Earnings Call: Q1 2021

May 6, 2021

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Corel twenty twenty one First Quarter 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 Engineer Francesco Nalini, Chief Executive Officer of Corel. Please go ahead, sir. Thank you. Good afternoon, everybody, and thanks for joining our call for the presentation of the first quarter twenty twenty one results. As usual, I'm starting from page two with the main highlights. We are delighted to report in this 2021 the highest quarterly organic growth rate ever reached by the group in the last ten years. This is both compared to the 2020 and as well as compared to the 2019. Since in the 2020 our sales results were basically in line with the previous year. So revenues grew by 24% in the period compared to the 2019 or 26.9% excluding the foreign exchange effect. We had an acceleration in results in all regions and in both markets confirming our expectations of an acceleration of the positive trends that we had in the 2020 compounded with a recovery in the most cyclical applications like HVAC industrial, for example in automotive we have more than 30% growth as well as a recovery in food service where we reported a double digit growth rate. This confirms the capability of the group to be not only very resilient as shown in 2020, but also capable of seizing growth opportunities in the context of an accelerating demand scenario. EBITDA margin was 22.5%, up to 180 basis points on the full year and four thirty basis points on the 2020. This excellent result was of course driven by operating leverage as well as the continuous deployment of the initiatives to contain operating expenses that we started in 2020. The net financial position improved by 9%. We had a free flow from operations of approximately €20,000,000 easily covering €12,000,000 of expected increase in net working capital and approximately €2,000,000 in CapEx. As we will see, net working capital increased mainly for a seasonal effect in receivables, which happens every first quarter, as well as an expected unwanted increase in inventory to cope with the global shortage of raw materials. And now moving to Page three with some more figures. So revenues were €97,600,000 up 24% from the €78,700,000 of the 2020. As we can see in chart at the top right, growth was 21.9 compared to the 2019, since in the 2020 revenues were basically in line with the previous year. This confirms our expectations again for a strong acceleration in demand, confirming the trends of the 2020 plus a recovery in the other more cyclical applications. We saw an acceleration in most applications and all geographies confirming the well balanced product and application portfolio of the group. EBITDA grew by 53.2% to €22,000,000 up from the €14,400,000 in the 2020. This represents 22.5% of sales, thanks to operating leverage and the cost containment measures. And this also discounts approximately €1,300,000 of lost EBITDA due to the negative effect of the foreign exchange. Net profit of 13,300,000 was up 75.5% from the €7,600,000 of the 2020, thanks to the operating results, while the tax rate was basically stable at 19.4% in line with the 19.3% of the same period last year. Capital expenses at €2,000,000 were in line with the €2,400,000 of last year. Of course, of the capital expenses expected for 2020 are still to be incurred. I'm now moving to page four with the revenue breakdowns. To the left, can see the breakdown by region. So all regions accelerated and reported exceptional results. EMEA net of the foreign exchange grew by 22.1% with a very good result both in HVAC and Refrigeration. Asia Pacific grew by 47.3% net of the foreign exchange. This is due of course to an especially good economic performance of China whose GDP grew by 18.3% in the period, but also to the execution of our strategy to grow the market in the region. In China, we had a growth well in excess of 50%, but also the rest of the region improved dramatically. In North America, sales grew by 29.9% net of the foreign exchange. This is thanks to a recovery in the market conditions, but also thanks to better execution since last year we changed the leadership in the region. Latin America grew by 62% net of the foreign exchange. Of course, here we discount a very negative effect of the currency in euros, even in euros we grew by almost 30%. We had good results both in Brazil and in the rest of the region driven by cross selling and up selling in Food Retail as well as actions to increase prices. If we look to the breakdown by sector to the right, we can see that both markets accelerated. HVAC grew by 27.2% net of the foreign exchange. We saw an acceleration in heat pumps and data centers and also a strong recovery as expected in the more cyclical applications like industrial and for example automotive, while commercial HVAC is rather flattish in this period since players in Europe are waiting for the detailed execution of the next generation new program, but this represents an upside for the future. Also the wellness application is still suffering a little bit. In refrigeration, we grew by 28.4% net of the foreign exchange. In Food Retail, the market share acquisition that was present already in 2020 and that is due to the end user promotion strategy that we are executing is compounded by the expected recovery in the investment cycle at the end market level achieving an exceptional result, but also the foodservice segment is improving and we are achieving a double digit growth there. I now leave it to Nicola to comment the items below the EBITDA. Thank you, Francisco. The slide number five details the group result from the EBITDA to the net profit. The first quarter 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 the increased amount of loans available for the group. The ForEx impact in Q1 twenty twenty one was negative for around $05,000,000 compared to a loss for more than 300,000 realized in Q1 twenty twenty. It was mainly related to the group