Carel Industries SpA
MIL:CRL
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Carel Industries SpA
Earnings Call Analysis
Q1-2024 Analysis
Carel Industries SpA
In Q1 2024, the company reported a sales decline of 9% year-over-year, primarily due to a drop in the heat pump market in Europe, which is estimated to have decreased by over 50%. This decline, while significant, is viewed as a temporary setback resulting from a previously high comparison base in 2023 related to the backlog recovery. Ultimately, the management remains optimistic, expecting demand to recover in the second half of the year.
The total reported revenue was EUR 146 million, a 4% decrease from the previous quarter. The EBITDA margin fell to 18.2%, down from 20.8% a year prior, reflecting negative operating leverage due to reduced sales volume. Despite these challenges, the company maintained strong cash generation, aided by lower inventory levels and receivables, leading to a net financial position of EUR 78 million.
Sales in the EMEA region saw a substantial decline of 16.3%, with the majority of heat pump orders originating from this area. In contrast, other regions displayed resilience; Latin America achieved an 18% growth, primarily driven by Brazil. There is also recognition of progressive changes in refrigeration technology and increased market share in sectors focused on natural refrigerants.
In a move to strengthen its market position, the company acquired the remaining 49% stake in its Turkey-based system integrator, CFM. This EUR 44 million acquisition will allow for better control over the sales footprint, especially in HVAC where growth potential remains underdeveloped. The company continues to prioritize investments in innovation, with R&D expenses aligning with its target of over 5% of sales.
The outlook for Q2 indicates similar sales performance to Q1, with revenue expected to remain flat as the company navigates through the current economic environment. Looking ahead to the second half of the year, a recovery is anticipated, particularly in refrigeration, driven by improved demand and normalizing comparison effects. However, the exact timing and extent of recovery in the heat pump sector remain uncertain.
While the company advocates for maintaining a target EBITDA margin of 19-20% tied to high single-digit organic growth rates, recent profitability dips due to the market downturn pose challenges. To navigate these conditions, discretionary spending is being curtailed, but R&D expenses are being increased to ensure continued innovation and competitiveness.
In summary, while the company faces short-term headwinds evidenced by declining sales and profitability, strategic acquisitions, ongoing investments in R&D, and a commitment to cost management could position it well for recovery. Shop-level improvements and a market rebound in the latter half of 2024 could provide a favorable trajectory for growth and stability.
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Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Carel's First Quarter 2024 Results Conference Call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO. Please go ahead, sir.
Good afternoon, and thank you for joining our call for the presentation of the first quarter 2024 results. I start from Page 4, where we can see the main highlights of this period. In Q1 2024, after 3 years of top line growth in excess of 20%, we saw a temporary decline in sales by 9% compared to the same period of last year or 13.3% organic. This is a temporary short-term decline entirely caused by the sharp decrease of the heat pump market in Europe as well as by a very high comparison base in 2023 related to the backlog recovery that was present in the first part of the year.
Reported revenue in the period was EUR 146 million, 4% below Q4 2023 due to a further sequential slowdown in the heat-pump market, essentially in line with our expectations. Compared to Q1 2023, we have an organic decline in sales by 13.3%, totally attributable to the poor performance in the EMEA area, while the other regions reported growth. In fact, the vast majority of our heat pump sales are in EMEA, and this vertical for us was down well in excess of 50%.
Overall, in 2023, this vertical was 13% of sales. But in the first part of the year, it was more than that. So the impact on the total top line in this very moment is quite visible. On top of this, in January last year, a significant improvement in the shortage situation started. So for the first part of 2023, in addition to demand, we had backlog recovery, and this makes for a quite challenging and I would say also misleading comparison effect that is present basically across all verticals. These 2 elements, heat pumps and the comparison base entirely explain the poor performance in this moment. But fortunately, these are both short-term effects. Also considering that the general improvement in end demand across the different verticals is expected, especially in the second part of the year.
EBITDA margin in the period was 18.2%, down from the 20.8% in Q1 2023 and shortly due to the negative operating leverage effect mitigated by a number of initiatives to contain purely discretionary expenses. On the other hand, no reduction has been made in our innovation efforts, where we even increased our investment and our R&D expense or revenue has come back to our target range being in excess of 5% in the quarter from 4% last year.
