Carel Industries S.p.A. (CIG.F) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Carel 2025 First 9 Months Results Conference Call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO of Carel Industries. Please go ahead, sir.

Thank you. Good afternoon, everybody, and welcome to our call for the presentation of this first 9 months 2025 results. I'm starting as usual from Page 3 with the most relevant highlights. I'm very happy to report that this has been another very strong quarter. In Q3, organic revenue grew by 14%, slightly above our expectations. And this, in turn, led to a further improvement in the EBITDA margin. It reached in the period the highest level of the past 7 quarters. So coming back to the levels of 2023. Year-to-date, revenue was EUR 463.7 million, up 7.1% compared to the first 9 months of 2024 or 8.4% organic, that is excluding exchange rates. As such growth was very distributed across regions and across markets. HVAC has been the primary growth driver with over 14% organic growth in Q3. Data centers was the strongest vertical, but also commercial and residential had a very good performance. As expected, refrigeration had a strong rebound after a contingent timing effect in Q2 with approximately 13% organic growth in the period. Adjusted EBITDA in the 9 months was 19.8% of sales, while reported EBITDA was 19.6%. In the third quarter, profitability has been approximately 21%, thanks to operating leverage to the ongoing positive trend in raw material costs and the accretive contribution from digital services, while R&D expense remains at the target level of above 5% of sales. Very good operating performance, together with the positive development of working capital led to a really strong cash generation, reducing net debt to approximately EUR 14.8 million, down from EUR 50.2 million at the end of 2024. Net operating cash flow in this 9 months has been, in fact, double the one of the same period of last year. If you exclude the impact of IFRS 16 corresponding to EUR 30.3 million, we actually are cash positive. Moving now to Page 4. We can provide some additional comments on these highlights. Q3 marked a further acceleration of revenues, up to EUR 463.7 million in the 9 months from the EUR 432.9 million of 2024, corresponding to a year-to-date growth of 7.1% or 8.4% if we exclude the foreign exchange effect. This last quarter, all regions grew, all of them double digits organic, apart for South America. The top line negative impact of the foreign exchange was EUR 3.7 million in the quarter, mainly due to the weakness of the U.S. dollar. EBITDA adjusted for some nonrecurring costs related to our reorganization grew by 15.7% in the 9 months to EUR 91.9 million, up from the EUR 79.4 million of 2024. Corresponding profitability has been 19.8%, up both from the 18.3% of the first 9 months of 2024 and from the 19.3% of the first half of this year. Again, this improvement is due to operating leverage, raw material costs, the accretive contribution from digital services, in particular, Kiona, of course, and the ongoing optimization of operating processes in the group. It's also due to the good level of natural hedging that we maintain in our operations, offsetting the majority of the negative impact of the exchange rate we have on the top line. In fact, the negative impact at the EBITDA level of the foreign exchange is less than EUR 2 million in the 9 months. The target level of R&D at above 5% of sales has been confirmed. Net profit in the 9 months was up 6.6% to EUR 42.3 million from the EUR 40.2 million of last year. So back to growth in spite of the absence of some relevant extraordinary accounting items that were present last year and in spite of the negative foreign exchange effect. Tax rate in the 9 months was 23.1%, essentially in line with last year. CapEx at EUR 15.3 million were down from the record EUR 22 million of last year, but please consider that last year was actually a record one for CapEx since among other things, we realized a new research laboratory in Padova, and we expanded the mechanics plant in Poland. Moving now to Page 5. We can comment the revenue breakdowns. And to the left, we see the breakdowns by region. EMEA sales grew by 6% in the 9 months, net of the foreign exchange. In Q3, we continue to have very positive momentum, particularly in HVAC commercial and residential. At the same time, we had, as expected, a strong rebound in refrigeration after a temporary timing effect in Q2 with the sector growing by 10% organic in the quarter. Asia Pacific grew in the 9 months by 3.4% organic. Q3 was still solid with 10% organic growth after a very strong Q2 when the region grew by 17%. We had excellent results in China and India, thanks to data centers and refrigeration, while South Asia Pacific continued to suffer from a very weak macro. We believe though that South Asia Pacific has now bottomed out in terms of macro and also in terms of execution. Therefore, we are pretty confident of a good development of the area in the coming quarters. The performance in North America continues to be outstanding with 30% organic growth in the quarter in spite of already very high comparables, thanks especially to continued strong growth in data centers, but also thanks to excellent results in HVAC commercial. In the region, we are also very optimistic about coming developments in refrigeration as well as in the introduction of the variable speed compressor technology. In South America, we are back to growth in the third quarter in spite of the economic uncertainty in Brazil, thanks to the good results in the other countries of the region. To the right, we have the breakdown by sector, and we can see that HVAC has been the biggest contributor to growth so far this year with 9.4% organic growth or 14% in the last quarter. This result is very distributed across verticals, data centers, most of all, but also commercial and residential, thanks to the recovery of the heat pump market in Europe. Refrigeration grew by 6% organic year-to-date, low teens in the quarter. In EMEA, we had the expected recovery after the short-term postponement of Q2, but we posted very good growth also in America and especially in Asia Pacific, in particular, in China, where we are gaining market share in the cold chain industry. I now leave it to Nicola to comment the items below the EBITDA on Page 6.

