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 2022 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 Industries. Please go ahead.

Good afternoon. Thank you for joining our call for the presentation of the 2022 full year results. I start immediately from Page 2 where we summarize the main achievements in terms of strategy execution. On the operating standpoint, we completed our second production facility in Croatia with additional 5,200 square meters for increasing the group resiliency and supporting our growth in Europe. We also completed the construction of 2 new high-efficiency buildings in our headquarter campus in Padua, with new offices, a new conference and training center, a technology showroom and most of all, a new laboratory for thermodynamic research, which is twice as large as the existing one. We continue the execution of our process digitalization road map. And the most important result here was the implementation of the first wave of our very extensive Product Lifecycle Management system which already led to the dramatic reduction of time-to-market lead times for the customization of a new range of controllers. As you know, we aim for sustainable success, meaning that increasingly, our strategy and execution are integrated with our ESG vision. And to confirm our commitment this year, we joined the UN Global Compact and we also improved all our sustainability ratings, namely MSCI, Sustainalytics and CDP. The group also continued deploying its strategy of growth in technology, market share and services through acquisitions. We completed 4 bolt-on transactions in 2022, all fully in line with our strategic guidelines. The acquisition of 70% of the share capital of Sauber in services, the acquisition of a further 30% stake steady control of Arion designing and manufacturing sensors. The full takeover of Klingenburg, allowing CAREL to become the European leader in heat recovery systems for ventilation. And finally, the full takeover of Senva specialized in a variety of sensor technologies. As we speak, our pipeline remains definitely pretty active. Moving to Page 3. We have the main highlights in terms of 2022 results. For the second consecutive year, the group reported a top line growth rate close to 30%, maintaining a profitability higher than 20% and an NFP on EBITDA ratio lower than 1. And this is not a rebound from COVID since in 2020, we also had an organic increase in the top line, as you know. As just mentioned, we also had very strong results in terms of M&A and ESG standing. So in 2022, revenues grew by 29.6% over 2021. Like-for-like growth was 20.8% on the high end of our expectation. And if we take out also the positive effect of the exchange rate, organic growth was 17.7%. This excellent result comes from the strong contribution of both markets and all regions, and we are particularly proud when we consider that we faced an extremely challenging situation in terms of supply chain constraints that were very severe during the entire year. For this reason, we couldn't express the full growth potential coming from very positive trends, mostly in heat pumps, indirect quality data centers and refrigeration. EBITDA margin in 2022 was 20.5% of sales, slightly higher than 2021 when it was 20.3%. If we don't consider approximately EUR 3 million of nonrecurring costs related to M&As, adjusted profitability was 21.1%. Cost inflation effect was offset by operating leverage and price increases. Our balance sheet is very solid. We had a strong cash generation, keeping NFP below EUR 100 million and below our EBITDA. Actually, if we exclude the purely accounting IFRS 16 effect, NFP would be approximately EUR 63 million or 0.5x EBITDA. And needless to say, this translates in firepower for our M&A pipeline. Moving to Page 4. We can see some additional figures. Revenues were EUR 544.9 million, up 29.6% from the EUR 420.4 million of 2021 with a generalized growth across markets and regions. Organic growth rate in Q4 as expected as a slight deceleration due to seasonal factors and also to specific contingent issues of availability of some components that materialized in Q4 and affected mainly the refrigeration market. As we can see in the top right chart, we have the positive contribution of M&A for EUR 37.1 million and foreign exchange for EUR 12.9 million. Growth with fixed foreign exchange was 26.5% and with the same perimeter was 20.8%. EBITDA was EUR 111.7 million, up 31% from the EUR 85.3 million of 2021. Operating leverage and price increases offset cost inflation. In fact, profitability in Q4 was approximately 18% in line with the same period of 2021. If we adjust for approximately EUR 3 million of nonrecurring costs related to M&A, adjusted EBITDA margin was 21.1%, up from the 21% of the previous year. Net profit at EUR 62.1 million was up 26.6% from the EUR 49.1 million of 2021, thanks to the operating results. As we will see, tax rate of 22.3% was higher than 2021 when it was 19.6% due to a different country mix and to fiscal regulation changes in some countries. CapEx were EUR 26.8 million, in line with expectations and up 43.3% from the EUR 18.7 million of 2021, mainly due to the new plant in Croatia and the new facilities in the headquarter campus. Finally, we proposed the distribution of EUR 0.18 per share, 20% higher than 2021 and corresponding to a payout of approximately 30%. On Page 5, we have the top line breakdown by regional market. To the last there is the region breakdown where we can see that all regions have an outstanding growth in 2022. EMEA grew by 26.8% as of foreign exchange, 18% like-for-like, with a strong performance in most applications. Asia Pacific grew by 17% with robust growth in Southeast Asia, Korea, India and Japan, compensating a softer year in China that has, in any case, high single-digit growth in local currency. And this softer growth was mainly due to the COVID lockdowns, of course. South Asia Pacific, in particular, grew by more than 30%. Now after the end of the zero-COVID policy that is in China, the potential for a significant rebound of the economy. North America was the fastest-growing region in 2022. Sales grew by 38.8% as of the foreign exchange and in any case, more than 20% organically. We had excellent results especially in HVAC and mainly in data centers and Indoor air quality. We expect the general sensitivity towards sustainability in the U.S. to accelerate driven also by regulation. Inflation reduction act can also be a significant tailwind, thanks to its drive for renewables and electrification, for example, [indiscernible] concerns heat pumps. In Latin America, revenues grew by 22.8% net of the foreign exchange, a very good performance, especially outside Brazil even if with a deceleration in Q4 due to logistic issues related to the shortage. To the right, we can see the breakdown by market. HVAC grew by 34.4% net of the foreign exchange, more than 20% organically. Most HVAC applications had strong growth, but especially heat pumps, indoor air quality, ventilation and data centers. Refrigeration grew by 13.2%, net of foreign exchange, approximately 10% organically. As mentioned, we had a specific contingent issue of availability of some components in Q4 that affected mainly refrigeration that led to deceleration compared to the 9 months. As we will discuss in a few minutes, the situation continued in the first weeks of 2023, but is now being fast resolved. I now leave it to Nicola for commenting the items below the EBITDA on Page 6.

