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

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Carel 2020 Full Year 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, and thanks for joining our call for the presentation of 2020 full year results. I'm starting from Page 2 with the main financial highlights. In this incredibly challenging year, we confirm the resilience of the group and its ability to seize new opportunities even in such a fast-changing and uncertain scenario. We grew our top line, we grew our profitability and we generated an outstanding cash flow. Revenues grew by 1.3% or 2.8% net of the foreign exchange. The positive market trend that we saw in the third quarter continued in the fourth quarter. Throughout the year, we had a very good performance in data centers, hospitals, heat pumps, food retail. In the fourth quarter, we saw an improvement in all geographies and in most applications. So we started to see a recovery also in the most challenged applications in the first part of the year like, for example, automotive and food service. This is particularly remarkable if we consider that we faced, in the first half of the year, the temporary shutdown of more than 60% of our total production capacity due to the lockdowns in China and Italy. EBITDA margin was 19.7%, 40 basis points more than the 19.3% of 2019. Thanks to the effective implementation of a number of measures to contain operating expenses, we managed to offset the lack of operating leverage, which was not there as we would have liked. We offset the negative impact of the foreign exchange and extra logistic costs due to the disruptions. We had an exceptional cash generation with a free cash flow of approximately EUR 38 million. Net of the purely accounting effect of the IFRS 16, the net financial position went down to EUR 21.4 million from EUR 46.9 million. So it's way below the EBITDA, and that means that we have a very strong firepower to invest. And now moving to Page 3. With some -- with the main nonfinancial highlights. In fact, in 2020, we achieved a number of very important ESG milestones and more are expected in 2021. In April, we gained 1 notch in our MSCI ESG rating, achieving a score of BB. We have been invited to take part in the CDP rating, and we decided upfront to disclose our score. We received a score of C placing Carel in the awareness category. So we basically skipped the D disclosure category, which is typically granted when you take part in the CDP for the first time. In the summer, we created an ESG team, a multifunctional team led by the CFO to collect, elaborate and execute the input received from the main stakeholders. And at the beginning of 2021, we started drafting our new 3-year sustainability plan, again, taking into consideration all those inputs from the stakeholders and with the objective to further improve our sustainability profile in the coming years. On Page 4, we can see some additional figures. So revenues were EUR 331.6 million, up 1.3% from 2019. If we look at the revenue bridge on the top right, though, we can see that we lost EUR 5.1 million for the foreign exchange and EUR 0.6 million from -- for the no core. So the purely organic growth in 2020 was 3.1%. EBITDA was EUR 65.2 million, up 3.3% or 19.7% of sales, 0.4% more than the 2019 results. So the efficiency gains during 2020 offset the lack of operating leverage, offset approximately EUR 2 million of extra logistics costs and offset EUR 2.5 million of impact of the foreign exchange. So the impact of the foreign exchange was EUR 5.1 million on the top line, but EUR 2.5 million at the EBITDA level, thanks to our natural hedging position. Net profit was essentially stable. It was up 0.3% to EUR 35.1 million. And it benefited from a slight reduction in the tax rate. The tax rate was 21.1% from the 22% in 2019. CapEx were EUR 13.3 million, in line with expectations. There was a strong reduction from the EUR 23.6 million of 2019 due to the fact that the capacity expansion program was over in 2019. In 2020, we basically did maintenance CapEx. In 2021, on the other hand, we decided to accelerate our capacity expansion in Croatia since demand in Europe and Eastern Europe is growing faster than expected. And we also decided to accelerate on our digitization road map that was extremely important in 2020 in order to become stronger and more resilient for the future. The Board of Directors this morning proposed a dividend distribution of EUR 0.12 per share, which is in line with 2019 and it corresponds to a payout ratio of approximately 34%. I'm now on Page 5 with the revenue breakdowns. To the left, there's the breakdown by region. So all regions improved in the fourth quarter. And net of the foreign exchange, basically all regions grew in 2020 apart for North America. So EMEA grew by 5% net of the foreign exchange. We had a very good performance throughout the year in Eastern Europe and Northern Europe. And at the end of 2020, we started to see a recovery also in the other countries like in Southern Europe. In Asia Pacific, we grew by 1%, net of the foreign exchange, with a very good result in China, partly offset by a softer performance in the rest of Asia. North America sales declined by 7.7% in low currency with a slight improvement in the fourth quarter. Let's say that in North America, the market in 2020 was particularly challenging also because in 2019, we had an exceptional growth. In any case, in this beginning of 2021, we already see a remarkable improvement in the scenario in North America. Latin America, we grew by 10.1%, net of the foreign exchange, so a very good result, especially concentrated in Brazil. In Europe, of course, the performance was negative because we had a very strong impact from the foreign exchange in the region. If you look at the breakdown by sector to the right. Also in both sectors, we had an improvement in the fourth quarter. HVAC grew by 2.1%, net of the foreign exchange. We had a very good performance, positive performance in data centers, heat pumps and hospitals. We had a negative performance in other industrial applications, like in automotive, but we started to see an improvement in the -- at the end 2020. Likewise in refrigeration, we grew by 5%, net of the foreign exchange, with a very positive performance in food retail. In the fourth quarter, we saw an improvement in the general market in food retail, while previously, we were growing through market share increase, and we also started to see a recovery in foodservice that year-to-date is, in any case, negative. So the growth in the core business, net of the foreign exchange, is actually 3.1%. And then we have 14.5% decline in the no core business. I'm now moving to Page 6, and I leave it to Nicola to comment the items below the EBITDA.

