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 2024 Presentation Full Year Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Rodolfo De Benedetti, Chairman; and Michele Cavigioli, CFO of CIR. Please go ahead.

Thank you. Good afternoon, everybody, and welcome to this conference call. I would, as usual, like to go through the presentation that you have on the website. We had our Board this morning. We approved the '24 accounts. And I'll just go over them quickly and then leave chances to ask questions. I will go rapidly on the things that are already known, i.e., the Sogefi results and what we have done last year and maybe just focus on what we approved this morning, which are the consolidated accounts and KOS results. So if we start on Page 4, '24 has been quite an eventful year for CIR. We had a major extraordinary transaction, the sale of the Filtration division. We thought at the time that it was a good transaction for us. We're even more convinced today in view of what's going on in the auto market and the global uncertainties that this was both a strategically sound decision as well as a financially attractive transaction. We finished to sell our investment in JV with the last 5% that was sold last year at a higher price than our balance sheet values. We finished -- we completed the divestiture of the noncore real estate for EUR 38 million in the course of last year, and we ended the year completing the offer on our own shares, where we were able to buy a total, including the ordinary buybacks of 167 million shares for close to EUR 100 million during the year. So this was a significant return of capital to our shareholders. In terms of the consolidated numbers, I don't want to spend too much time on it because, as you know, they are relatively meaningless given the fact that we consolidate different businesses, but they are very good, both at the subsidiaries level because we had higher than budgeted and higher than previous year results in both Sogefi and costs. We had some extraordinary transactions that I mentioned earlier, and we had a very good return from our treasury assets, our financial assets. I'll go through them later. In terms of the outlook that we have approved this morning, in cost, over the last few quarters, we've talked about many times about the coming back of the performance of COVID after the severe negative effect following COVID. We had a plan. We are about a year ahead of plan in terms of our '24 results. And so we're pretty satisfied about our ability to increase occupancy, which is a key driver in this business, both in Italy and in Germany as well as to raise tariff and to keep a control on the discretionary part of the cost. There are some components of costs, for example, labor cost, which is the biggest one. where, unfortunately, we are not in control. We just experienced a very high growth in the last 3 years. And this is continuing, particularly in Germany. This year, we had a close to 10% increase in labor cost in '25. So this is clearly a challenge. We have been able to more than make up that in terms of higher tariffs and higher occupancies. But clearly, that has been a headwind. In terms of -- so for the year, we expect to continue along the path of an increasing profitability due to those drivers, both in Italy and in Germany. We'll see the '24 results, but we expect -- we are pretty constructive on '25. And for the time being, the first 2 months of the year are in line with our budget. So JV operates in a very volatile and difficult market, the auto market. I think anybody that follows the sector knows it well. I think what we did through the Filtration divestiture has been 2 things. One is to focus on the 2 residual divisions, focused both financially and managerially. This is particularly important for the turnaround that is ongoing in the suspension component business, which has continued in '24, but clearly needs to be completed and to be consolidated. And the second thing is that it is safer to face headwinds and uncertainties and volatilities like the one that we are experiencing today with the macro environment and a global trade environment, which is very much difficult to forecast. It is much safer to have those kind of challenges with a very solid balance sheet like we have today. The company has almost no debt. And this clearly allows us flexibility that we had less of before the divestiture of the Filtration business. Going on to Page 6. You have the consolidated P&L. Again, I won't comment a lot on revenues and EBITDA. I think what is probably more relevant is the financial results. As I mentioned earlier, the financial assets result has been particularly good. So we experienced a profit of EUR 30.5 million in '24 compared to EUR 5 million the year before, so a significant increase. And on the lower right-hand side of the page, you have the composition of our P&L. You have the net result from continuing operations. This includes our pro rata share of the earnings of both KOS and Sogefi, as you can see, they're both significantly higher than the previous year. You have the holding company result, which benefits from the return on the financial assets, the EUR 30 million that I mentioned earlier, minus the costs. And then on the lower part of the chart, you have the extraordinary transactions. So you have the pro rata share -- the CIR pro rata share of the Filtration sale, EUR 75.7 million as well as the capital gain on the real estate sale. So the total noncontinuing operations, EUR 93 million and -- EUR 39 million plus EUR 93 million is EUR 132 million, which is our net result. So I'd say a pretty good year, both on the ordinary front as well as on the extraordinary one. On Page 7, you have the evolution of our net financial position on a consolidated basis. So if you take the bridge on the right-hand side of the page, we go from a slightly negative net financial position to a positive EUR 200 million net financial position despite having distributed EUR 167 million of funds, both through dividends in Sogefi and KOS for the minorities as well as the buyback share, the EUR 100 million that I mentioned earlier. So clearly, a more conservative and cash-rich balance sheet, but in the same time, a significant distribution to our shareholders during the year. We now go on Page 9, just to remind the buybacks. I mentioned it earlier, about 100 million distributed spent on those buybacks, buying back 167 million shares, which has allowed us to reduce in a meaningful way our share count with benefit both in terms of earnings per share and NAV per share. Today, we own 3.5% of our capital, 32 million shares. And today's Board has decided to restart the ordinary buyback that we had suspended ahead of the extraordinary one at the end of last year. And so we -- from Monday, we will resume that activity. On Page 10, you have the holding company balance sheet. On the left-hand side, you have the book value. This is not an NAV. This is really an accounting -- those are accounting numbers. So those are the book value that we have for both KOS and Sogefi. They basically increased because of the results of the net assets in the 2 companies. Private equity increases slightly. There's been close to EUR 10 million distributions. There has been about EUR 6.5 million of positive fair value adjustment and EUR 5 million roughly of new investments. Those were pre-existing commitments that were drawn by the funds in which we are