Thank you, Francesco. Slide #6 details the group result and from the EBITDA to net profit. Fiscal year 2022 was impacted by higher D&A cost related to M&A activities for EUR 1.5 million and the relevant investment in CapEx in the present and last year. The financial charges were higher compared to last year due to the interest rate evolution and the time effect of the put and call option of CFM. The ForEx impact in 2022 was better than last year for more than EUR 500,000. Due to the good performance of the Turkish company, CFM, it was deemed prudent to review the fair value of the pool put and call option on the residual 49% of shares with a negative impact of around EUR 2.2 million. In 2022, the result of the company consolidated with the equity method was a gain of around EUR 2.3 million compared to a profit of EUR 500,000 over the same period of 2021, mainly influenced by a fair value evaluation of Arion. The tax rate of the period was around 22.3%, higher than last year, mainly due to the new law introduced in Croatia, which impacted the group for around EUR 600,000 and the application of so called [indiscernible] in CAREL Industries SPA and the different country mix. The group net profit in 2022 was equal to EUR 62.1 million compared to EUR 49 million over the same period of 2021. Slide #7 shows the net financial position evolution of 2022. The flow from operation was strong and equal to EUR 89.2 million. The increase in net working capital was mainly driven by stronger growth of revenues and to a planned increase in inventory to better cope with the raw material shortage. It should be noted that the DSO is better than the same period of last year. During the period, the group paid dividends for EUR 18.2 million, and the net financial position was impacted by M&A activities for around EUR 57.9 million. At the end of December 2022, the net financial position of the group was equal to EUR 95.8 million. Taking out the effect of IFRS 16 the net financial position with banks amount to EUR 63.1 million, a level significantly below the EBITDA. I leave Francesco to go on with the presentation.