Thank you, Francesco. Slide #6 details the group result from the EBITDA to the net profit. The 2020 result was impacted by higher D&A cost, mainly related to the relevant CapEx level of 2019. In the period under review, financial charges were pretty in line compared to 2019. Instead, ForEx exchange losses were higher, in particular, related to the U.S. weakness versus euro of the last quarter of 2020. The tax rate of the period was 21.1%, slightly below 2019 level. So that decrease is mainly related to a different country mix. The group net profit at the end of 2020 was equal to EUR 35.1 million, in line with the 2019 figures. Slide #7 shows the net financial position evolution of fiscal year 2020. The net financial position strongly improved compared to 2019 level. At the end of December 2020, the net financial position was equal to EUR 49.6 million, compared to EUR 62.1 million of the end of December 2019. Such amount includes EUR 28.2 million of IFRS 16 liabilities. This amount was equal to EUR 15.2 million at the end of 2019. So the net financial position with bank improved of around EUR 25 million. The fund from operations was equal to EUR 38 million. The decrease in net working capital was mainly driven by seasonal effects and a better credit collection management in 2020. In June, the group paid a dividend of around EUR 12 million. At the end of December, the group has an amount of cash, cash equivalent and available credit line of more than EUR 100 million. I'll let Francesco to go on with the presentation.

Thanks, Nicola. So I'm on Page 8 with the closing remarks. In terms of operations, in 2020, we faced the temporary shutdown of more than 60% of our capacity due to the lockdowns in China and Italy. We mitigated this effect, thanks to our long-standing mirroring production strategy. And so we limited the backlog, which was entirely recovered between June and July. On the demand side, we start to see a strong improvement on the market at the end of Q2 that continued in Q3 and Q4. In Q4, in particular, we saw an improvement in all geographies and in most applications. We have a positive performance year-to-date in heat pumps, data centers, hospitals and food retail. And we have a negative performance in the other industrial, HVAC and in foodservice, but we started to see a remarkable recovery in both applications at the end of the year. All of this led to an improvement in the top line, in profitability as well as in cash generation, even in such a challenging year as 2020. Looking forward, it's still too early to provide the precise guidance for the full 2021. Since there are still significant elements of uncertainty linked to the end of the pandemic and the current situation of global shortage of raw materials. In any case, we have an optimistic stance considering that the positive trends that we saw in the second half of 2020, accelerated in the first month of 2021. Thank you very much for your attention. We are now more than happy to answer to all of your questions.

[Operator Instructions] The first question is from Alessandro Tortora with Mediobanca.

I have, let's say, some questions. Sorry, should be 5, okay, but I will try to be very quick. The first one is on the business. As you mentioned before, there is a widespread recovery by the region in the last quarter of the year. What I would like to understand is, if you can elaborate a bit more on North America, which, let's say, was the underperformer, okay, in the past year to understand what is your view, okay, on this area? This is my first question.

Okay. So in -- thanks, Alessandro, for the question. So yes, I confirm that in the fourth quarter, we saw an improvement in all geographies and most applications, and that trend is accelerating at the beginning of 2021. Especially -- yes, also in North America, we saw this improvement and we are seeing a strong acceleration, strong improvement in the beginning of 2021. So the trend is definitely positive. I'd remind that during, let's say -- at the end of 2020, we also changed the leadership in North America. So the former CEO of Latin America is now CEO of both Americas, North and South. But in any case, also the general context of the market is more positive, and we are getting results from the actions that we took during 2020.

Okay. The second question is on the application. Clearly, we have, let's say, the overall picture, organically speaking. Can you give us an idea of the top performers, for instance, heat pumps or data center. If you can share with other, let's say, the organic performance of this specific application.

Okay. So the -- I would say that the top performers in 2020 were heat pumps and food retail, both were growing at double digits. Also, data centers, as mentioned, was positive. Also HVAC related to indoor quality. But for sure, the top performers were heat pumps and food retail, both with a double-digit growth.

