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 2024 Full Year Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Nicola Nalini (sic) [ Francesco Nalini ], CEO of Cara. Please go ahead.

Good afternoon, and thank you for joining our call for the presentation of the full year 2024 results. I'm starting from Page 3 with the main highlights from this period. As you know, after 3 years of annual growth exceeding 20%, 2024 has proven to be a transition year due mainly to the decline in heat pumps and to a generalized destocking process. In spite of our revenue decline, though, we managed to maintain a good profitability and especially strong cash generation, easily supporting record investments, especially in innovation. Now looking at the figures. Revenues declined by 11% in 2024 to EUR 578.5 million or by 13.7% on an organic basis. As expected, in Q4, we had a significant improvement since the quarter was broadly in line with Q1 and Q2 but stronger than Q3 in spite of the usual seasonality where Q4 is normally the softest quarter of the year. In fact, the year-on-year performance of Q4 went from minus 15.3% of Q3 to minus 4.8% in Q4. During 2024, the revenue decline is almost entirely due to the poor performance of the EMEA region, in particular, for the sharp decline in heat pumps. This vertical declined by approximately 70%, explaining by itself close to 10 percentage points of turnover decline. The weight of this vertical on total sales is now in the mid-single-digit range. Also, refrigeration was weak in EMEA during the entire year, and everything was compounded with a massive destocking process that happened across almost all markets. EBITDA margin in the full year was 18.1%, in continuity with the first 9 months as the OpEx containment initiatives and a relatively stronger Q4 helped to offset the usually seasonally weaker profitability. We basically managed to maintain an adequate level in spite of the negative operating leverage, thanks to a number of savings that led to lower overhead expenses compared to 2023 even considering the perimeter change as well as thanks to an improved gross profitability, which is related to the positive trend in raw material costs and a positive mix. On the other hand, we reached record levels of R&D expenses that are confirmed at the target of above 5%. Overall, CapEx were also at a record level, but cash generation was very strong with a cash conversion of approximately 60% and a final net financial position of EUR 50 million. This is after EUR 44 million for the acquisition of the residual 49% stake in CFM without which the NFP would have been close to 0. The balance sheet of the group remains very strong with NFP over EBITDA approximately 0.5 but actually 0.2 if you exclude EUR 31.6 million related to the IFRS 16 accounting principle. And now on Page 4, we can see some more figures. Revenues at EUR 578.5 million were down 11% from the EUR 650.2 million of 2024 with a decline of EUR 88.5 million in organic revenues. The positive contribution of EUR 17.4 million is from the perimeter change, and the small negative effect for EUR 0.6 million is related to the foreign exchange. The perimeter change is mainly due to Kiona that grew by 15% and recurring revenues at fixed exchange rates. EBITDA at EUR 104.9 million was down 23.6% from the EUR 137.2 million of 2023 or 18.1% of sales versus the 21.1% of 2023, entirely due to the negative operating leverage, partly offset by higher gross profitability and the discretionary cost containment plan. The higher gross profitability, again, is due to a favorable trend in raw material costs and a positive mix. The EBITDA margin was stable during the year, so we did not have the usual seasonal decline in Q4, thanks to the cost containment in sales and thanks to a relatively stronger quarter. R&D expense was at a record level, above 5% of sales, and the contribution of Kiona was accretive with a profitability in excess of 20%. Net profit in the period has been EUR 62.6 million, down 11.7% from the EUR 70.9 million of 2023, entirely due to the operating performance, while the tax rate at 20.7% is in line with the previous year. As anticipated in 2024, we sustained record CapEx, mainly in R&D and in the expansion of the Klingenburg plant in Poland, to centralize and increase the efficiency of our mechanics production process. We invested in the period EUR 31.6 million, which is approximately 5.5% of sales, up 15.3% from the EUR 27.4 million of 2023. Finally, we proposed a dividend distribution of EUR 0.165 per share, corresponding to an approximate 30% payout ratio. Moving to Page 5. We can see the usual top line breakdowns. On the left, we have the breakdown by region. And as we can see, almost all the decline in revenues in 2024 comes from EMEA with a decline of 16.3% at fixed exchange rates. Q4 confirmed in general the trend of the previous quarters, but we started seeing a material improvement in the order intake and in the expectations, especially in refrigeration. EMEA area as a whole was, of course, the most impacted in 2024 by the heat pump and destocking trends, and the comparables in 2023 were extremely challenging due to the backlog recovery during the entire year. In APAC, sales declined by 5.8% in the full year at fixed exchange rates, also in this case with a significant improvement in Q4, which has been the strongest quarter of the year. We have very positive results in refrigeration, data centers and industrial, mitigating in China the still weak macro scenario in the country. In North America, the strong momentum continued, driven in particular by data centers with Q4 being the highest of the year at EUR 28 million. Growth in the full year was 6.7% at fixed exchange rates. And obviously, also here, we have to consider the very challenging comparison of 2023 with a backlog that in the case of America was recovered mainly in the second half. So these results have to be considered as very, very positive. North America has now reached 18% of total group sales, as we can see from the pie on the left. Latin America had also a very good result with a growth of 19.8% at fixed exchange rates, particularly concentrated in Brazil, while the rest of the region had mixed results. To the right, we see the breakdown by sector. HVAC had a decline of 13.1% in 2024, net of the foreign exchange with a slight improvement in Q4 due to the strong momentum of data centers in the U.S. On the other hand, EMEA was stable quarter-on-quarter but with an improvement visible in the order intake. In refrigeration, we had a decline by 3.9% at fixed exchange rates with the continuity of the trend in Q4, in particular, a stagnant market in EMEA and a strong trend in America with a focus on natural refrigerants and energy efficiency. In EMEA in Q4, also here, there's an improvement of the order intake, even stronger than in HVAC. I now leave the stage to Nicola for the items below the EBITDA on Page 6.