In this Q1 of 2024, we acquired the residual 49% share in CFM, our system integrator in Turkey. This was executed according to the existing option scheme consistently with a strategy of fully controlling the sales footprint. In particular, in this case, we aim at growing in still underdeveloped verticals, especially in HVAC, since so far, CFM has been very successful, but mainly refrigeration. The impact of this transaction was approximately EUR 44 million, and excluding the net financial position would have been slightly lower compared to what reported at the end of 2023. In fact, we maintained a good cash generation in Q1 that easily covered working capital and CapEx with operating cash flow even higher than Q1 last year, thanks to lower inventory level and lower receivables. So the net financial position at the end of Q1 is EUR 78 million, of which EUR 32.5 million are related to the IFRS 16 accounting effect.
Moving to Page 5. We can see in the top right chart that organic growth was negative for EUR 21.5 million, while we had EUR 7.3 million coming from the perimeter change, mainly thanks to Kiona that saw recurring revenues growing by approximately 20% in the period. We then had EUR 0.5 million of negative exchange rate effect driving total revenues in the quarter for EUR 146.4 million from the EUR 161 million of the same period last year. Again, this temporary decline is almost entirely due to the heat pump market and a very tough comparison across all verticals for the backlog recovery of the first part of last year.
EBITDA was EUR 26.7 million, down 20.3% from the EUR 33.4 million of last year and was 18.2% of sales, down from the 20.8% of the same period in 2023. The reduction in profitability due to the negative operating leverage effect, while gross profitability was slightly higher than last year.
We continued scaling up our investment in R&D that in the quarter was over 5% of sales, in line with our target. Kiona reported an EBITDA profitability above 22%, so started being accretive. Net profit at EUR 16.5 million was down 10.9% from the EUR 18.5 million of Q1 last year. As we will see here, we had the positive effect of higher gains from the foreign exchange and a capital gain from the purchase of 49% of CFM compared to what was estimated at fair value before the transaction.
Tax rate was approximately 22%, in line with Q1 last year. CapEx were EUR 5.4 million, up 80% from the EUR 3 million of last year, basically for our R&D activities; in any case, perfectly in line with our 5% of sales target ratio.
Moving now to Page 6. We see the sales breakdown by region and market. EMEA, where sales are down 16.3% net of the foreign exchange is by far the worst performing regions is heat pump sales are concentrated here. We still don't see in the region a material recovery in refrigeration either even if we maintain positive expectations according to the market [Audio Gap] sales grew by 14.8% as of the foreign exchange, thanks mainly to industrial applications, including data centers and electrification.
Senva is performing very well, and we can also report a very good recovery in refrigeration due to the market, but also very much to market share gains, thanks to better execution and an increased interest in natural refrigerants.
There are significant qualitative development in the direction of CO2 for supermarkets as well as the penetration of inverter technology and projects for the development of commercial heat pumps. Latin America reported a growth of 18% net of the foreign exchange. Here, we continue to have a very good performance in Brazil. And finally, we see also a significant recovery in the rest of the region, especially in refrigeration.
To the right, we can see the breakdown by market with HVAC declining by 10.1% net of the foreign exchange. As mentioned, this result is mainly due to the sharp acceleration in heat pumps that started in Q3 last year and sequentially strengthened in Q4 and Q1. On top of this, we have the comparison issue. Industrial and data centers are growing well in spite of this, while commercial is pushed into negative territory by this comparison. This effect will still be present in Q2 and will normalize in the second half of the year.
Refrigeration is down 3.8% net of the foreign exchange also suffering from the comparison base. We did not see a material recovery in EMEA in spite of consistent positive qualitative indications, while we do see, as mentioned, a very good result in North and Latin America.
I now move to Page 7 and leave the stage to Nicola for the items below EBITDA.
Thank you, Francesco. Slide #7 details the group result from the EBITDA to the net profit. The increase of D&A cost is related to the process price allocation of Kiona for EUR 1.1 million, and the residual part to the relevant CapEx activities of the last few years. The increase of financial charges is mainly related to the figurative interest on accounting effects such as put and call options, earn-out liabilities and IFRS 16 liabilities, which impacted the quarter for more than EUR 1.2 billion.
The ForEx gain is linked to the effect of the Kiona put and call option expressed in NOK. The capital gain refers to the difference between the estimated fair value and the actual amount of the put call option of CFM. The tax rate of the period was 22.2%, in line with the same period of last year. The group net profit at the end of March 2024 was equal to EUR 16.5 million compared to EUR 18.5 million over the same period of 2023.
Slide #8 shows the net financial position evolution of the first quarter 2024. The period was impacted by M&A activity for EUR 44.2 million. The flow from operation was strong and equal to EUR 26.4 million. The first quarter of 2024, net working capital increase is mainly due to typical seasonal effect. Taking out the effect of IFRS 16, the net financial position is equal to EUR 45.5 million. I'll leave Francesco to go on with the presentation.
