Elica S.p.A. (ELC) Earnings Call Transcript & Summary

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Elica Group Third Quarter and 9 Months 2023 results conference call. [Operator Instructions]. At this time, I would like to turn the conference over to Mr. Giulio Cocci, CEO of Elica. Please go ahead, sir.

Thank you. Good afternoon. Good afternoon, everyone. Thanks for joining our quarterly call. Let's move directly to Slide #3, that is the summary of probably the toughest quarter in very tough, I would say, last 12 months. Net sales were EUR 106 million, declining almost 16% organically, basically for a persisting weak market demand in the cooking business in all the geographies we are playing our game. The big hit came also from the Motor division where we mentioned it in our H1 call, June was a very negative month and it was the first month of the period in which we noted the market falling at a rate of minus 30% with a strong destocking phase from all of our key customers. In this scenario, we have been able to protect our margin despite a very important volume effect. This, of course, comes from the flexibility of our industrial footprint and strong work on the organization and on the cost control. EBITDA margin was even better than the same period of last year. EBIT was in the region of 5%, so losing 0.5 percentage points versus the same period of last year. With falling revenues, we have been able to keep the leverage under control and we have opportunities for the second -- the last part of the year coming from strong inventories reduction plan to arrive at the end of the year with an inventory level that is lower versus what it was last year. If we move to the following slide, this is the summary of the first 9 months of 2023. So inorganic -- negative growth of 13%, which we have lately commented and that depends from the demand trend that was basically worsening quarter-after-quarter since H2 last year. We have been able to defend our margins, operating profit so far is EUR 19.4 million, meaning that 5.4% of revenue, EUR 19.4 million by the way is the full year EBIT margin of 2019. So again this is for what we have created so far a company that is able to sustain completely different dynamics defending its margin. And net financial position, meaning the leverage is, as I mentioned, under control. If you look to the graph on the right side of the slide, you can see the revenue trend on the first line and the margin trend on the second line of EUR 40 million revenue less from Quarter 3 2023 and Quarter 1 2022 meant slightly more than 1 point of operating margin loss. That means that all the action that we put in place, the movement of the production between Italy and Poland, the decomplexity project, the work on the organization and the price increase has allowed us to digest EUR 60 million of inflation that we're not pulling in, in Quarter 1 2022 worked well. Now moving to the industry trend, I leave the word to Stefania.