Thank you, Francesco. The Slide #6 details the group results from the EBITDA to the net profit. The increase in D&A cost is related to the relevant CapEx activities performed last year. The financial charges improved compared to last year due to the combined effect of the reduction of interest rates and the improvement average net financial position of the period. It should be noted that the amount of interest paid to bank and other institutions is equal to EUR 1.6 million versus EUR 2.4 million of last year. The residual amount refers to accounting effect. The evolution of ForEx result compared to last year was mainly impacted by the evolution of NOK against the euro. 2024 figures were also impacted by the capital gain related to the difference between the estimated fair value of -- and the actual amount of the put and call option of CFM for EUR 3.4 million. The tax rate of the period was 23.1%, in line with the same period of last year. It is important to point out that the Chinese tax authorities confirmed the status of high-tech company to our local subsidiaries, granting a favorable tax rate for other 3 years. The group net profit at the end of September 2025 was equal to EUR 42.3 million compared to EUR 39.7 million of the same period of 2024. Slide #7 shows the net financial position evolution of the first 9 months of 2025. The cash generated by the group in the period was very strong. The free cash flow of the first 9 months of 2025 was equal to EUR 63.5 million compared to EUR 17.9 million of the same period of previous year. In June 2025, the group paid dividend for EUR 18.6 million. Taking out the accounting effect of IFRS 16, the group is in cash positive for EUR 15.5 million. I leave Francesco to go on with the closing remarks.

Thank you, Nicola. I'm now on Page 8. Q3 was another strong quarter, even slightly ahead of expectations with a good performance very distributed across verticals and across regions based on favorable trends in the market, but also on the group capacity to execute its strategy in terms of technology and in terms of channels and path to market with higher effectiveness granted by our new organizational model. EBITDA profitability improved even further in this last quarter, reaching the highest level of the past 7. This is due to operating leverage, positive raw material cost development and the expansionary effect of digital services and Kiona in particular. The negative effect of the foreign exchange is mitigated by natural hedging, a long-standing objective of the group. All of this plus solid working capital management resulted in very strong cash generation with a net operating cash flow double the one of the first 9 months of 2024 and bringing the group to a cash positive position if we exclude IFRS 16. Please let me emphasize once again that these results demonstrate the solidity and resilience of our business model and execution capabilities since such results are not just due to one vertical or one region, even if, of course, data centers and North America are the fastest growing, but they are very well distributed across many markets and geographies. And surely, the group is working for the opportunities of the future, developing and introducing new technologies and executing the diversification of sales channels and business models. So to conclude, while the macroeconomic backdrop remains challenging and volatile, the group expects a substantial continuity with the trends observed in the previous period. As a result, we expect to maintain in Q4 substantial growth from Q4 last year with quarterly revenues broadly in line with those reported in the third quarter. Thank you very much for your attention. We are now happy to answer to all of your questions.

[Operator Instructions]. The first question is from Niccolò Storer from Kepler.

