Earnings Call: H1 2021

Aug 4, 2021

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Karel First Half twenty twenty one Results Conference Call. As a reminder, all participants are in listen only mode. After the presentation, there will be an opportunity to ask questions. At this time, I would like to turn the conference over to Mr. Francesco Nalini, CEO of Karel. Please go ahead, sir. Thank you. Good afternoon, everybody, and thanks for joining our call for the presentation of the first half 'twenty one results. I'm now starting from Page two with a recap of the main corporate events related to the execution of the group strategy. In this period, we started construction of our new plant in Croatia intended to support our growth in EMEA as well as to increase the resiliency of our supply chain. This plant will start operating at the 2022. A new Board of auditors and a new Board of Directors were appointed by the shareholders, and tasks and powers concerning ESG were assigned to the Director, Carlo Akerosziluchani. As anticipated, we strengthened and accelerated our M and A activity, and we pursued two opportunities in this period. We acquired 51% of the share capital of CFM, a system integrator very strong in services on the Turkish market and a long standing distributor and partner of ours. We also completed the acquisition of 100% of the share capital of Engenia, a leading company operating in the ventilation and air handling unit sector. I will spend a few words on Engenia at the end of the presentation. We also entered into our first sustainability linked loan for €20,000,000 linking the loan specifically to achievements in gender equality. I'm now moving to Page three with the main financial highlights. Basically, Q2 confirmed the already excellent performance that we had in Q1. Revenues grew by 25.9%. If we exclude the positive effect of the consolidation of CFM for approximately €1,600,000 for one month as well as the negative effect of the exchange rate, the real like for like growth was 27%, so even more. All regions and markets contributed to this achievement. Of course, the background is one of strong economic recovery in most of the world. However, we continue to execute our strategy of end user engagement efficiency and for the transition to sustainable refrigerants. And thanks to this, we managed to seize very important opportunities in several key strategic applications like indoor air quality, data centers and heat pumps. In Food Retail, we continued to expand our market share, but we also benefited from an expected recovery in the investment cycle. On top of this, we saw a strong recovery in the most like HVAC Industrial as well as Foodservice that had a strong recovery almost all over the world. Adjusted EBITDA margin was 22.4%, basically in line with the first quarter, up three twenty basis points on the 2020 and two seventy basis points on the full year 2020. This excellent performance was driven mainly by operating leverage but also through the continuous execution of the efficiency measures that we started taking last year. All of this offset the increased costs caused by the situation of raw material shortages. Organic net financial position basically saw net of the M and A activity decreased by 13%. We had a free flow of operations of approximately €37,000,000 that easily covered €13,000,000 of increase in net working capital, euros 7,000,000 of CapEx and €12,000,000 of dividends. I'm now moving to Page four, where we can see some more details. So revenues at €202,600,000 grew by 25.9 from the €161,000,000 in the 2020. As we can see on the top right, we also had an increase of 21.4% compared to the 2019, which was not affected by the pandemic. If we exclude the negative effect of the exchange rate, fixed exchange rate revenues grew by 28%, so almost 30% growth. EBITDA at €44,100,000 grew by 42.9% from the €30,900,000 of last year. And if we adjust for some nonrecurring items, which are basically expenses related to our M and A activity, EBITDA adjusted was €45,300,000 growing by 46.3% and representing 22.4% of sales. Net profit was 26,800,000 up 64.4% from the €16,300,000 of last year. This is thanks mainly to the operating result but also thanks to a significant reduction in the tax rate compared to the same period of last year, mainly due to a favorable geographic profit mix, as we will see in more detail in a few minutes. CapEx at €6,900,000 grew by 37.1% from the €5,000,000 of last year, and this CapEx also starts to include some expenses related to the construction of the new plant in Croatia. I'm moving to Page five, where we can see the revenue breakdown. To the left, there's the breakdown by region. All regions had an outstanding performance. EMEA grew by 26.2% net of the foreign exchange, with a very strong performance in all applications. APAC grew by 40.9% net of the foreign exchange. Here, we have a really outstanding performance in China, but also a strong recovery in South APAC. In China, in particular, our strategy of end user engagement and innovation for the local market is delivering results in some key applications like, for example, data centers and indoor air quality for the local market. In North America, we had a strong impact from the foreign exchange, but net of the foreign exchange, sales grew by 18.1%. In Latin America, sales grew by 72.5 net of the foreign exchange. And here, we have a recovery in also the countries outside Brazil. So this very good performance basically involves the entire region. To the right, we can see the breakdown by market. HVAC grew by 25.6% net of the foreign exchange. Again, here, we have a confirmation of a strong performance in key applications like data centers, indoor quality, health care as well as heat pumps, plus we have the recovery of the cyclical industrial applications. HVAC commercial in Europe saw a slight recovery. However, the full