So good afternoon to everybody. Going forward to the industry trend where this time in order to give you more insight about the performance of our Motor division, we also added some information that is coming from the heating industry association about the trend. So start from Slide #6 and start from the Cooking. This slide shows the Europe cooker hoods market. That's for us [indiscernible] represents more than 80% of our cooking turnover and is confirmed to stay negative still again after 5 consecutive quarters. So moving to the next slide. So before we need to go through the number of the industry trend of cooking. Like to share with you some information about the market scenario where it's different according to the China distribution. What we are seeing here for China like [indiscernible] offset. So the mass market is still a matter of pricing down rather than volumes. Instead of premium markets where we are playing with our brand, the information that we gathering in that market is saving our double-digit negative trend. So coming back now to -- moving to Slide #7. This data is coming from special source that is AHAM that is reporting a market relating to the cooking cycle, so [indiscernible] is related to the cooking side. That it means that involved not only ventilation, but also induction hobs, electric hobs and [indiscernible] excluding microwave. As you can see, it seems that the market is recovering -- like recovering quarter-by-quarter. In the Q3 recorded a minus 1%, but if you go only to the ventilation segment in the middle box, so you have [indiscernible] with a focus on the ventilation products. You can see that the ventilation is still double-digit negative all through Q3. So starting from the beginning of the year, minus 19%, second quarter minus 34% and the last quarter minus 19%. It still represents 40% of the market, by the way, is the official data that we generated from the North America. Moving to Slide #8 and this is the trend of the European heating industry and you see the data that is coming by the association. This data is all specific to boilers. That is our reference market for our Motor division, and it's not included [indiscernible] as you know, we launched this product in the last part of the year. So as you can see, during this Q2, there was an important drop of demand versus the previous quarter of minus 30% due to the uncertainty of regulation and the reduction in some cases and countries also the block of the incentives like the super bonds. With a volume that you can see in Q2 that they came back to the record period. We still don't have an official data for the Q3, but our expectation is to see [indiscernible] working according [indiscernible] that has been taken by the easing customer internal staff reduction. Going now through the sales dynamics and so Slide #10. So in Q3, sales minus 18% out of which [indiscernible] are related to currency effect, mainly dollar and [indiscernible]. The negative market trend and the effect on the [indiscernible] comes to [indiscernible] continue to offset our results. And on top of this, there is an important drop on the Motor division. The 9 months overall turnover 360 million with a drop of minus 14%. That means less 60 million versus last year. Moving to Slide #11, the performance by the base region. That basically, the Q3 is almost in line to what we recorded in the first 6 months. No changes in terms of impact of regional [indiscernible]. And among them are not comparable since in America, the market is mainly related to the B2B customer. And in EMEA, the market was regional for the cooking division, but also in [indiscernible] both OEM and our brand. We can move to next Slide #12, the sales performance by business. Here, you have the breakdown for the Q3 of the minus 16% of the organic loss. So minus 32% is coming from Motors. We have already shared which are the reason behind the loss during this quarter. And the cooking division minus 11 -- 10.9% versus the last quarter that is almost in line with the market. And moving to Slide #13. Here, you have also the breakdown for what is concerning the cooking division, between OEM customer and own brand. As you can see, minus 16% -- 17%, sorry, OEM customer that is improving versus the first 6 months where we recorded a loss of minus 30%. And our own brand minus 6.4%. So a resilient performance versus the market. And also you can see in the year-to-date number for our brand results versus the last year is minus 5.5%. Moving to Slide #15 in terms of the profit and loss. We have already commented the top line for Q3 and if you go to the EBITDA, you can see that despite minus 23 million less versus the last year, we increased our EBIT margin at 10.8% versus 10% of the last year. And this is the reason that we confirm that we did a strong job in terms of cost base alignment to the sales drop and with the project execution. Also in terms of the EBIT, we are close to the last year, 5% versus 5.5% and if you take into consideration the impact of the volume of the mix effect, without action, the impact in our results will be around 3 points, and we were able to offset almost all the total gap that is coming from the volume drop. The group net profit at 1.8 million is double in the quarter versus the last year. Thanks to the EBIT reported production in terms of absolute value is more in line with the last year. Thanks also to the healthy financial cost management and finally also to a positive tax impaction. In terms of results of the first 9 months in terms of EBIT, as you can see, 19.4 million as the same result of the full year 2019. But with that 1 Quarter [indiscernible] 120 million less than the full year 2019. Moving to Slide #16. In terms of net financial position, we keep the sales level in line with the last year despite the revenue drop and we were able to finance it around EUR 15 million of cash out for M&A for the last tranche also of the footprint relocation for this buyback done during the Q3 and also the payment of Elica dividend in July. There was an impact, a negative impact of an extra working capital that is around EUR 8 million versus last year, but we are still working on our supply chain finance program for most customers. As you know, the last year, we did a very great job taking the program that allow us to offset almost the negative impact of net working capital. We are continuing to carry on with program with most customers. And we are also on inventory reduction plan ongoing to reduce the stock at mid-10% respective value at the end of September. I leave the stage to Giulio for next slides.