I have a few. So let's start from the first one is about HVAC. Francesco, if you can help us making a sort of ranking of the main verticals. If I remember well, in Q1, heat pumps were even stronger than data centers. Now you said that data center were the strongest, but at the same time that heat pumps accelerated even further. So just to clarify this. And also on commercial HVAC, if you can confirm whether this was still up in the double digit or not? Second question is about your guidance. Basically, if I put the same number of Q3 in Q4, we would have a slight slowdown compared to the growth that we have seen in Q3. Is there any reason why you're assuming that? Are you seeing any of the verticals maybe slowing down? Or it's just a matter of caution also due to December, which is always a very unpredictable month? Third question is about CapEx. I understand that you had tough comparison compared to last year. But if I look at Q3, the amount spent is just EUR 2 million, which seems quite low. So what's going on here? And what should we expect going forward? And then my last question is about again, heat pumps maybe. If you have, let's say, a view about what's been happening on the market and in particular, if you're seeing any mismatch between production and sales levels because clearly, numbers are very strong, but not in all the geographies. There are some countries, which are much stronger than others. So I was wondering if we might get back to a sort of 2023, 2024 scenario or at least we have this risk.

Okay. Thanks, Niccolò, for the questions. So starting from HVAC, basically, the ranking is among the different subverticals of HVAC is in terms of percentage growth is similar to Q2. So the fastest growing is residential, of course, starting from a significantly smaller base. So the percentage is the highest, but of course, the absolute value is the smaller. Second, data centers; and third, commercial and fourth, industrial ex data centers. So then I'll come back to the heat pumps for your last question. Data centers is, of course, extremely strong, particularly in North America, but it's also very strong in especially China and India, in Asia Pacific. We are seeing some slight pickup also in Europe, even if we are still far from the levels of investment and growth that we are experiencing in North America. But let's say, we are optimistic about a pickup of data center soon enough also in Europe. Commercial is also posting solid growth, especially in America and Europe. Here, we have, let's say, the positive development of the market, but we have also some very specific effects related to our strategy execution, in particular, cross-selling and the penetration of the ventilation market. Cross-selling, for example, in the U.S. with inverters that are doubling the value in this 9 months from the first 9 months of 2024. Of course, the value is still small, but I mean, they're growing very, very fast. Plus we have the cross-selling of the mechanical components in ventilation that, if you remember, has been a strategy that we have been pursuing for years. So this also helps on top of the fact that the end market in commercial is recovering. Finally, industrial is growing, but it's growing low single digits, let's say, and that's basically due to a number of weaknesses in the end markets like automotive, for example, or renewables in the U.S. that, of course, have been facing a setback. So this is basically the ranking in HVAC that is approximately the same of Q2. Now concerning Q4 and the percentage growth, yes, the percentage growth implied by the expectation we have is probably is slightly lower compared to what we experienced in Q3. Let's say that we don't see significant differences in the trends and everything from Q3. The point is we have 2 aspects to consider. The first is that Q4 last year was strong for being in Q4 because you know that normally Q4 is the weakest quarter of the year. But Q4 last year was strong. And second, we have the uncertainty related to December because December, like August, probably even more than August is a pretty volatile month because some customers, some big OEMs, especially in Europe, could take the opportunity to shut down the factories to basically to reduce inventory or, let's say, for their logistic tactics. So it could be a volatile month. So let's say, we take some cautiousness here. So these are the 2 elements to consider. Having said that, we don't foresee any changes in the trends for the near future. Considering -- now I'll leave it to Nicola for the CapEx before let me answer for the heat pumps. So yes, we are seeing a significant recovery in Europe in heat pumps that probably most of it is related to the fact that now the overstocking has been completely -- is completely over. So production is trading demand. We -- let's say, we do not have any signals that there is some significant overstocking in the market in this moment. We are starting to see more and more customers, let's say, starting again with their growth. This remains, though, of course, a market with a number of uncertainties that we're all very aware of, so related to subsidies to the level of stock and so on. For the short term, we don't see any risks. Now production from our customers should be trading demand. Demand is finally picking up again and because of the interest rates, which are lower because incentives have, let's say, restarted in some countries. There's also the EPBD, I mean, which slowly, slowly is starting to become effective as a regulation in the different European countries. So let's say, we are confident that this recovery is -- should be relatively solid. Having said that, I mean, for the long term, the IPA market could be -- could remain volatile, but with a solid underlying growth rate, not explosive, but solid, yes, because, of course, it's a technology which is absolutely fundamental, as you know very well, for decarbonizing the building footprint of Europe. But let's say, short answer is we don't see major risks in the short term. For the long term, this remains pretty volatile market, but we have no evidence in this moment of specific risks. I'll leave it to Nicola for the CapEx.

