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 Half 2022 Results Presentation Conference Call. [Operator Instructions]
At this time, I would like to turn the conference over to 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 half '22 results.
I'm starting from Page 2 with the main highlights. We are proud to report another very strong quarter, the sixth consecutive period with an organic double-digit revenue growth over an already very strong growth performance in the comparable period of last year. Demand follows the same trend as the previous quarters and is very strong, both in HVAC and refrigeration. These results are especially remarkable considering that managing the supply chain, which actually has been the real bottleneck, is still very challenging. Revenues were up 29%. And if we don't consider the positive impact of the exchange rates and the contribution coming from the acquisitions of CFM and Enginia that account to approximately EUR 16 million, organic revenues growth rate is, in any case, close to 20% at 18.2%.
In the quarter, like-for-like growth at fixed exchange rates was 15% at the top end of our expectations at the end of Q1. Thanks to a demanding but very effective management of the supply chain since once again, the supply chain has been the limiting factor and not demand. Supply chain management was made more difficult by the different severe lockdowns in China that in the short term, affected also demand in the region.
EBITDA margin at 21.5% was higher both compared to the full year '21 as well as to the first quarter, offsetting higher raw material costs. Thanks to the materialization of the actions taken on prices in the last quarters and also thanks to operating leverage, even allowing for higher investments in innovation, digitalization and supply chain.
We continue to execute our M&A strategy, completing 2 bolt-on acquisitions in the period. The acquisition of 70% of the share capital of Sauber, active in services and taking control with a further 30% share of our existing joint venture, Arion, active in the design and manufacturing of sensors. Our pipeline is still very active with a focus on Europe and North America.
Now moving to Page 3. I take the opportunity to commence these 2 acquisitions. Sauber is based in the Lombardy region in Italy near Mantua, had revenues of EUR 7.6 million in '21 and an EBITDA of EUR 800,000. Sauber is very strong and has a very strong know-how in on field and consulting services with a special focus on energy optimization. This acquisition follows our guideline of growing in services and the specific strategy with Sauber will be to develop those services, which are particularly in line with Carel's core business, like humidification and refrigeration and also grow geographically in other parts of Italy.
We'll also leverage on the very strong know-how of Sauber to fuel our innovation in digital services, but also in products, making them easier to install and maintain something which is particularly critical, for example, in heat pumps, considering the expected strong acceleration of deployment of these units. Of course, we'll also use our digital platform to strengthen the capabilities of Sauber. In the future, we'll possibly execute similar transactions in other countries to roll up our service strategy.
On Page 4, as regards Arion, it's a joint venture established in 2015 between Carel and Bridgeport, a manufacturer of sensors, particularly strong in the automotive sector with the purpose of joining Bridgeport know-how in design, industrialization and manufacturing in large volumes with the know-how of Carel in the HVAC and refrigeration domains.
By taking control of this joint venture, the design to manufacture sensors for our markets, first of all, we are securing the supply of a critical technology, but we're also strengthening our design and manufacturing capabilities for technology. There is indeed a great enabler of energy efficiency and also digital services in our applications. 2021 revenues of Arion were EUR 2.7 million and EBITDA was EUR 500,000.
Before moving to Page 5, let me once again emphasize that our M&A pipeline is still very active with particular focus in Europe and North America, and the guidelines are always the same consistently with our strategy.
So now on Page 5, we can go back to our first half results. Revenues at EUR 261.3 million were up 29% from the EUR 202.6 million of last year. If you look at the chart on the top right, we can see that we have EUR 36.8 million of organic growth, plus EUR 15.8 million coming from M&A and then EUR 6.1 million is coming from the foreign exchange. So approximately 3% of our revenue growth in the period is related to ForEx, without which growth was 26%, while same perimeter growth without M&A was 21.2%. It's worth remarking that we are compounding on an already very strong result in the first half of '21 when we had a growth of 26%.
EBITDA at EUR 56.1 million grew 27.2% over the EUR 44.1 million of last year, with a profitability of 21.5% of sales, slightly down from the 21.8% million of last year but improving on the year-end '21 and also on the last quarter when it was 21.1%. If you look at the EBITDA in the period, so in Q2, it was approximately 22% of sales. Thanks to the massive realization of the actions taken on prices in the previous quarters and thanks to operating leverage, while at the same time, the group is increasing its investment in innovation, production and digitalization. And as we said, those have always been our priorities.
