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 2026 H1 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Francesco Nalini, Chief Executive Officer of the group. Please go ahead, sir.

Thank you. Good afternoon, and welcome to our call for the presentation of the first half 2026 results. Thank you for attending, and I'll go directly to Page 3 for the main highlights of the period. So on Page 3, we are very pleased to report that Q2 has been another very good quarter with revenues approaching EUR 200 million. Once again, I really want to underline that the quality and mix of the growth has been outstanding with both HVAC and Refrigeration growing in excess of 20% in the first half. And likewise, all geographies growing double digits. In this first half, reported revenues reached EUR 370.1 million, up 20.9% on the first half 2025 or up 23% at constant exchange rates. We saw a further acceleration in the second quarter. And what really makes us very happy is the balance of the performance, which is completely broad-based in terms of markets and geographies, thus highlighting the resiliency and balance of our portfolio. In fact, HVAC grew by approximately 24% organically, supported by data centers, residential and a very good improvement in industrial, but also Refrigeration grew by approximately 21% organic with a strong acceleration driven by the expected recovery of some projects that were temporarily delayed in EMEA and by strong market share gains in North America. EBITDA margin in the 6 months was 22.5% of sales with an expansion of 350 basis points on the same period last year, improving over an already very good Q1. This was mainly driven by operating leverage more than offsetting some inflationary headwinds. Also, digital services continued to provide expansionary support with Kiona profitability close to 30%. In spite of the fast top line growth, R&D investments remain at approximately 5%, so at our target level. And finally, we closed the period with a positive net cash position of EUR 7.1 million after CapEx, dividends for more than EUR 21 million, the Senva earn-out payment for EUR 17.4 million and seasonal and tactical working capital absorption. Now to Page 4 with some additional figures. Top line in the first half was EUR 370.1 million, up 20.9% from the EUR 306.2 million of the same period last year. We lost approximately EUR 7 million here due to the exchange rate. So organic growth was 23%, marking a significant acceleration and in spite of a sequentially more challenging comparison base. As in previous quarters, this growth is predominantly volume-based with price changes representing a very minor effect. EBITDA at EUR 83.1 million grew by 42.7% over the EUR 58.2 million of last year and represented 22.5% of sales, up 350 basis points over the 19% of the first half 2025. In the second quarter, in particular, profitability was in excess of 23%. This acceleration being mainly driven by operating leverage and by the expansionary effect of digital services with, again, Kiona having an EBITDA close to 30% of sales. We do have some inflationary headwinds, but the gross profit remains pretty stable, thanks to purchasing and pricing discipline, and again, thanks to digital services. Net profit at EUR 45.7 million was up 72.5% from the EUR 26.5 million of the first half 2025, basically thanks to the operating performance, with a stable tax rate at 23.1%. Finally, CapEx in the period were EUR 9.5 million, with a slight 7.1% increase over last year, and they also involve investments in production capacity in Europe and North America, not yet the new facility that we will start building very, very soon in the U.S., where the CapEx will be seen mainly in the second half of the year. I now move to Page 5 to describe some additional market elements. The key message here, which, again, in my opinion, is very important, is that our growth is very well balanced in terms of geographies and in terms of markets. On the left, we see that all regions grew double digits. EMEA accelerated to an 11.8% organic growth, thanks to the expected acceleration in the data center market as well as in Refrigeration. Here, as anticipated during the Q1 presentation, a number of customer projects had experienced timing delays and most of these were effectively recovered in Q2. More broadly, the European Refrigeration market continues to benefit from the transition towards natural refrigerants supported by the F-Gas regulation and by the group's strong technological positioning. Asia Pacific continues with an excellent performance and an organic growth of 31.6% with a very broad-based and distributed results across the different verticals. North America saw a sequential acceleration, both in HVAC and in Refrigeration to a growth at constant foreign exchange of 55.7%. HVAC was mainly driven by data centers, but also commercial and industrial grew double digits. And we're very excited about the results we're having in Refrigeration that in the first half was essentially doubling the result of the same period 2025, thanks to the technological transition taking place in the market that sees the group leveraging its technological leadership and fast gaining market share. Finally, also South America improved in spite of the economic uncertainty in Brazil with an organic growth in excess of 20% in the 6 months. All of this is reflected in the performance by market, as we can see on the right. HVAC grew by 23.7% net of the foreign exchange with very strong growth in data centers, but actually with all the verticals reporting double-digit growth in the 6 months. At the same time, Refrigeration grew in excess of 20%. As I said, we had in EMEA, the expected deployment of some projects that were delayed in Q1 and also a consistent acceleration in North America as we gain market share by rolling out our most advanced solutions in the context of technological transition that we expect to be structural and long-lasting. Let me now please briefly present the Cotes acquisition on Page 6. This transaction follows our direction of growth through bolt-on M&As and complementary technologies. In fact, we have been looking to add this specific technology to our portfolio for some time, and we're very happy to have found an agreement with an outstanding company like Cotes. As you know very well, we provide a number of solutions for increasing humidity in industrial as well as in indoor quality applications. And we were basically missing the reverse to complete our humidity control offering, that is dehumidification. The technology of Cotes, adsorption dehumidification, uses a specific material to absorb moisture from the air and compared to alternative solutions like using a refrigeration circuit is much more precise and can work also with very low temperatures. It's therefore, particularly suitable for many industrial processes, which is where we have very strong cross-selling synergies to begin with -- having had for a long time, customers asking for a complete solution and not just humidification. Many industrial processes require not only precise temperature control, but also strict humidity management to ensure product quality, process reliability, energy efficiency and regulatory compliance. Examples include pharmaceutical, food processing, cold storage facilities, battery manufacturing and other critical industrial environments requiring very low dew point conditions. And these are all areas where Cotes has already developed proven expertise. But Cotes is also the European leader in dehumidification for offshore wind turbines, thanks to proprietary technology that can remove salt in addition to water. We have, therefore, now access to the offshore wind sector, a market where CAREL had very limited exposure before the transaction and where we see attractive long-term fundamentals driven by the global energy transition and the necessity for Europe to develop strategic energy independence. We believe this specific proprietary technology from Cotes is also very interesting in order to explore a number of other applications like marine and defense. The company itself was founded in 1986 and is headquartered in Denmark with a manufacturing facility in Poland. The expected revenues for 2026 are approximately EUR 31.5 million, with approximately EUR 6.5 million EBITDA and 120 employees. The enterprise value for the transaction is EUR 56 million, corresponding to approximately 9x 2026 EBITDA. The closing is expected during Q3 after the clearance of some customary regulatory approvals. I then move to Page 7 and leave the stage to Nicola for the items below EBITDA.

