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 Industries First Quarter 2025 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO of Carel Industries. Please go ahead, sir.

Thanks. Good afternoon, and thanks for joining our call for the presentation of Q1 2025 results. I'm starting, as usual, from Page 3 with the main highlights of this period. Well, as expected in this quarter, we saw the continuation of the sequential positive top line performance improvements we've been having since Q3 last year. Actually, we finally returned to top line growth even if a small one for the time being. In fact, revenues at EUR 147.4 million are 0.7% up from the same period of 2024, and definitely could have been higher not for our supply chain capacity that had been streamlined during 2024. As already mentioned, it took us a few weeks to adjust capacity to a fast-improving order backlog in terms of materials and labor. Now this adjustment has mostly been done, so we are in line with the order pipeline that remains, in any case, very short and so provides very little visibility. We've been seeing a sustained positive momentum in data centers, especially in the U.S. as well as a strong recovery in refrigeration in Europe. Adjusted EBITDA profitability in this quarter has increased to 18.6%, not considering some nonrecurring elements related mainly to our ongoing reorganization, while reported EBITDA profitability was 18.1% of sales. We had an improvement mainly due to a significant positive result at the cost of goods sold level because of a positive trend on raw material costs and because of the increasing weight of digital services that have an expansionary effect on gross profitability. We continue to prioritize investments in innovation and also in this quarter, we remain well above 5% of sales. We have in the quarter a further reduction of our net debt that was reduced to EUR 43.9 million from EUR 50.2 million at the end of 2024, even if the first quarter is usually seasonally soft in terms of cash generation. Net debt over last 12 months EBITDA is now at 0.4, but if we exclude the EUR 30.8 million related to the IFRS 16 accounting principle, net debt is slightly more than EUR 11 million, so basically negligible and confirming our very strong balance sheet position in this moment. Let's go now to Page 4 with some additional figures. Revenues at EUR 147.4 million, grew by 0.7% from the EUR 146.4 million of the same period last year. We had growth in all regions, except for Asia Pacific, where, as expected, we had a contingent effect related to the specific timing of some projects. Kiona grew in the period by approximately 15%, in line with the expectations for the quarter. And as expected, we already saw further acceleration in April. EBITDA adjusted for some nonrecurring costs related to our organizational change was EUR 27.4 million, up 2.1% from the EUR 26.8 million of last year or 18.6% of sales, up from 18.3% of the first quarter 2024. We had the positive contribution from raw material costs that are now back to the usual deflationary trend, but also the growing contribution of digital services, in particular, Kiona that add approximately 25% EBITDA margin in the period. We confirm the strong commitment to innovation with R&D expenses at around 5.6% of sales as per our target. Net profit at EUR 10.1 million is down 38.7% from the EUR 16.5 million of the first quarter last year due to the lack of some accounting extraordinary items that were present last year related to the valuations of options on minority shares in acquired companies as we will see in a few moments. Tax rate was 21.3% with an improvement over the 22.3% of Q1 last year. CapEx were EUR 4.4 million, down 15.3% from the EUR 5.4 million of last year. We confirm the expectation of an approximate 5% of sales target for the full year, considering that there is the usual seasonality where CapEx level is lower at the beginning of the year. Moving now to Page 5, we'll see some more details on the top line. Looking at the different regions, we can see that all of them grew in this quarter, except Asia Pacific. EMEA finally went back to a slight growth of approximately 1% year-on-year, mainly due to a strong recovery in the refrigeration sector. In general, stock levels are, for the most part, normalized, so we are more closely tracking end demand. It's mainly here in EMEA that production capacity has seen a bottleneck in Q1, since it took a few weeks to adjust it to the new order levels. In Asia Pacific, we had a soft quarter as expected, with a decline of 15.5% in local currency due to the timing of some significant projects and also economic weakness in Australia. We do expect a significant improvement already in Q2, also thanks to the ramp-up of some new projects with new products we have been designing in China for the local market, especially inverters. North America grew by 10.4% in local currency with another strong quarter, especially if we consider the tough comparison with last year. The solid performance is supported by the continued positive momentum in data centers, but we have very good additional development prospects related to inverters and food retail. Latin America grew by 2.9% in local currency, so still growing, but decelerating due to the challenging economic scenario in the region. To the right, we can have a look at the sector breakdown. HVAC results were basically in line with Q1 last year as well as sequentially with Q4. We do expect an improvement in the rest of the year, thanks to Europe, where stock levels are mainly normalized and also end demand should improve. As mentioned, we expect an improvement in Asia Pacific as well. Refrigeration grew by 3.3% in local currency in the period, mainly thanks to the strong rebound in Europe that had a double-digit growth in the sector, after a long period of weak investment in the region. In this sector, likewise, we expect an improvement in the rest of the year, thanks also to the full restoration of our production capacity. I now leave Nicola to comment the items below the EBITDA on Page 6.

