Earnings Call: H2 2020

Mar 4, 2021

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the Carrol twenty twenty Full Year 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 Carrol. Please go ahead, sir. Thank you. Good afternoon, and thanks for joining our call for the presentation of twenty twenty full year results. I'm starting from page two with the main financial highlights. In this incredibly challenging year, we confirm the resilience of the group and its ability to seize new opportunities even in such a fast changing and uncertain scenario. We grew our top line, we grew our profitability and we generated an outstanding cash flow. Revenues grew by 1.3% or 2.8 net of the foreign exchange. The positive market trend that we saw in the third quarter continued in the fourth quarter. Throughout the year, we had a very good performance in data centers, hospitals, heat pumps, food retail. In the fourth quarter, we saw an improvement in all geographies and in most applications. So we started to see a recovery also in the most challenged applications in the first part of the year, like for example, automotive and food service. This is particularly remarkable if we consider that we faced in the first half of the year, the temporary shutdown of more 60% of our total production capacity due to the lockdowns in China and Italy. EBITDA margin was 19.7%, 40 basis points more than the 19.3% of 2019. Thanks to the effective implementation of a number of measures to contain operating expenses, we managed to offset the lack of operating leverage, which was not there as we would have liked. We offset the negative impact of the foreign exchange and extra logistic costs due to the disruptions. We had an exceptional cash generation. We had a free cash flow of approximately €38,000,000 Net of the purely accounting effect of the IFRS 16, the net financial position went down to €21,400,000 from 46,900,000.0 So it's way below the EBITDA and that means that we have a very strong firepower to invest. I'm now moving to Page three with some more with the main non financial highlights. In fact, in 2020, we achieved a number of very important ESG milestones and more are expected in 2021. In April, we gained one notch in our MSCI ESG rating achieving a score of BB. We have been invited to take part in the CDP rating and we decided upfront to disclose our score. We received a score of C placing Karel in the awareness category. So we basically skipped the D disclosure category, which is typically granted when you take part in the CDP for the first time. In the summer, we created an ESG team, a multifunctional team led by the CFO to collect, elaborate and execute the inputs received from the main stakeholders. And at the beginning of 2021, we started drafting our new three year sustainability plan, again taking into consideration all those inputs from the stakeholders and with the objective to further improve our sustainability profile in the coming years. On Page four, we can see some additional figures. So revenues were $331,600,000 up 1.3% from 2019. If we look at the revenue bridge on the top right though, we can see that we lost $5,100,000 for the foreign exchange and $600,000 for the NOCOR. So the purely organic growth in 2020 was 3.1%. EBITDA was $65,200,000 up 3.3% or 19.7% of sales, 0.4% more than the 2019 results. So the efficiency gains during 2020 offset the lack of operating leverage, offset approximately €2,000,000 of extra logistic costs and offset €2,500,000 of impact of the foreign exchange. So the impact of the foreign exchange was €5,100,000 on the top line, but €2,500,000 at the EBITDA level, to our natural hedging position. Net profit was essentially stable. It was up 0.3% to €35,100,000 and it benefited from a slight reduction in the tax rate. The tax rate was 21.1% from the 22% in 2019. CapEx were €13,300,000 in line with expectations. There was a strong reduction from the €23,600,000 of 2019 due to the fact that the capacity expansion program was over in 2019. In 2020, we basically did maintenance CapEx. In 2021, on the other hand, we decided to accelerate our capacity expansion in Croatia since demand in Europe and Eastern Europe is growing faster than expected. And we also decided to accelerate on our digitization roadmap that was extremely important in 2020 in order to become stronger and more resilient for the future. The Board of Directors this morning proposed a dividend distribution of EUR0.12 per share, which is in line with 2019 and corresponds to a payout ratio of approximately 34%. And now on Page five with the revenue breakdowns to the left, there's the breakdown by region. So all regions improved in the fourth quarter and net of the foreign exchange, basically all regions grew in 2020 apart for North America. So EMEA grew by 5% net of the foreign exchange. We had a very good performance throughout the year in Eastern Europe and Northern Europe and at the 2020, we started to see a recovery also in the other countries like in Southern Europe. In Asia Pacific, we grew by 1% net of the foreign exchange with a very good result in China, partly offset by softer performance in the rest of Asia. North America, sales declined by 7.7% in local currency with a slight improvement in the fourth quarter. Let's say that in North America, the market in 2020 challenging also because in 2019, we had an exceptional growth. In any case, in this beginning of 2021, we already see a remarkable improvement in the scenario in North America. Latin America, we grew by 10.1% net of the foreign exchange, so a very good result, especially concentrated in Brazil. In Europe, of course, the performance was negative because we had a very strong impact from the foreign exchange in the region. If you look at the breakdown by sector to the right, also in both sectors, we had an improvement in the fourth quarter. HVAC grew by 2.1% net of the foreign exchange. We had a very good performance, positive performance in data centers, heat pumps and hospitals. We had the negative performance in other industrial applications like