operations in Brazil, Croatia and China. The tax rate of the period was pretty in line with the first quarter twenty twenty. The group net profit of the first quarter twenty twenty was equal to €13,300,000 compared to €7,600,000 of the same period of 2020. Slide number six shows the net financial position evolution of the first quarter twenty twenty one. The net financial position was improved compared to December 2020 level reducing from 49,600,000 to €44,900,000 Taking out the accounting effect of IFRS 16, the net financial position with banks amounted to 17,400,000.0 The flow from operation was equal to €18,100,000 higher than CapEx and then increase in the net working capital of the period. The increase in net working capital was mainly driven by a strong growth of revenues to a planned increase in inventory to better cope with the raw material shortage and to a seasonal effect in accounts receivables. It should be noted that the DSO at the end of the quarter improved compared to the same period of last year. At the December 2020, the group has an amount of cash, cash equivalent and available credit lines for more than €1.100 I leave the floor to Francesco to go on with the presentation. Thank you, Nicola. So I'm on Page seven. To summarize, in this quarter with this exceptional result, the highest organic growth rate reported in the last ten years, both compared to last year as well as compared to 2019, we confirm not only the strong resiliency of the group that we shown in 2020, but also the capability to seize growth opportunities in a market of growing demand. In fact, demand was pretty positive. As expected, we saw the acceleration of data centers, heat pumps, as well as the recovery of the more cyclical applications like industrial as well as food service. In food retail, the market share acquisition was compounded by the expected recovery investment cycle also facilitated by the new F Gas milestone in Europe. In terms of operations, last year we started working after the start of the sanitary emergency. We started working to increase our resilience, which was already very high and we started a number of actions. So we deployed 12 new production lines between Croatia, U. S. And China. We are moving our double sourcing strategy to a double country source strategy and we are homologating a big number of new alternative components also to cope with the shortage. Our R and D is very much engaged in this activity and we are homologated alternative components also where technically it's not so easy like for example for microprocessor, but this is helping a lot in coping with the shortage. We also started to increase the inventory to cope with the shortages. So to conclude, taking into account the excellent results reported in this quarter and the positive indications coming from the current order intake, without any further worsening of the global raw material shortage or the current COVID-nineteen scenario, we expect to maintain a double digit revenues growth rate for the full year with a floor of 12%. Before leaving it to your questions, I would like to comment on Page nine on the deal we signed late last night for the acquisition of fifty one percent of CFM. CFM is a long standing partner of ours based in Izmir, Turkey. They are a distributor of ours, but they are much more than a distributor since they have a very distinctive business model. They take technologies from us and from other leading manufacturers and they create high value added engineering solutions with a very strong technical content and a very strong content in terms of services both on field and digital. This is reflected in the very high profitability of the company, which is well above 30%. Last year they reported revenues of million and an EBITDA of EUR5 million. They are protected from currency fluctuations since they sell in euros. They are very strong in the food retail market. They have strong and long lasting relationships with end users to whom they provide on field technical and digital services. Approximately half of their 34 employees are technicians, engineers and software developers. So they're a very strong engineering company. The industrial rationale of the acquisition fits several guidelines that we have. It's a bolt on, it's a footprint expansion outside Western Europe and a platform for The Middle East and it's a strong strengthening of our know how in digital and on field services. The sales that so far that we currently make to CFM amount to approximately €2,500,000 The valuation of the company is nine times the EBITDA and for the remaining 49% there are cross call and put options to be exercised between 2427% according with the valuation according to future results. We believe we can create a lot of value with this transaction. The closing will take place after the approval from the authorities. We can create a lot of value thanks to the high profitability of the company, thanks to its service and engineering capabilities, thanks to the possibility to grow in HVAC since so far CFM didn't focus on HVAC but just on food retail and it's also a possible platform for expansion in The Middle East. Thank you very much for your attention. I now leave it to your questions and we are more than happy to answer to all of your questions. Excuse me, this is the Chorus Call conference operator. We will now begin the question and answer session. The first question is from Will Turner of Goldman Sachs. Please go ahead. Hello. Thanks for taking my questions. I have three or four questions, but I'll ask some of them and then I can go back to the end of the queue. And my first question is you've now given some guidance for the full year or indication of guidance. Relating to that, first one is, does that include the impact from CFM? I know it will be relatively small, but that's the first one. The second one is, how do you expect profitability to develop for the rest of the year? Because obviously, a very strong quarter in 1Q, but some of the headwinds