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 2022 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. As usual, I would start with a brief introduction and maybe leave more time for Q&A, which is probably the most interesting part. I'd start on Page 4 with the highlights. So recently, we had a shareholders meeting that canceled about 170 million treasury shares. This is in line with what we have said in the past few years, i.e. that we would continue to take advantage of opportunities to reduce the share count as long as we see a significant gap between what we consider to be fair market value and where the shares are trading. And so this, together with the reduction of the statutory capital, give us for the future the flexibility to continue this policy of buying back our own stock as we see opportunities in the marketplace, and we've been doing this on a regular basis in the last 12 months. We also concluded a divestiture at the end of December, we announced the sale of part of our buildings in Milan, those are -- that are not occupied by our headquarters. This was a building which was rented out that had a book value of EUR 11 million and that we have agreed to sell for EUR 38 million. Closing of this transaction will happen in the second part of this year, and we cashed in, in advanced payment when we signed the contract in December. In terms of the operating subsidiaries, you have -- we will go through the 2 businesses. But just key numbers, both KOS and Sogefi increased their top line last year. KOS continued a slow recovery after the COVID-induced slowdown. And Sogefi had a good year both in terms of growing the volumes, even if the overall [ CIR ] market was weak in terms of overall production levels. And we had a boost because of price increases. We're able to pass on higher raw material prices and energy prices to our clients and basically had an impact on our -- both top line and bottom line. In terms of results, strong contribution from Sogefi. We will see it later. We had a very good year last year. We're happy about that. KOS is still in a recovery mode. We're basically breakeven, slight loss last year. We are continuing to see a gradual increase in the occupancy rate in the nursing home Italy segment. We're continuing to see a fairly weak market in Germany in terms of occupancy rate and that a gradual comeback of the -- we have business in Italy. Negative contribution from the holding company. This is basically due to a lower or negative financial returns from our liquidity. We basically had a zero return on our liquidity, excluding the write-down on the JV 5% stake, which is much lower than the results that we had the previous year. We think we did relatively well given how bad financial market performance last year, which proves the resiliency of our portfolio and the prudent policy that we always said that we would adopt. But clearly, results were not positive. And this is what explains the swing in terms of the holding company contribution to the consolidated period. In terms of net debt, pretty stable, both at the holding company with a significant net cash position as well as on a consolidated level, where we produce reasonable positive cash flows, and we continue to invest, particularly in the KOS business through greenfield initiatives. In terms of outlook, we continue to see a progressive catch up of the performance of KOS. It's slightly slower than what we would like to see, but that's the market. And there are some regions and some units which have gone back to the '19 numbers. But in some others, we're not there yet. There has been some significant cost inflation, mainly on the labor side, which is here to stay. There's been some increases in tariffs but not enough. So we think it's a long-term structural work that needs to be done and that we are doing with the KOS management on a daily basis. We believe that Sogefi will continue to perform reasonably well this year. We're not particularly bullish on volumes. So our budget was not built on a significant increase in volumes. If that happens, that's going to be a plus. We will continue to keep a tight cost discipline, i.e., to pass on cost increases to our clients, which is clearly a challenging exercise, but we've shown that we've been able to do that last year, and we will continue to work in that direction. So on an overall level, if you go to Page 6, I will not comment the consolidated P&L because I don't think it's particularly relevant. But just maybe I mentioned on the right side of the page what I said earlier about the holding company financial assets. As you can see, there's a swing of about EUR 30 million, slightly less than EUR 30 million from '21 to '22, which is due to what I mentioned earlier, which is good results -- good financial assets results in '21 and a fairly mediocre one in '22 in absolute terms. The EUR 5 million includes the JD write-down. So without that, as I said, we were kind of flat, which, given our mix of assets, was reasonably good given how markets have performed last year. On the bottom side, we have the contribution of the 2 operating businesses to P&L. So as I said, KOS is around breakeven. Sogefi had a positive contribution. And the holding contribution went from plus 16 in '21 to minus 16 because of what I just said earlier. So net result is substantially 0 for '22. On Page 7, you have the net financial position where you have the breakdown as usual between the operating businesses. No major changes there. Good -- I'd say, good cash flow generation at Sogefi level with a decrease of debt, reasonable cash flow generation at cost. The increase in net financial position is due to investments CapEx and, at the holding company level, a slight decrease due to the financial results on the one hand, and the fact that we have invested -- we continue to invest in share buybacks. So since about 12 months ago, we bought about 22 million shares in the open market, which clearly reduces net financial position. On Page 8, you have the simplified balance sheet. I remind you that those are -- on the left-hand side, those are book values for both KOS and Sogefi. Those are not our own valuations of those businesses. The private equity portfolio is pretty flat. And you have on the right-hand side the composition. So there were roughly 12 million capital calls, which were funded with roughly EUR 12 million of distributions. So the net number is pretty much stable with no fair value adjustment. I remind you that we -- we take here the NAVs that are communicated by the funds, where we're talking about funds or if we talk about rate investments -- the latest fair market value. Other investments is the JV write-down that I mentioned earlier for about EUR 5 million. We did it because we have a contract, which provides