Thank you, Francesco. Slide #6 details the group result from the EBITDA to the net profit. The increase of D&A cost is related to the purchase price allocation of Kiona for EUR 0.47 million and the residual part to the relevant CapEx activities of the last few years. The decrease of financial charges is mainly related to the interest rate reduction to the lower level of financial liabilities and the different comparison base since the second half of 2023 was impacted by the bridge loan of EUR 180 million related to the acquisition of Kiona. This line is also impacted by relevant figurative interest of accounting effect such as put and call options, earn-out liabilities and IFRS 16 liabilities. The net financial charges paid to banks and other institutions decreased from EUR 4.8 million of 2023 to EUR 3.3 million of the present year. The ForEx gain is mainly linked to the effect of the Kiona's put and call option expressed in NOK. The capital gains refer to the difference between the estimated fair value and the actual amount for the put and call option of CFM and the different fair value of Kiona and Senva. The result of company consolidated with the equity method include the valuation of Free Polska, a company owned by [ Alfaco ] focused on sourcing activities. The tax rate of the period was 20.7%, in line with the level of last year. The group net profit in 2024 was equal to EUR 62.6 million compared to EUR 70.9 million of 2023. Slide #7 shows the net financial position evolution of fiscal year 2024. The cash conversion of 2024 was around 60%, including a record level of CapEx equal to EUR 31.6 million. The period was impacted by M&A activities for EUR 44.2 million, and the group paid a dividend for around EUR 21.3 million. Net working capital improved in the last part of 2024 due to the typical seasonal effect and a good management in all the main components. Taking out the accounting effect of IFRS 16, the net financial position is equal to EUR 18.7 million. I leave Francesco to go on with the presentation.