Okay. Okay. The third question is on the margin. If you look at, let's say, comparative year, the company has been able, clearly, to post a high single-digit organic growth, but also to achieve a significant EBITDA margin expansion, reaching in the second half, an EBITDA, let's say, close to 20%. The question is, considering also the structural or partly structural cost savings you implemented in 2020, what's your view on the progression on the margin side on the back of a positive outlook on volume, if I understood well, but also if we also consider some cost inflation risk you mentioned in the press release.

Okay. Yes. So let's say, our expectation mid-cycle is to stay with the profitability between 19% and 20%, so more or less where we are. Now for 2021, we do expect, for sure, a better contribution from the operating leverage. On the other end, as you mentioned, there could be some tensions on the raw materials cost side. And also, we are definitely investing to make the group stronger for the future, for example, in digitization. So let's say that our mid-cycle expectations is to maintain the profitability where it is. Just a comment on the raw materials cost side that I just mentioned. So yes, there could be, and there are already signs of tensions on the cost of raw materials. We don't expect that to be major on our income statement. So we are taking all the countermeasures that since the end of 2020, we are working on the countermeasures on this. So we don't expect any material -- any significant impact. But of course, those tensions are there, and they create some uncertainty, that's for sure.

Okay. Then the third question is on the working capital side. Clearly, the level you achieved, let's say, this year was extremely low. Are there any, let's say, indication or a normalized level we can assume for net working capital and sales on the back of also of what we discuss about electrical components and therefore maybe some, let's say, stock you are going to do on that side?

Look, in -- Alessandro, this is Nicola. In -- we -- with a view of the year-end, we believe that the incidence of working capital on net sales should be around the 15%, 16%. And it is related more to the possible increase that we wanted to have on the inventory side, even taking into consideration the service level that we wanted to guarantee to our customers and to have a good level of safety in our stock.

Okay. And the last question maybe for you, Nicola, is on the CapEx side. You mentioned before a capacity expansion project in Croatia. Can you give us an idea of which level of CapEx we may assume for 2021?

The total amount of CapEx that we are foreseeing for 2021 is around EUR 20 million of CapEx, and it includes even the investment in Croatia. That is pretty significant for our side.

The next question is from Will Turner with Goldman Sachs.

I guess my first question is on the outlook. I perfectly understand by -- it's hard to give like a formal outlook. But could you just give a little bit more color on like what optimistic means for you going into 2021. Should we think about -- is this going to be a year in line with how Carel has grown historically, which is mid- to high single digits organically? Is it going to be less than -- are you expecting it to be less than that? Or could it be greater because of some pent-up demand from places like the commercial HVAC part, which may see, in the second half, a good recovery? So just a little bit of more color on that would be really interesting.

Okay. Thanks, Will. So let's say that as we mentioned also in our last call for the third quarter 2020, our -- we entered into 2021 with, let's say, an expectation to more or less be in our mid-cycle expectation, which is high single digit. The fact is that we have both upsides and downsides for 2021 because we have an upside related to the fact that there could be pent-up demand. There could be a strong recovery in many applications that were late in investing. There could be the effect of the next-generation EU plan in Europe. So there are definite upsides. There are also downsides related, for example, to uncertainties on the supply chain for the shortage of raw materials. Now for that, we started taking action at the end of 2020. We increased our safety stocks. We booked capacity in advance. We placed orders for the entire 2021. We don't see any disruptions at the moment, but there could be some increases in lead times that we believe would be absorbed by the end of 2021, by the end of the year. But in any case, the uncertainty is there. And of course, needless to say, the pandemic is still going on. There are these virus mutations. So there are elements of uncertainty that provide downside. So I would say, I would summarize by saying that on the demand side, we see mainly positive things. We don't see negative elements on the demand side. There could be upside on the market. On the other hand, there are uncertainties related to exogenous factors like the pandemic and these supply chain issues. That's why it's not easy to provide the guidance at this stage.

Okay. That's very clear. And just switching a little bit more on to that kind of like the components in the raw material supply issues. Is it semiconductors, which is -- and electronics, which is the item which is, in particular, of concern to you? And then when you talk -- I can understand that you're doing quite a lot to try and offset it at the moment. Are you expecting to try and offset that with price increases? I know how historically you haven't really put through that significant price increases. But are you expecting 2021 to be a different year in that sense?

Yes, yes. We are referring mainly to electronic raw materials and semiconductor-related components, yes, because those are -- the situation is pretty general on all commodities, but especially for us, semiconductors and electronic components are significant. Again, we started implementing countermeasures during Q4 2020, increasing our resilience, which is already pretty strong. On the cost side, there could be some tensions and some possible countermeasures, yes, could be acting on prices. You're right that historically, we never -- we tended not to increase prices, but the strong volatility we are seeing in this last quarter led us, for example, during 2020 to increase prices. So we had -- in 2020, we had an average positive effect coming from prices, also because of the logistic -- extra logistic costs. So in 2021, we could also do something on the price side, if that's necessary because of the cost attentions. Again, we don't expect -- coming from experience, we don't expect any big impact on the P&L coming from the cost side. So probably it won't be necessary to do anything major on prices, but we are prepared to do that, and we can do that. In any case, the -- let's say, the order intake in this moment is very positive, and we don't see any disruptions related to the raw materials. But of course, I mean, the situation is very volatile. So there is uncertainty.

