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

Good afternoon, and thanks for joining our call for the presentation of the acquisition of Kiona. We are really excited to present this opportunity as we believe it represents a key strategic milestone in our growth journey fully consistent with our strategy of developing digital services. And as we will see, it perfectly fits in to complement our system solution. This is indeed a company with unique characteristics and significantly strengthens our position. I'm first starting from Page 2 to present the key highlights of the transaction. We signed yesterday a binding agreement to purchase 82.4% of the share capital of Kiona with an implied enterprise value of NOK 2.35 billion or approximately EUR 210 million. Several key shareholders of Kiona decided to reinvest in the company, the reinvesting shareholders are the founder and CEO, Trond-Øystein Bjørnnes, that we have been personally knowing and admiring for many years, then some key employees and two Norwegian early financial investors in the company. They decided to maintain a relevant portion of their existing state. There is approximately 30% that post transaction will translate into an approximate 17.6% minority stake. They have a 3-year lockup period followed by a food court option scheme. And needless to say, we're very happy about them reinvesting in the company, such a significant part of their holding as a demonstration, they share our view on the great opportunities that lie ahead for Kiona together with CAREL. The acquisition of Kiona is fully consistent with our strategic guideline of investing in digital services as we are adding a state-of-the-art technology platform, established channel presence and a great team of 150 people very skilled in developing and selling these solutions, almost doubling the size of our existing software development talent pool. Kiona is based in Trondheim, Norway and provide software tools for reducing the environmental footprint of refrigeration installations and commercial, public and multi-residential buildings through control and optimization of energy usage. It's fast-growing and profitable being a so-called rule of 40 company as the sum of recurring revenues growth and EBITDA profitability exceeds 40%. In fact, it's a pretty unique company in this space. Again, Kiona fits perfectly in our strategy of digital services aimed at energy and performance optimization in our reference markets since it operates in several of our verticals, like industrial and commercial HVAC as well as refrigeration. Like CAREL, Kiona is perfectly positioned to benefit from several structural tailwinds related to the digitalization of buildings and the pursuit of energy efficiency. Approximately 75% of buildings in Europe are considered not efficient. The drive to make them more sustainable will be strong for decades and the Kiona systems are especially suited to connect and optimize existing buildings with whatever kind of legacy infrastructure is present on site. We do expect that the combination of Kiona with CAREL will boost its growth prospects, thanks to CAREL Industry know-how, global presence in R&D and the value creation potential for both companies is very high. At closing, the transaction is expected to be entirely funded with a mix of newly committed debt facilities, existing committed credit lines and cash on balance. Closing is expected within Q3, subject to completion of required regulatory approvals and other customary closing conditions. Moving to Page 3, we can see a brief summary of the strategic rationale for the acquisition in general terms. With this transaction, we are going to strengthen our position in a number of key strategic dimensions. First of all, we're going to strengthen our technological leadership in solutions for saving energy in our reference market, thanks to Kiona cutting edge technology. We're also very much strengthening our digital services value proposition considering the Kiona solutions are provided on a Software-as-a-Service basis. We're strengthening our human capital with a large organization with proven and focused competencies in software development and sale of digital services. We believe we are creating one of the strongest talent pools in software and digital services in our field with massive firepower for technological innovation. We're also going to make Kiona stronger, for example, accelerating its expansion beyond Nordic countries through our global presence and also through the combination with our unique technological know-how in the industry and our channel presence. On Page 4, we have some more details on Kiona. As mentioned, it's a pioneering provider of Software-as-a-Service solutions for energy usage, control and optimization with more than 75% of annual recurring revenues expected in 2023. Kiona was formed in 2021 through the combination of 5 highly synergic companies operating in the same space and is based in Trondheim, Norway. On a side note, we've been directly knowing one of the 5 companies for many years and have always been admiring its technology and digital service provision capabilities. The combination of these 5 companies really provides a unique value proposition in the industry. The systems are extremely open and focused on making the integration of buildings, even existing ones very, very easy. The system can easily connect all kinds of legacy installations present in a building, therefore, leveraging on the necessity to make the existing stock of real estate in Europe more sustainable. Its solutions used, among other elements, AI to have self-learning adaptive algorithms that minimize the energy usage with a return on investment that is way more attractive than other actions that can be taken for making buildings more efficient. The end markets served by Kiona are fully consistent with CAREL markets since we are talking about food retail, commercial, public and industrial buildings as well as multi-residential buildings. Kiona is a leader in the Nordics and has 17 offices across 8 countries. Its sales are mainly Norway and Sweden as we can see on the chart in the bottom right, but there is an ongoing plan to expand in other countries that will be boosted by the combination with CAREL. It has approximately 150 employees, 25% are in R&D proper. However, the majority is in any case involved in software development and provision. Kiona is fast growing and is already very profitable since 2023. Expected EBITDA margin is in the range of 20% to 25%. Top line growth is expected to accelerate, and profitability is expected to expand, thanks to the scalability of the Software-as-a-Service business model. On Page 5, we can present some more details on the systems provided by Kiona. There are essentially 3 main segments: multi-residential buildings, retail and industrial refrigeration, public and commercial buildings. In the first segment, we can