Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining the Carel Q1 2023 results conference call. As a reminder, all participants are in listen-only mode. After the presentation, there will be an opportunity to ask questions. Should anyone need assistance during the conference call, they may signal an operator by pressing star and zero on their telephone. At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO of Carel. Please go ahead, sir.
Thank you. Good afternoon, everybody, and thanks for joining our call for the presentation of the Q1 2023 results. I will start from Page two with the main highlights of the period. I'm very pleased to report that Q1 2023 was the ninth consecutive quarter that Carel reported a double-digit organic growth in revenues, in spite of some very challenging supply chain issues in the first weeks of the year that did not allow us to express the full growth potential. Profitability was also very good, with an EBITDA margin very close to 21%.
Revenues grew in the quarter by 24.8% over the Q1 of 2022, with an organic growth of 11.3%, exceeding the expectation provided in March, thanks to the capacity of the group to mitigate the strong supply chain issues experienced at the beginning of the year. We continue to record a very positive demand in HVAC, in particular heat pumps, data centers, and indoor air quality. This offset the expected temporary slowdown in refrigeration that started to materialize, and that is due to the uncertain global economic scenario, as well as to cost inflation. EBITDA margin was 20.8% of sales, above the 20.5% of the full year of 2022, and slightly less than the 21.1% of Q1 2022.
In spite of the fact that in this quarter we had high marketing expenses due to the group participation to two very big trade shows, not present last year, and that we have the slightly dilutive effect of recent acquisitions we made, particularly Klingenburg. This result is due to the continuous deployment of the effects coming from previous price increases and from positive operating leverage, offsetting raw material cost inflation, which is still present this year, even if to a lower extent compared to 2022.
The net financial position at the end of the Q1 is substantially in line with the full year of 2022 due to the acquisition of Eurotec and also to an approximate EUR 20 million net working capital increase related to higher inventory and also to higher receivables, which in turn are due to the fact that in March we had a strong sales recovery after the supply chain issues of January and February. This receivables effect is of course, absolutely temporary, and the quality of our receivables is at record levels. I'm now moving to Page three for some more details on the results. Revenues at EUR 161 million grew by 24.8% from the EUR 128.9 million of Q1 2022, with EUR 14.6 million coming from organic growth and EUR 17.4 million coming from M&As.
This is the third consecutive year in which the group reports a top line growth exceeding 20% in Q1, and also the ninth consecutive quarter with a double-digit organic revenue growth at 11.3%. This is remarkable, especially if we consider the fact that we had a very challenging supply chain scenario, as you know, at the beginning of the year, and so we're not able to fully satisfy demand. EBITDA at EUR 33.4 million was up 22.8% over the EUR 27.2 million of Q1 2022 and was 20.8% of sales, slightly down from the 21.1% of Q1 last year.
Again, we have to consider on the OpEx level that we participated in two very important exhibition in this quarter that were not present last year, and also that we had a slightly dilutive effect coming from recent acquisitions, especially Klingenburg. Of course, as you know, over time, the profitability of these companies will increase thanks to the execution of their integration. Net profit at EUR 18.5 million grew by 13.2% from the EUR 16.4 million of last year, benefiting from the operating results but discounting a tax rate at 22.3%, which is in line with the full year of 2022 and with expectations. Is higher than Q1 last year when it was 20.5% due to a different country mix and regulatory changes, especially in Croatia.
CapEx were EUR 3 million in the period, down 35.3% from the EUR 4.7 million of last year due to a different quarterly distribution. We confirm, in any case, our expectation of approximately 5% of revenues for the full year. I'm now moving to Page four for the revenue breakdowns. As usual, to the left, we can see the regional breakdown. In EMEA, sales grew by 26.2% net of the foreign exchange, close to 13% like for like, mainly driven by HVAC applications like heat pumps, data centers, and ventilation. In APAC, sales grew by 13.6% net of the foreign exchange, mainly driven by HVAC. In China, the market is gradually improving. In Q1, we had positive results from heat pumps, also for export to Europe, and from applications related to electrification like energy storage.