The Slide #6 details the group result from EBITDA to the net profit. The increase in D&A cost is related to the relevant CapEx activities performed last year. The ForEx evaluation on the put and call option of Kiona express in NOK had a negative impact in Q1 2025 for EUR 2.1 million. It was a gain of EUR 2.8 million in Q1 2024. Q1 2024 was also impacted by the capital gain preferred on a difference between the estimated fair value of the actual amount of the put and call option of CFM. The tax rate of the period was 21.3%, an improvement with the same period of last year. The group net profit at the end of March 2025 was equal to EUR 10.1 million compared to EUR 16.5 million of the same period of 2024. Slide #7 shows the net financial position evolution of the first quarter 2025. The flow from operation was strong and equal to EUR 21.3 million. In the first quarter 2025, net working capital increased mainly due to a seasonal effect. It should be noted that this value is improving compared to the same period of last year of EUR 6 million. Taking out the accounting effect of IFRS 16, the net financial position is equal to EUR 13.1 million. I leave Francesco to go on with the presentation.

Thanks, Nicola. So on Page 8 for the closing remarks. As expected, the beginning of 2025 shows significant signs of improvement on the demand side, particularly in the refrigeration sector in Europe with a strong order intake that has been accelerating during the quarter and that took a few weeks to fully materialize into sales due to the necessity to adjust the production capacity adjustment that now has been done. Profitability at 18.6% adjusted remains solid into Q1 '25 with the decline in raw material costs and the development of digital services offsetting increased investments in innovation. Likewise, net debt continued to decline, supported by strong cash generation even if the first quarter is not typically the strongest in this respect. As far as the tariffs are concerned, also in this occasion, we can leverage on our very resilient global supply chain footprint. We manufacture in the U.S. the vast majority of what we sell in the country. And in any case, we plan to absorb almost entirely the impact of the current tariffs through supply chain adjustments and price revisions. Of course, we cannot foresee at the moment the impact of a possible significant worsening of the macro scenario. But for the time being, in the U.S., demand remains very strong without any signs of slowdown. In general, of course, the macro environment remains very uncertain. However, we see positive signs of recovery in EMEA, especially in refrigeration. At the same time, the very positive momentum in data centers continues, especially in the U.S. The Asia Pacific region presents a more mixed outlook. However, we expect a significant improvement throughout the year. To conclude, even if we have to remember that visibility remains very limited, based on the results achieved in the first quarter, a strong order book and positive market developments, we expect to close the second quarter of 2025 with revenue growth in the high single-digit to low double-digit range over the same quarter of 2024. 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 of Goldman Sachs.

I want to start on the order development. The last results, you'd called out a pickup in orders in the first few months of 2025. It sounds like that momentum has continued, and you've talked about the strength in the recovery in refrigeration. Maybe if you could add any further color on that in terms of the different subsegments or product areas that might be seeing strength, as well as if there's any sort of intra-country distinction in demand? That would be the first one.