effect of the investment cycle in HVAC commercial will be probably visible from our standpoint in the next six to twelve months. Refrigeration grew by 33.4% net of the foreign exchange. We confirm an excellent performance of food retail, where the market share growth is compounded by a recovery of the investment cycle. Plus, we had a strong recovery all over the world of the foodservice application. So the core business, net of the foreign exchange, grew by 28.3%. The no core business grew by 7.7%, and so the total result, of the foreign exchange, is 28% growth. I'm now moving to Page six, and I leave it to Nicolas to comment the items below the EBITDA. Thank you, Francesco. The Slide number six details the group result from the EBITDA to the net profit. The first half of twenty twenty one was impacted by G and A pretty in line with 2020 level. In the period under review, the financial charters were higher compared to last year due to an increased effect deriving from the IFRS 16. The ForEx impact in the 2021 was a loss for around 250,000 compared to a gain of around 30,000 realized in the 2020. It was mainly related to the group operation in Brazil, Croatia and China. In the 2021, the result of the company consolidated with the equity method was a gain of 618,000 compared to a profit of 250,000 of the 2020. The tax rate of the period was equal to 19.9% to 23.1% of the 2020, originated by a different country mix. The group net profit of the 2021 was equal to €26,800,000 compared to €16,300,000 of the same period of twenty twenty. Slide number seven shows the net financial position evolution of the 2021. Net of the M and A activities, the net financial position was improved compared to December 2020 level, reducing from €49,600,000 to €43,300,000 The free flow from operation was equal to €36,700,000 higher than the CapEx and the increase of net working capital of the period. The organic increase in net working capital was mainly driven by strong growth of revenues and to a planned increase in inventory to better cope with raw material shortage and the seasonal effect in account receivables. It should be noted that the DSO at the end of the period improved compared with the same period of last year. During the 2021, the company paid a dividend of €12,000,000 and the net financial position was impacted by M and A activity, which implied payment of around 35,600,000.0 At the June 2020, the net financial position of the group was equal to €78,900,000 Taking out the accounting effect of IFRS 16, the net financial position with banks amount to €50,200,000 and even significantly below EBITDA. At the December 2020, the group at the June 2021, excuse me, the group has an amount of cash, cash equivalent available to credit line of around €90,000,000 I leave the floor to Francesco to go on with the presentation. Thank you, Nicola. I'm on Page eight. So to summarize, on the demand side, we have a background of strong economic recovery almost all over the world. However, in this context, we continue to seize strategic opportunities executing our strategy of end user engagement and innovation for our service. On the operations side, of course, we had the impact of the global raw material shortage, but in this period, this was mitigated thanks to a number of countermeasures that we took in the last twelve months: increased flexibility through the deployment of new production lines homologation of alternative components, even alternative microprocessors as well as an increase in inventory. So in this period, the effect of the shortage was mitigated by the actions that we took at the 2020, While the actions that we took at the 2021 during this six months will be visible mainly starting from the fourth quarter. Am I referring in particular to the homologation of alternative components? So for these reasons, probably Q3 will be the most impacted quarter of the year. But in any case, the tensions are expected to continue at least for the second half of this year, and they are still pretty challenging. All of this led to a confirmation of the ten year record growth rate in revenues that we reported at the end of Q1 with an EBITDA margin significantly higher than 20%. As anticipated, we improved our M and A activity, and we used our strong balance sheet to pursue two important opportunities in this period with two bolt on acquisitions, CFM and Ingenia, that are fully in line with our strategic guideline. So to conclude, taking into account the very positive trend experienced in the first half as well as the indications from the current order intake without any worsening in the current scenario with respect to the pandemic and the raw material shortages, we expect to achieve an organic revenue growth rate between 1520%. We, therefore, improve the view that we had at the end of the first quarter. Before leaving it to your questions, I'm now moving to Page 10 with a few words on the last acquisition, Engenia. Engenia is a leading manufacturer of components for air handling units, mainly dumpers to control the airflow. Ingenia has been constantly growing in the last few years. However, like for recuperator, we intend to accelerate the growth of Ingenia using our sales footprint since currently Ingenia does not have an international sales force. Besides commercial synergies, we also in any case, the industrial rationale of this acquisition is basically expanding our offering for air handling units. Air units represent a strategic application for us for a number of reasons, not least because it's expected to grow significantly, thanks to the increased sensitivity to indoor air quality as well as to the energy efficiency of buildings. We also expect significant operating synergies with Recuperator. The two companies are actually geographically very close, and in fact, the entity that acquired Engenia was Recuperator itself. Sankey Data, revenues of Engenia