see here on the left, Kiona is not targeting individual residential buildings but owners and managers of multi-residential units. There, its system is based on cloud control and monitoring, integration of existing legacy assets, energy management and optimization with AI algorithms, analytics and data visualization. In the second segment, which is retail and industrial refrigeration, it provides cloud control and monitoring, system integration, energy management and data visualization. Here in refrigeration, Kiona has direct relationships with end users to which it provides recurring digital service sales and also 24/7 alarm monitoring and technical support. This solution is fully consistent and actually partly overlapping with the CAREL monitoring solution. And of course, part of the strategy will be to take the best parts of both systems. Furthermore, we will leverage on Kiona's strong capabilities in selling the digital services on a recurring basis, which is demonstrated by the very high market share achieved in the Nordic countries. In the third segment, public and commercial, Kiona aims at buildings with a plurality of legacy HVAC-R technical installations. There, it provides cloud control and monitoring, system integration, energy management, analytics and data visualization. Essentially, Kiona has set self-learning adaptive algorithms that provide energy savings in the typical range of 20% to 30% in buildings with a very short return on investment compared to other energy efficiency-related interventions. The simplest solution actually continuously learns and adapts the functioning of plants compared to the external environment in order to consume the minimum possible energy. And starting from there, it's possible to have very deep energy analytics as well as algorithms easily customizable by the contractor to achieve better integration and performance. In total, there are already approximately 57,000 buildings connected with Kiona systems. Now moving to Page 6. We can have a look at some top line and profitability growth figures for Kiona. In 2023, expected sales amount to approximately NOK 285 million or approximately EUR 25.4 million, with a CAGR from 2019 to 2023 expected of approximately 19%. This top line growth is expected to accelerate in the medium term. The vast majority of sales are recurring with more than 75% annual recurring sales expected in 2023. Expected EBITDA margin in 2023 is in the range of 20% to 25% of sales. And thanks to the high scalability of the business model based on Software-as-a-Service margin is expected to expand. On Page 7, we can commence some examples of synergies that we can leverage to create even more value. First of all, by joining technical development forces, considering that Kiona has 150 employees with very strong competencies in software development and sales of digital services. By joining the development capabilities of Kiona with the capabilities of CAREL, we achieved a huge firepower in terms of software and digital services development, probably one of the largest in our industry space. Second, we will leverage on CAREL's global presence to accelerate the expansion of Kiona outside Northern Europe. Third, as mentioned, we will develop unique technological synergies, leveraging the system software of Kiona as well as the deep presence of CAREL in HVAC unit, and CAREL's uniquely deep know-how in the functioning of the units themselves, where, as you know, we have a pretty high market share, especially in Europe. Fourth, we can explore new applications for Kiona. For example, in the indoor quality and ventilation domains where, as you know, we have been investing significantly in the last few years, leveraging also our strong presence in sensors and presence in the contracting channel, for example, in the U.S. with Samba. And it's relatively easy for Kiona to develop adjacent solutions for these adjacent spaces. Again, these are just examples. There are definitely more synergies to that like in Kiona sales of hardware, for example, in fact, Kiona sells hardware to facilitate the connection of buildings and installations. And for sure, these pieces of our hardware can be provided more efficiently by CAREL, achieving cost synergies. On Page 8, we also find an indication of how we intend to manage our capital structure. The acquisition of Kiona takes CAREL leverage to slightly above 2x EBITDA based on Q1 net debt at a level that we believe is fully sustainable. However, in order to maintain high flexibility in pursuing future growth opportunities, the Board of Directors will submit for approval to the general meeting of the shareholders a proposal for a share capital increase by way of rights offering of up to EUR 200 million, inclusive of any share premium with preemption rights. The founding families and controlling shareholders, Luigi Rossi Luciani S.a.p.a. and Athena S.p.A. expressed their intention to follow the capital increase for approximately EUR 50 million in total or approximately 50% of their stake as a sign of strong support, and at the same time, giving also to new investors the opportunity to enter in the shareholding structure, a large in investor base and giving more liquidity to the stop. The rights issue is expected to be performed indicatively within year-end, subject to market conditions and the obtainment of the relevant regulatory authorizations. So to summarize, on Page 9, we can find the key takeaways. We acquired a pioneering provider of software-as-a-service solutions for energy usage, control and optimization with more than 75% recurring revenues expected in 2023 and serving several of the very same end markets that we serve. We expect to have seamless combination of Kiona solutions with ours, both in terms of digital services as well as by leveraging our strong market share in HVAC-R units and systems as well as our industry know-how. We added to our talent pool, a very strong team focused on developing and providing state-of-the-art software and digital services. And together with our team, we believe we have one of the strongest organizations in our industry. The Founder and CEO as well as several other shareholders of Kiona reinvesting in the company a significant portion of their holding as a sign of commitment to the great opportunities we will have in ensuring a full alignment of interest. Even if we can easily sustain this transaction through debt only, we want to maintain the full flexibility of our capital structure for future growth opportunities. Therefore, we're going to propose to CAREL shareholders a share capital increase by way of rights offering. And to conclude, we believe this is a key milestone in our growth story, significantly strengthening our position in digital services and perfectly complementing our system offering. Thank you so much for your attention. We're now more than happy to answer to your questions regarding the Kiona acquisition.