Thank you, Nicola. I'm on Page 8 now. As mentioned before, we are committed to fully integrating our business strategy and execution with our ESG vision and targets. We believe that their synergy and the sustainability drive success and vice versa. This committed is also reflected in our ESG ratings. And in this last period, we improved all our existing scores plus we received the new one. In October, we've been upgraded by MSCI to AA in their ESG rating. This is part of the continuous improvement journey that brought us from B in 2019 to AA now. CAREL is now in the ESG leaders category. So according to MSCI is a company leading its industry in managing the most significant ESG risks and opportunities. We took part in 2022 for the first time in the ECOVADIS rating process. This is a very important rating for the number of companies involved approximately 100,000 worldwide and because it's the [indiscernible] rating of reference for industrial supply chains. We received a silver medal ranking in the top -- ranking us in the top 23% in our industry. In December, CDP upgraded our rating to B minus from C. CDP, formally carbon disclosure project is the most important rating provider on climate change issues, and we now move to the management category from the awareness one. And finally, in January 2023, Sustainalytics improved CAREL  ESG risk to 17 from 24.8, positioning the company in the low ESG-risk category specifically in the lowest 2% ESG risk in the industry. I'm now moving to Page 9 for the closing remarks. We're very proud to highlight that at EUR 545 million, we closed 2022 with substantially double the turnover we had in 2018, the year of the IPO despite the huge disruptions of the last 3 years. Q4 2022 was the eighth consecutive quarter reporting a double-digit organic growth. This is even more remarkable since we experienced in this last quarter temporary but relevant issues in terms of delivery of some specific electronic components, particularly impacting refrigeration. We continued in 2022 with the consistent execution of our strategy in terms of organic growth, M&A, digitalization and sustainability. And there are still relevant challenges and uncertainties, of course. On the macro level, geopolitical dentures, inflation, restrictive monetary policies could definitely hinder global growth in the coming quarters. In the very short term, though the biggest challenge is the electronic material shortage, which unfortunately for industrial electronics is still present. As mentioned in the last quarter of '22, we had some relevant availability issues for specific components. This continued also in the first weeks of '23. However, the situation has been very contingent and is already improving path as we speak. So we expect the gradual but substantial improvement in the supply chain for the rest of the year. Fortunately, there are also many secular opportunities, for example, is the transition to low global warming potential refrigerants which is fast gaining traction outside Europe driven by the ratification of the Kigali amendment by China and India and its authorization by the U.S. Senate. Another example is the booming heat pump market, in particular in Europe due to the REPowerEU regulation. On the demand side, we still see a solid outlook. However, the refrigeration market could have a temporary and contingent short-term deceleration, meaning that it could grow less than the 2 previous years. Growth in Asia, on the other hand, should remain sustained. To conclude, taking into consideration that the aforementioned situation in the electronic material shortage will not permit in the very short term to fully satisfy the very positive demand in a number of applications. The company expects to report a high single-digit like-for-like revenue growth in the first quarter of '23. The company is, in any case, optimistic on the gradual loosening of the electronic material shortage in the following quarters. Thank you very much for your attention. We're now more than happy to answer to all of your questions.

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

Francesco. I have, let's say, some questions, okay, if I may. The first 1 is related to the outlook short-term on the first quarter outlook, you mentioned before. Is it fair to assume that considering, let's say, the shortage also in terms of profitability we should think about, let's say, an evolution of the EBITDA margin that probably could be a bit affected in this first quarter and then let's say the rather [indiscernible] in the second quarter. So this is the first question, just to understand what should you impact on the, how can I say, the lower volumes on the refrigeration side due to the shortage? I don't know if you want to go one by one, Francesco.

As you prefer Alessandro. I can take this 1 immediately. So yes, of course, as you know very well, our profitability is influenced by growth because there is operating leverage. So now in this first quarter, yes, there is the effect of the shortage. We are, in any case, talking about the high single-digit organic growth. Let's say -- needless to say, if growth was higher then also profitability would be higher. So we do expect, let's say, in this respect, profitability to improve during the year. So in the following quarters, that's for sure.

Okay. Okay. And as related to also, let's say, to the 21% adjusted EBITDA margin you reported over the last 2 years. So what are the reason why we cannot see this level as sustainable going forward, that is 20% -- around, let's say, 21% instead of the original guidance you gave in the [indiscernible], which was a range between 19% and 20%.