North America grew by 32.6% net of the foreign exchange, with a strong contribution from the Senva acquisition. Organic growth in the region was heavily impacted in the quarter by the shortages issues we had in January and February, but the situation is improving fast. We're having also in this region, interesting developments from electrification applications like battery storage. South America grew by 9.5% net of foreign exchange, in spite again, of a strong impact coming from the supply chain issues. To the right, we can see the market breakdown. HVAC grew by 39.4% or approximately 20% organic. It was an excellent result driven mainly by heat pumps, data centers and ventilation.
This offsets the softer result in refrigeration that was basically flat in the period due to a stronger impact of the raw material shortages in the period compared to HVAC as anticipated, and also to an expected deceleration in demand in food service and food retail. We believe this deceleration is temporary, and we're optimistic about a gradual improvement in the coming quarters, also because of the strong secular investment growth drivers and their opinion in the food retail sector. Just a quick comment on the no core. It declined by 59.3% in the quarter following the expected exit of the group from this business, accelerated by the divestiture of a small activity in this field that took place last year, which was not material on the overall group results.
I now leave it to Nicola to comment the items below the EBITDA on Page five.
Thank you, Francesco. The Slide five details the group results from the EBITDA to the net profit. The Q1 , 2023 was impacted by higher D&A costs related to the purchase price allocation from M&A activities for EUR 600,000 and the relevant investment in CapEx in the last years. The financial charges increased for the impact of the interest rate evolution. It should be noted that the increase is mainly influenced by accounting matters like the timing effect of the full consolidation option on CFM, and at the IFRS 16. The tax rate of the period was around 22.1%, higher than last year, mainly due to a different country mix. The minority result increased for the good performance of the Turkish legal entity, CFM.
The group net profit in the Q1 2023 was equal to EUR 18.5 million compared to EUR 16.4 million of the same period of 2022. Slide six shows the net financial position evolution of the Q1 2023. The flow from operation was strong and equal to EUR 27.1 million. The increase in net working capital was mainly driven by strong growth of revenues and to the increase in inventory influenced by the shortage of components. It should be noted that the DSO is better than the same period of last year, and the overdue of account receivables is at a minimum level of the last years. Taking out the effect of IFRS 16, the net financial position with banks amounts to EUR 64.4 million, a level significantly below the twelve-month EBITDA.
I leave Francesco to go on with the presentation.
Thank you, Nicola. I'm on Page seven for the closing remarks. In Q1 2023, we reported a double-digit organic revenue growth for the ninth consecutive quarter, in spite of very challenging supply chain issues in the first weeks of the year and in spite of the expected slowdown in refrigeration. This is a confirmation of the capacity of the group to execute and also of the resilience of the wide portfolio of products and markets and geographies that we serve. Most of them enjoy secular, medium, long-term growth drivers, but they have different short-term cycles and scenarios, providing great resilience to our business model. The M&A activity of the group continued in Q1 2023 with the acquisition of Eurotec, a distributor and system integrator based in New Zealand and a long-time commercial partner of Carel.
This is in line with our strategy of deploying a direct sales force globally to better control the commercial deployment of our technologies and services. Several work streams have been opened to quickly integrate the companies acquired in 2022. In Europe, we have designed the digital integration of Klingenburg. We also started integrating the purchasing and production processes for all the platform companies in the indoor air quality area, namely Klingenburg, Recuperator and Enginia, that share similar materials and production technologies. In the U.S., with Senva, we are designing the roadmap of future product innovation. We already started getting significant commercial synergies from the Senva strong presence in its reference application. Obviously, relevant challenges are still present. The supply chain situation is definitely improving. It's still subject to long lead times and unexpected disruptions on specific components and applications.
On the macro side, the restrictive monetary policy and the geopolitical tensions are having, as expected, an impact on the most cyclical applications the group serves. In particular, industrial HVAC and commercial refrigeration. Industrial HVAC, fortunately though, in some areas that are still performing well, like data centers, and some opportunities like applications related to electrification, for example, energy storage. Another big opportunity is of course, related to the booming TIPA market, as well as to the transition to the low global warming potential refrigerants that is now gaining traction also outside Europe. To conclude, taking into consideration the above-mentioned situation, the group maintains a positive and optimistic outlook for the rest of the year. An improvement in the supply chain is expected, and the slowdown in refrigeration demand should be temporary.