in automotive, but we started to see an improvement at the 2020. Likewise, in refrigeration, we grew by 5% net of the foreign exchange with a very positive performance in food retail. In the fourth quarter, we saw an improvement in the general market in food retail while previously we were growing through market share increase and we also started to see a recovery in Food Service that year to date is in any case negative. So the growth in the core business, net of the foreign exchange is actually 3.1% and then we have 14.5% decline in the non core business. I'm now moving to Page six and I leave it to Nicolas to comment the items below the EBITDA. Thank you, Francesco. Slide number six details the group result from the EBITDA to the net profit. The 2020 result was impacted by higher D and A cost, mainly related to the relevant CapEx level of 2019. In the period under review, financial charges were pretty in line compared to 2019 instead, ForEx exchange losses were higher in particular related to The U. S. Weakness versus euro of the 2020. The tax rate of the period was 21.1%, slightly below twenty nineteen level. Such a decrease is mainly related to a different country mix. The group net profit at the 2020 was equal to $35,100,000 in line with the 2019 figures. Slide number seven shows the net financial position evolution of fiscal year 2020. The net financial position strongly improves compared to 2018 level. At the December 2020, the net financial position was equal to €49,600,000 compared to €62,100,000 of the December 2019. Such amount includes €28,200,000 of IFRS 16 liabilities. This amount was equal to €15,200,000 at the 2018. So the net financial position with bank improved of around €25,000,000 The fund from operations was equal to 38,000,000 The decrease in net working capital was mainly driven by seasonal effect and a better credit collection management in 2020. In June, the group paid a dividend of around $12,000,000 At the December, the group has an amount of cash, cash equivalent in the variable credit line of more than $100,000,000 I'll leave Francesco to go on with the presentation. Thanks, Nicola. So I'm on Page eight with the closing remarks. In terms of operations in 2020, we faced the temporary shutdown of more than 60% of our capacity due to the lockdowns in China and Italy. We mitigated this effect, thanks to our long standing mirroring production strategy. And so we limited the backlog, which was entirely recovered between June and July. On the demand side, we started to see a strong improvement on the market at the end of Q2 that continued in Q3 and Q4. In Q4 in particular, we saw an improvement in all geographies and in most applications. We have a positive performance year to date in heat pumps, data centers, hospitals and food retail And we have a negative performance in the other industrial HVAC and in food service, but we started to see a remarkable recovery in both applications at the end of the year. All of this led to an improvement in the top line, in profitability, as well as in cash generation even in such a challenging year as 2020. Looking forward, it's still too early to provide the precise guidance for the full 2021 since there are still significant elements of uncertainty linked to the end of the pandemic and the current situation of global shortage of raw materials. In any case, we have an optimistic stance considering that the positive trends that we saw in the 2020 accelerated in the 2021. Thank you very much for your attention. We are now 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 Alessandro Torre with Mediobanca. Please go ahead. Yes, sir. Hi. Good evening to regarding good afternoon. I have, let's say, some question. Sorry, it should be five, okay? But I will try to be very quick. The first one is on the business. As mentioned before, there is a widespread recovery by the region in the last quarter of the year. What I would like to understand is if you can elaborate a bit more on North America, which let's say was the underperformer in the past year. So to understand what is your view on this area? This is my third question. Okay. So in thanks, Aleksandro, for the question. So yes, I confirm that in the fourth quarter, we saw an improvement in all geographies and most applications and that trend is accelerating at the beginning of 2021. Especially, yes, also in North America, we saw this improvement and we are seeing a strong acceleration, a strong improvement in the beginning of 2021. So the trend is definitely positive. I remind that during, let's say, the end of twenty twenty, we also changed the leadership in North America. So the former CEO of Latin America is now CEO of both Americas, North and South. But in any case, also the general context of the market is more positive and we are getting results from the actions that we took during 2020. Okay. The second question is on the application. Clearly, have let's say the overall picture picture, speaking. Can you, let's say, give us an idea of the top performers, so for instance, heat pumps or data center, if you can share with us, let's say, the organic performance of this specific application? And idea at least? Okay. So I would say that the top top performance in 2020 were heat pumps and food retail, both were growing at double digits. Also data centers as mentioned was positive, also HVAC related to indoor air quality, but for sure the top performance were heat pumps and food retail both with a double digit growth. Okay. Okay. The third question is on the margin. If you look at let's say, compared to the year, the company has been able clearly to post a high single digit organic growth, but also to achieve significant EBITDA margin expansion reaching in the second half an EBITDA, let's say, close to 20%. The question is considering also the structural or partly structural cost savings that you implemented in 2020, what's your view on the progression on the margin side on the back of a positive outlook on volume, if understood well, but also if we also consider some cost inflation risk