Okay. Thanks, Christian, for the question. So let's say that talking about Europe, as you said, the main development is in -- the most accelerated development is in refrigeration after, let's say, some time of slow investment, now the market is picking up again. They have a quite long backlog to recover also in light of the F-gas regulation, which is the reason why we do expect, let's say, further accelerations also in the medium term, not just in the short term. There's -- and we are very well positioned to get, let's say, this additional demand coming to the fact that in the next few years, the market has to adjust for the F-gas regulation. We're well positioned on a number of fronts on the technical and commercial side. As far as HVAC -- and this, by the way, sorry, this is across the board in Europe. So there is no particular, let's say, there is no specific difference between individual countries. As far as HVAC is concerned, let's say that the rebound as expected, is more gradual also due to the nature of the market. We have been seeing a significant improvement in data centers in Europe over last year. If you remember last year, data centers in Europe were a little bit more subdued compared to the rest of the world. Now it's picking up. So it's improving. Let's say that -- or commercial is also gradually improving. And let's say, we do expect the demand in general to pick up in Europe in the coming quarters, and we will trade the demand because the stock levels are now normalized. As far as heat pumps are concerned, demand there is still, let's say, there are no clear signs of improvement yet. Again, stock levels are pretty much normalized, but the end market is still not clearly started its rebound in general. There are some specific cases where we are seeing improvements. But in general, it's still not picking up again. There are growing expectations that possibly the market could, let's say, restart in the second part of the year of 2025. But of course, it's not certain yet. In America, demand is very, very good, very solid. It's, as you've seen, very positive already, also considering the comps, but it's going to improve. Data center is very, very strong, and there's no sign of deceleration whatsoever. And also, let's say, we are -- we have growing prospects coming from the refrigeration market, where we have very interesting project developments for the short to medium term and also related to the introduction of inverter technology. So the prospects are very, very good in that region. Asia Pacific, as expected, was softer. That was entirely due to the timing of some projects as well as economic weakness in -- especially in Australia. But also here, we do expect an improvement as, let's say, the timing of the projects becomes more favorable. Of course, in China, especially, we have the uncertainty related to the tariff effect that we still don't know. But in general, let's say, we expect an improvement in -- coming again from data centers and also from refrigeration.

Maybe I can follow-up on the heat pump demand comments. I appreciate the color there. I guess, can you remind us, you said in the press release that, that was actually growing for you in Q1 of last year. Obviously, you're supplying into the OEMs here. If we look at the actual sell-in data, at least for Sweden and Germany in Q1 looks to show an improvement year-on-year in terms of demand. I just wonder if there's any consideration there on the country levels for Carel. And yes, interested in what the sort of comp consideration was as well.

Yes. So basically, yes, you're correct. Let's say that in Q1 last year, we still had, let's say, orders that we had to fulfill that we don't have, of course, in Q1 this year. Q1 this year is more or less in line or slightly above, let's say, in EPA, slightly above Q2, Q3, Q4 last year. So let's say, there is a slight improvement over Q2, Q3, Q4. Why we're down over Q1? Because, again, there were some deliveries that were still happening in Q1 last year. This improvement is actually mainly concentrated in Germany, you're right. It's mainly there. But again, it's too early, in my opinion, to say that a rebound of the market is approaching. I could be wrong, and I hope to be wrong, of course, but it's -- we do not have clear signs. We do have some small signs of recovery, mainly concentrated in Germany.

Maybe just a short follow-up on that. In terms of your country, should we think of your alignment in the Heat Pump segment as sort of reflective of volumes in the industry overall? Or are you particularly indexed to, say, Germany or certain countries?

I would say that our demand in heat pumps more or less reflects general demand in Europe because we have quite widespread customers, and they in turn export all over Europe. Again, there are some, let's say, growing expectations mainly related to the investment plan that the German government announced that from, let's say, Q3, Q4 this year that could, let's say, a good recovery could start to happen. There are growing expectations for this. Probably that the slight improvement we are seeing over Q2, Q3, Q4 last year is a reflection of a slight end demand improvement. But let's say, not as vigorous or as robust as we would like. We hope that the expectations for an improvement towards the end of the year are correct. Could be sooner. Just honestly, we don't know. We cannot say for sure. But there is some slight improvement for sure, mainly concentrated in Germany, but of course, the production base in Germany for heat pumps, it goes all over Europe. So I cannot say for sure that this is related to German demand or it's more general European demand.

The next question is from Niccolò Storer of Kepler.

