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 2025 Full Year 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, and welcome to this results -- '25 results conference call. I will go through, as usual, the document that you have on the website. We'll start on Page 4 with the highlights for '25. So those are the consolidated revenues of the 2 businesses. They're slightly down about 1% on '24, slightly up for KOS and slightly down mainly for currency translation in Sogefi. The dollar and other currencies have been weak compared to the euro last year, and this has had a negative impact on our top line. In terms of net results, we published a profit of EUR 28.4 million. This compares to the extraordinary profits of EUR 132 million of '24, which, as you might remember, included the divestiture of the Filtration business in Sogefi. And this compares to a EUR 39 million comparable number, so excluding the divestiture for '24. And it is the result of an improvement in KOS. Net result at KOS went from EUR 12.3 million in '24 to EUR 19.2 million in '25 and a decrease in contribution from Sogefi from EUR 9.8 million the previous year to EUR 6.5 million. Those are the pro rata numbers for CIR this year. This year results, we'll see it later, in Sogefi was impacted negatively by a restructuring provision that was passed in the last quarter. And at the holding company level, the holding company result was EUR 3.5 million compared to EUR 17.4 million. As you might remember, '24 has been a very positive year for financial assets and for our portfolio. This year was -- '25 was a reasonably good year, but not as good as the previous year. In terms of net financial position, we closed the year at positive EUR 220 million. This is a consolidated number. And this is after dividend distribution to third-party investors, so not consolidated within CIR, and what we spend on buybacks during the year. And this is mainly due to a pretty strong operating cash flow. In terms of the outlook for the 2 businesses, we continue to see a good consolidation of the occupancy level in KOS, particularly Italy has had a very good year on nursing homes last year. We continue to see increasing level in Germany, too. And so what we guide for is an increased operating result for KOS in '26 compared to '25. For what Sogefi is concerned, what we have indicated is a mid -- low to mid-single-digit revenue decline. This is mainly due to a very soft market. This was actually done before the latest geopolitical events, which clearly don't make it easier. And so there's going to be an issue in terms of the full year impact of higher energy costs as well as higher oil prices, which typically are not good for the car industry. And what we indicated was that we shoot for a similar operating margin compared to '25. As you know, in -- on Page 5, at the end of January, we completed the acquisition that we announced in -- at the end of last year of the 40.23% stake in KOS that was held by F2i, which CIR owns 100% of KOS. The consideration for the purchase of the shares were EUR 220 million. The cash outlay for CIR was slightly smaller because we paid a dividend before the transaction and so part of the price was paid by a distribution from KOS. And today, we had our Board that basically approved the accounts of last year and announced the launching of a partial tender offer on CIR's own shares for a maximum of 50 million shares at a price of EUR 0.68 a share. And this really goes in line with we had done 2 other transactions of this sort in the last few years, so partial tender offers. As you know, we have had a continuous buyback program. The program with buyback programs is that the quantities that are doable are limited by the little number of shares that trade. And so we thought that this would conduce to a more immediate capital distribution to shareholders in the next few months, obviously, depending on the level of acceptance. On Page 7, I'm just going to comment the macro numbers. So I talk about revenues in terms of -- I'll maybe skip this part because I'll comment the 2 subsidiaries one by one because aggregating those numbers doesn't always make a lot of sense. Maybe just a comment on the financial results that were negative EUR 26 million compared to negative EUR 19 million the previous year. And this is both the cost of financing on a consolidated basis. So this is the net interest cost in the 2 operating businesses. There is the IFRS 16 accounting for the leases. You have the holding company financial assets that generated EUR 30 million, I mentioned earlier a particularly good '24, against EUR 17 million this year. So it was a reasonably good year. On average, we made about 4% return on the total liquid assets, which have been invested as in the past in a very prudent way. And this means -- this brings the total financial results to minus EUR 26 million, as I mentioned earlier. In terms of the contribution to net result that you see on the right-hand side -- bottom right-hand side of