So what we wanted to point out here before coming to the conclusion is that despite being a difficult year part of the very difficult 18 months passed, we still believe we changed the company. We are more positioned today than yesterday to achieve our midterm target. We are defending our shares in Europe. We are growing our market share in America, where usual market for our reference product and minus 15%. But basically, our brand performance in North America will be flat year-on-year. We are losing half of the market for what concerns our branded sales in Europe and we are gaining projects and share in the Motor division despite that specific segment of our business now is under a perfect storm, I would say. Why we believe -- we strongly believe that we are still there that we are stronger than we were before despite what is happening now to our industry. Because we are in the right segment, because we made the right decision. First of all, Heat Pumps. In December, we will start the production in Poland. I will be there Monday and Tuesday next week just to double check that everything is fine and to motivate the team. This is the trend that is expected to come from that segment in the coming years. Even if there is a formula mistake, even if [indiscernible] and we are in with one of the best name in this industry, and we have the queue of big brands that want to work with us. So this is a big opportunity that we still haven't seen in our numbers. If we move to the following slide, we mentioned many times, not necessary that Elica now is different also from the product offer. In the next [indiscernible] in April 2024 what we have been seeing this year with our customers, silently, I would say, saving costs going around with our [indiscernible] more than shouting on advertising will be on the floor when it will be sold. So not only LHOV, but also our induction hobs, the full range of ovens developed [indiscernible], the full range of wine cellars. This will be strongly [indiscernible] and will be something that will completely change also our catalog together with the rebranding campaign that we will start at the beginning of next year that will promote Elica not only as a leading specialist in aspiration, but as a leading brand within the kitchen. Moving forward to the next slide Induction. Induction is a big opportunity. Today, if you are producing gas, you are a problem unless you didn't start a couple of years ago to change your production -- to change the perception that your customer has of your capabilities. This year, we started also a project to be the first one -- the first brand to enter in North America with induction of NikolaTesla, but also induction hubs. From July, we are producing in Mexico. We will be the first brand that will get this trend in the U.S. If you see the development between the chart on the top of the slide and the one on the bottom that represents Europe, there is a huge opportunity of growth. And we know that the direction will be seeing induction winning and gas and traditional electric losing. In Europe, again, NikolaTesla family, you know very well the story. This year, we started with our induction hobs proposal, we are on the right trend. We know that we are in a trend that once the specific phase will pass, will keep on growing as it did in the last 6 years. Moving to the following slide, Distribution. Southeast Appliance is the first boots on the ground to have more control of our distribution in North America, together with [indiscernible]. So together with [indiscernible] from a side, we are completing our product range on the other side, we are approaching a new distribution path together. We have the strategy, we have the sales force, we have a factory in Mexico, which is relevant when you talk about North America, they have the [indiscernible] which is a problem without which it's very difficult to win in the U.S.. Together, we opened this company in Florida. We have basically doubled our sales force by sharing the cost and also sharing the potential versus the distribution and we are working to implement the same project for Canada. And again, next year, whatever additional opportunity we see together with them that can be Western part of the U.S. that can be [indiscernible] , we are already thinking how to proceed together. So closing remarks. Before going to the final conclusion, if you move to the slide, you see that we started back to advertise our offering in the very last part of the year. So from a side, we are controlling our costs on the other side, we understood that is the right moment despite there is still an important crisis in our sector to telling the people the value of our products, the competitiveness of our offer, the design content in every product we bring. This will be accompanying our path in December, but what we know is that next year, with all these tools that we have, we will have to be more [indiscernible] from an advertising point of view, from a visibility point of view, from a market support and new product launch point of view. So we know that this next year, it will be an year where while we are completing our offer, while we are completing our distribution, while we are, as always, defending our margins a market that will not grow; we will have to invest also in ourselves. In our image, in our distribution, in our new range in the potential that we can give to our customers. To close up, how do we see the year so far? I mentioned at the beginning, difficult 9 months. All of our sectors are under pressure. You know very well the reasons high rates, housing market, inflation which is still high, uncertain regulation that is affecting mainly the Motor division and low consumer confidence. We are defending our margin. We did the right things in the last couple of years. So this year, we are generating revenues and cash to keep financing our business, our vision, our key products. Maintaining a debt which is healthy and which is also covered by intelligent debt structure that we closed in 2020 at that year rate. We expect an year with the revenue that will be in the region of minus 15% versus last year. What we see also looking to our order portfolio is bringing us to this number, million more or million less, it doesn't make so much difference. Our priorities remain to the one I mentioned before, so to defend our market share, to defend our growth -- branded growth in North America, to keep enlarging our product range and distribution and for what concern the Motor division, to complete the hydrogen certification and moreover, to start producing heat pumps in order to be ready first of January to share to our customers. We are foreseeing an operating margin drop versus last year of almost 50 basis points and a leverage that will be in line with what we are commenting now for quarter. Ready to start an year that will be difficult 2024. We know there are no reasons to imagine that the demand dynamics, at least in the first 3 quarters, will be different from the one we are living now, but there will be pool of projects that will start delivering some results. Thank you.

This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions] The first question is from Alessandro Cecchini of Equita.