Net profit at EUR 34.8 million was up 29.7% from the EUR 26.8 million of last year. Thanks to the operating results and even in spite of a normalization of the tax rate, which was 21.4% in this period compared to 19.9% in the same period of last year. Finally, CapEx at EUR 8.9 million were up 29% from the EUR 6.9 million of last year, they're in line with expectations and include the new plants in Croatia, which is now fully operating.
On Page 6, we can see the revenue breakdowns. To the left, there is the breakdown by region. Here, we see a continued strong growth in all regions with an acceleration in America and a deceleration in APAC, mainly due to the lockdowns in China.
In EMEA, sales grew by 27.3% net of the foreign exchange or 19% like-for-like with continued strong demand in most applications, especially heat pumps, indoor air quality, data centers and food retail. The slight deceleration in like-for-like growth is related to the Ukrainian and Russian markets.
In APAC, sales grew by 13.4% net of the foreign exchange. Here, the deceleration is due to the lockdowns in China that affected especially the project-related businesses like food retail. In any case, demand expectations for China remain solid, but with a normalization expected. South APAC, on the other hand, had a very good performance with a growth of more than 20%.
In North America, sales grew by 34.7% net of foreign exchange or more than 20% like-for-like. Here, we continue to see strong demand in data centers, indoor air quality but also a good recovery in refrigeration. We are also here improving our execution of the strategy.
In Latin America, sales grew by 24.3% net of the foreign exchange with a strong improvement over Q1 due to the seasonal factors and also an improvement in our capacity to fulfill demand in the region vis-a-vis the shortage.
To the right, we can see the breakdown by market. HVAC grew by 28.9% net of foreign exchange, basically in line with the previous quarter. Thanks to continued strong demand in heat pumps, indoor air quality and data centers.
Refrigeration grew by 21.2% net of the foreign exchange with a lower growth compared to the previous quarter, mainly due to a comparison effect for the very strong results reported in Q2 '21 when refrigeration had a growth of more than 30%. In any case, demand remains good, especially in food retail.
In general, please let me mention once again that the bottleneck has been the supply chain, namely the availability of components and not demand in all regions and in both markets. And this scenario we foresee will last at least for the entire 2022.
I now leave the stage to Nicola on Page 7 for the items below EBITDA.
Thank you, Francesco.
The Slide #7 details the group result from the EBITDA to the net profit. The first half of 2022 was impacted by higher D&A costs, mainly related to the M&A activities performed during the last year and the consequent purchase price allocation process.
In the period under review, the financial charges were higher compared to last year due to an increased effect deriving from IFRS 16, amortized cost and the financial effect of the put and call option on CFM. The ForEx impact in the first half of 2022 was a loss of around EUR 153,000 compared to a loss of EUR 255,000 live in the first half of 2021, and it is mainly related to group operation of the legal entities based in Italy and Croatia.
In the first half of 2022, the result of the company consolidated with the equity method was a gain of EUR 2.3 million compared -- mainly influenced to the fair value evaluation of Arion. The tax rate of the period was 21.4% compared to 19.9% of the first half of 2021, originated by a different country mix, in particular to a growth in North America, U.S.A. and Germany. The group net profit of the first half of 2022 was equal to EUR 38.8 million compared to EUR 26.8 million of the same period of 2021.
Slide #8 shows the net financial position evolution of the first half of 2022. The flow from operation was equal to EUR 44.5 million, pretty in line with the CapEx and the increase in the net working capital of the period. The increase in net working capital was mainly driven by a strong growth of revenue to a planned increase in inventory to better cope with the raw material shortage and the seasonal effect of account receivables. It should be noted that the DSO at the end of the period is in line with the same period of last year.
During the period, the group paid dividends of EUR 16.6 million. and the net financial position was impacted by M&A activities that implied a net impact of EUR 1.4 million. At the end of June 2022, the net financial position of the group was equal to EUR 74.8 million. Taking out the effect of the IFRS 16, the net financial position with banks amount to EUR 47.2 million, a level significantly below the yearly EBITDA.
