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 First Half 2022 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Rodolfo De Benedetti, the Chairman of CIR. Please go ahead, sir.

Thank you. Good afternoon, everybody, and welcome. So I'm going to take a few minutes of your time to just go through the decisions that were taken at this morning's Board as well as the -- to comment 6 months results that we just published. So the -- I'll start with the extraordinary part, which is that the Board this morning decided to call an extraordinary shareholders' meeting that will be held at the beginning of September that we'll propose to the shareholders to cancel the bulk of the treasury shares, i.e., 170 million shares out of the 190 million that the company owns today as well as to propose a reduction of the statutory capital by EUR 218 million, and the creation of distributable reserves with those EUR 218 million. And the last thing is a new authorization that will replace the existing one that was given earlier this year for a limited amount given the limited reserves that were available. And so the new authorization will be for the maximum statutory limit, which is, as you know, 20% of share count, which is 220 million shares. The purpose of this is to grant the company and the board and the flexibility in the future of managing capital allocation in the form of either dividend distributions and/or buyback programs, as we have done in the last few years, and as we were not anymore in a position of doing for the lack of distributable reserves, as you well know. So this decision, again, is allowing the company to have this flexibility at this instrument. Nothing has been decided so far by the Board. And so the shareholders' meeting will have to vote on this proposal. And should this proposal be approved by the shareholders, the board in the future will have that flexibility available. Concerning the 6-month numbers, we just issued a press release, so you have seen the numbers. I don't think it makes much sense to comment on the consolidated numbers. So I think we should maybe focus on commenting the controlled companies' results. Those of Sogefi are known already, the company and the Board last week and issued a press release. Today, we communicate, of course, 6-month numbers as well as the CIR parent company results in terms of holding company cost and financial results. So I'll come on that later. I think in terms of outlook, what is important is that what we see, as we said in the recent quarters, is a progressive and relatively slow comeback of the cost activity following the reduction in volumes that COVID provoked. For acute -- and we have -- this is happening more rapidly. So we think in the course of this year, we should be back to the volumes pre-COVID. This is taking a bit more time in nursing homes. And as we earlier said, we believe that we will need at least 2023 to go back to the previous numbers. The situation is very different between Italy, which is actually -- had a more severe fall but has a more reactive path to recovery. Germany is softer, and some of this softness was compensated by public support, both in Italy and in Germany, which we see as phasing out starting from the second half of the year because of the situation of the pandemic. So in a word, or in 2 words, slow recovery. Sogefi, I'll comment the results, but we see a fairly low visibility in terms of the market for the second half of the year. I've seen that many of our clients as well as our competitors have commented in the same way. There's very little visibility. There are still production bottlenecks in terms of the supply chain and there is a fairly weak market on the demand side, particularly in Europe, with some brighter spots in other areas like the U.S., India and China. And I would say that the other element, which I'll comment in more detail, is that obviously, the financial component of our results. So the management of our liquid resources had a negative result in the first half of the year. Every asset class, be it fixed income or be it equities or be it hedge funds, have been negatively affected by the increased volatility, by increased interest rates, by increased inflation expectations and by lower equity market. On Page 6, you have the P&L. And again, I won't comment line by line. Maybe just a comment on the financial results that last year, was negative EUR 10 million, pretty much in line with H1 '19. And this year is negative almost EUR 30 million. This is the sum of the net interest income at the operating company's level and the holding company financial management. And if you break it down, the financial costs at the operating subsidiaries is lower this year by about EUR 2 million compared to H1 last year because we had lower net -- average net debt, with a slightly higher IFRS 16 accounting, mainly because of the increased real estate usage with long-term contracts by cost. And the holding company financial assets had a negative contribution of EUR 5 million this year compared to a positive 1 of EUR 12.5 million in the same period of last year. This is almost entirely due to fair market value adjustment. So those are not realized results or realized losses, but this is fair market value adjustment on the portfolio of financial assets. And I'll give you some more color on that later. The holding company costs are in line with the same period last year. And so those are the main comments on this Page 6. On Page 7, in terms of the net financial position, no really substantial changes. Slightly worse net financial position at cost mainly for CapEx investments during the first 6 months of the year. On the other hand, a better one at Sogefi, working capital was the main driver here, and the holding company decreases from EUR 332 million at the end of December '21 to EUR 313 million. And this is the result of the fair market value adjustment that I mentioned earlier. You have also the -- including the IFRS 16 where you see the big component there is cost because of the long-term leases on the real estate. On Page 8, you have a simplified holding company balance sheet where you have the adjustment for the operating companies, which is due to their results in the 6 months. Fixed asset is the real estate that CIR owns. The private equity portfolio increased its mark from EUR 60 million to EUR 64.4 million. Basically, distributions and new investments were pretty much the same at slightly less than EUR 5 million, and there was a positive fair value adjustment of EUR 4 million in the period. Nothing to report on other investments. No meaningful change there. The net cash I already commented on. And so I will now go to the operating businesses, starting from cost, Page 10. And following on Page 11, you have the P&L for the first 6 months, where you see the EBITDA is slightly lower, actually lower than H1 '21. This is the EBITDA pre -- sorry, post-IFRS 16. So if you want to