the page, those are the numbers that I mentioned earlier. So the contribution from KOS and Sogefi totaled EUR 25.7 million. The holding company results, EUR 29 million total compared to EUR 39 million in the previous year. And then you have the extraordinary result in Sogefi in '24 that it was related to the divestiture of the Filtration business. Going to Page 8. This is our balance sheet. So those are the net financial positions of the operating subsidiaries. So KOS debt was slightly lower than the previous year, thanks to a healthy cash flow. In between those 2 numbers, you have dividend distributions. Sogefi had a relatively weak year in terms of cash generation, but still positive. And the holding company increased its net financial position from EUR 341 million through to EUR 362 million. This is thanks to the return on the financial assets. I recall here that the KOS transaction happened in January, and so it is not included in the year-end numbers that you see here. You have on the lower end side, the same net financial position, including the leases. This is not very particularly relevant, particularly the number for KOS is very significant because we rent most of our premises. And so you have to basically present value the future rents into this number. On the right-hand side, you have a bridge between end '24, end '25, where, as you can see, the operating cash flow contributed positively to the tune of EUR 60 million. Dividend and CapEx a bit less than EUR 10 million and dividends and buybacks, EUR 33 million. Of those EUR 33 million, KOS paid EUR 21 million in dividends, Sogefi paid EUR 21 million in dividends and CIR spent EUR 14 million in buybacks. On the -- in the middle, at the bottom of the page, you have the funds from operations for both the operating subsidiaries at the holding company as well as the CapEx, and this is the EUR 60 million that I mentioned earlier of net operating cash flow at a group level. Now going on to CIR's balance sheet on Page 10. As usual, you have the carrying value of the 2 operating subsidiaries. This is basically the pro rata share of the book value of those 2 businesses. So it's not an NAV, it's not a valuation. You have the private equity portfolio that has slightly reduced because of distributions and fair value adjustments during the year. The net cash that I mentioned earlier, you have a bridge on the right-hand side for the net cash, where you see the main components that explain the increase from EUR 341 million to EUR 362 million. And at the bottom, you have a group shareholders' equity, which is almost EUR 800 million at the end of '25, divided by the number of shares. And this clearly is helped by the buybacks and the canceling of shares that we went through in the last few years in terms of increasing the book value per share. Page 11, you have the holding company and the wholly owned subsidiaries P&L. So the biggest component is income from financial assets. You have a slightly lower running cost for the holding company, a bit of taxes and the net result that I mentioned earlier, which is EUR 3 million compared to EUR 35 million in the previous year, which was helped both by income from financial assets but also from divestiture of assets where we realized a capital gain in the sale. Page 13, KOS. You have the updated numbers here in terms of number of beds. No major changes. As you know, in the last few years, we have really focused our effort in bringing back the level of profitability of the business to the pre-COVID levels and tackling some structural issues, particularly related to higher cost of labor, the necessity to compensate that with higher tariff and the work that it means in terms of negotiating with the authorities. And we think we've done a reasonably good job. As you will see in the next few pages, the results were very good for nursing homes, were not as positive for rehab in Italy and on the good trend for Germany, even though we are not there yet. On Page 14, you have the full P&L. So about EUR 800 million -- more than EUR 800 million in revenues with a slight increase, mainly coming from nursing homes. Better EBITDA, so almost EUR 178 million. The EBITDA pre-IFRS 16 is probably the number that people are used to look in terms of valuing the business. So we went from EUR 80 million in '19 to EUR 96 million. So in absolute terms, better margin and better than the EUR 83 million of last year. And the net number is EUR 32.2 million, which is more than 50% higher than the previous year. You have on the bottom page -- bottom of the page, you have the net book value of real estate with a fair value and with the real estate debt. I would say that, as I said earlier, the main comment here is very happy about nursing homes in Italy, 5.7% growth. Occupancy was up 1.1 point. And I think the team has done a great job in terms of increasing profitability here. Germany was helped by increased rate. So revenues grew 8%, thanks to the tariff increase. Not so good on occupancy. It was down 