you mentioned in the press release. Okay. Yes, so let's say our expectation mid cycle is to stay with the profitability between 1920%, so more or less where we are. Now for 2021, we do expect for sure a better contribution from the operating leverage. On the other hand, as you mentioned, there could be some tensions on the raw materials cost side. And also we are definitely investing to make the group stronger for the future, for example, in digitization. So let's say that our mid cycle expectations is to maintain the profitability where it is. Just a comment on the raw materials cost side that I just mentioned. So yes, there could be and there are already signs of tensions on the cost of raw materials. We don't expect that to be major on our income statement. So we are taking all the countermeasures that since the 2020, we are working on the countermeasures on this. So we don't expect any material, any significant impact. But of course, those tensions are there and they create some uncertainty, that's for sure. Okay. The first question is on the working capital side. Clearly, the level you achieved, let's say, midyear was extremely low. Are there any, let's say, indication or a normalized level that we can assume for net working capital on sales on the back of also what we discussed about electrical components in the form and be some, let's say, stock you're going to do on that side? Look, Alessandro, this is Nicolas. In we with the view of the year end, we believe that the incidence of working capital on net sales should be around the 15%, 16%. And it is related more to the possible increase that we wanted to have on the inventory side, even taking, say, on the service level that we wanted to guarantee to our customer and to have a good level of safety in our stock. Okay. And the last question maybe for you, Nicolas, is on the CapEx side. You mentioned before a capacity expansion project in Croatia. Can you give us an idea of which level of CapEx we may assume for 2021? Okay. The total amount of CapEx that we are foreseeing for 2021 is around $20,000,000 of CapEx and it includes even the investment in Croatia that is pretty significant for our side. Okay, thanks. The next question is from Will Turner with Goldman Sachs. Please go ahead. Hi, everyone. Thanks for taking my questions. Hope you're all doing well. I guess my first question is on the outlook. I perfectly understand why it's hard to give like a formal outlook. But could you just give a little bit more color on like what optimistic means for you going into 2021? Should we think about is this going to be a year in line with how Corral has grown historically, which is mid- high single digits organically? Is it gonna be less than are you expecting it to be less than that? Or or could it be greater because of some pent up demand from places like, like the commercial HVAC part, which may see in the second half a good recovery? So just a little bit more color on that would be really interesting. Okay. Thanks, Will. So let's say that as mentioned also in our last call for the third quarter twenty twenty, our we entered into 2021 with, let's say, expectation to more or less be in our mid cycle expectation, which is high single digit. The fact is that we have both upsides and downsides for 2021 because we have an upside related to the fact that there could be pent up demand, there could be a strong recovery in many applications that were late in investing. There could be the effect of the next generation EU plan in Europe. So there are definite upside. There are also downsides related, for example, to uncertainties on supply chain shortage for of raw materials. Now for that, we started taking action at the 2020. We increased our safety stocks. We booked capacity in advance. We placed orders for the entire 2021. We don't see any disruptions at the moment, but there could be some increases in lead times that we believe would be absorbed by the 2021 by the end of the year. But in any case, the uncertainty is there. And of course, needless to say the pandemic is still going on. There are these virus mutations. So there are elements of uncertainty that provide downside. So I would say, I would summarize by saying that on the demand side, we see mainly positive things. We don't see negative elements on the demand side. There could be upside the market. On the other hand, there are uncertainties related to exogenous factors like the pandemic and supply chain issues. That's why it's not easy to provide the guidance at this stage. Okay. That's very clear. Thank you. And just touching a little bit more onto that kind of like the components and the raw material supply issues. Is it semiconductors, which is and electronics, which is the item which is in particular of concern to you. And then when you talk, I can understand that you're doing quite a lot to try and offset it at the moment. Are you expecting to try and offset that with price increases? I know how historically you haven't really put through that significant price increases, but are you expecting 2021 to be a different year in that sense? Yes, yes. We are referring mainly to electronic raw materials and semiconductor related components. Yes, because those are the situation is pretty general on all commodities, but especially for us, semiconductors and electronic components are significant. Again, we started implementing countermeasures during Q4 twenty twenty, increasing our resilience, which is already pretty strong. On the cost side, there could be some tensions and some possible countermeasures, yes, could be acting on prices. You're right that historically we never we tended not to increase prices, but the strong volatility we're seeing in this last quarters led us, for example, during 2020 to increase prices. So we had in 2020, we had an average positive effect coming from prices also because of the logistic extra logistic costs. So in 2021, we could also do something on the price side, if that's necessary for because of the cost tensions. Again, we don't expect coming from experience, we