I do one by one in order to be more effective. So my first question is about the potential sales contribution in 2024 coming from new products, new clients like Home Depot and potentially new products also in the Motor division. So in -- for the heat pumps, if you could elaborate a little bit more how much sales you expect considering, I will say, flattish market, as you recently said, what kind of additional sales you expect for next year coming from these bulk?

Thank you, Alessandro. So cooking business, what we expect from, let's say, new projects or new customers or what has been launched by the end of this year. So we are not fully visible in 2024. Now I will consider it as a delta versus this year. We expect EUR 3 million more or less coming from North America -- sorry, coming from new customers and Southeast Appliances, mainly Southeast Appliances, now that started in September, so add a minimal carry over also into next year. We expect almost EUR 3 million on top of the EUR 2 million that we will have in 2023 coming from new products. Of course, we are being totaltive in this approach because a market that is suffering [indiscernible] which is not, how can I say, receiving at this [indiscernible]. We expect another couple of million coming from B2B projects. So new customer broad-range complexion initiatives that will see the beginning in some cities in the second half of next year, but that are already under approval phase from our customers. So we have them in our hand. This means roughly EUR 8 million of beneficial effect of new initiatives. For what concern, Motor division, we -- in this moment, we are foreseeing 30,000, 40,000 units dialing with our main heat pump customers, which is [indiscernible]. Also, a lot of this depends from their visibility on their market as we probably mentioned in another couple of meetings their forecast at the beginning of the year, I met them in February was 100,000. But if we invested to double our production capability within this year, it would have been also almost 150,000. Then it become 70,000. Now what we understand dealing with them is that 30,000, 40,000 should be a safe baseline for 2024. This means revenue-wise, roughly EUR 3 million additional revenue. So let's say, 8 plus 3, we expect EUR 11 million coming from new products and customer initiatives.

Okay. And also about -- speaking about next year 2024. So I was just wondering if you could elaborate a little bit how much of organic sales growth you need in order to, I would say, achieve 6% or 7% EBIT margin that was -- I mean, your previous, I would say, target in terms of adjusted EBIT margin. So just to have a sort of sensitivity, of course, given the current macro condition, it is difficult, but maybe sensitivity could be interesting in order to understand if for instance, with this 2%, 3% organic growth, what kind of margins you can have next year, all other, I mean, cost items remain at these level?

Okay. Here is -- I'll try to arrive there step by step. So we achieved a 6% EBIT margin in 2021, where volumes were running. There was no -- that much of inflation. Because if I remember well, the inflation effect started in the second half of the year. But we didn't have a completed -- I'm not -- we were announcing, so we didn't start the relocation of our industrial assets in Poland. Then we did with EUR 542 million revenue. The following year, the revenue was EUR 549 million, something like that. There was a huge inflation, EUR 60 million, and there was not, again, we increased our prices, so we reduced brutally, I would say, our cost base and we closed with the 6%. This year, the market -- starting from the second part of last year, but this year, almost full impact on the year, the market is absolutely suffering. So this minus 15% is what we imagine will represent [indiscernible] year-on-year. We are getting a benefit of, I would say, EUR 7 million, 8 million from price reduction inflation on raw materials, components and energy. But we have implemented last year our industrial footprint [indiscernible]. That means that we will close with an EBIT of 5.5%. So we have recovered [indiscernible] we have lost EUR 6 million in volumes. In my point of view, with the top line in the region of EUR 120 million, 130 million, we go largely above 7%. At the same time, as I mentioned during the advertising part of the presentation, next year will be an important year in which we will reduce -- we will keep under control our cost base as we did basically in the last 2 years. But at the same time, we have to invest in ourselves, in our visibility, in our distribution and in our customers in order to push the new products, the new brands more, I would say, effectively than we did silently this year. So again, the potential is still there -- is absolutely there to do more than 7% or 8%, let's say is a matter of keep delivering the projects and [indiscernible] market to normalize [indiscernible] appliances market, plus 1, plus 2, minus 1 and minus 2. But again, with this potential now we have also to invest in our new product range in our catalog in the distribution, in the display of our customers otherwise. We have a lot of new things, but we are not communicating them in a proper way, also in a future perspective logic.

