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 9 Months 2021 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 9 month 2021 results. I'm moving straight to Page 2 with the main financial highlights. So as expected in this quarter, tensions on the global supply chain, in particular for electronic components, intensified. In spite of this, we managed to achieve in the quarter, so June to September, a very good growth of 15% on a like-for-like basis over a third quarter of last year that was already pretty positive because we had a growth of almost 8%. And this is thanks to the actions and investments that the group has been taking to increase its resiliency. This led to a growth in the 9 month of 25.1%. If we exclude almost $3 million of negative effect from the foreign exchange and $9.4 million of positive effect coming from the consolidation of CFM and Enginia, in any case, organic growth was well above 20% at $22.6 million.
Demand was very positive across the board, like in the first 6 month and also the outlook remains very positive. Growth was lower than in the first half, entirely due to the shortage. In any case, most of the backlog will be recovered in the coming quarters.
EBITDA margin adjusted was 21.9%, up 230 basis points on the 9 month of 2020 and 220 basis points over the full year. This excellent performance was mainly driven by operating leverage as well as by the cost containment measures we have been taking since last year. This offset higher input costs due to the shortage as well as a slightly different product mix effect, again due to the shortage.
On the cost side, we have to say that we still have to see the full effect of the actions we took on prices due to the long lead times which are present in this moment in the supply chain. We will see the full effect in the coming quarters. What I mean by product mix is that the more sophisticated programmable controllers that use more microprocessors were affected more than other platforms by the shortage. They insist mainly on the HVAC commercial and HVAC industrial applications, which are pretty sophisticated applications. And these products tend to have a slightly above than average profitability.
This effect, in any case, is entirely temporary and due to the shortage and will go away as soon as the shortage improves. Organic net financial position, so net of M&A, decreased by 30% where the free flow from operations in the 9 month of EUR 55 million easily covering EUR 14 million of increase in net working capital, which was driven by a 1/3 increase in inventory as well as a higher volume of business, EUR 14 million of CapEx, as we will see, and EUR 12 million of dividend.
I'm now moving to Page 3 with some more economic details. Revenues at EUR 310.3 million were up 25.1% from the EUR 248 million in the 9 month of 2020. We had almost EUR 3 million of negative effect from the exchange rate. If we adjust for this, revenues at EUR 313 million were 26.2% above last year. If we take out the EUR 9.4 million coming from the contribution of CFM and Enginia, revenues like-for-like were EUR 300.9 million with a growth of 21.4% over last year.
In the chart on the top right, we can see that this 21.4% increase applies also if we make the comparison with 2019, since in the first 9 months of 2020, revenues were in line with the previous year. EBITDA, at EUR 66 million, was up 36.1% from the EUR 48.5 million of last year. If we adjust for the nonrecurring items, mainly related to our M&A activity, EBITDA adjusted was EUR 68 million with an increase of 39.6%. So this means that profitability in the 9 month was 21.9%, up from the 19.6% in the first 9 month of 2020.
Net profit was EUR 38.8 million with a 48.2% increase from the EUR 26.2 million of last year thanks to the operating performance and also thanks to a strong improvement in the tax rate compared to last year, since the tax rate was 20.8% against 23% last year, mainly due to a favorable geographical profit mix.
CapEx were EUR 13.8 million, up 77% from the EUR 7.8 million in the first 9 month of 2020. They are in line with expectations, and they include the construction of the new factory in Croatia.
I'm now moving to Page 4, with the revenue breakdowns by region and sector. To the left, we can see the breakdown by region. EMEA, net of foreign exchange, grew by 25.4%. Here, we have the main contribution coming from CFM and Enginia that mainly insist on this region. But in any case, the purely organic growth in the quarter, June to September, was above 13% in this region despite a very challenging supply chain situation.
In Asia Pacific, sales grew by 30.4%, net of the foreign exchange. Here, we have an exceptional result in China, but also a good performance in Southeast Asia despite the extensive lockdowns that happened in the region. In China, we continue to see a very strong demand, basically across the board. In HVAC, all applications are growing very well and have a very positive outlook. So data centers, industrial, commercial, heat pumps as well as projects related to indoor air quality.
Also, foodservice had a very good growth in China. The only application that had a softer growth in China was food retail because we noticed the slowdown of investment in the end market, but we have also to consider that we come from a few quarters of exceptional growth in food retail in China. So also some consolidation was to be expected. In any case, also for food retail in China, the outlook and the expectations for the future are very positive. In North -- also thanks to the execution of our strategy in China.