for a put and call agreement on this investment with the formula. And so given the fact that the put and call start -- the exercise period starts this year, from an accounting standpoint, we needed to take into account the possible sale price of this investment. So as you can see, you have the evolution of the holding company net cash on the lower side -- on the right side, we have the effect of the holding company costs, the buybacks as well as the positive contribution from the real estate advance. Going to the businesses, I will go to Page 11 and just comment a bit the evolution of the KOS numbers. So revenues increased because of an increase in perimeter. As I said, we continue to invest in new structures as well as organic growth and growth in occupancy, which clearly increased revenues for the same structures. As you can see, EBITDA is slightly up on the previous year. It's not really comparable to '19 because of the perimeter. And you probably want to focus more -- I mean, the number that we look more is the EBIT number because of the accounting treatment for IFRS16. So EBIT is more or less in line with '21. '21 had some positive exceptionals due to real estate divestitures that we don't have in '22. On the other hand, '22 still has a significant contribution from public story in Italy, so public support, both in Italy and in Germany for the lower occupancy rate of our facilities. So this basically brings you down to a roughly breakeven number and to -- in terms of financial position, slightly higher because of the continued investment. As you can see in terms of outlook, we foresee a continuous increase this year due to increased occupancy even though we most probably will have lower contribution or zero contribution from the public support, which clearly when you go year-on-year comparison will wait. On Page 12, you have a breakdown of both businesses and geographies. I think it's quite self-explanatory. I think on the occupancies right side -- on the left side, as you can see, there's been about a 10-point increase on average from '21 to '22, which was expected. But as you can see, we're still significantly lower than the '19 number. And as you can see the December number is better than the average number. So the exit velocity from the year is positive, but we're not there yet and there is a significant discrepancy between regions in Italy. So there are some regions which are back to the '19 levels, but there are some which are clearly late. In terms of -- we have -- I think you have the revenues, the occupancy numbers are really very relevant. Acute care, same thing. And as you can see in Germany, the occupancy went actually down from '21 to '22 on average, it's pretty much in line in December. We have increased revenues because we have increased the number of beds. And one of the issues in Germany has been the availability of personnel because of a high inflation in labor costs but also a tighter availability of labor. So in most cases, we could not either open or fit entirely structures because of scarcity of labor forces. On Page 13, you have '19, '21 and '22. You have it by -- so it's a P&L where you have it by country. So you have the Italian business. And you have the German business just has to make them more comparable from year-to-year. And a lot repeat what I said earlier, but as you can see, there has been some increase, but we're still -- some increase, I would say, mainly in Italy. We are lagging in Germany. We hope that the labor availability issue is in the process of being sold but we're not there. Going to Sogefi on page 14. Revenues were up as I said earlier, quite significantly, about 17.5%, 4% volumes and 12% prices and FX. EBITDA was slightly higher than the previous year. But EBIT was, I would say, significantly better. You might recall, we discontinued the Argentinian filter operations in '21, which is a significant effect on net income. This is what explains the significant jump in net income. I would say that in terms of mix, both regions and customers, no major change in the year. We think we have seen, at least for now, the worst in terms of raw material price increases last year. We have seen some softening in the last few months. Energy prices have come down, but we're probably going to experience higher energy costs this year because we benefited last year from some fixed prices, that in some countries are going to run out either this year or next year. And so we still probably have some inflation on the energy side. We see a relatively solid market at the beginning of the year, the first 2 months were reasonably good and a bit above budget in terms of volumes. But it's -- the outlook is quite difficult to forecast. There's a lot of variables, there's a lot of volatility, and it's very difficult to read what our clients are telling us in terms of volumes. On Page 15, you have a breakdown of the divisions. And as you can see, there is a significant difference. So the problem type of the portfolio is the suspension division, which was hit particularly by the higher raw material prices. This is the division which has the highest component of raw material costs on total cost and on sales, and this is a division which doesn't have aftermarket and has the highest concentration on the European market, which has been the weakest in terms of geography. So we are going through a major restructuring and downsizing of that business in terms of industrial footprint, but that takes time. And so we expect this year to see some progress, but it's going to be a multiyear effort to bring this division back to historical profitability. I remind you that this business used to be a quite profitable one after a few years ago. I think the market deteriorated. I think management made some mistakes in terms of contracts that were taken at prices that didn't guarantee sufficient margins. And all this takes time to be established. I would say the standout performance came from Filtration. Filtration had almost 10% EBIT margin. which in this business put us the best-in-class in terms of profitability with very strong cash generation, relatively low investments, significant contribution from the aftermarket, which had a very good performance because of the aging of the part and the weakness of the [ OE ] market. And Air and Cooling performed well, continues to gain market share. This is a division which is going through a strategic repositioning of its product offering from internal combustion engines to EVs, and we have gained some significant contracts both in hybrid platforms as well as EVs, and this is the division where over the next -- over the medium term, we expect the biggest change in the composition of the business. I would pause here not to take too much time and open it up to your questions.