Okay. So -- okay, thank you for this comment. And about -- I mean, tax rate, I saw that was -- I mean, still around 22%, 23%. I was wondering if this level is something that after the reorganization, is your new normative level in terms of tax rate? And if you could elaborate a little bit more on your net financial expenses for the 9 months?

Thank you, Alessandro, for the question. Starting from the tax rate. Year-to-date, yes, it's right. We are around 22% of the tax rate on average, respective to the last year that was around [indiscernible]. The reason yet, partially coming from the new organization, so the movement of the production to Poland due to the fact that we have a good tax rate [indiscernible] belonging to economic special zone in terms of tax regime, so we have a contribution from this point of view. The second reason is coming also from the mixed region. The current year, what's happening in terms of [indiscernible] that due to the fact that the Mexican region, the American region is performing worse versus the last year and it's the region with the highest tax rate for the group. This gives us a positive tax rate mix. So we have 2 double effects. The positive contribution of Poland and also the unfortunately negative mix coming from the Mexican region. Regarding your second question of the financial costs. So thank you to the fact that, as you know, the main part of our long-term EBITDA debt is referring to the club deal that we closed in 2020 [indiscernible] fixed tax rate that has been -- interest rate, sorry, 1%, around 1.2% where we are not seeing our numbers for a big impact in terms of financial costs. We expect the last year, the impact is also related to the short-term financial -- short-term debt. And as more part of mid-time that we with that on top of the [indiscernible] bill. Overall, the total amount is less than EUR 1 million more than the last year.

So basically, out of EUR 4.3 million?

Sorry. Roughly EUR 600,000 that is coming from short-term interest rate and EUR 400,000 that's been coming from the mid-term.

Okay. I was just asking, I mean, out of EUR 4.3 million of financial expense, how much were poor financial expenses and how much is ForEx, something that is, I mean, nonrecurring, I would say.

Around EUR 2 million are related to the financial costs. And the last year, as you know, there was the positive impact of the [indiscernible] that has been absorbed during the last part of the year. So for the moment, you still see a negative impact of financial cost versus the last year because the last year, in the first 9 months, there was a positive effect of labor.

The next question is from Emanuele Negri of Mediobanca.

I have two questions. The first one is about demand. You said that you do not expect demand to stabilize or to improve in the last quarter of this year, in both the business units, Cooking and Motors. So I was wondering when do you think that recovery will start, also considering that next year, starting from the first quarter, will have an easier comparison base. So this is the first one.

So when do we think that the recovery will start, is difficult. We would be -- everybody will be rich if we know the answer. Apart from the jokes, Emanuele, one thing we're sure Motor division [indiscernible] toughest one, but an easy one to answer. Motor division started to drop dramatically in June. Now this didn't affect our performance in the first 6 months, which remained positive or in line with the previous year, but is strongly evident in the second half of the year. Now it is, I would say, reasonable to imagine that this minus 30%, maybe minus 20%, 25% will carry over at least, I think, the first half of the year. So there are no reasons to imagine that something will change. There is a destocking phase that needs to be evaluated for sure that may decrease the effect of this drop. But for sure, the first 6 months in the Motor division will be tough. Then we expect the demand in that specific segment to normalize, so to be -- to represent the next baseline. For Cooking division, we imagine that we are almost there despite the data of the third quarter are scary because to be minus 10% versus last year means to be minus 22% or 23% versus 2021, which is a loss. We expect that overall, the demand should have reached this baseline. With some, how can I say, question marks and some opportunities. Opportunities are those markets where the drop was inexplicably too high and that we are seeing with some, how I can say, vital signs like Spain, like some smaller countries like [indiscernible] U.K. The risks are on those couple of markets, which are important markets, France and Italy, where this year, especially in the second one, so far, let's say, we have been very good. And we are market leaders, but we haven't seen a huge drop in the demand like in other markets. So some negative carry overs maybe in this market. Overall, we imagine that the cooking market is the baseline. But there are some opportunities and some situations that we need to understand how they will develop in the next years. We know that kitchen makers, which are a big part of our customer base, especially in Italy, are pushing a lot on promo or motivation on sales plan in order to give some positive signals to a market that they expect to understand is not growing -- is still suffering.

