CIR S.p.A. - Compagnie Industriali Riunite (CIR) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the CIR Full Year 2021 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Rodolfo De Benedetti, Chairman of CIR. Please go ahead, sir.

Thank you. Good afternoon, everybody. Welcome to this conference call. I would, as usual, go through the presentation that you have on the website. I will do this quite briefly because I assume that you have seen the numbers and maybe leave more time to Q&A, which is probably the most interesting part for you. So I'll start on Page 4 where we have resumed some of the highlights of the year. So last year, we successfully closed a partial self-tender on 12% of our capital at EUR 0.51 a share. So we returned basically EUR 80 million to our shareholders. And we just today, at the Board, decided to start a new buyback program using the authorization that we had from the shareholders meeting last year. This is limited to EUR 17 million because this is the amount of available reserves that the company has on its balance sheet. So we will start with that and then see, when that will be done, what to do next. As you know, because we communicated this a few month ago, Sogefi completed some divestiture of nonprofitable assets, and particularly the filtration activity in Latin America, which actually contributed, accounting-wise, negatively to both Sogefi and CIR, you will see, even though that is not a cash cost. We reiterated our commitment on both our operating businesses to ESG targets that we have quantified, and we are committed, and we have also linked some management incentives to those KPIs. In terms of the consolidated numbers, our turnover was close to EUR 2 billion on a consolidated basis. It was up 8.7% on the previous year. Net result was EUR 18 million. It would have been EUR 31.9 million, almost EUR 32 million, which is the real number, but accounting-wise, we had to take the hit from the divestiture of the filtration activities in Latin America that contributed negatively to the CIR P&L. Our net financial position was actually better at the end of the year despite the EUR 80 million outflow from the partial tender offer. So we had a good -- we generated a good cash flow during the year that enabled us to strengthen our financial position. I would -- in terms of outlook, as we said to many of you with whom we talked in the last few months, we are seeing a progressive recovery of the KOS activity starting from the spring of last year, progressive and slow. So we are clearly not where we would like to be compared to the pre-COVID volumes. And occupancy rate, we'll talk about that later. And Sogefi managed a pretty good year despite a challenging market. We had a very good first half of the year and a much more challenging second half of the year, which was impacted materially by higher purchasing prices in mainly raw material and energy costs. I will also make some comments about what we see for the current year when we talk about the businesses. On Page 6, you have the consolidated P&L. So you see close to EUR 2 billion in sales, a bit over EUR 300 million in EBITDA. So good progress on the previous year and a higher number than the '19 numbers. A good EBIT number, pretty much at the pre-COVID levels. And as you can see, the net results from continuing operation is a positive EUR 31.9 million. And then the assets held for sale, this is our pro rata share of the Lat Am divestiture, which had a purely accounting effect of EUR 13.9 million for our share. On the right-hand side of Page 6, you have a breakdown for the 2 businesses, both in terms of -- in terms of revenues. And then you have the financial results. I think what is notable here is the very good result of the financial assets in CIR that had good performance both on the listed part as well as on the private equity portfolio. We had a very good year. We -- I recall you that we mark-to-market those results every period. And so last year was a good year. Markets were good and we had good performance despite the fact that, as you know, the bulk of our financial resources are invested in very low-yielding and low-risk type of assets, which we are happy this year, which is clearly -- has started as a much more challenging one than last year. You have the breakdown of the contribution of net results. So basically, KOS contributed almost 0. We'll see its P&L later. And Sogefi had good contribution, particularly before the accounting effect of the Lat Am divestiture. And net profit was EUR 18 million. On Page 7, you have the financial position, both -- of the holding company. We ended the year with EUR 333 million in net cash, after having spent EUR 80 million in the self-tender in August, so good cash generation. And you have a breakdown also of both the KOS and the Sogefi net financial position. I would say that in both cases, it was a good year from a cash generating standpoint. So we were able to lower the leverage of both operating businesses, which was one of the objectives that we had. On Page 8, you have the simplified holding company balance sheet, where you have the carrying amount of our 2 operating businesses for EUR 311 million. And then you have the holding company assets for EUR 429 million. And you have the detail here, both the liquid assets and the illiquid assets. There hasn't been really much change in the composition of our financial assets. You have some detail on the right-hand side of Page 8. And obviously, if you have any questions, feel free. I will go on to talk about the operating businesses, starting with KOS on Page 11. You know the business, so I won't describe it. I would say that -- what is notable here is the fact that, starting in the spring of last year, we have seen some comeback in occupancy rate, particularly on the nursing home business, both in Italy -- particularly in Italy because it was deeply reduced the previous year, but also in Germany. We still had some contribution during the year from public support, particularly in Germany, but also in Italy, which were basically deemed to compensate the lower volumes, the lower occupancy rate and the higher cost due to COVID-19. So this business is normalizing, but it -- as we said many times, the process is slow. It's not a rapid one. But we expect, during the course of this year, to basically be at a normalized level on the rehab business, but probably not before next year on nursing homes. Clearly, it's difficult to make forecast because the progression of the pandemic is difficult to forecast, and it goes by waves. And before the end of last year, we thought that we were probably on the way out, and then Omicron struck. And I think the situation is much more manageable than it was at the outset of the pandemic, simply because vaccination rates are very high, both for the personnel and for the guests. And this is clearly creating a substantial and major protection in terms of the virus. But the virus is still there. So there are extra costs which are related