Thank you, Nicola. Now we are on Page 8. And I would like to take the opportunity to provide some updates and examples of our continuous innovation in different areas. We've already mentioned in previous conferences the breakthrough coming from the software side with STone on the edge and with Kiona on the cloud. But of course, we strive for maintaining our competitive edge also in the hardware and service side. In electronics, for example, we introduced in 2024 the new generation of our control platform for refrigeration, specifically the controllers that drive cabinets in food retail, the MPXpro. There are many innovations in this new range that is powered by STone and so gets all the extremely powerful features of this system. It's, of course, fully compatible with all leading natural refrigerants, including propane, and it has additional sensors embedded so that it's possible to get more physical data points from the cabinet to run more powerful algorithms in the controller itself or at the store system level with our local supervisor, boss, or at the cloud level. In mechanics, specifically in heat recovery systems, after the launch of B-Blue, which has a new surface material for the plates of the heat exchanger to make water usage in data centers more efficient, we introduced a groundbreaking innovation in indirect evaporative cooling, which is the V-Series, a range of heat recovery systems in PVC. This is the first on the market and ensures much higher durability and longevity against corrosion vis-a-vis traditional materials, making the V-Series vastly superior for harsh industrial applications and data centers. In sensors, as a joint development between our 2 sensor companies, Arion and Senva, we just launched an infrared propane gas leakage sensor, the mini GLD. It's specifically designed to support the transition to natural refrigerants like propane that being flammable has, of course, to be checked for leakages. This new sensor delivers exceptional accuracy and safety since its infrared design makes it immune to poisoning effects. It's auto calibrating and has redundant microprocessors for unparalleled reliability. This is the first product of our new Mini-Architecture sensor platform that will be fully modular and will support different sensing elements for various applications in HVAC and refrigeration. In services, we just launched in Europe an initiative called Total Store, where in addition to our comprehensive control system for food resale on the refrigeration as well as HVAC sites, we will have digital services and also consultancy to provide performance and energy optimizations. This will be obviously supported by AI, for example, with the new automatic rule engine for alarms currently under development in Kiona that we already mentioned in our last call. On Page 9, I also take the opportunity to briefly mention our new multiyear sustainability plan. As you know, sustainability has always been one of the main driving forces of our activities. And the last plan, the '21-'24, allowed us to achieve many successes we are very proud of and has been consistently integrated with the industrial business plan. In this page, we can see several examples of results from the last plan and goals for the next '25-'28 plan. I would just like to mention in terms of results the approval of Carel's near-term decarbonization targets by SBTi and the goal of implementing a 10-year greenhouse gases reduction plan to cut Scope 1 and 2 emissions within 2033. I'd also like to mention that our headquarter in Italy has just obtained the gender equality certification as we firmly believe that increasing our gender equality will lead, among many other things, to a more innovative organization in the future. And now finally, on Page 10 for the closing remarks. 2024 has been a challenging year of transition with contingent but very steep trends like the heat pump decline, the destocking, the tough comparison with the backlog recovery of 2023. Visibility and volatility have been through the roof throughout the year, but all the secular drivers underlying Carel growth for the future remain untouched. Despite the negative operating leverage, we maintained a solid 18.1% profitability, thanks to discretionary cost containment and gross profitability improvements that also offset the typical Q4 seasonal decline in profitability. We also had a strong cash generation easily supporting record investment levels, particularly in innovation, strengthening the foundations for our long-term growth. In fact, we introduced a number of cutting-edge products and initiatives in all our technology domains, and we also just launched our new multiyear sustainability plan to execute our commitment to sustainable growth. Needless to say, the current macroeconomic landscape remains challenging and volatile with geopolitical tensions and limited visibility. In our markets, the EMEA region shows significant signs of recovery, especially in refrigeration. The APAC region presents a mixed outlook with solid developments expected in data centers and industrial, while North and Latin America remain positive. To conclude, since the beginning of the year, we have been observing a significant improvement in the order intake. That obviously takes some time to materialize into actual results, also due to the supply chain ramp-up. So we expect Q1 revenues to be close to those of the same period of 2024 with an acceleration in performance starting from the second quarter. This is due to a recovery in EMEA, especially in refrigeration, and in APAC, where the launch of new locally developed inverters is giving us very interesting opportunities for HVAC. At the same time, we confirm the solid expectations for North America, driven in particular by data centers and inverterization. Thank you very much for your attention. We're now more than happy to answer to your questions.

[Operator Instructions] The first question is from Christian Hinderaker from Goldman Sachs.

I wanted to start on the comments about the significantly positive trend in orders at the beginning of 2025. You touched on it a little bit in the closing remarks, but I wonder if this is concentrated by end market. And I guess curious as to why it's likely to take months to benefit the P&L. Is that suggested that you've been running a bit lean on inventories?