This is the Chorus Call conference operator. We will now begin the question session. [Operator Instructions] The first question comes from Christian Hinderaker of Goldman Sachs.

I just wanted to start, you mentioned that this is aligned with some of your existing verticals. I just wonder whether it's taking you out a little bit of the niches in air handling, humidification and refrigeration and more towards general building management on a sort of more broad-based application in terms of the Kiona business. And does that not move you more towards the sort of competitive positioning of sort of the major industrials in Europe like Schneider, Belimo, Siemens. Just curious as to who you see as Kiona's key competitors?

Okay. Thanks, Christopher (sic) [ Christian ], for the question. So actually, starting from the second part, we don't see no direct competitor to Kiona in this moment because Kiona has a unique value proposition made through its history, but also through the combination of the different solutions they made in 2021 because basically, they can combine monitoring solutions with energy management with algorithms and optimization. Everything is cloud-based, and everything is designed to be very, very easy to install basically making it seamless to install it on whatever kind of legacy infrastructure is present on the building. So in a way, it's fully open to existing infrastructure. And currently, there is -- as far as we know, no other directly competing offering on the market. In this respect, we don't believe we are going to compete against the traditional BMS players because they are -- again, we are open, whereas they are focused on the sale of their hardware. Their systems are definitely more complex to install compared to the systems of Kiona, which are designed to be very easy to install. The Kiona has thousands and thousands of preexisting frameworks for adapting existing buildings, and this platform is expanding continuously. So this fact that it's so easy to install makes it very suitable for smaller commercial buildings, whereas the BMS, traditional BMS solutions are more suited to larger buildings, mainly new buildings. And in any case, they're not as open, as Kiona, not even remotely to the, let's say, the landscape of existing infrastructure present in building. So Kiona is uniquely positioned to leverage on the necessity to digitalize and make the existing top of real estate more efficient. So we don't believe we are competing against the BMS players. We are talking about commercial buildings here. So it's in our space. And we're not moving into the general -- let's say, the general space. We're talking about energy efficiency, which is what we do. The software that runs on the units with our controls that, as you know, have a very high market share in Europe, they do energy efficiency. And by combining them with the Kiona system solution, which is so easy to apply to existing buildings, we believe we definitely have a unique position on the market that will be very, very strong in the future.

Maybe secondly, just looking at Page 6 on the historical, it looks like there was 9% revenue growth in 2022 and then 30% growth in 2023 and with a big uplift in the margin as well in the sort of forecast for the 2023 period. Just wondering what you see is driving that acceleration in growth and whether you think that, that could be an exceptionally strong year and whether that might have been factored in, therefore to consideration around valuation and the 8x revenue multiple paid.