Okay. So, yes, we did have let's say, in the last 2 years, the profitability evolved our mid-cycle expectations that, as you know, is 19% to 20%, also because growth was very high. We had an organic growth of, let's say, approximately 20% per year in the last 2 years. So that, let's say, explains a good part of this above the expected profitability. Having said that, I mean, we remain with our -- for the time being, we remain with our expectations of profitability between 19% and 20%, again, related to organic growth in the high single-digit range. So again, that -- the 2 figures are very related. On top of that, if profitability is above expectation, our idea is, in any case, to prioritize growth and invest more. So in any case, we don't strive for profitability above 20%. We strive for accelerated growth. So should profitability consistently remain above 20%, we would just invest more. In the last 2 years, we have been investing significantly, as you have seen.

Okay. Okay. Then the second question was on the U.S. market. You mentioned before that is a very promising market for you. Considering the Senva acquisition you made some months ago, do you see the concrete possibility that you can expand the production of some other products locally in the U.S. market, I can say, 1, 2 years from now.

Yes, definitely, yes, Alessandro. So in -- we will -- we are definitely planning to expand our production footprint in the U.S. So in terms of products, we are already evaluating and that's probably could be pretty short term to bring in the U.S. manufacturing of products related to indoor air quality and ventilation, like Enginia and Klingenburg products, for example, those we are already evaluating. Then we will also probably next year start the execution of the footprint expansion in the U.S. and that could be done -- the exact location is yet to be determined, but of course, Senva could be a base for that because we're very happy about the footprint we found in Senva in terms of R&D and manufacturing capability.

Okay. Okay. And then, let's say, very -- let's say, short term -- short question on the modeling, Nicola, if you can help me to understand that you mentioned before tax rate are higher due to mix -- due to change in regulation in Croatia. What's the sustainable level of tax rate for you going forward? And also some indication on the CapEx for the current year and on working capital on sales considering the strong reduction in working capital we saw in the last quarter.

Yes, Alessandro. So if we talk about the tax rate, I expect that in the future will be pretty stable with the end -- with the level at the end of 2022. So it's around 22%. With [indiscernible] CapEx, we expect to be around the 5% of the net sales. So it is level that we deem [indiscernible] mid and long term, it will be [indiscernible] for us. And even in 2023. With reference to the net working capital at the year-end, we expect for next year, for 2023, I mean, a level of around 17%, and during the year, there are some seasonal effect that I expect in line with what happened by quarter in 2023.

Okay. So basically, it should increase compared to the year, Nicola?

Starting yes, it is possible.

The next question is Gianluca Pediconi from MOMentum.

Congratulations on both the financial achievement above all the sustainable 1 as well. I have a couple of questions. The first 1 is related also to what Alessandro just asked you. And when I look at the breakdown of [ color ] by region in terms of sales, but I'm much more interested in terms of production footprint, let's say, in 3 to 5 years. What do you see Francesco there, the ideal breakdown. I understand now Europe is probably one of the fastest-growing market. So I'm not looking at the revenues, but I'm much more interested in, let's say, midterm target of capacity breakdown by region. So that is the first question. The second 1 is when I look at your portfolio, is there anything I don't want to mean -- but is there anything that you would like to add in order to better serve your customers? Or you are happy with the current value proposition of CAREL?

Okay. Thanks, Gianluca, for the questions. So in terms of capacity expansion, the first -- we are still going to invest in Europe definitely. So in addition to the new facility in Croatia of last year, we are going probably towards the end of this year to start executing additional capacity somewhere in Europe because we do expect a significant growth in Europe to continue. Likewise, in Europe, we are going to, let's say, exploit synergies in manufacturing among the different companies we now have working in mechanics for ventilation, namely Enginia, Recuperator and Klingenburg on top of that, we will also expand capacity in Europe followed by probably, as I was mentioning before, to Alessandro followed probably in '24 by capacity expansion also in the United States. Probably even before that, we will have some -- we'll deploy some specific lines for, again, some products for ventilation like Enginia, for example. Because that is growing pretty well in the U.S. Now with these investments we made in ventilation, we are in a good position to grow in the HVAC commercial segment in the U.S., and that's what we are definitely achieving in this moment. As far as Asia is concerned, as of now, our capacity is sufficient. You know that in 2019, we tripled our capacity in China. So for the time being, it's sufficient, but then, of course, we will monitor the situation to see if the necessity exists to add the capacity somewhere else in Asia. Concerning products, that's, let's say, of course, we continuously invest for innovation, and innovation comes also from expanding our system. It's difficult to say at this stage what we miss because that depends on the innovation path that we believe is the most interesting. For example, like a few years ago, we thought that the ventilation could start taking over in Europe, and that was also the moment for expanding our position in ventilation for the U.S., and we started doing acquisitions there. We identified sensors as a very important technology, and we started making acquisitions in sensors. Now there are still some components left in ventilation, definitely, for example, I don't know, there are filtration systems, just to name one, some kinds of bots. And another direction, very important one is, of course, in software and digital services that definitely something that would be very relevant for us to add.