Thanks, Nicola. So I'm now on Page 9 for the closing remarks. To summarize, in this quarter, we had a revenue decline due to the combination of 2 elements. The first is the well-known sharp decline in the heat pump market in Europe that from our standpoint, is even higher than the decline in end demand because of the high level of inventory present in the supply chain downstream.
The second is the very challenging comparison base since in the first part of 2023, we were in the process of recovering the backlog in addition to satisfying demand, and this effect applies to all verticals in all regions. The combination of these 2 effects is very strong, but fortunately, it's temporary and doesn't affect anything on our medium, long-term growth drivers and expectations. The decline in sales led also to a decline in profitability that was 18.2% in the quarter versus 20.8% last year, entirely due to the negative operating leverage.
In fact, gross profitability was slightly better, and we maintained a good cash generation that easily covered working capital and CapEx. Needless to say, in the last few months, we launched a number of cost containment initiatives to contain the most discretionary expense items like travel, marketing and consulting. There was obviously no reason to contain R&D expenses. On the other hand, we have the possibility to go back to our target range of R&D on sales above 5% with an increased expense.
On the ESG direction, there is a core strategy embedded in our business model. As expected, we presented our commitment letter to the science-based target initiative for a medium-term decarbonization plan. And finally, in terms of scenario, as I said, we're not concerned about the medium, long term since all the structural drivers behind our markets are still present, and some are gaining traction like data centers, and there are very positive expected developments in America related to natural refrigerants, the introduction of variable speed compressor technology and heat pumps.
In the short term, we expect a significant improvement, especially in the second part of the year due to the normalization of the comparison effect and the possible recovery of heat pumps, the timing of which is uncertain, also in consideration of the stock level present in the supply chain. Also for refrigeration, we expect the recovery in Europe to start within 2024. We continue to experience a positive qualitative sentiment, even if we still don't see the materialization in terms of sales. For the second quarter, the scenario should not undergo significant changes. Therefore, the group expects to report consolidated revenues close to those of the first quarter of this year. Thank you very much for your attention. We're now more than happy to answer to your questions.
Thank you. This is the Chorus Call conference operator. We will now begin the question and answer session. [Operator Instructions] The first question is from Christian Hinderaker with Goldman Sachs.
I wanted to start on the heat pump side of things. I guess you flagged in the last results that demand there was down more than 50%. I just wonder if we should consider that as ex the comps effect from last year? And I guess, also curious as to what you're hearing from the OEMs in terms of their procurement plans over the coming quarters as we understand it, they very much plan to cut inventories of components. So presumably, this demand decline might persist for some time? That's the first one.
Okay. Thanks, Christian. So yes, this is more than 15% decline is on the reported figures, so it includes everything. Concerning the stock level, what the customers tell us is effect that they have quite a substantial amount of stock of components, but not only components, also finished goods on their own warehouses, plus there are finished goods in the distributors, plus there are finished goods with installers sometimes. So it's a quite long supply chain full of end units.
So yes, you're right that it could take some time for recovery. This fact is not -- is really very difficult to forecast in terms of timing. Let's say that the general expectation is for some recovery in demand in the second half, we would see it with some delay, but the timing really quite uncertain.
Francesco, that's fair enough. Maybe just turning to margins. I guess now we said 2 quarters consecutively in the high teens versus the sort of 23% levels that we saw last year, which perhaps look high in the benefit of history. I guess if we enter a slower period for HVAC, but maybe an improving period for Refrigeration, should we think of that as having any mix dynamic in terms of profitability? Just curious about how we should think about marginality as the year progresses.
Refrigeration does not have a significantly different profitability compared to HVAC. On the other hand, overall, let's say, in terms of gross profitability, sometimes higher, especially in food retail because we're talking about more non-OEM channels.
But for sure, one thing that we can say is that the heat pump vertical has a slightly lower profitability compared to the others because we have bigger customers there. And typically, profitability is influenced by the size of the customer. So the heat pump vertical has a slightly lower profitability compared to the rest. So ironically, in this moment, let's say, the slowdown of heat pumps and the underweight of this vertical is beneficial to the gross profitability. And by the way, as I mentioned, our gross profitability is even slightly better compared to Q1 last year.