Well, this acceleration is due to the strengthening of the system they made by combining the different companies. So again, now they have -- they are well ahead in the process of integrating the different solutions, which are perfectly complementary because they complement each other. And this is very much giving -- very much giving a unique value proposition, as I was mentioning. So the acceleration is due to that. And we don't believe this is an exceptional year. On the contrary, we do expect top line growth to further accelerate in the near future.

And then finally, maybe one on the rights issue, if I may, and I appreciate the 2 linked but not necessarily directly. Obviously, the intention is to raise up to EUR 200 million. If that proceeds, that's a little bit above the amount that would be required to be paid for this transaction. Does that indicate that there's sort of more M&A in the pipeline? If you're able to comment at all in terms of how the pipeline looks with regard to profile in terms of market positioning and any other dynamics that would be relevant?

Yes. The -- yes, for sure, we do -- we still maintain an active pipeline, fully consistent with our traditional guidelines, which are just to remind our complementary solutions, market share expansion and services, which is the direction where Kiona fits. So yes, we do still have an active pipeline, and this is one of the reasons why we want to maintain a flexible capital structure. Then the amount is slightly above also because there is a process we have to go through for the rights issue, issuing a prospectus and so on. So in order to really justify the process, we rounded up a little bit the amount, so to speak.

The next question is from Nicolas Storer of Capital Cheuvreux.

The first 3 questions are really linked to one with the other. And so starting from expected growth acceleration. I was wondering if you can, Francesco, spent a number on where should we expect growth lending to maybe in the 30% region, 40%, 50%, I don't know. Whether this growth is the result of synergies with CAREL or is a growth that would have been reached also by Kiona as a stand-alone company. So basically, I'm asking if here, we have also the effect of COVID integration and synergies in the number -- in the prospective numbers you have mentioned. The second related to that is about earnings accretion. And so when do you think that this deal will become earnings accretive for CAREL? And still linked to this, which kind of mix of cash existing funding and new funding should we imagine for the EUR 170 million you're going to spend on the acquisition. Then last question is on clients. Just to understand who are, in the end, the clients of Kiona, more final users? Does it happen also that OEMs are client? Just a clarification on that.

Okay. Thanks, Niccolò. So in terms of more precise figures, we would not disclose them at this stage also because of regulatory reasons as we're growing through the rights issue. Let's say that we do expect a growth acceleration as well as margin expansion. And they would happen even on a stand-alone basis. So Kiona would have definitely a significant growth acceleration and margin expansion stand-alone. On top of this, we do have the synergies that I briefly touched on, but there are very, very, very significant, I can assure you. In terms of earnings accretion, again, I cannot give you a precise -- a very precise reference, but let's say that we do expect this transactions to become EPS accretive pre-PPA and pre-synergies pretty soon. In terms of customers, then I leave it the last part of the question on the funding in terms of customers. In refrigeration, the customers of Kiona are both contractors and end users, they're both. Typically, they sell the solution to the end user, but it's installed by a contractor. So the Software-as-a-Service is invoiced to the end user together with a 24/7 technical support. But then there is a contractor that also uses the system to provide value-added services. In buildings, on the other hand, it's mainly through contractors and system integrators that basically buy the system, resell the system and provide value-added services to the end users. So the Software-as-a-Service is sold through the contractors. Kiona has, in this moment, approximately 300 sales partners between the system integrators, contractors, installers, which is an extremely strong channel presence and a very scalable business model because it leverages on external partners. And this is one of the reasons of the acceleration and of the margin expansion for the future. In terms of OEMs, no, they don't sell typically directly to the OEMs, we do. So that's where definitely several synergies came -- especially on the technological front can be explored. Now I leave it to Niccolò for the question. Could you please repeat, Niccolò, the question on the funding.

Yes, I was asking the mix of funding for the EUR 170 million, around EUR 170 million you're going to spend on this acquisition between available cash, existing funding, new funding, new lines to drawn.

Yes, so we have -- in part of this amount is already available in our credit line. And then we have even another credit line with the [indiscernible] Banca that we have committed for the full payment of this amount.

Next question is from Gianluca Pediconi of Momentum Alternative Investments.