don't expect any big impacts on the P and L coming from the cost side. So probably it won't be necessary to do anything major on prices, but we are prepared to do that and we can do that. In any case, let's say the order intake in this moment is very positive and we don't see any disruptions related to the raw materials. But of course, I mean, the situation is very volatile. So there is uncertainty. Great, thanks. And then my final question, you mentioned earlier in the call how your deleveraging is giving you some greater financial power to invest. Can you elaborate that a bit more on where you're looking to invest and quite importantly why that particular either region or product category? Okay. Well, we mentioned that we are investing now a little bit more on digitization and we are accelerating the capacity expansion also because demand is growing, especially in Europe faster than anticipated. That's not a big investment overall because as Nicola said, we are talking about a possible €20,000,000 CapEx in 2021. So nothing really big. Capacity to invest means the possibility to accelerate even more in digitization and means adding more firepower on the M and A side. Now on the M and A side, we let's say that we strengthened our M and A team in the last few months to after the COVID, the most difficult situation due to the COVID where we were forced to slow down things, we are now pretty active on the market and we are strengthening our pipeline. So that's the main direction in the end where we want to invest, is M and As and the guidelines are the same. So complementary components, market share and geographical expansion and services, but we are definitely strengthening our pipeline in this moment. Great, thanks. The next question is a follow-up from Alessandro Tortra with Mediobanca. Please go ahead. Yes, thanks again. Two questions from my side. The first one is a follow-up on the capital allocation strategy. You mentioned before two direction. The one is expanding the product range. The second one could be, let's say, the service side. Can you give me the same a better idea of what Karel could do on the service side considering that now there is a booming world for everything related to edge computing, edge analytics, whatever it is, but just to understand which sort of service the company could do and maybe which M and A opportunity you see on the service side for Carbon? Okay. Yes, one, I would say there are many possibilities also because the service, as you just mentioned, the service landscape is in flux, is in strong evolution. A broad a broad general direction is energy optimization. So service companies that basically provide interventions on the on the installations on the plants. There could be many different kinds of plants from supermarkets to buildings to to to data centers to many many other kinds of of different plants. And so services related to energy optimization, which could be strongly augmented by our analytics. So by our products and by the analytics that we can provide through our products. Now that's very broad. There are many, many different possible ways that this can be implemented. There are many, many also different possible targets all around the world doing this. The priority for us would be Europe for this kind of new service because that's something newer for us. So we would prefer to stay, let's say closer to home. But that's a broad direction that we are definitely exploring. Again, are many possible ways to do that, many possible targets and many different ways we can execute that. But that's the general direction. So energy, energy optimization. Okay. Okay. And the second question was on, let's say, tax rate. So considering also Croatia, considering the investment in Croatia, maybe some fiscal incentives you can get there. The 21% level tax rate, is it something you consider sustainable for I don't want to say forever, but at least three, four years from now? Okay. The investment that we are going to do in Croatia will have a fiscal incentive for the future and it is around 25% of the investment. And but we are foreseeing for the future a higher amount of taxes compared to 2020 to be around 23% we believe. And sorry, Nicolas. The reason for this higher tax rate is due to China, due to regional mix? It will be mainly related to Croatia because the fact is that in Croatia we had last year, part of the year was covered by the let's say the old investment that we are doing. We are foreseeing higher volumes and the benefit will cover just one part of the more profit that we are doing in this country. And then even in Italy, we had some incentive from a reduction in Europe because we have we had the the ordinary up, not the extended Europe, let's say, like that. And it is possible that if in the future we are going to do some M and A activities, we will be back to the longer extended period. Okay. Thank you. Thanks. The next question is from Guillaume Bon Pan with GMP. Please go ahead. Good afternoon. Could you confirm the level of free cash flow that was generated in Q4? If we do a sort of back on the envelope calculation seems to be around €13,000,000 And is that a good basis to estimate what's going to happen in the next few quarters? Yes. The last quarter had a very, very positive effect on the cash conversion rate because we were something above 80% and it was very, very high even because as we mentioned that we were able to reduce the level of net working capital to a very low, low level. We believe that as we said before that the ordinary working capital with the year end level during the different quarters, there is a seasonal effect that is not always stable, but we believe that it will be around 15%. So it will depress our cash conversion. And we are forecasting for a sustainable level a level of cash conversion around the 70%. You. Gentlemen, there are no more questions registered at this time. Okay. Thanks everybody for your participation and for your questions. Looking forward to present the first quarter twenty twenty one results. Thank you very much.