Thank you, Francesco. Slide 7 provides a bridge from the group's EBITDA to net profit. D&A was broadly in line with previous year. The amount includes EUR 5.6 million of depreciation and amortization arising from purchase price allocations. Net financial charges decreased compared with last year, mainly thanks to the improvement in the average net financial position over the period. The year-on-year change in foreign exchange result was mainly driven by the movement of the Norwegian krone against the euro and its impact on the valuation of the put and call option relating to Kiona. The line companies consolidated under the equity method mainly reflects the group's shares of the result of Free Polska. The effective tax rate of the period was 23.1%, broadly in line with last year. Overall, the group reported a net profit of EUR 45.7 million for the first half of 2026, a significant increase compared with EUR 25.5 million (sic) [ EUR 26.5 million ] in the same period of 2025. Moving to Slide 8. This shows the evolution of the group net financial position during the first half of 2026. Funds from operation was strong, amounting to EUR 67.4 million compared with EUR 48 million in the same period of last year. Net working capital absorbed EUR 32.2 million of cash. This was due to a combination of seasonal trends, strong business growth and the temporary increase in safety stock of certain components in response to market supply tensions. During the second quarter, the group paid dividend of approximately EUR 21 million and EUR 17.4 million earn-out relating to Senva. Despite this cash outflow, the group closed the first half of 2026 with a net cash position of EUR 7.1 million. I will now hand back to Francesco to continue with the presentation.