I understand that you cannot disclose additional and more precise figures because of regulators. But as far as the several synergies -- the references you mentioned. Is it right to assume that most of them are revenue synergies, so cross-selling, upselling the debt? Or there are also some cost synergies. That is the first question. The second question is, I have to say that I'm very happy that you will use your paper so about the capital increase. And I also like the idea that both families inject capital but are diluted because that is probably the most efficient way in my opinion to both increase liquidity and show the shareholders' commitment. But it's the second best because did you propose -- because I think the first -- the best option was an all paper deal. Did you propose this kind of transaction? And at the end of the day, you are coming back to this solution because the seller wants to cash in or you didn't even consider this and if so why? Last but not least, this deal was proposed by some bankers? Or it was just your direct relationship with the managers or the founders of the company?

Okay. Thanks, Gianluca. So starting from the first question, in terms of synergies, yes, of course, we do expect a number of synergies that I mentioned. In terms of cost synergies, okay, the very first one, very simple, is maybe I briefly mentioned that is hardware cost synergies because Kiona has limited sales of hardware as routers, basically to connect the installations. And of course, we can provide, these business are very easily and much more compared to now. So this is the very first one and relatively easy. Other cost synergies are indirect, if you want, more strategic and indirect, meaning that by combining Kiona, we -- I mean we get a massive and huge talent pool of software developers. And should we hire, I mean, organically, all these talent developers with this level of experience, it would be -- it would have been a really long and expensive process. While in this way, I mean, we have a very fast and sustainable way to scale up our R&D capability with a business which is already very strong in cash generation and providing, of course, very high operating leverage. So there is, in a way, an indirect cost synergy here. Talking about the paper acquisition, we actually prefer that the current -- let's say, the current minority shareholders of Kiona remain invested in Kiona itself because we want them to stay close to the business and to have a full alignment of interest with the development of this business and not having them, let's say, to some extent, diluted in a larger group that makes also other things. So we want them to stay really, really focused and close to this business. In terms of the deal, I thank you for this question because this is very, very interesting. In my opinion -- I mean we are very happy about this transaction because, I mean -- we are very happy just for the fact that we did it because this is really a unique company in this space. And we managed to do this. One of the reasons is that we have been knowing the CEO and founder and also which was the founder of one of the companies that basically, let's say, the first company in the Kiona platform for many, many years. We've been knowing each other personally, our teams have been knowing them. They have been knowing us. And we have been having a lot of respect together. We've been talking each other. And so this is actually the result of a relationship that has been lasting for many years. So the idea for this started from us. Then, of course, we've been helped by advisers, but the idea started from us, and it's not new. It's something that route back too many years ago and to a very good personal relationship that we have with several people of Kiona.

I have a follow-up question because this is very important for me. So you do not see any risk of a cultural clash between CAREL and Kiona. So you know them pretty well. You know the culture, you know the mission. So you do not expect -- because I mean usually when there is a Scandy company merging into Italian is not very easy. So you read on this point in term of integrating people in culture -- different cultures -- managerial culture, a strategic culture, I mean.

Yes. I see your point, Gianluca. First of all, let's say that we now have quite some experience in integrating different cultures because as you know, we made acquisitions all over the world and all of them have been pretty, let's say, successful in terms of also of cultural integration. In this case, specifically, I mean you're right. I mean we don't see any significant risk of cultural clash because we know very well the team. We have a very good cultural fit. We share the same values. We share the same approach. All the discussions that led to these transactions where rates moves, I have to say we had -- of course, as you can imagine, we have a deep business due diligence before doing this and everything went very smoothly, and we definitely have a very, very good cultural fit. We're also very happy about this. And this makes us, of course, very confident on the success of this.

Very, very last follow-up, and sorry to my colleagues. U.K., that was the preferred capital part, I understand the reason, but there is a puts and call. And as you expect, a dramatic acceleration in both revenues and profitability, these puts and call can be materially more expensive than the current valuation. Or there are also kind of caps and floor to the value of this put and call.

Yes. The put and call is based on a multiple of revenues, but with significant targets and thresholds in terms of profitability. So we are catching both fronts. We're catching the revenues, the revenues acceleration and with very, let's say, pretty strict targets on profitability because, of course, this is important for us because we see this business model as accretive to our profitability. So this is important for us. And before -- yes, the valuation, of course, can increase if the results are good, but I mean, we would be happy in that case.

Congrats again.