to protection materials and to -- more space that we have to make available for our guests. And probably, some of it is going to stay for the long term, so we will get out of this pandemic with a slightly higher fixed cost. The question is how much of that will be passed on in tariffs over the next few years? As you know, in the past, the tariff system was somewhat linked to inflation. And so some of those costs, we hope, we will be able to pass them on to -- in tariffs to our clients. Obviously, this is not easy to do when you have a lower occupancy rate and where you have more room than what -- more volumes available than what demand is. But we don't see any reason why the dynamics that were prevailing before the pandemic will not come back in terms of shortage of quality accommodation in this business. This has not changed, in our opinion. So we believe it's a question of time, and we are working in that direction. The German business is performing according to plans. You might remember that, that business was barely profitable when we bought it. And we are executing on the acquisition plan, and so we're pretty satisfied with what we are seeing there. And we confirm the strategic interest of being part of the consolidation process in that market. We have deleveraged substantially our balance sheet. Net debt is relatively low. I mean this business compared to most of its peers is substantially deleveraged. So we have financial flexibility, which enable us both to expand unforeseen events like a lower occupancy rate, but also, we have financial resources to grow the business inorganically, which is part of the strategy both in Italy and in Germany. On Page 12, you have a few data on the number of beds, both split between Italy and Germany, and the nursing homes and rehab. You have a number of beds and you have occupancy rates. And then you can see the big hit was particularly to the occupancy rate in Italy more than in Germany. And as you can see in the comment below, that number is gradually recovering from very, very low levels, because as you can see, the average for '21 was lower than 70%, which is something that we've never experienced in 20 years we've been operating in this business. So this is really a one-off, very, very severe event that has affected this business. On Page 13, you have the numbers by business and by quarter. There, you can see some progression quarter-by-quarter in the different businesses. If you have any questions here, just feel free. And on Page 14, you have the P&L for the last 3 years, where we have separated to make it comparable, the LTC/Acute Care business in Italy, the German business, which was acquired during the course of '19. So you just have parts of the year in '19 and then you have full year in '20 and '21. So there, you can see the progress that we made on that business. You have the ClearMedi India, which is the leftover assets from the Medipass business which was divested. As you know, we kept the Indian business with the objective of selling it as soon as the business stabilized after COVID, which it partly has, as you can see in the results. It's a small business, but the results are -- have been quite decent in '21. And the -- you see the impact of the pandemic when you look at both EBIT and EBITDA in '20 compared to '19. And you see some of the recovery in '21, but clearly, we're not there yet. On Sogefi, the results are public, so I guess -- I just recall them, but they are known to you. Last year, as I said, was overall a pretty good year, particularly good in the first half, less good in the second. We had a higher level of profitability than in '19. So despite the fact that we had lower volumes and lower sales, but we're able to have a better bottom line. We have outperformed in terms of volumes, the market in every geography where we operate. And I think that those results are mainly thanks to the very prompt and deep fixed cost restructuring plan that was enacted at the outset of the pandemic in the half -- in the first half of 2020, which bear this fruit in the second part of the year, but particularly in '21. And so we are able to have a significantly lower fixed cost, which we think is important going forward because this is enhanced competitiveness. We have -- you have a breakdown -- on Page 17, you have a breakdown of the business by -- in the 3 business units. And as you can see, we have good and growing, and I would say that in absolute terms, a very satisfactory results, both in Air and Cooling and Filtration, which are experiencing good profitability and good free cash flow generation. The more challenging business is the Suspension one, which was challenged before COVID, which actually was affected by COVID, particularly because of the rapid increase in raw material costs. This is the business which has the highest incidents of raw material cost on sales of the 3 businesses. And so we are in the middle of a turnaround plan there. We have a new management team in place since now a year. And we are very hopeful that the actions that were put in place in a very decisive way in the last few months will bear fruit. Clearly, what is going on in the last few weeks is not helping. We have -- we don't have any direct exposure to either Russia or Ukraine in terms of sales or in terms of industrial footprint. But we are indirectly affected by what's going on in the energy markets and by what's going on in the material markets. So we clearly are experiencing significant price inflation on purchases and significantly higher costs on energy. And so this is exacerbating a trend that was already there, which is creating some tough discussions with our clients in terms of passing on those price increases to them. As you might have seen from carmakers, results last year was an exceptional year for most of them. They had extremely positive results. Despite lower volumes, they were able to raise prices, and therefore, have very good bottom lines. And we are basically discussing with them the fact that we need to be compensated for those sharply higher raw material costs which we cannot continue to provide products to them on a medium to long-term basis. On Page 16, you have the splits of the revenues by quarter, both at the group level, and then you have the different geographies, and you have all the data here. And obviously, if you have any questions, please feel free to ask. And then lastly, on Page 19, this is a new chart, we have basically included the ESG strategies and KPIs that we have included in the business plans of both KOS and Sogefi. There is something also for the holding company, but the holding company is really not very meaningful and material from that standpoint. And we have included those goals and those KPIs in the objective, based on which we're going to measure and we're going to pay our top management in the operating businesses as well as in the holding company. I will pause here. I don't want to take too much of your time and leave it up to your questions.