And Francesco, if I may, you are considering, as you mentioned, in both innovation and acquisition. You are considered for this new, say, potential new components to develop them internally or to buy a company in the market. So if it would be a kind of -- sorry?

Yes. Sorry, Gianluca, yes, in general, we will consider for...

So you will be opportunistic.

Opportunistic...

No. I mean the strategy is to try and develop these components that you believe you may add to Europe internally or you are scouting for the best company in the market, if you see if we can buy them.

Okay. It depends on the kind of technology. I can give the example of, for example, software and digital services. Our idea is to follow both direction. So we are definitely investing organically, but we're also actively scouting for M&A. So we're doing the 2 things simultaneously. For other technologies, it would depend. So if it's a completely new technology for us, then probably M&A would be an interesting way to [indiscernible] the technology like we did in the last few years.

The next question is from Niccolò Storer from Kepler.

The first 1 refers to heat pumps. I was wondering if growth you have seen in 2022 was aligned to the 38% growth of the market or if you had impression, it was higher or lower and in the press release, you speak about an accelerating trend in '23. So we expect this 38% growth to be even higher in the current year. And always related to [indiscernible] you mentioned before the opportunity from the inflation reduction factor in the U.S. And so here, the question is, if you have already started seeing something in this very first part of the year. And if you are able in a way to quantify the opportunity at least in the initial term. Second question is related to the shortage, you mentioned which goes a slowdown in refrigeration growth. Should we think that refrigeration is the only activity impacted by shortage or just it is more impacted, and we have shortage also elsewhere, but it's not that easily detectable. And also related to shortage. I was wondering if you are able to quantify in a way the quantity of [indiscernible], which could be there and fill up once all the components become available. Third and last question is related to pricing and cost evolution. So should we expect a further price increases into 2023? And also -- on the cost side, what are you seeing in terms of inflationary pressures? Are you seeing something coming back, you see a continuation of the same trend of 2022, just a qualitative view on that.

I apologize. We lost connection with the moderator. Could you please hold the line and it should resume shortly. Thank you. I apologize for the slight delay. We're resuming connection with the moderator. If you could please hold on. Please go ahead, sir.

Yes. Sorry, the line went down. I don't know where you lost me.

Can you hear me, Francesco?

Yes. Where did you lose me?

We heard basically no answer to questions. So just to start from the beginning. Sorry for that.

Okay. So start again. So in heat pumps in '22 our growth was, yes, more or less in line with the general market growth. So approximately what you mentioned, the general market in EU, 38%. In any case, our growth would have been higher in '22 in heat pumps if it were not for the shortage because we have been gaining market share. So we would have been growing more than the market. However, unfortunately, the shortage limited our growth was a bottleneck, so we couldn't grow more than that and more or less was in line with the market. Concerning '23, the shortage is being resolved very fast as we speak. We are very confident that the situation will improve significantly for the rest of the year. The capacity is there because we have been investing. So we're confident that growth for heat pumps will definitely be higher in '23. Concerning the U.S., it's very promising for the midterm. It's still too early to see any material effects. Of course, we are exploring very actively in the market, but it's still too early to see anything meaningful moving. But it's definitely a big opportunity. Concerning the shortage, it was impacting also HVAC. So it was impacting -- in these last few weeks, it was impacting both refrigeration and HVAC. It was much more visible in refrigeration for a number of technical issues. For example, 1 is that we had an issue with components related to the connectivity hub of a supermarket, which is basically the brain that controls the entire supermarket and it's connected to the rest of the system. And if you don't have that component, you miss the entire installation of all the other components. So that's an example why refrigeration was more impacted than HVAC. It's not the only example, but let's say, refrigeration -- it was much more visible in refrigeration, but it was impacting also HVAC. But again, it's been resolved very fast now already as we speak. Concerning pent-up demand, unfortunately, that's pretty difficult to estimate. So it's not -- it's not easy for us now to estimate demand. There is -- let's say, there is a significant backlog. That's for sure that we see generated because of this shortage. But in any case, since the shortage is being resolved, we will recover all this backlog in the coming months. So we -- let's say, this is not a lost business. It's something that we will recover in the following months.