Thank you, Nicola. So here on Page 9 for the closing remarks. With almost EUR 200 million in revenues, this has been a record quarter after an already very strong Q1. In the first half, we grew organically by 23% with a great balance in the portfolio since all business verticals and all regions grew double digits. In particular, in the second quarter, we had an expected acceleration in Refrigeration, driven also by our capability to ride the structural technological transition taking place in the U.S. This led to strong operating leverage with an EBITDA margin in the 6 months of 22.5%, up 350 basis points over the first half of 2025. In this quarter, we signed the acquisition of Cotes, adding a very complementary missing technology to our value proposition, and we continue to look for additional value-creating opportunities. In terms of scenario, we continue to see on the market similar trends to those observed in the last few quarters with a robust order intake, even if we must be mindful that, as you know, the visibility in our business model is structurally very limited also because the external environment remains challenging with geopolitical tensions and macro volatility. To conclude, all things considered, we expect another very positive performance in Q3 2026 with consolidated revenues close to EUR 190 million without including any possible contribution from Cotes and corresponding to a growth of approximately 20% over Q3 2025. Thank you very much for your attention. We are now at your disposal for any questions you might have.

[Operator Instructions] The first question comes from Niccolo Storer of Kepler Cheuvreux.

Francesco, congratulations on this very strong set of results. I have three questions, if I may. The first one is linked to Refrigeration. I was trying to quantify which was in Q2, the growth, excluding the very strong performance of North America, and ending up in something between 15% and 20%. Could this be a correct number? Second question is about your -- maybe sorry, linked to this question on Refrigeration, I was wondering if the strength that you have shown -- you have been showing in the U.S. is linked to specific projects with just a few counterparties or if it is more, let's say, broad-based? Second question is about your guidance. In the press release, you talked about further strengthening of certain verticals, if you can elaborate on that. And my last question is about the commercial business. I'm kind of reading through the lines that this portion of the business could be somewhat softening. Is this a right interpretation? In particular, I'm thinking about the EMEA region. And if yes, why you think so?

Okay. Niccolo, so concerning Refrigeration, growth, if we exclude North America, growth in Refrigeration would have been in the high teens, let's say. Then again, if we look at North America, we are -- let's say, we are having a very important success in the execution of our strategy for Refrigeration, because in the last few years, we have been strengthening very much our organization for promotion and support of these technologies in the retail space in North America. And this is coupled with the fact that finally, the market seems ready for a number of reasons to introduce our technologies. We are working with several supermarket chains. Of course, some project waves are bigger than others. But we passed the, let's say, the trial phase with some significant supermarket chains, and now we are starting the rollout, which is why we see the materialization of significant growth figures, but we have several others in the pipeline. So it's not -- I mean, of course, it starts from a few, then we have others which are smaller, but we have a pipeline, and we're very optimistic about this technology. And the one thing which is very interesting in my opinion, is that, for example, we're having a very good success with the introduction of variable-speed compressors, onboard refrigerated cabinets, which is what we call the decentralized architecture. This technology is, in the rest of the world, it's typically confined to convenience stores because typically, of course, by having a compressor onboard each cabinet, it tends to be more expensive when the number of cabinets grows. But in America, this technology is extremely attractive beyond many other technological benefits, also because it allows for redundancy and continuity of operations in the store, which is particularly important in that region because, of course, with a decentralized architecture, it's possible to refurbish or move or -- I mean, operate on individual cabinets without shutting down the entire store. And there is, of course, much higher redundancy in terms of installation. And so this is very, very appreciated in the U.S. And this goes over the fact that this technology is more expensive as the number of cabinets grows. And for us, of course, this is a very big opportunity because the value that we sell per store is much higher. At the same time, this is also a very good opportunity to introduce the CO2 technology because by having these modules using CO2 already installed -- already, let's say, manufactured in the factory, they require less technological competence from the installers on the field, which is good in an area where the competence and the level of know-how on CO2 tends to be, let's say, less widespread than in Europe. So sorry, I took the opportunity to emphasize the benefits that we are providing with this technology and the reason why it's also providing a lot of value. Of course, we have a number of projects and many projects in the pipeline. So we believe this is a very good opportunity and could be pretty long lasting. Concerning commercial, actually, it's not slowing down. It's slightly accelerating globally. And it's very strong, for example, in North America as well, and that's also related to the inverterization. So to the introduction of the variable-speed compressor technology in commercial. So commercial in the U.S. is performing particularly well, but it's going very well also in Asia Pacific. In EMEA, it's softer. It's in the low single-digit range, but it's not decelerating compared to Q1. On the other hand, it's slightly accelerating. So we don't see a softening of commercial.