last year were €12,300,000 with an EBITDA of €1,500,000 Enterprise value was €12,400,000 corresponding to approximately 8x the EBITDA. The impact on our net financial position, therefore, is very sustainable, and this represents a bolt on acquisition. Thank you so much for your attention. We're now more than happy to answer to all of your questions. Question session. The first question is from Alessandro Torstra with Mediobanca. I have four questions, if I may. The first one is related to the CapEx and investments that you are planning to do because if I remember well, you were planning to spend around €20 euro million, and I'm assuming that probably you should speed up, okay, the pace of investments in the second half, but I would have, let's say, a confirmation on that. The second question is on the shortage that you mentioned before. Are there any specific area, I don't know, Europe, for instance, or Western Europe, where we are going to see this tougher impact from shortage? And in terms of the geographical mix, can you comment a little bit also the performance for North America that if understood well from the first quarter to the second quarter slowdown? So if there are any specific reason at constant effects that explain this trend? The third question is on the Turkish acquisition. If understood well, you're going to let's say, the minority stake, 49% is going to take a valorization of almost EUR 50,000,000, something like that. Can you explain at least or give us a qualitative indication of what are the underlying assumption behind these huge amount for this minority stake considering that you paid the 51%, 23,000,000? And the last two questions around the cash flow side. If you can, first of all, confirm to us that the overall buildup you made at working capital in the first half more or less should be stable going forward? And on tax rate, if this level of 20% is overall sustainable for you? Mr. Nalini, maybe your line is on mute. Mr. Nalini, please check if your line is on mute. We cannot hear you. Ladies and gentlemen, please hold the line. The conference will resume shortly. Sorry, Thank we had some technical problem. And so with reference to CapEx, confirm you the level, Alessandro, and we are confirming to arrive around to €20,000,000 of CapEx. Anyway, you know, it could happen that some projects will shift from one month to the other, and so there could be some adjustment at the end of the period. Anyway, the CapEx projects are confirmed and we are going to invest on this. Then with reference to CFM, were asking how we put a liability in the balance sheet of around €49,000,000 that is a relevant amount. To make this evaluation, we were supported by an external consultant who took the contract and even the business plan that we have prepared with the seller on the who is still involved in the management of the company on the future evolution of the business plan. And so it is based on this and the technicality that was used from the consultant. It was a model, sort of Monte Carlo model, where it made several different scenarios and to each scenario was based on a different probability. And so it is mainly based on the expected evolution of the business of the new subsidiary. Then there was, I think, a question about the working capital. And the working capital of the period, what you see, it takes in consideration even the acquisition that we made because we made the consolidation full consolidation from the balance sheet set point, of Engenium and even CFM. Anyway, we can confirm you that our aim is to have a level of working capital, even taking special these two subsidiary of around at the end of the year of around 16% of net sales. This is the target that we have even because our aim is to have an inventory level that is in line with the needs of our customers. Then you were asking about the tax rate level for the future. And from this year, we are taking benefit even of the step up mechanism that was applied two years ago. And we believe that 20% should be a sustainable level for the group for this year. Now I'll give Francesco to comment about Yes. The shortage and the Thanks, Nicolas. So let's say in terms of geography mix, the shortage is basically affecting all regions. Let's say that currently, probably, we expect a slightly higher impact on HVAC, more than on refrigeration concerning the specific product and component mix. So let's say, the differentiation is more market related than geography related. Of course, we are taking all the countermeasures, and in particular, demologation of alternative components has been mainly addressed to HVAC just because of this reason. In terms for as far as North America is concerned, the reason why there was a slight decrease in the growth rate is basically related to HVAC because growth the growth rate in Refrigeration improved. We had a slowdown in HVAC, but HVAC OEM especially is tends to have cyclicalities from one quarter to the other related to a number of factors. So we are not absolutely concerned about the performance of North America looking forward. And we are still in the process we are starting execute all the actions to improve our performance there. So basically, this is a contingent fluctuation mainly related to HVAC OEM. The next question is from Will Turner with Goldman Sachs. Alessandro many of the questions that I had, which is quite useful. So you've already touched on some of them. But I want to go into a bit more detail on your comments on the electrical component shortages. And just you mentioned how it could get worse in the second half of the year. Could you just give a bit more color on how that's going to impact for you and whether it's quantifiable to the extent that it's going to be worse? Because when I look at the 2Q results, it does look like it has had an impact because the cost of material and components as a percentage of sales