that you talk about in your release, they shouldn't really be starting to impact until now. So are you quite are you wary to give a profitability guidance? And how would you see the profitability developing over the next couple of quarters? Thanks for the questions, Will. Okay. So no, the guidance doesn't include the impact from the consolidation of CFM. In terms of profitability, you rightly say that the big impact in the possible increase of costs related to the shortage will be seen in the rest of the year. So you're right. We expect possibly an average increase in the cost of raw materials in the low single digit range. But of course, we're taking countermeasures to mitigate that like for example actions on prices. So the impact will be material, but not huge. We're not concerned about profitability. However, there is uncertainty, so it's not easy to provide the guidance for the full year Let's say that considering also that we're investing heavily in digitization and we have to support this very strong growth rate. If we revert to our mid cycle expectation for profitability, which is 19% to 20%, we expect that probably for the full year we will be in the high end of the range, but we can be more precise at the presentation of the half year results. Great. And then I suppose on guidance of 12%, you've obviously started this year pretty the 1Q very strong. 2Q should be a good quarter as well because the comparative is not as strong either. Like do you not feel that maybe 12% might be quite easy to hit? Or is it still do you think there's too much uncertainty to really be more precise? Like where do you think an upper limit could be? Is that a different way of wording it? Okay. Let's say that in a scenario which remains very uncertain for a number of reasons, we prefer to be on the conservative side of the guidance. So 12% is a floor, is let's say the worst case scenario in the current condition. We prefer to let's say not to be more precise at this stage, we'll be more precise again at the half year considering the higher certainty related to the shortages of raw materials. But again, percent is a conservative floor to our expectation and we prefer to maintain it like that at this stage. Okay. That's fine. And then final question, you kind of alluded to it. Do you intend to do you intend to increase prices? I know this is something that you usually don't do. Has there been any price increases already in the first quarter? And I assume these will be single digit low single digit price increases. And then kind of also related, I guess, is there any particular component which you're concerned about with in terms of tightness in supply? It seems to be like, for example, electronics and semiconductors, in particular, are causing issues for a lot of industrial companies. You don't see any one particular component which is going to potentially cause headaches later in the year? Okay. So as far as the prices are concerned, we did the price list increase already at the beginning of the year. In some specific regions, we took stronger actions also related to the currency. For example, as I mentioned during the presentation in Latin America. For other customers, we are of course, we are forced in several cases to raise prices because to reflect the increases in input costs. So yes, we are taking actions on prices. As far as the raw materials are concerned, basically the critical situation is more or less across the board. So most categories are affected. As I said, we started at the end of last year to take a number of very strong countermeasures in terms of inventory, in terms of additional production lines and especially in terms of homologating alternative components. Our R and D has been strongly engaged in the last few months in these activities to homologate alternative components and this is definitely helping a lot to cope with the shortage. Fortunately, our supply chain was already pretty resilient to begin with, but then already at the beginning of the pandemic before the shortage we started to increase the resiliency and these actions are helping. Of course, the situation is not easy and is uncertain, but we have strong countermeasures in place. Great. Thank you. The next question is from Alessandro Tortora of Mediobanca. Please go ahead, sir. Yes. Hi. Good afternoon to everybody. I have four questions, if I may. The first one on the top line trend, the guidance you mentioned. Let's say, first of all, that you're talking about, let's say, at least a floor at constant FX, okay, which clearly is a non important factor for you this year? The second question is on the regional outlook because we read in these months U. S. But even China focusing much more on, let's say, the switch, okay, from the synthetic refrigerants to the natural refrigerants. So the question is, can you share with us the growth potential you see in areas like The U. S. Or China, considering that at least in The U. S, penetration of natural refrigerants are quite low? Because in the past, we saw refrigeration independently from this year growing, let's say, teens. So what I would like to understand, let's assume the addressable market is getting larger. Which sort of size, which sort of potential you see, okay, also considering that we are going beyond Europe with The U. S. And China? So this is the second question. The third question is on, let's say, some application because you mentioned before heat pumps as a top performer. Can you elaborate a bit more on that, just sharing with us an idea of the underlying trend of heat pump, okay, for you? And the last question is on the margin. I understood that the historical track record was 19%, 20%, but considering the, let's say, exceptional trend, but also some, let's say, carryover of some cost efficiency, okay, actually you made, honestly, I thought the company would have been able to be at least this year, okay, above 20%. Maybe it's a one off. So I would like to understand better why you still see, okay, a