Thank you, Francesco. And so with the reference to the CapEx, we confirm our midterm view to have something like the 5% of the revenues invested in CapEx. Last year, it depends on even the weight of the project that sometimes when there are relevant projects and they finalize in the quarter, the percentage could be higher. So if you remember last year, it was something like the 5.5% of the revenues. This year, we will be closer to the 4% than the 5%. But now we are in the project period. We are discussing about some important projects for the following years, and we are foreseeing in the future again to come back to the 5%.

The next question is from Christian Hinderaker from Goldman Sachs.

My first one is a little bit of an expansion maybe on the residential HVAC market and the growth acceleration you've seen there. I guess just curious in terms of your exposure, if there's any distinction across geographies or technologies, i.e., if you're supplying particularly into air-to-air products or air to water or geothermal? And any color you can add in that context would be very helpful. That's the first question.

Yes, sure. So the exposure we're seeing in this moment, in particular, for growth is -- well, our exposure in general, our customer base is pretty spread all over Europe, plus China to some extent. In this moment, the biggest growth is coming from Germany and Northern Europe. And it's coming mainly from air-to-water heat pumps because those are, let's say, the -- where most of the volumes are, especially in this moment. And of course, we work also with the geothermal. But in this moment, most of the volumes are coming from the air to water.

Maybe one for Nicola's perhaps. We talked about CapEx, but you flagged the D&A cost increase that followed the higher CapEx from last year. I'm just curious if we think of Q3 now is the reasonable run rate we should project going forward for D&A?

Yes, Christian, I think so it could be a good comparison for projecting the evolution of the D&A cost for the next few quarters.

And maybe we should just come back to the data center dynamic. You touched on maybe some hopes that, that explosive growth in North America spreads to Europe. Can you just talk a little bit about how you think about the European opportunity next year and beyond? And I guess, what it is you think that drives that distinction? Is it an issue with permitting in Europe versus the U.S.? Is it just where the hyperscalers are choosing to invest? Any added color on that market distinction would be helpful.

Yes, Christian, I think it's -- yes, as I said, we are seeing some acceleration in Europe, but still very far from the American levels. I believe that the real growth will start when the -- especially the hyperscalers will start to deploy data centers, with data centers, let's say, in Europe in a widespread way. And this is, I mean, happening in a very fragmented way now in this moment. For sure, in Europe, there are higher constraints than in the U.S. in terms of the availability of land, in terms of the availability of energy. So this is -- and also regulation, I mean, often doesn't help. So there are a number of limitations here. I'm pretty confident that the European Commission and also the European Parliament are very aware that we need these investments and that they need to, let's say, make things as easy as possible for the hyperscalers to invest in Europe. So I'm confident that this acceleration will come sooner or later. We are seeing already an improvement. I hope it will continue, of course, very difficult to say exactly what the pace will be or the timing, but I'm pretty confident of a positive development in the not-so-far future.

The next question is from Natasha Brilliant from UBS.

My first one is I just wanted to come back on the beat in Q3 where you delivered ahead of guidance. Are there any areas in particular that were much better than expected? Because I guess we anticipated that recovery in refrigeration, but any color on what has performed better than you thought a few months ago would be helpful. My second question is just around capital allocation and M&A. Any update there you can give us on priorities and the pipeline just given the strong cash flow generation that you mentioned? And then finally, just on Kiona, clearly, that's performing well, both in terms of top line and margin. How sustainable is that? And if you can give us any thoughts over the coming quarters?