Thanks, Christian, for the question. So basically, we actually started having a significant improvement in the order intake, especially since the beginning of the year. And of course, yes, the supply chain was quite lean after what happened in 2024, and it takes at least a few weeks to ramp it up. The -- let's say the turnover itself as from what we are seeing in this moment is improving during Q1. But especially, we will have the first materialization, [ significant ] materialization from what we expect in Q2. We have also to consider that in Q1 2024, especially at the beginning of Q1 2024, we had still some residual backlog of heat pumps. And so there was -- especially in the very beginning of this year, there's still some, let's say, challenging comparison, which is basically going away now. So basically, the point is that it takes a few weeks for the supply chain to adapt to a higher regime of order intake. And that's why basically it's -- let's say turnover is improving during Q1, but especially, we'll see the materialization in Q2. As far as the verticals are concerned, I briefly touched that we're seeing an improvement in EMEA, especially in refrigeration. So now it's becoming really tangible, the restart of refrigeration in EMEA, and that's probably the biggest change. Plus we have, let's say, very -- quite good expectations for APAC for Q2. Q1 last year in APAC was very, very strong for some specific reasons. So while, on the other hand, Q2 in APAC will see a significant improvement in performance from what we are seeing also because we're having these new projects for the inverters that we developed locally in China that we are launching in the market in this moment. As far as America is concerned, we confirm the expectations that -- the results, let's say, and the expectations that we have been seeing in 2024. So quite solid expectations in especially data centers but also from the introduction of variable speed compressors.

And just moving to margins. Obviously, you have the unusually strong margin for the fourth quarter, which usually sees a seasonal step down. And you've obviously saved some costs. I'm just curious how we think about the evolution of the cost lines as we move through 2025.

Look, we expect some evolution of cost that will be pretty much in line with this year with some relevant investment in R&D cost and quality cost. But the rest, pretty much in line with the evolution of this year.

Yes, quality cost, I mean improvement -- quality improvement projects.

Yes.

Okay. Makes sense. And then finally, interesting to read your 2028 sustainability report. In that, you talk about major investments in plant infrastructure as you move away from nonrenewable energy sources. If I look at consensus, there's about EUR 92 million of cumulative CapEx over the next 3 years, roughly EUR 30 million a year. Does that figure need to be higher to account for these investments? Or is it inclusive of the existing CapEx framework?

No, no, Christian, it's included in the existing CapEx goal. So around 5% of sales. Everything is included.

The next question is from Niccolò Storer of Kepler.

Two questions. First one is on the outlook. If you maybe can comment about your expectations for what concerns HVAC commercial and HVAC industrial ex data center. I was wondering if also in this space you are looking to some early signals of recovery or if it's still too early. Second question, again on cost, in particular, on cost of materials. Probably 2024, the weight of cost of material on revenues was the lowest in many years. And so what was behind this? And do you think that maintaining, if I'm not wrong, 41% weight on sales could be something sustainable into the future?

Thanks, Niccolò, for the question. So as far as HVAC commercial and industrial are concerned, speaking especially about EMEA because I think that's what you're referring to, that's a little bit more unclear, especially in commercial. Industrial, we are quite optimistic apart for the side of industrial related to automotive. But commercial is a little bit more uncertain. We are optimistic and confident for a number of reasons that the market will continue to improve. But we have a little bit less visibility. The stronger visibility we have in this moment is for a significant restart of refrigeration in EMEA. Overall, though, there is a generalized also in HVAC improvement that we are starting to see in EMEA. So it's not only refrigeration. It's also in HVAC. But the situation is a little bit more unclear and more volatile. As far as the raw material costs are concerned, let's say that we do expect to continue having additional improvements in electronics. On the other hand, for the mechanical part, of course, even if we are investing, especially in Poland for improving the efficiency of the process as far as the materials are concerned, of course, that's more difficult to forecast because it depends on the metal price, on the duties and so on. So tariffs notwithstanding, more or less, overall, we can say that we expect to maintain this level of incidence of raw materials on prices.

Maybe a quick follow-up. When you talk about -- just to frame a little bit better what you are saying, when you talk about significant improvement on refrigeration, if you had to quantify, this means double-digit rebound, mid-single-digit rebound? Which is the range we should think of?