go back to the previous measure, it's EUR 22 million, which is a fairly low level. EBIT is EUR 11.5 million from EUR 21 million in the same period of last year. Same period of last year included some extraordinary items, and we'll see after an adjusted EBIT number. On the asset side, the net book value of the real estate has increased slightly from the end of December and as well as the fair value and the financing on that real estate is pretty much in line with the end of last year. I would go to Page 12. You have here a number of beds and occupancy. As you can see, there's been a meaningful increase in occupancy in Italian nursing homes. So the average occupancy for the first 6 months was close to 76%, and it's about 80% at the end of June. And the trend is a growing trend there, which is what drives also the increase in revenues. We have is -- here, occupancy is probably less meaningful. Good increase in revenues from pre-COVID but lower profitability and acute care quite stable with slightly higher revenues. Germany is more of a challenging situation on the occupancy, which is actually down. Here, as you might recall, we were compensated and we've been compensated up to June 30 this year from public support. This support was announced to be finished at the end of June. So starting from July 1, there probably -- most probably won't be any more public support, which is kind of understandable given the evolution of the pandemic. Medipass India is a leftover from our medical diagnosis business that, as you know, was sold in -- the European business was sold. This is a business that we have targeted for disposal. We needed to wait for the numbers to recover from the pandemic and we are still planning to dispose off that business. There's -- I would say, overall, there has been a margin pressure in this business. So I think there are 2 issues. One is the occupancy, which I commented earlier. Frankly, from what we see, we do not see any reason why occupancy going forward should not go back to the pre-pandemic levels. We think it's just a question of time. We don't think that there is any fundamental structural change in the business and in why people use structure like ours. What has certainly happened is that the profitability of this business at the same level of occupancy has been under pressure because, basically, we have seen a pretty much across the board increase in costs and we were able only marginally to increase our prices, and this clearly has had a negative impact on profitability. We are working very closely with the management team and we are going through a deep analysis structure by structure to understand the reasons. The good news is that there are structures that are back to good profitability levels, good occupancy levels. But there are projects that are not. And so the question is how to make sure that we have a more -- a better average across the board. And so this is an exercise that is going on, and I think in the next few months, we'll have a bunch of plans, concrete operating plans on how to address those -- that issue. On Page 13, you have the breakdown of the business in terms of the various activities, the various countries. And you see the margins compared to H1 of last year. And I think I don't have much to comment other than what I just said, there are some nonrecurring impact. We had some of them in H1 last year for about EUR 12 million. So when you compare the first 2 halves of the year, you have to take into account that. We're certainly not satisfied about the overall level of profitability. And again, we are counting on both an increase in occupancy, but probably as importantly, an action plan to intervene on those structures that don't have sufficient profitability levels. Sogefi, Page 14. Sogefi managed to have a very satisfactory performance in the first half of the year. We are pretty much in terms of normalized EBIT in line with the first half of last year, which had some positive extraordinary elements, which were nonrecurring. The business was basically flat in terms of volumes, and we're able to achieve a 12% growth in revenues, roughly 3/4 of that, pricing; and 1/4 of that, foreign exchange, mainly dollar. So for all the sales that were generated outside of Europe, we had that positive FX variance this year. The market is very weak. It's very weak, little visibility, huge pressure from higher raw material prices. I think the company has done an extraordinary successful job of basically isolating the P&L from that higher raw material and energy prices. The combination of the 2 were about EUR 55 million higher than the same period of the last year. And they were able to basically compensate close to 100% of those higher input cost with higher prices. As you know, this is not an easy exercise because OEMs are very reluctant to concede price increases. But I think the company has done a very effective job of, on the 1 hand, guaranteeing the level of service and of reliability that our clients expect from strategic suppliers as we are, but at the same time, pricing that in a fair way. So we have not taken advantage of higher raw material prices, but at least clients have paid for those, which is the way it should work. In terms of the performance by division that you have on Page 15, very big differences between 2 highly successful divisions, Filtration and Air and Cooling, where the level of margins that the company achieved were at the top end of both our peer group as well as our historical performance. So very satisfied. I think Filtration is benefiting from a very strong aftermarket environment, which is a bit of a consequence of the low OE activity. The installed base is aging fast, and this is creating more demand for replacement in aftermarket, and as you know, the pricing of our products in the aftermarket is substantially higher than on the OE side. So there is a mix effect, which is a positive one. And I think the management is on a really outstanding job there. And same thing for Air and Cooling. We are running at a fairly high margins, and we're able to basically compensate for the negative variances, both in terms of volumes and input prices. Different situation on the Suspensions side, a really challenging environment. This activity has 2 elements, which makes it more challenging. One, it is -- of the 3 divisions, it is the division that has the biggest exposure to the European market, and Europe has been the toughest market in the last few years, both in terms of volumes and in terms of margins. And the second one, this is a division that has the highest component of raw material prices on sales. If you take the P&L, close to 50% of revenues is represented by raw material prices. And so in an environment where you have a very rapid and significant increase in input prices, that is clearly the most challenged one. I will pause here now. I don't want to take too much of your time and really open up to your questions.