1 point, and it's still too low. 90.4% is not sufficient. Part of this is related to the lack of personnel in certain structures. But clearly, this is a number that we need to move higher. In rehab, revenues were flat. Rehab is the business which is more tied to public tariffs and to the volume of services, which is related to the capacity that the region have or need. So there is maybe less levers that management has compared to nursing homes. But still, we had a slightly higher budget that we didn't realize. And clearly, there are a number of actions here that we are looking at. Net debt decreased by EUR 6.5 million despite EUR 21 million of dividend distribution and almost EUR 8 million of development CapEx. And so recurring operational cash flow was EUR 35 million, which is a good number. The outlook, we -- I think I just commented earlier, so I won't repeat it here. On Page 15, you have the breakdown between the various businesses. So NH and rehab in Italy and NH in Germany, and you have a comparison between '24, '25. And as a reminder, '19. And as you can see, there's been a significant growth in occupancy in NH Italy. This has contributed positively to performance. We think we still have a couple of points in Italy to increase. Germany is lagging in terms of occupancy, as we said earlier. And we're working on that. We have a new CEO for Germany since September last year. And so we think we're going to be more focused on execution in Germany with this new team. On Page 16, you have the profitability of the various segments, both Italy and Germany. And as you can see, Italy has had a good performance, good margin, increased margins compared to last year. And even compared to '19, we have pretty good margins. Germany has lower margins. As you can see, at the EBIT level, we're about 1/3 of the margins in Italy, and this is due to the structure of the market and also to the fact that there are 4 units, 4 structures in Germany that lose money and lose money in a structural way. We are looking at how to address that. And so it's obviously an average and you have some structures that are nicely profitable, not far from the Italian levels, but then the average is brought down by a couple of lower-yielding structures. Going to Sogefi on Page 17. I'll go quickly on Sogefi because Sogefi's results are public, and so you've already seen them in the past few weeks. Revenues were down mainly because of currencies. They were almost flat at constant exchange rates. Good performance in North America, good performance in Mercosur and in China and not surprisingly, weak Europe. And this is more surprising weak India even though those are small numbers in India for the time being. EBITDA was up on '24, which was a notable performance. Good first part of the year, weaker second part. Particularly last quarter was weak on volumes. And we also had some extraordinary costs that were passed at the end of the year and that had depressed profitability in the last quarter. Free cash flow was positive EUR 21 million, lower than the EUR 30 million in the previous year that benefited from an intercompany payable related to the Filtration sale. So it's not really comparable. But still, free cash flow was a bit lower even correcting that on the previous year. And net financial position was EUR 19.2 million, slightly worse than the previous year. The visibility right now in this sector is very limited. What is going on with oil prices is -- was not predictable. It is very difficult to know how long this will last and the kind of damage that this will create both to the industry in terms of the end demand, but also in terms of the margins through higher energy cost that clearly will have to be passed on to customers. But this is always, as you know, a difficult thing to do, and it has some lags. And there is also the risk of higher raw material prices, particularly plastic, which are oil related, but also steel, which is energy related. And so we think that '26 is going to be a challenging year for the sector. On Page 18, you have the evolution of the EBITDA margins in the 2 businesses. You can see we talked a lot in the last few years about the turnaround in Suspensions. I think it confirmed and consolidated in '25 despite the fact that the market was not easy. But I think passenger car Europe, which is the biggest division in the Suspension business, did a good turnaround there. We had a weaker performance on the heavy-duty part. And the Air and Cooling maintained a good level of profitability, slightly lower than the previous year. Here, we are investing a lot in the transition from internal combustion engine type of products to EV products. And so we have a number of contracts that we have taken that require investments and the amortization of those investments. And so this is an investment phase for the Air and Cooling division. But overall, as you can see, EBITDA was up on what was already a pretty good year in '24. I am done. And so I will now leave it to your questions.