In the first half of 2023, we expect to report the low to mid-teens like-for-like revenue growth at current exchange rates. Thank you very much for your attention. We are now more than glad to answer to all of your questions.
Thank you. This is the Chorus Call conference operator. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. To remove yourself from the question queue, please press star and two. Please pick up the receiver when asking questions. Anyone who has a question may press star and one at this time. The first question is from Niccolò Storer with Kepler. Please go ahead.
Yeah, good afternoon, and thanks for taking my questions. Maybe we go by one by one, Francesco.
Yeah, sure. As you prefer, Niccolò.
Okay. The first one is related to your organic growth reported in Q1. Is it fair to say that the beat versus the guidance you provided in March was entirely attributable to some easing in the supply chain issues, and so to the refrigeration business?
Well, it's definitely related to an improvement of the supply chain issues that affected the capacity of the group to satisfy demand in the first weeks. We do expect a gradual improvement of refrigeration related to the easing of the shortage. Yes, even if the refrigeration demand has been definitely slowing down. We do expect a gradual improvement related, again, as you said, to the easing of the shortage. Yes, yes. Even if in a context, in this very moment of a softer demand.
Okay. The second one, if you can give us a little bit more flavor of drivers behind the 20% organic growth in HVAC by reference market. How strong heat pumps were? How strong was commercial business? How strong was data centers? Maybe also flavor on the refrigeration side with food service versus food retail, if we had maybe a diverging performance or consistent one with the other.
Okay. Yeah. In HVAC, for sure, the fastest growing application is heat pumps. In Q1, the growth rate of heat pumps approximately was in line with the growth rate we experienced in 2022. That was not completely satisfying demand because of course also HVAC was impacted by the shortage in Q1. Demand in heat pumps was high in line with last year. We do expect that we will be able to more, to better satisfy demand in the coming quarters. Also the heat pump application will probably have some improvements in the coming quarters. The rest of HVAC more or less had a similar growth rates between data centers and applications related to ventilation.
Both end markets have been performing well. As I said, we are also having some interesting opportunities in Asia and North America especially, related to electrification, like energy storage applications or battery charging stations. These are not, still not, yet not very big in terms of absolute value, but we're having interesting developments there. Concerning refrigeration, both food retail and food service were impacted by the shortage and had a soft demand. Let's say that in food service, probably the strongest impact was related to demand because of course, the food service market in this moment is pretty soft overall globally.
Food retail has also a softer demand related to the fact, which is very well known, that retailers are not investing because they are facing a reduction in consumption and higher costs due to inflation. Food retail in particular was impacted by the shortage also because for a number of reasons, and one of the reasons is that food retail is more project related and less OEM related. It's less, let's say less, plannable in advance. It tends to be affected more by the shortage. There is also some technological reasons why it was more affected by the shortage. Let's say food service was more related to softer demand. Food service was related to both soft demand and the shortage.
We do expect a recovery in this market already for the shortage, but also in terms of demand, we are optimistic that especially in the second part of the year, we will see some improvement in demand, both on the food service side and on the food retail side.
Perfect. My last question relates to North America. Is it right to say that without taking into account the Senva contribution, your revenues would be negative year-on-year? If yes, how do you explain that? Thank you.
No, they were not negative organically. We had a slight growth in organic terms in North America. The reason why in any case, growth in North America was not very high, even if we did grow, but the growth was not very high because of especially the shortage, because North America has a strong reliance on programmable controls that were highly affected by the shortage of a specific component in January and February. This slow growth was really almost entirely due to the shortage issue that was present in January and February. The situation is already improving. The refrigeration in North America was pretty soft like in the rest of the world for the reasons I mentioned.
Okay, perfect. Thank you. Thank you. Maybe I come back later with another few. Thank you.
The next question is from Gianluca Pediconi with Momentum. Please go ahead.
Good afternoon, gentlemen, and thank you very much for taking my question. The very first one, I have a few. The very first is on what you wrote in the press release when you mention financial, digital and operational integration, which will be able, will allow to seize important cost and revenue synergies. What would like to understand also from just a qualitative point of view, if they are exceeding your initial expectation. If the integration of Sauber, Arion, Klingenburg and Senva are actually providing more synergies than initially expected. That is the first question. I don't know, Francesco, if you want to go step one by one as with Nicola.