It's difficult to quantify at this stage, Niccolò, because it's true that the order portfolio is slightly longer due to the supply chain ramp-up. But it's not so long. Let's say it's material. So it's a material rebound.

The next question is from Alessandro Tortora of Mediobanca.

I have 3/4 okay questions, but they are brief, if I may. So the first one, Francesco, if you can comment also, let's say, a little bit. I heard your comment on the regional performance. But considering, let's say, your comments on EMEA but also North America and APAC, can you give us also a kind of sense if you see, for instance, North America accelerating okay in full year '25 considering clearly the greater exposure to data center application. And secondly, if you believe that making the sum of all the application in EMEA, you see basically EMEA, let's say, returning to a decent okay level of growth. And lastly, considering the comments you made on China for APAC, do you expect basically APAC to return to positive territory this year? That's the first question.

Okay. Thank you, Alessandro. So it's definitely too early to provide a quantitative indication for the full year. So I can give you some qualitative indications on the trend. So North America remains very positive. And so yes, the results should be pretty good this year. We have to consider that last year, the growth was very good. But we had a very tough comparison in 2023, which, to some extent, should normalize in 2024. So let's say this could help, but we have very solid expectations. And again, please consider the evolution of the, for example, inverterization, which is very important. Having said that, of course, it depends on -- then we cannot forecast what could happen with geopolitically induced recession, stuff like that. We cannot know. But looking at the current market conditions, this is what we expect. Then in EMEA, we do expect, yes, we are optimistic about a return to growth. So let's say you said a decent growth. It depends. But what do you mean by decent? But let's say -- yes.

Let's say mid, mid-single digit.

I cannot -- it's difficult to say. But let's say we are thinking about a return to a positive result. And APAC, likewise, we have good expectations for an improvement during the year, yes. In APAC, probably yes. Again, the comparison in Q1 is quite difficult, but the rest of the year should be definitely better.

Okay. Okay. Then the second question is you mentioned initially the cost efficiency measure the company put in place in order also to de-seasonalize a little bit the profitability last year. If we need to think about also the historical corridor, okay, you had in terms of EBITDA margin in the past years and also, let's say, this return to growth in the coming quarters, do you believe this year the company can come back, let's say, to the normal corridor, which is at least, let's say, the 19% EBITDA margin?

Well, that's still our target, of course, related to our usual path of organic growth. So assuming growth -- assuming high single-digit growth, the result should be 19% to 20%, yes, profitability. That remains our target and expectation for the midterm. This is not a guidance for 2025. It's our midterm general expectation. So high single-digit growth, 19% to 20% profitability. We confirm that at this stage.

Okay. Then let's say the third question is, let's say, some major moving parts for the free cash flow generation or the cash conversion in 2025. If we need to think about the CapEx on sales close to, let's say, around 5% also in 2025 but also on the net working capital, which kind of assumption, okay, we need to think about also for the net working capital sales?

Look, in terms of net working capital, I expect stability with the end of the year. I'm talking about the end of what we are expecting of 2025. And there could be some improvement maybe on the inventory level. Instead, the other relevant matters, it will be pretty much stable with this year.

Okay. And then the last question is on, let's say, the M&A strategy. You briefly, let's say, commented on the Kiona performance, okay, last year. I think that probably -- first of all, if you can share a little bit also your feeling on 2025 performance, okay, expected for Kiona, if you're assuming some kind of acceleration. And then beyond Kiona, considering the current environment also, let's say, by region, where do you see, let's say, interesting opportunities for Carel in terms of possible, let's say, M&A targets? Do you still believe North America is a top priority for you? Or maybe considering also this return to growth for EMEA, maybe you also see some opportunities in our region?

Okay. So Kiona basically had -- in 2024, as we mentioned, had a 15% recurring revenue growth, which is a little bit behind the initial expectation. But I mean considering how challenging 2024 was in Europe, we consider that a quite satisfactory result. For -- let's say our expectation for 2025 is for an improvement of this performance. And likewise, for example, also Senva had a very, very solid result and a very solid profitability -- accretive profitability. In terms of strategy, we now have a pretty solid balance sheet. So we are -- let's say, we have quite a significant firepower. And so we are increasingly active. We maintain the focus on North America. But of course, we don't exclude Europe because there could be some interesting technological market opportunities. So the focus is still North America, but we can -- we do not exclude other regions, especially Europe.