And sorry, about the guidance and the vertical strengthening?

Sorry, could you repeat the question, please, Niccolo? Sorry, I missed that.

I mean, in the press release, you're writing that you see signals of further strengthening in certain verticals. If you can elaborate that on, refer to Q3 guidance.

Well, in -- we see, let's say, a strengthening -- a continuous strengthening in Refrigeration in the U.S. And we also see -- which is the structural trend I mentioned. We also see in the U.S., in particular, the introduction of the variable-speed compressor. And then in -- these are more structural trends rather than short-term trends. And then in Europe, we are seeing the strengthening of data centers. So the level of investment in data centers in Europe is picking up and also of industrial. So also the industrial application is strengthening in Europe, in EMEA.

The next question is from Christian Hinderaker of Goldman Sachs.

I want to start on the supply chain dynamics, if I may. Vertiv, and some others have flagged some issues in revenue phasing related to the congestion in the supply chain and particularly in the data center vertical. And I guess curious to hear what you're seeing in terms of the supply side dynamics. I recall maybe last half that you were stocking up on some products ahead of a growth spurt. So yes, interested in the latest there.

Yes, sure. Christian, so the -- definitely, there are some tensions on some categories of raw materials like memories in particular and relays. And that is related, of course, to the data center supply chain, even because we use chips of memories of industrial category. But of course, the capacity of the manufacturers moving towards the more sophisticated memories used for data centers. We have been seen coming this risk for several quarters now, and we have been stocking up and increasing our safety stocks of, in particular, memories, but also relays for several quarters now. You can see that also reflected in the working capital, which is going up. And that's specifically because we are increasing the strategic stock levels of some components in particular, memories. So for this reason, considering that we have been stocking up and placing long-term orders now for almost 1 year, we do not face any significant bottlenecks or constraints in terms of production capability. We do see cost increases. So we have some headwinds in terms of the cost that we are, of course, managing through cost discipline and through price selective, price adjustments where the cost increase the most. But we do not face any bottlenecks in terms of production. And one of the reasons, again, is that we have been preparing for this for almost 1 year by stocking up. And that is basically the reason why working capital has been increasing in the last few quarters.

Maybe sticking with the stocking theme. I guess curious in terms of the residential HVAC market where you're supplying components into OEMs, whether you think demand there is reflecting a sort of end demand profile, i.e., one-for-one or whether the OEMs themselves are looking to stock up on components that they receive from you?

Well, no, we believe that there has been some restocking, let's say, probably a couple of quarters ago, mainly when the market -- probably in the second half of last year, there has been some restocking effect because the OEMs had to recreate the stock that was basically very much reduced during 2024. But since 2, 3 quarters, in my opinion, now we are very closely trailing end demand. The stock levels are pretty normalized now. And I don't see in this moment, they are significantly stocking up. So they have been stocking up, I would say, last year to some extent, but now we're following the end demand.

And then, third and finally, obviously, you had a very strong operating leverage in the quarter with a 23.2% margin on a very strong growth rate. You're applying a slightly slower growth rate in the guidance for Q3, but still 20%. I guess we should take from that, that it should be another quarter for strong margins. Is that fair?

Okay. Well, yes, the guidance for Q3 is still pretty strong. It's 20%, which is slightly less than Q2, but please consider that we have a seasonal effect because we have August where many, many customers close in Europe. So that's the reason why, in absolute terms, let's say, the turnover for Q3 is expected to be slightly lower than Q2. So that's a seasonal effect. In terms of profitability, it's -- profitability always depends on the real level of growth that we achieve. Of course, with the 20% growth, we are above our mid-cycle guidance. So that is definitely supporting for a good level of profitability. At the same time, we do have some headwinds on the raw materials that are manageable because, I mean, we're talking about some categories of raw materials. And overall, they also have, let's say, a not huge weight on the bill of materials of our products. So we're going to manage those. So in general, yes, there is a reason to be optimistic about a good profitability level also for the next quarter, I would say.