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

The first questions are on the -- today's news. On the dividend, you will return to pay. Have you any general rule of thumb in terms of payout or what else in order to have an idea of what could be the dividend payment? And second, you are talking about flexibility on dividends and buyback. Anything else? So flexibility is not a [ destiny ] to industrial assets. And on costs, on the occupancy rate. In rehabilitation, you expect to return to full occupancy by year-end. Could you provide us a very rough indication of what could be the profitability once you get back to the full occupancy for a rehab? And for nursing homes in Italy and Germany, you are projecting 2023 as full occupancy. Is it back-end loaded, so it will be at the end of '23? Or you expect probably first half?

Okay. I will start with the -- your first 3 questions, and then I'll ask Michele to answer the one on cost. So dividend policy, as you might know by now, we don't have a policy. We don't think it is advisable for a holding company like ours to have a policy because our results are affected by a bunch of nonrecurring items and we think it's very difficult to have a rigid policy going forward and to give guidance on that. So the answer is, we don't have a policy. As I said earlier, the decision that was taken by the Board today is that of proposing to a shareholders' meeting, changes to the composition of our capital that will allow the Board in the future to have flexibility in terms of dividends and buybacks. And so we have not discussed and we have not taken any decisions about how to use that flexibility in the future. When I said flexibility, it's flexibility on capital distributions that could take the form of either dividends or buybacks. Obviously, flexibility is also to invest the capital into our businesses, but we didn't need to do anything on the composition of our capital to do that. So if your question is flexibility, it should also include how to invest in our businesses. Obviously, that is the case. That has always been the case. That was the case before, and we didn't need to do anything, and we will continue to compare options of deploying capital into our businesses and compare that with options of returning capital to our shareholders, and we will try to be as pragmatic and as rational as possible and, from time to time, to choose what is the best option available in the interest of our shareholders. So that really doesn't change. Michele, do you want to answer on costs?