[Operator Instructions] The first question is from Nicola [indiscernible] of Equita.

Can you hear me?

The line of Mr. [indiscernible] has dropped. [Operator Instructions] we have a question from Gian Marco Gadini of Banca Akros.

Can you hear me?

Yes.

Okay. I was wondering how are you dealing with inflation, particularly in Italy and how tariffs are being increased in Italy. I've read and I have heard that tariff increases were limited in 2022. So do you think this is a lever you can act on and we will see the effects in 2023 and beyond? Or there is some -- there is little room to increase prices?

Excuse me, this is will be your question related to which business?

Pardon -- for the cost business and particularly in Italy.

Okay. I would start to answer this and then maybe ask Michele to complete. So as you know, in -- so we have 2 businesses in Italy, we have the nursing home business, where prices are a combination of administrated price. So those are fixed by the regions for any level of service that we provide, and they are the same for all the operators. And they are typically reviewed by the regions on an annual basis. And historically, they have trade inflation. So on this part of the tariff, there are some regions that have increased tariffs recently to take into account the significant cost inflation. But it's an uneven situation in the sense that it didn't happen in every region, and it didn't happen with the same magnitude. So it's really I would say, a local issue every region is different. Then you have the private tariff that operators can add on top of what is paid out by the National Health Service. And here too, the difference -- there are differences in regions. There are regions where you're totally free to apply the private component of the tariff. And there, it's really a question of competitiveness, supply and demand and your ability to pass on those price increases. Clearly, this is more challenging when your occupancy rate is low as it has been for us since COVID. And so obviously, you have to make a determination of volumes versus prices. That depends on each local structure and the competitive environment that you operate in. And then you have regions where you don't have that ability. So the private component is not free -- is not freely set by the operator. It's not up to the market, and those are the most difficult regions because, clearly, you don't have that lever in terms of price increases. So I don't think that answers your questions, but in a nutshell, there is some flexibility to pass on price increases. But that is limited, and that is not everywhere. Michele, do you want to add something on this?

Well, just to complete the picture on -- in Italy, we also have -- we have an acute care business. In that case, the remuneration is 100%, almost 100% public with a limited portion of private business. In that case, the remuneration is at national level rather than regional level. And there is now an ongoing revision of -- particularly of the rehab tariffs going on at a national level, and we are expecting an increase of those tariffs, hopefully, in 2023. Of course, all of these tariff increases, both the ones that I just talked about and those at regional level for nursing homes, did not fully compensate for the cost inflation that we experienced in 2022. We had a very steep increase of the energy cost, which is very relevant for cost, plus we had increase in the cost of certain professional categories, in particular, the professional nurses. So those -- that kind of inflation already materialized and only being -- it has only been compensated in part. Because the jump was quite high, we expect the adjustment of tariffs to happen over multiple years and not to happen all at once, unfortunately, and not in every region simultaneously. So it will be a probably gradual adjustments over the next few years, and we'll have to fight for it at the association of associations level. So the operators associations level, we have individual operators responsible for those -- for those tariff increase.

[Operator Instructions] The next question is from Daniel Ridolfi of Kepler Cheuvreux.