Yes, Gianluca. Okay. Thank you for the question. Yes, these activities basically in terms of digitalization, we're now designing basically the roadmap for fully integrate Klingenburg especially because it's the biggest one and also the less advanced from a digital standpoint, integrated with the systems of the group. The most interesting synergies in terms of results, let's say in the short to mid-term, are related to purchasing and production. You know, we basically built a platform of companies doing having mechanical technologies related to ventilation, which are especially Recuperator, Klingenburg and Enginia, that share very similar production processes and raw materials. We already started getting synergies from purchasing because that's, let's say, the low-hanging fruit.
We're starting getting savings in terms of raw materials. In terms of processes, we are now designing, let's say, the possible integration of some process phases, some production process phases in, let's say, centralizing and integrating them among the three entities in order to have also efficiency, process efficiency savings, definitely much higher than the individual entities. This will deploy their effects more in the, let's say, in the coming years. We're very optimistic about, let's say, the synergies that are operation synergies we can get from having a platform of companies sharing similar technologies. In terms of expectations, I think that the synergies we are getting are basically in line with our expectations.
So far, these recent acquisitions we made are performing basically in line with our expectations. It's too early to say that they will overachieve expectations also because, I mean, the acquisitions were made just a few months ago. We're optimistic that we will at least reach our expectations. There are several opportunities, again, on the operational side for these platform companies to get synergies. Talking about Senva, we are designing the innovation roadmap that of course will deploy its effect in the medium term. It's not short term, but it's extremely promising in terms of product development for the sensor technology also involving Arion, because here we have two platform companies, Arion and Senva for sensors, as well as Carel itself. Here we are designing new, very interesting solutions for the future.
In terms of more short term synergies, we're getting already significant synergies commercially from Senva, because they have a very strong presence in the building application in the U.S. Also in some industrial applications, this is already providing very interesting commercial synergies to North America.
Thank you very much, Francesco. Second question, you were one of the very few, also a few months ago, warning me that the supply chain issue was not over. Now I'm hearing more and more companies complaining of these, of resurgence, of a kind of raw material shortage, at least in some electronic component. I understand that now you are seeing some easing. What I would like to understand is, because of what we experienced over the last two, three years, and because of the erratic supply of some key component, are you planning to manage your stock of some, let's say, important component which may be erratic once again in the future in term of supply, to have a higher stock?
At the end of the day, you will try to optimize your net working capital, and so you will have a greater structure? That maybe is more for Nicola than for you. I don't know who wants to answer.
Sure, Gianluca. As, as you said, and as we said in the last few calls, for us, the inventory in this moment is an investment, trying to minimize any problems to our customers. Until there will be some shortage problems, we want to keep a level that should be higher than our normal level. For this reason, we believe that in the second half of the year, we hope that we are going gradually to reduce the stock. We will do just after that the situation will be better. In this moment, with the information that we have, we hope that from the second half of the year we will improve on this.
Is that a little bit, I don't say, a kind of, risky situation? I'm not suggesting to pile up a very high stock, but combination of a slowdown in the most cyclical sectors and maybe some easing combined with from time to time companies say, "I met with the delivery," then a few months later they are not. Would you not suggest to be maybe a little bit more on the cautious side, have a little bit higher networking capital, but having the possibility to satisfy the demand?
Look, it was. This strategy is already in our plan. I explain better. A few years ago, we were taking the, as a reference, the year-end level. We were around 12%-13% on net sales of the net working capital. Now we are planning that, let's say, by the end of the year, we are foreseeing to stay at 17% level. That is something like this. That is higher than the last year levels. This very-
Okay, that was very clear. Very clear.
Like-
I understand. I understand.
Our target in this moment.
It is all clear. Okay. That's it. Thank you very much for clarifying. Very last question. It's a little bit more a mid-term, so let's say three to five years. One of the strengths, at least, from my point of view of Carel is you have a very wide portfolio of application and solution. Also here, I do not need a number, but in three to five years, how much, roughly speaking, of your revenues you expect coming from, say innovation, which means a new solution, new application, something that you have in the pipeline but is not yet in the market? Just a qualitative indication is more than enough without any details. Probably excluding M&A, I don't know which obviously. I'm just talking organically.