Great. And then my final question. You mentioned earlier in the call how your deleveraging is giving you some greater financial power to invest. Can you elaborate that a bit more on where you're looking to invest? And quite importantly, why that particular region or product category?

Okay. Well, organically, we -- I -- we mentioned that we are investing a little bit more on digitization, and we are accelerating the capacity expansion also because demand is growing, especially in Europe, faster than anticipated. That's not a big investment overall because, as Nicola said, we are talking about a possible EUR 20 million CapEx in 2021. So nothing really big. Capacity to invest means the possibility to accelerate even more in digitization and means adding more firepower on the M&A side. Now on the M&A side, we -- let's say that we strengthened our M&A team in the last few months to after the COVID, the most difficult situation due to the COVID where we were forced to slow down things. We are now pretty active on the market. And we are strengthening our pipeline. So that's the main direction, again, where we want to invest, which is M&As. And the guidelines are the same, so complementary components, market share and geographical expansion and services. But we are definitely strengthening our pipeline in this moment.

[Operator Instructions] The next question is a follow-up from Alessandro Tortora with Mediobanca.

Yes. Two questions from my side. The first one is a follow-up on the capital allocation strategy. You mentioned before 2 directions. The one is expanding the product range. The second one could be, let's say, the service side. Can you give me, let's say, a better idea of what Carel could do on the service side, considering that now there is a booming word for everything related to edge computing, edge analytics, whatever it is. But just trying to understand which sort of service the company could do and maybe which M&A opportunity you see on the service side for Carel.

Okay. Yes, one, I would say there are many possibilities also because of the service, as you just mentioned, the service landscape is -- influx is in strong evolution. A broad general direction is energy optimization. So service companies that basically provide interventions on the installations on the plants. There could be many different kinds of plants from supermarkets to buildings to data centers to many other kinds of different plants. And so services related to energy optimization, which could be strongly augmented by our analytics. So by our products and by the analytics that we can provide through our products. Now that's very broad. And there are many, many different possible ways that this can be implemented. There are many, many also different possible targets all around the world doing this. The priority for us would be Europe for this kind of new service because that's something newer for us. So we would prefer to stay, let's say, closer to home. But that's a broad direction that we are definitely exploring. Again, there are many possible ways to do that, many possible targets and many different ways we can execute that. But that's the general direction. So energy, energy optimization.

Okay. Okay. And the second question was on, let's say, tax rate. So considering also Croatia, considering the investment in Croatia, maybe some fiscal incentives you can get there. The 21% level tax rate is something you consider sustainable for, I don't want to say forever, but at least 3, 4 years from now.

Okay. The investments that we are going to do in Croatia will have a fiscal incentive for the future, and it is around 25% of the investment. And -- but we are foreseeing, for the future, a higher amount of taxes compared to 2020 to be around 23%, we believe.

And -- sorry, Nicola. The reason for this higher tax rate is due to China -- is due to regional mix?

It will be mainl0y related to Croatia because the fact is that in Croatia, we had -- last year, part of the year was covered by the, let's say, the old investments that we are doing. Now we are foreseeing higher volumes and the benefit will cover just one part of the more profit we were doing in this country. And then even in Italy, we have -- we had some incentive from reduction in Europe because we have -- we had the ordinary era, not the extended era, let's say it like that. And it is possible that if in the future we are going to do some M&A activities, we will be back to the longer -- extended era.

[Operator Instructions] The next question is from [ Guillaume Bonpun ] with GMP.

Could you confirm the level of free cash flow that was generated in Q4? If we do a sort of back-of-the-envelope calculation, it seems to be around EUR 13 million. And is that a good basis to estimate what's going to happen in the next few quarters?

Yes. The last quarter had a very, very positive impact on the cash conversion rate because we were something above 80%, and it was very, very high, even because, as we mentioned, we were able to reduce the level of net working capital to a very low level. We believe that -- as we said before that the ordinary working capital with the year-end level during the different quarters, there is a seasonal effect that is not always stable, but we believe that it will be around 15%. So it will [indiscernible] our cash conversion, and we are forecasting for a sustainable level of cash conversion around the 70%.

Gentlemen, there are no more questions registered at this time.

Okay. Thanks, everybody, for your participation and for your questions. Looking forward to present the first quarter 2021 results. Thank you very much.