[Operator Instructions] The first question is from Martino De Ambroggi with Equita.

The first question is inevitably for KOS. We have the occupancy rate on average for the full year, but what was at the end of the year? And what's the visibility for the first quarter this year? Just to have an idea of what is the speed of the recovery. And on last year results, what's the total amount of subsidies you received? And third question on KOS, you already anticipated that profitability will not be as good as it used to be before the pandemic. But could you try to quantify what could be the impact in terms of inflation cost, labor cost and so on? Just to have an idea of what could be -- when the business will return to normal life, what could be the profitability. And last on KOS, you mentioned it's not easy not having full occupancy. But what's your ability or your expected ability when you will be, with a higher occupancy rate, to recover these inflation costs through tariff increase?

Okay. I will try. And then I'll ask Michele to -- and Pietro to jump in on some of your questions. So occupancy -- so if you go to Page 12, you have the occupancy. On the higher end of the table, you have the average for the 3 years. So if you take nursing homes, Italy, the average occupancy was slightly less than 70% in '21. And if you look at the note down on the page, you have the number for -- at the end of the year, which is December '21 was at 74%, okay? And the first quarter was 62%. So the average is somewhere in between, and the exit number for December is 74%. And Germany, the average number is 83.6%, and the December number is 83%. So it's pretty much in line with the average. So those are the occupancy numbers. I hope that answers your questions. On subsidies...

If I may, sorry, before changing the subject, what's your speed expected in Q1 based on the visibility so far?

Michele?

In Q1, we -- it's typically a not very strong quarter for seasonality. So it's pretty flat today, both in Italy and Germany. Last year was more or less the same, and then we had a recovery later in spring. Yes, can we move on? Or do you have any other?

Yes. And the rehab occupancy?