Okay. Then we had the question on pricing and cost.

Sorry, I missed that 1 because the line went down.

Okay. Okay. Okay. So basically, I was asking where we are in terms of price increases if we still [indiscernible] seems to be past in 2023 and also which are the trends you have been seeing on the cost side if you're still experiencing the inflationary pressures or if you are seeing some items, some purchases coming back, a little bit of a quality that is picture of that.

Okay. So for '20 -- as you know, in '22, we had cost increases on average of, let's say, high single digit. For '23, we are -- we still expect the cost inflation on electronics, not on the other categories of materials, not on energy, of course, not on mechanics, not on metal, but mainly on electronics. So we do expect cost increases in '23, but to a lower extent compared to '22. We are applying a price increase in '23 already, but of a lower magnitude compared to what we did in '22. And in general, we will continue with our general reactive approach. So we will see where costs go. And eventually, we will see what to do with prices. But we do expect to definitely apply much less price increases than what we did in '22.

So can we assume that something in the 2% to 3% region could be fair for 2023, assuming...

Yes, you're talking about prices or costs, sorry.

Prices.

Prices, yes, we do expect more or less a low single-digit price increase.

Okay. And maybe I have 2 additional questions. The first 1 is a follow-up on refrigeration. You talked about the possibility for this business segment to be impacted by some economic slowdown. And I was wondering if barring, of course, the shortage of components. We're already seeing something or if this is just -- this is as you mentioned is just a possibility. And very last question for a modeling [ part ] of this. What should we expect for next year in terms of financial charges that has come down. On the other hand, we have this interest rates coming up, [indiscernible] something in the EUR 3 million region.

Okay. So Niccolò, in terms of refrigeration. Yes, the market sentiment in general, is of a likely, let's say, slower growth in '23 compared to the previous years. We're now talking about like a decrease in the market. We're talking about a lower growth rate. That's the sentiment of the market and what we expect. Let's say that we are probably starting to see some early signs of softer order intake, let's say, beyond the backlog that we have, of course, some softer order intake. So that's pretty likely. But again, we're talking about a lower growth rate and not a decrease. On the other hand, let's say, it's definitely too early to say, but there could be positive surprises in China, as you know, because there the strong expectations for recovery on the market and refrigeration was very weak last year in China. So there could be a positive surprise, but it's still too early to see any visible signs there. Let's say, in Europe, in -- especially in Europe, there is this very likely, let's say, softening of growth because of cautiousness related to specialty cost inflation. Typically -- and that -- we have been expecting that for a while now. But that typically is very short term because the food retailers start again investing also because there's the, I mean, regulation that is driving them to invest. Now for the interest rates, I leave it to Nicola.

Yes. On the interest rate, we expect the financial charges to have an increase in 2023 compared to 2022. It will be certainly the increase similar to what happened in 2022 compared to 2021. And then this is for the typical part of the financial charges. I do not -- I'm not taking in consideration evaluation on the put and call option that we have, for example, we have say the minority stake. On the other hand, we are expected this increase because we have a part that is at fixed rate and part of it on a variable rate. So a part will be increased.

Okay. Somewhere in the EUR 4 million range than EUR 3 million?

Yes, yes [indiscernible].

The next question is a follow-up from Alessandro Tortora from Mediobanca.

Francesco. Just to follow up on the price trend and the price component. Can you remind us, considering the organic growth you achieved in the full year 2022, what is the portion related to price increases considering the [indiscernible] increases you made over last year?

That's a mid to high single digit. It's mid to high single digit price in '22.

Okay. And for what you mentioned before, probably we are still far from coming back to the -- how can we say the automatic price listing revision year-by-year made by OEMs considering that [indiscernible] scenario for electronic components. So is it fair to say that we are still talking about, let's say, some inflationary trend for you for -- let's say, your electronic components in the [indiscernible] OEMs.