Yes. In regards to the occupancy of nursing homes, in Italy, it is progressing according to our expectations, which we announced earlier this year. It's slow, but progressing in Italy. We're experiencing a steady level of increase in most regions with a few exceptions. It will take the whole year of '23 before we get to full occupancy, as far as we can see today. Of course, it's a new situation. So very difficult also to predict. With regards to Germany, the drop was much more contained during the COVID -- the first COVID wave. It was a bit more impacted during the second year of the pandemic. And then it has had a slower path to recovery this year, actually flattish right now. It's not -- it's different drivers. In Germany, it's mainly related to the unavailability of professional nurses, without whom, you cannot really take new guests if you don't have the right level of staffing. Probably many of those nurses were recruited by the public sector, as I said, [ through in Italy ]. There were also a fair share of non-German nurses, which might have left the country during the pandemic. So it's quite challenging now to hire those kind of professional staff. We have now new recruits, which will join the company in the second half, which should enable the recovery of the occupancy in Germany. With regard to profitability, again, we need to separate 2 cases. In Germany, as we highlighted in the past, the system is quite clear. It's a cost-plus mechanism. So the inflation in the cost of staff, which is actually there, and the cost of energy, which is becoming also quite relevant, will be compensated by the tariffs in due course. And this happens normally in a structured way and quite swiftly, quite timely. So we expect the margins to be in line with what we had devised when we bought the company, which should enable us to get to a high single-digit level of EBITDA in the long term after paying for the rent. In Italy, the situation is not as structured and not as predictable. We are also experiencing inflation, although to a lesser extent than Germany. In particular, we have had increases in the cost of the doctors and the qualified nurses. For the buy -- for the personnel, which is nonqualified nurses, this decrease has not really materialized yet, although there might be a labor contract renewal, additional levels, sometime in the future. We also had increase in the cost of energy, increase in electricity. So this all adds up to increasing cost base. And plus, if you add the inefficiencies that are generated by a lower level of occupancy, that explains the lower level of profitability that we see today. Once we recovered for occupancy, the recovery of the extra cost from the cost of inflation, it is not for granted, so it will have to be discussed for each individual region in Italy. So some regions, like Lombardia. And to a lesser extent, Piemonte and Liguria, started to recognize a little bit of tariff increase already this year. Others didn't. And there will be more to be done even in the next couple of years to fully recover the increase of the cost base. So it's not easy to predict where we will land in Italy after the COVID is finally over, and we still have [indiscernible]. For now, we get a few points lower marginalities, but it will all depend on the public sector and to what extent they will compensate for the cost inflation.

And Michele, on the rehabilitation business, that should be close to full occupancy by year-end, is it already possible to guide on profitability?

Again, we see a few points lower profitability compared to before the COVID. And again, there will be a discussion at national level because, already, the additional tariffs are at the national level. There will be a discussion and there should be some kind of realignment of tariffs. But at the moment, we have no indication on the size of this tariff increase.

Okay. If I may follow up on the dividend and buyback question. Having to choose in the past, you always chose buyback compared to dividend. Is it still the case?

Again, I give you my personal opinion, but obviously, this is, as I said earlier, a decision that the Board will have to take. And so we'll have these discussions in due course. I think that to the extent that buybacks are feasible, i.e., they can buy the shares, I think that they're more efficient, just because you're reducing the NAV of the nonselling shareholders by capturing the discount at which you're buying the shares. Obviously, then you need to be able to effectively buy the shares. And as you know, at least in Italy, buybacks are subject to a series of operating limitations in terms of volumes, and it depends also on the liquidity of the market, which hasn't been great of late. And so this is a bit the constraint. On the other hand, dividends are easier because you just pay. You don't have to -- it doesn't -- you don't depend on market conditions to do a distribution. So I think those are pluses and minuses that we will have to -- at the point in time in the future where we'll make those decisions, we'll have to choose the best instrument.

The next question is from Daniele Ridolfi with Kepler Cheuvreux.