invested. Other investments goes down almost to 0 because of the JV divestiture that I mentioned. And so despite the EUR 100 million spent on buybacks, as you can see, our net financial position at the holding company level increases from EUR 314 million at the end of '23 to EUR 341 million at the end of '24 and you have on the left-hand side, the shareholders' equity, both net of treasuries and per share net of treasuries. On Page 11, you have a detail of the holding company's P&L. So as I said earlier, income from financial assets was particularly positive. Every asset class performed very well last year. The recurring cost of the holding company were in line with the previous year, stable. We had some nonrecurring costs. We had the merger of CIR International into CIR Investimmenti. And you have the -- on a separate line, the CIR International costs. This was a separate company before the merger. We had an operation in Luxembourg. We closed the office. We moved a person from Luxembourg to Milan. The rest of the employees were terminated. And so we think once this is consolidated into our operations in Italy that the combined cost will be significantly -- I mean, the costs that were previously related to CIR International will be substantially lower than before, not 0, but substantially lower. And then you have the real estate transaction impact. On KOS, Page 13, I think you all know KOS, so I won't go through Page 13, but maybe focus on 14. So this is the P&L of KOS. As you can see, revenues have increased at a pretty healthy pace. This is, I would say, everything is, correct me, Michele, but everything is organic here. Obviously, there are some greenfields that add to the perimeter, but there is no acquisition. So the biggest component of this increase is really related to tariff increases that we were able to carry on both in Italy and in Germany. This has had a substantial increase in EBITDA. So as you can see, EBITDA after the new accounting principle is EUR 164 million. If we go to pre-IFRS 16, we are EUR 83 million. So this is comparable to the EUR 80 million in '19. Obviously, there's a bigger company today. So in relative terms, the profitability is still lower, mainly because of Germany, and a bit also because of Italy. Probably the most relevant number is the EBIT number, which increases from EUR 53 million in '23 to EUR 67 million last year. Financial result is pretty much in line, and this brings the bottom line to a EUR 20.5 million profit compared to EUR 10.8 million before -- without extraordinary of the previous year. So it's almost doubling of net results. I think the significant point here is the increase about 3 percentage points in Italy and about 2 percentage points in Germany of the occupancy of the nursing home business. In Italy, if you take away greenfields, we are pretty much where we were pre-COVID. We still have probably 1 or 2 points of possible growth. In Germany, we are slightly behind, but we're getting there a bit more slowly than expected and then in Italy. Rehab increased revenues by 3.4%. As you know, Rehab is a fully regulated business. So our ability to grow the business is limited because we run structures at full capacity. And so the only way to really grow the business is by growing rates, which are regulated and they typically increase pretty much in line with inflation. And as I said at the beginning, we -- in terms of outlook for the year, we think we can continue to increase the profitability, particularly in Germany, where we still are not at the levels where we should be. And we think that, that is going to come from an increase in occupancy and a continuous increase in tariffs to take into account the cost increases. On Page 15, you have a breakdown of the of the capacity in terms of number of beds, split between Italy and Germany and in Italy, the different businesses, you have the revenue line. So I think it speaks for itself. But as you can see, there's been good growth, particularly in the nursing home business in Italy. There's been an increase in both average and end-of-year occupancy, both in Italy and in Germany. And as you can see, Germany grows revenues by 14%, and this is really a combination of both the increase in occupancy, but more importantly, the increase in tariffs. On Page 16, you have split in terms of, again, Italy and Germany. And you have -- you also have the profitability. As you can see, there's been a good increase in Italy. We're still a couple of points below in percentage terms, a couple of points below the '19 numbers. We are not there yet with Germany, even though, as you can see, there's been a substantial increase on '23. So the trajectory is a good one. But we think we have more to work on Germany. I would say that the one I mentioned the growth in labor cost. I need to mention also the availability of personnel. This is not new, but this is clearly a bottleneck that we are confronted with both in Italy and more importantly, in Germany. On Page 17, going to Sogefi, you have a reminder of the key numbers for the Filtration divestiture. I won't go through them. They're known. And unless you have questions, I'll go to Page 18, where you have the '24 numbers. Again, those were made public by Sogefi a few weeks ago, so they're all public knowledge since a few weeks now. This is clearly without the divested assets. So this is a like-for-like perimeter. And as you can see, those 2 divisions, despite a difficult and challenging year, we're able to manage a substantial increase in profitability even though we had lower revenues. So I think the key here was really cost control was the result of the actions that were taken in the last few quarters or in the previous year. We had a good contribution from outside of Europe. So both Mercosur and China in terms of growth, not so much NAFTA in terms of growth, but good profitability there. Cash flow was good. Here, the outlook that the Board gave a few weeks ago is that we see a fairly difficult and weak car market in terms of production for this year, particularly taking into account our geographic mix. So Europe, which is the bulk of our business, we believe is going to stay pretty weak. What has been positive has been lower raw material prices. So the spread between prices and cost has been better last year. And what we expect for this year is a slight decrease in sales because of car production and because of what we expect our clients to generate in terms of demand, but a slightly better EBIT margin. So the 2 things should roughly compensate. On Page 19, you have for the last 2 years and compared to '19, you have a chart with the profitability in terms of EBITDA margins, split between the 2 divisions. So as you can see, Air & Cooling has stayed pretty profitable. I mean those type of numbers, is about 8% EBIT margin are pretty high compared to auto part makers generally speaking, in Europe. There are a few exceptions of niche players that have higher margins that we have, but most of our competitors have lower margins than the Air & Cooling division. So Air & Cooling has continued to perform strongly in terms of profitability. As you know, suspension was in a difficult position a few years ago. We were money losing. We turn around the business. We don't lose money anymore, but still profitability is not enough. And so we still have work to do there to bring it to satisfactory levels. I would stop here and maybe leave room for your questions.