Okay. No, Alessandro. In this moment, we don't see, in the short term, a return to a deflationary context not on the cost side and not even on the price side, of course. So both sides will increase less than '22, but we still are not seeing a deflationary situation.

The next question is from [indiscernible] from GMP.

Two questions, Francesco. First 1 is regarding the cash generation of the business. Can you confirm the actual free cash flow generated last year, more generally, what type of cash conversion from EBIT or EBITDA should we work with when we look at CAREL. So that's the first question. The second question is now that the debt is significantly sub onetime EBITDA, that gives you probably much higher capacity for acquisition, maybe up EUR 200 million, something like that. Should we expect a larger acquisitions going forward?

Okay. [indiscernible], thanks for the question. So I'm taking the second one. Yes, we do aim probably in the future for bigger transactions on average because we are bigger, we are more firepower, we have been building a track record and experience in acquisitions. So definitely, our target is to increase the average size of our transactions. So the answer is, yes, nothing transformational. We're not looking actively for anything transformational, but bigger. Yes, bigger, meaning so far, let's say, we had transactions of up to EUR 30 million in turnover. So bigger means from there on, let's say, but not transformation. I'm not actively looking for transformation. Now I leave it to Nicola for the first question.

Yes, with reference to the cash conversion, we expect for the next year, something like the 40%, 50% is influenced to the investment policy of the company. We are program with the relevant CapEx. As I said before, it was around the 5% of the [ net base ]. So we expect a trend between 40% and 50% of the EBITDA.

The next question is a follow-up from Gianluca Pediconi from MOMentum.

Sorry, can you hear me?

Yes, Gianluca, we can hear you.

Okay, perfect. My follow-up question is just a clarification. On the material, the component shortage. Because I was -- last week I met a few Nordic industrial company, none of them competitors of our customers or not in the same industry of CAREL, but they were flagging higher level cost and rising component costs, but they were not complaining any longer about any shortage of electronic material. So is it possible that this shortage is affecting just some very specific electronic components used in our industry?

Yes, Gianluca. So, first of all, in general, industrial electronics has a very different context compared to consumer electronics. Consumer electronics, let's say, the shortage is already gone -- has been gone for months now. But in industrial electronics due to the huge backlogs that were present in the supply chains, consumer electronics still is definitely tighter. And you said that the situation even in industrial electronics is better now overall. We had some issues on some very specific components that affected some, let's say, product lines. It was a very specific issue related to very few components. And again, it's now being resolved. So we do expect from now on, a significant improvement on the supply chain. Let's say, again, in general, though, there is 1 category of components that probably will remain tight for a while, which is power electronics for inverters because the demand for electrification, EVs, renewables and so on will drive very strong demand for those kinds of components for a while. We have been taking very strong counter measures for that. And we have really a very, very resilient footprint now in terms of possibility of sourcing alternative power electronic modules. So we're very confident about the future. So this was really pretty contingent specific issue that lasted for a few weeks was pretty painful for those few weeks, but lastly just a few weeks now, things are improving very fast.

And what is the -- to understand here is that was similar to all of your competitors. So your customers were not, let's say, disturbed by the fact that you were not able to supply some products.

Well, they were not happy, of course, but...

No, there were not happy, but this was not a CAREL issue, it was an industry-wide issue.

Definitely, definitely, for example, power electronics is definitely a general issue. And likewise, the issue on the [ half ], let's say, the supervisory systems for supermarkets, I was mentioning before was pretty generalized. So it was...

So it was not due to a stock which was, let's say, too tight or something, I guess. So at the end of the day, what I'm interested is no major complaint, let's say you didn't lose any customer because of it.

No, let's say, in general, no also because, again, it's in our business model, it's typically not really possible to change the supplier for just a few weeks. So, no. It's basically postponed projects and postponed demand. But in this situation, I don't -- considering the mass, which has been going on for so long now on the supply chain, I don't think that we were being -- we have been worse than our competitors on the contrary. I mean, especially looking at the overall result and also the fact that in Q4, even considering this situation, we've been growing organically double digits. I mean the situation was not dramatic with just contingent situation. And again, it's already improving very, very fast.

[Operator Instructions] Mr. Nalini, there are no more questions registered at this time.

Okay. Thank you very much, everybody, for your attention and your questions. Looking forward to speaking with you for the Q1 '23 results. Bye.

Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Goodbye.