The next question is from Alessandro Cecchini of Equita.

The first one actually is on cash generation in 2025. During your last call, you were, I mean, expecting net working capital on sales to be below 20% from 22%, 23% of this year 2024. So if you can elaborate a little bit more on this? And secondly, maybe also on the cash flow, I didn't catch about the CapEx because this year CapEx were significant. So EUR 40 million, if we include also leasing rental fees. So if you can elaborate a little bit more on this for 2025. And my second question is instead on -- you were referring that you expect some growth in the first quarter. So it's growing. Maybe not big growth, but it's growing. It's correct, my interpretation in terms of sales. And my final question, it's about the data center. If you can share, I mean, which kind of growth you saw in 2024 and which are the projects, which are the feeling that you have for next year.

Sorry, I start from these last 2 questions. Then I'll leave it to Nicola for the questions on the cash flow and the CapEx. So actually, our expectation for Q1 is for a flattish Q1 compared to Q1 2024, which is, in any case, an improvement year-on-year because we would go from minus 15% in Q3 to minus 4.8% in Q4 to more or less around 0 in Q1. So it will be a year-on-year, let's say, improvement. But as I said, we do expect Q1 -- a flattish Q1 compared to Q1 last year, while we do expect an acceleration in Q2. Concerning data centers, we're having very important projects, especially in North America. Quite -- let's say we have some very important customers playing in data center cooling there. Some of them are specialized. And they have very, very important growth prospects. They have fully booked order pipeline. We're working a lot on liquid cooling. That's the fastest-growing part. But of course, it's across the board. So that's -- and as I mentioned, we are also, let's say, creating -- we're in the process of creating a competence center specifically for data centers, which will be based -- initially, we thought to base it mainly in the U.S. Now we're thinking to base it in the U.S. but also in China because also in China, there is significant investments going on. And we are seeing quite good results in data centers also in China like for chillers, for example, or for CDUs, coolant distribution units for liquid cooling. So we're seeing good results and strong investments also in China. So probably this competence center will have a double, let's say, double leg, one in -- this competence center, one in the U.S. and one in China. And from an organizational standpoint, that's the main project. Of course, we are talking to customers, exploring the market, exploring the path to market to see if it's possible to have stronger exposure to the end users. Senva is getting very good results from data centers. They have a range of sensors, which are specifically suited to data centers. They are growing a lot. They have some access to end users in data centers, and they are -- let's say we are trying to leverage on those relationships also for the rest of the range of Carel.

With reference to the net working capital, to go below -- the trade working capital below 20%, it could be our, let's say, midterm goal. And I think that it's something that we can reach. On the other hand, you have to take in consideration that this year, we were around 22%, considering that we had a good December result in terms of sales that we had a higher level of account receivables. On the other hand, compared to last year, compared to -- if you take into consideration our, let's say, credit, the quality is very high. We are at minimum level of overdue compared to what was in the past. We think that there is space to improve, as I told you, in the inventory. It is a choice that we can do during the year, but it depends even where we see the opportunity. In this moment, we have no pressure from our -- because we have a strong financial position, and we will decide if we invest on the inventory in order to fulfill the requirements from the customer or to work on the working capital. And so if -- on 2025, we can project something in line this year. But in the midterm, we can think about even an improvement on this. In terms of CapEx, we always gave a guidance, and we are confirming this to have 5% of the CapEx without taking into consideration the lease effect around the 5%. And we are confirming this amount, including, as it was said before, even the ESG investment on this.

This year, it was slightly above 5%, 5.5%, approximately. But we -- let's say it's around 5%. Of course...

It depends in the date when you complete some investments. So it's not something that is -- CapEx are, by definition, fluctuating on a quarterly basis.

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

Okay. Thank you so much for your attention and for your questions. And looking forward to speaking with you again for the presentation of Q1 2025 results. Good afternoon. Bye.