is higher in 2Q 'twenty one than it has been in historical years. But you obviously still managed to achieve a quite good profitability by historical standards. Is that going to get worse and therefore we should expect lower margins in the second half of the year? Or is it that sales might be worse because you can't ship products because you don't have the components in order to finish assembly? Okay. Thanks, Will. So the impact on the second half from the cost standpoint, let's say, will be more visible in the second half than in the first half because, of course, from on the P and L, it will be we will the effect will be more visible now going forward. However, we are still talking about a low single digit cost increase for the raw materials. So it's something manageable. And we are in the process of recovering most of it through prices. So that will translate probably to some margin deterioration, but nothing too meaningful or scary, let's say. The impact will be definitely more visible on the top line growth because basically, it represents a bottleneck on our possibility to grow. In fact, our guidance of 15% to 20% organic growth for the full year basically reflects our assumptions and uncertainties related to how much this bottleneck will affect our possible growth rate. So but in general, the effect would be, let's say, more visible in terms of limiting the potential for growth rather than on the cost side. But that's quite interesting. I mean if you didn't have the bottlenecks from these components, do you have an estimate of how much you think you would have been able to grow this year? Or is your orders running a lot further ahead of your sales? Well, definitely, definitely. The demand is definitely higher than sales because there's this supply chain bottleneck. So the order portfolio we have is very high. Demand is extremely positive. But unfortunately, we have this bottleneck related to the raw material. Then, of course, we're trying to mitigate as much as possible, but demand would be definitely higher. Okay. And then my final question is on the end markets you're exposed to. It feels like most of them are obviously very favorable. Commercial buildings has obviously been one of the relatively weaker ones, but a very important one. Your comments that you made around the next on the cycle for commercial HVAC, to become more apparent over the next six to twelve months. So just so that we understand that, you're expecting commercial HVAC to see stronger growth in the next six to twelve months? And then is there any of your markets now which you see easing or where growth seems to have peaked and you think will be weaker over that time horizon? Okay. So yes, what you said is right. So commercial HVAC is recovering. So it's growing. And now not considering like projects related to indoor air quality because those are performing very well. The rest of commercial HVAC is improving. Already on the end market in Europe, we are seeing definitely a more positive outlook for commercial HVAC. So the end market is already picking up. However, we are late in the cycle for the end market in commercial HVAC. So that's why we expect to see a more significant improvement in the next six to twelve months. So it's already growing. It will we expect it to grow even more in the next six to twelve months. And probably, it can be a medium term growth due, for example, to the attention, the focus on the energy efficiency of buildings in Europe. Sorry, And then what was the second the second question was, is there any of your kind of end markets which you think may be easing in growth over the next six to twelve months? Okay. No, not really. Not really. We have a very positive outlook on the demand side on all applications, with some of them that have the potential to grow even more. The next question is a follow-up from Alessandro Tortora, Mediobanca. The question was, let's say, just a follow-up related to the discussion we made on the profitability. Just to understand that, considering the trend experienced in the first half, Are there any specific reason why we, let's say or maybe there are some specific reason why we shouldn't be, let's say, marginally better than your historical range between 1920% because clearly, we have such an improvement in the first half. And if, let's say, the shortage is much more related to slower deliveries instead of, let's say, additional cost, I guess, maybe we could be a bit better than these historical guidance that you gave us? Okay. Let's say that in the second half, we expect the profitability to converge towards our historical target, which is between 1920%. The reasons are basically three. One is the fact that we have we will see as mentioned, we will see more the impact of the cost of the raw materials. Again, we will we're working to mitigate most of it, but of course, it will show some additional deterioration on profitability. The second reason is because every fourth quarter of the year, profitability tends to go down because typically, the fourth quarter is softer in terms of profitability. And the third reason, which is also the most uncertain, is related to the top line growth because, of course, we have an important operating leverage. So the real extent of the top line growth will have a very strong effect on the final profitability. So in case the top line growth will be in the high end of our range, then of course, we can also expect our profitability to be in the high end of the range. So let's say, we expect a good profitability this year, but converging towards our historical target due to these reasons. Mr. Nalini, we have no more questions registered at this time. Okay. Thanks, everybody, for your attention. I'm looking forward to talk to you again for the presentation of the third quarter 'twenty one results. Thank you so much. Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your