Yeah, yeah, sure, Gianluca. Well, I believe that an important part of our, of our, business will come from innovative solutions. Just an example, we are investing a lot, in, innovation related, for example, to the heat pump, application, which is, an important application for us. The landscape, is changing. Medium term, we definitely, we're definitely investing to play an important role, mid-term in this application, and this is, this will be. A few years down the road, this will be done mainly through new solutions. This is, this is one example of why innovation will play a big role.
Likewise, also our, for example, digital services, which are continuously being developed and innovated, they will play a bigger and bigger role directly and also indirectly by driving sales of other products. Again, sensors, we made investment in sensor technology, and as I mentioned, we are going to invest significantly in innovation there for a number of technical reasons, and that will also be very important. Looking medium term, I believe that innovation will play a fundamental role in our competitive position, as it has always been, by the way, because that has always been the case for us.
Thank you very much, Francesco.
Thank you.
As a reminder, if you wish to register for a question, please press star and one on your telephone. The next question is a follow-up from Niccolò Storer with Kepler. Please go ahead.
Yes. Two very quick ones. The first one, if you can quantify the contribution of higher pricing on your top line growth. The second, since you mentioned twice in your speech, the detrimental, if we can call it so, effect of the these two shares, if you can quantify the negative impact they had on EBITDA. Thank you.
Ciao, Niccolò. With reference to the first question, we can say that the price effect was a mid single digit effect, yeah, on the, on the net revenues. Taking out the effect of, the M&A, the new company that we acquired in 2022, EBITDA level would be around, the 22%.
Sorry, I was asking, how much was the impact, from the participation to the industry fair that you mentioned, in the speech?
Okay. Sorry. I didn't get the second point. Okay.
No worries.
It was around, we can say, around EUR 700,000, and EUR 1 million, taking in consideration all the staff expenses, say around the.
Approximately EUR 1 million.
EUR 1 million, let's say.
EUR 1 million.
Okay. That was.
Perfect. Thank you.
The next question, is from Alessandro Tortora with Mediobanca. Please go ahead.
Yes. Hi. Good evening, good afternoon, everybody. Let's say it's just some follow-up. The first one, Francesco, is on the refrigeration. Considering that Italy, that you were talking about that tempo is low down, and now we're talking about a flattish performance, is it fair to say that the division that Italia will still post a positive, let's say, figure maybe, okay, not in the double-digit space, but, let's say, at least still in the mid-single-digit area? To just understand, because you mentioned before some sequential improvement, the company's forecasting in this division. Thanks.
Well, Alessandro, yes. Well, first of all, thank you for the question. Yes, I think that we can be optimistic to, yes, to reach more or less that level, a mid single digit, which is more or less the, let's say, the historical market growth before, let's say, the COVID disruption. Yes, I believe that we can be optimistic to achieve, let's say, some level of growth in refrigeration that could be somewhere around the mid single digits. Yes.
On the, let's say, pricing side, considering that you had the carryover effect of price increases today, do you plan further price increases, maybe, I don't know, on the HVAC side, much more than ref, considering the soft demand that you mentioned before? Just to understand what is the expected trajectory on the price side this year for you? Thanks.
Yes. We very recently started applying an additional price increase, more limited than the ones we did last year, but we already applied some price increases. We will see the effect in the coming quarters. Again, more limited than last year. Besides that, as usual, we will wait to see where costs will go, taking a reactive approach. Because we adjust prices upwards according to cost. We will see where costs go. We will see, yes, an additional slight positive price effect in the coming quarters and beyond that, we will wait and see the evolution, of course.
Yeah. The reason why, let's say, you announced this price increase is that you see some, let's say, rising cost inflation of some, let's say raw material, maybe in the second part of the year?
Yes, definitely. We still see cost inflation, lower than last year, but still cost inflation.
Mm-hmm.
-is present, definitely, especially in some categories of raw materials. For example, raw materials related to power electronics, inverters, electrification. These are, again, related to demand for electrification, which is booming globally in many, many applications. Here there is a still cost inflation, basically for the pricing policies of the manufacturers of these kinds of components. Yes, we do still see cost inflation present.
