent acquisitions we made are performing basically in line with our expectations. So it's too early to say that they will overachieve expectations also because, I mean, the acquisitions were made just a few months ago. But we're optimistic that we will at least reach our expectations and there are several opportunities, again, on the operational side for these platform companies to get synergies.
On the -- talking about Senva, we are designing the innovation roadmap that, of course, will deploy its effect in the medium term. It's not short term, but it's extremely promising in terms of product development for the sensor technology, also involving Aareon because here we have 2 platform companies, Aareon and Senva sensors as well as [indiscernible] And here, we are designing new, very interesting solutions for the future.
In terms of more short-term synergies, we're getting already significant synergies commercially from Senva because they have a very strong presence in the building application in the U.S., and this is already -- and also in some industrial applications. And this is already providing very interesting commercial synergies to North America.
Second question, you were one of the very few also a few months ago, warning that the supply chain issue was not over. And now I'm hearing more and more companies complaining of the resurgency of a kind of raw material shortage at least in some electronic components. I understand that now you are seeing some easing. What I would like to understand is because of what we experienced over the last 2, 3 years and because of the erratic supply of [indiscernible] components are you planning to manage your stock of some let's say, important component, which may be a rapid once again in the future in terms of our supply to have a higher stock or at the end of the day, you will try to optimize your net working capital and so you have a very lean structure. That's may mean more [indiscernible] who wants to answer.
[ Ciao ], Gianluca, so as you said and as we said in the last few calls for us, the inventory in this moment investment trying to minimize any problems to our customers. And so until there will be some shortage problems we want to keep elevated higher than our normal level. And so for this reason, we believe that in the second half of the year, we hope that we are going gradually reduce the stock, but we will do just after that the situation will be better. In this moment, with the information that we have, we offer from the second half of the year, we will improve [indiscernible]
Is that a little bit -- I don't [indiscernible] a kind of a risky situation. I don't want to -- I'm not suggesting to pile up a very high stock, but combination of a slowdown in the most you can call sectors and recent easening, combined with from time to time, companies say, I mean to be the delivery, then a few months later, they are not. Not suggest to be maybe a little bit more on the cautious side. I have a little bit higher net working capital, but having the possibility to satisfy the demand.
Okay. It was -- strategy is already in our plan. I explain better. A few years ago, we were taking the -- as a reference the year-end level, we were around 12%, 13% on net sales of the working capital. Now we are planning that, let's say, by the end of the year, we are foreseeing to see -- to stay at the 17% level that is something like this that is higher than last year level [indiscernible] our target in this moment.
And very, very last question, a little bit more midterm, so the next, let's say, 3 to 5 years. And one of the strengths from my point of view, of CAREL is to have a very wide portfolio of application and solution. Also here, I do not did a number. But in 3 to 5 years, how much, roughly speaking, of your revenues you expect coming from, say, innovation, which means new solution, new application, something that you have in the pipeline, but is not yet in the market. just qualitative indication is more than enough without any details. Probably excluding M&A [indiscernible] just talking organic organically.[indiscernible]
Yes, yes, sure. Sure. Gianluca. So well, I believe that an important part of our business will come innovative solutions. Just an example, we are investing a lot in innovation related, for example, to the heat pump application which is an important application for us.
The landscape is changing. So medium term, we definitely -- we are definitely investing to play an important role midterm in this application. And this is -- this will be a few years down the road, this will be done mainly through new solutions. So this is one example of why innovation will play a big role. And likewise, also our, for example, digital services, which are continuously being developed and innovated they would play a bigger and bigger role directly and also indirectly by driving sales of other products.
Against sensors, we made investments in sensor technology. And as I mentioned, we are going to invest significantly in innovation there for a number of technical reasons, and that will also be very important. So looking medium term, I believe that innovation will play a fundamental role in our competitive position, exited has always been, by the way, because that has always been the case for us.
[Operator Instructions] The next question is a follow-up from Niccolo Storer with Kepler.
Yes. 2 very quick ones. The first one, if you can quantify the contribution of higher pricing on your top line growth? And the second since you mentioned twice in your speech, the cement that if we can call it. So effect of this sales, if you can quantify the negative impact on EBITDA.
Niccolo with reference to the first question, we can say that the price effect was a mid-single-digit on the net revenue that taking out the effect of the M&A, the new company that we acquired in 2022 EBITDA level will be around 22%.
Sorry, I was asking how much will be but from the participation to the industry [indiscernible] that you mentioned the on the [indiscernible].
Sorry, sorry. I didn't to get to the second point. Okay it was around, we can say around EUR 700,000 and EUR 1 million reconciliation one the staff register pay around the [indiscernible]
So approximately EUR 1 million.
EUR 1 million [indiscernible]
The next question is from Alessandro Tortora with Mediobanca.
Let's say, just some follow-up -- the first one just is on the refrigeration. So considering basically that you were talking about the tempo is now down and now we're talking about a flattish performance.
Is it fair to say that the [indiscernible] division of the year will keep positive, let's say, figures that we can not in a double-digit space, but let's say, at least still in the mid-single-digit area. So just to understand, because you mentioned for some sequential improvement in the company's forecasting in this division.