I have 3 questions, please. The first one is on your guidance for Q2. I was wondering if the mentioned high single-digit, low double-digit growth is, let's say, tracking the underlying market or if it is also benefiting from the shift that you have had from Q1 into Q2 as you were not ready to fulfill all the orders you received. The second question is on the gross margin improvement you have reported in Q1. You mentioned mix, but also lower cost of material? Should we expect going forward adjustments -- downward adjustments in prices clearly net of any effect from tariff? Last question, just a clarification on commercial HVAC and heat pumps. Can we say that with Q2, finally, the comparison base on these 2, let's say, segments has become a fair one?

Niccolò, thanks for the questions. Okay. So concerning the first question, let's say, that the fact that our capacity was not yet totally ready in Q1 was reflected in slightly longer delivery lead times. In general, I don't think that the demand we are seeing in Q2 is to a significant extent related to the postponement from Q1 because in turn, that postponement from Q1 led to postponement to Q3. So I wouldn't -- for sure, some of those orders could have been in Q1. But in general, I don't expect that the demand improvement we are seeing is related to shift -- to production shifts to a significant extent. Concerning the -- I go -- I jump to the third question, then I leave Nicola for the second. Concerning heat pumps, I believe you made an absolutely good point. Yes, from Q2 on, the comparison should be quite fair compared to last year in heat pumps, because Q1 was the last quarter last year when we had some, let's say, deliveries coming out of the heat pump ramp-up. And that's why, I mean, already in Q1, we saw -- this year, we saw some improvement over Q2, Q3, Q4. So absolutely, you're right about that. Now I'll leave it...

Sorry, Francesco, is this true also for commercial HVAC?

Yes. I would say, yes, absolutely. Definitely, yes, because in Q1 last year, we had some backlog recovery still to be fulfilled also in commercial HVAC, especially in the U.S. So I'd say that from Q2, more or less, everything should be normalized, yes.

Thank you. With reference to the gross margin evolution during the first quarter of 2025, it has a benefit of the growth of digital service like Kiona and the cost of material that were reduced from the suppliers. And for this reason, we can say that it's something back to the normal of the industries that it is typical to have a reduction in cost of materials, and there is for a part of this pass-through to the customers typically. Then you were mentioning about the tariffs. We are, for sure, monitoring very strictly the evolution of this impact in the profit and loss of the company. But we are estimating like not a very relevant number in our profit and loss, this amount, and we are working in order to do a complete pass-through to the customers about this eventual effect.

The next question is from Alessandro Tortora of Mediobanca.

Yes. I have, let's say, 3 questions, okay? The first one, Francesco, if you can -- if you can elaborate a little bit more on the APAC performance. So if I understood well, there was -- there were some delays on some specific projects. But can we assume that this normalization in the project deliveries you mentioned before is going to bring basically APAC to a positive organic growth or the macro context you mentioned before, this is something, let's say, not realistic. So this is the first question.

Alessandro, yes, for sure, we do expect to revert pretty quickly to growth in Asia Pacific. This -- on an individual quarter, the timing of some specific projects can have a relevant effect. This will be recovered. And likewise, let's say, there's weakness, especially in the Australian economy, which is an important market for us in Asia Pacific. But that is also expected to improve during the year. So definitely, we are confident that the Asia Pacific region will revert to growth, absolutely.

Okay. Okay. And then sorry to come back to the question, okay, made before on raw materials. But raw materials, let's say, on sales were extremely low, probably the lowest number I have in mind, okay, for you. Can you give us some ideas of if there are some specific action you did, I don't know, you renegotiated prices with your suppliers in a better way than we saw in the past or this is something structural? Maybe you have -- in the market, you exploit higher availability of electronic materials. So just to understand because clearly, this is a bottom level, right, but this is extremely low. So if you deem that this level is, how can I say, kind of structural for you and therefore, this would help the company nothing to restore its historical profitability.

So yes, it was -- there was a relevant part related to the negotiation with the supplier, and it was a real negotiation with them. The demand was pretty much low in the market, and we were able to benefit about this. And then please remember even the effect from the digital service. And even you can imagine even Kiona that this period is doing very with -- is performing with a very strong growth in terms of sales and even profitability. So we have a double effect about this. And with reference to the second effect, for sure, we deem that it is something structural because it is a different investment that we did 2 years ago with this specific goal to have different service to offer to our customer. And with reference to the supplier, as I was saying before, it is something structural in the trend, something that is typical in the trend of the industries that when you are able to gain some benefit from the supplier, a part of this usually is invested with the customers.