range of around 20% this year as EBITDA margin? Thank you, Alessandro for the question. So first one, the clarification, the guidance on the top line is in current FX, not constant. So of course, it discounts a negative foreign exchange effect. Concerning the regional outlook, yes, we had several good news in terms of regulation both in China and The U. S. They both ratified the Kigali amendment. In The U. S, there is a stronger push for transition to lower impact refrigerants. So the outlook is definitely improving as we had expected by the way. And so the growth potential is definitely improving. This was let's say something that we were waiting for. So we were thinking that it was going arrive. Of course, translates into a very strong outlook for the growth in the medium term that we expect to remain let's say solidly mid term in the double digit organic growth region both in China and The U. S. Also thanks to execution. Execution. In China, the results the very good results we're having is not only because of the good economic performance of China, but also because we are executing a strategy of end user engagement more and more. And also North America, are improving execution. So let's say that mid term again we expect to maintain a double digit growth solidly thanks to this improved outlook that we were expecting. For the heat pumps, let's say that the heat pump has secular very positive growth expectations because it's in this moment, it's the most sustainable way to heat buildings. It's a renewable. It's considered a renewable, it's consistent with electrification with the reduction of emissions, it's let's say subsidized directly or indirectly in many countries. So definitely the growth expectations for the application are very, very high in the medium term. I have to remind that we don't work in heat pumps in general, we just work on the top tier of the segments in the most efficient high technology segment of the application. In general, in terms of outlook, a very positive development will be and it's starting to become significant the evolution towards natural refrigerants also for heat pumps. Natural refrigerants so far have been mainly related to refrigeration. Now they are starting to develop also in HVAC and heat pumps especially are now starting the transition towards natural refrigerants which is another very interesting development for us. The growth results we're having are of course related to this very strong underlying trend, but also to our activity of course of market share increase, but also of cross selling to customers because we're increasing the share of wallet we provide to our customers in the ePump segment to provide more value for example with variable speed compressors as well as electrical panels to increase the share of wallet in each unit and this is also compounding the growth we're seeing in the application. As far as the margin is concerned, let's say, our margin is very much related to operating leverage. So since we have uncertainty on the top line, the uncertainty is even higher on the bottom line. So that's why it's not so easy to provide a precise guidance this year. The potential to arrive at more than 20% is for sure there, for sure is there. But let's say it's difficult to sure at this stage. So we will definitely try to be more precise at the presentation of the half year. And let's say a follow-up and another question. The follow-up is considering, let's say, and hoping that these, let's say, first quarter with a rate of revenues, let's say, around €90 euro million per quarter is sustainable as we are discussing now with, let's say, new trends. In theory, we could assume that the at least 20% of EBITDA margin going forward, considering the high utilization rate of your capacity could be, let's say, sustainable, okay? This is a follow-up. And the other question is on M and A. You commented before the deal on distribution plus, let's say, service. Is the company still assessing, let's say, some other potential targets? Or we have to think about, let's say, this is the deal for this year and just understand the strategy on M and A for the current year? Thanks. Okay. Let's say that as if again, talking about the profitability your first question. So if again profitability is definitely related to the operating leverage. So let's say that if we the assumption mid term that we have a profitability in the range of 1920% is related to an organic growth rate in the high single digit range. If the growth rate in sales is higher, then also profitability would be in the higher end of this range. So I mean, it's now we want to change in this very moment the mid term expectation. So, in this very moment, we maintain our mid term expectation of high single digit organic growth profitability between 1920%. Should we see the potential for a higher expectation for our organic growth rate that of course will translate in a higher profitability for the mid term. Of course, at the same time, please consider that we want to invest to sustain and accelerate the growth of the company. So many resources we get from the growth are invested in digitization, in strengthening our footprint, in innovation and so on. So again, our target is to grow sales more than to grow profitability. That's our idea in general. Concerning CFM, no, we are still active in this moment. We still have an active pipeline and we are still working, let's say pretty intensely on M and A. So we don't believe we mean we have finished our activity for this year. Of course, we don't know if we can finalize anything else, but we will try. Okay. That's helpful. That's There are no questions registered at this time, sir. Okay. Thank you very much. Thank you for your attention and for your questions and looking forward to speaking with you again for the presentation of the first half twenty twenty one results. Have a good afternoon. Bye. Ladies and gentlemen, thank you for joining. The conference is now over and you may disconnect your