Well, Alessandro, Yes. Well, first of all, thank you for the question. Yes, I think that we can be optimistic to yes, to reach more or less that level mid-single digit, which is more or less the, let's say, the historical market growth before, let's say, the COVID disruption. So yes, I believe that we can be optimistic to achieve, let's say, some level of growth in refrigeration that could be somewhere around the mid-single-digit, yes.
Okay. Then on the, let's say, pricing side, considering that clearly, you had this carryover effect of price increases today, do you plan [indiscernible] price increases, maybe, I don't know, on the HVAC side, much more than rest considering the soft demand that you mentioned before. So just to understand what is the expected trajectory on the price side this year for you.
Yes. So we very recently started applying an additional price increase more limited than the ones we did last year, but we already applied some price increases. So we will see the effect in the coming quarters, again, more limited than last year. Besides that, as usual, we will wait to see where costs will go taking a reactive approach because we adjust prices upwards according to cost. So we will see where costs go. So we will see, yes, an additional slight positive price effect in the coming quarters. And beyond that, we will wait and see the evolution of costs.
Yes. And the reason why you announced this past increase is that you see some, let's say, rising cost inflation of some, let's say, raw material, maybe in the second part of the year?
Yes, definitely. We still see cost inflation, lower than last year, but still cost inclusive definitely, especially in some categories of raw materials, for example, raw materials related to power electronics, inverters, electrification. These are, again, related to demand for electrification, which is booming globally in many, many applications. So here there is still cost inflation basically for the pricing policies of the manufacturers of these kinds of components. But yes, we do still see cost inflation present.
Okay. Okay. Then the third question is on CFM. This is a company that, considering the line the minority is performing pretty well. Can you remind me today how much you would pay for the remaining 49% stake, there should be, let's say, some put in co-mechanism starting for next year, if I remember well. But adjusted EBITDA how much will take today for this minority stake?
Yes. In the balance sheet, it is written in EUR 52 million, 5-2.
So Nicola, didn't catch you [indiscernible]
EUR 52 million.
EUR 52 million. Okay. Okay. Okay. And the [indiscernible] will happen also for you next year? So you have basically a call option or just, let's say, on the seller side, but the option to say the business next year?
2026, it is just on the further side after there is a call option.
Okay. And the last question, Nicola is for you on, let's say, 2 very, let's say, quick check. On the D&A side, considering that Carel also have the impact of [indiscernible] TTA let's if you can to assume, let's say, the number we showed in the first quarter time for, I don't know if the easy, but the idea of TTA going forward around EUR 30 million total number for you for the full year [indiscernible] And also on the net financial charges, you can serve the other considering the current context of higher interest rates, if you can [indiscernible] expectation for this line for the full year.
Yes. On the G&A, I agree with doing this last calculation, that on the EUR 7.5 million, that is inside that for your knowledge, EUR 1.8 million refers to the M&A processes. In terms of the financial charges, during the year, we are foreseeing an increase of effect of the exchange rate -- sorry, interest rate and we pursue something more than formation this total financial targets of [indiscernible]
The next question is a follow-up from Gianluca Pediconi with Momentum.
It's just a quick follow-up. We actually, you mentioned the shortage of raw material. If we shift to the shortage of key employees. Can you elaborate a little bit what is your hiring plan for the next 2, 3 years? And if there is any update on Eastern Europe also related to the [indiscernible] agreement [indiscernible] that.
Yes. Yes, Gianluca, this is, of course, for us, like for everybody else in this moment, a challenge to basically get the talent that we need to support our growth. The -- we are following a number of actions on the M&A side, now the, let's say, the presence of strong technical base is one of the main criteria we are using for our M&A targets...
By skilled employees as well.
Exactly. For example, Senva has a quite strong skill base in this respect and also the R&D expense, they have is in percentage, pretty high, definitely higher than ours. So this is now one of the criteria that we explicitly take into consideration when evaluating M&A targets, and this is one direction.
Another direction is to open R&D hubs around the world where we believe it's, let's say, easier to recruit talent. Just, for example, in this very moment, we are staffing up our R&D base in China. Because we have a big R&D office already in China, but we are staffing that up because in this very moment in China due to the context, the present there, it's relatively easy to find very, very skilled engineering talent. So in the very short term, this is one direction we are taking. But of course, we are exploring several other locations where we are present to staff up our R&D base.
By the way, I love your this connection and meeting guidelines with great confidence.
Thank you, Gianluca. Thank you very much. By the way, sorry, Gianluca, just a brief comment on this, just collaborate a little bit more of course, to recruit and retain talent. It's very important now in this moment to provide number of things like flexible workplace. And for example, we have a policy such as that the number of work from or remote work days that employees can have depend on the distance from the facility.
So if you leave above a certain number of kilometers from our plant here, for example, I think, 120 kilometers stronger. You can according to our policies now fully work remotely, which is very important now to one very important thing to recruit talent.
I want to be 100%, these are the intangible benefits that new younger talents will appreciate. So I complete ever with you.
[Operator Instructions] Mr. Nalini, there are no more questions registered at this time.
Thank you so much for your attention. Thank you so much for your questions, and I'm looking forward to speaking to you for the presentation of the first half 23 results. Thanks again. Have a good weekend. Bye.
Ladies and gentleman, thank you for joining. The conference is now over, and you may disconnect your telephones.