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

A few questions on KOS. Number one, on the occupancy rate. Is it foreseeable the return to 95%, 96% occupancy rate in Italy this year? And what is your target on the underperforming German activity? And I suppose this is just a matter of shortage of nurses? Or is there any other reason for the Germany recovering so slowly? Second question. On the loss-making German nursing homes that you mentioned, could you quantify the 4 loss-making, how much is the loss? Just to have an idea of how the rest of the business is performing in Germany. And also in this case, it's just a matter of shortage of nurses or there is maybe another structural issue? And third, on KOS, now that you have 100% of the company, maybe are you more willing to look for acquisitions, maybe big acquisitions? I don't know if you have any comment on this. And what is the maximum firepower that you have in mind?

Okay. So in the order, occupancy in Italy back to 94%, 95%, I think it's feasible. We had this before COVID. I don't think that there are structural reasons why we should not get back to those levels, whether that will be this year or next year, too early to say; I don't know. But clearly, that is the objective. Germany, the reason of the lower occupancy is mainly related to shortage of labor, as you said. There has been very significant increases in salaries for nurses in Germany in the last few years. It continues even this year. And so we hope that that will help in a way to cure the problem, both through local workforce that could be redirected from other sectors or from immigration. But that has been the biggest bottleneck in Germany. The 4 loss-making structures, they're loss-making because occupancy is particularly low, but also because they have been saddled with real estate costs, which are nonsustainable in this environment. And so they have to pay rent. We don't own the premises. This is part of the structures we bought in when we made the acquisition. And we are in negotiation phase with the owners of the premises, which is clearly a difficult one because those are fixed rents. But on the other hand, if you have a fixed rent on a structure that cannot generate enough revenues and cash flows to pay the rent, there's a problem. So we are tackling those 4 situations. Clearly, if we could just shut them down, we probably save not far from EUR 4 million to EUR 5 million. And so that's the order of magnitude, which for the P&L of Germany is meaningful. And so this is something that we definitely had to come to a conclusion and a solution. Your questions about acquisitions. As you know, we have focused in the last few years on really putting the house in order and making sure that we had a solid performance. And it's only when you have a solid performance that you can build and add new structures and acquisitions. I think we are there today, certainly in Italy. Hopefully, not far from being there in Germany. And this means that we will be more proactive in looking at possible acquisitions. There are very limited numbers of significant acquisitions that would be game changers for KOS in the geographies and in the type of businesses that we're interested in. So I would suspect more small, midsized acquisitions, but we are open. We are open to everything that makes sense. And as you mentioned, we have both the financial firepower in KOS because we have a very low leverage, but also as a shareholder, of course, we have always said that we were ready to invest more capital if the right opportunity came along. And this is clearly, from a CIR standpoint, the sector in which we want to focus our attention, both managerially and from a capital standpoint. But if the question is, is there anything immediate or actual that we are working on, the answer is no.

Okay. Is there any threshold in terms of debt-to-EBITDA or any other ratio that you are not willing to pass, to exceed?

Well, let me put it this way. I don't want to give you an absolute number because clearly a lot also depends on how much real estate you have. If you have -- if you finance real estate that you own as opposed to financing an operating company that doesn't have real estate, the answer is different in terms of the debt capacity and your ability to support that leverage. What I would say is that back in the days when people leverage those businesses at 5, 6, 7x EBITDA, we always thought that that was crazy and it was dangerous and that it created financial risk, and we never did anything closer to those levels. And that continues to be our stance and our position. We want to be conservative in the way we finance the balance sheet. Unfortunately, accidents happen. COVID, nobody forecasted COVID and COVID is hopefully one type -- one-in-a-lifetime opportunity, but you can always have issues. And frankly, we are not as aggressive financially as some other investors have been with this business. We don't think that it is prudent. And we also don't think that it is good compared to the authorities and to the clients. I mean, this is a business that has to be run in a safe way, to be predictable, to be solid, to be dependable, and we don't want to change that.

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