Yes. But it is fair to say that so far, you get basically the cost benefit, but you didn't start yet, okay, to recognize, let's say, the annual price adjustment, right?

There was already a part, for sure, less that was the benefit that we had from the supplier.

Okay. Okay. [indiscernible] and obviously...

I would add on this -- yes. No, I would add on this that basically, we do expect more or less an average of 1% price reduction every year, which is basically the pass-through -- the partial pass-through effect that Nicola was mentioning. Normally, in any case, the pass-through is just a part of the raw material cost reduction. And then we have to consider, but this is still unclear, the positive price effect related to the tariffs in the U.S. This is, of course, the situation is continuously evolving. So it's still not very clear. But in that case, most probably there will be some -- not negligible price adjustment upwards.

Okay. Okay. And Francesco, sorry, if we come back, let's say to your guidance on, let's say, Q2 and therefore, we come back, let's say, to the normal cruise speed, organic cruise speed for the group, so the high single digit, low double digit. So basically, if we consider your EBITDA margin seasonality, we should come back, let's say to the region of 20% EBITDA margin -- touch above that. And then are there any specific reason why you shouldn't come back already this year in your historical range, so between 19% and 20%?

No. In general, there's no reason why if growth is, let's say, high single digit or in the high single-digit ballpark, why profitability shouldn't be in our usual range. So that's, let's say, absolutely. So if growth -- in general, we maintain our expectation that with the growth of high single digit, profitability should be in the 19% to 20% range. And -- yes, then, of course, we are investing for growth. Our main target is not margin expansion. So we are increasing our investment in innovation. We're increasing our investment in the commercial deployment. And that's why -- I mean, we don't target margin expansion. But let's say, I mean, if we consider adjusted EBITDA already in this Q1, we are at 18.6%.

Okay. And the last question is on refrigeration. So basically, refrigeration grew low single digit in Q1. Probably it is going to accelerate considering your -- the order backlog you have on your hands. Is it fair to assume that considering the order available, this is a segment that, let's say, could stay in the mid- to high single-digit area by year-end? And considering the supportive regulation, if understood well, do you reasonably expect, let's say, further acceleration in, let's say, the coming years? Is it right?

Yes, Alessandro. So it's -- the visibility is very low. So to provide an expectation for the full year on the market is difficult. But from a qualitative standpoint, absolutely, we do expect an acceleration from this low single digit, which is related to a number of factors. Because as I said, we had double-digit growth in Europe already in spite of the necessity, again, to adjust the production capacity. We had, let's say, softer results in Asia Pacific, but as mentioned, due to purely contingent reasons and also in North America due to very, very, very strong comparables in refrigeration in Q1 last year. But we do expect an improvement in all regions because in Europe, there will be a further acceleration that we should continue for years, again, because there's the F-gas deadline approaching, and there is a backlog also related to the missed investment of the last 1.5 years, 2 years. There's -- in Asia Pacific, things should improve in general, as I mentioned. And in North America, we have a pretty interesting developments for food retail in the -- and also food service for the medium term. So let's say that our expectations are definitely for a return of the refrigeration market to its very positive annual growth rate that we have been experiencing, let's say, before the last few quarters. Now to provide the guidance for the full year -- precise guidance, it's a little bit difficult at this stage, but definitely we are optimistic that this market should return to a very interesting growth rate.

The next question is from Gianluca Pediconi of MOMentum Alternative Investment.

It's a quick one on North America. The 14% increase in revenues that you experienced in the first quarter, do you have the sense that it was partially inflated by any pre-buys or actual demand?

Charles Gianluca...

[indiscernible]

Charles, sorry, sorry. No, there -- it's -- we don't think that there has been any significant effect of this kind because we're -- let's say, we're talking about -- the big bulk of this growth in the first quarter was related to data center projects. So I don't think that was related to stocking up. It's mainly stuff that is produced in the U.S. And so we produce in the U.S., so there was no reason to really overstock on that stuff. Customers know that. It's data center project. Now it doesn't mean that in the U.S., we expect to grow only in data centers because, as I said, there are extremely interesting prospects also in the other markets. But if you look at the big growth in Q1, it was mainly related to that. And I don't think there's reason to believe that was, let's say, overstocking because of the incoming tariffs because it's stuff that we manufacture there. And especially these kind of projects normally are not so prone to overstocking.