[Operator Instructions] First question is from Martino De Ambroggi, Equita.

My first questions are on costs. Number one, in the press release, you talked about a significant increase in revenues and operating results for this year. Could you elaborate a bit more on what is significant for you? The second is on Germany, in particular, what is the trajectory for the recovery? Third, you mentioned the issue for the cost of labor. Could you quantify what was the negative impact in '24 and what you expect in '25 and elaborate on the scarcity of nursing if it's close to an end or is still there? And last, on cost and tariff increases, both in Italy and Germany, just to understand where we are today.

I'll ask maybe Michele to start, and I'll complete.

So Germany, as you know, the labor market has been tight over the last few years. There has been a substantial increase in the mandatory minimum wage that must be paid. And it has been around 20% in the last few years. And we have another 10% for 2025, which has been decided by the authorities. And the problem is that you don't recover that instantaneously on tariffs despite the cost-plus mechanism because the tariff renegotiation happened once a year for every facility. And so we have at least 1 year time lag, plus when the increase is quite sharp, then you have -- you don't get it on the first round of tariff improvement. So in '24, we had an impact on costs that was probably close to EUR 10 million versus '23, which we were able to more than compensate this year through the tariffs. In Germany, we had a quite substantial average tariff increase of 8%. So we had around 3% increase in occupancy, 8% increase in average revenues. And then the rest of the growth is coming from the ramp-up of greenfields that we started in the last few years. For '25, you asked what does it mean substantial improvement. We normally don't disclose business plan figures. But the trajectory, I can comment on the trajectory on a quantitative basis. Italy, is going to further improve on occupancy, but a bit less than last year because we are approaching full activity. Germany has a little bit underperformed in terms of occupancy versus our expectations in '23 -- in '24, sorry. We expect now the trajectory to recover, although this does not fully depend on us and not even on the demand because demand is there and strong. It depends mainly on our ability to recruit nurses, the situation is tight. So we have a budget which goes on a similar trajectory of improvement versus of what we registered in '24, but we'd rather not make -- disclose too much about it because it's not fully under our control. But definitely, Germany is where you're going to see most of the financial improvement coming next year, at least in our expectations.

Maybe just a comment on labor shortages and on increases. Unfortunately, I don't think that we can be very optimistic about the end of labor shortages. I mean I think this is pretty structural. I don't see how this is going to change short term. And labor increases, cost increases, we recently -- I mean, a couple of months ago, we had this decision in Germany of a 10% across the board increase of labor cost. This is like a law. I mean this is an obligation. This is not subject to company-by-company labor negotiations. So unfortunately, those are given. And the only thing we can do is really work with the authorities to make sure that, that price increase is reflected in a tariff increase. And we work in a business where as Michele was saying, demand is there and our structures are almost at full capacity. And so we should be able to increase tariff if there are increasing costs.

Another item that is worth considering in the performance of '24 is that we had no subsidies anymore this year, whereas in '23, they were still about EUR 8 million. So this kind of improvement is not going to be there next year because we're 0 and will be 0 again in terms of subsidies. But again, Germany has got a lot of potential to improve. That's where we are concentrating our efforts in terms of turnaround. And as I said, we don't have all the levers under full control, but we are optimistic.

Okay. If I may, on the tariff increase, you mentioned Germany up 8% in '24. What was the increase in Italy, if any?

In Italy, we had, of course, less. In nursing homes, we had plus 3% occupancy and plus 4% average tariff, which is less than Germany, but much more than what we normally get in an average year, as you know. And whereas in rehabilitation and factory, there was little to no tariff increase. A national reform is long overdue on this. It was supposed to come in '24, maybe will come in '25, but we don't have any certainty in Italy about tariffs.