In North America, sales grew by 22.5%, net of foreign exchange. Here, we have some contribution from Enginia. If we take that out, sales grew by approximately 18%, which is in line with the growth in the first half. This result is particularly positive if we consider that in North America, there is a bigger impact due to the shortage since North America is heavily exposed to HVAC industrial and HVAC commercial, as I was mentioning before. So North America was, more than other regions, impacted by the shortage. But despite this, they managed to maintain an organic growth like in the first half.
In Latin America, sales grew by 48.8%, net of the foreign exchange, with a very good result in Brazil and in the rest of the region.
If we move to the right to the breakdown by sector, HVAC grew by 24.2% net of the foreign exchange or 20% organic. We have a very strong demand in all applications in HVAC, in, again, data centers, industrial, heat pumps, commercial, indoor air quality and air handling unit. Demand is extremely positive, and we also expect very positive results coming in the future from the European Union policies for increasing the energy efficiency of buildings.
In refrigeration, sales grew by 30.9%, net of the foreign exchange, or 25% organically. We have a very strong result in foodservice that picked up again after 2020. We have a very good result in food retail, especially in Europe, besides China. In Europe, food retail is benefiting from a very strong recovery of the investment cycle, also compounded by the pursuit for energy efficiency and sustainability.
In both markets, HVAC and refrigeration, growth was lower than in the first half, entirely due to the shortage. Demand is still very strong, and all the backlog that was accumulated will be recovered in the coming quarters. The noncore business finally grew by 7.7%, and so we ended a total revenue growth net of the foreign exchange by 26.2%.
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 net profit. The first 9-month result was impacted by higher D&A costs, mainly related to M&A activities performed during the present year and a consequent purchase price allocation process.
In the period under review, the financial charges were higher compared to last year due to an increased IFRS 16 effect. Such growth was, in part, compensated by a better result of the company's consolidated with the equity method.
The tax rate of the period was equal to 20.8%, below 2011. Such a decrease is mainly related to a different country mix. The group net profit as at September '21 was equal to EUR 38.8 million compared to EUR 26.2 million of the same period of 2020.
Slide #6 shows the net financial position evolution of the first 9 month of 2021. As at September 2021, the net financial position was equal to EUR 68.5 million compared to EUR 49.6 million at the end of December 2020. Excluding IFRS 16 liabilities, the net financial position as at September 2021 amounted to EUR 40.3 million.
The free flow from operation of the period was equal to EUR 55 million. The increase in net working capital, mainly driven by seasonal effect. It should be noted that the DSO at the end of the period, slightly improved compared to September 2020 level. In June, the group paid dividend of around EUR 12 million. In 2021, M&A activities impacted the net financial position for around EUR 35 million. At the end of September, the group has amount of cash, cash equivalent and a variable credit line of more than EUR 100 million.
I leave the floor to Francesco to go on with the presentation.
Thank you, Nicola. I'm on Page 7 with the closing remarks. So on the demand side, the same very positive trends that we reported in the first half are still there in the third quarter, with the same intensity and with a very positive outlook.
In HVAC, we have a very good demand in all applications, heat pumps, data centers, indoor air quality and air handling units. In refrigeration, we have a strong recovery in food service as well as a very good result in food retail, especially in Europe, driven by a strong recovery of the investment cycle, also driven by regulation and the pursuit for sustainability.
In general, the pandemic as well as the recent spike in the price of energy commodities is very much increasing the sensitivity of everybody for high-efficiency solutions and sustainability. Just as a matter of example, there is a regulation, which is now proposed by the European Commission and is in discussion, the so-called Fit for 55, which basically asks to renovate -- asks countries to renovate 3%, at least, of old buildings every year compared to the current 1% of renovation cycle. So it's 3x the current investment required for renovating buildings for energy efficiency.
And this is just an example. So the perspectives are very, very strong. On the operations side, as expected in this quarter, the tensions in the supply chain intensified. We managed, in any case, to achieve, as we have seen, a 15% like-for-like growth in the quarter, June to September, over an already very good quarter last year. Thanks to the actions that we took to increase our resiliency like deployment of new production lines, homologation of alternative components, inventory increase and also cheap pivoting, which means redesigning products to allow for the usage of different macro processors.