Maybe just finally, I just wanted to clarify on commercial HVAC, the comment there in terms of quarterly growth. I guess just curious as to whether that's expected to recover or whether the dynamic there was again more about just the comps effect from Q1 or if there's anything else that's driving a decline for commercial HVAC, I guess, ex data centers?
Yes, let's say, commercial HVAC in this quarter was, let's say, more or less in the mid-single-digit decline range. That's probably due to the comps because the -- otherwise, we would see some positive growth, not much because the market, especially in Europe, is not brilliant due to the interest rates, mainly, but we would see some growth.
We -- of course, the comps will normalize in the second part of the year, plus we do expect an improvement in end demand here, especially if interest rates start to go down as expected. So yes, definitely, in HVAC commercial, we do expect an improvement in the second part of the year for the combination of end demand improvement plus the comps that will normalize.
Thank you, Francesco.
The next question is from Niccolo Storer of Kepler.
Three questions, please. The first one, a clarification on heat pumps. So basically, if you are down in excess of 50% probably also the end market is if, let's say, the existing stock is not getting up so. Can you confirm that because we are reading here and there figures by count, but we miss an overall picture about demand at the European level.
The second one is on the acquisition of minorities and CFM. Is it fair to say that basically all the minority interest you had at the end of 2023 on your P&L were referred to this company, and so are going to disappear starting this year clearly, still considering that you have a portion of Q1 to be taken into account?
And the last one is on working capital. Have your assumptions about working capital to sales level to year-end change compared to last time we spoke, in particular, given all the issues that we have been seeing in the Red Sea with difficulties in transportation, et cetera.
Okay. So Niccolo thanks for the question. I'll take the first one, then I'll leave it to Nicola. So concerning the heat pumps, let's say, the figures we saw for Q1 is, if I remember correctly, something like 52% decline in end demand in Germany which is an important market. So it's probably a good proxy for the general market. Our sales are down more than that, plus let's say that we have some -- also some smaller volumes on higher-end units. Please consider that we are more on the higher end of the market for heat pumps, also some commercial heat pumps. And in that case, it's going slightly better for us.
So probably the vast majority of the decline for us is concentrated on the bigger customers that are closer to the general market. So this is to say that, in my opinion, we are definitely experiencing the destocking by our customers, if I understood correctly your question. So we are definitely seeing the destocking because especially with the bigger customers, we are seeing a decline quite high. So definitely very much higher than 50%; this is partly compensated by some smaller customers that have commercial units that have a better performance.
So yes, we are in the process of destocking. Of course, considering that the end demand is not brilliant, let's say, the destocking could take some time. And I'll leave it to Nicola for the other 2 questions. So first one is also...
With reference to the minority, it is correct to say that last year result, the minority result, there was mostly referred to the CFM results. So this year, this part will disappear, and we will have the [ partial effect ] to Kiona that these are the minority, the 17.6%. Then on the working capital, it is -- we do not see a problem related to the transport in this moment. And we are not foreseeing a particular evolution compared to the last year figures always talking about the expectation of the year-end level of working capital. In this moment, accounts receivable is performing very well in terms of collection and then we have a regular relationship with supplier and given the inventory level is in a regular situation.
So basically, in other words, for the end of the year, we expect an operating working capital in percentage more or less in line with the end of last year.
It was 21%. It was correct.
The next question is from Alessandro Tortora, Mediobanca.
Okay. I have 3 questions. The first one is related to the refrigeration, let's say, segment. Can you tell us, let's say, excluding Kiona and therefore, let's say, constant perimeter, what is the reasonable scenario going, let's say, in the coming quarter. So if we can still forecast refrigeration, I would say, posting marginal growth, okay, organic growth this year? Or if I understood well, maybe, okay, this is much more a topic related, let's say, to next year to see much more bigger [indiscernible]could also care of refrigeration is the question [indiscernible]
Okay. Okay. Thank you, Alessandro. So in terms of refrigeration, even let's say that Q1 sequentially on Q4 already saw an improvement in refrigeration. So we saw already a sequential improvement. Of course, compared to Q1 last year, we have the comp issue that brings the result now. And we do think that the market will continuously improve during the year. Of course, it's -- as I said, -- everybody is expecting this big recovery in Europe of the market, but the timing is frankly still uncertain. But in general, we do expect a sequential improvement in refrigeration, which has already started [indiscernible] .
Talking about Europe because again, in North America and also Latin America, even if it's smaller, the performance is very, very good, and we expect that to continue.