I leave Francesco to go on with the presentation.
Thanks, Nicola. So I'm on Page 9 for the closing remarks.
To summarize, we saw and still see solid demand in all regions and in both markets, leading to a strong growth. Some applications continue to stand out, such as heat pumps, data centers, indoor air quality and food retail. Demand in our applications is fueled also by an increasing focus by end clients on energy saving and environmental sustainability with an acceleration related to the rising cost of energy and the drive to transition away from fossil fuels.
The strong effort the company put and is still putting into initiatives to increase its resilience like chip-pivoting, longer-term orders, double sourcing and double country suppliers as well as the new plant in Croatia, allowed for double-digit organic growth in revenues for the sixth consecutive quarter. The outlook on demand remains positive. And for the rest of the year, we still see the supply chain as the main bottleneck which unfortunately is pretty difficult to forecast.
We're consistently executing our M&A strategy. And in this period, we completed 2 bolt-on acquisitions with a great strategic potential. Sauber, strengthening our position in the services area, and Arion securing the supply chain in the critical sensor technology and opening new opportunities for innovation related to energy efficiency and digital services. Our M&A pipeline is still very active with a particular focus on Europe and the U.S.
On the macro side, unfortunately, we are still in a very challenging scenario where the electronic material shortage and cost inflation have not shown significant signs of relief. Furthermore, the restrictive monetary policy as well as inflation are likely to slow down global economic growth. Fortunately, though, many of our applications are very resilient and present strong secular tailwinds.
For this reason, to conclude, a demand scenario that remains positive and the continuous efforts by the company to increase its resilience should allow us to positively cope with the macro challenges. Thanks to this and net of a possible further worsening in the supply chain, the group expects to report in the second half of '22 a low- to mid-double-digit growth in revenues compared to the second half of '21 on a like-for-like current foreign exchange basis.
Thank you very much for your attention. We're now more than happy to answer to your questions.
[Operator Instructions] The first question is from Will Turner with Goldman Sachs.
I have a couple of questions. The first one I'm going to ask is, we've obviously -- for the last quarter, we've seen a lot of industrial companies build up inventories. And in various different industries, there are commentary that inventory levels are quite well supported or they fully restart after obviously having issues over the last couple of years. How do you see your customers' inventory levels? Do you think that part of your volume growth that you've had in the last couple of years has now resulted in a more normalized inventory level from your customers?
Okay. Thanks, Will. So I believe that the inventory level on average downstream in our supply chain is pretty high in this moment as in many other industries, as you said, because everybody, of course, try to stock up for the components they could. And also because the shortages of some categories of components specifically implies that they receive materials that they could not fully use for production because some other components were missing. So I believe stock levels downstream are high. On the other hand, I don't believe that the stock levels downstream are high for our products, specifically because just -- I mean, we try to be cautious in supplying our products since they are in shortage to customers that as much as possible would use them to production for -- let's say, for sales and not for inventories for stock. So in general, stock levels are high, but not of our products, in my opinion.
Okay. Interesting. And the recent acquisition of Sauber, obviously, this is more of a servicing business, and thanks for the kind of explanation. Is there any change in kind of Carel's strategy or its route to market here? And how do your customers feel about you trying to service some of the installed base? Are you not cannibalizing some of that business?
Yes, that's a good point. Thanks for the question. So in general, our strategy is not changing. The acquisition of Sauber is perfectly consistent with our strategy because it's consistent with one of the three guidelines we always had for M&As, which is deployment of services on field, consulting and digital. So it's absolutely consistent. Concerning -- because those services that Sauber does in large part, we're also developing organically.
For what concerns, the possible cannibalization of our customers? That should not be not be the case because we are going to orientate the strategy of Sauber mainly towards -- for example, humidification, which is an end product that we sell, where we don't cannibalize customers or refrigeration where, let's say, some kind of offering on our part is expected.
So in general, no, we're not cannibalizing services provided by our customers. And in general, whenever that is the case, we try to avoid a direct conflict because sometimes some specific businesses in some geographies that could happen, a potential overlap could happen. But we are always very sensitive to manage it in the proper way, so not to cannibalize our customers. So in general, we don't see a conflict, and any if any conflict would emerge, we will try to manage it to avoid it basically.