Very clear. Congratulation.

The next question is from Michele Baldelli of BNP Paribas.

I have a couple of questions. The first one relates to the evolution of the top line, if you can provide sort of granularity and color around price mix and volumes. The second one relates to personnel costs as a percentage of sales, because I just wanted to understand if the percentage on sales that in Q1 was pretty high was related to a different mix, because you said that you are going -- you are pushing on the services front? Or it's just front-loading of the investments needed to expand your capacity to cope with the increasing orders?

Okay. So in terms of price volume mix, let's say that it's basically volume because there was some price effect, as Nicola was mentioning, but pretty limited, so downwards, of course. So it's basically all volume and volume even more than prices evidently. As I said, we do expect price increases in the U.S. But in general, we do expect a partial pass-through of the cost reduction on the prices. So let's say that all in all, the vast majority of the effect is related to volumes. As far as the personnel costs are concerned, it's basically front-loading of innovation. So as we anticipated, we are scaling up our innovation capacity and efforts, and this is a front-loading because, of course, we cannot have personnel costs continue to grow at this rate. This is really front-loading for some strong innovation directions that we are taking related to a number of fronts. So yes, it's front-loading, and it's mainly related to innovation. In terms of capacity, the incidence of labor on our sales is pretty limited. So it's not the biggest effect.

[Operator Instructions] The next question is from Arturo Lopez Spajani of Clear Value.

Do you hear me?

Yes.

Fantastic. I'm trying to -- I'm struggling a little bit with the positive tone of your results during the press release on this conference call and the consensus that you have out currently. When I look at the consensus, it seems that there's about EUR 60 million net income for the year. And you're actually guiding for a high single-digit, low double-digit increase or improvement in the market, which is very good and fantastic, to be honest. But it seems to me that I'm missing out a little bit of something. Either you have a 50% increase expected due to backlog or the consensus is a bit challenging. I do understand the difference in the -- I would say, noncash items of last year. But at this point, it's really difficult. And if you can make a little bit of clarity, I would really, really appreciate.

Sorry, you're talking about the consensus on net profit for the full year. Did I understand correctly?

Yes, correct. Correct. Yes. If I look at your consensus on Bloomberg, basically, it's EUR 120 million EBITDA from 5 analysts and EUR 60 million net income, which obviously it's a bit -- it looks a little bit challenging with the results of the first quarter. So your tone of voice is very positive, and it's really, really fantastic. We think you're a very solid company. But at the same time, I'm really struggling to understand how are you going to make the consensus or the consensus is completely wrong one or the other. But your tone is very good. So perhaps you can enlight me a little bit on that, that would be great.

Okay. So [indiscernible] below the EBITDA. So in terms of...

Could you move to the phone, please, because there is some return on it.

Thank you. And so with reference to the financial charges, we believe that it should be something pretty much in line with last year evolution, maybe even some improvement if the interest rate will go down. And it is difficult to predict for sure the ForEx impact since nobody has the knowledge about what is happening. And even for us, it is a very specific items related to the exchange between NOK and euros. And so it's something very specific. And then last year, there was, as we said, the impact from the valuation of CFM. If I compare this quarter, I'm talking about the net profit with the last year first quarter, this -- the difference of these lines is more than EUR 8 million. And so I think that these 2 lines explain very much of what happened in this quarter during -- compared to what was last year. So I honestly do not believe that there will be big evolution like this, but I don't know there with reference to the NOK for the following years. In terms of tax rate, that is another important line of this part of the profit and loss, we see a sort of stability with what was the result of this quarter and even what was the result of last year. And so we do not expect big changes on these lines. I hope to answer -- to have answered to your question.

Okay. Maybe I have a follow-up then later. Appreciated.

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

Thank you, and thanks, everybody, for listening and for your questions. Looking forward to speaking with you again for the presentation of the first half 2025 results. Good afternoon.