These actions will allow us to enter into 2022 with a much, much more solid, robust and resilient footprint compared to what we had at the beginning of the year. In the last few months, there has been extended lockdowns in Southeast Asia, where an important part of the supply chain for electronic components is located. This resulted in higher tensions that will also last through Q4. But in any case, we expect a slow improvement in the situation in the coming quarters, also thanks to the actions that we have taken.
And thanks to this action, again, we achieved in the quarter, a double-digit like-for-like growth and a 21% adjusted EBITDA margin in the quarter despite all the inflationary pressures that we have. And again, all these results are even more remarkable if we consider that the comparison is more challenging now because Q3 last year was pretty strong.
So to conclude, taking into account the very positive trend in demand along with the tight supply chain scenario, we moved our previous revenue growth guidance for the full year from the 15% to 20% range to, let's say, the upper half of this range, that is 17% to 19%, excluding any contribution from M&A.
As far as profitability is concerned, as anticipated, we expect that for the full year, it will converge towards our historical target in the region of 20% also because I remind you that every year, we see a slight reduction in Q4 due to seasonality.
Thank you very much for your attention, and we are now more than happy to answer to all of your questions.
[Operator Instructions] The first question is from Alessandro Tortora with Mediobanca.
Yes. I have, let's say, 3 ones, okay. Three question. The first one is on the ongoing deterioration of -- on the shortage side that you mentioned before. The question is if you can share with us, let's say, any additional infos on shortage, let's say, by division, it is chiefly related to the HVAC and if, let's say, on the refrigeration side, this is something, let's say, much more manageable. So this is the first question. But also going forward, if you believe, let's say, when -- I know it's difficult, but when do you believe that we can think about, let's say, a normal pace of growth for CAREL without this constrain coming from chip to you.
The second question is on the working capital absorption, but also the CapEx side. If you can give us an update because if I understood well, probably this is a year where it's difficult to build up inventories, then probably -- on the working capital side, maybe you are performing a bit better. And also on the CapEx side, if you can give us an update because if I remember well, you were guiding something close to EUR 20 million this year. So just to have an update if this is something confirmed by you.
Okay. Thanks for the questions, Alessandro. So for your first question on the shortage. So yes, as I mentioned, so far in the last few months, the shortage affected the more sophisticated, let's say, the bigger programmable controllers because they use more microprocessors and are mainly used in HVAC industrial and commercial.
Now this is going to improve in the coming month because of the actions we took mainly in terms of chip pivoting. So this is going to improve pretty soon. On the other hand, that we are seeing some tensions on other components, for example, for inverters, but we are, of course, now in this moment, taking actions to overcome this. So let's say, for HVAC industrial and commercial, this is something that will be resolved in a few months, pretty soon. We could see some additional tensions on inverters on the other end. But again, we are taking actions. So we believe, let's say, that we can mitigate the effect.
Now coming to the improvement. So what we -- now unfortunately, the tensions due to the lockdowns in Southeast Asia that -- I mean happened during the summer, the tensions will last also through Q4. For, let's say, 2022, what we expect is a slow, and I mean slow, but continuous improvement in the situation in general, but also related to us, thanks to the actions that we have been taking. So let's say that these actions will help us to mitigate the effect.
I don't think we will come back to the full potential growth, let's say, very, very soon. But over the course of 2022, we will get close to the full potential of growth. And I expect the situation to become normalized probably by the end of the year, but this is, of course, a very, very difficult guess. I mean it's just a guess. But I expect that maybe by the end of the year, the situation could become close to normal. We will mitigate, in any case, very much the effect through 2022, thanks to the actions that we have been taking.
For working capital and CapEx, I leave it to Nicola.
Yes, Alessandro, with reference to working capital, our aim in the medium term is to increase the working capital, in particular, to have more inventory in order to guarantee the service to our customers. So if we get the view at year-end level, we can year-end level on the long run, it would be around, say, 16% on the net sales, something like that.
Then on CapEx, I confirm you the level of around EUR 20 million of CapEx. We are investing even in the new facility in Croatia in order to expand our facility there and the production site that we have. And even we have -- building the new lines in order to produce the goods to guarantee the service to the market.
Okay. Okay. And just 2 quick follow-up. The first one is on, let's say, the expectation that by year-end, EBITDA margin will be close to 20%. Considering that despite the shortage, let's say, the top line will be still significantly up in the last quarter, are there any specific reason, let's say -- because implicitly, you're telling us that the EBITDA margin will be like, I don't know, 17% or something, okay, in the last quarter of the year.