Okay. Okay. Thanks Francesco. And then, let's say, a question regarding the -- I'm sorry on this, but on the full year qualitative indication. In the sense, if we take other Q2 sales outlook, basically, we are talking about an organic decline in terms of top line, which is not far from, let's say, around 15%, sales decline. Just as a sense, do you believe that it is realistic to think about probably a best case that the company could stay in the 0 organic growth environment or maybe, let's say, 0 to minus 5%, considering likely okay, restocking in some segments, as you mentioned also before on heat pumps, for instance, do you believe, as I said before, it is realistic to see maybe a year ending something organically speaking, between 0% to minus 5%?
Yes. This is a very good question, Alessandro. Unfortunately, it's very difficult to answer at this stage. Of course, second half definitely will be better than the first. There will be a recovery and improvement in sales. In this very moment, it's very difficult to quantify the extent of this recovery because there are -- one element is that, okay, the comps will normalize and that we know.
But in terms of heat pumps and in terms of refrigeration recovery, this is something that, unfortunately, as you know, it's quite difficult to quantify in terms of timing and magnitude. We have no concern at all from -- for the medium-term recovery of these markets, absolutely. On the other hand, we have very positive expectations for the medium term. But in the short term and talking about the second half timing and extent of recovery, it is very difficult to quantify.
So -- and second half will be definitely significantly better, by how much is difficult to say in this moment. We will, of course, be more precise at the presentation of the first half results.
Okay. Okay. I understood this point, Francesco. And then if, let's say, we stick to what basically the company can control much better in this environment. So also you mentioned before, the incremental cost containment action the company has launched. In this environment, clearly, with a softer top line, do you still believe that with this -- let's say the action you mentioned before the company can stay in the, let's say, historical range, which was 19% to 20% or at least, let's say, to stay there, which means the 19% and not, let's say, a profitability below that level?
Well, again, as you know, this -- our 19% to 20% target is related to high single-digit organic growth rate. And also, let's say, to a target level of R&D, which is between 5% and 6%. So it's true that we are containing -- we are incrementally containing discretionary expenses. But on the other hand, we are increasing our R&D expense. And the end result in profitability, of course, will depend also on sales. So since it's difficult at this stage to forecast sales, it's even more difficult to forecast the profitability. So it's difficult to say. I can just confirm that the target 19% to 20% with this level of R&D, let's say, is related to high single-digit organic growth rate. And then the final profitability will depend on the final result that we will achieve on the top line.
Okay. Okay. I know that it is not easy, okay, in terms of visibility. And then the last question is on the M&A strategy, clearly now you decided basically not to purchase this minority stake. Can you give us a sense considering clearly the current environment? Can you give us a sense of the option you see on the market? You mentioned a very strong North American market for you -- so I would like to understand if the company is active in monitoring any potential opportunity, for instance, in a healthy market like the North American one or maybe, okay you see also some opportunities in Europe considering the current difficulties?
It's both, Alessandro. Absolutely, the key focus, we have a key focus on North America. We are very active there and we're starting very actively there because it's a market that has a huge potential for us. And so there is a key area of exploration and investigation, and we're very, very active. But we are also looking at other parts of the world, for sure, Europe, but also the rest of the world. Europe, as you know, is interesting for technology in our sector. North America is very important for acceleration of our market share and market access. So I would say to summarize, key focus on North America, very active there, but also looking at Europe and the rest of the world.
The next question is from Alessandro Cecchini of Equita.
Everybody, thank you for taking my questions. The first one actually, it's -- if you can provide, I mean, a Kiona is the first time, I mean, it's the first time this year, of course, that you are reporting the sales now of Kiona. So just if you can -- for 3 months, if you can split the part of Kiona that we needed to put in HVAC business and the part of Kiona that it's considered, I would say, refrigeration. This is my first question.
And my second question is that about the profitability. So just to model a little bit. So second quarter, if we assume similar sales -- absolute sales, I don't see major reasons to see different margins in the second quarter? Or we needed to account something in order to estimate profitability in the second quarter.
Thanks, Alessandro. So for Kiona, let's say, the split is approximately 60% HVAC and 40% refrigeration. That's approximately the split. Concerning the profitability for the second quarter, I mean you're basically right. I mean, so if top line is more or less where it is and there is no particular reason to expect the major changes on the cost base. So your assumption is absolutely reasonable.
[Operator Instructions] Gentlemen, there are no more questions registered at this time.
Okay. Thank you very much for your attention and for your questions, and I look forward to speaking to you for the presentation of the first half 2024 results. Thank you. Good afternoon. Bye.
Ladies and gentlemen, thank you for joining. The conference is now over, you may disconnect your telephones.