Okay. Okay, thanks. The third question is on CFM. This is a company that, considering the line minority is performing pretty well. Can you remind me today, how much you would pay for the remaining 49% stake? There should be, let's say some put and call mechanism, starting from next year, from number 1. Just to have an idea, how much you will pay today for this minority stake.
Yes. In the balance sheet, it is written as, EUR 52 million. 52.
Sorry Nicola, I didn't catch your number.
EUR 52 million.
EUR 52 million. Okay. Okay. Okay. Is it window open also for you next year? You have basically a call option or it's just let's say on the, on the seller side, the option to sell the business next year?
If until 2026, it is just on the seller side. After, there is a call option.
Okay. Okay, thanks. The last question, Nicola, is just for you on let's say two very quick check. On the D&A side, considering that clearly also the impact of let's say the CPA, is it fair to assume let's say the number we saw in the Q1 times four? I know it's very easy, but just an idea of CPA going forward, so around EUR 30 million total number for you for the full year for D&A. Also the net financial charges, you can share with us, considering the current cost context of higher interest rates, if you can let's say share with us, an expectation for this line for the full year effects?
Yes. On the D&A, I agree with doing this rough calculation. Just on the EUR 7.5 million that is inside, just for your knowledge, EUR 1.8 million that there refers to the M&A processes. In terms of the financial charges, you know, during the year, we are foreseeing an increase of effect of the exchange rate, of the, sorry, of the interest rate, and we foresee something more than EUR 4 million, but in this, in this as total financial charges for the year.
Okay. Okay, thanks a lot. Yeah.
The next question is a follow-up from Gianluca Pediconi with Momentum. Please go ahead.
Thank you very much. It's just a quick follow-up. We actually, you mentioned the shortage of raw material. If we shift to the shortage of skilled employees, can you elaborate a little bit what is your hiring plan for the next two, three years? If there is any update on Eastern Europe, also related to the, some university, you know, the agreement or something like that?
Yes, yes, Gianluca. This is of course, for us, like for everybody else in this moment, a challenge to basically get the talent we need to support our growth. The, we are following a number of actions. On the M&A side, now that, the, let's say the presence of a strong technical base is one of the main criteria we are using for our M&A target.
When you buy skilled employees as well?
Exactly.
Not just the company. Okay.
Exactly. For example, Senva has a quite strong skill base in this respect, also the R&D expense they have is in percentage, pretty high, definitely higher than ours. This is now one of the criteria that we explicitly take into consideration when evaluating M&A targets, and this is one direction. Another direction is to open R&D hubs around the world where we believe it's let's say easier to recruit talent. For just for example, in this very moment, we are staffing up our R&D base in China because we have a big R&D office already in China.
Yeah.
We are staffing that up, because in this very moment in China, due to the context present there, it's relatively easy to find very, very skilled engineering talent. In the very short term, this is one direction we are, we are taking. Of course, we are exploring several other locations where we are present, to, to staff up our, R&D base.
Thank you very much. By the way, I loved your disconnection and meeting guidelines. Really great compliment.
Thank you, Gianluca. Thank you very much.
We're about to close the-
Yes, by the way, sorry, Gianluca, just a brief comment on this, just to elaborate a little bit more. Of course, to recruit and to retain talent, it's very important now in this moment to provide a number of things like a flexible workplace. For example, we have a policy such as that the number of work from or remote work days that employees can have depend on the distance from the facility.
If you live above a certain number of kilometers from our plant here, for example, I think 120 km, if I'm not wrong, you can, according to our policies now, fully work remotely, which is very important now to one very important theme to recruit talent.
No, at this point, I agree 100%. These are the intangible, benefits, that new younger talents, do really appreciate. yeah.
Definitely.
I completely agree with you.
Thank you.
Once again, if you wish to ask a question, please press star and one on your telephone. Mr. Nalini, there are no more questions registered at this time.
Thank you so much for your attention. Thank you so much for your questions. I'm looking forward to speaking to you for the presentation of the first half 2023 results. Thanks again. Have a good weekend. Bye.
Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.