Well, rehab is not really measured on occupancy usually, because that's not a very good indicator as we have a lot of mix effects. In fact, it depends what you do much more than how much you do. So in general, what we can say, activity is -- has gone well right after any of the waves -- of COVID waves. So the interruption was more severe during the COVID waves, but then the recovery was much faster, because there, the stay in the rehab structure is pretty short. So it means that as soon as the hospitals start doing their normal activity, then the rehab [indiscernible] quite fast. Then I think you had a question on subsidies. So subsidies last year -- so '21 were EUR 33 million; EUR 13 million, 1-3, in Italy and EUR 20 million in Germany, of which, partly -- part were related to this year and part to -- even to 2020. And in part, they were related to cost compensation, in part, to revenue shortfall. In general, in Germany, we had a full compensation, both of lost occupancy and extra costs. So almost one to one. And that's been confirmed at least until Q1 this year, and then we'll see. In Italy, it was very much dependent on every region. And very predictable and largely sufficient to cover either costs and revenue shortfall. With regards to profitability, we have given, in the outlook, an indication that long term, we're going to see a slightly lower profitability than we used to have before COVID. We are not in a position to give an exact number today, even though we, of course, are making our projections. But it's going to largely depend on how much the cost increase is going to be compensated by tariffs. And that's an unknown, at least in Italy. Italy, in the past, there used to be a tariff adjustment when there was inflation and labor contract renewals, but there is no rule. In Germany, it's different. In Germany, the system is cost plus. So whenever there is a cost increase, then each nursing home can renegotiate their tariff with the authorities, and that produces a very -- pretty stable and predictable margin on revenues.

Yes. And I think that should answer also your question on tariff, which is clearly key for profitability. And frankly, it's difficult to forecast this on a multiyear basis. As Michele said for Germany, it's probably easier and more mechanic. For Italy, it's going to be a matter of negotiation with the regions. And so it's difficult to forecast what that is going to be in the next few years.

The next question is from Daniele Ridolfi with Kepler Chevreux.

Yes. I have a few questions, if I may. The first question is on the treasury shares, which now stands at 14% of the capital and should further increase in '22. I was wondering if you have taken a decision on the destiny of the treasury shares and if you are going to sell them in the future. If yes, what could be the timing? And then on KOS -- on the cash flow generation of KOS, I was wondering if you can elaborate more on the EUR 16 million of negative working capital absorption in 2021. And I also would like to understand if you expect to recover this negative trend in '22? And the last question on CapEx, capital costs, if you can provide some guidance on the maintenance and development CapEx for 2022. If EUR 15 million for maintenance and EUR 16 million for development could be a reasonable level or do you expect something different?

Okay. I'll ask -- I'll answer the first question, and then I ask Michele to do costs. So on the treasury, you're right. So you mentioned we own today 13% of the capital. We hopefully will increase that in the next few months by executing the decision of today's Board. As we did in the past, we don't see any reason to cancel the share right away. So the civil code allows us to own up to 20% of the shares. And last time when we did get close to that number, we canceled most of them, and we're able to continue our buyback programs. So no decision has been taken. There is no, frankly, reason to give up the optionality of having those shares. We don't need to cancel them today. But obviously, if we want to continue to buy back our own shares, as we did in the past, we will have to do. So no plans for the time being, but everything is open, and the Board will have to decide on this.

On KOS cash flow, you might remember that KOS, before COVID, was generating about EUR 50 million free cash flow before for development, so including maintenance CapEx. This year, as we disclosed, we have made EUR 4 million despite a negative working capital impact of EUR 16 million, which would be a EUR 20 million normalized cash flow. So you see fell short EUR 30 million compared to pre-COVID. Regarding to the working capital, we think it's partly seasonal working capital. So most of the payments by the public sector in Italy happen on -- across the deadline of end of the year. So depending on whether the public administrations locally pay before [indiscernible], we have some swings, so that should be not structural. And then the -- half of this EUR 16 million was related to lower usage of factoring, which is just a decision. So that's not structural either. So a good proxy for recurring cash flow in '21 would be EUR 20 million. CapEx, we still have maintenance CapEx in the range of EUR 20 million for Italy, pretty stable over time. And just a couple of millions, EUR 2 million, EUR 3 million, EUR 4 million in Germany, because most of the investments are borne by the landlord there and the buildings that are quite new. And development CapEx, we have a few greenfields which are underway. And that, we will spend around about EUR 10 million or a bit more million planned. But then there would be more this year. In '22, we have a few of them which will go into construction phase. So it's going to be more than EUR 30 million development in '22. And then this is the planned part. Then to the extent we will find the acquisition opportunities, there will be -- there could be more. Does that answer your question?

[Operator Instructions] The next question is a follow-up from Martino De Ambroggi with Equita.

Still on KOS. Are you planning any additional property divestiture? Second, how the negotiation, if any, is progressing for the Indian assets divestiture? And you mentioned if there are opportunities, we can make acquisitions. And what reasonable potential firepower you believe to have in the -- based on current results?