Okay. Great. And when you say about the quarter, one of the big headwinds you probably had was the Chinese lockdowns and production there. Is it possible to quantify how big of an impact this had on you in terms of any potential missed sales in China or production that was kind of delayed and therefore, not being able to generate from elsewhere in the world?
Okay. Well, on the demand side, we could say that approximately the difference in growth between -- for the APAC region between the first quarter and the second quarter is due to these lockdowns. So basically, the deceleration is entirely due to this which is a very short-term effect by the way, because demand is still there, just, of course, was mainly postponed. On the supply side, we didn't had any, let's say, major disruptions. We had some delays. So I mean the effect would not be so material, maybe some business move to Q3, but not so material on the supply side, just creating some delays. For demand, it's basically the difference in growth between the first and the second quarter for the APAC region.
The next question is from Alessandro Tortora with Mediobanca.
Francesco, let's say, some so question, okay, brief question, but it's, let's say, a brief list, okay? The first one, so a clarification on the guidance. So basically, for the second part of the year, let's say, the company is forecasting low -- was it low teens, mid, let's say, double-digit organic growth with FX, okay? So just a clarification on this point that you are including clearly the FX impact inside this guidance. I don't know if you want to go one by one, Francesco.
As you wish, Alessandro, yes. Well, thanks for the question. So for this, let's say, the guidance is in current exchange rates. Approximately the effect of the exchange rate on our top line, as I said in the presentation, is around 3%. I would say that we are, in any case, confident that we could maintain this range also in constant exchange rates.
Okay. Okay. Then the second question is on the, let's say, pricing strategy. You mentioned in the presentation price increases, let's say, made and implemented. Are you planning to do further price increase in the second part of the year?
Yes, we applied the price increase on the 1st of July, an additional one. Of course, as for the previous ones, the effects will be seen. It will take a few months before we fully see the results on the top line. But yes, in the second half of the year, an additional low- to mid-single-digit price increase has been applied. But again, it will take a few months before we see it.
Okay. And that to better understand. The reason behind this was related to logistics or, let's say, some specific, I don't know, cost inflation?
Yes, it's basically to match -- to partially match the cost inflation. We're not matching entirely the cost inflation but to partially match the cost inflation. In this moment, let's say, the cost increase on average for raw materials is in the high-single-digit range, while the positive price effect is in the mid-single-digit range.
Okay. Okay. And on the back, let's say, of this planned -- I'm sorry, that you made price increase. If we look at, let's say, the current EBITDA margin that you got, but also the guidance, let's say, you gave on the top line side. Is it fair to say that considering the range you have always given to us 19% to 20%, there are, let's say, a good chance to stay in the high end of this range.
Well, I believe so. Let's say that, as you know, in -- towards the end of the year, seasonally, our profitability tends to decrease a little. And likewise, we have -- we are increasing our investments and significantly, which is our strategic priority. But -- so we maintain our mid-cycle target, but it's fair to assume, as you say, that we could converge towards the high end of the range, yes.
Okay. And the other question is on the M&A pipeline you mentioned. Are there significant let's say differences in terms of targets? If you think about Europe, maybe you mentioned before service signification, I don't know. I have immediately in mind maybe something in Germany consider the ratification presence there, for instance. So if I look at the U.S., for instance, are there different targets, maybe I don't know, some product or distribution. So just to better understand the strategy among the 2 countries you mentioned this target?
Okay. Well, the strategy, in general, is the same. We are looking for similar kinds of targets in Europe and the U.S. Let's say that in North America, the size, for example, of service companies is definitely larger than in Europe, because the Europe service companies tend to be very local, while in North America, it's much easier to find national service companies operating nationally. So in that respect, the size of service companies is bigger. Also, the average size of companies is larger, so we could expect to have a larger acquisition maybe in North America in the future.
But having said that, the strategy is basically the same. Of course, since in North America, our market share is smaller than in Europe. It's more interesting to look for targets, for example, opening new channels or closer to end customers. So more kind of market share-related targets in general. But these are, let's say, slight differences on a strategy, which is generally consistent between the 2 regions.