So just to understand if there are any specific reason on top of what you already mentioned, like cost inflation behind this sequential decline in margin. And the last follow-up was on order backlog. You already mentioned, Francesco, very strong demand. Can you, let's say, share with us any outperformer by application inside, let's say, your order backlog that probably, let's say, a bit stronger compared to normalized level?
Okay. Thanks. So for the margin, I didn't say that it will be 20%. Let's say, it will converge towards our historical target, which is in the region of 20%. Of course, it will very much depend on the final level of turnover growth that we will manage to achieve.
The tensions that we are having on the cost side are mainly related to the gross profit in this moment. And this is a contingent, of course, situation related to the shortage because as I mentioned, we are, of course, having inflationary pressures, and we still have to see the full effect on prices from our actions because there are long lead times. So the effect on prices is delayed compared to when we incurred the cost. So we will see the benefits in the coming quarters. So far, we don't see much of that benefit, and that is one of the reasons. But we will see the benefit in the future.
Second reason is transportation costs. For us, transportation costs, of course, have increased like for everybody else, but not as much as in other industries because the products are relatively light and small. However, since we are in the process of increasing the inventory. Then, of course, inbound transportation costs are visible in this very moment where they are expensive, are visible because we're increasing the inventory.
Another point is, as I mentioned, the product mix because the, let's say, the more sophisticated controllers that have slightly above than average profitability in this moment are suffering more. And finally, of course, in Q4, every year, we have a seasonal effect because we incur some costs and also, say, it tends to be softer. So there is a number of reasons, mainly at the gross profit level, that's very contingent, very short term, that basically could -- let's say, are putting some pressures on our profitability.
[Operator Instructions]
Sorry, I forgot to answer to the second question of Alessandro. On the backlog, the highest backlog we have in this moment due to the shortage is in HVAC because, again, in HVAC is where we use the more -- the vast majority of the more sophisticated controllers because we use them also in food retail, but in a lower number. While in HVAC with OEMs, we use bigger number of those. And so in this moment, the, let's say, the higher backlog is, for sure, in -- concentrated in HVAC, mainly, again, in HVAC industrial and HVAC commercial.
The next question is from Will Turner with Goldman Sachs.
I've got a couple of questions. The first one is -- just the first one is just regarding the acquisitions. In the quarter, you've mentioned that you've had EUR 9.4 million of sales to date. And that implies about EUR 8 million in the third quarter.
How have the acquisitions been growing? Because if we take out the 2020 sales that's reported, it implies quite a slowdown into the fourth quarter. So how those acquisitions performed? Or is there a significant seasonality with them? That's the first question.
Okay. Will, the third quarter of the 2 companies, it was pretty, pretty good because it was around EUR 9.4 million of turnover, the 2 companies. That is -- it was pretty good. For the -- and even in terms of profitability, it was a good result, and we are satisfied about the result of this.
In terms of evolution of this company. In the fourth quarter, we believe that CFM, it is pretty stable in terms of seasonality during the year. Instead, Enginia, maybe it was a good quarter, the third one. And typically, the fourth quarter is something below the third quarter level.
I mean in any case that the 2 companies grew in the third quarter, they had a good performance.
The performance was good. And they grew higher than prior years. Both of them.
Okay. Great. And in terms -- do you have any idea of what the inventory levels of your customers are? Have you seen any signs of your customers maybe double-ordering because they know that your parts are made with electrical components and therefore they're trying to build up their own inventories?
Okay. So of course, we don't have a precise answer to this. We believe that our customers are like everybody else, probably trying to build up stock. They are, for sure, releasing orders with a longer time horizon and are trying to get the components. Probably their stock level could be high, but not for our components because what they do typically, when they have some missing components, not only electronic controllers but also others, they do the manufacturing, in any case, and leave the units to be finished when the final components arrive. So maybe they are building up stock of whatever they can find and wait for the missing components to arrive.
I don't think that they have high stock levels of our components because, as far as I know, like everybody, they are struggling with the current production. So I don't believe they have high levels of stock, even if they are trying to.
[Operator Instructions] Gentlemen, there are no more questions registered at this time.
Okay. Thank you very much for your attention. Looking forward to meeting you for the full year 2021 results. Thank you very much.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.