I have a few questions, if I may. My first question is on the investment of liquidity at holding level. I was wondering if you have changed your view on the possibility to enter into new sectors, or do you think your portfolio of assets is fine with the current perimeter? If you can elaborate on your capital allocation strategy? Second question on the holding cost, which stood at EUR 5.7 million in the first half, below 2021 and 2020. So I was wondering if you can -- if we can consider EUR 11 million, EUR 12 million on annual base as a reasonable level, or you still see room for efficiencies? If you can guide us on the holding costs for 2022 and 2023. And last question on costs. If you could elaborate a bit on the positive performance of acute in the first half of 2022 with revenues up 11 -- 18%. And also, if you can give us an update on the hospital in [indiscernible], which is managed by cost in concession. I was wondering when the concession is going to expire? If you're going to renew the concession, if there is any time for tender? If you can elaborate a bit on this point.

Okay. So liquidity investment strategy, I think we said in the last few years pretty consistently that we were not planning to look for investments outside of our existing portfolio companies because we didn't think that the environment in terms of pricing of assets was particularly attractive. We didn't think we had any particular angle to compete in a market, which was, frankly, a seller's market, in our opinion, more than a buyer's market. There's a lot of competition. We haven't changed our mind on that. And so I think we would look at the possibility of deploying the capital on the 2 businesses that we own. And of the 2 businesses that we own, and on those 2 businesses, we haven't really run into sufficiently attractive investment opportunities in the last few years to justify a different use than basically buying our own shares at a discount because buying your own shares at a discount is you buy what you know, you buy what you control. And so that creates a pretty high hurdle in terms of cost of capital. And you have to think that you can do better by deploying this capital into our businesses. So Sogefi, we haven't seen that opportunity in cost. The company has continued to expand its business mainly through greenfield. So we have a significant number of new structures that are in construction right now or that we have opened in the last few years. So even in the downturn, the COVID downturn, we never stopped investing in growth. We have [ privilege ] there compared to buying existing structures simply because at a certain point, a few years ago, prices increased so much and there was so much competition that we felt that it was more interesting from a value equation standpoint to invest in greenfields as opposed to buying existing businesses. We will continue to make that analysis on a continuous basis. And that obviously will depend on what opportunities we find. We have also on paper the possibility of increasing our investment in cost by buying out our partner. We were not confronted with the opportunity to do this, at least not on terms that we thought were attractive in the last few years, but this might change in the future. So those are, I'm saying, are the possible uses of our excess capital. But we also think that it is reasonable to have alternatives. And this is why we decided to go for this flexibility of being able to eventually to distribute through dividends or buybacks because if we don't find those opportunities, well, we have the ability to distribute some of that excess capital. The holding company costs on Page 8, you have the numbers. So for the first 6 months of the year, holding company costs were EUR 5.7 million. So slightly lower than H1 '21, which was EUR 6 million, and substantially lower than H1 '20, which was EUR 8.5 million. I would say that the level of this year is pretty much, we think, recurring stable numbers. So obviously, we'll always try to decrease and to save on costs that are not productive, but we don't see any major opportunities to change that in a substantial way.

Just add 1 detail. In the last couple of years, we haven't had any tax benefit on those costs due to the tax consolidation at the group level not being in positive territory. One situation -- regime situation is restored with -- among the Italian companies on those cash -- on those holding company costs, we should also have a tax benefit of around 20%, 25%. So that could decrease the final number that the holding will have to disburse every year.

Good point. Do you want to comment on the acute performance and Suzzara?

Yes. So in acute care, it's not really our core business. We have all the 2 hospitals. One is the Suzzara Hospital in Mantua, and the other one is an acute care facility that is included within the rehabilitation business unit, although it operates in acute care. Both companies have been better off in the COVID years, a little bit like we have, but with an additional advantage of carrying out a lot of activities related to COVID sales. And in particular, the second structure that we own in the market [ region ] was extremely profitable these last 2 years. Suzzara has not been as profitable lately. Actually, was never one of the most profitable structures in the network. So the concession of the Suzzara hospital is due to expire October this year, and the talks with the Lombardia region about the renewal have been ongoing for many years now. So there is still a good possibility that we can renew. Shouldn't that be the case, it's not going to be a major loss in terms of EBIT contribution.