And the second one is on the Motors division. Can you provide us a bit more of detail on the trends in the deferral part category, meaning the heating part and the ventilation part. How was the trend in the third quarter? And if you see a different trend in the next quarter?

I would say that the next quarter heating, which is the one -- which is suffering the most, is coherent with the graph that Stefania showed during the market trend part of the presentation. So in that chart, that was already showing a minus 30%, Germany was missing. Now Germany dropped down from July on. So what we see is a minus 25%, minus 30%. Just to give you some reference, a customer like Vaillant that were used to buy 22,000 to 25,000 orders every month in Quarter 3 was ordering an average of 5,000, 7,000 orders per month. So now we see a small improvement in the very last part of the year. But again, it's not that much significant to show a trend inversion. Now we're still there. The ventilation part is coherent with what we see in our ventilation business in the appliance is one, our [indiscernible] division produced Motors for heating but also for ventilation, so [indiscernible] and ovens. And the trend is exactly the one we see on the B2B side of -- because our customers are the big OEM brands own our cooking business. So again, we do not expect any different signal of any improvement so far and we don't expect the trend inversion next year, a flattening of the trend, so baseline, probably yes.

[Operator Instructions] The next question is from Carlo Maritano of Intermonte.

I just have a couple of questions. The first one is on investments. In the first 9 months, you have done almost the same investment over the last year. So I was wondering if you expect in 2023 CapEx to amount broadly to the same level of last year. And finally, on raw materials. In the previous call, you indicated some EUR 3 million to 4 million of improvement in the second part of the year. I was wondering if you think this estimate to be still reasonable or if you have seen any movement in raw material prices that could change this view?

Okay. Regarding the CapEx investment. Yes. In terms of investment, we are aligned versus last year. But our estimation that due to the reduction of volume also due into the protection of the -- our net financial position, we are seeing the priority of the CapEx according to the strategic investment. So we are carrying on all the investments that are strategic for our group for the future. And so -- at the same time, to keep percentage that is almost in line at 4% that is [indiscernible] the EUR 23 million that we did the last year, but we are around EUR 19 million, 20 million of CapEx. If you remember the last year, during the Q4, we did almost 40% of the total CapEx of the year. So during the current year, we review our priority according to growth. The second question is relating to the raw material. In terms of raw materials, during the current year, [indiscernible] the EUR 60 million of impact that we got in the 2022. We -- the expectation is to see around EUR 8 million of a positive effect. So to recover the 15% of the total cost from the last year. In terms of raw material trend for the next year, we are seeing that there are -- we expect to recovering almost the same percentage. So almost the 15% growth for the next year, that means around EUR 8 million that is coming from cooking for the raw material like carbon steel, steel and we are also [indiscernible] in some of electronic parts, we don't see any kind of recovery in terms of price but we are doing to review our source, so try to introduce also that will [indiscernible] so leverage the price in terms of negotiation. So we expect this on cooking to get around EUR 5 million positive effect. And in terms of Motors, we expect it to have the remaining amounts that are around EUR 3 million that is coming from the magnetic [indiscernible] , a small amount of copper. So roughly, we expect it to have the same impact of the current year. So into Q3, recovery almost 50% of the impact that we recorded in 2022.

The next question is a follow-up from Emanuele Negri with Mediobanca.

Yes. Just a quick follow-up. I know that the context -- the market context is quite tough and maybe you are prioritizing other investment categories. But do you see any opportunities from M&A emerging from the current declining valuation in the reference market?

Yes. We do. As we mentioned in other location is a complicated process, especially in a moment in which the market is [indiscernible] to be going down. And this is what's happening in the stock exchange, but it doesn't happen in the world outside of the stock exchange. We have some initiatives that we are working on, again, always in the direction of range completion and geographies tolerate. So we are not, how can I say, -- it remains one of the priorities that we are working on. With the proper time, considering also the situation, considering also how much it costs [indiscernible] it must be a project that is not diluted in our margins and that come back with rates to pay in the region of 6%, 7%. So it must be really effective.

Mr. Cocci, there are no more questions registered at this time. You have the floor for your closing remarks.

Very good. Thank you for joining our call. Thanks a lot.

Thank you.