Okay. Okay. And the last 2 questions I've, let's say, just more on the accounting side, maybe for Nicola. The first one is on the working capital on sales that you're considering the buildup in inventories that we observed in the first half. So is it reasonable, let's say, to see maybe some partial reversal? Or maybe if you can give us an idea of working capital on sales we may, let's say, see by year-end. And the last question again is on minorities. It's let's say, pretty high contribution of minorities around EUR 1 million. So just to better understand, let's say, what is the outperformer to you to have this EUR 1 million of minorities?
And so Alessandro, with reference to the working capital, I believe that at the end of the year, it will be pretty substantially in line to what was the result at the end of the half year report. So pretty in line with 19%. On the midterm, we confirm our guidance to say that it would be something around 16%, 17%. So it is a momentum that we have to manage the situation that is in place with the supplier in this way with the customer. With reference to minority, if you mean the result that we have on the profit and loss, it mainly refers to the CFM acquisition, and it refers to the 49% of results that it was resulted by the legal entity intact.
Okay. Okay. And sorry, Nicola, just because you mentioned, let's say, CFM is there, let's say, are there any specific impact related to hyperinflation in Turkey that I should think about?
I do not believe so because the company in Turkey at the end, they are managing the business based on euro. And even to the customers, they are invoicing euro, they are collecting in euro and even the purchasing is in euro. And so maybe the inflection is at the end of the day, a positive effect on the profit and loss because the operating costs that are paid in Turkish lira are consolidated and even managed in an advantaged way because it's a gain on the profit and loss at the end of the day.
The next question is a follow-up from Will Turner with Goldman Sachs.
Yes. Sorry, I had a follow-up question. On the guidance for the second half of the year. So you're pointing towards low- to mid-double digits organic sales growth, right? So that's excluding both acquisitions and FX. And when I look -- yes, when I read that, I think of low- to mid-double-digit, that's 15% up to maybe 35%, 40% and anywhere in that range. What's giving you the confidence behind that? Because you did have a slowdown in organic growth in the second quarter. I know part of it is explained by the Chinese demand, but that will only be a minor impact. And going into the second half of the year, we do have an economic environment, which is slowing, and you have a much tougher comp. So it'd be really interesting to know why you're confident from 2Q, you're going to see an acceleration for the remainder of the year.
Well, yes, so -- yes, the guidance I confirm is, let's say, let's put it in numbers, 10% to 15% organic growth half-on-half. The guidance is actually in current foreign exchange. But as I said, we're confident we could match it also in constant foreign exchange. The reason why we're forecasting this is because demand in several applications and in several geographies is still very strong. And our outlook is still pretty positive. For example, heat pumps, I mean, heat pumps is a booming business. It's boom, it's exploding. And the bottleneck is definitely what everybody can supply in this supply chain.
But also North America, the outlook is still is still positive. We have data centers, which is good. We have still good demand from food retail in Europe because they're driven by the regulation and the rising energy costs are putting additional pressure on end users to save energy.
So in general, yes, the demand is proving pretty resilient and still pretty strong. And if it were not for the shortage, the results in the first half would have been definitely higher. And again, our guidance so far for the second half is based on what we can supply, not on demand because the real uncertainty here is the raw materials availability, it's not demand. So that's the highest uncertainty. So this guidance is essentially in continuation of the very challenging scenario that we have, but not the worsening of this scenario because that's the limit in this moment.
Okay. Great. Yes. So I misread that slightly with the low- to mid-double digits. So you're meaning in the 10% to 15% range, is that?
Yes. Yes, absolutely. Yes.
Okay. Great. And in terms of the order intake, I know you have a relatively short order book, but can we assume then that in the second quarter, the order intake was growing much more significantly than the sales growth?
Well, that's more or less in line with sales. So what the order intake we are seeing is more or less aligned with what we experienced in the last few months and aligned with sales. Again, barring, of course, the shortage because we are not able to deliver anything that we are ordering for. But yes, the order intake is more or less in continuation with the last few months.
Mr. Nalini, gentlemen, there are no more questions registered at this time.
Thank you very much, everybody, for attending this conference and for your questions. We're looking forward to talking to you again for the presentation of the third quarter results. Thank you very much.